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THE ROLE OF INSPECTORS GENERAL: 

MINIMIZING AND MITIGATING 

WASTE, FRAUD, AND ABUSE 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

OVERSIGHT AND INVESTIGATIONS 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

MAY 5, 2009 

Printed for the use of the Committee on Financial Services 

Serial No. 111–27 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES WILSON, Ohio 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

DAN MAFFEI, New York 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

ERIK PAULSEN, Minnesota 

LEONARD LANCE, New Jersey 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

DENNIS MOORE, Kansas, Chairman 

STEPHEN F. LYNCH, Massachusetts 

RON KLEIN, Florida 

JACKIE SPEIER, California 

GWEN MOORE, Wisconsin 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

ALAN GRAYSON, Florida 

JUDY BIGGERT, Illinois 

PATRICK T. MCHENRY, North Carolina 

RON PAUL, Texas 

MICHELE BACHMANN, Minnesota 

CHRISTOPHER LEE, New York 

ERIK PAULSEN, Minnesota 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

May 5, 2009 ....................................................................................................... 1 

Appendix: 

May 5, 2009 ....................................................................................................... 25 

WITNESSES 

WEDNESDAY, FEBRUARY 00, 2009 

Coleman, Elizabeth A., Inspector General, Board of Governors of the Federal 

Reserve System .................................................................................................... 8 

Rymer, Jon T., Inspector General, Federal Deposit Insurance Corporation ...... 10 

Thorson, Eric M., Inspector General, U.S. Department of the Treasury ............ 6 

APPENDIX 

Prepared statements: 

Moore, Hon. Dennis .......................................................................................... 26 

Coleman, Elizabeth A. ...................................................................................... 28 

Rymer, Jon T. ................................................................................................... 42 

Thorson, Eric M. ............................................................................................... 56 

(1) 

THE ROLE OF INSPECTORS GENERAL: 

MINIMIZING AND MITIGATING 

WASTE, FRAUD, AND ABUSE 

Tuesday, May 5, 2009 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON OVERSIGHT

AND INVESTIGATIONS, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

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

2128, Rayburn House Office Building, Hon. Dennis Moore [chairman of the subcommittee] presiding. 

Members present: Representatives Moore of Kansas, Lynch, 

Driehaus, Grayson; Biggert, Lee, and Paulsen. 

Chairman MOORE OF KANSAS. This hearing of the Subcommittee 

on Oversight and Investigations of the House Financial Services 

Committee will come to order. Our hearing this afternoon is entitled, ‘‘The Role of Inspectors General: Minimizing and Mitigating 

Waste, Fraud, and Abuse.’’ 

We will begin our first subcommittee hearing of the year with 

members’ opening statements up to 10 minutes per side, and then 

we will receive testimony from our 3 witnesses. After that, members will each have up to 5 minutes to question the witnesses. 

Without objection, all members’ opening statements will be made 

a part of the record. I now recognize myself for up to 5 minutes 

for an opening statement. 

There have been a few signs recently that our economy may be 

slowly nearing the bottom of the decline. I believe our economy will 

eventually stabilize, recover, and grow once again, but despite a 

few glimmers of hope, my constituents remain anxious and I share 

their concern. 

In March, the U.S. economy lost 663,000 more jobs, bringing the 

unemployment rate to 81⁄2 percent, the highest since November 

1983. Since the recession began in December 2007, a total of 5.1 

million Americans have lost their jobs. That is nearly double the 

entire population of my home State of Kansas. 

Last Friday, regulators shut down 3 more banks, bringing the 

total number of U.S. banks that have failed in the past 17 months 

to 57. The FDIC has estimated that one of those banks, Silverton 

Bank in Georgia and the biggest bank to fail this year, will cost 

the Deposit Insurance Fund $1.3 billion. 

There are some painful lessons that we need to learn from this 

financial crisis so we can strengthen the rules and improve the 

2 

oversight of our broken financial sector. In addition to modernizing 

the regulatory structure to prevent another financial meltdown, 

Congress must ensure there is tough oversight and transparency of 

the extraordinary actions the Federal Government has taken to the 

stabilize the financial sector. 

Some examples include the Treasury Department’s use of $700 

billion in TARP funds, the FDIC’s debt guarantee program, and the 

Federal Reserve’s intervention with AIG and their $1 trillion TALF 

program. To that end, I appreciated the opportunity to work recently with Ranking Member Biggert, Congressman Driehaus and 

Congressman Paulsen of the subcommittee to enact our Special Inspector General of TARP, or SIGTARP, bill that President Obama 

signed into law on April 24th. 

Just last month, the SIGTARP reported that he has already 

launched 20 criminal investigations. He previously indicated he did 

not have the staff he needed to track down every lead. The new law 

gives the SIGTARP stronger oversight over the TARP program as 

well as the expanded authority he requested to hire the necessary 

auditors and investigators to provide tough oversight. 

This afternoon, the Oversight and Investigations Subcommittee 

will have the Inspectors General from Treasury, the Federal Reserve Board, and FDIC testify about their ongoing efforts to expose 

and eliminate waste, fraud, and abuse. For example, the Treasury’s 

Office of Inspector General reported investigations leading to 13 arrests and nearly $400,000 in court-ordered fines, restitution, and 

recoveries during a 6-month period last year. 

The FDIC’s Office of Inspector General reported investigations leading to 61 convictions and nearly $353 million in fines, restitution, and other monetary recoveries. 

As a former District Attorney for 12 years, and the chairman of 

this Oversight and Investigations Subcommittee, one of my top priorities is to make sure that our Inspectors General have all the 

tools and resources they need to continue this important oversight 

work. 

One issue of concern I would like to focus on today is material 

loss reviews, or MLRs, which are required to be completed by the 

Inspectors General whenever a failed bank costs the Deposit Insurance Fund over $25 million. 

In January, our three witnesses wrote Chairman Frank expressing their request that Congress raise the MLR threshold from $25 

million to between $300 million to $500 million. In addition to a 

higher threshold, they suggested a requirement for failed banks 

falling below the new threshold that an initial assessment still be 

taken to ensure that unusual or potentially significant situations 

are not missed. 

I was disturbed to learn recently that the failure of Washington 

Mutual, the largest failure in U.S. history, did not trigger a mandated material loss review because there was no cost to the Deposit 

Insurance Fund, given that JPMorgan Chase acquired the institution after it failed. I understand the voluntary review is underway, 

but we need to update the MLR system so that a review of a bank 

failure like WaMu would be required. 

I was also disturbed to read the Inspectors General’s letter to 

Chairman Frank claiming that without a modernized MLR system 

3 

the current system would limit their ability to effectively oversee 

many of the new and significant programs and initiatives that the 

Federal banking agencies are undertaking to address current economic conditions. We must address this problem. 

I look forward to hearing the testimony from our witnesses discussing this MLR concern and then working with members of our 

committee on both sides, Republicans and Democrats, to quickly 

address this concern so we can provide the best oversight effort 

possible. 

I now recognize for 5 minutes the ranking member of this subcommittee, my colleague and friend from Illinois, Mrs. Biggert. 

Mrs. BIGGERT. Thank you, Chairman Moore, and thank you for 

holding this important hearing. 

I would like to start by thanking today’s witnesses and their 

staffs for tackling waste, fraud, and abuse in our regulatory and financial system, which I believe is at the heart of our financial crisis. 

A couple of years ago, the Chicago Tribune published a series of 

articles that revealed that gangs in the Chicago area were increasingly turning to mortgage fraud. They found it more lucrative than 

selling drugs. It turns out the gangs were not alone. Everyone, it 

seemed, was in on the act. In March, the U.S. Attorney in Chicago, 

Patrick Fitzgerald, brought mortgage fraud indictments against 

two dozen players, brokers, accountants, loan officers, processors, 

and attorneys. 

Mortgage fraud comes in all sizes and shapes. Scam artists inflate appraisals, flip properties, and lie about information, including income and identity on loan applications. Some use the identity 

of deceased people to obtain mortgages, and other desperate thieves 

bilk the most vulnerable homeowners and seniors in dire financial 

straights out of their homes and home equity. 

Let’s face it; I think this is the tip of the iceberg. And as we in 

Congress work to get the economy back on track and credit flowing 

again we have to address what was at the root of the mortgage 

meltdown in the first place, and that, I believe, is mortgage fraud. 

As Inspectors General of three of the most important banking 

regulators, today’s witnesses, I think, hold key positions to investigate mortgage fraud and really get to the bottom of the turmoil 

that plagues today’s financial markets. What went wrong, who 

broke the law, were the laws enforced, were the laws and regulations adequate to restore confidence in our markets and address 

any failing in our system of regulation, including enforcement? We 

must determine the answers to these questions. 

On that note, it is important that our financial Inspectors General have the resources to do their jobs. That is why today we will 

examine the role and capability of the Fed, Treasury, and the FDIC 

Inspectors General. In addition, we will focus on a provision in current law that requires IGs to review and report on any failed banks 

that cost $25 million or more material loss to the Deposit Insurance Fund. 

I think we will hear from today’s witnesses that the material loss 

review is that the lower end of the threshold make up the bulk of 

their cases, but don’t result in significant findings beyond what was 

revealed when an institution closed. However, we will hear that 

4 

these low end of the threshold cases take up considerable time and 

resources. Due to the high level of bank failures and more on the 

way, this MLR requirement with the current threshold level promises to become increasingly burdensome to the IGs and to continue 

to divert them from other important work, including oversight of 

TARP and other Federal financial assistance programs, aiding law 

enforcement in its efforts to crack down on illegal behavior and 

identifying failing of financial regulators, regulations, and laws. 

For example, today’s Wall Street Journal indicated that some 

banks may be disproportionately laden with commercial real estate 

loans and other banks need to increase capital to have enough of 

a cushion for anticipated losses. 

The sooner we get back to the root of these matters, the sooner 

we can get financial institutions off of the Federal dole and our financial markets and economy back on track. 

I would like to conclude by reiterating my continued commitment 

to working on these matters. In the past, I worked on the FDIC 

Enforcement Enhancement Act, and recently, the Fight Fraud Act. 

For two Congresses, I introduced a bill, the Stop Mortgage Fraud 

Act, to increase Federal law enforcement funding to investigate and 

prosecute mortgage fraud. In addition, I supported reforms of numerous financial services regulations and programs, and I and others here today care deeply about getting this right. 

So with that, I look forward to working with my colleagues and 

look forward to hearing from today’s witnesses. I yield back. 

Chairman MOORE OF KANSAS. Thank you. I recognize the gentleman from Massachusetts, Mr. Lynch, for 3 minutes. 

Mr. LYNCH. Thank you, Mr. Chairman. Thank you for holding 

this very important hearing, as well as Ranking Member Biggert 

for her work on this as well. I would like to thank our witnesses, 

not only for the good work that you do every day, but also for your 

willingness to come before the subcommittee and help us with our 

work. 

There is a natural alliance, I think, between our Inspectors General and the Oversight Subcommittee. We each search for transparency and we each hope to inject accountability, I think, to the 

governmental process and make sure that the various efforts of 

government are carried out properly. But part of our problem that 

we address here is really part of a larger problem, which is the 

complexity in some of these issues, and I know with each of you, 

you are dealing with some of these new financial iterations that are 

extremely difficult to follow. We on the Oversight Subcommittee 

have had a difficult time getting information back from our TARP 

expenditures and just some of the dealings between the Federal 

Reserve and the SEC with some of these so-called rescued companies. 

It is part of a larger problem for the reason that while technology 

has changed drastically at lightning speed, and industries are rebuilt continuously, we in government are still operating with the 

same set of rules basically, and you are really our eyes and ears 

out there. We got rid of the powdered wigs, but that is about all 

we have done to update our response to some of the changes 

around us. 

5 

And so what I would like to hear today is, since we are partners 

in this, how we might better allow you to do the job you need to 

do, and also how we might better equip you and support your efforts out there. Rather than just throwing out criticisms because 

things aren’t going the way we want, we should really be working 

in a better way with our Inspectors General to accomplish the job 

that we all want to have done. 

So I would be really interested in hearing your thoughts on that, 

how we can do it better, and how Congress can be more helpful. 

Mr. Chairman, I yield back the balance of my time. 

Chairman MOORE OF KANSAS. Thank you. Next, I recognize the 

gentleman from Ohio, Mr. Driehaus, for 2 minutes. 

Mr. DRIEHAUS. Thank you, Mr. Chairman, and I just want to 

echo your comments. Obviously, this is a very important hearing, 

and I want to thank the Inspectors General for the tremendous 

work that you already do. I know a tremendous amount is being 

asked of you, especially at this time, and we, as Mr. Lynch has 

said, are very concerned about making sure that we get it right. 

We share a common goal in trying to get to the bottom of any fraud 

and abuse that might be occurring. And so I am very interested 

also in hearing your testimony. 

I think at some point, Mr. Chairman, we are going to break here 

for votes, and then I will be doing special orders on the Floor. However, I do have several questions that I would like to either submit 

to you in writing that I might get answers to or hopefully ask if 

I am still here. 

I am particularly interested in following up, as the chairman 

noted, from your letter to Chairman Frank in January in terms of 

increasing the threshold for material loss reviews. I am very sympathetic to that request. I understand it is about allocation of resources and appropriate allocation of resources. However, I think 

there are questions about how you might still identify fraud that 

exists in those cases that fall below the threshold and how we 

might be ensuring consumers that they are still safe as we move 

forward. 

So I would like to further discuss that, and I hope in your testimony you will spend a little bit of time talking about any increase 

in that threshold and what that means in terms of ongoing investigations, as well as how you might otherwise identify fraud for 

those institutions falling below the threshold. 

Thank you, Mr. Chairman. 

Chairman MOORE OF KANSAS. I thank the gentleman, and I am 

pleased to introduce the witnesses for this afternoon’s hearing. 

First, we will hear from Eric Thorson, Inspector General for the 

Department of the Treasury. Mr. Thorson was sworn into office on 

August 12, 2008. Before joining Treasury, Mr. Thorson worked at 

the Small Business Association, where he also served as Inspector 

General. He previously served as the Chief Investigator for the 

Senate Finance Committee and Chief Investigator for the Senate 

Permanent Subcommittee on Investigations. Mr. Thorson also 

served as Deputy Assistant Secretary and Acting Assistant Secretary of the Air Force and earned the Distinguished Flying Cross 

during his service as an Air Force pilot. 

6 

Our second witness is Beth Coleman, Inspector General for the 

Board of Governors of the Federal Reserve System. She was appointed Inspector General for the Board, effective May 6, 2007. Ms. 

Coleman joined the Board’s Office of Inspector General in 1989 as 

a Senior Auditor and worked her way up. In 2004, she was appointed the Assistant Inspector General for Communications and 

Quality Assurance. Prior to joining the Board’s Office of Inspector 

General, she was employed by the Government Accountability Office. 

And finally, we are also glad to have with us Jon Rymer, Inspector General for the Federal Deposit Insurance Corporation. After 

being appointed by former President George W. Bush and confirmed by the Senate, Mr. Rymer was sworn into office July 5, 

2006. From 1981 through 1997, Mr. Rymer was a bank executive 

at two different banks and also was employed by the accounting 

firm of KPMG to provide internal auditing, assurance processes, 

and process improvement guidance. Mr. Rymer has served for 28 

years in the active and reserve components of the United States 

Army. His awards include the Meritorious Service Medal (with Oak 

Leaf Cluster) and the Humanitarian Service Medal. 

Without objection, your written statements will be made a part 

of the record. You will each be recognized for a 5-minute statement 

summarizing your written testimony. 

Mr. Thorson, you are recognized for 5 minutes, sir. 

STATEMENT OF ERIC M. THORSON, INSPECTOR GENERAL, U.S. 

DEPARTMENT OF THE TREASURY 

Mr. THORSON. Chairman Moore, Ranking Member Biggert, and 

members of the subcommittee, I want to thank you for the opportunity to be here this afternoon. I know we all appreciate the subcommittee’s interest in this important topic. 

It is a privilege to appear before you with my colleagues Jon 

Rymer and Beth Coleman. Over the years, our respective Offices 

have forged strong bonds in addressing numerous matters of mutual interest and what I consider one of the best professional working relationships between agencies in the Federal Government. 

Our Office provides independent audit and investigative oversight of the Department of the Treasury, which includes numerous 

departmental offices as well as the eight non-IRS bureaus. Our 

oversight includes the Office of the Comptroller of the Currency 

(OCC), and the Office of Thrift Supervision (OTS), Treasury’s two 

financial institution regulators. 

The material loss review requirement was enacted as a part of 

the FDIC Improvement Act of 1991 following on the heels of the 

S&L crisis. It calls for the IG of the appropriate regulator for a 

failed bank to perform a review within 6 months when the failure 

results in a material loss to the Deposit Insurance, that material 

loss being defined as the greater of $25 million, or 2 percent, of the 

banks assets. That threshold has not changed since 1991. 

In conducting an MLR, the OIG ascertains the causes of the failure, assesses the regulator’s supervision, and makes recommendations in an effort to prevent similar failures in the future. Material 

loss reviews are some of the most resource intensive audits performed by my Office. 

7 

MLRs can also lead to other important areas of work. Last year, 

for example, during our review of IndyMac, we learned that a senior OTS official had approved the backdating of a capital infusion 

made in May so that the thrift could report its condition as well 

capitalized in March of 2008. Less than 4 months later, IndyMac 

failed, costing the fund some $10 million. As a result of our inquiry 

into this matter, OTS removed the regulator who had approved the 

IndyMac backdating contribution. 

As a result of further investigation, we found another instance of 

backdating, one that found that OTS, the regulator itself, had directed the bank to take such action. The Acting Director of OTS 

has been placed on administrative leave, pending a Departmental 

review. 

Last January, as you mentioned, my colleagues and I sent you 

a letter recommending that the Congress consider raising the 

threshold from $25 million to between $300- and $500 million. In 

that letter, we also summarized the tremendous demands that the 

current threshold has placed on our office in light of the current 

economic crisis. 

The concerns we expressed in January are just as compelling 

now as they were then. Since September of 2007, 16 OCC and OTS 

banks and thrifts have failed that met the material loss review 

threshold, and we are obviously concerned that this unfortunate 

trend could continue. 

To meet the material loss review requirements, we had to shift 

nearly all of our discretionary audit resources to this work. We 

have either shut down or indefinitely deferred most of our audits 

in other Treasury high-risk programs. This includes work in Treasury’s anti-money laundering and terrorist financing programs. 

Another area where we are deferring work is whether offshore 

operations of U.S. banking institutions are being effectively supervised. Also, we should be looking at OTS’s role in supervising large 

financial institution holding companies such as AIG and GE Capital. I consider our oversight of such high-risk programs to be truly 

urgent. 

Based on all these factors, I endorse your amendment to S. 383 

to increase the threshold for material loss reviews to $400 million. 

I also support, as a prudent measure, the amendment’s proposal 

that we look at all losses over a 6-month period for the purpose of 

determining if any warrant an in-depth review. This provides us 

with the flexibility to perform a review whenever we feel it is necessary, despite the size of the loss. 

In conclusion, I would like to take 1 minute to acknowledge Dennis Schindel, Marla Freedman, and Bob Taylor, who are with me 

this afternoon. It is under their strong leadership and expertise 

that our excellent audit staff have been able to timely complete the 

many MLRs that I have mentioned earlier. These achievements are 

possible only through the dedication of these fine people, and I am 

very proud of them for that. 

This concludes my testimony, and I will be happy to answer any 

questions. 

[The prepared statement of Inspector General Thorson can be 

found on page 56 of the appendix.] 

Chairman MOORE OF KANSAS. Thank you, sir. 

8 

Ms. Coleman? 

STATEMENT OF ELIZABETH A. COLEMAN, INSPECTOR GENERAL, BOARD OF GOVERNORS OF THE FEDERAL RESERVE 

SYSTEM 

Ms. COLEMAN. Chairman Moore, Ranking Member Biggert, and 

members of the subcommittee, I appreciate the opportunity to testify today about the ongoing oversight efforts of my Office, including how material loss reviews affect our efforts to strengthen oversight and accountability to the Congress and the public. 

As you are aware, the Federal Reserve System, the Nation’s central bank, consists of the Board of Governors in Washington, D.C., 

the 12 Reserve Banks, the Federal Open Market Committee, and 

several advisory groups. While the Board is an agency of the Federal Government, the Reserve Banks combine public and private 

elements. 

Consistent with the IG Act, my Office conducts independent audits, inspections, evaluations, and investigations of Board programs 

and operations to promote economy, efficiency, and effectiveness 

and to prevent and detect fraud, waste, and abuse. 

Currently, about 75 percent of our audit resources focus on mandated work, which includes contracting for the annual financial 

statement audit of the Board and reviewing failed State Member 

Banks that result in a material loss to the Deposit Insurance Fund. 

In fact, about 40 percent of our audit resources are working on 3 

material loss reviews, and we are we are just beginning a fourth. 

If the current pace of State Member Bank failures continues, and 

materiality threshold remains at $25 million, our workload will be 

heavily concentrated on material loss reviews at a time when actions related to the current economic crisis demand our full attention. 

My colleagues and I endorse the legislation proposed by Chairman Moore to increase the material loss threshold and to provide 

the IGs with needed flexibility to ensure that bank failures receive 

appropriate attention, while meeting our strategic objectives. 

In light of the financial crisis, the subcommittee has asked about 

oversight of the Federal Reserve System. As the IG for the Board, 

we are authorized to audit or investigate any Board program or operation, and our work spans the Board’s mission areas. While we 

are not authorized to directly review Reserve Banks, we can assess 

how well the Board carries out its general program oversight and 

supervision of the Reserve Banks, and review any Board-delegated 

function conducted by a Reserve Bank. 

The Federal Reserve has taken a number of actions to address 

the current economic crisis. The Office of Inspector General is reviewing these actions. We are auditing the Board’s role in the 

TARP Capital Purchase Program and have initiated a broad review 

to identify risks in the Federal Reserve’s new lending facilities. 

Furthermore, we are conducting a review of the Federal Reserve’s 

consolidated supervision of bank and financial holding companies. 

Our criminal investigators are leading and participating in a 

number of multi-agency investigations. For example, they have 

joined a nationwide effort by the FBI and the United States Attorney’s Office to investigate and prosecute mortgage-related crimes in 

9 

the States considered hotspots for such crimes. Most recently, we 

referred information to the Detroit Mortgage Fraud Task Force, 

and we are working with the FBI on a south Florida mortgage 

fraud case. 

I have joined other financial regulatory IGs on the TARP IG 

Council and have also coordinated with SIGTARP in forming the 

Term Asset-Backed Securities Loan Facility Task Force, a 

proactive effort to prevent and detect fraud and abuse in the TALF. 

Additional oversight of the Federal Reserve System is provided 

in a variety of ways. The Board contracts for an annual independent financial statement audit of the Reserve Banks, including 

an evaluation of internal controls over financial reporting. The 

independent public accounting firm also audits the financial statements of the consolidated limited liability companies that the Federal Reserve established in 2008. 

The Reserve Banks are also subject to Board oversight and each 

Reserve Bank has a general auditor who reports to the audit committee of that bank. Furthermore, GAO, which is the investigative 

arm of Congress, has audit jurisdiction over the entire Federal Reserve System (both the Board of Governors and the Reserve Banks) 

and SIGTARP has audit cognizance over TARP-related activities 

pertaining to the Federal Reserve. 

While our Office and GAO share oversight functions in certain 

areas, we also have noteworthy distinctions, particularly in the 

area of monetary policy. Our Office is authorized to audit the monetary policy programs and operation of the Board with potential 

limitations under specifically defined circumstances. While GAO 

has greater authority to directly audit the Reserve Banks, legislation precludes it from auditing all monetary policy matters and actions. Currently, GAO is conducting about 20 reviews of the Federal Reserve System, which includes 17 congressional requests. 

Maintaining Federal Reserve independence, particularly in monetary policy matters, remains critical in assessing whether GAO’s 

audit coverage should be expanded to include the areas that are 

currently restricted. According to the legislative history on the Federal Reserve Act, ‘‘it cannot be too emphatically stated that the 

committee regards the Federal Reserve Board as a distinctly nonpartisan organization whose functions are to be wholly divorced 

from politics.’’ 

In closing, Chairman Moore, I would like to thank you, Ranking 

Member Biggert, and the subcommittee for your interest in the Inspector General’s oversight role. I would also like to thank my colleagues from the Treasury and FDIC for their ongoing professional 

coordination on material loss reviews and other issues of common 

interest. My Office takes its mission and authority very seriously 

and remains committed to promoting integrity, efficiency, and effectiveness. 

I would be pleased to respond to any questions you may have. 

[The prepared statement of Inspector General Coleman can be 

found on page 28 of the appendix.] 

Chairman MOORE OF KANSAS. Thank you, Ms. Coleman. And finally, Mr. Rymer, if you would like to testify, you have 5 minutes, 

sir. 

10 

STATEMENT OF JON T. RYMER, INSPECTOR GENERAL, 

FEDERAL DEPOSIT INSURANCE CORPORATION 

Mr. RYMER. Thank you, Mr. Chairman, Ranking Member 

Biggert, and members of the subcommittee. Thank you for the opportunity you have provided us to participate in this very important hearing. We appreciate your interest in the challenges that 

the IGs of the Federal financial regulators face. 

Briefly, I would like to speak for a moment about the condition 

of the banking industry. As you know, there are 8,300 FDIC-insured financial institutions in the U.S. banking system. The FDIC 

is the primary regulator for 5,100 of the State nonmember banks. 

It is important to note that the vast majority of these institutions 

remain viable, notwithstanding the current economic crisis. However, banks have been failing, and we are experiencing a dramatic 

upswing in a number of those failures. In 2008 alone, 25 institutions failed. During the first 4 months of this year, another 29 institutions have failed. In total, this amounts to an over $21 billion 

loss to the Deposit Insurance Fund. 

Next, I would like to talk for a moment about our MLR coverage. 

As I detailed in my written statement, the landscape has not 

changed from the one we described in the letter to Chairman 

Frank we sent back in January 2009. In short, our predictions have 

become reality. The current volume of MLR work and the time and 

resources this work demands puts at risk my Office’s ability to effectively oversee core activities at the FDIC. Expending our scarce 

resources on these reviews also limits our ability to oversee the 

new initiatives that the banking agencies are undertaking. 

My Office of Audits is principally responsible for performing 

MLRs. Each MLR usually involves a team of 2 or 3 auditors and 

takes around 2,000 staff-hours to complete. We have 36 auditors in 

our Office. To supplement the Office of Audits, we have temporarily 

reassigned a number of staff from other OIG component offices to 

carry out our mandatory workload. 

We currently have 20 MLRs underway; we have completed 6, 

and we will issue 3 more this month. At this level, we are at capacity, and assuming no further increase in failures, we can manage 

this workload through September of this year. 

As IG, my first priority is to complete all statutory requirements. 

An equally important priority includes the audit and evaluation 

coverage of the FDIC’s new and expanded programs, which include 

receivership and resolution activity. This activity involves all the 

business processes associated with selling an entity and winding up 

its business. We will be looking at controls FDIC has in place over 

the contracting and legal services functions and the loss share provisions to ensure compliance with all related terms. 

The Temporary Liquidity Guarantee Program is a new program 

that was established to help address unprecedented disruptions in 

the credit markets. Shortly after the program was established, we 

performed, with the use of an independent professional services 

firm, a risk assessment on key aspects of the internal controls of 

the program. 

As part of the TARP’s Capital Purchase Program, the FDIC was 

responsible for processing applications from FDIC-supervised 

banks. We performed a review of the program and found that the 

11 

FDIC had established effective controls for application processing, 

and the Corporation was in compliance with the Treasury’s guidelines. 

We have other work, however, that needs to be done. We believe 

there is a need for audit and evaluation coverage of loan modification programs the FDIC had entered into and oversight of the 

WaMu and IndyMac failures. There will be additional work as well 

on the Legacy Loan Program that is currently being developed. The 

Public-Private Investment Program was announced 6 weeks ago by 

the Department of the Treasury, and the FDIC was tasked with establishing the Legacy Loan Program as part of the Public-Private 

Investment Program. The Chairman of the FDIC has requested 

that we, along with the Special Inspector General for the TARP, review the preliminary control structures that are being designed 

into the program. 

Unfortunately, difficult work decisions have been made and there 

are certain areas of work we are having to defer. 

In conclusion, given our resource limitations, I will continue to 

review and evaluate our work to provide the most appropriate coverage of the FDIC programs and operations while maintaining our 

statutory responsibilities. Based on the number of problem banks, 

we anticipate the number of MLRs required to be completed will 

continue to grow. Depending on the level of this growth, my office 

may not be able to keep up. Considering our other statutory responsibilities and the high-risk activities I have just noted, we are 

challenged to provide sufficient oversight. 

Thank you again, and I look forward to answering any questions 

you may have. 

[The prepared statement of Inspector General Rymer can be 

found on page 42 of the appendix.] 

Chairman MOORE OF KANSAS. I thank the gentleman, Mr. 

Rymer, and we will now turn to members’ questions. I recognize 

myself for 5 minutes. 

While it seems the intent of Congress nearly 2 decades ago was 

to prioritize the work of IGs by putting in place a $25 million 

threshold in material loss reviews, it does not appear that standard 

has kept up with the times and is restricting the ability of our IGs 

to investigate higher priority items. 

Starting with Mr. Thorson, your testimony underscores the need 

to adjust the MLR requirements. You can focus on oversight priorities like the public debt programs, payment systems, and the Office of Thrift Supervision’s regulation or lack of supervision of AIG. 

Would adding flexibility to the MLR—and I think you maybe already answered this in your comments earlier—requirements permit you to do strong oversight of the other priorities as well? 

Mr. THORSON. We included a table in our statement that showed 

the difference it would make in changing the threshold, and I believe from a difference of 16 going back to January of 2007 to 6. 

So it would give us a great deal of flexibility to be able to redirect 

some of our assets to be able to pick up some of the normal audits—I call them normal for what our Department normally would 

be experiencing. So for us, it would make quite a difference. 

Chairman MOORE OF KANSAS. Thank you, sir. Mr. Rymer, do you 

have any comments? 

12 

Mr. RYMER. Yes, sir, I would agree with Mr. Thorson. I think we 

provided a table as well. The table would indicate that raising the 

threshold to $100 million would provide significant relief for us, reducing the number of MLRs required at the moment from 29 to 18. 

At the $400 million, the level that was originally discussed, that 

would put us down to three. 

Mr. Chairman, if I could just go on just a moment and give the 

committee some comfort in the fact that even if the thresholds are 

raised, and noting some of the concerns raised earlier about potentially not investigating fraud in closed banks, let me give you the 

assurance that regardless of whether we are performing an MLR, 

we respond to any suspicious activity, either as entered through 

FinCEN or noted by our bank examiners when a bank closes. So 

those banks, even if they are not subject to an MLR, will certainly, 

if there is suspicious activity or suspected fraud in the bank, be reviewed by our Office of Investigation. 

Chairman MOORE OF KANSAS. Thank you, sir. Ms. Coleman, do 

you have any comments? 

Ms. COLEMAN. Yes. I recognize that in raising the threshold, a 

lot of the banks that the Federal Reserve supervises are generally 

the smaller commercial banks. In fact, about 90 percent of the 

State Member Banks under our jurisdiction are really less than $1 

billion, so clearly, raising the threshold would pretty significantly 

reduce the number of MLRs that we are currently conducting. 

Nevertheless, having the ability to have the resources that we 

have dedicated to that area would really help us in terms of taking 

a more in-depth look at some of the broad areas that we are looking at, the lending facilities and clearly the bank and financial 

holding companies. 

Chairman MOORE OF KANSAS. Thank you. 

Ms. Coleman, someone suggested that given the Federal Reserve’s recent use of emergency 13.3 powers, and the scale of the 

facilities it has established during the financial crisis, Congress 

should eliminate restrictions on the GAO from doing a complete 

audit of the Fed, but others have expressed strong reservations 

about that approach and say that by granting GAO such sweeping 

oversight by the Fed, Congress would be jeopardize the independence necessary for the Fed to conduct monetary policy without fear 

of political pressure. 

I appreciate your testimony, but to get to the heart of this matter, Ms. Coleman, should Congress grant you more oversight authority of the Federal Reserve System perhaps given your oversight 

of the Federal Reserve Banks instead of just the Board? Is your Office better equipped to provide strong oversight while balancing the 

need of the Fed’s independence? 

Ms. COLEMAN. Actually, the Office of Inspector General and GAO 

do share responsibility in certain areas, and I think that is to the 

advantage of the system. I would say that the Inspector General 

for the Board, with the authority that we currently have, is able 

to do quite a bit of oversight regarding Federal Reserve programs 

and operations. We are able to look at the Fed’s oversight at the 

Reserve Banks and go out and collect the information that we 

need. 

13 

Nevertheless, you are correct in pointing out that we are not able 

to directly go out to audit a Federal Reserve Bank, and I certainly 

would be willing to spend some time with the committee to talk 

about possible options in that area. 

We do have one restriction on our jurisdiction, which I would 

also like to bring to your attention. The Chairman can restrict our 

work in certain areas in policy and policy deliberations, if he determines it is necessary to prevent the disclosure of deliberations or 

policy decisions that would significantly harm the economy or market behavior. But if that restriction is used, the Chairman would 

have to send a letter detailing the reasons to the Inspector General, who would then forward the letter to Congress. So I think 

there are some good protections that would come into play. 

Chairman MOORE OF KANSAS. Thank you. 

I recognize the vice chair, Mrs. Biggert, for 5 minutes. 

Mrs. BIGGERT. Thank you, Mr. Chairman. I think this is for all 

of you, my first question. What are the potential negative ramifications, if any, of increasing the MLR trigger? It seems like most testimony mentions that with the lower threshold level reviews they 

result in no significant findings beyond what was found at closing 

of the institution, but why did the institutions close in the first 

place and was it a failure of management, a failure of regulators 

to initiate prompt corrective action measures? What would be the 

negatives? 

Mr. THORSON. As long as we have the flexibility to look at any 

of the bank failures regardless of the loss to the fund, I don’t really 

see any negatives. If it were precluding us from doing a certain 

MLR or one that for some reason stood out to us as important, then 

that would be a big negative. But we will still have the ability and 

the right to go in and do one any time. So I don’t really see that 

there is any negative in raising this at all. It just becomes more 

our discretion. 

Mrs. BIGGERT. Yes. So it is kind of if you get the feeling that 

there is something wrong here that you need to investigate, you 

would have the flexibility? 

Mr. THORSON. Right. 

Mrs. BIGGERT. Inspector Coleman, do you have any other— 

Ms. COLEMAN. I think that the proposal that the committee presented does include some provisions that would involve taking a 

look at all failures at a certain level of review, which I think would 

give us enough information to make a determination as to whether 

or not the failure was as a result of perhaps the conditions in that 

particular geographic area; for example, a concentration in commercial real estate or if there were other issues. If we see indications of fraud perhaps or other areas that raise our concern, we 

certainly would feel free to begin a review at that point. 

Mrs. BIGGERT. Inspector Rymer? 

Mr. RYMER. Yes, ma’am. I would agree with my colleagues that 

we do have the discretion to conduct an evaluation or an audit of 

any activity of the FDIC. And as I mentioned a moment ago, I 

think we would certainly look at, at a very high level at least, 

every failure to determine if there were unique circumstances; for 

example, if there were fraud involved in the institution, particularly by senior officials in the bank. 

14 

Another example of unusual circumstances in the failure, as Ms. 

Coleman mentioned, could include concentrations of particular 

types of lending, out-of-territory lending, or generating wholesale 

deposits. A number of the issues, though, we really have already 

looked at and gathered information from the 20 MLRs that we 

have ongoing. Thus far, we have really learned a lot, particularly 

as to the causes of some of the small bank failures. 

Mrs. BIGGERT. Well, are the existing laws and regulations missing the mark? Are they too prescriptive and not giving regulators 

enough flexibility to shift resources and adapt to market conditions? There is no problem? You have the flexibility now? 

Mr. RYMER. Yes, ma’am, we do. We do. Whether it is an MLR 

or other programs that the FDIC is involved in, I have the flexibility to audit or evaluate any of those programs. 

Mrs. BIGGERT. And you think that the regulators are expert 

enough? You know, when we look back and with all of these things 

that we have seen, particularly with hedge funds and the credit default swaps, we kind of wonder with all these new products whether the regulators were expert enough. Are they expert enough now 

to be able to judge whether there is a problem or if there is any 

corruption? 

Mr. THORSON. One of the things that we want to do is—we look 

at the MLRs as really they are looking backwards in time. And one 

of the things that would address what you are talking about is trying to make sure that they begin to take on a more perspective nature, that the regulators basically start to look for emerging risks 

in financial markets and other products. And this is really what 

happened here with the subprime mortgage crisis, is that we would 

have liked to have been involved in looking and seeing how they 

are doing their work currently so that we know whether they are 

better prepared to head off these kinds of risks. 

Mrs. BIGGERT. Do you think we need to look at the controls and 

concentrations of certain types of loans, like the commercial mortgage loans that were mentioned in today’s Wall Street Journal? 

Anybody had time to see that? 

Mr. RYMER. Yes, ma’am, I can speak to that. I think we have 

seen concentrations in the half dozen MLRs we have completed. We 

will be doing subsequent work on identifying loan concentrations, 

particularly in commercial real estate development loans and some 

of the interest reserve processes that have been going on, in particular in the de novo banks, or the new banks. 

In my view, although we haven’t completed the work yet, there 

are certainly indications that concentrations in young banks or de 

novo banks can lead to problems. And not just on the loan side, but 

we also see similar things when generating wholesale deposits and 

allowing banks to grow very rapidly without market deposits, and 

then those deposits essentially being used to fund high concentrations in commercial loans. That is something we definitely need to 

look at. 

Mrs. BIGGERT. Thank you. I yield back. 

Chairman MOORE OF KANSAS. Thank you. We have been advised 

that votes will be called sometime between 2:45 and 3:00 p.m., and 

I believe there were 3 votes. I was saying to the members that I 

15 

would like us to go for another 7 or 8 minutes after votes are called 

and that will give us plenty of time still to get over there. 

Mr. Lynch, you are recognized for 5 minutes. 

Mr. LYNCH. Thank you, Mr. Chairman. 

Mr. Thorson, one of the other hats I wear in Congress is I am 

the co-chair of the Task Force on Terrorist Financing and Nonproliferation, so I work directly with FinCEN, the Financial Crimes 

Enforcement Network. In my humble opinion, those folks are doing 

some of the most wonderful work on behalf of our country. They 

get very little credit for the work that they do. I work with them 

in Afghanistan, I work with them in Jordan, helping to stand up 

the new financial intelligence unit there. I work with them; they 

just cut the ribbon on the new financial intelligence unit in Morocco. Those folks are doing unbelievable work on behalf of this 

country. I have regularly tried to increase funding to the Financial 

Crimes Enforcement Network because I see the work that they are 

doing. 

How does this—in your position, do you get to review their contributions? I know there are some changes here that you have 

looked at, some deferments that have had to occur. Is this effort 

diminishing the ability of FinCEN to do its job? 

Mr. THORSON. As I mentioned, we have pretty much tabled everything other than MLRs in our office, specifically with FinCEN 

and dealing with their responsibilities under the Bank Secrecy Act 

and the PATRIOT Act. FinCEN relies a lot on Treasury and other 

non-Treasury agencies to do their work. We want to be able to take 

a look at what they are doing and how they are doing it. Previous 

audits and even congressional hearings have shown that there 

have been regulatory gaps in the detection of violations and also 

enforcement action against financial institutions for Bank Secrecy 

Act and related violations. We would like to be involved in that. We 

would like to pick up that work that we have sort of left behind 

for a while. 

Mr. LYNCH. That would be helpful, I think, not only to FinCEN, 

but also to some of the other responsibilities within Treasury, you 

know, the opposite of thrift supervision and some others. There is 

a real patchwork of coverage and there are some gaps as you have 

noticed. I am just very, very concerned about resources being so 

limited in that very important area. If we don’t get the suspicious 

activity reports, if we don’t get the cash transaction reports, and 

if those reports aren’t analyzed, as well as all the other data we 

get in, that is really the basis of a lot of operations that choke-off 

or at least limit the ability of terrorists to use legitimate financial 

systems to conduct their business, and I think that is a huge issue 

for us. 

So I just want to sound the alarm on behalf of FinCEN that if 

they are not going to get the money they need to do their job, then 

it may be happening away from the spotlight— 

Mr. THORSON. Right. 

Mr. LYNCH. —but it greatly affects—you know, it will be one of 

those situations where after something happens, we will read about 

the fact that this system wasn’t allowed to conduct the oversight 

that it was mandated to because of unbalanced funding priorities. 

So I am worried about this. 

16 

Mr. THORSON. Your point is a very good one, and people could 

misunderstand as well. You know, why are you looking at failed 

banks as opposed to things like you are describing that clearly relate to anti-terrorism? We have to prioritize the office based on 

those things that are mandated, such as the financial audit of the 

Department, those kind of things we have no choice in. 

Mr. LYNCH. Yes. 

Mr. THORSON. The other is that, of course, in doing those things, 

we are not there to strictly just to try and find fault with them. 

The truth is in everything we do and all the bureaus that we look 

at we are trying to help the Department and to be a positive influence in their work. So it really has two different aspects of it. But 

clearly, the prioritization is one that we feel is a bit out of kilter 

right now because we just don’t have a choice in what it is we are 

going to do. 

Mr. LYNCH. I appreciate that, and I am not blaming anyone. I 

realize if there is anybody to blame, it is probably us up here. We 

have priorities that are set sometimes by public opinion or the 

newspaper headlines, and so I appreciate the struggle that you are 

having. 

Thank you, Mr. Chairman. I yield back. 

Chairman MOORE OF KANSAS. Thank you. The gentleman from 

New York, Mr. Lee, is recognized for 5 minutes. 

Mr. LEE. Thank you, Mr. Chairman. I appreciate that you have 

a monumental task ahead of you in terms of trying to protect the 

taxpayer. It is one of the reasons I am here as well. I came from 

the private sector, and I look at these numbers sometimes and my 

concern is I think people get numb to them because at a $25 million threshold, that is an awful lot of money, and to actually create 

that kind of money as a profit itself is astronomical. To make 5 percent net profit on $25 million, you have to have $500 million in 

sales. That is an awful lot of money. And my concern here is we 

are now talking about raising this threshold before you look at an 

MLR to $400- or 500 million. I just frankly think that is too high 

a threshold. If we look at the inflation rate over the last 16 or 17 

years, even using 4 percent, I can’t up come up with a number 

higher than potentially $100 million that you would even look at. 

I would like to hear some of your basis. My concern is that we keep 

throwing good dollars after bad. And I know you are short staffed 

here, but I would like to hear your thoughts if you are short 

staffed. Do you use a different method; instead of using 2,000 hours 

to go after or to look at a bank failure, do you use a lesser amount 

if it is a smaller dollar amount? If it is $25 million, do you use 

1,000 hours? I mean, trying to get creative on the approach? 

And also, there was a comment from Mr. Rymer in terms of private auditors for work currently being done by the MLR team; 

there are concerns due to potential conflicts of interest. But I would 

be curious to hear if you exhausted all opportunities to look outside 

of potentially even regional firms that may not have a conflict of 

interest rather than to continue to grow the Federal ranks here. 

So with that, maybe Mr. Rymer could start. 

Mr. RYMER. Yes, sir. Those are very good questions. The $300- to $500 million figure was arrived at based on GAO’s determination of materiality within the Deposit Insurance Fund. That numVerDate Nov 24 2008 16:30 Aug 25, 2009 Jkt 051586 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K:\DOCS\51586.TXT TERRIE
17 

ber was $500 million. So that is where the starting point came 

from. 

But let me explain a little bit about my reluctance to use—I 

think you really asked two questions. One was the 2,000 hours, 

and are there opportunities to perform an ‘‘MLR lite.’’ Yes, sir, we 

explored that actually when we started with these. The first one 

or two were in the 2,500 to 3,000 hour range. So we are very conscious of trying to do them more efficiently and more effectively. 

We have experimented with doing these, rather than GAO yellow 

book audits, with doing them in our Office of Evaluations to see if 

we can squeeze down the time. And I think we can improve, but 

I don’t really see, given yellow book requirements and professional 

standards, getting much below 1,500 hours with those. 

Your second question was the potential use of perhaps smaller 

regional accounting firms. That is something we have considered 

and there are opportunities even to use other auditing agencies 

within the Federal Government that are not IGs that we can use 

as well. So we believe largely, particularly the bigger banks, that 

determining the cause of failure is something that I feel more comfortable having government auditors do, but there are opportunities for us to do some of the other work with contract firms, and 

we are doing that. 

Mr. LEE. What do you think is a minimal level you would be able 

to work with on an MLR standpoint, a threshold? 

Mr. RYMER. Minimal level, anything would be an improvement, sir, but I think I would feel comfortable with anything around $200 

million. 

Ms. COLEMAN. I would just like to add on to what Inspector General Rymer noted. 

In our Office, we have, as I mentioned, three MLRs and we are 

just adding on a fourth, and we have a relatively small audit staff. 

What we have done is to try and keep our teams fairly small, only 

2 or 3 people. We are actually leveraging them to work on a couple 

of MLRs at one time. 

In addition, I compliment Tony Castaldo, our Assistant Inspector 

General for Inspections and Evaluations. He and his team have 

come up with, I think, a pretty good way to array the data, to gather information, so that we can look at it fairly quickly, look across 

the data, and get what we think are very good data points that we 

need. 

Nevertheless, even with those efficiencies, we are still finding 

that if the pace of these MLRs continues, I think that it will be increasingly difficult for us to carry on our other statutory work 

while also completing these material loss reviews. 

And in terms of the actual threshold, a minimum threshold, because a lot of our State Member Banks that we supervise are relatively small, I would agree with Inspector General Rymer that 

$200 million, I think, would be a reasonable threshold, and coupled 

with the fact that we would still look at closures below that threshold when we feel it is warranted. And we actually have, in our 

past, looked at a very small bank, but we did so because we 

thought it was warranted by the amount of the failure, even for a 

small bank, and the fact that fraud was very much involved. 

Chairman MOORE OF KANSAS. The gentleman yields back. 

18 

Next, I will recognize Mr. Driehaus for 5 minutes. 

Mr. DRIEHAUS. Thank you, Mr. Chairman. 

Just to follow up on the conversation that we are having regarding this potential ‘‘MLR Lite’’ issue, you know, whether the threshold is $300 million or $200 million, could we identify certain characteristics that might be evident in a cursory review that would indicate that further review needs to take place? 

I guess some of the concern that I am hearing and when I look 

at raising the threshold is that there is a tremendous amount of 

subjectivity involved, in terms of whether or not we go forward 

with the full MLR if the loss is below the threshold. And I guess 

I am wondering, is there some way where we can add some objectivity to this by identifying certain characteristics in the language 

that would trigger a more thorough review? 

So I realize that you still have the discretion to conduct material 

loss reviews if, in fact, it falls below the threshold. But are there 

characteristics that might be present that we could be more explicit 

about in the language in the bill as we move forward? 

Ms. COLEMAN. I would almost encourage the committee to consider having us take a risk-focused approach. That is something 

that we are very familiar with on a lot of our audit work and inspections and evaluations, where you take an initial look at any 

topic and, based on your knowledge and experience in that area, 

identify factors that you think would point to potential areas that 

warrant further review. And I think that a lot of our auditors and 

evaluators are all experienced in that type of model and could 

work, you know, fairly quickly to identify areas. 

So, from that perspective, that would allow us to look at things 

that one might not normally see when you are looking at these reviews, so it kind of gives you a broader definition of areas. It could 

include any factors that seemed out of the norm for an institution 

of that particular size. 

Mr. DRIEHAUS. I assume that is what is done, you know, in order 

to determine whether or not an institution falling below the threshold is worthy of a full investigation. I assume that type of analysis 

is already done. 

I guess the question is, how do we make that a little less subjective and a little more objective when it comes to the criteria that 

we put forward in legislation and whether or not that is necessary? 

Do you prefer the flexibility? Do you prefer the subjectivity? Or 

would you prefer more specific guidelines along the lines of, you 

know, the characteristics involved in a risk-focused review? 

Mr. THORSON. I think we would prefer the flexibility, but I will 

give you, I hope, what is a pretty good reason for that. 

The people who do these and who go into these banks and look 

at their documents, the supervisory memo, the legal memo, etc., 

and review them, they are really very good at this. So, to give us 

the flexibility of doing that helps a great deal, because the people 

who are going to be actually doing the work are not going to miss 

much, is what I am really saying. And we would be able to trust 

their judgment on whether or not there is something here. 

And that would be—really, the depth of the review is going to, 

of course, depend upon the complexity of how the bank was structured, how the loss shapes up. But the situation really becomes one 

19 

of the ability of the people who are actually doing the work to recognize what it is they are looking for, to spot something that would 

get their attention, and then, no matter what the amount of the 

loss was, above or below the threshold, we would be making decision to go in and look at it. 

And that is a very nice convenience to have. But you should also 

feel some reliance on the fact that the people who do this work are 

really excellent at what they do. 

Mr. RYMER. Yes, sir, if I could just offer one suggestion. Rather 

than becoming overly prescriptive, perhaps, with something that is 

more rules-based, it may be an option in any contemplated legislation that you have something along the idea that the IG be required to report to the Congress why they elected not to do a review. 

That might be something that we would incorporate in, say, our 

semiannual reports by listing the bank that failed along with the 

IG’s rationale for electing not to do a review of that failure. 

Mr. DRIEHAUS. Thank you, Mr. Chairman. 

Chairman MOORE OF KANSAS. Thank you. 

And next, Mr. Paulsen is recognized for 5 minutes. 

Mr. PAULSEN. Thank you, Mr. Chairman, and thank you, also, 

for holding this hearing. 

I know the folks on the panel before us play a very, very important role in terms of the importance of the current financial crisis 

that has been gripping the country, with your powers and review. 

I wanted to just ask a couple of questions. Mr. Thorson, your Office has conducted some of the initial audit work for the TARP program prior to the Special Inspector General for TARP being appointed to oversee the program. 

Can you tell the committee anything about how you are coordinating now with SIGTARP, that Office, in terms of ensuring effective oversight of the TARP program in general and some of the 

more complex components that might apply to that? 

Mr. THORSON. I am sorry. Are you asking about the coordination 

between the SIGTARP and our Office? Is that what you are asking? 

Mr. PAULSEN. Correct. 

Mr. THORSON. For the most part, I think it is pretty well-defined. 

I think there are areas where it gets a little bit cloudy. And, for 

our part, we feel that when it comes especially to the area of whatever—the Department itself, the employees, the regulators, and 

those kind of things, and the bureaus that we oversee, I would say 

that is a fairly clear line. 

Part of it gets—when I mention it gets a little cloudy, it is only 

because of the fact that one jurisdiction is defined by a block of 

money and our jurisdiction is defined by the Department that we 

serve. But, for the most part, it works fine. 

Mr. PAULSEN. Okay. And then just to follow up a little bit, too, 

when auditing now, have you done anything with the Office of 

Thrift Supervision in regard to their admitted failed oversight of 

the AIG Financial Products subsidiary? 

Mr. THORSON. I am sorry. What was the last part? 

20 

Mr. PAULSEN. Just in terms of oversight with AIG, have you 

done anything with regard to the Office of Thrift Supervision, with 

regard to their admitted failed oversight of AIG in general? 

Mr. THORSON. Well, one of the things that I mentioned earlier 

was we would like to be able to look at, for instance, OTS’s role 

and the piece of AIG that they oversee, as well as something—you 

know, the large ones like GE Capital. But we have not been able 

to do that at this point. 

Mr. PAULSEN. Okay. Would you plan on conducting or undertaking an audit, then, in regard to AIG in particular? 

Mr. THORSON. Depending on how our workload shapes up, that 

is definitely something we would like to do and that has been 

planned. 

But, again, as I mentioned before, a lot of this work, especially 

MLRs, is mandated, and we really have no real flexibility in how 

we do them. Because, right now, it is pretty much taking all of the 

audit resources we have. 

Mr. PAULSEN. Thank you. 

And, Ms. Coleman, I was going to ask too—Neil Barofsky, the 

SIGTARP Inspector General, essentially has reported that several 

components of that program do pose significant risks for waste, 

fraud, and abuse. Do you think the recently created Fed holding 

companies, in general, the lending facilities, could also pose any 

significant risks for waste, fraud, and abuse that have not been discovered? 

Ms. COLEMAN. Well, first of all, I did want to mention that we 

are coordinating with SIGTARP on several fronts, including the Inspector General Council for TARP. We also have joined forces with 

him in creating the TALF Task Force, which is a proactive effort 

to get ahead of any fraud, waste, and abuse in one of the Federal 

Reserve’s largest programs, which is the Term Asset Liquidity Facility, the TALF. 

In addition, I would say that we are currently conducting fairly 

high-level reviews of all of the Federal Reserve’s lending facilities. 

This is really to gather information to identify specific areas of 

risk. So I would probably be in a better position after we complete 

some of that work to respond to your question about the lending 

facilities as well as the bank and financial holding company area. 

Because we are, in part, with the other mandated work that we 

have ongoing and the fact that we are working in the MLRs, we 

are looking at these areas at a fairly high level, with the intent of 

getting additional resources and zeroing in more to look at the internal controls more specifically. 

Mr. PAULSEN. Thank you. 

And I will yield back in just a second, but, Mr. Chairman, I want 

to thank you for holding this hearing, because I think as much 

flexibility as we can provide to these Inspectors General is really 

critical to ensuring not only the confidence of consumers and those 

in the financial sector but also of getting down to the real nuts and 

bolts of where some of the problems lie. 

Thank you. I yield back. 

Chairman MOORE OF KANSAS. Thank you, sir. 

And finally, Mr. Grayson, you have 5 minutes, sir. 

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

21 

Inspector General Coleman, you are the Inspector General for 

the Federal Reserve, right? 

Ms. COLEMAN. That is correct. 

Mr. GRAYSON. Okay. Have you done any investigations concerning the Federal Reserve’s role in deciding not to save Lehman 

Brothers, which led to shockwaves that went through the entire financial system? 

Ms. COLEMAN. In that particular area—you know, I don’t generally comment on specific investigations. But we do not currently 

have an investigation in that particular area. 

Mr. GRAYSON. All right. What about the $1 trillion-plus in expansion of the Federal Reserve’s balance sheet since last September? 

Have you conducted any investigations regarding that? 

Ms. COLEMAN. Right now we have a—we call it a ‘‘review.’’ The 

term ‘‘investigation’’ may have different connotations. So we actually are conducting a fairly high-level review of the various lending 

facilities collectively, which would include the TALF, a variety of 

the different programs that are in process. We are looking at them 

at a fairly high level to identify risk. 

Mr. GRAYSON. Well, I understand that, but we are talking about 

events that started unfolding 8 months ago. Have you reached any 

conclusions about the Fed expanding its balance sheet by over $1 

trillion since last September? 

Ms. COLEMAN. We have not yet reached any conclusions. 

Mr. GRAYSON. Do you know who received that money? 

Ms. COLEMAN. For the—? We are in the process right now of 

doing our review, and— 

Mr. GRAYSON. Right. But you are the Inspector General. My question is specifically, do you know who received that $1 trillionplus that the Fed extended and put on its balance sheet since last 

September? Do you know the identity of the recipients? 

Ms. COLEMAN. I do not. No, we have not looked at that specific 

area at this particular point on those reviews. 

Mr. GRAYSON. What about Bloomberg’s report that there are trillions of dollars in off-balance-sheets transactions that the Federal 

Reserve has entered into since last September? Are you familiar 

with those off-balance-sheet transactions? 

Ms. COLEMAN. You know, I think it may be important at this 

point, too, just to bring up a certain aspect related to our jurisdiction and just to clarify, perhaps, some of my earlier comments. 

We are the Inspector General for the Board of Governors, and we 

have direct oversight over Board programs and operations and are 

also able to look at Board-delegated functions to the Reserve Banks 

as well as the Board’s oversight and supervision of the Reserve 

Banks. We do not have jurisdiction to directly go out and audit Reserve Bank activities specifically. 

Nevertheless, in our lending facilities project, for example, we are 

looking at the Board’s oversight over the program and to the extent 

that extends out to the Federal Reserve Bank of New York. 

Mr. GRAYSON. Well, I have a copy of the Inspector General Act 

here in front of me. And it says, among other things, that it is your 

responsibility to conduct and supervise audits and investigations 

relating to the programs and operations of your Agency. 

Ms. COLEMAN. That is correct. 

22 

Mr. GRAYSON. So I am asking you, if your Agency has, in fact, according to Bloomberg, extended $9 trillion in credit, which, by 

the way, works out to $30,000 for every single man, woman, and 

child in this country, I would like to know, if you are not responsible for investigating that, who is? 

Ms. COLEMAN. We, actually—we have responsibility for the Federal Reserve Board’s programs and operations, audits—to conduct 

audits and investigations in that area. 

In terms of who is responsible for investigating—would you mind 

repeating the question one more time? 

Mr. GRAYSON. What have you done to investigate the off-balancesheet transactions conducted by the Federal Reserve, which, according to Bloomberg, now total $9 trillion in the last 8 months? 

Ms. COLEMAN. I will have to look specifically at that Bloomberg 

article. I don’t know if I have actually seen that particular one. 

Mr. GRAYSON. That is not the point. The question is, have you 

done any investigation or auditing of off-balance-sheet transactions 

conducted by the Federal Reserve? 

Ms. COLEMAN. At this point, we are at the very—we are conducting our lending facility project at a fairly high level and have 

not gotten to a specific level of detail to really be in a position to 

respond to your question. 

Mr. GRAYSON. Have you conducted any investigation or auditing 

of the losses that the Federal Reserve has experienced on its lending since last September? 

Ms. COLEMAN. We are still in the process of conducting that review. Until we actually, you know, go out and gather the information, I am not in a position to really respond to the specific question. 

Mr. GRAYSON. So are you telling me that nobody at the Federal 

Reserve is keeping track on a regular basis of the losses that it incurs on what is now a $2 trillion portfolio? 

Ms. COLEMAN. I don’t know if—you are telling me that there— 

you are mentioning that there are losses. I am just saying that we 

are not—until we actually look at the program and have the information, we are not in a position to say whether there are losses 

or to respond in any other way to that particular point. 

Mr. GRAYSON. Mr. Chairman, my time is up, but I have to tell 

you honestly, I am shocked to find out that nobody at the Federal 

Reserve, including the Inspector General, is keeping track of this. 

Chairman MOORE OF KANSAS. I thank the gentleman. 

And I want to thank our witnesses for the testimony here today. 

This hearing gives us a better sense of the oversight work being 

done by these Inspectors General and the importance of their work 

to expose waste, fraud, and abuse. We need to address the concerns 

discussed today, of the concern on MLR requirements and how to 

improve it for stronger oversight. 

23 

The Chair notes that some members may have additional questions for this panel. And, sir, if you have additional questions, you 

are certainly welcome to submit those in writing. Without objection, the hearing record will remain open for 30 days for members 

to submit written questions to these witnesses and to place their 

responses in the record. 

The hearing is adjourned, and I thank the witnesses. 

[Whereupon, at 3:15 p.m., the hearing was adjourned.] 

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A P P E N D I X 

May 5, 2009 

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