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HAS DODD–FRANK ENDED TOO BIG TO FAIL?

HEARING

BEFORE THE

SUBCOMMITTEE ON TARP, FINANCIAL SERVICES

AND BAILOUTS OF PUBLIC AND PRIVATE PROGRAMS

OF THE

COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

FIRST SESSION

MARCH 30, 2011

Serial No. 112–21

Printed for the use of the Committee on Oversight and Government Reform

(

Available via the World Wide Web: http://www.fdsys.gov

http://www.house.gov/reform

(II)

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

DARRELL E. ISSA, California, Chairman

DAN BURTON, Indiana

JOHN L. MICA, Florida

TODD RUSSELL PLATTS, Pennsylvania

MICHAEL R. TURNER, Ohio

PATRICK T. MCHENRY, North Carolina

JIM JORDAN, Ohio

JASON CHAFFETZ, Utah

CONNIE MACK, Florida

TIM WALBERG, Michigan

JAMES LANKFORD, Oklahoma

JUSTIN AMASH, Michigan

ANN MARIE BUERKLE, New York

PAUL A. GOSAR, Arizona

RAU ́ L R. LABRADOR, Idaho

PATRICK MEEHAN, Pennsylvania

SCOTT DESJARLAIS, Tennessee

JOE WALSH, Illinois

TREY GOWDY, South Carolina

DENNIS A. ROSS, Florida

FRANK C. GUINTA, New Hampshire

BLAKE FARENTHOLD, Texas

MIKE KELLY, Pennsylvania

ELIJAH E. CUMMINGS, Maryland, Ranking

Minority Member

EDOLPHUS TOWNS, New York

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, District of

Columbia

DENNIS J. KUCINICH, Ohio

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

STEPHEN F. LYNCH, Massachusetts

JIM COOPER, Tennessee

GERALD E. CONNOLLY, Virginia

MIKE QUIGLEY, Illinois

DANNY K. DAVIS, Illinois

BRUCE L. BRALEY, Iowa

PETER WELCH, Vermont

JOHN A. YARMUTH, Kentucky

CHRISTOPHER S. MURPHY, Connecticut

JACKIE SPEIER, California

LAWRENCE J. BRADY, Staff Director

JOHN D. CUADERES, Deputy Staff Director

ROBERT BORDEN, General Counsel

LINDA A. GOOD, Chief Clerk

DAVID RAPALLO, Minority Staff Director

SUBCOMMITTEE ON TARP, FINANCIAL SERVICES AND BAILOUTS OF PUBLIC AND

PRIVATE PROGRAMS

PATRICK T. MCHENRY, North Carolina, Chairman

FRANK C. GUINTA, New Hampshire, Vice

Chairman

ANN MARIE BUERKLE, New York

JUSTIN AMASH, Michigan

PATRICK MEEHAN, Pennsylvania

JOE WALSH, Illinois

TREY GOWDY, South Carolina

DENNIS A. ROSS, Florida

MIKE QUIGLEY, Illinois, Ranking Minority

Member

CAROLYN B. MALONEY, New York

PETER WELCH, Vermont

JOHN A. YARMUTH, Kentucky

JACKIE SPEIER, California

JIM COOPER, Tennessee

(III)

C O N T E N T S

Page

Hearing held on March 30, 2011 ............................................................................ 1

Statement of:

Barofsky, Neil, Special Inspector General for the Troubled Asset Relief

Program ......................................................................................................... 13

Massad, Tim, Acting Assistant Secretary for Financial Stability and Chief

Counsel .......................................................................................................... 42

Letters, statements, etc., submitted for the record by:

Barofsky, Neil, Special Inspector General for the Troubled Asset Relief

Program, prepared statement of .................................................................. 16

Connolly, Hon. Gerald E., a Representative in Congress from the State

of Virginia, prepared statement of .............................................................. 99

Maloney, Hon. Carolyn B., a Representative in Congress from the State

of New York, article dated March 29, 2011 ................................................ 66

Massad, Tim, Acting Assistant Secretary for Financial Stability and Chief

Counsel, prepared statement of ................................................................... 44

McHenry, Hon. Patrick T., a Representative in Congress from the State

of North Carolina:

Prepared statement of ............................................................................... 4

Various prepared statements ................................................................... 72

Quigley, Hon. Mike, a Representative in Congress from the State of

Illinois, prepared statement of ..................................................................... 10

(1)

HAS DODD–FRANK ENDED TOO BIG TO FAIL?

WEDNESDAY, MARCH 30, 2011

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON TARP, FINANCIAL SERVICES AND

BAILOUTS OF PUBLIC AND PRIVATE PROGRAMS,

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM,

Washington, DC.

The subcommittee met, pursuant to notice, at 9:30 a.m., in room

2154, Rayburn House Office Building, Hon. Patrick T. McHenry

(chairman of the subcommittee) presiding.

Present: Representatives McHenry, Buerkle, Meehan, Ross,

Quigley, and Welch.

Also present: Representatives Issa and Cummings.

Staff present: Michael R. Bebeau and Gwen D’Luzansky, assistant clerks; Robert Borden, general counsel; Lawrence J. Brady,

staff director; Katelyn E. Christ, research analyst; Benjamin

Stroud Cole, policy advisor and investigative analyst; Drew

Colliatie, staff assistant; John Cuaderes, deputy staff director;

Adam P. Fromm, director of Member liaison and floor operations;

Linda Good, chief clerk; Tyler Grimm and Ryan M. Hambleton,

professional staff members; Peter Haller, senior counsel; Christopher Hixon, deputy chief counsel, oversight; Hudson T. Hollister,

counsel; Justin LoFranco, press assistant; Laura L. Rush, deputy

chief clerk; Becca Watkins, deputy press secretary; Kevin Corbin,

minority clerk; Ashley Etienne, minority director of communications; Carla Hultberg, minority chief clerk; Lucinda Lessley, minority policy director; Jason Powell, minority senior counsel; and Suzanne Sachsman Grooms, minority chief counsel.

Mr. MCHENRY. The committee will come to order. Today’s hearing is entitled ‘‘Has Dodd-Frank Ended Too Big to Fail?’’ This is

the Special Inspector General for TARP, Mr. Barofsky’s last day on

the job, and he has had an eventful 21⁄2 years. It has probably felt

like a lifetime. We certainly appreciate your service and we appreciate you being here on your final day on the job.

But as has been tradition for our subcommittee, we begin by

reading the Oversight and Government Reform Committee’s mission statement: We exist to secure two fundamental principles:

first, America has a right to know that the money Washington

takes from them is well spent and, second, Americans deserve an

efficient, effective government that works for them. Our duty on

the Oversight and Government Reform Committee is to protect

these rights. Our solemn responsibility is to hold government accountable to taxpayers because taxpayers have a right to know

what they get from their government. We will work tirelessly in

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partnership with citizen watchdogs to deliver the facts to the

American people and bring genuine reform to the Federal bureaucracy.

This is the mission statement of the Oversight and Government

Reform Committee. It is also very similar to the mission statement

of inspector generals across our government.

Today’s hearing will explore whether our largest financial institutions—I will start by giving an opening statement, so we will

start the time now. Today’s hearing will explore whether our largest financial institutions are still too big to fail. Despite passage of

the Dodd-Frank Act and subsequent financial regulations, specifically, we are concerned about the ongoing perception that government bailouts remain an option for poorly managed financial firms.

The bottom line is that 2,300 pages, or over that, Dodd-Frank was

supposed to end too big to fail. As it turns out, Dodd-Frank has

only reinforced the bailout culture, perpetuated the moral hazard

of government intervention, and tipped the economic scales for a

few at the expense of growth and competition.

In his January 2011 quarterly report to Congress, the Special Inspector General for TARP, Mr. Barofsky, outlined his concerns with

the lasting legacy of too big to fail. This report detailed the unfair

competitive advantage of certain financial institutions with implicit

government support. Through inflated credit ratings and greater

access to cheap credit, these institutions receive benefits that crowd

out their smaller competitors.

Those findings were backed up by data from the FDIC, which

found the large financial institutions paid 78 basis points less to

borrow funds than their smaller rivals. This point was not lost on

credit rating agencies, who now take implicit government backing

into account when rating credit worthiness. This funding advantage is the result of the market perception that certain institutions

are just simply too big to fail.

Dodd-Frank codifies open-ended ad hoc deal making like we saw

in the financial crisis of 2008. And if that was not enough, Secretary Geithner stated to the Special Inspector General in December 2010 that in the future we may have to do exceptional things

again. And he said this well after the passage of Dodd-Frank.

The combination of an implicit government guarantee and cheap

money only reinforces the moral hazard that Dodd-Frank failed to

eliminate. Instead of taking bailouts off the table, the Federal Government has given large institutions a special preferred status.

Last November voters delivered a very loud message to Washington: they don’t want their hard-earned tax dollars going to any

more bailouts. The American taxpayer does not want their government in the business of picking winners and losers.

We need to create a competitive lending environment where

small businesses can gain access to capital and thrive; where they

can feel confident in the credit markets and start creating jobs

again. By recognizing our Government’s ongoing willingness to bail

out large institutions, we can begin to have an honest conversation

about ending too big to fail.

I am interested to hear what our first panel and second panel

have to say about this matter. On the first panel we are going to

have the Special Inspector General for TARP; on the second panel

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we will have a representative from Treasury, Mr. Massad, who is

the Acting Under Secretary for Financial Stability.

With that, I would like to yield the balance of my time to the

chairman of the full committee, Mr. Issa.

[The prepared statement of Hon. Patrick T. McHenry follows:]

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Mr. ISSA. I thank the chairman for holding this hearing and I

thank the chairman for yielding his time.

I really just wanted to thank a unique individual. If there is a

wall of fame for IGs, Neil, you are going to be on it. You have done

an amazingly good job. I looked at your op ed this morning and

said, darn, he got the title we should have had. It is entitled

‘‘Where the Bailout Went Wrong.’’ So I look forward to hearing

your thoughts on, regardless of good intentions of Dodd-Frank and

of the TARP bill, where we should learn from the mistakes that

probably were inevitable, but, due to your hard work, they are very

public, and we intend to address them one by one. So as you go

off to academia to teach and to write, I hope you will consider an

invitation to come back here exactly that, an invitation, one, where

we want your counsel in whatever form it can be provided.

Again, Mr. Chairman, thank you for holding this hearing, one of

many in your series, and taking seriously the special committee responsibilities for oversight. And again, nobody is more a hero here

than a great IG, and we have a great IG in front of us.

I yield back.

Mr. MCHENRY. I thank the chairman.

At this time I yield 5 minutes to the ranking member, Mr.

Quigley, and, by prior agreement, he will share his time with the

full committee ranking member as well.

Mr. QUIGLEY. Thank you, Mr. Chairman, for convening this

meeting.

Again, I would like to thank our guest today, Mr. Barofsky, for

his work at SIGTARP. We appreciate all you have done for us.

One of the lessons of the financial crisis is that the government

bears too much risk and taxpayers are left vulnerable to huge

losses. More importantly, if firms perceive that taxpayers will cover

their losses, then those firms have an incentive to take even bigger

risk. And as these over-leverage firms grow in size, they can become too big to fail, in effect passing all their risk on the taxpayers,

who would not allow a financial collapse.

TARP, which was passed by Congress and signed by President

Bush, averted a catastrophe, and while TARP will likely end up as

a net profit for taxpayers, we should not minimize the fact that it

exposed taxpayers to unacceptable losses.

Today we must continue to safeguard our financial system

against collapse. TARP did not create too big to fail, but it did reinforce it. The Dodd-Frank law is an attempt to roll back those perverse incentives that caused firms to become too big to fail; it establishes stronger prudential regulation, closing many of the loopholes that allowed excessive risk-taking; it created a systemic risk

regulator to oversee all financial firms that are systemically important; most importantly, it creates a special resolution authority for

failing firms to end bailouts and impose losses on shareholders.

Resolution authority’s successive failure will be judged on whether the market perceives it is a credible alternative to bailouts. For

me, this is the key question: Does the market view resolution authority as a credible alternative to bailouts? It is my understanding

that implementation of Dodd-Frank is still in its early stages. I am

hopeful that the result will be a predictable, credible, and orderly

process for unwinding failing financial firms.

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Addressing the too big to fail problem is even more important

today than before the financial crisis. In 1999, the five largest U.S.

banking institutions controlled 38 percent of all banking industry

assets. Today they control 52 percent of banking assets. To fix this

problem, we need to ensure that Dodd-Frank is successfully implemented.

I look forward to hearing testimony from our witnesses and I

yield the balance of my time to the ranking member of the full

committee.

[The prepared statement of Hon. Mike Quigley follows:]

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Mr. CUMMINGS. I thank the gentleman for yielding and I thank

the chairman for calling the hearing this morning. Unfortunately,

today’s hearing represents a tragically missed opportunity in the

majority’s refusal to grant the request to invite Representative Barney Frank to testify before the subcommittee. As the chairman of

the House Financial Services Committee throughout the drafting of

the financial regulatory reform legislation and as the current ranking member monitoring the implementation of that legislation,

Representative Frank’s expertise on the matters before us today is

unparalleled. We would have benefited greatly if we were able to

hear from him.

But despite the disappointment in this subcommittee’s process, I

thank our witnesses for appearing before us today. I particularly

recognize our Special Inspector General Barofsky and I too commend you for a job well done. I want to thank you for working with

me the many times I bugged you to do reports and look into things;

I really do appreciate it. Your tireless work has enabled us to better fulfill our role in ensuring efficient and effective government

oversight of the TARP program and again I thank you.

In the wake of the 2008 financial crisis, we enacted Dodd-Frank

in order to set into place a robust regulatory structure to end too

big to fail. According to FDIC Chairwoman Sheila Bair, the new requirements under Dodd-Frank will ensure that the largest financial companies can be wound down in an orderly fashion without

taxpayer cost. Under Title 2 of the Dodd-Frank Act, there are no

more bailouts.

However, as Chairwoman Bair has said, and Mr. Barofsky and

others have acknowledged, Dodd-Frank will not work unless we

provide our regulators with the resources they need to make full

use of these new regulatory authorities.

Frighteningly, the budget proposed by the new majority would effectively cripple the regulators. If we drastically cut the budget of

our agencies charged with carrying out this important regulation,

we will be paving the way for the next financial collapse and we

will never be rid of entities that are in fact too big to fail, and I

trust that Mr. Barofsky will comment on that, the whole issue of

the need to make sure that these agencies are properly funded.

I am looking forward to the hearing from today’s witnesses and

again, Mr. Barofsky, I want to thank you for all that you have

done. I know you are moving on to academia, but I know that

many students will benefit from what you have to say and what

you have learned, and we hope you will return to government soon.

May God bless you, and I yield back.

Mr. MCHENRY. I thank the full committee ranking member. In

response to requests to have Mr. Frank testify before the committee, I also serve on the Financial Services Committee. He is an ex

officio member of five subcommittees on that committee; he has

been chairman of the Financial Services for the previous 4 years;

he is the ranking member of Financial Services. He has every

venue to speak about his law that he passed.

Today is about the implementation of Dodd-Frank and whether

or not that has ended the culture of too big to fail or whether or

not it has propagated it. So we have two panels today. One is the

Special Inspector General who oversees the program; the second

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panel is the Treasury Department, and they can, in essence, have

a full panel to themselves. In essence, we are giving the minority

a full panel. So usually that is praised, but I certainly understand,

in this atmosphere, it may not be.

But our first witness today is Mr. Neil Barofsky. He is the outgoing Special Inspector General for the Troubled Asset Relief Program. Prior to assuming his position at the U.S. Treasury, Mr.

Barofsky was a Federal prosecutor in the U.S. Attorney’s Office for

the Southern District of New York for more than 8 years.

Mr. Barofsky’s last day is today. I know his staff is sitting behind

him. They are not smiling. I think they are sad to see you go, Mr.

Barofsky. We certainly appreciate your service to your Government

that you have rendered in the last 21⁄2 years; we know it has been

busy, it has been challenging, and you have put more hours into

government service than you will ever be paid for, so we appreciate

your service to your Government, and in the interest of openness.

So, with that, it is the policy of the committee that all witnesses

be sworn in to testify. If you would please rise and raise your right

hand.

[Witness sworn.]

Mr. MCHENRY. Thank you. Let the record reflect that the witness

answered in the affirmative. Thank you, Mr. Barofsky. So now we

will give you an opportunity for your opening statement. Your written testimony will be entered into the record, but we would like to

give you an opportunity to say what is on your mind.

STATEMENT OF NEIL BAROFSKY, SPECIAL INSPECTOR

GENERAL FOR THE TROUBLED ASSET RELIEF PROGRAM

Mr. BAROFSKY. Thank you, Chairman McHenry, Ranking Member Quigley, Chairman Issa, Ranking Member Cummings. Thank

you for your kind comments and thank you for the opportunity to

appear before you today. It is a privilege and an honor to testify

before this subcommittee on this, my final day as Special Inspector

General.

It is hard to believe that 21⁄2 years ago there was no such thing

as TARP, no such thing as SIGTARP, certainly no such thing as

a TARP Subcommittee, and since that time we have seen an historic outpouring and outlaying of Government funds to a financial

industry that was teetering on the brink of collapse, accompanied

by historic oversight.

The Emergency Economic Stabilization Act [EESA], which, of

course, created TARP, also created SIGTARP at Congress’s insistence, and I am proud to say that, since our inception in December

2008, we have made great progress fulfilling the goals set forth for

us by Congress. By the numbers alone, we have issued nine quarterly reports, 13 audits, secured civil or criminal charges against

more than 50 individuals, 18 different defendants have been convicted of TARP-related fraud, and our investigations have helped

assist in the recovery of or prevention to loss from fraud from more

than $700 million, making sure that SIGTARP as an agency will

more than pay for itself. As importantly, we have helped bring

transparency and accountability to a program desperately in need

of them.

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Treasury, through TARP, made a series of promises both to Wall

Street and to Main Street. Unfortunately, its track record has been

mixed. It has fulfilled its promises to Wall Street, as reflected in

the returns of record profitability of the Nation’s largest banks,

but, unfortunately, it has failed to live up to some of its promises

to Main Street.

First, with respect to the promise to restore lending, such an important part of any economic recovery, has gone unfulfilled. When

Treasury gave out hundreds of billions of dollars to banks, it did

so without any policy in place to accomplish that goal, without any

strings to require lending or even provide incentives for it. Not surprisingly, credit continued to contract throughout the financial crisis and well into the recovery.

Second, the promise to preserve home ownership, such an important part of the legislative bargain that Treasury struck with Congress in order to get TARP passed, lies in tatters. The original

promise to modify up to $700 billion in mortgages that Treasury

was to purchase under TARP cast aside within weeks after EESA

was passed. That was replaced months later by a promise by this

administration to modify up to four million mortgages for struggling homeowners. That promise too has essentially been cast

aside, replaced with the cold, stark reality of a failed program that

was poorly designed, poorly managed, poorly executed, and will

come nowhere close to living up to that original promise.

Finally, after Secretary Paulson and then Secretary Geithner

told the world that they would stand by and not let our largest

banks fail, and demonstrated that they were ready, willing and

able to use the TARP funds to accomplish that, we are left with

a financial system with the largest banks that are bigger, more

concentrated, and even more dangerous to the system than before

the crisis.

We were then promised that through regulatory reform, the era

of bank bailouts would end, a promise that looks like it too may

very well go unmet because, notwithstanding the passage of DoddFrank, the financial markets still perceive that the U.S. Government will bail out the largest banks, with credit rating agencies explicitly giving higher ratings to those banks based on the assumption that, should they hit the rocks again, the U.S. Government

will come to their rescue.

As to the execution of Dodd-Frank, it still remains theoretically

possible that it will address the problems of too big to fail. Treasury and the regulators were certain we would give them the broad

powers and authorities to take on the largest banks. But these are

the same regulators whose incompetence and lack of foresight was

described by the Financial Crisis Inquiry Commission as one of the

causes of the financial crisis.

And while Chairman Sheila Bair stands out as a strong advocate

for using the tools of Dodd-Frank to either shrink or simplify the

most complex financial institutions as necessary, she also appears

to stand alone as her term quickly winds down. Without dramatic

and quick action, I am afraid that this promise too will be broken,

with potentially devastating consequences.

Mr. Chairman, ranking member, I thank you for the opportunity

to be here today. I also want to thank you and the chairman of the

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full committee and the ranking member of the full committee for

your strong support over the years. At SIGTARP, we would not

have been able to accomplish nearly any of our goals or our accomplishments if it wasn’t for the strong, continuous and, above all, bipartisan support from Congress.

If we had received only support from one side or the other, it

would not have had nearly the impact that your uniform support

has been for our office, so I thank you. I also want to thank the

incredible men and women who work at SIGTARP for their sacrifices, their commitment. They demonstrate all the good that is in

Federal workers, and it has truly been my privilege and honor to

get to work with them for the last two-plus years.

So I thank you and I look forward to answering any questions

you may have.

[The prepared statement of Mr. Barofsky follows:]

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Mr. MCHENRY. Thank you for your testimony. I recognize myself

for 5 minutes.

To initially start this questioning, you have mentioned in your

reports, you mention in your editorial today in the New York Times

that the objectives of TARP have been shifted dramatically in the

21⁄2 years since the creation of the program. It is not evolving, but

it seems like if they fail to meet metrics they have set for themselves, that they change the metrics. Can you elaborate on this?

Mr. BAROFSKY. It has happened far too often with this program

that when a goal wasn’t met, rather than do what you would expect in a good government program, which is you have a goal, you

set forth a plan or policy to achieve that goal, you measure performance against that goal, and if you are not performing you

change the program, so make the necessary changes to accomplish

that goal.

Far too often in TARP it has been set a goal, adopt no policy to

achieve that goal, basically ignore it, try not to be incredibly transparent about the progress toward that goal; when you don’t meet

that goal, rather than change the program, change the goal and

then declare mission accomplished, program a success, and move

on. That has happened with the housing program, certainly, and it

has happened with a lot of the Main Street goals, which have basically been written out.

Recently, in testifying in front of congressional oversight panel,

a Treasury official talked about these goals, these incredibly important Main Street goals that were part of the bargain, is why TARP

got passed, and dismissed them essentially a window dressing, just

things to be taken into account. Well, they were intended to be

more than that, and those are some of the broken promises that

I discussed in the op ed and that we discussed in our reports.

Mr. MCHENRY. Now, to go further on this, there has been a discussion in recent days that TARP has been a success for the taxpayers, that in dollars and cents terms it hasn’t been a huge negative. What are the negatives? What is the legacy of TARP and our

unprecedented intervention in the market?

Mr. BAROFSKY. Well, I think that there are a number of areas

where TARP fell short. First, of course, are the goals not met, the

goals that were part of the bargaining we just discussed that were

not met, and there is a cost to not meeting your Main Street goals.

One of those costs has been on the impact of government credibility, and the bottom line is that people don’t trust their government,

and part of the reason why they don’t trust their government today

is because of the bailout, because of the failure to meet its goals

and, frankly, because of the mismanagement of the program.

Second, one of TARP’s greatest legacies is the two big to fail

problem. As I noted before, when the secretaries told the markets

we are not going to let these banks fail, this was instrumental in

one of the other positive aspects of TARP, which is helping to prevent a financial collapse, but it really exacerbated the problem of

too big to fail; it was no longer implicit, it was as explicit as it

could be.

The whole reason why TARP helped contribute to avoiding the

economic collapse was because of the promise we are not going to

let these institutions fail, and that has had the unintended conVerDate 11-MAY-2000 12:16 Sep 12, 2011 Jkt 000000 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 C:\KATIES\DOCS\67620.TXT KATIE PsN: KATIE
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sequences of the problem of getting bigger and bigger, more concentrated. You mentioned now the statistical data that backs up

what we all know, that they are able to borrow money more cheaply, they are able to access the credit markets, access the capital

markets, and right now they are more systemically significant than

they were before, if for no other reason that there are fewer of

them and they are bigger than ever, and that is a real legacy.

Mr. MCHENRY. Now, has Dodd-Frank prevented that from continuing?

Mr. BAROFSKY. Dodd-Frank was not a magic wand. Passing a

piece of legislation that gave Treasury and the regulators certain

powers and authorities didn’t actually change the status quo; it

gave one possible path that the regulators could choose to use to

potentially accomplish that goal, but the bill itself is just that, a

bill, and, unfortunately, based on the market’s perception, they are

very, very much unconvinced that it will be used in the effective

way that it would need to be used in order to really address too

big to fail.

Mr. MCHENRY. Even in the design of the bill does it leave wide

openings for bailouts to continue?

Mr. BAROFSKY. Well, technically, under the letter of the law, and

there is some dispute about what the meaning of all this is, it does

state in certain language that bailouts won’t happen. But that sort

of ignores reality, and the reality is when we talk about too big to

fail, I think far too often we lose sight of the fact what those words

mean and that it means really what they say, that whether there

is a law on the books or not a law on the books, if these institutions, if we have a repeat of the financial crisis, it is not going to

matter what the law on the books is because its failure is not an

option.

You can’t let those banks fail if that happens. It doesn’t matter

your political ideology, it doesn’t matter your personal ideology; the

country will go down the tube, there will be a systemic crash that

will have devastating consequences, Great Depression, Armageddon, no cash coming out of the ATMs. And the point is that, much

like with TARP, the White House, whoever happens to be president

at the time and whoever happens to be controlling Congress at that

time, for the best of the country has to go in and rescue the banks.

It is not a moral question; that is what too big to fails means.

So while I think people can argue whether certain interpretations and portions of Dodd-Frank which gives a certain degree of

discretion as to which creditors possibly get paid 100 cents on the

dollar and which don’t, which I know is a subject of the debate, or

other provisions that you can point to and say, OK, this doesn’t

mean an orderly bankruptcy, this gives a suggestion that these

banks can continue in the form of a bailout, whether funded by the

industry or elsewhere, it is almost all besides the point because, if

you have too big to fail banks, it is all going to be put to the side

and we are going to be right back where we were in late 2008.

Mr. MCHENRY. So, in essence, it codifies the status quo.

Mr. BAROFSKY. Unless and until Treasury and the regulators use

the powers that they have under Dodd-Frank—and a lot of these

powers, frankly, they had before Dodd-Frank and went unused. But

unless and until they use those authorities, we are actually in the

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status quo or slightly worse than the status quo because this, with

nothing. Maybe you have a chance of convincing the markets, but

right now the markets are looking at Dodd-Frank and they are rejecting it.

Now, that is not to say that Dodd-Frank doesn’t do some good

things that help limit the banks. Increasing capital requirements

is important around the edges, the Volcker rule, although I think

a lot of exceptions may defeat it, are all helpful to help limit, in

certain areas, potential risks, but the big ticket question that we

are talking about today, does it solve too big to fail, the answer is

certainly not yet. And by all indications of what has been happening and what the direction has been, I am not entirely optimistic

that it will.

Mr. MCHENRY. Thank you. Thank you for testifying.

I recognize Mr. Quigley.

Mr. QUIGLEY. Thank you, Mr. Chairman.

It is not that I disagree with you on the point; I want to understand it a little bit better. As you advocate in your testimony today

and editorial discussing Ms. Bair’s recommendation to simplify or

shrink, can you react to, I guess, the response to that about too big

to fail, Mr. Zandi’s remark? And if I can quote, ‘‘There is no reasonable way of sufficiently reducing their size and complexity without

jeopardizing their independence. Large European and Asian banks

will gobble them up, pushing the too big to fail risk overseas and

outside of our control. Cutting our banks down in size won’t mean

there will be any less risk taking in the financial system; it will

mean that the risk taking will shift elsewhere in the financial system where it is harder to monitor and to regulate. Think hedge

funds.’’

What would your response to that be?

Mr. BAROFSKY. Well, that seems almost to me like an embracing

of too big to fail.

Mr. QUIGLEY. But is he correct?

Mr. BAROFSKY. I don’t think he is correct. I mean, I think that

if you—this is very similar to a different argument that has been

advanced that our largest banks, if they are not of the size and

scope that they are, they are not going to be able to compete with

their larger European banks.

Essentially what that means, if we break that down, what it

really means is that, OK, so other countries guarantee their banks

and those banks have an advantage, and unless we guarantee our

banks, our banks are not going to be able to compete with those

other banks. That is essentially what it comes down to.

So really the question becomes do you believe that the Government should subsidize and guarantee and backstop our largest financial institutions or do you believe that we should be true to our

capitalist ideals and let these banks compete without an economic

subsidy, a very significant subsidy that they receive? And, sure,

there are a number of doomsday scenarios that one could posit,

that if we actually use the tools of Dodd-Frank and were true to

the idea of ending too big to fail, it may actually result in banks

that are not as profitable as they are today.

Mr. QUIGLEY. But there are all sorts of instances in which unfair

trade practices, for example, by other countries do put our capitalVerDate 11-MAY-2000 12:16 Sep 12, 2011 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 C:\KATIES\DOCS\67620.TXT KATIE PsN: KATIE
27

istic ideals at risk. I am just asking, you don’t see that as a possibility in the banking industry?

Mr. BAROFSKY. I think it is a possibility, but I think there are

other ways to deal with those policy concerns rather than embracing the idea that we should be effectively granting our largest

banks a subsidy and essentially putting them on the books. I mean,

there is very little difference when you compare where we were in

the lead up to the financial crisis with Fannie Mae and Freddie

Mac than we are right now with some of our largest banks.

It is the same type of implicit guarantee; it is the same type of

distortions on the market. And in many ways we could very well

end up in that exact same situation. So, sure, maybe our banks are

able to reap short-term profits because they are able to compete

with other banks that have subsidies, but I am going to take the

other side. I am going to say if we remove these subsidies, if we

remove this implicit guarantee, over time we are going to have a

healthier and better banking system. This is what Chairman Ben

Bernanke said recently, this is what Larry Summers said recently,

that our system would be stronger without it.

Mr. QUIGLEY. How do you protect our banks in the meantime

from unfair practices or unfair competition as it might exist?

Mr. BAROFSKY. Well again I think there is constant

interaction——

Mr. QUIGLEY. I don’t think you need to like too big to fail or embrace it to be concerned about that potential risk, right?

Mr. BAROFSKY. Right. And we shouldn’t ignore it. But the Treasury Department has whole offices that are dedicated to dealing

with foreign countries and dealing with foreign regulators through

the G–20. There are mechanisms to deal with unfair practices

internationally, and that is the right place to deal with them, I

think, not throwing your hands up and saying we are going to subsidize our largest banks; we are going to take money out of one

pocket and put it into the pockets of the shareholders and executives at these largest banks, and I think that is what is happening.

One study I saw recently was $34 billion was one of the dollar

subsidies that we give to our largest banks as an implicit guarantee, and I say take that money and let’s put it elsewhere, and I

think we will be better off.

Mr. QUIGLEY. And I appreciate that. I guess the second point

would be what is implied here is that this encourages banks to engage in risky behavior. Could you detail the risky behavior you see

today?

Mr. BAROFSKY. Sure. The idea of risky behavior is that banks

sort of have—anyone who runs a bank, especially when they are

large and interconnected in so many different businesses, they are

going to make decisions on how they invest their money, how they

manage their portfolio, and the question comes what is the level of

risk that they are going to attach to each of those decisions.

And the problem with too big to fail is that it impacts that decisionmaking process. Senator Kaufman, when he was Chair of the

congressional oversight panel, described it as being the rational decision of an executive when you take out the sine curve, what you

call the bottom of the sine curve in the decisionmaking process of

profit and loss from a particular design, and that what too big to

28

fail does is takes out the bottom of that because it is the rational

assumption that if the risk doesn’t work out, you are not going to

have the negative consequences of that risk. And that is what happens with too big to fail, is you actually rationalize risky behavior

because it is in the best interest not only of the bank, but of the

shareholders and its executives.

Mr. QUIGLEY. Thank you. I yield back.

Mr. MCHENRY. Mr. Meehan for 5 minutes.

Mr. MEEHAN. Thank you, Mr. Chairman.

And thank you, Mr. Barofsky, for once again coming before our

committee. But let me thank you, as well, for the service that you

have given in looking at this issue in such scope, a tremendous

challenge to our country when it happened but the healthy capacity

to then look back at what happened and ask the kinds of difficult

questions that allow us to consider the implications of all that happened so quickly with such remarkable significance at the height

of the challenge to our financial system.

So I appreciate your service to our Nation and I thank you for

it and wish you the best of luck as you move into the next part,

but thank you for your contribution. And I know that you would

say, as well, that is something that has been a great part of it, has

been the work that you have done, but you have been supported

by some other fine people as well, some of whom I have known

from prior existence, and I want to compliment them too on the

great work that they have done with you for your work.

But you have studied this. You have spent time really looking at

the big picture and have had the chance to sit back maybe more

than many of the people here in Congress have, and you made a

comment talking about unless there is dramatic and quick action,

we are going to head down a path, and that is a very concerning

observation to me. Can you identify what you mean by dramatic

and quick action, and what you think we ought to be doing here

in Congress to protect against the kind of concern that you have

identified in your testimony?

Mr. BAROFSKY. First of all, thank you for your kind comments,

and it is certainly true, I am the one who gets to sit at the table

and I am the one who gets to take the credit for our successes and

the blame for our failures, but it doesn’t happen without the people

at SIGTARP and the senior staff, and, yes, we have both benefited

from one individual, you as a U.S. attorney, of course, that is my

Chief of Staff, Geoff Moulton, who has been wonderful for our organization and I am deeply appreciative.

As to your question, what I was referring to is I think we have

to stay here within the realm of the possible, and I could go back

and say that there are certain things that could have been done

with Dodd-Frank, things that were suggested in the Senate by Senators Brown and Kaufman that could have made this a better protecting against too big to fail, but here in the realm of where we

are today there is a path that has a better chance than most of succeeding, and that is the one that is being advocated by Sheila Bair,

outgoing chair of the FDIC, and it is ultimately not a very dramatic

departure, it is really just fulfilling the mandate of Dodd-Frank.

And what she has said is that part of the proposal is these living

wills, where the banks are required to come up with plans of how

29

they would be resolved in the event of a financial crisis, and she

came out with something and has been saying this over and over

again, which on its face does not appear to be very controversial.

She says in order for us to carry out the mandate of Dodd-Frank,

in order for us to really address too big to fail, we need to use these

provisions, and if banks come up with things that are not sufficiently credible not just to us but to the markets, so that they can

be resolved in a meaningful way, then we need to use the powers

of Dodd-Frank to simplify and shrink those institutions. And she

has had stronger language than that on other occasions.

What is remarkable about this is the deafening silence with

which it has been met by the other regulators, the other members

of the Financial Stability Oversight Council, including its chairman, Secretary Tim Geithner. This is a path that at least has a

chance of working because ultimately they are too complex, they

are too large, and I think Chairman Greenspan said, famously, in

the beginning of this crisis, too big to fail starts with too big. And

it is not always too big; that would be an oversimplification. It is

interconnectedness, it is a number of other things. But it is a really, really good place to start.

But it really does appear that is what is happening with Chairman Bair’s suggestion is that the others are playing the equivalent

of a regulatory game of running out the clock; they say nothing,

they do nothing, and the bottom line is that she is not going to be

able to institute those changes before she steps down over the

course of this summer, and even those plans aren’t going to be coming in a matter of 6 months. It could be a year before anything

happens.

So what would be an example of dramatic change? How about a

strong endorsement from the Secretary of the Treasury, from the

chairman of the Federal Reserve and others that Chairman Bair’s

suggestion is going to be adopted? Perhaps this could help chip

away at the market’s perception that resolution authority is somewhat of a joke. I mean, if you look at the language that Moody’s

used in rejecting the idea that Dodd-Frank is going to work, going

to somehow end too big to fail, that this resolution authority is

going to work, it is striking language. It is not just a passive rejection, it is a complete rejection.

Mr. MEEHAN. Well, Moody’s is one of the groups that has actually included within their analysis the idea that the government is

actually going to bail out the banks. I mean, this is part of the

problem that we are looking at.

Mr. BAROFSKY. Absolutely. They reject that this is really going

to happen. So it is a minor first step. But I think if we start by

the government officials who are in charge of implementing DoddFrank, instead of issuing what are basically, I am sorry, empty

statements that this is going to end too big to fail as we know it,

we are never going to have to bail out anyone again, citing to different provisions in the law, which I have heard and I am sure you

will hear again, that, oh, this law says we can’t bail out, so therefore there will never be a bailout, let’s start with an articulated

plan, similar to the one advocated by Chairman Bair, saying, OK,

this is how we are going to do this; we are going to simplify and

shrink these institutions so we can have a credible response to the

30

market that we are not going to bail them out, because right now

the empty rhetoric we are not going to bail these banks out, the

market is not buying it.

And you can actually measure whether or not your statements

are effective or not; all you have to do is look at what the credit

rating agencies say, look at what the spread is, how much cheaper

the benefit is, how much cheaper it is for the big banks to raise

capital. I mean, there are things you can actually look to.

And while it is unfortunate that credit rating agencies still have

so much power and so much influence, that is the sad reality of

where we are today, and I think that it has to start with an increase in rhetoric and then it has to be backed up by demonstrated

action to fulfill those rhetorical promises. But right now we don’t

really have any of that; what we have is a lot of discussion about

endless rulemaking that will accomplish some goal; a real sense of

incrementalism, we will do a little bit here and a little bit there,

and maybe eventually the incentives will be in place that these

banks may reduce in size. I personally believe that Chairman

Bair’s approach is the better one.

Mr. MCHENRY. The gentleman’s time has expired.

Mr. MEEHAN. Thank you, Mr. Chairman.

Mr. MCHENRY. Thank you.

The ranking member of the full committee, Mr. Cummings.

Mr. CUMMINGS. Mr. Barofsky, thank you so much. As you were

testifying, I could not help but think about the fact that come June

25th, in my district, 40 miles from here, people will march into a

room to a conference, someone preventing foreclosure, they will

march in, Mr. Barofsky, with tears, literally, about 1,000 of them—

that is what happened at the other five—and they will face some

very difficult situations, and finally they will get a chance to sit

down with some lenders and try to come to some resolve with regard to modifications. Many of them will be lied to. Many of them

have been lied to. They have been playing games with them, a lot

of these servicers, as if they were fools.

When I read your editorial piece at 4:25 this morning, I was very

impressed and I am just wondering. You know, we just voted yesterday to end the HAMP program, and I know how you feel about

it; many of us feel the same way. But when you end the program,

if we end the program and there is nothing to substitute, nothing,

I am just wondering is that a good idea? I am just curious.

Mr. BAROFSKY. I mean, as Special Inspector General it has always been my position and continues to be my position that TARP

made a promise and, Congressman, I don’t want to presume anything about you or your decision to make your vote, but for a lot

of progressives that I have spoken to, Members of Congress, the

reason why they voted for TARP, one of the really things that convinced them to vote for what was essentially a bank bailout was

this promise to preserve home ownership.

Mr. CUMMINGS. Well, you are right, that was one of the reasons

why I voted for it.

Mr. BAROFSKY. So this is as part and parcel of TARP, in my

view, as was the need to save the financial system. I don’t rank

them, but I put them side by side. It was just as important a goal

31

of TARP to preserve home ownership in dealing with the foreclosure crisis as it was to save the large banks.

Now, the second panelist today disagrees with that conception

and talks about that as being something to be taken into account,

but I believe that is on par. So I look at the disappointment, the

broken promise of the HAMP program and I do agree with you that

we can’t just abandon that goal of TARP.

I also can’t defend, for those who voted for termination of HAMP,

I can’t defend this program because ultimately Treasury has had

opportunity after opportunity to make meaningful change. Why on

earth have those servicers that you just described, what they have

done to those homeowners in this program, which has been so well

documented, how come Treasury has not lived up to a different

promise it made, the promise it made in November 2009 to impose

financial penalties on those servicers for not performing? Why are

we here, 2 years into the program, without a single financial penalty for nonperformance under the program?

Mr. CUMMINGS. And I agree with you. Before they shut me down,

I need to get to one other thing, though. You know, the reason why

I started out the way I did is because we can have all the discussions we want, but when I go back to my district, and I know Members on both sides of the aisle, when they go back to their district,

some of them may not see these folks, but there are a lot of Americans suffering, and you are talking about too big to fail and DoddFrank. If we basically cut the money for carrying out Dodd-Frank,

do you have an opinion on that? Because that is what is happening.

Mr. BAROFSKY. I come from a law enforcement background; I

spent 8 years at the U.S. Attorney’s Office, and I have seen, during

budget freezes, and hiring freezes. At SIGTARP we have been

blessed, and I thank all the members of this committee on both

sides of the aisle for your generous support through resources for

our agency; we couldn’t do what we could otherwise. But those

types of budget cuts and freezes have a direct impact on the ability

of those offices to put people in jail, to lock people up, to hold people accountable.

Mr. CUMMINGS. But does it also have an impact, you said you

know how the market is viewing Dodd-Frank. You talked about the

possibilities that Dodd-Frank could operate, but you also said they

look at it and say, you know what, we are not so worried about it

because you said too big to fail. But also could it be that they see

that there is an effort to kind of take the money from out of these

agencies so that they can properly enforce and carry out DoddFrank? That is what I am trying to get at.

Mr. BAROFSKY. It may be part of that perception issue. Look, the

bottom line is if the regulatory agencies that are charged with,

again, they are not just charged with implementing Dodd-Frank,

they are implementing other things, including law enforcement

goals and enforcement goals. I am thinking specifically of the SEC.

When you take away funding, it may be that they reallocate resources to Dodd-Frank, but overall, as an agency, they are going

to be able to accomplish less as far as enforcement is concerned

and accomplish less, perhaps, in implementing Dodd-Frank. And I

am not here to wade into the politics of a budget battle.

Mr. CUMMINGS. No, I understand.

32

Mr. BAROFSKY. But, look, it is just simple; I have seen it over

and over again. When budget cuts hit, when spending freezes hit,

it has a direct impact on enforcement. That is a reality.

Mr. CUMMINGS. Just one last thing, Mr. Chairman.

A Wall Street Journal article recently noted that Republicans appear to be drafting bills aimed at dismantling the financial reform

piece by piece at a time. What impact do you think that these repeated news reports about the funding or dismantling Dodd-Frank

have on the market’s perception of whether Dodd-Frank is working?

Mr. BAROFSKY. To be honest with you, I am not really sure of

what the impact is, in part because of the political realities of divided government. It is a question of how much success one side

may have versus the other side. I haven’t really traced anything or

seen anything or heard anything that directly links that but, of

course, if the agencies are cut so deeply to the bone that they are

unable to implement provisions of regulatory reform, that is going

to have an impact.

But I think the far greater impact, frankly, is the lack of political

and regulatory will in staking out how they are going to use those

authorities, even if they have all the resources, to really take on

the issue of too big to fail. And unless and until we see that shift,

I think that is going to have the far greater impact on market perception.

Mr. CUMMINGS. Thank you, Mr. Chairman.

Mr. MCHENRY. I thank the ranking member.

Ms. Buerkle is recognized.

Ms. BUERKLE. Thank you, Mr. Chairman, and thank you, Mr.

Barofsky, for being here this morning. To echo my colleagues’ comments to you and your staff, thank you for all the fine work that

you do. I have one general question and then I would like to just

ask a couple questions about some of the comments you have made

already.

Would you agree that TARP picked winners, perhaps letting

weaker entities survive? And, if so, do you think that maybe was

a misallocation of funds?

Mr. BAROFSKY. Well, when you look at TARP as a whole, I think

that the lack of transparency in the program in certain aspects

have led to the very fair criticism that at times TARP may have

picked winners and losers. Generally speaking, when we are talking about the different TARP programs and, of course, there were

13 different TARP subprograms. We often think of TARP as a

monolith, and usually then we think of TARP as one of those programs, the capital purchase programs, which, by very definition,

picked winners and losers because banks applied for TARP funds,

and some received TARP funds and others didn’t. And those who

received TARP funds essentially got the benefit of government capital and those that did not.

But there was in fact a process in place that was dependent

mostly on the banks’ regulatory ratings or CAMEL’s ratings, that

type of thing, and on certain occasions there were exceptions and

we have done audit work on this. So certainly there were winners

and losers picked. TARP certainly didn’t have a perfect record;

there have been a number of banks that were supposedly healthy,

33

deemed healthy and viable that failed; others that were deemed

healthy and viable and, months later, had to get tremendous

amount of additional support, like Bank of America and Citigroup.

So I certainly understand that concern.

On the flip side, it would have probably been inappropriate for

TARP to give money to all financial institutions that came to the

window. Part of the importance of protecting taxpayer money was

making sure that it went into banks that were healthy and viable,

but they didn’t have a perfect track record. But I don’t blame them

for not having a perfect track record. Based on our audit work and

our reporting, it was an incredibly difficult time, to say the least;

there was a real sense of panic. They made mistakes, for sure, but

I don’t think those were mistakes that were intentional in any way.

Overall, I think they tried to get it right; they just didn’t sometimes.

Ms. BUERKLE. Thank you. I just want to go back to a comment

when you were responding to our chairman. You mentioned that

unless Treasury and the regulators use their authorities, and you

mentioned that some of those authorities they already have, that

we will experience a status quo or worse. Could you expand on that

for me, the authorities that you are referring to, and whether or

not they exist outside of Dodd-Frank, prior to Dodd-Frank, actually?

Mr. BAROFSKY. I think the concept of, for example, caps on leverage, capital floors are sort of examples of things that have been

around for a while. I think what Dodd-Frank does, and this is sort

of one of the positive things it does, it really forces an entry point

for using those types of mechanisms anticipatorily.

In other words, again, I am going to go back to the discussion

earlier about using living wills. This gives us an entry to evaluate

the largest banks, those deemed systemically significant, and

evaluate whether or not they really could survive or whether the

system could survive their failure; and that is the key to any resolution plan, is to take whatever it is and, as Chairman Bair suggests, putting it through a reality check.

And if it doesn’t meet that reality check, using those tools to either spin off certain businesses, to shrink the company, to simplify

the organizational structure. If you look at some of the stuff that

came out of the Lehman bankruptcy and the 3,200-something different entities that were comprised there, hopelessly complex, it

makes resolution very difficult. I mean, I think that is a good start.

Of course, we also have to remember that one of the limitations

if we wait too long, in other words, we don’t use the authorities

when we get these resolution plans, prescriptively, before the next

financial crisis, even our best intentions may not really work because in an era of a financial crisis, that is when all these institutions are suffering similar threats at the same time. It is going to

be very difficult to execute some of these resolution plans.

How do you sell off a large business or a large business chunk

as part of a resolution if there is no one to buy it because the other

entities are also going through the same stress of a financial system collapse? And I think that is what Secretary Geithner meant

when he said to us that Dodd-Frank helps, but in the event of another financial crisis the size and the scope of the one that we just

34

went through, there may be a need to do exceptional things again,

because even with the best intentions the reality of that type of

shock to the system is going to require, as long as the banks are

too big, it is going to require, again, extraordinary intervention.

Ms. BUERKLE. Thank you very much.

Mr. MCHENRY. Mr. Welch, 5 minutes.

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

Mr. Barofsky, I want to thank you for the tremendous work that

you have done. We are really in your debt.

Mr. BAROFSKY. Thank you.

Mr. WELCH. As I understand it, what you are saying is that

Dodd-Frank has not succeeded in making the market believe that

it has addressed this question too big to fail.

Mr. BAROFSKY. In essence, the implementation of Dodd-Frank

has not succeeded in convincing the market.

Mr. WELCH. And when you say the implementation, is that because of the regulatory provisions that had to be part of the followup of Dodd-Frank?

Mr. BAROFSKY. Right. So much of Dodd-Frank put the responsibility on the regulators and, frankly, on the Treasury Department

as the chair of the Financial Stability Oversight Council to implement the necessary changes and send the right messages to the

market.

Mr. WELCH. So we would have been better off with Congress

specifying what were the guidelines and what were the parameters

within which these large financial institutions could operate, is

that what would have been a better approach?

Mr. BAROFSKY. Well, I don’t know whether I can say it would

have been a better approach; it would have been a more effective

approach if ideas like Senator Browns and Senator Kaufman’s

amendment in the Senate to Dodd-Frank, which would have put leverage caps and size caps on the largest institutions. If that had

passed, that would have sent a very large and very clear message

to the markets that the largest banks are not going to be too big

to fail.

Mr. WELCH. And that is simple.

Mr. BAROFSKY. And much simpler. You would have relied a lot

less on the regulators if that were included.

Mr. WELCH. And when we get into the regulators, we are, of

course, having a budget challenge in this country and in this Congress, and if we are cutting the budget for, for instance, the SEC

by $25 million, what kind of signal does that send and how does

that affect the ability to actually supervise the regulations that

would apply?

Mr. BAROFSKY. Well, according to the SEC, it would have a very

direct result; it would inhibit their ability, according to Chairman

Shapiro, of being able to implement the requirements that they

need to do under Dodd-Frank.

Mr. WELCH. Right. And in your independent capacity, that conclusion that they are offering makes sense to you; that is a threat

to their ability to carry out their responsibilities?

Mr. BAROFSKY. There is no question. When you are a regulatory

agency, a law enforcement agency, and you have fewer resources,

you have to make cuts. Frankly, you have to make cuts across the

35

board; everything suffers. So that will suffer; I think enforcement

will suffer.

Mr. WELCH. The same thing with the Consumer Financial Protection Board. Dodd-Frank called for an independent watchdog and

that would be independent, it wouldn’t be their advocating for the

interest of the large financial institutions, it would be advocating

for the interest of consumers, and the CR provision, continuing resolution provision, would cut that budget by 40 percent, from about

$143 million to $80 billion. So would you have the same response

to that budgetary cut and its impact on being able to provide those

protections?

Mr. BAROFSKY. I would imagine so. I am not really familiar with

the budget of the Consumer Protection Bureau and what the requirements are, but, again, having been fortunate enough to work

with Elizabeth Warren as she was the chair of the congressional

oversight panel, I would certainly take her at her word that if this

would impact the ability of that bureau to go forward, then it

would be accurate.

Mr. WELCH. Let me ask you this. One of the points of this hearing is there are some legitimate questions about how TARP is

being implemented and whether too big to fail is going to work,

and it is not clear what the consensus would be on this committee

as to whether we would want to be tougher on the too big to fail

policy or not; that is not part of what the hearing is.

But let’s assume that we did have a view that was shared across

the aisle, both sides, where we did want to protect the taxpayer

from a future bailout. What would be your recommendation that

Congress should do in order to provide us with protection against

another bailout?

Mr. BAROFSKY. I think, again, step one is working within the

realm of the possible of the bill that has already been passed, and

that is to exert as much pressure as you can on the Financial Stability Oversight Council, on Secretary Geithner to fulfill the promise and to not take an incrementalist approach, but to take a

strong, hard look at the recommendations and the advocacy of

Chairman Bair and use those tools. The goal should be nothing

short of getting rid of that subsidy, getting rid of that economic advantage that the largest banks have over their smaller counterparts, whether it is the 78 basis points referenced in the chairman’s opening statement, whether it is the implicit guarantee, the

increased credit rating.

That has to be a goal because this is the remarkable thing about

too big to fail: perception matters. Perception is as important as

anything else, and it is unfortunate. It is unfortunate that credit

rating agencies still have so much influence over things, but that

is the reality, and we need to take that perception head-on and we

need to figure out how to use the tools that we currently have to

try to deal with that perception and not just, I am sorry, essentially ignore the advocacy of Chairman Bair and others who have

strong ideas about trying to get us to a point where these banks

no longer enjoy that subsidy.

Mr. MCHENRY. If the gentleman would yield, I would be happy

to, I think we agree that we want to end too big to fail, and I know

that has been your advocacy in your time as Congress, as well as

36

mine. The bill of goods that some of us saw coming out of DoddFrank is that it would prevent too big to fail.

Mr. WELCH. Well, I appreciate that and, as the chairman knows,

I voted, really in significant part because of the testimony of Mr.

Barofsky, in favor of the committee bill on HAMP. And to the extent that we can find ways to solve the problem, we have to do it

together. So I really appreciate your statement.

Mr. MCHENRY. Well, thank you. And I appreciate the gentleman’s advocacy. We don’t always agree, but you certainly had a

great way of reaching out and trying to find consensus, and I appreciate that.

With that, I yield 5 minutes to Mr. Issa, the chairman of the full

committee.

Mr. ISSA. Thank you, Mr. Chairman. I would join in saying that

as we start looking at the particulars of the continuing resolution,

if we can get to some bipartisan discussion where we agree to the

number and then begin saying if we need to add to SEC or as Mr.

Barofsky, I am sure, would agree, some of the sunlight Web sites

and so on that are also seeing cuts plus those back up because they

actually save us money, then I think we could find those offsets.

I think as the chairman worked so hard to recognize that HAMP

was a large amount of money that did not need to be spent to ruin

people’s credit ratings, it still, at the same time, I would join with

the gentleman in saying I am concerned about where we make the

cuts, and I would hope that in the very near future we begin talking about the need to make austerity moves and then begin to say

where can we find multiple votes for something by putting things

back in.

You mentioned the SEC. I am very concerned that many of the

sunlight activities that we have, on a bipartisan basis, been investing in are also on the block there, and it is my intention to work

with leadership on whatever the final resolution is, once we get

with the Senate, to plus those back up. I think we need to have

the access that, quite frankly, Dodd-Frank, with bipartisan support

of this committee, almost got in the way of data transparency; and

we still have to get back as a committee to getting that transparency into what was Dodd-Frank.

Mr. Barofsky, if I can throw a slide up, I want to just go through

a couple of these, because it illustrates probably the most important point you are making today, which is the two to dash three

step credit rating increase.

Go to the next slide.

Real examples. Wells Fargo. If their cost of money is 4.81 versus

Comerica at 5.26.

Next slide.

If Goldman Sachs, vilified often here, but if their cost of money

is just under 5 percent while National City is over 6 percent, that

is not the three-quarters of a point you were talking about, it is

even greater.

Next slide.

Barclay’s Bank at 4.39 versus BB&T, certainly important in this

region, a little less than three-quarters of a point, 5.07 higher.

Last, Citicorp, 5.64, not earned in any way except that they are

big; Huntington National Bank, 6.54.

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Let me ask it to you in a different way, as a former businessman.

If I am among the most credit-worthy companies, the Fortune 500

down to small companies that simply have healthy balance sheets,

is there any reason in the world that they are not going to migrate

to the largest banks when the largest bank can make a profit nearly a point cheaper than its competition? Pure cost of money. Isn’t

this going to move the most creditworthy onto the big banks, while

leaving the little banks with higher rates and being forced to take

whatever is left behind?

Mr. BAROFSKY. No, absolutely, because, again, let’s say you are

depositing money at one of these banks and you go beyond the

FDIC’s limit. Don’t you want to have the implicit government guarantee of too big to fail behind your deposits? I mean, you may, from

an ethical and moral point of view, not want to support these institutions because of this implicit government guarantee, but, as a

businessman, how could you not take advantage of the fact that

you are getting what is essentially free deposit insurance based on

the implicit guarantee that the government is going to bail them

out? And what does that do? Makes them bigger; makes them even

more systemically important. It is a downward spiral. It also takes

those smaller banks, it gives them an incentive as well. We need

to get bigger; we need to get into this gravy train; we need to get

on this subsidy level so that we can also out-price our competition

and raise money more cheaply just because of this implicit guarantee. It is a complete perversion of the system.

Mr. ISSA. And I think that brings up a point that I want to make

sure the committee focuses on. If we do not change where we are

today, the five banks that represent 50 percent will be seven banks

that represent 80 percent. Basically, through mergers the little

banks will get this rate by getting big enough to be not too big to

fail, right? That would be the business approach in order to get my

business away from the big five.

Mr. BAROFSKY. It is a real danger. I mean, there are some provisions in Dodd-Frank that limit concentration above 10 percent of

all deposits, but it is a real concern and a real problem. One of the

things that we talk about is Lehman, and wasn’t Lehman a good

example of the government not stepping in, but so much of the incentive of allowing Lehman to fail was the lesson that we need to

get bigger than Lehman because we need to make sure that we are

big enough that we don’t have to go through a bankruptcy because

of the implicit guarantee of too big to fail.

Mr. ISSA. Well, thank you and thank you for your service and

your testimony here today. I look forward to reading your work as

an academic.

Yield back.

Mr. MCHENRY. Thank you, Mr. Chairman.

Now I recognize Mr. Ross of Florida.

Mr. ROSS. Thank you, Mr. Chairman.

Mr. Barofsky, a pleasure to have you here. You know, as I was

a kid growing up, I remember commercials and the Avis commercial: We try harder because we are No. 2. All of a sudden No. 1

seems to now be, in the financial markets, a guarantee by the Federal Government, and that whoever is No. 2, good luck to them, beVerDate 11-MAY-2000 12:16 Sep 12, 2011 Jkt 000000 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 C:\KATIES\DOCS\67620.TXT KATIE PsN: KATIE
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cause you can try as hard as you want, as long as you are too big

to fail, you will always be No. 1.

So my question and followup with the chairman here, with community banks, if we see what happens, where you have seven

banks take 80 percent of the market, it seems to me that there is

an incentive only for community banks to merge with or to be acquired by the too big to fail banks. Is that what we are seeing a

precedent with the TARP package?

Mr. BAROFSKY. Well, again, there are some limits on, there potentially could be some limits in Dodd-Frank and from the regulators that could help to prevent the largest banks from just gobbling up all the smaller community banks over a certain cap, but

certainly consolidation and continued consolidation certainly could

occur and might be a likely bi-product of where we are.

Mr. ROSS. Which really wouldn’t be that healthy for the consumer or, in this state of economy that we have today, where the

community banks are the ones that are serving most of our businesses in terms of loans, it could give them what I think would be

an opportunity for the too big to fail banks to dictate more policy

and restrictions that would make it even more prohibitive to have

a recovering economy.

Mr. BAROFSKY. Less competition is never good for the consumer.

And I have to say although the notion of the too big to fail banks

of having even more political power almost seems unfathomable at

this point, but it certainly could happen.

Mr. ROSS. Systemically, as a result of the TARP package, and I

may have missed this because I came in late, but has there been

anything to change the way we do business to avoid ever having

to have another TARP package passed by this Congress?

Mr. BAROFSKY. In many ways, the way the TARP has been executed, and its legacy of increased moral hazard has made future

bailouts, if anything, more likely, and unless and until we deal

with this too big to fail problem, the increased concentration, the

increased size, the increased interconnectiveness, the fewer number

of large institutions all will contribute and lead us to a point where

the too big to fail banks have become even bigger and their failure

even less conceivable or possible.

Mr. ROSS. And would it not be just as likely, then, because of the

precedent set there, that such packages, TARP packages would

now be considered for nonfinancial institutions; insurance companies? We saw that with AIG, but I guess my question is does this

not set a precedent that goes well beyond assisting the too big to

fail financial institutions and to any entity that may be deemed to

be too big to fail, regardless of what their commercial purpose is?

Mr. BAROFSKY. The moral hazard generated by TARP wasn’t just

limited to banks, it was, as you said, to insurance companies like

AIG, to the automobile industry like GM and Chrysler. So, no, I

think that is part of TARP’s legacy, is the expanding moral hazard.

Mr. ROSS. And as a professor, would it be wise now in any of

your classes that you would consider the opportunity of changing

your business plan to include a path to where you can now be acquired or be guaranteed by Federal Government because of the

precedent that has been set over the last 2 years?

39

Mr. BAROFSKY. It certainly is a possibility. Again, unless we take

the steps to make that so painful and really address it through our

regulation, again, right now it is a pretty good place to be, to be

too big to fail.

Mr. ROSS. So much for entrepreneurship.

I yield back. Thank you.

Mr. MCHENRY. I thank the gentleman.

With that, I ask unanimous consent that I have two additional

minutes, and I will grant the full committee ranking member or

the gentleman from Vermont, Mr. Welch, 2 minutes. OK, thank

you.

Mr. Barofsky, I have spoken to you about the Small Business

Lending Fund, this legislative creation that doesn’t have oversight

from your office, from the SIGTARP’s office. Can you talk about the

Small Business Lending Fund and the impact this has, especially

on these TARP banks, these small TARP banks that are still within the program?

Mr. BAROFSKY. Sure. Part of the Small Business Lending Fund

Congress enabled Treasury to refinance, if you will, really move

banks off of the TARP ledger and onto the SBLF ledger. And, when

doing so, Congress gave Treasury the authority and direction to

adopt certain procedures that were different for the TARP banks

than other banks that come in and apply for this program.

And we made a series of recommendations to Treasury, which

have been rejected, to help protect the American taxpayer as those

banks move from the TARP ledger to the SBLF ledger. Look, there

is less oversight in the SBLF program; there are less protections,

capital protections for the taxpayer, and we have made a couple

recommendations and they have been rejected.

It is not entirely within our jurisdiction; on this issue it very

much is within our jurisdiction because we have jurisdiction over

the sale of troubled assets, and here the sale of the preferred

shares of stock, which essentially are being sold from one government entity and purchased by another government entity is very

much, in our view, within the confines of our jurisdiction, which is

why we have announced an audit specifically on this issue.

Unfortunately, Treasury is dithering on whether or not they

think we have this jurisdiction. We have tried to schedule an entrance conference and we were told to hold off for a little bit because the Treasury general counsel has to decide whether or not

we have the right to conduct an audit of the exit of banks from

TARP.

Now, I haven’t written a letter, I haven’t made a big deal about

this because, frankly, I can’t even conceive that they are going to

come out and suggest that the very clear intent of Congress that

we have jurisdiction over the exit of TARP banks isn’t going to be

there, and because the money hasn’t funded into this program yet,

we don’t have this great sense of immediacy of getting this entrance scheduled.

But if there is some bizarre legal construct that they adopt and

suggest that we can’t do this work, I certainly hope that my successor will immediately bring that to this committee’s attention because this is a really important area because of the potential for

40

the taxpayer really to get a raw deal as TARP banks exit TARP

and go into SBLF, and we need very close oversight.

Mr. MCHENRY. Thank you. Thank you for testifying.

I yield 2 minutes to the full committee ranking member, Mr.

Cummings.

Mr. CUMMINGS. Mr. Barofsky, back on February 25th I requested

that your office conduct an audit and analyze the homeowner complaints. Can you tell me what is going on with that and when we

can expect to have some results?

Mr. BAROFSKY. I just got an email that has the preliminary numbers. We are going through I think it is more than 25,000 hits to

our hotline, and part of what this has been helpful is helping us

to organize and categorize our hotline hits. Since we have gotten

your letter our staff has been going through our hotline literally

entry by entry and pulling together, and I got notice just last night

that we have some preliminary results.

So I expect that we will have it to you before too long. I don’t

want to give you an exact date because when you are walking out

you shouldn’t dump on the people behind you with a commitment

that you can’t deliver, but I will definitely have staff get in touch

with your staff today to give you an estimate of the timeframe.

Mr. CUMMINGS. Thank you. That may be one of your last duties?

Mr. BAROFSKY. Probably, yes. I think so.

Mr. CUMMINGS. Let me ask you this. One of the things that concerns me is that we are going to—as you move on, the question becomes—and Mr. Massad is going to testify in a few minutes. I remember when I was practicing law, one of the things I would say

if one witness wasn’t side by side with the other, which is never,

I would say what would your response be to what they are going

to say in some way or another. It sounds like you made some reasonable recommendations and Mr. Massad, who will testify in a

few minutes, has said, Mr. Chairman, that he is going to come in,

he told us a month or so ago that he was going to be retooling.

Have you seen any evidence of that? And why wouldn’t the administration accept some of your recommendations? Why do you

think? I am just curious because there is a lot of frustration on

both sides of the aisle, and I am just curious as to what you think.

Mr. BAROFSKY. There has been no retooling. The announcement

yesterday, which I think, non-coincidentally, was on the date of the

vote in the House to terminate HAMP. There was an announcement, it was an op ed in Politico that Mr. Massad authored, and

essentially it said that they are going to now, finally, 2 years later,

almost 18 months after the promise to impose financial penalties

on nonperforming servicers, there is going to be a plan.

So I read the op ed, it was brought to my attention, and, frankly,

it sounded initially like a little bit of a gimmick. The idea is they

are going to give servicers grades and then withhold payments

based on that grade. But, OK, at least it is some movement in that

direction, although, again, I don’t put a lot of faith in words at this

point, given the words that we had almost 18 months ago; it is action that matters.

So I did what I would normally do in that situation, I reached

out to the Treasury and said, OK, give us the backup for this. Let’s

give us so we can evaluate, so if I am asked a question today in

41

front of this committee, I can give an opinion about whether this

is going to be effective, what the construct is, and the response

back I get, first, I got no response, and then eventually we got a

response that, no, no, no, we can’t tell you because we don’t have

any other policy or plan other than what was outlined in the op

ed.

This is ready, fire, aim all over again with respect to this program. So this has been the one incidence of potential retooling of

finally meeting our recommendation? And not just our recommendation, almost everyone’s recommendation to start holding

servicers accountable financially? And I am hopeful. I am hoping

that this is better late than never, as opposed to too little too late,

but ultimately words, at this point, are just words. And after all

of the broken promises we need to see some action on this front if

we are ever going to get the servicers to be held accountable for

their terrible and abysmal performance that even Treasury acknowledges.

Mr. CUMMINGS. Thank you, Mr. Chairman. Thank you very

much.

Mr. MCHENRY. I thank the ranking member.

Mr. Barofsky, we certainly appreciate your testimony, your candor, your ability to actually react to a whole variety of questions.

Too often in Congress we see the person on the other side of the

panel as more sport. It is quite interesting to have someone who

is on the other side of the panel who is of sporting mood, that you

are willing to react and answer the question posed to you.

Too often in this place and around Washington it is not about answering the question posed to you, it is about what you want to answer; and you have been very frank, very forthcoming, very open

in answering the questions posed to you, even when they are not

convenient, and we certainly appreciate your service to your government and to your country. Thank you for your time today,

thank you for your testimony, and, most of all, thank you for your

hard work.

Mr. BAROFSKY. Thank you, sir.

Mr. MCHENRY. Good luck to you in your future endeavors. God

bless.

Mr. BAROFSKY. Thank you so much.

Mr. MCHENRY. This committee will now be in recess for 5 minutes until we set for the second panel.

[Recess.]

Mr. MCHENRY. The committee will come back to order. We will

now recognize our second panel. Mr. Timothy Massad is the Acting

Assistant Secretary for Financial Stability at the U.S. Treasury. In

his capacity, Mr. Massad heads the Office of Financial Stability

which administers TARP. Prior to joining Treasury, Mr. Massad

was a partner with a New York law firm which has a diverse corporate practice.

Thank you for being here today. It is the policy of this committee

that all witnesses be sworn in before they testify. If you would

please stand and raise your right hand.

[Witness sworn.]

Mr. MCHENRY. Thank you. You may be seated. Let the record reflect that the witness answered in the affirmative.

42

So, with that, Mr. Massad, we will recognize you for 5 minutes.

Your written testimony will be entered into the record. We will

then have some questions from the panel.

STATEMENT OF TIM MASSAD, ACTING ASSISTANT SECRETARY

FOR FINANCIAL STABILITY AND CHIEF COUNSEL

Mr. MASSAD. Thank you. Thank you, Chairman McHenry, Ranking Member Quigley, and distinguished members of the subcommittee for the opportunity to testify today. You have invited me here

to address whether the perception that some institutions are too

big to fail persists despite the passage of Dodd-Frank, and I am

happy to do so. I am also pleased to be following Special Inspector

General for TARP Neil Barofsky on his last day in office.

SIGTARP’s recent quarterly report suggests that TARP’s most

significant legacy may be the moral hazard associated with too big

to fail institutions, and I am happy to address that statement as

well.

Moral hazard is a real and significant concern, but to suggest

that this is TARP’s main legacy confuses a response to a crisis with

the need to fix the flaws in our regulatory system that helped trigger the crisis. TARP was necessary and it did what it was supposed

to do. Its most significant legacy is that it, combined with other

government actions, helped save our economy from a catastrophic

collapse and may have helped prevent a second Great Depression.

The lesson we learned from having to take these actions was

that, to better protect ourselves against future crises and to deal

with the moral hazard issue, our regulatory system needed to be

fixed. Today, while more work remains, we have taken significant

action to do just that. In particular, we have taken steps to address

the moral hazard associated with the fact that TARP and other

government interventions were necessary and to address the too

big to fail problem.

Just 19 months after TARP was enacted, Congress passed the

Dodd-Frank Wall Street Reform and Consumer Protection Act, the

most comprehensive reform of our financial regulatory system since

the 1930’s. Dodd-Frank contains three main elements that work together to address the too big to fail problem in particular.

First, and most important, Dodd-Frank gives the government authority to shut down and break apart large non-bank financial

firms whose imminent failure might threaten the broader system.

It does so in a way that protects the economy, while ensuring that

large financial firms, and not taxpayers, bear the costs. DoddFrank provides us with the tools to ensure that no firm will be insulated from the consequences of its actions or protected from failure. Dodd-Frank makes clear that taxpayers must not be asked to

bear the costs of a financial firm’s failure.

Second, Dodd-Frank creates a framework for identifying and responding to risk in the financial system; it creates the Financial

Stability Oversight Council, FSOC, and the Office of Financial Research, the OFR. FSOC is charged with identifying risks to financial stability, responding to any emerging systemic threats, and

promoting market discipline. OFR supports this task by addressing

the critical need for more standardized, more useful, and more reliable data.

43

Third, Dodd-Frank requires regulators to impose substantially

stronger prudential standards. Risk-based capital, leverage and liquidity standards will be tougher. Bigger and more complex firms

will have to hold more capital than smaller and less complex firms.

Dodd-Frank also requires that certain large firms undergo regular

stress tests, and requires living wills. It also restricts risky activities by banks such a proprietary trading, as well as the excessive

growth by acquisition of the very largest firms.

Dodd-Frank sets a clear path forward. We have made important

progress since enactment to implement its provisions, but there is

a lot more work to do. The financial markets are closely watching

this progress, which underscores the importance of the implementation.

Let me turn briefly back to TARP, because another piece of restoring a strong financial system is unwinding the extraordinary

assistance that had to be provided during the crisis. Since I last appeared before the full committee, TARP has continued to make

good progress. We have moved quickly to reduce the dependence of

the financial system on the emergency support provided.

I am happy to note that as this hearing is taking place, we ex- pect to receive an additional $7.4 billion in repayments from banks.

This means the taxpayers will have recovered more than 100 percent of the funds invested in the banking system, that is $251 billion compared to the $245 billion invested. Every additional dollar

we recover from now on will be a net gain to the taxpayer. And

with today’s repayments, over 70 percent of the total amount disbursed under TARP has been recovered. The ultimate cost of TARP

will be far less than anyone expected. Earlier this month, the CBO

estimated the overall cost to be approximately $19 billion.

Of course, TARP is only one part of the actions taken by the government to respond to this crisis, which also included support for

Fannie Mae, Freddie Mac, the Federal Reserve’s actions to provide

credit and guarantees of money market funds and bank debt. And

it is important to look also to the cost of all of these measures. Our

latest estimate of the direct fiscal cost of these interventions, which

will be made available shortly, will show that there actually should

be a small profit when we look at all those actions combined.

Now, this estimate does not include the stimulus measures and

it doesn’t include the significant costs to our economy of this crisis.

Jobs were lost, businesses failed, household wealth declined, and

tax revenues fell. But that damage would have been far worse

without the government’s emergency response.

Thank you again for the opportunity to testify. I welcome your

questions. And let me just say I am also happy to respond to any

of the matters that Mr. Barofsky raised, whether it is pertaining

to Dodd-Frank or other issues.

[The prepared statement of Mr. Massad follows:]

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48

49

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Mr. MCHENRY. Thank you, Mr. Massad. I recognize myself for 5

minutes.

There are a number of questions that Dodd-Frank raises. Now,

I certainly read your editorial against my legislation ending the

HAMP program. We don’t have to relitigate that; we won the vote

last night, so I am fine with that, obviously, and we had a bipartisan vote as well.

And I hope that sends a strong message to the overseer of that

program, you, Mr. Massad, and your staff that the status quo there

is simply not acceptable. Destroying 800,000 people’s credit scores,

taking their savings is not a responsible program in order to help

a half a million people. And the people that are brought into the

program, given verbal modifications of their mortgages, and yet are

kicked out at the program at the end of the day, in your recent report, that number was 740,240. And we appreciate your releasing

those numbers, but it is simply not acceptable. But we don’t have

to relitigate that because I was happy to win the vote.

Now, I want to raise a question that I think is interesting. You

said the taxpayers won’t be on the hook for future bailouts. Can

you explain how you justify that under Dodd-Frank?

Mr. MASSAD. Dodd-Frank provides that taxpayers will not fund

any bailout. What it provides is it gives the authority——

Mr. MCHENRY. How does it provide that?

Mr. MASSAD. It gives the authority to the FDIC to liquidate a

non-bank financial firm that is threatening the system and to impose those costs on creditors and shareholders, including the ability

to clawback those costs. And to the extent those costs can’t be imposed on creditors and shareholders, then there is an assessment

after the fact on large financial institutions.

Mr. MCHENRY. OK. So you disagree with Mr. Barofsky’s assertion that Dodd-Frank and your boss, the Treasury Secretary’s comment in the event of a next crisis, we would have to do extraordinary things beyond the scope of the Dodd-Frank legislation?

Mr. MASSAD. As I have testified before, Mr. Chairman, the Secretary’s statement referred to the fact that it is difficult to predict

the shape, the nature of a crisis, and you may have to take extraordinary actions, but he was referring to using the tools of DoddFrank.

Mr. MCHENRY. Interesting. Interesting. OK, so another question

I have is, is Treasury, in terms of looking at financial stability, are

you looking at the interconnectedness of our financial markets

across regulatory regimes, meaning foreign regulations and how

they are moving forward? Speaking to market participants, I think

they see an opportunity for regulatory arbitrage and to make

money based on the fact that other European countries, for instance, are behind us in terms of changing their financial regulations. Is this a concern to you?

Mr. MASSAD. Oh, absolutely, Mr. Chairman. It is a very good

question; thank you for raising it. One of the important things we

have to do is to work with foreign regulators to try to——

Mr. MCHENRY. Are you doing that?

Mr. MASSAD. Yes. There is a lot of work going on by Treasury,

by the Fed, by others to do that. The Dodd-Frank law provides for

that.

52

Mr. MCHENRY. Well, I know it provides for that. I am asking you

the question of how that is going. Is that progressing? And how is

it progressing? What are you doing?

Mr. MASSAD. There is a lot of work going on by each agency, Mr.

Chairman.

Mr. MCHENRY. I know that there is a lot of work going on by

each agency. I mean, you are stating some very obvious things. I

understand part of the Treasury tact here, and I have seen you in

committees before, is not to answer questions. Well, I am the chairman of this committee; I call my own time, so you need to answer

the question.

Mr. MASSAD. Mr. Chairman, I will be happy to provide you with

details about that. I do not have them at my fingertips. It is not

my responsibility to coordinate with our international friends on

those regulatory regimes; it is my responsibility to implement the

TARP program. But I would be very happy to get you a detailed

response on that.

Mr. MCHENRY. OK. So financial stability doesn’t entail looking at

international regulatory regimes is what I am trying to understand

from you. I will move on. I will move on. It is fine.

So the Financial Stability Oversight Council, which is a creation

of Dodd-Frank, entails a number of regulators sitting on a council

together, and I understand that. Now, each regulator has their own

staff. Is it your view, in terms of preparing for this and how this

council will actually operate, how their meetings will occur, where

they will occur, is this largely being driven by the Treasury Department?

Mr. MASSAD. Mr. Chairman, the FSOC is chaired by the Secretary of the Treasury; it has a number of members, as you know,

10 voting members as well as non-voting members. It meets periodically. It is developing staff. It is promulgating rules. So there is

a lot of activity there and it requires the coordination across all

agencies, as you know.

If I may also, though, respond, I don’t believe I said that financial stability doesn’t entail looking at international regimes; I think

I said the contrary, sir. And, again, I would be happy to get you

details on what is going on in that regard.

Mr. MCHENRY. Well, you said it wasn’t your responsibility.

Mr. MASSAD. That is correct, it is not. My responsibility is the

TARP program.

Mr. MCHENRY. Right. OK, fantastic. Great.

So, with that, I recognize Mr. Quigley for 5 minutes.

Mr. QUIGLEY. Thank you, Mr. Chairman.

Good morning.

Mr. MASSAD. Good morning.

Mr. QUIGLEY. Questions this morning were brought up earlier

about community banks and their relative disadvantage. Are you

in a position to talk about the comparative disadvantage many of

those banks, many of them in my State, are at at this point and

what can be done?

Mr. MASSAD. Congressman, that is a very important question. I

would be happy to talk about that. We obviously have to have a

thriving community bank sector in this country. We have taken a

number of actions under the TARP program to do that. The Obama

53

administration did not provide any funds to large banks; we provided funds to about 400 small banks, and about 650 small banks

were funded under the program.

The Treasury also pushed for the implementation of the Small

Business Lending Fund to provide additional assistance to those

banks. The differential you have referred to is important, and I

think, once again, Dodd-Frank provides us with some tools to address that. It allows us to impose tougher standards on the largest

banks; capital standards, leverage standards, liquidity standards.

Now, again, there is a lot of work to be done to implement that,

but I think it does give us some tools to address that very problem.

Mr. QUIGLEY. If you could mention at least some of the differences that still exist that need to be addressed. Could you detail

some of those?

Mr. MASSAD. Sure. Well, a basic problem, of course, is a lot of

our small banks don’t have access to the capital markets. That is

why, of course, we have been able to see that a lot of the larger

banks have repaid TARP funds; many of the smaller banks have

not because it is more difficult for them to raise money to do so.

But we are continuing to work with them. The capital under TARP

is not required to be repaid at any time. And I think, again, the

fact that we funded a lot of those banks has helped them weather

this storm.

Mr. QUIGLEY. The perception in my State is that, as simplistic

as it sounds, you have bailed out the big banks and shut down the

small ones. If you were in my position, how do you respond to those

banks?

Mr. MASSAD. Very good question, Congressman. I think what we

say is that, in fact, under TARP, particularly under President

Obama, we provided capital to any small bank that was viable, and

we ended up providing that to, as I say, overall in the TARP program, about 650 banks, and we are continuing to work with them.

Now, the issues you have raised, as to whether big banks have an

advantage, again, I think the Dodd-Frank Act is meant to provide

us with tools to level the playing field. It needs to be fully implemented.

Mr. QUIGLEY. Longer discussion at some other point.

Let me shift gears just for a few minutes. March 21st of this year

Forbes reports that Goldman Sachs and others are skirting the

Volcker Rule by saying that it doesn’t apply to long-term principal

investments. What has Treasury’s reaction to that been?

Mr. MASSAD. Congressman, I am not familiar with the particulars of implementing the Volcker Rule. I would be happy to get you

a response on that.

Mr. QUIGLEY. Thank you. I yield back.

Mr. MEEHAN [presiding].

[Remarks made off mic.]

Mr. MEEHAN [continuing]. Time to be before our committee, and

you had identified at the outset of your comments that one of the

things that you would do is to try to be responsive to any comments that were made by the gentleman who testified before you.

He raised an issue, which was a question that I think your general

counsel was looking at, the right to conduct an audit of the exit of

banks from TARP. Is there any reason why that should be a quesVerDate 11-MAY-2000 12:16 Sep 12, 2011 Jkt 000000 PO 00000 Frm 00057 Fmt 6633 Sfmt 6633 C:\KATIES\DOCS\67620.TXT KATIE PsN: KATIE
54

tion? And what is your position as to the authority of the Inspector

General to audit that particular process?

Mr. MASSAD. Thank you, Congressman, that is a very good question. I believe that issue goes to whether SIGTARP or the Treasury

Inspector General has jurisdiction or what each of their jurisdiction

is. That is the issue. In my capacity, I respect that both are entitled to their opinions, and I defer to the judgment of the General

Counsel as to the proper jurisdiction between them, and that is

what is going on.

Mr. MEEHAN. OK. Well, you have a willingness on the part of

SIGTARP to engage in this particular activity. If it is determined

that the Inspector General from Treasury is the entity by you, are

we assured that the Inspector General from Treasury would conduct that same audit?

Mr. MASSAD. Well, again, it is not my determination; it is a question of interpreting what the law requires and provides for, both as

to the Small Business Lending Fund law as well as TARP, and I

would say that I think both the Special Inspector General’s Office

and the Inspector General’s Office are very, very excellent operations that have conducted thorough audits, and I would be happy

to work with both of them as we have.

Mr. MEEHAN. Well, thank you. Well, then I understand that is

a little issue that will have to be resolved, but it will give us a

chance to follow that, and I thank you for your observation because

I didn’t understand why there would have been any reluctance.

As we look at the larger question of not just where we have been

with TARP, because there is a lot of analysis and information on

both sides, much of it credible, about the successes of TARP, but

there is a real issue about where we are going, and part of the

problem has been, I think, in some ways, the unintended consequences, or presumably unintended consequences, with the bigger banks getting bigger; as my colleague, Mr. Quigley said, a lot

of the oversight going toward the institutions that perhaps were

not really the target of this initial effort.

And what I am concerned about is the perception that now we

have rating agencies that are factoring in the likelihood that somebody is going to step in to cover these banks in shoring up their

position. So I am dramatically concerned about the consequences,

as Mr. Bernanke said, sort of it creates almost limited market, it

limits the market discipline in this kind of a context.

So how do we check the ability to be assured that we aren’t going

to see this again? And one of the factors that I see that you have

been looking at has been the idea of the living will. Now, what is

going to happen in practice with that living will? Are we enforcing

this and are we requiring that a real effort be made to compel

these organizations to explain how they are going to get out of it?

Mr. MASSAD. Absolutely, Congressman. It is a very good question, and I was rather surprised by Mr. Barofsky’s comment that

somehow Treasury was opposed to this. It is a requirement of

Dodd-Frank. Implementation of living wills is left to the FDIC and

the Federal Reserve. They are working on it; they have until January 2012. But it was part of the original proposal that Treasury

made, and we have backed the concept the entire time. But you are

absolutely right that is a critical tool, and how thoroughly that is

55

enforced, I think, and how thorough those plans are will make a

critical difference.

Let me just add, also, in terms of the rating agencies, they are

obviously watching this very closely, as well they should, but I

think, again, they have made it clear that what they are doing is

monitoring it. They are seeing how we develop——

Mr. MEEHAN. They are not just monitoring, they are making calculations, and the calculations they are making is that we are rating these banks, giving them a preferential position with respect to

the rest of the market based on their confidence that effectively

somebody else is going to step in.

Mr. MASSAD. That is correct, and they are doing that worldwide.

But they have also said we are closely monitoring the situation to

see how these resolution regimes are implemented and to see if

there is the political will to ensure that there aren’t bailouts in the

future.

Mr. MEEHAN. What would that political will take? What should

be requiring of them in order for them to be able to pass the scrutiny of that living will analysis?

Mr. MASSAD. Well, again, I think we are at the early stage of the

implementation. This law was passed 8 months ago, and to sort of

say it is not going to work is a bit like saying, when we passed the

Securities and Exchange Act in 1933, that, well, because they

didn’t fix our markets within 6 months, they didn’t work. In fact,

we set up the SEC, we took a lot of actions.

We now have the most vibrant, robust capital markets in the

world. It is the same thing as saying, well, we passed the Civil

Rights Act and it didn’t end discrimination overnight. There is

some time needed to implement these things. We are busy working

on it; it involves many, many agencies, not just Treasury. And I

welcome Mr. Barofsky’s suggestions, if he has suggestions on how

to implement it, but I haven’t heard any specifics.

Mr. MEEHAN. Thank you, Mr. Massad.

At this point in time I turn to the gentleman from Maryland, Mr.

Cummings.

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

Let me ask you this, Mr. Massad. You heard the testimony of

Mr. Barofsky, did you not?

Mr. MASSAD. Yes, I did.

Mr. CUMMINGS. And when you were here before us before, you

said that there was going to be some retooling with regard to the

HAMP program. Basically, if I were to sum up what Mr. Barofsky

said with regard to the HAMP program and your retooling is that

it is a little late, but at least it seems like you are aiming in the

right direction, but he doesn’t seem to have a lot of confidence,

based on the past, that your department is going to do very much

of anything, even under the threat of demise of the program. And

I am just wondering what is your reaction to that?

Mr. MASSAD. Certainly, Congressman. Thank you for the question. I guess my reaction was once again to be a little puzzled. I

felt like there was strong criticism, but I didn’t hear a whole lot

of specifics. SIGTARP has made about 18 recommendations to us

on the HAMP program. We have implemented 14 of those. The

ones we didn’t implement basically would have made it harder for

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people to get assistance; it would have required us to thumb print

anyone, it would have required more documentation about income,

comparing their income today to when they got their mortgage, and

other things like that. And the last specific recommendation we got

was in April of last year.

Now, lately he said the program is a failure, but, again, we

haven’t seen anything specific. We made an announcement yesterday that we are expanding our compliance reporting and we will

withhold incentives. Again, on that, what we did from the outset

was we had a very strong compliance program to try to get

servicers to fix the problem. There wasn’t, frankly, we only pay

money when they actually enter into the permanent modification.

They weren’t entering into the permanent modification, which is

why we focused on remedial actions initially.

Mr. CUMMINGS. But you understand there is a lot of frustration

on both sides of the aisle, and the question is what can we do

passed the conversation to really effect more people. Is there something that we need to do differently? I, for one, and I know many

of my colleagues voted against the bill yesterday to end the HAMP

program, but most of us said to ourselves and to each other that

Treasury has to do better. I mean, that is just real.

So I am just wondering what is going to happen. We can’t keep

going down this road the way we are going, because there a lot of

people suffering. And with all of that money out there, I think it

just gives the opposition more ammunition to not only destroy the

program, but also not replace it with anything. And that goes

against everything that we are trying to accomplish. So I just want

to know what your reaction is to that.

Mr. MASSAD. Well, you are absolutely right that those people

who want to end the program have not offered any alternatives. We

continue to look at ways that we can improve it, but it is a very

difficult issue. We have a lot of people who have spent a lot of time

on this and, believe me, if there was a silver bullet, if Mr. Barofsky

knows of a silver bullet, he certainly hasn’t told us. It is not easy.

At the same time, the program is continuing to help tens of thousands; it is affecting people indirectly through the standards that

we are setting.

Mr. CUMMINGS. Do we need to raise the standards?

Mr. MASSAD. Yes, absolutely. We need national servicing standards, and there is a lot of activity going on in that regard, as you

know, both through the discussions on the foreclosure problems

and otherwise, and I think we will see that coming. We are very

committed to that. And we have also met with Members of Congress about the specific things that need to be in those national

servicing standards.

Mr. CUMMINGS. One of the things that Mr. Barofsky said, too,

with regard to too big to fail, he said that in Dodd-Frank there are

the tools there, and I think you agree with that. But he said that

he does not believe that the administration has the will to really

carry it out, and I want you to comment on that. But I also want

you to comment on this other issue that I brought is, which is that

if we take substantial funds away from your budget, how would

that affect and that market perception that he talked about so

much?

57

Mr. MASSAD. Congressman, I agree 100 percent that taking away

funds from implementation at this time, whether it is Treasury,

SEC, FDIC, CFTC, because they all have responsibilities here,

would not be a good thing. We need to make sure we vigorously

enforce this.

As to Mr. Barofsky’s comment, again, I don’t know what specifics

he is referring to. The implementation process is an open one.

There are a number of rulemaking proceedings going on. If he has

comments on those, he can make them. If he thinks that certain

things aren’t happening fast enough, he should point that out.

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

Mr. MEEHAN. Thank you, Mr. Cummings.

At this point the gentlelady from New York, Ms. Buerkle.

Ms. BUERKLE. Thank you, Mr. Chairman.

And thank you, Mr. Massad, for being here this morning and

your willingness to testify. I am looking at your opening statement

and I just wondered if we could flesh out a couple of items that are

in your comments here this morning. In reference to Dodd-Frank

you listed three points for us. The first one is Dodd-Frank gives the

government the authority to shut down and break apart large nonbank financial firms. To what extent, what is the scope of that, and

should we be concerned that the government has that kind of

power that they can just shut down a private entity?

Mr. MASSAD. It is a good question, Congresswoman. There is a

process that has to go on. There is a determination that has to be

made by the Treasury, with also the vote of the FDIC and the Federal Reserve, and in consultation with the President, and there are

criteria that have to be met in order to do that in terms of when

you can use that authority. Those criteria include that there is not

another way to deal with the situation, that the firm in fact does

pose a threat to our financial stability, and there are others. And,

again, there is rulemaking going on to further explicate that because it is important for there to be clarity as to those rules.

Ms. BUERKLE. Thank you. And I guess the second point for identifying and responding to risk, I think that would tie back to the

first point. Are there certain benchmarks that you are going to look

for that will identify that someone is in trouble that then the government needs to take this aggressive action?

Mr. MASSAD. Sure. And again there are standards in the law

that now have to be implemented and flushed out more. But I

think the key thing to remember here is that prior to the passage

of Dodd-Frank we regulated entities based on the type of entity,

and we didn’t have a comprehensive way of looking at risk to the

system, and that is what we have now and that is why this law

is so important and that is why implementation of it is so important.

And we can take proactive measures to impose prudential standards, whether it be capital, leverage, liquidity. We can limit risky

activities, and there is a whole process where even before you exercise the liquidation authority you can impose restraints on firms.

So it gives us a lot of tools but, again, they need to be implemented.

Ms. BUERKLE. I guess going along with that gives you the tools,

at what point what is the concern that the government—many feel

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Dodd-Frank is an overreach, and while we want to prevent what

happened in the meltdown, we want to still maintain free market.

So what point does the government step back and say we are not

going to get involved?

Mr. MASSAD. Sure. Well, obviously, there is a balance there. I

think Congress struck the right balance in the Dodd-Frank Act in

giving us those tools, but the answer to your question really gets

into the details of how it is implemented, and that is why, again,

it has to be implemented thoughtfully over time, and that may

change over time. As our financial industry changes, we are going

to have to change how we look at it and how we think about risk.

Ms. BUERKLE. Then just one more question regarding your testimony. You talk about Dodd-Frank, you say but much work remains

to be done. Can you just expand on that briefly?

Mr. MASSAD. Certainly. There are about 250 rulemakings that

have to happen; there are about 70 studies, one-time studies that

have to happen; it involves efforts of many agencies, not just the

Treasury, not just the FDIC, but also the Federal Reserve, the

SEC, the CFTC and others. So that is the work I am referring to.

A number of those things have already been done or are in process;

a number of proposed rules are out there, but there is a lot more

work to be done.

Ms. BUERKLE. Thank you. In my few seconds that are remaining

here, I just have one last question. The government now is a player

and a referee. Do you see a conflict in all of this?

Mr. MASSAD. Well, I don’t think we want the government to be

a player in the sense of having interest in firms; that is why we

are trying to unwind the TARP program so quickly, for example,

and get out of the business of owning stakes in private companies.

And, as I said, we have been very, very successful in doing that

quickly. I think the government needs to stick to its role of regulating risk and monitoring risk and taking action when firms pose

risks to the system. But clearly we have to have a system where

there is no firm that is too big to fail and that firms fail as a result

of the actions they take.

Ms. BUERKLE. Thank you very much.

I yield back.

Mr. MEEHAN. Thank you, Ms. Buerkle.

The Chair now recognizes the gentlelady from New York, Mrs.

Maloney.

Mrs. MALONEY. Thank you and welcome to the committee again.

Mr. MASSAD. Thank you.

Mrs. MALONEY. During the financial crisis some firms became so

risky, they were so risky and so interconnected that their failure

was a threat to the broader economy, and I know Congress tried

to address that and Treasury in Dodd-Frank. Can you describe the

progress being made under the authority granted under DoddFrank to prevent companies from becoming so interconnected and

so risky that they could be a danger to the broader economy?

Mr. MASSAD. Well, yes. Thank you for the question. There are a

number of efforts going on in that regard looking at the riskiness

of activities. For example, the FSOC will make determinations

about which firms pose those sorts of risks based on not just their

size, but also their interconnectedness, their leverage, the nature

59

of their activities; and that work is ongoing. Those determinations

haven’t been made yet; they will be made by the FSOC, which, as

I noted earlier, is comprised of all these various agencies.

Mrs. MALONEY. Thank you. One of the factors that led to the financial crisis was the evolution of what we call the shadow banking system, where the purchase, sale, and trading of derivatives

had grown to a trillion dollar business, but it became very evident

during the crisis that people, Treasury, even the companies did not

understand the scope, location of the risk, the size of it. I can recall

AIG coming before this committee, saying the threat was only $50

million, and then later it became billions and billions and billions.

There was no control, no understanding of even the location, the

size. Can you comment on what advances you have made on the

derivative market and bringing them to the light of day to ensure

that it can exist without posing a threat to financial stability?

Mr. MASSAD. Certainly, Congresswoman. As you know, DoddFrank does provide provisions for greater transparency and regulation of the derivatives market, and we did not have those previously, and there is a lot of work going on in that regard.

Mrs. MALONEY. Can you specify?

Mr. MASSAD. Congresswoman, I am not directly involved in that

work. Again, I would be happy to get back to you. That involves

Treasury, but also the SEC, the CFTC. But I would be happy to

arrange that for you.

Mrs. MALONEY. And the growth of the shadow banking system

also illustrates the fact that Federal regulators had in many ways

failed to keep up with market innovation and development. Regulation couldn’t keep up with the innovation and dynamic action taking place in the markets. Can you ensure us that Dodd-Frank and

the regulations that you put in place are going to be able to keep

pace with innovations in the financial markets?

Mr. MASSAD. That is a very good question, and, again, what

Dodd-Frank does is gives us the tools to do that. We have to implement them. But previously we didn’t have a system where we could

look at risk across our entire system; we regulated banks, we had

certain regulation of other type of entities. But as you have noted,

the had an entire shadow banking system developed; we had all

this risk being taken on by firms that weren’t subject to regulation.

AIG is a classic example. There was no Federal regulation, effectively, of AIG, and it did engage in these derivatives that were terribly destructive. Now, as to AIG, for example, we have now wound

that down. That is part of the reason why they are going to be able

to repay the government every dollar that we gave them.

Mrs. MALONEY. That is good news. Earlier, we heard testimony

from Special Inspector General Barofsky, and one of the points that

he raised and has raised is that the act does not reach far enough

to fully address international firms that operate globally, and we

are in a global economy, a global market. Are U.S. regulators working with their foreign counterparts to address the issue of crossborder resolution authority and are our financial institutions at a

competitive disadvantage because we have regulation, yet many of

these other areas in the financial global market do not? They don’t

have the capital requirements; they don’t have the risk restraints;

they don’t have the oversight that American firms will be having.

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Mr. MASSAD. Congresswoman, thank you for that. The international coordination piece of this is very critical. We are dealing

in a global world; we have these large institutions who aren’t just

national institutions, they operate worldwide, and that is why that

coordination is important. It is going on; I know the Federal Reserve is involved in that, the Treasury is involved in that. I would

be happy to get you more details on what is taking place in that

regard, but obviously Congress couldn’t legislate something that

mandates what our foreign counterparties do; it requires us to engage in cooperation and coordination with them.

Mrs. MALONEY. Well, the Basel talks, where do they stand? They

are going to have international capital requirements.

Mr. MASSAD. They will.

Mrs. MALONEY. Where does that stand now?

Mr. MASSAD. That is right, and that will result in higher capital

requirements that will be phased in over time that are badly needed. Fortunately, many of our institutions are better capitalized

today than their foreign counterparts, but we need to phase in

those tougher standards.

Mrs. MALONEY. Well, my time has expired. Thank you for your

service.

Mr. MASSAD. Thank you.

Mr. MEEHAN. Thank you, Mrs. Maloney.

Let me turn now to the gentleman from Illinois.

Mr. WALSH. Thank you, Mr. Chairman.

And, Mr. Massad, thank you for your testimony today. Let me

ask you just a brief question or two related to the insurance industry. I have heard from a number of people of late who have expressed concerns with how Dodd-Frank has and will affect the insurance industry. You know that insurers are already heavily regulated at the State level, including an industry-funded State guarantee system that helps secure policyholders in the event of an insurance company failure.

Most insurers are not engaged in significant unregulated, interconnected off-balance sheet, highly leveraged activities, and so designations such as systemically important would appear to be unwarranted in this industry. Overlapping and conflicting rules between State and Federal regulators adds an additional costly layer

of regulation that would significantly disadvantage these insurers

and their customers.

As you know, in the event of another large financial company

failure, companies with assets over $50 billion could be on the hook

to pay for the resolution of these failed firms, even though they exhibited no bad behavior of their own. Insurance companies who, according to the Dodd-Frank Act, will continue to be resolved in the

existing State system, are never resolved by the orderly liquidation

process, and yet have to pay to resolve banks and other bad actors

in the financial industry. These costs will inevitably be borne by

the consumer.

So if insurance companies are already regulated at the State

level and if it is clear that they don’t participate in systemically

risky behavior, why do they have to bail out other failing financial

service companies that do participate in this risky behavior?

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Mr. MASSAD. Congressman, your question raises a number of

very, very important issues. Let me try my best. I guess where I

would start is that we have come out of a period where in fact we

did have a very large insurance company that was regulated at the

State level, but which posed huge risks to our system because it

wasn’t regulated beyond that, and that was AIG. And we didn’t

have the tools to deal with it and its potential failure could have

brought down our entire system. So obviously that has animated

the provisions of Dodd-Frank that in part address the insurance industry.

But I recognize your point, that we have to make sure that these

provisions are implemented in a way that which is fair to those

companies that don’t pose those risks and that don’t engage in

those activities. I think that is a process that we have to focus on

as we go forward. The FSOC is very focused on those sorts of issues

because we, again, need to do this in a way that imposes standards

and restrictions on those firms that pose the significant risk to the

system, while at the same time level the playing field for the others.

Mr. WALSH. You would acknowledge, though, that with regard to

AIG, it wasn’t their insurance business that in effect got them in

trouble or brought them down.

Mr. MASSAD. Well, it is a complicated question. There were

things going on with their insurance business that did pose some

risks, but you are correct that AIG was involved in a number of

activities that went outside of the traditional insurance area.

Mr. WALSH. And outside of the traditional insurance activities,

which really didn’t get them in trouble. What activities did get AIG

in trouble?

Mr. MASSAD. Well, again, I think it is a complicated question.

They had, obviously, a derivatives business that posed a lot of

risks, but they were also engaged in some activities with the capital through their insurance business that posed liquidity challenges, and that was one of the reasons why they had liquidity

problems and the Fed had to step in.

Mr. WALSH. But even using AIG as an example, is there a part

of you that thinks, again, it is a bit of a stretch to want to lump

the insurance industry into Dodd-Frank as well?

Mr. MASSAD. Well, again, I think the regulation of large firms

that pose a risk to the system is designed to recognize that we can’t

achieve our goal by doing that by type of entity or by particular

business line today. We have to have the ability to look across the

entire financial industry and determine where are the risk coming

from and take appropriate action. At the same time, as you have

pointed out, we have to make sure that those regulations don’t impose unfair burdens on other companies that aren’t engaged in

those activities.

Mr. WALSH. Right. And I would second that point and just reiterate that fact that, in general, the insurance industry did not at

all engage in systemically risky behavior. But, Mr. Massad, thank

you.

And, Mr. Chairman, thank you.

Mr. MCHENRY. I thank my colleague.

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In your testimony you say outright that Dodd-Frank was necessary because of the moral hazard created ‘‘when government provides emergency assistance to private firms.’’ So you believe that

Dodd-Frank answered the too big to fail question?

Mr. MASSAD. Congressman, yes. I believe Dodd-Frank gives us

the tools to address the too big to fail problem.

Mr. MCHENRY. And so too big to fail is no longer permissible?

Mr. MASSAD. Well, Congressman, Mr. Chairman, as I said when

you were out of the room, you know, we have to implement the law.

The law is not a magic wand, it is a bit, as I said, like saying, when

we passed the Civil Rights Act, that didn’t eliminate discrimination. We have a lot of work to do.

Mr. MCHENRY. That is a heck of an analogy. In today’s financial

times, Alan Greenspan wrote, ‘‘The financial system on which

Dodd-Frank is being imposed is far more complex than the lawmakers, and even most regulators, apparently contemplate. We will

almost certainly end up with a number of regulatory inconsistencies whose consequences cannot readily be anticipated.’’ Do you

agree?

Mr. MASSAD. No. I guess what I would say is the question is

what are we saying would be the alternative. I don’t think anyone

would say that we would be better off without the tools that we

have now provided for through Dodd-Frank to regulate risk, to impose higher prudential standards, to be able to prevent a firm from

threatening our entire system. The question is, again, we have to

implement those wisely.

Mr. MCHENRY. Are we doing that?

Mr. MASSAD. I think we are doing that.

Mr. MCHENRY. OK. To continue with Mr. Greenspan’s piece in

today’s Financial Times, ‘‘Under Dodd-Frank, the regulators are

being entrusted with forecasting and presumably preventing all undesirable repercussions that might happen to a market when its

regulatory conditions are importantly altered. No one has such

skill.’’ Do you agree or disagree?

Mr. MASSAD. Well, I think, again, we have to try. I don’t think

any of us want to be in the situation that we were in in the fall

of 2008, where because we had a regulatory system that had been

outgrown, we had a financial industry where there was a huge

amount of risk being taken on without transparency, without adequate regulation, and that is what contributed to the crisis we had.

I think because of that we learned the lesson that we need to overhaul our regulatory system. That is the judgment Congress has

made, and I think the task is now to implement that judgment.

Mr. MCHENRY. Mr. Barofsky and a number of folks have testified

that during the last financial crisis, in 2008, that the laws that we

had then we could have prevented the crisis. Do you agree?

Mr. MASSAD. That is news to me. I would be happy to discuss

that with Mr. Barofsky.

Mr. MCHENRY. OK. So basically it is your view that Dodd-Frank

has ended too big to fail.

Mr. MASSAD. As I said, Mr. Chairman, Dodd-Frank gives us the

tools to address the problem.

Mr. MCHENRY. OK. Now, moving back to HAMP, I want to give

you an opportunity to respond now in our second round here. You

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know, you made an interesting face when I was saying that we

have 740,000 homeowners who have actively been harmed by this

program. Do you disagree?

Mr. MASSAD. I do, sir, and I appreciate your——

Mr. MCHENRY. So the folks that have fallen out of this program,

that enter into the program, you tout 1.4 million, is that the number?

Mr. MASSAD. Trial modifications? That is correct.

Mr. MCHENRY. Trial modifications. Now, do you understand that

when they are entered into a trial modification they are told verbally that oftentimes they are going to make a lower monthly payment going forward? Are you aware of that?

Mr. MASSAD. I am, sir.

Mr. MCHENRY. OK. Now, in a trial modification that is verbal,

as all these are verbal, when you are paying less than what is contractually obligated by a homeowner, that harms your credit. Are

you aware of that?

Mr. MASSAD. Mr. Chairman——

Mr. MCHENRY. Are you aware of that, yes or no?

Mr. MASSAD. Mr. Chairman, if I can answer how the trial modification works, because I think it is important to have all the facts

on the table. The trial modification provides a 3-month period in

which payments are lowered temporarily, and during that time we

have to determine if someone qualifies for a permanent modification. What we did at the outset was we allowed people, we allowed

servicers to accept people into trial modifications on the basis of

what we called stated income; you could basically raise your hand

and say this is how much I make, I qualify. Because it was a terrible crisis, because we had a lot of people who were in need.

Mr. MCHENRY. I understand; I read your editorial. The point I

am asking—and I know you are trying to go through all this. I understand how this works operationally. I want to make sure that

you understand how this works. So when you are given that verbal

modification, this temporary modification, does that hurt your credit?

Mr. MASSAD. Mr. Chairman, I think——

Mr. MCHENRY. You are not answering the question.

Mr. MASSAD. Well, I don’t——

Mr. MCHENRY. It either does or it doesn’t. If it doesn’t hurt your

credit——

Mr. MASSAD. I think the answer can’t be given as a simple one

without, again, looking at what happens to those people. If I may

answer—can I answer the question in this regard, if you will allow

me? You refer to all these 750,000 people being hurt. We

actually——

Mr. MCHENRY. It is 740,240 according to your last report.

Mr. MASSAD. Thank you. We actually publish statistics on what

happens to those people. Now, those statistics are based on servicer

surveys, but it is in our monthly report, and it shows what happens. The majority of them ended up in alternative modifications

or alternative payment plans or are current. Very few of them went

to foreclosure.

Mr. MCHENRY. Do you believe that HAMP has harmed any borrower?

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Mr. MASSAD. I am sure there are people who were harmed.

Mr. MCHENRY. How many?

Mr. MASSAD. I don’t know the answer to that.

Mr. MCHENRY. I thought you publish statistics about what happens.

Mr. MASSAD. Mr. Chairman, we publish a lot of statistics, and I

am trying my best to address your concern. I think it is important

to remember that whenever you implement a program like this on

a massive scale in a crisis, what we were doing was buying time

for people. Most of those people ended up in better situations.

There are——

Mr. MCHENRY. How many?

Mr. MASSAD. Well, again, based on the servicer surveys, the majority, the vast majority of them were clearly in better situations;

only a small number went to foreclosure. But the point even about

those is——

Mr. MCHENRY. How many went to foreclosure?

Mr. MASSAD. About 5 percent. But the point is——

Mr. MCHENRY. How many? What is that number? I don’t have

the report in front of me.

Mr. MASSAD. Foreclosure completions is 58,000. But the point is

that their loan wasn’t increased; they owed the same amount.

Mr. MCHENRY. And so when the servicer comes back in, when

they are not given a permanent modification, they owe those

missed payments or the difference between the payment they were

making and the payment they were obligated to make.

Mr. MASSAD. That is correct, sir.

Mr. MCHENRY. Right. And there are penalties and fees associated with that, as well as additional interest.

Mr. MASSAD. There may be in some cases.

Mr. MCHENRY. So, therefore, that temporary modification has

left them worse off than had it not been given originally.

Mr. MASSAD. Sir, if, again, you are talking about a pool of people

who are given that breathing room, and the majority of them, the

vast majority of them end up being in better situations, I still think

it was the right policy judgment to make.

Mr. MCHENRY. Even if this program is actively harming individuals and leaving them worse off?

Mr. MASSAD. Well, again, it is not that the program is actively

harming them, sir, it is that they have a mortgage. They owe the

same amount. It should have been explained to them that if they

didn’t get the permanent modification, they would still owe what

was previously due.

Mr. MCHENRY. OK.

Mr. MASSAD. Now, if that wasn’t explained to them, that was a

mistake. But that should have been explained to them. But the

program didn’t make them worse off.

Mr. MCHENRY. Well, I have numerous examples from constituents that I could read to you. The program has harmed a large

number of individuals, and the Treasury Department—you know,

the Special Inspector General’s report on HAMP has been out there

for quite a while; you have had plenty of authority to go in and fix

this program. You haven’t fixed it. So you are touting some of these

statistics. The other thing I just wanted to make sure to ask, while

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you have the survey there, or your statistics there, you quoted the

foreclosure number. How many are in pending foreclosure? Do you

have a statistic similar to that?

Mr. MASSAD. Foreclosure starts, those not accepted for trial

modifications is 163,000. Now, a lot of those could have been in

foreclosure starts even before they went into the trial.

Mr. MCHENRY. OK. Well, look, I wanted to give you an opportunity to respond. If you would like to add anything else, I would

be happy to give you the opportunity right now.

Mr. MASSAD. I would be happy to. Again, I think we faced the

worst housing crisis of a generation. We were trying to roll out a

program that could help a lot of people. A lot of people were already delinquent for months, so we were trying to create some

breathing room. Most of those people are in better situations.

Those that are not I think, again, their mortgage didn’t increase

because of HAMP; they simply weren’t accepted into the permanent

modification because we have very prudent eligibility criteria so

that we spend taxpayer dollars wisely.

Mr. MCHENRY. Thank you.

Mrs. Maloney.

Mrs. MALONEY. Thank you. First of all, Mr. Deputy Secretary,

could I request to have your op ed, your editorial, placed in the

record?

Mr. MCHENRY. Without objection.

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Mrs. MALONEY. And I would like to say that at meetings with the

HPD department in the city of New York, they are very grateful,

as are the 35,000 families that were able to stay in their homes because of the HAMP program.

I would, with all respect, say that it is very easy to throw stones

and criticize. It is harder to come up with a program that addressed this crisis, which a large part of it was the housing crisis.

And for every person who stayed in their home, not only did it help

that person, it helped their community, because vacant homes

bring down the value of housing for their neighbors; it helped their

communities, it helped their city, and it helped with the overall financial stability of our country.

Mark Zandi and other economists have testified that housing is

roughly 25 percent of our economy. So if we do not stabilize housing and grow in housing, we are not going to stabilize out of this

great recession.

Now, I am very concerned that the Republican majority in the

past 3 weeks have eliminated four critical housing programs that

helped people stay in their home, and I would say that it is very,

very dishonest to criticize a program for not helping people that

had no help to begin with, and they didn’t get in the program because they did not meet the high criteria that the program had,

that tax dollars would not be spent unless people had a job, had

a credit record, and were believed to be able to meet that commitment going forward.

So I want to congratulate the Treasury Department and really

the Obama administration for not just criticizing and saying we

have a problem, but getting out there and doing something, like

FDR. When FDR had a problem, he didn’t just look at it, he started

working on it. And, granted, not every program works, but come in

with some ideas of how to make it better. But to come in and criticize a program when you have no ideas of your own, when you

haven’t come forward with a program, when you haven’t done anything to help the people and I would say the overall economy.

So I want to congratulate you on the work that you have done.

I support the HAMP program. I hope that President Obama has a

lot of veto ink in his pen, and if the Republican bill gets to his

desk, it is my hope that he will veto it.

And I respectfully ask the if they will have a hearing where we

can bring in HPD directors from across the country, people on the

front line that were working with our government to help people

stay in their home. In the city that I represent, the officials that

do this every day, the not-for-profits that are committed, and the

banks that have voluntarily stepped up to the plate to help have

said this program works.

So instead of just being critical, come up with ways to improve

it if you think there is a problem. But to criticize because people

didn’t get into the program because the criteria was so high—and

I agree with the proposal from Treasury to keep that criteria in a

way that protects taxpayers’ money.

Now, I would like to move on to the TARP workout. I really want

to quote from an article that was written recently, October 20,

2010, in Bloomberg. It is one of our big papers and media experts

there. They testified, and I would like your response to this, Mr.

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Massad, that TARP investments have actually provided taxpayers

with ‘‘higher returns than yields paid on 30-year Treasury bonds,

enough money to fund the Securities and Exchange Commission for

the next two decades.’’ The article also states, ‘‘The government has

earned $25.2 billion on its investment of $309 billion in banks and

insurance companies, an 8.2 percent return over 2 years.’’

Now, that beat out U.S. Treasury’s high yield savings accounts,

money market funds, and certificates of deposit, am I correct?

Mr. MASSAD. Congressman, you are correct that we have had

some good returns on the programs. I am not familiar with those

exact numbers, but the bank program is making a profit and some

of the other——

Mrs. MALONEY. Well, could I ask could you describe generally the

ways in which Treasury is seeking to maximize taxpayers’ investment under TARP and ensure that our country and taxpayers are

made whole?

Mr. MASSAD. Certainly, Congresswoman. Let me first just say

that, obviously, the purpose of TARP was to stabilize the system,

not to make money. But it is terrific that this program will not cost

the taxpayers very much, and we are looking to maximize the returns on the various programs. As I say, we have earned about, we

estimate we will earn about $20 billion on the bank investments.

AIG right now is at a profit. We will have some loss on the autos.

Let me just note one other thing, though, going back to HAMP,

and I apologize to the chairman; I misquoted the numbers. In

terms of those who were in trials and didn’t make permanent

mods, they were actually about half of what I said. The foreclosure

completions are only 28,000 and the foreclosure starts at only

84,000.

Mr. MCHENRY. The gentlelady’s time has expired and, with that,

I gave the gentlelady 6 minutes and I will give the ranking member 6 minutes, since I went well over my time, out of fairness to

all that are here. I am sorry, I will give the ranking member, I am

sorry, Mr. Cummings, 6 minutes now.

Mr. CUMMINGS. Very well, Mr. Chairman. Thank you very much.

I do want to associate myself with every syllable that Mrs.

Maloney just said. I think part of the frustration, Mr. Massad, and

I think you are well aware of this, we want even more people to

be helped because there are so many people suffering.

Mr. MASSAD. Absolutely.

Mr. CUMMINGS. And I guess the reason for the criteria was the

dilemma that people didn’t want a program—I mean Congress

didn’t want a program that standards would be so low that there

would be a lot of people failing. Is that part of the reason?

Mr. MASSAD. Well, I think it is a few things. You know, we did

have what we felt were very prudent eligibility criteria. We don’t,

for example, provide modifications for vacation homes, for vacant

homes; we don’t provide assistance for those people who can afford

their mortgage without it; we don’t provide assistance for those

who need to move on to another situation. And we make sure that

the modification economically makes sense.

And as a result of that, the pool of people that we currently estimate are eligible, as you probably know, is about 1.4 million today.

That is a pool of families. We have reached a lot of those. We want

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to continue to reach more of them. But it is a very difficult problem. We have had a lot of people looking at whether there are other

ways we can do this. Our authority to implement new programs,

as you know, has expired. We did take funds and reallocate them

to the States so that the States can come up, particularly those

States that are hardest hit by these problems, so those States can

innovate with some programs that in particular address the needs

of the unemployed and the problem of falling house prices.

Mr. CUMMINGS. Now, early on much has been made with regard

to the whole issue that it was projected by the President that more

people would be helped by HAMP than was. Is there something

that happened along the way that caused you all to look at this

thing and say, wait a minute, maybe we cannot accomplish those

numbers that we really wanted to accomplish? And, if so, what was

that?

Mr. MASSAD. We recognized that, No. 1, the eligibility pool

wasn’t as big as we originally thought it might be; it was very hard

to know when the program was launched. And, again, we were in

a crisis; people had no sort of historical basis to say, well, you

know, this is how you should do it. That was No. 1.

No. 2 was servicers were not equipped to deal with this crisis;

their business model was set up to basically collect payments on

performing loans, so it was very, very difficult to implement. We

have tried to take a lot of actions to improve that. As we discussed

earlier, we need more. We need national servicing standards. There

is a lot of work going on a lot of fronts to address the servicer performance.

And No. 3 was it is hard to reach people sometimes. People don’t

necessarily want to talk on the phone when they get a call from

their mortgage servicer; they don’t even want to hear what it is

about. It was hard to reach people.

Mr. CUMMINGS. And so going back to this issue of the trial modifications, so that we will have a clear picture, so you are saying—

and this is a very important point—that a lot of the people who did

not end up with permanent modifications were able to resolve their

problems in other ways, is that right?

Mr. MASSAD. That is absolutely true, and it is important to remember that before we launched our program there were no, there

were very, very few modifications getting done by the industry, and

many of those that were being done increased people’s payments.

HAMP set standards that the industry then largely adopted in its

proprietary programs, what we call the affordability standard in

terms of the ratio of the payment to one’s income.

And as a result of that, and as a result of other borrower protections we have put in place, HAMP’s effect has also been very indirect in terms of helping a lot of people. There have been about two

million modifications done outside of HAMP since we launched this

program, and I think our standards helped cause that. We have

put in, as you know, a number of protections that now the industry

is following in terms of prohibitions on dual track, where someone

who is in the process of being considered for a modification could

otherwise be foreclosed upon; other types of appeal processes for

people who are rejected. And we require the servicers to not only

evaluate someone for HAMP; we require them to then look at other

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types of assistance, to make sure that person can’t qualify for

something else, before they are allowed to foreclose upon them.

Mr. CUMMINGS. Now, I don’t know whether you have—I assume

you do—have some type of access to information or maybe you are

a part of these negotiations with the Attorney Generals. Are you

a part of that?

Mr. MASSAD. I am not directly.

Mr. CUMMINGS. Not you, but do you have access?

Mr. MASSAD. I am aware of what is going on, yes.

Mr. CUMMINGS. And I am not trying to get into any confidentiality on the part of those negotiations, might HAMP be affected by

anything that comes out that?

Mr. MASSAD. Well, it certainly will be. What is going on in that,

and again I appreciate the question. As you know, I can’t comment

on the details of it because it is an enforcement matter, but clearly

this is another example of the fact that this industry is broken. It

didn’t have the standard that we needed and it didn’t have the

ability to cope with this crisis, and we saw that through HAMP,

we saw that through what they were doing on foreclosures, which

was outside of HAMP. And I think what is emerging from this is

clearly a push to get national servicing standards. And, yes, those

will have an effect across the whole industry, and that is what we

need.

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

Mr. MCHENRY. I appreciate the ranking member’s questions, especially the last question is of interest. So it is a push for national

servicing standards.

Mr. MASSAD. Mr. Chairman, what I said was I think what we

need, what is evident by what has been found as to foreclosures

and what we found as to HAMP is that we do need national servicing standards.

Mr. MCHENRY. OK. Thank you.

Mr. MASSAD. As to what comes out of——

Mr. MCHENRY. Go right ahead, go ahead and finish your sentence.

Mr. MASSAD. As to what exactly would be in a settlement, I

wasn’t commenting on that.

Mr. MCHENRY. Oh, OK.

Mr. MASSAD. That would be determined by the various parties to

the settlement.

Mr. MCHENRY. OK. Well, thank you for your testimony. Thank

you for being here today.

At this time, I ask unanimous consent to submit for the record

three written testimonies of what would have been a panel today,

testimony by Joshua Rosner, testimony by the Independent Community Bankers, and, finally, testimony by Anthony B. Sanders. I

ask unanimous consent they be submitted for the record. Without

objection, so ordered.

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Mr. MCHENRY. Today’s hearing was certainly interesting; we had

two oftentimes dramatically different views of the facts, views of

the lay of the land, but certainly stimulating and interesting for us

to inform Congress’s thinking on how the implementation of DoddFrank is progressing, the impact of the TARP program and the

bailouts, and whether or not bailouts continue to be the rule of the

day.

A couple of interesting points in terms of Mr. Barofsky’s testimony. He refers to HAMP as a broken promise, as well as it being

poorly designed and executed, and that the Main Street goals of

TARP were not followed through with. Finally, he also testified

that what he said was ‘‘resolution authority is a joke,’’ and that

goes to the heart of really what many of us here, in terms of Congress, believe is one of the lasting impacts of Dodd-Frank, is that

we have codified the bailouts in terms of calling it resolution authority.

Now, that was Mr. Barofsky’s testimony. Now, Mr. Massad did

an able job of defending the administration’s actions, in particular

HAMP. We simply disagree on the impact it has in terms of those

that it is hurting. I appreciate your testimony and your willingness

to be here. Thank you.

This meeting is adjourned.

[Whereupon, at 12:15 p.m., the subcommittee was adjourned.]

[The prepared statement of Hon. Gerald E. Connolly follows:]

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