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REGULATORY RESTRUCTURING AND 

REFORM OF THE FINANCIAL SYSTEM 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

OCTOBER 21, 2008 

Printed for the use of the Committee on Financial Services 

Serial No. 110–143 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

PAUL E. KANJORSKI, Pennsylvania 

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 

DENNIS MOORE, Kansas 

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 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin, 

LINCOLN DAVIS, Tennessee 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES WILSON, Ohio 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

DON CAZAYOUX, Louisiana 

TRAVIS CHILDERS, Mississippi 

SPENCER BACHUS, Alabama 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

DEAN HELLER, Nevada 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

October 21, 2008 ............................................................................................... 1 

Appendix: 

October 21, 2008 ............................................................................................... 89 

WITNESSES 

TUESDAY, OCTOBER 21, 2008 

Bartlett, Hon. Steve, President and Chief Executive Officer, The Financial 

Services Roundtable ............................................................................................. 48 

Johnson, Hon. Manuel H., Johnson Smick International, Inc. ............................ 20 

Rivlin, Hon. Alice M., Senior Fellow, Metropolitan Policy Program, Economic 

Studies, and Director, Greater Washington Research Project, Brookings 

Institution ............................................................................................................. 12 

Ryan, T. Timothy, Jr., President and Chief Executive Officer, Securities Industry and Financial Markets Association (SIFMA) ......................................... 51 

Seligman, Joel, President, University of Rochester .............................................. 18 

Stiglitz, Joseph E., Professor, Columbia University ............................................. 15 

Washburn, Michael R., President and Chief Executive Officer, Red Mountain 

Bank, on behalf of the Independent Community Bankers of America 

(ICBA) ................................................................................................................... 54 

Yingling, Edward L., President and Chief Executive Officer, American Bankers Association (ABA) .......................................................................................... 50 

APPENDIX 

Prepared statements: 

Bachmann, Hon. Michele ................................................................................. 90 

Capuano, Hon. Michael .................................................................................... 92 

Kanjorski, Hon. Paul E. ................................................................................... 93 

King, Hon. Peter ............................................................................................... 94 

Klein, Hon. Ron ................................................................................................ 95 

Manzullo, Hon. Donald .................................................................................... 99 

Roskam, Hon. Peter .......................................................................................... 102 

Speier, Hon. Jackie ........................................................................................... 104 

Bartlett, Hon. Steve ......................................................................................... 106 

Johnson, Hon. Manuel H. ................................................................................ 121 

Rivlin, Hon. Alice M. ........................................................................................ 123 

Ryan, T. Timothy, Jr. ....................................................................................... 130 

Seligman, Joel ................................................................................................... 140 

Stiglitz, Joseph E. ............................................................................................. 149 

Washburn, Michael R. ...................................................................................... 168 

Yingling, Edward L. ......................................................................................... 177 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Frank, Hon. Barney: 

Roll Call Votes from the Committe on Financial Services and on the 

Floor of the House ......................................................................................... 247 

Excerpt from Mark Zandi’s book entitled, ‘‘Financial Shock’’ ....................... 263 

Bachus, Hon. Spencer: 

Letter to Hon. Christopher Cox, Chairman, SEC, dated October 14, 2008 . 198 

Page

IV 

Garrett, Hon. Scott: 

Report of the American Enterprise Institute for Public Policy Research 

entitled, ‘‘The Last Trillion-Dollar Commitment: The Destruction of 

Fannie Mae and Freddie Mac,’’ dated September 2008 ............................. 199 

Article from the New York Times entitled, ‘‘Pressured to Take More 

Risk, Fannie Reached Tipping Point,’’ dated October 5, 2008 .................. 209 

Article from The Wall Street Journal entitled, ‘‘Obama Voted ‘Present’ 

on Mortgage Reform,’’ dated October 15, 2008 ........................................... 216 

Kanjorski, Hon. Paul E.: 

Letter from the National Association of Federal Credit Unions (NAFCU), 

dated October 20, 2008 ................................................................................. 242 

Written statement of the National Association of State Credit Union 

Supervisors (NASCUS), dated October 21, 2008 ........................................ 244 

LaTourette, Hon. Steven: 

Article from the Cleveland Plain Dealer entitled, ‘‘Time to account for 

foreclosures,’’ dated October 21, 2008 ......................................................... 219 

Article from the New York Times entitled, ‘‘Building Flawed American 

Dreams,’’ dated October 19, 2008 ................................................................ 220 

Letter from the Credit Union National Association (CUNA) to Hon. Christopher Dodd, Hon. Barney Frank, Hon. Richard Shelby, and Hon. Spencer Bachus, dated October 21, 2008 ............................................................ 239 

Price, Hon. Tom: 

Article from Investor’s Business Daily entitled, ‘‘Saddest Thing About 

This Mess: Congress Had Chance To Stop It,’’ dated September 26, 

2008 ................................................................................................................ 228 

Article from the National Journal entitled, ‘‘When Fannie and Freddie 

Opened The Floodgates,’’ dated October 18, 2008 ...................................... 230 

Article from The Wall Street Journal entitled, ‘‘Another ‘Deregulation’ 

Myth,’’ dated October 18, 2008 .................................................................... 233 

Article from The Wall Street Journal entitled, ‘‘Most Pundits Are Wrong 

About the Bubble,’’ dated October 18, 2008 ................................................ 236 

(1) 

REGULATORY RESTRUCTURING AND 

REFORM OF THE FINANCIAL SYSTEM 

Tuesday, October 21, 2008 

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

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

2128, Rayburn House Office Building, Hon. Barney Frank [chairman of the committee] presiding. 

Members present: Representatives Frank, Kanjorski, Maloney, 

Velazquez, Watt, Ackerman, Meeks, Moore of Kansas, Capuano, 

McCarthy of New York, Lynch, Scott, Green, Cleaver, Bean, Moore 

of Wisconsin, Ellison, Klein, Perlmutter, Donnelly, Foster, Speier; 

Bachus, LaTourette, Manzullo, Biggert, Garrett, Barrett, 

Neugebauer, Price, McCotter, and McCarthy of California. 

Also present: Representative Baird. 

The CHAIRMAN. The hearing will come to order. 

I want to express my appreciation to Members on both sides for 

joining us today. There is a great deal of interest in the country 

on what we plan to do next year. The purpose of this is to focus 

on where we go from here. 

We have two panels. The first panel consists of experts, many of 

whom have had responsibilities in the past but who do not now 

have governmental authority. That was a deliberate decision on my 

part so that we did not have to get clearances from various entities 

but could get the best thinking from thoughtful and experienced 

people. The second panel will consist of representatives of the financial institutions themselves. 

I have spoken with the Minority, and we have agreed to 15 minutes on each side for opening statements to accommodate the members. 

With that, we will begin with the chairman of the Subcommittee 

on Capital Markets, the gentleman from Pennsylvania, Mr. Kanjorski. 

Mr. KANJORSKI. Mr. Chairman, we have reached a crossroads. 

Because our current regulatory regime has failed, we now must design a robust, effective supervisory system for the future. In devising this plan, we each must accept that regulation is needed to prevent systemic collapse. Deregulation, along with the twin notions 

that markets solve everything while government solves nothing, 

should be viewed as ideological relics of a bygone era. 

We also need regulation to rein in the private sector’s excesses. 

In this regard, I must rebuke the greed of some AIG executives and 

agents who spent freely at California spas and on English hunting 

2 

trips after the company secured a $123 billion taxpayer loan. Their 

behavior is shocking. The Federal Reserve must police AIG spending and impose executive pay limits. If it does not, I will do so legislatively. After all, the Federal Reserve’s lending money to AIG is 

no different from the Treasury’s investing capital in a bank. 

Returning to our hearing’s main topic, I currently believe that 

the oversight system of the future must adhere to seven principles: 

First, regulators must have the resources and flexibility needed 

to respond to a rapidly evolving global economy full of complexity 

and innovation. 

Second, we must recognize the interconnectedness of our global 

economy when revamping our regulatory system. We must assure 

that the failure of one company, of one regulator or of one supervisory system does not produce disastrous, ricocheting effects elsewhere. 

Third, we need genuine transparency in the new regulatory regime. As products, participants, and markets become more complex, we need greater clarity. In this regard, hedge funds and private equity firms must disclose more about their activities. The 

markets for credit default swaps and for other derivatives must 

also operate more openly and under regulation. 

Fourth, we must maintain present firewalls, eliminate current 

loopholes, and prevent regulatory arbitrage in the new regulatory 

system. Banking and commerce must continue to remain separate. 

Financial institutions can neither choose their holding companies’ 

regulators nor evade better regulation with a weaker charter. All 

financial institutions must also properly manage their risks, rather 

than shift items off balance sheet to circumvent capital rules. 

Fifth, we need to consolidate regulation in fewer agencies but 

maximize the number of cops on the beat to make sure that market 

participants follow the rules. We must additionally ensure that 

these agencies cooperate with one another, rather than to engage 

in turf battles. 

Sixth, we need to prioritize consumer and investor protection. We 

must safeguard the savings, homes, rights, and the financial security of average Americans. When done right, strong consumer protection can result in better regulation and more effective markets. 

Seventh, in focusing financial firms to behave responsibly, we 

must still foster an entrepreneurial spirit. This innovation goal requires a delicate but achievable balancing act. 

In sum, we have a challenging task ahead of us. Today’s esteemed witnesses will help us to refine our seven regulatory principles and ultimately construct an effective regulatory foundation 

for the future. I look forward to their thoughts and to this important debate. 

Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from Cleveland—from Ohio—is 

now recognized for 2 minutes. I do not want to get too picky here. 

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

you for having this hearing. I am just a little east of Cleveland, 

thankfully. If I were from Cleveland, I would not be successful. 

The witnesses’ statements today have a lot of references to 

things like socialism, Ms. Rivlin’s testimony in particular. I think 

that word ‘‘socialism’’ is being bandied about quite a bit today. The 

3 

notion that right before we left we handed over $700 billion to the 

Secretary of the Treasury was disconcerting to a lot of us. Some of 

us voted ‘‘no,’’ not once but twice, on that piece of legislation. 

I think the witnesses also talk about finger pointing as being not 

very productive, and I agree with that. I think that this hearing 

needs to look forward rather than back, but I think in order to look 

forward you do need to look back just a tad in that there are a lot 

of theories as to how we find ourselves in this situation. 

Some are indicating that the 1999 legislation, Gramm-Leach-Bliley, is somehow in default. If that is the case, I would hope our witnesses would chat with us about the changes that need to be made 

to that to prevent this from happening again. 

Many have indicated that the failure to put a tougher regulator 

instead of OHFEO over Fannie Mae and Freddie Mac saw the release of up to $1 trillion in subprime mortgages by those GSEs between 2005 and 2007. I think we should see if that is the problem. 

Credit swaps apparently have no regulators. I wish they would 

talk a little bit about that. 

Then, lastly, I did read the Washington Post editorial this morning that talks about mark-to-markets not being a problem. That 

does run counter to some of the things that people back in northeastern Ohio are indicating to me. I would wish that the witnesses 

would talk about that as well. 

Just two quick unanimous consent requests: There is an article 

appearing in today’s Cleveland Plain Dealer that talks about an 

area called Slavic Village. I would ask unanimous consent that it 

be included in the record. 

On October the 19th, Sunday, there was an article in the New 

York Times called, ‘‘Building Flawed American Dreams.’’ I would 

also ask unanimous consent that it be included in the record as 

well. 

I yield back. 

The CHAIRMAN. Without objection, it is so ordered. 

I would ask unanimous consent that we give general leave for all 

members to insert into the record any material they wish. 

Is there any objection? Hearing none, general leave is now granted, and members may insert whatever they wish into the record. 

They can, of course, allude to it as well if they would like to. 

I will now yield 1 minute to the gentleman from New York, Mr. 

Ackerman. 

Mr. ACKERMAN. A major contributing factor to the economic crisis facing the country is that our financial regulatory system is broken and needs to be fixed. 

Without question, at least part of the blame for the seizure of our 

credit markets rests with the credit rating agencies. The credit ratings that were assigned to many mortgage-backed securities over 

the past 3 years were not based on sound historical data and for 

good reason. There was none. The types of securities that were 

bought and sold in the secondary market contain new subprime 

mortgage products that had no historical data on which to base any 

rating. Accordingly, the AAA ratings assigned to securities that 

contained subprime loans had absolutely no statistical basis whatsoever, but the pension fund managers and investors who placed 

their trust in the ratings took the credit rating agencies at their 

4 

word and purchased these exotic products. That the credit rating 

agencies would rate these securities without any statistical data is 

bad enough, but continuing to do so is absolutely bewildering. 

Mr. Chairman, if we are to fix the cause of this crisis, that area 

surely needs to be addressed. Mr. Castle and I have introduced legislation that would require nationally rated statistical rating organizations, those who are registered with the SEC, to assign two 

classes of ratings. One class, SRO ratings, would be reserved solely 

for homogenous securities whose ratings are based on historical 

statistical data and whose ratings pension fund managers and risk 

adverse investors could rely on. The other class of ratings would 

permit the rating agencies to continue to rate heterogeneous riskier 

products that may not have data. 

The CHAIRMAN. The gentleman’s time is expiring. 

Mr. ACKERMAN. I would place the rest of my statement in the 

record. 

The CHAIRMAN. Thank you. 

We do have a large turnout. Members have asked for 1 minute, 

and we are going to have to ask that they stay very close to that. 

Next, the gentleman from Texas, Mr. Neugebauer, for 2 minutes. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

One thing we know about Congress is that we do not necessarily 

do our best work in a crisis environment. We get a lot of pressure 

to just do something and to do something quickly. As a result, Congress can tend to overreact. 

Our financial markets are not functioning normally, and our Federal Government has gone to some unprecedented steps to intervene in these markets. Certainly, we need to consider some regulatory improvements. This committee started regulatory hearings 

this year, and the industry and the Treasury and others have put 

forward regulatory proposals. Before Congress rushes to overhaul 

regulations, we need to do a complete autopsy of the current problems so that we know exactly what went wrong and what changes 

could help prevent this from happening again. 

We also need to understand the outcomes of these problems on 

the structure of our financial services sector. Much focus has been 

on institutions that are too big or too interconnected to fail, but 

now it seems that more institutions fall into these categories. Expanding regulation to new entities also brings expectations of future government help. 

Now, this debate isn’t simply about having more regulation or 

about having less regulation; it is about having effective regulation. 

Effective regulation allows market discipline to drive decisionmaking, and it minimizes moral hazard. Effective regulation keeps 

the U.S. capital markets competitive with others around the world. 

Effective regulation protects investors and consumers and rewards 

innovation and responsible risk-taking. 

We must also look at how the Federal Government plans to work 

its way out of these interventions. While some of these interventions are still being implemented, at some point the Federal Government will need to pull back. We need a bona fide exit strategy. 

This strategy needs to be a part of our discussion as we talk about 

regulatory changes. Moving forward, we need to work together 

5 

across this committee aisle to come up with the right solution so 

we can leave America’s financial system and economy stronger. 

The CHAIRMAN. The gentleman from Massachusetts, Mr. Lynch, 

is recognized for 1 minute. 

Mr. LYNCH. Thank you, Mr. Chairman. 

I want to thank the ranking member as well and the witnesses 

for helping the committee with its work. 

I want to associate myself with the remarks of the gentleman 

from Ohio, who said that the time for finger pointing is long past, 

and we really, within this committee structure, have to figure out 

where we need to go in the future and how to fix this regulatory 

system. 

I would like the economists and the industry participants who 

are before us today to really focus on the purpose of the regulatory 

regime that we put in place, which is to provide information to investors, not only in external transparency but also in internal 

transparency. Because what we have seen is that these companies 

themselves do not understand truly the value of some of these complex derivatives that they hold. 

So, again, I thank you for your attendance here today, but I 

would like to see the focus on transparency, after reading your remarks, and on the value that that would have in any system that 

we will devise going forward. 

Thank you. I yield back. 

The CHAIRMAN. The gentleman from Illinois, Mr. Manzullo, is 

recognized for 2 minutes. 

Mr. MANZULLO. Thank you, Mr. Chairman, for holding this hearing today. 

This committee needs to examine ways to ameliorate the impact 

of this crisis while examining long-term solutions to ensure that a 

crisis of this magnitude never happens again. 

As we examine the underlying causes of this crisis, it is clear to 

me that Fannie Mae and Freddie Mac were right in the thick of 

things. Some of us in Congress have been fighting the unethical, 

illegal, and outright stupid underwriting practices at Fannie and 

Freddie for many years. Our efforts are a matter of public record, 

at least in the last 8 years, of going so far as to publicly confront 

Franklin Raines, who took $90 million in 6 years from Fannie Mae, 

and with regard to his fraudulent, unethical lobbying campaign in 

2000 and in regard to the use of unethical accounting practices to 

inflate the bonuses of Fannie Mae’s executives in 2004. In 2005, we 

finally got a bill to the Floor, a vote in favor of GSE reform, including the tough Royce amendment, to make even more difficult the 

types of practices to continue that we see have led to this crisis. 

Any solution to this crisis undoubtedly needs to include a serious 

reexamination of the role that these GSEs will play in any future 

housing market. It is obvious that new regulations are necessary 

both to ease this crisis and to ensure that it never happens again. 

One thing for sure is that these two organizations need to be dissected, ripped apart, and examined thoroughly. Because once we 

find out what happened there as the root cause of the problem, we 

will make sure it never occurs again. 

Thank you, Mr. Chairman. 

6 

The CHAIRMAN. The gentleman from Georgia, Mr. Scott, is recognized for 1 minute. 

Mr. SCOTT. Thank you, Mr. Chairman. Thank you for the hearing. 

I think we have to realize that the damage has been done. We 

have to change our mindset from one of continuing to try to find 

blame; and, instead, we have to work on real solutions. 

The number one issue we have before us is that our system is 

vulnerable. It has been vulnerable because a small quantity of 

high-risk assets undermined the confidence of investors as well as 

other market participants across a much broader range; and the 

combined effect of these factors, without the necessary regulation, 

caused the system to be vulnerable to self-reinforcing asset price 

and credit cycles. 

The issue before us: What are the reforms that will be necessary 

to reduce the vulnerabilities in our economic system in the future? 

We have to press hard to make sure that we stop the blame game 

and understand that the American people are looking to us to provide real solutions. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Mrs. Biggert of Illinois is recognized for 2 minutes. 

Mrs. BIGGERT. Thank you, Mr. Chairman. Thank you for holding 

this hearing to overhaul our financial services regulatory system 

and to bring it into the 21st Century. 

During previous Congresses, this committee held about 100 hearings on GSE reform and led the House to pass a reform bill to rein 

in Fannie Mae and Freddie Mac. I worked on it and supported it 

in 2005 and 2007 because we saw the handwriting on the wall. 

These mortgage giants were too big, their accounting was irregular, 

and capital was too low. 

We also produced legislation to reform the credit rating agencies, 

which we worked on, and that was signed into law in 2006. The 

SEC was unacceptably slow in implementing any reform. 

Now more work needs to be done to ensure that agencies adequately evaluate credit risk. So our work to reform these regulations and many other reforms is by no means done nor will it ever 

be as the financial services industry is ever-evolving. 

Today’s witnesses will touch on a litany of concerns that merit 

further review and serious consideration by this committee. I think 

that our ultimate goals should be to bolster integrity and confidence in the U.S. financial system, to invigorate U.S. competition, 

to enhance consumer protections, to arm consumers with financial 

education and information, and to never again have the taxpayers 

pay for Wall Street’s mistakes. 

With that, I thank the witnesses for joining us today, and I look 

forward to hearing all of their ideas. 

I yield back. 

The CHAIRMAN. The gentleman from Missouri, Mr. Cleaver, is 

recognized for 1 minute. 

Mr. CLEAVER. Mr. Chairman, I will reserve my comments for the 

question-and-answer period. Thank you. 

7 

The CHAIRMAN. Well, then, we will go to the gentleman from 

Florida, Mr. Klein. I apologize. We will go next to the gentleman 

from Texas, Mr. Green. I was out of order here. 

Mr. GREEN. Thank you, Mr. Chairman. I will be brief. 

Mr. Chairman, I thank you for hosting this hearing, because the 

American people are angry. They are upset. They understand that 

and believe that we have within our power to change things to 

make a difference. They are upset about golden parachutes as companies crash. They are upset because people were allowed to have 

loans that they could not afford. They are upset because there are 

markets that are unregulated. They expect us to act. I think this 

is the genesis of the action that we have to take. 

I yield back. 

The CHAIRMAN. The gentleman from New Jersey, Mr. Garrett, 

for 2 minutes. 

Mr. GARRETT. I thank the chairman and the ranking member, 

and I thank also the members of the panel for your testimony we 

are about to hear. 

As you all know, we are facing very challenging times in our Nation’s financial services industry. It is important that we work in 

a bipartisan fashion to move forward to ensure that we put in place 

the proper regulatory framework to allow our economy to grow once 

again. But it has been said already: Before we are able to go forward with new and important changes to the overall regulatory 

structure for our financial services industry, I do believe that it is 

essential that we better understand just how we got into this problem. 

One of the main parts of the problem was poor regulation in the 

past, specifically in the area of Fannie and Freddie. Now in the 

past, I know that our distinguished chairman has noted that he 

and his party were the ones to finally get a new GSE regulator 

over the finish line, albeit a little bit too late. That is quite true. 

However, there is a distortion of the facts to allow them to claim 

the mantle of being a champion of reform with Fannie and Freddie. 

If you look back to the facts during the first committee markup 

of GSE regulation in 2005, it was I and some of my colleagues who 

have already spoken who offered a number of amendments to 

strengthen the regulatory controls and to reduce the overall risk 

that both companies posed to our Nation’s economy. Each and 

every time, the chairman and everyone on the Democrat side of the 

aisle voted against these proposals, whether it was an amendment 

to raise the capital levels, to reduce the retained portfolios, to lower 

the conforming loan limits, or anything else. The other side of the 

aisle voted time and time again for what? Less regulation over 

these two companies. It was this lack of regulation that played a 

large part in getting us to where we are today. 

So I honestly think that we need to learn the lessons of the past 

if we are going to be successful in the future. To formulate a new 

regulatory scheme is a process that is going to take a lot of months, 

a lot of conversations, many hearings, and as much input from all 

parties as possible to ensure that we create really a solid system 

under which we can safely move forward. Creating these new regulation reforms is not a partisan project. It is really about making 

8 

sure American families are protected in the future from the kind 

of financial crisis that we are experiencing now. 

Again, I thank the panel. 

The CHAIRMAN. The gentleman from Florida, Mr. Klein. 

Mr. KLEIN. Thank you, Mr. Chairman. I thank the ranking member as well for calling this hearing. 

We all understand that this financial crisis is deep. It is affecting 

people with their investments. It is affecting small businesses’ access to capital. I think many people understand that it is due, in 

part, to a lack of regulation and oversight. 

Regulation does not have to be a burden. Smarter regulation will 

make our economy stronger, and I would definitely concur that we 

have to bring in, as we are doing today, some of the best and 

brightest people from all over our country to come up with some 

new ideas to have better regulation that will be effective in continuing to promote good ideas in the market and that will protect 

consumers and taxpayers. 

A couple of suggestions: 

One, when we talk about regulation, we have the SEC. We have 

the CFTC. There are ideas out there about a new financial product 

safety commission. It does not matter what we call it. I think the 

goals have to be the same, and that is to make sure that we are 

doing things to stimulate creative ideas. Again, the proper balance 

has to be in place. 

Also, I have great concern about the credit rating agencies. It 

seems to me that there is an inherent conflict of interest there. The 

way it is set up right now, huge fees are being paid. And how 

things could be rated AA and AAA, when people are looking at 

these investments, there is a problem there. 

Also, in encouraging competition among financial institutions, we 

have pretty much eliminated much of our antitrust law in the 

United States, and now we have more and more power consolidated 

with a few institutions in many different areas. This notion of ‘‘too 

big to fail’’ really bothers me. It is like continuing to build and 

build and build and being successful. When you make a number of 

bad decisions, I think you run out of that. 

So I think it is a question of we need to go back and look at all 

of these. Do it in a bipartisan way, but let’s move. Where there is 

a will, there is a way. Let’s get it done as quickly and as reasonably possible. 

The CHAIRMAN. The gentleman from Georgia is recognized for 2 

minutes. 

Mr. PRICE. Thank you, Mr. Chairman. 

I want to join with some on both sides of the aisle who have said 

that the same old politics, frankly, from both sides will not get us 

to a solution to our current challenges. 

There has been lots of excellent work done on attempting to identify the cause of our current financial challenge. I will be inserting 

a number of items into the record. One of them is an article entitled, ‘‘Another Deregulation Myth: A Cautionary Tale about Financial Rules that Failed.’’ 

While the genesis of our current challenge is certainly multifactorial, what began on a microlevel with imprudent borrowers and irresponsible lenders became a full-scale financial crisis, fueled by 

9 

the GSEs that were rapidly expanding their purchasing and 

securitization of subprime mortgages. 

Today, the resulting credit crunch is extended to every area of 

our economic system. What is taking place, though, is truly unprecedented: The direct Federal intervention in individual mortgages; 

a broad overreach by the Federal Reserve; an unlimited use of taxpayer dollars; and steps to nationalize banks. These actions are in 

their totality, I fear, an assault on American principles and on capitalism itself. It is a marked turn toward a nefarious ideal that 

problems can be solved by centralized decisionmaking here in 

Washington. 

To have a full understanding of the financial services’ regulatory 

state, there must be an investigation of all facets of the sector. I 

look forward to working with the chairman for a more broad appreciation of that in our hearing process. 

Moving ahead, Congress must be sensible. The goals should be 

to eliminate previous destructive regulatory actions, not to eliminate all regulation but to have appropriate regulation, close the 

gaps in the regulatory framework, increase transparency, and enhance market integrity and innovation. The end result must promote economic growth and not stifle opportunity. I look forward to 

working with all who are of the same mind. 

Thank you. 

The CHAIRMAN. I will now recognize myself for our remaining 

time. 

The purpose of this hearing was to be forward-looking, and that 

is why the panel of witnesses, proposed by both sides, are people 

who, in their testimony—and I was pleased to see it—talked about 

going forward. The next panel is a panel of people from the financial industry, and I had hoped we could focus on that, but after the 

gentleman from New Jersey’s comments in having decried partisanship, he then practiced it. It does seem to me to be important 

to set the record clearly before us. 

He alluded to a markup in 2005 in which the Democrats refused 

to support his amendments. The Democrats were, of course, in the 

Minority on the committee at that time. Had a Republican Majority 

been in favor of passing that bill, they would have done it. 

The facts are—and, again, the gentleman from New Jersey continues to return to this, so we have to lay the record out here— 

that from 1995 to 2006, the Republicans controlled the Congress, 

particularly the House. Now, he has claimed that it was we Democrats—myself included—who blocked things. The number of occasions on which either Newt Gingrich or Tom DeLay consulted me 

about the specifics of legislation are far fewer than the gentleman 

from New Jersey seems to think. In fact, the Republican Party was 

in control from 1997 to 2005, and it did not do anything. 

I now quote from the article that came out from the lead representative for FM Watch, which is the organization formed solely 

to restrain Fannie Mae and Freddie Mac and which is an organization, by the way, after the Congress finally passed the bill that 

came out of this committee in March of 2007, when Congress finally overcame some Republican filibusters that passed in 2008, 

that disbanded, saying that our bill had accomplished everything 

they had wanted. 

10 

He says he was asked if any Democrats had been helpful. Well, 

Barney Frank of Massachusetts: ‘‘The Senate Banking Committee 

produced a very good bill in 2004. It was S.190, and it never got 

to the Senate floor.’’ The Senate was then, of course, controlled by 

the Republicans. ‘‘Then the House introduced a bill which passed,’’ 

the one the gentleman from New Jersey alluded to, ‘‘but we could 

not get a bill to the floor of the Senate.’’ 

So here you have the documentation of the Republicans’ failure 

to pass the bill. 

He goes on to say, ‘‘After the 2006 election, when everyone 

thought FM policy focus issues would be tough sledding in their restrictions with Democrats in the majority, Barney Frank, as the 

new chairman, stepped up and said, ‘I am convinced we need to do 

something.’ He sat down with Treasury Secretary Paulson, and 

upset people in the Senate and Republicans in the House, but they 

came up with a bill that was excellent, and it was a bill that largely became law.’’ 

So there is the history. I will acknowledge that, during the 12 

years of Republican rule, I was unable to get that bill passed. I was 

unable to stop them from impeaching Bill Clinton. I was unable to 

stop them from interfering in Terri Schiavo’s husband’s affairs. I 

was unable to stop their irresponsible tax cuts with the war in Iraq 

and in the PATRIOT Act that did not include civil liberties. 

Along with the chairman of the committee, Mike Oxley, I was for 

a reasonable bill in 2005. Mr. Oxley told the Financial Times, of 

course, that he was pushing for that bill, the bill that’s mentioned 

favorably by the advocate for FM Watch but that, unfortunately, all 

he could get from the Bush Administration was a ‘‘one-finger salute,’’ and that killed the bill. Now, I regret that we have to get 

into this. I do hope we will look forward. 

One other factor: There is a book out by Mark Zandi called, ‘‘Financial Shock.’’ Mr. Zandi is an adviser to John McCain. Here’s 

what he says on page 151: 

‘‘President Bush readily took up the homeownership at the time 

of the start of his administration. To reinforce this effort, the Bush 

administration put substantial pressure on Fannie Mae and 

Freddie Mac to increase their funding of mortgage loans to lower 

income groups. They had been shown to have problems during the 

corporate accountingscandals and were willing to go along with any 

request from the administration.’’ 

This is Mr. Zandi, John McCain’s economic adviser. 

‘‘OHFEO, the Bush-controlled operation, set aggressive goals for 

the two giant institutions, which they met, in part, by purchasing 

subprime mortgage securities. By the time of the subprime financial shock, both had become sizable buyers.’’ 

That is John McCain’s economic adviser. That is the advocate for 

FM Watch. 

I will throw in one other factor, which notes, ‘‘The Congress in 

1994,’’ the last year of Democratic control, ‘‘passed the Homeowners’ Equity Protection Act, giving the Federal Reserve the authority to regulate subprime mortgage. Mr. Greenspan refused to 

use it.’’ As Mr. Zandi—again, John McCain’s economic adviser— 

notes: ‘‘Democrats in Congress were worried about increasing eviVerDate Aug 31 2005 16:29 Feb 09, 2009 Jkt 046591 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K:\DOCS\46591.TXT TERRIE
11 

dence of predatory lending, pushed for legislation, pushed the Fed. 

We were rejected.’’ 

I hope we can now go forward and try to deal with this situation. 

Yes, it is too bad that we did not do anything about subprime lending. I wish the bill that the Congress passed on Fannie and Freddie 

in 2007 and in this committee in 2008 had been passed earlier, and 

I wish I could eat more and not gain weight. Now let us get constructive about what we need to do in the future. 

The gentleman from Alabama is recognized for the final 3 minutes. 

Mr. BACHUS. Thank you, Mr. Chairman. 

Mr. Chairman, I have a real concern, and that concern is that 

we are going to repeat the mistakes of the past. Now, how did we 

get here? We did it by the overextension of credit. We did it by 

overleveraging. We did it by too much borrowing and by too much 

lending. Yet what are we talking about this week and last month? 

We are talking about how can we stimulate lending, about how can 

we stimulate consumption, about how can we stimulate spending. 

I believe that what we ought to be talking about is how we encourage people to save. How do we encourage people to live within 

their means? How do we encourage the government, not just American families but the government, to live within its means? 

Another concern—and I think it is wrapped up in this—is this 

propensity of Americans to borrow more than they can afford to 

repay and to spend excessively and to not live within their means 

and to intervene on behalf of those who do. You know, we have 

talked about the market. Well, the market has been brutally efficient in the past several months. If it is allowed to work—and 

there will be negative consequences for all of us, but it will penalize those who took excessive risk. It will penalize those who borrowed more than they could afford. It has penalized our investment 

banks. There are no more investment banks. They have overleveraged. 

The best way to discourage people from making bad loans is to 

let the market make them eat those losses. We need, I think, number one, to realize there are limits on what government can do to 

try to intervene in this market process. 

Over a year ago, I was interviewed by the New York Times, by 

one of their editorial boards. I said this is not going to be pretty. 

It is going to be painful, but to a certain extent—and it is not popular to say—it is cathartic. It has a certain cleansing ability in the 

market by doing this. But we are going to be right back here in 

5 years or in 10 years or in 15 years if we, as a country, go out 

and we have a stimulus package where we encourage people to 

spend money, we encourage them to take on loans, to take on debt, 

as opposed to figuring out a way to encourage them to balance 

their budgets as families and as a government. 

If we are going to have an economic stimulus package, I have 

said it ought to be restricted to those things we have to do anyway, 

to those things we are going to do, like sewer projects and water 

projects, even tax policies, which encourage spending. We are here 

today because we borrowed excessively and because we did not live 

within our means. 

12 

I have said this, and I will close with this: On this committee, 

Ron Paul in a debate said we are not a wealthy nation. We are a 

nation of debtors. We are in debt. When we are in debt, and if we 

take on more debt, we are actually going to restrict our ability to 

grow and to thrive economically. That is a negative. Lending excessively and borrowing excessively is not something we ought to encourage. We are going to probably inflate this economy. We are 

going to probably print a lot of money, and we are going to, in my 

mind, it appears that we are going to continue to go down a road 

that has brought us here today. And that is not living responsibly. 

Thank you, Mr. Chairman. 

The CHAIRMAN. I thank the gentleman. 

We will now begin with—the gentleman from Pennsylvania had 

a unanimous consent request he wanted to mention. 

Mr. KANJORSKI. Mr. Chairman, I would ask unanimous consent 

to insert in the record at this point a communication from NAFCU 

regarding this hearing and the responsibility of the committee and 

other positions in the Congress and, also, a statement for the 

record from NASCUS of the State regulatory organization for credit 

unions on the same subject. 

The CHAIRMAN. I thank the gentleman. 

I would just take a second to note that both of them quite correctly pointed out that credit unions bear absolutely no responsibility for the bad lending practices, and I think they are entitled 

to that recognition. 

We will now begin with our witnesses. We will begin with Alice 

Rivlin, who is a senior fellow at the Metropolitan Policy Program, 

economic studies, and director at the Brookings Institution. 

Dr. Rivlin. 

STATEMENT OF THE HONORABLE ALICE M. RIVLIN, SENIOR 

FELLOW, METROPOLITAN POLICY PROGRAM, ECONOMIC 

STUDIES, AND DIRECTOR, GREATER WASHINGTON RESEARCH PROJECT, BROOKINGS INSTITUTION 

Ms. RIVLIN. Thank you, Mr. Chairman, and members of the committee. 

Past weeks have witnessed historic convulsions in financial markets around the world. The freezing of credit markets and the failure of major financial institutions triggered massive interventions 

by governments and by central banks as they attempted to contain 

the fallout and to prevent total collapse. We are still in damage 

control mode. We do not yet know whether these enormous efforts 

will be successful in averting a meltdown, but this committee is 

right to begin thinking through how to prevent future financial collapses and how to make markets work more effectively. 

Now pundits and journalists have been asking apocalyptic questions: Is this the end of market capitalism? Are we headed down 

the road to socialism? Of course not. Market capitalism is far too 

powerful a tool for increasing human economic wellbeing to be 

given away because we used it carelessly. Besides, there is no viable alternative. Hardly anyone thinks we would be permanently 

better off if the government owned and operated financial institutions and decided how to allocate capital. 

13 

But market capitalism is a dangerous tool. Like a machine gun 

or a chain saw or a nuclear reactor, it has to be inspected frequently to see if it is working properly and used with caution according to carefully thought-out rules. The task of this committee 

is to reexamine the rules. 

Getting financial market regulation right is a difficult and painstaking job. It is not a job for the lazy, the faint-hearted, or the ideologically rigid. Applicants for this job should check their slogans at 

the door. Too many attempts to rethink the regulation of financial 

markets in recent years have been derailed by ideologues shouting 

that regulation is always bad or, alternatively, that we just need 

more of it. This less versus more argument is not helpful. We do 

not need more or less regulation; we need smarter regulation. 

Moreover, writing the rules for financial markets must be a continuous process of fine-tuning. In recent years, we have failed to 

modernize the rules as markets globalized, as trading speed accelerated, as volume escalated, and as increasingly complex financial 

products exploded on the scene. The authors of the financial market rule books have a lot of catching up to do, but they also have 

to recognize that they will never get it right or will be able to call 

it quits. Markets evolve rapidly, and smart market participants 

will always invent new ways to get around the rules. 

It is tempting in mid-catastrophe to point fingers at a few malefactors or to identify a couple of weak links in a larger system and 

say those are the culprits and that if we punish them the rest of 

us will be off the hook, but the breakdown of financial markets had 

many causes of which malfeasance and even regulatory failure 

played a relatively small role. 

Americans have been living beyond their means individually and 

collectively for a long time. We have been spending too much, have 

been saving too little, and have been borrowing without concern for 

the future from whomever would support our overconsumption 

habit—the mortgage company, the new credit card, the Chinese 

Government, whatever. We indulged ourselves in the collective delusion that housing prices would continue to rise. The collective delusion affected the judgment of buyers and sellers, of lenders and 

borrowers and of builders and developers. For a while, the collective delusion was a self-fulfilling prophesy. House prices kept rising, and all of the building and borrowing looked justifiable and 

profitable. Then, like all bubbles, it collapsed as housing prices leveled off and started down. 

Now bubbles are an ancient phenomenon and will recur no matter what regulatory rules are put in place. A housing bubble has 

particularly disastrous consequences because housing is such a fundamental part of our everyday life with more pervasive consequences than a bubble in, say, dot com stocks. 

More importantly, the explosion of securitization and increasingly complex derivatives had erected a huge new superstructure 

on top of the values of the underlying housing assets. Interrelations 

among those products, institutions, and markets were not well-understood even by the participants. But it is too easy to blame complexity, as in risk models failed in the face of new complexity. Actually, people failed to ask commonsense questions: What will happen 

to the value of these mortgage-backed securities when housing 

14 

prices stop rising? They did not ask because they were profiting 

hugely from the collective delusion and did not want to hear the 

answers. 

Nevertheless, the bubbles and the crash were exacerbated by 

clear regulatory lapses. Perverse incentives had crept into the system, and there were instances where regulated entities, even the 

Federal Reserve, were being asked to pursue conflicting objectives 

at the same time. 

These failures present a formidable list of questions that the 

committee needs to think through before it rewrites the rule book. 

Here are my offers for that list: 

We did have regulatory gaps. The most obvious regulatory gap 

is the easiest to fill. We failed to regulate new types of mortgages— 

not just subprime but Alt-A and no doc and all the rest of it—and 

the lax, sometimes predatory lending standards that went with 

them. Giving people with less than sterling credit access to homeownership at higher interest rates is actually, basically, a good 

idea, but it got out of control. Most of the excesses were not perpetrated by federally regulated banks, but the Federal authorities 

should have gotten on the case, as the chairman has pointed out, 

and should have imposed a set of minimum standards that applied 

to all mortgage lending. We could argue what those standards 

should be. They certainly should include minimum downpayments, 

the proof of ability to pay, and evidence that the borrower understands the terms of the loan. Personally, I would get rid of teaser 

rates, of penalties for prepayment and interest-only mortgages. We 

may not need a national mortgage lender regulator, but we need 

to be sure that all mortgage lenders have the same minimum 

standards and that these are enforced. 

Another obvious gap is how to regulate derivatives. We can come 

back to that. But much of the crisis stemmed from complex derivatives, and we have a choice going forward. Do we regulate the leverage with which those products are traded or the products themselves? 

The CHAIRMAN. Doctor, you will need to wind this up soon. 

Ms. RIVLIN. Okay. Then, if you would prefer, I can submit the 

rest of the statement for the record. 

The CHAIRMAN. It will be in the record, and we will have plenty 

of time for questions. 

[The prepared statement of Ms. Rivlin can be found on page 123 

of the appendix.] 

The CHAIRMAN. In fairness to the members who have made a 

special trip, what I am going to do is, as we do the questioning, 

when we finish the questioning on our side of the first panel and 

when we have the second panel, I will begin the questioning with 

where we left off in the first panel so that every member will get 

a chance to question at least one set of witnesses before any member questions again. I will defer my own questioning, because I do 

appreciate members coming. So we will have the questioning in 

regular order for the first panel, and then we will pick up where 

we left off at that first panel for the second panel. 

Secondly, we do not have any government officials here today, 

which means that the front row, which is usually reserved for their 

entourages, is available. So if people would like to sit in those 

15 

seats, please feel free. There are people standing up. I do not think 

we will have any deputy assistant, executive whatever whispering 

in anybody’s ear today, so the rest of you should feel free to sit 

there, and you can look bureaucratic if you think you will fit in better. 

Dr. Stiglitz. 

STATEMENT OF JOSEPH E. STIGLITZ, PROFESSOR, COLUMBIA 

UNIVERSITY 

Mr. STIGLITZ. Mr. Chairman and members of the committee, first 

let me thank you for holding these hearings. The subject could not 

have been more timely. 

Our financial system has failed us. A well-functioning financial 

system is essential for a well-functioning economy. Our financial 

system has not functioned well, and we are all bearing the consequences. There is virtual unanimity that part of the reason that 

it has performed so poorly is due to inadequate regulations and due 

to inadequate regulatory structures. 

I want to associate my views with Dr. Rivlin’s in that it is not 

just a question of too much or too little; it is the right regulatory 

design. 

Some have argued that we should wait to address these problems. We have a boat with holes, and we must fix those holes now. 

Later, there will be time to address these longer-run regulatory 

problems. We know the boat has a faulty steering mechanism and 

is being steered by captains who do not know how to steer, least 

of all in these stormy waters. Unless we fix both, there is a risk 

that the boat will go crashing on some rocky shoals before reaching 

port. The time to fix the regulatory problems is, thus, now. 

Everybody agrees that part of the problem is a lack of confidence 

in our financial system, but we have changed neither the regulatory structures, the incentive systems nor even those who are 

running these institutions. As we taxpayers are pouring money into 

these banks, we have even allowed them to pour out moneys to 

their shareholders. 

This morning, I want to describe briefly the principal objectives 

and instruments of a 21st Century regulatory structure. Before 

doing so, I want to make two other prefatory remarks. 

The first is that the reform of financial regulation must begin 

with the broader reform of corporate governance. Why is it that so 

many banks have employed incentive structures that have served 

stakeholders, other than the executives, so poorly? 

The second remark is to renew the call to do something about the 

homeowners who are losing their homes and about our economy 

which is going deeper into recession. We cannot rely on trickledown economics—throwing even trillions of dollars at financial 

markets is not enough to save our economy. We need a package 

simply to stop these things from getting worse and a package to 

begin the recovery. We are giving a massive blood transfusion to 

a patient who is hemorrhaging from internal bleeding, but we are 

doing almost nothing to stop that internal bleeding. 

Let me begin with some general principles. It is hard to have a 

well-functioning, modern economy without a good financial system. 

However, financial markets are not an end in themselves but a 

16 

means. They are supposed to mobilize savings, to allocate capital, 

and to manage risk, transferring it from those less able to bear it 

to those more able. Our financial system encourages spendthrift 

patterns, leading to near zero savings. They have misallocated capital; and instead of managing risk, they have created it, leaving 

huge risks with ordinary Americans who are now bearing the huge 

costs because of these failures. 

These problems have occurred repeatedly and are pervasive. This 

is only the latest and the biggest of the bailouts that have become 

a regular feature of our peculiar kind of capitalism. The problems 

are systemic and systematic. These systems, in turn, are related to 

three more fundamental problems. 

The first is incentives. Markets only work well when private rewards are aligned with social returns, but, as we have seen, that 

has not been the case. The problem is not only with incentive structures and it is not just the level, but it is also the form, which is 

designed to encourage excessive risk-taking and to have shortsighted behavior. 

Transparency. The success of a market economy requires not just 

good incentive systems but good information. Markets fail to 

produce sufficient outcomes when information is imperfect or asymmetric. Problems of lack of transparency are pervasive in financial 

markets. Nontransparency is a key part of the credit crisis that we 

have experienced in recent weeks. Those in financial markets have 

resisted improvements such as more transparent disclosure of the 

cost of stock options, which provide incentives for bad accounting. 

They put liabilities off balance sheets, making it difficult to assess 

accurately their net worth. 

There is a third element of well-functioning markets—competition. There are a number of institutions that are so large that they 

are too big to fail. They are provided an incentive to engage in excessively risky practices. It was a ‘‘heads I win,’’ where they walk 

off with the profits, and a ‘‘tails you lose,’’ where we, the taxpayers, 

assume the losses. 

Markets often fail; and financial markets have, as we have seen, 

failed in ways that have large systemic consequences. The deregulatory philosophy that has prevailed during the past quarter century has no grounding in economic theory nor historical experience. 

Quite the contrary, modern economic theory explains why the government must take an active role, especially in regulating financial 

markets. Regulations are required to ensure the safety and soundness of individual financial institutions and of the financial system 

as a whole to protect consumers, to maintain competition, to ensure 

access to finance for all, and to maintain overall economic stability. 

In my remarks, I want to focus on the outlines of the regulatory 

structure, focusing on the safety and the soundness of our institutions and on the systematic stability of our system. In thinking 

about a new regulatory structure for the 21st Century, we need to 

begin by observing that there are important distinctions between 

financial institutions that are central to the functioning of the economic system whose failures would jeopardize the economy, those 

who are entrusted with the care of ordinary citizens’ money, and 

those who prove investment services to the very wealthy. 

17 

The former include commercial banks and pension funds. These 

institutions must be heavily regulated in order to protect our economic system and to protect the individuals whose money they are 

supposed to be taking care of. There needs to be strong ring-fencing 

of these core financial institutions. We have seen the danger of allowing them to trade with risky, unregulated parties, but we have 

even forgotten basic principles. Those who managed others’ money 

inside commercial banks were supposed to do so with caution. 

Glass-Steagall was designed to separate more conservative commercial banking concerned with managing the funds of ordinary 

Americans with the more risky activities of investment banks 

aimed at upper income Americans. The repeal of Glass-Steagall not 

only ushered in a new era of conflicts of interest but also a new 

culture of risk-taking in what are supposed to be conservatively 

managed financial institutions. 

We need more transparency. A retreat from mark-to-market 

would be a serious mistake. We need to ensure that incentive 

structures do not encourage excessively risky, shortsighted behavior, and we need to reduce the scope of conflicts of interest, including at the rating agencies, conflicts of interest which our financial 

markets are rife with. 

Securitization for all of the virtues in diversification has introduced new asymmetries of information. We need to deal with the 

consequences. 

Derivatives and similar financial products should neither be purchased nor produced by highly regulated financial entities unless 

they have been approved for specific uses by a financial product 

safety commission and unless their uses conform to the guidelines 

established by that commission. 

Regulators should encourage the move to standardized products. 

We need countercyclical capital adequacy and provisionary requirements and speed limits. We need to proscribe excessively risky and 

exploitive lending practices, including predatory lending. Many of 

our problems are a result of lending that was both exploitive and 

risky. As I have said, we need a financial product safety commission, and we need a financial system stability commission to assess 

the overall stability of the system. 

Part of the problem has been our regulatory structures. If government appoints as regulators those who do not believe in regulation, one is not likely to get strong enforcement. The regulatory 

system needs to be comprehensive. Otherwise, funds will flow 

through the least regulated part. 

Transparency requirements in part of the system may help ensure the safety and soundness of that part of the system but will 

provide little information about systemic risks. This has become 

particularly important as different institutions have begun to perform similar functions. 

Anyone looking at our overall financial system should have recognized not only the problems posed by systemic leverage but also 

the problems posed by distorted incentives. Incentives also play a 

role in failed enforcement and help explain why self-regulation does 

not work. Those in financial markets had incentives to believe in 

their models. They seemed to be doing very well. That is why it is 

absolutely necessary that those who are likely to lose from failed 

18 

regulation—retirees who lose their pensions, homeowners who lose 

their homes, ordinary investors who lose their life savings, workers 

who lose their jobs—have a far larger voice in regulation. Fortunately, there are competent experts who are committed to representing those interests. 

It is not surprising that the Fed failed in its job. The Fed is too 

closely connected with financial markets to be the sole regulator. 

This analysis should also make it clear why self-regulation will not 

work or at least will not suffice. 

Mr. KANJORSKI. [presiding] Doctor, please wrap up. 

Mr. STIGLITZ. I noted that there has to be an alignment of private rewards and social returns. I think it is imperative that we 

make those who have contributed to the problem, the financial sector, now pay for the cleanup. 

Financial behavior is also affected by many other parts of our tax 

and legal structures. Financial market reform cannot be fully separated from reform in these other laws. For instance, our tax laws, 

particularly the preferential treatment of capital gains— 

The CHAIRMAN. Joe, he’s nicer than me, so you have to stop it. 

Mr. STIGLITZ. Okay. Let me just say that there is also an international dimension, that we can redesign our financial system to 

actually encourage innovation. We have had bad innovation. The 

agenda for regulatory reform is large. It will not be completed overnight. But we will not begin to restore confidence in our financial 

system until and unless we begin serious reform. 

Let me submit my whole statement for the record. 

The CHAIRMAN. Yes, we are going to have a lot of questions. 

There will be elaboration and a chance to elaborate with questions. 

[The prepared statement of Mr. Stiglitz can be found on page 149 

of the appendix.] 

The CHAIRMAN. Dr. Seligman. 

STATEMENT OF JOEL SELIGMAN, PRESIDENT, UNIVERSITY OF 

ROCHESTER 

Mr. SELIGMAN. Mr. Chairman, we have reached a moment of discontinuity in our Federal and State systems of financial regulation 

that will require a comprehensive reorganization. Not since the 

1929–1933 period, has there been a period of such crisis and such 

need for a fundamentally new approach to financial regulation. 

Now, this need is only based, in part, on the economic emergency. Quite aside from the current emergency, finance has fundamentally changed in recent decades while financial regulation 

has moved far more slowly. 

First, in the New Deal period, most finance was atomized into 

separate investment banking, commercial banking, or insurance 

firms. Today, finance is dominated by financial holding companies 

which operate in each of these and cognate areas such as commodities. 

Second, in the New Deal period, the challenge of regulation was 

essentially domestic. Increasingly, our fundamental challenge in financial regulation is international. 

Third, in 1930, approximately 1.5 percent of the American people 

directly owned stock on the New York Stock Exchange. Today, a 

substantial majority of Americans own stock directly or indirectly 

19 

through pension plans or mutual funds. A dramatic deterioration 

in stock prices affects the retirement plans and sometimes the livelihoods of millions of Americans. 

Fourth, in the New Deal period, the choice of financial investments was largely limited to stock, debt, and to bank accounts. 

Today, we live in an age of increasingly complex derivative instruments, some of which, as recent experience has painfully shown, 

are not well-understood by investors and, on some occasions, by 

issuers or counterparties. 

Fifth, and most significantly, we have learned that our system of 

finance is more fragile than we earlier had believed. The web of 

interdependency that is the hallmark of sophisticated trading today 

means when a major firm such as Lehman Brothers is bankrupt, 

cascading impacts can have powerful effects on an entire economy. 

Against this backdrop, what lessons does history suggest for the 

committee to consider as it begins to address the potential restructuring of our system of financial regulation? 

First, make a fundamental distinction between emergency rescue 

legislation, which must be adopted under intense time pressure, 

and the restructuring of our financial regulatory order, which will 

be best done after systematic hearings and which will operate best 

when far more evidence is available. 

The creation of the Securities and Exchange Commission, for example, and the adoption of six Federal securities laws between 

1933 and 1940 was preceded by the Stock Exchange Practices hearings of the Senate Banking Committee and counterpart hearings in 

the House between 1932 and 1934. Second, I would strongly urge 

each House of Congress to create a select committee similar to that 

employed after September 11th to provide a focused and less contentious review of what should be done. The most difficult issues 

in discussing appropriate reform of our regulatory system become 

far more difficult when multiple congressional committees with 

conflicting jurisdictions address overlapping concerns. 

Third, the scope of any systematic review of financial regulation 

should be comprehensive. This not only means that obvious areas 

of omission today such as credit default swaps and hedge funds 

need to be part of the analysis, but it also means, for example, our 

historic system of State insurance regulation should be reexamined. In a world in which financial holding companies can move resources internally with breathtaking speed a partial system of Federal oversight runs an unacceptable risk of failure. Fourth, a particularly difficult issue to address will be the appropriate balance 

between the need for a single agency to address systemic risk and 

the advantages of expert specialized agencies. There is today an obvious and cogent case for the Federal Reserve System and the Department of the Treasury to serve as a crisis manager to address 

issues of systemic risk, including those related to firm capital and 

liquidity. But to create a single clear crisis manager only begins 

analysis of what appropriate structure for Federal regulation 

should be. Subsequently, there must be considerable thought as to 

how best to harmonize the risk management powers with the role 

of specialized financial regulatory agencies that continue to exist. 

Existing financial regulatory agencies, for example, often have 

dramatically different purposes and scopes. Bank regulation, for exVerDate Aug 31 2005 16:29 Feb 09, 2009 Jkt 046591 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 K:\DOCS\46591.TXT TERRIE
20 

ample, has long been focused on safety insolvency, securities regulation on investor protection. 

Similarly, these differences and purposes in scope in turn are 

based on different patterns of investors, retail versus institutional 

for example, different degrees of internationalization and different 

risk of intermediation in specific financial industries. The political 

structure of our existing agencies is also strikingly different. The 

Department of the Treasury, of course, is part of the Executive 

Branch. The Federal Reserve System and the SEC, in contrast, are 

independent regulatory agencies. But, the SEC’s independence 

itself as a practical reality is quite different from the Federal Reserve System with a form of self-funding than for the SEC and 

most independent regulatory agencies whose budgets are presented 

as part of the Administration’s budget. Underlying any potential financial regulatory reorganization are pivotal questions I urge this 

committee to consider, such as what should be the fundamental 

purpose of new legislation, should Congress seek a system that effectively addresses systemic risk, safety insolvency, investor consumer protection, or other overarching objectives. 

How should Congress address such topics as coordination of inspection examination, conduct or trading rules enforcement of private rules of action? Should new financial regulators be part of the 

Executive Branch or independent regulatory agencies? Should the 

emphasis in the new financial regulatory order be on command and 

control to best avoid economic emergency or on politicization to ensure that all relevant views are considered by financial regulators 

before decisions are made? How do we analyze the potentialities of 

new regulatory norms in the increasingly global economy? What 

role should self-regulatory organizations such as FINRA have in a 

new system of financial regulations? These and similar questions 

should inform the most consequential debate over financial regulation that we have experienced since the new deal period. 

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

140 of the appendix.] 

The CHAIRMAN. And finally, Manuel Johnson, Mr. Johnson. 

STATEMENT OF THE HONORABLE MANUEL H. JOHNSON, 

JOHNSON SMICK INTERNATIONAL, INC. 

Mr. JOHNSON. Thank you, Mr. Chairman. The current state of 

the U.S. financial regulatory system is a result of an extreme 

breakdown in confidence by the credit markets in this country and 

elsewhere so that U.S. regulatory authorities have determined it 

necessary to practically underwrite the entire process of credit provision to private borrowers. All significant U.S. financial institutions that provide credit have some form of access to Federal Reserve liquidity facilities at this time. All institutional borrowers 

through the commercial paper market are now supported by the 

Federal Reserve System. 

Many of the major institutional players in the U.S. financial system have recently been partially or fully nationalized. While it appears that the Federal Reserve, along with other central banks, 

have successfully addressed the fear factor regarding access to liquidity, there are lingering fears in the markets about the economic viability of many financial firms due to the poor asset qualVerDate Aug 31 2005 16:29 Feb 09, 2009 Jkt 046591 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 K:\DOCS\46591.TXT TERRIE
21 

ity of their balance sheets. All of these measures to restore confidence are the result of huge structural and behavioral flaws in 

the U.S. financial system that led to excessive expansion in 

subprime mortgage lending and other credit related derivative 

products. 

Because these structural problems have encouraged distorted behavior over a long period of time, it will take some time to completely restore confidence in these credit markets. However, over 

time, as failed financial institutions are resolved through private 

market mergers or asset acquisitions and government takeovers 

and restructurings, confidence in the U.S. credit system should be 

gradually restored. Unfortunately, this will likely be very costly to 

U.S. taxpayers. Over the longer term, the public, I think, should 

be very concerned about the implications of the legislative and regulatory efforts to deal with this crisis of confidence. 

From my perspective, permanent government control over the 

credit allocation process is economically inefficient and potentially 

even more unstable. One of the major reasons why excesses developed in housing finance was a failure of Federal regulators to adequately supervise the behavior of bank holding companies. Specifically, the emergence of structured investment vehicles (SIVs), an 

off-balance sheet innovation by bank holding companies to avoid 

the capital requirements administered by the Federal Reserve, set 

in motion a virtual explosion of toxic mortgage financings. 

While the overall structure of bank capital reserve requirements 

was sound relative to bank balance sheets, supervisors were simply 

oblivious to bank exposures off the balance sheet. If bank supervisors could not police the previous and much less pervasive regulatory structure, you can imagine the impossibility of policing a 

vastly more extensive and complicated structure. Again, while bank 

capital requirements are reasonably well-designed today, it is supervision that is a problem. The U.S. financial system has been the 

envy of the world. Its ability to innovate and disburse capital to 

create wealth in the United States and around the globe is unprecedented. A new book by my colleague, David Smick, entitled, ‘‘The 

World is Curved,’’ documents the astonishing benefits the U.S. financial system has provided in the process of globalization. The 

book also clearly describes the dangers presented by regulatory and 

structural weaknesses today. 

It would be a mistake to roll back the clock on the gains made 

in U.S. finance over the last several decades. As the current crisis 

of confidence subsides and stability is restored, U.S. regulators 

should develop clear transition plans to exit from direct investments in private financial institutions and attempt to roll back extended guarantees to credit markets beyond the U.S. banking system. Successfully supervising the entire U.S. credit allocation process is simply impossible without dramatically contracting the system. More resources and effort should be put into supervision of 

bank holding companies. Financial regulators should focus on the 

full transparency of securitization development and clearing systems. Accurate disclosure of risk is the key to effective and sound 

private sector credit allocation. Reforms following these type principles should help maintain U.S. prominence in global finance and 

22 

enhance living standards both domestically and internationally. 

Thank you, Mr. Chairman. 

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

121 of the appendix.] 

The CHAIRMAN. Thank you. 

We will begin the questioning with Mr. Kanjorski. I remind 

members on the Democratic side that if we have to cut this off we 

will begin—if we have to stop at some point to let these witnesses 

go, we will begin questioning with those members who did not get 

a chance to question in the first panel. So you might decide if you 

want to talk to them or the next group. It is your choice. The gentleman from Pennsylvania. 

Mr. KANJORSKI. Thank you very much, Mr. Chairman. Gentlemen, there have been suggestions out there from various members 

of the panel that we create some sort of commission or select committee. And I assume that is so that we could get to the basis of 

what the cause of the present economic situation is and where 

there is a failure or a weakness in the existing system. I guess my 

question to you is, one, is this ever attainable or is it not only an 

economic problem but also a political problem? I notice of late and 

even occurring here today that there is a constant argument about 

who is at fault. 

I have heard a lot of my colleagues question that it is truly a 

problem of the Clinton Administration. And then someone said no, 

it is really a problem of the Buchanan Administration. And going 

all the way back, I am not sure whose fault it is. Maybe it is the 

fault of George Washington; if we didn’t have the country, we 

wouldn’t have the problem. But before we can get to a clean-up situation, would you recommend that almost immediately we take 

steps to create either a commission empowered for 90 or 180 days 

to report back to the Congress to get some equilibrium as to cause 

so that we can then decide legislatively how to approach this? And 

particularly, before I turn it over to you all for answers, I was impressed in listening to you that if you remember just 3 years ago, 

the country was in the throes of almost a 50/50 argument that Social Security should be privatized. 

And at that time, the argument was being made that, look, if we 

did that, how much greater that would be to the assistance of people having a better retirement. And I didn’t hear a lot of people 

raise objections to the risk. It was like, great idea, let us do it. And 

I just keep thinking as I meet with my constituents today how, 

thank God, 3, 31⁄2 years ago, this country didn’t fall into that terrible trap or we would really have a disaster on our hands in terms 

of all of the Social Security funds that probably would have been 

lost by this time. 

So what I am sort of asking you for is, if you can, give us an outline of how we would start this—a commission, a select committee, 

whether or not then we should go to the regular order of the Congress, how to act, and can we do it without establishing some basic 

foundation, if I may? Dr. Seligman. 

Mr. SELIGMAN. I think there are two different fundamental 

needs. First, you need some mechanism for investigating the relevant facts. And a challenge you have is because so many of the 

financial regulators were involved in regulation which has been 

23 

called somewhat into question, how to create an independent mechanism. In 1987, after the stock market crashed then there were a 

number of reports. Some came from Congress. There was a particularly good one in that case that came from the Department of the 

Treasury. But one of the first things you should do is see if through 

Congress or otherwise you want to stimulate some sort of special 

study on a timeline which will be able to present to you a comprehensive report on what has happened. 

Second, and the point I stressed in my testimony, select committees, I think, are important for a different reason. Different congressional committees have different jurisdiction. To give you an illustration, this committee has a very broad ambit but it does not, 

for example, have within its scope the Commodities Futures Trading Commission, which reports to a separate committee. Given the 

urgency with which you should address financial futures and credit 

derivatives which have been not clearly allocated in our current 

regulatory scheme, a select committee would be a mechanism to a 

more comprehensive review. You could have everybody at the table 

hearing the same evidence and hopefully get to the appropriate resolution. 

Mr. KANJORSKI. Very good. Dr. Stiglitz. 

Mr. STIGLITZ. I agree that one needs to approach this comprehensively. I think that looking at the past and what has caused this 

problem is only part of what needs to be done, because there are 

all kinds of crises we could have had and that we will have in the 

future. We are looking at this in a way parochially as Americans. 

This has been a global crisis. Countries that didn’t have our particular institutions have also had problems. And so I think we really need to think about this looking forward, taking into account the 

changes in the financial markets that have occurred, what are the 

risks, and how do we manage those risks. And I guess a final point, 

I think one of the real difficulties is the very large role of the special interest at play in shaping our current financial structures, 

regulatory structures, the failures of the current financial regulators are going to make it very difficult to go forward. That is 

something you just have to take into account, that they are going 

to try to shape the regulations to allow them to keep doing what 

they did in the past because it worked for them. 

The CHAIRMAN. Mr. Neugebauer. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. Mr. Johnson, in 

your testimony you said regulators should develop a clear transition plan to exit from the direct government investments and credit 

backstops moving forward. And quite honestly, I agree that we 

need an exit strategy. One of the reasons that I voted against the 

plan, not once, but twice, was that nobody was really ever able to 

articulate a clear exit strategy of this major market intervention by 

the Federal Government. Can you elaborate a little bit more on 

when, in your estimation, it becomes appropriate to begin that 

transition where we begin to back the elephant out of the room, so 

to speak, and let these markets, you know, return to an environment where the government is not intervening? 

Mr. JOHNSON. Yes, Congressman. Well, I agree with some of the 

other comments here that something like a select committee could 

be organized to look at this problem in a comprehensive way. I 

24 

don’t really have much input on the best organization to deal with 

this issue because there are many oversight organizations that 

have been set up over the years to cover almost all aspects of the 

regulatory sector. But I do strongly believe that once financial markets are stabilized and confidence is restored, we should have a 

transition plan and an exit strategy. A specific exit date is important even if that date is somewhat arbitrary. 

I am not a believer in central government control over the entire 

credit allocation process. I am a believer in strong supervision and 

regulation over those aspects of the financial system that are underwritten by the U.S. taxpayer such as the banking sector. But 

what worries me now is we have spread the U.S. Federal safety net 

over the entire financial system, the entire credit allocation process 

today. And I think we must determine an exit from that. The risk 

reward structure is what drives this economy and we have failed 

miserably to supervise the safety net and keep it more narrowly focused. 

We have allowed excessive risk-taking with no accountability and 

no transparency in the risk process. And therefore, today we are 

afraid to let anyone fail because we don’t know what the systemic 

damage of this might be. Failure is a critical part of this system. 

Yes, there must be rewards for risk-taking. But if you can’t fail 

when you make bad mistakes, the system is broken and you might 

as well just go to total control. 

So I would say that once a comprehensive review has been undertaken, you should rationalize the regulatory structure, in my 

opinion, as narrowly as possible to limit the safety net. But, I 

wouldn’t favor doing that unless people were accountable for their 

risk-taking. And so—but I would favor shrinking this back to the 

bank holding company structure and of course having as much disclosure and transparency as possible in the securitization process 

so that risk takers know what risks they are taking. And I can’t 

say the exact moment at which that should be done, but it should 

be done when you have rationalized in a comprehensive way and 

feel strongly that you understand what has happened and that the 

supervisory structure is adequate. But I think the sooner the better 

that you can get on with that I would favor. 

Mr. NEUGEBAUER. Well, you did a great job. I had two more 

questions for you and you answered both of those. And so I appreciate that. Just a lightning round here. One of the concerns I have 

is there has been a lot of talk about systemic risk. And I think, Mr. 

Stiglitz, you mentioned ‘‘too big to fail.’’ Yet part of the plan here 

is that we are encouraging a massive consolidation of entities here, 

and are we, in fact, continuing to add to the systemic risk in the 

marketplace. 

Mr. STIGLITZ. I actually remarked on that. I think it is a very 

serious problem, and I think part of a general failure to enforce 

antitrust laws in the last few years. And so one of the things I 

think is part of your exit strategy is that we have to think about 

breaking up some of the big banks and realizing that actually the 

economies of scale are not as big. And one of the things that I think 

has facilitated this growth has been the recognition that they are 

too big to fail and will put our money there because the government implicitly or explicitly is going to guarantee them. 

25 

The CHAIRMAN. Thank you. 

Mr. SELIGMAN. Let me just make a quick— 

The CHAIRMAN. Very quickly, Mr. Seligman. 

Mr. SELIGMAN. There is another aspect of systemic risk, and that 

is counterparties. That is with derivative instruments. That is regardless of the size of the institution if it is linked to other institutions through transactions where the failure of one can set in a cascading effect. That is what the real risk with Lehman Brothers 

turned out to be. 

The CHAIRMAN. I recognize the gentleman from New York and 

ask you to give me 15 seconds. It occurs to me that what we should 

be looking for as an offset to the doctrine of ‘‘too big to fail,’’ we 

should have a rule of ‘‘too failing to be big,’’ and that is the job of 

regulation. The gentlewoman from New York. 

Mrs. MALONEY. Thank you, Mr. Chairman. I would like to welcome all the panelists and mention to Dr. Stiglitz that I have enjoyed your books, particularly the latest one, ‘‘The $3 Trillion War.’’ 

And I would like to reference your written comments where you 

said that America’s financial markets have engaged in anticompetitive practices, especially in the area of credit cards. And you go further on to say, and I quote, ‘‘the huge fees have helped absorb the 

losses from their bad lending practices, but the fact that the profits 

are so huge should be a signal that the market has not been working well.’’ I do want to note that the Federal Reserve has also 

called credit practices and credit cards unfair deceptive and anticompetitive and this committee and this House passed in a bipartisan way reform legislation in this area, so we are acting in that 

area. 

You also mentioned that one of the problems is the lack of transparency. I would like to hear your ideas on a master super 

counterparty netting system. The idea of the system would be to 

provide a complete and transparent view of the entire financial system which would require every dealer to download all transactions 

every night, including all international. This would be in one place, 

an international area that would have a transparency so that we 

could track what is happening in the system. We know that derivatives are a huge part of it. But to date, the credit derivatives have 

been what we have focused on, yet they are only 10 percent of the 

global derivatives volume, so we may have an even larger problem 

that we have no idea how wide it is, and with such a super 

counterparty netting system, add more transparency, and help us 

move forward towards a better knowledge about our markets. 

Mr. STIGLITZ. I think that would help. One of the things I commented on in my remarks was the need for standardization of 

these products. Because one of the problems is that if they are very 

complex, it is hard to know what is being netted. And so part of 

what needs to be done is moving towards more standardization 

which would allow greater transparency in the products themselves 

and greater competition in the market. When you have highly differentiated products it is more likely that they will be less transparent and that markets will be less competitive. 

Mrs. MALONEY. Thank you. What I am hearing from my constituents is they are not getting access to credit still, even though it was 

reported Monday that the credit markets are easing. And these are 

26 

established businesses, small and large, that are paying their loans 

on time, yet some banks are pulling their loans. This could be a 

downward spiral forcing them into bankruptcy, hurting our economy. So I would like to ask Ms. Rivlin, would one approach to help 

the stability in the credit markets be that at the very least, we 

could guarantee the loaning between the banks and have a blanket 

guarantee of new short-term loans to one another by the central 

banks? Would that be helpful in this regard? We have seen, so far, 

a piecemeal approach, as has been mentioned by the panelists, and 

not only in America, but in Europe and Asia as well. This obviously 

requires a high degree of international cooperation. I welcome your 

remarks and other panelists on this idea. Would that ease the credit? Would that help us get the credit out to the substantial businesses that are employing paying taxes part of our economy? 

Ms. RIVLIN. I am sorry, a guarantee of interbank lending? Well, 

that has been discussed. I think we may not need that. It does look 

as though interbank lending is coming back. And the international 

cooperation doing the same thing in different financial markets has 

been actually I think quite impressive that the central banks and 

treasuries have been working together. So I am not sure that we 

actually need at this point a guarantee of interbank lending. The 

interbank lending rates are coming down and the capital injection, 

it seems to me, is probably going to be enough to do that. 

Mrs. MALONEY. Mr. Stiglitz. 

Mr. STIGLITZ. I am not sure that the capital injection is going to 

be enough. But I do feel nervous about guaranteeing individual 

loans. I think guaranteeing interbank lending again would facilitate that market. But that itself, again, is not going to suffice. The 

real problem and the reason that we want to have a good financial 

system is that credit is the life blood of an economy. And when 

there is the degree of uncertainty going into an economic downturn, 

the fundamental problem, the hemorrhaging at the bottom, the 

foreclosures are going to continue because house prices are going 

to fall. If we aren’t doing anything about either the stimulus, the 

stimulating economy, or about the foreclosure, banks are going to 

be more conservative. And so I think it was necessary to recapitalize the banks but it is not going to be sufficient to address our 

problems. 

The CHAIRMAN. Mr. LaTourette. 

Mr. LATOURETTE. Thank you, Mr. Chairman. Dr. Stiglitz, I want 

to thank you for your testimony. I want to thank everybody for 

your testimony. But Dr. Stiglitz, your testimony hit on all the 

points that I think I was attempting to make in my opening remarks. The first question I have for you is, I am over here, Dr. 

Stiglitz. I am one of the few guys with a beard in the room besides 

you. You made the observation during your truncated opening remarks that there was a feeling at least on your part and I think 

it is one that is shared by a lot of people that the people who made 

the mess should clean up the mess. And in my part of the world 

in Ohio, people believe that not only includes paying in dollars, but 

some people think people should go to prison. I agree with that if 

you have broken the rules and cost people their life savings. But 

I think I would ask you, what do you mean, and how would you 

27 

envision that the people who have made the mess pay for the mess, 

clean up the mess? 

Mr. STIGLITZ. In my more extended remarks, I gave the analogy 

that in environmental economics, we have a principle called ‘‘pollute or pay.’’ And financial markets have polluted our economy 

with toxic mortgages and they need, ought to pay for the clean-up. 

The fact is that we are providing now capital to the financial sector 

taking advantage of the low cost of funds that the government has. 

And the criteria that we have set is that we just get paid back that 

low cost funds. I think that what I had in mind is that if it turns 

out that we don’t make a good return on the money that we have 

put into the financial system, and I mean not a zero return, but 

above the zero because we bore a risk, that there be some form of 

taxation of the financial institutions that have made use of these 

funds. For instance, a tax on excessive capital gains imposed on 

these financial institutions. 

Mr. LATOURETTE. I agree with you. I think that is why some of 

us weren’t so crazy about the bailout of $700 billion, because it 

didn’t have one that guaranteed. And it seemed that rather than 

finding different ways to take care of this, we just gave $700 billion 

to folks and said, we hope that these toxic assets have a market 

value some day in the future, which is a big ‘‘if’’ for a lot of money. 

The other observation you made was about a transfusion, the 

$700 billion being a transfusion given to a hemorrhaging patient, 

I think were your words. And that—did it have to be just from your 

observation a publicly financed bailout? There was a proposal for 

instance for repatriation of offshore funds held by American corporations to buy these toxic assets who then obviously would receive something in the form of a capital gains treatment if they 

bought them, created a market for them, and held them. Do you 

think—I mean, a lot of people, we talk about greed, we talk about 

lack of regulation or poor regulation, we talk about people overborrowing, buying houses they had no business buying. But doesn’t it 

offend your sensibility, I guess, that all this bailout has to come 

from the public sector at this moment in time? 

Mr. STIGLITZ. It does offend my sensibilities, but I don’t think 

there was any alternative. In earlier crises in 1997 and 1998, the 

global financial crisis, there was a lot of talk of what they called 

bailing on the private sector. But individual private investors are 

not going to go into the morass of our financial markets where 

there was so little transparency. Those who went in at the beginning got burned. And so I think there were—and the magnitudes 

involved required were just too large to be able to get that from the 

private sector. So one had to do something. But it could not have 

been done in a much worse way than the way it was done in terms 

of protecting American taxpayers. 

Mr. LATOURETTE. And the last observation that you made, you 

said the retreat from mark to market would be not a good thing. 

And, at least from my observation, I have been told that about $5 

trillion in liquidity has been taken out of the market just by the 

mark to market principles. And so rather than coming up with another bad regulation on mark to market or retreating from it, since 

there is no market for some of these assets, and that is creating 

the double whammy: One, you are marking down your portfolio; 

28 

and two, you have to store away more cash for safety and soundness, could we replace mark to market with something else such 

as intrinsic value so that we could create a level of value for an 

asset. 

Mr. STIGLITZ. Well, I think that it is imperative to continue with 

mark to market. When there is no market, as is the case in some 

assets, obviously you can’t mark to market, you have to use some 

other principle. The issue is what you do with mark to market. I 

had a very brief reference to countercyclical provisioning which 

takes into account what happens in these kinds of situations to 

market values. What I find very interesting is that those who have 

criticized mark to market didn’t criticize it when they overestimated the prices in the bubble and haven’t offered to give back the 

bonuses that were based on those over excessive prices when the 

market was excessively exuberant. They want an asymmetry where 

when it is too low, they will get the market up, when it is too high, 

they will leave it up to high. I think we have to stay with a transparent system but think very carefully about how we use that information in regulatory processes. 

Mr. LATOURETTE. Thank you. Mr. Chairman, Mr. Seligman is 

practically jumping out of his chair to comment on the mark to 

market. 

Mr. SELIGMAN. I don’t mean to be jumping out of my chair, Congressman. 

The CHAIRMAN. We worry about jumping out of our chairs all the 

time, or falling out. 

Mr. SELIGMAN. If there is a market, not to use it runs the risk 

of deluding yourself. I mean, it is the essence of capitalism that we 

rely on markets. To suggest there is some other intrinsic value 

other than the markets can lead to excessive ebullience in ways 

that can mislead you terribly. 

The CHAIRMAN. Thank you, Mr. Seligman. I am going to recognize Ms. Velazquez and take 15 seconds to say that I think what 

we intend to pursue, or what I hope we will pursue, is what Mr. 

Stiglitz said, namely that mark to market is one thing, the automatic consequences that result from that are a separate thing, and 

that it is possible to leave mark to market in place, but then to 

make sure that all these negative consequences, as the gentleman 

said, put more cash aside, which have a procyclical effect. 

And my own view was that there is a consensus forming about 

a two-step process in which you have mark to market, but which 

you then get flexibility on the consequences. And that will be—the 

ranking member had asked that this be particularly part of this 

hearing. That will be part of our agenda next year. The gentlewoman from New York. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. If I may, Ms. Rivlin, 

I would like to address my first question to you. In the recent economic crisis, several of our Nation’s largest financial firms received 

unprecedented levels of Federal resources because regulators believed that they were too big to fail. At the same time, many community banks and credit unions who did nothing to contribute to 

our current situation are equally affected by the crisis but have 

been largely left out of the Treasury’s rescue plans. Given this reality, how will this affect consumers in those areas that rely upon 

29 

community banks and credit unions for the credit needs, especially 

small businesses? Every day that we read the news, newspapers, 

there are different stories across the Nation where it is very difficult for small businesses to access credit. 

Ms. RIVLIN. I think this is a very real problem. The hope was 

that at least stabilizing the major institutions first would get credit 

flowing and that it would help with the rest of the system. How 

to intervene at the community bank and credit union level is another question. Part of it, I think, goes to intervention in the mortgage markets themselves and to finding better ways and with larger amounts of money behind them to buy up the mortgages and renegotiate them so that you can keep the homeowner in the house 

where possible or re-sell it or re-rent it to somebody else. That 

strikes me, and Dr. Stiglitz mentioned this, as a really important 

part of this puzzle. 

Ms. VELAZQUEZ. So let me ask you, Dr. Stiglitz, should a revised 

regulatory framework eliminate this dichotomy where some firms 

are too big to fail and others are too small to save? 

Mr. STIGLITZ. As I said before, I think we do need to deal with 

the problem of the big banks and have effective antitrust enforcement. One of the things that I mentioned about the objectives of 

regulation should be access to finance, access to credit. I didn’t 

have time to talk about that, but that is really very important. The 

community banks and the credit unions play a very important part 

in that. And I worry a little bit that in the rush to save the stability of our financial system, we are not focusing on in the long 

run, what is the most important, is access to finance. I think it 

would be very important to create a monitoring of where the finance is going, who is getting it, making sure that there is finance 

to small businesses. And that may necessitate giving some more 

help to the small—to the community banks, local banks, regional 

banks, and credit unions. 

Ms. VELAZQUEZ. Ms. Rivlin, even before recent mergers and takeovers, the 3 largest banks in the United States control more than 

40 percent of the industry’s total assets. Should working families 

who have watched as their retirement accounts dwindled be concerned about this increased level of consolidation and what do we 

as policymakers need to consider going forward in an era of increased industry consolidation? 

Ms. RIVLIN. I think we do need to worry about it. I think it is 

very hard to figure out exactly how to fix it. And I wouldn’t want 

to be the antitrust judge trying this case because I don’t think we 

know what the rules are. There was reference to Gramm-Leach-Bliley earlier; was that a mistake. I don’t think so. I don’t think we 

can go back to a world in which we separate different kinds of financial services and say these lines cannot be crossed. That wasn’t 

working very well, nor was our older prohibition under GlassSteagall of interstate banking. You are not old enough to remember 

that. But we can’t go back to those days. We have to figure out how 

to go forward. But I think the consolidation of these huge financial 

behemoths is a problem. 

Ms. VELAZQUEZ. But the present days are not working either. 

The CHAIRMAN. Mrs. Biggert. 

30 

Mrs. BIGGERT. Thank you, Mr. Chairman. I thank you all for 

your testimony. And like some of you, I want to see a Federal entity that supervises and ensures the safety and soundness of larger 

hybrid financial institutions like AIG. Second, that we need the 

FEC to regulate the credit default swaps market, revise mark to 

market accounting, enhance the credibility of credit rating agencies, reign in hedge funds, as well as market manipulations like the 

short selling. And third, it is essential, I think, that we work towards modernizing mortgage and credit product regulations like 

RESPA, TILA, UDAP and determining the fate of Fannie and 

Freddie. And I will assume that you all have read Paulson’s Blueprint for a modernized financial regulatory structure. The model 

proposes that instead of the functional regulations that we create 

the three primary financial services regulations to focus on market 

stability across the entire financial system and then safety and 

soundness of financial institutions with government guarantee; and 

then third is the business conduct regulations that investors and 

consumers—that gives the investors and consumers protection. So 

I would like to know, in your opinion, is this a silver bullet structure that you can paint a picture for us as to what the ideal financial services regulatory structure would look like? Maybe Mr. Seligman. You talked a lot about the— 

Mr. SELIGMAN. The Department of Treasury Blueprint started a 

conversation and it deserves credit for that. But in spite of the fact 

it was a reasonably long document, it did not seem to have the detailed understanding of the purposes of the separate regulatory 

agencies that do exist, understand their advantages, and understand their institutional context. I think that is important as you 

consider how to go forward. I thought the first tier of recommendations made more sense with respect to market stabilization. I call 

it a crisis manager. There are other terms. And clearly the notion 

that you need to have one hand firmly on the till makes sense. I 

thought scrapping the SEC and some of the other initiatives in the 

second and third tier were quite question-begging. 

I was struck by a starkly ideological tone. The notion that in effect, the core principles articulated by the Commodities Futures 

Trading Commission, were necessarily the wisest approach to address issues like market manipulation is quite question-begging. 

The history of addressing market manipulation require statutes, 

rules, and case determinations. It is quite case-specific. Having 

said that, the point that was useful in that exercise, and it was like 

an academic exercise, was it did focus us on the fact that we are 

not just dealing with an immediate economic emergency, we are 

dealing with a fundamental changes in the dynamics that actuate 

regulation at the Federal level. When the underlying markets 

change, regulation must change in constructive ways to address it. 

Mrs. BIGGERT. Thank you. Ms. Rivlin. 

Ms. RIVLIN. I did read the Treasury Blueprint and I didn’t think 

it was anything like a silver bullet. And particularly because I 

think as long as we do have big financial institutions, maybe they 

are too big, but we are going to have big financial institutions, it 

is very hard to separate market stability from the safety and 

soundness of those institutions. So they were giving one institution 

the market stability job, and another institution the safety and 

31 

soundness job. They are very hard to separate. They would have 

to work together. I don’t think it is a cure for the duplication. 

There were some other things in it that were better. 

Mrs. BIGGERT. Do you think that since we are looking at systematic risk which has been such a big problem, then how do we fit 

that into a regulatory structure? 

Mr. SELIGMAN. I would like to suggest that just as in say a national security emergency in the White House, you have one person 

definitively in charge of command and control under some circumstances. In an economic emergency and to prevent an economic 

emergency, you need someone who is unequivocally or some institution that is unequivocally in charge. And it could be the Federal 

Reserve System, it might be the Department of the Treasury. But 

it is not sufficient for it just to be reactive to a crisis. The question 

is, how do you provide sufficient information flow, examination, 

and inspection so we can avoid a crisis. The purpose of regulation 

is not to clean up messes but to prevent them. And in that sense 

one of the, I think, pivotal decisions this committee or some committee is going to have to wrestle with is, how do we make permanent a system of risk avoidance or crisis avoidance? The second ordered question, which I touched on briefly in my testimony is however that just begins the analysis. The specialized expert knowledge that some regulatory agencies have specific industries cannot 

easily be addressed by the crisis manager. 

The CHAIRMAN. Thank you. It did strike me as we talked about 

silver bullets that it would have been very appropriate to have 

given it to the Chairman of the Federal Reserve who played the 

role last year of the ‘‘Lone Ranger,’’ so he might have been appropriately armed. The gentleman from North Carolina. 

Mr. WATT. Thank you, Mr. Chairman. It may be fortuitous that 

I am following Mrs. Biggert in asking questions because I want to 

actually go down the same line. It seems to me that in the 16 years 

I have been on this committee, most of our time has been spent trying to decide what we legislate and what we punt to some regulator 

to regulate. And this may be the first time that we are called on 

to try to address a different question that we started maybe to try 

to address when we were trying to set up the parameters of the 

regulation of OFHEO, but we started with the assumption that 

there would be an OFHEO. 

This time, we have to figure out what the appropriate regulatory 

structure is. It seems to me that the question we have to ask is, 

how many regulators do we have? And the Blueprint that Paulson 

came out with at least started that discussion, I agree. You all 

have picked his proposal apart, so I guess my question to you is, 

if you picked his proposal apart, you didn’t like it, how many regulators would you have and what jurisdiction or what regulatory 

oversight, who would you put under their jurisdiction or what 

would you put under their jurisdiction? And if I could get each of 

the four of you to address those quickly within my 5 minutes, that 

would be great. 

Ms. Rivlin, I will start with you. 

Ms. RIVLIN. I don’t think I have a full answer to that yet. I think 

the number of regulators should be less than we have now. We 

32 

clearly have quite a lot of duplication. I think the idea of combining 

the responsibilities of the— 

Mr. WATT. How many and what would they regulate? 

Ms. RIVLIN. Well, I am not prepared to give you a number like 

5 or 3; what I am saying is we can combine some of the ones we 

have to a smaller number. I do think we need a regulator of financial behemoths sometimes known as bank holding companies that 

is responsible for making sure that they are adequately understanding and not monitoring their own risk. I think that is the biggest thing. We have not had that in this crisis. 

Mr. WATT. Okay. We have one, one bank holding company regulator. Dr. Stiglitz, do you have one? 

Mr. STIGLITZ. First, let me just begin by saying I think the issue 

isn’t so much the number of regulators. 

Mr. WATT. Well, tell me what they would regulate then? If you 

don’t want to tell me a number, tell me in what areas we ought 

to be regulating. 

Mr. STIGLITZ. Part of the problem is that we have had regulatory 

capture. So I worry that if we had one regulator like the Federal 

Reserve, it would be captured by the investment community. 

Mr. WATT. I worry about that too, but that is a different issue. 

I want to know what—if you didn’t have that problem, you were 

setting up an ideal world, there were going to be no regulatory capture, what would you—how would you organize this? That is the 

question I keep asking. 

Mr. STIGLITZ. I think we need—let me just say, I think the cost 

of duplication is low compared to the cost of failure. So we need a 

system that checks and balances. I think duplication is fine. Overall, I think the general problem is you need to have somebody sitting on top looking at the whole system, the performance of the 

system. And then underneath that. 

Mr. WATT. All right. We have a system regulator and we have 

a bank holding company regulator. 

Mr. STIGLITZ. Underneath that, you have to have somebody who 

understands each of the parts very deeply. And those are two separate issues that can be coordinated. 

Mr. SELIGMAN. The system has to be comprehensive. That means 

it has to address some gaping holes such as right now like credit 

default swaps. Second, there has to be some sort of risk avoidance 

or crisis manager at the top. This could be the same agency that 

would address things like financial holding companies. Third, you 

have to have sufficient expert knowledge to address a series of specialized industries including securities and investment banks, insurance, and commodities. 

Mr. WATT. Those are separate regulators you are describing. 

Mr. SELIGMAN. Well, I think the issue as to whether they will ultimately be separate or consolidated should be carefully explored. 

We have five depository institution regulators today. I think a case 

can be made that we don’t need that many. You then have a separate issue which you haven’t touched upon, which is we also have 

State regulation of insurance and we have State regulation of 

banking. How are you going to coordinate what you do at the Federal level with the States? Then you have yet another issue, which 

is terribly complex, and that is increasingly financial products are 

33 

sold internationally. How do you coordinate what we are doing in 

this country with what is being done abroad? 

So I think you have the right questions, but I think more evidence has to come in to flush out the answers. 

Mr. WATT. I think I ran out of time. 

Mr. JOHNSON. I will be brief. Since I believe that the financial 

regulatory system should be consolidated around bank holding 

companies, I think you need one bank holding company regulator. 

I think the Federal Reserve is already doing that. It should continue to be the regulator there. I think that their resources are inadequate and their expertise in supervision is weak and we need 

to concentrate on that much more. For securitization, which covers 

a lot of finance, you have the SEC. 

Transparency, securitization, and supervising the rules of running a clearing system should be an SEC-like function. You already 

have one. I think it could be strengthened. But there needs to be 

coordination between a bank holding company regulator and someone overseeing the securities markets. There should be mandated 

coordination to avoid turf battles. 

Mr. WATT. Thank you, Mr. Chairman. 

Mr. KANJORSKI. Thank you. Mr. Barrett. 

Mr. BARRETT. Thank you, Mr. Chairman. Panel, thank you for 

being here today. I love the idea about the select committee and 

I think that is a great way to start. But Mr. Johnson, let’s start 

with you. I am sitting on the select committee and you are giving 

me advice today. The goal of the Federal regulation should be 

what, stability and growth, or to ensure that fraud and malfeasance are punished? And of the current situation, how much has 

been caused by lack of enforcement or lack of effective regulations? 

Mr. JOHNSON. Well, certainly, I think punishing malfeasance and 

maintaining the safety and soundness of the market go hand-inhand with growth and prosperity. So I think that those are one and 

the same thing. But in my opinion, supervisory failures have been 

one of the primary factors in this crisis of confidence we have had. 

And even though our regulatory system is overlapping and somewhat antiquated, the resources are there and the lines of supervision are there to prevent this. We didn’t prevent it because we 

failed to detect systemic risk. That is one of the reasons why I 

argue that if you try to create a pervasive financial regulatory system, it can’t be policed by the public sector because we are already 

failing now. So we ought to focus our regulatory and supervisory 

efforts narrowly and pour in all the resources necessary along with 

strong accountability to make it work. We can’t control everything. 

And it would be a miserable failure if we tried. 

Mr. BARRETT. Mr. Seligman. 

Mr. SELIGMAN. I agree with Mr. Johnson that there have to be 

multiple objectives, and clearly law enforcement would be one of 

them. I think that when you look at the recent failures, the reality 

is the failure of inspection, examination, and supervision is a pivotal part. The Office of Inspector General of the Securities and Exchange Commission recently did a report on Bear Stearns. And it 

noted that among other apparent causes of the failure, there were 

rules that didn’t adequately address liquidity, the Commission did 

34 

not have sufficient staff to engage in sufficient examinations, and 

it did not respond to red flags in a meaningful way. 

Apparently someone on the staff changed the requirement that 

was in the so-called consolidated supervised entity structure of the 

SEC that you use outside auditors to internal and that didn’t rise 

to the Commission’s level for review. There wasn’t a sense as you 

saw the Bear Stearns devastation in the spring that you almost 

needed to say what is going on here, how systemic is this, this is 

a crisis, we have to look much harder and change rules much faster 

than we would otherwise. 

There were a lot of different causes. Sometimes regulatory agencies have the right rules, sometimes even the right people, but 

don’t have the right sense of urgency. Too often, though, what you 

find is they are understaffed, they are underbudgeted and they get 

stuck in a kind of rut of doing the same things over and over again 

and don’t respond effectively to changes in fundamental dynamics. 

Mr. BARRETT. That is a great point. And Dr. Stiglitz, I want to 

ask you, following up on that, do you think our regulators have 

enough discretion to make decisions to modify these rules? I mean, 

is that part of the problem, they feel like they are locked in and 

they can’t make some decisions if the rules change, if all of a sudden the environment changes are they afraid to make decisions? 

Mr. STIGLITZ. Well, I think part of the problem in the past has 

been that we have had regulators who didn’t believe in regulation. 

So that for instance, it was noted earlier that the Fed had authority, more authority to impose regulations than it used. And it 

wasn’t until Bernanke became the Governor that additional regulations were imposed but it was like closing the barn door after the 

horse was out. So they had more authority than they used. And 

that is why I keep coming back to the issue of the incentive of the 

regulators. And it also comes back to the design to the rules. The 

rules need to be, I think, simple enough that there is, and transparent, so that everybody, including Congress, can see on an ongoing basis whether there is enforcement. And that means for instance restricting in the core part of our financial system the commercial banks the engagement, the use of some of the derivatives, 

particularly the nonstandardized derivatives so you can’t see what 

is going on. 

Mr. BARRETT. Thank you, sir. I think my time is up. Thank you, 

Mr. Chairman. 

The CHAIRMAN. I thank the gentleman. The gentleman from New 

York. 

Let me say we have talked to the witnesses, and we do want to 

hear from industry people. We are going to break this panel at 

12:30. A couple of the witnesses have time constraints. We will immediately go into the next panel, and we will begin the questioning 

where we left off. 

I would also advise members if you could find any place in this 

area in the building that is serving lunch, on our side at least, if 

members want to go and come back, no one will lose his or her 

place because of that. We do want to try to accommodate people in 

that regard. 

The gentleman from New York is now recognized. 

Mr. ACKERMAN. Thank you, Mr. Chairman. 

35 

Damon Runyon, less famous for being born in Manhattan, Kansas, than writing about Manhattan, New York, didn’t write about 

or create characters on either Main Street or Wall Street, but more 

on 42nd Street for plays like Guys and Dolls. He created characters 

that included street hustlers, gamblers, and book makers. If he 

could create a character here who was looking at this subprime 

mess that we are in, he would probably create one who wanted to 

ask a question that went something like: How can you make book 

on a horse that ain’t never run before? 

And I guess I would ask that question, because there is no other 

character here. 

The CHAIRMAN. Does the song follow this? 

Mr. ACKERMAN. Thankfully, no. 

The CHAIRMAN. Okay. 

Mr. JOHNSON. I will comment on that. I think you are making 

the point that well, okay, if somebody creates a new security that 

has never really been used before so you don’t know how it might 

perform— 

Mr. ACKERMAN. My gosh, you have it. 

Mr. JOHNSON. —how do you know that it is safe and sound and 

will not add instability to the system? The truth is, you don’t. But 

the key to that is transparency. When you register a security, you 

should be required to reveal every aspect of that security. The overthe-counter markets in debt securities lack in transparency. 

Mr. ACKERMAN. Should you be putting a credit rating on a product that is not rateable because it has no history? 

Mr. JOHNSON. I don’t believe in the credit rating agencies’ ability 

to get it right. I think the market can determine those things. 

Mr. ACKERMAN. But you can’t bet on a horse unless you look at 

the morning line and see what the odds are. 

Mr. JOHNSON. Yes. I just think full disclosure is the best policy. 

Mr. ACKERMAN. Okay. 

Mr. JOHNSON. If a horse has never run, you still don’t know, but 

an informed investor can decide for himself. Rating agencies have 

been miserable failures as forecasters. 

Mr. ACKERMAN. But if an investor is told the odds are 5 to 1 or 

2 to 2 or whatever the odds might be—or the odds are AAA— 

Mr. JOHNSON. Well, you can have rating agencies that want to 

put out ratings and you can read them if you want. But mandating 

reliance on ratings is a mistake. 

Mr. ACKERMAN. Volunteer rating agencies. Okay. 

Mr. JOHNSON. Okay. 

Mr. SELIGMAN. Let me just say a kind word for credit rating 

agencies. I don’t think anyone does anymore. But to the extent they 

are independent of internal management, even with all the conflicts of interest, they give you a fresh set of eyes. 

Mr. ACKERMAN. Should the owner of the horse pay the bookie to 

rate the horse? 

Mr. SELIGMAN. You are out of my area of expertise. I know about 

securities, but I don’t know about bookies. 

Mr. ACKERMAN. Should a company that is creating securities pay 

for their own rating? 

Mr. SELIGMAN. It happens, currently. 

36 

Mr. ACKERMAN. I didn’t ask you if it happens currently. We all 

know who is paying to get a AAA. 

Mr. SELIGMAN. I appreciate that. But the question is, if you 

eliminate it, how do you evaluate quality? 

Mr. ACKERMAN. How about if we created a system where you can 

only rate things—if you are a recognized rating agency, you can 

only rate things that are rateable and have an experience rating? 

And not to stifle creativity, you can package it, do whatever else 

you want to structure up by saying these products have never run 

before, they don’t have a rating, they are three-legged horses; if you 

want to bet on them, buddy, you are on your own. 

Mr. SELIGMAN. Clearly, there are different ways you can structure access to the credit rating agency, create different rules. All 

I am suggesting is the headlong rush right now to in effect eliminate that as a vehicle for giving some independence—not great, but 

some independence—and a separate set of eyes is something we 

may regret if we move too quickly. 

Mr. ACKERMAN. Okay. Ms. Rivlin? 

Ms. RIVLIN. Two points. I think we should have rating agencies 

paid by the buyer, not the seller. The buy side, not the sell side. 

I think that would be fairly simple. It wouldn’t— 

Mr. ACKERMAN. An independent sheet? 

Ms. RIVLIN. Pardon? You would have the major investment funds 

pay a small fee to support rating agencies rather than the sellers 

of securities. 

But another point. You said earlier that there was no record on 

the mortgage-backed securities backed by subprime. Actually, there 

was, and the record was pretty good. As long as prices were going 

up, defaults on subprime were minimal. So the rating agencies 

weren’t absolutely wrong in using the past. It just wasn’t— 

Mr. ACKERMAN. What if there was no past? 

Ms. RIVLIN. Well, no, there was a past. Subprime mortgages 

didn’t start in 2006. There was a history. Ned Gramlich has set 

this out rather nicely in his book. But the problem was as long as 

prices were going up, housing prices, there were relatively small 

defaults on subprime. So using that history—and there was a history—was misleading. As soon as we got to the top of the housing 

market, all the rules changed. 

Mr. ACKERMAN. As long as all the horses are winning, you don’t 

care what you are betting on. That is the market going up. 

The CHAIRMAN. It is post time for the next race. The gentleman 

from Georgia. 

Mr. PRICE. Thank you, Mr. Chairman. 

I am not sure how my running shoes are these days, but I will 

give it a try. I want to thank each of you for your comments. And 

I want to have you speak specifically about the issue of regulation, 

deregulation. Each of you mentioned in varying degrees of certitude 

that the issue wasn’t whether or not we had more regulation or 

less regulation; it was that we had the right regulation. 

There seemed to be some, however, who still hold to the notion 

that there was this fanciful groundswell of deregulation that was 

the cause and genesis of our current situation. I have heard that 

the situation regarding the lack of regulation, or appropriate reguVerDate Aug 31 2005 16:29 Feb 09, 2009 Jkt 046591 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 K:\DOCS\46591.TXT TERRIE
37 

lation, was due to resources, personnel, sense of urgency, lack of 

flexibility, all those kinds of things. 

I wonder if each of you would comment very briefly about this 

notion that it was deregulation that was the cause of where we are 

right now. Ms. Rivlin? 

Ms. RIVLIN. I don’t think it was so much deregulation as failure 

to recognize that the markets were changing very rapidly and that 

we needed new kinds of regulation. 

Mr. PRICE. The nimbleness and flexibility. 

Ms. RIVLIN. That certainly is mortgage markets’ story, derivatives’ story. 

Mr. PRICE. Correct. 

Ms. RIVLIN. And we didn’t do that. There were people who might 

have done that who were opposed to it, like my former colleague 

Alan Greenspan. 

Mr. PRICE. Right. Dr. Stiglitz, would you? 

Mr. STIGLITZ. I think I agree. It was the deregulation philosophy. 

And that led them not to use all the regulatory authority that they 

had. There was a need, probably, for more regulation in certain 

areas; for instance, the mortgage market that we have been talking 

about. 

Mr. PRICE. Could it have been accomplished under the current 

structure with the right individuals? 

Mr. STIGLITZ. Probably, under the current structure. But if you 

had an attentive regulator, if he didn’t have that authority— 

Mr. PRICE. Right. 

Mr. STIGLITZ. —he would have gone to Congress and said, look, 

these things are dangerous. And in terms of the question that was 

asked before— 

Mr. PRICE. I want to run down the panel. 

Mr. STIGLITZ. Dangerous—what I want to say is you have to ask 

about not only the recent experience, but knowing the fact that 

house prices can go up, but they can also go down. And you have 

to ask not only what has happened in the last 5 years, or even 10 

years, but what would happen if the prices returned to—or say the 

price-income ratio returned to a more normal level— 

Mr. PRICE. Right. 

Mr. STIGLITZ. —what would happen? 

Mr. PRICE. Mr. Seligman? 

Mr. SELIGMAN. I think when you look, for example, at the Bear 

Stearns report prepared by the Office of Inspector General, a legitimate question can be asked whether or not the people who were 

in charge of enforcement there actually believed in it. That is a 

question of a deregulatory philosophy. And it may not be— 

Mr. PRICE. But it is a deregulatory philosophy, not the act of deregulating it. Would you agree with that? 

Mr. SELIGMAN. In that specific instance, yes. More broadly, 

though, when you look at much more serious issues such as the 

loopholes for credit default swaps, and the lack of coverage of hedge 

funds, these are areas where a broader deregulatory approach may 

not have served us particularly well. 

Mr. PRICE. Thank you. Mr. Johnson? 

Mr. JOHNSON. Yes, I don’t believe the mentality of deregulation 

was the cause, but if you are going to have a Federal safety net 

38 

and protect deposits, then you have to regulate and supervise the 

banking system, and you have to do it very well. 

Mr. PRICE. And— 

Mr. JOHNSON. Because the taxpayer is extremely exposed. My 

view is that the safety net ought to be as narrow as you can make 

it to allow the market to work, but the market only works if failure 

is part of that process. 

Mr. PRICE. Right. Thank you. I think we all are interested in appropriate regulation, not an absolute unregulated system. 

I want to touch, in my remaining few moments, on a concern 

that I have that much of the criticism of what has gone on I believe 

to be an attack on the capitalist system of markets and the ability 

to take risk and realize reward. 

I wonder if you might comment briefly on whether or not financial regulators should try to reduce systemic risk by setting limits 

on private risk-taking. Ms. Rivlin? 

Ms. RIVLIN. I think we need limits of various kinds on 

leveraging. I think we were overleveraged in many respects. And 

in respect to the derivatives, I think—or even the credit default 

swaps—was the basic problem that we had credit default swaps or 

was it the people who were trading them were way overleveraged? 

And I would worry about the overleveraging. 

Mr. PRICE. Dr. Stiglitz, private risk-taking? 

Mr. STIGLITZ. I think the core point is that at the center of the 

financial system, the commercial banks, our credit system, pension 

funds, people who are using other people’s money they don’t have— 

that has to be ring fenced. Outside of that, if you can ring-fence 

that core part, if people want to engage in gambling, and we allow 

them to fail because it won’t have systemic consequences, that is 

fine. Let them gamble. But in that center part, we do have to restrict risk-taking, because we will pick up the pieces when it fails, 

as we have seen. 

Mr. PRICE. Thank you. Mr. Seligman? 

Mr. SELIGMAN. I think the whole purpose of a Federal financial 

regulatory system in part should be to fortify capitalism, to make 

it more effective. It is not an attack on capitalism. It is, rather, a 

way for it to work most effectively. 

Mr. PRICE. Mr. Johnson. 

Mr. JOHNSON. Yes, I don’t have anything to add. I agree with 

that. 

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

The CHAIRMAN. Thank you. Next we have Mr. Meeks. 

Mr. MEEKS. Thank you, Mr. Chairman. 

I don’t want to resume the horseracing, but let me just try to follow up some on the end of what Mr. Ackerman—I believe what he 

was driving at. And you know, I know that in New York, for example, our attorney general has begun an investigation into this issue 

called short selling. It seems as though, you know, one can get an 

unfair advantage—and I think that is where Mr. Ackerman was 

going—in races if you have the spread of false information going 

out. And it seems as though in short selling it can, because of false 

information, even though it is an illegal act, affect the price of 

stock. And you can indeed have a manipulation of the market in 

that regard. 

39 

So my question then is—and I know Mr. Ackerman has a bill in 

this nature—that as a possible response to the possibility—or to 

market manipulation through short-sell misinformation, should the 

Federal Government reinstitute the uptick rule and evaluate calling in all the outstanding shorts on financial stocks to get a true 

cash price discovery at this time? 

Mr. SELIGMAN. You know, the short-sale rules were adopted by 

the Securities and Exchange Commission in its earlier financial 

emergency in the 1930’s, and initially included the uptick rule. And 

it should be reexamined. 

But I think the current debate with respect to short selling has 

focused exactly on the point you just raised, the notion that false 

rumors and short sellers were driving down financial institutions. 

What I don’t think is fully apparent yet is a number of investigations have been launched by the Securities and Exchange Commission, and, I suspect, by the Justice Department as well. False information is fraud. It is criminally wrong today. It is civilly wrong 

today. 

In the next few months, we will see whether or not existing Federal laws will provide a strong enough deterrent so we are less 

likely to see the dissemination of false rumors in the future. I do 

not think, though, that the uptick rule is a silver bullet or a magic 

wand. It is a regulatory device. It may or may not be appropriate. 

But it is not the real issue here. It was the belief that financial institution stocks were being pounded down in an inappropriate way. 

And at the time, the enforcement mechanisms were too slow to act. 

Mr. MEEKS. So you don’t believe that the uptick rule would at 

least—because what happens is the speculation or the thought that 

maybe it was—and I agree, the investigations have to go on, and 

we have to find out what did or did not take place. But the confidence in the market or the thought and the rumors that go out 

that it is being manipulated, if we can prevent that, because all of 

the markets are based upon confidence. And if the confidence—if 

the uptick rule helps restore confidence, does that help further stabilize, you know, stabilize the markets as a regulatory tool? 

Mr. SELIGMAN. The uptick rule will slow market declines. It 

won’t prevent them. And when we have seen the securities markets 

overwhelmed with sales recently and driven down hundreds of 

points in a day, I am very skeptical the uptick rule would have 

made much difference. 

Mr. MEEKS. Yes, ma’am. 

Ms. RIVLIN. I agree with Mr. Seligman. But I think probably the 

uptick rule would have helped, and we ought to put it back. 

Mr. JOHNSON. I agree with Mr. Seligman that the uptick rule 

might slow things, but it won’t stop the fundamentals. The key to 

avoiding manipulated short selling, or for that matter, manipulated 

long purchases as well, is transparency. If investors really knew 

what was on the balance sheets of the organizations that were 

being traded, and you had financial statements that accurately portrayed this on a regular basis, it would be very difficult for false 

rumors to develop. And so I would just encourage better preparation of accounting, financial statements, and maybe more regular 

disclosure. 

40 

Mr. MEEKS. Let me ask this last question, because my time is 

running out. You know, my Governor, David Paterson from New 

York, last week he said would begin regulating credit default 

swaps. And he said that regulation is going to take effect on January 1st. But he asked me, he said, ‘‘Hey, what about the Federal 

Government? Will it take steps on its own to oversee the credit default swaps?’’ 

And so the question that I would like to ask you really quick is 

whether or not the Federal Government should follow the lead of 

New York and, specifically, should we regulate them as insurance 

products under a Federal insurance regulatory— 

The CHAIRMAN. I am going to ask for very quick answers. When 

members ask questions at the timeline, you really can’t expect an 

answer. If one wants to give an answer, the others can answer in 

writing if they would, in fairness to members. Does anyone want 

to take a shot? 

Mr. SELIGMAN. Credit default swaps should be regulated at the 

Federal level. But I think we need to work through the appropriate 

regulatory agency to address them. 

The CHAIRMAN. Thank you. Now, the ranking member has asked 

me—there are a number of members who wanted to talk to this 

panel—he has agreed he has four members left who will take 3 

minutes each. I won’t cut our people off, but that way we can probably—I know somebody had to leave at 12:30—if we can stay until 

12:40, we can finish, if that is all right. 

Mr. BACHUS. Mr. Chairman, I know Mr. Manzullo is protesting. 

My alternative would be to let— 

The CHAIRMAN. We lose time by discussing it. 

Mr. BACHUS. —one person do 5 minutes and then it would be 

over. Or I can let three of you do 3 minutes. 

Mr. MANZULLO. I am asking for 10 minutes. 

The CHAIRMAN. I just ask the gentleman to give me—I mean this 

has to be settled on your side. The witnesses do have to leave. 

Mr. BACHUS. We will let Mr. Garrett have 5 minutes, and we will 

close out our hearing. 

The CHAIRMAN. The gentleman from New Jersey. We can go until 

12:40, so if the gentleman from New Jersey wants to go—we are 

eating up the time by arguing about the time. 

Mr. MANZULLO. Mr. Chairman? With all deference, if we are 

given 5 minutes here, I don’t think it will take that much longer. 

The CHAIRMAN. Well, the gentleman, there are three before, it 

would take another 40 minutes or so before we reached the gentleman. And that is over the time that we would be keeping people. 

Mr. BACHUS. I have proposed that all our members who are here 

have 3 minutes, Mr. Manzullo, and you wouldn’t—under this proposal, you would get 3 minutes. Under the original proposal, you 

would get zero. 

Mr. MANZULLO. Okay. That is fine. 

The CHAIRMAN. What is the verdict? 

Mr. BACHUS. We are at 3 minutes apiece. 

The CHAIRMAN. Mr. Garrett for 3 minutes. 

Mr. GARRETT. I will talk really fast. My first point is, I appreciate your comment with regard to a select committee. I should 

point out the fact, and Mr. Barrett raised that issue as well, the 

41 

benefit of that—Marcy Kaptur, the gentlelady from Ohio, a former 

member of this committee, has a bill to that effect, and I have supported that as well. I appreciate your opinion at the end as far as 

going on that. 

Secondly, I do have several documents that I will put into the 

record and won’t go through them all now. Most important, though, 

is from the American Enterprise Institute by Peter Wallison, ‘‘The 

Last Trillion-Dollar Commitment: The Destruction of Fannie Mae 

and Freddie Mac,’’ in which he says—and I will put that in for the 

record—the government takeover of Fannie and Freddie was necessary because of the massive loans of more than a trillion dollars 

of subprime, all of which was added during the 2000 and 2005 period. 

He goes on to say Congress did not adopt strong governmentsponsored enterprise, GSE, reform until the Republicans demanded 

it as a price for Senate passage of the housing bill in July of 2008. 

It led invariably to the government takeover and the enormous 

junk loan losses to this point. 

And three other points from the Wall Street Journal and the 

New York Times, which, without objection, I will enter those into 

the record. 

Finally, on this point of entering information into the record, I 

go back to the opening comment by the chairman. And I do want 

to make sure that the record is clear where we all were on this 

issue going forward. In committee markup on May 25, 2005, I offered an amendment to direct the new regulator to establish limits 

on the GSE portfolios in the case of any issues of safety and soundness or possible systemic risk. That was opposed by the chairman. 

At the same committee markup on that day, Representative Paul 

offered an amendment, 1–H, to cut off the Fannie and Freddie $2 

billion Treasury line. The chairman opposed that amendment for 

reform. 

Floor action was then taken October 26, 2005. Amendment was 

offered to strike language in the bill that would raise conforming 

loan limits to allow GSEs to purchase more expensive, riskier 

homes. Again that amendment failed, and the chairman opposed it. 

Floor action on the same day by Representative Leach offered an 

amendment to give the newly created regulator greater authority 

to impose capital strictures on GSEs. Again, the chairman opposed 

that reform. 

Floor action on the same day by Representative Royce, who was 

here earlier, amendment 600 to authorize a regulator—this is important—to require one or more of the GSEs to dispose or acquire 

assets or liabilities if the regulator deems these assets or liabilities 

to be potential systemic risk—in other words, all those toxic risks 

we are talking about—to the housing or capital markets. The gentleman, the chairman opposed that reform. 

Floor action on the same day by Representative Paul, offered 

amendment 601 to eliminate the ability of Fannie and Freddie and 

the Federal Home Loan Bank to borrow from the Treasury. The 

amendment failed. The chairman opposed. 

I do want to give credit where credit is due. Just this past week, 

a gentleman from the other side of the aisle said, ‘‘Like a lot of my 

Democrat colleagues, I was too slow to appreciate the recklessness 

42 

of Fannie and Freddie. I defended their efforts to encourage affordable homeownership. In retrospect, I should have heeded the concerns raised by the regulator in 2004. Frankly, I wish my Democratic colleagues would admit it, when it came to Fannie and 

Freddie we were wrong.’’ 

This was stated by Representative Davis from Alabama. I appreciate his sign of intellectual honesty as to where we came from and 

how we got here. 

The CHAIRMAN. I now recognize myself for 5 minutes. The gentleman’s 3 minutes has expired. And let’s talk about intellectual honesty. The gentleman said that he offered an amendment. I have the 

roll calls here. I am going to put them in the record, the list. He 

offered an amendment in committee. It was withdrawn. It never 

went to a vote. There were two amendments offered by Republicans 

in 2005 that went to a vote. They were both defeated, with a majority of Republicans voting against them. He kept saying ‘‘the chairman.’’ I don’t know if he meant Mr. Oxley or me, but we voted pretty much the same there. So the fact is the gentleman from New 

Jersey did offer an amendment. He said earlier he offered amendment after amendment. In his head, maybe, but on the Floor, he 

offered one, which was withdrawn. Mr. Royce had one that was defeated 53–17. There were 30-some odd—37 Republicans on the 

committee. Then we had one from Mr. Paul that was defeated 14 

to 56. 

The gentleman from New Jersey just mentioned the amendment 

offered by Mr. Leach on the Floor. That was defeated. And the 

point was he said the Democrats stopped it. This is a serial violator 

writing on the mirror, ‘‘Stop me before I don’t legislate again.’’ 

Here is the vote on the Leach amendment. He said I opposed it. 

I did. So did 377 other Democrats and 190 Republicans. The vote 

on the Leach amendment, now you want to talk about intellectual 

honesty, blaming the Democrats for defeating an amendment that 

lost 378 to 36, with 190 Republicans voting against it, does not 

seem to be accurate. 

He then talks about the amendment he offered on the conforming 

loan limits. On the conforming loan limits, on agreeing to the Garrett amendment, it failed 358 to 57. There were over 220 Republicans in the House; he got 57 of them. 

Now I know it is a bad feeling not to be able to get your own 

party to be with you. I understand the gentleman’s distress that he 

couldn’t get a majority of his own party, and on a couple of these 

amendments was thoroughly repudiated. The majorities aren’t always right, but they are who they are. 

So this fantasy that the Democrats stopped it is simply untrue. 

I am going to put these into the record as well. They are the roll 

call votes from the committee and on the Floor. And the fact is in 

committee in 2005—now the committee did vote the bill to the 

Floor 65 to 5. It is a bill mentioned favorably by the people from 

FM Watch. The gentleman from New Jersey was one of the five. 

But a great majority of the Republicans voted against him. It is legitimate to talk about this. But saying it was the Democrats that 

did it and the Democratic—excuse me, the Democrat Party that did 

it, when in fact it was a bipartisan majority that repudiated all the 

43 

gentleman’s efforts, does not give a fair presentation. So we will 

put these in the record: 378 to 36; 357 to 58. 

In committee, to correct what the gentleman said, he did not 

push his amendment to a vote. Apparently, it was withdrawn. I 

guess the gentleman, he said I opposed it. So when I opposed the 

amendment, he withdrew it. I had not thought the member from 

New Jersey to be a man of such delicacy that the mere opposition 

by me would lead him to withdraw the amendment. I wasn’t the 

chairman. I think it was the fact that he knew this would be another one where he might get only 7 or 8 votes and be somewhat 

embarrassed by it. But I will put all these in the record. 

There are zero cases—we are talking 2005 now—zero cases on either the Floor of the House or in committee where an amendment 

offered by a Republican was defeated even though it had a majority 

of Republican votes. Yes, Democrats voted against them, in almost 

every case joined by 90 percent of the Republicans, sometimes only 

by 60 percent of the Republicans. 

And then came 2007, when the bill was passed that the FM 

Watch said worked. And the gentleman had quoted someone as 

saying, ‘‘Well, it didn’t pass until July, when the Republicans—the 

Democrats agreed to do it for some reason.’’ Here are the numbers. 

This committee organized under a Democratic Majority on January 

31, 2007. On March 28th, we passed a very strong bill, supported 

by the Administration, and approved by FM Watch. We then asked 

the Secretary of the Treasury to put it in the stimulus package because we were afraid of Republican and Democratic inaction in the 

Senate, a bipartisan problem. The Secretary felt he couldn’t do 

that. We then pushed for it to be adopted in the bill. Senator Dodd 

was pushing for it. It was held up for a couple of months by filibusters by Senator DeMint and Senator Ensign on unrelated matters, 

but it finally passed in July. 

So the fundamental point is, yes, it is legitimate to talk about 

differences, but this portrayal that the gentleman was valiantly 

trying to rein in Fannie Mae and Freddie Mac in 2005, and he was 

frustrated by the Democrats is, of course, implausible because we 

are talking about the House run by Mr. DeLay, which was hardly 

one where the Democrats were able to stop Republicans from doing 

what they wanted. But the record clearly goes in the opposite direction. These amendments he talked about, and which he sort of implied that the Democrats had blocked these Republican efforts, are 

fantasies. They don’t exist. 

Mr. BACHUS. Mr. Chairman? 

The CHAIRMAN. Yes. The gentleman is asking me to yield? I don’t 

yield. I am using my time. Oh, my time has expired. My time has 

expired. 

The gentleman from Illinois is recognized for 3 minutes. 

Mr. MANZULLO. I thank the chairman. In 2000, this committee, 

through the efforts of Richard Baker, began a more intensive focus 

on the potential systemic risk posed by Fannie and Freddie. In an 

effort to lobby against Mr. Baker’s bill, Fannie Mae engineered 

over 2,000 letters from my constituents in my district concerned 

about the ‘‘inside the Beltway’’ regulatory reform bill. That was a 

reform bill in 2000. The problem was the letter campaign was a 

fraud. My constituents did not agree to send those letters. And 

44 

what ensued was a confrontation with Mr. Raines in which he arrogantly claimed Fannie did nothing wrong in stealing the identities 

of 2,000 of my constituents. At that point, I threw the Fannie Mae 

lobbyists out of my office and said, ‘‘You are not welcome to come 

back.’’ That was 8 years ago. 

Then again in 2004, there was a confrontation between myself 

and the head of OFHEO over the fraudulent accounting motivated 

by executive greed and Mr. Raines, who took away $90 million. 

That led to a lawsuit, and he unfortunately had to give back only 

$27 million of that. And I cosponsored the reform bills in 2000 and 

2004, and again—2003 and 2005. 

Dr. Rivlin, I have been one of your biggest fans, even though you 

don’t know that, because you make astounding statements such as 

on page 3, ‘‘Americans have been living beyond our means individually and collectively.’’ You talk about personal responsibility. You 

also talk about commonsense regulations, that you should not be 

allowed to take out a mortgage unless you have the ability to pay 

for it and have proof of your earnings. 

My question to you today is, as we discuss restructuring and reform, what kind of changes or curbs should be placed upon GSEs 

in your opinion? 

Ms. RIVLIN. I think you have a really hard problem with the 

GSEs, because the problem was that they were structured in such 

a way that they had very conflicting missions. They were told they 

were private corporations, owned by stockholders, responsible to 

those stockholders to make money, and they were also told that 

they had public responsibilities to support affordable housing. And 

they interpreted those—they came late to the party on subprime, 

but they came, as you pointed out, in a very big way. And that 

turned out to be part of fueling the collective delusion. And then 

they got caught in a really big way when the market—when the 

crash happened. 

I think the real problem going forward is how to unwind this untenable situation. Either you have to have Fannie and Freddie 

being truly private institutions with no government guarantee, in 

which case they have to be a lot smaller—that would take a long 

time to accomplish, but it is one model—or they have to be fully 

regulated, with the rules clear what they are to do in the mortgage 

markets, and that they should lean against the wind when a bubble seems to be getting out of hand. That is another possible model. 

But the thing that isn’t possible is this combination of conflicting 

incentives. 

The CHAIRMAN. If the gentleman wants to ask one last question, 

I will give him the time. 

Mr. MANZULLO. That is fine. 

The CHAIRMAN. Okay. The gentleman from Kansas. 

Mr. MOORE OF KANSAS. Thank you, Mr. Chairman. 

Ms. Rivlin and others on the panel who would care to comment, 

my question is this: The events of the last few weeks have resulted 

in extraordinary intervention by government, designed to stem the 

growing crisis. But there is still pessimism, and questions about 

whether what we have done will work. Are there further actions 

that can and should be taken by the Federal Government to restore 

confidence in our financial markets and institutions? 

45 

Ms. RIVLIN. I think part of it is not in the jurisdiction of this 

committee, it is stimulating the economy itself. You are going to 

need a stimulus package. I think it should be quick, it should be 

temporary, it should be targeted, but it should be big to get this 

economy turned around. 

Mr. MOORE OF KANSAS. How big? 

Ms. RIVLIN. How big? Oh, I don’t know, $2-, or $3 billion. Big 

stuff, but carefully crafted. And you also need to go to the problem 

of the homeowners themselves, and getting as many people to stay 

in their homes, if they can pay, as possible. I think those are the 

bigger things than fixing the regulatory mechanism right now. 

Mr. STIGLITZ. I think there are four things. The first is the stimulus, and it has to be large, I think 2 or 3 percent of GDP. It has 

to be carefully crafted. But given the mountain of debt that we 

have inherited, that means we have to focus on things with big 

bang for the buck. Preferably automatic stabilizers, at least a large 

part, to recognize the fact that there is some uncertainty. So aid 

to States and localities, absolutely essential to fill in the gap in 

their revenues. Extended unemployment insurance. But I also 

think a strong infrastructure. 

Second, I think we need to do something about the foreclosure 

problem. I think that needs to be done quickly because prices are 

going to continue to fall, and there are going to be more foreclosures, the hemorrhaging I talked about before. And that needs 

a comprehensive approach. 

We need, I think, aid to lower-income people like we have had 

aid to—we pay 50 percent through our tax system, many States, 

for the housing costs of upper-income Americans. We contribute 

nothing to lower-income Americans. We need a bankruptcy reform; 

what I call it, a homeowners’ Chapter 11. And we may need, and 

I think we probably do, government participation taking over some 

of the mortgages to help—and passing on the low-cost interest that 

the government has access to to help homeowners. 

Third, as I said, I don’t think we are going to restore confidence 

unless we begin the regulatory reforms. Because why should anybody believe that the financial system that has failed so badly 

change their behavior without more fundamental reforms? 

And fourth, I think that we need to more comprehensively address the problems of our financial system that we have been talking about. That is necessary to restore confidence. 

Mr. MOORE OF KANSAS. Thank you. Any other comments? If 

there is time. If there is not— 

The CHAIRMAN. The gentleman has a minute and 15 seconds. I 

am sorry. 

Mr. JOHNSON. I am not as big on a stimulus package. I think a 

lot of short-term, targeted stimulus would have a very short-term 

effect, and is wasted money. If I were going to do anything on the 

fiscal side, I would enact permanent across-the-board tax rate reductions to all classes. But I think that the better thing to do right 

now is to focus on resolving this crisis of confidence through the 

regulatory measures we are talking about today. 

I think the Federal Reserve has already stopped the bleeding regarding the risks of deposit runs. And so I think that issue is pretty much covered. 

46 

There are still a lot of issues about the uncertainty of balance 

sheets of the financial institutions. Those need to be resolved as 

fast as possible through restructuring, acquisitions, and even failures. 

I am in favor of those who made failed investment decisions 

being resolved through having their good assets merged and acquired by others. There are trillions of dollars still on the sidelines 

not willing to take a risk now but looking for an opportunity to be 

new participants in the financial markets. Give them a chance. 

Why work with the institutions that have failed and are sitting 

around with toxic assets on their balance sheets and can’t make a 

move? You know, I understand the point about getting those assets 

off the balance sheet, but take the good assets and give them to 

someone who can put them to use. 

Mr. MOORE OF KANSAS. Thank you. Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from Alabama will be our last 

witness, the last one to question this panel. 

Mr. BACHUS. Thank you, Mr. Chairman. 

Mr. Chairman, I do want to say this. And I have—and I am not 

going to depart from this. I have not tried to pin blame or engage 

in partisan politics. I do want to say this: Whatever else was said 

about the gentleman from New Jersey, Mr. Scott Garrett, he did 

vote right. His vote was right. Had the majority of members followed his lead, we could have avoided some of the problems we had 

today. Now— 

The CHAIRMAN. Would the gentleman yield? 

Mr. BACHUS. Yes. 

The CHAIRMAN. That is very generous of the gentleman, since he 

was one of the ones who voted with us and against the gentleman. 

So I appreciate— 

Mr. BACHUS. I am just saying that his votes, they were not only 

right on the amendment where he voted with you, he was right on 

final passage where he voted differently than you did. But I am 

just saying that I compliment him. 

Now, let me ask this question. Professor Stiglitz, back when we 

were doing the Fannie and Freddie Mac bailout, you were very opposed to that. You called it an outrageous and old form of 

corporatism passed off as free enterprise. Further, you warned the 

amount of potential liability that we undertook when we passed the 

blank check we just don’t know. You said it was the worst kind of 

public irresponsibility. You said that we are in the worst of all possible worlds right now. And I and most of my Republican colleagues in the House agreed with you, and we opposed that bailout. 

Do you still hold the same view that it was a mistake, which was 

our view? 

Mr. STIGLITZ. Well, let me make clear we had a gun pointed at 

our head. And the question was— 

Mr. BACHUS. No, I agree. I have used that very term, that we 

had a gun to our head on that one and on the one 2 weeks ago. 

Mr. STIGLITZ. Exactly. So the point I was trying to raise is there 

were other ways of handling the problem that I was encouraging 

Congress and the Administration to think about. And that— 

Mr. BACHUS. What should we have done? And okay, I am agreeing with you. What should we have done as opposed to that? 

47 

Mr. STIGLITZ. For instance, on some of these there was the possibility of a debt-for-equity swap so that if you—you know, we bailed 

out the debt holders, the bond holders, as well as—even when the 

equity owners took a beating. There were huge amounts of increases in the value of the debt. And I was also concerned at the 

terms at which the money was being provided. And you can see one 

piece of evidence that we got—two pieces—three pieces of evidence 

that we got a very bad deal in the way it was administered by our 

Secretary of the Treasury is the fact that most of the companies, 

when it was announced they were going to get an equity injection, 

their share price went way up. 

Second, you compare the terms that we got versus the terms that 

Warren Buffett got, there is absolutely no comparison. 

Third, you look at the terms that we got versus the terms that 

the U.K. Government got, there is no comparison. So I was concerned— 

Mr. BACHUS. Well, now, are you aware that I proposed capital injections with covered bonds or lending or, you know, backup private 

equity? But we did get a 5 percent rate of return that goes to 9 

percent. 

Mr. STIGLITZ. Yes. But Warren Buffett, on equity injection to arguably one of the better capitalized and best capitalized investment 

banks, got 10 percent. And his warrants were far better than the 

warrants that we got. 

Mr. BACHUS. And I agree that, you know—I agree. But I think 

at least in this bill we got a better deal than what we were going 

to get in buying the worst of the assets. 

The CHAIRMAN. I do have to remind the gentleman the 3-minute 

deal was his deal. 

Mr. BACHUS. So we are through. 

The CHAIRMAN. We are way over it. I thank the panel. The panel 

is excused. 

The next panel will check in. We will begin the questioning 

with—all right. Can we move quickly, please? Have the conversations outside. Would the witnesses and our staff please talk outside? Would the witnesses please leave? Members who want to talk 

to them, do it outside. I thank the members of the second panel for 

waiting. It is very important that we have the testimony from industry representatives going forward. We have heard and will hear 

in the past from consumer representatives. We will hear from people who are in the physical parts of the economy. We will hear from 

organized labor. 

The witnesses properly said, I think, and I want to say I thought 

the gentleman from Georgia, Mr. Price, raised very important philosophical questions that we have to deal with. We are here talking 

about some of the most important basic principles in government, 

about how in a free enterprise economy you do or don’t regulate. 

And I look forward to a serious debate in this country, beginning 

when we come back, on the appropriate economic philosophical 

principles. I think the old discipline of political economy is going 

to come back as we talk about these. And we will be very careful. 

These are historic decisions that are being made. And you know, 

we have a silver lining to the cloud. The cloud, of course, is the terrible shutdown of economic activity. The silver lining is that noVerDate Aug 31 2005 16:29 Feb 09, 2009 Jkt 046591 PO 00000 Frm 00051 Fmt 6633 Sfmt 6633 K:\DOCS\46591.TXT TERRIE
48 

body is doing any good things or bad things right now. So that the 

notion that we have to rush, I think, has been alleviated by the 

fact that not much is happening, and that gives us time to do this 

right. It is as important a set of economic decisions as I think this 

country will be making since the Depression, and I am determined, 

and I know the Minority is as well, that we will work together to 

do this. 

With that, we will begin with our former colleague and member 

of this committee. Fortunately, he wasn’t around at any of the 

times we are fighting about, so he can stay above the battle. 

Our former colleague from Texas, on behalf of the Financial 

Services Roundtable, Mr. Bartlett. 

STATEMENT OF THE HONORABLE STEVE BARTLETT, PRESIDENT AND CHIEF EXECUTIVE OFFICER, THE FINANCIAL 

SERVICES ROUNDTABLE 

Mr. BARTLETT. Thank you, Mr. Chairman, and Ranking Member 

Bachus. I provided in my written testimony a description of the 

size and scope and some examples of the problem of the regulatory 

system as it now stands. Suffice it to say that in summary it is a 

lack of coordination, a lack of uniformity, huge gaps in the system 

in which literally hundreds of agencies are not even authorized to 

talk with one another about their regulatory structure or regulatory conclusions, much less to engage in a consistent regulatory 

coordination. As you noted, Mr. Chairman, that will be entered into 

the record. 

The current crisis has erupted. And when the current crisis 

erupted, literally no coordinating body was clearly responsible, and 

so it was an ad hoc response that required all the agencies, and 

including Congress. 

So today we bring ourselves—and Mr. Chairman, I commend you 

and the members of the committee. This is an extraordinary hearing, with an extraordinary turnout. It may be the first that I can 

recall during this time, this season, in which this many members 

of the committee would come on a legislative effort such as this. 

The hearing is timely. It is urgent. And I think it requires some 

relatively rapid action. I propose today, Mr. Chairman, I would 

share with you five near-term regulations the Financial Services 

Roundtable have. These are—I call them ‘‘no regret moves’’ in that 

they won’t stand in the way of long-term solutions. And I believe 

that the committee and the Congress will consider and adopt longterm solutions in short order. But on the near-term, and these 

near-term solutions should lead to those longer term restructuring, 

I would cite five. 

First, is market stabilization. Reduce the potential for systemic 

risk by giving the Federal Reserve Board overarching supervisory 

authority over systemically significant financial services firms that 

seek access to the discount window. And provide that statutory authority in advance of the crisis, not after the crisis. 

Second, interagency coordination. Our proposal in the short term 

is to expand the membership and mission of the President’s Working Group by statute to make it more forward looking. The fact is 

the President’s Working Group is the only authority at all with any 

coordinating authority. They have no statutory authority. And on 

49 

that group is not the OCC, the OTS, the PCAOB, or any insurance 

regulatory agency. 

Third, adopt principle-based regulation. The principles should be 

adopted by statute by Congress. Enact those principles to serve as 

a common point of reference for all regulatory agencies as encompassed. 

Fourth, is prudential supervision. Encourage the early identification of potential risk by the application of prudential supervision 

by all financial regulators for all financial services forms. 

And fifth, is adopt financial insurance supervision. The fact is 

that the State-by-State system of insurance regulation is the last 

vestige of 19th Century regulation. It is time to move into the 20th 

Century. 

We would have you implement those recommendations—we 

would not—I would not contend that the implementation of those 

regulations would have prevented this current crisis entirely. But 

I do believe they would have helped regulators and the financial 

services industry to better and much earlier appreciate the market 

developments, and would have significantly reduced the scope and 

the severity of the crisis. 

We do recommend, Mr. Chairman, three additional actions to 

take in the near term. 

First, is fair value accounting. We advocate the use of a clearminded system to determine the true value of assets in distressed 

and illiquid markets. The current application of fair value accounting is neither clear-minded nor fair. It is causing significant damage to individual institutions, but way more importantly, to the 

economy as a whole. The SEC and the Public Company Accounting 

Oversight Board has the authority to act. We urge them to provide 

auditors the flexibility in the application to apply fair value accounting. 

Second, credit default swaps. We think that the first step is to— 

the first step will lead to regulation. We think the first step is to 

establish a clearinghouse for credit default swaps. We do think it 

requires a Federal regulator. We recommend either the CFTC or 

the Federal Reserve. 

And then, third, is mortgage interest rates, Mr. Chairman. We 

believe that at this point this sort of mystical thing in London 

called the LIBOR has declined 6 days in a row—that is some kind 

of a record—to lead us out of the crisis, but it has not led to a reduction of mortgage interest rates. And until that happens, the 

economy will continue to be in jeopardy and getting worse. So if 

mortgage rates do not fall, then we urge Congress, the Treasury, 

and the Federal regulatory agencies to consider additional appropriate actions. 

Lastly, Mr. Chairman, we do believe that sitting here on October 

the 21st, it is not clear at this point whether an additional fiscal 

stimulus should be adopted. But Congress should consider that if 

in the next few weeks the measures that have already been taken 

do not result in the beginning of a recovery, then we think the Congress should consider a stimulus package. That stimulus package, 

in our view, should have 3 points: Housing; job creation; and capital investment. 

50 

Mr. Chairman, we urge neither more regulation nor less regulation, but better, more effective regulation. Thank you. 

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

106 of the appendix] 

Mr. WATT. [presiding] I thank the gentleman for his testimony. 

Mr. Yingling. 

STATEMENT OF EDWARD YINGLING, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, AMERICAN BANKERS ASSOCIATION 

(ABA) 

Mr. YINGLING. Thank you for the opportunity to present the 

views of the ABA on regulatory reform. 

Mr. WATT. I am not sure your microphone is on. 

Mr. BACHUS. And pull your microphone a lot closer. 

Mr. YINGLING. Thank you for the opportunity to present the 

views of the ABA on regulatory reform. Clearly, changes are needed. The recent turmoil needs to be addressed through better supervision and regulation in parts of our financial services industry. 

The biggest failures of the current system have not been in the regulated banking system, but in the unregulated or weakly regulated 

sectors. 

Indeed, while the system for regulating banks has been strained 

in recent months, it has shown resilience. In spite of the difficulties 

of this weak economy, I want to assure you that the vast majority 

of banks continue to be strongly capitalized, and are opening their 

doors every day to meet the credit and savings needs of their customers. As the chairman has noted many times, it has been the unregulated and less regulated firms that have created problems. 

Given this, there has been a logical move to begin applying more 

bank-like regulation to the less regulated parts of the financial system. For example, when certain securities firms were granted access to the discount window, they were subjected to bank-like leverage and capital requirements. The marketplace has also pointed toward the banking model. The biggest example, of course, is the fact 

that Goldman Sachs and Morgan Stanley have moved to the Federal Reserve for holding company regulation. Ironically, while both 

the regulatory model and the business model moved toward traditional banking, bankers themselves are extremely worried that the 

regulatory and accounting policies could make traditional banking 

unworkable. Time after time, bankers have seen regulatory 

changes aimed at others result in massive new regulations for 

banks. Now, thousands of banks of all sizes are afraid that their 

already crushing regulatory burdens will increase dramatically by 

regulations aimed at less-regulated companies. 

We appreciate the sensitivity of this committee and the leadership of this committee toward this issue of regulatory burden. As 

you contemplate changes in regulation to address critical gaps, 

ABA urges you to ask this simple question: How will this change 

impact those thousands of banks that are making the loans needed 

to get our economy moving again? 

There are gaps in the current regulatory structure. First, although the Federal Reserve generally looks over the entire economy, it does not have explicit authority to look for problems and 

51 

take action to address them. A systemic oversight regulator is 

clearly needed. 

The second type of gap relates to holes in the regulatory scheme 

where entities escape effective regulation. It is now apparent to everyone that the lack of regulation of independent mortgage brokers 

was a critical gap, with costly consequences. There are also gaps 

with respect to credit derivatives, hedge funds, and others. 

Finally, I wish to emphasize the critical importance of accounting 

policy. It is now clear that accounting standards are not only measurements designed for accurate reporting; they also have a profound impact on the financial system. So profound that they must 

now be part of any systemic risk calculation. 

Today, accounting standards are made with little accountability 

to anyone outside the Financial Accounting Standards Board. No 

systemic regulator can do its job if it cannot have input into accounting standards, standards that have the potential to undermine any action from a systemic regulator. The Congress cannot 

address regulatory reform in a comprehensive fashion if it does not 

include accounting policymaking. 

ABA therefore calls on Congress to establish an accounting oversight board, chaired by the chairman of the systemic regulator. The 

SEC Chairman could also sit on this board. The board could still 

delegate basic accounting standards-making to a private sector 

body, but the oversight process would be more formal, transparent, 

and robust. I believe this approach would accomplish the goal that 

the chairman mentioned a few minutes ago in his comments about 

separating mark to market from the consequences of mark to market. 

And I appreciate your recent letter, Congressman Bachus, on this 

subject. That is a good goal. But I don’t think that that goal can 

be accomplished if you have the current regulatory situation on accounting. Clearly, it is time to make changes in the financial regulatory structure. We look forward to working with Congress to address needed changes in a timely fashion, while maintaining the 

critical role of our Nation’s banks. Thank you. 

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

177 of the appendix.] 

Mr. WATT. Thank you, Mr. Yingling. 

Mr. Ryan. 

STATEMENT OF T. TIMOTHY RYAN, JR., PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION (SIFMA) 

Mr. RYAN. Chairman Watt, Ranking Member Bachus, and members of the committee— 

Mr. BACHUS. Tim, pull that microphone a lot closer to you. 

Mr. RYAN. Thank you. My name is Tim Ryan, and I am president 

of the Securities Industry and Financial Markets Association. I 

want to thank the committee for holding this hearing. It is a good 

time to do this. It is an important subject. I have a few brief remarks. I would like to have my full testimony entered into the 

record. 

Mr. WATT. Without objection, the full text of all testimony will 

be put into the record. 

52 

Mr. RYAN. I am speaking on behalf of the Securities and Financial Markets today, but from 1990 to 1993, I was the Director of 

OTS. I also was one of the principal managers of the savings and 

loan cleanup. And from 1993 until April of this year, I was a senior 

executive at J.P. Morgan. So I would like to have my comments 

here reflect that background. 

As you all know, the debt and equity markets across the globe 

have experienced serious dislocations in the last few months. Congress has aggressively responded to this by passing the Emergency 

Economic Stabilization Act, and granted the Treasury Department 

extraordinary responsibility to promote the confidence in the financial system. We fervently hope that the steps being taken will 

unfreeze the credit markets and restore calm to the equity markets. 

Serious weaknesses, however, exist in our current regulatory 

model for financial services. And without reform, we risk repeating 

today’s serious dislocation. 

I commend this committee for beginning the process of reexamining our regulatory structure, with a view toward effective and 

meaningful improvements. We in the securities industry and financial markets stand ready to be a constructive voice in this critical, 

important public policy dialogue. 

I have just a few specific comments on recommendations. One, 

which has been really a part of the comments all morning here, the 

need for a financial market stability regulator. As you know, our 

Nation’s financial regulatory structure dates back to the Depression. That regulatory structure assumed, and even mandated to 

some extent, a financial system where commercial banks, broker 

dealers, and insurance companies engaged in separate businesses, 

offered separate products, largely within local and domestic borders. 

Financial institutions no longer operate in single product or business silo or in purely domestic or local markets. Instead, they compete across many lines of business and in many markets that are 

largely global. 

The financial regulatory structure remains siloed at both the 

State and Federal levels. No single regulator currently has access 

to sufficient information or the practical and legal tools and authority necessary to protect the financial system as a whole against 

systemic risk. Thus, we believe Congress should consider the need 

for a financial markets stability regulator that has access to information about financial institutions of all kinds that may be systemically important, including banks, broker dealers, insurance companies, hedge funds, private equity funds, and others. 

This regulator should have the authority to use the information 

it gathers to determine which financial institutions actually are 

systemically important, meaning that would likely have serious adverse effects on economic conditions or the financial stability or 

other entities that were allowed to fail. We believe this is a relatively small number of financial institutions. 

We think it is important that a stability regulator have information gathered through coordination with other regulators to avoid 

duplication of oversight and unnecessary regulatory burdens and 

provide confidentiality. 

53 

If Congress takes the approach of creating a markets stability 

regulator, it would be important to ensure that it not become an 

additional layer of regulation. Rather, Congress should consider the 

stability regulator in the context of the overall streamlining of financial regulatory system. 

Second, additional steps are necessary to improve the efficiency 

and effectiveness of regulation. In general, financial services regulation has not kept up withinnovation or risk. Modernizing financial regulation should be a priority for regulatory reform by Congress. In general, financial regulation should encourage institutions 

to behave prudently, and incentivize them to implement robust risk 

management programs. 

We also believe Congress should consider how financial regulation can be streamlined to be more effective. Duplicative Federal 

and State regulation is one area of review. Another is the separate 

regulation of securities and futures. We believe that the United 

States should merge the SEC and the CFTC in the interests of regulatory efficiency. Combining their jurisdiction would be consistent 

with the approach taken in other financial markets around the 

world. 

Congress should also consider merging the Office of Thrift Supervision into the Office of the Comptroller of the Currency in order 

to achieve greater efficiency in the operation of Federal bank regulatory agencies. 

One comment on structured products and derivatives: Innovation 

has generated many new financial products in recent decades that 

have the basic purpose of managing risk. For example, over the 

last 2 years alone, the credit default swap market has grown exponentially. CDSs are an important tool for managing credit risk, but 

they also increase systemic risk if key counterparties fail to manage their own risk exposures properly. 

SIFMA recognizes the risk inherent in this market and will continue to work closely with ISDA, with the Futures Industry Association and with other stakeholders in an effort to create a clearing 

facility for CDS that will reduce operational and counterparty risk. 

Mr. WATT. Mr. Ryan, can I encourage you to wrap up as soon as 

you can? 

Mr. RYAN. Thank you, Mr. Chairman. I can wrap up right now. 

I am ready for your questions. 

[The prepared statement of Mr. Ryan can be found on page 130 

of the appendix.] 

Mr. WATT. Thank you for your testimony. 

I understand that Mr. Washburn is from the ranking member’s 

congressional district, so I will recognize him for a brief introduction. 

Mr. BACHUS. Thank you, Mr. Chairman. 

Mike Washburn, his wife Marian, and his daughter Allie, are 

constituents of mine. In fact, his 12-year-old daughter Allie and 

about 1,000 other folks have announced their intention to run 

against me if I do not get my act together in the next election. He 

is the CEO of Red Mountain Bank, which is a very progressive 

community bank, with three locations in Birmingham and one in 

Tennessee. Far more importantly, he is on several ICBA boards. 

54 

His bank has received a prestigious national award for their community service, and it has also received 3 awards over the past 3 

years as one of the best places to work in Alabama. So it is a good 

place to work. It is a successful bank. 

They have avoided the problems that bring us here together 

today. That is why I think there ought to be a representative from 

Main Street here, and I think he is very capable in that regard. 

So welcome to Washington, Mike. I look forward to some Main 

Street wisdom. 

Mr. WATT. Mr. Washburn, you are recognized. 

STATEMENT OF MICHAEL R. WASHBURN, PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, RED MOUNTAIN BANK, ON BEHALF OF THE INDEPENDENT COMMUNITY BANKERS OF 

AMERICA (ICBA) 

Mr. WASHBURN. Thank you, Congressman. You took my first 

paragraph away. 

My name is Mike Washburn. I am here from Red Mountain 

Bank; I am president and CEO of that bank. We are a $351 million 

community bank in Hoover, Alabama. I am here to testify today on 

behalf of the Independent Community Bankers of America. I appreciate the opportunity to share the views of our Nation’s community 

banks on the issue of financial restructuring and reform. 

Even though we are in the midst of very uncertain financial 

times, and there are many signs that we are headed for a recession, I am pleased to report that the community banking industry 

is sound. Community banks are strong. We are commonsense, 

small-business people who have stayed the course with sound underwriting that has worked well for us for many years. We have 

not participated in the practices that have caused the current crisis, but our doors are open to helping resolve it through prudent 

lending and restructuring. 

As we examine the roots of the current problems, one thing 

stands out: Our financial system has become too concentrated. As 

a result of the Federal Reserve and Treasury action, the four largest banking companies in the United States today now control 

more than 40 percent of the Nation’s deposits and more than 50 

percent of the Nation’s assets. This is simply overwhelming. Congress should seriously consider whether it is prudent to put so 

much economic power and wealth into the hands of so few. 

Our current system of banking regulation has served this Nation 

well for decades. It should not be suddenly scrapped in the zeal for 

reform. 

Perhaps the most important point I would like to make to you 

today is the importance of deliberation and contemplation. Government and the private sector need to work together to get this right. 

We would like to make the following suggestions: 

Number 1: Preserve the system of multiple Federal regulators 

who provide checks and balances and who promote best practices 

among these agencies. 

Number 2: Protect the dual banking system, which ensures community banks have a choice of charters and of supervisory authority. 

55 

Number 3: Address the inequity between the uninsured depositors at too-big-to-fail banks, which have 100 percent deposit protection, versus uninsured depositors at the too-small-to-save banks 

that could lose money, giving the too-big-to-fail banks a tremendous competitive advantage in attracting deposits. 

Number 4: Maintain the 10 percent deposit cap. There is a dangerous overconcentration of financial resources in too few hands. 

Number 5: Preserve the thrift charter and its regulator, the OTS. 

Number 6: Maintain GSEs in a viable manner to provide valuable liquidity and a secondary market outlet for mortgage loans. 

Number 7: Maintain the separation of banking and commerce 

and close the ILC loophole. Think how much worse this crisis 

would have been if the regulators had to unwind commercial affiliates as well as the financial firms. 

We also believe Congress should consider the following: 

Number 1: Unregulated institutions must be subject to Federal 

supervision. Like banks, these firms should pay for this supervision 

to reduce the risk of future failure. 

Number 2: Systemic risk institutions should be reduced in size. 

Allowing four companies to control the bulk of our Nation’s financial resources invites future disasters. These huge firms should be 

either split up or be required to divest assets so they no longer pose 

a systemic risk. 

Number 3: There should be a tiered regulatory system that subjects large, complex institutions to a more thorough regulatory system, and they should pay a risk premium for the possible future 

hazard they pose to taxpayers. 

Number 4: Finally, mark-to-market and fair value accounting 

rules should be suspended. 

Mr. Chairman and members of the committee, thank you for inviting ICBA to present our views. Red Mountain Bank and the 

other 8,000 community banks in this country look forward to working with you as you address the regulatory and supervisory issues 

facing the financial services industry today. 

Thank you. 

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

168 of the appendix.] 

Mr. WATT. Thank you. 

Thank you to all of the witnesses for their testimony. 

I believe Mrs. McCarthy is the first to be recognized in this 

round. 

Mrs. MCCARTHY OF NEW YORK. Thank you, Mr. Chairman. 

Again, thank you for your testimony. 

You know, when this all started, the first thing that came to my 

head was Enron. One of the things I was thinking about with 

Enron was, where is the moral guide in our financial system nowadays? I happen to think that an awful lot of innocent people are 

community bankers, are independent bankers, are credit union 

guys. They did not make any of these loans, yet they are still out 

there trying to help inside the community. 

I know there was a story going back a while ago that one of the 

larger financial institutions on Wall Street had been told by their 

risk management guy that they were overloaded and that they 

should stop buying an awful lot of these pieces of commercial paper 

56 

out there. He was fired. He did go to another large company that 

actually took his advice, and that was one of the larger companies 

that came out of this risk free. 

We cannot legislate morality. Whether it was banking, or whether it was Wall Street, they have lost their way. Reputation on Wall 

Street was the most important thing, and that is what their customers counted on. We cannot do that. That has to come from within the system. 

I guess what I need to know is, what are the lessons that we can 

learn from other countries? They got involved. They bought our 

paper. Everybody wanted to be part of that bubble. Have they done 

anything that we have done differently where we could look to 

them to see if there are some sort of regulations? They always complained about our having too many regulations. Now they are saying that we should actually be more regulated. So is there a balance in there? That is going to be the biggest problem, as far as 

this committee goes, in trying to find a balance. I do not think 

there is anybody here who really wants to overregulate. We want 

the system to run smoothly. 

I would look forward to hearing any of your comments on that. 

Mr. BARTLETT. Congresswoman, there is one lesson that we have 

studied a lot in the last 3 years from Europe and from FSA, the 

Financial Supervisory Authority, and that was to use guiding principles or principles for regulation in order to write your regulations. 

This does not eliminate regulations. The regulations are still there, 

but it is to create some uniform principles. 

When we looked at the roundtable, it is like the weather in 

Texas. Everybody wants to complain about it, but nobody wants to 

do anything about it. So everybody wants to talk about principles, 

and nobody wants to write them down. We wrote them down, and 

I will enter them into the record. 

Our conclusion was that there should be six, by statute, that this 

Congress should adopt as the guiding principles for regulations. 

They would include fair treatment for customers, stable and secure 

financial markets, competitive and innovative financial markets, 

proportionate risk-based regulation, prudential supervision, and responsible and accountable management. 

I would offer that had those been in place for the recent round 

prior to the crisis, things would have been a lot different and a lot 

better. 

Mr. YINGLING. I am not sure every foreign country has done all 

that well in terms of their regulation, but one thing we really do 

need and that, I think, there is a consensus on here is that we need 

an oversight regulator who really looks over the economy and who 

looks at gaps and who looks at trends. 

I must say that about a year ago, I asked our economics department to give me the information on what had happened with some 

of these mortgages, and they brought me some charts that really 

made me gasp. These were charts about no-down-payment loans 

and how they had grown in 2004 and in 2005 and in 2006. That 

graph went like that. How you could have graphs like that and not 

have somebody in our government say, ‘‘Wait a minute. We have 

to really look into this very hard,’’ is somewhat beyond me, because 

I gasped. I said, ‘‘How could this be?’’ 

57 

I think the problem is that nobody has really been assigned to 

do that. In some ways, the Fed was supposed to do it, but we have 

not assigned anybody in our government to look at potentially big 

problems. Why didn’t we have somebody looking at the growth of 

these SIVs? Why didn’t we have somebody look at and see the 

growth of the securitizations of these mortgage products? It fell between the gaps. 

So I think one thing we need is a systemic overview regulator 

who has the explicit role of saying, ‘‘I am going to look for big problems.’’ Any time you have a chart that goes like that, you had better look at it. We do not. It falls between the gaps. 

The CHAIRMAN. The gentleman from Michigan. 

Mr. MCCOTTER. Thank you, Mr. Chairman. Thank you for holding this hearing. 

We heard from the previous panel. From yourselves, I gather 

that in many ways this was not a failure of deregulation or a philosophy of deregulation. It seems that in many ways the entrepreneurial spirit of the free market had transcended regulation, and 

that it was a failure then to intelligently, proactively and accountably act as a government to step in, in instances of a failure of selfgovernment on the part of market participants. 

What I would be very curious to hear, as we enter into this initial discussion of where we are going to head, is when you speak 

of principles, to me the fundamental principle undergirding a free 

market economy is the principle of personal responsibility and that 

appropriate regulation creates a framework in which people can 

self-govern through the concept of personal responsibility with 

guidelines that ensure that human nature does not always exceed 

the better angels of our nature. 

So, as we move forward, I would like to hear from the panelists 

as to what specifically we can try to do to encourage personal responsibility within a regulatory environment so that we will wind 

up with a proper framework as opposed to a governmental dictation to the market, which could have a very deleterious effect on 

the future prosperity of Americans. 

Mr. RYAN. I would like to address your comments and the question posed previously. 

As you can see from our opening comments—and I think we are 

all pretty consistent here—the financial markets are very global. 

We have considerable concentration globally in financial services, 

and they are interconnected. We have no real regulatory structure 

globally to address those major institutions, so that is work that is 

critical here. It is critical that it needs to be replicated without 

massive overlap in the European community and probably in other 

major countries, developed countries. 

We have many financial institutions that are much smaller than 

the type I am talking about that are subject to the financial market 

stability regulator. There it is easier to have personal responsibility 

within boards and within management. As you get into some of 

these larger institutions, clearly people take their jobs seriously. 

They work actively to manage risk, to manage their people. At 

times we need an oversight, and that is what the market stability 

regulator could do, integrate a lot of that information; provide inteVerDate Aug 31 2005 16:29 Feb 09, 2009 Jkt 046591 PO 00000 Frm 00061 Fmt 6633 Sfmt 6633 K:\DOCS\46591.TXT TERRIE
58 

grated, aggregated information to the people who run these institutions so they can manage the risks. 

Mr. MCCOTTER. On that point, I think it is a very accurate point, 

because one of the other problems that, I think, has become apparent is that it was a failure of government reform, a failure to reform the United States Government to the point where you could 

have intelligent, proactive, and accountable regulators in place that 

could try to keep up with the market in instances where there were 

failures to self-govern, because, as you know, even where there are 

some misdeeds amongst many good deeds, those some misdeeds 

can cause a lot of problems. 

You also referenced something that I find fascinating. Secretary 

Paulson also mentioned it previously, although not in front of this 

committee. He talked about how now the interdependence amongst 

American financial institutions was originally thought to be a 

guard against the very type of meltdown that we saw; that if we 

had linked them all together, and that if one were to fail, the new 

web of financial institutions would help support the overarching 

framework of the financial services sector. Yet the exact opposite 

has happened. Has that not been replicated on the global scale as 

you seem to indicate? 

So then what we have to look at is not only an internal reform 

of the United States Government to get more intelligent, proactive 

and accountable, but we will also have to start looking at our international institutions to guarantee that the interconnectivity between global financial institutions does not lead to what we seem 

to be on the brink of, which is a continued meltdown based upon 

some bad actors dragging everyone down with them on top of innocent people. 

Thank you. 

The CHAIRMAN. Any comments, gentlemen? 

I thank the gentleman. 

We now have the gentleman from Massachusetts, Mr. Lynch. 

Mr. LYNCH. Thank you, Mr. Chairman. 

I thank the panel for their willingness to help the committee 

with its work. 

At a very basic level, I think there are a couple of things we have 

to admit to in going into this whole idea of reforming our regulatory system. One is that we cannot and should not try to prevent 

every single failure. That is not the purpose of our regulatory 

framework. On the other hand, I think it is enormously important 

that we should devise a system that allows investors and market 

participants to have accurate and timely information in order to defend themselves and in order to make prudent and well-informed 

decisions. 

There are a couple of examples out here that we have seen in 

this whole crisis. I want to point to one which is really illustrated 

best in an article by Gretchen Morgenson of the New York Times 

a while back. She was talking about Bear Stearns. The article is 

on Bear Stearns. She was talking about—this was at the very 

end—on their way down, based on their annual report, they reported that they had $46 billion in mortgages and in mortgagebacked securities and in complex derivatives based on mortgages; 

$29 billion of them were valued—and this is a quote—‘‘using comVerDate Aug 31 2005 16:29 Feb 09, 2009 Jkt 046591 PO 00000 Frm 00062 Fmt 6633 Sfmt 6633 K:\DOCS\46591.TXT TERRIE
59 

puter models derived from or supported by some kind of observable 

market data.’’ 

Then she goes on to say that the value of the remaining $17 billion, according to Bear Stearns, is estimated based on ‘‘internally 

developed models or methodologies, utilizing significant inputs that 

are generally less readily observable.’’ In other words—and these 

are her words—‘‘your guess is as good as mine.’’ 

We have another example in the Merrill Lynch situation where 

E. Stanley O’Neal, the CEO, went out on October 5th and said that 

the company had $4.5 billion in writedowns. On October 30th, 3 

weeks later, he came out and said that they had $7.9 billion in 

writedowns. Then in November, he increased the amount to $11 

billion. 

The bottom line here is that neither of these companies knew 

what was going on internally. They did not have internal transparency. Part of that reason is the complexity of these instruments, 

and with a system based on trust, it is extremely important. If we 

are ever going to get back to a system of normalcy, we have to have 

that type of transparency. 

Mr. Ryan, you mentioned earlier the clearinghouse and how we 

might deal with derivatives and how we might vet these things or 

have a clearinghouse to quantify the value of these. Is it not the 

case that we are going to have to bring these instruments that are 

outside the regulatory process into a tighter regulatory framework? 

Mr. RYAN. The answer is yes. 

One comment: Clearly, from our perspective, financial engineering was taken to a level of complexity that was unsustainable. We 

know that 2 years from now, you are not going to have hearings 

where you are talking about CDOs and some of the other things 

that Ed talked about—SIVs and different off-balance-sheet vehicles. 

Clearly, the industry and the country and, in fact, the financial 

market participants around the globe have seen that the complexity is just too much, so we are all focused on what we can do 

that makes sense. We are all focused on the critical element in financial markets, which is confidence. Right now people lack confidence. That is what is reflected in the volatility in the markets, 

and we need to fix that. So we are very, very focused globally within this industry on fixing it. 

Mr. LYNCH. I am happy to hear you say that. I am just concerned 

that when this urgency goes away, that the folks over at MIT, 

whom I dearly love, will go back to designing these very complex 

models, and that we will be back into this same mess again. So I 

am hoping that we might fix this once and for all. 

I do not know if anyone else wishes to comment. 

Mr. YINGLING. I happen to think all regulators and all Wall 

Street bankers ought to watch ‘‘Jurassic Park,’’ because it is kind 

of the same thing, a theory about how everything will work, but 

the reality is the animals will figure out a way around it. 

Mr. RYAN. I spent a lot of time in this hearing room from 1989 

to 1993 because we were closing seven institutions a week at that 

time, and we had all kinds of problems. So I certainly did not intend to come back here 15 or 16 years later. We are talking about 

60 

different instruments and different problems, but, also, in the financial sector. 

So what I have learned is that things do repeat themselves. They 

are a little bit different. The most important thing is, because regulators are looking in rear-view mirrors principally, we need to set 

up a structure that actually can look forward and that can have 

the ability to understand what we are actually doing on a global 

basis. We need to have the right people. We need to have enough 

people, and we need to pay them enough so they can really maintain, keep, and attract the right people. 

Mr. LYNCH. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. 

The gentlewoman from Illinois. 

Mrs. BIGGERT. Thank you, Mr. Chairman. 

I would like to direct my first question to Mr. Washburn. 

I have been out and about in my district, talking to my local 

banks and credit unions. What they have been saying is that they 

are doing okay, that their mortgages were kept in house, and that 

they do not seem to have the lack of liquidity as much as the larger 

banks do. 

So I was wondering, Secretary Paulson is pushing a program 

under the capital purchase program that will capitalize banks, not 

just those in trouble, and that they should be included in this program. Would you agree with that for the smaller banks? 

Mr. WASHBURN. I would. 

In speaking for ICBA, there has been a lot of interest among our 

membership, again, of 8,000 banks participating. And speaking 

specifically about Red Mountain Bank, we would be interested in 

participating in the program. Capital is king, and we are in a great 

market. We are experiencing a tremendous loan demand because 

of what is going on around us. If we had additional capital to grow, 

it would be a great thing for our bank, for our economy, for job creation, and for all of the things that go along with that. So, indeed, 

we would be willing to participate, and we would be very excited 

about the possibility. 

Mrs. BIGGERT. In your testimony, you advocated that there be a 

tiered regulatory system with less stringent and less intrusive regulation of community banks. 

Do you think that the banks might then be willing to take more 

risk if they do not have the same regulations as do the larger 

banks? 

Mr. WASHBURN. Absolutely not. Community banks have been 

around forever, and we operate by a very simple business model. 

We lend money to people who pay us back. It is very simple. It has 

worked for years. We continue to want to do that going forward, 

so I do not see that changing whatever changes here. 

Mrs. BIGGERT. Do you think that one of the problems with the 

financial institutions in getting into this securitization was that 

they did not keep part of the assets within their own institution? 

Mr. WASHBURN. I agree. That is so true. 

You talk about covered bonds and things you see and you read 

about today. If those assets had remained on the balance sheet, 

and you had had responsibility and personal responsibility for 

those, and if it had been your money invested in your bank, it 

61 

would be a new day for not only the people inside the bank, but 

for the shareholders and for the regulators as well. 

Mrs. BIGGERT. Thank you. 

Then the other thing we have heard is that the engine will start 

up again once the banks are willing to loan to each other. Is that 

a problem in the community banks? 

Mr. WASHBURN. No, ma’am. 

Mrs. BIGGERT. Maybe I will ask Mr. Yingling. 

Is that the big problem, this credit freeze between banks? 

Mr. YINGLING. Well, it is really a problem with the larger banks 

in the international markets. As Mr. Washburn said, it is not really 

a problem with community banks. The great majority of community 

banks are in solid shape and are willing to lend. This new program 

can have a positive impact. 

One thing we have to watch is how many strings are attached, 

because these are banks that can do just fine by themselves, but 

they need capital to support growth in lending, and the capital 

markets to community banks right now are not functioning very 

well. So you could have a situation where a bank will take some 

of this capital for a very short period of time, and then when the 

capital markets open, they will replace it with private capital. 

Mrs. BIGGERT. Okay. I asked that question earlier about the Secretary’s Blueprint. Do you agree with changing the regulators from 

the functional to the other types of regulators that he has proposed? 

Mr. YINGLING. By and large, we have found some positive things 

in the Blueprint. We did not care for it. For one thing, we found 

that, in the end, the structure was more complicated for an individual bank than it had been to start with. 

Mrs. BIGGERT. Do you think that would help, though, the systemic risk problem that we seem to be having with the regulator? 

Mr. YINGLING. It was not covered particularly in the Blueprint, 

but as I testified, I do think there is a real need for a regulator 

who looks over the economy. Now, that may be different than the 

regulator who actually regulates day-to-day, but we had not had 

somebody looking over the economy and identifying these incredible 

types of growth and these bubbles, such as the mortgage bubble 

and other bubbles. So we do need a regulator who has the charter 

to look across the economy and to identify problems before they 

occur. 

Mrs. BIGGERT. Thank you. I yield back. 

The CHAIRMAN. The gentleman from Georgia. 

Mr. SCOTT. Thank you, Mr. Chairman. 

It is good to have you all here. As bankers, you are right in the 

catbird’s seat. You represent about 95 percent of the entire financial industry’s assets; that comes to about $13 trillion. That is everything, so it is critical that you stay healthy. 

As we go forward with this restructuring for reform and for regulatory reform, there are two types: There is the unregulated; and 

then there is the regulated part of your industry. We have to look 

at it in a way in which we come up with a delicate balance. Nowhere is the vulnerabilities. I talked earlier in my opening statement that we must zero in very quickly in the vulnerabilities, and 

62 

that there is no greater vulnerability than what caused this problem, and that is bad mortgages and default. 

I know one thing: If we follow the scenario of what got us into 

this problem, and if we get the urgency quickly to resolve it, we 

are on our way, because the American people want some real solutions, and that is this: Home foreclosures and these bad deals that 

were made, first of all, we have mortgage brokers and loan originators who go in and make these loans based upon high risk because 

that is the way they are compensated. Somebody has to do something about that. Then they take these loans, and they securitize 

them. Once they are securitized, it immediately disconnects the 

loan servicer and the loan originator from the borrower. Then these 

security packages are packaged, and they are sold all around the 

place. So people are just in there; they make their money; they cut 

it up, sell it; and they are out of there. Then these mortgages are 

sold and packaged all around the world. That is how we got into 

this. So we have to move forthrightly in that respect, and I would 

like to get your comments on that. 

Secondly, I believe that we have to put an infusion of capital into 

helping homeowners stay in their homes. Now, Chairman Frank 

was kind enough when we were on the Floor with the $700 billion 

bailout to allow us to address that issue. One of the things that we 

need to do is to put in some capitalization. We tried to get 1 to 2 

percent of the $700 billion or to direct the Secretary to make sure 

we had that available. We do not have any incentives in here for 

the lenders and for the loan servicers to come in and to restructure 

these loans on a sustainable basis. We have an economic stimulus 

package coming. We could not get it in there because, as the chairman said, we would have to send the bill back to the Senate. 

Chairman Frank and I have instructed the Treasury Secretary to 

move in this regard, and we realize that there has to be some 

money set aside. 

I have talked with Barack Obama about it. He certainly was for 

this going forward, as you will recall, as a modified, different type. 

At least Senator McCain also addressed this issue. We need some 

money. Just as surely as we got it for Wall Street, we need some 

money set aside here so that we will be able to have money to help 

homeowners stay in their homes and to restructure these loans and 

to put some incentives in there for lenders to go and to restructure 

their homes. 

The CHAIRMAN. If the gentleman wants answers to the questions, 

there is only about 1 minute left. 

Mr. SCOTT. I would. We have the economic stimulus coming up. 

We might be able to address it here. Please do so. Thank you. 

Mr. RYAN. May I give an answer on securitization, please? 

Mr. SCOTT. Yes. 

Mr. RYAN. Thank you. 

Just to put this in perspective, globally, and by our estimate in 

2007, about $2.5 trillion of consumer assets were securitized and 

distributed. This year, in 2008, we will be down very significantly 

at less than $1 trillion, probably at about $800 billion. This is principally mortgage, but also credit card, auto, and student loans. 

Without the securitization process that has developed over the 

last 20 years, many, many citizens would not have had access to 

63 

this consumer financing. The financial system in the United States, 

which we all know well, does not have the capacity from a capital 

standpoint to support the consumer finance that I have just noted 

here without securitization. 

Now, we know we have had some issues with securitization. I am 

sure this committee has talked about some of the things that need 

to be done. We have been working very, very hard at reforming the 

credit rating agency process, at disclosure and transparency on underlying documentation and at valuations for securities. We are 

highly confident that we can roll out a process here that would 

make a lot of sense and that would still afford people the opportunity to pay for their homes, to buy cars, and to use credit cards. 

The CHAIRMAN. One quick answer if anybody has any other comment. 

Mr. YINGLING. I just want to say your analysis of the cause of 

the problems was exactly right. One of the things that is not talked 

about much is when the unregulated side did these things—and 

this happens all the time—they ended up blowing up the regulated 

side. So this has had a very negative effect on good banks that did 

not do any of this. 

I would also say that it just seems to me that some part of the 

stimulus package ought to be devoted to what caused the problem. 

That is housing—keeping people in their houses and helping some 

of those homes be taken, perhaps, by entrepreneurs who would 

turn them into rental housing. 

The CHAIRMAN. The gentleman from Texas. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

On one of the things I agree with Mr. Yingling and with Mr. 

Washburn, and it is that we need to make sure that we do not 

overreach and impact those financial institutions that did not do 

that. I kind of liken that to little Johnny misbehaved in class, and 

the whole class had to stay after school. 

What we have in our banking system today are our community 

banks. Some of them are small. Some of them are medium-sized. 

Some of them are large community banks. Then we have these 

very large banking financial institutions. There is going to be a lot 

of discussion over the next few months and years, probably in this 

committee, on systemic risk and on the size of an institution and 

on how you manage that risk. 

With a broad range of financial institutions, how do we develop 

a new regulatory pattern or institution that can regulate such a 

broad range? Because one of the things we hear folks say is that 

we need one regulator for, for example, the banking industry or 

that we need two regulators. 

Can one regulator do that? What would that new structure look 

like, if we were to change that structure, that could regulate such 

a wide variety of institutions? 

Mr. WASHBURN. I cannot imagine one regulator regulating the 

entire banking system as we know it. That is one reason we are 

calling for the divestiture of those larger institutions into a more 

manageable size. I think that is critical. We still maintain and we 

still believe that we need different regulatory bodies. There are two 

types of charters available to us. This creates some healthy competition among the regulators. As long as they maintain contact in 

64 

interagency decisions, they will all be governed consistently across 

the board. 

Mr. YINGLING. I would agree with that. In the dual banking system, the diversity of charters has been critical. It is one area where 

we differ from some other countries. 

One of the advantages of it is that there is much more lending 

and capital available to small businesses and to entrepreneurs in 

this country because we have such a diverse system. 

I think another thing—and this committee has worked hard on 

it—is to recognize that when you pass rules designed to solve a 

problem, that they quite often apply most heavily to your analogy 

that did not cause the problem. One of the really big problems for 

community banks, and it may be the biggest problem in competing 

today, is just the huge regulatory burden. There are great economies of scale in dealing with these regulations, and the small 

banks just cannot deal with that. 

Mr. BARTLETT. Congressman, I might add that you are not going 

to get down to one regulator, nor should you, but there should be 

fewer regulators than there are now. More importantly, the system 

of regulation should be coordinated between one another. There are 

literally hundreds of regulators for financial services, and it is the 

gaps that cause the problem. 

One other admonition: I would hope that the committee and the 

Congress and the industry do not sort of fall into the traditional 

fights of large versus small. It is not large versus small; it is a continuum of size, just like every other industry. Nor should they pit 

one sector against another, the traditional thrift versus bank, insurance versus bank versus securities dealers. 

The fact is that it is an integrated financial services system that 

needs to be regulated as an integrated financial services system for 

safety, for soundness, for systemic regulation, and for business conduct. Therein lies the answer. 

Mr. NEUGEBAUER. One of the issues that keeps coming up is ‘‘too 

big to fail.’’ So the question is: When we look at the factors of systemic risk, if size is a piece of it—and we heard Mr. Washburn say 

that he thinks that some of these entities are too large, if you do 

not break up these larger entities, is there a regulatory environment where you can manage systemic risk from the safety and 

soundness side rather than having to worry about the size of that 

institution? 

Mr. BARTLETT. Well, first, I would just submit that there is no 

such thing as ‘‘too big to fail’’ from the perspective of the shareholders. There are shareholders all over America who have failed. 

The Federal Reserve and others have concluded, I think appropriately, that there is a certain size where the systemic risk to 

hundreds or to thousands of other companies and individuals is so 

great that allowing those assets to simply stop is worse for everyone, and so the assets and the liabilities go somewhere else, but 

the institution failed. 

Secondly, I think that it is not so much the size as it is the regulation, to make sure that it is regulated for the gaps so that each 

regulator talks to one another and coordinates with one another. I 

do not think it is the size overall. I think it is what the institutions 

do, not how large they are. 

65 

The CHAIRMAN. Mr. Ryan, do you want to add something quickly? 

Mr. RYAN. My only comment here is that the issue before the 

globe, really, right now is not really ‘‘too big to fail.’’ It is the issue 

of interconnectedness and, when we see an interconnected entity 

that has problems, what the governments need to do about it. I 

think that is the major issue on the table going forward. 

The CHAIRMAN. The other gentleman from Texas. 

Mr. GREEN. Thank you, Mr. Chairman. 

Mr. Chairman, there are some things that the consumers are focusing on, and they are becoming more and more sophisticated. 

There are some things that they just cannot understand. They do 

not understand why a person with five homes can go into bankruptcy, where he can save four but cannot save his principal residence. They see something inherently unfair about a system that 

allows me to save my vacation home, but that will not allow me 

to save my residence. They do not really understand why there is 

something called a yield spread premium that allows the broker to 

qualify me for a loan at 5 percent, to accord me a loan at 8 percent, 

to get a lawful kickback, and to not have that made known to the 

consumer. They really do not understand how we can have naked 

short selling and not do something to try to curtail it. They do not 

understand how hedge funds that require sophisticated investors 

can have pension funds with money that belongs to pensioners who 

are not necessarily sophisticated investors. This is in the truest 

sense of what a sophisticated investor is, not based upon knowledge, but based upon capital as well as some degree of intellect. So 

the American public is starting to focus on these things, and they 

are becoming very concerned about them. 

My question to members of the panel would be, do we need to 

do something about some of these things? The bankruptcy law that 

allows for the vacation home to be saved in bankruptcy, but for my 

principal place of residence or for the consumer’s principal place of 

residence not to be saved, is that law just fine as it is? If you think 

that it is just fine as it is, would you kindly raise your hand? 

All right. Mr. Bartlett, let us start with you. 

The CHAIRMAN. For the benefit of the reporter, I assume you got 

who raised their hands. 

Mr. GREEN. Mr. Bartlett and Mr. Yingling. 

The CHAIRMAN. I would just encourage Members to remember 

that the system of recordation was not made for pantomime. 

Mr. GREEN. Thank you. I appreciate that, Mr. Chairman. You 

are a much better lawyer. 

Let us just visit briefly—I think, Mr. Bartlett, you mentioned 

earlier that the next stimulus package should contain something 

with a reference to housing. What did you have in mind for housing? 

Mr. BARTLETT. Congressman, it is very clear that it was housing 

that led us into the recession, and so I think the housing is going 

to be required to lead us out of the recession. 

Mr. GREEN. Because my time is going to be very short, I am 

going to have to interrupt. Please forgive me. I do not mean to be 

rude, crude, and unrefined, but I have 5 minutes, and there is 

much more that I need to do. So let me ask you this: With refVerDate Aug 31 2005 16:29 Feb 09, 2009 Jkt 046591 PO 00000 Frm 00069 Fmt 6633 Sfmt 6633 K:\DOCS\46591.TXT TERRIE
66 

erence to bankruptcy, what do you see as the impediment to allowing persons who only have one home to save their one home when 

they are in bankruptcy? 

Mr. BARTLETT. We think that person should be able to save that 

home if you can remodify the mortgage so that they can pay it. 

Mr. GREEN. That is what the bankruptcy laws do not permit. 

They do not permit the restructuring of the loan so that you can 

reduce principal and so that you can reduce interest. That is what 

the laws do not permit. 

So are you saying that you would now allow this? 

Mr. BARTLETT. We do allow that. We do it all the time. 

Mr. GREEN. Would you allow the bankruptcy laws to be amended 

so that this can be done by a bankruptcy judge? 

Mr. BARTLETT. Congressman, I suppose our disagreement would 

be that we do not agree that people should be required to go into 

bankruptcy in order to modify their mortgages. 

Mr. GREEN. Well, it is when you go into bankruptcy. It is not because you want to, but it is because you have to, because it is your 

last resort, and because your home is all you have left, and you are 

trying to protect your last good chance to start all over again in life 

with a home. That is what we are talking about. 

Should the bankruptcy laws allow a person to keep his home? 

Mr. BARTLETT. Congressman, I suppose what I am trying to say 

is that we hope now the new Treasury proposal on a much faster 

pace is modifying mortgages and will be modifying mortgages without requiring people to go into bankruptcy. 

Mr. GREEN. I understand. Those who do have to go are the folks 

we are talking about, not the ones we would hope would never get 

there. Some do go into bankruptcy. Why not have that person afforded the opportunity as the person who has two homes? Senator 

McCain said he had seven homes, I think, or eight, I am not sure 

how many; he can save six of those homes. The person in bankruptcy with only one has a problem. He cannot save that one under 

the current law. 

Mr. BARTLETT. It is hard for a Texan to disagree with another 

Texan. We are trying to get to the same place. 

Mr. GREEN. Well, we do it with a degree of love for each other. 

We are going to still be friends when this is all said and done, but 

some of us are concerned about the consumer who has to lose everything and who, maybe, should be afforded the opportunity to 

save his or her home. 

The CHAIRMAN. Let Mr. Yingling finish. 

Mr. YINGLING. Just quickly, it is a trade-off because, right now, 

the interest rate on that second home is higher because of the 

bankruptcy rules. So, if you make the first home like the second 

home, it may help some people now, but it means that, marginally, 

interest rates are going to be higher on everybody else who gets a 

first mortgage going forward. That is the trade-off that Congress 

has dealt with. 

The CHAIRMAN. The gentleman from Missouri is yielding to the 

gentleman from Texas one of his minutes, I gather. 

Mr. GREEN. Yes, sir. 

My understanding is that same argument was made with reference to farm property, that the interest rates would go up on 

67 

those farm loans. We find that, after a while, these things tend to 

find their own equilibrium in the economic order. At some point, 

the consumer ought to be given some preference in this process; 

$700 billion and we do not bail out the consumer? Something is 

wrong. People are not going to stand for it. I am telling you we 

have to focus on doing something for the consumer. 

With regard to the yield spread premium, really fast, what would 

you do about the yield spread premium? 

Mr. YINGLING. Well, I think it is something that needs to be 

looked at. 

Mr. GREEN. We have looked at a lot of things. What do we do 

about it? 

Mr. YINGLING. There are some ways in which it is justifiable, but 

it has clearly been abused. There is no doubt about it. 

Mr. GREEN. What about putting pension funds into hedge funds 

where you are required to be a sophisticated investor? 

Mr. YINGLING. Well, you would have to talk to the pension fund 

people. I think they would tell you that they have made some 

money on it. Clearly that is another issue that needs to be looked 

at. 

The CHAIRMAN. We will go back now. The gentleman will get his 

4 minutes after the gentleman from Ohio. 

Mr. LATOURETTE. Thank you, Mr. Chairman. 

To my friend from Texas, I would just share your pain and would 

indicate that when you have closed rules, nobody gets to make 

modifications to bills. You do not get cramdown. We do not get a 

repatriation of funds. 

Mr. Chairman, I want to ask unanimous consent to enter into 

the record an October 15, 2008, letter from CUNA to balance out 

Mr. Kanjorski’s NASCUS letter. 

The CHAIRMAN. Yes, we have general leave. 

Mr. LATOURETTE. Thank you so much. 

Gentlemen, at the beginning of the hearing, I referenced two articles, one appearing over the weekend in the New York Times that 

dealt with a development down in Texas. In this morning’s paper, 

in the Cleveland Plain Dealer, it talks a little bit about the same 

thing. The author of the Plain Dealer article is a guy named Phillip 

Morris. 

You, Mr. Bartlett, and you, Mr. Yingling, at least have talked 

about the unregulated side dragging down the regulated side. I just 

want to sort of focus on that for a second. There was a fellow just 

indicted in Ohio for turning a place called Slavic Village, a beautiful place, into a wasteland. The fellow who has been indicted was 

a mortgage broker from Cleveland Heights. 

Basically, the article indicates—and I am paraphrasing—that he 

could turn you into a real estate mogul on somebody else’s dime. 

No credit, no problem. The guy would invent you some. No work 

history, no problem. He could create that, too. The example is a 

guy named Irvin Johnson, not the basketball player but another 

Irvin Johnson. He indicated that the FBI was sort of sniffing 

around because, between 2005 and 2006, he and his wife amassed 

nearly $2 million in residential property. By profession, he was a 

grass cutter who made no more than $10,000 a year, and his wife 

was a nurse’s aide. So it clearly goes through that probably this 

68 

guy should not have been qualified for the six mortgages that he 

had. 

I think we would all agree that the unregulated side and the unscrupulous, in some cases, had willing victims, but his walk-off line 

is: The bankers who financed and who once greatly profited from 

the foreclosure epidemic remain in the shadows. I think what he 

is talking about is that the unregulated side may have originated 

the mortgages, but that the regulated side purchased the mortgages, and then they were securitized, as Mr. Ryan talks about. 

Either Mr. Bartlett or Mr. Yingling, if you could respond to sort 

of that walk-off line. We all know of these fly-by-night groups that 

came in and that wrote mortgages they were not supposed to write 

on the basis of a commission, but then somebody bought them. 

Somebody bought the paper. 

Mr. Bartlett. 

Mr. BARTLETT. Congressman, you have it about right. 

During the crisis of subprime, 50 percent of all of the subprime 

mortgages were originated by a totally unregulated mortgage lender. Fifty-eight percent total were sold by mortgage brokers, but it 

is actually worse than that because then the other 50 percent that 

were originated by regulated lenders, regardless of the nature of 

those loans, were mostly then sold to Wall Street, to a different set 

of regulators, either lightly regulated or not regulated at all, that 

were then packaged up into another set of unregulated mortgage 

pools, that were then brought back to mortgage insurance, which 

was regulated by 50 State regulators, and that were all sort of certified by credit rating agencies that were not regulated at all. 

So, as to the system as a whole, you are right. Half of it originated was totally unregulated, but the rest of the system that was 

regulated was virtually unregulated at least with the gaps. So it 

is the system that needs to be reformed systemically. 

Mr. LATOURETTE. I would say where some of us had a disappointment or a dissatisfaction with the Treasury Department’s 

proposal is that is where the $700 billion is going, to the other 

lightly regulated side, which was packaging and then moving these 

mortgages. It was not the traditional banks, right? 

Mr. BARTLETT. Well, Congressman, I would not concur. I think 

the $700 billion is going to a whole series of places to put capital 

back into the system, including buying these mortgages. When that 

happens, the first step is to put capital into the financial institutions overall, not merely into banks as the statute provides. 

Mr. LATOURETTE. Let me just ask: Three of you mentioned mark 

to market. I asked the last panel about mark to market, and one 

fellow from Rochester said I was trying to go back to the 13th Century, I think. 

Mark to market, I am told, is really having a tremendous impact 

on the ability of the community banks—all banks—to have the capital necessary to loan. I would just ask you each to make that observation. If mark to market is not it, what should we put in place 

of mark to market, or what follow-up should we have on the chairman and Mr. Bachus’ idea of looking at the ancillary impact of 

mark to market? 

Mr. Yingling. 

69 

Mr. YINGLING. Well, I think what the chairman said a little while 

earlier in the hearing makes a lot of sense. There are a lot of straw 

men in this debate. Nobody is talking about not disclosing everything. 

When you have mark-to-market accounting in a dysfunctional 

market—and I will just give you an example, the Bank for International Settlements, which is the premier international regulatory 

body, did a study a month or so ago that said the top tier of mortgage securities, the safest part of the mortgage securities, was 

being undervalued by the index that was used as the base for mark 

to market, undervalued by 60 percent because that index is in a 

dysfunctional market. It is a very narrow index. It is an index that 

is based on dumping. It is an index that is run by bears, and that 

is what they said. So it may make sense to disclose that. What does 

not make sense is to have that drive issues relating to capital and 

to the ability of institutions to function. 

So I do think you need to have a system in which you can have 

disclosures, but the impact of mark to market has to be dealt with. 

The CHAIRMAN. We have to finish up here, Mr. Yingling. 

Mr. YINGLING. Frankly, I think the current structure will not let 

you get there. I do not think the SEC’s regulating FASB in the 

light way they have will let you get there. That is why we have 

put out a proposal that would have an oversight board, headed by 

the systemic regulator. I think that would help the chairman get 

to his proposal. 

The CHAIRMAN. Thank you. 

Now I have a request of the witnesses. Would all of you look 

around and see if you can find Joe Stiglitz’s cell phone, which he 

left somewhere, and it is turned off? So, if you find his cell phone— 

Mr. WASHBURN. What is his number? 

The CHAIRMAN. Well, it is turned off. Nobody should sit at the 

witness table with his or her cell phone turned on. 

The gentleman from Missouri has 4 minutes. 

Mr. CLEAVER. Thank you, Mr. Chairman. 

Whenever we begin this discussion of regulation, it always creates ideological differences. 

Mr. Yingling and Mr. Washburn, I am wondering, since someone 

here on our committee made a comment before the break that the 

CRA and minorities were responsible for the subprime mortgage 

debacle, I would like to find out from you, from the banking industry, do you believe that the CRA is a regulatory burden? 

Mr. Yingling or Mr. Washburn. 

The CHAIRMAN. I am sorry. Let us not have anybody standing in 

the way of the witnesses. 

Mr. YINGLING. Well, I want to say that banks have no trouble 

with the philosophy of CRAs. Indeed, if you are going to be a good 

banker, you should be serving your communities. 

Mr. CLEAVER. I am sorry. I hate to interrupt, because I think 

that is rude. Could you just answer the question, because I only 

have 4 minutes. 

Mr. YINGLING. We do have some problems with the regulatory 

costs, but I have made a strong argument during these hearings 

that the root cause—and some of your colleagues have talked about 

it—was the unregulated part of the financial services industry in 

70 

starting these loans, bypassing the regulated banking system and 

taking them to Wall Street. CRA applies to the regulated side. So 

I am sometimes inconsistent, but I try not to be inconsistent in a 

public hearing. So, having argued that it is unregulated that started it, it is hard to argue that the regulated part with CRA is a 

major cause of it. 

Mr. CLEAVER. Mr. Washburn. 

Mr. WASHBURN. I do not think it is a major problem. We live in 

a very regulated world. Being a commercial bank, it is part of the 

regulations that we understand and that we deal with weekly, 

daily and annually. So I do not see its being a major problem. 

Mr. CLEAVER. Okay. So Congressman Green and I did not create 

this debacle, nor did our people? 

Mr. YINGLING. Well, we have many community banks that are 

living with CRA, and they did not cause this problem. 

Mr. CLEAVER. But do you understand the—you do understand. 

Thank you for your answers. 

I guess the point I want to make is whenever we begin to speak 

about regulations it generates the rising of this ideological opposition. And in order to make points, then false information is shot 

across the country. It is refreshing that those of you who represent 

the banking industry are not involved in that. 

I think it would be very healthy if you would—your associations 

would speak very openly and clearly about it because I knew that 

when I went to my town hall meeting Saturday that it would be 

just a matter of time before someone stood up and said the CRA 

and minorities caused this crisis. And I think when we talk about 

regulations, it is used as an opportunity to divide as opposed to trying to figure out ways in which we can operate our financial institutions better. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Will the gentleman yield just briefly? I had the 

staff do a very thorough study, and at no point in the history of 

CRA is there any evidence that any covered institution was ordered 

to comply with CRA by engaging in credit default swaps. We are 

able to definitively say that. 

The gentleman from New Jersey. 

Mr. GARRETT. I thank the chairman and I thank you all here for 

your testimony. One of the things, obviously, that has led to the 

macro issue, the credit problem issue they are currently experiencing as indicated earlier, is the problems in the mortgage sector. 

I thought I would take a moment to discuss an alternative to our 

current mortgage securitization process, and I think one of your 

members mentioned it before, just very briefly, and that is covered 

bonds. 

Covered bonds, as you know, have been used effectively in Europe for centuries and recently were introduced in the United 

States. Basically, they are debt instruments created from highquality assets and they are held—and this important—on the 

bank’s balance sheet and secured by a pool, and that is why it is 

called a covered pool of mortgages. 

And so in contrast to mortgage securitization where loans are 

made and then sold off to investors, a covered bond is a debt instrument issued by the lending institutions to the investors. And 

71 

this debt is then backed or covered by that pool of typically highrated AAA mortgages, and they then act as the collateral for the 

investor in the case of a bank failure. This structure keeps the 

mortgages on a lending institution’s balance sheet. And that also 

provides for greater accountability, if you will, as to the high underwriting standards. And they have the potential to aid and return liquidity to the mortgage marketplace we are in today through 

improved underwriting and accountability. 

I will just say as an aside, I dropped in a bill, H.R. 6659, the 

Equal Treatment of Covered Bonds Act of 2008, and this legislation 

will clear up some of the ambiguities in the current law and codify 

several existing parameters of the market. It enshrines in the investment tool the law that will provide greater certainty, stability, 

and permanency for covered bonds. 

In addition, the spreads would be narrower, which will encourage 

more institutions to enter into the covered bond marketplace. And 

it is a goal to provide an environment through its legislation in 

which the market would be able to flourish, as it used to be, and 

produce increased liquidity. So legislation covered bonds provide for 

a greater sense of legal security than ones through regulations. 

And so, Mr. Ryan, I will throw that out to you. I know SIFMA 

announced at the end of July, in the summer, that it was creating 

a U.S. covered bonds traders committee, possible investors that 

would support the growth of covered bonds market in the United 

States and play an active role in fostering and strengthening this 

market. 

I know that there have been a lot of other things going on as far 

as other proposals and recommendations that you have been talking on. But I would ask you, first of all, how is the committee 

going, what do you see for the future? And then I have another 

couple of questions. 

Mr. RYAN. The committee is working, I would say, comprehensively in coming up with reasonable suggestions to the Congress 

and the Administration on changes that are necessary in the 

United States so that we can have a covered bond market similar 

to Europe. Our members in Europe are integrated into that program. So we are trying to take what we have learned in Europe 

and apply it to the United States. 

We certainly appreciate the attention you paid to this issue because once we make our way through this crisis, we will need to 

find new tools for financing housing in the United States. This 

could be one of them. 

Mr. GARRETT. One last question on this point is, do you see the 

benefit of doing this through the legislative process, to try to bring 

that homogeneity to it and also the structure to it and the stability 

to it, as opposed to a regulation approach? 

Mr. RYAN. I think it probably will require some statutory 

changes and we will give those to you. 

Mr. GARRETT. I appreciate that. Does anyone else on the panel 

need to—or not need to, but wish to address the issue of covered 

bonds? I see my time is just about up. If not, then I yield back to 

the chairman. 

The CHAIRMAN. The gentlewoman from Illinois. 

72 

Ms. BEAN. Thank you, Mr. Chairman, and Ranking Member 

Bachus, for holding this important hearing today on something so 

many Americans are concerned about. They are rightfully concerned about their own and our Nation’s economic futures and 

want to know that we are going to put in place the oversight and 

transparency to avoid this kind of situation ever happening again. 

I am proud to chair the new Democratic Working Group on Regulatory Modernization and we have put together a number of issues 

we are focusing on. And so, I wanted to give each of you maybe one 

question that addresses one of those each issues. 

To Mr. Washburn, regarding the mortgage reform bill that this 

committee passed last year, I believe it was in April, but unfortunately didn’t get through the Senate and get to the President to become law, in that bill that we passed, we eliminated many of the 

risky lending practices that contributed to the subprime fallout 

that has so affected the rest of the capital market structure. 

We also put liability to the securitizers to address what Congressman LaTourette I think rightly attributed to, one of the problems was that the originators weren’t ultimately going to be holding the bag for bad loans that they might write. And by putting liabilities to the securitizer we also then gave them a home waiver 

provision; that if they had best practices in place to make sure that 

the originators were adhering—the ability to pay models and old 

underwriting standards that used to work, they wouldn’t have that 

liability. 

So my question to Mr. Washburn is, how do you feel about that 

bill, had it become law; and if it had a year ago, would we have 

avoided the number or the severity of some of the challenges that 

we are facing in this crisis? Before you go there, I want to lay out 

a couple of other questions and then we will come back. 

To Mr. Yingling, on mark to market, I think the chairman earlier 

talked about how the real issue—and you just spoke to it briefly— 

is that the capital calls more than necessarily how you measure, 

but the consequences of the accounting rules that affect it. My 

question is, the SEC has changed some of those rules recently, and 

how do you think that is affecting balance sheets currently with 

those changes that allow a little more flexibility? 

To Mr. Ryan, my question is regarding the uptick in the collateral rules. Earlier in the previous panel, we had some questions 

about the uptick rule and, if that was reinstated, would it avoid 

some of the naked short selling that has gone on and contributed 

to the downward spiral of many securities? But also the collateral 

role, not just as applied to those, but to the credit default swaps 

that don’t require collateral to get involved in them and how that 

has allowed so many people to even create greater degrees of risk 

and leverage, what are your thoughts on that? 

And if we get to it with timing to Mr. Bartlett, you talked about 

a clearinghouse for derivatives and disclosure of risk and what 

your comments are on that. 

So I would like to go to Mr. Washburn first. 

Mr. WASHBURN. Could you go back over my question? 

Ms. BEAN. Sure. Yours was on mortgage reform which eliminated 

risky lending practices, put liability to the securitizers so they 

would make sure the originators did what they were supposed to 

73 

do to avoid that liability; is that a good thing, is that what we need 

now? Or do we need something else, because I think that bill would 

have addressed it. And second, if we had done it, would we have 

avoided some of this fallout? 

Mr. WASHBURN. I think that would have solved part of the problem that you see today. Some of it may have occurred that we could 

have done nothing about having happen in the past. But I think 

responsibility is something that the whole industry needs to step 

forward on. We talked about covered bonds being a way to keep 

those assets on the balance sheet. In each step those securities 

were moved from the originator, the less liability you have. 

As someone told me recently in a conversation, probably 80 percent of those originators that were out there are no longer in business. So it is just a new day for mortgage origination. I think that 

might have helped. 

Ms. BEAN. Okay. Thank you. Mr. Yingling, it was about the 

SEC’s change. 

Mr. YINGLING. The steps the SEC tried to take were marginally 

helpful. Unfortunately, FASB—they delegated part of it back to 

FASB and they took us right around in a circle. So marginal 

progress but really not significant, and I think it shows why the 

current system doesn’t quite work. 

Ms. BEAN. If I can, Mr. Chairman. I believe you concurred with 

the chairman earlier that it should be more about capital cost than 

changing the accounting rules specifically. 

Mr. YINGLING. Well, the way the accounting rules—the impact of 

the accounting rules need to be changed as opposed to the disclosure. 

The CHAIRMAN. It triggers capital requirements at a time when 

it is a problem. You also have a situation where there are certain 

entities which by law can’t buy certain other entities, and the mark 

to market can trigger an inability to sell and it is procyclical. 

And if you notice, Professor Stiglitz, who is not usually accused 

of being a shill for the industry, talked also about not having these 

things be procyclical. 

Mr. YINGLING. He did. But just to correct the record, he said that 

we weren’t pure when the market was up. We have raised these 

questions about mark-to-market accounting being procyclical in up 

and down. We have raised them for years. You are exactly right, 

Mr. Chairman. 

The CHAIRMAN. Well, if I were you, I would take the agreement 

I can get and go debate your purity elsewhere. But some arguments are easier to win than others. 

I would just say with regard to covered bonds, and this question 

of what consequences we should flow in a mark to market, will be 

very high on this committee’s agenda next year. We have a very 

broad set of things to look at that will not stop us from doing some 

specific things, including continuing our deregulation in the areas 

of security and others as well. 

The gentleman from Alabama. 

Mr. BACHUS. Thank you. I will submit a question on the countercyclical capital requirements, which I do believe that is a problem. 

The CHAIRMAN. If the gentleman would yield. I would note that 

on September 18th, the gentleman from Alabama asked that this 

74 

particular subject be a specific topic of the hearing, so it is something that has our attention. 

Mr. BACHUS. Thank you. Mark to market, early on when we 

started proposing an intervention to buy troubled assets from a 

small number of large institutions, many members mentioned 

mark to market. But I want to say this to representatives of the 

banking group, almost immediately, you all endorsed TARP as a 

way to solve the problem. I don’t want to second-guess you, but it 

did undercut our efforts to have a more comprehensive program. 

I submitted a letter, again October 14th, to the SEC saying that 

we needed urgent action on this matter. And mark to market is because of Enron and WorldCom. So I am for fair valuation. But the 

existing interpretation of FAS 157, as you all know and I know, 

can be done better. And if we continue to place these reduced values on these assets it is going to cancel out, I think, any benefit 

of capital injection. So to me it is a very important thing. And I 

know you have my September—I mean October letter to the SEC, 

and I hope we will join together and continue to push this. 

Mr. YINGLING. We agree completely with your letter. They 

have—at FASB and SEC, within the current rules they have flexibility to make important interpretations. 

Mr. BACHUS. Absolutely. And they need to base those values on 

some reasonable expectation. Now, you know, you have mentioned 

that we continue to have this debate over regulated or nonregulated, what caused the problem. But now I am going to take issue 

with this idea that most of these institutions weren’t regulated. At 

some level, they were regulated. If you are talking about the investment banks which, you know, if the investment banks hadn’t 

engaged in what they did, I am not sure we would even be here 

today. And they were regulated by the SEC, by the CSE program. 

And it was the SEC that in 2004 let them water down their capital 

ratios that went from 12 to 1 to 40 to 1. 

And you know AIG, is gone today. I mean not gone, they are the 

subject of a massive bailout. Now, the reason I bring that up is not 

to get in a conflict with you, but we still have this idea of licensing 

and registration of mortgage originators. And you know, you and 

I, we have been on the opposite sides of that. You all have opposed 

registration and licensing of mortgage originators. You want to just 

do it for the mortgage brokers, not for those under the regulated 

institutions. 

But, Mr. Bartlett, as you said, or Congressman Bartlett, 40- 

something percent of the bad actors were working for regulated institutions. We are talking about Golden West, Countrywide, 

IndyMac, Washington Mutual, a lot of them are at banks. I know 

you all are continuing to resist my efforts to extend that to all 

mortgage originators. And I hope you will take a look at this in 

hindsight—because you all have resisted these efforts for 3 or 4 

years in subprime reform—and just say, look, we are there. 

I am just going to ask you to continue to look at that. Because, 

look, if you don’t, you are going to have 40 percent of the problem, 

or it could be 60 percent of these folks who go from one institution 

to another. They make bad loans in one State, they show up in another State, and it is a big loophole. 

75 

Let me ask you this: When you all endorsed the TARP plan, did 

you not have the same concerns that I expressed from day one, 

that why would you want those assets to come into the government, you know, to be managed by the government? Wasn’t the expertise with the institutions? Wasn’t it far better to use covered 

bonds or lending or preferred stocks to inject the capital in the institution? 

Mr. BARTLETT. Congressman, we endorsed it because there is a 

crisis, an economic crisis. And we think that you have to get capital 

back into the system to restore liquidity. The Secretary of the 

Treasury and others have proposed a solution. And we constantly 

advocated to advance that solution on all fronts and, to add to it, 

to allow for multiple options. It was a colloquy on the Floor, for example right at the end, that then permitted this or at least referred 

to investing equity in the institutions. 

Mr. BACHUS. And that was that section, I think 118, which we 

actually insisted on. 

Mr. BARTLETT. So we don’t see it as one solution, we see it as 

advancing on all fronts to get liquidity back into the system. And 

it hasn’t started yet. There is not a dollar that has moved yet. 

Mr. BACHUS. I just want you to remember that there is a big difference that people seem to be missing. And that is if the government buys these mortgages and mortgage-backed securities and 

credit default swaps, they have to manage it. And if the institutions themselves aren’t able to manage it with all their expertise 

and experience, how do you expect the government to do that? Mr. 

Ryan. 

Mr. RYAN. I would just like to make one comment. We are very 

supportive of the TARP program for a different reason. We feel 

that a major problem in today’s financial sector is not only 

illiquidity in these troubled assets, but price discovery. And the one 

result which—and as Steve said, we haven’t seen this yet, but our 

hope is that through the purchase program we will have transparency; people will know what an asset is worth; we will actually 

have a real mark that makes a difference; we won’t be debating 

mark to market; we will know what the price is. 

Mr. BACHUS. What about a private auction, or where the private 

sector has to participate at a certain level? 

Mr. RYAN. I am in favor of that. 

Mr. BACHUS. As opposed— 

The CHAIRMAN. Your 2 minutes are up. 

Mr. BACHUS. That is it. Thank you. 

The CHAIRMAN. Sometimes I wonder if price discovery is kind of 

like heartbeat discovery. We are trying to find out if there is one. 

The gentleman from Florida is next. The intervening members 

have agreed to let him go next. 

Mr. KLEIN. Thank you, Mr. Chairman. And thank you, gentlemen, for being here today. 

When speaking to people at home, large sophisticated borrowers, 

real estate, and large businesses as well as small businesses, we 

continue to hear, as you know, that it is difficult to get credit. And 

I appreciate the fact that community bankers have been very astute in their lending practices over the years. But generally speaking, we are not hearing that there is a lot of capital available. And 

76 

when we are hearing it is available, it is available under very difficult terms to borrow. 

So I want to just—if people are listening at home, watching this 

today, some would think, based on some of the comments, that 

some lending is really free flowing out there. Maybe it is in different parts of the country. 

I am from Florida, South Florida, and it has been very very difficult. So just as a thought, one of the things we were talking about 

back home with small business, SBA loans for example, is maybe 

expanding the underwriting capacity a little bit. Those are highquality loans for the most part; the default rate is fairly low, and 

we already have an institution in place. And that is something 

that, to the extent we can maybe get SBA loans out there quicker, 

that may be something to consider. I know there has already been 

an effort to do that, but if we can really push hard, it is a faster 

way of getting capital in businesses hands. So if you have some 

thoughts on that. 

And then just in general, also to the extent that we know that 

this is an immediate problem—and there are no silver bullets— 

whether it is the large, sophisticated borrowers or the smaller borrowers, is there anything that we can or should be doing other 

than maybe the SBA loans, Treasury, Fed, Congress, that can try 

to advance the small business side of this thing a little quicker? 

And if you could direct that to Mr. Yingling and Mr. Washburn. 

Mr. WASHBURN. I think we have always been big proponents of 

SBA lending, and that is what we do. We are, again, a community 

bank in Hoover, Alabama, with probably almost 20 percent of our 

portfolio concentrated in small- to medium-sized business loans. We 

have worked with the SBA and hopefully will continue to do so. 

That is a way to get money back out. 

As I mentioned earlier in my testimony as well, our loan demand 

is big, and is great as it has ever been, but capital is holding us 

back. And so any way to get capital injected into the community 

bank system, the healthy community bank system will only benefit 

your area as well as ours and any other area who has a community 

bank. 

Mr. KLEIN. Is that a question of using the $250 billion that is out 

there and trying to have our community banks and others—I read 

Mr. Paulson’s letter, which I am sure you saw, in terms of everybody has access to us, not just for large institutions. Are you comfortable that that strategy or what you are hearing so far of the 

application process will get that capital into the community bank 

system? 

Mr. WASHBURN. We hope it will. We have a concern, because 

right now I think the way it is written, private banks and Subchapter S corporation banks are not eligible or may be left out. We 

hope there is some change in the dynamics of the bill. But I like 

what I—the initial read, I like what I see. I think it is a solution. 

If you read, I think most all the banks that are willing to participate can participate that are healthy. And I think you will see a 

flow of capital back out, which will result in lending money back 

into the markets where it needs to be. 

Mr. KLEIN. Mr. Yingling. 

77 

Mr. YINGLING. I agree with that answer completely. I think one 

of the problems with this idea of putting capital into community 

banks is a perception problem. And that is—and you see it on TV, 

you see it in the media—are we bailing out these banks? 

We don’t need to bail out these banks. These banks are solid 

banks, willing to lend, and they don’t have to take this capital. But 

the capital markets are pretty well closed to them right now. So 

if you want them to have more lending, you have to say, we want 

you to do this. And in a way, you are a hero to do it. It is not a 

natural thing for community banks to say, I want a government investment. That is against their philosophy. But they need to know 

they are not going to have a scarlet ‘‘A’’ around their necks if they 

do this kind of thing. 

Mr. KLEIN. And we are most concerned, obviously from a business point of view, of getting capital and credit available for small 

business. I mean, we want both capacity, large and small banks to 

be out there. But to the extent that if you see, as this process is 

beginning, that your community banks are not having the capacity 

or the access, for whatever reason, you know, please let our Chair 

know; and we are all interested, because we want to make sure everyone has the ability if they need it, and it will help the local businesses to get access to this capital, we would like to help. 

Mr. YINGLING. You are right and thank you. 

Mr. WASHBURN. Thank you very much. 

The CHAIRMAN. The gentlewoman from Wisconsin. 

Ms. MOORE OF WISCONSIN. Thank you, Mr. Chairman. I guess I 

want to direct my question perhaps to Mr. Ryan. 

One of the things that I have found more frightening than anything, more than these toxic assets, are these credit default swaps. 

Speculation is that the value, outstanding value is something like 

$58 trillion, more than twice the size of the U.S. stock market. And 

I guess the beauty of bankruptcy perhaps would be that we would 

be able to take advantage, avail ourselves of the discovery process 

in bankruptcy, where a special master could sort of do an autopsy 

and figure out what happened and sort of sort this stuff out. 

Many of my colleagues and many people on the first panel seem 

to be enamored with the idea of our having a select committee to 

pull together all the different jurisdictions and sort of tagging onto 

that idea. 

I guess my question would be, since the judicial jurisdiction is 

spread out among the Fed, the SEC, FTC, CFTC, FDIC, maybe 

even the Department of the Treasury, what do you think about— 

and in the absence of any bankruptcy except for Lehman Brothers, 

what about having a special master look at this and help us do an 

autopsy of what happened so that we can do the right thing? Mr. 

Ryan, I will let you answer. 

Mr. RYAN. Thank you. First of all, as to the number, the number 

that is floated around in the press is a notional number; it is not 

really the net number once these things are settled out. We are 

still talking in excess of $1 trillion. 

Ms. MOORE OF WISCONSIN. Of what trillion? 

Mr. RYAN. $1 trillion, once it is netted out. Fifty is a lot of double 

counting. That is number one. 

78 

Number two, the industry, meaning the financial markets industry, is very engaged right now with the Fed and with regulators in 

Europe to address the issues with structured and derivative products because it is not just CDS, it is other products. And what we 

are trying to do is to come up with a system that works. Principally, it is going to be a clearing system. And I expect that we 

will hear some reasonably positive news about that soon. 

Ms. MOORE OF WISCONSIN. Okay. 

Mr. RYAN. I don’t think we need a special master. 

Ms. MOORE OF WISCONSIN. Well, the reason I am asking this 

question is because maybe I disagree with others, that we don’t 

need to determine in order to move forward; I don’t necessarily 

agree that we don’t need to assign some blame in order to discern 

what has gone wrong. I think that without the judicial and the judicial sort of jurisdictions of all these departments engaged and involved, it is hard to hold people responsible. 

My colleague, who had to leave, had a question about credit default swaps as well. And basically her question was, should we 

have some collateral rules or capital requirements for credit default 

swaps? 

Mr. RYAN. Well, we do. I mean, most of the players in the derivatives business are major financial institutions around the world. 

They are, by the way, highly regulated. In the United States, those 

institutions are largely regulated by the Fed, and they have the 

same capital requirements that apply to all of the institutions represented here. So capital, collateral, are covered right now. 

Ms. MOORE OF WISCONSIN. Okay. Well, then why is this so complicated? I mean, if there is—I guess my understanding about these 

credit default swaps is that one of the reasons that they are so 

problematic is because there are actually very little, unknown assets underneath them. I mean at least with the toxic mortgage 

asset products, we know that there is a house and an address associated with it. But some of the betting on top of betting and credit 

default swap activity is sort of opaque to us. 

Mr. RYAN. I am going to make a couple of comments. First, as 

to the general business of credit default swaps, they are risk mitigators and they serve a very useful purpose on a global basis. Some 

of the, I would say, concern that exists in today’s marketplace and 

the reason for a lack of confidence is, as I said before, we have 

taken financial engineering to a level of complexity that people do 

not understand. Most of the problems, by the way, are not with 

credit default swaps, they are with other instruments where they 

were very very complex, and insurance was purchased around 

those securities, which are called credit default swaps. That is why 

this is implicated in the discussion right now. 

Ms. MOORE OF WISCONSIN. Thank you. I yield back. 

The CHAIRMAN. The gentleman from Minnesota. 

Mr. ELLISON. Mr. Ryan, maybe you can elaborate on that. What 

are some of the other instruments besides credit default swaps that 

are out there that played a role in the current financial meltdown? 

Mr. RYAN. As I said before, if we do a retrospective on this, 

which I believe we will be doing over the next couple of years, we 

will find that instruments like CDOs, certain types of CDOs, where 

79 

the underlying assets are really by reference to an index, CDO 

squares which are a collection— 

Mr. ELLISON. Just for the record, CDOs are collateralized debt 

obligations? 

Mr. RYAN. Correct, collateralized debt obligations. And when you 

had multiple CDOs collected and then securitized and sold, they 

were called CDO squares. 

Mr. ELLISON. Now, another question. If you were to—let’s just 

say you did not have these derivative instruments that have developed, but you did have the poor underwriting standards that were 

associated with subprime mortgages. Would we be in the financial 

circumstances we are in today? 

Mr. RYAN. Well, clearly many of the underlying assets in these 

problematic structures were subprime or Alt-A mortgages, mostly 

subprime. 

Mr. ELLISON. I guess my question is, to what degree is the credit 

default swap proliferation and the derivative market, to what extent did it accelerate the problems associated with the subprime 

market? Do you understand my question? 

Mr. RYAN. I do, and I am not sure that it necessarily accelerated 

it. What it certainly did was it took these products, packaged them, 

and structured them in such a way that they could be distributed 

through the capital markets and distributed globally. So I would 

say the biggest difference, quite frankly, between the problems we 

have in the S&Ls between 1989 and 1992, 1993 and today, is we 

have taken most of these mortgages and we have packaged them 

in such a way that they could be distributed through the capital 

markets. That is the biggest difference. 

The CHAIRMAN. It sounds pretty accelerating to me. 

Mr. RYAN. Excuse me? 

The CHAIRMAN. That sounds pretty accelerating to me. 

Mr. RYAN. Accelerating? 

The CHAIRMAN. Yes. That is what he asked you. 

Mr. ELLISON. My next question is, you know, we have been debating over whether or not deregulation was a causal factor in the 

financial circumstance that we find ourselves in. And I guess my 

question is, you know—and I think it was the year 2000—I think 

then-Senator Gramm introduced a piece of legislation, I think it 

was called the Commodity Futures Modernization Act. To what degree did the passage of this amendment exempt derivatives from 

regulation? Or in your view, Mr. Ryan, did they? Do you understand my question? 

Mr. RYAN. I think I understand your question, but I don’t know 

the answer. 

Mr. ELLISON. Does Mr. Bartlett know? 

Mr. BARTLETT. I don’t know. 

Mr. ELLISON. Are you familiar with this piece of legislation, the 

Commodities Futures Regulations Act? 

Mr. RYAN. I am familiar with the fact that the regulation of credit default swaps was an issue at that time, and I believe Congress 

decided that it would not be regulated as a product. That is what 

you are talking about. 

80 

Mr. ELLISON. Yes. And how much did that decision—well, let me 

ask it this way: Did that decision by Congress serve the public 

well, particularly in light of the present circumstances? 

Mr. RYAN. I think that is something that time will tell. I am not 

sure of the answer to that question right now. 

Mr. ELLISON. Mr. Bartlett, do you have a view on this? 

Mr. BARTLETT. I don’t have a conclusion. I have a lot of views. 

The first view is that setting up this clearinghouse, the New York 

Fed setting up a clearinghouse, we will know more about it. And 

then over the course of the next several months, I think that we 

will have a full debate as to whether to regulate credit default 

swaps through either CFTC or the Federal Reserve. 

I haven’t reached a conclusion yet, but I do think it is fair to say 

that the question has been reopened. 

Mr. ELLISON. And the last question. We have talked about some 

of the economic history, Glass-Steagall and then the move to 

Gramm-Leach-Bliley. And the way I understand Gramm-Leach-Bliley—I wasn’t in Congress then—is that it allowed financial institutions to leave their area of core competency and sort of do things 

that they traditionally had not been doing. What now is the best 

regulatory approach to address the current circumstances? 

I mean, I guess we could have repealed Gramm-Leach-Bliley and 

returned to a Glass-Steagall-type era, or we could try to modernize, 

as I guess that is the topic of today’s hearing. What strategies 

should we pursue if we are going to try to meet the financial opportunities opened up by Gramm-Leach-Bliley? 

Mr. YINGLING. The one comment I would make is that GrammLeach-Bliley had nothing to do with this. I mean Gramm-LeachBliley didn’t have anything to do with mortgages or mortgage origination. It didn’t have anything to do with Fannie or Freddie. It 

didn’t have anything to do with AIG. It didn’t have anything to do 

with Lehman Brothers or Bear Stearns. In fact, Bear Stearns and 

Lehman Brothers were stand-alone securities firms. 

In a way, Gramm-Leach-Bliley has provided an exit because Merrill Lynch was able to be acquired by Bank of America, and Goldman Sachs and Morgan Stanley were, because of Gramm-LeachBliley, able to get under the Federal Reserve. And in fact, GrammLeach-Bliley had some good capital provisions in it. 

So I think that argument, in my opinion, is misguided. I do think 

that Gramm-Leach-Bliley was incomplete in the sense that we did 

not have—and I keep coming back to this—a systemic regulator. 

And that is what we really need is a systemic oversight regulator. 

The CHAIRMAN. Thank you. I think that point is fascinating. The 

gentleman from Alabama wanted to take 30 seconds. 

Mr. BACHUS. Let me credit default swaps, and correct me if I’m 

wrong—I would compare in the real world with sort of insurance 

or a guarantee. I mean it is a form of where you are issuing insurance on an obligation. Now, the problem with it was, unlike insurance, where there are reserves and it is regulated, when you make 

a guarantee you have to have reserves to stand behind it. It was 

so highly leveraged that you may issue some on a $100 million obligation. When it went wrong there was only, you know, $200,000 

worth of capital backing that guarantee and it was blown through 

almost immediately. 

81 

The CHAIRMAN. If the gentleman would yield, the analogy, I 

think, is that these were people who were issuing life insurance on 

vampires. They didn’t think they needed any money because vampires don’t die. And then when the vampires died, they didn’t have 

any money. 

Mr. BARTLETT. Well, just briefly, the problem with credit default 

swaps was its excess leverage to the extreme and then no systemic 

regulation at all. I mean none. 

The CHAIRMAN. If you don’t think you are ever going to have to 

pay it off, then you don’t worry about your obligations. 

Mr. BACHUS. It was an incredibly leveraged guarantee with no 

reserves backing it. 

The CHAIRMAN. The gentleman from— 

Ms. MOORE OF WISCONSIN. Will the gentleman yield? 

The CHAIRMAN. Yes. 

Ms. MOORE OF WISCONSIN. So did I use the wrong term by calling them credit default swaps instead of CDOs? 

The CHAIRMAN. They are two different issues. They are two different things. 

Ms. MOORE OF WISCONSIN. So would your answer change? 

The CHAIRMAN. Gwen, we don’t have time. 

Ms. MOORE OF WISCONSIN. No problem. 

The CHAIRMAN. The gentleman from Colorado. 

Mr. WILSON. Thank you, Mr. Chairman. You can see from the 

conversation that the setting we have to try to solve all the ills of 

the financial markets by asking you all 5 minutes’ worth of questions doesn’t quite meet the issues that we have to confront. 

But just a couple of things, and then I have a bunch of questions. 

This applies to Mr. Ryan or Mr. Washburn. I came out of the 

1980’s, the savings and loans, the oil and gas bankruptcies, all of 

that stuff, and a lot of community banks failed back then. And the 

good news is we are not seeing that. It is sort of a different sector 

of the financial industry that has been struggling. 

But there was an article yesterday by Robert Samuelson, entitled, ‘‘The Trouble With Prosperity.’’ It says, if things seem splendid, they will get worse. Success inspires overconfidence in excess. 

And if things seem dismal, they will get better. Crisis spawns opportunities in progress. And we see that kind of—those ups and 

downs within the financial market. 

Now, one of the things that I want to ask about is we see within 

community banks in particular, smaller banks, credit unions, less 

interconnectness—I think that was somebody’s terminology, 

interconnectness—that has allowed them to be not immune from 

all of this, but at least in a better financial position than those 

groups that were very interconnected. And whether it is GrammLeach-Bliley or not, you have banks, investment banks and insurance companies, all, in my opinion, kind of wrapped up in one big 

thing. 

I would like a comment on that if you could, Mr. Washburn or 

Mr. Ryan. And then I want to talk about money markets, because 

we went through a whole heck of a lot. We went through two hedge 

funds failing, we went through a failure of Bank Paribas, we had 

the lockup in the student loans and the municipal bonds, we had 

Bear Stearns, we had Fannie Mae, we had Freddie Mac, we had 

82 

AIG go down, and Merrill Lynch. And then we got involved when 

the Treasury ran over here because there was a run on money markets. So I want to talk about how do we deal with money markets. 

So first question, interconnectedness. 

Mr. WASHBURN. I think you are correct. The lack of that interconnectedness is what made the community bank model successful. 

And there were failures back in the time you mentioned. But if you 

look at the overall economy we are still doing—or the overall industry, we are still doing the same thing we have done for years. I 

mentioned earlier we are lending money to people who pay it back. 

And we offer some peripheral services that are tied into our client 

base. So us extending what we normally do, extending into markets 

we don’t understand and into products and services we don’t understand, we shied away from that. I don’t see that changing going 

forward, so yes, I think that is correct. 

Mr. WILSON. Mr. Ryan. 

Mr. RYAN. Clearly, we have cyclicality at work and there are certain types of institutions that are affected more by the pressures 

they are under—15 years ago it was the smaller banks, and now 

it is, I use the word ‘‘interconnected’’ financial institutes. That is 

the principal issue. It is why our principal recommendation is to 

have a systemic regulator. And we need one on a global basis. So 

that is as to the first question. 

As to the second question, you know, your litany of the problems 

we have been dealing with over the last 2 months, it tells the 

whole story as far as the crisis atmosphere. The issues with money 

markets are also interconnected with many of the other issues because the market funds were investing in what they thought were 

very high-level AAA and AA bonds to support the money markets. 

We are, I would say, very, very pleased at the way the Treasury 

stepped in, because we cannot afford to have the money markets 

break the buck. So the fact that they used the emergency stabilization fund quickly and then came to you in the form of TARP, we 

think was critical in stemming the tide. So we thank you for your 

help on that. 

Mr. WILSON. And then to Mr. Bartlett or Mr. Yingling, both of 

you were talking about under TARP, I think there are three things 

that we could do. And I would ask that you talk to your members 

about it. One is, you know, buy the junk portfolios, whatever you 

want to call them, the troubled assets. Two, recapitalize the banks. 

And the third one is—and this I got in a colloquy with the chairman—is that we can use this $700 billion to go directly through the 

SBA, go through the Federal Home Loan Bank system or get to the 

community banks directly and the Farm Credit Administration, because there is fury out in, you know, Wheat Ridge, Colorado, about 

money getting down to small businesses and to people. I mean, 

there really is a huge amount of anger about all of this. 

And so one of the things that I would ask all of you to take back 

to your members and also continue to promote is that there is a 

way through this whole thing we have done to get it directly down 

to the people on the street, the small businesses on the street, the 

homeowners on the street, the bankers and the farmers. But I 

didn’t get that in there. It is not as crisply written as I would like, 

but it is in the record. Thank you. 

83 

The CHAIRMAN. The gentleman from Indiana. 

Mr. DONNELLY. Thank you, Mr. Chairman, Ranking Member 

Bachus, and members of the panel. We want to try to help create 

proper regulations as we move forward. But the question I have is 

regarding the executives running your companies, the people in 

charge. Do they get the sense of responsibility that they have, because folks back home in Indiana who played by the rules and who 

worked hard have been damaged extensively, personally by this. 

And this is a crisis of confidence. Can you tell everybody that the 

executives of these companies get it now? That they are not chasing a way to get a higher bonus through a risky leverage program? 

Is there a code of conduct in place? Have they talked about that? 

I would like you to speak as to these people that you talk to 

every day. And do they understand they not only have an obligation to their shareholders, which I understand, but to this country; 

that the people investing their dollars in their organizations are 

going home and looking at their kids and trying to make sure they 

can make ends meet every day. 

Mr. BARTLETT. Congressman, the executives of my companies 

feel a heightened and a strong sense of responsibility, a sense of 

accountability, and a sense of accountability for getting it right and 

moving forward. I do have to say it is easy to say ‘‘they.’’ I am sure 

that each of the 435 Members of Congress have a sense of responsibility also. 

Mr. DONNELLY. Absolutely. 

Mr. BARTLETT. And so each of us has a responsibility to get it 

right. This crisis sort of melted down and there is a lot of blame. 

But these executives take it seriously, and it is a sense of total 

commitment to get it right. 

Now, I do want to say one other thing, and that is that the sense 

of ‘‘they’’ is that they are not to blame. Clearly there were individual companies and individual executives who made mistakes. 

But if you look at these companies—U.S. Bank, Raymond James, 

Prudential Financial, Wells Fargo, PNC, Frost Bank, Bank Corp 

South of Tupelo, American General in Evansville, Indiana—it is 

neither accurate nor—well, it is not accurate to sort of broad brush 

and say, well, all of those people are somehow— 

Mr. DONNELLY. And nobody is doing that. 

Mr. BARTLETT. I know you weren’t. 

Mr. DONNELLY. What we are trying to do is to say to everybody 

who may be watching that they can be confident, that they can 

look to these organizations and know that their funds will be protected. 

And so what I am wondering is, is there some code of conduct 

that we won’t invest in these type of products; that these are areas 

we will stay out of. We have exceptional leaders. 

You know, I am familiar with the banks and institutions in my 

home State. Our community bank leaders and credit union leaders 

and others have been off the charts in their solid nature and what 

they have done. And what I am trying to do is to tell the folks back 

home why they can have this confidence. 

Mr. BARTLETT. Congressman, to take one more minute. In fact, 

these executives have, and the executives I work with have a total 

84 

commitment to get it right, to work with the Congress and with the 

regulatory agencies to get it right. It was a systemic failure. 

And I will use one example of one company in Indiana. American 

General had one of the lowest rates of delinquencies of the 

subprime market and one of the largest subprime lenders in the 

country, 2 percent rate of delinquency. And yet they are owned by 

AIG. The credit derivative swaps was the problem that brought the 

whole company down. But it wasn’t the subprime loans that were 

being made in Evansville, or throughout the country, from Evansville, Indiana. So it is a systemic failure, not a failure of individual 

parts. It is the fact that the parts didn’t have a mechanism to talk 

to one another. 

Mr. DONNELLY. And I know as a leader with them, you will be 

talking to them about—and they of course know, we hope going forward, what areas they don’t want to get into. They don’t want to 

go near, in terms of just the things you were talking about, the 

credit default swaps that may not have been backed up. 

And then to Mr. Washburn, what are the things that we can do 

to make it easier for our small businesses to be able to get loans? 

How can we be able to make sure that those who are so creditworthy, coming to you, that the funds are there? What are the 

things the community banks and small banks are looking for as we 

move forward? 

Mr. WASHBURN. I think the number one thing that—and again 

I am speaking for 8,000 banks, but I think the number one thing 

that we see as a need for us is capital. We may be a little bit 

unique, but we are in a high-growth area, and opportunities are 

great at this time, as I have mentioned a couple of times today. 

The access to capital and stabilization of the market, I think 

there is fear out there that has just caused a lot of the lenders to 

sit on the sidelines not knowing what is coming next. So I think 

a combination of those, the possible fear going away, capital injected into the markets, and just the ability to get the system moving again. 

Mr. DONNELLY. Thank you. 

The CHAIRMAN. The gentlewoman from California. 

Ms. SPEIER. Thank you, Mr. Chairman. And thank you for being 

here and for your participation. I will make this painless because 

I know I am the last to ask questions here. 

One of the things that is very apparent to me, and I think to all 

of us really, is if you have no skin in the game it is really easy to 

make mischief and get out there. And a lot of that went on in this 

crisis. You all are supportive of ceasing mark to market. And yet 

I worry that if we do in fact get rid of mark to market, that it is 

going to create an environment where banks can take on risks because there is not going to be the accountability that mark to market requires. 

So my question is, are you interested in seeing mark to market 

suspended for a short period of time because we are in this crisis, 

and then return to it? Or are you supporting doing away with mark 

to market completely? 

Mr. BARTLETT. Congresswoman, I would like to start. There may 

be slightly different variations. But I think that mark to market or 

fair value accounting needs to be reformed to where it actually obVerDate Aug 31 2005 16:29 Feb 09, 2009 Jkt 046591 PO 00000 Frm 00088 Fmt 6633 Sfmt 6633 K:\DOCS\46591.TXT TERRIE
85 

tains a fair value. If there is no market of a daily market then you 

can’t use the market of a transactions to achieve the market. And 

we believe that is part of the law, that is part of good accounting 

principles, and that what we have urged is that FASB and the 

PCLB use the fair value accounting in its proper way, which is if 

there is no market then use a cash flow model to estimate the 

value. 

Ms. SPEIER. So you still support mark to market? 

Mr. BARTLETT. Yes, we do. We don’t support a return to historical cost accounting. But currently the system is broken because it 

is being regarded in many places as a theology rather than an accounting method. And so we want to move back to good accounting 

and away from the theology of it. 

Ms. SPEIER. Mr. Ryan. 

Mr. RYAN. Just to get the record straight—at least within our industry representing, really, the financial market players, these are 

global players—that we do not have the same uniform view expressed by the other panelist on mark to market accounting. So 

that is from an industry standpoint. 

From a personal standpoint, and this goes to the point you just 

made, it is a pretty difficult time period to make a change to the 

accounting as we are in the middle of a crisis. And that is especially true when pricing and confidence in the system is so critical. 

So when you at this juncture, just on a personal basis, I have a 

hard time supporting a change in accounting exactly today. 

I think that we all need to look at overall accounting standards 

and how they apply to the financial services business because there 

are other accounting conventions that have also caused problems. 

So the whole issue as we start looking at how do we want to be 

regulated in the future, we need to put the accounting profession 

into this system and think through broadly the impact the accounting profession has had on this industry. 

Ms. SPEIER. To you, Mr. Yingling, you said something earlier in 

your testimony that kind of stunned me. You said you kind of 

gasped when you saw the number of loans that were being offered 

with no money down, and that government should have done something. Well, I guess my first reaction is, why didn’t you come to 

Congress and say, hey, there is a problem here, we need to fix it, 

instead of sitting back and looking at it? We don’t look at your figures on a daily basis. You are in a position to do that. 

Mr. YINGLING. That is a good question. By that point in time, we 

were already well into it, and so we did come up here and work 

with the chairman and this committee on the legislation that ultimately passed the House. So by that point in time, it was too late. 

Part of the problem is these statistics, largely again, were outside 

the banking industry. And so we weren’t looking at them, we 

weren’t looking at the mortgage brokers. And my point was I don’t 

think there was anybody in the government that was really looking 

across the whole spectrum of what was going on in mortgage lending. 

And so, yes, we probably should have seen it earlier because it 

had a terrible impact on our industry. But at that point, we were 

already well into the problem. 

86 

Ms. SPEIER. Last question: I met with a national investment firm 

CEO last week who said to me, ‘‘We are not about to invest in any 

bank right now because we can’t tell what they have.’’ And he was 

speaking particularly of Wachovia and how there is no transparency. If we can’t find out what they are holding, why would we 

invest? 

So my question to you as the head of the ABA is, how far are 

you willing to go out in terms of transparency within the industry? 

And that is my final question. 

Mr. YINGLING. Well, we should have full transparency. I think 

the problem is in this dynamic, you not only have trouble seeing 

what may be in a loan portfolio, you really have trouble knowing 

what it is going to be worth 2 months from now or 3 months from 

now because the market is changing so rapidly. But, yes, we ought 

to work on issues of greater transparency. 

Ms. SPEIER. Thank you. 

The CHAIRMAN. The gentleman from Ohio had a question. 

Mr. LATOURETTE. Thank you very much. Mr. Ryan—I am going 

to ask the chairman unanimous consent—when you were talking to 

Ms. Moore, this issue that has been in the newspaper about $53 

trillion of securitized stuff out there, and I think you said $1 trillion. 

Could you supply for the record, and I ask the chairman unanimous consent for permission to do that, why you say it is $1 trillion 

and not $53 trillion? 

The CHAIRMAN. Thank you. Mr. Yingling, I would like to ask you 

a question. You said no one in the government was looking at mortgages across-the-board. At what period were you making that comment about? 

Mr. YINGLING. I would say, it is just my impression, that if you 

go back to 2003, 2004, 2005, or 2006, maybe the Federal Reserve 

was looking at that. 

The CHAIRMAN. I want to take serious exception to that. It wasn’t 

your job to know differently. But there is a fundamental issue here. 

In 1994, under John LaFalce’s leadership as the second Democrat, 

and Chairman Gonzalez was chairman, this Congress passed the 

Homeowners Equity Protection Act. 

Mr. YINGLING. I understand that. 

The CHAIRMAN. That said that the Federal Reserve should regulate mortgages. And it was assumed at the time that the bank regulators were regulating the mortgages on the regulated institutions, but that the Fed should do across-the-board mortgage regulation, knocking out a lot of things that should happen. Well, this is 

an important point, and it is not what you said. 

Mr. Greenspan, under his philosophy of deregulation, refused to 

use it. Now it is true, as some of my colleagues over there said, the 

law was on the books. But Mr. Greenspan said, no, the market is 

smarter than I am, and explicitly refused to use it. Federal Reserve 

Governor Gramlich urged him to use it, and he refused on philosophical grounds. Finally, frustrated that that wasn’t happening, in 

2005, four members of this committee—Mr. Bachus, who was then 

the chairman of the Financial Institutions Subcommittee as a Republican, Mr. Watt of North Carolina, Mr. Miller of North CaroVerDate Aug 31 2005 16:29 Feb 09, 2009 Jkt 046591 PO 00000 Frm 00090 Fmt 6633 Sfmt 6633 K:\DOCS\46591.TXT TERRIE
87 

lina, and myself—began conversations to adopt legislation. So it is 

simply not true that no one was looking at this. 

In 2005, we began negotiations among us to adopt a bill to do 

what Mr. Greenspan wouldn’t do, to restrict subprime mortgages 

that shouldn’t have been granted. Those negotiations went on for 

a while, and I was then told by the then-chairman of the committee—I think Mr. Bachus got the same message—the Republican 

House leadership did not want that to go forward. And the efforts 

ended. 

In 2007, when I became the chairman, we took that issue up, and 

we did pass a bill in 2007. And Mr. Bachus, who voted for the bill, 

indicated he thought some of the people testifying had been against 

it, but we did pass a bill that would restrict most of these things. 

But here is some good news, and we don’t like to talk about the 

good news for some reason. Even though that bill didn’t pass in the 

Senate, which is a phrase you hear quite a lot these days, or forever, Mr. Bernanke, after the House acted, and in conversation 

with the House, then used exactly the authority that Alan Greenspan refused to use, and has promulgated a set of restrictions on 

subprime mortgage origination which will stop this problem from 

happening again. So the problem was twofold. 

And this is what the acceleration question is, Mr. Ryan. The 

weapons that destroyed the financial system of the world were the 

subprime loans. They shouldn’t have been granted. A lot of people, 

certainly myself included, but top-ranked officials, all thought that 

while this would be damaging, the damage would be confined to 

the mortgage market. What very few people understood was the extent to which subprime damages would rocket throughout the system. And yes, it was the super sophisticated, not very well-understood, and not very well-regulated financial instruments that took 

these subprime loans and spread them around. 

Now, we have solved part of that problem going forward because, 

thanks to Ben Bernanke, acting after the House moved, there will 

be no more of those subprime loans. Ben Bernanke’s rules are pretty good ones, and everything I would like to do. And we want to 

go further on yield spread premiums and elsewhere. 

The problem is that while subprime loans won’t be the weapon 

that is loaded into these super sophisticated instruments and shot 

around, there may be something else. So that is why the second 

part of the job, having seen that subprime loans don’t go forth, the 

second part of the job is what we have been talking about today— 

and you have all been very helpful and we appreciate it—how do 

we put some constraints on excessive risk-taking in the financial 

system so the next time—and nobody can be sure it won’t happen— 

loans are made that shouldn’t have been made, we don’t have them 

multiplied in their effect. 

But I did want to say it is really not fair to say that no one was 

looking at subprime loans. Many of us were doing it in 2005, and 

even earlier, trying to get Mr. Greenspan to do it. 

Yes, Mr. Yingling. 

Mr. YINGLING. Could I clarify my response, then? I am not saying 

that people weren’t looking at—and I was here for all that history, 

so I know exactly what you are talking about. I am not saying people weren’t looking at it from the point of view of consumer protecVerDate Aug 31 2005 16:29 Feb 09, 2009 Jkt 046591 PO 00000 Frm 00091 Fmt 6633 Sfmt 6633 K:\DOCS\46591.TXT TERRIE
88 

tion, and maybe weren’t looking at it correctly from that point of 

view. And I think you have made this point before, and that is that 

consumer protection and safety and soundness are not separate 

items. 

The CHAIRMAN. But by 2005, and you are right, that the Homeowners Equity Protection Act had a consumer protection orientation. That was in the days before people really understood credit 

default swaps—or maybe they never do—but they weren’t there. 

But by 2005, I guarantee you that when we were talking about 

this, we were talking about not just consumer protection, but about 

the systemic damage that could be done. We underestimated it, but 

we knew there would be systemic damage. 

Mr. YINGLING. I guess my comment, then, is I don’t know how 

regulators could look at that graph from a safety and soundness 

point of view and not say, whoa, we have a big problem. 

The CHAIRMAN. Well, you have to ask Mr. Greenspan, because he 

explicitly did. I mean look, this is a deep philosophical approach. 

Mr. Greenspan explicitly said in Mark Zandi’s book, Greenspan’s 

deregulatory failure, it is very clear there were fundamental philosophic issues here. And we are debating—and Mr. McCotter raised 

it, and Mr. Price raised it in very thoughtful ways. We are now discussing what the role is of regulation. 

But I agree, I think Mr. Ryan said it best in terms of—and others, and Mr. Yingling and Gramm-Leach-Bliley, this is not a case 

so much of deregulation as a case of not adopting appropriate new 

regulations to keep up with innovation. It is not that old rules were 

dismantled, it is that as the system innovated, appropriate new 

rules were not adopted. And that is what we need to do. But I do 

want to say on subprime we were looking at it from the systemic 

point of view as well as the consumer protection. 

Mr. YINGLING. And should it not be the explicit requirement of 

a systemic overview regulator when they see something like that 

to address it? 

The CHAIRMAN. Yes, it should be. And you know what? While I 

think we need to fix it up, if you had asked me 10 years ago if that 

was part of Alan Greenspan’s general mandate, I would have said 

I thought it was. So I regret the fact that we have to make it more 

explicit, because we wouldn’t have had as much damage. 

The hearing is adjourned. The record is open for any submissions. 

[Whereupon, at 3:02 p.m., the hearing was adjourned.] 

(89) 

A P P E N D I X 

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