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Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

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50–414 2010

S. HRG. 110–1012 

TURMOIL IN U.S. CREDIT MARKETS: 

RECENT ACTIONS REGARDING GOVERNMENT– 

SPONSORED ENTITIES, INVESTMENT BANKS, 

AND OTHER FINANCIAL INSTITUTIONS 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

ON 

THE RECENT ACTIONS TAKEN BY THE FEDERAL REGULATORY AGENCIES TO CONTAIN THE FINANCIAL CRISIS, THE CURRENT STATE OF 

THE FINANCIAL MARKETS, AND PROPOSALS TO ADDRESS THE CRISIS 

TUESDAY, SEPTEMBER 23, 2008 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html 


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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

CHRISTOPHER J. DODD, Connecticut, Chairman 

TIM JOHNSON, South Dakota 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

EVAN BAYH, Indiana 

THOMAS R. CARPER, Delaware 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

ROBERT P. CASEY, Pennsylvania 

JON TESTER, Montana 

RICHARD C. SHELBY, Alabama 

ROBERT F. BENNETT, Utah 

WAYNE ALLARD, Colorado 

MICHAEL B. ENZI, Wyoming 

CHUCK HAGEL, Nebraska 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

ELIZABETH DOLE, North Carolina 

MEL MARTINEZ, Florida 

BOB CORKER, Tennessee 

SHAWN MAHER, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director and Counsel 

AMY S. FRIEND, Chief Counsel 

MARK OSTERLE, Republican Counsel 

DAWN RATLIFF, Chief Clerk 

DEVIN HARTLEY, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 


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(III) 

C O N T E N T S 

TUESDAY, SEPTEMBER 23, 2008 

Page 

Opening statement of Chairman Dodd .................................................................. 1 

Opening statements, comments, or prepared statements of: 

Senator Shelby .................................................................................................. 4 

Senator Johnson ............................................................................................... 7 

Senator Bennett ................................................................................................ 8 

Senator Reed ..................................................................................................... 8 

Senator Enzi ..................................................................................................... 9 

Senator Schumer .............................................................................................. 10 

Senator Hagel ................................................................................................... 11 

Senator Carper ................................................................................................. 12 

Senator Bunning ............................................................................................... 13 

Senator Menendez ............................................................................................ 13 

Senator Crapo ................................................................................................... 15 

Senator Brown .................................................................................................. 16 

Senator Dole ...................................................................................................... 17 

Senator Casey ................................................................................................... 18 

Senator Martinez .............................................................................................. 20 

Senator Bayh .................................................................................................... 21 

Senator Corker .................................................................................................. 22 

Senator Akaka .................................................................................................. 23 

Senator Allard ................................................................................................... 24 

Senator Tester .................................................................................................. 34 

WITNESSES 

Henry M. Paulson, Jr., Secretary, Department of the Treasury ......................... 25 

Prepared statement .......................................................................................... 87 

Ben S. Bernanke, Chairman, Board of Governors of the Federal Reserve 

System ................................................................................................................... 28 

Prepared statement .......................................................................................... 89 

Christopher Cox, Chairman, Securities and Exchange Commission ................... 30 

Prepared statement .......................................................................................... 94 

James B. Lockhart III, Director, Federal Housing Finance Agency ................... 32 

Prepared statement .......................................................................................... 102 

Response to written questions of: 

Senator Reed .............................................................................................. 130 


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TURMOIL IN U.S. CREDIT MARKETS: RECENT 

ACTIONS REGARDING GOVERNMENT– 

SPONSORED ENTITIES, INVESTMENT 

BANKS, AND OTHER FINANCIAL INSTITUTIONS 

TUESDAY, SEPTEMBER 23, 2008 

U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. 

The Committee met at 9:35 a.m., in room SD–G50, Dirksen Senate Office Building, Senator Christopher J. Dodd (Chairman of the 

Committee) presiding. 

OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD 

Chairman DODD. Good morning. I want to thank our colleagues, 

thank our witnesses, those who are in attendance. The Committee 

will come to order, and this morning we meet for a hearing on the 

‘‘Turmoil of U.S. Credit Markets: Recent Actions Regarding Government-Sponsored Entities, Investment Banks, and Other Financial Institutions. We want to welcome our distinguished witnesses 

here this morning. We thank the Secretary of the Treasury, Hank 

Paulson, who is here; the Honorable Ben Bernanke, of course, the 

Chairman of the Federal Reserve; Christopher Cox, Chairman of 

the Securities and Exchange Commission; and Jim Lockhart, the 

Director of the Federal Housing Finance Agency. 

The way we are going to proceed this morning is I will make a 

brief opening statement; turn to my colleague from Alabama, Senator Shelby, former Chairman of the Committee, to make his opening remarks; and given the magnitude of this issue and the seriousness of it, I am going to ask if my colleagues would like to make 

any brief opening comments quickly; and then we will get to our 

witnesses. 

My goal would be that we terminate the hearing sometime 

around noon, if we can. We all recognize the gravity of the situation and the importance of these witnesses to be able to get back 

and do the work they are doing. So my hope would be that we try 

and move along here. But, again, I want to give each of my colleagues a chance to at least say something at the outset of these 

remarks. But I beseech you to try and keep them brief. All of your 

full statements will be included in the record, and any supporting 

documents you care to include in the record will be there as well. 

So, with that admonition in mind, we will try and make the 

opening rounds here about 8 minutes apiece. That way we can at 


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least get decent responses and properly ask questions. And I am 

not going to gavel down tightly, but try to keep it within that 

framework, if we can. 

With that, let me share some opening thoughts this morning, and 

then I will be turning to Senator Shelby. 

The Committee gathers this morning at an extraordinarily and 

perilous moment in our Nation’s history. The landscape of our Nation’s economy has been radically reshaped by the U.S. Government over the course of just a few days in a totally ad hoc manner, 

it would seem. Companies that have formed the foundation of our 

financial markets are shrinking and disappearing practically overnight. Their insatiable appetite for risk in many cases has permeated all sectors of the financial services industry and has spread 

beyond our shores. It has felled giants like Bear Stearns and Lehman Brothers; brought others to their knees like Merrill Lynch, 

AIG, Fannie Mae, and Freddie Mac; prompted the largest, I might 

point out, thrift failure in our Nation’s history, the Indy Mac Bank; 

and eliminated the final two independent investment banks, Morgan Stanley and Goldman Sachs. 

These drastic changes have reverberated far beyond the trading 

floors and boardrooms of corporate America. Across our great Nation, families are gathering around their kitchen tables each night 

asking how they will weather this storm and how it will affect 

them very directly. Hundreds of billions of dollars that Americans 

invested in retirement accounts and mutual funds have evaporated. 

Homeowners are watching the value of their homes plummet. Foreclosures are forcing 9,800 families from their homes each and every 

day in our country. Families worry about how they will afford groceries and gasoline. Six hundred thousand Americans have lost 

their jobs while millions more have watched their paychecks shrink 

and their benefits wither away. 

Perhaps the most dangerous consequence, the one that we do not 

speak enough about, in my view, of this economic maelstrom is 

that our collective confidence in our Nation’s future has been badly 

shaken, and that needs to be restored. 

Less than 6 months ago, our Banking Committee gathered in 

this very room to listen to the financial leaders of the Bush administration describe what at the time seemed an inconceivable event: 

the Government’s $30 billion intervention in the sale of Bear 

Stearns to JP Morgan. Now after spending hundreds of billions of 

dollars more to prop up, bail out, and wind down a multitude of 

institutions, the U.S. Government effectively runs, supports, or outright owns vast swaths of the financial sector. 

American taxpayers are angry, and they demand to know how 

we arrived at this moment and, more importantly right now, how 

the architects of this economic landscape will put us back on a 

sound financial footing and restore American confidence and optimism. 

As I and many Members of this Committee have argued for the 

past 17 months since I became Chairman of this Committee, the 

root cause of our economic crisis has been the collapse of our housing market, triggered by what Secretary Paulson himself has called 

‘‘bad lending practices.’’ These are practices that no sensible banker 

should have engaged in—and many did not, I might add—reckless, 


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careless, and sometimes unscrupulous actors in the mortgage lending industry that allowed loans to be made that they knew hardworking, law-abiding borrowers would not be able to repay. Financial regulators acted much too late and much too timidly. They 

failed to enforce the laws that Congress passed requiring them to 

prohibit these bad lending practices. 

What is tragic and lamentable is that the ensuring calamity was 

entirely foreseeable and preventable. This was no act of God. It 

was not like Hurricane Ike. It was created by a combustible combination of private greed and public regulatory neglect. And now 

we must confront the present crisis. 

Barely 72 hours ago, Secretary Paulson presented a proposal that 

he believes—and others do as well—is urgently needed to protect 

our economy. This proposal is stunning and unprecedented in its 

scope—and lack of detail, I might add. It would allow the Secretary 

of the Treasury to intervene in our economy by purchasing at least 

$700 billion of toxic assets. It would allow the Secretary to hold 

onto those assets for years and to pay millions of dollars to handpicked firms to manage those assets. It would do nothing, in my 

view, to help a single family save a home, at least not up front. It 

would do nothing to stop even a single CEO from dumping billions 

of toxic assets on the backs of American taxpayers, while at the 

same time do nothing to stop the very authors of this calamity to 

walk away with bonuses and golden parachutes worth millions of 

dollars. And it would allow this Secretary and his successors to act 

with utter and absolute impunity without review by any agency or 

a court of law. 

After reading this proposal, I can only conclude that it is not just 

our economy that is at risk but our Constitution as well. Nevertheless, in our efforts to restore financial security to American families 

and stability to our markets, this Banking Committee has a responsibility to examine this proposal carefully and in a timely manner. In my view, any plan to address this crisis must embody three 

principles: 

First, American taxpayers must have some assurance that their 

hard-earned money is being used correctly and responsibly; 

Second, we must put in place proper oversight so that the executors of this plan are accountable and their actions are transparent; 

And, finally, we must address the root cause of this crisis by putting an end to the rising number of foreclosures sweeping across 

our Nation. 

In the longer term, it is clear that our current economic circumstances demand that we rethink, reform, and modernize supervision of the financial services industry. Certain basic principles 

should form the foundation for reform. We need a leader in the 

White House who will ensure that regulators are strong cops on 

the beat and do not turn a blind eye to reckless lending practices. 

We need to remove incentives for regulators to compete against 

each other for bank and thrift clients by weakening regulation. We 

need to ensure that all institutions that pose a risk to our financial 

system and taxpayers are carefully and sensibly supervised. And 

we need to accept the premise that consumer protection and economic growth are not in conflict with one another but inextricably 

linked. 


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If we learn nothing else from this crisis, it is that the failure to 

protect consumers can cause the collapse of our largest financial institutions, the loss of hundreds of thousands of jobs, and the draining of hundreds of billions of dollars of wealth from hard-working 

Americans. 

Today, we are very fortunate to be joined, as I said at the outset, 

by Treasury Secretary Henry Paulson, Federal Reserve Chairman 

Ben Bernanke, SEC Chairman Chris Cox, and the Director of the 

Federal Housing Finance Agency James Lockhart. 

Regardless of how so many feel about the decisions these leaders 

have made and the impact they have had, we all ought to be able 

to agree that these four individuals are good, talented, knowledgeable, and experienced individuals who, I think, want to do the very 

best for our country. And I agree as well that we need to move, and 

move quickly if we can, but I feel even more strongly that we need 

to move carefully and prudently and to make sure that what we 

do is right. I understand speed is important, but I am far more interested in whether or not we get this right. There is no second act 

to this. There is no alternative idea out there with the resources 

available if this does not work. So it is critically important that we 

get it right. And the purpose of this hearing is to discuss whether 

or not this is the right approach and how we can prove it if we 

need to. 

Senator Shelby. 

STATEMENT OF SENATOR RICHARD C. SHELBY 

Senator SHELBY. Thank you, Chairman Dodd. 

This may be the most important hearing that this Committee 

has conducted, at least in the 22 years I have been a Member here. 

Over the last 10 years, trillions of dollars were poured into our 

mortgage finance markets, often with the encouragement of wellintended Government programs. At first, the money backed conventional mortgages with standard downpayments and properly 

verified incomes. 

Over time, however, the number of homebuyers that met conventional loan requirements dwindled rapidly. In order to fuel the upward spiral, mortgage products became more exotic, requiring less 

of borrowers and involving more risk. Without regard for fiscal prudence and simple economics, bankers, investment bankers, mortgage brokers, realtors, home builders, mortgage bankers, and 

homebuyers created the conditions that helped inflate the housing 

bubble. At the same time, Wall Street was developing ever more sophisticated financing vehicles to ensure that money continued to 

flow into the mortgage markets to meet the demand. 

Mortgages were pooled, packaged, and rated so-called investment 

grade by the credit rating agencies. They were then sold into a 

market eager to purchase securities with a wide range of risks and 

yields. 

Many purchasers employed massive amounts of leverage, 

layering risk upon risk in an effort to maximize return. To cover 

their risks, many of the buyers also bought credit protection from 

one another, entered into derivatives contracts with nominal values 

in the hundreds of trillions of dollars. All the while, our financial 

regulators appeared to be unaware as they sat on the sidelines. 


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As early as July of 2003 here at the Banking Committee, I asked 

Chairman Greenspan, then Chairman of the Federal Reserve, 

whether he was concerned about the growing number of loans to 

borrowers with weak credit histories and the number of homeowners who spent more than 50 percent of their income on housing. I also asked him if he was concerned whether an economic 

downturn could lead to increasing delinquencies and foreclosures. 

Chairman Greenspan at this very Committee assured us that increasing home prices provided an equity cushion for mortgagors 

and that lending to such borrowers would pose ‘‘a rather small risk 

to the mortgage market and the economy as a whole.’’ 

As recently as March of this year, Vice Chairman of the Federal 

Reserve Cohn, testifying before this very Committee, assured us 

that the banking system was in, and I will quote his words, ‘‘sound 

overall condition’’ and that losses ‘‘should not threaten their viability.’’ 

Now, we now know that was not the case. Eventually, economic 

reality caught up with our housing market, and housing prices 

stalled and then began falling. Many who bought homes with unconventional loans found that they were unable to afford their rising payments. Because home values were dropping, they were unable to refinance, and delinquency rates skyrocketed, as we all 

know. 

Once homeowners began defaulting, the value of mortgagebacked securities plummeted. Collateralized debt obligations—we 

call them ‘‘CDOs’’—that were comprised of the riskiest mortgagebacked securities became worthless. As a result, financial institutions holding securitized assets have suffered enormous losses and 

have been desperately trying to raise new capital. 

Of the five investment banks regulated at the beginning of the 

year by the Securities and Exchange Commission under its Consolidated Supervised Entities Program, two have failed, one was forced 

to merge with a bank, and the remaining two have now left the 

program to become bank holding companies. The recent demise of 

our investment banks lies in stark contrast to the vote of confidence we received in the Banking Committee from Chairman Cox 

in February of this year, when he assured us that the CSE program was up to the task, and I will now quote Chairman Cox. According to Chairman Cox’s words, ‘‘The purpose of the CSE program is to monitor far and to act quickly in response to financial 

or operational weakness in a CSE holding company that might 

place regulated entities or the broader financial system at risk. The 

Commission’’—that is the SEC he is speaking of—‘‘seeks to ensure 

that the holding company has sufficient stand-alone liquidity and 

financial resources to meet its expected cash outflows in a stressed 

liquidity environment for a period of at least 1 year.’’ 

That was earlier this year. In late 2007, Mr. Erik Sirri, head of 

Market Regulation for the Securities and Exchange Commission, 

described a consolidated supervision program that had ‘‘demonstrated its effectiveness during the current credit market difficulties.’’ Nothing can be further from the truth. 

He likewise assured us that the SEC’s consolidated supervision 

had achieved ‘‘the goal of reducing the likelihood that weakness 

within the holding company or an unregulated affiliate will place 


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a regulated entity or the broader financial system at risk. Notwithstanding assurances to the contrary, uncertainty about housing 

prices and the value of mortgage-backed securities have brought 

our markets to a halt. 

We are now facing the most serious economic crisis, as Chairman 

Dodd said, in a generation. So far, the Treasury Department and 

the Fed’s response to the crisis has been a series of ad hoc measures. 

First came the bailout of Bear Stearns, which we were told was 

unavoidable. Then came Lehman Brothers, which was allowed to 

fail. And then, just last week, the Fed and Treasury organized a 

bailout of AIG. 

I believe the absence of a clear and comprehensive plan for addressing this crisis has injected additional uncertainty into our 

markets and has undermined the ability of our markets to tackle 

this crisis on their own. 

Unfortunately, the Treasury Department’s latest proposal continues, I believe, its ad hoc approach, but on a much grander scale. 

The plan contemplates the purchase, as we know, of up to $700 billion in troubled, toxic, mortgage-related assets from financial institutions that nobody would buy. Treasury expects, but is not required, to purchase most assets through a type of reverse auction 

process. 

There are very few details in this legislation. In fact, Treasury 

officials admit that they will have to figure out the mechanics as 

they go along. Rather than establishing a comprehensive, workable 

plan for resolving this crisis, I believe this legislation merely codifies Treasury’s ad hoc approach. 

My hope is that this hearing will give us an opportunity to explore the parameters of the plan and why Secretary Paulson believed it will work. I also hope to hear why the plan does nothing 

to address the root cause of the crisis: the rise in default rates on 

mortgages. While Wall Street banks get to sell their bad investments to the Treasury Department, homeowners will still be saddled with mortgages that they cannot afford. 

My record is very clear on taxpayer-funded bailouts. I have long 

opposed Government bailouts for individuals and corporate America alike. As a young Congressman, I voted against the loan guarantees for Chrysler, I believe in 1979 or 1980. However, if the Government is going to get into the bailout business, shouldn’t we also 

be focusing our resources on average Americans, the taxpayers, 

rather than sophisticated and well-compensated Wall Street bankers? 

The Treasury’s plan has little for those outside of the financial 

industry. It is aimed at rescuing the same financial institutions 

that created this crisis with the sloppy underwriting and reckless 

disregard for the risk they were creating, taking, or passing onto 

others. Wall Street bet that the Government would rescue them if 

they got into trouble. It appears that bet may be the one that pays 

off. 

Once again, what troubles me most is that we have been given 

no credible assurances that this plan will work. We could very well 

spend $700 billion or $1 trillion and not resolve the crisis. Before 

I sign off on something of this magnitude, I would want to know 


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that we have exhausted all reasonable alternatives. But I do not 

believe we can do that in a weekend. Unfortunately, the incredibly 

accelerated process for considering this bill means that Congress 

does not have time to determine if there are better alternatives or 

any alternatives to the Treasury’s plan. 

I am very concerned that the express need to pass something 

now may prevent us from devising a plan that would actually work. 

Without question, our markets and financial institutions need serious attention. I do not believe, however, that we can solve this crisis by spending a massive amount of money on bad securities. It 

is time for this administration and the Congress to do the work of 

devising as quickly as possible a comprehensive and workable plan 

for resolving this crisis before we waste $700 billion to $1 trillion 

of taxpayer money. 

Thank you, Mr. Chairman. 

Chairman DODD. Thank you, Senator Shelby. 

Senator Johnson. 

STATEMENT OF SENATOR TIM JOHNSON 

Senator JOHNSON. Thank you, Senator Dodd. 

This administration has asked Congress for the authority to buy up to $700 billion worth of residential and commercial mortgage— 

related assets from troubled Wall Street financial institutions. 

They are asking that this package have no strings. In South Dakota, we believe strongly in personal responsibility. When you 

make mistakes, as many of these companies have, you should be 

held accountable for those decisions. This package may be a necessary evil, but we cannot allow it to become a gift. 

It should have teeth, with real oversight from Congress. We 

should not use this package or American tax dollars to benefit foreign banks. And this package should contain limits on executive 

compensation. People in South Dakota work hard for the taxes they 

send to Washington, and their earnings should not be wasted on 

the bloated compensation of a CEO. 

Today we need answers from the regulators as to how we got to 

this point and specifics about how our regulatory system failed us. 

We also need to begin the dialog between the regulators and this 

Committee as to how to best change the regulatory structure so 

that this type of crisis does not happen again. Our system needs 

good, effective regulation that balances consumer protection and allows for sustainable economic growth. 

For years many Members of this Committee, and myself included, have been calling for just this sort of regulation. There 

should be no mistake that change is coming. I look forward to 

working with the Members of this Committee to institute the 

changes needed to regulate and to guarantee a responsible, modern 

regulatory system. 

Please submit my full statement for the record. 

Chairman DODD. Thank you, Senator. Let me urge again, as I 

said at the outset, to try and keep these comments as brief as we 

can so we can get to the testimony. I am very grateful, by the 

way—we have been working as a Committee, by the way, many of 

us over the weekend, a lot of us, and Senator Bennett and I have 

talked at length, and I thank him for his participation. 


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Senator Bennett. 

STATEMENT OF SENATOR ROBERT F. BENNETT 

Senator BENNETT. Thank you, Mr. Chairman. 

We have had a housing bubble, and the bubble has burst. And 

every time we have a bubble, whether it is housing or dotcom 

stocks or anything else, when the bubble bursts there is disaster. 

And we will have bubbles in the future because the human propensity to believe that the market will always go up is still there. Let 

us understand that. 

The economy runs on credit, credit is granted on confidence, and 

confidence is based on one of two assumptions: the collateral is 

worth it or the cash-flow will be sufficient. One way or the other, 

the loan will be repaid. What we are faced with now is finding a 

way to restore the confidence in the system so that credit can start 

to flow again. That is what we are here to try to do. 

Thank you, Mr. Chairman. 

Chairman DODD. Thank you. 

Senator Reed. 

STATEMENT OF SENATOR JACK REED 

Senator REED. Thank you very much, Mr. Chairman. 

The essence of the proposition that the administration is presenting to us today is that the taxpayers will assume the risk of 

disastrous investment decisions made by very highly compensated 

individuals and institutions on Wall Street. I think the custom on 

Wall Street is that when you assume the risk, you get paid to do 

that. I believe it is essential that the taxpayers of this country are 

compensated for their assistance. I think the only effective way to 

do that is a mandatory program of warrants as a prerequisite to 

participating in this assistance for non-voting equity in companies. 

And as these companies improve, which is the hope and expectation of this program, the American taxpayers could also benefit 

from that improvement. 

I think this also goes to the very difficult issue of pricing these 

securities, that if the Treasury or its agents misprice the securities 

and they overpay, presumably the benefits of that will flow to the 

companies and, frankly, with the appreciated stock, again, I think 

taxpayers should benefit from that. 

I think also, too, there is some discussion that if we do this, there 

will be some limitation in participation, but I would suggest that 

might not be altogether a bad thing; that if this system can be 

gamed by people who are not desperately in need of Government 

assistance, that will be done. I think to present a company with the 

choice between surrendering warrants and participating or simply 

getting through on their own is not an unfair choice for sophisticated business managers who, we presume or we hope, are dedicated to preserving their company and benefiting the shareholders. 

And, finally, I want to associate myself with the comments of the 

Chairman and others who say that we cannot simply assist Wall 

Street. We have to assist hundreds of thousands of homeowners 

who are facing foreclosure. If we do not do that, that will be, I 

think, unfair and it will not result in a program that is legitimate 

in the eyes of the American people. 


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Thank you very much. 

Chairman DODD. Very good. Thank you. 

Senator Enzi. 

STATEMENT OF SENATOR MICHAEL B. ENZI 

Senator ENZI. Thank you, Mr. Chairman. 

In the past 6 months, our Federal Government has devised a 

dozen strategies to save America’s financial markets. Each plan 

has been more costly, more risky, and less aligned with the principles of our country’s free market economy than the last. I am disappointed to say that this latest plan puts all the rest of them to 

shame. This proposal means a full-scale intervention into our country’s free markets with the Treasury buying every bad asset in 

sight with taxpayer money. To make this point clear, if approved in this current form of $700 

billion, this plan will cost every man, woman, and child in this 

country approximately $2,300. This plan will come with an enormous cost and enormous risk. Unfortunately, the only plan more 

costly would be doing nothing at all. 

Last week, I was given the legislative language for this proposal, and it was only three pages long—$700 billion, three pages. I know 

that it has grown to six pages and perhaps to 42 pages. When I 

questioned Secretary Paulson and Chairman Bernanke about this 

plan on Sunday, they explained that flexible and broad authority 

was the only way the plan would work. I was immediately reminded of the last time the Chairman and the Secretary appeared 

before this Committee and asked for such broad authority; that 

was to save Fannie Mae and Freddie Mac from insolvency this past 

summer. I hope this time the plan is more successful. 

I have no illusions about the urgency of the problem our economy 

faces today, but Congress cannot be expected to approve this bill 

without a guarantee of proper oversight and accountability for the 

taxpayers. As I said before, we are talking about the equivalent of 

$2,300 from every U.S. citizen. This Committee would not be doing 

its job if that were allowed to happen. 

Where is the accountability for these banks and their management? The Treasury and the Federal Reserve have asked us to cut 

them the biggest bailout check in history, and that money will be 

handed out to the same banks that put us in the mess to begin 

with. Nowhere in the text of this bill do I see any equity sharing 

or loss mitigation that will protect taxpayers from unknown costs. 

It did make a difference to AIG stockholders who are trying to pay 

off their loan already. A Treasury buy from our banks will be 

priced by the seller, not buy the buyer. The Federal Government 

could end up owning mortgages that cost multiples of the resale 

value, and yet there is no recourse for our taxpayers. It does not 

make any sense. It will reward the banks first who got us in the 

financial mess and the taxpayers second, many of whom were completely unaware that this kind of financial—— 

Chairman DODD. I am going to ask the audience—we will have 

to clear this room. I do not want to do that. It is a public hearing. 

Let’s have respect for the speakers, and there will be no outbreaks, 

applause or other comments. This is a serious hearing. 

Senator. 


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Senator ENZI. I have heard the argument that punitive or prescriptive measures could cause sellers to leave the market. I think 

that offends common sense. If banks can get a better price for their 

paper from someone other than Treasury, they should not be bailed 

out in the first place. If they choose to fail rather than sell their 

debt at its real market value and record their loss on the books, 

they should be free to take that option. 

This legislation must be passed to help Main Street, not because 

the Federal Government is being held hostage by Wall Street. 

I have some ideas. This Committee must find a way to make financial regulation more efficient, effective, and accountable. I have 

some ideas, including a reevaluation of the marked-to-market accounting. It is clear that such a method is not sustainable in a 

volatile market. Providing some relief today could prevent firms 

from needing this expensive Federal bailout. Reforms in the long 

term could prevent capitalization issues down the road. 

Thank you, Mr. Chairman. 

Chairman DODD. Thank you, Senator. 

Senator Schumer. 

STATEMENT OF SENATOR CHARLES E. SCHUMER 

Senator SCHUMER. Thank you, Mr. Chairman, and thank you for 

holding this hearing. 

My colleagues and fellow Americans, we live in amazing and 

dangerous times. Who would have thought that the lowly mortgage, long regarded as the safest of investments, could bring our 

financial system to its knees? But that is where we are. And while 

we must look back and see what went so dramatically wrong, our 

immediate task is to look forward and to try and avoid a meltdown 

of the financial system. And as we look forward in the week ahead, 

we face both a Scylla and a Charybdis—dangers on both sides. 

On the one hand, as we are reminded, there are real dangers if 

we do not act. The description Chairman Bernanke gave us when 

the leadership of the Democratic and Republican House and Senate 

met in Speaker Pelosi’s conference room, the description Chairman 

Bernanke gave, in quiet terms, without hyperbole, was astounding. 

Chairman Bernanke told us that our American economy’s arteries, 

our financial system is clogged, and if we do not act, the patient 

will surely suffer a heart attack, maybe next week, maybe in 6 

months, but it will happen. So we must act, and we must act soon. 

And make no mistake about it, while Wall Street caused the 

problems we face, unfortunately if we do nothing, Main Street will 

also pay a severe price. Pension funds, money market mutual 

funds, 401(k) plans will be negatively impacted. The lockdown in 

lending has widespread consequences. I have heard from car companies that it is virtually impossible to get an auto loan right now 

unless you have a credit score over 720. And if that continues, the 

auto industry will sell 6 million fewer cars this year than it did in 

years past. Even though the workers in Buffalo and Detroit and St. 

Louis are blameless, they will suffer. It is not fair. It is not right. 

But that is the world we live in. 

So I want to assure the markets—and I think I speak for all of 

us—that we will not be dilatory, we will not ‘‘Christmas tree’’ this 


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bill with extraneous amendments, and we will work in a bipartisan 

way to act, and to act soon. 

But there is also the Charybdis, the other danger of acting so 

quickly that we choose a bad solution. The markets want action, 

and we understand that. But if we act so quickly that we create 

an ineffective solution without adequate safeguards, then we risk 

the plan failing, which would be an even worse outcome for the 

markets, for the economy, for our country. Even on Wall Street, 

$700 billion is a lot of money, and none of the thousands of money 

managers would invest that sum without appropriate due diligence. 

This hearing today and the discussions that will follow are our 

congressional due diligence, and we take that responsibility seriously, and we will make intelligent and relevant improvements. 

Secretary Paulson has proposed his plan, the Troubled Asset Relief 

Program, or TARP, to Congress. And while I certainly recognize the 

need for action and want to move quickly, I think some changes are 

necessary. 

To Secretary Paulson’s TARP program I believe we need to add 

THOR: T for taxpayer protections; H for housing; O for oversight; 

and, down the road, R for regulation. 

I can talk about each of these at some length, but we do not have 

time, Mr. Chairman. But on taxpayers, we must put taxpayers 

first, should this program work. They must come ahead of bondholders, shareholders, and executives, and we need to add to this 

legislation those types of protections, such as my colleague Senator 

Reed has spoken about in terms of warrants. That would be more 

of a mandatory than an optional nature. 

Homeowners. Secretary Paulson has labored mightily to try to 

improve the homeowner problem, and Chairman Bernanke has 

said repeatedly until we find a floor to the housing markets—and 

foreclosures are directly related to the housing markets—we will 

not solve this problem. And that affects not just those who made 

bad mortgages or not just those who will lose their home through 

not fault of their own, but every homeowner. The number of foreclosures and the price of the average American’s home is related 

and cannot be separated. 

Oversight. There have been lots of discussions of oversight led by 

Chairman Dodd, and there are excellent suggestions, and we must 

do them. 

And R, regulation. We must have a much better system of regulation, and many of us have begun thinking about this. It will probably have to wait until after we act here, but we must do it. 

The bottom line, Mr. Chairman, is this: We do have to act, but 

we have to act smartly, wisely, and relevantly. And I believe that 

is what this Committee will do over the next few days. 

Chairman DODD. Thank you very much, Senator. 

Senator Hagel. 

STATEMENT OF SENATOR CHUCK HAGEL 

Senator HAGEL. Thank you, Mr. Chairman. 

The essence of our efforts and final product is accountability, 

transparency, and timeliness. We must define a rescue agreement 

based on the common interests of our country. We have a responsiVerDate Nov 24 2008 01:50 Apr 02, 2010 Jkt 050414 PO 00000 Frm 00015 Fmt 6633 Sfmt 6602 E:\HR\OC\A414.XXX A414

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bility to construct a program based on the general principles of 

agreement, not held hostages to the details of the differences. 

We are in uncharted waters. We are living in a 21st Century 

global marketplace. We are behind in not only understanding that, 

but regulating that. This is going to require a new 21st Century 

regulatory regime. 

But our current effort—we must stay focused on our current effort—is a short-term rescue effort, clearly in the interests of our 

country and the world. And it must be done. And it must be done 

with responsibility but also with timeliness. 

Mr. Chairman, thank you. 

Chairman DODD. Thank you, very much. 

Senator Carper. 

STATEMENT OF SENATOR THOMAS R. CARPER 

Senator CARPER. Mr. Chairman, thank you. 

Gentlemen, thank you very much for joining us again here today. 

What I would like to just mention, I am going to mention four 

things that I hope to take away from this hearing today. The first 

of those is to better understand how we got into this mess. Chairman Cox and I were talking about short selling yesterday and I 

want to understand better the role that that played in getting us 

where we are today. I want to better understand how changing leverage ratios has gotten us to where we are today. But I want to 

know when we walk out of here today, I want just a better understanding of how did we end up in this mess. 

The second thing I hope to get out of this is after understanding 

how we got into this mess, how do we get out of this mess? And 

how do we do so in a way that does not reward bad behavior from 

people who should not be rewarded for the bad behavior? 

The third thing I would like to take away with me today is to 

have some assurance myself in the plan that we are discussing 

here or that eventually evolves, so that we can make sure this kind 

of tragedy does not occur again in our lifetime and beyond. 

And finally, I want to better understand how we maximize the 

chances that the Treasury will be made whole or maybe even make 

a buck or two for the taxpayers at the end of the day. I mentioned 

at another meeting here on Capitol Hill this morning, I went back 

and recalled the bailout at the time of Chrysler where the Federal 

Government did not provide loans to Chrysler, they provided loan 

guarantees issued in conjunction with warrants which were exercised—we never had to backup the loans but we did have the opportunity to exercise the warrants. We made money for the taxpayers on that deal. 

When the S&L debacle occurred, we ended up creating the Resolution Trust Corporation. The Resolution Trust Corporation, you all 

will recall, came in and bought not the savings and loans, but what 

were deemed to be the bad assets of the savings and loans. And 

as it turned out, a lot of them were not bad assets. They were assets whose value had diminished during that crisis but assets that 

over time appreciated in value. We were able to sell them and recover most of the taxpayers’ money. 

My hope is as we go forward here, that we look to those two examples as maybe a bit of a road map to enable us, while we find 


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out how we got into this mess, how we get out of it, how we make 

sure it does not happen again, how we do all of that without rewarding bad behavior, at the end of the day—putting this much 

taxpayer money at the risk—at the end of the day I would feel a 

lot better if we had a pretty good assurance that when all is said 

and done that we have actually recovered this money for our taxpayers. 

And if we can make a buck or two at the end of the day, so be 

it. 

Thank you. 

Chairman DODD. Thank you, Senator, very much. 

I want to point out, I turn to Senator Bunning, it was 2 years 

ago that Senator Bunning and Senator Allard held a joint hearing 

on subprime mortgages, at the conclusion of which Senator Schumer, Senator Reed, Senator Sarbanes, and myself, joined them in 

a letter to the regulators asking what actions and steps they were 

going to take in the subprime mortgage problem. 

Senator Bunning. 

STATEMENT OF SENATOR JIM BUNNING 

Senator BUNNING. Thank you, Mr. Chairman. 

So much has happened since the last time we had our witnesses 

before us that we could probably hold this hearing for a week and 

still have more to talk about. It is hard to even know where to 

begin. What is pressing is the $700 billion Treasury proposal that is 

being negotiated with the Chairman of the House Financial Services Committee. The Paulson proposal is an attempt to do what we 

so often do in Washington, D.C., throw money at a problem. 

We cannot make bad mortgages go away. We cannot make the 

losses that our financial institutions are facing go away. Someone 

must take those losses. We can either let the people who made the 

bad decisions bear the consequences of their actions or we can 

spread that pain to others. And that is exactly what the Secretary’s 

proposal is to do, take Wall Street’s pain and spread it to the taxpayers. 

The plan has not even passed and already Americans are paying 

for it because of the fall in the dollar as a result of all of the new 

debt that we will be taking on. 

I know there are problems in the financial markets and I share 

a lot of the same concerns that other members and witnesses do. 

However, the Paulson plan will not fix those problems. The 

Paulson plan will not help struggling homeowners pay their mortgages. The Paulson plan will not bring a stop to the slide in home 

prices. But the Paulson plan will spend $700 billion worth of taxpayers’ money to prop up and clean up the balance sheets of Wall 

Street. 

This massive bailout is not a solution. It is financial socialism 

and it is un-American. 

Thank you. 

Chairman DODD. Senator Menendez. 

STATEMENT OF SENATOR ROBERT MENENDEZ 

Senator MENENDEZ. Thank you, Mr. Chairman. 


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Certainly in my 16 years in Congress, there has not been a more 

critical time for our economy and a more important Banking Committee hearing than this one. The Administration’s economic and 

regulatory policy over the last 7 years has led us to today. Now we 

have been told that we have less than 7 days to make our choices 

and 8 minutes to ask questions, so you will forgive me if I am not 

signing right away on the bottom line. 

Unfortunately, the Administration comes to the Congress at the 

final hour instead of before, and in doing so leaves us with undesirable choices. The credit crunch and the failing investment banks 

did not occur in a vacuum. At their core they are about the housing 

foreclosure crisis. And that weakness was created by lax regulation, regulators asleep at the switch, and an unwillingness by 

many to acknowledge the direness of the situation early on. 

In March of 2007, Mr. Chairman, at this Committee I raised the 

prospect of a tsunami of foreclosures in the Banking Committee, 

but the Administration dismissed it. A few months later, as foreclosures mounted, they assured us that the problems would be contained to the housing market. And in July, we asked them about 

the prospect of a bailout of Fannie and Freddie, but they could not 

foresee it. 

So how many times can the Administration be wrong and still instill confidence? 

This is why, while I need to know—and I think we need to act, 

and I agree we need to act—I am not going to be stampeded into 

rubber-stamping this proposal. There are serious questions that we 

need answers to before you have at least my vote. 

Illiquid assets are illiquid either because they are non-performing, they are over valued, or even worse, we do not even know 

what their true values are. Questions range from are you intending 

to buy these bad loans at a significant discount or will we be overpaying? If they are at a deep discount, how does that create the 

much-needed capital for their cash future, and therefore solve the 

problem? If Treasury is overpaying and working to create capital 

for the institutions, why aren’t we getting equity just as shareholders do so that the taxpayers can recoup their money? And as 

Treasury has amended their proposal for foreign entities to also be 

subject to this bailout, what are the central banks of those countries doing to establish and prop up their own institutions? 

Why are we asked to put $700 billion to keep CEOs in their office while families get kicked out of their homes and the public gets 

the bill while this Administration says it is all about Main Street? 

We cannot say that homeowners should bear all of the consequences of bad decisions but that financial institutions get to 

share the pain of their bad decisions through public debt. 

So Mr. Chairman, last week the President said ‘‘The risk of doing 

nothing far outweighs the risk of the package.’’ As his statement 

inherently implies, there is a risk involved. And with risk comes responsibility. We need to quantify that risk. We need to limit taxpayer exposure. We need to work to keep families in their home as 

part of their effort. 

Therefore, I look forward to some honest answers here today. 

The Secretary’s testimony, as it has been presented to the Committee, just reiterates the need. But I hope we will get to the anVerDate Nov 24 2008 01:50 Apr 02, 2010 Jkt 050414 PO 00000 Frm 00018 Fmt 6633 Sfmt 6602 E:\HR\OC\A414.XXX A414

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swers of how do they intend to have this work and work in a way 

that limits the taxpayers’ exposure, puts homeowners back in their 

home, and creates responsibilities by those who have believed that 

private risk can now become public debt. 

Chairman DODD. Thank you, Senator. 

Senator Crapo. 

STATEMENT OF SENATOR MIKE CRAPO 

Senator CRAPO. Thank you very much, Mr. Chairman. 

I share many of the concerns and observations that have been 

made by my colleagues, so I will not restate all of them. 

I do want to indicate, however, that I agree that this is probably 

the most critical threat to our economic circumstances in our country that we have faced since I have served in Congress. And one 

which has the type of urgency that requires us to take prompt action. 

But I also share the sentiments that we must take the time to 

get it right. And I have a lot of the same concerns that others have 

shared about whether we have the right proposal or whether we 

need to continue to work through a refinement of it. 

I have a number of questions. For example, as have been raised 

by some already today, how will these assets be priced? If there is 

a market value that the holder or seller simply does not want to 

sell at, will the taxpayer be asked to buy them at a premium simply to help recapitalize those who are facing capital problems? 

And if so, how will the taxpayer ever regain its investment in 

this circumstance if more than the assets are worth are paid for 

them? 

In fact, that raises another very interesting question. And that 

is if it does require a significant infusion of capital, should the plan 

be having the taxpayers purchase distressed assets? Or should the 

plan involve the taxpayers gaining some type of ownership interest 

or some type of ability to come ahead of the shareholders in terms 

of the losses that are taken in the operations of the firms? 

The question as to what type of investment or what type of capitalization should take place is critical and I think that the basic 

bottom line here is that we must protect the taxpayers. So that as 

losses must be taken, those losses are taken not by the American 

taxpayer but they are taken by those who have the ownership interests in the firms involved. 

I have many, many other questions. But again, the bottom line 

to me is how do we make sure that the connection between Main 

Street and Wall Street is understood not only by America but by 

the policymakers here in this Committee and in this Congress so 

that we address the issue in such a way that we make sure that 

the taxpayer is protected and that the markets are strengthened 

and reassured? 

I think that Senator Schumer’s comment about assuring the 

markets that we are going to be diligent and careful and prudent 

as we move forward is very helpful. I think the markets need to 

know that. We also need to make sure that the markets know that 

we will be efficient and careful and prudent to making sure that 

the solution that we get is the right solution. 

Thank you, Mr. Chairman. 


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Chairman DODD. Thank you, Senator, very much. 

Senator Brown. 

STATEMENT OF SENATOR SHERROD BROWN 

Senator BROWN. Thank you, Senator Dodd, for calling today’s 

hearing. Thanks to the witnesses for joining us. They have had 

many long nights lately and this may be a long morning. I make 

no apologies for that. I doubt they seek any. 

Like my colleagues, my phones have been ringing off the hook. 

The sentiment from Ohioans about this proposal is universally negative. I count myself among the Ohioans who are angry. Had the 

Federal Government acted to contain the epidemic in subprime 

lending, I do not think we would be sitting here today. The time 

we spend this morning will be time well spent, not just for our own 

benefit but for the benefit of the people we represent. I am not sure 

they will be convinced, but they sure deserve a better explanation 

than they have received to date. 

A man from Westerville, Ohio was so concerned he took a day 

off work and drove to Washington this week—a 7 hour drive—to 

share his views with me. He quite rightly asked why we are rushing to bail out companies whose leaders got rich by gambling with 

other people’s money? 

Here is another communication, and I quote, ‘‘The Federal Government must not prolong necessary corrections in the housing 

market, bail out lenders, or subsidize irresponsible borrowing and 

lending at the expense of hard-working people who have played by 

the rules.’’ Except that statement did not come from Ohio. It came 

from the Office of Management and Budget three short months 

ago. 

Throughout this sorry chapter in our Nation’s financial history, 

the Administration has shown extraordinary attention to the problems of Wall Street while at times showing hostility to rebuilding 

Main Streets across the country. The statement I quoted above was 

from the Administration’s veto threat of the housing bill. Congress 

had the audacity to include $4 billion to rebuild neighborhoods devastated by the foreclosure crisis but the Administration did not 

want to reward irresponsible borrowing and lending. 

Now it does. But before we agree, there are many, many unanswered questions that Congress and the American people have a 

right to ask that the Administration needs to answer. 

As Chairman Bernanke knows, the bank panic of 1933 started in 

Detroit and in 2 weeks spread to Cleveland. Two of the city’s largest banks were shuttered and never reopened. One had ties to my 

predecessor in this seat, Republican Marcus Hanna. Rumors flew 

that the bank’s closure was a political decision. If we do not know 

the rules now, these types of rumors will be reborn. 

Secretary Paulson, as much as I respect your judgment, you will 

not be making the hundreds of individual decisions that this effort 

will require. And as your colleague, Secretary Kempthorne has 

found, a lack of close supervision and adherence to rules can lead 

to disastrous results. 

Many of the people who will be making these decisions as to the 

purchase of these troubled assets have come from Wall Street, and 

they may be returning to Wall Street. The notion that they can opVerDate Nov 24 2008 01:50 Apr 02, 2010 Jkt 050414 PO 00000 Frm 00020 Fmt 6633 Sfmt 6602 E:\HR\OC\A414.XXX A414

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erate without clear guidelines is not just unfair to taxpayers, I 

think it is unfair to them. 

So I hope this morning we go into considerably greater detail. I 

hope we can give Main Street a good bit more help and attention 

than we have to date. I think the taxpayers need to be protected. 

And I think the leadership of these companies have to be held accountable. 

If any CEO hesitates to participate because of his or her narrow 

self-interest, his or her compensation, I would say it is time to get 

a new CEO. It is fine to say that people’s 401(k) accounts may be 

affected. They will be if we do not act. But for most people, their 

home is their 401(k). We need to help them, as well. 

Mr. Chairman, gas is expensive. I want that man from 

Westerville, Ohio to know that his time and his money were well 

spent. 

Chairman DODD. Thank you very much, Senator. 

Senator Dole. 

STATEMENT OF SENATOR ELIZABETH DOLE 

Senator DOLE. Mr. Chairman, I have very strong concerns that 

this rescue proposal will unfairly hold taxpayers responsible for the 

costly and reckless decisions of investment bankers on Wall Street. 

I, like the North Carolinians I am hearing from, am very skeptical of this proposal. And frankly, I am extremely frustrated that 

we find ourselves in this position. 

So much of what is happening with regard to the credit crisis, 

the housing slump, the bankruptcy and dissolving of major financial institutions can be linked to the mismanagement of Fannie 

Mae and Freddie Mac, which was made possible by weak oversight 

and little accountability. 

Since arriving in the Senate, I have been one of a handful of 

members pushing for stronger oversight of Fannie Mae and Freddie 

Mac. I have helped introduce—as have Senators Chuck Hagel, 

John Sununu, Mel Martinez, and Richard Shelby—legislation to 

strengthen oversight. And I have raised the issue in the Banking 

Committee hearings time and time again. Unfortunately, Fannie 

and Freddie dispatched an army of lobbyists, reportedly spending 

more than $100 million, to gain protection in Congress and this 

Committee to oppose our legislation. 

As we know, one of my Committee colleagues proclaimed in April 

2005 that Fannie and Freddie have done, and I quote, ‘‘A very, very 

good job.’’ It was only 2 months ago that our bill was finally included in the housing stimulus package. So it took 5 years to finally get appropriate action. 

This problem could have been resolved years ago. It is astounding that despite the years of widely publicized mismanagement at 

Fannie and Freddie, despite our group of United States Senators 

sounding the alarm about the lack of oversight, despite Alan 

Greenspan in 2005 urging Congress to act, warning that we are 

placing the total financial system of the future at a substantial 

risk, despite the preponderance of red flags, it took—of all things— 

the Investment Banking Division of Morgan Stanley, hired by the 

Treasury Department, to uncover that Fannie and Freddie were 


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still using overly aggressive accounting techniques to inflate their 

capital adequacy positions. 

Now my constituents, and indeed taxpayers across the Nation, 

are asking how we arrived at this crisis. It is infuriating. We need 

to end the existing structure of an implied Government guarantee. 

We need to end the practice of private rewards at public risk. I 

fully support the mission of affordable housing and believe the Government will continue to play an important role in this area. 

That said, it is abundantly clear that Fannie and Freddie have 

utterly failed to deliver on their intended purpose. In fact, because 

of their Congressional apologists, Fannie and Freddie have effectively done just the opposite. They have put us on the brink of a 

situation in which almost no one can obtain financing for a home. 

One of the big casualties in all this mess is AIG. As we know, 

Treasury had to swoop in with an $85 billion loan to prevent the 

largest company failure in history. The AIG downfall was caused, 

in large part, by the hemorrhaging credit default swaps on mortgage-backed securities. 

Consistently throughout the year, I have been one of the few 

members who called for more oversight and tougher reporting requirements for the $60 trillion credit default swaps market, which 

we now know also played a significant role in the collapse of Lehman Brothers. I reference this as yet another example of what is 

now painfully obvious, the Federal Government’s oversight structure for the financial sector is fatally flawed. And I am not at all 

convinced that this bailout plan, which appears incredibly expensive and hastily concocted, is the answer. 

I welcome today’s hearing, not only for us lawmakers to get answers but for the taxpayers who need to understand in no uncertain terms why they are being asked to foot this bill. 

Thank you, Mr. Chairman. 

Chairman DODD. Thank you, Senator. 

Senator Casey. 

STATEMENT OF SENATOR ROBERT P. CASEY 

Senator CASEY. Mr. Chairman, thank you very much. 

I want to thank Secretary Paulson, Chairman Bernanke, Chairman Cox, and Director Lockhart for your presence here today. 

I think my reaction to the proposal that was sent by the Administration this weekend was similar to not just members of this 

Committee and others, but I think the American people, in a couple 

of ways. One was I thought it was far too broad a grant of authority to the Treasury Department, and I will talk more about that. 

But I think in terms of what was missing from it were a couple 

of basic features. First of all, I think it missed completely the idea 

of addressing directly the root cause of this problem, which you 

know started with foreclosures. And I know there has been work 

done this weekend to try to fill in that hole, fill in that blank. 

On Friday, I sent a letter both to you, Secretary Paulson and 

Chairman Bernanke, outlining a couple of things on housing. First 

of all, HOPE for Homeowners is a way to further amplify or expand 

our efforts in that area. The moratorium issue that Senator Brown, 

Senator Menendez, and Senator Schumer and I proposed. 


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And also, an innovative way in the city of Philadelphia, where 

literally the city government, the court system intervened, to try to 

prevent foreclosures. And it is a very successful model. 

And I think there are other ideas that we will hear. I know that 

Chairman Dodd has made a series of proposals just in the last couple of days that I think are very instructive here and very helpful 

on transparency and accountability, the idea of oversight, certainly 

in the area of assistance for homeowners. 

So we are going to have a chance to review those today and in 

the next couple of days. 

I think overall, people are looking for—taxpayers and families 

are looking for a couple of things. They are looking for more oversight. They want to know that if a department of their Federal 

Government is given the opportunity to exercise power which involves the expenditure of maybe $700 billion, that there is some 

oversight by the elected officials and others who are charged with 

that responsibility. 

I think taxpayers have a real concern, obviously, a deep abiding 

concern about their own savings. What will this mean to their own 

livelihood, any kind of short-term livelihood, but especially longterm, in terms of their own personal savings. I think they know 

that we need more performing loans, not loans that are headed to 

foreclosure. And I think the bankruptcy strategy here, in terms of 

that enhancing our ability to modify loans, is central to achieving 

that kind of result where you have more performing loans instead 

of loans headed to foreclosure. 

But I think in the end what people are most concerned about is 

staying in their homes. We have got to do everything possible with 

limited time, I realize, and under duress and urgency, to do everything possible to keep people in their homes. And I think that is, 

in the end, what most Americans are concerned about. They are 

concerned about not just their own family, but their own neighborhoods. And it really comes down to peace of mind in so many ways. 

I would hope that in your efforts, and I know that you are trying 

to do this, but in your efforts to explain what has to happen to support financial institutions and other entities which will, in turn, 

strengthen our economy and help on Main Street, that you keep in 

mind what individual families are up against. 

In my home State of Pennsylvania, which has been spared somewhat, in a relative sense, what other States have gone through, the 

foreclosure crisis got a lot worse in August of 2008 compared to August of 2007, up 60 percent, a much higher rate than the rest of 

the country. 

And then if you add the foreclosure problem in a State like Pennsylvania and add the other challenges that people have, with gas 

prices, health care costs, the costs of education. One that stood out 

for me is child care. If you are a family in Pennsylvania and you 

have got two kids, your monthly cost for child care is $1,311. That 

is weighing on people as they worry about making the house payment this month and next month and all these months ahead of 

us. 

So I would urge you, as we finalize a proposal, I know we are 

trying to work together to make this happen, that we keep in mind 

those families and their peace of mind and their economic security. 


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Thank you very much. 

Chairman DODD. Thank you, Senator. 

Senator Martinez. 

STATEMENT OF SENATOR MEL MARTINEZ 

Senator MARTINEZ. Thank you, Mr. Chairman. 

I look forward to hearing from the witnesses, and I will be very, 

very brief. But I do think it merits for us to look for a moment to 

how we got here because a lot can be said about the lack of regulation. And I want to associate myself with the excellent comments 

from Senator Dole. 

I cannot help but have a sense that a lot of what has transpired 

here, a lot of what we are dealing with today, has its origins in 

Fannie Mae and Freddie Mac. And as we look at that, and we try 

to deal with the current problem, we cannot help but also look 

back. We have not looked back enough to know how Fannie Mae 

and Freddie Mac got the entire financial world in the mess that we 

are in today. 

One of the problems is that it did not have a world class regulator. And I know it is real popular today and easy to do to just 

beat up on the Administration and blame everything from 

tsunamis to hurricanes on them. But having been a part of this Administration and having come to this Congress, and before this 

very Committee, to testify in 2003, along with then-Secretary of 

Treasury Snow, to ask for stronger regulation over Fannie and 

Freddie, to have a world class regulator, I find it just a little troubling to just exactly overlook and not pay some attention to how 

we got here. 

And I do want to recall also Chairman Greenspan’s comments in 

2005 before this Committee where he said that if Fannie and 

Freddie continue to grow, continue to have the low capital that 

they have, continue to engage in the dynamic hedging of their portfolio—which they need to do for interest rate aversion—they potentially create ever growing potential systemic risk down the road. 

And that is where we are today, systemic risk. 

So that is just a little bit on how we got here, where I think we 

need to, Director Lockhart, I hope we are going to drill down and 

find out a lot more about how Fannie and Freddie got us here. But 

beyond that, we need to do what we need to do now. We need, in 

the long term, to also deal with a complete revamping of our regulatory scheme of our financial institutions. 

But that will come in the future. For now, I believe we are saddled with a problem that needs and requires action, that action 

needs to be thoughtful but timely. We need to talk about oversight. 

We need to talk about the size of this fund, and whether it will 

work or not. But it does appear to me that there are also some 

questions that we need to have answered, which is if the underlying problem regarding this entire matter has to do with the ever 

declining home values, what are we doing here that will help to 

stem that decline in home values? 

It seems to me, when we look at the State of Florida, that it is 

about a tremendous inventory of unsold properties, as well as the 

availability of credit. Hopefully, what we are doing here may help 


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with the availability of credit. But certainly the tremendous inventory is something that I think we also need to address. 

So I look forward to hearing the testimony from the witnesses, 

having many questions answered. But at the end of the day, I do 

believe that it is our responsibility to act, to act timely, and to act 

responsibly but yet to act. 

Thank you, Mr. Chairman. 

Chairman DODD. Thank you, Senator. Senator Bayh. 

STATEMENT OF SENATOR EVAN BAYH 

Senator BAYH. Thank you, Mr. Chairman and thank you, gentlemen, for your public service. We may not agree on everything but 

we are all grateful for your efforts to try and deal with this important moment for our Nation. 

Mr. Chairman, we gather here today at a time of the most palpable sense of national crisis since we gathered here in this building immediately following the 9/11 attacks. It has been less than 

72 hours since we listened to the Chairman of the Federal Reserve 

tell us that we were only a matter of perhaps days from the beginning of a major economic collapse, the free fall of our financial markets, and the beginnings of a severe and protracted recession that 

could cost businesses going out of business, many jobs being lost, 

savings being wiped out, people losing their homes, real distress for 

our country. And coming from a man who I think, Mr. Chairman, 

it is safe to say is not known for engaging in hyperbole, this tended 

to focus the mind. 

So the sense of urgency is palpable. And yet, we also have to 

focus on getting it right. 

I am going to focus my questions on what alternatives have been 

considered? Why are we convinced that this is the right path? Were 

there no private sector solutions available that would perhaps lead 

to better outcomes than the ones that have been proposed? 

If it takes us a couple of extra days to increase the likelihood 

that this will work and work well, well it is worth working through 

the weekend. It may be worth postponing going home to campaign 

for. I mean, this is important enough that we take the time to get 

it right. 

And so I am going to focus my questions first on what other alternatives were considered? And why do we think this is the optimal solution to the problem? 

Several of my colleagues, including Senator Menendez, have 

mentioned is our purpose here to protect the taxpayers by buying 

these instruments at market prices? If that is the case, how does 

it help solve the problem by recapitalizing these institutions? If we 

are paying above market prices, what do the taxpayers receive in 

return? If equity is the answer, that is one thing. If it is not equity, 

then we have to ask why not? And if it is not equity, we have to 

ask why do we encourage, or at least permit, sovereign wealth 

funds to invest in our companies and markets but perhaps not 

allow the American taxpayers to take a similar interest in our own 

companies and markets? So I will be asking about that, as well. 

Finally, and perhaps my greatest concern, Mr. Chairman, and 

you and I have discussed this. We have to act. But we also have 

to be willing to take the steps to make sure that this situation does 


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not reoccur. As my colleagues have indicated, there is a sense of 

outrage on the part of ordinary taxpayers. I hear from my citizens 

all the time, people who behaved prudently, who did not take inordinate risks, who saved their money, who did not get in over their 

heads, who did not participate in highly leveraged instruments that 

have not come back to haunt them. 

What about them? Who speaks for them? Who will protect them? 

We owe it to them to make sure that we learn the lessons from this 

so that it does not happen again. 

And the way Washington works—I must say, I am not a cynic 

but I am a skeptic. We will act in this moment of crisis. But once 

the crisis has abated, the sense of urgency will dissipate. The forces 

of reform will not have the energy they have today. All of the interests will circle this place like hungry birds looking at carrion to 

prevent us from taking the steps that are necessary. And we must 

not let that happen. 

So I understand we cannot make the long-term reforms in this 

vehicle. It is not possible in the time frame that is at our disposal. 

But I am going to be looking for some incentive, Mr. Chairman, 

some mechanism that will force us to revisit this issue. Because if 

we do not revisit the issue of long-term reform to keep this from 

happening again, it will happen again. And history will judge us 

poorly and our children and grandchildren will not forgive us, nor 

should they. 

Chairman DODD. Thank you, Senator. 

Senator Corker. 

STATEMENT OF SENATOR BOB CORKER 

Senator CORKER. Senator Bayh made some good comments. 

I want to say to all of you that I thank you for coming. I think 

it is absolutely reprehensible that in the biggest financial crisis in 

modern history, our timeline is to get out of here on Friday so we 

can adjourn for the year in September. And I agree with those who 

think we ought to get this right. I will focus these comments to 

Secretary Paulson and Chairman Bernanke. 

I cannot imagine two people that have a better background to 

deal with this, nor people that I respect more from the standpoint 

of that and their perspective. I did not support the rebate stimulus, 

and I did not support the ‘‘bazooka in the pocket’’ theory. And history will judge whether that was a good decision or not. But in both 

cases, you came to us with strength of commitment and telling us 

that that absolutely was the right thing to do. I disagreed. 

In this case, what bothers me is that each of you—and I realize 

you are trying to solve a problem, and I truly believe you are trying 

to do it in a way that you think is best for the country. I believe 

that with all of my heart. But I get a sense that it is with more 

of a deer-in-the-headlights mentality. 

This is a much bigger undertaking, this bailout, and I do not, by 

the way, criticize you for not knowing exactly what to do. But this 

is being done on the fly. If this $700 billion were to be extended 

per Bloomberg data today, it would add up to $1.8 trillion that we 

have extended to the markets, not counting the rebate checks that 

went away at $168 billion or somewhere thereof. 


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So I just have to tell you that I hope today that what you will 

do in questions and answering is talk about some of the options 

that you have thought about that Senator Bayh brought forth, and 

I hope you will be able to convince us that this solves the problems 

that we are dealing with. 

I am getting letters from bankers throughout the State of Tennessee that were not involved in this, and yet they have severe 

issues that are caused by some of the things that have happened 

on Wall Street. 

So I hope this meeting will be full, Mr. Chairman. I did the math 

for you. I hope you do not object. But 21 times 8 is 168 minutes. 

I know no one will stay within that 8 minutes, and I do hope that 

this hearing will last long enough so that we leave here fully understanding what it is we are talking about. 

Chairman DODD. I appreciate that very much, and, again, I 

thank my colleagues. And there are a couple more members who 

want to be heard from, but this is, as many have pointed out, probably the single most important hearing this Committee has held, 

certainly in my tenure. Therefore, having the opportunity for Members to be heard on this I think is particularly important. And it 

is important, I think, that our witnesses have the opportunity as 

well. They are reflecting the views of their constituents about these 

matters, and it is clearly important that we be working together on 

this. 

So I apologize for the length of it, and I will try and make sure 

we move along here, recognizing our witnesses have work to do as 

well. But it is a critical moment in our system that we hear from 

Members. So I thank my colleagues for their comments as well. 

Let me turn to Senator Akaka and then Senator Allard, and then 

we will then go to our witnesses. Senator Akaka. 

STATEMENT OF SENATOR DANIEL AKAKA 

Senator AKAKA. Thank you very much, Mr. Chairman. I appreciate your conducting this hearing today, and I want to add my 

welcome and thanks to the witnesses who are here today. 

Mr. Chairman, I understand the need to act to stabilize the markets. However, we must not give the Secretary of Treasury a blank 

check with no accountability or oversight. We must deliberate and 

provide a solution that protects taxpayers as much as possible and 

limits the potential for this new authority to be abused. Seven hundred billion dollars is a huge sum of money. 

I know the President has said that the whole world is watching 

Congress now. I remind all of you that the Members of this Committee and the rest of the taxpayers will be closely watching the 

development of the Troubled Assets Program. The purchase and 

sale of assets has great potential to be abused and lead to corruption. Members of Congress, the GAO, the Treasury Inspector General, and the public must review the activities of Treasury authorized by this proposed act. We must make sure that this situation, 

which has been caused partially be greed, will not be exploited to 

enrich individuals and corporations. 

In addition to stabilizing the markets, we must do more to help 

working families. We need to help those who have already suffered 

the consequences of the current economic downturn. We must do 


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more to try and keep people in their homes. Consumer protections 

must be improved to better protect families from being exploited by 

predatory lenders. 

Mr. Chairman, we are here today due to a massive market failure. In addition to this emergency legislation, we need a complete 

reexamination of our financial services oversight system in order to 

strengthen regulation and prevent the need for future bailouts. 

While most of those issues will be considered in the next session 

of Congress, I look forward to working with all of you to bring together a fair proposal to stabilize the markets, improve the lives 

of working families, and overhaul the financial services regulatory 

system. 

Thank you very much, Mr. Chairman. 

Chairman DODD. Thank you, Senator. 

Senator Allard. 

STATEMENT OF SENATOR WAYNE ALLARD 

Senator ALLARD. Thank you, Mr. Chairman. 

I want to thank the panel for being here with us today. This is 

a critical time in our Nation and our economy, and we must move 

forward from here. I hope to get more details on how we do that. 

We need to act on solid facts so that we can act in the interests 

of the taxpayers of this country. I urge the administration to be 

more forthcoming with facts on their plan, their cost estimates and 

implementation. Telling Congress to give full discretion in implementing the bailout program is not the way to go. Congress needs 

to be involved, and I urge more cooperation and sharing with the 

Congress in the hope that we can act in a limited way and avoid 

going beyond what is necessary to stabilize the markets. This Committee, this Congress, must act to preserve our free market tradition. We have tried to avoid propping up failed businesses on Main 

Street. We should not prop up failure, malfeasance, and avarice on 

Wall Street. 

Second, we cannot do so successfully, even if we wanted to. The 

history of Government’s ineptitude at running business is known 

now the world over. 

And, third, we must prevent panic both in the market and in the 

Government. Overreaction will in the long run be worse for our 

freedom and our economy. We must remember the long run. 

Mr. Chairman, thank you. 

Chairman DODD. I thank the Senator very much. 

Before turning to Secretary Paulson, let me just say for the benefit of my colleagues and others, our intention had been, quite 

frankly, barring events of the last few days, to actually use this 

month and next month to have some hearings and informal conversations on exactly the issue of long-term restructuring of our financial service regulatory system. My intention is as some point to 

do this. In fact, Chairman Bernanke and I ever chatted about this 

yesterday as well, and we hope to get to that to be able to start 

that process before the inauguration of the new President in January to be able to present some ideas. It is impossible this week to 

do that, but I want my colleagues to know it is our intention. I 

know certainly Members—Senator Allard and others—have worked 

on regulatory reform for a long time, and so I am going to be callVerDate Nov 24 2008 01:50 Apr 02, 2010 Jkt 050414 PO 00000 Frm 00028 Fmt 6633 Sfmt 6602 E:\HR\OC\A414.XXX A414

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ing upon us as a Committee, informally or formally, to actually 

have those conversations in the coming weeks even before we commence our work in January to actually consider ideas that would 

allow for the restructuring of that. So I want the witnesses as well 

as our colleagues to know that. 

With that, Secretary Paulson, let me underscore what has been 

said by others here. We admire immensely your willingness to 

serve our country, and that goes for all of you there at the table. 

There are obviously concerns that are being expressed here strongly this morning. I hope it has been valuable for you to hear from 

across the country how our colleagues are hearing from their constituents and their own concerns about these issues. 

In no way should this be an interpretation of our lack of respect 

and admiration for those willing to serve our country, and we appreciate immensely your willingness to do it. We admire as well 

your background and experience you bring to this issue. 

So, with that, we thank you for being here this morning and are 

anxious to receive your testimony and ask some questions. 

STATEMENT OF HENRY M. PAULSON, JR., SECRETARY, 

DEPARTMENT OF THE TREASURY 

Secretary PAULSON. Thank you very much, Chairman Dodd, Senator Shelby, Members of the Committee. Thank you very much for 

the opportunity to appear before you today. I very appreciate the 

comments you made, and I understand them and I appreciate 

them. 

Chairman DODD. Could you pull that microphone a little closer? 

Secretary PAULSON. I also share the comments that you all made 

about the importance of the situation and the importance of this 

hearing. 

This is a difficult period for the American people. I very much 

appreciate the fact that congressional leaders and the administration are working closely together so that we can help the American 

people by quickly enacting a program to stabilize our financial system. 

We must do so in order to avoid a continuing series of financial 

institution failures and frozen credit markets that threaten American families’ financial well-being, the viability of businesses both 

small and large, and the very health of our economy. 

The events leading us here begin many years ago, starting with 

band lending practices by banks and financial institutions and by 

borrowers taking out mortgages they could not afford. We have 

seen the results on homeowners—higher foreclosure rates affecting 

individuals and neighborhoods. And now we are seeing the impact 

on financial institutions. These loans have created a chain reaction, 

and last week our credit markets froze. Even some Main Street 

non-financial institutions—or, excuse me, some non-financial companies had trouble financing their normal business operations. If 

that situation were to persist, it would threaten all parts of our 

economy. 

Every American business depends on money flowing through our 

system every day, not only to expand their business and create 

jobs, but to maintain normal business operations and to sustain 

jobs. 


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As we have worked through this period of market turmoil, we 

have acted on a case-by-case basis, addressing problems at Fannie 

Mae and Freddie Mac, working with market participants to prepare for the failure of Lehman Brothers, and lending to AIG so it 

can sell some of its assets in an orderly manner. 

And here I would make the comment, you know, I have heard 

your comments on executive compensation. I share your frustrations. I feel those frustrations. Practices throughout America also 

upset me. Let me just say that, with regard to Freddie and Fannie 

and AIG, in case you or your constituents do not know, in those 

cases CEOs were replaced, the Government got warrants for 79.9 

percent of the equity, golden parachutes were eliminated, strong 

action was taken. 

I will also say to the comments made about Freddie and Fannie 

and the bazooka, you all can be darn glad you gave us the bazooka, 

because we needed it. 

Let me tell you something. The root of that problem was in congressional charters started many, many years ago. We were living 

up to our obligations here. There are ambiguities. There are obligations around those charters. And what we did was we came in, we 

stabilized the market, mortgage rates went down so that capital 

could flow through our system. And I can just say I for one—and 

I know that the other witnesses feel very glad about this—thank 

goodness that was done and they were stabilized before we had 

some investment banks report their earnings, or let me tell you, 

this would be a much more serious situation than it is today. So 

there is an example of broad authorities working the way they 

were supposed to work to stabilize our system. 

Sorry for that ad hoc response, but we have also taken a number 

of powerful tactical steps to increase confidence in the system, including a temporary guaranty program for the U.S. money market 

mutual fund industry. These steps have been necessary but not 

sufficient. 

More is needed. We saw market turmoil reach a new level last 

week and spill over into the rest of the economy. We must now 

take further, decisive action to fundamentally and comprehensively 

address the root cause of this turmoil. 

And that root cause is the housing correction, as you have all 

pointed out, which has resulted in illiquid mortgage assets that are 

choking off the flow of credit which is so vitally important to our 

economy. We must address this underlying problem and restore 

confidence in our financial markets and financial institutions so 

they can perform their mission of supporting future prosperity and 

growth. 

We have proposed a program to remove troubled assets from the 

system. We would do this through market mechanisms available to 

thousands of financial institutions throughout America—big banks, 

small banks, savings and loans, credit unions—to help set values 

of complex, illiquid mortgage and mortgage-related securities to 

unclog our credit and capital markets and make it easier for private investors to purchase these securities and for the financial institutions to raise more capital after the market learns more about 

the underlying value of these hard-to-value, complicated mortgagerelated securities on their balance sheets. 


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This Troubled Asset Relief Program has to be properly designed 

for immediate implementation and be sufficiently large to have 

maximum impact and restore market confidence. It must also protect the taxpayer to the maximum extent possible and include provisions that ensure transparency and oversight while also ensuring 

the program can be implemented quickly and effectively. 

And let me give you another ad hoc comment there. When we all 

met Thursday night, as you will recall, Chairman, with the leaders 

of Congress, you all said to us, ‘‘Don’t give us a fait accompli. Come 

in and work with us.’’ We gave you a simple three-page legislative 

outline, and I thought it would have been presumptuous for us on 

that outline to come up with an oversight mechanism. That is the 

role of Congress. That is something we are going to work on together. So if any of you felt that I did not believe that we needed 

oversight, I believe we need oversight. We need oversight. We need 

protection. We need transparency. I want it, we all want it. And 

we need to do that in a way that lets this system, lets this program 

work effectively, quickly, because it needs to work effectively and 

quickly, and it needs to get the job done. 

Now, the market turmoil we are experiencing today poses great 

risk to U.S. taxpayers. When the financial system does not work 

as it should, Americans’ personal savings and the ability of consumers and businesses to finance spending, investment, and job 

creation are threatened. 

The ultimate taxpayer protection will be the market stability 

provided as we remove the troubled assets from our financial system. Don’t forget that. This system has to work, and has to work 

right, and that will be the ultimate market protection. I am convinced that this bold approach will cost American families far less 

than the alternative—a continuing series of financial institution 

failures and frozen credit markets unable to fund everyday needs 

and economic expansion. 

Again, I am frustrated. The taxpayer is on the hook. The taxpayer is already on the hook. The taxpayer is going to suffer the 

consequences if things do not work the way they should work. And 

so the best protection for the taxpayer and the first protection for 

the taxpayer is to have this work. 

Over these past days, it has become clear that there is a bipartisan consensus for an urgent legislative solution. We need to build 

upon this spirit to enact this bill quickly and cleanly, and avoid 

slowing it down with provisions that are unrelated or do not have 

broad support. This troubled asset purchase program on its own is 

the single most effective thing we can do to help homeowners, the 

American people, and to stimulate our economy. 

Earlier this year, Congress and the administration came together 

quickly and effectively to enact a stimulus package that has helped 

hard-working Americans and boosted our economy. We acted cooperatively and faster than anyone thought possible. Today we face 

a much more challenging situation that requires bipartisan discipline and urgency. 

When we get through this difficult period, which we will, our 

next task must be to address the problems in our financial system 

through something you have all talked about. We need reform that 

fixes this outdated financial regulatory structure. You have all 


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heard me talk about that a lot. And we need other strong measures 

to address other flaws and excesses in the system. And there are 

plenty, and we have all talked about them, and they cannot be addressed this week. We need to take time to address these. I have 

already put forward my recommendations on this subject. Many of 

you have strong views based on your expertise. We must have that 

critical debate, but we must get through this period first. 

Right now, all of us are focused on the immediate need to stabilize our financial system, and I believe we share the conviction 

that this is in the best interest of all Americans. Now let’s work 

together to get it done. 

Thank you. 

Chairman DODD. Thank you very much, Mr. Secretary. I would 

be remiss if I did not just point out—and thank you, by the way— 

that but for the cooperation that Senator Shelby and the overwhelming majority of Members of this Committee, we were able to 

enact that legislation in July that you have referenced. It does not 

mean that everybody was supportive of every detail of it, but it was 

an example of coming together and getting a job done. It took some 

time, but we got it done, and I thank you for your comments about 

it, and I thank Senator Shelby and Members of this Committee, 

Democrats and Republicans, who worked with us to get that done. 

Chairman Bernanke. 

STATEMENT OF BEN S. BERNANKE, CHAIRMAN, BOARD OF 

GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Mr. BERNANKE. Mr. Chairman, Senator Shelby, I have submitted 

formal written testimony for the record. With your permission, I 

would like to speak just a few minutes about the Treasury proposal. 

The Fed supports the Treasury initiative. We believe that strong 

and timely action is urgently needed to stabilize our markets and 

our economy. But I believe some clarification is needed about why 

this proposal could make a positive difference, and I would like to 

offer a few thoughts on that subject. 

Let me start with a question. Why are financial markets not 

working? Financial institutions and others hold billions in complex 

securities, including many that are mortgage related. I would like 

to ask you for a moment to think of these securities as having two 

different prices. The first of these is the fire-sale price. That is the 

price a security would fetch today if sold quickly into an illiquid 

market. The second price is the hold-to-maturity price. That is 

what the security would be worth eventually when the income from 

the security was received over time. 

Because of the complexity of these securities and the serious uncertainties about the economy and the housing market, there is no 

active market for many of these securities. And, thus, today the 

fire-sale price may be much less than the hold-to-maturity price. 

This creates something of a vicious circle. Accounting rules require banks to value many assets at something close to a very low 

fire-sale price rather than the hold-to-maturity price, which is not 

unreasonable in itself given their illiquidity. However, this leads to 

big writedowns and reductions in capital, which in turn forces additional sales that send the fire-sale price down further, adding to 


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pressure. Meanwhile, private capital is unwilling to come in because of uncertainty about the value of institutions and because of 

the prospect of more writedowns. 

One suggestion that has been made is to suspend mark-to-market accounting and use banks’ estimates of hold-to-maturity prices. 

Many banks support this. But doing this would only hurt investor 

confidence because nobody knows what the true hold-to-maturity 

price is. Without a market to determine that price, investors would 

have to trust the internal estimates of banks. So let me come to 

the critical point. 

I believe that under the Treasury program auctions and other 

mechanisms could be designed that will give the market good information on what the hold-to-maturity price is for a large class of 

mortgage-related assets. If the Treasury bids for and then buys assets at a price close to the hold-to-maturity price, there will be substantial benefits. 

First, banks will have a basis for valuing those assets and will 

not have to use fire-sale prices. Their capital will not be unreasonably marked down. 

Second, liquidity should begin to come back to these markets. 

Third, removal of these assets from balance sheets and better information on value should reduce uncertainty and allow the banks 

to attract new private capital. 

Fourth, credit markets should start to unfreeze; new credit will 

become available to support our economy. 

And, fifth, taxpayers should own assets at prices close to holdto-maturity values which minimizes their risk. 

Now, how to make this work. To make this work, we do need 

flexibility in design of mechanisms for buying assets and from 

whom to buy. We do not know exactly what the best design is. That 

will require consultation with experts and experience with alternative approaches. 

Second, understanding the concerns and the worries of the Committee, we cannot impose punitive measures on the institutions 

that choose to sell assets. That would eliminate or strongly reduce 

participation and cause the program to fail. Remember, the beneficiaries of this program are not just those who sell the asset, but 

all market participants and the economy as a whole. 

But, finally, and very importantly, this is not to say that the financial industry should not be reformed. It should be. It is critical. 

I agree with the Treasury Secretary. The Federal Reserve will give 

full support to fundamental reform of the financial industry. But 

whatever reforms the Congress makes should apply to the whole 

industry, whether they participate in this program or not. 

So, in summary, I believe that under the Treasury authority 

being requested, a program could be undertaken that will help establish reasonable hold-to-maturity prices for these assets. Doing 

that will restore confidence and liquidity to the financial markets 

and help the economy recover without an unreasonable fiscal burden on taxpayers. So I urge you to act as soon as possible. 

Thank you. 

Chairman DODD. Thank you, Mr. Chairman, for that testimony. 

Christopher Cox. 


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STATEMENT OF CHRISTOPHER COX, CHAIRMAN, 

SECURITIES AND EXCHANGE COMMISSION 

Mr. COX. Thank you, Chairman Dodd, Ranking Member Shelby, 

and Members of the Committee, for inviting me here to today to 

discuss the current turmoil in our markets and our policy responses to it. The extraordinary nature of recent events has required an extraordinary response from both policymakers and regulators. 

Last week, by unanimous decision of the Commission and with 

the support of the Secretary of the Treasury and the Federal Reserve, as well as in close coordination with regulators around the 

world, the SEC took emergency action to ban short selling in financial securities to stabilize markets as you consider this legislation. 

At the same time, the Commission unanimously approved two additional measures to ease the crisis of confidence in the markets. 

One makes it easier for issuers to repurchase their own shares on 

the open market, thus providing additional liquidity. The second 

requires weekly reporting to the Securities and Exchange Commission by large investment managers of their daily short positions. 

In addition, the SEC recently issued new rules that more strictly 

enforce the ban on abusive naked short selling under our Regulation SHO. Beyond these immediate steps, the SEC is vigorously investigating how illegal activities may have contributed to the 

subprime crisis and the recent instability in our markets. 

First and foremost, the SEC is a law enforcement agency, and we 

already have over 50 ongoing investigations in the subprime area 

alone. The Division of Enforcement has undertaken a sweeping investigation into market manipulation of financial institutions, including through the use of credit default swaps, a multi-trillion-dollar market is completely lacking in transparency and is completely 

unregulated. 

Last month, the Enforcement Division, working with State regulators, entered into agreements that will be the largest settlements 

in SEC history, in behalf of investors who bought auction rate securities from Merrill Lynch, Wachovia, UBS, and Citigroup. Happily, 

the terms of these agreements would provide complete recovery for 

individual investors. 

The Commission also recently brought enforcement actions 

against portfolio managers at Bear Stearns Asset Management for 

deceiving investors about the hedge funds’ overexposure to subprime mortgages. 

The Commission is using its regulatory authority simultaneously 

to ensure that the market continues to function. Last week, the 

Commission’s Office of Chief Accountant provided guidance to clarify the accounting treatment of banks’ efforts to support their 

money market mutual funds. This will help protect investors in 

those funds. And our examinations of the major credit rating agencies for mortgage-backed securities exposed weaknesses in their 

ratings processes and led to our sweeping new rules to regulate 

this industry under the new authority that this Committee and the 

Congress have given us. 

We are also moving quickly to mitigate the impact of recent 

events. In the past week, the SEC oversaw the sale of substantially 

all of the assets of Lehman Brothers, Inc., to Barclays Capital. 


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Hundreds of thousands of Lehman’s customer accounts with over 

$1 billion in assets can now be transferred in a matter of days, instead of going through a lengthy brokerage liquidation process. 

With all that has happened, it is important to keep in mind how 

we got here. The problems that each of these actions has addressed 

have their roots in the subprime mortgage crisis, which itself was 

caused by a failure of lending standards. The complete and total 

mortgage market meltdown that led to the taxpayer rescue of 

Fannie Mae and Freddie Mac was not built into the stress scenarios and the capital and liquidity standards of any financial institution. Bank risk models in every regulated sector, for better or 

for worse, failed to incorporate this scenario that has caused so 

much damage in financial services firms of all kinds. 

The SEC’s own program of voluntary supervision for investment 

bank holding companies, the Consolidated Supervised Entity program, put in place in 2004, was fundamentally flawed because it 

adopted these same bank capital liquidity standards and because 

it was purely voluntary. It became abundantly clear with the near 

collapse of Bear Stearns that this sort of voluntary regulation does 

not work. Working with the Federal Reserve, the Division of Trading and Markets moved quickly last spring to strengthen capital 

and liquidity at investment bank holding companies far beyond 

what the banking standards require, and we immediately entered 

into a formal Memorandum of Understanding with the Fed to 

share both information and expertise. But the fact remains that no 

law authorizes the SEC to supervise investment bank holding companies let alone to monitor the broader financial system for risk. 

For the moment, this regulatory hole in the statutory scheme is 

being addressed in the market by the conversion of investment 

banks to bank holding companies. But the basic problem must still 

be addressed in statute by filling that regulatory hole, as I have 

reported to Congress on previous occasions. 

I will conclude, Mr. Chairman, by warning of another similar 

regulatory hole in statute that must be immediately addressed or 

we will have similar consequences. The $58 trillion notional market 

in credit default swaps, to which several of you have referred in 

your opening comments—that is double the amount that was outstanding in 2006—is regulated by absolutely no one. Neither the 

SEC nor any regulator has authority over the CDS market, even 

to require minimal disclosure to the market. This market is ripe for 

fraud and manipulation, and indeed we are using the full extent 

of our antifraud authority, our law enforcement authority, right 

now to investigate this market. Because CDS buyers do not have 

to own the bond or the debt instrument upon which the contract 

is based, they can effectively ‘‘naked short’’ the debt of companies 

without any restriction, potentially causing market disruption and 

destabilizing the companies themselves. 

As the Congress considers reform of the financial system in the 

current crisis, I urge you to provide in statute for regulatory authority over the CDS market. This is vitally important to enhance 

investor protection and to ensure the continued operation of fair 

and orderly markets. 


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Mr. Chairman, I appreciate the opportunity to discuss the current market turmoil, and I look forward to answering your questions. 

Chairman DODD. Thank you, Mr. Chairman. Just very briefly, we 

received your testimony about 20 minutes before the hearing began 

today. Other Chairmen over the years have talked about it, and 

again, I would just raise it briefly here with you. We need to get 

the testimony—and I appreciate the fact we did from other witnesses last evening. We need to get it from the SEC earlier than 

20 minutes before a hearing. 

Mr. Lockhart. 

STATEMENT OF JAMES B. LOCKHART III, DIRECTOR, 

FEDERAL HOUSING FINANCE AGENCY 

Mr. LOCKHART. Chairman Dodd, Senator Shelby, and Members of 

the Committee, thank you for the opportunity to testify on the Federal Housing Finance Agency’s decision to place Fannie Mae and 

Freddie Mac into conservatorship. 

Fannie Mae and Freddie Mac share the critical mission of providing stability, liquidity, and affordability to the Nation’s housing 

market. Between them, these enterprises have $5.3 trillion of guaranteed mortgage-backed securities and debt outstanding, which is 

equal to the total publicly held debt of the United States. Their 

market share earlier this year reached 80 percent of all new mortgages made. 

During the turmoil that started last year, they had played a very 

important role in providing liquidity to the conforming mortgage 

market. They required capital to support a very careful and delicate balance between safety and soundness and mission. That balance was upset as house prices, earnings, and capital have continued to deteriorate. In particular, the capacity to raise capital without Treasury Department support vanished. That left both enterprises unable to fill their mission. Worse, it threatened to further 

damage the mortgage and housing markets if they had to sell their 

assets. 

Rather than letting those conditions worsen and put the financial 

markets in further jeopardy, FHFA decided to take action. The goal 

of these dual conservatorships is to help restore confidence in 

Fannie Mae and Freddie Mac, enhance their capacity to fulfill their 

mission, reduce systemic risk, and make mortgages—and this is 

the most important—make mortgages available at lower cost for 

the American people. 

FHFA based its determination on five key areas, each of which 

worsened significantly over the last several months: First, there 

were accelerating safety and soundness weaknesses. Second, there 

was a continued and substantial deterioration in equity, debt, and 

MBS market conditions. Third, the current and projected financial 

performance and condition of each company, as reflected in the second quarter financial reports and our ongoing examination. Fourth, 

the inability of the companies to raise capital or to issue debt according to normal practices and prices. And, last, the critical importance of each company in supporting the country’s residential mortgage market. 


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I shared our growing concerns with Federal Reserve Chairman 

Bernanke, who was made our consultant in the law you passed in 

July, and with Secretary Paulson. They agreed that a conservatorship was necessary, as did the boards of both firms. A detailed list 

of events leading to our conclusion to appoint a conservator is provided in my written statement. I will just highlight a few. 

It became apparent during this intense supervisory review that 

began in July that market conditions were deteriorating much 

more rapidly than anybody expected. We supplemented our examination team with senior examiners from the Fed and the OCC. All 

three sets of examiners corroborated that there was a significant 

deterioration in the credit environment and it was a threat to the 

capital of these two companies. We also finished our semi-annual 

examination ratings of the companies and, across the board, there 

were significant and critical weaknesses. 

The companies themselves disclosed in their second quarter filings how rapidly the environment had deteriorated and was negatively affecting their outlook and their ability to raise capital. 

Freddie Mac reported losses of $4.7 billion over the last year. 

Fannie Mae reported losses of $9.7 billion. 

Now, let me turn to the conservatorships. The first signs are that 

the conservatorships are positive. The enterprise funding costs and 

the spreads on MBS have declined. This lower cost has been passed 

on to homebuyers, with 30-year mortgage rates well below 6 percent for the first time since January. On the first day, business 

opened as normal but with stronger backing for the holders of their 

mortgage-backed securities, their debt, and their subordinated 

debt. 

Over the next 15 months, they are allowed to increase their portfolios to provide support to the housing market. They will also be 

able to continue to grow their guaranteed MBS books. 

As the conservator, FHFA assumed the power of the board and 

management. Highly qualified new chief executive officers and nonexecutive chairmen have been appointed. They will be delegated 

significant powers. In order to conserve over $2 billion in annual 

capital, the common stock and preferred dividends were eliminated. 

The U.S. Treasury financing facilities, which are critical to this 

conservatorship, are all in place and will provide the needed support to Fannie Mae and Freddie Mac to fulfill their mission over 

the long term, while giving upside potential for taxpayers. FHFA 

will continue to work expeditiously on the many regulations needed 

to implement the new law. The new legislation adds, importantly, 

affordable housing, a trust fund, and mission enforcement to the 

responsibilities of the safety and soundness regulator. We are also 

continuing to work with the enterprises on loan modifications, foreclosure preventions, pricing, and credit issues. 

The decision to appoint a conservator for each enterprise was a 

tough but necessary one. They can now become part of the solution. 

Unfortunately, all the good and hard work put in by the FHFA and 

the enterprises was not sufficient to offset the consequences of the 

antiquated regulatory structure which was overwhelmed by the 

turmoil in the housing markets. Conservatorship will give the enterprises the time to restore the balances between safety and 

soundness and their mission. 


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Working together with the enterprises, Congress, the administration, and other regulators, I believe we can restore confidence in 

the enterprises and, with the new legislation which you passed, 

build a stronger and safer future for the mortgage markets, homeowners, and renters in America. 

Thank you. I would be pleased to answer questions. 

Chairman DODD. Thank you very much, Mr. Lockhart. 

Senator Tester was presiding over the Senate when we were 

gathering here, and everyone else had a chance to make a brief 

comment. And, Senator Tester, do you have a brief comment you 

would like to make? 

STATEMENT OF SENATOR JON TESTER 

Senator TESTER. I do. Thank you, Mr. Chairman, and thank you 

for allowing me to just ask a few questions. 

Ten years ago, I got involved in politics because of electrical deregulation in the State of Montana. It was a total disaster. I have 

got plenty of questions to ask about the plan, and I will as they 

come forth. But I guess my concern is this: Six months ago, we 

heard about Bear Stearns, and then we have had Fannie and 

Freddie, and we have had some other ones come down the pike. A 

week ago, you came forth with a $700 billion bailout plan—$700 

billion, and it was made clear that this was going to be—there was 

going to be nothing added on to it. Accountability, demand of reregulation was not going to be accounted. And my question—and 

this is the concern I have. You guys are a lot smarter in financials 

than I am. I am a dirt farmer. You guys have been in the business, 

former Chairman of Goldman Sachs. Why do we have 1 week to determine $700 billion that has to be appropriated or this country’s 

financial systems go down the pipes? Wasn’t there some opportunity sometime down the line where we could have been informed 

of how serious this crisis was so we could take some preventative 

steps before this got to this point? 

That is it. Thank you, Mr. Chairman. 

Chairman DODD. Thank you, Senator, very much. 

Well, again, we will turn the clock on here and try and move 

along, and let me pick up sort of on that question. I appreciate, 

Chairman Bernanke, your laying out why you think this particular 

plan will work. But I would like you, if you could, to step back, in 

addition to laying out why you think the plan would work, tell us— 

and, again, Senator Schumer mentioned the other evening when 

we sat on Thursday night, the reason why we have to act. Put 

aside whether or not we are going to act this week or next week. 

But for a minute tell us why you believe it is critically important, 

one, that we act; what are the circumstances out there that warrant us responding as quickly as we are being asked to; and, second, do you believe that the amount being asked for is going to 

adequately address the issue, particularly if we adopt the plan as 

suggested by the Secretary? 

Mr. BERNANKE. Mr. Chairman, the financial markets are in quite 

fragile condition, and I think, absent a plan, they will certainly get 

worse. But even in the current state, they are not serving the necessary function to support the economy. Credit is not being provided. As Secretary Paulson mentioned, non-financial companies 


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are not able to finance themselves overnight. Credit is just not 

going to be available. It is going to also affect savers because of the 

values of their assets that they have. 

So even in the current condition, even if things do not get severely worse—but I think they would get worse without some kind 

of action—this will be a major drag on the U.S. economy and will 

greatly impede the ability of the economy to recover in a healthy 

way. 

The amounts involved are intended to be enough. We do not 

want to go in and underwhelm the situation. That might be to suggest more problems down the road. There have been some ways of 

looking at it. This is about 5 percent of all the mortgages outstanding, for example, $700 billion. But it certainly illustrates the 

size of these markets and the size of the problem. 

I think it is important to state that, as I mentioned before, this is not an expenditure of $700 billion. This is a purchase of assets, 

and if auctions are done properly, if the valuations are done properly, the American taxpayer will get a good value for his or her 

money. And as the economy recovers, most all or perhaps more 

than all of the value will be recovered over time, as was the case 

in other similar situations in the past. 

Chairman DODD. Let me ask you this. Again, we have heard our 

colleagues, again, across the spectrum here, both politically and 

geographically, talk about the impact this is having beyond, obviously, the information we are aware of in terms of firms that have 

disappeared or been consolidated and the concerns about what is 

happening to people in the country, their homes being lost and the 

like. 

Explain, if you would, what is your concern as Chairman of the 

Federal Reserve if we were not to act. Give us some idea of what 

you think the implications would be if we did not respond in one 

way or another to this situation that you just described. 

Mr. BERNANKE. Well, again, I think—— 

Chairman DODD. In terms of what happens outside of the financial services sector, what happens to people out there who have a 

job, are getting ready to retire, are worried about their kids’ education? These are matters which are going to be directly affected, 

I presume. That is the argument you are making. Give us some 

sense as Chairman of the Federal Reserve why those people’s concerns are going to be even more dire straits than they would be if 

we did not act. 

Mr. BERNANKE. Senator, you made my point for me. I am a college professor. I was criticized for taking the job without having 

worked on Wall Street. I never worked on Wall Street. I do not 

have those interests, those connections. My interest is solely for the 

strength and the recovery of the U.S. economy. I believe that if the 

credit markets are not functioning, jobs will be lost; the unemployment rate will rise; more houses will be foreclosed upon; GDP will 

contract; that the economy will just not be able to recover in a normal healthy way, no matter what other policies are taken. 

I, therefore, think this is a precondition for a good, healthy recovery by our economy. These institutions provide credit for homeowners. They provide credit for businesses that create jobs. It is 

about the people who need those services and that credit. It is 


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about people retiring who need to have assurances about the value 

of their investments and their assets. 

Again, I think that if this is not done, there will be significant 

adverse consequences for the average person in the United States. 

Chairman DODD. And that is your recommendation as Chairman 

of the Federal Reserve? 

Mr. BERNANKE. Yes, sir, it is, and I do believe we need to act to 

stabilize the situation, which is continuing to be very unpredictable 

and very worrisome. 

Chairman DODD. Let me, if I can, look just quickly at the foreclosure mitigation issue. I think there is general consensus here 

about oversight and accountability. We may argue about specifics, 

but I think every one of us here feels very strongly that there has 

got to be strong areas now. I think we all sort of agree as well on 

the issue of taxpayer protection, one way or the other how the taxpayers are going to be covered in this proposal. 

There is, I think, greater debate probably about foreclosure mitigation, but let me run back, if I can, and remind you in May what 

you told this Committee. You said, ‘‘High rates of delinquency and 

foreclosure can have substantial spillover effects on the housing 

market, the financial markets, and the broader economy. Therefore, doing what we can to avoid preventable foreclosures is not 

just in the interest of lenders and borrowers. It is in everyone’s interest.’’ That was Federal Reserve Chairman Bernanke. 

Would policies that help American families keep their homes and 

prevent foreclosures help address the root cause, in your view, of 

the present crisis? 

Mr. BERNANKE. Well, foreclosures are not all of it, but it is an 

important part. The housing market is very central to this whole 

issue, and I support and I have supported efforts to avoid preventable foreclosures. I have spoken about this on a number of occasions, and I think it would be helpful to the economy. 

I would note that steps have been taken. The GSE conservatorship, for example, has already lowered interest rates and has 

helped to stabilize the mortgage market, which will be supportive 

of house prices and, therefore, reducing foreclosures. 

The Federal Reserve is on the board of the Hope for Homeowners 

bill that was just passed by this Congress that involves $300 billion 

of purchases of mortgages to be refinanced into the FHA. I am sure 

much more could be done. I will support further action. 

I would note two things. First, as a minor point, one of the things 

that this program being discussed could do would be to purchase 

second liens, which have proved to be a very significant barrier to 

the resolution of foreclosures. But, more importantly, the housing 

market is not going to recover if the economy is declining, if jobs 

are being lost, if credit is not available. And so I do think you cannot separate these as two completely separate issues. You need to 

have financial stability and financial markets working properly for 

the economy and the housing market to have a chance to recover. 

Chairman DODD. Well, my quick follow-on question, then, to Secretary Paulson is—and I understand why you have been reluctant 

to get into the oversight and accountability questions. But given 

the fact that this is not just a cosmetic issue and a feel-good issue 

but it goes to the very core of why we are here today, and if that 


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is the core reason—and you have said it over and over again. I 

have quoted you. It is the ‘‘bad lending practices’’ that went on. 

Why didn’t we include some mitigation for foreclosure as part of 

this, not because we want to send a message that we care about 

Main Street, but because if we do not address that, the bad mortgages out there are still going to be a lingering problem, and our 

ability to address this is going to be less. 

Secretary PAULSON. Mr. Chairman, thank you very much. As we 

thought about what is the best thing we could do to minimize foreclosures and deal with this problem, we thought, first of all, stabilizing Fannie and Freddie; second, Treasury has a program where 

we are going to be buying and holding agency securities, and now 

that the Government is really behind them, it is, I think, a good 

use of taxpayer money, and it will help get—it will help the market. And then, of course, we all believe that the very best thing we 

can do is make sure that the capital markets are open and that 

lenders are continuing to lend. And so that is what this overall program does, it deals with that. 

Now, as the Chairman said, we both have been very involved in 

working with servicers and others in avoiding preventable foreclosures, and there is no doubt that this program will give us more 

leverage in doing that, given the securities that will be owned, the 

second-lien mortgages and so on. So that was the way we looked 

at it, and we looked at it, let’s address the root cause through these 

authorities we are asking for. 

Chairman DODD. Senator Shelby. 

Senator SHELBY. Thank you, Mr. Chairman. 

I would like to address my first question to Secretary Paulson 

and Chairman Bernanke. I assume that during your deliberations 

dealing with this crisis, you must have considered a range of proposals before you decided on the one that you proposed to us. Is 

that correct? Is that right, you considered other proposals? 

Secretary PAULSON. Yes. 

Mr. BERNANKE. Yes. 

Senator SHELBY. Could you just in a few minutes describe several of the proposals that you considered, telling us in detail in specific terms why those proposals were deemed inadequate by both 

the Treasury and the Fed? 

Secretary PAULSON. OK. I will go first. We have, as you know, 

Senator, been talking with Congress and talking among ourselves 

for some time about what is going on in the housing area. And we 

have worked very hard together to approach the foreclosure issue. 

And so there is a lot of work that was done in dealing with foreclosures, No. 1. 

No. 2, as you yourself have said, you saw some case-by-case approaches, and, you know, I would argue that every one of those was 

absolutely essential and was necessary. And as we looked at this 

situation, we said the root cause of this is housing. The root cause 

is housing and the housing correction, and until we get at that, we 

are not going to solve it. 

And as we looked at how we get at that, there are some that said 

we should just go and stick capital in the banks—put preferred 

stocks, stick capital in the banks. And that is what you do when 


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you have failures. That is what happened in Japan. That is what 

happened in other spots. 

We have dealt with some failures, and we have dealt with them 

where there is capital. But we said the right way to do this is not 

going around and using guarantees or injecting capital—and there 

have been various proposals to do that—but to use market mechanisms. And, again, I think that some of the questions here and 

some of the frustration here I share, you know, on compensation 

and so on. And when you deal with ad hoc situations, when you 

deal with an institution that is failing or about to fail, and you 

have to buy mortgages or securities well above value, or you need 

to put capital in, then you take tough compensation measures. 

But as we looked at it and thought about this—and we consulted 

together about this, you know, for a long time—and said ultimately—and we hope we do not get there. We hope that this decline can be arrested. But we both had said that until the biggest 

part of the correction in housing prices is over, there is no way to 

really have a stable financial system. So we decided that this market mechanism and going out very broadly—this is broadly to financial institutions all over, and working on the asset prices and 

helping develop value that the market can build around. 

Senator SHELBY. Do you agree with that, Chairman Bernanke? 

Mr. BERNANKE. I do, Senator, but let me just add a couple comments. 

As you know, I am a student of financial crises and financial history, and we have looked at past experiences in the United States 

and other countries, like the Homeowners Loan Corporation, the 

RTC, the RFC, Japan, other situations. Those were all situations, 

again, as the Secretary said, where you were dealing with failed institutions and having to dispose of relatively simple assets that 

were taken over by the Government. That works in that context, 

and there are ways to do that. 

The situation we have now is unique and new. It involves not 

failing institutions—although we have had a few failures. Where 

we had failures, we dealt with them in a very tough way. You 

know, we have insisted on, you know, bringing the shareholder 

value down close to zero, imposing tough terms and so on. But the 

firms we are dealing with now are not necessarily failing, but they 

are contracting, they are de-leveraging, they are pulling back. And 

they will be unwilling to make credit available as long as these 

market conditions are in the condition they are. 

So, in order to address the illiquidity of the market and how to 

deal with these complex securities in the hands of going concerns, 

the methods used to resolve failed institutions in other contexts are 

not really appropriate because that would involve, I think, a great 

deal of concern on the part of other potential investors that if they 

invest in a bank that the Government is going to come in and take 

away their value. So I think that we are better off trying to address 

the root cause of the problem. 

Senator SHELBY. What banks would be eligible to participate in 

this plan, assuming Congress adopted it as you proposed it, in selling their nonperforming assets to the Treasury or to an entity? And 

what size banks would be eligible to participate in that plan? 


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Secretary PAULSON. Senator, thank you for that question, because that is where I think there have been broad misunderstandings, and maybe we did not communicate this properly. But 

what we are seeking to address with this is we are seeking to address—first of all, we are dealing with complicated securities, mortgage and mortgage related, and we have got various asset classes 

here, and we need different approaches for different asset classes. 

But when we use the market mechanisms, we want—we are looking at thousands, you know, of institutions. Because to make this 

run properly, we need to deal with big banks, small banks, S&Ls, 

credit unions, because what we are trying to do here—and I think 

we will be successful—is to develop mechanisms where we get values out there, and where there is some value that the market can 

look at, then private capital will come in. 

Senator SHELBY. Are you planning to buy assets of foreign banks 

doing business in the United States? And if so, why? And how do 

you rationalize that the American taxpayer? 

Secretary PAULSON. The answer is yes, and it is very easy to rationalize it to the American people. 

Senator SHELBY. I need your help here. 

Secretary PAULSON. OK. Here is how I want to—this is all about 

the American taxpayer. That is all we care about. And so any business, any banking operation in the United States that is doing 

business here and dealing with the American public is important. 

They are all important to keeping our markets open, keeping credit 

flowing. The American public, when they are dealing with the financial system, does not know who owns that bank. What they 

care about is how is the system working. And so we are doing this 

to protect the system, and it is about keeping credit flowing, protecting savings, making it possible to have car loans, student loans, 

mortgages. 

And, again, if you have operations in the United States and you 

are doing business with the American people, that is what we are 

focused on. But let me also say to you we have a global financial 

system, and when I was on the phone a number of times, and most 

recently Monday morning, talking with central bankers and finance 

ministers around the world, I urged them all to put in place where 

it is necessary similar programs with similar objectives. 

Senator SHELBY. What do you say to people that ask us, or at 

least ask me—and I am sure others—how do you rationalize or justify bailing out banks and so forth that cause, are the root cause 

of a lot of this problem where they will be made whole with capital, 

at least it will strengthen them? And I understand that strengthens the economy, but they will profit dearly from this, more than 

likely. 

Secretary PAULSON. Senator Shelby, I share your frustration, so 

I hate to be on this side of the table, because this is not something 

that I ever wanted to ask for. 

Senator SHELBY. I know. 

Secretary PAULSON. But it is much better than the alternative. 

So what I do is I start off saying I am not only concerned, I am 

angry by the things that got us here. OK? But the greatest protection for the American taxpayer, by far the greatest protection is 


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having this program work and having it be effective, because the 

consequences if it does not are worse. 

When the credit markets—you asked Chairman Bernanke about 

what would happen if it did not work. I looked at the—— 

Senator SHELBY. Worst-case scenario under your plan. What if it 

does not work? You know, you assume it will work, but you cannot 

assure us that you know it is going to work because you thought 

some of the other plans would work. 

Secretary PAULSON. Well, let me say this: With all due respect, 

Senator, I believe that Freddie and Fannie worked the way it was 

supposed to work. We stabilized that. And in terms of the other actions, I would very respectfully submit, if the Federal Reserve had 

not stepped in on AIG, we would have been facing a major calamity. So, again, I do not think any—this problem has been growing 

for a long time. 

But to get to your question about this plan working, it gets to 

the root cause—housing; deals with illiquid assets; it is going to 

free up the balance sheets, let capital flow; and it will lead to price 

discovery, private capital coming in, and injecting confidence in the 

markets. 

Senator SHELBY. What does it do to the homeowner who is losing 

their home? And thank you, Senator Dodd, for your—— 

Secretary PAULSON. I would say, regrettably, there is not every 

homeowner that is going to save their home. As you well know, 

even in normal times, in good times, there are many foreclosures. 

There are some people that cannot afford to stay in their home. 

But there is a huge effort being made so that everyone that can 

afford to stay in the home and want to stay in the home stays in 

the home. 

But what this plan will do is make financing available. And I do 

not think there is anything more important. Lenders have got to 

keep lending. If they are not lending and there is not capital available, homeowners are not going to be able to stay in the home. 

Chairman DODD. Thank you very much. 

Senator Johnson. And let me just remind my colleagues, we want 

to try to keep to the time. We are going over, and I want to give 

everybody a chance to ask some questions. 

Senator JOHNSON. Secretary Paulson, the Treasury proposal, it 

seems to me, rewards the bad actors. Those financial institutions 

that engage in irresponsible lending have bad assets on their books 

and need help from the Government to stay afloat. What punitive 

actions are being taken against these companies and their CEOs? 

Secretary PAULSON. Senator, thank you for the comment. The 

first thing I wanted to say is this plan is broad based and it is dealing with the root cause. And when we have needed to come in and 

do something to save a failing institution, there have been very 

harsh consequences. And when we deal with one-off situations, I 

think there always should be very significant consequences. That 

is No. 1. 

No. 2, in terms of what needs to be done to fix the system, we 

could have a long conversation about that, and you are going to be 

busy for a long time, and you are going to be busy after I am gone 

doing that. I have given you my suggestions, and they are suggesVerDate Nov 24 2008 01:50 Apr 02, 2010 Jkt 050414 PO 00000 Frm 00044 Fmt 6633 Sfmt 6602 E:\HR\OC\A414.XXX A414

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tions that have to do with a totally outmoded and insufficient regulatory structure. 

When I got down here and after about several months on the job, 

I was shocked, absolutely shocked, to find it was not deregulation 

or too much regulation or too little regulation. It was just a flawed 

regulatory structure. It was built for a different model, for a different financial system. The financial system changed. The regulatory system did not change. And so that clearly has to be corrected. 

When you look at these mortgages, the vast majority of the mortgages that were originated with very, very shoddy procedures were 

regulated at the State level. OK? You cannot come down here, come 

down to Washington at Treasury Secretary and fix all that. We 

made a proposal that I think is the right proposal for this mortgage 

origination commission, which would be a Federal commission not 

to invalidate State regulation but to make sure there are common 

standards enforcement. 

So there are a lot of things that need to be done, and in terms 

of the compensation issue, there are a lot of things that need to be 

done there. But I would respectfully submit that we cannot do 

those as quickly as it takes to get this system up and running, because that is what you care about. You care about the constituents 

in your State, the average people, and Americans in terms of what 

the impact is going to be on them. And, unfortunately—and it may 

make you angry; it makes me angry—when you ask about the taxpayers being on the hook, guess what? They are already on the 

hook. They got put on the hook by the system we have, the system 

we all let happen, the system that Congress, the administration, 

future administrations let exist. And so if this system is not stabilized, they are going to bear the costs. The Chairman explained 

that. I have explained it. So the best thing we can do for all of 

them is to stabilize the financial markets so that people can continue to get loans, small businesses can get loans, small farmers 

in your States can get loans, big farmers in your States can get 

loans. And then go to work to make sure that this does not happen 

again, and that is going to take a longer period of time. 

Senator JOHNSON. Given what occurred with AIG, should the 

Federal Government regulate some or all insurance companies? 

Would an optional Federal charter model be appropriate? 

Secretary PAULSON. Well, in the regulatory blueprint that we put 

forward to there—we put it forward well before we were in the 

midst of this crisis, something we had been working on for a long 

time. There were a series of recommendations. One was that the 

Federal Reserve play the role of macro stability regulator to look 

for excesses and problems throughout the economy. Another was 

there should be a Federal charter for insurance companies. I 

strongly believe that. There is a lot of debate on both sides of the 

aisle here. That will take, in my judgment, a good deal of time to 

sort out. But that would be my judgment on that one. 

Senator JOHNSON. Chairman Cox, last week, you issued several 

emergency orders regarding short selling. How did the SEC determine which firms to include? And what happens when the orders’ 

10-day period expires? 


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Mr. COX. Senator, this is not a step that we took lightly. With 

the support of the Federal Reserve and the Treasury and a unanimous Commission, we took temporary emergency action directed at 

financial stocks for the purpose of stabilizing the market at a time 

when Congress is considering important legislation that may deal 

in a broader way with these problems. 

The financial sector is defined according to standards that the 

SEC has provided to the exchanges. The exchanges themselves are 

making the particular determinations of whether their listing companies fall within those categories. 

When the order expires, which it will because it is an emergency 

order, we will segue into sturdy protections against naked short 

selling. We already have permanent rule changes that have just 

taken place in the last week to make even stronger the existing 

ban against naked short selling. 

Senator JOHNSON. Mr. Lockhart, what will the GSEs look like 

when they come out of conservatorship? And how long do you plan 

on having them in conservatorship? 

Mr. LOCKHART. We will certainly be working with the two companies and their new management teams to rehabilitate themselves 

and work through the issues. The time period will depend a lot on 

what is happening in the housing market and their ability to raise 

capital in the future. That may take a year or even longer. How 

they will look, to a large extent, may depend on where Congress 

wants to go. 

The legislation that was passed in July—and I thank you for 

passing that legislation—does create a much stronger regulator 

with the kinds of tools that would be needed to regulate these companies going forward. 

Chairman DODD. Thank you, Senator. 

Senator Bennett. 

Senator BENNETT. Thank you, Mr. Chairman. 

Chairman Cox, I would like to spend time with you on the short 

selling issue. As you know, I have spent a lot of effort pursuing 

that, and I want to thank you for the diligence with which you 

have pursued that. 

Having said that, I am driven by the conversation to concentrate 

on Secretary Paulson and Mr. Bernanke, so do not take my passing 

over it as a symbol that I am not still intensely interested, because 

I am, and that I am not supportive of what you have done, because 

I am. I think you have done an excellent job, and I appreciate that. 

Chairman Bernanke, you ran us through a tutorial, true to your 

college professor background, which I found very helpful, talking 

about the difference in hold-to-maturity prices and fire-sale prices. 

And there is going to be an auction, presumably, to determine what 

the fire-sale price is or what the hold-to-maturity price is. What are 

people going to be bidding on, do you think? 

Mr. BERNANKE. Well, we know more or less what the fire-sale 

prices are. Those are the marks that a lot of companies have. 

You know, there are a lot of different ways—auctions, auctions 

combined with expert evaluations and so on—to try to determine 

the hold-to-maturity price. So, for example, if the Government tries 

to acquire a substantial portion of a security, the marginal seller 

would be somebody who has a hold-to-maturity interest in it, for 


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example. So I think there are methods to determine that hold-tomaturity price. 

Senator BENNETT. OK. Well, the best place to determine a price, 

obviously, is willing buyer and willing seller. But this is not going 

to be your ordinary auction because the Treasury is going to be 

there with a $700 billion checkbook. And the question that arises 

in my mind is: Who is going to bid against the Treasury? Against 

whom is the Treasury bidding? And what effect will that have on 

the price? 

Mr. BERNANKE. It is a reverse auction, which means that there 

will be many bidders holding these securities who will be bidding 

the lowest price in order to sell them to the Treasury, which is the 

reason why you do not want to limit participation—— 

Senator BENNETT. So that is an offer, not a bid? 

Mr. BERNANKE. Sorry? 

Senator BENNETT. That is an offer price, not a bid. 

Mr. BERNANKE. Well, it is a reverse auction so that people are 

bidding in order to sell rather than to buy. 

Senator BENNETT. OK. Secretary Paulson, do you anticipate that 

this might attract some outside capital into this auction and say 

that looks like a pretty good price and I would like to own it at that 

price? 

Secretary PAULSON. Not exactly that way, but here is—and, 

again, let me come back and say to you the reason we asked for 

broad flexibilities—and the Chairman said it earlier—is that we 

are dealing with complex securities. We are dealing with many 

classes of securities. We are going to need to use different approaches in different situations. So the reason we have been general and talked about market mechanisms, we are going to have to 

involve experts, we are going to have to use different approaches. 

The Chairman said, you know, Treasury, we are going to need to 

get some really good asset managers, we are going to—we will do 

a certain amount of experimentation. But if this works the way it 

should work, that once there is a, you know, bid from Treasury and 

there is more learned about these securities, the thought would be 

that then it is easier for private capital to come into the market; 

and that there will be some price discovery mechanism. 

Now, again, the—— 

Senator BENNETT. Let me just comment on that. The price discovery mechanism in a simple world—and you are describing a 

very complex, un-simple world—has to do with the cash-flow the 

underlying asset will produce. And I would think the problem here 

is determining what that cash-flow is. Is that what you are bringing all these experts to determine what—— 

Secretary PAULSON. I wish it were that simple because—and 

even that would not be easy. But what the Chairman said, when 

he presented, he said no one has been faced with this situation before. We spent a lot of time thinking about it, and there are different types of asset classes—mortgage derivatives, mortgagebacked securities. There are different whole loans. And so when 

you look at dealing with this, we are going to have to use different 

approaches in different situations, and there will be market-based 

approaches, and that is all—even I cannot sit here and figure out 


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what the auction technique should be and how to use it and in 

what situations to use it. 

So what we asked for was broad-based authority to use a series 

of market-based approaches, and we will be dealing in different approaches in different situations. We cannot sit here and say here 

is the reverse auction we are going to use in every situation. So we 

need flexibility. 

Senator BENNETT. My time is up. I understand that. My time is 

up. I just wanted to leave this last comment. This is the whole core 

of what you are trying to accomplish, and this is the whole problem 

with our giving you blank-check authority to accomplish it, because 

in theory it is easy to describe and it will work, but if you end up 

paying too little to these institutions, which mark-to-market accounting might drive you to, you are not giving them the support 

that they need. If you end up paying too much, then there is no 

upside potential for the taxpayer when the time comes for you to 

liquidate these, and the details of how you find the right balance 

here are the ones that all of us need—you, but certainly as much 

as we—all of us need to understand better as we make our determination whether or not to support your proposal. 

Secretary PAULSON. You are right, and you have defined the 

problem, and the problem is easier to define than to solve. And we 

believe that we are going to get the right group of experts and we 

are going to come up with a solution, and it will be different with 

different asset classes and in different situations. And as I said, 

this should not be confused—and some people have confused it— 

for instances where you need to go in and, you know, do things 

that are extraordinary things to save an institution. So those are 

two different actions. 

But for the system to work the way it needs to work, we need 

a broad group of institutions—banks and S&Ls—to want to participate, and we need them to participate, not just those that are 

under immediate pressure. And so for this to be effective, it has got 

to be designed to have it work that way. 

Senator BENNETT. Thank you, Mr. Chairman. 

Chairman DODD. Thank you very much. 

Senator Reed. 

Senator REED. Thank you very much, Mr. Chairman. 

Chairman Bernanke, the equity participation rights which were 

a central part of the AIG arrangement, were they punitive in nature? 

Mr. BERNANKE. Well, they are 80-percent participation. 

Senator REED. Well, no, was that a way to punish—— 

Mr. BERNANKE. Our terms included, besides 79.9 percent, an interest rate, which is currently over 11 percent and essentially a 

super lien on most of the assets of the company. So I think that 

it is a very tough deal that we struck. We did that because we 

wanted to protect the taxpayer. At the same time, we were concerned about the implications for the markets of the failure of this 

large company. 

I would like to say, I think we do have a serious ‘‘too big to fail 

problem’’ in this economy. It is much worse than we thought it was 

coming into this crisis. And as we go forward, we need to develop 

methodologies to reduce that ‘‘too big to fail’’ issue. 


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Senator REED. But why wouldn’t equity participation rights work 

in this arrangement to protect the taxpayers and reimburse the 

taxpayers, particularly with the difficult problems of pricing these 

securities, the different arrangements that Secretary Paulson suggested might be undertaken, and the need, really, to assure the 

public that this is not a one-way salvation for Wall Street at the 

expense of taxpayers? 

Mr. BERNANKE. The reason is that when we dealt with Bear 

Stearns or AIG or Fannie and Freddie, those were situations where 

the company was about to fail, had no option. We came in to prevent failure for systemic reasons. In those situations, it is appropriate to knock the share values down low to reduce the moral hazard for subsequent events. But if we are dealing with going concerns, companies that, you know, are still operating, have reasonable business prospects, we do not want to threaten the companies 

with reducing their share values to zero because that will obviously—— 

Senator REED. Well, no one is suggesting that you reduce their 

share values to zero. But I think in that context of going companies, this program will be strictly voluntary. There will have to be 

a business judgment made by the managers of that company 

whether it is worth it to them to enter into this transaction to rid 

their balance sheets of toxic assets. Right now the price of admission is zero. I think it is not inconceivable or inappropriate to demand in that calculation they recognize if they will benefit from 

this transaction in the future—and that is the notion of participation in the future—that they will share that benefit with the taxpayers who made the benefits possible. 

Mr. BERNANKE. We just would note that if you leave the risk on 

the balance sheet in that way, you really have not accomplished 

anything. 

Senator REED. Well, if a company is willing to accept that risk, 

manage those risks themselves, they do not need a bailout. If they 

are unwilling to do that or cannot do that, then they should pay 

for it, at least in a contingent fashion, which is the essence of this 

whole issue of participation rights or warrants or whatever you 

would like to call it. 

Secretary PAULSON. Let me approach it this way. This is a 

huge—— 

Chairman DODD. Turn on your microphone so we can hear you, 

Mr. Secretary. 

Secretary PAULSON. Approach it this way. When you talk about 

what the companies need, this is not about the companies. This is 

about the American people. We need something to work. And for 

something to work here, rather than going to a group of troubled 

institutions that need to sell and saying here we are, sell to us, you 

know, here are all the things we want from you in turn for that, 

we need—and we want for this to work—a broad range of institutions to willingly—not that we have to go and sign them up, but 

to willingly participate because we are trying to find value and we 

are trying to get markets working, because we do not want to have 

to deal with a failure. 

RTC is about failure. Putting capital in institutions is about failure. This is about success. 


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Senator REED. Mr. Secretary, you are suggesting that these very 

brilliant financial people who run these companies would risk the 

failure of their enterprise by not participating in this function because now we have imposed a contingent reimbursement to taxpayers. 

Secretary PAULSON. Let me just say one more time. I am as frustrated as you are about compensation—— 

Senator REED. This is not about compensation, Mr. Secretary. 

This is not about what they get paid. This is about when they do 

well, and if they don’t do well, the value of those warrants are zero. 

Secretary PAULSON. Here is what I am saying: that if this—when 

we protect the taxpayer, the right way is to have the program work 

and have the assets appreciate when the economy appreciates. I 

am saying that the model you are looking at is a model where we 

go to people that absolutely need to sell and say, If you want to 

sell, give us something. The model we are looking at—and what we 

believe it takes to be successful here—is to go to a broad group of 

institutions, a very, very wide range of institutions that own these 

assets and have them participate. And if we deal with it selectively, 

as we deal with situations where there is serious trouble, to use a 

different approach. 

But, anyway, I appreciate your comments. 

Senator REED. Well, Mr. Secretary, the one other way to describe 

what you just said is to go to some institutions that do not need 

help and we give them help for free. But let me change the subject, 

if I may, and I am indulging the Chairman’s time. 

In this reverse auction, it is a very difficult set to price, but one 

of the principles—would one of the principles be that someone cannot sell to you or bid to you at a price higher than what they paid 

for? Because today there are firms that are collecting distressed assets at discount prices. If you do not have some protection like that, 

they will walk in and they could very well sell you something that 

they paid much less for. 

Secretary PAULSON. Well, first of all, Senator, we are going to be 

dealing and our intent is to be dealing with regulated financial institutions. OK? That is No. 1. 

And, No. 2, the reason we want to deal with it on a broader basis 

is so we do not get into that situation. 

But, third, let’s not focus on one reverse auction. That is one way 

of doing it. There will be a number of market mechanisms. I think 

a reverse auction—and there are different forms of that. 

Chairman DODD. It is not regulated. 

Senator REED. Mr. Secretary, then you would not oppose language in legislation that would restrict this to regulated financial 

institutions. 

Secretary PAULSON. What I would like—rather than negotiating 

language here, what I would like is I would like as much flexibility, 

but the intend would be to deal with regulated financial institutions with business operations in the United States. 

Senator REED. Thank you. 

Chairman DODD. That is a very important point, the definition 

of a financial institution and whether or not you would limit it to 

regulated financial institutions. 

Senator Enzi. 


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Senator ENZI. Thank you, Mr. Chairman, and I appreciate the 

questions that Senator Reed had. I had a number of those, too, on 

equity sharing and future assessments. Actually, all the questions 

that I have, I would like everybody to answer them, but we do not 

have time to do that. So I will ask them of one person, and I would 

hope that you would have your staffs get together and answer for 

me later, but not very late. 

One of the things that follows up on Senator Reed’s question is 

what happens if Treasury cannot price the assets accurately. This 

is for Secretary Paulson. Shouldn’t we have the process designed 

before we do $700 billion in an experiment? Treasury has to set the 

perfect market for the assets, and I am not sure that I have faith 

in the ability of the Federal Government to emulate the free market. How can an artificial market drive a real market for these assets? 

Secretary PAULSON. In terms of that, I would say you have pointed to the complexity and the difficulty. I would very respectfully 

say that if the Federal Government tried to legislate a prescriptive 

solution, it almost certainly would not work when you are getting 

into the market mechanisms. 

Again, you are asking me about free markets and how the Government is going to work better than free markets, and, listen, I 

have never been a proponent of intervention. And I just think we 

have an unprecedented situation here, and it calls for unprecedented action. And there is no way to stabilize the markets and 

deal with the situation other than through Government intervention. And so what we are going to do, we have put forward something we have thought about for a long time in terms of the issue 

and different ways of dealing with the issue. And so what we are 

asking for is some broad powers with some good, strong oversight, 

and we think that is the best way to protect the taxpayer. That is 

our view. 

Senator ENZI. I want to get into something a bit more specific on 

that because I am concerned about the small banks in this reverse 

auction situation. A lot of the details are left out. As you say, you 

do not want it to be prescriptive. But the reverse auction that you 

described in your testimony—— 

Secretary PAULSON. We are not just recommending a reverse 

auction. That would be one way of handling it. 

Senator ENZI. OK, but just on the reverse auction part of this, 

I mean, we are going to have questions on all parts of it, but I 

think it will help the big banks to sell their toxic debt. But what 

about the smaller banks? How are they going to be able to compete 

with the Citigroups in the world to sell their assets? Economies of 

scale suggest to me that the plan will bail out the big banks, and 

our community institutions might be left holding the bag. What 

kind of consideration has been given to that? 

Secretary PAULSON. Well, that, we are very focused on that— 

very focused—because to have this work right we are going to have 

to go broadly, because only by going broadly in a number of these 

asset classes and these securities are we able to really deal with 

the market. And so that is something that we have very much in 

mind. And if this were just about going to a few big banks, we 


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would have designed an entirely different program with a different 

structure. 

Senator ENZI. Thank you. 

Chairman Cox, I am always interested in the accounting aspects 

of all of these things and the effect that they can have on it. And 

I have been looking at getting some authority to suspend the markto-market accounting. I know that writing regulations takes a long 

time, but sometimes if it is included in congressional language, it 

can short-circuit that and make it possible. 

Another area that I have gotten a lot of comment from, the small 

banks that hold the GSE stock, they prefer that that be considered 

a loss to the bank rather than—a loan loss rather than a stock loss. 

Some implications like that, I hope that you are taking a look at 

them. I know that we have talked about this being a fire and wanting to put the fire out before we address the fire code. But I am 

hoping that we will take a look at all tools and make sure that this 

proposal has all the tools possible so that we are not throwing 

water on an electrical fire. 

Have you given consideration to whether Congress would need to 

act on some of these accounting things or whether you have enough 

authority to do that? 

Mr. COX. Senator, both the United States and international accounting standard setters are very focused on the need to provide 

timely guidance on the fair value issues that several of you have 

raised here this morning and this afternoon. In fact, today the 

FASB’s Valuation Resource Group is meeting to address these very 

application issues in the context of U.S. generally accepted accounting principles, with a goal of providing timely guidance to companies. 

Senator ENZI. Thank you. My time has expired. I will have additional questions. 

Chairman DODD. Thank you very much, Senator. 

Senator Schumer. 

Senator SCHUMER. Thank you, Mr. Chairman, and I thank all 

the witnesses. This is not an easy day. 

One of the things that I mentioned I want to focus on is taxpayers, and so I have a couple of questions in that regard, first to 

Secretary Paulson. 

One of the things I have thought about is whether we shouldn’t 

create an insurance fund, similar to the FDIC, for the whole financial system. All firms over a certain size would pay, not small little 

community banks but everything else. They would pay a fee, not 

too onerous or too large, but over time it could help defray the costs 

of any losses we might suffer. It is the financial system that has 

the trouble and the taxpayers are bailing it out, as you say, in part 

because it will help the taxpayers. But why do the taxpayers have 

to do the whole thing? 

What would be your initial reaction—I am not asking for a commitment here—of some kind of broad FDIC that would help pay for 

some of these losses from financial institutions, as I said, above a 

certain size, whether they participate in the program or not? 

Secretary PAULSON. One thing that both the Chairman and I 

have talked about a lot, have spoken with the Chairman and Senator Shelby about, is that we were not left with the authorities we 


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needed fully to protect the system and the taxpayer because we 

have wind-down authorities with insurance for, you know, savings 

depositors, FDIC insurance. In 75 years, you know, we have not 

had a saver with FDIC insurance lose a penny. 

Senator SCHUMER. It works. Yes. 

Secretary PAULSON. You know, for $100,000. So what you need 

is if—but if a non-bank or for someone without deposit insurance 

fails, in many cases there is just bankruptcy, and that throws the 

system into disarray. So—— 

Senator SCHUMER. But this would be different, the FDIC—— 

Secretary PAULSON. That is right. And so I am saying so if you 

had wind-down authority, then you have got to say, OK, how do 

you pay for it? And there are various ways to pay for it, and one 

way, as you have mentioned, would be some kind of broader industry-wide tax. But that is something we did not have, so—— 

Senator SCHUMER. You would be open to it, in other words. 

Secretary PAULSON. Yes. 

Senator SCHUMER. And would you think it might be a good idea, 

Mr. Chairman? 

Mr. BERNANKE. Potentially, yes. But I think it is more important—— 

Senator SCHUMER. Well, I think I am going to cut you off right 

there. 

Mr. BERNANKE. It is more important to—— 

[Laughter.] 

Mr. BERNANKE. It is very important to try to address this ‘‘too 

big to fail’’ problem. It is a big problem. 

Senator SCHUMER. Understood, but I think this—on the second 

question, again about protecting the taxpayers, I think in some of 

our informal discussions when we ask why $700 billion and over 

how long a period of time, one of you, I think—somebody mentioned it would cost about—we would probably use about $50 billion a month. If that is the case—and you are certainly not going 

to use all $700 billion immediately. And as you can see, there are 

a lot of questions about whether this would work. We understand 

you have done your best, you think this would work best. But, 

clearly, we are in uncharted waters with Scylla and Charybdis 

around. What about doing this in tranches? Why couldn’t you ask 

us for $150 billion and on January 15th or January 20th we would 

come back, we would assess how this worked, and grant some more 

money if it is really working? Maybe, you know, the markets will 

have stabilized, and you actually will have made money. Why ask 

for the full $700 billion? I never thought I would think that $150 

billion is a low sum of money, but compared to $700 billion it is. 

And I think it would make people sit—not easily, but at least a little easier. 

Secretary PAULSON. I will give you my answer, Senator. I think 

you got at it when you said when we come back in January, because what we need to do is we need to stabilize the system, and 

we need to—this is based on market—we need market confidence, 

and we need the tools to work with. 

Now, of course, we plan to do this in tranches, and, again, as a 

number of people have said, this is not an expenditure. I know that 


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this does not fit into your outlay system in Congress. The taxpayer 

is on the hook. 

Senator SCHUMER. Yes, yes. 

Secretary PAULSON. But, again, it is purchasing assets. They will 

be held. They will be resold. Money will come back in. 

Senator SCHUMER. Understood. 

Secretary PAULSON. But to your basic question, we think we need 

the 440 for that size to do the job and stabilize the market. 

Senator SCHUMER. Could you live with less? 

Secretary PAULSON. That does not mean—that does not mean 

that it is going to be invested—be spent between now and January. 

We are going to—— 

Senator SCHUMER. Could you live with less? I think people would 

feel better if it were—if we did this and we could come back and 

reassess it. As I said, it is uncharted waters, so I am not asking 

you to support it now. But, again, could the system work if we put 

in the legislation, say, this is the first tranche and by January 

15th, say—just pick a date—Congress will come back and reexamine? 

Secretary PAULSON. I think that would be a grave mistake. 

Senator SCHUMER. And why? 

Secretary PAULSON. Because I think what this is about is about 

market confidence and having the tools to do the job. We are going 

to do this in tranches, but I am wondering, when Congress is gone 

and if we need—if we need this, what it is we do. And so, 

again—— 

Senator SCHUMER. Well, the President, if there is an emergency 

of any type, if this does not work over the next 2 months and the 

cataclysm that Chairman Bernanke has talked about, you are 

going to have to call us back into session if you need some other 

type of authority. 

I have to tell you, I would ask you to think about this. I know 

ideally you would like to just have as much as possible. But you 

are not going to use $700 billion in these 3 months. It is a huge 

sum of money, even $150 billion. And the confidence in the markets will be determined by how well it works initially, not by how 

much money you have in your pocket next to your bazooka. 

Secretary PAULSON. Well, I would say with all due respect, Senator, you are going to have to decide. The two of us have made the 

recommendation of what is required. As you said, this will not be 

spent or invested right away. It is going to be done in tranches. 

And all we are doing is giving you a—again, I do not like to be in 

this position asking for things and, you know, answering to the 

American taxpayer on this. I think this is—it is a sad story, but 

the American taxpayer, as I said, is already on the hook. 

You know, here is the other thing I want to say to you, because 

it is so important. This is not about big financial institutions. 

Every American employer depends on money flowing through our 

financial system every day, not just to create new jobs, but to sustain and keep existing jobs. What we are playing with here is very 

important, and, again, give us the tools we need to make this work. 

Senator SCHUMER. Thank you, Mr. Chairman. 

Chairman DODD. Thank you, Senator Schumer, very much. 

Senator Hagel. 


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Senator HAGEL. Thank you, Mr. Chairman. 

Secretary Paulson, you have addressed a number of questions regarding reverse auction elements and how it would work. If you 

could explain to the Committee your concept of the implementation 

of the plan, focusing first on a framework of oversight, which you 

noted in your remarks why that was important. How do you conceptualize this working? Who would be the oversight? How would 

it work? I know Chairman Dodd has laid some ideas down. And 

then take us down from that, the oversight structure and then the 

implementation of the plan. You have noted, I think, in your words, 

the right group of experts that you would bring in on valuating equities and so on. Walk us through that. 

Secretary PAULSON. First of all, in terms of—and this is what we 

are working through right now with your Committee and with others. We need to have transparency here. We clearly need protections. There has to be oversight. And we are going to work with 

you on that group. And we have to be effective and efficient, and 

we cannot get slowed down to the point we cannot do the job. And 

so this is a balance we are going to need to work on together. 

And, again, as I said, in terms of the market mechanisms, we 

can spend—and I know our staffs have spent time together on this. 

But, again, there are so many different asset classes, some held by 

a very broad range of institutions, that what we are going to do is 

look to use market mechanisms and bringing in some of the very 

best asset managers and others to work with our people getting 

help from within the Government, help from, obviously, the Fed, 

other talent we have here, to make this work. But this is not a situation where we can come up and say, ‘‘Here is what we want to 

do, here is how we want to price it, here is exactly how the reverse 

auction will work.’’ 

Senator HAGEL. I understand that, but that is not really the 

question. You understand, as does everyone on this panel, why 

these hearings are so valuable. They are valuable, in my opinion, 

first because they allow you to educate and inform the American 

people and the Committee as to how these kinds of things work. 

And there is a tremendous amount of misunderstanding, as you 

know—and as has been reflected by comments this morning—about 

how does this work. Are we just putting $700 billion of taxpayers’ 

money out here with no oversight, with no structure? 

So what I want to bring you back to is: Are you envisioning an 

oversight board, once-a-month meetings? Or just walk me through 

in very layman’s terms so someone could understand how are you 

going to do this. How are you going to implement it? Also, does the 

Treasury have the capacity and the capability to administer something this big? 

Secretary PAULSON. Well, those are very good questions, and let 

me answer them. 

First of all, we need an oversight board. OK? We need and we 

want it. OK? And so what—and the way I envision this working 

is with great transparency so that the board clearly knows what we 

are doing. We can explain this to the American people, as complicated as it is. Again, the process which we are looking at doing, 

which I think has been misunderstood, is something that would be 

broad based and—to a large extent, broad based. There may be 


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some parts of it that need to be more narrowly focused, and then 

we will deal with that and use different methodologies and different approaches to deal with that. 

And so it would be something that, as we went along and as we 

started, we would probably start with a simpler set of securities, 

something simple like mortgage-backed securities as opposed to 

something more complicated. And we would go out, and we would 

do it—the first tranche would be, obviously, a smaller tranche, not 

a significant part of the $700 billion. And we would get it out 

quickly into the market. And we would be very clear to people what 

it is we have done. 

So that is as much right now as I can say to the American people 

other than that the key thing for the American people is that if 

this works the way it should work, with the assets, this is not an 

expenditure. This is an investment, and as the economy grows, as 

housing corrects, these assets should appreciate in value. The cost 

to the taxpayer will be far below what is invested in the assets. 

Some people have mentioned that under certain circumstances you 

could actually make money. We are not committing that. We are 

saying the taxpayer is at risk. And we have also said very up front 

that there is going to need to be some experimentation because we 

are dealing with things that have not been dealt with before. And 

so there will be experimentation in terms of experts. We are able 

to attract and we have attracted a variety of experts, and we are 

going to continue to bring them in. We want the best and brightest 

working this as we go through this. 

Senator HAGEL. Mr. Chairman, thank you. 

Chairman DODD. Thank you, Senator Hagel. Very much. 

We turn now to Senator Carper. 

Senator CARPER. Thank you very much. 

First of all, a question for Chairman Cox, if I could. I have been 

out of the hearing for a while chairing a hearing on the census. The 

census has had its share of problems in the last year or two as 

well, and I think we are getting that resolved. I told the Director 

of the Census if we can finish getting the census ready, we might 

bring him in and help address this issue, and he offered his assistance. 

A question for Chairman Cox. We talked a little bit earlier this 

week about short selling and the role that that has played in getting us into the jam that we are in today. And I know you have 

not just some thoughts but have taken a number of steps. Just a 

little bit of a Short Selling 101 for us, and what role do you believe 

it is playing, it has played in getting us to where we are today? 

Mr. COX. Senator, the decision to intervene in market rules in 

this way was highly unusual and a very difficult one for the Commission. It is not a step that was taken lightly. It was taken with 

the support of and in coordination with the Secretary of the Treasury, the Chairman of the Federal Reserve, but also, importantly, 

international regulators. As you notice, the U.K. took this step, and 

we worked very closely to coordinate our actions with them. We 

have been in contact with our counterpart regulators around the 

world who are taking related actions in the current circumstances, 

narrowly focused on financial stocks. And the reason is based on 

the connection between the share price, which we have seen, and 


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confidence in the institution itself. We have got healthy institutions, or at least all institutions—perhaps there are none healthy 

anywhere, but if that is the case, we have the kind of problem that 

the Congress is here to address—that are put at risk if there is a 

downward spiral based not on normal information but on fear. 

And so in this climate, we want to make sure that decisions in 

the market are going to be made in a way that protects the overall 

market and investors in it. But we also want to get out as quickly 

as possible. That is why this is an emergency order. It is very narrowly tailored, and it is time limited. 

Senator CARPER. All right. Thank you. 

I do not know if you all have gotten into this today. Let me just 

ask you this. The proposal offered by Senator Dodd includes the 

creation of a Special Inspector General. I believe my understanding 

from the House bill is they do not create an Inspector General, but 

they do call on the General Accounting Office, the Comptroller 

General, to play a role with respect to accountability going forward. 

And my question is for each of you. 

I am going to start with Mr. Lockhart. I do not know if you have 

fielded a lot of questions today, but we are going to make sure you 

earn your keep here. We will turn to you first. What are your 

thoughts on the creation of an Inspector General to oversee this 

program? I am just going to come right down the line, if you will. 

Mr. LOCKHART. Thank you, Senator. Actually, we are getting an 

Inspector General as part of the new legislation that was just 

passed. Inspector Generals are a useful part of the government 

process. I have found them useful, and I have certainly found working with GAO useful in my career as well. 

Senator CARPER. All right. Thank you. 

Mr. Cox, Chairman Cox. 

Mr. COX. I would support it. 

Senator CARPER. All right. 

Mr. Chairman, Chairman Bernanke. 

Mr. BERNANKE. I think that you have to have rigorous oversight, 

and OIGs—the Federal Reserve has an OIG, as do many other 

agencies, and they are very effective. 

Senator CARPER. All right. Thank you. 

Secretary Paulson. 

Secretary PAULSON. I would say the same thing, but I do not 

think we can sort of design it here today, but we clearly want— 

to protect the American taxpayer and for all our protections, we 

want oversight. 

Senator CARPER. Another question that kind of relates to the one 

I just asked, but with respect to conflicts of interest or the potential 

for conflicts of interest going forward, the Treasury plan calls for, 

as I understand, private sector portfolio managers to basically run 

the day-to-day management of the assets that would be purchased 

by the Treasury. And while this may be more efficient than creating a Government entity, my first thought is to be supportive of 

what you are asking for, but it also does create some possibilities 

for conflicts of interest. 

Let me just ask, what safeguards need to be put in place to minimize, in your view, any potential conflicts of interest? 


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Secretary PAULSON. Well, I would say we cannot design these 

here, but we have been very conscious of this. And when we have 

dealt with advisors before, we have been very careful about how we 

do it. 

But I just cannot emphasize enough to you how important it is 

that we have experts available to begin working quickly, because 

this is about market confidence, effectiveness, and so we need to 

balance. OK? We need to balance the need to go quickly with the 

protections we build in. And I want strong oversight, strong protections, great transparency. And as this develops, I am sure it will 

evolve. And it may evolve in various different ways, but right now 

we need to get up and running and deal with the market as it exists. 

Senator CARPER. Thank you for that response. My time has expired, and I am not going to ask another question. But I do want 

to make a statement, just to follow up on what others have said, 

Mr. Chairman, and what I said earlier during my opening statement. 

I went back in time, and I asked us to recall the Chrysler bailout 

where the Federal Government did not take an equity position in 

Chrysler. The Federal Government did not actually make a loan to 

Chrysler. The Federal Government actually guaranteed loans, and 

ultimately our guarantee was never exercised. We did not actually 

have to use the guarantee, although it was out there. But at the 

end of the day, we made money. The Federal Government and taxpayers made money, recovered money on behalf of our citizens. 

And the Resolution Trust Corporation, when it was established, 

my recollection is the Resolution Trust Corporation did not go in 

there and take an equity position in savings and loans. The Resolution Trust Corporation took off the hands of the S&Ls the nonperforming loans, and a lot of them were actually good investments— 

shopping centers, apartment complexes, and on and on. And because of the condition of the market, they had fallen in value. They 

were actually taken off the books of the S&Ls, held for a period of 

time, and as the economy recovered and as property values recovered, the Resolution Trust Corporation was actually able to recover 

a fair amount of money for the Treasury. 

We need that kind of thinking. We need to be entrepreneurial. 

And I do not know at the end of the day if the Federal Government 

ought to have an equity position in these companies, but at the end 

of the day, I do not want to go home unless we can say to the taxpayers in my State, ‘‘We have come as far as we can, as close as 

we can to recovering every dime we put into these companies.’’ 

And, last, we will be able to look them in the eye and say, ‘‘We 

have made, to the best we can, every effort to ensure that no bad 

behavior is being rewarded.’’ And the people who should not be rewarded in this financially, they are not going to get rewarded. 

Thank you very much. 

Chairman DODD. Thank you, Senator, very much. 

I just briefly wanted to make a point because I think this is 

something we have missed a little bit. If we were to move forward 

with this, the idea of giving the Treasury, with all of the oversight 

and accountability built in, is the authority to deal with this. What 

I think needs to be said, Mr. Secretary, unless you are going to tell 


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me this would not be allowed under your plan, is that if you discover along the way that there is some better idea or some variations of these ideas that would work better—and there are a lot 

of ideas we are all hearing about from people from the world from 

which you come—that there is nothing in here that would prohibit 

you from using the flexible notions and thoughts out there on how 

a better approach might work, an equity infusion, for instance. 

Secretary PAULSON. Mr. Chairman, you said it better than I did, 

and this is—I am not looking and I did not want to find myself in 

this position. I did not want to find myself in the position of being 

here asking for these authorities. But under the circumstances, I 

think they are better than the alternative. This is something we 

will work on together. And as we learn if there are better ways of 

doing things, clearly, as we get in the markets, we are going to 

learn, and our whole objective here is going to be to minimize the 

ultimate cost to the taxpayer. 

Chairman DODD. Senator Dole. 

Senator DOLE. I would like to ask Secretary Paulson, Chairman 

Bernanke, and Chairman Cox the following question: According to 

the Wall Street Journal, the market for credit default swaps has 

reached $62 trillion, up from $144 billion as of 10 years ago. The 

issue of credit default swaps, as I mentioned earlier in my opening 

comments, is one that I have consistently raised throughout the 

year, beginning with Bear Stearns in March: the transparency of 

this market and what regulators have been doing to improve oversight of these securities. Chris Cox has spoken today to the regulatory issue. 

At the time, though, the Treasury Department, Federal Reserve 

and SEC all testified that these CDS securities did not play a 

major role in the situation at Bear Stearns. Now Americans come 

to learn that these same securities—credit default swaps—played 

a role in the collapse at Lehman Brothers and the Government 

intervention of AIG. Simply put, what has changed? And given that 

we now know they played a significant role in the demise of AIG 

and Lehman Brothers, will the Treasury Department plan on purchasing some of these illiquid CDSs? 

Secretary PAULSON. Senator, there is some confusion here. Let 

me explain. This is a huge market, and we have all, from the day 

I came down here, my very first meeting—as a matter of fact, my 

first meeting with the President talked about these issues. We 

have been working with the Fed because there is this huge market, 

and the most important thing that needed to be done was to build 

the protocols, to build the infrastructure to handle this. 

And so we have all known the risks. As a matter of fact, the fact 

is that the reason—one of the major reasons that the Government 

helped out in the Bear Stearns situation was to avoid throwing it 

into bankruptcy with all the credit default swaps and not having 

the infrastructure. 

One of the reasons the Chairman has said to Senator Schumer, 

even more important than the wind-down in the insurance, is the 

‘‘too big to fail,’’ and part of the reason for the ‘‘too big to fail’’ is 

the lack of all the infrastructure and protocols and discipline 

around over-the-counter derivatives market. But it is not as simple 

as to just say let’s just regulate it. 


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This is a market that regulators, led by the New York Fed, have 

been making huge inroads in with the industry, and there is a lot 

more that needs to be done on this market. So it is a big problem. 

We have been focused on it for a long time. How it got here is another story. But we have been dealing with it. 

Mr. BERNANKE. Senator Dole, this is an instrument that has 

grown extraordinarily rapidly, as you point out, more quickly than 

the infrastructure that supports it. And the Federal Reserve, particularly the New York Federal Reserve Bank, have been extremely 

active in working with market participants to improve the transparency, the clarity of those trades, to develop protocols in case 

there is a failure, how to deal with that, and to move toward a central counterparty that will help make this a safer market. 

So we are working on that and making a lot of progress. It is 

part of a broader plan to try to make the system more resilient, 

more transparent, so that when we have crisis conditions that, you 

know, those problems will be much less severe. 

So we understand your concern, and we have been working very 

hard to try to make that market better. 

Senator DOLE. Yes. 

Mr. COX. Senator, I think that there are several issues here. One 

is the infrastructure issue that the SEC is working on with the 

Fed, and the Treasury, of course, and the President’s Working 

Group are very aware of this, and this has been a leadership effort 

for some time. It is important to have an OTC derivatives clearance 

and settlement infrastructure that works much better. It is important to have a central counterparty. 

It is also important to note that legislation has expressly excluded CDS from regulation even of the most modest kind, such as 

disclosure. And the lack of disclosure, the lack of transparency 

around this market is one of the reasons that we as a law enforcement agency but also market participants are very, very concerned 

about this. 

We have seen what happens with these regulatory holes. We 

have got a big regulatory hole around investment banking supervision. We now have right in focus—and we can see how this 

works—a bit regulatory hole around CDS. 

Holding a credit default swap is ordinarily effectively taking a 

short position in the underlying. But CDS buyers do not have to 

own the underlying. They do not have to own the bond or the debt 

instrument upon which the credit default swap is based. So they 

can effectively naked short it. This is a problem that we have been 

dealing with with our international regulatory counterparts around 

the world with straight equities, and it is a big problem in a market that has no transparency and people do not know where the 

risk lies. 

The opportunity, therefore, for fraud and manipulation in this 

market can lead to market distortions, market disruption, and 

damage to the companies themselves. And it is just vitally important, as we consider reform of the financial system in the current 

crisis, that we regulate this so that we can have disclosure, so that 

we can have transparency in this market. 

Senator DOLE. Thank you, Mr. Chairman. My time has expired. 


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Chairman DODD. Thank you very much. I was just asking staff 

as to whether or not this is something—I would ask Chairman 

Bernanke or Secretary Paulson, is this something we ought to be 

thinking about as including in some proposal given the language 

of the Chairman of the SEC? 

Mr. BERNANKE. You mean in part of a reform? 

Chairman DODD. I understand the logic, but I am talking about 

more immediately. 

Secretary PAULSON. You cannot deal with this immediately. This 

is a huge market that has built up over a long period of time. It 

has also been extraordinarily useful in avoiding collapses and problems, letting institutions hedge themselves, as we went through— 

I could just go through situation after situation where, you know, 

Enron failed at great cost and human suffering, but the markets 

held up. 

So these are really valuable tools. It is a case where they grew 

too quickly, and when I talked earlier about we had a regulatory 

system that was static and did not change with the marketplace. 

And so the first work that has been done—and I think it would 

have to be done before you could regulate anyway—is all the work 

that Tim Geithner at the New York Fed has been leading with the 

industry to work out the transparencies and the protocols and the 

discipline in this market. And so—— 

Chairman DODD. The only reason I asked the question is because, Chairman Cox, there was an urgency in your comments. 

Just quickly, do you disagree with the Secretary? 

Mr. COX. Well, I think the Secretary is absolutely right when he 

says that these instruments provide a lot of important support for 

liquidity in the markets. And so we ought not to view regulation 

as somehow going to stamp out credit default swaps or the derivatives markets or all the functions they perform. But at the 

same—— 

Chairman DODD. But you are not recommending that as the 

amount of this package we are talking about—— 

Mr. COX. Well, there is an urgency to what I am saying, but I 

do not want to get in the way of your consideration of what you 

have before you. On the other hand, giving regulators authority 

does not mean that it will be used in ways that disrupt the market. 

Chairman DODD. I hear you. Senator Menendez—— 

Secretary PAULSON. And I think what the Chairman was talking 

about was law enforcement, which you urgently—— 

Mr. COX. Well, we have already got the antifraud authority. 

What we need is—— 

Chairman DODD. There is a statutory gap. 

Mr. COX. Yes, we have a big—somebody in the Government 

needs to be able to look at this. 

Chairman DODD. Senator Menendez. 

Senator MENENDEZ. Thank you. Thank you, Mr. Chairman. 

As I listen here for a while, I get the sense that while you have 

given this a lot of thought, by the same token I get some sense that 

we are flying by the seat of our pants and that in that respect, you 

know, that you want to come in strong and have the cavalry be 

there, but you are not quite sure what the cavalry does once it arrives. And that is part of my concern here. 


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The trouble is that these assets are so intertwined and complex 

that no one seems to be able to figure out what they are worth. 

And, hence, no one has been willing to buy them, which is why, Mr. 

Chairman, as you described, they have been in a lockdown mode. 

But you talked about the maturity price, and I just wonder how, 

in fact, since they are impossible to value as instruments at this 

point in time, how does one actually achieve that? If the Secretary 

pays the market rate, presumably if that was enough to be able to 

achieve the sale, that would be enough to persuade banks to sell 

already, so they would have sold. For that plan to work, then it 

would almost seem that you have to pay some type of a premium. 

And if that is the case—and I have heard the Secretary say many 

times we are going to look toward market mechanisms. Well, you 

know, some of us are concerned that market mechanisms have 

brought us to where we are today. 

So how do you know—how do any of these institutions even 

know how to bid, for example, in the reverse auction, if, in fact, 

they could not in the first place determine what the value is? And, 

therefore, how do we make the determination of what, in fact, the 

hold-to-maturity price is so that the taxpayers do not get left holding the bag? 

Mr. BERNANKE. The holders have a view of what they think it 

is worth. The trouble is it is difficult for those outside to know 

what it is worth. And I think that there are combinations—and I 

want to be clear. I have not, you know, specified a specific mechanism, and this is an important thing to be looking at. But I do believe that there are combinations of market-based type auction procedures with expert input that would reveal—just as when you sell 

a painting at Sotheby’s, you do not know—nobody knows what it 

is worth until the auction is over. Then people know what it is 

worth. I think it is the same thing here. If you have an appropriate 

auction mechanism together with other types of inputs, with flexibility to address different assets in different ways, I think what you 

will do is you will restart this market, and then you will get a 

sense of what the more fundamental value is. 

Senator MENENDEZ. In essence, what you are going to do is a 

massive—ultimately, you create a massive repricing, right? 

Mr. BERNANKE. On the grounds that the prices that we now see 

are what I called fire-sale prices, prices that are seen when you sell 

into an illiquid market. 

Secretary PAULSON. There is no doubt that we are saying Government intervention. There is no doubt about it. And I would just 

add it is not just market mechanisms that have got us where we 

are today. It is also a hopelessly failed and outmoded and outdated 

regulatory structure that has helped get us where we are today 

also. 

Senator MENENDEZ. Well, I would add to that, even within the 

regulatory structure you have, a lack of pursuing some of the regulations that we have aggressively in doing that. 

Let me ask you, what in this process do you envision not having 

the market try to manipulate the process in doing so? For example, 

what makes you believe that the institutions will not sell the very 

worst of the assets that they have in order to unload them and, in 

essence, be able to do that? 


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Secretary PAULSON. What we are going to do is we are going to 

do this focusing on one asset class at a time. So we will start off 

with maybe simpler asset classes, and it may be that one of the 

things we are going to want to do over time is buy some of the 

most illiquid asset classes and pay for them appropriately in order 

to preserve the system and do all the things you have heard me 

emphasize before to protect the taxpayer. 

Senator MENENDEZ. Well, let me ask you, Chairman or Mr. Secretary, you said the institutions believe there is a value. They 

think that there is a value. The question is: When you have it in 

the reverse auction, what if they ultimately offer a value you do not 

think is appropriate? 

Mr. BERNANKE. This is one of the reasons, you know, in response 

to Senator Bennett, you know, if we narrow—if we keep the range 

of participants too narrow, only failing institutions, for example, 

then we will not have a robust, competitive auction. The more participants we have, the more people who are involved in offering 

these assets, we will have a competition. And auctions are good at 

producing, you know, relevant prices, even if individuals have an 

incentive to underprice. 

Senator MENENDEZ. Well, let me ask you this: I have heard you 

both make statements today and in the past that would lead one 

to believe that, at the end of the day, there is minimal risk to the 

taxpayers here. And, in fact, I have heard you say that there are 

some who argue that, in fact, we could make money. 

Can you both look at me in the eye and tell me that, as we in- crease the debt limit of the United States by $700 billion, which 

basically means about $2,333 for every man, woman, and child in 

this country, that this will not cost the taxpayers anything if we 

pursue what you want us to do? 

Mr. BERNANKE. I never made any guarantees like that. There is 

going to be risk involved for sure. 

Senator MENENDEZ. Can you quantify the risk then? 

Mr. BERNANKE. No. We are going to have to look at it. But I 

think that what is clear is that the $700 billion is not an expenditure. There is going to be a substantial amount of recovery. Whether it is the full amount is hard to know. 

Secretary PAULSON. Senator, I think what you heard me say 

today is that, unfortunately, there is great risk to the taxpayer 

today with what we have. The taxpayer is already on the hook, 

through no fault of his or her own. And now the taxpayer is on the 

hook because if the system does not work the way it needs to work, 

people are not going to get the loans they need, small businesses 

are not going to get the capital they need, farmers are not going 

to get the loans they need. So there is risk to the taxpayer. 

Now, in terms of what we are doing here, you have not heard me 

say that there is not risk to the taxpayer. You have heard me say 

there is less risk to the taxpayer in this course versus not doing 

it. 

Senator MENENDEZ. Can you give us any quantification what 

that risk is? 

Secretary PAULSON. I cannot give you a quantification because— 

and I will explain why. We are not making an expenditure. We are 

buying the assets, we are holding the assets, and we are reselling 


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assets. And what the cost to the taxpayer will ultimately be will 

depend upon how the economy recovers, what happens in the housing markets, and how we execute this program. 

And so I wish there were a simple answer. I do not like being 

in this position. But I need to tell you the truth. And I certainly 

have not told you there is no risk to the taxpayer. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

Chairman DODD. Thank you very much, Senator Menendez. 

Senator Crapo. 

Senator CRAPO. Thank you very much, Mr. Chairman. 

I want to go first to you, Chris, and talk about the short sell rule. 

Could you give the rationale for why you felt it was necessary to 

implement a ban on short selling? 

Mr. COX. Yes, Senator. The decision was taken by the Commission after a great deal of careful thought, albeit in urgent circumstances. We consulted very closely with the Secretary of the 

Treasury, the Chairman of the Federal Reserve, the President of 

the New York Fed, and it was the considered view and recommendation of all that we take this course, as well as international regulators—the U.K. Financial Services Authority, in fact, 

took this action slightly ahead of the United States, as have regulators in markets in Europe and Asia. This has been the subject 

of a G–7 statement. And the purpose of it is to ensure that in circumstances that we have seen where there is panic and fear in the 

markets, that that does not lead, because of the close correlation 

that we have seen between equity prices and confidence in the institutions, to a run on the bank. That would affect the entire financial sector, and that is why this is restricted to financial institutions. But it is also time limited. The emergency nature of this 

makes it time limited. It is not something we would want to do on 

a permanent basis. 

And what we were looking to accomplish is to give the Congress 

an opportunity to consider this legislation in an environment of relative calm and to segue away from this emergency order as quickly 

as possible. 

Senator CRAPO. But you do deem it to be short term and limited. 

Mr. COX. It is short term, limited, and focused on the financial 

sector. 

Senator CRAPO. I want to go on to another issue, and I have 

short time, so I will get into this with you privately. But as you 

know, I am very concerned that the way we have implemented the 

rule needs to make necessary exceptions for the kinds of proper 

short sales that are important for our markets to work well. But 

we can discuss that at a later time. 

I want to get to, which Chairman Bernanke and Secretary 

Paulson, the question of the run on the bank issue in the context 

of the actions that were taken to protect our money market funds. 

Could you explain to me just quickly what was done and what authority was used there? 

Secretary PAULSON. Yes, Senator, let me explain the authorities 

the Treasury used and why we used them, and then the Chairman 

can explain what they did to support the commercial paper market. 

We have talked generally about the stresses in the capital markets when they froze up and when banks stopped lending to each 


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other and things really slowed down. We have millions of Americans that have savings in money market funds. We have institutions that have savings in money market funds. And we had some 

of that money start to leave. We had an institution or two halt redemptions, you know, break the buck in a case. And there was 

great concern about this. And so this was not a normal circumstance. 

And so what we did was, at the same time we came to Congress 

Thursday night and said we want to address the root cause, which 

is housing and capital and we had this big plan, we also had some 

tactical steps. And one of the things we did at Treasury was we 

have an exchange stabilization fund, and in our judgment—and we 

got strong legal opinions that what happened in the money markets really gets to the stability of our system and, you know, to our 

currency and so on. So on this emergency basis, what we did was 

guaranteed all investors in money market funds, and we did it all 

funds that were there as of the date. So we did not want to create 

an uneven playing field going forward, but what we wanted to do 

was come up with this guarantee, and that is what we did. And 

then individual institutions will be—as they opt into this, we are 

working out the arrangements and the fee. 

Senator CRAPO. And this is emergency. Do you contemplate that 

it needs to be temporary, or does the legislation need to authorize 

this? 

Secretary PAULSON. No, we did this. It is in place for a year, and 

we do not think that this is something that needs to be codified because I do not believe this is something that needs to be done permanently. And it is something you can look at as you are looking 

at broader reform issues. 

Senator CRAPO. All right. In the limited time that I have left, I 

would like to get back once again to the issue that you have already talked about a number of times here, which is why we do not 

look at an approach of obtaining equity for the taxpayer. And I understand the points you have been making about the fact that this 

is different from a failed institution that we are stepping in to fix 

and that you are trying to get broader participation. 

What I do not understand is, even given the fact that you are 

looking for broader participation, why we could not achieve that. 

Or maybe said another way, is it really necessary for us to go to 

the level of $700 billion to get more broadly out into the economy 

to institutions that are not facing the kinds of pressures that would 

require this kind of an emergency response by Congress? Why 

aren’t we focusing simply on those firms and those portions of our 

market that really do need to have the recapitalization occur quickly? 

Secretary PAULSON. Well, I will answer it and then let the Chairman answer it. There were two possible approaches, and this is by 

far the best in our judgment. One is to come up with something 

that is aimed solely at propping up a relatively small number of 

bigger institutions if and when they need it. OK? 

And the other approach, you know—and, again, we have flexibilities to deal with individual’s situations as they arise. But the approach we thought was the better approach was to focus on the securities themselves and the markets of the securities themselves, 


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looking at various security tranches and asset classes, and by establishing markets, working to establish values and markets here, 

to then induce the flow of private capital. And, again, when you 

look at all of our financial institutions, when people say why not 

recapitalize them, one of the reasons that capital is not coming into 

these institutions is they do not know—investors do not understand 

the value of some of these securities, and we need more transparency. 

So that is the approach, and it is—one is an approach to deal 

with failure, and the other is to try to make the system—to get to 

the system in advance of that. 

Mr. BERNANKE. Senator, as the Secretary said, those distressed 

firms have been a big problem. We have seen a number of cases, 

and in those cases, injecting equity and so on has been the right 

approach. But this is a systemwide problem. Even banks that are 

relatively healthy are contracting their balance sheets, refusing to 

lend, not able to raise more capital, and it is that contraction, even 

in the absence of failures, that is creating the pressure in the U.S. 

economy. 

So by trying to address this as a market phenomenon rather 

than an institution-by-institution phenomenon and getting wide 

participation, we have a much better chance of having a beneficial 

effect on credit and on the economy. So I do believe that is a better 

approach. 

And I will not take your time, but the Fed has done a number 

of things to try to help out on the money market mutual funds as 

well, trying to avoid—helping them not liquidate in such a disorderly way. 

Senator CRAPO. Thank you. My time is up. 

Senator BAYH [presiding]. Resisting the temptation as the temporary Chairman to jump the line, I will recognize Senator Brown. 

Senator BROWN. Thank you, Mr. Chairman. 

I do not think a single call to my office on this proposal has been 

positive. I do not believe I have gotten one yet of the literally thousands of e-mails and calls we are getting. Part of this reflects outrage by taxpayers making $30,000, $40,000, $50,000, $75,000, 

$100,000 a year, bailing out people whose country club memberships cost many times that. Part of it is, I think, an attitude. Wall 

Street to most people in my State, I think—certainly to many of 

them—Wall Street did not care one bit what it was doing to neighborhoods in Cleveland and Dayton and Toledo. It did not see the 

devastation. It did not feel the pain. And my question for each of 

you is: Do you think Wall Street owes the American people an apology? 

Mr. BERNANKE. Wall Street made a lot of mistakes; regulators 

made a lot of mistakes. We are going to have to go through all that. 

But let me just say this: People on Main Street who think that 

Wall Street is somewhere far away and whatever happens there 

has no implications for their lives are just misinformed, because if 

Wall Street, if the markets freeze up—— 

Senator BROWN. Mr. Chairman, people know that what happens 

on Wall Street has an effect on their lives. That is not the question. 

The question is: Does Wall Street owe the American people an 

apology? 


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Mr. BERNANKE. Wall Street itself is an abstraction. There are 

many people who made big mistakes and many regulators who 

made mistakes, and we need to figure out what those were and 

make sure they do not happen again. 

Senator BROWN. Secretary Paulson. 

Secretary PAULSON. You know, I share the outrage that people 

have. It is embarrassing to look at this, and I think it is embarrassing for the United States of America. There is a lot of blame 

to go around. A lot of blame. And a lot of blame with the big financial institutions that engaged in—that is where I started with 

this—irresponsible lending, the overly complicated and complex securities that no one understood as well as they should, and it turns 

out they did not understand them themselves; the rating agencies 

that rated those securities; blame to the people that made loans 

they should not have made to some people that took out loans they 

should not have taken out; to regulators. 

So there is no doubt about that, but what we are focused on now 

is—and what I think your constituents want to hear, is let’s fix the 

problem in the way that is going to have the least negative impact 

on them, and then let’s go out and deal with all these problems and 

figure out how to make sure that we minimize the likelihood that 

it will happen again. 

Senator BROWN. No disrespect, Mr. Secretary, but they understand much of that. They do want a solution. But they do not want 

the same people that have helped to inflict this pain on the American people to get the opportunity, because of our reluctance on executive compensation and our reluctance to do accountability, to inflict more pain. And I think that is—well, let me move on from 

that. I apologize for interrupting. 

Senator Bennett raised a good question about troubled assets, 

and, Mr. Secretary, how would you determine the price of a troubled asset if not by a transparent method like an auction? I am not 

asking you to commit to a certain way, but give me an example or 

two how you could determine the price of a troubled asset outside 

of an auction and do it in a transparent way? 

Secretary PAULSON. In terms of—when I am talking about trans, 

I am talking about how we report to the American people, how we 

report to the oversight board. If you are looking for transparency 

and being able to explain to you here today or anyone how some 

of these securities are valued and the issues surrounding them, I 

wish I could tell you, because we do not have—part of the problem 

that has gotten us here is excess complexity. And so we have very 

complex, illiquid securities, some tranches are more illiquid than 

others. And all I can say to you is we are going to need to use a 

variety of mechanisms, market-driven mechanisms as much as possible, bring together bright people from different backgrounds to 

work through this and do it with the main objective of protecting 

the taxpayer. 

Senator BROWN. Thank you for that. Let me offer an idea, and 

you said part of the reason we got into this was the complexity. 

Part of the reason we got into this, too, is that the various actors 

had so little or no stake in the ultimate success of the mortgages. 

It was like a game of musical chairs. The appraiser got a fee, the 


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broker got a fee, the investment bank got a fee, until the music 

stopped and somebody did not have a chair in some sense. 

Have you given any thought—both Chairman Bernanke and Secretary Paulson, have you given any thought to creating a system 

where the seller determines the price but must retain a good fraction of the asset, live with the consequences, and indemnify the 

Government if it was wrong on the high side? 

Mr. BERNANKE. I am sorry. I thought you were talking about 

securitization processes. Are you talking about this operation—— 

Senator BROWN. I am talking about when we buy these troubled 

assets if there is—— 

Secretary PAULSON. We did not give thought to that, because I 

do not think that would be—I do not think that that would be a 

successful way to deal with something systemically. 

Senator BROWN. Why not? 

Secretary PAULSON. Because what we are looking to deal with is, 

as I said, the asset classes broadly and market-based solutions and 

getting—reaching out to many institutions to do that. And so that 

is—I recognize that there are a lot of ideas, and I have heard a lot 

of them. We spent a lot of time over the last number of months 

talking through these issues. I have heard in the last couple days 

all kinds of ideas that have come forward. And what we need to 

do here, I think, is move quickly and have some flexibility to—we 

have got some very good ideas and I think some approaches we 

spent a lot of time on. But we are going to have to spend time 

learning as we go along also. 

Senator BROWN. If we subscribe to sort of the theory of the ownership society, which your administration kind of stands for, 

doesn’t an idea like that, where there is some ownership of the 

asset by the seller to make the price perhaps more real or more fair 

to taxpayers, make some sense? 

Secretary PAULSON. Well, again, I will let the Chairman respond 

from his standpoint, but given what we are trying to do to the system—and, again, the fairness to taxpayers, I am defining fairness 

to taxpayers as what is going to create the least cost to taxpayers, 

what is going to protect the taxpayers to the greatest extent. And 

I believe that by far the most important thing is addressing the 

questions that Richard Shelby and some others have asked: How 

do we make this work? How do we make this work so it is going 

to be effective, keep our economy going, keep capital flowing, and 

do something systemically? And to do something systemically the 

way we need to do that, I do not think that is the right way to go. 

Mr. BERNANKE. Let me just—there are many different mechanisms for trying to establish value. There are different ways. Some 

involve various kinds of copay type arrangements like you are describing. I think we need to go to experts. I have received a number 

of e-mails from world leading auction experts saying, ‘‘We want to 

come work with you on this.’’ The thing I would ask you to do is 

not to put in the legislation precisely how these mechanisms would 

work, because that would prevent us from using the advice of experts and the benefit of experience in this very novel type of situation to learn the best way to do it. 

Senator BROWN. Thank you. 

Thank you, Mr. Chairman. 


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Chairman DODD [presiding]. Good questions. Thank you very 

much, Senator. 

Senator Martinez. 

Senator MARTINEZ. Thank you, Mr. Chairman. 

This is for Mr. Lockhart and Secretary Paulson, if we could, Director Lockhart. When Fannie and Freddie were put into the conservatorship, one of the impacts that it has had has to do with the 

asset quality or the equity capital of America’s banks. And I am 

talking now about Main Street; I am talking about community 

banks. Apparently, about 11 percent of their core equity capital 

was involved in these types of equities even as a result of the conservatorship, because of this situation, maybe about—it is believed 

about $36 billion in value of the preferred shares has been essentially wiped out. 

The question really—and, apparently, the impact on small and 

community banks, everyday banks in our towns and our cities and 

in Florida towns and cities that are making the loans to the small 

business guy, to the car purchasers and so forth are being impacted 

by this in a much greater way than was initially anticipated. 

So the question is: How could we restore the value of these assets to these banks? And when would dividend payments begin 

again? And how do we deal with this unintended consequence of 

the conservatorship? 

Mr. LOCKHART. Fannie and Freddie had about $35 billion of preferred outstanding. It was held across the board, but there was a 

concentration in banks, and sometimes in smaller banks. It was 

something that was considered at the time, and the view was that 

we needed to conserve Freddie and Fannie and those dividend payments were going to be excessive. So, a decision was made to stop 

the dividends. 

The preferreds are still in place. If the companies come out of 

conservatorship, there is potentially an opportunity some time in 

the future for dividends to be restored but not in the near term. 

Mr. BERNANKE. Senator, the Federal Reserve and the other Federal regulators are very aware of this situation. We understand it 

is an unusual situation. It wasn’t brought about by bad lending, for 

example. And we are going to be working with banks to try to find 

solutions for them. 

Senator MARTINEZ. Good deal. Thank you. 

And in the situation that brings us here today, Mr. Secretary, 

today, I have heard you say that you welcome oversight, so as we 

try to narrow differences and begin to work in a bipartisan way to 

find a way of getting to a solution to this problem, which is not just 

about Wall Street but is directly related to what is happening in 

Miami and Orlando and Tampa and the small cities across America, so therefore, we have the idea that you have asked for a blank 

check or that Congress would give you a blank check or that Congress—I mean, we can remove that from the debate. You are not 

asking for a blank check. We are not going to give you a blank 

check. There will be oversight. And you accept and understand that 

that is part of what we have to do? 

Secretary PAULSON. I accept and understand it. I welcome it. 

And as I said earlier, I was told by Congress, by your Chairman, 

let us work together. Please don’t work out all the details. So we 


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sent up a simple outline of a bill expecting to work on an oversight 

and then I read that I didn’t want oversight. So clearly, the position I am in, I want—I welcome oversight, protection, transparency, all of that, but we need to work together to do it and 

make this effective and very efficient. 

Senator MARTINEZ. And likewise, there needs to be and there will 

be transparency in the way in which this is executed in terms of 

how you are going to move ahead and whether it is an auction or 

reverse auction or exactly how these securities are going to be valued. 

Secretary PAULSON. Yes. We will—as I said, there are going to 

be various methodologies. We are going to do the things we think 

make most sense and with a lot of experts, and then that is something we are going to need to explain to an oversight body, and we 

are, again, going to need to be transparent and I totally accept that 

and agree with it. And we all need to understand this is something 

that hasn’t been done before. It is something that Congress had 

never welcomed, authority, intervention of this size. We weren’t 

recommending it in this size months ago. We have—we are, again, 

dealing with a market situation where we need to move quickly 

and we need to move quickly to protect the American taxpayer. 

And so this will be—this is something we are going to be working 

through very carefully as we go forward here. 

Senator MARTINEZ. That issue, quickly, is something that as 

we—we first discussed this on Friday, I believe, some of us. We 

now are moving down the road to try to get something done, and 

obviously it needs to be done right more than it needs to be done 

fast. But do you still—and this is also to Chairman Bernanke—do 

you both continue to feel the sense of urgency that was present 

when we first spoke about this on Friday? 

Secretary PAULSON. I feel at least as great an urgency because 

I believe that what calmed the markets was the understanding 

that we were going to do this, and we stood—or I had a press conference with the leaders of both Houses saying we are all going to 

work together to get this done quickly. And so I feel great urgency 

and I believe it has got to be done this week or before you leave. 

Senator MARTINEZ. Mr. Chairman? 

Mr. BERNANKE. I agree with that. I think it is necessary, at a 

minimum, to give a very strong indication of exactly what is happening and very soon so that markets will understand what is happening. Yes, I do see that urgency. 

Senator MARTINEZ. And Mr. Chairman, while we are on that, you 

do agree that this is the best and the only way forward that you 

know of at this time? 

Mr. BERNANKE. Well, we haven’t specified all the details, obviously, but the only other model which we have is sort of the failed 

bank model we have seen in the S&Ls and other cases and that 

just doesn’t apply to this particular situation. So yes, I do believe 

this is our best shot. 

Senator MARTINEZ. Thank you, Mr. Chairman. 

Chairman DODD. Thank you very much, Senator. 

Secretary PAULSON. Not only our best shot, it is—we are going 

to make it work. 

Chairman DODD. Thank you, Senator. 


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Senator Casey. 

Senator CASEY. Mr. Chairman, thank you very much for this 

hearing and for the way you have conducted it. 

I guess my first question will be directed mostly at Secretary 

Paulson and also Chairman Bernanke. Both of you have said today 

and on numerous occasions that the root cause of this, of course, 

is housing, and you have taken steps, both of you and others here 

today have taken steps to deal with that over time, and I think a 

lot of the strategies that have been employed have helped. I think 

we should enlarge them, especially at this time when we have an 

opportunity to do so. 

You know the numbers about foreclosures per day. It is approaching now, by one estimate, 10,000 per day. The Center for Responsible Lending is predicting that 6.5 million foreclosures over 

the next couple of years. And I know that both Chairman Bernanke 

and Secretary Paulson today, especially Chairman Bernanke, have 

spoken about both fire sale prices and hold-to-maturity prices. But 

I believe, and I think the evidence is compelling, that foreclosure 

itself forces fire sale prices of homes. And isn’t it true that if these 

foreclosures occur, then all home values are going to drop and drop 

to the fire sale price and that that forces the hold-to-maturity price 

to fall to the fire sale price. 

So in essence, what I am asking in a long way is why does this 

proposal have this, what I would argue is a gaping hole in it, with 

no specific provisions that deal with foreclosure prevention? 

Mr. BERNANKE. Well, I certainly agree that we should—every 

preventable foreclosure that we can, we should prevent, and we 

have a number of actions in that direction, including the bill that 

Congress just passed, for example. And I think that we ought to 

keep working in that direction. 

One of the things that will help will be increased jobs, stronger 

income, better credit availability. That is essentially what we are 

trying to achieve here. It is not a substitute for other things, including working with servicers to develop better methods, insisting 

the banks work effectively with their borrowers, using the FHA in 

the way that we have been doing through the HELP for Homeowners, HOPE for Homeowners that the Federal Reserve is part of. 

So those things need to go together. But certainly, housing is not 

going to do well in an economy which is not growing in which credit is not available. 

Senator CASEY. And I understand the point that you have made 

and Secretary Paulson has made about there is a direct connection 

between what is happening in a proposal, or what we hope happens 

as a result of the implementation of this proposal between helping 

financial institutions and what happens on Main Street or in the 

American economy. I get that and I think we need to say that 

more. 

But what I don’t understand is even though we made progress 

on HOPE for Homeowners in July—we can help 400,000 homeowners—why not use this opportunity to take another shot at that 

and expand that 400,000 to a million or to a million-and-a-half or 

two million, whatever it takes to, in two words, stop foreclosures 

as best we can? And I don’t know whether, Secretary Paulson, you 

have some thoughts on that. 


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Secretary PAULSON. Again, I think you know, Senator, that we 

have spent a lot of time on this and the HOPE Now Alliance has 

helped about 200,000 people a month avoid preventable foreclosures. And our big focus, one of the things—as you said, housing 

is at the root of this. What we are doing with Fannie and Freddie 

and what we are doing with this action should help. And I have 

also said, and I know the Chairman and I have talked about this, 

that with some of the securities we own, we will have much more 

leverage to get things done to avoid preventable foreclosures. But 

we very much hear your concern and we understand it and there 

is no doubt that foreclosures are a significant problem. 

Senator CASEY. Because I think when people are looking at this 

proposal and they see elements like that and like transparency, 

like oversight, like executive compensation, the warrant question, 

when they see those missing, I think it gives further credence to 

the idea that this is very narrowly tailored to financial institutions, 

even though you have made the case that that has a connection to 

the larger economy. 

I do want to move to the question of how we modify the mortgage 

agreement between a lender and a borrower. One of the ways that 

has been proposed, and we voted on it before and I think we should 

return to it, is the question of bankruptcy. Can we use bankruptcy 

procedures, the bankruptcy law, to have a—to help modify some of 

these mortgages, in some ways, frankly, to force people to sit down 

to do it? I want to get your perspective on that, because I know it 

is a source of convention in our ability to not just come to a resolution on this proposal, but also on the foreclosure issue itself. 

Secretary PAULSON. Senator, I will give a quick view and I am 

sure the Chairman will. From a policy perspective, you have heard 

me express disapproval. I think that that is—although many people 

have considered it and advocate it, I very respectfully think it is 

a mistake, and when I look at what we are trying to do here, is 

to get lending going again and increase lending, I think this really 

mitigates against that and it is in contradiction with what we are 

trying to do, is to get lenders to do more if we do these bankruptcy 

modifications or cram-downs. But I understand there are differences of opinion and I respect the other view. I just think it is 

a mistake. 

Senator CASEY. Chairman Bernanke. 

Mr. BERNANKE. It is hard to know which way that would go, 

whether putting things into courts is a way of facilitating this or 

not. The Fed didn’t take a position on bankruptcy reform last—a 

few years ago. We have just basically not taken a position on this 

one. 

Senator CASEY. Well, I would respectfully urge you to reconsider 

that, because I think we need a voice like yours, the voice of the 

Fed, on something this, I think, essential to the debate. 

I know I might have a minute left, if that. My last question is 

in terms of real contention here, obviously, executive compensation 

is a huge issue and I think the American people, even though I 

think most understand that the dollar amounts for executive compensation may not impact or compare to the dollar amounts we are 

talking about overall here, whether it is $700 billion or whatever 

number it ends up being, but I think the message sent by a failure 


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to address the executive compensation question in a reasonable 

way, in a way that we can have bipartisan forces come together, 

I think would send the wrong signal. 

And in terms of confidence, we are concerned about market confidence, but we also—I think part and parcel of that is the confidence the American people have in us, all of us, to be able to deal 

with an essential question of fairness and equity and real justice. 

And I guess I want to have you to reiterate your position on the 

issue of executive compensation and if there is any way we can 

come together on that by providing some reasonable limits on it, 

especially with regard to severance after the fact, after there is a 

problem. 

Secretary PAULSON. Again, I will—— 

Chairman DODD. Try to be brief in your answer, because we have 

got other members here. 

Secretary PAULSON. I will be very brief, because I understand 

how serious the problem is. I just got—and how great the concern 

is and the outrage. You know, I hear it everywhere. But I can just 

say to you the most important thing by far, the most important 

thing is to have something that works, works well, and works effectively. 

Senator CASEY. Thank you. 

Chairman DODD. I would just say, almost any plan we are going 

to talk about is going to deal with executive compensation. Count 

on it. Just count on that one. We will figure it out, but it is going 

to be here. 

Senator Bunning, I missed, and I apologize—— 

Senator BUNNING. That is all right. Thank you. I was absent for 

a while and I understand. 

We are trying to get at the housing problem, is that correct? Secretary Paulson? The problem that the housing mess has created 

and spilled over into the rest of our economy and worldwide. 

Secretary PAULSON. I would say that is a major cause. I have 

called it the root cause, the housing correction. 

Senator BUNNING. OK. Then why did I read in the paper this 

morning that we are now going to include student loans and credit 

card debt? How does that fit the housing? 

Secretary PAULSON. I would say to you, that is certainly not my 

proposal, is to—I think the vast bulk of our effort needs to be 

aimed at mortgage-related securities. We asked for broad authorities and various kinds of securities because again, what we need 

to do is to free up the—— 

Senator BUNNING. I think you have made that perfectly clear, 

Mr. Secretary—— 

Secretary PAULSON [continuing]. So what I am saying, so that 

is—that that—— 

Senator BUNNING. Then how are we getting in other things that 

are non-related? This is something that—is that untrue? 

Secretary PAULSON. I would say the reason we want flexibility to, 

if we need to, buy some other classes of assets would be that if the 

banks—if capital starts to—as capital flows more freely, it will help 

the housing, because the fact that the financial system is gummed 

up and there is illiquidity hurts it and it may be that to deal 

with—— 


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Senator BUNNING. Student loans and then credit card debt are 

messing up the housing? 

Secretary PAULSON. That is—I certainly, sir, did not say we are 

going to focus on this and that that was going to be the major 

focus—— 

Senator BUNNING. I didn’t say you said it. I said I read it. 

Secretary PAULSON. OK. OK. Well, I am not sure what you read. 

Senator BUNNING. I read that included because someone insisted 

on it, that you were dealing with—included that we were going to 

deal with credit card debt and student loan debt. 

Secretary PAULSON. I—— 

Senator BUNNING. It is untrue? 

Secretary PAULSON. I don’t know what you are talking about. 

What we have said, though, is we have asked for broad authorities 

to deal with a variety of securities if we need to, and a variety of 

asset classes. But the focus here, the major focus will be dealing 

with mortgage and mortgage-related. 

Senator BUNNING. This is unrelated, but it is essential for me to 

get a handle on some prior statement you made earlier today. How 

long were you the CEO of Goldman Sachs? 

Secretary PAULSON. I was the CEO of Goldman Sachs from May 

1999 until I left to come down here at the middle of 2006. 

Senator BUNNING. Now, that is not what I want—I don’t need 

help from the audience. I can ask the questions on my own. Then 

you said in an earlier statement that you didn’t realize the maze 

of regulatory problems that we have here on the Hill and that you 

and other companies like you were CEO of were dealing with here. 

You made that statement to us all sitting at this table. 

Secretary PAULSON. I said, you have to get down here, look at the 

people, look at the plumbing, look at the inadequacies. I was not 

studying—— 

Senator BUNNING. You were dealing with it on a daily basis. 

Secretary PAULSON. I was dealing with all of the best regulators. 

So I guess what I said is that you have got to see it up close and 

personal and then step back and look at it and think about it and 

say, how does this make sense, and that was my statement, yes, 

sir. 

Senator BUNNING. In other words, you didn’t know or somebody 

in your firm other than you was dealing with the regulatory burdens that were placed on your firm? 

Secretary PAULSON. Well, I was dealing with—very well with the 

regulatory burdens on my firm, but to look back and say—look at 

the broader economy, to look at some of the holes in the regulatory 

system as it relates to other institutions, yes, that is it. 

Senator BUNNING. Mr. Secretary, do you know if large Treasury 

debt holders such as foreign official investors, Commonwealth 

Fund, Bank of China, whatever it might be, are going to go along 

with a massive debt issue? Have you heard from any such investors 

who are complaining about the close to one trillion or more dollars 

of debt increase we are looking at between the GSE plan and the 

new debt to finance the Fed activities? 

Secretary PAULSON. I would say to you, sir, when we had—when 

I have had a discussion with central banks and finance ministers 

from around the world, their primary concern was that we deal 


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with this situation and they were very complimentary of this action. And I believe from the conversations that I have had with 

central bankers, China, Japan, around the world, their first and 

foremost concern was stabilizing our financial system because it is 

so integrated with the rest of the world. 

Senator BUNNING. OK. I guess maybe I am the only one that has 

a problem with this, but one of the big problems I am having dealing with your plan and Chairman Bernanke’s and others to address 

this issue is that you are not going to be here after January 20 of 

2009, and I am going to have to answer to the 4.2 million people 

in Kentucky and all these other Senators up here are going to have 

to answer to their constituents if this plan does not work. And I 

am frightful to the point of almost panic that I don’t see a solution 

in your plan to address this financial crisis that we are in. 

Secretary PAULSON. Senator, all I can say to you is I got here 2 

years ago. I am going to—I have been trained all my life to run 

toward problems. I have had some big problems to have to run toward. And I have worked very closely with the Chairman of the 

Fed, with the Chairman of the SEC, the President of the New York 

Fed, my colleagues, Congress, to address these issues as they have 

come up and I believe that this is my plan to deal with these set 

of circumstances which are unprecedented. And so that is what I 

can say to you. 

Senator BUNNING. This is my last question. This is for Chairman 

Bernanke, also. Your predecessor came up to the Hill today and 

said that the $700 billion in this plan is chicken feed and it won’t 

take care of the problem. I don’t necessarily agree with your predecessor on many things, as you might well know. And I happen to 

think that he is wrong here, also. But what happens if it doesn’t? 

Are you going to come back to us and say, by the way, the $700 

billion is insufficient and now we have to open the taxpayers’ box 

and bring more money to the table to get this mess straightened 

out? Chairman Bernanke, would you like to—— 

Mr. BERNANKE. Well, Senator, I can’t predict the future and I 

have been wrong quite a few times now. But we may—we don’t 

know exactly what is going to happen, but I think this is a very 

powerful program and that the amount of money is enormous, of 

course. There is a chance we may come back and say we didn’t 

need it all, but it is very hard to know. But I think this is a very 

substantial effort by the Congress to address what is indeed a very 

large and serious problem. 

Senator BUNNING. Thank you, Senator. 

Chairman DODD. Thank you. Thank you, Senator Bunning. 

Senator Bayh. 

Senator BAYH. Thank you, Mr. Chairman, and thank you, gentlemen. 

Some of this ground has been gone over before, and I apologize, 

but I would like to follow up a little bit. Secretary Paulson, I would 

like to begin with you. Many of us would feel a little bit better if 

we were convinced that private sector-based solutions had been exhausted in this, or if at least there were some private sector participation in this to validate the decisions that the public entities 

will be making. 


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For example, I mean, you said that you have been bombarded 

with a variety of suggestions. One I heard was that we require a 

10-percent private sector participation along with the purchases 

the government will be making in these options. Another would be, 

and one of my colleagues floated this idea, some sort of guarantee 

of private sector purchases. That historically has worked fairly 

well. It would allow the private sector companies to—purchasers to 

purchase closer to the hold-to-maturity value. Why are those sorts 

of things not viable? Why is this the optimal solution to this problem? 

Secretary PAULSON. Well, we have thought a lot about it. We 

need a systemic approach, and again, I think it is—I have described the systemic approach. I have also heard conversations 

about taking equity stakes, various other things, and I just believe 

very strongly if you impose these kinds of conditions, if you impose 

any kind of punitive conditions, this program won’t work and we 

will all lose. And—— 

Senator BAYH. This wouldn’t be punitive. This is including the 

private sector along with the public sector in answering the problem and—— 

Secretary PAULSON. Yes—— 

Senator BAYH [continuing]. They would be validating the decisions—— 

Secretary PAULSON. Well, I would say in terms of bringing in the 

private sector, OK, along with it, I think we have looked at a number of initiatives. We started off, actually, with some initiatives 

with the private sector, some that got off the ground and others 

that didn’t. I would say with the private sector as frozen as it is 

and as concerned as it is and with the overall system as fragile as 

it is, now is the time that we need to do something very strong as 

a government, and so that is why we have come up with this plan. 

Senator BAYH. Chairman Bernanke, many of my colleagues, Senator Reed foremost among them, have asked, and I think you put 

your finger on the essential point here, and that is how do we go 

about valuing the hold-to-maturity price versus the fire sale price, 

and I think you would acknowledge—you have acknowledged it is 

an inexact science at best. So the taxpayers do—there is some 

downside risk here. What do they get in exchange for bearing that 

downside risk? Why should they not be allowed to participate in 

the potential upside, and then that gets to the question once again 

of possible equity participation. 

Mr. BERNANKE. Well, first, to go back to your—— 

Senator BAYH. And I understood your answer about the difference between failed institutions and contracting institutions. It 

seems to me these are different points on the same continuum and 

I struggle for a principal differentiation. I mean, this is a market 

intervention. The taxpayers are bearing risk. Aren’t they entitled 

to something in exchange for that risk if things work out well? 

Mr. BERNANKE. Well, first, to go back to your earlier point, as I 

mentioned earlier, there are various mechanisms for auctions and 

for valuation that do involve private sector participation. I think, 

you know, that experts ought to look at that. You know, the bad 

bank model, for example, is one approach that we have actually— 

the Secretary has actually tried. I guess my just concern is it not 


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be written into the legislation because we have to work and see 

what is going to be most effective. 

I am just concerned that we not do anything that limits participation, because one of the issues with valuation is, as I mentioned 

earlier, is to get wide participation in the auction process. If you 

are auctioning a—if you only have one seller, then there is essentially no way to figure out what the thing is worth—— 

Senator BAYH. Compensating the taxpayers for the risk they are 

bearing would disincent others from participating? 

Mr. BERNANKE. No, but if you make it a condition of participation in the valuation process, that is going to—that is essentially 

going to cause some not to participate when they would otherwise 

be part of the competitive valuation process. 

Secretary PAULSON. I would say it this way. If we have to 

grant—have companies grant equity stakes, grant options, that 

would render this ineffective because it just—broadly, because our 

approach, as I said, there is different approaches, and if we dealt 

with people and institutions that were very fragile and needed to 

do something in order to prevent failure, then I think we have had 

a really strong record of getting equity stakes. I think you will see 

us continue to do that under those circumstances. But what we 

want here is a broad array of institutions to participate and so that 

just makes it—this would make this program ineffective if we approached it that way. 

Senator BAYH. I would appreciate at another time when you are 

not quite as busy some further explanation about why such a thing 

would disincent further participation, because as you can see, that 

is a common concern that we have. 

Secretary PAULSON. Yes. 

Senator BAYH. You don’t need to answer me further, Mr. Secretary. 

I did have one final thing. I found—Senator Shelby raised this 

point, and Secretary, I don’t know whether it was you or the Chairman addressed it, about the participation about foreign domiciled 

entities participating in this, and I must be candid. I found the explanation to be somewhat unpersuasive and I think many of the 

American people will probably have a similar reaction. Forget all 

that for a moment. 

You say you are going to be going to the central banks of other 

countries to ask them to help out in dealing with this problem. 

Why should it not be a prerequisite for participation in this that 

the central banks of the countries in which these foreign institutions are domiciled agree to participate? 

Secretary PAULSON. I am leaning on them to participate—not to 

participate, but to come up with programs that make sense in their 

countries. But we need to go back to what we are saying here. 

What we are saying is that institutions that do business in the 

U.S., employ people of the U.S., are part of the financial system of 

the U.S. They are there to benefit the American taxpayer. If they 

have problems, they are our problems. If they work the way they 

are supposed to work, they help get the economy growing. 

And so the focus here, although we are clearly dealing with this 

and communicating in very strong terms with other governments, 

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ple, if any institution has got a major office here, regulating institution, doing business that is very important to the American people, those are the—that is the universe we want to deal with. 

Senator BAYH. Well, my time has expired, Mr. Chairman. I 

would only say that if this works well, which we all hope that it 

does, this will restore balance sheets for these institutions. Share 

prices will rise. They will benefit. I think the American people will 

find it to be odd, to say the least, if our government cared more 

about the financial integrity of these institutions than the home 

countries of these institutions. 

Mr. BERNANKE. They would. What we are aiming at, of course, 

is the market, and it is not just those who participate who benefit 

or don’t benefit. If prices go up generally, that will help the entire 

system. In fact, it will help the global system, you know, which 

strengthens financial conditions generally. 

Senator BAYH. Thank you, Mr. Chairman. 

Chairman DODD. Thank you very much, Senator. 

Senator Corker. 

Senator CORKER. Thank you, Mr. Chairman, and Chairman 

Bernanke, I am heartened by your comments regarding the openness and hopefully desire to look at some of the accounting standards as it relates to banks that have held—not the banks we are 

talking about here, but the banks throughout the country that have 

held Fannie and Freddie and now need some transitional help in 

accounting. I hope Chairman Cox and others involved will join in 

that effort and make it happen. 

Mr. Secretary, I don’t normally tweak people, especially someone 

I respect like you. I noticed in your comments you ad hoc-ed, if you 

will, regarding a bazooka comment. I do want to remind you that 

the theory behind the bazooka was that if you have a bazooka in 

your pocket and the markets know that you have it, you will never 

have to use it. And I would like to point out that you not only 

pulled that out of your pocket and used it, huge amounts of ammunition was pulled out of the taxpayer arsenal to solve that. I think 

you have done some very deft things, and I compliment you on 

that, but the point is that things don’t always work out the way 

people and their best efforts think they are going to work out. 

And I have to tell you, if we were part of a venture board, if you 

will, up here, listening to what is really today a concept—this is 

not really a deal—I think most of us in dealing with our own 

money would say, you know, come back and talk to us when you 

can put a little meat on the bones, OK. At the same time, I understand where you are and I understand the severity of the situation 

which puts some balance in that. 

I guess the concern that I have, especially listening to Chairman 

Bernanke talking about valuing these in a hold-to-maturity basis, 

that would automatically give me the impression, based on what I 

know about these securities, is that we are going to actually be 

paying above what these securities are marked to market now in 

many cases. Do you have any concern that with you being the only 

player and with private capital being on the sidelines that you are 

crowding out private capital by, in fact, handling it on this basis? 

Mr. BERNANKE. I would say I have a number of concerns. That 

is clearly not the biggest one, because the private capital has come 


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in two or three times during this difficult period, this turmoil in 

the markets, and each time, it has been overwhelmed by the leverage in the system, and so private capital isn’t coming into the 

system. 

And I would also say to you that these securities—we never said 

that under certain circumstances, they wouldn’t—you wouldn’t do 

things where we pay above the mark. We are doing—because these 

securities are marked with different marks and different types of 

institutions. So this is a very complicated process and so—and it 

is going to be difficult to get our arms around valuation, but that 

is why it is so important that we cast our net broadly. 

Senator CORKER. Let me pick up on that comment. I know you 

have said several times how excessively complex this is. We talk 

about these auctions as if we are auctioning off securities that are 

like one another when, in fact, they are not. I mean, these securities are very different. The collateral that backs them up is very 

different. And so to talk about the due diligence—and I am going 

to lead up to something, if I could—the due diligence that one 

would have to go about to actually even buy these at anywhere 

close to an appropriate rate is going to be massive. Is that true? 

Would you say yes or no to that? And that is why you are employing another—— 

Secretary PAULSON. It is, but I want to correct maybe a 

misperception we have left you with. We believe, for the reasons 

you outlined, the way to deal with this is to deal with it by—with 

similar securities, to deal with it, you know, looking at the CUSIP 

numbers, looking at different tranches of the same security broadly, rather than saying let us have an auction and put any security 

you would like into it. But your point is still the same. 

Senator CORKER. Tremendous due diligence. 

Secretary PAULSON. Right. 

Senator CORKER. OK. And Chairman Bernanke, I heard you say, 

and I don’t know whether you were being somewhat politic and trying to help someone with a foreclosure process, but you mentioned 

we were going to be buying second liens. Surely we are not going 

to be buying second liens with taxpayer money. Would you expand 

on that? 

Mr. BERNANKE. Well, second liens are selling for a few cents on 

the dollar and I wouldn’t expect them to be worth much more than 

that. But I was only pointing out that—I know this from Governor 

Duke, who is on the HOPE for Homeowners Board, that the problem of second liens is a big issue right now because it prevents renegotiations of the first mortgage. So I was just saying that a side 

effect, if we do buy them at a market value, a few cents on the dollar, would be to help free up this other issue. 

Senator CORKER. I know my time is up. I can see the light, I 

guess, on the timer. I just want to close by saying there have been 

a number of concepts thrown out regarding getting the private sector involved. I actually think that has not been explored to the 

length that it should. I know there have been some thoughts put 

forth about maybe a levy on the industry. It is a huge industry, a 

$2.5 trillion industry, and that maybe a levy on the industry to 

help, if you will, cash-flow this process until some of the yields can 

come back to the taxpayers would be interesting. 


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But I just want to close by saying, following up on Senator Schumer’s comments, we had a meeting Sunday, and I appreciate again 

so much your time. I am struck by the fact that, again, this is a 

concept and you want $700 billion to deal with this concept that 

no one can explain how it is going to work, and I am certainly not 

asking you to do that and you can’t do that today. It seems that 

what he said makes a tremendous amount of sense. 

You are going to have to figure out a way to do this, if we agree 

to do it. It is going to take you—it is not going to be happening 

in 14 days. There are going to have to be some guidelines. People 

are going to have to be hired with instructions, the institutions 

that help support this. 

It is very difficult for me, knowing that we really don’t know 

what this is going to do, it is very difficult for me to understand 

why we don’t pass legislation that says something like, we have a 

goal of $700 billion, but that you are going to put in place the processes and expand a tranche or two, $50 billion, $100 billion, maybe 

$150 billion, and you are going to get this put together in a 

thoughtful way and we are going to know who the Treasury Secretary really is and that you bring back to us a fully baked concept 

with the markets knowing that is what you are working through 

and that we have something intelligent and well-constructed to actually certify to go to the lengths that you are talking about doing 

now. 

It seems to me that is very workable, and you would be sending 

a signal to the markets. And in fact, over the next 60 to 90 days, 

you would know which of these things is working and which is not. 

That just seems to me to be prudent. And I can’t imagine why that 

is not acceptable to you, even though—I just can’t imagine that. 

Secretary PAULSON. Let me comment that under normal circumstances, that would be a good way to go. These are extraordinary circumstances. We have been moving quickly already to get 

ready to be in the position where we could implement within weeks 

something with some of the simpler things after you all act. 

I think what I would come back to you and say, I believe and 

the Chairman believes, and we have talked about this a lot, this 

is what we need here to deal with this market situation. We will 

be going out in a methodical way. There will be plenty of time to 

review what is done. There will be plenty of time to add to transparency over time. We are going to put in strong protections. And 

you will have an opportunity to work with the new Treasury Secretary. We will have flexibilities. We will have flexibilities to involve the private sector. We will have flexibilities to move this to 

another area. But this is—we know how unusual it was to ask for 

this, but we have asked for it because we think it is the best way 

to protect the taxpayer. 

So we both want to do the same thing, sir. You want to protect 

the taxpayer. I want to protect them. I am thinking the best way 

to protect the taxpayer, and you have a very strong view of that, 

is to do something that has got the maximum chances of working 

in this marketplace to calm the market, and so that is our view. 

Chairman DODD. I thank Senator Corker. 


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Just an editorial comment here. Senator Shelby and I were talking. Senator Shelby is a young-old appropriator and sometimes we 

do things that—— 

Senator SHELBY. Together, we are. 

Chairman DODD [continuing]. But there are times, I would say 

to Senator Corker, when we have appropriated funds and then 

fenced funds. So they have been appropriated, so it is not just a 

goal, and what you then can set up, some conditionality. 

I would say, Mr. Secretary, I appreciate your point, but this is 

not—we are not going to try and draft legislation here, but I would 

leave that door open a little bit. If we are looking to build the kind 

of consensus up here to move forward quickly and thoughtfully and 

responsibly, I think it is very important to not reject some of these 

ideas as a way of getting something done, and I appreciate very 

much the spirit in which Senator Corker has raised an issue as 

maybe we can begin to talk about as how we move forward in an 

expeditious fashion, but a careful one, as well. So I thank him very 

much for that thought. 

Senator Akaka. 

Senator AKAKA. Thank you very much, Mr. Chairman. 

This is an historic time in our nation and I want to commend all 

of you, the administration as well as the Congress, for using this 

spirit of working together to try and find the best way to work ourselves out of the disaster we are in. Historically, we have just been 

through a disaster that is natural and now we are in a manmade 

disaster. But we are using this period of working together to try 

to make a difference. 

Chairman Bernanke, this economic downturn and credit crisis 

have produced great public concern, and it has been expressed here 

many times. My question to you has to do with human capital concern. What effect will this troubled assets program have on the supervisory duties, the supervisory duties of the Federal Reserve? 

Mr. BERNANKE. Well, we will continue to evaluate. For those institutions that we supervise, we will continue to evaluate their positions, their capital, their risk management, and so on. But I think 

this will obviously be helpful in removing some risk from their balance sheet and allowing them to expand their lending. So I don’t 

see any problem from this, but we will certainly keep close track 

of what is going on. 

Senator AKAKA. I am also concerned about the statutory as well 

as regulatory aspects that what we are trying to do will affect us. 

So Chairman Bernanke, the Federal Reserve’s statutory responsibilities focus on monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates. My 

question is, to what extent will the injection of this $700 billion affect your ability to meet these goals? 

Mr. BERNANKE. Well, if the program works, it will be extremely 

helpful because we are in a situation now with financial markets 

freezing up and it is very difficult for us to achieve the objective 

of full employment in a situation where credit is not available and 

the financial markets are so unstable. So I think we have taken the 

view—we have been working very hard over the last year using a 

variety of tools to try and promote financial stability. That was, in 

fact, the historic purpose of the Federal Reserve. But I view it as 


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essential to the other objectives you just mentioned. Without financial stability, you are not going to have full employment and price 

stability. So we think that is very important and we have been 

working together with the Treasury Secretary very intensely in trying to promote stability in our financial markets. 

Senator AKAKA. Chairman Bernanke, should we worry about the Treasury being given the ability to move $700 billion in and out of 

the economy and the potential impact that this could have on monetary policy, and also the political independence of the Federal Reserve? 

Mr. BERNANKE. I don’t see any problem in terms of macroeconomics, only a positive effect in terms of stabilizing the financial 

system. The Federal Reserve would like to get out of dealing with 

some of these crises we have been dealing with because there is no 

broader authority, no broader support, and we prefer to get back 

to monetary policy, which is our function, our key mission. 

Senator AKAKA. Mr. Secretary, you mentioned about needing the 

right group of experts to help in this huge effort. Has there been 

any consideration, Mr. Secretary, given to specifically what parts 

of the Federal Acquisition Regulations would need to be waived to 

get contractors and consultants to establish this program? 

Secretary PAULSON. Yes. We have given a lot of thought to that 

and we have worked it through very carefully with our General 

Counsel. 

Senator AKAKA. Do you plan to have competitive bidding, and if 

not, why not? 

Secretary PAULSON. Well, we have procedures that are designed 

to mitigate against conflicts, but we need to move very quickly here 

and so we can’t go through all of the normal processes or it won’t 

work for the markets. 

Senator AKAKA. Chairman Cox, do you need additional statutory 

authority to properly regulate brokerage holding companies? If not, 

why not? 

Mr. COX. Senator, the regulatory hole that I have referred to that 

still exists gives no regulators the authority or the responsibility to 

regulate investment bank holding companies. The marketplace has 

dealt with this in the context of the current market turmoil by investment banks opting to become or merging or combining to become bank holding companies. But the problem remains, and if 

there are to be other investment, pure investment banks in the future, there is no statutory responsibility. 

The SEC, for its part, does not have legal authority over the entire investment banking firm. It doesn’t have the authority to require that it maintain capital levels or liquidity or what have you. 

We have had a voluntary program that was put in place 1 year before I arrived. Senator Shelby referred to our view of that early in 

the year, prior to Bear Stearns in March, the trial by fire for this 

voluntary program. It was very clear that it was broken and it did 

not serve the purpose. Certainly, it did not serve the purpose of 

looking at systemic risk, something that the SEC is not assigned 

to do in statute. 

And so I think with respect to this question, we have now an 

MOU that we signed up with the Federal Reserve immediately in 

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tion about regulated investment banks’ subsidiaries, or I should 

say, regulated broker-dealer subsidiaries of bank holding companies and the Fed could take a look at the same information for investment bank holding companies. That is working very well, or 

was working very well, to broaden our reach, but the fundamental 

flaw was that it was voluntary. And so I think, yes, that needs to 

be taken care of. 

I also mentioned the other regulatory hole, which I think is urgent in the current circumstances, and that is CDS. We are looking 

at effects of short selling, but those same effects, and indeed greater opportunities for manipulation exist in the CDS market. No regulator has authority except anti-fraud authority with respect to 

credit default swaps. 

Chairman DODD. Thank you, Senator, very much. 

Senator AKAKA. Thank you, Mr. Chairman. 

Chairman DODD. Senator Tester. 

Senator TESTER. Thank you, Mr. Chairman. I should request 

that we could have gotten this hearing over a lot quicker if you had 

just called my name first. 

[Laughter.] 

We have been at this about four-and-a-half hours. I want to 

thank you fellows for being here. I really appreciate it. 

My first question is going to be with Secretary Paulson and 

Chairman Bernanke. When you were at the last hearing that I was 

at—it was on July 15—asking for some sweeping powers to provide 

taxpayer equity into the two housing GSEs, I asked you then if this 

could in any way affect the credit rating of the U.S. Treasury. You 

both at that point in time said no. That decision is starting to look 

like a minimum of about $200 billion commitment, followed by $85 

billion to AIG and another $29 billion to Bear Stearns before now. 

We have an additional $700 billion now on top of that. Could this 

threaten the credit rating of the U.S. Treasury? 

Secretary PAULSON. Let me comment. First of all, you have heard 

why we did what we did—— 

Chairman DODD. You have got to get closer to that microphone—— 

Secretary PAULSON [continuing]. There were obligations, and 

that this—when you look at this, this authority is the authority to 

invest up to $700 billion. It is not to invest all of $700 billion. It 

is up to as much as needed and it will be investing, buying assets, 

and then we are selling those assets, and hopefully for a cost that 

is—we are buying the assets. We are not spending it. So it is difficult to determine what the ultimate cost will be. 

Senator TESTER. But my question is that, as has been pointed 

out about bazookas in people’s pockets and the last housing bill we 

sent out, I mean, we had the conversation on the phone. You said, 

we need it. If I have got it, I am probably not going to have to use 

it. You had to use it. I am not arguing that point. 

What I am asking you is that we have got $700 billion in spending authority. Is this—could this potentially affect our credit rating 

to our U.S. Treasury? And really, it is yes or no. 

Secretary PAULSON. Well, obviously, everything we do in some 

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plain here is that this is different from normal expenditures or outlays—— 

Senator TESTER. So you don’t think it is going to affect the credit 

rating? 

Secretary PAULSON. Anything we do, every expenditure, every investment has an impact. But we believe this is the right thing to 

do, and I will, Ben, let you—— 

Senator TESTER. OK. 

Mr. BERNANKE. I don’t know how they make those decisions. I 

don’t know. But I do know that a weak economy means lower tax 

revenues. So if it goes either way, there is going to be a fiscal hit. 

Senator TESTER. OK. I understand. So what you are saying is the 

increase in potential debt would not have an impact on U.S. Treasuries. 

Mr. BERNANKE. I don’t think so, but I don’t know how that rating 

agency does its analysis. 

Senator TESTER. Good enough. The ‘‘too big to fail’’ issues have 

been brought up here several times today, and this is for Chairman 

Bernanke. Both you and your predecessor have warned about the 

threat of systemic risk to financial markets when some companies 

are too big to fail, or we are talking about the whole system. Chairman Greenspan spoke most frequently about the systemic risk 

Fannie Mae and Freddie Mac posed. In response to the recent crisis, Secretary Paulson, if I can quote you, you said, ‘‘as we have 

worked through this period of market turmoil, we have acted on a 

case-by-case basis,’’ which is accurate. 

In that work, we have forced some marriages of some of Wall 

Street’s biggest titans, Bear Stearns, AIG, Bank of America and 

Merrill Lynch, Morgan Chase, all those. So the question is, are we 

posing additional risks by this consolidation in the marketplace 

and how do we spread risk as long as this consolidation is going 

on, because it appears we are forcing some of this consolidation. 

Mr. BERNANKE. Well, I think some consolidation is necessary in 

the industry. In particular, in the investment banking industry, 

there were real concerns about that model raised by the recent 

events, which is part of the reason why Morgan Stanley and Goldman Sachs have applied to become bank holding companies. 

I think the ‘‘too big to fail’’ problem is a very serious problem, 

but I think we have to get through this period and then work 

through ways to mitigate that problem in the future, and I have 

made a number of suggestions along those lines which I think is 

very important. That is a very important issue. 

Senator TESTER. When you have consolidation in any marketplace, it tends to result in less benefits for the consumer—this is 

my perspective, you may disagree—less benefits to the consumer 

and need for more regulation. Do you see both of those things occurring or needing to occur? 

Mr. BERNANKE. Well, the financial supermarket approach has 

benefits and costs. It has some complementarities across different 

types of services. It has some market issues, like you are referring 

to. I think we need to look at the regulatory system very extensively, as I said earlier today. 


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Senator TESTER. OK. And the consolidation, do you see it having 

an impact, a greater impact on rural America than it does on 

urban America? 

Mr. BERNANKE. I think one of the—in the medium-term, at least, 

one of the beneficiaries of these events will be smaller and community-type banks who have retained those relationships within their 

own towns and communities and didn’t get into some of these problems. 

Senator TESTER. My time has—this is the quickest time in the 

world. I cannot believe how fast this time has gone by, and I apologize. I will just tell you that there is—I am just going to make a 

real quick statement. 

Chairman DODD. Senator, you have been patient. Why don’t you 

take another couple of minutes if you want to? 

Senator TESTER. I can? 

Chairman DODD. Yes, you can. 

Senator TESTER. Well, thank you, Mr. Chairman. 

Chairman DODD. I will exercise—— 

Senator TESTER. I appreciate that. 

Chairman DODD [continuing]. Imperial authority I have here. 

Senator TESTER. Man, you are top flight. I will buy you a cup of 

coffee. 

[Laughter.] 

I want to talk a little bit about foreign entities and possible dollars going to them. It has been brought up several times. And I 

think in your testimony, I heard—and correct me if I am wrong— 

that you have been talking to the folks in the G–8 around the 

world about the United States’s role in propping up our markets, 

and have you talked about their role in us propping up their markets? 

Secretary PAULSON. Yes. Our system is integrated. We have 

clearly talked about their role. They have different policies. The 

U.K. had a significant policy action related to their banks and 

mortgages. There are actions being taken elsewhere. We are talking to them. We are urging them. But again, I just want you to understand that our motive here is not propping up foreign banks. 

Our motive here is—— 

Senator TESTER. I understand that, and it is well taken. But 

when the taxpayers see us propping up foreign banks, there are 

questions that are asked to me and then I ask you questions. That 

is the way this process works, I guess. 

What is the financial condition worldwide? I mean, and where I 

am going with this, just so you know, we passed a bill here a couple of months ago that we funded a very, very important project 

for research that, quite honestly, we are going to be borrowing 

money from other countries to fund that project when other countries in the G–8 should have been putting in the same kind of 

money. That is a little convoluted. But what I am asking is where 

are the other countries at in this process, because I think that, unless their economy is—and you said it is totally integrated, so it is 

integrated down on us, too—why aren’t they ponying up? Why 

aren’t they stepping up to the table? Because if we go down, like 

you say we could go down, I can’t imagine they are going to be in 

very good shape. 


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Secretary PAULSON. We didn’t say we are going to go down. I certainly said what we need to do is protect the American people from 

a system—— 

Senator TESTER. Bad choice of words. I am sorry. 

Secretary PAULSON. But I will say this, that all of them are dealing with their own economies. Economies are slowing down around 

the world. We have fragility in the markets around the world. We 

have equity markets declining in various parts of the world. So 

again, every one of these countries is dealing with their own situation. 

Senator TESTER. And so you feel comfortable that they have 

stepped up to the plate in a commensurate way? 

Secretary PAULSON. Well, do I feel comfortable they have all—I 

can’t speak for every country and every—— 

Senator TESTER. Your assessment. 

Secretary PAULSON [continuing]. And every—— 

Senator TESTER. Your assessment. 

Secretary PAULSON. So I can’t say that. I say that there are different approaches to dealing with this with different situations. 

Senator TESTER. OK. And I don’t want to miss the opportunity 

to follow up with Chairman Cox on the whole Bear Stearns investigation and what went on there and what transpired and all that. 

It is still in the back of my mind and hopefully we can take care 

of that. 

I just, in very quick closing, I want to say this. I haven’t been 

involved in government all that long, 10 years. I have been involved in public service at the local level a lot longer than that. But 

I can tell you that every time, every time that I can think of that 

we made a spur-of-the-moment decision, that we didn’t do our due 

diligence on, and with the level of governments I have been involved in, it has been a wreck. 

To quote Senator Menendez, I don’t feel a lot of confidence. I 

mean, I am not sure we have got the whole sentence written, much 

less the ‘‘i’’s dotted and the ‘‘t’’s crossed. And I fully feel the urgency, and I know you guys are frustrated. I am frustrated. Everybody up here is frustrated. But the truth is that we have to be 

given the time to do this right or it is not going to work and we 

will be back here next year or in 2 years asking for another $700 

billion or more, and that is a real issue with me because my kids 

have got to pay for that. 

Thank you. Thank you for being here. I appreciate your patience. 

Chairman DODD. Senator, thank you very, very much. 

Just a couple of points. Let me ask you something, if I can, Mr. 

Secretary, that hasn’t come up here today. Section 8 of your proposal says the following: Decisions by the Secretary may not be reviewed by any court of law or any administrative—order in the 

room—by any court of law or any administrative agency. This is 

rather sweeping, to put it mildly. I am trying to recall any other 

example I can think of in my 28 years where a request has been 

made of us to basically immunize any agency from any review. 

And it would seem to me that—and I understand, as I understand, the motivation behind it would be to sort of calm the markets. We are going to be able to make decisions and they are not 

going to be able to be challenged. I almost have the opposite reacVerDate Nov 24 2008 01:50 Apr 02, 2010 Jkt 050414 PO 00000 Frm 00086 Fmt 6633 Sfmt 6602 E:\HR\OC\A414.XXX A414

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tion. It would seem to me it would almost have the opposite reaction to me. The idea that you are going to have decisions made that 

are not subject to review by courts or agencies is so sweeping that 

it would be troubling to me, that you are not going to have that 

kind of tension that occurs when decisions are being challenged. 

And so, one, I would just tell you, maybe I am speaking for myself here, there will be real problems with this kind of language. 

Now, I understand you want to do some things, but I have asked 

the Judiciary Committee and others who spend more time on this, 

this language, in my view, cannot last here. 

Secretary PAULSON. I hear your comment that we need to work 

through this. We put this together. It was bare bones. But again, 

I will just say to you, this is not a position I wanted to be in. I 

didn’t want to be in this position. I am the Treasury Secretary. We 

moved very quickly to deal with something and it is very easy to 

second-guess it and it is very easy for everyone to—everyone has 

got to do their job here. 

Chairman DODD. Right. 

Secretary PAULSON. But we need something that can have strong 

oversight. We have got to have the protections. We have got to 

have the transparency. You have heard me say that. Would I like 

to have months and months to put this together? Yes, I would. But 

I don’t think that the situation calls for that. And so what we want 

to do is have the oversight, have the protections, but be able to 

move quickly to implement this. 

Chairman DODD. I hear you. 

Secretary PAULSON. And again, implementing it does not mean going out and investing $700 billion immediately. 

Chairman DODD. No, I understand that. But the rule of law is 

something that all of us up here, regardless of party, care deeply 

about. And the idea that you would ask for such sweeping authority here, to sweep that aside, I suspect maybe met with as much 

concern as I am expressing to you. So I just raise that with you 

here. It takes some work. This is a paragraph that is going to require some work, to put it mildly. 

Let me turn to Senator Shelby and we will try to wrap up here. 

Senator SHELBY. Thank you, Chairman Dodd. 

Chairman Bernanke, have you ever known of any central bank 

of any country in the world bailing out foreign banks doing business in their country other than their own? In other words, have 

you ever known any central bank bailing out our banks or some 

other banks? I have never heard of it. Now, you are a student of 

economic history. 

Mr. BERNANKE. Well, central banks have an important role as 

the lender of last resort—— 

Senator SHELBY. We know that. 

Mr. BERNANKE [continuing]. To provide liquidity, and we provide 

liquidity to any bank that is within the—whose branches—or, 

sorry, whose subsidiary is within the boundaries of the United 

States and is regulated by U.S. regulators, and that has been our 

general policy. 

Senator SHELBY. We understand that, basically providing liquidity. But in this, this would provide liquidity, but at a price. You are 

talking about buying toxic securities or securities that there is no 


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market for them from all the banks, our banks and foreign banks 

doing business in this country. I don’t—I understand why you are 

doing that, but I think that is a bad, bad precedent. 

Senator Dodd, I know we are getting toward the end of the hearing, and I think there are still significant unresolved issues here. 

You have brought up several. Foremost is the basic question regarding whether the plan will actually provide stability and greater 

liquidity. I think, as do many of my colleagues that it appears here 

today on the Banking Committee, that the pricing mechanism that 

we have talked about is the absolute key to whatever you are 

doing, assuming you are playing pass. 

Too high and the private money does not return to the market. 

There are trillions of dollars—you know this—in the private market looking for an investment. But they won’t return here if it is 

not done right. If the price is too low, firms will become insolvent, 

fail, and bring instability back to the market. 

Consider this proposition. We spend hundreds of billions of dollars, maybe a trillion dollars. It leads to the collapse—I hope not, 

but it could—of more firms. We have to spend billions more to recapitalize, among other things, the Federal Deposit Insurance 

Fund. There is also the question, as I see it, Mr. Chairman, as to 

whether our efforts might be better directed—something to think 

about—if we targeted some resources at homeowners beyond these 

issues. 

I think there are a broad range of questions that haven’t been 

resolved here and can’t be resolved in a short time, such as taxpayer protection—this goes to the heart of this—GAO oversight, 

conflicts of interest, and many others brought before us today. I 

think we need better answers and I think that before we really proceed on this—I don’t believe Congress should just ratify what has 

been thrown up to them. I understand the situation is dire, but so 

is the condition of the taxpayer out there. And I believe we, as Senators, should consider this. 

And my last statement regarding this, the market is overwhelmed. I believe some of you used that term, or somebody did. 

I think it is overwhelmed by greed, by mismanagement, by lack of 

regulatory reform in the past, regulatory oversight. And the bottom 

line, as I see it, you are visiting the taxpayer with it. I think that 

is shameful, myself. I know there are better ways. Would it be 

without pain? Oh, no. There is always pain. But the best—and 

Chairman Bernanke, I have heard you say this, or something to 

this effect—that the best disciplinary mechanism we have is the 

marketplace. The marketplace will discipline all of us. We are paying, but we learn. I am not sure people will learn if this goes 

through. 

Thank you, Mr. Chairman. 

Chairman DODD. I see—I know Senator Schumer wanted to ask 

one additional question. I presume he is on the way over. But let 

me ask Senator Dole if you have a quick question here, or Senator 

Corker. 

Senator DOLE. Yes, just a couple of comments. I want to underscore, Chairman Dodd, your concerns about the power assault here, 

and I would like to ask Secretary Paulson, how did you or how will 


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you select these so-called unbiased asset managers? Won’t there be 

a perception of Wall Street helping Wall Street? 

Secretary PAULSON. I would say we will design the process that 

has as many protections around this as possible to bring in experts, 

and we will have the proper oversight. Senator, that is how we are 

going to work through this. 

Senator DOLE. Publicly, you have stated that the long-term fate 

of Fannie and Freddie rests with the subsequent Congress and 

next administration. In addition, you have expressed that these 

GSEs are a relic of the past and burdened by various conflicts of 

interest. Given this, before leaving in January, will this administration commit to releasing its own recommendations as to what it 

believes should be the Federal Government’s role in supporting the 

U.S. mortgage market? 

Secretary PAULSON. Senator, I have said that in the weeks or 

months ahead, that I will express views on different ways to deal 

with these conflicts or these ambiguities and some very specific 

views. 

Senator DOLE. Specific written recommendations? 

Secretary PAULSON. I didn’t say written, but I will certainly express views, because there are—there clearly are significant issues. 

There, we had to stabilize the situation to deal with it, have them 

continue to play the very important role they have to play in our 

economy and our housing markets. But there is no doubt that the 

big structural issues have yet to be dealt with, and there are structural flaws and there are solutions, in my judgment, to those structural flaws. 

Senator DOLE. Thank you. Thank you, Mr. Chairman. 

Chairman DODD. Senator Corker, did you have a—— 

Senator CORKER. I think since we are filibustering for Schumer, 

I will just—— 

[Laughter.] 

Senator CORKER. I know they have to go, and I can’t believe we 

can keep them unless we are filibustering, but I would just say to 

them that I do hope—— 

Secretary PAULSON. We do have to go. 

Senator CORKER. That is fine. 

Chairman DODD. I know you do. 

Senator CORKER. Let us end it, then. 

Chairman DODD. Well, let me just say, I just want to make a 

couple of quick concluding remarks. 

First of all, I just want to—Senator Casey raised about some 

modifications to the bankruptcy provisions. We ought to talk about 

that, because that could help, I think, on the mortgage, not to end 

up in bankruptcy courts, but it is the incentive to try and do workouts so you don’t end up in courts, but I will leave that for further 

discussion. 

I hope our witnesses see the value of this. I know it has taken 

a lot of time, but it is very important. These are the people here, 

at least in this committee, we have been charged because of jurisdiction to deal with this. And so it is critically important that my 

colleagues have a chance to do this. And through us, the public 

gets a better understanding of what is going on. Your answers, I 

think, have been very good. They have been further explanation of 


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what needs to be done. Obviously, there were those who have other 

ideas, but I think it has a value and it is important that there be 

an appreciation of that. 

And again, I can’t speak for everyone here, but I think most of 

us recognize the gravity of the situation and that it is important 

we act. And we are going to need to try and figure out how to do 

that. The present system of how we legislate does not lend itself 

to a moment like this, where you normally have this body works, 

then the other body works, and we meet back and forth and try 

and come up with an answer over weeks, in some cases, months, 

in some cases. 

So I would hope the leadership of our respective bodies, and I 

think they are, are thinking about a mechanism by which we get 

together. It is not going to do any good just to have the Secretary 

negotiating with the House and then try and negotiate with the 

Senate. It seems to me we need a different system right now to 

begin to go through these ideas and put together a proposal that 

may then be adopted by both chambers and get us to move along. 

So I am going to recommend that we have some thought to how 

that can work. 

But again, I think it is extremely important that we work together on this. And again, my desire here is to try and come up 

with something that can work. And so on behalf of all of us here, 

we thank you immensely for the time you have spent. It has been 

valuable, I think, for the country and valuable for this committee. 

With that, this Committee will stand adjourned. 

[Whereupon, at 2:25 p.m., the hearing was adjourned.] 

[Prepared statements and responses to written questions supplied for the record follow:] 


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RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED 

FROM JAMES B. LOCKHART III 

Q.1. Director Lockhart, I was pleased to see your recent statement 

affirming your support for the multifamily lending programs of 

Fannie Mae and Freddie Mac, and your intention not to sell the 

low income housing tax credit interests at either institution. As you 

know, Fannie and Freddie are the single most important sources 

of financing for affordable multifamily rental housing, vital to hundreds of thousands of low income families across the country. The 

GSEs provide valuable stability to multi-family rental housing by 

being active in this market all the time. Do you agree that this 

part of the enterprises’ business is fulfilling their liquidity and stability missions, and that you will continue to support their financing of this housing, which overwhelmingly serves people below 100 

percent of area median income, and is a significant contributor to 

Fannie Mae and Freddie Mac’s regulatory housing goals? 

A.1. Yes. Fannie Mae and Freddie Mac historically have provided 

valuable stability to the multifamily market by maintaining a regular presence in the financing of such housing, and they should 

continue to do so. Such a presence, however, requires an innovative 

and market-oriented approach that reflects the current financial 

condition of the Enterprises themselves and the actual needs of the 

multifamily market. 

Q.2. Given the serious dislocation of the Low Income Tax Credit 

market in the absence of Fannie and Freddie investments, are you 

planning to permit the companies to reopen that business line as 

soon as practicable? 

A.2. While we recognize that LIHTC investments have provided 

significant assistance to affordable housing markets in the past, 

new investments in LIHTC are not economically attractive for the 

Enterprises when they are reporting losses. In their most recent 

quarterly financial statements, both Enterprises established valuation allowances for their deferred tax assets, which are indicative 

of their potential inability to realize future tax benefits associated 

with LIHTC investments. 

Part of what needs to be done to assist the LIHTC market is to 

broaden participation. Accordingly, FHFA has been working very 

hard with the Enterprises to determine how they can play a key 

role in achieving that goal. That involves the Enterprises looking 

at creative transaction structures, in consultation with FHFA, as 

well as conducting outreach to stakeholders, including housing advocates, lenders, and state and local housing finance agencies, with 

the goal of expanding the universe of these credits. FHFA’s meetings with such groups have been regular, extensive, and productive, and are ongoing. 

Q.3. Last year HUD declared the regulatory housing goals ‘‘infeasible’’ for both enterprises because of market conditions. Since then, 

Congress has adopted a new approach to the calculation and measurement of the companies’ housing goals, as well as added new ‘‘duties to serve’’ specific populations and markets. I’m sure you agree 

that given the current market and the companies’ situation it is vitally important to reaffirm and clarify their housing goals requirements. What is your plan to quickly issue new regulations to exeVerDate Nov 24 2008 01:50 Apr 02, 2010 Jkt 050414 PO 00000 Frm 00134 Fmt 6602 Sfmt 6602 E:\HR\OC\A414.XXX A414

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cute these new provisions and ensure that both companies have 

clear direction in meeting these important requirements, and to 

publish clear guidance on what FHFA considers to be the important additional ‘‘duties to serve’’ under the statute? 

A.3. Given current market conditions, it is vitally important to reaffirm and clarify the Enterprises’ requirements with respect to 

housing goals. FHFA has begun the process of reviewing housing 

goals for 2009 and will issue proposed goals for public comment in 

the first quarter of 2009. In addition, FHFA has begun the process 

of implementing regulations to establish new housing goals, as well 

as new ‘‘duty to serve’’ requirements, for 2010. We expect to issue 

a proposed regulation for public comment by the second quarter of 

2009 and to issue a final regulation by the fourth quarter. 

Q.4. Over the years the GSEs have provided important services to 

populations that are especially hard to serve, such as Native Americans living on trust lands, and people with special needs. Fannie 

Mae also has provided lines of credit and equity and equity-like investment to community loan funds and community development 

lenders. These investments provide community-oriented lenders 

with more capital to support revitalization projects in come of 

America’s hardest hit communities. They also have developed products such as Community Express and Modernization Express that 

help public agencies finance important public investments in housing. Do you agree that these specialized lending products are important extensions of their mission to serve low and moderate income people and underserved communities, and what role do you 

anticipate these specialized and targeted products will play in their 

future business? 

A.4. Specialized and targeting lending products have made a significant contribution to the Enterprises’ achievement of their affordable housing mission. FHFA expects that Fannie Mae and 

Freddie Mac will continue to develop and market such products to 

fulfill that mission in the future, consistent with safe and sound 

management of credit risk and maintenance of adequate capital. 

Q.5. Much has been said about the GSEs’ affordable housing mission. Specifically, their mission includes providing ‘‘ongoing assistance to the secondary market for residential mortgages (including 

activities relating to mortgages on housing for low- and moderateincome families involving a reasonable economic return that may 

be less than the return earned on other activities) by increasing the 

liquidity of mortgage investments and improving the distribution of 

investment capital available for residential mortgage financing.’’ 

(12 § U.S.C. 1716 and 12 U.S.C. § 1451) The statute specifically recognizes the need to provide affordable housing for low- and moderate-income families. It seems to me that the Affordable Housing 

Fund and the Capital Magnet Fund will help ensure that the enterprises fulfill this mission. Do you agree? Why or why not? 

A.5. Section 1337 of the Federal Housing Enterprises Financial 

Safety and Soundness Act of 1992, as amended, requires each Enterprise to set aside an amount equal to 4.2 basis points for each 

dollar of the unpaid principal balance of its total new business purchases as funding for the Housing Trust Fund and Capital Magnet 

Fund. Each Enterprise’s contributions to those funds will further 


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its mission of supporting affordable housing. Section 1337 also authorizes FHFA to suspend the contributions on a temporary basis. 

After reviewing the Enterprises’ 3Q 2008 financial results, FHFA 

exercised that authority on November 13, 2008, by directing each 

Enterprise, until further notice, not to set aside or allocate funds 

for the contributions. 

Q.6. Director Lockhart, an article in the September 8, 2008 Wall 

Street Journal stated as follows: ‘‘At both Fannie and Freddie, socalled Alt-A loans, a category between prime and subprime, 

amounted for roughly 50% of credit losses in the second quarter, 

even though such loans accounted for only about 10% of the companies’ business. Alt-A mortgages include loans made with less than 

full documentation of borrowers’ income or assets.’’ Is it true that 

a disproportionate share of Fannie and Freddie’s credit losses are 

related to mortgage loans that were made without anyone checking 

the borrower’s income? If so, do you think it would be prudent, especially now that the American taxpayer is responsible for insuring 

loans held by Fannie and Freddie, for the FHFA to require that 

Fannie and Freddie purchase only those mortgage loans for which 

income verification has been performed? 

A.6. A disproportionate share of each Enterprise’s credit losses 

have been on Alternative-A (Alt A) single-family mortgages, which 

are loans made to borrowers who generally have limited verification of income or assets or no employer. Fannie Mae and Freddie 

have greatly curtailed their purchases of Alt-A and other low documentation loans in 2008. Beginning in 2009, neither Enterprise 

will purchase any such mortgages on a flow basis (where loans are 

delivered pursuant to pre-negotiated contracts and pricing). Acquisitions of pools of such loans on a negotiated basis will occur only 

after adequate due diligence and with appropriate pricing. 

Q.7. As I understand it, part of the strategy of the entire mortgage 

lending crisis is that it would have been so simple to verify consumers’ incomes. In her April 6, 2008, New York Times column, 

Gretchen Morgenson wrote about the IRS 4506–T form, which is a 

request for tax transcripts, and how lenders could have used that 

form to avoid a considerable part of the subprime mortgage mess. 

According to Morgenson’s sources, approximately 90 percent of borrowers signed the form, but lenders used the form to obtain tax 

transcripts only 3 to 5 percent of the time—and usually after the 

loan had closed. Tax transcripts are prepared by the IRS with data 

contained in tax returns, and are therefore unlikely to contain exaggerated amounts of income. Given that the 4506–T process is 

cheap and efficient, do you think IRS tax transcripts should be utilized to protect the GSEs and therefore the American taxpayer 

from bearing the losses for inappropriate mortgages? 

Another reason for requiring tax transcripts is that they provide 

an easy means for identifying fraud. Section 1379 E of the Housing 

and Economic Recovery Act of 2008 contains the following report 

requirement: 

The Director shall require a regulated entity to submit to the Director a timely report upon discovery by the regulated entity that it has purchased or sold a fraudulent loan or financial instrument, or suspects a possible fraud relating to the purchase or sale of any loan or financial instrument. The Director shall require each 


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regulated entity to establish and maintain procedures designed to discover any such 

transactions. 

A.7. The income verification processes at Fannie Mae and Freddie 

Mac have been subject to increased scrutiny by FHFA and these 

processes have tightened considerably. Working with FHFA, the 

Enterprises have explored the use of a variety of tools, including 

IRS forms 4506 and 4506–T, to better verify and document borrower income. Considering the pros and cons of those various approaches, the Enterprises have decided to reduce significantly their 

purchases of Alt-A mortgages and other lower documentation loans 

in 2009 and beyond. 

Given the volume of loans Fannie Mae and Freddie Mac guarantee, it is not operationally feasible for them to individually review every loan; instead, they rely on lenders to verify borrower income and assets and other necessary information. The lenders represent and warrant that mortgages are eligible for Enterprise purchase; if an Enterprise identifies a misrepresentation, it requires 

the lender to repurchase the questionable loan. Both Fannie Mae 

and Freddie Mac now require lenders to verify borrower income, 

have increased their quality control reviews, and are issuing repurchase requests in cases where nonconforming loans are identified. 

Such repurchases discourage poor underwriting practices, including 

the use of unverified income to establish borrower eligibility. 

Q.8. The FDIC’s summer 2007 issue of Supervisory Insights cites 

an April 2006 Mortgage Asset Research Institute report for the fact 

that ‘‘90 percent of stated incomes [on mortgage loan application] 

were exaggerated by 5 percent or more, and 60 percent of stated 

incomes were inflated by more than 50 percent.’’ Given these statistics, do you plan to institute, as part of your anti-fraud program, 

a rule requiring Fannie and Freddie to purchase, re-sell, or otherwise back only loans for which income verification has been executed and what method will you recommend for verification? 

A.8. Fannie Mae and Freddie Mac are subject to a mortgage fraud 

reporting regulation promulgated by the Office of Federal Housing 

Enterprise Oversight (OFHEO), one of the predecessor agencies to 

FHFA, as set forth in Title 12, Chapter 17, Part 1731 of the Code 

of Federal Regulations (CFR). That regulation requires each Enterprise to establish adequate and efficient internal controls and procedures and an operational training program to assure an effective 

system to detect and report mortgage fraud or possible mortgage 

fraud. The regulation defines mortgage fraud broadly in order to 

give the Enterprises the flexibility to adapt their internal controls 

and procedures to fraudulent practices that may emerge over time 

within the industry. FHFA’s ongoing examinations include evaluations of the extent to which the internal policies, procedures, and 

training programs of the Enterprises minimize risks from mortgage 

fraud and mortgage fraud or possible mortgage fraud is consistently reported to FHFA. 

Fannie Mae and Freddie Mac have also increased quality control 

reviews to identify cases of exaggerated income. The Enterprises 

are actively requiring lenders to repurchase such loans. As mentioned in the previous answer, working with FHFA the Enterprises 

have decided to significantly reduce the use of stated income going 


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forward. Any change to that standard will also require a safetyand-soundness review by FHFA. 

Q.9. The 4506–T process for IRS tax transcripts has a proven track 

recorded and is currently being utilized by the FDIC in their efforts 

to modify loans as the conservator for IndyMac. In Housing and 

Economic Recovery Act of 2008, Congress enacted a requirement 

pursuant to the HOPE for Homeowners Program that mortgagors’ 

income be checked via tax transcripts or tax returns. In the Bankruptcy Reform Act of 2005, Congress provided debtors the option of 

producing a transcript of their tax returns via a 4506–T form in 

lieu of providing their actual tax returns to the court. This was to 

provide consumers additional privacy protections as well as speed 

of service. And, as Housing and Urban Development Secretary 

Preston well knows because he used to be the Administration of 

the Small Business Administration, the SBA requires a 4506–T 

form for its loan applications. Given that this process has been 

adopted and recognized so pervasively, do you see any reason that 

Fannie and Freddie should not require its use for the loans they 

purchase, re-sell, or otherwise deal with? 

A.9. As indicated above, Fannie Mae and Freddie Mac have decided 

to reduce significantly the use of stated income loans going forward. The Enterprises give lenders several options for verifying income, including using tax records for self-employed individuals. Enterprise lenders use forms 4506 and 4506–T to obtain borrower permission to request tax transcripts from the IRS. 


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