S. HRG. 111–18 

LEARNING FROM THE PAST: LESSONS FROM 

THE BANKING CRISES OF THE 20TH CENTURY 

HEARING 

BEFORE THE

CONGRESSIONAL OVERSIGHT PANEL 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

THURSDAY, MARCH 19, 2009 

Printed for the use of the Congressional Oversight Panel 

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LEARNING FROM THE PAST: LESSONS FROM THE BANKING CRISES OF THE 20TH CENTURY 


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48–951 2009

S. HRG. 111–18 

LEARNING FROM THE PAST: LESSONS FROM 

THE BANKING CRISES OF THE 20TH CENTURY 

HEARING 

BEFORE THE

CONGRESSIONAL OVERSIGHT PANEL 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

THURSDAY, MARCH 19, 2009 

Printed for the use of the Congressional Oversight Panel 

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C O N T E N T S 

Page 

Opening Statement of Elizabeth Warren, Chair, Congressional Oversight 

Panel ..................................................................................................................... 4 

Statement of Damon Silvers, Deputy Chair, Congressional Oversight Panel .... 6 

Statement of Richard H. Neiman, Member, Congressional Oversight Panel ..... 27 

Statement of Bo Lundgren, Director General, Swedish National Debt Office ... 28 

Statement of Richard Katz, Editor-in-Chief, The Oriental Economist ................ 37 

Statement of David Cooke, Former Executive Director, Resolution Trust Corporation ................................................................................................................. 65 

Statement of Eugene White, Professor of Economics, Rutgers University, and 

Research Associate, National Bureau of Economic Research ........................... 81 


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(1) 

LEARNING FROM THE PAST: LESSONS OF 

THE BANKING CRISES OF THE 20TH CENTURY 

THURSDAY, MARCH 19, 2009 

U.S. CONGRESS, 

CONGRESSIONAL OVERSIGHT PANEL, 

Washington, DC. 

The Panel met, pursuant to notice, at 10:01 a.m. in room 208– 

209, U.S. Capitol Visitor Center, Elizabeth Warren, Chairman of 

the Panel, presiding. 

Attendance: Elizabeth Warren [presiding], Richard H. Neiman, 

Damon Silvers, Bo Lundgren, Richard Katz, David Cooke, and Eugene White. 

OPENING STATEMENT OF ELIZABETH WARREN, CHAIR, 

CONGRESSIONAL OVERSIGHT PANEL 

The CHAIRMAN. This hearing is called to order. 

Good morning. My name is Elizabeth Warren. I am the chair of 

the Congressional Oversight Panel. 

Last October, Congress established this Panel to oversee the expenditure of funds from the so-called Troubled Assets Relief Program. It is our duty to issue monthly reports and to evaluate 

Treasury’s administration of that program. 

In its first report, the Panel asked Treasury a series of fairly 

tough questions about TARP on behalf of the taxpayers. The very 

first question we asked consisted of only four words, but probably 

the most important four words in the report. What is Treasury’s 

strategy? 

The lack of a strategy from Treasury has never been clearer than 

it has been this week, as outrage has spread across the country 

over the millions of dollars awarded in bonuses to executives at 

AIG. This entire issue could have been avoided. If Treasury had developed and clearly articulated a comprehensive strategy to deal 

with this crisis from the beginning, rather than announcing and 

abandoning inconsistent plans, issues such as executive bonuses 

would have been addressed early on in the agreements with participating financial institutions. 

This lack of a clear strategy is also hampering our economic recovery. The markets need predictability. Investors are reluctant to 

take risks. Business people are hesitant to take on new obligations 

when no one is sure about our overall strategy. 

Certainly, the most important person—the most appropriate person to speak to Treasury’s strategy would be the Treasury SecVerDate Nov 24 2008 22:38 May 07, 2009 Jkt 048951 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 E:\HR\OC\A951.XXX A951

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retary, and it had been the strong hope of the Panel to have Secretary Geithner here today to testify. While we understand that he 

has many pressing concerns right now, it is very disappointing that 

Secretary Geithner did not make it a priority to be here. 

The development of a strategy requires an overview of the problems and of possible solutions. To advance that conversation, we 

believed that we could learn a great deal from prior financial crises. That is why we have called today’s hearing ‘‘Learning from the 

Past: Lessons of the Banking Crises of the 20th Century.’’ 

We understand that this crisis is different from past calamities. 

No examples will ever provide a perfect analogy. That said, while 

George Washington may not have known the difference between a 

credit default swap and a hybrid ARM—and I suspect he didn’t— 

he had a powerful learning experience with a bank crisis. 

In 1792, during his first term as President, our young Nation 

suffered a severe panic that froze credit. Subsequent Presidents 

faced similar challenges, as have leaders from across the globe. 

And so, it is important that we reflect on the efforts of policymakers who have steered their nations during some very dark 

hours. 

It is also important that we reflect on the efforts of other governments that have confronted similar circumstances but failed to restore the banking system and restart economic growth. 

We have invited four very thoughtful experts to join us here 

today in embarking on that reflection. Richard Katz is a veteran 

journalist, editor-in-chief of The Oriental Economist, and the author of two books on Japan’s banking crisis of the 1990s. Mr. Katz 

will testify about what has become known by policymakers as Japan’s ‘‘Lost Decade.’’ 

Bo Lundgren is the director general of the Swedish National 

Debt Office. As Minister for Fiscal and Financial Affairs, Director 

General Lundgren led the effort to steer Sweden out of a banking 

crisis in 1992. 

David C. Cooke is the former executive director of the Resolution 

Trust Corporation, which helped steer us out of the savings and 

loan crisis of the 1980s by taking over more than 700 financial institutions. 

And lastly, Eugene White is professor of economics at Rutgers 

University. Professor White has written widely about the Great Depression and will testify about how the lessons of the 1930s apply 

to today’s crisis. 

Welcome to all of you. 

There is no longer any question that we sit at a critical moment 

in history. The decisions made by our Government leaders today 

will have an impact for generations. While we cannot fix this crisis 

with one hand and prevent all future crises with the other, we 

must use all of the knowledge and lessons of the past to ensure 

that prior mistakes are not repeated and that success is not ignored. 

That is why we greatly appreciate that our distinguished witnesses have taken the time to be here with us today. We have your 

statements in full, and they will be made part of the record. But 

we will start with our conversation with you in just a few minutes. 


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In the meantime, I would like to recognize the Deputy Chair of 

the Panel, Damon Silvers, and ask Damon if he has opening remarks. Mr. Silvers. 

[The prepared statement of Ms. Warren follows:] 


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STATEMENT OF DAMON SILVERS, DEPUTY CHAIR, 

CONGRESSIONAL OVERSIGHT PANEL 

Mr. SILVERS. Thank you, Madam Chair. 

Let me begin by expressing my profound appreciation to the witnesses for joining us here today, and particularly to Mr. Lundgren 

for traveling from Sweden to be with us for this hearing. 

Recently, Thomas Hoenig, the president of the Federal Reserve 

Bank of Kansas City, gave a speech in which he praised the work 

of Mr. Lundgren and his colleagues in addressing the Swedish 

banking crisis of the 1990s. This speech was called to my attention 

by Mr. Hoenig’s Senator, Senator Brownback of Kansas, and I ask 

that it be entered into the record of this hearing. 

[The information referred to follows:] 


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MR. SILVERS. In this Panel’s first report, our very first question 

was what is Treasury’s strategy? I hope that this hearing and the 

further work of the Panel and its staff will enable us to better understand what Treasury’s strategy is and how it measures up to 

the lessons of history. 

In the written testimony we have received from today’s witnesses, there were some distinct common points. Financial crises 

tend to follow asset bubbles. Two, financial institutions are reluctant to admit their true condition, and there is a tendency for regulators and other political bodies to indulge them in this wishful 

thinking. Three, financial institutions with weak balance sheets, 

large financial institutions, contribute to a downward economic spiral by pulling back on lending activity. 

The testimony suggests successful strategies for dealing with 

these common dynamics include, one, giving a Government agency 

clear authority to restructure the banks; two, being completely 

transparent about the strategy and operations of that agency; 

three, having that agency value bank assets on a realistic basis; 

four, holding bank executives accountable for their mistakes; five, 

being prepared to combine haircuts for bank investors with public 

funds to either, one, wind up truly failed institutions or, two, revive 

savable institutions with adequate capital; and six, above all, to 

move quickly to accomplish these tasks. 

It is noteworthy that in the three successful examples we are 

considering today, in no case did effective action result from trying 

to keep shareholders of zombie banks alive or from deferring to the 

incumbent management of those banks around key decisions such 

as asset evaluation or executive pay. 

On the positive side, the written testimony suggests that effective action often turns out to be less expensive than it appears at 

first, while delay in acting to restructure sick banks appears associated with increases in the ultimate cost to the public. This appears 

to be a striking feature of the testimony we have received on the 

most recent U.S. experience of financial institution failure, the S&L 

bailout. 

Of course, every country is unique. And while we in the United 

States benefit from the dollar’s status as reserve currency on the 

one hand, on the other hand, we cannot rely on someone else’s consumer demand to rescue us, and to some extent, it seems both 

Japan and Sweden were able to rely on U.S. consumers to rescue 

them. 

Ironically, the United States has until very recently had a fairly 

decentralized banking system. But now our banking system looks 

more like Sweden’s and Japan’s than it does the U.S. system of the 

Depression era or even the late 1980s. And it seems that while we 

have many sick smaller banks, the FDIC is so far able to resolve 

them. It is the sick mega banks that are driving the crisis. 

While this Panel is awaiting a more detailed statement of the 

new administration’s strategy, I believe the unstated strategy pursued by the Bush administration in the 4 months following the passage of the Emergency Economic Stabilization Act of 2008 was essentially to offer a mix of implicit and explicit guarantees backed 

up by equity infusions in the hope of buying time for markets to 

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damental assumption behind this strategy was that time was on 

our side. 

This Panel has held field hearings in Nevada and in Prince 

George’s County, Maryland, where we have heard firsthand from 

homeowners and seen the assets underlying at least the first 

rounds of our financial crisis. I am convinced that the fundamental 

assumption of the Bush administration’s approach—that time was 

on our side—was mistaken because the fall in asset prices at its 

heart was rational. 

Subprime loans and everything derivative upon them are not 

now and will never be worth their face value. The borrowers cannot 

pay their exploitative terms. The collateral is not worth and will 

never be worth on a present value basis anywhere near the value 

of the loans made on them. 

The reality of these losses, combined with the dramatic concentration in the financial sector that has left us with four mega 

banks, is a profound procyclical force, deepening the recession and 

worsening the bank crisis. 

Spoon feeding capital to broken institutions will not bring them 

back to life, nor will indulging in fantasies of reviving the real estate bubble. Having the Government buy bad assets will either 

fully reveal the weakness of bank balance sheets if done at fair 

prices, or if done at inflated prices will simply be a way of hiding 

the largest regressive wealth transfer in U.S. history, a wealth 

transfer that will still not be big enough to revive the sickest big 

banks. 

Most of all, the reality of losses and weak balance sheets is that 

time is not on our side, just as time was not the cure in any of the 

case studies. Time without action was not the cure in any of the 

case studies we are looking at today. 

The Obama administration now faces the choice of continuing a 

failed strategy based on mistaken assumptions or looking to the 

lessons of history to craft a new strategy consistent with the values 

of responsibility, transparency, and shared sacrifice that President 

Obama has rightly asked our nation to embrace. 

I look forward to hearing from our witnesses today on the lessons 

of history. 

[The prepared statement of Mr. Silvers follows:] 


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The CHAIRMAN. Thank you very much, Mr. Silvers. 

Mr. Neiman. 

STATEMENT OF RICHARD H. NEIMAN, MEMBER, 

CONGRESSIONAL OVERSIGHT PANEL 

Mr. NEIMAN. Thank you. 

Good morning, and thank you all for appearing here today. 

It is especially appropriate that we are meeting here to discuss 

the strategies that have been used successfully in past crises, both 

here in the U.S. and around the world. 

The current financial turmoil has demonstrated just how interconnected the global markets have become. What began as a wave 

of defaults in the subprime sector of the U.S. housing market was 

transmitted across the world, impacting seemingly unrelated products, distant markets, and billions of people. 

This is certainly not the first time that financial dislocations 

have occurred. But the increasing interconnectedness of the capital 

markets amplifies the shocks, which could, in turn, delay recovery 

unless all affected countries work together in a coordinated response. 

In developing that response, it is critical that we understand 

what strategies have worked in the past and what obstacles stand 

in the way of an effective solution. We can’t afford to overlook past 

lessons learned. As they say, those who cannot remember the past 

are condemned to repeat it. 

But, while there are similarities among all financial crises, no 

two are exactly the same. The prevailing conditions in the broader 

economy and the type of financial institutions involved provide a 

dynamic that makes every situation unique, requiring a unique solution. 

And there is no one regulatory approach that is immune from 

systemic shocks. The financial crisis has affected countries with diverse systems, including the UK with its more consolidated regulatory structure. 

However, understanding why certain strategies worked in other 

contexts can help us develop the right strategy in our own circumstances. And while there is no ready prescription for solving 

the crisis of today, there are time-tested principles that we can 

adapt to our present situation. 

One of the most important aspects of any successful strategy involves restoring consumer and investor confidence in the financial 

system. Instilling that confidence depends in part upon the Treasury Department articulating a clear strategy for moving forward 

and then clearly communicating the metrics to be used in measuring our progress in delivering on that strategy and in meeting 

our goals. 

Your testimony today will provide vital information for the Panel 

as we continue to advise Congress about the effectiveness of the 

Treasury’s strategy, and I look forward to your statements and the 

question and answer period. 

Thank you. 

The CHAIRMAN. Thank you. 

So let us get down to business. As we do, I want to thank Patrick 

McGreevy and Brian Phillips of the Oversight Panel for their hard 


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work in putting together this hearing. I don’t want to take the 

chance that I will forget at the end because we have gotten so engaged in this conversation. 

I would also like to pause to recognize His Excellency, the Swedish ambassador Jonas Hafstrom. Your Excellency, we are honored 

to have you here. And we appreciate the opportunity to learn from 

the challenges that your nation faced and how you dealt with them. 

We very much look forward to this. Thank you for joining us. 

So let us start with Director General Lundgren. I remind you all 

we have your statements, your written statements in full, and they 

will be made part of the official record. So if you could hold your 

oral comments to 5 minutes, that will give us a little time to be 

able to ask questions. 

Mr. Lundgren. 

STATEMENT OF BO LUNDGREN, DIRECTOR GENERAL, 

SWEDISH NATIONAL DEBT OFFICE 

Mr. LUNDGREN. Thank you very much, and thank you for the invitation. 

Let me start with the differences between the Swedish banking 

crisis and what is happening now in the U.S. and, indeed, in the 

global context. Size, of course, Sweden being a small country. We 

had a regional crisis. This is a global crisis. 

This is a more complex crisis. We had a rather pure one with ordinary loans, not so much securitized. And we had another political 

situation. My advice is that if you have a banking crisis, please 

have it after elections, not before elections because after the election, it is much easier to build political consensus. We enjoyed that, 

and I would say that that is a very, very good situation to be in, 

listening to political debate in the U.S. 

There are, on the other hand, similarities as well. I mean, first 

of all, we are—both the U.S. and Sweden are market economies, 

even though I hear sometimes from commentators that we are a socialist country. The problem is that is not quite true. We have socialized, to a large extent, people’s incomes. But the business sector 

is very free and market oriented. 

We have the same challenges that we had in the ’90s and that 

the U.S. stands for today. One is to maintain liquidity in the financial system, and that, I would say, was taken care of then and is 

taken care of now. 

The second thing is to restore confidence in the financial sector, 

and that means that depositors and investors have to be feeling secure. And you have, thirdly, to restore the capital base. If you want 

to avoid or minimize credit crunch effects in the economy, of 

course, you need to have a capital base for lending. And if private 

sector investors don’t invest, then government has to invest. 

In Sweden, in the beginning of the ’90s, we had seven large and 

medium-sized banks that altogether had 90 percent of the markets, 

and then a couple of hundred smaller banks as well, mostly savings 

banks. The roots to the crisis was a speculation bubble in real estate mainly, same kind of roots as today. 

When I took office in October ’91, we already had the bubble 

bursting, and we had problems in one of the big banks, the partially already nationalized Nordbanken, and we got problems also 


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in a big savings bank at that time. Initially, we worked case by 

case, but found out during spring ’92 that we were on the verge of 

having a systemic crisis. And in the autumn of ’92, we came to a 

situation close to the one that the U.S. experienced after Lehman’s 

when confidence was totally lost. 

We had prepared for that moment some months, and what we 

did then with the support of the opposition, since I talked about 

the political consensus being there, was to implement a package 

with two main ingredients. One was a blanket guarantee for depositors and creditors. Of course, not for shareholders. Shareholders have to pay first. That is a principle we used. 

We also had the right from parliament to be able to reconstruct 

and to restore the system, per se, by taking much different measures to unwind banks that should be liquidated, to capitalize banks 

that could be capitalized and then work again. We had a full assortment of tools to be able to use, and we had also a situation 

where we had an unlimited economic frame. 

We dared not to ask for a frame where we had to go back to parliament again because that would have increased the fright about 

the situation, and we didn’t want to take too much. So we got an 

unlimited frame, which was a good thing. 

We didn’t ask to own banks, which, being a center-right government and myself being market liberal, we wanted to avoid nationalization of banks. On the other hand, if you have to do it as part 

of a crisis management, so be it. Then you have to do it. 

Governments are not very good at running banks, but obviously, 

this time around, the former owners or the owners today hasn’t 

been very good either. And if you do it as a part of a crisis management in order to save all the taxpayers’ money, you should do it. 

We used the banks we took over, which was only two that were 

nationalized, the concept of a good bank/bad bank, in order to have 

management in the good banks being able to concentrate on the future and also to be able to get rid of or handle the bad loans, the 

nonperforming loans in a manner what we could recover as much 

as possible of the original loans. And it really worked quite well. 

We thought it could take up to 10, 15 years, but it took approximately 5 years before we could unwind these entities. We used 

transparency. Valuation was vital, of course. We had to have a situation where people trusted what we were doing and trusted, and 

the investors and others could trust that the estimates on the situation in the banks were correct as well, so we had rather tough 

mark-to-market valuation rules, which also helped us. 

Altogether, we got rather soon out of the crisis. Already in 1994, 

after 2 years, the bank system together was profitable once again. 

Thank you. 

[The prepared statement of Mr. Lundgren follows:] 


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The CHAIRMAN. Thank you very much, Mr. Lundgren. 

I should point out the buzzing is nothing to be alarmed about. 

It indicates that there is a vote going on on the floor, to alert members that they need to be elsewhere, and that is one of the reasons 

we don’t have one of our members with us. 

Mr. Katz, could you speak to us of Japan? 

Mr. KATZ. Yes, and—— 

The CHAIRMAN. Push the little red button. 

STATEMENT OF RICHARD KATZ, EDITOR-IN-CHIEF, THE 

ORIENTAL ECONOMIST 

Mr. KATZ. First of all, thank you for having me. 

Japan is mostly lessons in mistakes to avoid. I very much agree 

with the comments made by members of the committee. The crisis 

is very, very different in the U.S. In Japan, there was a crisis in 

the real economy of goods and services that was reflected in the 

banking crisis, mostly about plain vanilla loans. Twenty percent of 

GDP was just bad debt. 

In the U.S., most of the nonfinancial sector outside of autos is 

actually quite healthy. The U.S. crisis is a problem in the shadow 

banking system of asset-backed securities and derivatives, not even 

so much the commercial banking system or the commercial banking part of the banking holding companies, but really the shadow 

banking system. So it is a more complicated problem, but not as 

deeply penetrating into the overall economy. So that is different, 

and that has pluses and minuses. 

Some lessons. One, the truth shall set you free. Japan hid from 

itself the depths of the problem, denied, covered up. I mean, criminal fraud cover-up. In the U.S., we created regulations that actually prevented us from even monitoring the size of credit default 

swaps or knowing the amount of counterparty risk. And the notion 

that we don’t sell financial derivatives on exchanges like we sell 

corn futures and stocks is just asking for trouble. 

So regulations requiring greater transparency, and putting derivatives on public exchanges, would certainly be a remedy. That 

would allow us to avoid the counterparty risk like AIG and allow 

us to just know what is going on as well as regulate it. 

Second, some people have got to go jail. Two reasons. One, they 

deserve to. When bank executives press loan officers to approve 

loans that they know are probably fraudulent and then they pass 

them on by securitizing them, that has got to be against the law. 

If it is not against the law, then the Congress has got to remedy 

that. 

The second reason is that the public will not approve spending 

hundreds of billions of dollars if they think you are bailing out 

banker crooks. That is one of the reasons it took Japan so long to 

inject public capital into the banks. 

In the U.S. S&L crisis, hundreds of U.S. banker crooks went to 

jail. In Japan, few, if any, went to jail. So to get public support for 

that kind of money, the public has to feel that they are the ones 

being bailed out, not the malefactors of great wealth. 

Thirdly, you do need a capital injection. Japan finally combined 

the capital injection with an upside for taxpayers, and the capital 

injection has got to be combined with insistence that that be used 


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to write off the tax to toxic assets. In Japan, it took them about 

6 or 7 years to finally inject some money. But initially, they injected the money so the banks could continue bailing out the zombie borrowers. 

When the Koizumi administration, after about a year in power, 

finally decided to go after the problem, they insisted that the toxic 

assets actually be written off the books. It took about 3 years to 

do it. The social dislocation was actually less than they had feared. 

So the U.S. needs to inject enough capital so that banks can afford to write off the bad loans—the Japanese banks were very, very 

thinly capitalized—but it also has to have the controls to make 

sure it is being used to get rid of toxic assets. The record on bank 

nationalization in Japan is actually a mixed record, which I can 

discuss in the Q&A, if you would like. 

Mark-to-market accounting is procyclical the way it is being used 

now. That needs to be adjusted. A large part of the capital losses 

of banking institutions is actually mark-to-myth writedowns because, in fact, capital markets have gotten panicked. So, there is 

irrationality in terms of these derivative prices relative to the level 

of the original asset. You could have the original loans being paid 

on time. And yet the securities based on them have lost a third of 

their value. 

Fiscal and monetary stimulus is absolutely essential. You cannot 

cure the crisis without it because you have to have a cushion underneath the economy to prop up the economy. It is inherently depressive to wipe out all of this wealth or to recognize the wealth 

that has already been written off. 

So you have to have that cushion. Japan did it in such a stopgo fashion that they gave fiscal stimulus a bad name, just as I fear 

some of the stuff we have done has given markets a bad name 

around the world. 

So you need fiscal and monetary stimulus, but you need it as anesthesia for the surgery of curing the banking problem of toxic assets. If you use it as heroin to dull the pain and avoid the surgery, 

as Japan did for 10 years, then you have bigger costs, more pain, 

more losses in the end. 

Japan needed regulatory institutional changes. We certainly do. 

I think the heart of the U.S. crisis was an orgy of deregulation, 

which basically gave financial executives incentives to act like buccaneers, creating loans they knew to be dubious, selling them off 

to pension funds of teachers and plumbers and bank tellers. And 

that, I believe, is the heart of the crisis. 

It is not excessive debt, per se. It is that the debt was used for 

worse than useless projects. I have figures here showing actually 

the debt level in the United States is not as bad as many people 

suppose. The problem is how the money was used and the fact that 

the shadow banking system is so obscure that the players don’t 

know what anything is worth. The markets are frozen. 

I will stop there. 

[The prepared statement of Mr. Katz follows:] 


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The CHAIRMAN. Thank you very much. I appreciate it. 

So we go from Sweden to Japan to the United States. Mr. Cooke. 

STATEMENT OF DAVID COOKE, FORMER EXECUTIVE 

DIRECTOR, RESOLUTION TRUST CORPORATION 

Mr. COOKE. Hello. Thank you very much, Madam Chair and 

members of the Panel, for letting me be here today to talk a little 

bit about the RTC experience and what lessons may be relevant. 

What I will do pretty quickly is go back. The S&L crisis really 

started back in the late ’70s and early ’80s when interest rates 

were very high, and a lot of S&Ls got into deep trouble because 

they had made a lot of long-term, fixed-rate loans and depended on 

deposits. And depositors left, funding costs went up, and so then 

they started to lose money, and their capital accounts became very 

jeopardized. 

So you are dealing with—as rates are coming down, you are dealing with an industry that has already got weak capital, which is 

very important. During that time, a lot of the S&Ls that were 

mutuals converted to private stock ownership. They brought in new 

investors, and they started to use some of the expanded authority 

that Congress gave in ’80 and ’82 to basically allow the S&Ls to 

do more things so they wouldn’t be so dependent on residential 

mortgages. 

The S&Ls, what a lot of them did was they started making risky 

loans that they didn’t really understand, and the regulators really 

didn’t understand either. The S&L regulators at that time really 

were very good on understanding residential mortgages, but they 

didn’t understand a lot of this other stuff. 

So about around ’86, credit losses started to surface. Actually, 

they started to surface even earlier, and then it became pretty 

clear that a lot of the S&Ls were really in trouble and needed to 

be resolved. The regulators were really unprepared for what happened, in my view, over on the S&L side, of course. 

And already by the time ’88 ended, ’86 to ’88, there were like almost 300 failures and over $100 billion in assets of failed S&Ls 

that had been resolved either in some kind of assistance transactions, a lot of them were done in 1988. It got very controversial 

and political, and Congress got very outraged that the FSLIC, the 

insurer at that time, was bankrupt and it was making all these 

deals that it really didn’t have the authority or the funding to do. 

And things went pretty sour. 

So, at that time, you also had a very strong industry influence 

that didn’t want to acknowledge that the problems really existed. 

I mean, the S&L industry had a very powerful lobby, and they just 

disputed. And when the administration at that time did get some 

money in, back in those days, they didn’t get near enough. It had 

only gotten about 10 percent of what the costs ended up being. 

In 1988, in late 1988, the Treasury Department came over to the 

FDIC and asked if maybe we could provide some help in eventually 

running a temporary agency, the RTC, as well as taking over some 

of these failing thrifts that the FSLIC would say were no good. 

Take them over.’ 

We agreed. In August of ’89, FIRREA was passed, and that law 

was a fairly comprehensive law. As the executive director, my job 


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was trying to ramp up operations and interact with the other agencies. So maybe I am a little influenced by that too much. 

But FIRREA did a major overhaul of the S&L regulatory system. 

At the same time, it was trying to have that system deal with the 

crisis, and that involves a certain amount of personal interaction 

and time that I don’t know yet is fully appreciated. FIRRA basically eliminated, abolished the Home Loan Bank Board, FSLIC, 

created OTS, created the Federal Housing Finance Board and created the RTC, transferred new functions to the FDIC. 

That takes time to do, but there was no time allowed to really 

do that. Maybe it is wrong, but at the FDIC side, we sort of kept 

an eye on it. But we didn’t do much until we knew there was going 

to be a law passed. And so, there really was not much preparing 

that I am aware of. 

The RTC was set up. I was the deputy to Chairman Bill Seidman 

at that time. He asked if I would go over to ramp it up, and I didn’t 

expect him to ask. And in hindsight, there were many times when 

I wish he had never asked. 

But in terms of the temporary agency, the RTC, first of all, it 

would avoid confusion in governance. If you are going to overhaul 

the regulatory system, don’t confuse people as to who is responsible 

for what. 

We had an oversight board that was created for the purpose of 

policy and had control of the budget. The oversight board consisted 

of Secretary of the Treasury, chairman of the Federal Reserve, the 

Secretary of HUD, and two private sector. A very, very high-level 

board. 

And the FDIC was responsible for putting someone in charge, 

trying to oversee the operations of the FDIC. There was a gap between the operation end and understanding the governance. And 

so, whatever is done, don’t put yourself in that same mess. 

On the operating side, we knew what we were supposed to do 

now. We didn’t realize how many there would be, but we knew we 

were supposed to take over these S&Ls and resolve them. That 

took a lot of time. Original loss etimates of $50 billion were way 

low. They were based on, maybe 400 failures and a couple hundred 

billion in assets. Ended up being like twice that, and that took a 

lot of time. 

I am trying to rush through here. About half of the assets were 

hard-to-sell assets. We had to come up with new ways to try to sell 

the assets and to value them. We came up with new valuation policies, and we came up with new disposition methods. 

We did not have to negotiate and buy. But we did have to come 

up with values because there were provisions of FIRREA not to sell 

any asset for less than 95 percent of fair value and no one really 

knew what was the fair value. Some of the markets in the Southwest, you know, Arizona, Texas, very hard hit during this, and people were concerned we would dump the assets. 

Interestingly, when I was in the chairman’s office, we had representatives from Arizona, as I recall, come in and ask that the 

RTC not dump assets and destroy the values that healthy banks 

had on their books. A year later, the same group came in and said 

you have got to start moving these assets because RTC was freezing up the market. 


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So we started a much more aggressive approach. At the time, we 

went through a lot of times having to go back to Congress and say 

we don’t have enough money. We needed two types of money. We 

need money to pay for the losses in these institutions, but more 

money to get these institutions out of conservatorship. On the day 

that we opened our doors on August 9th, we had like 270 institutions in conservatorship, which meant that we were supposed to be 

somehow running them. 

There were no real guidelines on what meant. So when you nationalize an institution, at least know what you expect it to do, if 

that happens. 

The CHAIRMAN. Mr. Cooke, let me just stop you there. 

Mr. COOKE. Am I running over? I am sorry. 

The CHAIRMAN. Yes, that is all right. We are a couple of minutes 

over, but we will get back to more of this in the questions. 

Mr. COOKE. Okay. All right. Thank you. 

[The prepared statement of Mr. Cooke follows:] 


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The CHAIRMAN. Okay, thank you very much. 

And Dr. White. You will take us to the U.S., but further back. 

Please. 

STATEMENT OF EUGENE WHITE, PROFESSOR OF ECONOMICS, 

RUTGERS UNIVERSITY, AND RESEARCH ASSOCIATE, NATIONAL BUREAU OF ECONOMIC RESEARCH 

Dr. WHITE. Yes. I would like first to thank the Panel for the invitation to provide testimony on the actions of the U.S. Government 

to stabilize the financial and housing sectors during the Great Depression. Although I devote equal time to these two questions in 

my written testimony, I understand the committee has requested 

that I focus on the operations of the Reconstruction Finance Corporation. 

At the beginning, I would like to point out that the financial system then was very different than today, and it is those differences 

which are instructive—principally, the absence of deposit insurance 

and the very high levels of capitalization. 

The Great Depression, as you know, we all know, was the most 

severe recession the U.S. has ever experienced. There is a general 

scholarly consensus that the primary driving force that transformed a relatively ordinary recession into the Depression was the 

failure of the Federal Reserve to pursue correct policies at several 

critical moments. 

The first question must always be why didn’t the Fed respond to 

the rising number of bank failures? That answer is fairly straightforward. Bank failures were a common feature of the financial 

landscape because of a structural weakness in the banking system. 

State and Federal regulations had a nearly universal prohibition 

on branching that created a system dominated by small, single office banks. 

Thus, in the 1920s, there were well over 20,000 banks. Failures 

of a few hundred a year were regarded by policymakers and most 

of the public as a normal winnowing of weak institutions with poor 

management. Shareholders lost their investment—in fact, more because there was double liability—and depositors faced a haircut. 

While this may sound severe, aggregate losses of the entire system 

were relatively modest. 

In the absence of Federal deposit insurance, bankers were aware 

that the public was attentive, withdrawing deposits if the banks 

appeared to be in trouble. Consequently, they maintained high levels of capital. For national banks of the 1920s, the capital asset 

ratio was about 12 percent, or approximately double what it is 

today. 

These bank failures did not present a systemic risk to the economy because they were relatively random and not part of a general 

economic decline. That changed in 1930, when the first panic 

began. 

The first major response to the massive bank failures was the 

creation of the Reconstruction Finance Corporation (RFC) in 1932. 

The Federal Reserve’s reluctance to provide additional liquidity to 

financial markets presented the Government with an unusual problem. The classic policy remedy in a banking crisis was for the central bank to lend freely from its discount window. This policy would 


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enable banks that were illiquid but otherwise solvent to survive the 

crisis. 

The task of the RFC was to provide sterilized lending without a 

change in the monetary policy of the Fed to banks that were weak. 

In other words, a second-best policy. The RFC was an agency of the 

executive branch of the Government and granted extraordinary discretionary authority. The agency aimed to follow sound banking 

practices with advances being fully secured. Lending was through 

its field offices, and these had full authority to grant loans up to 

what are the equivalent today of $1.5 million. 

The management philosophy was to pick a man to be completely 

responsible for the operations in an office and let him succeed or 

fail on the basis of whether or not his office showed a profit. Loan 

evaluation was simple. Once an application was received, the agency evaluated whether an asset value was sufficient. 

There were three phases of the RFC’s operations—the first from 

February 1932 to July 1932, second from July 1932 to March 1933, 

and third after March 1933. The first program in 1932 was where 

the RFC made loans to banks and railroads. During this period, 

Eugene Meyer, chairman of the Federal Reserve Board, was also 

chairman of the RFC. 

Meyer kept the terms and collateral on loans at the RFC the 

same as those at the Federal Reserve. Consequently, what happened was that the Fed could only lend to member banks. So he 

essentially extended the policy to nonmember banks; and it is during this period that the RFC loans are generally seen to be ineffective in improving bank survivability. 

I should add parenthetically that the RFC also made loans, substantial loans to railroads. However, various studies have shown 

that these did not actually solve the problems of the railroads. In 

fact, they prolonged their distress. 

The second phase of the RFC began in July 1932, when lending 

rules were liberalized. However, at almost the same moment, the 

list of banks that had received aid had been kept secret, just as the 

Fed had kept the names of banks who came to the discount window 

secret were made public. Making these loans known to the public, 

banks became hesitant to go to the RFC to get loans, and the number of loans offered by the RFC rapidly dwindled. 

The last phase began in March of 1933, when the RFC began to 

offer its preferred stock purchase program. Unfortunately, this program occurred at just the same time as the banking system was 

collapsing and the bank holiday occurred. 

When the RFC failed to prevent bank failures and runs, the state 

turned to a widely used 19th century method, which was to restrict 

payments, and they began to announce bank holidays, which snowballed eventually into the bank holiday of March 1933. 

The bank holiday was a drastic remedy. Before the holiday, the 

public was prone to run on a bank because it had no means to assess its solvency. This information asymmetry had always been 

present, but it was heightened during the financial crisis. 

The Government now stepped in and erred on the side of caution. 

After examination, only those banks that were clearly solvent were 

reopened. Those banks whose condition was dubious would remain 

closed until the Government could ascertain their true condition. 


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Thus, at the end of 1932, there were over 17,000 banks, but after 

the holiday, only about 11,000. The remaining 2,000 were either 

liquidated or merged. This had the effect of restoring public confidence in those banks which were open; and for those which were 

closed, depositors were not bailed out. Instead, all stakeholders in 

the failed institutions absorbed losses of $2.5 billion, or roughly 

equivalent today of $39 billion, about 2.4 percent of GDP. This burden was shared roughly between shareholders and depositors. 

To wind up, I will just offer you a rough comparison. If we compare the 1930s to the 1980s, the rough loss from the S&L and commercial banks was about $126 billion, about 3.4 percent of GDP. 

And if you believe that today’s crisis has losses of $1.7 trillion, that 

is 11.6 percent of GDP. So the cost of our crises seem to be spiraling upwards. 

[The prepared statement of Dr. White follows:] 


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The CHAIRMAN. Thank you, I think. Thank you very much. 

Thank all of you. 

What we will do now is we just want to engage in some questions, if we can here. We limit ourselves as we ask questions to 5 

minutes, but I think we will have enough time that we can go more 

than one round here. So we do want a chance to explore this while 

we have got everyone together. 

I get the privilege of asking the first. So let me tell you where 

I would like to start this. There has been much debate around the 

question of nationalization, and the argument back and forth about 

nothing is an appropriate analogy. Everything was different at 

every other point in time or every other place. 

And what I have tried to do as I have listened to this is I try 

to think, so what is it that people are concerned about with nationalization, other than it sounds like a scary word? And as best I can 

figure out, there are three things that seem to emerge each time, 

that sort of circle through this. 

One is that if we nationalize, there will be politics involved in 

lending. The notion that there will be folks from Congress who will 

call the local financial institution and lean on them to finance a 

constituent’s business or to—at a much larger level, to get involved 

in lending activities that they have no business getting involved in. 

The second is that it is simply too complicated. All well and good 

for those charming little banks of yesteryear, but that today we 

have mega institutions that are far too complex to be nationalized 

because, surely, no one in the public sector could run them. It takes 

the expertise of the private sector. 

And the third, and I think related to this, the argument runs 

there will be too many people who will have to be replaced. It is 

a sort of variation on the expertise argument. We will have to fire 

all the bank employees and put to work government employees who 

would then have to be retrained, who wouldn’t understand. 

That is the best I can figure it out from what I hear. And if I 

have left some out, you should feel free to add. But what I would 

like to do is I would like to start with you, Mr. Lundgren, if you 

could talk to us particularly about the political influence question. 

How did you deal with this problem in Sweden? How did you deal 

with the question of expertise, whether or not government officials 

could be expected to run these complex institutions? 

Mr. LUNDGREN. It has been fascinating to follow the debate in 

the U.S. regarding nationalization, which we didn’t use as a tool. 

That is not a tool. That is something that can come out of you handling a crisis. 

We had one bank that was partly nationalized, which we fully 

nationalized. And we had another one, which we nationalized because it was just a black hole and nothing else. 

What you have to do then is you replace top management because, obviously, those who led the bank into the black hole 

shouldn’t be there, and you have got to replace boards. And you 

don’t replace ordinary people in the banks. You don’t try to convince yourself that you are an expert in running banks because you 

are not. 

On the other hand, as I said, I mean, obviously, those people that 

have run the banks now and the shareholders that have been reVerDate Nov 24 2008 22:38 May 07, 2009 Jkt 048951 PO 00000 Frm 00102 Fmt 6633 Sfmt 6602 E:\HR\OC\A951.XXX A951

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sponsible for them haven’t been very successful, to put it mildly. 

So government, could they do it worse? I don’t think so, to be honest. It is a crisis management question, and nothing else. 

Regarding political influence, it is not a tradition in Sweden. I 

wouldn’t see how local politicians here would be able to do that, but 

I couldn’t answer that question, of course. We didn’t have that 

problem at all. It wasn’t discussed at all. 

When it comes to the expertise, as I said, it can be solved. You 

have a lot of good people that were not responsible for what happened in the banks, and they could take over. 

So we took the one nationalized bank, put the viable parts into 

what was the government-owned, fully nationalized then, and now 

it is partly privatized. Only 19 percent is still in government, and 

that is Nordea, which is a very good bank today. The new management managed to restore the bank, per se. 

So I don’t really see there are any dangers because what you 

really need to do is if government goes in with capital, market 

economists say that if you take the responsibility of being an owner 

and you also take the advantages of being an owner, you should 

do it fully. You shouldn’t abstain from voting power. You shouldn’t 

be afraid of taking ownership. But you should, as soon as possible, 

try to get rid of it. 

The CHAIRMAN. That is very helpful. 

Mr. Cooke, was this an issue in the ’80s with the RTC? 

Mr. COOKE. Well, at the RTC, we had a lot of institutions in conservatorship, and we had to run them. The law that was passed 

creating the RTC, as I remember it, basically said to Congress, 

don’t get involved. 

But your three points—you know, politics, complication, and you 

need too many expert people—of those, politics was not as big an 

issue with us. But there was always a little bit. You can’t get away 

from it totally. 

As far as being complicated, I think that is the worst excuse to 

give because that is basically saying, as back in my examiner days, 

‘‘It is too big to analyze. Pass it and watch it.’’ That is just going 

to be a problem. So you can’t—if it is too complicated to do something with, you have got to do something about that. 

And so, we had institutions that were complex, that were larger. 

But nothing like what people are talking about today. And as far 

as too many people to replace, you do have to get rid of the top 

management. You have got to do that. And you have got to get rid 

of probably the next line down before you start getting any objective analysis. Depending too heavily on the work of the guys in 

charge now, at least from my view, is a mistake that you will come 

to realize slowly. 

The CHAIRMAN. If my co-Panelists will indulge me, I just would 

like to follow by asking the question, in effect, in the reverse point. 

Mr. Katz, does the failure to nationalize take politics out of the relationship between the financial institutions and the government? 

Mr. KATZ. In Japan, it worked the other way around. There were 

some banks, about four, who were effectively nationalized. A couple 

actually had just simply gone bankrupt. Two were bailed out. 


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In the first couple of cases, the stockholders were totally wiped 

out. In the last case, the stockholders were bailed out, and the 

stock market had a rally. 

S&P is about to come out with a study about the banks which 

were nationalized in Japan. Let me just preface this by saying I am 

not sure if nationalization is the right solution here or not, but let 

me discuss the track record in Japan. Those banks that were nationalized in Japan got rid of toxic assets much more thoroughly 

and much more quickly than those which were not nationalized. 

On the other hand, the ones that were nationalized got a much 

bigger capital injection from the government. So they could afford 

to do the writedown. And on the third hand, if you will allow me 

a third hand, the ones that were taken over were smaller. They 

weren’t the mega banks in Japan. 

On the politics. Politics actually really worked the other way 

around. In Japan, your social safety net is your job. So you can’t 

allow companies to fail, and you can’t allow banks to fail. They 

called it the convoy system. So the Diet members would actually 

call up banks and say, you are not making enough loans to Mr. Tanaka down the street, to mom-and-pop stores. 

So the political pressure on banks to lend was actually very, very 

great, having nothing to do with nationalization. It is just the way 

the system worked. 

Now what happened was the crisis was so bad that the Diet took 

the whole power over running the banks away from the finance 

ministry, which had been in cahoots with the bankers for mutual 

cover-up, and created an entirely new agency called the Financial 

Services Agency. One of my favorite bureaucrats there actually 

spent some time working in the National Police Agency, and had 

spent some time in London and in New York, and so seeing other 

things. 

So the politics actually worked fine, despite an awful lot of political pressure on the nationalized banks, one bought up by a U.S. 

hedge fund, to make these loans to weak zombie companies. That 

came out in public. It was a big brouhaha. But, in fact, the politics 

worked the other way. 

On the complexities of nationalization, I basically agree with the 

other people’s comments. Lop off the top management. But you are 

the shareholder. So you are the boss. You hire people, but you don’t 

get rid of everybody. 

The CHAIRMAN. Good. Thank you, Mr. Katz. 

And if I could just have a final comment from Dr. White. Just 

keep it short. 

Dr. WHITE. There is good news from the Great Depression—— 

The CHAIRMAN. Turn your—good news from the Great Depression. We are ready. 

Dr. WHITE [continuing]. On the issue of favoritism. The New 

Deal programs have been extensively studied, and almost all of 

them find extraordinary political favoritism, with the exception of 

the RTC. And the reason for that is there was a great deal of insulation by granting extraordinary executive authority to the President. 

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gram. It was easy to find plenty of people to staff both the RTC 

and the HLC, which had 20,000 people on its staff. 

The issue about the complexity of valuing a failed banks’ assets 

is kind of misleading because what happens is that at this point, 

the economy is in a terrible downturn. Markets have become very 

thin. Assets are harder to evaluate. And so, it is natural that it 

seems more complicated, but it is just requiring that people, the 

bank examiners and those others, to exercise a little more discretion. 

The CHAIRMAN. Good. Thank you all very much, and thank you, 

Panelists, for your indulgence on the time. 

Mr. SILVERS. Yes, first, just one quick thing. Mr. Lundgren, in 

your opening comments, you referred to yourself as a market liberal. That is a term that is not current in U.S. parlance. Am I right 

to assume that you represent the more conservative of the major 

Swedish parties and that you believe in free markets? 

Mr. LUNDGREN. Yes, we call it market liberal because liberal is 

something that is freedom. It is not the American way of political 

liberalism. I am a conservative in that respect. Market conservative you could say. 

Mr. SILVERS. Yes, just one of those things where we are separated by a common language. 

Secondly—first, Mr. Lundgren and then Mr. Cooke—could you 

talk about the treatment first of stockholders and elaborate on the 

reasons for the treatment of stockholders in the respective programs you ran. And then secondly, bondholders and how they were 

treated and why? And then I will have a follow-up question. 

Mr. LUNDGREN. If I would start out with the bondholders, I 

mean, they were creditors. They were investors, and you could 

argue that they should, of course, be evaluating their investment 

and suffer if they did wrong in their analysis. 

On the other hand, if you come to a systemic crisis, I think that 

you have a situation where nobody, depositor or creditor, can lose 

on a bank. You saw that after Lehman. Lehman was a mistake, obviously. So, first of all, all creditors were covered by this blanket 

guarantee. 

Secondly, if you have the blanket guarantee, then you have to, 

of course, handle the situation within the banks, and all banks except one applied for government support. We then told them that 

if you want capital injection from government, it is not soft money. 

We even had to change legislation one more time in order to try 

to convince them that we were superior when it comes to negotiations. It was not so much negotiations as it was an offer that you 

couldn’t refuse if you needed capital injection from the government. 

And that meant that you diluted the shareholders’ value, of 

course. And if we got majority in the government, so be it, then we 

took the majority in the banks. This helped us getting private equity because the owner families of the SEB, SE Banken, the 

Wallenberg family, of course, understood that it wasn’t very nice to 

have the bank taken over by government. So they found private equity. 

Of course, we were helped by the appreciation of the currency by 

the economy reviving and so forth. But still, it was a very tough 

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tions. If you need capital injection from government, we will take 

the same stakeholding in the bank as the amount of capital we put 

into the bank. 

Mr. SILVERS. Voting power? 

Mr. LUNDGREN. Voting power, of course. I mean, without voting 

power, you don’t have the influence. 

Mr. COOKE. With regard to RTC, it was all the deals, all the 

transactions were closed bank transactions, which basically meant 

the shareholders ended up being left behind in receivership. And 

if there were any collections when the day was done, they might 

get something. But they were pretty much removed from the picture as we removed senior management and all that. 

As far as bondholders, depending on the terms of the agreement, 

they may have been left behind in receivership, which is like the 

bankrupt estate. We would sell off the deposit franchise. If we can 

get money to sell it off before it evaporated. And we would sell off 

the assets, and they would just wait for the collections, their pro 

rata share of collections in the proceeds. So they would be a general creditor, most bondholders, unless they had some kind of security, they were secured. 

What may be more interesting, in the mid ’80s before they 

changed the law, a lot of big banks, not a lot, but big banks were 

coming to the FDIC, looking for what we called open bank assistance, which is where you are not closing the bank. You are not putting it through a receivership. You are going to provide assistance. 

And at that time, Chairman Seidman—there were getting to be 

a lot of people coming in, looking for money, saying, ‘‘Why don’t we 

get this?’’ And he established some ground rules that basically said 

to shareholders if you get Federal assistance, your interest, number 

one, is going to be substantially diluted. And if you want us to 

bring in new capital, we better have a situation where somebody 

else puts their money on the hook so we know that you are not 

the—someone else has said this is a viable assessment and also 

that top management prepare your travel plans. 

And as far as shareholders, one of the things that we did was 

go aggressively after management at the RTC, and if there are any 

shareholders, controlling shareholders for any issues that we felt 

contributed to because every time we had to go up for money, 

which we had to keep doing, it was good to have something good 

to tell Congress. And we would say, well, we didn’t do perp walks, 

but we would say this many people went to jail in the regular update. 

Mr. SILVERS. Second question. There has been a lot of debate in 

the United States about valuation issues, particularly about markto-market accounting. What is the experience—and any of you 

could answer. What is your view about the effectiveness of essentially an administrative valuation, which I think is a common 

theme across a number of your testimonies? And how does one understand it in relation to debates about mark-to-market accounting? 

Mr. LUNDGREN. If you start with Sweden, we had a simple situation. We had ordinary bank loans, plain vanilla, which was coupled 

with mainly real estate as collateral. So what we had to do, in efVerDate Nov 24 2008 22:38 May 07, 2009 Jkt 048951 PO 00000 Frm 00106 Fmt 6633 Sfmt 6602 E:\HR\OC\A951.XXX A951

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fect, was to try to get right values out of the collateral, which was 

real estate, commercial real estate mainly. 

What we did was opt for the mark-to-market valuation. Even if 

it could exaggerate in the long run the situation, I think that that 

gave us, due to the transparency it gave, gave us more credibility, 

restored confidence much easier. Because even if it seemed that the 

losses and the total losses in the bank would be greater than otherwise, it was mark-to-market is mark-to-market. Whatever other 

method you use, it is not a clean method. There is always an argument to what, how do you valuate? How do you really put a value 

on it? 

Of course, this situation with all these securitized instruments is 

much more difficult. On the other hand, what you need to do, I 

mean, you need to be able to show that all of the banks’ stress testing or whatever, you can have a real picture of what is the black 

hole and what is the losses on the asset side and how much capital 

do you need to inject? 

Not only because Congress needs it to try to estimate what more 

funding might be needed, because probably more funding will be 

needed to handle the situation here, but also to convince investors 

that, okay, now you have a sizable—you have a picture of how big 

the size of losses are as well. So I would go for the mark to market, 

even if it is procyclical. I can see that there are those problems, but 

that is the one we would choose, and it helped us coming out quite 

good. 

Mr. KATZ. Could I make a very just quick comment on that? In 

Japan, there was, as far as the loans themselves, mark-to-market 

was less of an issue because they had preset sort of loan loss reserve ratios depending upon how much in arrears it was, how 

much loss. They began to develop an actual market in distress assets, both a government organization to create it and private markets. 

The real problem with their mark to market was that the banks 

were allowed to hold stocks as part of their capital. The stock market went down. That hurt them. The government tried what they 

call price-keeping operations, basically buying stocks. It didn’t 

work. This is the case where the patient has got a fever, so let us 

bribe the thermometer. 

But I would say the situation in the U.S. is different in the sense 

that mark to market is being used in cases where there is no market. So, for example, when Merrill Lynch has its fire sale of assets 

and 22 cents on the dollar to avoid bankruptcy, but there were so 

few actual deals in that particular instrument that everybody else 

had to mark it down to 22 cents to the dollar even though the underlying asset was actually good. 

Mr. SILVERS. Mr. Katz, I don’t mean to cut you off there. Keeping 

that in mind, I am curious about the effectiveness in the U.S. context in the past of essentially trying to get at real values through 

administrative processes rather than either through a frozen market or through pretending that they are worth more than they are. 

How good has that type of process been, and is it something that 

could be replicated in this situation? 

Mr. COOKE. In the case of the RTC, we had a lot of that. We had 

a lot of junk loans and construction development loans where there 


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was no market for those assets. Now we were in the sell mode, not 

the buy mode, because we got it when the institution took them 

over, and that made a difference. 

And we were also required not to sell anything initially less than 

95 percent of fair value in certain markets, which really created a 

problem. We updated appraisals, and appraisals were all revised, 

too, at that time because they were all—the practice was very 

flawed. We just couldn’t get a price we could sell the assets. 

So there was no market, but we worked with the private sector 

advisors as to what kind of reasonable returns would markets be 

looking for. Then we would take our assessment of the cash flows, 

and we would use that to establish what we called a derived investment value. We used that to sell the first pools of these structured 

assets, and we met what we thought was the fair market. And it 

definitely increased competition. 

Very quickly, everybody was in there because the market returns. All it takes is someone making on it to get somebody else 

to want to come in and do it. And the prices and the values went 

up. So it worked fairly well. 

But again, we were selling, not buying, and that is a little 

trickier. I would just say I agree. But I don’t know how you mark 

to market when there is no market. I just don’t know how you do 

that, and there has to be somewhat of a different model. 

Maybe the Government can come in and really assess cash flows, 

do something similar. I just don’t think you can price it. 

Dr. WHITE. Yes, just a bit of an historical comment on this. 

Given that commercial banks oftentimes specialize in lending to individuals who don’t have access to markets, it is hard to say that 

you mark to market a loan, particularly to small business or something like that. 

That being said, the bank examiners used to, before the Great 

Depression, basically mark to market, and it is only after the Depression comes when they gain the right to—because the markets, 

the values affecting it have tumbled so far—to make some judgments. And that is when we get forbearance at that point and that 

sticks, and we drift away from mark to market. 

The CHAIRMAN. Very helpful, thank you. 

Mr. Neiman. 

Mr. NEIMAN. Thank you. 

I would like a follow-on to Elizabeth’s first question, where she 

outlined three arguments against nationalization that are often 

used. I would like to add another one to the extent that nationalization could result in inhibiting factor for the attractiveness, attracting private capital into other institutions, particularly due to 

the risk of traders pushing down the price of the stock, shorting 

the stock in anticipation of which is the next bank to fall. 

This, I assume, is a relatively unique circumstance in our current 

events, but I would like your perspectives from whether it was a 

factor in your prior experiences and how it was significant. Is it a 

factor in the debate around nationalization? 

Mr. KATZ. In the case of Japan, it actually worked the opposite 

way. So the first couple of nationalizations, the companies actually 

went bankrupt. 


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The government bought them and then fairly quickly sold them 

off to hedge funds, U.S.-based hedge funds actually in both cases. 

In the third case, which is the most interesting, the bank had not 

yet failed. It wasn’t a de jure nationalization, but de facto it was. 

They bought up controlling shares. They fired the top management. 

They injected lots of capital. They did not wipe out shareholders. 

And what happened was the stock market, which was at ridiculously low levels, suddenly recovered because other people felt, 

okay, they are not going to wipe out the shareholders in rescuing 

the bank, but they are going to fire top management and they are 

going to say you either get those loans off your books, or we are 

going to get them off for you. 

And what happened was then it concentrated minds in the other 

banks, which had not been getting the bad loans off the books. 

They started getting off the loans very quickly so they would not 

be taken over. And then they began to do all kinds of stock 

issuance. Some of it was pressuring their customers to send in 

stock. But the fact is that stocks, including bank stocks, did rally, 

and from that point on, it was about 2 to 3 years before the problem was really solved. 

It ended up attracting capital because it induced the management to finally step up and do the right thing. 

Mr. COOKE. Well, I just want to comment. In terms of the institutions—you are not going to attract investors until they are comfortable with the asset problems. I realize short sellers and hedge 

funds can try to drive prices down, but if you have a bank and you 

have isolated the problems and take it out, there are plenty of investors looking to buy banks. 

One comment about nationalization in terms of political interference. Some may disagree with me. Back when we had Continental Illinois, at the time it was the seventh largest bank. There 

is a tendency for regulators, when they are running a bank, to be 

overly risk averse, and that is probably not the right thing to say 

now. But, there is such a tendency to not be unfairly competing 

with other banks that are healthy or to take risks. 

And, I don’t think you can do that very long. So if the government nationalizes, it is best not to stay long. Get it out of government hands. 

Mr. LUNDGREN. Well, I have no further comment. I don’t think— 

I don’t see that as a problem. We didn’t experience it either. But 

a good thing, if you encounter a situation where you have to, due 

to crisis management, nationalize, not because you wish to nationalize, you get a better tool in order to get taxpayer money back. 

One of the reasons our 4 percent of GDP that the total outlays 

were in ’92 and ’93, of that, most of it came back. A lot of it due 

to value increase and later privatization of the bank or the banks, 

rather, that were nationalized. So that is a way also of getting back 

to having an upside for the taxpayer as well, I would say. 

Mr. NEIMAN. To include Dr. White in this discussion, am I correct that FDR imposed two rules in this respect? One eliminating 

mark-to-market for bank valuations and also under his first chairman of the SEC imposing the uptick rule to address the concerns 

around short selling? 

Dr. WHITE. Yes, that is correct. 


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The CHAIRMAN. I think that you have all hit on this. I was really 

struck when I read the testimony that you all submitted in advance, which I appreciate. And it is certainly been a part of what 

we have been talking about today. But I want to give you an opportunity to draw a tighter line on the issue of honesty that I keep 

hearing in different incarnations. 

And if you can, I just want you to draw this line, if you can, as 

tightly as possible between what you learned from your experiences, what honesty meant in the context that you studied it or 

lived it and to how that affects or should be affecting what we are 

talking about today? Why this seems to be a live issue, if that 

would be appropriate? 

Could I start with you, Mr. Lundgren? 

Mr. LUNDGREN. It is a question of what you really mean with 

honesty. 

The CHAIRMAN. That is why I asked. 

Mr. LUNDGREN. It is vital that government is perceived as honest 

by the people. I mean, obviously, we had to be very, very straightforward, very open, very transparent. I went to Swedish parliament 

three or four times in order to be open about what we were doing 

and so forth. That is one thing. 

The second thing is that, obviously, a lot of bonuses we had at 

that time as well, or golden parachutes, you have to handle that. 

And you will be very strict in trying to reduce, get rid of, and so 

forth. And we also had—we sued boards of the two banks that were 

nationalized for compensation, since they obviously were not up to 

their responsibilities. There were breaking of bank rules and so 

forth. And we got some compensation out of that as well. 

So from a political point of view, you have to be very, very 

straight and very honest, and you have to try to see to it that people also understand that you shouldn’t be given gratification, bonuses or whatever, if you run something badly. And that is also a 

necessity to handle. 

The CHAIRMAN. I wonder if you had imagined that you would 

come here to testify to such points any time before the most recent 

past. 

Mr. Katz, you speak about this, and you speak about reluctance 

to acknowledge problems in Japan. 

Mr. KATZ. I think honesty is two levels. One is there was a theory in Japan that you would shatter confidence if you admitted the 

truth. So there was, on the instructions of the finance ministry, deliberate cooking of books. The problem is it destroys confidence because ultimately reality does come out. 

And certainly, if we don’t even know how big the derivative market is—we didn’t even know the size of the AIG exposure and all 

the links—then we cannot prepare for a crisis. So that is one level 

of honesty. 

The other level of honesty is what got us in the crisis in the first 

place. My belief is at the heart of the American crisis was a corrupt 

corporate governance system where CEOs were compensated in a 

way that they had to hit homeruns. If they hit homeruns, they got 

huge, huge bonuses. And if they struck out, there was no penalty. 

And should they actually get kicked out of the game, which is to 

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ance pay. So, naturally, you get people who should be hitting for 

singles and would be .300 batters who are instead always hitting 

for homeruns and striking out. 

And there is a huge difference between the performance of CEOs 

paid by stock options and those who were not. We also stopped applying rules that say when you lend to someone, they have to have 

a downpayment. When you lend to somebody, they have to be able 

to pay back. Also it would be preferable if they were alive. We have 

cases of banks lending to people who were dead. 

And so, these nonbanks originated these dubious mortgages and 

the nonbank portions of commercial banks could then unload these 

dubious loans, loans they knew to be probably fraudulent, on to 

other people through securitization. But executives made tons of 

money and faced no penalty. 

So we had an incentive system, which actually incentivized executives to do the wrong thing. That is a whole level of dishonesty 

that was not the case in Japan. It was much worse here. 

The CHAIRMAN. Thank you. Mr. Cooke. 

Mr. COOKE. I would just say, really, transparency is key. If you 

want honesty, the Government has to be honest. And I am pretty 

sure that the Government was not totally honest back in the S&L 

days. Everybody thought those problems were going to be more expensive, and they turned out to be so. So I think there was influences there. 

But honesty is important. You know, the Government has to be 

honest with the people, and they have to be—I mean, what is the 

situation right now? To me, the honest answer is the Government 

really doesn’t know. And what is worse, I don’t think the bankers 

know. I don’t think the heads of the major companies know any 

more than the regulators know about where the risks are. It is all 

over the place. 

So it is first try to feel, just tell the people that and say I am 

going to try to solve it. Maybe the stress test is the answer that 

they are doing. But it would be interesting to see exactly how that 

works, considering how global and complex these things are. Myself, I have great reservations. 

The CHAIRMAN. Thank you. Dr. White. 

Dr. WHITE. I would agree that it is transparency which is very 

important because if you have forbearance, then many things can 

happen. 

On the point actually of corporate governance, the reason why financial institutions are able to take these extraordinary risks is 

the fact that you have insured many of these institutions. That is 

the other side of the balance sheet, so to speak, so that that is one 

of the underlying, I think, problems is that there is such an extraordinary ability to take risks. And there is no risk essentially 

that a run will materialize or any sort of penalty will be imposed 

except from the oversight of the agencies. 

The CHAIRMAN. Thank you very much. 

Mr. Silvers, last question. We are going to—no, I mean down the 

line. [Laughter.] 

Mr. SILVERS. First, in preparing for this hearing, I had a look at 

a report done by the Norwegian bank authorities, looking comparatively at the Scandinavian experience during what you described, 


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Mr. Lundgren, as the regional crisis. Could you comment on the 

role played in terms of the net cost to the public in each country 

that faced this crisis? The role played by how aggressive they were 

in terms of taking upside? 

Mr. LUNDGREN. To be honest, I haven’t studied that. We studied, 

before taking to work with our crisis, the savings and loan crisis. 

We went back to 1933. We studied what happened in Norway some 

years before Sweden. They were nationalizing quite a lot, and we 

didn’t really like to do that, if we could. 

I haven’t followed up to what extent their initial outlays have 

been repaid. What I know about is our own, which was, as I said, 

4 percent of GDP, of which most is back, due to bad banks’ handling of the bad assets and so forth as well. But I have no comparison with Norway. 

Mr. SILVERS. They concluded that—and again, I don’t wish to 

spark any sort of rivalries here. But they concluded that essentially 

in those circumstances in which very aggressive positions were 

taken in terms of taking equity upside that it was directly correlated to the net final cost to the taxpayer. 

Mr. LUNDGREN. I mean, obviously, if you go in as owner, you get 

the upside, the whole upside in the bank. So, obviously, then it is 

a question, if you want to do it or use it as a tool, the first tool 

if you want to do it otherwise. It would be better if banks managed 

to get equity on their own, but still we managed to get most of the 

money we spent back. 

Otherwise, the main problem for us with Norway is all their gold 

medals. [Laughter.] 

Mr. SILVERS. You know, Mr. Lundgren and other witnesses have 

been very kind to be with us. And obviously, these issues are front 

and center not just for the United States, but on a global basis, as 

my colleague Mr. Neiman stated in his opening remarks. 

I would like to use the rest of my time to give Mr. Lundgren in 

particular, but any of you, the opportunity to comment further 

about the particular situation of today, and what, in your view, 

would be helpful policy for the United States to pursue in relation 

to what is obviously a global crisis. 

Mr. LUNDGREN. I mean, being a small country representative, I 

shouldn’t say so much. But on the other hand, what obviously is 

needed is some kind of—I mean, you have to restore confidence. 

And if stress tests will do that or not, it is difficult. 

But you have to have a way of getting people, investors, ordinary 

people understanding that you have—you are comfortable with 

handling the situation. You can tell about the size of the problems 

and so forth. 

We did a blanket guarantee for creditors and depositors. That restored confidence immediately. I see the problems with that. On 

the other hand, I mean, some kind of guarantee can help out, especially if it is difficult to value assets without having to buy them 

or try to make as you said an administrative pricing of that, which 

is very difficult to do that. 

In 1933, the Roosevelt administration did close the banks and restored confidence by that way. It is not very recommendable to do 

it, of course, in modern times. 


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But to find the size of the problems in one way or another also 

guarantees that you can restore both confidence by showing the 

size of the problems, by guaranteeing or whatever, and then also 

being able to do the capital injections, having the frame, the economic frame to be able to convince people that the capital base will 

be restored. So lending will take place in the same amount as before the crisis as well. 

Mr. SILVERS. Can I just stop for just one second on capital base? 

It seems to me that we have shifted from a moment in which sort 

of systemic confidence was the main issue, which was clearly the 

case in October, to a situation in which we have large, a handful 

of very large, systemically significant institutions with no capital 

base or an unknown capital base, I think, to Mr. Cooke’s comment. 

Does that strike you as the right—and I would welcome anyone, 

but since Mr. Lundgren was talking, does that strike you as the 

right description of where we sit today? 

Mr. LUNDGREN. I mean, obviously, there is a lot of uncertainty. 

I mean, exactly how certain it is for different institutions. But all 

around for the banking sector as a whole in the U.S., both in the 

U.S. and abroad, obviously nobody knows how the situation is. And 

that is something that you have to make clear. 

Restore confidence and restore capital base. That is a necessity, 

either by Government or by private capital, if possible. 

Mr. SILVERS. Now you can’t have a living bank without an adequate capital base, can you? 

Mr. LUNDGREN. No, no. I agree with you, and then perhaps government has to inject that capital, and then as I said, I think that 

for the taxpayers’ sake—and being a market conservative—working 

with market economy, you should also have the ownership. 

Mr. SILVERS. Radical notion. 

The CHAIRMAN. Thank you. 

Superintendent Neiman. 

Mr. NEIMAN. I am interested in your views, based on lessons 

learned as well as your current thinking, on how to structure these 

asset purchases by the Government of these toxic assets in a way 

to best protect the taxpayers. Are there other means, both in terms 

of valuing the assets or structuring, so that government is not paying all cash up front, giving it a right to recover a part of the losses 

suffered based on a later disposition of those assets? 

I would be interested in your thoughts, starting with David 

Cooke. 

Mr. COOKE. If you are providing assistance to a bank, then, yes, 

I think you should have some protection. If you are going to basically help them out with the assets and it turns out things turn 

out better, the Government should have something. 

That potential drain, though, it is going to discourage investors. 

If you want to bring new capital into the institution, depending on 

what you want. That doesn’t make sense if you ended up effectively 

paying too much for the asset, then, sure, it would make sense that 

the Government would share, would get something because the 

bank is better off than it would have been. But if it gets too much, 

the bank is back where it was. 

So it is a difficult thing to structure, but you probably can create 

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petition. And you can certainly price any asset. These are complex 

assets, but you can price them because underneath them somewhere there is an asset. There is a loan. There is a house. So you 

can do it. It is not going to be easy. 

So you can figure out a standardized approach to set your price, 

and then just get yourself some upside if you end up paying effectively too much. 

Mr. KATZ. Could I add here? In the private market, basically, you 

have an awful lot of debt-for-equity swaps. I don’t see why, if the 

Government wants to inject the money, it cannot do a similar 

thing. So there is an upside there. 

I look at the situation a little bit differently than Mr. Silvers. If 

you look at the figures, the banks, despite much more aggressive 

writing off of bad assets than in Japan, have an asset-to-liability 

ratio that is fairly high relative to current assets. It is just low relative to the future because they are going to have still more to 

write off. 

But I don’t see the problem in terms of the actual normal, plain 

vanilla lending. The problem is that the securitization market is so 

frozen that a bank which makes a car loan can’t then securitize it 

today, use the proceeds to make yet another loan, yet another loan. 

So even though the bank portfolio is going up, the actual net credit 

in the economy is going down. 

I think Bernanke’s measures of guaranteeing certain things, 

backstopping certain things is immensely helpful. Whether you use 

a good bank/bad bank technique or nationalization, you have to 

find some way to separate the good assets from the bad. I think 

pricing is difficult because in the shadow banking system, so much 

is obscure and unknown. It is not like pricing a loan for a house, 

where there is a relationship between the value of the instrument 

and the value of the underlying asset. 

The shadow banking system is so obscure, and that is why markets are frozen. That is what makes this difficult, in my view. 

The CHAIRMAN. Do you want to say something else? 

Mr. NEIMAN. No, go ahead. 

Mr. SILVERS. I read this part of your testimony, Mr. Katz, in relationship to this question. And it seems—and I was trying to reconcile your data with what we know about conditions in credit 

markets right now in the United States and what everyone tells us 

in field hearings and so forth. And I want to test something by you 

on this. 

If you look, we have four very large institutions now. Two of 

those institutions come back, have been coming back on a repeated 

basis to the Government for more capital. And it appears to me as 

though their capital ratios in some sort of real sense—although 

again there is a real question of what reality is here at all—are significantly lower than the averages you have, all right? 

You have a third, Wells Fargo, where I would say it is a little 

thin, although they haven’t come back for more money. These are 

sort of keystone institutions with a major presence in secondary 

markets, and it strikes me that that may explain this kind of paradox of the data you have versus people’s experience in the credit 

markets today. 


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And it also, again, focuses the problem that we face on what to 

do about these very large institutions, not the banking sector as a 

whole. And I wondered if does that make sense to you, or do you 

have another explanation? 

Mr. KATZ. Well, you know what? It puzzles me also because of 

these things. Here is my sense of it. 

First of all, some of the capital the banks raised, was raised in 

the first three quarters of the year before TARP. But there was 

this huge jump in the fourth quarter, so part of what we are calling 

the capital is, in fact, the result of the injection that has already 

occurred. 

And there will need to be further injections. I said you have to 

look at the capital ratio not only to their existing assets, but since 

we don’t really know the value of those assets, they are going to 

lose more capital going forward, certainly in the next few quarters. 

So in relationship to that, they are going to need more capital. 

But the fact is they have been aggressive about writing down. 

The real problem here is that I think you have to distinguish the 

writedowns of actual loans on real homes, cars, whatever, and the 

default rate there versus this mark-to-market writedown on securities, some of which is justified and some of which is not. And just 

the level of uncertainty is causing derivative levels to be lower than 

perhaps they ought to be. 

And that is why I think you need to separate the shadow stuff 

and dubious assets as well as outright toxic assets from the good 

assets. You have to do some sort of separation. In all of the examples that worked, there was a separation. 

In terms of the experience of borrowers, it is the fact that the 

bank cannot use the same dollar four or five or six times by 

securitizing the loan. So that is how I reconcile the fact that the 

outstanding loans on the books of the banks are going up, but people are not getting the money because the asset-backed securities 

market is going down. 

Mr. SILVERS. Our metrics for understanding credit markets don’t 

take into account how important the shadow credit markets have 

become and are not capturing the reality of what constitutes bank 

activity in this area anymore. 

Mr. KATZ. Because laws were passed that prevented us from 

knowing that under the theory of deregulation. 

Mr. NEIMAN. Yes, and I have confirmed that through conversations with the Fed economists. And, it is very revealing because 

they, in looking back at past recessions over the last 30 years, 

where bank lending has declined over that period of recession. This 

is a period when you look at that bank lending and it has actually 

increased from the start. 

Mr. SILVERS. It is misleading. 

Mr. NEIMAN. But it goes to the exact point I think that Mr. Katz 

is making about being able to securitize those loans and not making up for the difference in the lack of a securitization market. 

Any other follow-ups on the pricing of toxic assets if we were to 

create a bad bank or in the Treasury’s implementation of its private-public fund? 

Mr. COOKE. I would just make the comment that I agree that 

what the Fed is doing now to try to restore some liquidity to the 


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more easily quantifiable assets, the loans, makes a lot of sense. But 

I am pretty familiar with how securitization works and you can 

value those assets based on the underlying cash flows. It is not 

easy. You have got to get a lot of information you may not have 

access to. You need to get that information. But there is a way to 

approach it, and then to establish, if you are going to be on the buy 

mode, on the buy side, some value. But some of this, some of these 

derivatives and all are very, very complex. But they are solvable. 

Mr. KATZ. The Government may have to go in and create a market by buying some toxic assets. When somebody actually goes and 

create a market, that is a price. If it is the wrong price, the market 

will either push it up or push it down. But at least you started 

something as opposed to when there is no activity, then nobody else 

can make a decision. 

So make a market. And if you have made a mistake, it is a lot 

better than doing nothing and having the whole thing frozen. It 

will adjust. 

The government needs to create a debt-for-equity situation. So 

even if taxpayers lose on the downside, when the upside does occur, 

the taxpayer will get some of that back. And then you have created 

a market. You can begin unfreezing things. 

The CHAIRMAN. Let me ask on the question about markets because this is the one that puzzles me. So if the Government comes 

in, let us just say, hypothetically, and it buys at a highly inflated 

price because its ultimate goal is to make the banks look better, 

to make the financial institutions look better, how does that start 

a market? 

It says, hey, any time the Government will come in and pin $20 

to it and sell it, someone will buy it. But why does that start a 

market by itself if you use a highly inflated price? How does it 

produce the next purchase once the Government is not in it? 

Mr. COOKE. No, I think if the Government pays too high, it is 

going to be stuck with the assets, unless it turns out to be right, 

sometimes, a miracle happens. If it pays too low, it will be a difficult problem for the Government. But it has to have a rational 

basis for establishing those prices. If it pays too low, it is going to 

bring down other banks. 

The CHAIRMAN. So your real point about it is not just that someone will come in and make a purchase, it is that someone will come 

in and make a purchase that at least starts close enough that you 

are talking about markets. You are not talking about subsidization—— 

Mr. KATZ. No, no, no. I am not talking about going crazy. 

The CHAIRMAN [continuing]. Through the back door? 

Mr. KATZ. I am saying do your best possible estimate. 

The CHAIRMAN. Fair enough. 

Mr. KATZ. In a market that is just so crazy, if you are 10 or 20 

percent too high or 10 or 20 percent too low, that is something you 

can adjust to. If you are paying twice as much, well, then your 

markets can’t clear. 

The CHAIRMAN. But then what you are really saying is the only 

thing you can be driven by is trying to get an accurate market 

price because that is the only thing that runs at least the opportunity for starting a market, as you put it. 


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Of course, go ahead. Mr. Silvers. 

Mr. SILVERS. Yes, I am struck in this conversation by what I 

think was a model more or less in common of the RTC and the 

Swedish experience, which was to—and you all tell me if I have 

this wrong—which was, in the case of the RTC, you simply took the 

assets in a receivership mode, and I think, Mr. Cooke, your testimony was that you sold low in many cases? 

Mr. COOKE. We had to start to gin the market up, get it motivated in some areas. Yes. 

Mr. SILVERS. Right, and then, effectively, the Government only 

insured depositors. Whatever the hit was as a result of that was 

eaten by bondholders, effectively. Is that right? 

Mr. COOKE. Right. But let me just qualify that. We ended up 

with very conservative valuation assumptions that we were pretty 

convinced, advised by the advisors, if we could show the cash flow 

and we use the market discount rate, we would be able to move 

these assets. We didn’t sell them lower than what we thought was 

a fair price, but at what we thought was a market based, more realistic price. So we weren’t trying to sell low. 

Mr. SILVERS. No, I understand that. 

Mr. COOKE. Market competition came in, and prices went up. 

Mr. SILVERS. Right, but the key feature of what you did was is 

that you looked, and the process of doing that, which obviously did 

create markets for real estate in some places. In the course of doing 

that, your basic receivership was structured so that the losses that 

were going to happen versus the books at these banks was in the 

first instance absorbed by bondholders, right? And in the second instance absorbed by the taxpayer? 

Mr. COOKE. Yes, anybody that had any claim against the receivership, they suffered the loss first. I mean, shareholders would take 

the first—— 

Mr. SILVERS. Shareholders took first. Bondholders took second. 

Mr. COOKE. Well, it depends. Bondholders may share—at that 

time, and I think it is still the case, pro rata with general creditors. 

We didn’t have a preference. Then later, somewhere in there, I forget when, they give a depositor preference. Congress passed that. 

Before then, we were just like any other general creditor. So if 

the bondholder lost, we lost. The Government lost. Its agency lost. 

Mr. SILVERS. So the depositors were made whole in a context in 

which the Government as deposit insurer was pari passu. It was 

on par with the bondholder in the losses. Is that right? 

Mr. COOKE. At that time, yes. 

Mr. SILVERS. Right. Now, in the Swedish case, you all, as you 

said, Mr. Lundgren, you marked down very aggressively the assets 

when you took control of banks. That is correct? 

Mr. LUNDGREN. Only a couple of banks marked down, and we 

tried to find a mark-to-market valuation with a valuation board 

with a lot of experts on. We did, I think, 30,000 valuations or something like that for different real estate. 

But aggressive or not, we tried to find the right at that time 

mark to market, but only for the assets in the banks that we took 

over. So we only formed bad banks for those. We didn’t have one 

bad bank and bought other assets as well because—and that is why 


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we didn’t have a no valuation problem. If we were wrong, in a way, 

it was just in our own bank. 

And bad banks were formed also by the private banks that survived. They also did, and they formed their own bad banks. 

Mr. SILVERS. Let me just clarify also one thing while the chair 

is kind enough to give me the floor. Some people have asserted in 

U.S. debates that should the Government impose a receivership on 

one bank, it would have to do so on all, particularly in relationship 

to major institutions. That was not your experience, I gather? 

Mr. LUNDGREN. No, it was not. I mean, it depended on if the 

bank needed huge capital injections, which made government 

forced to take over the bank or get the majority anyhow. And that 

was only for these two banks. The others had a threat of having 

it coming into that situation, but they managed on their own. 

But what we are talking about here is, of course—I mean, we 

had, as the RTC, rather plain vanilla situation. Today, it is much 

more complicated, and I have all respect for that, and that is why 

I am thinking from my experience some kind of guarantee. Without 

buying assets, finding a situation where you really can’t find the 

right price, where you have a possible upside, you need to have it 

for the taxpayer. 

I mean, to use some kind of guarantees instead to restore confidence might be a possibility instead of a long, drawn-out process 

of trying to value unvaluable assets. 

Mr. KATZ. Could I make a comment from the Japanese experience? You know, if you had all these bad debts in Japanese banks, 

and again, there really is a difference between if it was an underlying asset, you would need to have a market-clearing price. But 

if there is no market, then there is no market-clearing price. 

Okay, so you had these assets the banks didn’t want to get rid 

of, couldn’t get rid of, whatever. And Lehman, of all people went 

out to the banks and started buying their bad loans. The banks 

couldn’t get rid of them because foreclosure laws in Japan are so 

cumbersome, they really couldn’t foreclose. And Lehman and others 

started buying them on, say, 20 cents, 30 cents to the dollar. 

And then they would sell the loans back to the borrower for 40 

cents, 50 cents on the dollar. So the bank got rid of some stuff at 

a very low price. Lehman made oodles of money. And the borrower 

had their debt cut in half. Now which price was right? The 20 percent that Lehman paid or the 40 percent that the borrower paid 

back to Lehman? 

Well, the point is a market was created. And over time, things 

began to coalesce. Once you have a market, then you could have 

a market-clearing price. 

My concern is in this area of these derivatives where the market 

is frozen, and there is no market—and I think Ben Bernanke is 

doing a superb job at trying to unfreeze that. That is why I am saying if you have a rational estimate of the right neighborhood, then 

you go about doing things to de-stress asset markets, resell them 

to other people. Prices will begin to be created, and they will go up 

or down, and we will find a price. 

Mr. SILVERS. Can I just comment on this that it seems to me 

that it is not possible to have that sort of effect if your primary objective in setting the price that you sell assets or that you buy asVerDate Nov 24 2008 22:38 May 07, 2009 Jkt 048951 PO 00000 Frm 00118 Fmt 6633 Sfmt 6602 E:\HR\OC\A951.XXX A951

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sets because I think that is what we are talking about—buying, not 

selling—what Mr. Cooke was doing. 

If the Government’s primary purpose in buying assets is to prop 

up stockholders in the banks, then the prices that the Government 

will put out there to buy will always be prices that are not—they 

don’t have any credibility in the marketplace because any price 

that comes anywhere near where shall we say self-protective actors 

in the market are willing to operate at will be one that will reveal 

the capital inadequacy of the banks. 

Mr. COOKE. Could I just make a comment on one thing? Just on 

one bank’s failure bringing down other banks. That may be a reference to the cross-guarantee provision. Are you familiar with that? 

Mr. SILVERS. No, it was a reference to the argument, Mr. Cooke, 

that—and I think Richard alluded to it a moment ago—that once 

you start, that in modern market conditions, once you start stepping forward and forcing dramatic dilution of equity holders, that 

you will set off some sort of dynamic of lack of confidence in the 

equity markets that otherwise healthy banks would have be taken 

over through a bear raid or panic of some sort in the equity markets. That was, I think, the position certainly held by Paulson’s 

team. 

Mr. COOKE. I don’t know. I don’t know if that would happen or 

not. As far as guarantees, one thing, some of the solutions the 

FDIC did when we were at the RTC, they found sometimes they 

would package up a failing bank. They would turn it over to another healthy bank, and they would have them isolate the bad assets, and they would get a stop-loss protection, but it wasn’t to the 

same owners and the same people. It was outside that. 

The CHAIRMAN. Thank you. 

Mr. Neiman, I want to make sure you complete your questions. 

I am afraid Mr. Silvers and I—— 

Mr. NEIMAN. No, this is a very good discussion. If I had a little 

time, I would go back to Mr. Lundgren and spend a little time on 

the disposition side. 

From what I read in your Swedish resolution process, there is an 

indication that had you had more time to sell those assets, you may 

have been able to increase your return. And, I know that there are 

issues around the RTC selling too quickly and the impact it has on 

the market. So I would be curious about the disposition period of 

assets. 

The CHAIRMAN. Please, go ahead, Mr. Lundgren. 

Mr. LUNDGREN. Thank you. 

The law in Sweden said that banks had to disperse of these kind 

of assets within 3 years. That was, of course, a short period of time. 

So we wanted to increase that time. They could hold somewhat 

longer. 

And when we formed these two bad banks for the two nationalized banks, my belief at that time was that we should give them 

about 10 to 15 years at least, but it was upon what they themselves experienced, that they found that after 5 years, in 1997, they 

could wind up the operations. They have been quite successful. 

You can always argue that they could have recovered even more 

if they stayed on for 5 more years. But I think myself that it was 

a good decision to wind up at that time. Altogether, as I said, with 


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the shares increasing in value and privatizations, we recovered 

most of the money anyhow. So you can always discuss the length 

of it. 

The CHAIRMAN. Good. I want to thank everyone. Thank you, 

Your Excellency, Ambassador Hafstrom, for being with us today. 

Director General Lundgren, we really appreciate your coming. And 

Mr. Katz, Mr. Cooke, Dr. White, this is what it should be about. 

I have to say I was very much struck by your comment before 

and that you alluded to in your testimony that as Sweden worked 

through its difficulties, that you had turned to the experiences of 

the RTC and our efforts during the Great Depression in part to 

help inform the next iteration of how to deal with these problems, 

and that makes me doubly grateful that you would travel to the 

United States and bring us your experiences that we might bring 

them together here. 

I want to say that this Panel reminds me of the importance of 

our having an overall strategy to deal with this problem. It is enormously valuable to hear from four different sets of experiences and 

to hear common themes that run through them, some of which we 

have already begun to heed, some of which we clearly have not. 

It is also very interesting to hear the much more shall I say muscular approach taken toward management and investors and on behalf of the taxpayers whose money is being used to try to rescue 

these organizations and to put the economy back on a sound footing. But ultimately, the idea of developing and executing a plan in 

order to be able to preserve the financial institutions and restart 

the economy is deeply underscored by the testimony of all four of 

you. 

I very much appreciate your taking the time to be with us today. 

The record will be held open if anyone wishes to add additional 

questions. 

I am sorry that our colleagues were not able to be with us. I 

know the press of other business has kept them elsewhere. We may 

have additional questions that we would like to send to you and 

ask for your remarks in writing so that they might be made part 

of the formal record. 

With that, this stands adjourned. Thank you. 

[Whereupon, at 11:40 a.m., the hearing was adjourned.] 


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