S. HRG. 111–316 

HEARING WITH 

TREASURY SECRETARY TIMOTHY GEITHNER 

HEARING 

CONGRESSIONAL OVERSIGHT PANEL 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

DECEMBER 10, 2009 

Printed for the use of the Congressional Oversight Panel 

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HEARING WITH TREASURY SECRETARY TIMOTHY GEITHNER 


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55–245 2009

S. HRG. 111–316 

HEARING WITH 

TREASURY SECRETARY TIMOTHY GEITHNER 

HEARING 

CONGRESSIONAL OVERSIGHT PANEL 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

DECEMBER 10, 2009 

Printed for the use of the Congressional Oversight Panel 

( 

Available on the Internet: 

http://www.gpoaccess.gov/congress/house/administration/index.html 


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(II) 

CONGRESSIONAL OVERSIGHT PANEL 

PANEL MEMBERS

ELIZABETH WARREN, Chair 

PAUL ATKINS

MARK MCWATTERS

RICHARD H. NEIMAN

DAMON SILVERS


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C O N T E N T S 

Page 

STATEMENT OF 

OPENING STATEMENT OF ELIZABETH WARREN, CHAIR, CONGRESSIONAL OVERSIGHT PANEL ......................................................... 1 

STATEMENT OF PAUL ATKINS, MEMBER, CONGRESSIONAL OVERSIGHT PANEL .............................................................................................. 4 

STATEMENT OF DAMON SILVERS, DEPUTY CHAIR, CONGRESSIONAL OVERSIGHT PANEL ................................................................... 8 

STATEMENT OF RICHARD NEIMAN, MEMBER, CONGRESSIONAL 

OVERSIGHT PANEL ................................................................................... 12 

STATEMENT OF HON. TIMOTHY GEITHNER, SECRETARY, UNITED 

STATES DEPARTMENT OF THE TREASURY ........................................ 14 

RESPONSES OF HON. TIMOTHY GEITHNER, SECRETARY, UNITED 

STATES DEPARTMENT OF THE TREASURY TO QUESTIONS FOR 

THE RECORD FROM THE CONGRESSIONAL OVERSIGHT PANEL . 73 


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HEARING WITH TREASURY SECRETARY 

TIMOTHY GEITHNER 

THURSDAY, DECEMBER 10, 2009 

U.S. CONGRESS, 

CONGRESSIONAL OVERSIGHT PANEL, 

Washington, DC. 

The Panel met, pursuant to notice, at 10:03 a.m. in Room SD– 

138, Dirksen Senate Office Building, Elizabeth Warren, Chair of 

the Panel, presiding. 

Present: Elizabeth Warren [presiding], Damon Silvers, Richard 

Neiman, and Paul Atkins. 

OPENING STATEMENT OF ELIZABETH WARREN, CHAIR, 

CONGRESSIONAL OVERSIGHT PANEL 

Chair WARREN. This hearing of the Congressional Oversight 

Panel for TARP, with Secretary of the Treasury Geithner, is now 

called to order. 

Welcome, Mr. Secretary, to your third appearance before the 

Congressional Oversight Panel. We appreciate your being here and 

appreciate your commitment to coming every quarter. 

Yesterday, this Panel released its monthly oversight report for 

December. It was a comprehensive assessment of TARP’s accomplishments and an exploration of the places where TARP has fallen 

short. You made it a busy news day by announcing, at the same 

time, that Treasury will extend TARP until October of next year. 

Thus, it seems that, between the two of us, we have intensified a 

vigorous debate, here in Congress, about what direction the program should take going forward. 

As the starting place for our conversation, I want to note the conclusion of our report. TARP was an important part of the government’s rescue strategy and it helped rescue the financial system 

from imminent collapse. The apocalyptic fears that we were all suffering 14 months ago have not come to pass. And for that we owe 

a great debt of gratitude to the public servants who toiled through 

the darkest days of this crisis. 

But, as the report also highlights, TARP has been far from an 

unmitigated success. Credit for consumers and small businesses remains scarce. The foreclosure crisis continues unabated. And 

Treasury’s mitigation programs have not achieved the scope, the 

scale, or the permanence necessary to stabilize the housing market. 

Large banks survived the crisis, with the help of government support, but smaller banks continue to fail at nearly unprecedented 

rates. And the FDIC is in the red for the first time in 17 years. 


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Perhaps most disturbing of all, TARP created an implicit government guarantee for major financial institutions, a guarantee that 

is not shared by their smaller counterparts. The unprecedented 

government actions taken to stabilize the system have created a 

huge moral hazard that makes our system riskier and that infects 

the pricing of assets. 

We welcome you here today, Mr. Secretary, to engage in a constructive process of evaluating the TARP and assessing whether it 

is serving taxpayers in the manner that was intended. I look forward to your testimony and a productive discussion. 

And with that, I call on Mr. Atkins for two minutes of remarks. 

[The prepared statement of Chair Warren follows:] 


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STATEMENT OF PAUL ATKINS, MEMBER, CONGRESSIONAL 

OVERSIGHT PANEL 

Mr. ATKINS. Thank you, Madam Chair. 

And welcome, Secretary Geithner. 

Milton Friedman once said that, ‘‘Nothing is so permanent as a 

temporary government program.’’ Yesterday, we learned that— 

what most of us had already suspected—that TARP will not die at 

the end of this year. The program can no longer—I think—be considered a hastily arranged effort to arrest the financial freefall. I 

can understand why a Treasury Secretary, any Treasury Secretary 

really, would want to extend TARP. Why not? It’s a free option, at 

taxpayer expense, and essentially a blank check to finance any 

macroeconomic stimulus initiative that the executive branch can 

imagine, to the tune of hundreds of billions of dollars. But, now 

that last year’s emergency has abated, the rationale behind TARP 

as a salve for financial markets in distress no longer supports 

Treasury’s choice, I believe, to extend it. 

The previous Congress reluctantly authorized TARP in response 

to an extraordinary financial panic. Would Congress, today, approve TARP? I cannot imagine it. That, essentially, is why it was 

extended, I believe. But, to extend TARP’s borders, I think, is recklessness and irresponsibility in Treasury’s role as a steward of the 

Nation’s financial system. 

TARP continues to inflict great economic cost, both directly to the 

taxpayer, in the form of actual and potential tens of billions of dollars of losses, and indirectly, as the Chair said, of moral hazard, 

distorted incentives created by implicit government guarantees, 

and inefficient government interference in the operation of private 

firms. Moreover, the administration’s legislative proposals will not 

solve these problems, I believe, but only institutionalize them. 

Now that unbridled financial panic, that was cited as the original 

justification for TARP, has disappeared, why deepen and prolong 

these costs? I think we’re still too close to the events of last year 

to determine whether TARP was a success. I’m not convinced that 

we can even yet credit the program itself for stopping a panic in 

the markets. 

The United States Government basically threw out $8 trillion in 

the form of guarantees, loans, and direct outlays to the financial 

markets. Something had to happen out of all that liquidity. And, 

in fact, I think this chart here shows how TARP rates as but a 

small portion of the total government outlays—this little red triangle here—compared to everything else—guarantees, outlays, and 

loans—that the federal government did last year. 

So, the lack of political accountability, I believe, may be TARP’s 

greatest liability of all. And I think the Treasury Department has 

done very little to assuage many obvious oversight concerns that 

this panel has expressed. 

First, Treasury takes the position that TARP essentially is a re- volving line of credit with a $700 billion limit on outstanding balances at any time. At your previous appearance before the panel, 

I asked for a legal opinion justifying the view that TARP is a revolving fund. We have yet to receive such an opinion from Treasury. I believe that this omission needs to be addressed as soon as 

possible. 


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So, I thank you. 

[The prepared statement of Mr. Atkins follows:] 


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Chair WARREN. Thank you. 

Mr. Silvers. 

STATEMENT OF DAMON SILVERS, DEPUTY CHAIR, 

CONGRESSIONAL OVERSIGHT PANEL 

Mr. SILVERS. Good morning, and thank you, Chair Warren. 

I wish to begin by saying, Mr. Secretary, that I believe the administration’s decision to extend TARP was the only responsible 

course of action. The financial system today is not fundamentally 

stable, in my opinion. The mortgage foreclosure crisis is accelerating. And the overall economic situation, particularly when 

looked at globally, is not good. The risk of a systemic problem in 

the coming months is significant. 

While I believe a tough resolution authority, such as proposed by 

the Obama administration and being acted on, hopefully, by the 

the House in the coming hours, would be far superior to TARP as 

a means of dealing with a possible future financial crisis. At the 

moment, Congress has not passed any such authority. 

In this context, the administration’s decision was the only responsible one. And as I think we—you just got a little taste of— 

it was an act of political courage for which I think you deserve a 

substantial amount of credit. 

Now, we found, in our December report, released earlier this 

week, that TARP played a positive role in halting a runaway financial crisis in the fall of last year. I recognize this is hard to prove 

in the way that a mathematician would prove something, but I’m 

completely convinced this is true. And the reason I think this is 

true is—and the reason why my colleague Mr. Atkins has it 

wrong—is because there’s a difference between liquidity and equity. 

Now, nonetheless, TARP is wildly unpopular among the American public. And this is not because the public does not understand 

what happened. It’s because the public understands all too well 

what happened. This panel has found, in report after report, that 

TARP transactions have been undertaken on less than fair terms 

to the public, that there have been issues of transparency in key 

TARP actions, including the stress tests, that the underlying weaknesses in the financial system have been inadequately addressed, 

and finally, and perhaps most importantly, that key credit markets 

that matter to the American public remain weak, with real consequences for jobs. 

It did not have to be this way, and it does not have to be this 

way in the future. This administration has taken significant steps 

to make TARP a program that works in the interests of the American people and not simply in the interests of the financial firms 

we bailed out, including allocating significant monies to foreclosure 

relief and managing to avoid putting more money into the large 

banks. But, more must be done. TARP, in its second year, must, 

one, work for Main Street, not just Wall Street; two, always transact with private parties on terms that are fair to the American 

public; and, three, address the underlying weaknesses in our large 

financial institutions by cleaning up firms that are broken, rather 

than continuing to hope that time will heal all wounds. 


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This week, President Obama spoke powerfully about the need to 

help solve the Main Street credit crisis so businesses can create 

jobs. And he spoke about the role TARP might play in that mission. 

I look forward today to hearing in more detail about those plans 

and, like the Chair and my colleagues, I’m very pleased to see you 

here today and thank you for your attention to the panel. 

[The prepared statement of Mr. Silvers follows:] 


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Chair WARREN. Thank you, Mr. Silvers. 

Superintendent Neiman. 

STATEMENT OF RICHARD NEIMAN, MEMBER, 

CONGRESSIONAL OVERSIGHT PANEL 

Mr. NEIMAN. Good morning, Mr. Secretary. 

Yesterday morning, our panel issued a report analyzing the overall effectiveness of TARP in a comprehensive year-end review. And 

while the report criticized several of TARP’s shortcomings to date, 

it also gave a large share of credit to the Treasury Department and 

to Congress and, in my opinion, to the Fed and the FDIC, for the 

achievement of the primary objectives of the EESA. TARP’s primary objectives were to restore financial stability and liquidity. 

And this has largely been achieved, as the report stated and I 

elaborated in my additional views. 

This reflection is critically important so that the American public 

can fully appreciate the depth of the crisis and how the Treasury’s 

multi-prong response stabilized not only the financial sector, but 

also avoided a dramatic worsening, if not collapse, in the real economy. But, Congress also charged Treasury with using TARP funds 

in a manner to preserve homeownership, in addition to promoting 

jobs and economic growth. And we are now entering perhaps the 

most critical stage of Treasury’s foreclosure prevention program. 

Hundreds of thousands of mortgage modifications in their trial 

phase are at risk of not converting to permanent modifications because servicers are not obtaining adequate supporting documentation from homeowners. The majority of the homeowners in these 

trials are, in fact, making their modified monthly payments, but 

they will soon be in danger of elimination from the program and 

will again face foreclosure as their trial period expires with documentation still deemed insufficient. I am sure you agree that neither homeowners nor our financial system can afford a trip back 

to square one. 

I look forward to reviewing these and other issues with you this 

morning, and, again, I thank you for your time with us this morning. 

[The prepared statement of Mr. Neiman follows:] 


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Chair WARREN. Thank you, Mr. Neiman. 

I want to note that we are missing our fifth and newest panelist, 

Mark McWatters, who joined the panel by appointment last night. 

He can’t be with us today because he has the flu. So, we are sorry, 

and we wish him well. 

As you can see, Mr. Secretary, we have kept our remarks brief 

so that we will be able to have the maximum amount of time for 

questions and answers. So, I would ask that you keep your remarks to five minutes. 

Mr. Secretary. 

STATEMENT OF HON. TIMOTHY GEITHNER, SECRETARY, 

UNITED STATES DEPARTMENT OF THE TREASURY 

Secretary GEITHNER. Thank you. Thank you, Chair Warren and 

members of the Congressional Oversight Panel. And thanks for the 

opportunity to come before you again to testify about this important set of policy issues facing the country. 

More than a year ago, as you noted, we faced one of the most 

severe financial crises in the past century, a deep economic contraction, and we’ve now begun to turn this around. Confidence in the 

stability of the financial system, in the security of American savings has improved dramatically, credit is flowing again, the economy is now growing, borrowing costs have fallen, businesses have 

raised substantial capital from private markets, housing prices 

have stopped falling in many parts of the country, and job losses 

have slowed at a pace that is more consistent with stronger recoveries than weaker recoveries. 

However, this is a very tough economy, and households and businesses still face very significant challenges. Unemployment, of 

course, is very, very high. Commercial real estate losses weigh 

heavily on many small banks, impairing their ability to extend new 

loans. Credit is tight for many small businesses. Foreclosures, driven now principally by unemployment, are very high. 

Today, I want to outline our strategy to address these challenges, 

going forward, and how we’re going to wind down and ultimately 

exit the TARP. There are four elements to the strategy: 

First, we will terminate and wind down the emergency programs 

that were put in place at the peak of the crisis that were necessary 

to break the back of this financial panic. In September, we shut 

down the Money Market Guarantee Program, which earned taxpayers $1.2 billion. We’ve effectively shut down, now, the Capital 

Purchase Program, under which the majority of TARP investments 

in banks were made. 

Second, we will limit new commitments under this program in 

2010 to three areas: housing, small banks, and credit markets for 

consumers and small businesses. For housing, we’re going to continue to work to mitigate foreclosures for responsible American 

homeowners as we take the steps necessary to continue to help stabilize the housing market. For small businesses, we recently 

launched initiatives to provide capital to small and community 

banks that commit to increase lending to small businesses. And we 

are reserving additional funds for additional efforts to facilitate 

small business lending. And finally, we’re going to continue to supVerDate Nov 24 2008 02:50 Mar 20, 2010 Jkt 055245 PO 00000 Frm 00020 Fmt 6633 Sfmt 6602 E:\HR\OC\A245.XXX A245

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port the securities markets that are necessary for credit flows to 

consumers and small businesses. 

Third, beyond these limited new commitments, we will not use 

remaining TARP funds—unless necessary to respond to an immediate and substantial threat to our economy stemming from financial stability, a determination that I will only make after consulting 

with the President and the Chairman of the Federal Reserve Board 

and submitting written notification to Congress. 

Fourth, we will continue to reduce our financial stake in banks 

and manage our other investments. We will keep the government 

out of the business decisions of these companies, and we will exit 

from our investments as soon as is practical and return ownership 

to private hands. This strategy requires a limited temporary extension of the authority provided by the Congress under the Emergency Economic Stabilization Act. It would be irresponsible to do 

otherwise. 

The expected costs of TARP have fallen dramatically. While we 

are extending the program, we do not expect, at this point, to deploy more than $550 billion, in total. We also expect up to $175 billion in repayments from banks by the end of next year, and substantial additional payments thereafter. And as a result, we now 

expect that the ultimate costs of TARP will be at least $200 billion 

less than was projected as recently as the August midsession review of the President’s budget. 

We now expect to make—not lose, but to make money on the $245 billion of investments in banks. We estimate that the TARP 

programs for banks will yield a positive return of over $19 billion. 

Indeed, banks have already repaid more than $116 billion in investments. The stress test of the major financial institutions helped 

accelerate repayments by providing markets with the transparency 

and the confidence necessary for banks to be able to raise capital 

from private sources. These programs, as you know, have generated significant income, roughly $15 billion, which have been 

used already to help pay down our Nation’s fiscal obligations. 

Of course, we do not expect all TARP investments to generate 

positive returns. It’s unlikely that we will be repaid for all of our 

investments in AIG, GM, and Chrysler. But, even there, the outlook, too, has improved. And you’ll see new estimates in the report 

we’re issuing today. 

We’re going to continue to manage TARP in a transparent and 

an accountable manner. Earlier this morning or maybe sometime 

today, I’m not sure it’s out yet, Treasury published the first annual 

financial statements for this program. These statements discuss in 

great detail the operations, the impact, the expected costs of the 

program. GAO provided an unqualified audit opinion of those statements, and concluded there were no material weaknesses in internal controls. And this is a notable achievement for the men and 

women that have helped put in place this very complicated, very 

important program in a very short period of time. 

Let me just end by emphasizing, as you did, the importance that 

we continue to work to reinforce the process of repair in our financial system. It is absolutely essential to try and make sure that we 

establish a strong recovery that will put Americans back to work. 

And it is very important, because of the consequences created by 


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the actions necessary to put out this financial fire, that Congress 

move to adapt a strong and comprehensive package of financial reforms. And I am encouraged by the progress received to date. 

There’s a lot of challenges ahead in getting a strong package in 

place. I know you’ve played a very helpful role in trying to help 

bring some thoughtful insight to those choices, and I hope you’ll 

continue to work with us to help make sure we have a strong package of reforms in place as quickly as possible. 

Thank you. 

[The prepared statement of Secretary Geithner follows:] 


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Chair WARREN. Thank you, Mr. Secretary. 

So, let’s start with your statement. You say, as part of the extension, that you want to focus any new spending on housing, small 

banks, and supporting credit to consumers. Let me focus on the 

small business initiative. I understand the importance of the initiative. This is the one part of TARP that may have a direct effect 

on unemployment, or maybe the most easily traced effect on unemployment. And, that is, if small businesses can borrow money, then 

they’ll be able to stay in business, they’ll be able to keep their employees or hire more employees. 

So, I understand the importance of this, and applaud that approach, but my concern is that last spring Treasury launched the 

TALF program to stimulate small business lending. I think it was 

not a success. Later, Treasury announced a program to purchase 

up to $15 billion in securities backed by SBA loans and I believe 

it’s the case that, so far, Treasury has not spent a single dollar 

under that program. And two months ago, Treasury announced a 

third program to support small business lending by providing low 

cost capital to community banks. And, as I understand it, so far 

nothing has happened. 

So, you know, it’s not news to anyone that small business lending 

is important. Small businesses are closing every day. But, Treasury 

has now announced three plans, and clearly has not gotten the job 

done. What’s going to be different now, Mr. Secretary? 

Secretary GEITHNER. Let me just start by saying the economy 

would not be growing today without TARP. Unemployment would 

be dramatically higher today without the actions we took to help 

stabilize the financial system and open up the markets that were 

so broken. 

Let me walk through those specific programs you pointed out. 

Small businesses, as you know, depend on banks, overwhelmingly, for credit. And small banks provide about half the credit 

small businesses get from the banking system as a whole. Small 

banks are among the most affected, still, by the challenges facing 

the economy as a whole. Many of them are going to need more capital. Those that need more capital are cutting back on lending and 

commitments; and, as you said, that’s affecting small businesses. 

In our judgment, to address this requires a set of different approaches. We actually have been quite successful in bringing liquidity back to the securities markets that are important for small 

business lending. The TALF program has actually been very helpful; that’s one reason why small business—SBA loans have increased so much. The SBA program, providing temporarily higher 

guarantees, lower fees, is also helping, although those programs 

are small in total magnitude. But, for this to work, we have to 

make it possible for banks to come get capital from the government 

so they can support more lending. 

Banks are, and have been, very reluctant to come. And the reason the 7(a) program you referred to has not yet been launched is 

because the institutions necessary to make that work have been 

very reluctant to come and do business with the government. And 

they’re concerned that if they come, they will be stigmatized and 

they will be subject to the risk of conditions, in the future, that 

might make it harder for them to run their businesses. 


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So, if we’re going to be effective in dealing with this, we have to 

find some way to mitigate both the stigma of coming and the fear 

of changes in the future rules of the game that are going to apply 

to them. It is something we cannot do on our own. It’s going to require some help from Congress, to help deal with those basic concerns. 

But, I think you’re right to say that, unless banks have access 

to capital, this is going to be a harder problem to solve. 

Chair WARREN. Well, let me just follow up though, Mr. Secretary, 

because I’m afraid I’m a little confused here. You were talking 

about small banks as the most effective lenders to small businesses. And we know this to be true. We’ve—— 

Secretary GEITHNER. About half are lending—— 

Chair WARREN [continuing]. Written a report about this. 

Secretary GEITHNER [continuing]. Half of banks—— 

Chair WARREN. That’s right. 

Secretary GEITHNER [continuing]. Are lending to small businesses—— 

Chair WARREN. But, I thought you started by saying you were 

going to terminate and wind down the Capital Purchase Program. 

And then I thought I just heard you say you were talking about 

putting more capital into small banks? 

Secretary GEITHNER. Yes, as a—— 

Chair WARREN. I’m just a little confused on this. 

Secretary GEITHNER. Again, the emergency programs that were 

necessary to break the panic and the capital programs for large 

banks can be wound down and put out of their misery. 

But, as you said, the President announced a program for capital 

for small community banks—— 

Chair WARREN. Right. 

Secretary GEITHNER [continuing]. A few months ago, and we’re 

going to preserve that, and we’re exploring ways to build on that. 

But, for it to work, Chairman, we need to make it more comfortable 

for banks to be willing to come. 

Chair WARREN. So, let me just, if I can, pinpoint—how can it be 

that we can manage to put hundreds of billions of dollars into the 

hands of very large financial institutions, in what was effectively 

a matter of days, and 14 months into TARP, we’re still talking 

about trying to figure out how to put much, much smaller amounts 

of money into very small financial institutions? 

Secretary GEITHNER. Let’s go back a little bit. We actually did 

not give the large banks a choice, because it was necessary for the 

country that they have capital put in right away. 

Chair WARREN. So—— 

Secretary GEITHNER. But, let me say that small banks, and we 

made the capital quite attractively priced, as many of you pointed 

out, are reluctant to come. They don’t want to come to do business 

with the government, they think it’s a sign of weakness, not 

strength. Even though capital is the best way to help get lending 

going again—— 

Chair WARREN. So—— 

Secretary GEITHNER [continuing]. They’re reluctant. And so—— 

Chair WARREN. So, let me make—— 

Secretary GEITHNER [continuing]. It’s not—— 


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Chair WARREN [continuing]. Sure, then, that—— 

Secretary GEITHNER [continuing]. It’s not about us or our willingness to do it, and as you said, we’ve tried, quite creatively, many 

different ways to design these things to make them more attractive, but we can’t force them to come. 

Chair WARREN. So, your statement here today is, the reason 

we’re having a problem with small business lending is that you’re 

making the money available to the small banks and they just won’t 

come—— 

Secretary GEITHNER. That is one—— 

Chair WARREN [continuing]. Pick it up? 

Secretary GEITHNER. That is one of the problems, and is absolutely a central problem in this area. The basic credit crunch you 

see across many small businesses across the country today is partly 

as a result of banks pulling back who don’t have capital. To solve 

that, which is not the only thing you can do, banks have to be willing to come get capital. 

Chair WARREN. All right. Thank you, Mr. Secretary. Mr. Atkins. 

Mr. ATKINS. Okay, thank you, Madam Chair. 

Well, I salute you very much for producing an audit of the TARP 

program. I think that’s great, and—as something that we’ve been, 

obviously, expecting, and that’s super. So, I look forward to seeing 

that, later today. 

Again, I disagree with you, as far as how important TARP was 

for the situation with the economy today. That’s basically the sine 

qua non of where we are with our meager recovery and whatnot. 

It’s hardly, anyway, an approbation of the program. 

But, I want to focus on—with all this talk from the White House 

and elsewhere about—job creation initiatives coming out of TARP. 

What troubles me is what sort of parameters are you going to put 

around this? When you’re talking about injecting money in the 

small banks that are not really troubled, but you’re doing it for 

some other reason, I think you’re very much drifting away from the 

intent of Congress in passing EESA. And I wonder, how are you 

going to analyze this and come to these determinations? 

Secretary GEITHNER. TARP was essentially about credit, recognizing that there is no growth without credit. The banking system 

is critical to the provision of credit. What we’ve designed for small 

banks, for community banks, is to help get small business lending 

going, securitization markets to open up, and housing more stable. 

These items are central to the basic objectives of TARP and fully 

consistent with the authority that Congress provided us. 

Mr. ATKINS. Okay, well, I guess one thing I want to disagree 

with is that EESA was enacted in a crisis atmosphere where people 

were afraid that banks were going to go under. We’re not afraid the 

community banks are going to go under. And obviously—well, I 

mean, maybe we are—I mean, it depends on what’s going to happen in the future, which is, I assume, why you’re keeping TARP 

alive, to react. But, your rationale of injecting money into them in 

order to spur lending is not a rational of keeping them from going 

under. It’s for—— 

Secretary GEITHNER. No, I wouldn’t say it quite that way. Again, 

capital is critical for lending. Without capital, lending will decline. 

Well, that means that a viable business, that has good demand for 


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its products, will not be able to grow. The risk is, its oxygen will 

be deprived and it will risk failure e.g., having to cut back on payroll, et cetera. 

Mr. ATKINS. But, you’re talking about the business, the 

lendee—— 

Secretary GEITHNER. That’s why—— 

Mr. ATKINS [continuing]. The borrower, right? 

Secretary GEITHNER. That’s why credit—— 

Mr. ATKINS. But, we’re talking—I’m talking about the bank—— 

Secretary GEITHNER. No, exactly. But, again, banks are critical 

to that. They’re not the only thing, but they’re critical to that. And, 

you know, if you’re a small business, and you were unlucky in your 

choice of bank, and your bank got exposed to a bunch of commercial real estate exposure, that bank’s going to cut back on your 

credit. You’re going to have to cut back on payroll and employment, 

and it takes time to find another bank, particularly in a system so 

traumatized by the crisis. But—— 

Mr. ATKINS. Well, I think, part of that is examiners and other 

people who are, through their scrutiny—and this is a natural 

human reaction, overreacting to a crisis—— 

Secretary GEITHNER. You’re exactly right. 

Mr. ATKINS [continuing]. And to ask—— 

Secretary GEITHNER. Right. 

Mr. ATKINS [continuing]. Questions that maybe need to be asked, 

but through that sort of process, it then causes banks to recoil a 

bit and not be so ready to lend. 

Secretary GEITHNER. As Superintendent Neiman knows, this is a 

very important balance to get right. And you’re exactly right to say, 

what happens in recessions after financial booms is everybody 

tends to overreact the other way. Banks may pull back more than 

is rational and supervisors may tend to overreact. These are independent supervisors, independent of Treasury—— 

Mr. ATKINS. Right—— 

Secretary GEITHNER [continuing]. But we’ve been encouraging 

the supervisors to try to provide some more balance in the guidance they give through examiners across the country, so they don’t 

overdo it. They issued some guidance on commercial real estate 

lending valuation standards a few weeks ago. I think that’s very 

helpful. They’re looking at additional steps. And you’re right to emphasize the importance of trying to lean against overreaction by supervisors. 

Mr. ATKINS. Okay. I want to go back to GMAC. Evidently, you 

all have decided that GMAC deserves some more funds from TARP. 

Secretary GEITHNER. Well, no—— 

Mr. ATKINS. And—— 

Secretary GEITHNER. GMAC is part of the institutions we put 

through the stress test early in the spring. 

Mr. ATKINS. Okay. 

Secretary GEITHNER. As for many institutions, we identified a 

significant capital need. And for all those institutions, we said, ‘‘If 

you do not go raise capital from the private markets, if you’re unable to, we will put capital into you, because it’s important to the 

stability of the system.’’ So, the only thing you had for GMAC is 

what we committed to do back then. And I think the ultimate estiVerDate Nov 24 2008 02:50 Mar 20, 2010 Jkt 055245 PO 00000 Frm 00049 Fmt 6633 Sfmt 6602 E:\HR\OC\A245.XXX A245

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mates will be a little lower than we anticipated back in June when 

we were—— 

Mr. ATKINS. But, apparently, you’ve decided to inject more capital into—— 

Secretary GEITHNER. No, actually somewhat less than we estimated in June. 

Mr. ATKINS. But, the more recent round, where they’ve come 

back—— 

Secretary GEITHNER. No it’s—— 

Mr. ATKINS [continuing]. And asked for—— 

Secretary GEITHNER. Just like in June, when we released the estimates in the stress tests, the estimated capital needs for these institutions, we gave them a period of time to go out and raise capital 

from the private markets. Overwhelmingly, banks were able to do 

that. In fact, it’s much better than that, because you see private 

investors wanting to come in and increase their stakes in banks 

across the country now, allowing the taxpayer to get out of those 

investments. It was never going to be possible for GMAC. They’re 

in a uniquely difficult situation. All we’re doing is—— 

Mr. ATKINS. I’ll say. 

Secretary GEITHNER [continuing]. Committing to put the capital 

in we committed to do back in June, probably at a slightly lower 

level than we thought back in June. 

Mr. ATKINS. I’ll follow up later. 

Thank you. 

Chair WARREN. Thank you. 

Mr. Silvers. 

Mr. SILVERS. Mr. Secretary, when EESA was enacted and TARP 

began, my read of the statute was that the purpose of TARP was 

not to rescue particular institutions, even particular firms. It was 

to preserve the system. And for the purpose—and the statute was, 

I think, pretty clear about this—not because the system was a 

thing of beauty or because of our particular concern for those businesses, but because of the role the financial system played in providing the resources necessary for the real economy to function. 

In that regard—and stop me if I’ve got it wrong—in that regard, 

it seems to me that you appear to be identifying—you and the 

President appear to be identifying that aspects of this system continue not to be working adequately and continue to need more support, particularly small business credit. Am I reading your own 

words back at you correctly? 

Secretary GEITHNER. Exactly. There has been a dramatic improvement in the overall stability and functioning of the U.S. financial system. But, parts of the system are still very damaged and 

broken. I’ll mention just three. Housing markets are still overwhelming dependent on the temporary programs put in place by 

the government. Commercial real estate financing is still very difficult, as you would expect with an economy coming through such 

a large basic adjustment. And there is a significant risk of a credit 

crunch across small businesses; in part, because of the small banks 

that are still somewhat exposed to the risk of losses ahead. 

I don’t really know anybody who would look at our system today 

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paired. And it’s not a surprise, given the scope of the damage 

caused by the crisis. 

There is a very strong economic case to use the authority provided, and it was perfectly consistent with the objectives of the authority, to continue to work to do that. But, that’s not the only reason we’re extending TARP. Mr. Silvers, as you understand, we still 

need to keep in reserve some ability to respond if we were to face 

again a serious escalation of systemic concern. It would be deeply 

irresponsible and imprudent, at this stage, only a year into this recovery process—only three months after we have the first period of 

growth—to stand back and walk away from those challenges 

ahead. That would leave the taxpayer at much greater risk of future losses. Ultimate costs of the program would go up, not down. 

That’s why we’ve judged it would be prudent to put in place this 

limited qualified extension. 

Mr. SILVERS. Now, if I may pick up on your exchange with the 

Chair, there are, under the TARP, two types of programs. You have 

programs where capital has been provided to firms who are then 

TARP recipients. And you have programs where TARP funds have 

been injected into markets in ways—such as the TALF and the 

PPIP—in ways in which the various private parties that may touch 

those funds are not actually TARP recipients. Is that a fair characterization of the—of one way of understanding the two—the range 

of programs you have? 

Secretary GEITHNER. That’s right. Programs for individual institutions. The institutions are TARP recipients. Although, as you 

said, they’re not for the benefit of the institutions; they’re because 

of the importance of the system. Programs that are about 

marketwide support to capital markets, securities markets, are designed differently. 

Mr. SILVERS. Now, in light of the concern that you stated that 

small banks have with receiving TARP money, particularly the 

issue of reputational risk, which I find that an understandable concern, and I’m not sure how congressional action can change that— 

in light of that, and in light of your description of the small business problem as a market problem, not a—it’s not a particular firm 

that’s weak, here, that’s the issue—in light of that, why not take 

the market-support approach rather than the firm-support approach in the small business area? 

Secretary GEITHNER. Our view, from the beginning, is, you have 

to work on both channels of credit. You have the bank channel and 

you have the capital markets, and you need both. If you can make 

a capital-market channel work better it creates competition for 

banks. It might pull the banks out of their concern and uncertainty. You need both to work. But, these are small business credits. They are very small loans. The capital markets were never 

going to be called a significant provider of—— 

Mr. SILVERS. Mr. Secretary, can I—— 

Secretary GEITHNER [continuing]. Support—in the future, so you 

have to work on both. 

Mr. SILVERS. My time is running out, so I just want to be clear 

of what I’m saying to you. I’m not suggesting that you can have a 

public capital-market solution here. 

Secretary GEITHNER. Right. 


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Mr. SILVERS. I’m suggesting that, if you want to move this money 

to small business quickly, that, both from the perspective of getting 

the banks involved without making them into TARP recipients and 

from the perspective of tapping small bank expertise, that you 

should be looking at structures that move money; and, thirdly, to 

avoid the problem, that’s been present in TARP from day one, of 

handing money to banks and not knowing what use is made of it, 

that the right way to do this is to do this through a conduit that 

moves TARP money more or less directly to small firms, with 

banks as a manager of the process rather than as an intermediary. 

Secretary GEITHNER. I generally agree with you, and I think the 

most promising ideas out there lie in that realm. Banks still need 

to have risk on the table—— 

Mr. SILVERS. No, I agree with you there. 

Secretary GEITHNER [continuing]. For that to work, and—because 

we don’t think the government—and we couldn’t do it through 

TARP—should be in the business of providing loans directly to 

businesses. 

Chair WARREN. Thank you. 

Superintendent Neiman. 

Mr. NEIMAN. Thank you. 

I’d like to come back to the foreclosure mitigation program. Over 

the last few weeks, there’s been a lot of media focus on the 25 percent of those individuals who are in trial modifications and who are 

not current on those trial modifications. In fact, some may not even 

have made the first payment. I’d like to focus, though, on the 75 

percent of those borrowers who are making payments in a timely 

fashion. And for them, January 1 of this new coming year will not 

only bring in a new year, but will also be a fateful day for almost 

400,000 homeowners whose trial modification period expires. Most 

of these homeowners have made at least 3 months of timely payments and, in some cases, four, five, or even greater, as required 

under the program. However, less than half of these homeowners 

have submitted all the required documentation. And, by some estimates—and I’ve talked to some of the largest servicers directly— 

half of this group, the group that has submitted all of their documents, have yet to have their documentation validated by the 

servicer. 

Now, given these numbers that I’ve stated, it looks as if possibly 

over 75 percent of the homeowners who have demonstrated a willingness and ability to make timely payments on their trial modifications may be eliminated from their program and once again face 

foreclosure. 

Now, you have recognized the urgency of this situation by implementing SWAT teams at the largest institutions, among other efforts, to engage homeowners and servicers to facilitate both the 

submission of documents by borrowers and the validation of that 

documentation by the servicers. 

So, fundamentally, my question is, does this expected low conversion rate imply that the original documentation standards are not 

set correctly and are too onerous? Or do you think that the standards are correct and any liberalization would impact the integrity 

of the program? 


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Secretary GEITHNER. Well, as you said, we’re working on this on 

many, many fronts. We’ve taken a careful look about whether we 

can streamline the documentation requirements to help address 

this. We’ve tried to mobilize a huge amount of resources to make 

sure services are processing these and convert to permanent modifications as quickly as possible. We’re working very closely with 

counseling agencies across the country to assist them in doing a 

better job of helping people benefit from a permanent modification. 

And I think we’re going to be able to make some substantial 

progress in the area, although there’s a lot of challenge in here. 

I just want to emphasize, though, what we’ve achieved so far. Almost three-quarters of a million Americans now are benefiting from 

modification programs that reduce their monthly payments dramatically—on average, $550 a month, $6,000 a year. That is a 

meaningful amount of support for income for some of the people 

hurt most by this crisis. 

Now, we want those modifications made permanent. And banks 

will not get a dollar from the Treasury unless they convert to permanent modifications. And we are using a tremendous amount of 

force and persuasion to try to make sure we get those conversion 

rates up to a reasonable level. 

Mr. NEIMAN. But, if those—and I agree with you, those reductions in monthly payments are significant—but if, at the end of the 

year, this first group cannot convert to permanent modifications, 

they will lose those monthly payments and now be faced with the 

same situation of being offered a non-HAMP modification by the 

servicer, which will likely increase those payments or foreclosure 

actions proceeding. 

So, are you considering extending again the opportunity for the 

trial modifications so that borrowers who have not had documentation validated—— 

Secretary GEITHNER. We’re going to work very hard to avoid the 

outcome you describe. We have a huge stake in trying to make sure 

this program reaches as many eligible homeowners as possible in 

order for them to benefit in real economic terms from this program. 

We’re not there yet. But, I think we’re going to be able to make 

substantial progress. 

Mr. NEIMAN. Okay. We look forward to some of your performance 

numbers being issued today, and I note that—— 

Secretary GEITHNER. I think we issue them today. And, you 

know, one of the benefits is that you can see performance, servicer 

by servicer. Everybody can look and see how many eligible homeowners they are reaching, and a number of them need to get their 

numbers up and do a better job. And they have the ability to do 

that. 

Mr. NEIMAN. There are two other big issues—— 

Secretary GEITHNER. It’s about will and effort. 

Mr. NEIMAN. There are certainly two other big issues around 

both negative equity and unemployment. You mentioned unemployment in your opening remarks. I appreciate the response from Mr. 

Allison as a follow up to our last hearing, promising to review some 

of the proposals that I have been promoting for quite some time, 

with regard to emergency mortgage assistance programs. And I 


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look forward and thank you all for agreeing to meet separately on 

those issues. 

Secretary GEITHNER. Well, you’re right that those are two areas 

where there’re a lot of ideas out there of ways we can help modify 

this program. And you’re also right to emphasize that this program 

was not designed to start with a principal reduction. And we made 

that choice because we thought it would be dramatically more expensive for the American taxpayer, harder to justify, create much 

greater risk of unfairness, and our program was not designed to do 

that. Our program, though, is doing what it was designed to do: to 

reach many, many people across this country and to substantially 

reduce monthly payments. And we are always looking at ways to 

try to help make sure this program reaches as many people as possible. 

Mr. NEIMAN. Thank you. My time’s expired. 

Chair WARREN. If I could, Mr. Secretary, I’ll just pick right up 

on that point. And that is the deliberate decision not to deal with 

negative equity, because it’s created an irony against the backdrop 

of the subprime mortgage crisis that started with zero-down loans 

and 100-percent financing. We now are creating modified loans, 

supported by the United States Government, that have 110-percent 

loan-to-value ratios, 120-percent loan-to-value ratios, 125-percent 

loan-to-value ratios. We have no experience with long-term payment of deeply underwater mortgages, but the little bit of data that 

we do have available about even modestly underwater mortgages 

suggests that, over the long term, second only to the question of affordability of the payment, being underwater on a mortgage means 

that people are unlikely to continue to make their mortgage payments. 

So, I want to push back on this a little bit. Are we creating a program in which we’re talking about potentially spending $75 billion to try to modify people into mortgages that will reduce the 

number of foreclosures in the short term, but just kick the can on 

down the road so that we’ll be looking at an economy with elevated 

mortgage foreclosures, not just for a year or two, but for many 

years? How do you deal with that problem, Mr. Secretary? 

Secretary GEITHNER. Our program reduces the basic overall obligation of these mortgages. It does not increase it. And we have people in these programs with very, very high LTV’s, substantial 

amounts of negative equity, able to qualify. And it does bring down 

the overall burden. 

Chair WARREN. I’m sorry, are you saying that you are doing principal reduction? 

Secretary GEITHNER. No, but the change in payment schedule 

does reduce the basic value of the obligations in the mortgage. But, 

I think that it’s more helpful for me to say it this way—I think 

you’re right to point out the huge problem the amount of negative 

equity across the system presents for us. The question is what to 

do about it? 

The whole foreclosure crisis across the country now is really driven by what happened to unemployment and what happened to the 

income of Americans. The best things we can do now to help mitigate that risk is to help get the economy growing again, bring unemployment down as quickly as we can, put people back to work, 


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and continue to make sure we’re providing overall stability to the 

housing market. And we’ve seen, actually, better results on prices, 

and expectations about future prices, than many of us expected. 

We’ve brought interest rates down to a very low level so that 

houses are much more affordable now. And housing demand is actually picking up a bit. 

The question is not whether what you’ve described is a problem; 

you’ve been eloquent and persuasive about the scale of the problem. The question is whether, in addition to those actions, we 

should embark now on a program that would be a dramatic additional cost to the taxpayer, helping relieve people of that obligation. 

And the problem in doing that, apart from its expense, is the basic 

sense of fairness and what it does to incentives in the future. 

But, I think you’ve got—you’re asking the right question, the 

question is do we have a solution that’s fair? 

Chair WARREN. Well, you know, I really would like to push back. 

You talk about relieving the homeowner. Let’s keep in mind this 

is about whether or not the investors in these mortgages, some of 

whom made substantial profits during the glory days, should be required to take the losses when the mortgages that they invested in 

turn out not to be worth—— 

Secretary GEITHNER. Through what—— 

Chair WARREN [continuing]. Nearly so much as they had promised. You know, the—— 

Secretary GEITHNER. Through what means is the issue. 

Chair WARREN. Well, one means would be bankruptcy, which 

doesn’t—— 

Secretary GEITHNER. That—— 

Chair WARREN [continuing]. Cost the American taxpayer any 

money. 

Secretary GEITHNER. That would be one option. And we’ve—— 

Chair WARREN. Another that I am deeply concerned about is the 

extent to which the current programs that Treasury advances send 

a signal to investors in mortgages. And the signal is, ‘‘Sit on the 

sidelines. You know, there’s no reason to come to the table and negotiate these mortgages. You can wait for the U.S. Treasury to 

offer a bribe to get you to the table to do what should have been 

in your interest to begin with.’’ We all understand that foreclosures 

don’t just destroy value for homeowners, they destroy value for the 

investors themselves. And yet, investors are hanging back. They 

are not engaging in rational write-downs that would keep a good 

stream of payments coming from these businesses. Instead, holding 

out for larger streams of payment and holding out for help from 

your Treasury Department. 

Secretary GEITHNER. Well, I don’t think I quite agree with that. 

You’re right that bankruptcy reform is one option that might help 

change the incentives a bit. And you’ve been an eloquent advocate 

of those reforms. As you know, the President of the United States 

did propose, and was supportive of this option, but Congress was 

unwilling to act, in part, because of concerns that it would make 

it harder for capital to come back into the banking system and help 

support improvement in housing markets that have broader returns. Congress considered this, but chose a different strategy. 


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I don’t agree that the programs we have in place are working 

against this process of repair that you’re—we all support. I think, 

actually, they’re helping. And, we’re seeing quite a lot of new interest and willingness from investors, people who hold these things to 

renegotiate and write down. We’re seeing much more of that than 

you saw before, and I think that’s encouraging. I don’t think we’re 

deterring that. 

Chair WARREN. You know, I have to say, Mr. Secretary, I lived 

through a big housing boom and bust down in the Southwest, during the late 1980s. In fact, I lost money on the house we had to 

sell during the bust. But, the government didn’t step in and help 

in the same way. The lenders had to eat the losses for bad investments that they got involved in, and so did the homeowners. This 

was not a question of taxpayer support there. 

Secretary GEITHNER. This crisis simply is not like that crisis. It’s 

much more dramatic in its scale and impact, much broader effects 

on people across the country. And I don’t think there’s anything 

from that basic crisis in the past that would have been helpful now. 

One could take the view that it was a mistake to try to give 

Americans the ability to see a substantial reduction in their monthly payments and therefore improve the odds they get to keep their 

house. I don’t agree with that. I don’t think you do, either. And I 

think, actually, this is a program that’s doing quite well in delivering a very meaningful improvement in the basic financial economic position. As I said, it helps almost three-quarters of a million 

Americans now. And I think it’s been part of what has actually 

been a successful effort to bring some modicum of stability to housing prices much earlier than many people would have thought. 

Chair WARREN. Thank you, Mr. Secretary. I apologize to my fellow panelists for going over my time. 

Secretary GEITHNER. I ask for—— 

Chair WARREN. No. I apologize to my fellow panelists for running 

over by two minutes, and I’m going to skip my next round of questions. 

Mr. Atkins. 

Mr. ATKINS. Thank you very much. 

Actually, I think you had some good rationale there with respect 

to negative equity. I think it would be a mistake to start dumping 

money into that. I don’t know that there’s enough money around 

to, once you start getting to that and the issues of fairness and everything else. I agree with you on that. 

I wanted to turn to, as far as TARP goes, the exit that we were 

talking about earlier, that you alluded to. The recent Capital One 

warrants auction, I guess you can call that a success of some sort. 

I was wondering how you foresee this going forward in the future. 

Are you still planning on engaging in negotiated price buybacks 

with TARP banks before establishing an auction? What is the current view of Treasury as to how you’re going to unwind this? 

Secretary GEITHNER. I think it’s possible that we’re going to still 

see a mix of approaches, going forward; in part, because, for many 

small banks, an auction is not going to be a realistic approach. But, 

an auction is a good approach for many cases and that gives a way 

to let the market determine the best price. We think that’ll help 

maximize the return to the taxpayer. 


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In the recent one you refer to, it was oversubscribed by about a 

factor of 12. And, the ultimate test as to what these things are 

worth is established by what people are willing to pay for them. So, 

I think it’s an approach that is going to deliver better returns than 

the alternatives in this case. But, it won’t be possible for all the 

institutions in which the government took warrants. 

Mr. ATKINS. So, then, as we go forward, and you talk about putting money into all sorts of community banks and others, what is 

the approach? What is actually the decisionmaking process of, you 

know, how the money goes in and what is received by the Treasury 

in return for a myriad—we already have 600-and-some banks that 

are participants. 

Secretary GEITHNER. Well, the program, at its beginning—and I 

was not the Secretary of the Treasury then, but I agree very much 

with this basic design—was—to make capital available on the same 

terms to all institutions. So, the same capital that was provided to 

some of the largest institutions was made available to any other institution that made similar standards for eligibility. And my predecessor and the supervisors put in place an elaborate process for determining viability to try to screen institutions. That process is in 

place today, and it will be used going forward. 

We’re changing strategy in some important ways. We do not believe it’s necessary to keep Capital Purchase Program open for 

large institutions. So, the remaining programs we’re going to provide, that provide capital, will be for institutions below a certain 

threshold. 

We’re trying to design these programs in a way that’s going to 

maximize the chance that they spur lending. We want them to 

come as a sign of strength, not a sign of weakness, as we just discussed with the Chair. But, we’re going to leave in place a basic 

viability standard, to make sure that we’re not supporting nonviable institutions. 

Mr. ATKINS. Sir, how do you determine that? 

Secretary GEITHNER. Well, the bank supervisors have a process 

in which they look at—— 

Mr. ATKINS. Capital ratings or—— 

Secretary GEITHNER [continuing]. All sorts of measures of financial strength. And, this is a highly imperfect process, but it’s better 

than the alternatives. 

Mr. ATKINS. Okay. Well, then, to go back—I’m sorry to go back 

to GMAC again—so, I understand, at least on the call I listened in 

on, that there is a negotiation going on. And I guess I want to try 

to understand how—I mean, who is actually the decisionmaker— 

is it Assistant Secretary Allison, or is it you—as far as determining, you know, under what terms a further extension of credit 

is given, viewing the particular facts—— 

Secretary GEITHNER. Well, the financial terms will be as defined 

in the other programs. They’re not differentiated financial terms. 

The question ahead is what plan for restructuring will the new 

board and management of this firm embark on? We want to be confident that there is some basic path to exit and viability; and what 

are the incremental capital needs, relative to what was identified 

back in June under the stress test. 

Mr. ATKINS. And so—— 


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Secretary GEITHNER. Those are the issues ahead. 

Mr. ATKINS. Okay. And so, two of those board members are 

Treasury picks. How much interaction do you have with people on 

the board? 

Secretary GEITHNER. Well, we have just about what you’d expect 

and hope, and not more than you fear, in the sense that—again, 

our obligation—— 

Mr. ATKINS. Our fears are rampant. But, anyway—— 

Secretary GEITHNER. I’m not sure what your fears are, but our 

obligation is to make sure that this institution has a plan in place 

for getting back to viability without government assistance, that 

has a reasonable prospect of working. And we want the plan to be 

as strong and robust as possible. At the same time, of course, we 

need to reassess what the incremental capital needs would be, and 

that’s the process we’re undertaking now. 

Mr. ATKINS. Okay. My time is up. 

Chair WARREN. Thank you. 

Mr. Silvers. 

Mr. SILVERS. Mr. Secretary, I’d like to shift, in terms of the winddown discussion, to the large banks, which we’ve mentioned a couple of times. My New York Times this morning tells me that— 

something that I think we all kind of already knew—which is that 

Citi would very much like to return its TARP money. Citi argues 

that they have lots of cash—at least that’s an argument they’ve 

made to this panel—and that having lots of cash means they 

should be able to return the TARP money. I don’t have your experience with banks, but that doesn’t strike me as exactly the right argument. 

Secretary GEITHNER. I think you’re right. 

Mr. SILVERS. Can you explain to me what the criteria is for being 

able to return the money, and what relevance, if any, having lots 

of cash has? 

Secretary GEITHNER. A few critical points. 

One, it is a good thing for the country that banks are eager to 

get out of the investments the government was forced to put in. 

Mr. SILVERS. Oh, I agree. 

Secretary GEITHNER. That is healthy, necessary, and desirable. 

Two, it is a very good thing for the country that private investors 

are willing to come in and, in effect, take the government out of 

those positions. We are not prepared to have this money come back 

in a way that would leave the system or these institutions with inadequate capital to face their challenges ahead. If we did that, that 

might seem good, near term, but it would be bad for the country 

as a whole, because it would leave the system with too little capital. 

So, what we’ve done is to say, ‘‘We want you to go out and raise 

capital—raise capital for the markets so you can repay the taxpayer with interest.’’ And that’s what’s happening. 

Mr. SILVERS. Mr. Secretary, do I have it right that the requirement is that you should be able to raise the entirety of your TARP 

money, that we’re not allowing repayments in stages? Is that correct? 

Secretary GEITHNER. I don’t think I would say it quite that way. 

And this is a difficult thing for me to do, because, under the laws 


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of the land, the supervisors are responsible for setting the terms 

of exit. But, effectively, all—— 

Mr. SILVERS. Surely you know a few things about how they’re 

doing it. 

Secretary GEITHNER. I do know a few things about it, and I have 

some views on that. But, the basic objective is to make sure that, 

as we exit, which we’re going to do as quickly as is prudent, we’re 

leaving the capital position of the institutions stronger, not weaker. 

Mr. SILVERS. Very good. In this regard, Mr. Secretary, obviously 

Bank of America has repaid—is now in process. It can be a little 

hard to follow the steps in which they’re doing it. Can you explain, 

are they repaying all of the TARP money, and have they raised equity capital to do that repayment in an amount that is equivalent 

to both the TIP and CPP? 

Secretary GEITHNER. Well, the good news is that I got a check for $45 billion last—— 

Mr. SILVERS. That’s nice. I’m interested what the source of funds 

for that check is. 

Secretary GEITHNER. And, as you said, they raised a predominantly common stock. But, I’d be happy to respond in writing or 

have the Fed respond in writing with the details of that. 

Mr. SILVERS. All right. But—— 

Secretary GEITHNER. Actually, I think the details are out there 

clearly in the market, because—— 

Mr. SILVERS. Yeah. 

Secretary GEITHNER [continuing]. That should be a public offering. 

Mr. SILVERS. Right. But, the policy appears to be—judging from 

what one reads out in the public, the policy appears to be to raise 

all the equity, in preferred or common stock, all of the money necessary to repay, not a portion. Is that your understanding? 

Secretary GEITHNER. I think that is generally a desirable approach, because a cleaner exit is better than a staged exit. I’m not 

sure that’s going to be possible in every circumstance, but I think 

it’s very desirable that these institutions are—— 

Mr. SILVERS. Yes. 

Secretary GEITHNER [continuing]. Eager to go out and have private investors come out and take the government out of it. 

Mr. SILVERS. Mr. Secretary, Andrew Ross Sorkin, a reporter for 

the New York Times, who, judging by his book, seems to often 

know more than we do, has written about the Bank of America repayment, that, quote—well, actually, I’m not going to quote, because it’ll take too long. He said, basically, two things. He said, 

one, the FDIC didn’t think they should be allowed to repay. And, 

two, that the reason why they were so eager to repay was so that 

they could increase their executive compensation that could be offered to a successor to their current CEO, Mr. Lewis. Can you tell 

me, are either of those statements true? 

Secretary GEITHNER. I don’t want to speak to the first question. 

I think it would be inappropriate for me to do that. 

On the second question, I think you’re absolutely right, that the 

compensation restrictions that we put in place for firms that took 

exceptional assistance were very tough restrictions. And they were 

appropriately tough restrictions. With these and other restrictions, 


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you’re going to be viewed as stronger, in the eyes of the market, 

if you’re an institution without public capital. These banks were 

eager to come and repay. And I think we should welcome that, encourage it, and I expect to see substantially more repayments. 

Mr. SILVERS. I’m not going to press you to reveal, perhaps, what 

you view as a confidence, but it strikes me that it’s a matter of 

deep concern if the FDIC doesn’t agree with allowing the repayment because the bank is too weak. My time is about to expire, so 

I’m going to express a further thought rather than pressing you on 

this. 

Effectively, the strength with which Treasury and the regulators 

sense that the premature repayment, when these banks are weak, 

is bad for the country. That is an extremely important thing. 

And—— 

Secretary GEITHNER. Right. And we would not—— 

Mr. SILVERS. And—— 

Secretary GEITHNER. And we would not allow that or support it. 

Mr. SILVERS. Right. And I want to encourage and bolster your 

viewpoint there, and I would be concerned, deeply concerned, if 

those kinds of considerations were overridden by, no matter how 

well meaning, any desire to increase people’s executive pay. 

Secretary GEITHNER. No, I agree. Again, we would not support 

that. And I think that the agreement you saw reached in that context strengthens the institutions. The best test of that is what happens, going forward. But, to have private investors come in and 

willing to put substantial amounts of capital is a sign of confidence 

and strength. 

Chair WARREN. Superintendent Neiman. 

Mr. NEIMAN. Thank you. 

Now, we all acknowledge the crisis that was avoided by the impressive efforts of the multi-prong efforts by the administration and 

other agencies. And we hear words, some of which you used this 

morning—last week, Chairman Bernanke characterized what we 

avoided as a ‘‘global financial meltdown of a magnitude unseen for 

generations, a second Great Depression, cataclysm.’’ 

As I stated in my opening, I think it really is imperative that the 

American public understand the linkage to the real economy, as 

well as what really was avoided. Could you share with us your descriptions of the sequencing of what could have played out with the 

failures of large interconnected firms and the direct linkage to the 

real economy? Because I think that really is at the heart of assessing the effectiveness of the program. 

Secretary GEITHNER. In September of last year, for the first time, 

I think, in almost 70 years, Americans across the country were 

starting to take their money out of banks, banks that were strong 

with no connection to the weaknesses in the subprime crisis, because they were scared about the security of their savings. Economic activity around the world come to a stop. Markets froze 

around the world. The value of American savings fell by more than 

40 percent. People were faced with the prospect of having to work 

10 years longer than they expected because of the loss of the value 

of their savings. Millions of Americans lost their jobs, thousands of 

businesses failed that did not need to fail, deeply unfair and unjust 

damage to the basic confidence of Americans in the fairness and 


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justice of our system. Deep loss of confidence around the world in 

our basic financial stewardship of this country. 

It is not something that is about a set of individual institutions 

or Wall Street, it is about the basic fabric of confidence in America, 

basic security Americans have in their future. When you allow that 

to suffer so—cause as much damage as you’re seeing, it takes a 

huge amount of time to repair that basic damage. 

So, financial crises are unjust and traumatic, because they cause 

deep damage to people who were careful and prudent and had 

nothing to do with the crisis. And the scars that creates are longlasting, and we are going to live with, for a long time, the challenge 

of trying to repair that damage. 

Mr. NEIMAN. Thank you for that. You know, one issue that is 

also addressed in our report, issued yesterday, are issues around 

moral hazard. And we have debate, among the panel itself, as to 

the extent that TARP increased the risks and costs of moral hazard. I think moral hazard was almost built into the fact of the 

emergency efforts. The question is, will government always be 

there? I think you just explained the criticality of why the government had to step in and why—I think your position, which I also 

agree with, is that we have to address ‘‘too big to fail,’’ and that 

is an imperative for our Congress, which they are debating currently. 

I strongly agree with the need for a systemic regulator and a resolution authority. But, I’d like your views on whether we should be, 

in effect, allowing institutions to grow to such largeness and complexity to be characterized as ‘‘too big to fail.’’ And isn’t it time to 

engage in a debate in this country, now that we all recognize the 

safety net that there is for financial institutions, the benefits that 

financial institutions, particularly depository institutions, have 

from FDIC programs, from Fed as a lender of last resort? Isn’t it 

time to debate what we want our institutions to be? Are they social 

utilities that should be able to engage in speculative and high-risk 

activities? 

Secretary GEITHNER. Well, I think I agree with everything you 

said. The tragic choice in financial crises is to solve the problem, 

put out the fire, protect the innocent, and limit damage. You have 

to act. You can’t sit there and hope it’s going to burn itself out. And 

if you worry about moral hazard too much, which was an issue for 

the first 18 months of this crisis, you can see enormous pain and 

damage. And what it takes to clean that up will cause even more 

moral hazard. So, if you care about moral hazard, you have to care 

about having basic protections to prevent panics from spreading. 

It’s a paradox. People tend to think that if you care about moral 

hazard, you should be against the fire station. But, if you don’t 

have the ability to act, the damage is so sweeping and traumatic, 

governments will have to do so much more, on such broader scale, 

with much greater cost to future incentives. So, there is a good case 

for emergency authority. 

We are having a debate about ‘‘too big to fail.’’ And we have proposed a sweeping set of new authorities and constraints that reduce the risk that banks in the future take on so much risk that 

they could imperil the system. And we’re offering a proposal whereby banks would be allowed to fail with less damage to the system 


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and less risk to the taxpayers as a whole. It’s very important to 

have this debate and we’re having it now in Congress. 

Chair WARREN. Thank you. 

Mr. Atkins. 

Mr. ATKINS. Well, that’s great. I wanted to, actually, pick up that 

thread. So, this is a good segue to talk about ways in which, in remaining months of TARP, you intend to use them. 

My friend from the United Auto Workers here has been very supportive of TARP, because, I guess, $80 billion went into GM, Chrysler, and GMAC. And we heard—— 

Mr. SILVERS. Paul? 

Mr. ATKINS. Yes. 

Mr. SILVERS. I don’t work for the United Auto Workers. 

Mr. ATKINS. Well—I’m sorry. 

Mr. SILVERS. I don’t know who you’re talking about. 

Mr. ATKINS. Okay. The socialization of small business lending 

that you were suggesting—one thing I wanted to focus on was the 

Treasury’s use of the funds, going forward, and how it’s going to 

be allocated. I think that has implications. You mentioned the proposals, the administration’s proposals, for new statutory authority 

for resolution and for a systemic risk regime. And basically, I guess 

the way I view the resolution authority is really just a codification 

of TARP, for years to come, because of the flexibility it builds in. 

And when we view how Treasury has interpreted TARP, over the 

last year and now, by the sounds of it, if we’re talking about job 

creation or whatever else is coming out from the administration, 

exactly what sort of uses are you going to put these funds to? Because you’ve said, sort of, both sides, now. You want to keep some 

in reserve, you want to put some in the community banks. And I 

guess I don’t really understand what—— 

Secretary GEITHNER. All right. Let me start with the—— 

Mr. ATKINS [continuing]. The process is. 

Secretary GEITHNER. Let me start with the job creation question. 

Because of what we’ve been able to achieve, in terms of stability 

in the system, there are at least $200 billion in lower costs ahead. 

That—— 

Mr. ATKINS. Because of? 

Secretary GEITHNER. Because financial stability has improved, 

we do not believe it’s going to be necessary to spend a substantial 

amount of resources. Also, since the expected value of these investments has gone up substantially, those savings reduce the budget 

deficit. 

You cannot use TARP to fund an infrastructure program. You 

can’t use TARP to provide a tax cut to small businesses. You can’t 

use TARP to incent green energy efficiency products. Those are 

choices Congress is going to have to make. 

What we’ve done, though, because of the careful financial stewardship of this program, is dramatically reduce the expected 

costs—much, much lower than anybody anticipated. Not just at the 

beginning of last year, but in August. That gives the Congress and 

the President some choices to make about how to use those resources. There will be a very strong case for using some of those 

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ation back quickly. But, there’s going to be substantial resources 

also to reduce our long-term future deficits. 

Now, I want to come back to where you’ve begun, though. The 

resolution authority we proposed is nothing like a permanent 

TARP. And I want to make this very clear. And I would not support that, for reasons I think you would agree with. What resolution authority does is allow the government to, in effect, take an 

institution that has mismanaged itself, put it in receivership, and 

wind it down. Not save it, not give it a chance for redemption, but 

to sell and wind it down safely, at less cost to the taxpayer, less 

damage to the public. 

Mr. ATKINS. Well, the problem is, though, there is so much flexibility built into that, it’ll—— 

Secretary GEITHNER. No, I don’t think so. In fact, this is very important. The challenge with this proposal is giving the government 

some authority to contain financial panics. That has to be very constrained—— 

Mr. ATKINS. They have plenty of authority right now. 

Secretary GEITHNER. No, it doesn’t, actually. 

Coming into this crisis, the only emergency authority the President had to contain the panic, in this case, before TARP was 

passed and the Fannie and Freddie legislation was passed—was to, 

in effect, declare a bank holiday and close markets. That was it. 

Mr. ATKINS. But the other—— 

Secretary GEITHNER. A tragic—— 

Mr. ATKINS [continuing]. Has a lot of power. 

Secretary GEITHNER [continuing]. A tragic mistake for the country. No, actually very limited. But, the panic-containing authority—— 

Mr. ATKINS. Eight? Okay. 

Secretary GEITHNER [continuing]. Reserved for emergencies, we 

think we need to limit the discretion, in that case. 

Mr. ATKINS. Well, I—okay. I think that—going back, then, to— 

basically, this goes back to the issue of TARP as a revolving—a revolving—— 

Secretary GEITHNER. Well, let’s talk about that. 

Mr. ATKINS. I would like to have an opinion, from the general 

counsel of the Treasury, addressing that issue, which we have—I’ve 

asked for, back in September, and we haven’t gotten yet. Because 

I think that is really germane to what you’re talking about, as far 

as how much money has been saved and is going to be reallocated. 

My time’s up. 

Chair WARREN. Okay. 

Secretary GEITHNER. Happy to provide that. And—— 

Chair WARREN. We’re at time, here. 

Secretary GEITHNER. We’ve provided that many times to a number of the sitting Members of Congress that have asked, but happy 

to copy you on those opinions. But, Congress designed the resolution authority with that basic feature. It was wise to do it, at that 

time. 

Mr. ATKINS. Well, you read the statute differently, because I disagree with that. I think, it really calls on the question of support. 

Secretary GEITHNER. Actually, there’s been no challenge from the 

Congress—— 


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Mr. ATKINS. Not yet, maybe. 

Secretary GEITHNER [continuing]. Who wrote the law to—— 

Mr. ATKINS. Not yet. 

Chair WARREN. All right, gentlemen. 

Mr. Silvers. 

Mr. SILVERS. I’d like to just make an observation, because my 

colleague mischaracterized whom I work for. I work for the AFL– 

CIO, the United Auto Workers is a member of the AFL–CIO. I do 

not work for the United Auto Workers. I don’t have that honor. 

And, I feel very, very strongly about the dignity of people who work 

hard, physically, for a living. And I think that is often not properly 

honored in Washington. 

Mr. Secretary, I’d like to come back to the big-bank issues. I’m 

just confused about something, and perhaps it’s just I’m not reading closely enough, but we passed notes back and forth with the 

staff here, and the staff is confused, as well. The government holds 

$45 billion in preferred stock of Bank of America. 

Secretary GEITHNER. Held. 

Mr. SILVERS. Held. Bank of America had a public offering of $19 billion. What is the source of funds for the remainder of the $45 

billion the federal government received from the Bank of America? 

Secretary GEITHNER. I should give it to you in writing, which I’d 

be happy to do. 

Mr. SILVERS. There isn’t any other equity offering, is there? 

Secretary GEITHNER. It’s a little more complicated than that. 

Mr. SILVERS. Okay. 

Secretary GEITHNER. The bulk of it was raised in common equity. 

That leaves the capital position of the institution stronger than it 

was before this, not just in the eyes of the banking supervisors, 

which they all agreed on, but also in the eyes of the market and 

their creditors. And that’s the ultimate test. But I’ll be happy to 

provide—— 

Mr. SILVERS. Are you saying that Andrew Ross Sorkin’s comment 

about the FDIC isn’t correct? Because you said they all agreed on 

it. 

Secretary GEITHNER. Well, I was trying to stick to my line, which 

is I’m not going to comment on the discussion. 

Mr. SILVERS. But, you just did. 

Secretary GEITHNER. And it is there. But, I know the banking supervisors believe that it is important to make sure that, as we exit, 

the institutions are stronger, not weaker. I think that they share 

that view. I’m glad they do. 

Mr. SILVERS. Okay. Well, perhaps Mr. Sorkin is wrong. 

I don’t have all the numbers in front of me, or can run them in 

my head, but, to what extent, if any, are the funds for the repurchase of the Bank of America preferred stock coming from internal 

earnings? 

Secretary GEITHNER. I don’t think they are. But, again, I need 

to go back and give you the numbers in detail. 

But, let’s focus on the stuff that is critical to the financial position of the firm. So, the best way to do this is, look at their common 

equity ratio to assets before the repurchase and after. That measure, which is probably the most valuable measure of financial 

strength, is stronger with repayment, not weaker. 


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Mr. SILVERS. What I’m concerned about—and I think I’ve—— 

Secretary GEITHNER. So, the quality of capital that has the 

strongest source of confidence to markets—— 

Mr. SILVERS. Well, now, if it’s a common equity ratio—of course 

it’ll be stronger, because you’re—— 

Secretary GEITHNER. Yes. 

Mr. SILVERS [continuing]. Because they raised common and paid 

off preferred. 

Secretary GEITHNER. That’s it. That’s the basic nature of the 

strategy. And it’s a good strategy. 

Mr. SILVERS. But, that would, of course, happen even if the bulk 

of the funds were raised by something other than a public offering. 

It concerns me that the basic standard appears to be a good one, 

which is that if you want out of TARP, you’ve got to be able to raise 

the equivalent in new equity as the TARP funds you are paying 

back. 

Secretary GEITHNER. That’s not quite the standard. 

Mr. SILVERS. Well, it’s not—— 

Secretary GEITHNER. I’ll be happy to explain. 

Mr. SILVERS. Well, explain the standard then. 

Secretary GEITHNER. Well, again, this is really a discussion you 

should have with the banking supervisors, because under the laws 

of the land, the banking supervisors set the terms for repayment. 

Mr. SILVERS. Yeah, I know. But, you seem to—— 

Secretary GEITHNER. I’m sure they’d be happy to—— 

Mr. SILVERS [continuing]. Know a fair amount about it, and 

you’re the only one here today. 

Secretary GEITHNER. I don’t think it’s as complicated as you’re 

making it. It’s a simple thing. Common equity is higher after repayment. It’s good for the system. 

Mr. SILVERS. It’s not clear to me that if you raised a little bit of 

common equity, but mostly allowed preferred to be paid back with 

cash that comes out of earnings—— 

Secretary GEITHNER. I don’t think that’s right. But, again—— 

Mr. SILVERS. All right. 

Secretary GEITHNER. Again, I’d be happy to ask the banking supervisors. I’m sure they’d be responsive and willing to lay it out in 

detail. But, I think it is in the market now. But, we’re happy to 

provide an authoritative report on that. 

Mr. SILVERS. I just hope you keep insisting on that in the future. 

I can’t change what you’ve done with Bank of America, but I hope 

you keep insisting in the future that you have to be able to have 

the strength to raise the equivalent amount in the public markets 

in equity, common or preferred, that you’re paying back in TARP 

money. 

Chair WARREN. Okay, that’s it on time. 

Superintendent Neiman. 

Mr. NEIMAN. I’d like to go back to a dialogue regarding supporting small business lending through expanding capital investments in community banks. And I am on record strongly supporting those initiatives. And I also agree with your assessment of 

the reluctance of community banks, in particular, to participate. 

And I think you identified the primary reason for that reluctance 

being a stigma. 


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One way to address that reluctance and stigma is to issue those 

details regarding the program, focusing on eligibility requirements, 

criteria for approvals, details about the approval process. I think 

greater transparency in the program—and the program was announced, I believe, October 19th, so we’re approaching almost two 

months before the details are issued—I think greater transparency, 

full disclosure of the eligibility requirements—Is there a black box 

that’s going to determine eligibility?—would go a long way in addressing those concerns and reluctance on the part of the banks. 

So, any further insight on how you intend to address those concerns of the banking community, as well as any projections as to 

when we may see more details about the application and approval 

process? 

Secretary GEITHNER. I am happy to try and do that. You’re a supervisor, so you know that some of this is going to have to be about 

judgment, too. You can’t reduce it to a clear, simple set of criteria. 

It’s not just about stigma, though. Again, it’s partly the concern 

about what future conditions might be, how they might change. Because they have changed over time. And that’s a big part of the deterrence. 

Mr. NEIMAN. Let’s talk about lessons learned in developing those 

details for the program. What are the lessons learned from the 

large-bank capital investments that can now be employed to the 

smaller-bank program? I was glad to see that the outline of the 

program would include detailed lending programs to be submitted 

as part of that application, as well as ongoing reporting requirements. 

Secretary GEITHNER. We think that would help. I can’t tell you, 

though, whether that’s going to be sufficient. We don’t want to 

have the government in a position of forcing banks to lend or meet 

quantitative criteria for lending; it’s just not a feasible way to do 

it, particularly with loan demand falling so much in the aftermath 

of the recession. But, we think it’s a promising approach. 

I think we are improving substantially. The survey we’ve put in 

place that allows banks to report on how they used the funds and 

what actually happened to different categories of lending and asset 

growth should help, too. And we’re open to other suggestions. 

Mr. NEIMAN. That raises another important point. Can you share 

with us your assessment or evaluation of bank lending in terms of 

both originations as well as bank balances? 

Secretary GEITHNER. You have to look at overall credit to have 

a good sense of the risk and credit crunch now. Overall credit, the 

price credit, has come down a lot. Bank lending is still falling. Borrowing from the securities markets, for those who have access, is 

increased very, very dramatically. On net, credit is still falling. No 

surprise in that, of course, because, in the recession the economy 

slowed and contracted so much, demand would fall as well. But, 

the pace of decline is slowing a bit. And if you look at surveys of 

what businesses say they’re seeing, they do not cite credit as the 

principal problem they face; instead it is lower demand for their 

products, going forward. 

Mr. NEIMAN. So, when we hear about banks maintaining large 

balances at the Federal Reserve, earning a spread, is that someVerDate Nov 24 2008 02:50 Mar 20, 2010 Jkt 055245 PO 00000 Frm 00066 Fmt 6633 Sfmt 6602 E:\HR\OC\A245.XXX A245

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thing that the public should be concerned about or are we looking 

at—— 

Secretary GEITHNER. No, I don’t think so. I think that’s just a 

necessary consequence of the actions the Fed’s taking to help bring 

growth back, bring unemployment down. And banks are still somewhat cautious. But, there is much more capital in the finance system today, and the overall system is a much stronger position to 

support recovery as recovery takes hold. 

There are a number of charts in my testimony that report on 

these survey-based measures of credit conditions and I think they 

provide some other helpful indications of the broad trends we see. 

And so I would say, the credit conditions are dramatically better 

than they were and recovery is quicker than we would have hoped, 

but there are still pockets of the country that are very vulnerable 

to a damaging contraction in credit. 

Chair WARREN. Okay. Thank you. 

So, Mr. Secretary, we’re talking a great deal here about systemic 

risk. And, of course, systemic risk is what we were talking about 

a year ago when we got into the business of bailing out large financial institutions. And particularly with AIG. That’s why I read the 

November 17th report of the Special Inspector General for the 

Troubled Assets Relief Program. As you know, he was quite critical 

of the actions that you took in negotiating with, ultimately, the 

counterparties for the AIG financial instruments. 

Now, I was struck by two quotes in there. He says that the Federal Reserve and Treasury officials defended the rescue of AIG on 

the grounds that the company’s failure, quote, ‘‘posed considerable 

risk to the entire financial system and would have significantly intensified an already severe financial crisis and contributed to a further worsening of global economic conditions,’’ which I think has 

been the standard story for well over a year. 

But, the report also states that you told SIGTARP that, quote, 

‘‘The financial condition of the counterparties was not a relevant 

factor in the decision to see to it that Goldman Sachs and other 

counterparties were paid 100 cents on the dollar.’’ 

I have to say that these two statements appear to be at odds 

with each other. 

Secretary GEITHNER. Let me try to explain. 

Chair WARREN. Please. 

Secretary GEITHNER. Systemic risk, you know, is complicated and 

difficult to assess and measure. The risk to the system from AIG’s 

collapse is not particularly reflected in the direct effects on its 

major counterparties, the banks that bought protection from AIG. 

The direct effects of failure—this is true for Lehman and for all the 

other financial failures in that period of time—would not have been 

particularly significant. What was significant for the system as a 

whole was the broader collateral damage that would’ve happened 

in the event of failure. So, what you saw after Lehman, for example, was a general pullback or a classic run on the entire system. 

AIG presented exactly that type of risk but, in some ways, on a 

much greater scale. AIG, unlike Lehman, unlike Bear Stearns, had 

written a bunch of different types of insurance products—savings, 

protection, vehicles—to the retail community across this country 

and around the world. And if those policyholders had lost conVerDate Nov 24 2008 02:50 Mar 20, 2010 Jkt 055245 PO 00000 Frm 00067 Fmt 6633 Sfmt 6602 E:\HR\OC\A245.XXX A245

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fidence in the system as a whole, then the damage could’ve been 

much greater. 

So the entire system was at risk. And if the system had collapsed, no institution in the United States or around the world 

would have been invulnerable to that collapse. 

Chair WARREN. I’m losing the logic here, Mr. Secretary. If Goldman Sachs could have withstood these losses, and the—— 

Secretary GEITHNER. Only the direct—— 

Chair WARREN [continuing]. Other counterparties—— 

Secretary GEITHNER. Only the direct effects of that—it’s not the 

right way to capture—— 

Chair WARREN. So, they still could have paid off all the parties 

that they owed money to. This would not have caused Goldman 

Sachs to collapse—— 

Secretary GEITHNER. No, but that—— 

Chair WARREN [continuing]. This would not have caused the direct counterparties to collapse. 

Secretary GEITHNER. But, Madam Chair, you understand this. 

When you decide it is necessary to prevent default, you prevent default. If AIG had not met its contractual obligations to its counterparties—— 

Chair WARREN. But, this is—— 

Secretary GEITHNER [continuing]. It would have defaulted, it 

would have been downgraded, and the company would have collapsed and happened to be liquidated in the midst of the worse financial storm in generations. There was no feasible way to selectively default on its counterparties without bringing the whole 

thing down. 

Chair WARREN. Mr. Secretary—— 

Secretary GEITHNER. That was the choice. 

Chair Warren. But, Mr. Secretary, we did not step in and back 

up all of the counterparties, all of the trades. We picked AIG, and 

AIG alone. 

Secretary GEITHNER. No, no, that—— 

Chair WARREN. And we moved in—— 

Secretary GEITHNER. Well, that’s not—— 

Chair WARREN [continuing]. And backed up—— 

Secretary GEITHNER. But, that’s not—— 

Chair WARREN [continuing]. A 100 cents on the dollar repayments. 

Secretary GEITHNER. No, that’s not true at all. We acted to prevent AIG’s default, because there was no other way to protect the 

system from the damage of that. The consequence of preventing default was that AIG met its contractual obligations. You cannot selectively default on contractual obligations without courting collapse and downgrade. Now, what we did—— 

Chair WARREN. But, Mr. Secretary—— 

Secretary GEITHNER [continuing]. For the rest of the system—— 

Chair WARREN [continuing]. The consequence of what you have 

just described is that these counterparty obligations, these financial instruments that are bought by very sophisticated parties, are 

going to be treated, effectively, like deposits in checking accounts—— 

Secretary GEITHNER. No—— 


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Chair WARREN [continuing]. And saving accounts. 

Secretary GEITHNER. Absolutely not. 

Chair WARREN. They ended up—— 

Secretary GEITHNER. Absolutely not. 

Chair WARREN [continuing]. Effectively, with 100-cent-on-the-dollar government guarantees—— 

Secretary GEITHNER. They did, because there was no—— 

Chair WARREN [continuing]. For which they had never paid. 

Secretary GEITHNER. No. You have to distinguish two things. 

First of all, there is no other way, in the context of that storm, to 

protect the economy from that failure. Now, looking forward, we 

need resolution authority, a strong package of reforms. We do not 

want investors, in the future or these particular firms to live with 

the expectation that the government bail them out. That is the 

challenge. That’s why financial reform is so necessary. 

Now, Madam Chair, nothing would have made me happier, in 

that basic context, to have a different set of choices. But, given the 

laws of the land, the authority we had, a tragic mistake for the 

country, we had no other choice in that circumstance. 

Chair WARREN. AIG believed that it had a choice, until you 

moved in, and that was that they could pay 90 cents on the dollar—— 

Secretary GEITHNER. I don’t understand why—— 

Chair WARREN [continuing]. 85 cents—— 

Secretary GEITHNER [continuing]. This is—— 

Chair WARREN [continuing]. On the dollar, 80 cents on the dollar. 

Secretary GEITHNER. I don’t understand why this is so complicated. You either prevent default—— 

Chair WARREN. I don’t think it is complicated Mr. Secretary. 

Secretary GEITHNER. No, but it’s come down to two choices. You 

either prevent default, because default would be cataclysmic, or 

you don’t. And when you prevent default, you’re doing it so that institutions can meet their obligations to everyone they have contractual obligations to. If you selectively default on any obligation, the 

institution will come crashing down. That is the consequence of the 

system we had, going into this crisis. That’s why we want to 

change the system. 

Chair WARREN. Mr. Secretary, I come from a world of Chapter 

11. People default all the time. They negotiate down on their obligations. 

Secretary GEITHNER. Right. 

Chair WARREN. And they do not bring down—— 

Secretary GEITHNER. But—— 

Chair WARREN [continuing]. The entire—— 

Secretary GEITHNER. You’re exactly—— 

Chair WARREN [continuing]. Financial system. 

Secretary GEITHNER [continuing]. Right. And you’re a national 

expert on this basic issue. But banks are different. AIG is effectively a bank. 

Chair WARREN. AIG was not a bank. 

Secretary GEITHNER. It—— 

Chair WARREN. I’m out of time, and I’ve done it to myself again. 

I apologize. 


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Secretary GEITHNER. Can we do it a minute longer? It’s a very 

important debate to have. 

Mr. NEIMAN. Fine. I think that’s fine. 

Chair WARREN. Go ahead, Mr. Secretary. 

Secretary GEITHNER. You can borrow my time. 

Chair WARREN. Go ahead, Mr. Secretary. 

Secretary GEITHNER. Financial institutions, which Congress has 

recognized for a long time, need a different type of bankruptcy regime than we have for other companies. Now, AIG is not a bank, 

but, in effect, it operated as a bank. It borrowed money, it operated 

on leverage, it did not have capital to support that. We’ve had in 

place a different type of bankruptcy for banks for many, many decades, however, we need one for complex finances that operate just 

like banks. 

Now, in bankruptcy, you have lots of choices. You can negotiate 

all sorts of different treatments, in this context, and in ways that 

would be helpful for the country. What we want is a bank-type resolution regime that gives us the choices that we’ve had for banks. 

But, we did not have that for complex, large financial institutions. 

And that’s what limited our choices. 

Chair WARREN. Well, we may disagree about whether or not we 

had it, but we would certainly agree that we do need a system in 

order to be able to liquidate large financial institutions. Where we 

may draw a very sharp difference is whether or not we should ever 

be in the business of doing that after the fact, and going back and 

effectively guaranteeing transactions with nonbank institutions—— 

Secretary GEITHNER. Do you feel the same way?—— 

Chair WARREN [continuing]. With taxpayer dollars behind it. 

Secretary GEITHNER. Just so I understand, do you feel the same 

way about the FDIC guarantees put in place in September? 

Chair WARREN. I—— 

Secretary GEITHNER. You would never, ever want a country to be 

in a position where you have to do guarantees—temporary, effective, whatever price—because of the moral-hazard risk. But, in a 

financial panic, there is often no other way to stem the risk of 

much greater damage to the innocent. 

Chair WARREN. Mr. Geithner, there are, though, real consequences to doing that, because now markets understand that you 

may, at any point, decide that anyone is large enough and that 

their debts should therefore be backed up by the U.S. taxpayers. 

Secretary GEITHNER. Well said, and no one feels more strongly 

about that. And that is why, even in the midst of this deep crisis, 

we propose sweeping reforms that would give us better choices in 

the future. 

Chair WARREN. In the future. 

Secretary GEITHNER. We could not feel more strongly about that. 

Chair WARREN. Good. Thank you. 

I apologize to my fellow panelists. 

Mr. Atkins. 

Mr. ATKINS. No, that was a very fruitful discussion, I thought. 

And I note that next month we’ll be drilling into AIG as a topic 

so I look forward to that, as well. 

But, I just wanted to turn back to—I think part of the problem, 

especially last year, was predictability, transparency of what the 


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government’s actions were, and also with respect to what balance 

sheets and other things were consisting of, and that sort of made 

the marketplace itself uneasy. I think that’s part of the same thing 

that I wanted to discuss here now which is the predictability of 

who gets what and who does what to whom. And that’s what I was 

trying to refer to earlier, as far as the auto programs. I wasn’t, certainly, disparaging the working man, but there is a huge perception out there that other unions got a great deal out of that audit 

rescue package that was negotiated earlier this year. 

That dovetails into the situation with small businesses that 

we’ve been talking about. A lot of the problem in today’s business 

environment is an uncertainty as to what the future holds. The administration is talking about—and Congress—huge tax increases, a 

huge new expensive healthcare plan, new onerous environmental 

regulations, and then looming deficits far into the future, not even 

counting the off-balance sheet obligations of the United States Government, which some people have put at $100 trillion or more. So, 

nobody, basically, can plan for anything, and that affects borrowing, and that obviously then affects lending. 

At the same time, we’re talking about the stigma of participating 

in TARP among some small banks. And people have been leery to 

participate in the Public-Private Investment Partnership, and others, because they don’t want to get close to any sort of government 

control of their business or influence. 

So, my main question is, how are you going to inject more predictability into the system? You’re talking about this vague notion 

of limiting TARP to $550 billion or so, and then focusing on small 

businesses and housing and other and—I can’t remember the last 

part. How exactly are you going to put these funds to work? What 

is the general plan? 

Secretary GEITHNER. Well, there’s a table attached to my testimony that gives very detailed estimates on what we think a reasonable estimate is of future programs. It’s very clear, and those 

programs have very clear, transparent conditions. And one of the 

things we did right from the beginning was make sure we put the 

specific terms of any contracts in the public domain for everyone 

to see. So, I think that we’ll be very effective and very clear in 

making sure what the limits are going to be in these programs and 

what the precise terms are going to be. 

Now, you’re right that businesses across America still face a lot 

of uncertainty. They face a lot of uncertainty about how strong the 

recovery is going to be. And they face some uncertainty about what 

the rules of the game are going to be, going forward. And I think 

that that’s one good reason why we hope that Congress can bring 

to closure the healthcare reforms moving through the system and 

the broader changes ahead on energy policy, things like that. I 

think that will help reduce uncertainty, help improve confidence. 

Businesses want to know what the rules of the game are. And so, 

I think I agree with you on that. You want to bring clarity as 

quickly as we can. 

Mr. ATKINS. Well, again, going back to the resolution authority 

that you’re asking for, I think that will just perpetuate the lack of 

clarity, because—— 


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Secretary GEITHNER. Relative to what? Let’s think about the 

choice ahead. Do you want to go back to a situation in which the 

United States comes into the worst crisis in generations with no 

authority, no ammunition, no ability to contain the damage? It cannot be good for us to court that disaster again. We’re describing—— 

Mr. ATKINS. But, it cannot be good to ascribe these particular undefined powers to either—— 

Secretary GEITHNER. No, they’re very well defined, and 

they’re—— 

Mr. ATKINS. Are they? 

Secretary GEITHNER [continuing]. Carefully limited. They’re more 

limited, in some ways, than those that exist today. And the ones 

that were created that are new are modeled on a resolute regime 

established and tested for banks over the decades. 

Mr. ATKINS. Well, I agree with the Chair that bankruptcy is 

probably the best—— 

Secretary GEITHNER. Bankruptcy itself or a quasi-bankruptcy for 

banks? 

Mr. ATKINS. Well, a bankruptcy—I’m talking about even beyond 

the banking system, about firms that are not necessarily banks, 

but are deemed to be, for some reason, too big to fail or a systemic 

risk. And I think that’s the thing that we’re concerned about. 

Secretary GEITHNER. Well, again, you know, these are all about 

choices, because I think many of us would share the basic objectives. It was not good for the country to allow very large, very 

risky, complex institutions to operate effectively as banks, outside 

all of the protections we put in place for banks in the wake of the 

Great Depression and the crisis that preceded it. That was a terrible mistake. 

So, institutions that effectively are banks, which take risk and 

could imperil the system, need to have constraints on their operations. 

Chair WARREN. I’m going to do time. 

Mr. ATKINS. Oh. 

Chair WARREN. And that way—— 

Mr. ATKINS. All right. 

Chair WARREN [continuing]. We’ll get another round. 

Mr. ATKINS. Okay. All right. 

Chair WARREN. Okay? 

Mr. Silvers. 

Mr. SILVERS. Mr. Secretary, why don’t you finish that sentence? 

Maybe you’ve lost it in the interim, but—— 

Secretary GEITHNER. Well, it’s one of the hardest problems to 

solve. Again, people want to know what the boundaries are, what 

the scope of this is. But, again, what caused this crisis, what made 

it so severe, was that we allowed an entire separate system of, effectively, banks operating without adequate constraints on risktaking and without the protections we put in place to mitigate runs 

and panics. 

Mr. SILVERS. Now—— 

Secretary GEITHNER. That was the classic mistake of the government, that’s something we have to fix. As part of that, we need to 


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be better tools to manage failure with quasi-bankruptcy-type regimes for those type of institutions. 

Mr. SILVERS. And, Mr. Secretary, is it your view that the bill currently in the House, which I understand the administration supports, that that bill provides this FDIC model, quasi-bankruptcy 

process, with no provision for TARP-like equity infusions, other 

than to transition a failed firm into an FDIC-like resolution process? Is that—— 

Secretary GEITHNER. That’s correct. 

Mr. SILVERS. Is that a—— 

Secretary GEITHNER. Yeah. 

Mr. SILVERS [continuing]. Fair statement? 

Secretary GEITHNER. That’s a fair statement. 

Mr. SILVERS. Fine. Let me just say that this issue is of great concern to me. I’ve looked closely at that bill. I thought earlier drafts 

were inadequate with respect to this and did run the risk of another TARP. I think the bill that’s in front of Congress today is the 

right one, and I think that your leadership on this has been very 

helpful. 

Let me return to the broader discussion, about panics and runs 

and so forth, in the context of AIG. I want to better understand the 

argument that you’re making. Are you saying that the reason that 

the counterparties to AIG had to be made whole was not because 

of the threat that, were they not made whole, they would fail, but 

because of the threat that, if anybody was not made whole in a 

credit derivative transaction, that there would be a broader, sort of, 

disintermediation of derivatives markets? Was that your concern? 

Secretary GEITHNER. I think you have most of it right, but let me 

say it slightly differently. 

Mr. SILVERS. Okay. 

Secretary GEITHNER. If AIG had defaulted on any single 

counterparty, derivatives or any other contractual obligation, that 

would have forced a generalized default. 

Mr. SILVERS. All right. Well—— 

Secretary GEITHNER. The system would have collapsed. 

Mr. SILVERS. Right. Now—— 

Secretary GEITHNER. The consequence of that collapse would’ve 

been cataclysmic for the system as a whole. 

Mr. SILVERS. Well, ‘‘default’’ is an interesting term here. ‘‘Default’’ is a formal legal term, it’s where the person who has the obligation asserts that the party hasn’t paid. And in that circumstance, the—in that circumstance, perhaps can try to insist on 

payment and force a bankruptcy. Is it your view that a negotiated 

haircut would have had same impact? I mean, because that would 

not have been a default. People—— 

Secretary GEITHNER. Let’s—— 

Mr. SILVERS [continuing]. Negotiate haircuts all the time—— 

Secretary GEITHNER. Let’s just—— 

Mr. SILVERS [continuing] Between commercial parties—— 

Secretary GEITHNER. They do. But that’s the point. Remember, 

this is not like there were three people that had the total exposure 

of counterparties and derivatives to AIG. There were tens and tens 

of counterparties on the derivatives side, maybe hundreds; there 

were thousands of other counterparties at stake in this context. No 


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one would have been willing to individually volunteer a concession 

without it being extended to all of the counterparties in similar positions. 

It’s a simple thing, it’s like flipping a switch. Either the firm is 

able to pay and avoid default, or it courts default—— 

Mr. SILVERS. So—— 

Secretary GEITHNER [continuing]. And downgrade and collapses. 

Mr. SILVERS. Is your view that SIGTARP is wrong—Mr. Barofsky 

and his staff, seem quite convinced that there was an opportunity 

to negotiate, not a default, but a concession on the part of the 

major parties. And the Chair mentioned—— 

Secretary GEITHNER. The real world does not work this way. You 

can’t run a strategy on the hope that people will be nice and decide 

they’re going to voluntarily give up a set of contractual obligations, 

and, if they’re unwilling to do it, then your only choice is that you 

not pay—— 

Mr. SILVERS. All right. So, your—— 

Secretary GEITHNER [continuing]. And take the consequences of 

default. 

Mr. SILVERS. So, your concern was that the default of AIG, not 

a broader run in the derivatives market. 

Secretary GEITHNER. It—well—— 

Mr. SILVERS. Is that right or was it both? 

Secretary GEITHNER. I think part of—just I—think about what 

happened after Lehman. It’s the simplest way to think about it. So, 

what happened to Lehman, Lehman failed, Lehman defaulted—— 

Mr. SILVERS. All right. But, that—— 

Secretary GEITHNER [continuing]. On a set of obligations—— 

Mr. SILVERS. But, then you’re saying that the issue was the default of AIG, not a run—I want to understand whether you believe 

that derivatives markets in a crisis are markets where everyone 

has to get a 100 cents on the dollar all the time. 

Secretary GEITHNER. In a financial panic if you see cascading defaults like this on any type of contractual financial obligation, that 

will accelerate, not mitigate, the panic. Again, nothing would have 

been better if there was a solution in place in this case, where you 

could have negotiated a set of outcomes that left the taxpayer with 

less exposure to losses. That has no realistic prospect of success in 

a financial panic of this magnitude. 

Resolution authority would make some of the choices a little bit 

easier, but there are no good choices in a panic like that. 

Mr. SILVERS. I would just conclude that if derivatives are the 

kind of instrument that have the kind of importance in our markets in which 100 cents on the dollar is necessary in a crisis, then 

we need to regulate them as such. 

Secretary GEITHNER. And we have proposed sweeping changes on 

how derivatives are treated and regulated in our markets, and 

partly because of that risk. 

Chair WARREN. All right. Thank you. 

Superintendent Neiman. 

Mr. NEIMAN. I’d like to weigh in on the AIG issue, for one reason, 

just to confirm that there is not necessarily a consensus on this 

viewpoint on the panel, but also, more importantly, to delve into 

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port, not because of the lessons learned, but because it does outline 

the sequencing of events that led up to and defined that transaction. 

My reading of that report says that, once the government decided 

that AIG was ‘‘too big to fail,’’ they no longer had leverage over negotiating any of those haircuts. That is a very different situation 

than was faced with the municipal issuers of months earlier. I 

think it also indicated very clearly the issues around violating the 

contractual obligations once the government decided to prevent a 

default. 

Also, treating U.S. counterparties differently than the foreign 

counterparties would have raised significant issues. Utilizing the 

supervisory powers of the Federal Reserve as leverage to force negotiation, I think, would also have raised significant concerns. 

Lastly, the issue that you raised, of downgrades, the impact it 

would have on the American taxpayer and the global system. 

So, I would encourage everybody to read that report, because of 

the descriptions and details, which, to my knowledge, were not 

clearly outlined up to the issuance of that report, but take disagreement with the lesson learned. And, in my opinion, the lesson 

learned is that we did not have the right tools for resolution of an 

institution of that nature. And that’s why it is so critical that we 

have a resolution authority to deal systemically with institutions. 

Secretary GEITHNER. Well said, and I think you said it right. I 

think it’s important to recognize that this is good for our country; 

it is going to happen for years to come. People are going to pore 

over every decision we made. They’re going to look very carefully 

at all those judgments. It’s, of course, hard to judge, with the benefit of hindsight, what would have been possible. And a lot of it’s 

going to be hard for anyone to appreciate who did not live through, 

minute by minute, what was happening in that acute series of financial panics, with not good choices for us. 

Our job was to make a set of choices among unpalatable, deeply 

offensive basic choices, and to do what was best, we thought, for 

the country at that stage. But, I respect the efforts of people to 

come back and look over this again. A lot will happen in the future. 

We’re going to cooperate with it, because the American people deserve to try to understand that. 

But, again, understand that no one really can appreciate the 

range of choices that were really available at that time. And that’s 

one reason why we have to work so hard to make sure we have better choices in the future. We need resolution authority to allow 

these firms to fail without the taxpayers being exposed to the risk 

of loss and that put constraints on risk-taking in the future that 

can help mitigate the moral-hazard risk. 

Mr. NEIMAN. Before moving on to another subject, can you give 

us an update on AIG, particularly what we’re reading in the press 

about issues of risk of losing individuals resulting from compensation directives from the Treasury? 

Secretary GEITHNER. Well, there is risk of that, as you expect, 

and as you’ve seen. I would say, in general, the new board, the new 

management of the institution are working very hard and effectively to strengthen the underlying insurance businesses, improving the prospect of the taxpayer being repaid and bringing down 


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the risk in the financial products division that took the institution 

to the edges of collapse. The risk in that has come down very, very 

dramatically. Overall scale of exposures and derivatives are about 

half of their peak level. But, that’s the basic strategy. 

Mr. NEIMAN. Is it something that we should be concerned about 

at this time? 

Secretary GEITHNER. What? 

Mr. NEIMAN. The impact to the American taxpayer if there is a 

loss of critical employees at an institution? 

Secretary GEITHNER. Absolutely. I mean, we need people who are 

capable running these businesses. The interests of the taxpayer, in 

making sure we maximize return on those actions we took, require 

there be capable people running these firms, running these businesses. 

Mr. NEIMAN. Thank you. 

Thank you. 

Chair WARREN. Thank you, Mr. Secretary. Our time grows short, 

so we’ll enter the lightning round here and try to get in at least 

one more question. 

Secretary GEITHNER. I have to be—— 

Chair WARREN. We know you need to leave—— 

Secretary GEITHNER [continuing]. Somewhere else at 12:00. 

Chair WARREN. We understand you’re here with us until 

12:00—— 

Secretary GEITHNER. Okay. 

Chair WARREN [continuing]. So we will make sure—— 

Secretary GEITHNER. So, just until five minutes before 12:00, because I need to be at my next thing at 12:00. 

Chair WARREN. Then this—— 

Secretary GEITHNER. I thought we were going to end at 11:45. 

Ms. WARREN. Oh, I think I was told we were ending at 12:00, 

that we had you for 2 hours. 

So, let me do ask the question. 

Secretary GEITHNER. You’ll have me again, I believe. 

Chair WARREN. But that’s three months off. As the banks we’re 

talking about how to wind down TARP, so here’s my question. 

We’ve talked about the fact that the guarantees for the money markets expired on September 18th. That’s one of the winding-downs 

of TARP. But, we jumped in—we, the federal government, we, the 

Treasury Department—jumped in when the money markets were 

about to break the buck. Now the money markets don’t have any 

official guarantees, they don’t pay anything for any guarantees, but 

most of the market believes that if the money markets started to 

break the buck again, there would be substantial government assistance. 

You described the banks as leaving TARP. They are stronger. 

Sure they’re stronger. They’ve paid back their debts, they have no 

restrictions under TARP. But, they also bask in the glow of implicit 

guarantees. After all, we’ve held up a big sign that says, ‘‘Those 

folks are worth saving, no matter what.’’ 

So my question is, how do we wind out of implicit guarantees? 

Out of the fact that the market sees and specifically assesses these 

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tions, for the specific reason that there is this implicit government 

guarantee. 

Secretary GEITHNER. I think the only way to do it is to put in 

place financial reforms that achieve two outcomes. One is authority 

for the government to constrain risk-taking, more broadly, more effectively in the future. That is necessary; it’s not sufficient. And 

you need quasi-bankruptcy authority that allows a credible risk 

that these firms can be failed, unwound, more safely. I don’t know 

a better way to do it. 

I worry about the risk you laid out. It’s inherent in any successful effort to put out a financial fire. There is no way to put out financial fire, arrest a recession, without taking some risk that 

you’re going to hurt future incentives in the way you described. 

The only solution to that is to change the rules of the game. 

Chair WARREN. Thank you, Mr. Secretary. 

Mr. Atkins. 

Mr. ATKINS. Thank you very much. 

Secretary GEITHNER. Mr. Atkins, you said something very important in the beginning, although you said it in disagreement with 

me, but I want to underscore it. 

Mr. ATKINS. Oh, yes. Right. 

Secretary GEITHNER. TARP was only one part of what helped 

bring growth and stability back to the economy. TARP would not 

have been effective without the guarantees put in place by the 

FDIC, without the broad measures of financial market support by 

the FED, and, most important without the Recovery Act itself. The 

economy did not improve, or bottom, until you had that full arsenal 

of policy responses deployed in parallel. It wouldn’t have worked 

without TARP. TARP was necessary; it was not sufficient, and it 

was a part of that basic strategy. TARP can’t claim the credit for 

all the things that improved, in this case, but it wouldn’t have been 

possible without it. 

Mr. ATKINS Yes, well, the Recovery Act is another whole issue, 

and I don’t have time to go into that one, so I’ll leave that. 

There are two things that I wanted to bring up. One is—you 

were discussing nonbanking firms before—I do have to note that 

many of them fared a lot better than the huge banking institutions 

that had regulators and examiners living in their offices—— 

Secretary GEITHNER. For example? 

Mr. ATKINS [continuing]. Day after day. 

Secretary GEITHNER. For example? 

Mr. ATKINS. A lot hedge funds and others have a lot less leverage 

two to one, three to one—than the other sorts of—— 

Secretary GEITHNER. I make that point a lot myself, and I agree 

with that. 

Mr. ATKINS. Okay. 

Secretary GEITHNER. I just might point out, that is in part because we were actually quite effective in making sure the institutions that provide them leverage, that give them financing, were 

much more constrained than they were in 1998, for example. 

Mr. ATKINS. Right. Well—— 

Secretary GEITHNER. But, I agree with you. 

Mr. ATKINS. So, we’ll have to pick that one up later. I just want 

to say that transparency, I do believe, is the answer, ultimately. 


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There is one last thing I did want to point out. With respect to 

the housing issues, we had a hearing, not too long ago, with six 

folks, one of whom brought up an issue as to EESA and the authority of Treasury to do some of the programs that you’re doing— 

HAMP and HARP—because the statute talks about how Treasury 

will acquire assets, meaning loans or the underlying mortgages or 

the securitized assets. And some of your programs are not geared 

towards that. And so, I wanted to ask you—— 

Secretary GEITHNER. So, you’d like a legal opinion on that? 

Mr. ATKINS. I would. 

Secretary GEITHNER. I’d be happy to provide it. 

Mr. ATKINS. Other homework for that. 

Secretary GEITHNER. Happy to provide that. 

Mr. ATKINS. Thank you very much. 

Chair WARREN. Thank you. 

And Mr. Silvers is going to take the last question. 

Mr. NEIMAN. No, I think, in recognition of your time considerations and your participation with us this morning, I will waive my 

last question. 

Chair WARREN. Mr. Silvers. 

Mr. SILVERS. I’ve looked at the composition of the revenue—it’s 

hard to look at the composition of the profits—of the four largest 

banks over the last six quarters, and it appears that there’s a trend 

toward interest income from loans declining slowly and income 

from securities—again revenue—from securities trading increasing. 

Are you at all concerned about this—essentially the quality of earnings within the four largest banks? 

Secretary GEITHNER. I’m not, at this stage. I think that actually 

they’re getting better, not worse. Most important is that what’s 

happened to earnings across the financial system is not just that 

the government did extraordinary things to save them from collapse, but that the markets are now opening up, firms are able to 

raise capital again, and that companies are able to go out and raise 

equity, raise debt again. This is a substantial source of revenue. 

That’s what banks exist to do. So, I think it’s largely a healthy 

thing. Obviously, we look at this very carefully, because what we 

don’t want to do is have a situation where the same type of risks 

that brought the system to the edge of collapse start to reemerge 

again. 

Mr. SILVERS. Thank you. 

Chair WARREN. Thank you very much, Mr. Secretary. 

I want to say our characterization of the past may not always be 

in agreement, but I think we are very much in agreement—at least 

I hope we are—that we cannot go this way again. There must 

never be a TARP 2.0. 

Secretary GEITHNER. And this is not over yet. We’ve got work to 

do to fix what was broken, not just put in place reforms to prevent 

the crisis of the future. 

Thank you very much. 

Chair WARREN. Thank you. 

This hearing is adjourned. The record will be held open for questions for the Secretary. 

[Whereupon, at 11:57 a.m., the hearing was adjourned.] 


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[The responses of Secretary Geithner to questions for the record 

from the Congressional Oversight Panel appear on the following 

pages.] 


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Questions for the Record from Elizabeth Warren, Chair, 

Congressional Oversight Panel 

1. According to Treasury’s Monthly Lending and Intermediation 

Snapshot, which measures the lending levels of the top 22 Capital 

Purchase Program recipients, there have been mixed signals with 

regards to the lending habits of those institutions that benefitted the 

most from TARP assistance. There are certain areas of lending that 

have shown improvement, most notably the 32 percent increase in 

mortgage originations and the 75 percent increase in refinancing 

originations since the enactment of EESA. However, precipitous 

drops in other lending categories have offset these increases. For example, new commitments to commercial real estate loans by these 

22 institutions have decreased by nearly 64 percent while commercial and industrial loans have decreased by 26 percent since October 

2008. Total originations made by these 22 institutions have decreased by 9 percent since October 2008. Why has lending continued 

to shrink after these financial institutions took TARP money? What 

do these trends indicate about the success of the TARP? Do these 

trends concern you? 

The role of the financial sector is to provide credit to our economy. Americans rely on that credit for homes, education, and cars. 

Businesses rely on it to hire and pay their employees. While U.S. 

credit conditions and the outlook for economic growth have improved significantly over the past year, bank lending continues to 

contract. It is vital that banks lend to creditworthy American consumers and businesses. 

A major cause of the reduction in lending is the fact that the 

U.S. banking system entered this crisis with insufficient capital. As 

credit losses mounted, first because of the correction in the U.S. 

housing market and subsequently because of the sharp contraction 

in the economy, banks have had to adjust. That adjustment has 

come through raising additional capital, reductions in total assets 

held by banks, and changes in the composition of those assets. The 

declines in loans held by banks are one part of this process of adjustment. But the economic contraction has also reduced the demand for credit as both consumers and businesses ave pulled back. 

In addition the contraction has undermined the credit worthiness 

of many borrowers. In past recessions, particularly those driven by 

credit cycles, bank lending has tended to lag the recovery of the 

economy. The fact that bank lending continues to contract is an indication that the adjustment in the U.S. banking sector is incomplete. Without TARP, the contraction in lending would no doubt 

have been much more severe. But TARP was never intended to 

solve all the problems of the banking sector. Relative to this historical record, the performance of bank lending in this cycle is not unusual. 

However, there has likely been some overcorrection in bank lending practices. And tight bank credit has a particularly severe impact on small businesses, which do not have the ability to raise 

funds in securities markets. To help mitigate this decline in bank 

credit, we are seeking legislation to transfer $30 billion from TARP 

into a new Small Business Lending Fund that would provide smaller and community banks with capital structured to provide an inVerDate Nov 24 2008 02:50 Mar 20, 2010 Jkt 055245 PO 00000 Frm 00080 Fmt 6602 Sfmt 6602 E:\HR\OC\A245.XXX A245

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centive to increase small business lending. We are also expanding 

our community development lending program. Eligible banks will 

now be able to receive more capital from the government—up to 5% 

of risk-weighted assets and the Treasury will match private investments in firms in order to increase the number of firms that have 

access to the program. Finally, we continue to encourage major 

U.S. banks to expand lending, and we created and publish a 

monthly snapshot of their lending activity. 

As the President has repeatedly stated publicly and privately to 

these banks: ‘‘The taxpayers were there for you to cleanup your 

mistakes. You now have a responsibility to be there for the community.’’ 

2. There were 149 bank failures between January 1, 2008 and November 30, 2009. The FDIC, forced to repay depositors at a growing 

number of banks, is in the red for the first time in 17 years. In the 

absence of a robust economic recovery, this problem may worsen. 

How do you explain this rate of failure? What are you doing now 

to redress that balance and protect the FDIC against further losses? 

What implications for financial stability do you see in the FDIC’s 

present level of assets? 

The current elevated pace of bank failures is a consequence of 

the excesses that built up in our financial system in recent years, 

resulting in large credit losses that many institutions were not 

equipped to absorb. Among the key lessons of the crisis is the need 

for more capital and more vigilant supervision of banks to make 

sure our system is safer and more resilient going forward. 

Despite the elevated pace of bank failures, it is clear that the 

FDIC has the resources and necessary tools to protect insured depositors and resolve failed banks. Throughout the FDIC’s 75-year 

history, no depositor has ever lost a penny of insured deposits. Although the Deposit Insurance Fund (DIF) balance fell to negative 

$21 billion as of December 31, the DIF balance should be distinguished from the FDIC’s liquid resources, which stood at $66 billion of cash and marketable securities. To bolster the DIF’s cash 

position, the FDIC’s Board approved a measure on November 12 to 

require insured institutions to prepay 13 quarters worth of deposit 

insurance premiums at the end of 2009. These prepayments were 

collected on December 31 and totaled approximately $45 billion. 

Additionally, the Helping Families Save Their Home Act, enacted 

on May 20, 2009, permanently increased the DIF’s statutory line 

of credit with the U.S. Treasury from $30 billion to $100 billion, 

and increased it to $500 billion through the end of 2010 if certain 

conditions are met. 

To redress the negative DIF balance going forward, on September 22, the FDIC took action to increase assessment rates on 

the banking industry. The FDIC’s Board decided that effective January 1, 2011, rates will uniformly increase by 3 basis points. The 

FDIC has projected that bank and thrift failures will peak in 2009 

and 2010 and that industry earnings will have recovered sufficiently by 2011 to absorb a 3 basis point increase in deposit insurance assessments. The Budget projects the DIF reserve ratio will 

return to 1.15 percent in 2018. 

3. Section 134 of the Emergency Economic Stabilization Act of 

2008 (EESA) (P.L. 110–343) states that should TARP realize a net 


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loss, ‘‘the President shall submit a legislative proposal that recoups 

from the financial industry an amount equal to the shortfall in 

order to ensure that the Troubled Asset Relief Program does not add 

to the deficit or national debt.’’ Please explain the plan Treasury is 

putting in place to recoup any losses. 

Due to improved market conditions and the effective performance 

in the management and use of TARP authority, the projected cost 

to the taxpayer is now significantly lower than earlier anticipated. 

In our FY 2011 budget, we estimated that the cost to taxpayers 

and the deficit will be about $224 billion lower than the estimate 

of $341 billion projected in the Midsession Review in August. However, as part of our commitment to ensuring that taxpayers do not 

face the costs of the extraordinary efforts taken to stabilize the financial system, the Administration proposed the Financial Crisis 

Responsibility Fee on January 14, 2010. This fee—which fulfills the 

President’s commitment to submit a plan to recoup TARP losses 

three years early—would be levied on the liabilities of financial institutions with over $50 billion in assets, and is expected to raise 

$117 billion over about 12 years, and $90 billion over the next 10 

years. 

Our proposed fee fulfills the requirement of Section 134 of 

EESA—ensuring that taxpayers are paid back in full—while also 

providing a deterrent against excessive leverage among the largest 

financial firms. In the coming weeks, we will be developing further 

details concerning the Financial Crisis Responsibility Fee, and we 

look forward to working with Congress and members of this Panel 

in designing it to most effectively recover the costs of TARP. 

4. I understand that the regulators’ enforcement action with respect to certain very large banks are embodied in memoranda of understanding with these banks, but those memoranda have not been 

made public. In the past, the regulatory agencies have explained 

that all such material must be confidential to assure the cooperation 

of banks with the examination process. The events of the last several 

years have revealed critical flaws in that process, flaws that have 

led to a bailout using hundreds of billions of dollars of taxpayer 

money. In light of the failure of the examination process and its results, do you believe that supervisory enforcement memoranda 

should be disclosed to the public, which is ultimately responsible for 

paying the costs of such failure? If you do not believe that such 

memoranda should be made public, please explain why not in light 

of the rationale I have cited. 

Treasury agrees that the financial crisis revealed serious flaws in 

the supervisory process. Supervisors for several large financial institutions missed emerging weaknesses or failed to react forcefully 

when such weaknesses were known. Treasury has called for a fundamental reassessment of the supervision and regulation of financial institutions based on an analysis of the lessons learned in the 

years leading up to this crisis. 

However, Treasury does not believe that memoranda of understanding that were confidential at the time of signing should be 

made public after the fact. Supervised entities rely on decisions 

taken by supervisors, including supervisor’s decisions to keep information confidential. Supervisors need to maintain their ability to 

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ties. In addition, the distinction between public and nonpublic enforcement actions is important to the conduct of supervision: the 

issuance of public enforcement actions represents a significant escalation in supervisory efforts to address weaknesses at financial 

institutions. It is important that supervisors retain the ability to 

address issues either confidentially or publicly, as warranted by 

specific circumstances. 

Questions for the Record from Damon Silvers, Deputy 

Chair, Congressional Oversight Panel 

1. Can you explain how it was in the public interest to allow 

Bank of America to repay TARP funds in such a manner that it had 

less Tier I capital than it did before the repayment? If you disagree 

with this characterization of the transaction, please explain why? 

While it would not be appropriate for Treasury to comment on 

any individual institution, it is important to note that Treasury is 

required under the American Recovery and Reinvestment Act of 

2009 to accept repayment of TARP funds ‘‘without regard to whether the financial institution has replaced such funds from any other 

source,’’ subject to consultation with the appropriate federal banking agency. As a result, many of the elements of this question 

would be best directed to the regulatory bodies that oversee the 

safety and soundness of individual institutions. 

We also note that one of our objectives has been to improve the 

quality of capital in the banking system. Although in some cases 

following the repayment of TARP, the total Tier 1 capital of an institution has been lower than that immediately preceding repayment, the quality of capital at institutions that have repaid TARP 

funds has generally improved. Tier 1 capital, the highest quality 

form of capital, has accounted for the vast preponderance of new 

capital raised by institutions since the Supervisory Capital Assessment Program (SCAP) stress test results were released. For example, the institutions subject to the stress test alone have raised 

more than $110 billion from common equity issuance since the May 

release of the stress test results. 

Further, the level of capital immediately before and immediately 

after TARP repayment is not the only relevant comparison. Postrepayment capital levels and ratios should also be compared to preTARP capital levels and ratio and, more generally, to supervisory 

capital requirements. Tier 1 capital has increased substantially at 

individual institutions and in the banking sector as a whole since 

the inception of TARP, demonstrating that TARP has successfully 

served as a bridge to private capital. 

Lastly, we believe that, consistent with the stability of the financial system, it is in the public interest for taxpayers to get their 

money back from TARP recipients, with interest, at the earliest 

date consistent with continued financial stability. Our judgment 

has been and continues to be that by replacing the Treasury investments with private capital, institutions will be in a better position 

to expand lending as the economy expands. 

2. Can you explain further why it was not possible in your view 

to negotiate concessions from the largest AIG counterparties as part 

of the rescue of AIG, in light of their limited number and those entiVerDate Nov 24 2008 02:50 Mar 20, 2010 Jkt 055245 PO 00000 Frm 00083 Fmt 6602 Sfmt 6602 E:\HR\OC\A245.XXX A245

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1 House Committee on Oversight and government, Hearing, ‘‘The Federal Bailout of AIG,’’ Jan. 

27, 2010, transcripts and webcast of hearing available at http://oversight.house.gov/ 

index.php?option=comlcontent&task=view&id=4756&Itemid=2. 

ties’ substantial stake in government intervention to support AIG 

and their relative financial and political vulnerability? Note I am 

not asking whether the Treasury and the Federal Reserve Bank of 

New York should have allowed AIG to go bankrupt or whether the 

Treasury and the New York Fed should have allowed a general default on all AIG derivaties-related obligations. 

On January 27, 2010, the House Committee on Oversight and 

Government Reform held a hearing that addressed the government’s role in negotiations with AIG’s counterparties.1 As part of 

that hearing, I, former Treasury Secretary Henry Paulson, Federal 

Reserve Bank of New York (FRBNY) General Counsel Thomas 

Baxter, and others provided extensive testimony on the subject. Although I provide an answer to your question below, I also refer you 

to the testimony from that hearing. 

In the fall of 2008, a near-complete collapse of our financial system was a realistic possibility. Americans were starting to question 

the safety of their money in the nation’s banks, and a growing 

sense of panic was producing the classic signs of a generalized run. 

Peoples’ trust and confidence in the stability of major institutions, 

such as AIG, and the capacity of the government to contain the 

damage was vanishing. Lehman Brothers filed for bankruptcy just 

a few days after AIG alerted Federal authorities that its problems 

had become acute. In the wake of Lehman’s failure major institutions such as Washington Mutual and Wachovia experienced debilitating deposit withdrawals, eventually collapsed, and were acquired by competitors. Money market funds also suffered a broad 

run, threatening what was considered one of the safest investments 

for Americans and severely disrupting the commercial paper market, a vital source of funding for many businesses. 

In this chaotic environment, the Federal Reserve and Treasury 

concluded that AIG’s failure could be catastrophic. At the time, the 

failure of a large, global, highly-rated financial institution that had 

written hundreds of billion dollars of insurance on a range of financial instruments could have tipped an already weak and fragile financial system and economy into the abyss. The company’s failure 

would directly threaten the savings of millions of Americans to 

whom it had provided financial protection through investment contracts and products that protect participants in 401(k) retirement 

plans. AIG was one of the largest life and property-casualty insurance providers in the United States. The withdrawal of such a 

major underwriter at the time risked creating a void for millions 

of households and businesses for basic insurance protection. And 

doubts about the value of AIG life insurance products could have 

generated doubts about similar products provided by other life insurance companies, feeding the panic that was crippling the economy. 

Convinced that the failure of AIG could be catastrophic for a financial system already in free fall, the Federal Reserve and Treasury determined that it was in the best interests of the United 

States to support AIG in order to slow the panic and prevent further damage to our economy. From the beginning, it was clear that 


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AIG needed a durable restructuring of its balance sheet and operations. Although the government faced escalating and unprecedented challenges on many fronts of the financial storm in September and October, it continued to work to address this need. 

Falling asset prices generated both substantial losses on the company’s balance sheet and increases in required payments to AIG’s 

counterparties under the terms of its credit production contracts. 

This, along with other factors, undermined market confidence in 

AIG and put its investment-grade credit rating again at risk. Understanding the counterparty negotiations addressed by your question requires an understanding of the role of the rating agencies in 

AIG’s businesses. Avoiding further downgrades of AIG’s credit rating was absolutely essential to sustaining the firm’s viability and 

protecting the taxpayers’ investment. Under credit protection contracts that AIG had written and the terms of various funding arrangements, AIG was required to make additional payments to its 

counterparties if its credit rating was downgraded. A downgrade (to 

below a certain level) also constituted an event of default or termination under many contracts. In addition, rating downgrades of the 

AIG parent holding company would have significantly undermined 

confidence in its insurance subsidiaries. People do not buy insurance products from firms they do not believe have the financial capacity to make good on those commitments over the long term— 

firms that they do not believe will pay out a life insurance policy 

or compensate a business if a factory burns down. Credit ratings 

are central to how people judge that viability. 

The counterparty negotiations were conducted in connection with 

the formation and funding of Maiden Lane III LLC (ML III), a company formed to purchase troubled assets that AIG had insured and 

to help insulate the company from further liquidity drains, thereby 

preventing it from being downgraded and failing. Before the Federal Reserve became involved with AIG, the company had entered 

into credit default swap (CDS) contracts with various third parties 

to protect the value of certain risky securities, called multi-sector 

CDOs, in exchange for periodic premium payment. The value of 

these securities was tied to pools of other assets, mostly subprime 

mortgages. The contracts required AIG to provide its counterparties collateral as the market value of the underlying CDOs, the 

credit rating of the assets behind the CDO, or AIG’s credit rating 

declined. As the financial crisis intensified, each of these events occurred. As of November 5, 2008, AIG had already posted approximately $37 billion in collateral against these exposures in accordance with the terms of the contracts, and these collateral calls contributed significantly to the $25 billion in losses that AIG reported 

for the third quarter of 2008. The box below provides a simplified 

example to help understand these contracts and negotiations with 

counterparties to them. 


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AIG’s CREDIT DEFAULT SWAP EXPOSURE—SIMPLIFIED EXAMPLE 

While the financial contracts involved were complex, AIG had basically 

agreed to insure the value of certain risky securities called multi-sector CDOs. 

The value of these securities was tied to pools of other assets, mostly subprime 

mortgages. As the financial crisis intensified, the value of the securities fell 

sharply. AIG incurred losses on these contracts and had to post collateral or make 

payments on the insurance. 

To help understand this kind of contract, imagine AIG had provided insurance on the value of a tangible asset, such as a house, to the homeowner. If the 

price of the house fell, AIG would be required to post collateral, or essentially 

make a payment to the owner, equal to the decline in the value of the house. So, 

if the house was originally worth $200,000 and fell to $125,000, AIG had to give 

$75,000 to the homeowner as collateral and would incur a loss of the same 

amount. In addition, AIG would have to post more collateral if the credit rating of 

the house fell, because it would signal that the home’s value was in jeopardy. Finally, if AIG’s credit rating fell, it would have to post even more collateral because the homeowner would be concerned about whether AIG could ultimately 

pay on the insurance. 

The problem was AIG had written billions of dollars of such insurance without sufficient capital. AIG was fine as long as the prices of the assets they were 

insuring—housing prices, in the example—didn’t fall, the credit rating of the assets didn’t fall, and AIG’s own credit rating didn’t fall. But if any of those events 

happened, it would be in trouble. In the fall of 2008, each of these events occurred. The value of the assets, their credit rating, and AIG’s own credit rating 

all fell, bringing AIG to the brink of bankruptcy. 

The counterparty/homeowner was fully protected and had all the leverage. If 

AIG failed to pay on the insurance, the counterparty could keep the collateral and 

the asset (house) and sue AIG for damages. Further, if AIG had failed to pay or 

threatened not to pay, it would have been downgraded and collapsed—threatening the economy. If the government had guaranteed the insurance, as some 

have suggested, and asset prices fell, the counterparty could demand more collateral and keep the asset (house). Therefore, the government funded ML III to buy 

the asset (house) at fair market value ($125,000). The counterparty kept the collateral ($75,00) in exchange for tearing up the insurance. As a result, the 

counterparty received par ($200,000), but the taxpayer gained the opportunity to 

benefit from recovery in asset prices—as has occurred. The transaction supported 

AIG’s viability and credit rating, removing a substantial threat to the economy at 

the crisis’s peak. 

To remove the persistent threat that these contracts posed to 

AIG’s continuing viability, ML III purchased the underlying CDOs 

from the counterparties at their then fair market value. The 

counterparties received $27 billion in payment from ML III, retained approximately $35 billion in collateral previously provided 

by AIG, transferred the CDOs to ML III, and terminated the CDS 

contracts. Thus, the counterparties essentially received the ‘‘par’’ 

value of $62 billion, consistent with the terms of their insurance 

contracts with AIG. ML III’s purchase was funded by a $24 billion 

loan from the FRBNY and $5 billion equity contribution by AIG. 

In designing and implementing this transaction the FRBNY’s objective was, as it always is, to protect the taxpayer. The FRBNY 

made judgments about these transactions carefully with the advice 

of outside counsel and financial experts. As they had done when establishing the lending facility in September, the FRBNY and its 

advisors reviewed a range of materials, including details regarding 

AIG’s exposure to each counterparty under the CDS contracts. 

However, the FRBNY faced significant constraints. The CDS conVerDate Nov 24 2008 02:50 Mar 20, 2010 Jkt 055245 PO 00000 Frm 00086 Fmt 6602 Sfmt 6602 E:\HR\OC\A245.XXX A245

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2Factors Affecting Efforts to Limit Payments to AIG Counterparties, Nov. 17, 2009, available 

at http://www.sigtarp.gov/reports/audit/2009/FactorslAffectinglEffortsltolLimit 

lPaymentsltolAIGlCounterparties.pdf. 

tracts entitled the counterparties to full or par value. The FRBNY 

could not credibly threaten not to pay without being willing to follow through on that threat and put AIG into bankruptcy. At the 

time, the government was working desperately to rebuild confidence in the financial system. Any suggestion that it might let 

AIG fail would have worked against that vital aim. The FRBNY 

could not risk a protracted negotiation. AIG’s financial position was 

deteriorating rapidly, and the prospect of a further ratings downgrade was imminent. AIG was scheduled to report a $25 billion loss 

for the third quarter on November 10, and the ratings agencies had 

informed AIG that, absent a parallel announcement of solutions to 

its liquidity and capital problems, they would downgrade the company yet again. Such a downgrade would have led to AIG’s failure 

and triggered the same catastrophic consequences the government 

had been trying to avoid since September 2008. Moreover, a bankruptcy would have entitled the counterparties to terminate the 

CDS contracts and keep the collateral that AIG had previously 

posted, as well as the underlying CDOs that AIG had insured. 

The Special Inspector General for the Troubled Asset Relief Program (SIGTARP) has suggested that the FRBNY should have used 

its regulatory authority, or some other means, to coerce AIG’s 

counterparties to accept concessions.2 This was not a viable option 

for several reasons. First, if the FRBNY had tried to force counterparties to accept less than they were legally entitled to, market 

participants would have lost confidence in AIG leading to the company’s failure. Once a company refuses to meet its full obligations 

to a customer, other customers will quickly find other places to do 

business. Second, the counterparties could have said refused to 

grant such concessions, kept the collateral they had already received, kept the CDO securities that AIG had insured, and sued 

AIG for breach of contract. This would have increased the taxpayer’s potential exposure and precluded them from benefiting 

from any recovery in the value of the CDOs, which has in fact happened. 

Third, if the FRBNY had attempted to use its regulatory authority to coerce or extract concessions from AIG’s counterparties, that 

attempt would likely have led to a further downgrade of AIG’s ratings, precisely the result that all of the government’s actions were 

intended to avoid. An ‘‘investment grade’’ credit rating is the rating 

agencies’ judgment that creditors will likely be repaid in accordance with the terms of their contracts, not according to a hypothetical government-coerced discount. If the FRBNY had attempted 

to force counterparties to accept less than they were legally entitled 

to, then AIG would not have met the ratings agencies’ standards 

for ‘‘investment grade’’ status, and it would likely have lost its ‘‘investment grade’’ rating. Such a downgrade could have led to the 

company’s collapse, threatened government efforts to rebuild confidence in the financial system, and meant a deeper recession, more 

financial turmoil, and a much higher cost for American taxpayers. 

In addition, the SIGTARP has stated that Treasury and the Federal Reserve ‘‘were fully prepared to use their leverage as reguVerDate Nov 24 2008 02:50 Mar 20, 2010 Jkt 055245 PO 00000 Frm 00087 Fmt 6602 Sfmt 6602 E:\HR\OC\A245.XXX A245

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lators to compel the nine largest financial institutions (including 

some of AIG’s counterparties) to accept TARP funding.’’ The 

SIGTARP suggests that the government should have similarly compelled concessions from AIG’s counterparties. First, I disagree with 

the SIGTARP’s characterization of the government’s discussions 

with the initial recipients of TARP funds. Second, the circumstances and authority in that situation were fundamentally different from what existed in the ML III transaction. Congress granted the Federal Reserve and, through EESA, Treasury with the responsibility to ensure the safety and soundness of the financial system. In the Federal Reserve’s case, that authority was limited to 

providing liquidity and regulating bank holding companies. In 

Treasury’s case, it was limited to purchasing or guaranteeing assets. Consistent with that responsibility and authority, in the midst 

of the financial crisis the government encouraged nine banks to accept additional capital. They were not forced to forfeit contractual 

rights for the benefit of another financial institution. The latter 

would have been an abuse of the authority granted by Congress, 

violated private parties’ contractual rights, and undermined confidence in the government’s strategy to stabilize the U.S. financial 

system. 

Operating with these constraints, the FRBNY and AIG initiated 

discussions with the major counterparties about whether they 

would be prepared to accept concessions on the prices of the securities. The FRBNY knew that the likelihood of success of such a negotiation was modest, especially given the imminent deadline and 

the bargaining constraints under which it was operating. Not unexpectedly, the FRBNY discovered that most firms would not, under 

any condition, provide such a concession. One counterparty (UBS) 

said that it was willing, but only if every other counterparty would 

agree to equal concessions on their prices. In the end, the prices 

paid for the securities were their fair market value, and because 

the counterparties retained the collateral they had previously received from AIG, they all received an aggregate amount equal to 

par value of their securities. In return, the insurance contracts 

were terminated, and ML III kept the securities. 

I strongly believe that the strategy that the Federal Reserve pursued in establishing ML III will generate a better outcome than 

any alternative. In particular, attempting to coerce concessions 

risked making the U.S. taxpayer significantly worse off. 

Since ML III purchased the CDOs, they have generated significant cash flows that have been used to pay down the FRBNY’s loan 

by more than 25 percent. The Federal Reserve and Treasury expect 

ML III to pay the FRBNY back in full and to generate substantial 

returns for U.S. taxpayers. The FRBNY is not only the senior creditor to ML III. It also has a right to two-thirds of any profits from 

the portfolio, once its loan has been repaid. Moreover, because ML 

III can hold the CDOs to maturity, it is largely immune from the 

trading prices and liquidity needs, and is therefore in a better position to maximize the value of the portfolio. 

However, the government’s return on ML III should be considered in the context of the overall return on its support for AIG. On 

the one hand, the Federal Reserve will likely generate returns on 

its financial support of AIG, including the FRBNY Credit Facility, 


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3 Congressional Budget Office, The Troubled Asset Relief Program; Report on Transactions 

Through June 17, 2009, Jun. 2009, 2, available at http://www.cbo.gov/ftpdocs/100xx/doc10056/06- 

29-TARP.pdf. 4 Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2010–2020, 

Jan. 2010, at 13, available at http://www.cbo.gov/ftpdocs/108xx/doc10871/01-26-Outlook.pdf. 

its loans to Maiden Lane II and Maiden Lane III, and its preferred 

interests in AIA Aurora LLC and ALICO Holdings LLC. On the 

other hand, it is unlikely that Treasury will fully recover the direct 

costs of its capital investments in AIG. In June 2009, the Congressional Budget Office estimated that Treasury would lose $35 billion 

of its $70 billion total commitment to AIG, including undrawn 

funds in the equity facility.3 And the 2011 Budget reflected an ex- pected loss of $48 billion on that commitment. 

Today, on the basis of a range of measures, Treasury believes 

that losses on its investments in AIG are likely to be lower. If market conditions continue to improve and AIG’s businesses perform 

well, the actual recovery on Treasury’s preferred stock could be significantly higher. The Congressional Budget Office recently estimated that losses on all Treasury investments in AIG would be $9 

billion.4

The President has put forward a concrete plan to recover every 

penny that Treasury committed to stabilize our financial system, 

including Treasury investments in AIG. The President’s proposed 

Financial Crisis Responsibility Fee would be imposed on large financial institutions to recoup all losses from TARP investments. 

Questions for the Record from Paul Atkins, Panel Member, 

Congressional Oversight Panel 

1. With respect to Treasury’s position that its authorization under 

EESA to extend $700 billion for the acquisition of troubled assets 

operates in the nature of a revolving line of credit, how does that 

treatment of repayments as restoring the ability to make further 

payments out of TARP up to the overall statutory limit not render 

nugatory the provisions of EESA that the public debt be reduced 

through repayments? 

Section 106(d) of the Emergency Economic Stabilization Act of 

2008 (EESA) requires that revenues and the proceeds from the sale 

of troubled assets purchased under that law must be paid into the 

general fund of the Treasury for reduction of the public debt. However, other applicable provisions under EESA govern the use of 

TARP funds. Section 115(a) authorizes Treasury to purchase troubled assets having aggregate purchases up to $700 billion ‘‘outstanding at any one time,’’ and section 106(e) authorizes Treasury 

to continue to purchase troubled assets under commitments entered into by Treasury prior to EESA’s sunset date. Finally, section 

118 makes new funding available for new purchases of troubled assets. 

Taken together, these provisions operate as follows: When a purchased troubled asset is sold or when a TARP investment is repaid, 

the proceeds are deposited into the Treasury general fund for reduction of the public debt. Upon such a sale or repayment, the total 

amount of troubled assets that are held by the Treasury and count 

against the $700 billion cap is reduced. This reduction in the total 


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amount of assets ‘‘outstanding’’ frees up headroom under the cap. 

To be clear, the funds used to pay for any new purchases under the 

freed-up headroom under the cap are not the same as the funds received from the sale or repayment of troubled assets. Instead, new 

funding is made available under section 118 for any new purchases 

and is recorded as a new, current-year cost. 

That the words ‘‘outstanding at any one time’’ mean that the 

statutory cap is a ‘‘revolving’’ cap on purchasing authority is without question. These words are always used by Congress to confer 

revolving budget authority (whether revolving borrowing authority, 

revolving lending authority or, as in this case, revolving purchase 

authority) as opposed to ‘‘once-used-gone’’ authority. 

EESA provides the U.S. government with a powerful tool for stabilizing the financial system. The Congress wisely provided Treasury with the flexibility to apply EESA’s purchasing power over the 

lifetime of the statute. 

2. How are the equity and other securities that Treasury has acquired under the CPP and other programs ‘‘troubled assets’’ under 

EESA, particularly since Treasury and the various institutions participating in those programs over the course of the past approximately 14 months have averred that the institutions into which 

Treasury’s capital injections have been made were ‘‘healthy’’? 

EESA defines ‘‘troubled asset’’ to mean ‘‘(A) residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each 

case was originated or issued on or before March 14, 2008, the purchase of which the Secretary determines promotes financial market 

stability; and (B) any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of 

which is necessary to promote financial market stability, but only 

upon transmittal of such determination, in writing, to the appropriate committees of Congress.’’ Each purchase of a troubled asset 

has been made in accordance with this language. Since the enactment of EESA, I have made such determinations, in consultation 

with the Chairman of the Board of Governors of the Federal Reserve System, which have been transmitted to the appropriate committees of Congress. In the case of the Capital Purchase Program, 

participation was reserved for viable institutions that were recommended by their federal banking regulator to receive a TARP investment. The Secretary of the Treasury under the prior Administration determined that injecting capital into viable institutions by 

purchasing preferred shares in those institutions was an effective 

way of increasing the capital base and strength of those institutions, thereby promoting financial market stability. 

3. At our hearing on 10 December, you discussed Treasury’s plans 

to extend more TARP funds to smaller banks, ostensibly to increase 

their lending. If Treasury acquires equity or other securities from 

these banks, does that mean that these instruments are perforce 

‘‘troubled assets’’ under EESA? Or, if Treasury acquires the underlying loans, are they perforce ‘‘troubled assets,’’ even if the loan is 

performing? By extension, does that mean that any such bank receiving such a capital injection is a troubled bank? 


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Under the terms of the Small Business Lending Fund that the 

President announced earlier this month, capital investments would 

be made under new legislative authority, not through EESA. We 

are currently in the process of developing legislation with Congress 

that would define the exact parameters for purchases under that 

program, although—as Treasury has announced—our proposal 

would provide for capital investments in banks with less than $10 

billion in assets that receive approval from their primary federal 

regulator. 

4. Do you believe that the acquisition of stock and warrants under 

the CPP has been more—or less—effective than the original intent 

of TARP, which was to purchase ‘‘residential or commercial mortgages and any securities, obligations, or other instruments that are 

based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008’’? 

Capital injections and purchases of illiquid assets serve somewhat different functions. The purchase of illiquid assets is a targeted response to problems involving specific assets. Capital injections have the advantage of providing insurance against the full 

range of challenges facing financial institutions. As the financial 

crisis intensified following the failure of Lehman Brothers, the 

broadening panic moved beyond mortgage-backed, and related, securities. In addition, the deteriorating economic outlook posed new 

challenges for banks. In this context, capital injections through the 

CPP were a more effective means of containing the financial panic 

than purchases of illiquid mortgage-related assets. 

5. Would you describe the current process in which Treasury determines which institutions should receive TARP assistance, how 

much, and under what terms? How was this determination made 

with respect to GMAC? 

Each institution receiving Troubled Asset Relief Program (TARP) 

assistance followed a different determination process depending on 

the individual program within TARP through which the institution 

applied for funding. 

Treasury’s assistance to GMAC was provided under the Automotive Industry Financing Program (AIFP) consistent with the 

goals of that program. Treasury’s determination to make additional 

investments in GMAC in 2009 was driven by the need to maintain 

automotive financing for dealers and consumers during the critical 

restructuring periods for GM and Chrysler and Treasury’s commitment under the Supervisory Capital Assessment Program (SCAP). 

Treasury’s investments in GMAC have helped to provide a reliable source of financing to both auto dealers and customers seeking 

to buy cars following the severe contraction of credit in the auto finance markets starting in 2008. Alongside Treasury’s efforts 

through the TALF program, a recapitalized GMAC has offered 

strong credit opportunities, helped stabilize our auto financing 

market, and contributed to the overall economic recovery. 

As to the SCAP, U.S. federal banking supervisors believe it to be 

important for the largest U.S. bank holding companies (BHCs) to 

have a capital buffer sufficient to withstand losses and sustain 

lending even in a significantly more adverse economic environment 

than is currently anticipated. In keeping with this aim, the Federal 

Reserve and other federal bank supervisors engaged in the SCAP, 


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or the stress tests, with each of the 19 largest U.S. BHCs, including GMAC. As part of the SCAP, Treasury committed to contribute 

capital to these institutions in the event that any of them could not 

meet their SCAP buffer requirement via third party sources. 

In line with its commitment to support the SCAP institutions, Treasury made a $7.5 billion investment in GMAC in the form of 

mandatorily convertible preferred stock (MCP) in May 2009. This 

investment was the result of two distinct capital needs: (i) $3.5 billion of the investment was an initial contribution towards the $9.1 

billion SCAP buffer requirement, and (ii) $4.0 billion of the investment was to support the origination of Chrysler dealer and retail 

loans which had been previously funded by Chrysler Financial. Treasury did not fund the additional $5.6 billion for the SCAP 

buffer requirement at that time. Waiting for certain events underlying the assumptions that formed the basis for the SCAP buffer 

to play out, resulted in a smaller Treasury funding requirement for 

the second installment. Due to a variety of factors, including that 

the establishment of the new General Motors and new Chrysler 

was accomplished with less disruption to GMAC than banking supervisors initially projected, the amount of funding to meet the 

SCAP was determined by the Federal Reserve to be $3.8 billion 

($1.8 billion less than the $5.6 billion previously announced). 

On December 30, 2009, Treasury funded the second installment of an additional $3.8 billion in GMAC. In structuring the investment, Treasury ensured that its capital contribution was in a form 

the Federal Reserve deemed satisfactory to establish the SCAP 

buffer and was made on terms most beneficial to the U.S. taxpayer. 

As such, $2.54 billion of the investment was made in the form of 

trust preferred stock, which are senior to all other capital securities 

of GMAC. 

6. Does a potential failure of GMAC itself pose a systemic risk to 

our financial system? 

The investment in GMAC was consistent with the purposes of 

EESA, which is to restore liquidity and stability to the U.S. financial system. The Secretary of the Treasury was given broad discretion under EESA to establish programs to purchase ‘‘troubled assets.’’ One such program was the Automotive Industry Financing 

Program (AIFP), which was established by my predecessor, in the 

Bush Administration, to prevent a significant disruption of the 

American automotive industry. It was determined that such a disruption would pose a systemic risk to financial market stability 

and have a negative effect on the economy. 

Treasury’s investments in GMAC were made pursuant to the 

AIFP and a ‘‘troubled asset’’ determination made by Secretary 

Paulson in December 2008. These investments have helped to provide a reliable source of financing to both auto dealers and customers seeking to buy cars. A recapitalized GMAC has enabled 

GMAC to restore liquidity to its finance business and helped to restore stability to the U.S. domestic automobile industry. This has 

in turn contributed to the overall economic recovery and to financial stability. 

As noted above, the current investment in GMAC also represents 

the completion of funding provided to GMAC as part of the SCAP 

process. Ensuring SCAP compliance enables GMAC to maintain 


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adequate capital under stressed conditions and continue to fulfill 

its role as a leading provider of financing within the U.S. automotive industry. Completing the SCAP exercise should help assuage investor concerns and assist GMAC in its private capital 

raising efforts. Capital market access will provide GMAC with necessary liquidity and should allow Treasury ultimately to exit its investment in a manner that protects taxpayers. 

7. Has Treasury performed a legal analysis of its authority under 

EESA with respect to foreclosure mitigation, including section 109 

of EESA? Has Treasury performed such a legal basis for HAMP, 

HARP, etc.? Please provide any such legal memoranda or opinions 

to the Panel. 

Treasury has separately provided Mr. Paul Atkins with a response to the request for a legal analysis of Treasury’s authority 

under EESA with respect to foreclosure mitigation, including section 109 of EESA, and Treasury’s legal basis for its Home Affordable Modification Program (HAMP). Delivery of that response did 

not waive the attorney-client privilege and its subject to the Panel’s 

confidentiality protocol entered into on May 21, 2009 and updated 

on December 11, 2009. 

The Home Affordable Refinancing Program (HARP) is a refinancing program developed by Fannie Mae and Freddie Mac (Government-sponsored enterprises, or GSEs) under the supervision of 

the federal regulator of the GSEs (the Federal Housing Finance 

Agency), and is available for eligible GSE-owned or GSE-guaranteed mortgages. Treasury does not administer the HARP, and the 

HARP is not based on Treasury legal authorities. 

8. According to Treasury’s guidelines with respect to the Home Affordable Modification Program (HAMP), ‘‘new borrowers will be accepted until December 31, 2012’’ and ‘‘program payments will be 

made for up to five years after the date of entry into a Home Affordable Modification.’’ How does Treasury intend to make HAMP payments using TARP funds beyond EESA’s expiration date of October 

3, 2010? Please cite the specific legal authority that allows Treasury 

to do this. 

EESA section 106(e) specifically authorizes Treasury to continue 

to fund the purchase of assets after the EESA purchase-authority 

sunset date (now October 3, 2010) under purchase commitments 

entered into before that purchase-authority sunset date. All HAMP 

payments made to servicers after October 3, 2010, will be funded 

under purchase commitments with servicers that will have been 

entered into before October 3, 2010. 

9. Has Treasury performed an analysis or developed a metric to 

determine how effective TARP has been in encouraging various categories of lending, including interbank, commercial, residential 

mortgage, consumer revolving credit, etc.? Can banks and similar 

institutions in the current economic environment increase their lending, while simultaneously increasing their capital and writing off 

non-performing assets? 

The U.S. banking system entered this crisis with insufficient capital. As credit losses mounted, first because of the deterioration in 

the U.S. housing market and subsequently because of the sharp 

contraction in the economy, banks have had to adjust. That adjustment has come through raising additional capital, reductions in 


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total assets held by banks, and changes in the composition of those 

assets. The fact that bank lending continues to contract is an indication that the adjustment in the U.S. banking sector is ongoing. 

But the recession has also reduced the demand for credit as both 

consumers and businesses have pulled back. In addition it has undermined the creditworthiness of many borrowers. The reduction in 

lending by banks reflects all three of the factors: the need for banks 

to adjust their balance sheets; reduced demand for credit; and the 

decline in the creditworthiness of many borrowers. 

The primary objective of TARP was to first contain the financial 

panic that followed the failure of Lehman Brothers and then to ensure the stability of the financial system by encouraging private 

capital raising by major financial firms. TARP has made an important contribution to achieving those objectives. Without TARP the 

contraction in lending would no doubt have been much more severe. But developing a specific estimate of TARP’s impact on lending is problematic because it requires making a judgment about 

what would have happened had TARP not been put in place. 

Questions for the Record from Richard Neiman, Panel 

Member, Congressional Oversight Panel 

1. Foreclosure Prevention: As we discussed at our December hearing, January 1st is expected to be a critical day for the roughly 

375,000 homeowners whose trial modification period expires. Most 

of these homeowners have made at least 3 months of timely payments as required by the HAMP program. However, less than half 

of these homeowners have submitted all required documentation, 

and by some estimates half of these borrowers that have submitted 

their documentation have yet to have their documentation validated 

by the servicer. Thus, it looks as if possibly over 75% of homeowners 

who have demonstrated a willingness and ability to make timely 

payments on their trial modifications may be eliminated from the 

program and once again facing foreclosure. 

(a) Do you see the documentation problem as one of homeowners failing to get their materials in, servicers failing to validate, or perhaps a problem inherent in the documentation requirement itself? 

Converting trial modifications to permanent modifications is 

the shared responsibility of borrowers and servicers. Treasury 

has taken a number of steps to simplify the process for both 

borrowers and servicers. On October 8, Treasury published 

streamlined and simplified documentation requirements for 

HAMP. In November, Treasury launched a conversion campaign, including posting the HAMP application documents and 

a number of new tools for borrowers on our consumer website, 

www.makinghomeaffordable.gov. As part of the conversion 

campaign, Treasury and Fannie Mae (as our agent) are requiring servicers to report conversion progress on a daily basis. 

As of the end of January, over 1 million Americans had 

begun trial modifications, saving an average of $500 per 

month. However, only about 31,000 of those trials had become 

permanent modifications. Although both borrowers and 

servicers share responsibility for increasing the number of perVerDate Nov 24 2008 02:50 Mar 20, 2010 Jkt 055245 PO 00000 Frm 00094 Fmt 6602 Sfmt 6602 E:\HR\OC\A245.XXX A245

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manent modifications, it is clear that servicers need to do a 

better job of increasing capacity, reaching out to borrowers and 

processing documents quickly. The current number of permanent modifications suggests a lack of mobilization by major 

servicers to convert borrowers to permanent modifications. 

For this reason, on December 23, Treasury released Supplemental Directive 09–10 (SD 09–10), enclosed here and posted 

at www.hmpadmin.com. Per SD–10, effective on December 23 

and lasting through January 31, 2010, Treasury implemented 

a temporary review period for all active HAMP trial modifications scheduled to expire on or before January 31, 2010, with 

the exception of modifications failing property eligibility requirements, such as those that are investor owned. 

During this review period, servicers were required to confirm 

the status of borrowers in active HAMP trial modifications 

scheduled to expire on or before January 31, 2010 as either 

current or not current. Servicers also must have confirmed 

which, if any, documents are due from borrowers. Servicers 

must send written notification to borrowers to inform them 

that they are at risk of losing eligibility for a permanent 

HAMP modification because the borrower has (i) failed to make 

all required trial period payments, (ii) failed to submit all required documentation, or (iii) failed both to make all required 

trial period payments and to submit all required documentation. The notice must have provided the borrower with the opportunity to correct any error in the servicer’s records or submit any missing documents or payments within 30 days of the 

notice or through January 31, 2010, whichever was later. If a 

borrower provided evidence of the servicer’s error or corrects 

the deficiency within the timeframe provided, the servicer 

must have considered the new information and determine if 

the borrower is eligible to continue in the HAMP modification 

process. 

On January 28, 2010, Treasury took an additional step to 

streamline the documentation process, releasing Supplemental 

Directive 10–01 which introduces a requirement for full 

verification of borrower eligibility prior to offering a trial period plan. Effective for all HAMP trial period plans with effective dates on or after June 1, 2010, a servicer may only offer 

a borrower a trial period plan based on verified income documentation in accordance with program guidelines. This Supplemental Directive also provides guidance to assist servicers in 

making HAMP eligibility determinations for borrowers currently in active trial period plans, including those borrowers 

subject to the temporary review period required by Supplemental Directive 09–10. 

(b) What documentation flexibility, if any, could perhaps be 

provided that would not impact program integrity but would 

help people meet their documentation requirements and stay in 

their homes? For example, could alternative documents such as 

bank statements be accepted in lieu of a profit and loss statement? What particular documents does your office find to be 

consistently missing or deemed inadequate? 


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Treasury has taken a number of steps to simplify documentation requirements. On October 8, Treasury published 

streamlined documentation requirements for borrowers, simplifying the documentation required for borrowers to get permanent modifications. As outlined above, on December 23, Treasury published new guidance for servicers requiring trial modifications to be placed in a temporary review period while 

servicers review document receipt and processing to ensure 

that all borrowers are being treated fairly and in accordance 

with program guidelines. 

Treasury has also launched a conversion campaign, requiring 

servicers to provide detailed data describing the status of all 

borrowers in trial modifications and cataloguing which documents are missing. As part of the conversion campaign, Treasury and Fannie Mae have sent staff to servicer locations to better understand alternative documentation processes that could 

facilitate conversions while maintaining program standards. 

These specific documentation issues are being discussed and 

resolved by Treasury and Fannie Mae on a daily basis, with 

new FAQs posted on the administrative website, 

www.hmpadmin.com, to explain program flexibilities on a regular basis. We will continue to examine ways to further 

streamline documentation and to make program adjustments 

to improve execution. 

The program guidelines released on January 28, 2010 also 

included a number of additional steps to streamline specific 

documentation requirements, so as to increase the number of 

permanent modifications. 

(c) Do you expect that upcoming program improvements such 

as document standardization and the implementation of a web 

portal for online document tracking will alleviate the problem? 

Can any of these program improvements be implemented before 

the current March start date, so they can help people now at 

risk of losing their trial modifications? 

Steamlined documentation requirements announced on October 8 have had a significant positive impact in simplifying the 

HAMP modification process for servicers and borrowers. The 

streamlined documentation requirements were effective as of 

October 8, 2009. The temporary review period will also help require servicers to re-evaluate the status of trial modifications 

and document handling procedures. In addition, the temporary 

review period will require servicers to let borrowers know 

where they stand—by providing a letter outlining any missing 

documents, and an opportunity to correct errors or complete 

the application. The temporary review period process was effective as of December 23. The new additional streamlined processes for conversions of modifications announced on January 

28, 2010 also became effective upon announcement—and we 

are seeing the impact of these changes in improved pullthrough rates. As of the end of January there were over 

116,000 permanent modifications and over 67,000 permanent 

modifications pending final approval. This group of approximately 180,000 permanent and pending permanent modifications represents about a third of the population of trial modiVerDate Nov 24 2008 02:50 Mar 20, 2010 Jkt 055245 PO 00000 Frm 00096 Fmt 6602 Sfmt 6602 E:\HR\OC\A245.XXX A245

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fications who have completed the trial modification and are at 

a point in the process where they are able to convert to permanent. We recognize that there is much additional work to be 

done in converting borrowers to permanent modifications but 

view the changes outlined above as significant progress. 

We expect that the web portal will further enhance the ability of borrowers to submit documents and servicers to receive 

and process HAMP applications. We are working to implement 

the web portal as quickly as possible. 

(d) What is the process for notifying borrowers if their trial 

modification fails to convert to a permanent modification? Will 

the reasons be provided, and what process is in place for borrowers to appeal? 

As described in Supplemental Directive 09–08 (SD–09–08), 

enclosed here and posted at www.hmpadmin.com, every borrower that is not approved for a trial modification must be sent 

a written explanation for the denial, indicating one of the specific denial reasons outlined in SD 09–08. In the letter required 

by SD 09–08, the borrower must also be provided with information about other foreclosure alternatives, contact information for the servicer, contact information for the HOPE Now 

hotline, and instructions on how to contact MHA Help. 

In addition, on December 23, Treasury released Supplemental Directive 09–10 as outlined above, requiring most trial 

modifications to be placed into a temporary review period. During this review period, servicers must have provided borrowers 

with a notice indicating application deficiencies. The notice 

must have provided the borrower with the opportunity to correct any error in the servicer’s records or submit any missing 

documents or payments within 30 days of the notice or through 

January 31, 2010, whichever was later. If a borrower provides 

evidence of the servicer’s error or corrects the deficiency within 

the timeframe provided, the servicer must consider the new information and determine if the borrower is eligible to continue 

in the HAMP modification process. 

2. Small Business Lending: What additional clarity can you provide regarding Treasury’s capital assistance program for small 

banks announced in October? As you stated, banks my be reluctant 

to participate due to potential stigma. What steps are you taking to 

address these concerns and to implement the program? What is the 

date for release of additional program details? Assistant Secretary 

Allison responded to questioning at our October hearing that he expected between $10 and $50 billion allocated to the program; is this 

still the estimated amount? 

On Tuesday, February 2, the President announced details of his 

new proposal to create a Small Business Lending Fund. Under this 

proposal, $30 billion in TARP funds would be transferred, through 

legislation, to a new program outside of TARP to support small 

business lending. The program would be separate and distinct from 

TARP. Participation would be limited to community and other 

smaller banks with less than $10 billion in assets. A core function 

of the new fund would be to offer banks capital with built-in incentives to increase small business lending—as banks increase lending, the dividend rate on the new capital they had received would 


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fall. The administration will work closely with the Congress to design this program and discuss other ways that the Small Business 

Lending Fund could be fully deployed. 

As referenced, concerns about TARP stigma have been a significant concern throughout the policy process. These concerns in large 

part motivated the decision to call for TARP funds to be formally 

transferred through legislation to a new, separate entity. We believe that creating a distinct fund will encourage broader participation. 

3. Limitations on Banks’ Risky Activity: Large financial institutions are a large part of our free market system, but they are also 

supported by a Federal safety net. Their deposits are insured by the 

FDIC, they have access to funding through the Federal Reserve, and 

of course have recently received significant taxpayer assistance 

through TARP. Are there certain activities that bank holding companies currently engage in that might be too risky given their access 

to government and taxpayer support? 

Under the legislation proposed by the Administration and passed 

by the House in December, the largest financial firms operating in 

the U.S. would be subject to higher capital, liquidity, and supervisory standards. For instance, the largest, most interconnected institutions will be subject to additional concentration limits and regulators may establish short-term debt limits as well. These new 

limits will help ensure that our largest, most interconnected financial firms have sufficient capital, liquidity, and other buffers to 

bear the risks they take. The Administration recognizes that the 

engagement by one or more of the largest, most interconnected 

firms in high volumes of certain high-risk activities could increase 

risk to the financial system. Accordingly, the Administration supports provisions in the House bill that give regulators the authority 

to force institutions to limit or terminate any activity that could 

threaten financial stability. 

While many of the largest, most interconnected firms are currently organized as bank holding companies (BHCs), these are not 

the only firms that will be subject to activity limitations and higher 

prudential standards. The Administration’s proposed legislation 

would also require any firm that owns an insured depository institution to become a bank holding company and, therefore, to be subject to the activity limits and higher safety and soundness standards of the Bank Holding Company Act. In addition, the Administration’s proposal would identify other firms that are so large and 

interconnected that their failure could threaten financial stability 

and bring those firms under BHC Act activity limits and tough, 

consolidated supervision at the holding company—subject to the 

higher capital, liquidity, and supervisory standards mentioned 

above. 

Æ 


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