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DOES THE DODD-FRANK ACT 

END ‘‘TOO BIG TO FAIL?’’ 

HEARING 

BEFORE THE

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS 

AND CONSUMER CREDIT 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

JUNE 14, 2011 

Printed for the use of the Committee on Financial Services 

Serial No. 112–37 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

LARRY C. LAVENDER, Chief of Staff 

(III) 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

SHELLEY MOORE CAPITO, West Virginia, Chairman 

JAMES B. RENACCI, Ohio, Vice Chairman 

EDWARD R. ROYCE, California 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JEB HENSARLING, Texas 

PATRICK T. MCHENRY, North Carolina 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

MICHAEL G. GRIMM, New York 

STEPHEN LEE FINCHER, Tennessee 

CAROLYN B. MALONEY, New York, 

Ranking Member 

LUIS V. GUTIERREZ, Illinois 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

RUBE ́ N HINOJOSA, Texas 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

NYDIA M. VELA ́ ZQUEZ, New York 

GREGORY W. MEEKS, New York 

STEPHEN F. LYNCH, Massachusetts 

JOHN C. CARNEY, JR., Delaware 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

June 14, 2011 .................................................................................................... 1 

Appendix: 

June 14, 2011 .................................................................................................... 53 

WITNESSES 

TUESDAY, JUNE 14, 2011 

Barr, Hon. Michael S., Professor of Law, University of Michigan Law School .. 40 

Krimminger, Michael H., General Counsel, Federal Deposit Insurance Corporation (FDIC) .................................................................................................... 7 

Lubben, Stephen J., Daniel J. Moore Professor of Law, Seton Hall University 

School of Law ........................................................................................................ 38 

Romero, Christy, Acting Special Inspector General, Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) ............... 9 

APPENDIX 

Prepared statements: 

Barr, Hon. Michael S. ...................................................................................... 54 

Krimminger, Michael H. .................................................................................. 64 

Lubben, Stephen J. ........................................................................................... 82 

Romero, Christy ................................................................................................ 86 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Maloney, Hon. Carolyn: 

Press statements on Moody’s decision from Moody’s Investors Service, 

The New York Times, and The Wall Street Journal ................................. 99 

(1) 

DOES THE DODD-FRANK ACT 

END ‘‘TOO BIG TO FAIL?’’ 

Tuesday, June 14, 2011 

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

AND CONSUMER CREDIT, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The subcommittee met, pursuant to notice, at 12:05 p.m., in room 

2128, Rayburn House Office Building, Hon. Shelley Moore Capito 

[chairwoman of the subcommittee] presiding. 

Members present: Representatives Capito, Renacci, Royce, Manzullo, Jones, McHenry, Pearce, Westmoreland, Luetkemeyer, 

Huizenga, Duffy, Canseco, Grimm, Fincher; Maloney, Gutierrez, 

Watt, McCarthy of New York, Miller of North Carolina, Scott, 

Meeks, and Carney. 

Ex officio present: Representative Frank. 

Chairwoman CAPITO. This hearing will come to order. I want to 

thank everybody for coming this morning. I know there is a lot of 

interest in the hearing and many members have opening statements, so I will try to limit my remarks in the spirit of expediency. 

My ranking member, Mrs. Maloney, is on her way so we are going 

to go forward with our opening statements, and I am sure she will 

be here shortly. 

During the financial crisis of 2008, Federal regulators were faced 

with the recurring challenge of determining whether or not a financial institution was so interconnected in the financial system that 

its failure would lead to a ripple effect in the financial markets. Regardless of the outcome for each individual institution, in the 

months following the crisis, there was considerable agreement that 

we should end the practice of the government picking winners and 

losers. The financial regulatory reform debate of 2009 and 2010 

provided a forum for this change, but I believe it had a missed opportunity for Congress, the large institutions continue to grow, and 

I feel that we have done nothing but further embed the idea of an 

institution being ‘‘too big to fail.’’ 

I know Mr. Krimminger and his colleagues at the FDIC fervently 

believe that the Dodd-Frank Act ends ‘‘too big to fail,’’ and we will 

hear his testimony on that. But I am skeptical as to whether or not 

the markets will share his view. The credit rating agencies, 

Moody’s and Standard & Poor’s, have both indicated they are taking into account the prospect of future government support when 

rating the largest institutions. If these institutions receive a credit 

rating advantage over smaller competitors because they have been 

2 

designated as systemically significant, then we have done nothing 

to resolve the root cause of the financial crisis. The big institutions 

will continue to get bigger, and excessive risk-taking will return 

with the expectation of a government bailout. 

I look forward to learning our witnesses’ thoughts on the process 

for designating an institution systemically significant, and unfortunately, I don’t think we really know who is systemically significant 

until the next crisis is upon us, and it will then be up to the new 

regime set forth for resolving these institutions in Dodd-Frank. 

The proponents of the Orderly Liquidation Authority (OLA) now 

granted to the FDIC argue that the new regime ends government 

bailouts. What they also fail to mention is that the FDIC has the 

authority to borrow funds from the Treasury once the FDIC is appointed the receiver of the failed institution. 

Even if the money is returned to the taxpayer, this still sends 

the message that the government will serve as a backstop. I know 

that Chairman Bair sincerely believes that these new powers effectively end ‘‘too big to fail,’’ and I sincerely hope that she is correct. 

We must all work together to ensure that the message is clear from 

the corner suites to trading desks, account for risk accordingly, and 

there will be no government bailout. 

I would now like to recognize the ranking minority member, the 

gentlelady from New York, Mrs. Maloney, for 4 minutes for the 

purpose of making an opening statement. 

Mrs. MALONEY. I thank the gentlelady from West Virginia for 

granting me the time and for calling this very important hearing. 

As the gentlelady said, we faced an incredible financial crisis, 

and we really, our regulators really had only two options and neither of them were very good. When large complex financial institutions had, or if their financial security was threatened, they could 

either fail, which happened with Lehman, or they could be bailed 

out, which happened with AIG. Neither alternative was a good one. 

And without the tools to have an orderly wind-down, without 

these tools, Treasury was unable to protect the economy as a 

whole. When it became clear that AIG Financial Products was 

going to fail, there was no choice but a taxpayer-funded bailout, or 

to just let it fail, which many thought would be too disruptive to 

our economy. 

I think we have forgotten how close we came in late 2008 to a 

complete financial collapse. Each of the largest financial institutions confronted their own demise in an unprecedented way, and 

for the most part, the regulators’ hands were tied. 

With the enactment of Dodd-Frank last year, we changed that. 

We gave the regulators the tools they need to act swiftly and efficiently if or when there is another crisis. 

We created the Financial Stability Oversight Council which fosters collaboration among the banking regulators to spot threats to 

our financial security before they create systemic risk, and we created an orderly liquidation process similar to what the FDIC already has for the banks it regulates. And by all accounts, the FDIC 

acted swiftly and effectively in many cases. That will allow a failing institution to wind down and its assets to be distributed to its 

creditors in a way that does not take down the entire financial system. 

3 

FDIC Chairman Sheila Bair testified before the subcommittee at 

the end of May, as she prepared to leave her position this summer. 

Her testimony outlined the conditions that the financial system 

faced leading up to the crisis, including excessive leverage, misaligned incentives in financial markets, gaps in the regulatory 

structure, and the undermining of market discipline due to ‘‘too big 

to fail.’’ 

She further testified that she believes the Dodd-Frank Act, if 

properly implemented, ‘‘will not only reduce the likelihood of future 

crises, but it will provide effective tools to address large company 

failures when they do occur without resorting to taxpayer supported bailouts or damaging the financial system input.’’ 

And just yesterday, Moody’s indicated that it might downgrade 

the investment ratings of the largest financial institutions because 

it believes it is clear that the government will no longer bail them 

out. 

I would like to ask unanimous consent to place in the record 

press statements on Moody’s decision. 

Chairwoman CAPITO. Without objection, it is so ordered. 

Mrs. MALONEY. There is a great deal of work that needs to be 

done to take the Dodd-Frank tools and build a framework that will 

be there for the system when the next financial crisis hits. It is 

very much a work in progress. And as we approach the 1-year anniversary of the signing of the Dodd-Frank Act, I do think it is important to take a look at how far we have come since the financial 

crisis, but still be aware of the great deal of work that needs to be 

done. 

I thank the chairwoman for calling this hearing, and, of course, 

I welcome our panelists today and thank you very much for being 

here. 

Chairwoman CAPITO. Thank you. I would like to recognize Mr. 

Royce for 1 minute for the purpose of an opening statement. 

Mr. ROYCE. Thank you, Madam Chairwoman. 

This should get our attention, the top 10 financial firms today account for 64 percent of the total assets. That is up from 25 percent 

in 1990. And because of their implicit government support, or the 

anticipation of a backstop, many of these firms benefit from lower 

borrowing costs than they would otherwise have. The FDIC, I 

think, estimates that at 100 basis points, so it is significant. And 

by definition, this implicit subsidy is going to continue to erode 

market discipline until we do something about it, and that is going 

to further weaken our financial system. 

We have a problem with Dodd-Frank. The truth of the matter is, 

in times of crisis, regulators are always going to err on the side of 

more intervention and more bailouts. The Orderly Liquidation Authority under Dodd-Frank does little more than facilitate this process. And as a result, ‘‘too big to fail’’ not only lives on, it is further 

compounded. 

So I hope we take steps to correct this failure in the coming 

months and reinstate market discipline by revisiting this issue. 

Thank you. I yield back. 

Chairwoman CAPITO. Thank you. 

I would like to recognize the ranking member of the full committee, Mr. Frank, for 3 minutes. 

4 

Mr. FRANK. Thank you, Madam Chairwoman. 

For people who do not fully understand what a self-fulfilling 

prophecy is, pay clear attention to this hearing because you will 

hear people try to do one. They will argue that we are going to continue to bail out big institutions and then complain that people perceive that we are. 

In fact, let’s go to the hard record. The argument is that being 

considered systemically significant confers on a financial institution 

an advantage that will translate to lower borrowing costs because 

that institution will be seen as immune from failure. 

What do the institutions think? Every single large financial institution thinks that is dead wrong. I have to say, I and some others 

have been critical of some of our large financial institutions for 

being a little bit too self-interested at times. But apparently, some 

of my Republican colleagues think they are the most selfless people 

in the world, they are 9 Mother Teresas or 10 or 12 or however 

many. Why? Because according to some of the Republicans, the bill 

confers on these large financial institutions a great benefit of being 

considered ‘‘too big to fail.’’ And every single one of them is fighting 

against it. 

Apparently, this is a gift that no one wants. The reason, of 

course, is very clear. Before you would ever get to the point of 

being faced with dissolution, not resolution, in fact, but dissolution 

as the bill required before a penny can be spent on your behalf, the 

firing of the CEO, the wiping out of the shareholders, you are subject to much tougher regulation. And what the financial institutions are saying is the prospect of the tougher regulation that 

would be mandated by this bill as it is carried out by the regulators 

who helped write it and who will certainly be carrying it out would 

do away with any perceived advantage. And it is for that reason, 

as the gentlewoman from New York the ranking member, noted, 

that Moody’s is now beginning to get one right, not always, I must 

say, Moody’s record, but Moody’s is starting to get it right, and 

they are saying, no, they are not ‘‘too big to fail.’’ 

And, by the way, those who say there will be a bailout do not 

seem to me to have been present in the United States Congress in 

the past few years. Here is what they are predicting. The law says 

that if one of these institutions cannot meet its obligations despite 

having been subject to much tougher capital controls etc., then the 

institution is dissolved. That is where the death panels are. And 

the shareholders are wiped out, the CEO is fired, and the institution no longer exists, and the regulators may, at that point, the 

FDIC, pay off some of the debts if it is necessary to prevent a 

downward spiral, but any penny paid out must be recouped from 

the large financial institutions. 

Some of my colleagues say no, no, that won’t happen. Congress 

will rush in and allow it to be paid out of public money, the people 

appointed by the President will say oh, no, no, we are going to ignore the law. We are going to violate the law, we are going to give 

them public money anyway. 

In what universe? The fact is, there is now an overwhelming national consensus not to do that. 

And the only people who are arguing that despite what happened 

in the past and despite the statute and despite the views of all the 

5 

large financial institutions, they are the ones who are arguing that 

nothing will change, and that if a large financial institution gets 

in trouble, the government will step in and bail it out and let it 

continue, are some of the Republican critics of the bill. They are 

the ones who are creating that false perception. Reality is overwhelming. 

And I close by noting we had every regulator here at a hearing. 

And we asked—I asked every one of them, has any institution— 

look, some institutions are automatically, the banks, are going to 

be covered; some large institutions, some insurance companies, 

some mutual funds, some others, it is not clear whether they will 

be covered or not and a lot of factors went into this, not just size, 

as it should. 

I asked if anybody has lobbied to be given the great advantage 

that my Republican friends say this bill confers on them to be systemically significant. Not one, not one. Have any lobbied not to be? 

Every one of them. 

So, apparently, as I said, we have discovered what many people 

were looking for, these selfless financial institutions, the institution 

that says, despite my Republican friends saying this is a great gift, 

please, we don’t want it. We don’t want that extra advantage because it is not an extra advantage. It is not a license; it is a red 

letter. It is a notion that you will be subject to greater regulation. 

That is what the law says. That is what people perceive. And it is 

only people who are trying to make political points who are trying 

to undermine that and create the very perception that they decry. 

I thank the gentlewoman for the time. 

Chairwoman CAPITO. Thank you. The gentleman from Georgia, 

Mr. Westmoreland, for 1 minute. 

Mr. WESTMORELAND. Thank you, Madam Chairwoman. 

One of the biggest problems that I have with the Dodd-Frank Act 

is that it does codify ‘‘too big to fail.’’ The problem in 2008 was that 

markets were conditioned to expect government bailouts following 

Bear Stearns. This guarantee was then priced into the market. Unfortunately, Dodd-Frank makes this guarantee. The government 

will be there for big firms when they are on the brink, just like 

Bear Stearns and just like TARP. 

Regrettably, the American taxpayers and small businesses will 

always draw the short end of the stick in this arrangement. If your 

Wall Street firm is teetering on the brink, the Dodd-Frank bill 

gives the FDIC the ability to finance these companies with taxpayer money up front. 

Considering this has not worked with Fannie and Freddie, and 

taxpayers are still paying for those bailouts, I am not hopeful that 

the Dodd-Frank bailouts will be repaid either. 

Congress must learn from the mistakes of the 2008 bailouts. I 

urge this committee and the chairwoman to work towards repealing these provisions of Dodd-Frank because the taxpayers cannot 

afford these perpetual bailouts anymore. 

And with that, Madam Chairwoman, I yield back. 

Chairwoman CAPITO. Mr. Canseco from Texas for 1 minute. 

Mr. CANSECO. Thank you, Madam Chairwoman. A critical factor 

that has helped to make our economy the strongest in the world 

is the allowance of failure, unlike other countries that create false 

6 

economies and prevent these failures. Companies fail for a variety 

of reasons: they are poorly managed; the product they offer is obsolete or the entrepreneurial idea fizzles out; or there is a failure to 

shift in paradigm at the right time. 

Failure, no matter how big or how small, is not a sign of a weak 

economy. Corporate failure allows for the healthy reallocation of 

capital to more productive companies and sectors that are better 

positioned to create jobs and contribute to economic growth. 

When this natural rebalancing is artificially disrupted, the result 

is confusion, moral hazard, a damaged economy, and a false economy. No company or industry should ever be considered too big or 

too important to fail. Unfortunately, there is widespread belief that 

the Dodd-Frank Act carved into stone the ‘‘too-big-to-fail’’ label on 

some of our largest financial institutions. 

And despite what other Members of Congress may think, you 

can’t legislate failure out of existence. Thank you. 

Chairwoman CAPITO. Mr. Grimm from New York for 1 minute. 

Mr. GRIMM. Thank you, Chairwoman Capito, for holding this 

hearing and thank you to the witnesses for testifying today. 

I believe that one of the greatest strengths of the United States 

is our free market system. It made our country the strongest and 

most prosperous in world history. 

However, I am very concerned that system is under attack. It is 

under attack by overregulation and overbearing government bureaucracy. 

It is imperative for our economy that strong firms can thrive and 

weak ones fail and that new businesses replace those that cannot 

compete. Therefore, I look forward to hearing the witnesses’ comments on whether or not Dodd-Frank allows a capitalist free market system to run its natural course or whether it short circuits it, 

ending with results that may be favored by some government bureaucrats to the detriment of our economy. 

I yield back. 

Chairwoman CAPITO. Thank you. 

The gentleman from Tennessee, Mr. Fincher, for 1 minute for an 

opening statement. 

Mr. FINCHER. Thank you, Madam Chairwoman. 

The issue before us today is whether or not Dodd-Frank adequately addresses the U.S. financial system’s vulnerability to future economic crisis. Dodd-Frank created a complex bureaucracy 

with the goal of solving the problem of ‘‘too big to fail.’’ But many 

in the financial industry are not convinced that it does the job, including the many community bankers and small business owners 

I represent in Tennessee. They are the heart and soul of our economy and create new jobs. Simply put, what will work on Wall 

Street will definitely not work on Main Street. 

I look forward to hearing the testimony today. I met with community bankers last week in my district, and they are just to the 

point of, it is very, very bad at home when we are restricting the 

flow of capital and we are trying to prevent the guys who have 

been doing this right from doing their jobs. 

Many of the community banks in rural America—I don’t know 

about Wall Street, but I know about rural America—are the heart 

and soul of these rural communities. And we have to make sure 

7 

that we are not defeating the purpose of moving our economy forward. So I yield back. Thank you. 

Chairwoman CAPITO. Thank you. And that concludes our opening 

statements. I would like now to go to the first panel and introduce 

the witnesses for the purpose of giving a 5-minute opening statement. 

Our first witness is Mr. Michael Krimminger, General Counsel 

of the FDIC. 

Mr. Krimminger? 

STATEMENT OF MICHAEL H. KRIMMINGER, GENERAL COUNSEL, FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC) 

Mr. KRIMMINGER. Thank you. Chairwoman Capito, Ranking 

Member Maloney, and members of the subcommittee, thank you for 

the opportunity to testify today on behalf of the FDIC on the question of whether the Dodd-Frank Act ends ‘‘too big to fail.’’ 

During 2008 and 2009, the U.S. financial system suffered its 

most severe crisis since the Great Depression. This crisis grew from 

an unevenly regulated and highly leveraged U.S. financial system 

that proved to be anything but strong and stable. 

Regulatory gaps allowed risks to grow in the shadow banking 

system of securitization trusts, CDOs and nonbank financial companies. Many of our largest financial institutions packaged and 

sold huge volumes of securities backed by mortgages that could 

never be repaid. 

The market, long before Dodd-Frank, had assumed that the largest financial companies were ‘‘too big to fail.’’ These nonbank companies could not be resolved under the FDIC’s bank resolution powers which have been used hundreds of times for the orderly resolution of failed banks while imposing losses on creditors and shareholders. 

In contrast, nonbank financial companies could only be closed 

under the Bankruptcy Code, and the market simply assumed this 

would not happen. 

The Lehman Brothers insolvency in the fall of 2008 illustrated 

the problems in closing a major financial firm under the Bankruptcy Code. As a result, given the options in 2008 of a bankruptcy 

proceeding during the post-Lehman financial turmoil or providing 

financial assistance, policymakers in several instances chose to provide financial assistance to prevent even more severe effects on the 

financial system. 

Title I and Title II of the Dodd-Frank Act are products of the realization that this should never be allowed to happen again. In 

combination, they provide the tools to end ‘‘too big to fail’’ if properly implemented. 

Under Title I, the Financial Stability Oversight Council is responsible for designating systemically important financial institutions, or so-called SIFIs, based on criteria that are now being established. Factors to be considered in designating a SIFI include size, 

leverage, off balance sheet exposures, its importance as a source of 

credit and the concentration, interconnectedness and mix of its activities. Related to all of these is whether it can be resolved effectively through the Bankruptcy Code without creating systemic consequences. That must be a key consideration. 

8 

Once designated, SIFIs will be subject to heightened financial supervision by the Federal Reserve. SIFIs must also develop detailed 

resolution plans showing they are resolvable under the Bankruptcy 

Code. Preparation of these plans will require hard thinking about 

how to achieve a workable set of resolution options. Given SIFIs 

current complexity, this process should improve shareholder value 

by improving efficiency as well. 

Resolution plans are essential to ending ‘‘too big to fail’’ because 

they will require a close working relationship between the companies and regulators to achieve workable options and between U.S. 

and foreign regulators to address the complexities of cross-border 

operations. 

These plans will provide the analysis, information, and advance 

planning that was lacking in 2008. 

Perhaps most importantly, Title II creates an alternative process 

to be used if bankruptcy would create systemic consequences. This 

new process, like the FDIC’s bank receivership law, allows prompt 

action to achieve operational continuity through a bridge financial 

institution or a transfer of operations to another private sector 

company. This would be critical to avoid a future financial meltdown. But let’s be clear. This is no bailout. There is no statutory 

authority in the Dodd-Frank Act for us to bail out a failed financial 

institution. The company must be liquidated. 

The statute imposes the losses on creditors and shareholders and 

affirmatively prohibits any loss to taxpayers. It requires removal of 

management and provides for a claw-back of compensation received 

by senior executives or directors who were substantially responsible for the failure. Like the bank receivership process, the DoddFrank resolution process is a transparent process defined by a specific structure for a payment of creditors that allows access to the 

courts to decide disputes. Notice in comment rulemaking will guide 

its application and the FDIC will be subject, as it is today, to Inspector General and congressional oversight. 

This insolvency process is an essential tool to ending ‘‘too big to 

fail.’’ Today, credit rating agencies are reassessing the likelihood of 

Federal support due to this new power. Earlier this month, Moody’s 

placed major financial institutions’ debt ratings under review for 

potential downgrade based on reconsideration of this prior uplift 

for assumed systemic support. According to Moody’s, and I quote, 

‘‘The U.S. Government’s intent under Dodd-Frank is very clear. 

Going forward, it does not want to bail out even large systemically 

important banking groups.’’ 

In summary, the Dodd-Frank Act creates a new, more effective 

SIFI resolution authority that will go far toward returning market 

discipline to our financial system. I will be happy to answer any 

questions. 

[The prepared statement of Mr. Krimminger can be found on 

page 64 of the appendix.] 

Chairwoman CAPITO. Thank you. 

Our next witness is Ms. Christy Romero, Acting Special Inspector General, Office of the Special Inspector General for the Troubled Asset Relief Program. Welcome. 

9 

STATEMENT OF CHRISTY ROMERO, ACTING SPECIAL INSPECTOR GENERAL, OFFICE OF THE SPECIAL INSPECTOR GENERAL FOR THE TROUBLED ASSET RELIEF PROGRAM 

(SIGTARP) 

Ms. ROMERO. Thank you. Chairwoman Capito, ranking member 

of the full committee Frank, ranking member of the subcommittee 

Maloney, and members of the committee, I am honored to appear 

before you today. 

SIGTARP was created to protect the interests of those who funded TARP, the American taxpayers. And an important part of 

SIGTARP’s mission is to bring transparency to decisions that were 

made in the wake of the financial crisis because there are important implications for the future by examining the past; we can take 

advantage of lessons learned to better protect taxpayers in the future. 

SIGTARP issued a couple of audits in which we determined that 

Treasury and banking regulators made decisions related to the use 

of TARP funds in order to bolster investor and consumer confidence 

in the Nation’s financial system. For example, we issued an audit 

detailing the government’s decision to inject $125 billion into 9 of 

the Nation’s largest financial institutions. 

And what we found were that these first TARP recipients were 

chosen for their perceived importance to the greater financial system. We also issued an audit detailing the decision by the government to step in and provide additional assistance to one of the 

nine, to Citigroup, and to deem Citigroup to be too systemically significant to be allowed to fail. The government gave that assistance 

to assure the world that the government would not let Citigroup 

fail. There are several lessons to be learned from the Citigroup 

bailout. Although the government restored market confidence in 

Citigroup, the decision that Citigroup had to be saved was strikingly ad hoc. The consensus that Citigroup was systemically significance was one based more on gut instinct and fear of the unknown 

as opposed to objective criteria. The absence of objective criteria for 

that conclusion raised concerns as to whether there was selective 

creativity being exercised in who was systemic and who was not. 

In addition, the government’s actions with respect to Citigroup also 

undoubtedly increased moral hazard. 

The mere enactment of the Dodd-Frank Act did not end the concept of ‘‘too big to fail’’ in the market’s eyes. The market still gives 

the largest financial institutions competitive advantages over their 

smaller counterparts. The Dodd-Frank Act provides for regulators 

to designate institutions as systemically significant and for requiring additional supervision and heightened standards and requiring 

them to have living wills for their orderly liquidation. Whether or 

not this determination will provide a competitive advantage for 

those institutions ultimately may be dependent upon the market’s 

perception of whether the government will step in again and stand 

behind these companies. But as long as the financial institutions 

themselves, their counterparties, and their rating agencies believe 

there will be future bailouts, competitive advantages that are associated with ‘‘too-big-to-fail’’ institutions will almost certainly persist 

and market discipline will be reduced. 

10 

It is too early to tell whether Dodd-Frank will ultimately be successful in ending ‘‘too big to fail’’ and that success will be dependent on the market’s perception of the effectiveness of the actions 

that are taken by Treasury and the regulators now. And as we observed with Citigroup stabilizing after the government announced 

additional assistance, the market will react to the words and actions that are taken by the regulators. 

In order to end ‘‘too big to fail,’’ the regulators must take effective action using the tools that have been given them under the 

Dodd-Frank Act. 

Regulators have a benefit now that was missing during the financial crisis, and that is the benefit of time. It is vital that regulators use this time when the Nation is not in a financial crisis to 

promulgate rules, and develop objective criteria and a solid framework for applying that criteria so that should the Nation face another potential financial crisis, the road map is in place along with 

all the needed sign posts. 

Rules, however, are only as effective as their application. And in 

order to convince the markets, the promise of the regulators and 

Treasury that to end ‘‘too big to fail’’ must be matched with actions, 

actions that signal with certainty that the government will not 

make future bailouts. The markets will watch to see what a designation of ‘‘systemically significant’’ means. The markets will 

watch to see the level and type of enhanced supervision that comes 

with that designation. The markets will watch to see whether these 

companies are restructured and simplified. Regulators have the authority to shape the living wills of these companies and to compel 

substantial changes to their structure and their activities. 

These actions rely on the courage of the regulators to protect our 

Nation’s broader financial system against any institution whose demise could potentially trigger another financial crisis. Chairwoman 

Capito, Ranking Member Maloney, and members of the subcommittee, thank you again for the opportunity to appear before 

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

[The prepared statement of Ms. Romero can be found on page 86 

of the appendix.] 

Chairwoman CAPITO. Thank you. 

I want to thank you both and I will start the questioning. 

Ms. Romero, in your statement, you talk about the process of 

whether or not Citigroup was ‘‘too big to fail,’’ and therefore, in 

need of a rescue as ad hoc. Then you went on to say that whether 

this would continue into the future may be a perception that the 

government would be willing to step in. 

I am not sure if you are aware that we argued pretty vociferously 

during ‘‘too big to fail’’ to have an enhanced bankruptcy where 

there could be no perception that the government could step in. 

I guess what I am interested in is these both sound like more 

esoteric terms, ‘‘ad hoc’’ and ‘‘perception,’’ and not a definitive 

statement that a government bailout could not occur. Do you see 

it that way? 

Ms. ROMERO. SIGTARP, when we did our audits and we went 

and looked at the past actions of the government during the financial crisis, what we found was that a lot of the decisions that were 

being made were being made to address the markets. Citigroup 

11 

itself said that it was healthy at the time that it ended up needing 

the additional government assistance. But there was devastated investor confidence in Citigroup which was shown by a dramatic drop 

in its stock price and in a widening of its credit default spreads. 

So what we found in looking at the past so you can determine 

the implications for the future is that what the market perceives 

has an effect, and has an effect as to whether the company is in 

trouble and whether that company will trigger another financial 

crisis and what the interconnectedness is with that company. 

And so, ultimately, you do have to take into account the market’s 

perception. 

Now, the market’s perception could be affected by what happens 

going forward. It could be affected in the case of if there was going 

to be an enhanced bankruptcy proceeding under the prior proposed 

legislation, the market could see that. The market could see what 

is here with Dodd-Frank. But Dodd-Frank just sets up the rules 

and the tools. It is ultimately going to be up to the regulators and 

the strength with which they use those tools and the objective criteria that they set out. Right now, the market just does not know 

what it means to be systemically significant. 

Chairwoman CAPITO. So building on what you say then with Mr. 

Krimminger as the regulator, let’s take the Citigroup example that 

she used. Citigroup said they were healthy at the time. So now we 

are going to ask them, assuming they will be systemically significant, which I think is a pretty good assumption, they are going to 

be asked what they are doing right now, creating a living will, 

which lets them predetermine what their fate is going to be, that 

is what a living will is for individuals, so their perception of themselves is different from the perception of the market or the perception of the regulator, and then I think we end up back to this ad 

hoc sort of esoteric feel. 

How does this Orderly Liquidation Authority that you now 

have—will that eliminate that in your mind? I would like your 

comments on that. 

Mr. KRIMMINGER. Thank you very much. 

I think one of the things to remember is that I have never met 

a financial institution that thought that it was in as bad a condition as it actually is in. 

So Citigroup’s impression of where they were in the fall of 2008 

might be a bit misleading. I think one of the key things of DoddFrank is in Title I and that is in section 165(d), which provides for 

the resolution planning process, as you referenced. I think that is 

not something where Citigroup will have the ability to predetermine its own fate. The statute actually is very clear. Citigroup has 

to show they have a credible plan for a rapid and orderly resolution 

under the Bankruptcy Code, which seems to me to be totally appropriate since the Bankruptcy Code, even after Dodd-Frank, will fully 

remain the primary option for resolving any financial company. 

I think one of the key things about that standard that is set in 

the statute is it will require some really hard thinking by the firms 

in order to develop resolution plans that show that they could be 

resolved under the Bankruptcy Code without creating systemic consequences. That is going to be a tough standard because they won’t 

have access to bridge financial institutions or bridge banks that we 

12 

use under the FDIC Act, so they will have to come up with some 

real hard thinking about what type of structures they will use, 

what types of liquidity support they should rely on, and what types 

of processes they should put in place in order to resolve themselves. 

Chairwoman CAPITO. The other thing I would add is, and my 

time is running short here, that they also wouldn’t have the ability 

to go into the Orderly—if they go into the Orderly Liquidation Authority, the FDIC has the ability to access taxpayer dollars, and I 

know Sheila Bair testified 2 weeks ago that the first payback is 

those Treasury dollars, but that is a big distinction between a 

bankruptcy and the Orderly Liquidation Authority that I think 

does lend itself more towards a reliance on the Federal taxpayer 

to begin this authority and end the authority, and I am going to 

go to my ranking member now. 

Mrs. MALONEY. To be clear, the Wall Street Reform Act absolutely requires that a company whose failure threatens the entire 

system be liquidated so that there cannot be a bailout. It provides 

tools for regulators to stabilize the broader system and specifically 

protects taxpayers. 

So the Dodd-Frank bill ends ‘‘too big to fail.’’ It ends government 

bailouts. 

I would like to ask the panelists, do you interpret the recent announcement that Moody’s is considering downgrading the largest 

banking entities to be based on reconsideration of the extent to 

which they receive government support? 

Do you see this as an indication that the market views the Wall 

Street Reform Act as ending ‘‘too big to fail?’’ 

I would like both panelists to answer, starting with you, Mr. 

Krimminger. 

Mr. KRIMMINGER. I will put it this way: We think that it is important, as Ms. Romero just mentioned, that we look to how the 

market is going to ultimately perceive this. The statutory provisions are very clear that the firm has to be liquidated, there can 

be no taxpayer losses, and that any losses in the resolution have 

to be paid back first from the firm, and then from an assessment 

against the industry if necessary. 

I think the key thing is looking at how the credit rating agencies 

will consider this. And in my discussions with several of the credit 

rating agencies, I have asked them this question pointedly. Is there 

any authority under Title II of Dodd-Frank for there to be a bailout 

of the institution or to prop the institution up, and they said ‘‘No, 

any uplift that we are providing to date for the credit ratings for 

these institutions is based upon the idea that the law could be 

changed in the future.’’ So the law today, the rating agencies are 

telling me, confirms that they can’t be bailed out. 

Mrs. MALONEY. Thank you. Ms. Romero? 

Ms. ROMERO. I think that the actions and the statements by the 

government in late 2008 and early 2009 made this explicit ‘‘too big 

to fail’’ statement to the markets and Dodd-Frank came in and 

there is an opportunity here depending upon the actions taken by 

regulators in putting in strong heightened supervision and strong 

requirements on these companies where there would be an opportunity to send a strong message to the market. 

13 

I think the credit rating agencies and their view of things can be 

one indication of that. 

Mrs. MALONEY. The fact that they are downgrading it shows that 

they think ‘‘too big to fail’’ has been ended. It is my understanding 

that large institutions, complex, nonbank financial companies, that 

they think that they possibly could be designated as ‘‘too big to fail’’ 

are lobbying the Financial Stability Oversight Council and other 

regulators not to designate them. They don’t want to be designated 

in that category. 

And doesn’t that directly contradict the notion that the financial 

industry perceives a funding advantage or a ‘‘guaranteed bailout’’ 

that some of my friends on the other side of the aisle seem to claim 

that there even though it clearly states in Dodd-Frank that there 

will be no bailouts, that there will be an orderly liquidation, doesn’t 

that show that these large and complex companies that are subject 

to stricter regulation that they don’t want it, they don’t want to be 

a part of it, doesn’t it show that they realized that they will not 

be bailed out? Mr. Krimminger? 

Mr. KRIMMINGER. I would just comment that I am not aware of 

any of the companies seeking to be designated as systemically important. The bank holding companies over $50 billion in size are 

designated by the statute so they are already designated. 

Mrs. MALONEY. But aren’t they lobbying to get out of the designation? 

Mr. KRIMMINGER. They are required to be within the designation 

by statute— 

Mrs. MALONEY. I have read press reports and I have had people 

come to me who don’t want to be designated. 

Mr. KRIMMINGER. I would agree. I am not aware of any company 

that is not automatically designated seeking to be designated. 

Mrs. MALONEY. Ms. Romero, could you comment? 

Ms. ROMERO. Yes. No one knows right now what will happen 

once someone is designated as systemically significant. And so I 

think it is not surprising that companies who are being told that 

they would be subjected to heightened supervision and heightened 

requirements without even knowing what these requirements are 

going to be would want to lobby against that. And I think those institutions, as well as the markets, are looking to see what happens, 

and so they are looking to see what is going to be the heightened 

capital requirements, the heightened liquidity requirements, and so 

you are certainly seeing companies not wanting to be given a designation what they don’t know the outcome is. 

Mrs. MALONEY. I would say it shows that they don’t see a funding advantage or a guaranteed bailout that they realize they are 

not going to be bailed out so there is no advantage, they want to 

get out of it. Anyway, my time has expired. 

Chairwoman CAPITO. Thank you. Mr. Renacci for 5 minutes for 

questions. 

Mr. RENACCI. Thank you, Madam Chairwoman. 

My colleagues on the other side, I believe, have said two or three 

times now that Dodd-Frank ends ‘‘too big to fail.’’ If I look at your 

testimony, first, Mr. Krimminger, you say the three basic elements 

of the Dodd-Frank Act together help end ‘‘too big to fail.’’ You say 

it helped end ‘‘too big to fail.’’ Are the power to designate the subVerDate Nov 24 2008 19:21 Sep 09, 2011 Jkt 067932 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\67932.TXT TERRIE
14 

jects as SIFIs to heighten prudential supervision by the Federal 

Reserve Board, the power to collect information necessary to plan 

and prepare for or to avoid the necessity of the resolution of SIFI 

including the requirement for SIFI to prepare detailed resolution 

plans and the orderly resolution authority to ensure that if necessary a SIFI can be resolved without course to bailout. 

So you have a tremendous amount of ‘‘subject to’s,’’ especially the 

prepared detailed resolution plans which I want to come back to. 

Ms. Romero, in your testimony, you say it is too early to tell 

whether Dodd-Frank will be ultimately be successful in ending ‘‘too 

big to fail’’ and its success will be dependent on the market’s perception of the effectiveness of the actions taken by regulatory and 

Treasury. You also say rules, however, are only as effective as their 

application in order to convince market promises of regulations to 

end ‘‘too big to fail’’ must be matched with actions that signal with 

certainty that the government will not make future bailouts. 

Just a simple yes or no, in your opinion, Mr. Krimminger, does 

the Dodd-Frank bill end ‘‘too big to fail?’’ 

Mr. KRIMMINGER. There is no authority—yes, because there is no 

authority to do a bailout as there was in 2008. 

Mr. RENACCI. But there are a lot of, if you will agree, ‘‘subject 

to’s’’ in your testimony. 

Mr. KRIMMINGER. If I may elaborate. Certainly, my point being 

on those ‘‘subject to’s’’ is that Title I includes a lot of authority to 

provide for resolution plans, the regulations are still out for notice 

and comment, and we will be finalizing those requirements very 

shortly. There are also the standards for the heightened supervision and the capital requirements. Those still need to be put in 

place, but as I said in my testimony, Dodd-Frank provides the tools 

to end ‘‘too big to fail.’’ 

The key thing in our perspective is that Title II for Orderly Liquidation Authority precludes bailing out a firm and requires it to 

go into liquidation and resolution. 

Mr. RENACCI. Again, ‘‘subject to.’’ And these detailed resolution 

plans, again, I am a CPA; I have actually been hired to go through 

bankruptcy filings. It is going to be interesting how easy it will be 

to get detailed resolution plans. 

Ms. Romero, you say, again, your comments, do you believe 

Dodd-Frank ends ‘‘too big to fail?’’ 

Ms. ROMERO. It is too early to tell. The mere enactment of the 

Dodd-Frank Act wasn’t enough to take away the competitive advantage that these large institutions realize now. But going forward, what happens with the regulators in using the tools and implementing some objective criteria and a sold framework for applying that, that will be determinative of whether it ends ‘‘too big to 

fail.’’ 

Mr. RENACCI. Now, let me add the question, if there were stipulations that there was a guaranteed no bailout and bankruptcy was 

the alternative, wouldn’t that bring the free market system in and 

ultimately end ‘‘too big to fail,’’ Mr. Krimminger? 

Mr. KRIMMINGER. That is what we had in 2008. The Bankruptcy 

Code was the only resolution authority for these large, nonbank financial institutions. And so the Treasury sought additional authorVerDate Nov 24 2008 19:21 Sep 09, 2011 Jkt 067932 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 K:\DOCS\67932.TXT TERRIE
15 

ity from Congress to provide additional inputs of funding in at the 

capital level, so I think that— 

Mr. RENACCI. I don’t mean to interrupt you, but I did say if there 

was no bailout and bankruptcy was the alternative, would that end 

‘‘too big to fail?’’ 

Mr. KRIMMINGER. There is a no-bailout provision of Dodd-Frank 

today. If bankruptcy is the only option, based upon the experience 

in other countries where bankruptcy is the only option, I don’t believe it would because there would be an incredible pressure to do 

something other than bankruptcy. 

Mr. RENACCI. But, again, I will go back to, I will go to Ms. Romero, if those two options were there, would it end, if you bring 

the private market back in with bankruptcy and you had no bailouts, would ‘‘too big to fail’’ end? 

Ms. ROMERO. I think the only way to end ‘‘too big to fail’’ is to 

ultimately have institutions that are not so interconnected that 

their demise takes down the entire financial system. So whether 

that is the situation that those institutions are restructured and 

simplified so they are not so interconnected or whether it is a situation where they are, it is with certainty that they will have to suffer the consequences of their own excessive risk-taking, that is 

what is needed to end ‘‘too big to fail.’’ 

Mr. RENACCI. Again, that is bankruptcy, but thank you. 

Chairwoman CAPITO. Thank you. Mr. Frank for 5 minutes. 

Mr. FRANK. First of all, we have to draw a distinction. The bill 

deals with the failure of large institutions in two ways, first of all 

by significantly increasing the regulators’ ability to stop this from 

happening or make it less likely, for example, by the regulation of 

derivatives, totally unregulated derivatives without any requirement of margin or capital, that was contributory. The bill outlaws 

the kind of mortgages that were made that many of us tried to outlaw earlier. So we don’t simply wait as to whether or not there is 

failure. There is a lot in here that prevents failure. 

Secondly, in terms of bailouts, people haven’t mentioned one of 

the major things this law does that ends the bailout, the largest 

single bailout per institution was of AIG. AIG was bailed out by the 

Federal Reserve under statutory authority to dating from the 1930s 

which the law abolished. Section 13-3 of the Act, of the Federal Reserve Act, allowed the Federal Reserve to advance all that money 

to AIG. We abolished that. That was one very big example of bailout authority that no longer exists. 

Then the question is, and my colleague who spoke previously 

asked for a yes-or-no answer, and he got a yes and he didn’t like 

it. I guess we now have not just a self-fulfilling prophecy but an 

example of not taking yes for an answer. Yes, our witness from the 

FDIC, does it end ‘‘too big to fail,’’ he said yes. How does it do it? 

By making it illegal for regulators to do this. 

Now let’s be very clear, under the law, no Federal official may 

extend money to a large institution that is failing. It can, after 

abolishing that institution, wiping it out, spend some money on 

some of the debts. 

So the question then is okay, it doesn’t end ‘‘too big to fail.’’ Do 

we assume that Federal regulators will then violate Federal law 

and give money despite the law saying they can’t and keep the inVerDate Nov 24 2008 19:21 Sep 09, 2011 Jkt 067932 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K:\DOCS\67932.TXT TERRIE
16 

stitution going? Or is it that Congress will say oh, well, we didn’t 

really mean it; we are going to vote the money. 

Neither one is likely. People ask the question. I don’t know what 

they mean. The law clearly says you cannot extend the money in 

those circumstances, and you can’t do what the Federal Reserve 

did, they can no longer do it because we explicitly took that away. 

Now, the dilemma is the question, can bankruptcy handle everything? It was Henry Paulson, George Bush’s Secretary of the Treasury, who first told the Congress in 2008 in the spring that the law 

was inadequate, that having to choose—and this is Secretary’s 

Paulson’s argument at the time—between bankruptcy and intervention that kept the institution going was an inadequate set of 

choices. And that is what happened in 2008. Lehman was allowed 

to go bankrupt with, they thought, negative consequences. 

It was the Bush Administration that came to Congress in September 2008 and said, we have a disaster on our hands because 

Lehman failed, and then AIG was about to fail. So one option was 

bankruptcy, Lehman Brothers. The other option was let the Federal Reserve give $80 billion right away without any congressional 

involvement to AIG. What Secretary Paulson said was, I have been 

begging you, give us an alternative. This is the alternative. The alternative is—there are three aspects. 

First of all, you regulate beforehand. You say, you are a particularly important institution because you are so interconnected, not 

just big, and I appreciate the Inspector General mentioning it, it 

is the interconnection that makes it particularly problematic. So we 

are going to give you a higher capital charge because you have people complaining about a higher capital charge. That is what makes 

it less likely to fail. We are going to regulate derivatives in ways 

they weren’t before. We are not going to let you get all these credit 

default swap obligations and not have the money to pay it back like 

AIG. We are not going allow those kinds of mortgages to be made 

and packaged and securitized with no risk retention. All of those 

things go forward. 

If, despite all of that, there is a failure, then the regulators are 

told under Federal law that the institution is gone. It is dead. They 

are fired. No more board of directors, no more shareholder equity. 

At that point we may decide, this is what Hank Paulson said, if 

it is bankruptcy, then if it was an institution that was so interconnected and there is no way to pay any of the debts, things may 

get worse. 

By the way, this is not untested. It is what the FDIC has been 

doing for years. That is why the FDIC is the authority here. They 

step in, they get rid of the bank that has failed, and they pay some 

of the debts to make it not get worse. So that is what we are talking about. 

And the only thing that is keeping alive the perception that ‘‘too 

big to fail’’ is still there are Republicans who are trying to make 

political points by denying the reality. 

And again, I do want to emphasize, if you ask the financial institutions that are the alleged beneficiaries of a ‘‘too big to fail’’ designation that will allow them to get cheaper capital, they all don’t 

want it. They all say no, that is not true. All this does for us is 

subject us to greater regulation. 

17 

And those institutions that have an option, the large banks, the 

large financial houses don’t, but those institutions that have an option not to be covered want desperately not to be covered, are lobbying us not to be covered, as The New York Times mentioned on 

Sunday, because this is not a license to get cheaper money; it is 

an eligibility for much tougher regulation. 

Chairwoman CAPITO. Thank you. Mr. Royce for 5 minutes. 

Mr. ROYCE. I think one of the questions here is regardless of 

what authority we give and what assurances we give in this committee about whether or not that authority will be used by the next 

FDIC regulator, I am just thinking back to a debate on the Floor 

in 2008, I think it was July of 2008 as we were debating the Housing and Economic Recovery Act, and the issue then was, the authority is in the bill in theory to bail out Fannie Mae and Freddie 

Mac, but no, argued those putting forward that legislation, that 

will never be used. That authority will never be used. 

Let’s examine some of the assertions that are being made here 

right now. And I would like to go, if I could, to Mr. James Wigand, 

I want to quote somebody from your shop, he is the head of the 

FDIC’s Office of Complex Financial Institutions. And here is what 

he says. 

He views the liquidation, in his words, that is a bit of a misnomer. For him, the most important part of the FDIC’s new authority isn’t liquidating failed firms. He views it as preserving their 

franchise value so they can be sold to other firms. 

So I would ask you a question. Does Mr. Wigand’s view represent 

that of the FDIC that the Orderly Liquidation Authority is not, in 

fact, a death panel as has been asserted here, but, in fact, a form 

of life support so that these firms can be sold off with taxpayer support presumably to other firms just like the Federal Reserve did 

with Bear Stearns? 

Mr. KRIMMINGER. Congressman, the FDIC’s position, as the law 

requires, is that the institution, the company that fails is put into 

a liquidation process. What Mr. Wigand is referring to is that in 

any liquidation process or any resolution process, you are selling 

the assets and operations of that firm to other private companies. 

That is how those assets are recirculated into or recycled into the 

private sector. So if you can sell them while they are operating in 

a functioning way rather than in a pure liquidation, which is what 

can occur in a Chapter 7 bankruptcy, they will have more value. 

That is what he means by franchise value. That is exactly the same 

thing we do with failed banks today. 

Mr. ROYCE. And your assumption here is that the taxpayers will 

be made whole. But I am going to go back to another issue which 

assumes that we will go back and get the money, get any excess 

payments from these now weakened institutions which we didn’t 

put through a normal bankruptcy process, and following up on the 

Chair’s comments, the problem with the Orderly Liquidation Authority is that it encourages regulators to err on the side of more 

bailouts with the assumption that they are going to go back and 

they are going to recover anything in excess of what creditors 

would have received in bankruptcy. 

I have laid out these arguments during the debate over DoddFrank and in the conference with the Senate. I am sharing with 

18 

you, going back and getting that money will be a very difficult task 

given that those creditors will also likely be other ‘‘too-big-to-fail’’ 

banks. And that goes to the issue of why there is this assumption 

that these institutions are going to come out of this better the way 

we have structured this than they would if they had to go through 

a bankruptcy? 

So the question is, is there a way to overcompensate for the 

error? 

The amendment that I brought up that was defeated was to have 

the FDIC, to have you estimate the likely payment under bankruptcy, then take a haircut, take 20 percent off of that, thus minimizing the potential for bailouts and encouraging market discipline 

by putting them on the same status as their smaller, ‘‘too-small-tosave’’ competitors out there in the market. 

I have yet to get any acknowledgement of what economists are 

arguing here. And I would like just like to ask your opinion and 

very quickly, Ms. Romero’s opinion on that kind of an offset in 

order to kind of at least try to mimic market discipline in this. 

Mr. KRIMMINGER. Congressman, there is a minimum payment 

today that a creditor receives that is limited by the Chapter 7 liquidation value. What we are talking about doing in Dodd-Frank, as 

I said, is nothing more than we do with smaller institutions today. 

The creditors receive payments based upon whatever the sale of 

the assets will recoup. So that the amount that the creditors in a 

Dodd-Frank resolution would receive is based upon the sale of, the 

value of the sale of, the assets. 

Mr. ROYCE. Ms. Romero? 

Ms. ROMERO. No, I think what has to happen is that market discipline has to be restored. What we have to have happen is that 

to the extent that these institutions who took excessive risk before 

and put our greater financial system at risk and ended up having 

a bailout, that has to end. So market discipline has to come back 

in so that the due diligence that takes place by counterparties, the 

access to capital, the terms of the credit, needs to equal the amount 

of risk. 

What is the best way to bring back that market discipline? The 

best way to bring it back is to make it very clear that these institutions are not going to be allowed to be so interconnected, so large, 

that they will take down the entire broader financial system. 

As to what is the best way to do that and whether it is through 

your amendment, I haven’t studied your amendment and so I am 

not sure. 

Mr. ROYCE. But clearly, the counterparties believe they would be 

worse off under the amendment that I am proposing here than 

they would be under this scenario, and that would help drive it in 

that direction. 

Chairwoman CAPITO. The gentleman’s time is expired. 

Mr. Gutierrez? 

Mr. GUTIERREZ. Thank you very much, and thank you to the witnesses. I didn’t know we are in a legislative session making amendments to Frank-Dodd, maybe Dodd-Frank, we do that later on. 

Maybe I was mistaken. 

So here is what we have to believe. We have to believe that the 

Congress of the United States would appropriate billions of dollars 

19 

in order to bail out our financial institutions that are significant 

and would pose a significant risk to the entire system. Yet no one 

on that side will do it, because you have all said you wouldn’t do 

it. There isn’t a Republican who said they would step up and do 

it. I haven’t heard anybody from this side say they would do it, but 

we are all afraid of something that everybody says no one will do. 

I think my friends in the Republican Party should just be very 

clear, they have always said they are the friends of big business 

and financial institutions and they say they don’t want any regulations and they— 

Mr. ROYCE. Will the gentleman yield because we, in fact, say 

none of that. 

Mr. GUTIERREZ. No. Please don’t interrupt. 

Chairwoman CAPITO. It is the gentleman’s time. 

Mr. GUTIERREZ. Thank you. And that is what they say. So they 

should just be very, very clear about it. The fact they get upset that 

I say it and repeat their mantra shouldn’t really bother them that 

much. They say they are the friends. How do I arrive at that conclusion? Because you are always saying we are the enemy. So if we 

are the enemy, you must be the friend of the financial institutions. 

And you should just be very clear. The fact is that a Republican 

President came in before this Congress and a Republican Treasury 

Secretary came before this Congress, and a host of other big-time 

Republican Wall Street big shots came before this Congress and 

said, ‘‘Bail us out. The system is going down.’’ That is what happened; those are the facts. 

And now, who gave the most votes to do that? The Democrats 

did. But now you come back and say, oh, well, this Dodd-Frank, 

let’s just get rid of that. 

Let’s go back to bankruptcy. Gentlemen, did you miss the point 

of the failure of the fall of 2008 that bankruptcy didn’t work? That 

we brought our financial system to the precipice of disaster and 

that we had to take action? 

So why would you want to go back to something that didn’t 

work? I know why you want to go back to something that didn’t 

work: so that you can try to finagle another bailout once again, 

after you take all the rules and all the regulations and everything 

away from the financial institutions that have been put in place by 

Frank-Dodd so that we can bail them out again. 

Because there isn’t an institution out there—I challenge my 

friends on the other side of the aisle to tell me a major financial 

institution that is ‘‘too big to fail’’ that wants and supports the 

Dodd-Frank bill. Just name me one that sends lobbyists here in 

order to get support. 

I know what they come here to do. I think we should all be 

transparent and clear with one another. They come here, the financial institutions, after they had gotten bailed out, to do one thing 

and one thing only, and that is to go back to the old course of business that they were involved in before, and that is no regulation 

whatsoever, so that they can get extreme profits with virtually no 

risk, because then in the end they will be ‘‘too big to fail’’ and cause 

a systemic risk. 

That is what you want to do. I get it. You cashed in on the one 

end, and you are trying to cash in on the other. But guess what? 

20 

There are going to be people here who are going to defend the consumers and the small—and then they come and tell us, ‘‘Oh, I met 

with my community bankers. They told me this was so bad.’’ This 

is not about your community bankers. ’Fess up. This is about the 

big titans on Wall Street that you want to come here to defend, trying to act as though you are here for the people on Main Street. 

That hasn’t been the case. 

Mrs. MALONEY. Will the gentleman yield? 

Mr. GUTIERREZ. I certainly will. 

Mrs. MALONEY. And on the bankruptcy deal, the bankruptcy has 

no specific taxpayer protections. Bankruptcy allows a bailout. And 

bankruptcy does not have systemic effects and a systemic impact 

on the industry. 

You are doing a great job. 

Mr. GUTIERREZ. No, wait a minute. It is just, it seems as though 

everybody just forgot. I just want to make one last point. 

In the Dodd-Frank bill, I put in an amendment—many of us supported it—that said that, much like the FDIC, all those ‘‘too-bigto-fail’’ institutions had to put money in a kitty. In case one of 

them went errant, all of them would help pay so that the taxpayers 

wouldn’t be there. And guess what my colleagues in the Republican 

Party said? Oh, no, we don’t want to do that to those big financial 

institutions. 

No, your little banker and your little community financial institutions have to pay the FDIC, but you don’t want the Wall Street 

titans to have to pay when they come and threaten our economic 

system. I think it is wrong. And you should just tell people you are 

for big banks and make it clear and simple. 

Chairwoman CAPITO. The gentleman from New Mexico, Mr. 

Pearce. 

Mr. PEARCE. Thank you, Madam Chairwoman. I am still trying 

to get my breath after that. 

If I could get the chairwoman to put up a chart there I think that 

might be loaded in, I would like to make the point. 

This is the government interpretation of how we would administer health care. And Mr. Krimminger, on page 9, would have us 

believe that the same government that developed that organizational structure could bring a rational organizational structure to 

private companies. I find that sort of incredulous, that the government is going to work any differently than it has in this chart here 

and give us that rational organizational structure in firms that 

they are sitting inside the rooms with, not participating. 

So that is one of the disbeliefs that we on this side have, at least 

this person on this side has, that government can bring anything 

rational. 

We are also being asked to believe that we are going to bring financial stability and financial believability to the firms in the financial institution, and the operational structure is going to be provided by a government that, itself, is in the process of having its 

debt downgraded. If the government can manage the debt and the 

organizational structure of the banks and the financial institutions, 

maybe it should start with its own business first, because it is in 

the process of being downgraded. And so I, for one, believe that the 

government structures that are created here and that are being so 

21 

eloquently supported by Mr. Krimminger maybe are going to fall 

somewhat short of their task. 

I think, as I am going through the discussions today and listening to them, I am thinking of a banking system, a financial regulatory system that is going to be subject to things that our other 

companies already do. I think, for example, of the Shell Oil Company and the Alaska oil fields that did a $4 billion study in order 

to provide an EIS, an environmental impact statement. And I am 

going to see the government develop these same sort of studies that 

are required before they allow the institutions to move forward. 

And the government just said, ‘‘Well, I am sorry, you left a paragraph out of that, and we are going to turn down the whole $4 billion thing.’’ 

Mr. Krimminger, when these resolution plans are not presented, 

what is going to happen to the institution? In other words, you say 

through here many times we got these resolution plans. You simply 

shut their doors? You stop them from operating? Tell me a little 

bit about that, if you would? 

Mr. KRIMMINGER. Congressman, the statutory provision, section 

165(d) of Dodd-Frank provides that the firms, themselves, develop 

their resolution plans. I can’t comment on— 

Mr. PEARCE. No, I am saying, let’s say that a firm does not get 

that. Let’s say that they don’t have a resolution plan that you consider adequate. So what is the penalty? Do you shut them down? 

Do you stop them from expanding? Do you begin to pull sections 

away from them, make them distribute part of their assets? 

Tell me a little bit about how you perceive it. You obviously were 

on the inside of the room, planning this. 

Mr. KRIMMINGER. The statutory provisions, Congressman, provide that if the resolution plan is not credible to provide for a rapid 

and orderly resolution under the Bankruptcy Code, then the firm 

would go back and try again. And if it tries again or fails to submit 

a plan, then the Federal Reserve, working with the FDIC, in discussion with the Council, could require additional capital requirements, additional liquidity requirements, because the firm has 

shown that it can’t be resolved under the Bankruptcy Code. 

And then if the firm still, after another 2 years, fails to provide 

a credible resolution plan with the additional capital and liquidity 

requirements in place, then the FDIC and the Federal Reserve, in 

consultation with the Financial Stability Oversight Council, can require the firm to take some actions, including selling some assets, 

if necessary, in order to make itself more simple and more resolvable. 

That is the statutory provision. 

Mr. PEARCE. And you feel like that is a plan that is going to 

work? 

Is the FDIC overseeing any part of the Lehman Brothers distribution? 

Mr. KRIMMINGER. No. That is a bankruptcy resolution. 

Mr. PEARCE. Are you kind of watching it? Are you proving up 

your concepts there? Are you taking a look at what all is required? 

Are you all watching that closely? 

22 

It is a fairly complex institution that is being broken up. It is a 

place for you to do a dry run. Are you all doing a dry run with all 

of your concepts? 

Mr. KRIMMINGER. We take a very careful look at the Lehman 

bankruptcy proceedings. We just released a paper a couple of 

months ago, looking at how Lehman could have perhaps been resolved under the Dodd-Frank provisions. So we obviously are monitoring it because it is a very good— 

Mr. PEARCE. And you believe that your findings would have 

stopped Lehman Brothers if they had been implemented? 

Mr. KRIMMINGER. I believe that the Dodd-Frank authorities 

would have allowed Lehman Brothers to be resolved in a less disruptive way to the financial system, yes. 

Chairwoman CAPITO. The gentleman’s time has expired. 

Mr. Miller? 

Mr. MILLER OF NORTH CAROLINA. Thank you, Madam Chairwoman. 

Serving on this committee is a strange experience. Hearing all of 

the statements on the other side, it sounds like Republicans really 

pushed to make Dodd-Frank or make a financial reform bill a really tough bill and Democrats watered it down. That is completely at 

odds with what actually happened in the last couple of years, 

where I think every provision that would have made the bill tougher, that would have, as Ms. Romero said, made for smaller, less 

interconnected firms that were less of a risk to pull the whole economy down with them if they collapsed, all of those provisions were 

unanimously opposed by Republicans. 

So, Senator Kaufman introduced an amendment on the Senate 

side that failed, which would have limited the overall size of banks 

to 2 percent of the GDP. That is still, like, a $300 billion company. 

That is a pretty big bank, big enough to do pretty much anything. 

But it would have required that the 6 biggest firms be broken up 

into more than 30 banks. No Republican support for that at all. I 

introduced the idea on the House side, but the fight was really over 

in the Senate side. 

Mr. Gutierrez mentioned the idea of an up-front resolution fund 

funded by the industry to make sure that taxpayers really were not 

on the hook. It was absolutely opposed by the industry and by Republicans, who pretty much said exactly the same thing the industry said. 

One of the issues in the last couple years, it was dimly understood at the time of the crisis, was that there was—Mr. 

Krimminger mentioned the shadow banking system, and there are 

a lot of things that are considered to be part of the shadow banking 

system. One is what is called the repo market, which is an interbank, inter-financial-institution lending system that was pretty 

much completely unregulated. And what happened in the fall of 

2008 was that there was a run in the repo system that almost 

looked like the run in, ‘‘It’s a Wonderful Life,’’ where everyone went 

down and took their money out and the whole system froze up. 

Chairman Bair did propose a solution to that to create some market discipline. I introduced it with Mr. Moore on this side. It went 

to the Senate, somewhat watered down. It then came back as a 

study. And the study will apparently come out this summer. 

23 

Mr. Krimminger, what is the current status of the repo market 

and the vulnerability of the repo market to another run like what 

we had? 

And we are talking about a lot of money here. I think Bear Stearns was getting $70 billion a night in overnight lending from 

the repo market. And when that dried up and went away, it collapsed. Pretty much the same thing happened to Lehman Brothers. 

What is the current status of that? 

Mr. KRIMMINGER. Congressman, I would have to get back to you 

with the statistics on the current repo market. 

The repo market certainly has stabilized dramatically from the 

fall of 2008. But you are correct that one of the characteristics of 

the fall of 2008, following the Lehman bankruptcy, was a dramatic 

shutdown of the commercial paper and repo market at that time. 

And Chairman Bair and the FDIC had expressed concern about an 

overreliance by some financial institutions in the past on shortterm secured financing. 

While the study will come out this year, I think that is an issue 

that we need to all look very carefully at, because that can have 

the same effects as a deposit run without deposit insurance. And 

neither I nor anyone else around would want to have insurance for 

repos, for sure. So we need to find a way of making sure that a 

repo run would be less likely in the future. 

Mr. MILLER OF NORTH CAROLINA. Before the FDIC, we really 

haven’t had a deposit run in 75 years, in three-quarters of a century since the FDIC. Now, of course, at the time, the banks pronounced that if the FDIC went into effect and there was deposit 

insurance and safety and soundness regulation, no one would ever 

put their money in a bank. And of course the opposite happened 

because people realized they could put their money in the bank and 

they would be able to get it back. 

But before that, there were runs every few years. There were crises in the financial system every few years. Is there any reason to 

think that there won’t be again? 

Ms. Romero? 

Ms. ROMERO. Again, as we looked at Citigroup and AIG and 

other things that we examined sort of what happened, it was runs 

that ended up causing the government to step in and do the bailout. 

So, the government before has taken action in response to this 

lack of investor and consumer confidence, whatever the run may 

be. And so it is really up to the regulators now in what they do 

with these plans—they have authority to shape these plans—and 

what they do with setting their requirements. 

The markets are going to watch that. And they are not just going 

to watch the words or the promises that the Dodd-Frank Act ends 

‘‘too big to fail.’’ It has to be matched up with actions—actions that 

say for certain that the government is not going to step in. 

And that is the way—what you want to do is get into a situation 

where, if there is a run on one of these companies, that run does 

not cause—doesn’t trigger the next financial crisis. And that is 

going to be key. 

Chairwoman CAPITO. The gentleman’s time has expired. 

Mr. Westmoreland? 

24 

Mr. WESTMORELAND. Thank you, Madam Chairwoman. 

And I would like to remind our colleague from North Carolina, 

at the time Dodd-Frank passed, I believe the Senate had a 59–41 

advantage and the House had a 252–183 advantage. So I believe 

they could have passed anything that they would have liked. 

Mr. Krimminger, in your testimony, you say, ‘‘Given the absence 

of a nonbankruptcy auction to prevent a disruptive collapse, government assistance was necessary to prevent the effects of these 

failures from cascading through the financial system, freezing financial markets’’—and I am assuming that is credit—‘‘and stopping the economy in its tracks.’’ 

Is that not what has happened? 

Mr. KRIMMINGER. I was describing, Congressman, in my testimony that we believe, in the fall of 2008, since there were no other 

options other than additional destabilizing and disruptive bankruptcy proceedings involving the largest financial institutions, that, 

without another option, the government assistance was necessary 

to prevent further and even more severe disruption of the financial 

markets. 

There is no question that the fall of 2008 was a very dire time 

for the financial markets and the financial system as a whole. 

Mr. WESTMORELAND. Did Lehman Brothers not go through bankruptcy? 

Mr. KRIMMINGER. Yes, it is in a bankruptcy proceeding today. 

Mr. WESTMORELAND. Yes. So it was an orderly process. 

Mr. KRIMMINGER. I don’t know that I—it followed the Bankruptcy Code. It was a very disruptive process, because even Alvarez 

& Marsal, who have been doing the liquidation, have testified that 

the bankruptcy process probably cost over $75 billion in losses that 

could have been recouped had there been the ability to continue 

some level of transactions in order to achieve a better value for the 

creditors. 

Mr. WESTMORELAND. Who were those losses to? 

Mr. KRIMMINGER. Those losses would be to all the creditors. To 

date, there have been unsecured creditors in Lehman who have not 

received a distribution. 

Mr. WESTMORELAND. Okay. 

Now, as you might know, Georgia has had 63 bank failures. Do 

you believe that the same government assistance should be extended by the FDIC to the community banks? 

And let me explain. When you talk about cascading through the 

financial system, it saved all the big banks, but when it got down 

to the small banks, it spread out and has caused more small banks 

to fail. So I guess ‘‘too small to save.’’ And what has happened is, 

that is real money that is sucked out of these communities. 

What is being done to try to save some of these community banks 

rather than putting the pedal to the metal and making them go 

faster? Is there anything that the FDIC is doing to look at these 

smaller institutions? 

Mr. KRIMMINGER. Congressman, we certainly participate, with 

the Georgia Department of Financial Institutions, in examinations 

of the State non-member banks. And other regulators, of course, 

are the primary Federal regulators for other types of banks in 

Georgia. 

25 

We are not trying to accelerate the closing of banks. We certainly 

are trying to make sure we follow the law very scrupulously. If a 

bank goes below the critically undercapitalized level, then the statute requires us to give them 90 days to correct that, and if they 

can’t, then they have to be closed. 

We certainly agree with you that it was unfortunate that the 

largest institutions benefited from a level of support that the smaller institutions did not. That was a demonstration of a long-held 

perception of ‘‘too big to fail.’’ That is why, however, that we think 

we should never be put in the position again where we don’t have 

an option that will make sure we can close the largest institutions 

while making the shareholders and creditors bear the losses just as 

the small banks do. 

Mr. WESTMORELAND. But it is the communities that it is getting 

sucked out of. And, you say that these— 

Mrs. MALONEY. Will the gentleman yield? Because I support your 

position completely. 

Mr. WESTMORELAND. Sure. 

Mrs. MALONEY. I support his position completely. A great number of small institutions that are serving communities and are really the heart of these communities have been closed. 

So I would like the gentleman to consider asking the question, 

is there any leeway on the 90 days? This is a financial crisis time, 

and these smaller banks need a little more time to try to get the 

capital to keep their doors open. Is there any leeway to allow them 

past the 90 days if they don’t meet your criteria to stay open? 

I yield back. 

Mr. KRIMMINGER. There is certainly an opportunity to extend the 

90-day period if there can be a demonstration. And, usually, it 

would be us working with the State regulator if it is a State nonmember, or the Federal regulator if it is a Federal regulator, to extend the period if there is a demonstration that there is a plan in 

place to provide the additional capital. I can assure you, we have 

tried to work very closely with institutions to try to make sure they 

have an opportunity to raise capital, to do a private-sector merger 

and acquisition. 

And I would just say, from the FDIC’s perspective, we certainly 

are not eager to close banks. We certainly would like to see the 

banks get recapitalized and continue on to serve those communities. I think there is a grave risk to the community banks in the 

United States. They, unfortunately, have—some have a substantial 

number of bad assets on their balance sheet, which is making it 

impossible for them to merge and avoid a failure. But we certainly 

agree on the importance of community banks to the U.S. financial 

system. 

Mr. WESTMORELAND. Let me make just one brief comment. 

The reason they have some of these bad assets is because some 

of these banks that were given TARP money went in and did fire 

sales in these communities that undercut the values of the assets 

that these banks were holding and, with the mark-to-market, had 

to immediately write them down. This was through no fault of 

their own. This was the fact that the government had given these 

big banks the money to go in and fire-sell assets of these banks 

that they had taken over. These acquiring banks had plenty of 

26 

money. They had the loss-share agreements that gave them no incentive to save those loans. 

And I will tell you that I have counties in my district that used 

to have three banks and now do not even have one community 

bank. This is systemically significant to my district and to rural 

districts all across this country. And I hope that the FDIC will recognize this and try do something with it to save some of these 

small lending institutions. 

I yield back. 

Chairwoman CAPITO. Thank you. 

Mr. Meeks? 

Mr. MEEKS. Thank you, Madam Chairwoman. 

And, okay, you hear it? Democrats and Republicans can agree. 

And I think that is really where we need to head on this. 

I came down, and I have heard both sides, and I think that there 

are just some basic philosophies that both sides have to agree to. 

I think that the Republican Party has been known for a long period 

of time as being the party of deregulation. I think there was a joke 

that one of President Reagan’s chief economic advisors reputedly 

had said back in 1981, ‘‘Don’t just stand there. Deregulate something.’’ And I think that the Democratic Party is the party that has 

been known probably to overregulate. And people will say that then 

hampers the opportunity to be competitive, etc. 

So the key for us is to try to find out where that middle of the 

road is. Because I think that we can agree that if you do no regulation, if you are talking about deregulating everything, then we are 

in big trouble. And I think that the flip side of that is also true, 

that if you overregulate and you stranglehold, then even the smallest of banks—because I have talked to some of the community 

banks, and they are concerned about, they can’t continue to exist 

because of what the costs would be for overregulation. So we have 

to try to figure out as adults how we get this thing right. 

One of the things that I know that we can’t do is to repeat what 

took place a few years ago, which created the need for Dodd-Frank 

in the first place. What took place? We went from one swing to the 

other, and we began to have mass deregulation, and we lost some 

transparency. And, as a result of it, banks bought other banks and 

got bigger and bigger and bigger. And then, we had a panic here 

in Congress, because when a bank began to fail, once we bailed out 

one—and then, because it wasn’t politically expedient, we didn’t 

bail out the other. And so, Lehman Brothers went down and went 

into bankruptcy. And the markets started going, and everybody 

panicked up here. 

Then, we decided that we are going to try to save this institution. 

We hated to spend the taxpayers’ money, but we decided that was 

the best thing to do. But we also resolved that we would never do 

it again. We didn’t want it to happen so that somebody becomes so 

big that it could systemically put everything, our whole economic 

system, at risk. So we had do something. 

And what we tried to do, and I think we did a good job of it, of 

coming up with something that ends ‘‘too big to fail,’’ so that we 

don’t get back to where we are. And the best way that I can see 

that we could end ‘‘too big to fail,’’ which Dodd-Frank does, is by 

requiring risky firms to create, basically, living wills, and subVerDate Nov 24 2008 19:21 Sep 09, 2011 Jkt 067932 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 K:\DOCS\67932.TXT TERRIE
27 

jecting them to periodic stress-testing, with all of the information 

made public—that is transparency—arming investors with vital 

transparency and greater decision-making power. 

It also explicitly ban bailouts. Nobody wants to see bailouts 

again. Taxpayers don’t want to do it. And it gives the FDIC the 

power to wind down failing firms in an orderly manner to avoid the 

chaos of the court-run bankruptcy system. 

There is going to be chaos, because I can tell you, I am still getting calls from people in New York and some who are constituents 

about the perils of the system because the bankruptcy with Lehman Brothers is still going on today. Their money is tied up. Some 

of them have university endowments. I am getting calls now, 

‘‘Help, save me. I have to get my money out of that.’’ So I don’t 

want that system, where I am still getting people today telling me 

their money is tied up in the British system, and we have some 

problems there. So we don’t want do that again. We have to fix the 

system. 

And so, I think everybody should oppose bailouts. And if you oppose bailouts, then it seems to me that Dodd-Frank is the best way 

to go because it prevents bailouts in the future, and we make sure 

that we are not taken under by any huge and risky enterprise that 

gets too big. 

Let me quickly just ask some simple questions to the FDIC, and 

they revolve around the allegation that ‘‘too big to fail’’ is perpetuated by designating a firm as a systemically important financial 

institution, or SIFI, which claims increases the likelihood of a bailout. 

My first question is, if this is just for big firms, getting bailed 

out, I haven’t heard of any big firm—you can correct me if I am 

wrong—that is lobbying to be classified SIFI. Do you know of any 

firms that have lobbied to be classified SIFI? 

Mr. KRIMMINGER. I am not aware of any, Congressman. 

Mr. MEEKS. And I see that I am out of time. So, all right, I will 

yield back. 

Chairwoman CAPITO. Thank you. 

Mr. Canseco for 5 minutes. 

Mr. CANSECO. Thank you, Madam Chairwoman. 

Mr. Krimminger, one of the major issues surrounding the FDIC’s 

new resolution authority is the requirement that the Treasury Secretary appoint the FDIC as receiver should it be determined that 

a bank is on the brink of failure and could bring down the whole 

system. 

If we go back to 2008, for a period of several months, there was 

denial from bank executives and from regulators and from politicians that a number of firms in the financial sector were on the 

brink of collapse. If the next crisis were to happen 10 or 15 years 

from now, we don’t know who the Treasury Secretary will be and 

how he or she will react during a market crisis. My point is that 

the FDIC’s authority has no chance of being successful if the Treasury Secretary either continuously denies to appoint them as a receiver or appoints them either too late or too early. 

This presents a problem. Unless the timing from the Treasury 

Secretary is perfect—and there is no guarantee that the FDIC receivership would then actually work if it is, or if it were—the marVerDate Nov 24 2008 19:21 Sep 09, 2011 Jkt 067932 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 K:\DOCS\67932.TXT TERRIE
28 

ket will likely panic as a result. If the Secretary waits too long or 

doesn’t act at all, the problems of the troubled financial institution 

will only grow. And if the Secretary acts too early, he risks taking 

over financial institutions that had a chance of surviving on their 

own. This would destroy confidence in the markets and would prevent private deals from being made for other firms that are in trouble. And the resulting confusion would have everyone asking, who 

is next? 

So my question to you is, is the FDIC’s resolution authority an 

end to ‘‘too big to fail’’ just because it exists? Or is it an instrument 

that can only work if actual problems in the financial system are 

relatively contained and then perfectly orchestrated, well-timed, 

and are taken by regulators at the right time? 

Mr. KRIMMINGER. I think the answer is that, under Title II, there 

is not the ability, there is no statutory power to bail out the firm, 

so the firm would either have to go into bankruptcy, which is the 

default option, or it would be placed into an FDIC receivership 

under Title II. 

You also have to go back to Title I, because it is not just the 

Treasury Secretary’s action at a particular point in time that is the 

key thing. That is why the designation of a particular institution 

for heightened supervision under Title I is pretty critical, because 

that then triggers the obligation of that firm to prepare resolution 

plans, which will go into the analytical structures of the firm and 

how it could be resolved under the Bankruptcy Code. 

Our hope and our goal—because we have no interest in being appointed the receiver for one of the largest firms if it can be resolved 

under the Bankruptcy Code. But what Title II does is provide an 

option so that, if the firm is at the edge of the bankruptcy, and it 

may be going into bankruptcy, that the Treasury Secretary, based 

upon the recommendation by the Federal Reserve Board and our 

board, could recommend to the President a decision that it would 

be placed into a Title II resolution. 

So a critical thing is to look at the relationship between Title I 

and Title II as providing a solution. 

Mr. CANSECO. Thank you. 

Failure of systemically important financial institutions rarely 

happens in isolation. The FDIC’s report on Lehman Brothers assumes that Lehman was the only trouble spot back in the industry 

back then. And even if the FDIC had the authority to properly 

wind down Lehman back then, wouldn’t the agency have been distracted by Citigroup, Wachovia, Washington Mutual, and other depository institutions that are the FDIC’s primary focus? 

Mr. KRIMMINGER. The FDIC has the responsibility of dealing 

with insured depository institutions. We have set up a separate office to look at the resolution and risk-monitoring characteristics of 

the largest institutions. 

But to get back to your initial premise for the question, our 

paper was not based upon the idea that Lehman was a simple blot 

on an otherwise clear canvas. It was based upon the facts and 

based upon the evaluation and the valuations prepared of the Lehman assets by those who actually were doing due diligence at the 

time in 2008 based upon the circumstances then. And the reality 

is that there was a bidder for part of the broker-dealer assets both 

29 

in the United States and England at the time of the Lehman failure, but that bidder decided not to participate pre-bankruptcy or 

pre-insolvency because of the fact that the holding company itself 

was burdened with a substantial amount of bad assets. 

Structuring a resolution where you have a failure that can be 

structured into a good-bank/bad-bank structure will allow you to 

deal with the bad assets and can help solve that problem. 

Mr. CANSECO. Thank you, Mr. Krimminger. 

My time has expired. 

Chairwoman CAPITO. Mr. Carney, for 5 minutes. 

Mr. CARNEY. Thank you, Madam Chairwoman. 

Thank you to the witnesses for coming. 

The title of this hearing is really pretty simple and straightforward, ‘‘Does the Dodd-Frank Act End ‘Too Big to Fail’?’’ I think 

I have heard each of you answer that question. 

Mr. Krimminger, you said, pretty simply, ‘‘yes.’’ 

And, Ms. Romero, you said, it depends, maybe, depends on what 

the regulators do. 

Is that an accurate summary of your answer to the question? 

Mr. KRIMMINGER. I will answer first. 

I think I would agree, yes. But also I think it is important to 

note that it is important what the regulators do going forward with 

the resolution planning process and the SIFI designation process 

and the supervision and capital requirements. 

Ms. ROMERO. And just to clarify my answer, the mere enactment 

of the Dodd-Frank Act was not enough to end ‘‘too big to fail.’’ 

Mr. CARNEY. So, not enough. So there were things in Dodd-Frank 

that changed the tools, changed the playing field, really changed 

the circumstances considerably or somewhat or— 

Ms. ROMERO. Absolutely. There are a number of tools there. I 

think the point is, just the mere enactment by itself was not 

enough to end ‘‘too big to fail.’’ So it does provide regulators the 

tools that the regulators said that they would have liked to have 

pre-crisis. 

Mr. CARNEY. Necessary tools that were suggested by regulators 

that they didn’t have when the crisis presented itself in 2008? 

Ms. ROMERO. That is right. And so then, it is up to the regulators 

to use those tools and put it into action. 

Mr. CARNEY. Right. So we have answered the question up here 

on the dais, yes, it does; no, it doesn’t; yes, it does; no, it doesn’t; 

yes, it does; no, it doesn’t—both sides, not a very intelligent kind 

of debate about that. 

The question for me really is—and I think the other side—or I 

heard the other side say, why don’t we just let failing institutions 

go through the normal bankruptcy process? And I have heard the 

answer several times, ‘‘Well, that is all we had in 2008, and that 

is what led to big bailouts.’’ 

Is that an accurate summary of those answers? 

Mr. KRIMMINGER. I would just respond for myself that, certainly, 

being, if you will, living through 2008 and the decisions that were 

being made, the conclusion was that bankruptcy alone—we could 

not take the risk of bankruptcy alone in the fall of 2008. Certainly, 

we had great trepidation about some of the actions that were 

taken, but those actions were necessary. It is important to have an 

30 

additional option that can provide for a more orderly resolution and 

liquidation of a financial institution. 

One thing I would want to note on that point is that the reality 

is that the same types of powers we have in the Dodd-Frank provisions for these institutions, with bankruptcy, again, being the primary way you resolve financial firms—and that is just the systemic 

ones we are talking about—that has really become the international standard that other countries are looking at. And it has 

actually placed the United States in a leadership role by having 

those authorities in Dodd-Frank. We are pushing very aggressively 

for other countries to adopt similar types of powers. And it will 

take some time, but there is progress being made. 

Mr. CARNEY. So it would be accurate to say that it is a more orderly, controlled bankruptcy process that might avoid, I heard 

somebody say, $75 billion of extra losses in the Lehman Brothers 

bankruptcy, that might avoid that kind of—and protect creditors 

better? 

Mr. KRIMMINGER. The critical thing, from our perspective, is that 

it would allow for mitigation of the systemic consequences of the 

failure. It will have the additional effect, we believe, of increasing 

value for creditors. But the key thing is to make sure that we are 

able to address the systemic consequences that we did not have the 

statutory authority to address in the fall of 2008. 

Mr. CARNEY. Ms. Romero, would you like to add anything to 

that? 

Ms. ROMERO. When we examined the past bailouts, we definitely 

saw that the regulators felt like bankruptcy was not an option. And 

so, looking forward, one of the things, when we interviewed Secretary Geithner, he said to us—and this was in relation to our 

audit that we did of the bailout of Citigroup—‘‘In the future, we 

may have to do exceptional things again.’’ And you don’t know 

what is systemic until you know what the nature of the shock is. 

Mr. CARNEY. So that is a good way of asking my last question. 

I am sorry for cutting you off; I am watching my clock. So are we 

better off to address—or are the taxpayers better protected? Because, really, that is what is underneath the question of whether 

Dodd-Frank has addressed ‘‘too big to fail.’’ 

Ms. ROMERO. I think more needs to be done than just having the 

tools there. The tools have to be implemented. 

Mr. CARNEY. Sure. 

Ms. ROMERO. To say— 

Mr. CARNEY. And that process is under way. There are some people who would want to curtail or hold that process up, stop it, 

change it. That is not a good thing, to change it, to allow that process to go forward and to do the additional things that need to be 

done to really prevent ‘‘too big to fail.’’ Is that— 

Ms. ROMERO. The concept of ‘‘too big to fail’’ still exists in the 

form of competitive advantages for the largest institutions, who are 

now—the top 5 are 20 percent larger than they were pre-crisis. So 

something has to change. 

Mr. CARNEY. Thank you very much. 

Chairwoman CAPITO. Mr. Luetkemeyer, for 5 minutes. 

Mr. LUETKEMEYER. Thank you, Madam Chairwoman. 

31 

I would like to follow up on your last comments there, Ms. Romero, from the standpoint that we continue to encourage our institutions to get bigger and bigger and bigger, and with that size 

comes more risk. I think that we are winding up getting into a position where we have more and more concentration, and, as a result, whenever one of those institutions becomes systemically interconnected with everybody else and is in big trouble, then we are 

talking about how do we wind it down. 

What happens when the whole group of all of these half a dozen 

or dozen institutions now are all in trouble? How are you going to 

wind them all down? This is the situation we were in 2008. This 

bill does not solve that problem. How do you respond to that? 

Ms. ROMERO. I certainly think that the concentration that has 

happened in the banking industry puts our greater financial system at risk. 

Mr. LUETKEMEYER. How do we solve that concentration problem? 

Ms. ROMERO. The only way to solve the concentration problem— 

there are two ways: one, they have to be simplified, whether they 

do it by themselves or whether they do it by regulation; or two, 

there has to be a situation where if they suffer financial distress, 

they are left to suffer the consequences of the distress. 

The problem is, if they are so interconnected with the greater financial system, then them suffering financial distress automatically puts the greater financial system in stress. And so that is 

what needs to be addressed. 

Mr. LUETKEMEYER. The problem is, if you have one of these big 

institutions that is in trouble, and you have narrowed it down to 

just half a dozen, and they all are interconnected, one infects the 

rest. So now, instead of one institution, you have half a dozen in 

trouble. How do you solve that problem? 

Because that is where we are going to be in 1 year, 2 years, 5 

years from now. Because we continue to have more and more of 

these institutions absorb the smaller institutions, and you wind up 

with fewer and fewer institutions holding more and more of the assets. And now, when one is sick, they are all sick. 

And if one can’t be wound down in a reasonable amount of time, 

what is going to happen? How are you going to react if a September 2008 situation occurs again, where you have to be able to 

make something within a few days’ time of judgment to get things 

going? You are talking here of 90 days to do something on some 

of these institutions. You are not going to have 90 days. If they are 

all infected with the same disease, you are going to have about a 

week to solve this problem or the whole thing collapses. How are 

you going to solve that problem? 

Mr. Krimminger? 

Mr. KRIMMINGER. I think that is why we are doing advance planning. That is why the resolution planning process is so very important, for a couple of reasons. First of all— 

Mr. LUETKEMEYER. Mr. Krimminger, with all due respect, you 

won’t have time to resolve this problem, you won’t have time to resolve this process, because you are going to have about a week to 

make the decision on how you rescue the institutions. 

Mr. KRIMMINGER. The resolution planning process is created long 

before that week. The resolution planning process is created for baVerDate Nov 24 2008 19:21 Sep 09, 2011 Jkt 067932 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 K:\DOCS\67932.TXT TERRIE
32 

sically the bank holding companies now over $50 billion, it is in effect now. We are finalizing the regulation very shortly to do that. 

The second point about the resolution planning process is that, 

ultimately, it is going to require the firms themselves to look at 

simplification. There are parts of Dodd-Frank that can require simplification. It is going to be important to move forward with those, 

so that actually occurs. Because I would fully agree with the Inspector General that simplification and reducing concentration is 

important to the system, and we need to move forward with doing 

that. 

Mr. LUETKEMEYER. Okay. How are you going to do the simplification? Are you going to require them to sell assets off, reduce size? 

Are you going to put a cap on deposits? What is your suggestion 

for doing that? 

Mr. KRIMMINGER. That is going to depend upon how the resolution plans for these firms come forward. If they can show that they 

can be resolved under bankruptcy, then they can show that, and 

that would be a very good thing. If they can’t show that, then they 

are going to have to take some hard decisions about what steps 

next to take in order to address that simplification issue. 

Similarly, Title I of Dodd-Frank can impose, and should impose, 

additional capital and leverage requirements on the largest financial institutions so that they would have an incentive then to not 

be so large and complex. 

Mr. LUETKEMEYER. You keep talking about the resolution of the 

problem. I am trying to get to the problem before it happens. Because my concern is, if we don’t find a way to get these banks capitalized or deconnected or be in less risky positions, we are going 

to wind up with the whole system being in a position where we 

can’t save it unless you do another huge bailout. And the bailout 

of 2008 is going to look like a little bitty one compared to what is 

going to happen if we don’t do this right this time. 

Mr. KRIMMINGER. I would fully agree that higher capital levels— 

in fact, that is part of the Basel III standard, to have higher capital 

for the largest financial institutions. 

I also fully agree that we need to take steps—the steps I am 

talking about are far in advance of any resolution. The planning 

process would be starting now, not waiting until there is a resolution— 

Mr. LUETKEMEYER. My concern is, we are not going to have time 

to do all this planning whenever the 2008 bomb hits us again. I 

think we are being very shortsighted instead of being long-sighted. 

And if the Chair would just indulge me for 1 second, there is a 

new movie out called ‘‘Too Big to Fail.’’ Have either one of you seen 

it yet? 

Ms. ROMERO. I have. 

Mr. KRIMMINGER. I have seen parts of it, yes. 

Mr. LUETKEMEYER. Is it a pretty accurate reflection of what happened in 2008, in your opinion? 

Mr. KRIMMINGER. It is a fictionalized version. 

Mr. LUETKEMEYER. Ms. Romero? 

Ms. ROMERO. I think it is a pretty sensationalized version, but 

a lot of the same players and things that happened matched up 

with what we audited. 

33 

Mr. LUETKEMEYER. Okay. Just curious. Thank you very much. 

Thank you, Madam Chairwoman. 

Chairwoman CAPITO. Thank you. 

Mr. Huizenga? 

Mr. HUIZENGA. Thank you, Madam Chairwoman. 

And just a general comment. I am shocked—shocked—that anything would be sensationalized out of Washington or out of Hollywood. So I am sure that is news to everybody. 

But I have a general question. And I appreciate—and I have to 

tell you, I have the utmost respect for my friend from Missouri 

here, and his knowledge and background in it. And I struggle to 

find anything more intelligent or as intelligent to ask. But it seems 

to me that he is right, as we are heading down this path of trying 

to make sure this never happens again. 

I am curious if either of you believe that the notion, just the notion of ‘‘too big to fail’’ has really been driven out of the marketplace? 

Mr. KRIMMINGER. Not yet. Certainly, to date, the largest financial firms do have something of an ‘‘uplift,’’ as it is called in credit 

rating parlance, for the fact that they have this expected potential 

future government support. 

And as I mentioned earlier in my testimony or in response to 

questions, the credit rating agencies have told me that it is not 

based upon any statutory authority today, because they agree that 

the statutory authority to provide a bailout doesn’t exist today. 

Their only concern is what could happen under a future law adopted by a future Congress in a crisis? 

That is why I think it is critical that we move forward aggressively to try to provide that simplification and to provide a more 

resilient and stable financial system through higher capital and 

other measures. 

Mr. HUIZENGA. Ms. Romero? 

Ms. ROMERO. Absolutely not. These large firms are definitely still 

‘‘too big to fail.’’ They enjoy all the competitive advantages: the enhanced credit ratings by Standard & Poor’s and by Moody’s; cheaper access to credit that doesn’t take into account all the risk; the 

ability to raise capital. These are all things that they currently 

enjoy. And, also, there is a reduced market discipline. 

Mr. HUIZENGA. Isn’t that somewhat counter to what you were 

saying earlier? 

Ms. ROMERO. No, no, I believe it is the same thing. I am saying, 

the enactment of Dodd-Frank itself did not change ‘‘too big to fail.’’ 

Mr. HUIZENGA. Okay. And it seems to me—this was brought up 

earlier by our colleagues on the side that is now empty—that, in 

many ways, the unknown is worse than the known. And this might 

be a case of the devil you know is better than the devil you don’t 

know. 

And we are talking about SIFI and these systemically significant 

institutions, but I had recently, as a freshman—I am a freshman 

on this committee, so I wasn’t here for those debates. I am sorry 

that my friend from Illinois got duped twice into voting for this. 

And as he was pointing out in his diatribe—it wasn’t a diatribe, 

close to, almost a question—that, somehow or another, this was 

driven by people who love big banks and who love Wall Street. 

34 

I had a visit up to Wall Street while I was here with a couple 

of other freshmen. We sat down and had a meeting with a CEO 

and a CFO from one of those major banks, not one of the nine, but 

a major bank. And they looked at us, and one of the statements 

was, ‘‘Congressman, if we ever find ourselves in this situation 

again, you simply are going to have to do the bailout again.’’ At 

which point, I said, ‘‘No disrespect, but I am curious. Where do you 

live?’’ The answer was Westchester, of course. I said, ‘‘Do you know 

anybody—have any of your of your friends or neighbors actually 

lost their job, much less their home, over what happened?’’ And the 

CFO kind of paused, and she kind of looked up at the ceiling for 

a second, and she said, ‘‘Well, honestly, no, I can’t.’’ I said, ‘‘Here 

is the problem. From Zeeland, Michigan, I can.’’ I know people. My 

family is involved in construction, all right? It has been a very, 

very difficult time. And those ripple effects that my friend from 

Missouri is talking about are huge. 

And I am concerned—Moody’s made note of this a year ago, that 

this language was out there. I think part of the problem is, the 

American people and the marketplace—and I am more concerned 

about, frankly, the American people than I am the marketplace— 

don’t believe our actions match our words here. 

So I am sure my friend from Illinois, who never dreamed he 

would be coming here to bail out Wall Street but ended up doing 

it twice, has every good intention. But this institution does not 

have a good track record, regardless of party label, of making sure 

that our friends back home in those small community banks and 

in those credit unions and in those other areas that are trying to 

provide that credit for those—whether it is rural or suburban or 

even urban areas, that we don’t have a very good track record of 

following our own words. And it seems to me that is a crucial element here, that we do not have the markets that actually believe 

what we have been saying that we are doing. 

And it seems to me—and, Madam Chairwoman, I appreciate you 

doing this hearing to underscore that and reiterate that for us. 

Thank you. 

Chairwoman CAPITO. Thank you. 

Mr. Grimm, for 5 minutes. 

Mr. GRIMM. Thank you, Madam Chairwoman. 

Mr. Krimminger, just to follow up, and expand upon what Mr. 

Luetkemeyer said, I guess I have a little trouble with the idea of 

the premise that the FDIC will take a failed institution and they 

will liquidate that institution. Is that correct? 

Mr. KRIMMINGER. That is what we have done, yes. 

Mr. GRIMM. And under Dodd-Frank, if we have one of these situations where we have a large institution, we are going to sell it off 

and we are going to try to get—obviously, if it is functioning, you 

will get more money. So the sooner we are able do that, the better. 

Is that correct? 

Mr. KRIMMINGER. Absolutely. 

Mr. GRIMM. Because there is only a handful of these very, very 

large institutions, you have to assume that, say, out of the nine, 

if one were to fall, the other eight are going to pick up a vast majority of that business. Is that a strong possibility? 

35 

Mr. KRIMMINGER. There are a couple of options there. That is one 

possibility. You can break up the institution in the resolution process and sell some of the business lines, which may be valuable to 

another firm. 

Another option would be to put it into a bridge financial institution and essentially recapitalize that bridge so that it could be then 

offered off to the private market for recapitalization itself. It would 

be close. All prior shareholders would be zeroed out, so to speak, 

they would have lost all their money. But it could be recapitalized 

so that you wouldn’t increase concentration. 

Mr. GRIMM. Right. That is my concern, is that we have one or 

two of these large institutions in a situation where they need to be 

liquidated, the market to absorb them is going to make those other 

seven, eight major institutions that are going to try to eat them up, 

probably be in a position to pay the higher price, it is going to 

make them even more complex and more interconnected, possibly 

compounding the problem. 

Is that a concern? Is that something the FDIC is conscious of, 

cognizant of, and considering? 

Mr. KRIMMINGER. It is a concern today in bank failures. It would 

be a concern in the future in a resolution under Dodd-Frank, because when one firm buys another firm, it does certainly increase 

concentration. 

Mr. GRIMM. I just want to emphasize also, we have heard the argument made 3 or 4 times today that none of these large institutions want to be considered SIFIs. They are all lobbying not to be 

and making it very clear that they don’t want to be subject to more 

regulations. 

That, in and of itself, doesn’t necessarily mean, though, that is 

not conclusive evidence, that Dodd-Frank is doing what it intended 

to do. Is that accurate to say, Mr. Krimminger? 

Mr. KRIMMINGER. I think that what—I am not going to comment 

on what it does or does not mean, because it could mean a bunch 

of different things, I think. But I think it certainly is indicative of 

the institutions not wanting to have heightened supervision and 

additional capital and liquidity requirements. 

Mr. GRIMM. Have you known of any circumstance ever in the history of banking where an institution wanted higher capital and 

more regulation? 

Mr. KRIMMINGER. I will have to think about that, but I can’t recall, off the top of my head. 

Mr. GRIMM. It is going to be ‘‘no.’’ 

Ms. Romero, do you? 

Ms. ROMERO. No. It is not surprising that the banks don’t want 

enhanced requirements and enhanced supervision. 

Mr. GRIMM. So I would conclude from that, that it is not a reflection on whether Dodd-Frank is good, is bad, is indifferent, or meets 

its goals. It is just simply, no financial institution is ever going to 

opt in for higher capital requirements or more regulation. That, to 

me, just seems like common sense. So I wanted to say that, since 

that argument was mentioned 3 or 4 times, that certainly is not 

conclusive as to Dodd-Frank in any way, shape, or form. 

36 

Enforcement—I think we can talk about the best rules and regulations ever promulgated in the history of the United States, but 

they are only as good as the enforcement. 

Mr. Krimminger, your FDIC banks now, don’t they have some 

type of leverage ratio requirements? 

Mr. KRIMMINGER. Yes. All U.S. banks today have leverage ratio 

requirements, correct. 

Mr. GRIMM. The average approximately 12 to 1, give or take? 

Mr. KRIMMINGER. I would have to look at what the average actually is, but that is probably reasonable. 

Mr. GRIMM. Probably in that ballpark? 

Mr. KRIMMINGER. Minimum. 

Mr. GRIMM. Right. Is there anything in Dodd-Frank that sets an 

explicit ratio so that these financial institutions are not overleveraged? 

Mr. KRIMMINGER. I do not believe there is a specific leverage 

ratio in Dodd-Frank. Certainly, there are heightened capital standards that are, we think, very important in section 171 of DoddFrank to set a floor so that you can’t go below those capital standards. But I don’t believe there is a specific leverage ratio per se in 

Dodd-Frank. That would be set by regulation. 

Mr. GRIMM. Do you think that is something that should be 

looked at or considered? 

Mr. KRIMMINGER. As you know, no doubt, the FDIC has long advocated strict leverage ratio requirements for institutions. Obviously, it would depend on what ratio would be set before I could 

tell whether it would be something good from our perspective or 

not. 

Mr. GRIMM. Fair enough. 

My time has expired. Thank you. 

Chairwoman CAPITO. Mr. McHenry, for 5 minutes. 

Mr. MCHENRY. Thank you, Madam Chairwoman. 

And to the witnesses, I certainly appreciate your testimony, and 

I thank you for your service to our government. 

Ms. Romero, thank you for your hard work taking over as acting 

head of SIGTARP—as acting SIGTARP, I should say. And in connection with that, your January report, quarterly report, in the 

context of the Financial Stability Oversight Council, you cite a 

quote from Secretary Geithner in which he says, ‘‘You don’t know 

what is systemic and what is not until you know the nature of the 

shock.’’ 

And when you talk about systemic risk for non-bank financial institutions, do you think the FSOC will be able to determine properly, identify these firms that are systemically important before the 

fact? 

Ms. ROMERO. I think, now, one of the issues that we saw—that 

interview with Secretary Geithner was in connection with our audit 

of the bailout of Citigroup—was that the determination that 

Citigroup was systemically significant was really an ad-hoc decision, and it was really one based on some gut instinct and fear of 

the unknown. 

What they need to do now, what FSOC needs to do now is set 

up some objective criteria. They have set out general criteria— 

interconnectedness and size and liquidity. But they do need to set 

37 

some objective criteria. We understand that there may be, in some 

cases, some need for some subjectivity for different industries, for 

example. But they have to set not only objective criteria but a 

framework in applying that criteria. Because now, when someone 

says, ‘‘The criteria is size and interconnectedness,’’ no one knows 

what that means. And that is what FSOC is working toward, and 

that is what they need do. 

Mr. MCHENRY. And that has been in your quarterly recommendations, right? 

Ms. ROMERO. It has been part of our audit. It is part of our work 

on the Council of IGs, CIGFO, that has oversight over FSOC. 

Mr. MCHENRY. Okay. And in connection with the Citi report as 

well, you cite in that report, ‘‘After the deal was announced, the 

impacts on the market’s perception of Citi was immediate. Its stock 

price stabilized’’—you mentioned this in your testimony—‘‘Its stock 

price stabilized, its access to credit improved, and the cost of insuring its debt declined.’’ 

So you think that designating firms as ‘‘systemically important’’ 

will result in similar market perceptions and actions? 

Ms. ROMERO. I think that remains to be seen. Right now, no one 

knows what it means—what is going to happen if there is the designation. And so I think the markets are watching for that. I think, 

right now, until there are some statements made as to what it 

means to be systemically significant and the enhanced supervision 

and if there is simplification that comes from that, the markets are 

going to watch that. 

Until the markets are convinced that what that means doesn’t 

include a future government bailout, all the competitive advantages that normally are associated with ‘‘too big to fail’’ are going 

to continue to persist and market discipline is going to be reduced. 

Mr. MCHENRY. Thank you. 

Mr. Krimminger, in terms of the S&P’s announcement that they 

are going to make permanent the prospect of government support 

in their ratings of these eight largest firms, and they have received 

basically a ratings uplift with the notion that there would be a Federal backstop to these largest institutions, do you think that is a 

fair assessment? 

Mr. KRIMMINGER. I think that, as I had mentioned earlier in my 

testimony, the uplift that these firms have gotten has been in existence long before the crisis and long before Dodd-Frank. Actually, 

just before the crisis, they began to be a little more—the rating 

agencies, that is—began to be a little more explicit about the basis 

for the uplift. 

My discussions with the rating agencies indicated that the reason for the uplift continuing is that they are looking at the residual 

effects of the prior assistance that was provided as well as, as they 

put it, the unpredictability of what a future law could be. They 

agree with me, however, when I have asked them the question 

pointedly, that the current law does not allow for the bailouts done 

in 2008. 

And I would just note in closing that Moody’s has put these institutions—or put the uplift under review for a downgrade based upon 

their view that the statute says that there is not going to be a bailout, so they should probably at least reduce it, if not eliminate it. 

38 

Mr. MCHENRY. Moody’s actually says in their report that it is 

‘‘unlikely to withdraw all government support from the ratings of 

these eight banking groups.’’ So they even cite it in their Januaryof-this-year report. 

Ms. Romero, in your testimony, you say, ‘‘Cheaper credit is effectively a subsidy, which translates into greater profits, giving the 

largest financial institutions an unearned advantage over their 

small competitors.’’ 

What are your thoughts on this development? 

Ms. ROMERO. I think it still continues to exist. I think the market still perceives these institutions as ‘‘too big to fail.’’ They are 

bigger than they were pre-crisis. There is now concentration in the 

industry. So that is what has to be reversed that has not been reversed yet. 

It is possible that if the regulators take action, that could be reversed. But understand what I am saying. I am talking about dramatic action that takes some significant courage on the part of the 

regulators to try to protect the greater financial system from one 

or two or others of these systemically significant institutions from 

suffering a material distress. 

Mr. MCHENRY. Thank you. 

Chairwoman CAPITO. Thank you. 

Our first panel is concluded and dismissed. I would like to thank 

both of the witnesses. I think we have had a very good discussion. 

At this time, I would like to call up our second panel of witnesses. And I will introduce them individually once they get seated. 

I would now like to begin the second panel. 

I would like to thank our witnesses for being here today and for 

your patience with sitting through the first panel. I appreciate 

that. 

I will introduce you first for the purpose of giving a 5-minute 

opening statement. 

First, Mr. Stephen J. Lubben, Daniel J. Moore Professor of Law, 

Seton Hall University School of Law. 

Welcome, Mr. Lubben. 

STATEMENT OF STEPHEN J. LUBBEN, DANIEL J. MOORE PROFESSOR OF LAW, SETON HALL UNIVERSITY SCHOOL OF LAW 

Mr. LUBBEN. Thank you for having me, Madam Chairwoman. 

I thought that, rather than rehashing what I have written in my 

prepared statement, I might just focus in on three particular issues 

that I wanted to highlight. 

First of all, especially since I am a bankruptcy person, I think 

there is a tendency to focus on the Orderly Liquidation Authority 

in isolation. And so, right up front, I want to make the important 

point that I think there is a strong connection between Title I and 

Title II of Dodd-Frank and, for that matter, between Title II and 

all the preexisting regulations, like prompt corrective action, so 

that, to some degree, what happens with regard to the Orderly Liquidation Authority in Title II is going to be driven by what happens 

beforehand in Title I and by those regulations, how those regulations are applied—for example, whether there are adequate capital 

charges put in place for ‘‘too-big-to-fail’’ financial institutions. 

39 

The second point I was going to make is just to lay out my cards 

on the table as to why I don’t think a pure bankruptcy system will 

work, despite some of the comments this morning. And so, in this 

regard, I may be somewhat on the same page as Professor Barr. 

First of all, speed and liquidity. As I say in my written testimony, I think that as fast as cases like Lehman and General Motors went, ideally, it would be even faster. So one good aspect of 

the Dodd-Frank Orderly Liquidation Authority is that the sale or 

the transfer can happen on the very first day of the case. 

The other one is liquidity. You do not want the financial institution to collapse on the first day. Maybe some people do want it to 

collapse on the first day, but if you don’t want the financial institution to entirely collapse on the first day, then you need some sort 

of liquidity to back that up. And the unfortunate reality is that 

probably in any financial crisis, it is going to be the government. 

So I think, rather than focusing on whether or not that liquidity 

exists, it is better to focus on how do we either make sure that the 

industry pays for it or that the government gets paid back when 

they do have to pay it out. 

In connection with this point, I will just say, too, that I think we 

need to be very careful about drawing lessons from the Lehman 

Brothers bankruptcy case and what that tells us how about how 

Chapter 11 works with regard to large financial institutions. The 

Lehman Brothers bankruptcy case, as the FDIC is fond of noting, 

had no preplanning whatsoever, but that is not typical for most 

large Chapter 11 cases. So we have to be careful about that. 

So if that is the case, then I get to my third point, and this is 

where I probably diverge here. One of the problems I see with the 

Orderly Liquidation Authority, it is the overriding question of, will 

it work? 

And the reasons why I wonder about whether it will work is, 

first of all, there is uncertainty about when it applies. And this was 

referred to in some of the earlier questions today. It would have 

been a lot simpler, if we wanted to go down this road with Orderly 

Liquidation Authority, to say it applies to a set of financial institutions, period. Instead, we have this odd system where Chapter 11 

applies unless the Treasury Secretary decides it doesn’t apply, and 

then Orderly Liquidation Authority applies. 

I am not sure that is a very workable thing. There is the scope 

of the Orderly Liquidation Authority. The analogy is often drawn 

to what the FDIC has done in the past with regard to bank resolution. The FDIC has full control over the entire bank. The FDIC will 

not have full control over a financial institution under the Orderly 

Liquidation Authority because it doesn’t apply to the bank part, it 

doesn’t apply to the insurance company part; it only partially applies to the broker dealer part. 

And then there is the final question of transparency, which I 

think gets to a question of legitimacy. Certainly, in the financial 

community, the people that I have talked to, there is just some real 

concern about the FDIC’s ability to resolve these complicated financial claims in a timely manner, and the way that they are going 

to do it, since they don’t have any obligation to do so publicly. 

And when we get to the question of ability, there is also the 

question of staffing, which I think was alluded to also in the first 

40 

panel today. Does the FDIC have the ability to staff the resolution 

of multiple large financial institutions simultaneously? I think 

there is some real skepticism on that point. 

So, despite what the FDIC has occasionally said about me in the 

past, I am not a bankruptcy fanatic, but, rather, I think the Orderly Liquidation Authority could be improved from what it is. 

[The prepared statement of Mr. Lubben can be found on page 82 

of the appendix.] 

Chairwoman CAPITO. Thank you. 

Our next panelist is the Honorable Michael Barr, professor of 

law, University of Michigan Law School. 

Welcome. 

STATEMENT OF THE HONORABLE MICHAEL S. BARR, 

PROFESSOR OF LAW, UNIVERSITY OF MICHIGAN LAW SCHOOL 

Mr. BARR. Thank you, Madam Chairwoman. 

Over 21⁄2 years ago, the United States and the global economy 

faced the worst economic crisis since the Great Depression. The crisis was rooted in years of unconstrained excess on Wall Street and 

prolonged complacency in Washington and in major financial capitals around the world. 

One year ago, President Obama signed the Dodd-Frank Act, 

which tackles the key problems that led to the crisis and will help 

to end the perception of ‘‘too big to fail.’’ The Act provides for supervision of major firms based on what they do rather than their corporate form. Shadow banking is brought into the daylight. The 

largest firms will be required to build up their capital and liquidity 

buffers, constrain their relative size, and restrict their riskiest activities. 

The Act comprehensively regulates derivatives with new rules for 

exchange trading, central clearing transparency, and margin. The 

Act creates a new Consumer Financial Protection Bureau. And the 

Act creates an essential mechanism for the government to liquidate 

failing financial firms without putting the taxpayers or the economy at risk. 

With respect to resolution, before Dodd-Frank, the government 

did not have the authority to unwind large financial firms that 

failed, such as Bear, Lehman, and AIG, without disrupting the 

broader financial system. When the financial crisis hit, that left the 

government with the untenable choice between taxpayer-funded 

bailouts and financial collapse. 

Today, major financial firms will be subject to heightened prudential standards, including higher capital and liquidity requirements, stress tests, and living wills. These standards will force 

firms to internalize the costs that they impose on the system and 

will give them incentives to reduce their size, complexity, leverage, 

and interconnections. Should such a firm fail, there will be a bigger 

capital buffer to absorb losses. These measures will help to reduce 

the risk that any firm’s failure will pose a danger to the stability 

of the financial system. 

But as Lehman’s collapse showed quite starkly, there are times 

when existing tools were simply not adequate to deal with the insolvency of a large financial institution in times of severe stress. 

That is why the Act permits the FDIC, in limited circumstances, 

41 

to resolve the largest financial companies outside of bankruptcy, 

consistent with the approach long taken for bank failure. 

This is the final step, in my view, in addressing the problem of 

moral hazard, to make sure that we have the capacity to unwind 

major financial firms in an orderly fashion that limits collateral 

damage to the system. 

Under the Orderly Liquidation Authority, the FDIC is provided 

with the tools to wind down a major financial firm at the brink of 

failure. Shareholders and other providers of regulatory capital to 

the firm will be forced to absorb losses, and culpable management 

will be terminated. Critical assets and liabilities of the firm can be 

transferred to a bridge institution, while any remainder is left in 

the receivership estate. Any required funding for the FDIC to provide liquidity can be obtained through Treasury borrowing that is 

automatically repaid from the assets of the failed firm or, if necessary, from other ex-post assessments on the largest financial 

firms. Taxpayers are not on the hook. The resolution authority allows the FDIC to wind down a firm without putting the financial 

sector and the economy as a whole at risk. 

The objectives of resolution differ from those of the Bankruptcy 

Code. The purpose of the Bankruptcy Code is to reorganize or liquidate a failing firm for the benefit of its creditors. The resolution 

authority is structured to manage the failure of a financial firm in 

a manner that protects taxpayers and the broader economy. This 

purpose is explicitly different from the Bankruptcy Code, and that 

is why the Act is narrowly tailored to situations in which there are 

exceptional threats to financial stability. 

In the future, major financial institutions would have prepared 

a living will embodying a liquidation strategy and would have been 

subject to comprehensive supervision. Such firms would have larger capital buffers and stringent conditions imposed on them. 

But we need to have some humility about the future and the 

ability to predict any financial crisis. In a severe crisis, if one or 

more financial firms fail and prudential measures are insufficient, 

a receivership should be available. 

This has three key advantages over the past: first, the FDIC 

could swiftly replace the board and senior management; second, a 

temporary stay of counterparty termination and netting rights, 

during which the FDIC could transfer qualified financial contracts 

to a third party or a bridge institution; and, third, the ability to 

set up a bridge firm with financing from the FDIC to fund necessary liquidity. 

In my view, the Dodd-Frank Act puts in place the key reforms 

that were necessary to end the perception of ‘‘too big to fail’’ and 

to establish a firm foundation for financial stability and economic 

growth in the decades ahead. 

Thank you. 

[The prepared statement of Mr. Barr can be found on page 54 of 

the appendix.] 

Chairwoman CAPITO. Thank you. 

I would like to begin the questioning. 

Mr. Barr, in your 5-minute statement there, you made two—and 

you might have made others that I missed—but you talked about 

Dodd-Frank being able to constrain—would work to constrain the 

42 

relative size of the institutions and that through further DoddFrank regulations, there would be incentives to reduce size. We 

just heard—and I think we know this to be true—that the bigger 

institutions are actually bigger than they were several years ago. 

How is that working? We have had Dodd-Frank for almost a 

year, and, obviously, neither one of these constraints of relative 

size or incentive to reduce size—how is that going to change here 

in the next year or 2 years, in your mind? 

Mr. BARR. Madam Chairwoman, the increase in size of these institutions occurred during the financial crisis, prior to the passage 

of the Dodd-Frank Act. What we have seen since the passage of the 

Dodd-Frank Act and the implementation of the BASEL III capital 

rules is that those firms are building bigger capital buffers and, at 

least in several instances, reducing balance sheets, shedding off 

riskier sets of activities. And I think we are going to continue to 

see that— 

Chairwoman CAPITO. So, would I take that to mean that that is 

constraining their size, if they are shedding their balance sheet? Is 

that the main thing, in your mind? 

Mr. BARR. Madam Chairwoman, the phrase that I used in my 

testimony and that I believe is the case is that the Dodd-Frank Act 

will constrain their relative size—that is, as a share of the financial 

sector as a whole. So, in particular, I was referring in my remarks 

and in my longer testimony to the provision in the Dodd-Frank Act 

that limits the liabilities of any one large financial firm to no more 

than 10 percent of the liabilities of the financial system. If they 

reach that level, then they are constrained in their ability to acquire or merge with other financial firms. They can continue organic growth. That is a relative constraint on relative size. 

I also believe that the implementation of the BASEL III capital 

rules, the Collins amendment, the FDIC’s new assessment system, 

will all have the effect of providing a kind of tax on firms as they 

continue to grow, particularly on the short-funded liability side of 

the system. So what you will see over time—and this will take 

time—is a relative constraint on the growth of any one firm as a 

share of the overall financial system. 

Chairwoman CAPITO. But a relative growth of one firm—and 

then when you look at the SIFIs in whole, that continues to grow 

and have a larger share, market share, in the country. 

We have heard a lot about regulations for our community banks. 

The gentleman from Georgia talked about the failures of banks in 

his home State, and that is a concern. I would like to ask Mr. 

Lubben if he would like to comment on that point. Because, in my 

mind, ‘‘too big to fail’’ is a lot of things, but ‘‘too big to fail’’ is getting so big that you can’t fail—that you can’t be permitted to fail. 

Mr. Lubben? 

Mr. LUBBEN. It seems to me that Dodd-Frank really has only an 

indirect effect on this issue. It has an indirect effect in the sense 

that it—and this is somewhat what Michael was speaking about— 

that it puts a kind of tax on the bigger financial institutions, so 

that to the extent that smaller institutions are more nimble and 

more competitive, they may eventually take market share away 

from the bigger financial institutions. But that strikes me as a kind 

of a glacial way of going about solving that problem. 

43 

On the other hand, I do have my doubts about whether anybody 

has the political fortitude to try to tackle the issue of financial institutions being too big head-on. 

Chairwoman CAPITO. And the SIGTARP, when she was here at 

the first panel, she kept going back to that, in terms of a way to 

assure that the bigness is not part of the problem. She talked about 

the systemic—did you want to make another comment? 

Mr. BARR. Just to that point, if I might. I don’t think that it is 

purely a question of the size of the institution. You also want to 

know, what is the size of the capital buffer, what are the other protections built into the system? 

We have very large institutions in the United States. They are 

a fraction of the size of our GDP of our economy. They are, in comparison, quite small, say, with respect to U.K. or Swiss firms, 

which are many multiples of their economy. 

I think what we want in our system is exactly what you said, 

which is a diversity of kinds of financial institutions. We need to 

have a system that is strongly supportive of community banks and 

credit unions and thrifts around the country. I think that is one of 

the great strengths of the American system that we need to preserve and protect. 

Chairwoman CAPITO. Mr. Lubben, really quickly, do you think it 

is plausible under the current law that the government will refrain 

from bailouts in times of severe financial crisis? 

Mr. LUBBEN. It depends. The phrase ‘‘bailout’’ is subject to multiple interpretations, so it depends what precisely you mean by 

that. 

I think the government will refrain from bailing out the failed financial institution itself. What the Orderly Liquidation Authority 

does allow them to do, though, is bail out the counterparties to that 

financial institution, so not unlike the treatment that Goldman got 

with regard to AIG. 

And in the sense that the financial institution that fails, I think 

as was—the point that was made repeatedly this morning was 

right—that financial institution has to fail and under the law. 

What the Orderly Liquidation Authority does allow, though, is the 

funding of the counterparties to that financial institution. So, in 

some sense, that is a bailout, a bailout of the counterparties of the 

failed financial institution. 

So that is a long way of saying ‘‘no.’’ 

Chairwoman CAPITO. All right, thank you. 

Ms. Maloney for 5 minutes. 

Mrs. MALONEY. I want to thank both of the panelists for coming. 

And thank you, Professor Barr, for coming all the way from the 

University of Michigan. 

A great deal of the debate today on both sides was about the 

modified bankruptcy versus the Dodd-Frank resolution authority. 

And I want to point out that during the debate and work on DoddFrank, at no time did my colleagues in the Republican Party propose regulatory reforms to prevent a company from endangering 

the system by becoming ‘‘too big to fail.’’ 

And, specifically, many people have argued today that the Republicans would say that alternative uses of a variant reorganization bankruptcy would have allowed the company to survive, inVerDate Nov 24 2008 19:21 Sep 09, 2011 Jkt 067932 PO 00000 Frm 00049 Fmt 6633 Sfmt 6633 K:\DOCS\67932.TXT TERRIE
44 

stead of mandating its liquidation. Could you go into greater detail? 

I will note that we had the bankruptcy authority during the crisis. Lehman is still in bankruptcy; it hasn’t been resolved. And in 

the bankruptcy proceeding, there is no provision that you don’t use 

taxpayers’ money to help them out. 

Could you—you were here during the hearing, and you saw the 

arguments back and forth. And I wish that you would go forward 

with why the proposal that is in Dodd-Frank is superior to bankruptcy in terms of the overall economy and safety and soundness 

and the taxpayer. 

Mr. BARR. Thank you, Representative Maloney. I would be happy 

to start. 

There are a number of key changes that are put in place in the 

Dodd-Frank Act that will make the financial system more resilient 

in the future: higher capital requirements, particularly for the largest, most complex firms; higher capital requirements at the holding 

company level—holding companies before were largely ignored and 

now they are a central feature of higher standards in the system; 

greater limits on interconnectedness among firms; limits on loans 

to one borrower; limit on inter-financial-institution credit exposure; 

limits on the riskiest activities of firms related to proprietary trading and hedge fund investment; limits on the ability of financial institutions to use loopholes in the law to evade regulatory requirements; the moving of a savings-and-loan holding company into the 

same structure as a bank holding company and their supervision 

at the holding-company level by the Federal Reserve; increased assessments based on total liability in the system for the largest 

firms by the FDIC; a much greater move to consolidated, uniform 

supervision standards; annual and transparent stress tests of all 

the major institutions so there is a horizontal review of the safety 

and soundness of those institutions; a requirement of living wills 

for those institutions that have the ability and the requirement to 

simplify their organizational structure and better align them. That 

is all before you get to the question of resolving a firm. Those are 

all measures designed to make the financial system more resilient. 

With respect to resolution, the Dodd-Frank Act made several key 

changes. It eliminated the ability of the Federal Reserve under 

13(3) to provide assistance to an individual failing institution. It removed the prior authority of the FDIC to issue a similar approach 

in the form of open bank assistance to a failing firm. And it provided the liquidation authority that has been the central topic of 

discussion today that provides that the firm that is failing will be 

put out of its misery, or our misery; culpable management will be 

fired; and shareholders and regulatory capital will be wiped out. 

And then there is a provision in there that permits the FDIC to 

continue the firm in a bridge firm or to sell it using a liquidity provision that I think all four of your speakers this morning believed 

is an essential element of any system that is designed to preserve 

financial stability at a time of great economic stress. 

Mrs. MALONEY. Could you comment on bankruptcy and the alternative? They keep saying bankruptcy would work. Obviously, it 

didn’t work; we are still mired in Lehman. But could you specifiVerDate Nov 24 2008 19:21 Sep 09, 2011 Jkt 067932 PO 00000 Frm 00050 Fmt 6633 Sfmt 6633 K:\DOCS\67932.TXT TERRIE
45 

cally address the bankruptcy alternative as not being appropriate 

going forward? 

Mr. BARR. I think that the entire package of reforms that DoddFrank put forward are essential for ending the problem of ‘‘too big 

to fail.’’ I don’t think that tweaking the bankruptcy system alone 

would resolve the problem. 

If you had decided—if the Congress decided, instead of providing 

special resolution, to go through the bankruptcy route, I believe 

that Congress would have found itself recreating the entire regulatory structure and calling it bankruptcy. 

I think the essential elements include supervision, capital requirements, the ability to intervene before a firm fails, the ability 

to have a stay of netting rights under the contract, the ability to 

fire culpable management, and the ability to fund through liquidity 

in that crisis period. So that whole package of reforms was essential. 

I think the bankruptcy process, unfortunately, has a different set 

of purposes, and it achieves those purposes, I think, reasonably 

well. But they are not the same purposes that the Congress is trying to achieve in making the financial system more resilient. 

Mrs. MALONEY. Yes, and preventing. Thank you so much. 

My time has expired. 

Chairwoman CAPITO. Thank you. 

Mr. Renacci for 5 minutes. 

Mr. RENACCI. Thank you, Madam Chairwoman. 

And thank you, gentlemen, for being here. 

I think we would agree today that the Orderly Liquidation Authority is better than bankruptcy because bankruptcy doesn’t have 

some of the things that are available to the Orderly Liquidation 

Authority. So the question would be, if we were able to change the 

Bankruptcy Code so that some of the attributes of the Orderly Liquidation Authority were there, would it not be better? 

Let me tell you why I am saying that. I have actually sat in the 

chair and had to take seven companies—I was hired—seven companies through the bankruptcy system. So I see it as a good way. It 

protects creditors, it protects assets. The only difference, from what 

I see, is that it doesn’t have—and, Mr. Lubben, you said this earlier—the ability for speed and liquidity. 

So if we were able to change the Bankruptcy Code to ensure 

speed and offer liquidity, tell me why you don’t believe the bankruptcy system would not offer the same opportunities as the Orderly Liquidation Authority. And it would take government out of 

liquidation and put the courts system into the liquidation process. 

Mr. Lubben first, and then Mr. Barr. 

Mr. LUBBEN. I do think that if you modified the Bankruptcy Code 

you could achieve, probably, a better solution than either pure 

bankruptcy or the Orderly Liquidation Authority. I think, to be 

clear, it would create a new kind of system that would be neither 

bankruptcy nor bank resolution; it would be some sort of hybrid of 

the two. But I think that is doable and, in some ways, might be 

preferable. 

Speed, liquidity—I would add the additional criteria that you 

would want to have the regulators have the ability to commence a 

case, not just the company itself. I think, given those conditions 

46 

and echoing what was said about the needs to also address the safe 

harbors—but I know that is not necessarily this committee’s jurisdiction—if you can do all those things, then I think you can get to 

the same place. And I think it would probably be preferable because it would, I think in many respects, be more transparent and 

more legitimate to a lot of people in the market. 

Mr. RENACCI. Mr. Barr? 

Mr. BARR. I think that you could make changes to bankruptcy 

law that would make it more effective than it currently is. I agree 

with some of the suggestions that Professor Lubben made. 

I still think it would be an inferior solution to the one that Congress has already enacted. Because what Congress has enacted is 

an overarching system of supervision, capital requirements, and 

resolution authority that work together as a whole to improve the 

resiliency of the financial system. You have the ability of regulators 

to intervene, to supervise the institution, to increase capital requirements, to increase liquidity requirements, and to intervene on 

an early basis if a firm gets into financial trouble, so that the resolution aspect of Dodd-Frank is at the tail end of a supervisory process. 

And I would suggest that is the more useful frame to think about 

resolution in than as a separate matter akin to bankruptcy. 

Mr. RENACCI. But, again, you would have government intervention versus court intervention on both sides. And I am trying to 

keep the government out of this, by the way, as much as possible, 

although I know we need regulations and we need supervision. And 

I think if the regulators would have stepped up in 2008, maybe 

some things would not have occurred. 

So the question is, what is better? 

Mr. BARR. I would agree with you that the key is having supervisors supervise and regulate and impose capital requirements and 

be involved. There is no way around that. 

I think what we had in the lead-up to the financial crisis in 2008 

was a failure of supervision, regulation, and legal structure that 

was corrected in the Dodd-Frank Act and needs now to be implemented to be effective. And I think that is really where our energies ought to focus in the coming years. 

Mr. RENACCI. One other quick question. Living wills, I know we 

talk about this as an advance opportunity. As a CPA and a business owner, putting living wills out there and having—I am not too 

sure how long they would last, because a living will could actually 

have to be updated daily, if not weekly, depending on what the entity was going into. 

So we are all running on a premise that the living will could be 

the answer. But would both of you comment and tell me whether 

you would agree or disagree that a living will, if not changed on 

a weekly basis sometimes, would not really be capable of handling 

the track of which direction these companies have gone. 

Mr. BARR. I will start, and then others can join in. 

I agree that a living will is not a silver bullet, to mix our metaphors. It is not the sole answer to how the system needs to work 

in the future. I think it is an additional useful tool in the supervisory process and will facilitate early resolution. 

47 

I also agree with you that, to be effective, living wills have to be 

updated almost on a continuous basis. That is, a living will is a 

document that helps the firm track its business risk against its 

legal organizational structure. It is going to need to be updated and 

should be updated, I think, on a continuous basis. 

Mr. LUBBEN. Just to chime in on that, I am deeply skeptical of 

the living wills. I think they have some potential, but you are right, 

they have to be updated almost continuously. And I think you also 

have to expect that both regulators and boards will have much 

more foresight than they did in the past to be able to see the problems before they develop. 

And as somebody who also has experience in the bankruptcy 

area, I know that boards of distressed companies routinely suffer 

from what we refer to as ‘‘terminal optimism.’’ And, it is hard for 

me to get to the point where I will trust that that system is going 

to work as designed. Theoretically, it sounds nice, but I am skeptical. 

Mr. RENACCI. Thank you. 

Chairwoman CAPITO. Thank you. The gentleman’s time has expired. 

Mr. Canseco? 

Mr. CANSECO. Thank you, Madam Chairwoman. 

Let me ask a very brief question with regards to Title II, section 

210, sections (a)(9)(D), limitation on judicial review. This provision 

severely limits creditors’ right to appeal any decisions. And I don’t 

want to quote from it because it will take too much of our time. 

But doesn’t that, in fact, impose an additional burden on our 

economy, if creditors have no right of appeal from any decisions 

of— 

Mr. BARR. If I might begin with an answer, that provision is the 

same kind of provision that has long existed in the bank failure 

law. And it is interpreted by the FDIC and by the courts to permit 

claimants to bring, not an appeal of an administrative ruling, but 

an actual de novo case in district court to adjudicate their claims. 

So they have full right to say that the claim that has been disallowed should, in fact, have been permitted. 

Mr. CANSECO. It says in subsection (i), ‘‘Any claim or action for 

payment from, or any action seeking a determination of rights with 

respect to, the assets of the covered financial company for which 

the Corporation has been appointed receiver, including any assets 

which the Corporation may acquire from itself as such receiver.’’ 

So it cannot go out there to Federal court and even bring it up 

de novo, because they will throw subsection (d) in their face. 

Mr. BARR. Again, I am happy to discuss this with your staff and 

counsel for the committee at any time, but that provision has been 

interpreted by both the FDIC and the courts to permit de novo review of claims. And that would be the same under this procedure. 

And, in addition, there are other judicial protections, as you know, 

built into the Act. 

Mr. CANSECO. Okay. Thank you. 

Recently, economists at the Richmond Federal Reserve published 

a paper estimating how large the Federal safety net for the financial sector has become. A study earlier this decade shows that, in 

2002, approximately 45 percent of liabilities in the financial sector 

48 

had some kind of government backing. The recent paper completed 

by the Fed from Richmond showed that, by the end of 2009, nearly 

60 percent of financial sector liabilities had either an explicit or implicit government backing. This includes everything from FDIC-insured deposits to pension guarantees to the debt of Fannie Mae 

and Freddie Mac. 

So we are at a point today where nearly two-thirds of all the liabilities in our financial sector are guaranteed by the government, 

and most of these liabilities are concentrated in the largest financial institutions. 

I would be interested to hear your thoughts on how this contributes to moral hazard, but also how it threatens to perpetuate ‘‘too 

big to fail,’’ given that large institutions are benefitting the most 

from these guarantees. 

Mr. BARR. I would agree with the idea that the government 

needs to reduce its exposure in the financial sector. I think the 

Dodd-Frank Act makes it much easier for the government to do 

that. 

The kinds of expansions that occurred during the financial crisis 

were extraordinary actions that the Congress, the FDIC, the Federal Reserve, and two different Treasury Secretaries felt were essential to preserve financial stability. But they ought to have been 

on a temporary basis, and they ought now to be wound down. 

Mr. CANSECO. Mr. Lubben, do you want to comment? 

Mr. LUBBEN. In part, again, this goes back to the question of the 

size of some of the ‘‘too-big-to-fail’’ institutions and what we want 

to do and what we have the political will to do, regulatorily speaking, with regard to those institutions. They are what they are, and 

I think we have to face up to that reality. 

Mr. CANSECO. Thank you. My time has expired, and I yield back. 

Mrs. MALONEY. May I clarify? 

Chairwoman CAPITO. The gentlelady, yes, from New York. 

Mrs. MALONEY. I am looking at the Public Law. And the limitation on judicial review, when you read the item, ‘‘Any claim or action for payment from, or any action seeking a determination.’’ Before, it said, ‘‘except as otherwise provided in the Title,’’ and it 

clearly provides in the Title ‘‘de novo review.’’ And we can get you 

that paperwork. 

Thank you. 

Chairwoman CAPITO. Okay. Thank you. 

Mr. Luetkemeyer for 5 minutes. 

Mr. LUETKEMEYER. Thank you, Madam Chairwoman. 

As we look at this Orderly Liquidation Authority, how effective 

do you think it is going to be, from the standpoint that a bank is 

a unique institution—it is a unique business entity from the standpoint that much of its business is transacted on the basis of confidence, the belief that if I loan you money, I am going to get it 

back; or if you invest money with me, you are going to get it back 

from me. And with the Orderly Liquidation Authority, we are sort 

of again believing that business is going to kind of go on, everybody 

is going to be okay. 

And, Professor Lubben, you made the statement that the FDIC 

is even not in full control of the liquidation, because there is going 

to be a lot of it that is going to be outside their purview. 

49 

Would both of you like to comment on how it is going to, in reality, work? Is this really going to be able to be something we can 

actually do because of the uniqueness of a banking institution? 

Mr. LUBBEN. Maybe I can start with that. 

I have serious concerns about how an actual orderly liquidation 

case would go, particularly if you start to think about an institution like Citibank or Citigroup. Part of that will be an Orderly Liquidation Authority; part of it will not. Especially if you imagine, 

purely hypothetically, a time when they still own an insurance 

company, it becomes even more complicated. 

I think the best I can say about Dodd-Frank in this regard is, 

we can hope that the Title I provisions prevent us from ever getting to that point in the first place. And so, in that sense, I think 

that Dodd-Frank does do something good. 

But I think there are real concerns about how an Orderly Liquidation Authority case will run, what kind of litigation will spin 

out of such a case. Because I think, while I agree that there are 

rights to court review, they are kind of cumbersome and they may 

not really get us to a place that is really any better than we are 

with regard to Lehman Brothers today. 

And there is this question of, does the FDIC have the staff and 

the capability to handle multiple resolutions simultaneously? Because, again, I don’t think they are going to happen in isolation. 

I think they are going to come in bunches. 

Mr. LUETKEMEYER. This was my concern a while ago, if you listened to my questions, that I think that, as they get bigger and 

bigger, they are all systemically linked together, therefore if one is 

in trouble, the whole outfit is in trouble and our whole system is 

in trouble. And now, while this sounds like a wonderful program 

to try and get this situation under control, I think that this bill has 

exacerbated our situation by allowing them to get bigger, and we 

don’t have the kind of controls in place that we need to be able to 

hold these folks. 

Mr. LUBBEN. Again, in part, that will depend on how the Title 

I provisions are implemented. 

Mr. LUETKEMEYER. Right. Okay. 

Professor Barr? 

Mr. BARR. If I could, I think it is a good idea for all of us to have 

a great deal of humility about our ability to predict the future. And 

I think being skeptical about that is a good thing. 

I think that the Act takes that as the right approach, in the 

sense that the Act, the Dodd-Frank Act, attempts to build in bigger 

buffers into the system, more resiliency into the system, higher levels of capital, greater liquidity requirements— 

Mr. LUETKEMEYER. If I can interrupt just a second? 

Mr. BARR. Yes, please. 

Mr. LUETKEMEYER. My time is running out here. 

And you made the comment a while ago, to follow up on your 

point right there with regards to the type of investment, the type 

of risk that you are taking on, you made the comment a while ago 

with regards to derivatives. It is a huge problem for a lot of these 

bigger institutions. A couple of them don’t have a lot of involvement in it, but many of them do. 

50 

And the derivatives market—I was listening to somebody the 

other day, and they were telling me that the derivatives market 

now is 10 times the GDP of the world. That scares the heck out 

of me. It just boggles my mind. It scares me to death, because we 

have these institutions involved in this, and we have them all 

linked together, and here we go. 

So where are we with Dodd-Frank with regards to sort of divesting ourselves or minimizing our risk along that line? 

Mr. BARR. The Dodd-Frank Act, I think, fundamentally changes 

the basic system of oversight and regulation in the derivatives market. I think it is one of the essential reforms that the Dodd-Frank 

Act put in place. 

Mr. LUETKEMEYER. We are not there yet, are we? 

Mr. BARR. No. With respect to all the provisions of the DoddFrank Act, as is typical under any law, you need to implement it 

through rules. And the rule-writing is proceeding quickly, but it is 

not done. 

Mr. LUETKEMEYER. Right. Okay. 

One more quick question here is—I guess my concern is that, 

again, we go back to the foundation of where we are at with this, 

with the bigger guys getting more risky. Are you comfortable with 

this bill having solved the problem? Or do you think it is going to 

exacerbate it? Or do you think we are headed down the road with— 

or, should we do more, I guess is my question. 

Mr. BARR. I think the bill and the changes that are being made 

to capital requirements are the right framework to proceed on. I 

think when those are fully done, when those are fully implemented, 

we will have a much more safe, resilient financial system in the future. Is it going to prevent every financial crisis in the future? No 

way. 

Mr. LUETKEMEYER. Dr. Lubben, really quickly? 

Mr. LUBBEN. I would agree with what was just said, but I would 

note that the focus is all on before-the-hand regulation. And you 

really do need to think about the what-if scenario of resolution, 

also, ahead of time. And I think that is the big unfinished aspect 

of Dodd-Frank. It strikes me that Orderly Liquidation Authority is 

kind of a job half-done. And I would hope it would be improved, but 

we will see. 

Mr. LUETKEMEYER. Thank you very much. 

Thank you, Madam Chairwoman. 

Chairwoman CAPITO. Thank you. 

Mr. Canseco, did you want to make a clarification? 

Mr. CANSECO. Madam Chairwoman, if I may just ask a followup question. 

Gentlemen, both of you seem to be law professors and very much 

knowledgeable of the Dodd-Frank Act. Where in the Act does this 

de novo review for creditors—where is it specified? 

Mr. BARR. I apologize; I don’t have my Act or section in front of 

me. Perhaps Professor Lubben can. 

But I can assure you that the Act and the way that the provision 

that you read has been interpreted in the past by both the FDIC 

and the courts permits parties to proceed for their claims, for de 

novo review of their claims. 

51 

And as I indicated before, I would be happy to follow up with 

your staff and committee staff with the particular specifications. 

Mr. CANSECO. But, Professor, this law isn’t even a year old. And 

where has a court ruled on Dodd-Frank and on the issue of creditors? 

Mr. BARR. I apologize. The provision I am talking about is the 

provision that is equivalent to the provision that has been interpreted by the courts and the FDIC in the past consistent with what 

I just said. 

Mr. CANSECO. Thank you. 

Mr. BARR. And I would be happy to follow up with you after. 

Mrs. MALONEY. If the gentleman would yield, we have the exact 

section of the law right here. We can— 

Mr. CANSECO. Would you cite it to me, please? 

Mrs. MALONEY. Okay. It is on page 1466, Public Law 11203. And 

it is section 4, under (d). 

Chairwoman CAPITO. I think we can take this discussion 

maybe— 

Mr. CANSECO. All right. 

Chairwoman CAPITO. —behind and let our witnesses go. 

I would like to express my gratitude for your patience and for 

your intellect and for your ability to really answer some very indepth questions. So I appreciate that. 

The Chair notes that some members may have additional questions for this panel which they wish to submit in writing. Without 

objection, the hearing record will remain open for 30 days for members to submit written questions to these witnesses and to place 

their responses in the record. 

At this point, I will close the hearing. 

I would like to say just one final comment for myself. I think my 

big takeaway here: Best-laid plans, all good intentions to try to figure out how to avoid what happened. We are really not going to 

know unless we have to use this mechanism again. Let’s hope we 

don’t have to use this mechanism. I think that would be the best 

takeaway we could have today. 

Thank you very much. 

[Whereupon, at 12:50 p.m., the hearing was adjourned.] 

(53) 

A P P E N D I X 

June 14, 2011 

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