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THE CONDITION OF FINANCIAL INSTITUTIONS: 

EXAMINING THE FAILURE AND SEIZURE 

OF AN AMERICAN BANK 

HEARING 

BEFORE THE

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS 

AND CONSUMER CREDIT 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

JANUARY 21, 2010 

Printed for the use of the Committee on Financial Services 

Serial No. 111–97 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

DAN MAFFEI, New York 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

LUIS V. GUTIERREZ, Illinois, Chairman 

CAROLYN B. MALONEY, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

DENNIS MOORE, Kansas 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

RUBE ́ N HINOJOSA, Texas 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

AL GREEN, Texas 

WM. LACY CLAY, Missouri 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES A. WILSON, Ohio 

GREGORY W. MEEKS, New York 

BILL FOSTER, Illinois 

ED PERLMUTTER, Colorado 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

WALT MINNICK, Idaho 

JEB HENSARLING, Texas 

J. GRESHAM BARRETT, South Carolina 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

WALTER B. JONES, JR., North Carolina 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

KEVIN McCARTHY, California 

KENNY MARCHANT, Texas 

CHRISTOPHER LEE, New York 

ERIK PAULSEN, Minnesota 

LEONARD LANCE, New Jersey 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

January 21, 2010 .............................................................................................. 1 

Appendix: 

January 21, 2010 .............................................................................................. 59 

WITNESSES 

THURSDAY, JANUARY 21, 2010 

Austin, Jeff III, Vice Chairman, Austin Bank ...................................................... 13 

Glassman, Mitchell L., Director, Division of Resolutions and Receiverships, 

Federal Deposit Insurance Corporation (FDIC) ................................................ 41 

Hartnack, Richard C., Vice Chairman, U.S. Bank ................................................ 12 

Kelly, Jennifer, Senior Deputy Comptroller for Midsize and Community Bank 

Supervision, Office of the Comptroller of the Currency (OCC) ........................ 39 

Kelly, Michael E., Chairman and Chief Executive Officer. FBOP Corporation . 10 

McCullough, Steven, President and Chief Executive Officer, Bethel New Life 

Inc. ......................................................................................................................... 8

Miller, David N., Acting Chief Investment Officer, Office of Financial Stability, U.S. Department of the Treasury ............................................................ 38 

APPENDIX 

Prepared statements: 

Gutierrez, Hon. Luis ......................................................................................... 60 

Austin, Jeff III .................................................................................................. 62 

Glassman, Mitchell L. ...................................................................................... 81 

Hartnack, Richard C. ....................................................................................... 92 

Kelly, Jennifer .................................................................................................. 98 

Kelly, Michael E. .............................................................................................. 112 

McCullough, Steven .......................................................................................... 131 

Miller, David N. ................................................................................................ 147 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Gutierrez, Hon. Luis: 

Responses to questions submitted to Jeff Austin III ..................................... 151 

Responses to questions submitted to Mitchell Glassman ............................. 152 

Responses to questions submitted to Steven McCullough ............................ 155 

Responses to questions submitted to David N. Miller ................................... 158 

Article from the Chicago Tribune entitled, ‘‘Failed banker called local 

hero,’’ dated January 20, 2010 ..................................................................... 159 

Written statement of David Pope, President, Village of Oak Park .............. 163 

Price, Hon. Tom: 

Responses to questions submitted to Mitchell Glassman ............................. 166 

Written statement of Steven D. Bridges, Executive Director of Legislative 

& Regulatory Affairs, Community Bankers Association of Georgia ......... 168 

Written statement of Richard R. Cheatham and James W. Stevens, Kilpatrick Stockton LLP .................................................................................... 172 

(1) 

THE CONDITION OF FINANCIAL 

INSTITUTIONS: EXAMINING 

THE FAILURE AND SEIZURE 

OF AN AMERICAN BANK 

Thursday, January 21, 2010 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

AND CONSUMER CREDIT, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:02 a.m., in room 

2128, Rayburn House Office Building, Hon. Luis V. Gutierrez 

[chairman of the subcommittee] presiding. 

Members present: Representatives Gutierrez, Maloney, Moore of 

Kansas, McCarthy of New York, Baca, Green, Clay, Miller of North 

Carolina, Scott, Ellison, Klein, Foster, Perlmutter, Speier, Minnick; 

Hensarling, Castle, Jones, Garrett, Neugebauer, Price, Marchant, 

Lee, Paulsen, and Lance. 

Ex officio present: Representative Bachus. 

Also present: Representatives Biggert, Davis of Illinois, and 

Rush. 

Chairman GUTIERREZ. This hearing of the Subcommittee on Financial Institutions and Consumer Credit will come to order. 

Good morning, and thanks to all of the witnesses for agreeing to 

appear before the subcommittee today. Today’s hearing will examine the current state of the U.S. lending system, with a specific 

focus on a case study involving the bank holding company FBOP 

and its affiliated banks, including Park National Bank of Chicago. 

The subcommittee has asked our witnesses to address not only 

the specifics of the case study, but also the overall picture of the 

health of the lending industry, as well as the process of how insolvent financial institutions are resolved. 

Because of the interest of members on this issue, I will be increasing opening statements to 12 minutes per side, with the ranking member’s agreement. But, without objection, the record will be 

held open for all members’ opening statements to be made part of 

the record. 

In addition, I ask unanimous consent that Congressman Davis, 

Congressman Rush, and Congresswoman Biggert and others be 

empaneled for this hearing, and that they be allowed 5 minutes 

each to question the panelists after the members of the committee. 

Hearing no objection, it is so ordered. I yield myself 5 minutes. 

2 

Ever since the beginning of this financial crisis in 2008, we have 

all heard about the big financial firms and the banks that have 

failed: Bear Stearns; Lehman Brothers; and Merrill Lynch. 

But for every large bank that fails, there have been dozens of 

smaller community banks that have also failed, banks with names 

like People’s First Community Bank and St. Steven’s State Bank. 

Even banks like Park National Bank, that was supported by a 

largely successful holding company, fail every week. 

While the focus of this hearing will be the failure of one particular bank holding company, it is my intention to shed light on 

lessons learned from recent bank failures and the insolvent bank 

resolution process. Last year alone, 140 banks failed across this 

Nation. And so far this year, four banks have failed, including 

three just last Friday. 

Through this hearing, I hope to provide our banks better insight 

into the factors used by the regulators when they make their decisions, and for the regulators to have a better understanding of the 

impact that bank closures and consolidations have on our local 

communities and on civic and community organizations like our 

schools and faith-based institutions. 

We should also examine today the FDIC’s flexibility in accounting for factors such as the purchasing bank’s knowledge of the market that it’s moving into, as well as a bank’s record of community 

investment and support beyond the standard CRA rating. If the 

FDIC requires a change in the current law to be able to account 

for our community’s well-being, then by all means, we should have 

that discussion now, before more and more banks fail and consumers suffer even more than they already have. 

Finally, I want to stress the importance of banks that focus on 

lending to our communities, and not simply on using their money 

to make profits through trading on Wall Street. Real economic 

growth in this country happens when we invest in Main Street. It 

is based on old-fashioned lending, through a loan to a bakery to 

buy a new commercial oven, by helping to finance the expansion of 

a local school, by helping to put a child through college, or simply 

by offering them a reasonable, affordable loan to purchase a home. 

The economic crisis that we face was created by trading in confusing and all-too-crazy products like credit default swaps and 

mortgage-backed securities, not by financing the expansion of a 

hardware store down the street. This kind of trading is still based 

too much on greed. Just take a look at the decrease in lending last 

year, and compare that to the increase in bonuses doled out by 

many of the largest and yet most vulnerable institutions. 

And, as our local lenders close all around us, these banks continue to play financial roulette. It’s fundamentally backwards, and 

quite simply, counterintuitive. I believe that in order to stabilize 

our financial system, we must re-examine what it means to be a 

successful bank in this country, and encourage a return to fundamentals of lending. 

I am glad to hear that President Obama will be addressing this 

very issue later today when he announces his plans for limiting the 

ability of commercial banks to conduct proprietary trading with 

their depository funds. 

3 

Finally, I want to thank all of you who came to this hearing— 

in particular, those who made the long journey by bus. I applaud 

your interest and your involvement in these important issues, 

which are vital to the sustainability of our communities. And I look 

forward to hearing the testimony of those before us today. 

I yield Mr. Hensarling 4 minutes. 

Mr. HENSARLING. Thank you, Mr. Chairman. And thank you for 

calling what is really a very, very important hearing. I think, although many would agree that the financial stability crisis appears 

to have passed, clearly, economic recovery has yet to take hold. 

Unfortunately, since this Administration has taken office, we 

continue to be mired in double-digit unemployment, and 31⁄2 million more of our fellow citizens have been put on the unemployment rolls. 

We know that we have the highest level of bank failures that we 

have had, I believe, since the early 1990’s: 140 last year, costing 

the Deposit Insurance Fund $36.5 billion. 

We know that for only the second time in history, the Deposit Insurance Fund in September went into the red. The taxpayers of 

this Nation are being oppressed. 

We have now seen, in just the last 2 years, the Federal deficit 

increase tenfold. Tenfold. We know that we are on a pathway now, 

under this Administration and this Congress, to triple the national 

debt in the next 10 years, and it’s just a matter of time before they 

are knocking on the door of the taxpayer yet again to bail out the 

Deposit Insurance Fund. 

We can afford no more bank failures. So I think it is important 

that we examine what is the cause, and also examine and try to 

understand why does there still appear to be a relative dampening 

of lending activity that is out there. 

It is interesting, as we look at the case that is before us—and 

I read, I guess—I believe it was from yesterday’s Chicago Tribune; 

I look forward to Mr. Kelly’s testimony, I assume that they got it 

right—but reading from the 20th edition of the Chicago Tribune, 

‘‘He,’’ referring to Mr. Kelly, ‘‘had stashed $890 million in the preferred stock of government-sponsored mortgage lenders Fannie 

Mae and Freddie Mac, partly to fund acquisitions. This would be 

the biggest mistake of Kelly’s career. At the time, regulators had 

created numerous incentives encouraging banks to invest in the socalled GSEs. They were deemed about as risky as government 

bonds, and were treated favorably when it came to evaluating a 

bank’s capital.’’ 

Again, another data point on how the GSEs have simply wreaked 

havoc with this economy, and how the regulators were actually 

pushing their paper, creating exemptions for them. 

And, speaking of exemptions, as we continue to look at how 

shocking a number of bonuses are, how about the bonuses for those 

who run the GSEs? We are paying more money for them to lose 

more money. 

Why was it that the Administration waited until Christmas Eve 

to simultaneously announce that they are lifting the cap on taxpayer exposure to Fannie and Freddie—apparently $400 billion 

wasn’t enough, apparently they hadn’t wrecked enough banks already—lifting taxpayer exposure at the same time they were anVerDate Nov 24 2008 16:24 Jun 09, 2010 Jkt 056240 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\56240.TXT TERRIE
4 

nouncing $6 million bonus packages for their chief executive officers, $42 million for other execs. Those are the bonus structures 

that I want to be taking a look at. So, I’m glad that we’re having 

this hearing. 

Another thing we need to look at is, why is there a dampening 

of lending activity? Well, I talked to bankers in the fifth congressional district of Texas that I have the honor and pleasure of representing in Congress. I talked to them all over east Texas. 

For example, I speak to Milton McGee, president and CEO of 

Henderson Citizens Bank Shares in Henderson, Texas. He said, ‘‘I 

think the primary reason we are not seeing much commercial lending is the uncertainty with what is coming out of Washington. The 

small business owner doesn’t know what health care costs are 

going to do to him, plus any new taxes, as a result of the ever-increasing deficit. Business owners are not going to borrow and invest until they feel comfortable with the economic and political conditions. Way too many mixed signals are coming out of the Administration.’’ 

I hear that all over my congressional district. I hear it all over 

east Texas. I hear it all over America. If you want there to be 

greater lending activity, there is going to have to be less of a tax 

burden, and more certainty about the regulatory burden on these 

businesses. 

I thank you, Mr. Chairman, and I yield back the balance of my 

time. 

Chairman GUTIERREZ. Mr. Bachus is recognized for 3 minutes. 

Mr. BACHUS. Thank you, Chairman Gutierrez, and I thank you 

for holding this hearing. I want to focus on the community banks 

and the regional banks, because for some period of time, I have felt 

like the rules were being applied more aggressively towards our 

community banks and our regional banks. 

In every part of the country, members are hearing from community bankers, frustrated by new, inconsistent, and often arbitrarily 

applied mandates from the regulators. This zealousness—or I 

would call it overzealousness—is stifling meaningful economic recovery. Healthy community banks across the Nation are dealing 

with conflicting standards, and hearing mixed messages from the 

regulators. 

At the same time that the Administration is advocating for more 

consumer and small business lending, the bank regulators and the 

bank examiners are implementing regulatory standards in ways 

that inhibit responsible bank lending. 

Mr. Chairman, no one questions the need for strong safety and 

soundness regulation of our Nation’s banks, particularly those toobig-to-fail institutions that nearly brought down our economy during the recent financial crisis. But there is mounting evidence that 

pendulum may have swung too far, and that regulatory overreach 

is preventing our smaller financial institutions and our regional 

banks from meeting the legitimate credit needs of the communities. 

In testimony before the Financial Crisis Inquiry Commission last 

week, Rusty Kluvier, on behalf of the ICBA, referenced a 2008 

interagency statement called, ‘‘Meeting the Needs of Credit-Worthy 

Borrowers,’’ that established a national policy for banks to extend 

credit. The statement said, ‘‘The agencies expect all banking orgaVerDate Nov 24 2008 16:24 Jun 09, 2010 Jkt 056240 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K:\DOCS\56240.TXT TERRIE
5 

nizations to fulfill their fundamental role in the economy as intermediaries of credit to businesses, consumers, and creditworthy borrowers.’’ 

But if this standard is operative, why is every Member of Congress hearing from bankers that regulators and their actions are 

undermining their ability to lend? Why are 61 percent of community bankers saying that their most recent safety and soundness 

exams were significantly tougher than their last? 

Actions speak louder than words. These actions stand in sharp 

contrast to statements by the regulators and the intent of the law. 

The mixed messages from regulators are impeding economic recovery. However, the mixed message that is coming from this Administration, and many Members of the Majority in Congress are even 

more harmful. 

The Administration and some Members of the Majority chastised 

banks for not lending, but then pushed legislation that discourages 

investment and creates uncertainty. Increases in capital gains 

taxes, the cap and tax bill, government-run health care, as well as 

the Administration’s new bank fee create regulatory uncertainty. 

When the rules of the game are constantly changing, financial institutions are less willing to invest the capital needed to sustain 

economic growth. 

Thank you for holding this hearing. I look forward to hearing our 

witnesses testify. 

Chairman GUTIERREZ. Mr. Garrett is recognized for 2 minutes. 

Mr. GARRETT. Yes, I thank the chairman, and I thank the chairman for holding this important hearing with regard to this one particular bank. But, along with my colleagues, I do believe the larger 

issue that we need to be looking at is the GSEs, Fannie Mae and 

Freddie Mac. 

Because, as the ranking member said, it was indeed on Christmas Eve that the Obama Administration and the Treasury Department expanded and extended the bailout to Fannie and Freddie, 

and also approved those now-famous multi-million dollar compensation packages with nary a word from the chairman of this 

committee. 

The CBO is currently projecting losses of over $400 billion by 

these institutions. So, when you think about it, we will probably 

end up spending more money on the bailouts for these institutions 

than what Congress did with TARP. 

Since Fannie and Freddie were bailed out, we have had exactly 

one full committee hearing, and exactly one subcommittee hearing 

on this issue, entirely. So a lot of people think that this committee 

has been negligent in its oversight responsibilities in this area. 

After Christmas, on December 30th, Ranking Member Bachus 

and I wrote a letter to the chairman, asking him to hold a hearing 

on this issue. But here we are, almost a month later, and no response to the hearing request. 

I do understand that this topic may cause discomfort to some 

Members of Congress, considering the role that they played in basically shielding the GSEs from meaningful regulatory scrutiny in 

the period leading up to their collapse. Nonetheless, we shouldn’t 

let past mistakes lead us from carrying on an oversight responsibility that we have now, going forward. 

6 

It was the chairman who did, in fact, announce a hearing on executive compensation for this Friday, tomorrow. But again, he has 

refused to agree with a request by Ranking Member Bachus to 

have the heads of Fannie and Freddie here to testify as well, as 

far as what their role is in all this. 

The chairman even stated, ‘‘The public, having provided significant support for the purpose of restoring trust and confidence in 

our country’s financial system rightfully insists that large bonuses, 

such as these awarded by institutions receiving public funds at a 

time of a serious economic downturn, cannot continue.’’ Well, if 

that’s the case, then it’s really unacceptable that this committee 

has not responded. And we must respond in an appropriate manner. 

So, once again, I do call on the chairman of the full committee 

to hold a hearing on the Obama Administration’s expanded bailout 

of Fannie and Freddie— 

Chairman GUTIERREZ. The time of the gentleman has expired. 

Mr. GARRETT. —and the approval of their $1 million bonuses— 

Chairman GUTIERREZ. Mr. Foster is recognized for 2 minutes. 

Mr. FOSTER. I won’t use my 2 minutes here. I just want to make 

it clear once again to everyone that we are dealing with the aftermath of the fact that, in the last year of the last Administration, 

$17 trillion of money was removed from this economy by the economic policies that were then in place. We should never forget who 

ran the car into the ditch here. And if you put those $17 trillion 

of money back into the local communities, back into the local 

banks, we would not be worrying about this today. I yield back. 

[applause] 

Chairman GUTIERREZ. I would remind you that you are all 

guests, and you are not to applaud for the comments of the members. 

Dr. Price of Georgia is recognized for 2 minutes. 

Mr. PRICE. Thank you, Mr. Chairman. I want to thank you and 

Representative Hensarling, as well, for holding this important 

hearing on the anatomy of a bank failure. This issue is of paramount importance, not just to this Nation, but especially to my 

home State of Georgia. 

As you know, Georgia holds the distinction of having the largest 

number of failed banks in 2009: 25 of the 140. Banks in Georgia 

employ over 50,000 people, and hold $276 billion in assets. Most of 

these banks are community banks, which were mere bystanders to 

the financial and liquidity crisis of the last 2 years. 

Understanding how a bank fails is critical to determining if all 

these failures are necessary, and if policies and procedures are 

being applied fairly and uniformly by prudential regulators, especially the FDIC. I have grave concerns that the FDIC has taken its 

mission to protect depositors and used it to promote a world in 

which there are fewer banks. 

FDIC actions in the last 2 years have shuttered over 350 banks, 

and further concentrated assets in already large depository institutions. As a matter of policy, this is a judgement that should be left 

to Congress to debate and decide. Congress must ask itself and the 

FDIC if the United States is best served with deposits concentrated 

in relatively few banks. FDIC’s own reports show that only 112 inVerDate Nov 24 2008 16:24 Jun 09, 2010 Jkt 056240 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 K:\DOCS\56240.TXT TERRIE
7 

stitutions have assets over $10 billion, which hold more than 75 

percent of all assets at all banks, combined. 

So, while Congress is not qualified to resolve failed institutions, 

and it’s not my intention to tell regulators which banks should be 

closed and which should remain open, Congress must aggressively 

investigate the FDIC to ensure transparency for the American people from this opaque institution, which is literally destroying communities across our State. In fact, one individual in our home State 

said, ‘‘We’re not losing an industry. We’re losing communities.’’ 

So, today’s hearing is just the first step to answer these questions. This committee must commit to doing its due diligence to understand the FDIC’s decision-making process in closing financial 

institutions, and I urge the chairman to hold more hearings on 

this, and I look forward to those, and this hearing as well. Thank 

you, Mr. Chairman. 

Chairman GUTIERREZ. Thank you. I yield myself 1 minute just to 

enter into the record, since I was here—I arrived here in the November 1992 election—and then in 1994, the Republicans were in 

the Majority, in 1996, 1998, 2000, 2002, 2004, and 2006, when finally we were in the Majority. 

So, to hear my colleagues say that we shielded everybody, and 

that we were in charge, it’s just not the historical record. As a matter of fact, let me see, President Bush was elected in 2001 and reelected in 2004, and the calamity happened the last year of his Administration. We weren’t in charge, again. So, I just wanted to put 

it in some perspective. 

And lastly, bonuses for GSEs? We proposed freezing bonuses for 

GSEs. That’s our proposal. Every one of my colleagues on the other 

side of the aisle voted against freezing the bonuses of the GSE, but 

they want the GSE chairman to come before us. So that’s kind of 

the record that we have. 

And now we will open to the opening statement of our colleagues— 

Mr. BACHUS. Mr. Chairman? 

Chairman GUTIERREZ. Yes, sir? 

Mr. BACHUS. Could I have a moment to respond? 

Chairman GUTIERREZ. It’s just that you—we have only used 7 

minutes of our time— 

Mr. BACHUS. Oh, okay, I see. 

Chairman GUTIERREZ. We gave you 12 minutes on your side. 

Mr. BACHUS. All right. 

Chairman GUTIERREZ. So I am going to just— 

Mr. BACHUS. I just wasn’t aware of a bill that restricted GSE 

compensation. I would like a copy of it. Thank you. 

Chairman GUTIERREZ. There is a hearing tomorrow on executive 

compensation, and it will come up tomorrow at the hearing. 

Mr. BACHUS. Now I do have legislation to limit the compensation 

of GSEs— 

Chairman GUTIERREZ. Really, really, you will have time. 

Mr. BACHUS. Okay, thank you. 

Chairman GUTIERREZ. I assure you, when your time comes up, 

either tomorrow or today, when 5 minutes—but the Majority used 

7 minutes, we granted you 12 minutes. And you used your time, 

and we used our time. 

8 

Mr. BACHUS. Thank you very much. 

Chairman GUTIERREZ. We are going to proceed. Before we get to 

the first panel, I would like to enter into the record an article entitled, ‘‘Failed Banker Called Local Hero,’’ from yesterday’s Chicago 

Tribune, which Mr. Hensarling quoted from as well, and a letter 

from the Oak Park mayor, David Pope. 

I ask unanimous consent that these two items be entered into 

the record. Hearing no objection, it is so ordered. 

And now, we will go to our witnesses today. Each of them will 

be recognized for 5 minutes. There is a little clock there, and it will 

get green, and then it will get yellow, and red means stop. So when 

you see the yellow, know that you have 60 seconds to kind of wrap 

it up. We know that we’re going to be very gentle up here, in terms 

of giving you the time necessary. 

We are going to start with Steve McCullough. He is the president 

and CEO of Bethel New Life in Chicago, and is here representing 

both his organization and the Coalition to Save Community Banking. 

Next, we will hear from Michael Kelly, who is the chairman and 

CEO of FBOP Corporation, and is here representing himself. 

After him, we will hear from Richard Hartnack, who is the vice 

chairman in charge of consumer and small business lending at U.S. 

Bank. 

And finally, Ranking Member Hensarling will introduce Mr. Austin, a fellow Texan, a little bit later on. 

Mr. McCullough? 

STATEMENT OF STEVEN McCULLOUGH, PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, BETHEL NEW LIFE INC. 

Mr. MCCULLOUGH. To the honorable members of the Subcommittee on Financial Institutions and Consumer Credit, thank 

you, Chairman Gutierrez, for inviting me to testify today. Thank 

you to the staff of your office for their support. 

One year ago, my wife and daughter, who was then 5-years-old, 

drove to Washington to witness history. We would never have 

thought that 1 year later, we would be here again, but this time 

as an entire community, to reverse a bad decision by our government. 

I represent not only myself as a proud resident of the West Side 

of Chicago, but also as a leader of a community-based organization 

named Bethel New Life that employs over 250 individuals and 

serves thousands of residents, and as a humble member of the coalition of citizens who have spontaneously, and in an unscripted 

manner, come together as a result of the seizure of Park National 

Bank, and First Bank of Oak Park Corporation, FBOP, in October 

of 2009. 

I am here to speak on behalf of that broad and diverse coalition 

of community organizations, nonprofits, local leaders, religious institutions, and concerned citizens named ‘‘A Coalition to Save Community Banking.’’ My testimony’s intent today is to make a case for 

the reversal of the seizure of Park National Bank and FBOP Corporation by the FDIC, to question the process by which Park National Bank was seized, and to advocate for real reform that supports community banks across rural and urban America. 

9 

Park National Bank was a model community-based bank. It was 

both financially successful and mission-driven. It provided the 

quality of service, access to capital, and community reinvestment 

that all financial institutions should aspire to deliver. PNB demonstrated its commitment to the community by employing local 

residents and investing in new schools, small businesses, and affordable housing. PNB supported the work of local nonprofits and 

cultural organizations, and exemplified innovation, fairness, and 

flexibility. All of this is detailed in my written testimony. 

Our experiences may be local in nature, but they are national in 

significance. In 2009 alone, 140 of the Nation’s 8,000 local banks 

failed. And at this moment, more and more are struggling to stay 

afloat, as the FDIC issues demands for banks to raise capital reserves above standard thresholds. In Illinois, seven communitybased banks are at serious risk, if not more. 

What is the wisdom of a program like TARP that allows model 

financial institutions to die, while saving banks that have ignored 

the call to increase lending and to bank the unbanked? Why was 

TARP funding allocated to only the largest banks, while smaller 

banks collectively received a much lesser amount? 

If we seek greater economic stability, then how does withholding 

crucial assistance from community-based banks advance the 

FDIC’s goal of avoiding a future in which banks become too-big-tofail? 

Invoking the cross-guarantee authority, a mechanism used by 

the FDIC only 6 times in 20 years, the FDIC seized Park National 

Bank, along with its sister banks under FBOP Corp. Despite the 

fact that PNB was profitable and well-capitalized, it was unable to 

compensate for the heavy losses suffered by its subsidiaries in the 

south and west, which were particularly hard hit by the mortgage 

crisis. As a result, PNB was sold to U.S. Bancorp, along with 

FBOP’s 8 other banks at a cost to the taxpayers of $2.5 billion. A 

pillar of our community and an exemplary bank was lost. 

The seizure occurred only hours after United States Secretary of 

the Treasury Timothy Geithner personally awarded $50 million in 

tax credits to Park National Bank, an indication of confidence in 

the bank’s stability and an acknowledgment of its vital role in community reinvestment and economic recovery. 

Furthermore, the FDIC inexplicably disregarded FBOP Corp.’s 

request for a 1-week grace period following the seizure to formalize 

the acquisition of $600 million in private equity, which FBOP had 

secured to help stabilize the struggling banks. 

We have come here today to ask why? To the residents of the 

community served by PNB, this seizure and sale are incomprehensible. Why was a financially successful, model community-based 

bank not only allowed to die, but prevented from saving itself? Why 

was the FDIC so inflexible that it would not grant the 7 days it 

needed to save itself? Why were TARP funds withheld from smaller 

financial institutions? And why is there still no relief for community-based banks? 

We presumed, we hoped, that the buck stops here with the 

United States Congress and the White House. Imagine our frustration when we learned that, in fact, the buck does not stop here, 

that there was nothing that our congressional representatives or 

10 

the White House could do to alter the FDIC’s decision. If the FDIC 

cannot be held accountable by our congressional representatives, 

then by whom? By what power? Who is regulating the regulators? 

We believe that it’s not too late to save our bank. We ask this 

subcommittee to urge the FDIC to reassess and reverse their actions regarding FBOP. If this cannot be done, we expect U.S. 

Bancorp, being the sixth largest bank in the United States, to not 

only meet, but exceed the commitment to our communities that 

Park made. 

We ask that Congress exercise its full power to ensure that other 

community banks across our Nation do not meet a similar fate to 

that of PNB. 

We rode for 14 hours on a bus to get here. 

Chairman GUTIERREZ. Your time has expired. 

Mr. MCCULLOUGH. And tonight we will make a 14-hour trip back 

home, because many of us cannot afford overnight accommodations. 

That is how important this issue is to our community. 

We realize that this issue is bigger than us alone, bigger than— 

Chairman GUTIERREZ. Mr. McCullough, your time has expired. 

Mr. MCCULLOUGH. —Mike Kelly at Park National Bank and U.S. 

Bank. These are questions that you can answer for us. 

Chairman GUTIERREZ. Mr. McCullough— 

Mr. MCCULLOUGH. Our country is waiting for your response and 

for your leadership. Thank you. 

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

page 131 of the appendix.] 

Chairman GUTIERREZ. Thank you. I would ask the witnesses— 

that was almost a minute over—and there is 5 minutes for everyone. 

Mr. MCCULLOUGH. I apologize. 

Chairman GUTIERREZ. So when you see the yellow light, start 

summarizing. We are going to ask you questions. If you want to answer a different question than the one we’re asking you to make 

a point—I think you all understand how we can get that done. 

Mr. Kelly, you are recognized for 5 minutes. 

STATEMENT OF MICHAEL E. KELLY, CHAIRMAN AND CHIEF 

EXECUTIVE OFFICER, FBOP CORPORATION 

Mr. KELLY. Thank you. Good morning. My name is Mike Kelly, 

and I am chairman of FBOP Corporation. Thank you, Mr. Chairman, and members of the subcommittee for inviting me to testify 

today. 

I would like to give some brief remarks on the background of 

FBOP Corporation, and the events that led up to the closure of our 

nine community banks. I would also like to explore ways in which 

TARP funds might be made available to smaller community banks 

that are struggling in the current economic environment. 

First, a little background on FBOP Corporation. FBOP Corpora- tion was a $19 billion privately held multi-banking holding company headquartered in Oak Park, Illinois. We operated nine separate charter community banks in the States of California, Texas, 

Arizona, and Illinois. We employed 2,400 people. We were the largest privately held holding company in the United States, and the 

second-largest bank holding company in Illinois. We posted record 

11 

profits for 25 straight years, of exceeding earnings and service to 

the community, and had never, ever paid a common stock dividend. 

All earnings were retained within the bank group. 

Regulators considered FBOP to be a problem solver, and approved us to acquire 29 institutions, primarily failed or sub-performing banks. We were recognized for best practices in credit administration by our regulators. We were rated as best in class by 

the largest real estate valuation company in the country as recently as only 6 months ago, and they referred to us as an A underwriter. 

One-third of FBOP’s 150 branches were located in low- to moderate-income census tracks. Our banks were consistently rated outstanding for their community investment efforts, an honor given to 

only 8 percent of banks in the United States. 

In 2007 and 2008, FBOP Corporation banks made community do- nations and investments totaling $55 million, which represented 28 

percent of our total earnings. 

Fannie Mae and Freddie Mac are Government-Sponsored Entities created by Congress, which carried the implied guarantee of 

the government. Banks like FBOP invested in Fannie Mae and 

Freddie Mac because it was considered to be a very safe investment. At the time we acquired these investments, they were all 

AA-rated investments. 

Furthermore, the market—in fact, the regulators assigned national banks like FBOP a 20 percent capital risk weighting for 

Fannie and Freddie preferred stocks, the same risk weighting as 

U.S. agencies or cash. The regulators considered it so safe that the 

FDIC permitted banks to invest up to 100 percent of their tier 1 

capital in Fannie and Freddie preferred securities. 

But on September 7, 2008, the Federal Government took over 

Fannie Mae and Freddie Mac, and rendered these investments 

worthless. This takeover created an $885 million impairment loss 

for FBOP in an investment that it considered to be a safe haven 

and a conservative investment. It left four of our banks less than 

well-capitalized. 

On the morning of the takeover, Secretary Paulson made a statement to the press, and I want to quote here, if I may: ‘‘The agencies 

encourage depository institutions to contact their primary Federal 

regulator if they believe that losses on their holdings of Fannie 

Mae and Freddie Mac common or preferred shares, whether realized or unrealized, are likely to reduce the regulatory capital below 

well-capitalized. The banking agencies are prepared to work with 

the affected institutions to develop capital restoration plans consistent with capital regulations.’’ In our case, this did not happen. 

I am also here this morning in the hope that other well-run, stillviable community banks are not closed unnecessarily. While more 

than 100 community banks have failed to date, estimates are that 

many more are still in danger of failing. Few of these community 

banks have ever engaged in predatory lending practices, or awarded exorbitant compensation packages to their executives. 

The first round of TARP provided a great deal of assistance to 

the largest banks during the worst financial meltdown since the 

Depression. Since then, Treasury has now imposed very strict 

guidelines for access to TARP. These guidelines were not in place 

12 

for the larger community banks when they were fully funded in the 

initial stages of the TARP program. 

The small community banks are bearing the brunt of these stricter guidelines. For example, regulators now require that, for a bank 

to qualify for TARP, they have to be well-capitalized and rated as 

either a one or a two institution—the top ratings. There are few 

banks in the United States today that meet that criteria. 

The issue of these smaller community banks stem not from poor 

management, but from their commitment to their communities as 

an active lender. 

Chairman GUTIERREZ. Take 30 seconds and wrap up, Mr. Kelly, 

please. 

Mr. KELLY. I have some other remarks. Hopefully, I will be able 

to make those in the question stage. 

Chairman GUTIERREZ. And your complete statement will be entered into the record without objection. 

Mr. KELLY. Thank you. 

[The prepared statement of Mr. Kelly can be found on page 112 

of the appendix.] 

Chairman GUTIERREZ. Thank you, Mr. Kelly. 

Mr. Hartnack? 

STATEMENT OF RICHARD C. HARTNACK, VICE CHAIRMAN, U.S. 

BANK 

Mr. HARTNACK. Thank you very much, Mr. Chairman. And members, I appreciate the time to speak with you today. In the time allotted, I would like to just give a little bit of background on a couple of points that I think are relevant to the discussions here. 

First, though, I would like to talk just a little bit about our bank. 

U.S. Bank has been participating in resolving failed banks because 

we have maintained a record of superior performance: consistent 

profitability; strong capital position; and far fewer loan problems 

than many banks in the country. 

To understand U.S. Bank, you should think of us as the largest 

community bank in America, not the smallest big bank, and certainly not a Wall Street bank. We are headquartered in Minnesota—go Vikings—and our business practices reflect our Midwestern roots and values. 

Second, in our view, the FDIC process, subsequent to the decision by the prudential regulator to fail a bank, is a sound, transparent, fair, and value-maximizing process. Our experience has 

been entirely satisfactory, and we believe we have met all of the 

obligations for the transactions in which we have participated. 

Third, we want you to know that we are in this process of resolving failed banks as an opportunity to invest in communities and expand our community franchise. We are not in this for a quick 

trade. We are not in this for a fast buck. And, as a result, we pay 

a lot of attention, in every case, to employment, maintaining 

branch access in the communities, community relations, and community support. We do everything we can to retain clients, enhance 

our reputation, and maintain support for the community. 

Finally, we believe our track record of financial performance, 

growth in our customer franchise, well-documented community reinvestment, and community support, and community development 

13 

lending and investing all suggest that the FBOP franchise has 

ended up in capable, caring hands. Thank you, Mr. Chairman. 

[The prepared statement of Mr. Hartnack can be found on page 

92 of the appendix.] 

Chairman GUTIERREZ. Thank you. And Mr. Hensarling will introduce Mr. Austin. 

Mr. HENSARLING. Thank you, Mr. Chairman, for the courtesy of 

introducing our next panelist. Jeff Austin is a fourth-generation 

banker, and vice chairman of the board of Austin Bank Texas. He 

also happens to be chairman-elect of the Texas Bankers Association. 

He has, in the past, served as: the past chairman of the Tyler 

Area Chamber of Commerce; a member of the Frankston/Lake Palestine Chamber of Commerce; a member of the development board 

and the audit committee of the UT Health Science Center in Tyler; 

a board member of Lon Morris College; a board member and past 

president of East Texas Area Council Boy Scouts; a member of the 

Better Business Bureau of East Texas; and a member of the Children’s Advocacy Center of Smith County. If we had more time, I 

could go through the rest of his biography. 

But the point I would like to make is there is simply there is 

very little good that goes on in charity or economic development in 

east Texas that Mr. Austin is not involved in or knows of. He is 

a very important voice in banking in east Texas, and a very respected voice in banking in our State. 

And, although he is technically not a constituent, I would be 

proud if he was. I am happy that he has joined us here today. Mr. 

Chairman, I introduce Mr. Austin. 

Chairman GUTIERREZ. And Mr. Austin, you are recognized for 5 

minutes. 

STATEMENT OF JEFF AUSTIN III, VICE CHAIRMAN, AUSTIN 

BANK 

Mr. AUSTIN. Thank you, Congressman Hensarling, Mr. Chairman, and committee members. I am proud to be here this morning. 

Like many other bankers across the country, we are involved in our 

communities, and we are on the front line when boards and people 

call us for involvement. 

My message is clear this morning, and I want to state it simply: 

I am proud to be a banker, and please do not shoot the survivors. 

The theme is an underlying and frustrating tone among many 

bankers across the country. This is also felt by the hundreds of 

thousands of employees and many other bankers across the country. 

The investment banking activities of some of the Wall Street giants that are sometimes loosely referred to as banks, or ‘‘the shadow banking system,’’ have been inappropriately blended with banks 

like ours. There seems to be a populace view that banks are not 

lending. I just looked in the Washington paper this morning, and 

it said, ‘‘Slow Lending; Cautious Banks.’’ 

This is true for banks across the country, but I will say that 

when the economy slows down and when some of the large banks 

as stated here in the Washington paper this morning slow down, 

if they sneeze, smaller banks catch pneumonia. 

14 

By saying banks do not want to lend, it’s like telling McDonald’s 

they do not want to sell hamburgers. We do want to loan money. 

That’s our mission, that’s our purpose. And we ask for your help 

to help us get back to this without throwing on unnecessary regulations, unnecessary taxes, unnecessary intrusion into compensation, 

and a lot of distractions that take us away from doing what we are 

supposed to do. 

I would also suggest when you go back into your districts over 

the next couple of weeks, create a conference call. Talk to your 

bankers. You’re going to hear a lot of other stories like the ones 

that you have heard here, and the ones that I will share. 

Recent exams? They’re not like they used to be. There is probably an overkill, looking at recent valuations on real estate that are 

being applied with distressed values. Banks are having to put up 

reserves against loans that have not taken losses. We’re building 

them up. 

And, in addition, the SEC’s rules and proposal from FASB-5 do 

not work. The intent of that was banks that were building up reserves in good times, they did not want that to happen, where it 

could come back into earnings. We would like to be allowed to build 

up reserves in the good times to prepare for the turbulent times 

that we have right now. 

There are a lot of things that are happening in the banking industry. Traditional bankers, as we are—there is a difference—we 

know our customers. We want to loan to them, we want to be involved with them. We want to work with them through the different and varying economic cycles. 

I have submitted my written testimony. I would like to give some 

time back and make myself available to answer some questions. 

But again, we are proud to be bankers. I am proud to be a banker. And please, do not shoot the survivors. 

[The prepared statement of Mr. Austin can be found on page 62 

of the appendix.] 

Chairman GUTIERREZ. Thank you, Mr. Austin. And I will yield 

myself 5 minutes. 

Welcome to everyone, especially those who did come on a bus. I 

know you will be returning on a bus shortly after this hearing, 

back to Chicago. 

We have work to do. Because, as Mr. Kelly suggests, and I agree 

with him, Fannie Mae and Freddie Mac, while not guaranteed by 

the Federal Government, certainly were taken over by the Federal 

Government, and certainly were institutions that were created by 

Federal mandate. And I remember when the Secretary said, ‘‘Tell 

us about your losses,’’ and the fact that did not happen in your institution, with nearly $900 million worth of equity that you had in 

Fannie Mae and Freddie Mac when it all disappeared overnight. So 

I think that’s a very serious issue that we should take a look at. 

And I agree with Mr. Kelly when he says that the rules were 

changed. That is, the bigger, larger institutions were able to access, 

by signing, actually, just a document, a sheet of paper no larger 

than—and with probably fewer words than many of the sheets of 

paper that we have here before us, in terms of our testimony, a 

simple signature and billions of dollars were transferred to them. 

15 

And the rules changed in that smaller institutions that were out 

in the community didn’t have access to that capital at the second 

place. So I think that’s an important issue that we should—so I understand the basic unfairness. 

And Park National Bank, within the holding company, obviously 

had a stellar reputation and condition, in terms of its relationship 

with the community, the geographical community that it represented. And I think it’s fair—it might not be the—in the regulations, you know, it might not be in the law, it might not be what 

is stated—but it seems fair that if the FDIC sells an institution 

to—in this case to U.S. Bank—that U.S. Bank consider what that 

institution was doing within the community when they acquired it. 

So, it not only acquires the accounts that were there, and the assets that were there, but it also acquires the history of that institution, and the relationship that institution had with that community. I think that is important. 

Because what we’re talking about, Mr. Austin, is not affecting 

your bank. What we’re talking about is what you suggested earlier. 

Many of the larger banks are really investment banking firms, and 

that’s where they’re making their money. Because we see many of 

them, the larger—the ones that got the TARP money, they are 

lending less money. 

But what is curious to us, and what we want to get down to is, 

if you are lending less money, but you’re giving out billions of dollars of bonuses at the same time you’re lending less money, then 

obviously you’re profitable somewhere. But you’re not profitable to 

the people who need, that is, by lending money to people. So you 

must be making your money somewhere else, while you’re FDICinsured, and while the Federal Government is standing behind you, 

and why, in many cases, you receive TARP money. 

So, that’s the—it’s really not the community bankers. I think we 

need to explore how it is we do ease up. But it’s the large banks 

that got the TARP money, that survived, that brought us into this 

crisis, that today are—you read about it, billions of dollars in bonuses, handing out billions of dollars less in loans. 

So, it seems to me you got the money, you’re just not lending it. 

But you’re keeping it in-house to give the billions of dollars of bonuses to your top employees, while not creating any economic activity, other than trading in equities, which I imagine is economic activity of a few people on Wall Street, as they trade. 

But it doesn’t create bakeries, it doesn’t create homes. It doesn’t 

create a hardware store. It doesn’t create economic activity. It 

doesn’t give somebody a truck that they might need so that they 

can start a landscaping service, I mean the basic fundamental 

kinds of things that people need and need access to capital. 

So, having said that, Mr. Hartnack, I don’t come to U.S. Bank— 

just so that we understand from the very beginning—in terms of 

what happened, in terms of making any judgements. But I would 

like to ask you, what has U.S. Bank done since it acquired the institution to keep that kind of faith and that kind of activity that 

was so well-known and cherished with Park National Bank? If you 

could, just speak to that a moment. 

Mr. HARTNACK. Thank you, Mr. Chairman. I would like to make 

sure that the record would reveal that U.S. Bank took TARP— 

16 

probably, in 20/20 hindsight, didn’t need it—paid it back, and 

doesn’t pay billions of dollars in bonuses. So— 

Chairman GUTIERREZ. That’s why I tried to not be defensive 

here. 

Mr. HARTNACK. Yes, okay. So I just want to be sure we— 

Chairman GUTIERREZ. If you could just speak to that issue, because— 

Mr. HARTNACK. Yes— 

Chairman GUTIERREZ. —time is up. 

Mr. HARTNACK. Yes. With regard to the process of integrating a 

new institution into our company, we have a process that we follow 

both in open market transactions and in these FDIC transactions. 

Fundamentally, we come to the bank, sit down with the management that’s there, and begin a process of understanding the bank, 

in terms of customers on the loan side, customers on the— 

Chairman GUTIERREZ. I’m trying to—because the time has expired, my time has expired, here is what I’m going to ask you to 

do. I’m going to ask you to put in writing to this committee what 

it is U.S. Bank, since acquiring these assets through the FDIC, 

since bidding on these assets, what it has done to keep its relationship. Is it keeping—what are your commitments, given the past 

history of Park National Bank, to the community? If you could, just 

roll those out. We will have a chance to talk a little bit later. 

Mr. Hensarling, you are recognized for 5 minutes. 

Mr. HENSARLING. Thank you, Mr. Chairman. Mr. Kelly, my first 

couple of questions will be for you, as I read through your testimony. 

My first question is, had the FDIC not had their rule in place, 

which you cite in your testimony, that allowed 100 percent of 

Fannie and Freddie preferred stock to count against the tier one 

capital where other investments are generally restricted to 10 percent, would you have concentrated as large of an investment in 

Fannie and Freddie? 

Mr. KELLY. Absolutely not. 

Mr. HENSARLING. Okay. So but for the FDIC rule, you would not 

have had that concentration. But for— 

Mr. KELLY. If I could elaborate on that just for a second? 

Mr. HENSARLING. Please. 

Mr. KELLY. There were four special regulations put in place by 

the FDIC and the OCC to specifically encourage banks to buy these 

instruments. We were allowed to buy no other equity-type instruments, other than this preferred stock. Preferred stock, in this instance, was nothing more than a highly-refined debt instrument. 

We had unlimited amounts—we were actually given regulatory— 

lowest regulatory capital, the same as a government issue. And 

there were a number of incentives for banks to buy this. 

We thought this was a safe haven, AA-rated instruments. We 

were never criticized by our examiners for the investment, or the 

large concentration in it. This was a terrible mistake on my part, 

on our part. But there were so many incentives in there to do this. 

Mr. HENSARLING. So, in some respect, your mistake was you 

trusted your government, which told you to go out and invest in 

Fannie and Freddie? 

17 

Mr. KELLY. We did believe that the government backed these instruments. They created the organizations. There was no SEC reporting on these—we could not define and analyze this, as we could 

with any other investment. 

Mr. HENSARLING. So, Mr. Kelly, you said but for the regulators, 

you would have not had the concentration of Fannie and Freddie. 

Once you had the concentration of Fannie and Freddie—but for 

that, would you still own the bank today, had you not concentrated 

in Fannie and Freddie preferred stock? 

Mr. KELLY. Unquestionably. We took a $900 million hit that 

wiped out over half of our capital on September 7th. We were never 

able to recover. TARP funding would have been adequate for us to 

recover and go forward. That was not available to us. 

I still don’t understand why that wasn’t available. We were approved for TARP in October. We were called and told we had received TARP. The next day we were told that, ‘‘I’m sorry, there is 

nothing in place for a privately held bank, only publicly traded 

banks are eligible for TARP at this time. You will have to apply 

next month.’’ We did after already being approved, and our request 

was deferred into January, there was a change in administration, 

and we never got a yes or a no on TARP. 

Mr. HENSARLING. Do you have a personal or professional opinion about the Administration announcing $6 million bonuses for the 

execs of Fannie and Freddie? 

Mr. KELLY. That’s a little beyond my scope of expertise. I am 

going to defer on that. 

Mr. HENSARLING. Thank you. Mr. Austin, I would like to turn to 

you. I believe—hopefully you—I certainly listened to your statement, I hope you listened to mine, as I quoted one of your fellow 

east Texas bankers, Milton McGee of Henderson Citizens Bank 

Shares. 

I would like to quote another Texas banker from Royse City, 

president and CEO of Texas Leadership Bank, talking about what 

he sees as a relative dearth of lending activity. He said, ‘‘I would 

say it’s twofold with lenders and borrowers. Borrowers are reluctant to take on additional debt during an uncertain economic period. They are reluctant to invest their liquidity as equity. They are 

unsure how much additional tax and regulatory burden that the 

President and the leadership in Congress may place on their business. Lenders are reluctant to take on additional risk during an 

uncertain economic period. Lenders are focusing their efforts on improving existing asset quality, rather than on new business opportunities, and are reluctant to take on any moderate levels of risk 

that are under the current intense regulatory scrutiny that may 

subject the institution to potential criticism.’’ 

So, these are just two of the bankers in Texas. Are these fair 

characterizations, as far as what many of us in Washington perceive to be an inadequacy of lending activity to help get this economy going? Could you elaborate on your views? 

Mr. AUSTIN. Sure. Congressman, those statements would be 

echoed by bankers across the country in every community. We are 

facing a glut in lending, because our focus has shifted from—we 

want to continue working with our customers, but we have shifted 

our focus to focus on the unnecessary regulation, the proposed regVerDate Nov 24 2008 16:24 Jun 09, 2010 Jkt 056240 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 K:\DOCS\56240.TXT TERRIE
18 

ulations that are coming down, and really trying to build up capital 

reserves. Capital is king. 

And taking on unnecessary risk is something that bankers are 

not going to do. We’re cautious by nature. We do want to lend 

money, but we need to be able to get back in. And looking at some 

of the exams that are coming from our regulators, we know they 

have a job to do, and this has nothing to do with the personalities, 

but the examinations are extremely tedious, looking at the alphabet soup of regulations, and that’s taking us away from being able 

to loan money, which is what we’re here to do. 

Mr. HENSARLING. Thank you. 

Chairman GUTIERREZ. Thank you, Mr. Austin. Congressman 

Moore, you are recognized for 5 minutes. 

Mr. MOORE OF KANSAS. Thank you, Mr. Chairman. Mr. Austin, 

on page four of your testimony, you say that ‘‘no examiner or agency wants to be caught not enforcing consumer protections or stated 

regulations because of the real fear of criticism from the inspector 

general’s office.’’ 

Are you saying examiners are only being tough on banks now because an IG might double-check their work to see if they’re fully 

enforcing the law? 

Before you respond, I would point out that taxpayers have 

learned a lot from recent IG audit material loss review reports. For 

example, the Treasury IG found six examples where OTS was 

complicit—or even worse, directed banks to back-date capital infusion so they would appear healthier than they really were. One 

OTS official involved resigned a few weeks after I wrote a letter to 

the acting director, inquiring why he had not been fired. 

So, should Congress eliminate these inspectors general with the 

hope that the bank examiners will look the other way if there are 

fewer consumer protection violations? 

Mr. AUSTIN. Congressman, thank you for your question. I will 

say I’m a fourth generation banker. 

Mr. MOORE OF KANSAS. Yes, sir. 

Mr. AUSTIN. I have read the minutes of a couple of our banks 

going back to the 1920’s and 1930’s. Trust me, examiners were 

tough then, too. That is something that has not changed. And they 

have a job to do. 

We have one of the most sound banking systems in the world, 

and I think all of us can be proud of that. It’s like going to the doctor. They’re going to ask you to do some things, and maybe it’s 

going to improve your health, which we need to continue to do. But 

some of the unnecessary results of swinging the pendulum too far, 

that’s what we are concerned about. 

With the proposed creation of a consumer protection agency, I 

think that’s also adding another unnecessary agency that would 

impose duplication and cause someone else to take a look at the examinations or the regulations, when we already have qualified experts with our regulatory agencies doing that right now. 

Mr. MOORE OF KANSAS. How do we protect and assure the public 

that we’re going to make sure what happened in this incident 

doesn’t happen again in the future, then, if we don’t put some further regulations in place to make sure that this doesn’t happen 

again? 

19 

Mr. AUSTIN. Regulations are good. Unfortunately, some people 

look at them as suggestions. We do not. And how we interpret 

these, our banks are profitable. We are staying focused to our core 

mission, and that’s lending back in our communities, working with 

borrowers that we have known for a long time, and been able to 

work with them through various cycles. That’s what traditional 

bankers do. 

Mr. MOORE OF KANSAS. But what about other bankers you’re 

calling, I suppose, non-traditional? I understand the community 

banks, and I have talked to my people back home. 

What should Congress do? What should this committee do to try 

to ensure that what happened before doesn’t happen again? 

Mr. AUSTIN. There are some of the activities that we did not engage in that I can come back with some other responses from 

other—I think some of the other entities are better qualified to answer that than I am, because we did not engage in those activities 

for a reason. Some banks do not have the expertise to do it; we did 

not have the expertise to do that. 

What can Congress do? One thing is to take a look at some of 

the other GSEs. Keep the respective agencies focused with their 

core mission, and do not allow mission creep. Keep the banking focused on banking. I have been involved in listening to different discussions of, let’s put the firewalls back up between traditional 

banking activities and the other activities. That’s something that I 

think we could take a look at. 

Mr. MOORE OF KANSAS. Thank you. Mr. Kelly, I would like you 

to talk about how the culture of excessive lending and abusive leverage contributed to the financial crisis. Will we ever know what 

the appropriate level of leverage and use of debt is that would 

maintain financial stability? 

I have heard from many bankers back in Kansas that bank examiners seem to be overcompensating, and not allowing them to 

loan as much as they prudently could. But how do we, as lawmakers, help strike the right balance of responsible lending that’s 

safe and sustainable, while also giving affordable credit to the 

small businesses which can help create jobs, get people back to 

work, and promote economic growth? 

Mr. KELLY. That’s a lot to answer. My response is that one of the 

basic things that can be done is allowances for banks to maintain 

larger loan loss reserves, generally. That’s basically prohibited 

under FASB right now. 

Everyone knows that banking is a cyclical industry. There are 

going to be downturns. There is no cushion allowed right now for 

loan loss reserves. That has to be changed, so when the bad times 

come, there are reserves there. 

As far as—I am sorry, the other part of your question? 

Mr. MOORE OF KANSAS. Well, that was it. And I would just ask 

you if you have— 

Mr. KELLY. That would be my one recommendation. 

Mr. MOORE OF KANSAS. If you have any further comments you 

would like to make, I would appreciate those in writing after this. 

My time is just about up. 

Mr. KELLY. Thank you. 

20 

Mr. MOORE OF KANSAS. Thank you. Would anybody like to address that in the few minutes we have left here? 

[no response] 

Chairman GUTIERREZ. The gentleman’s time has expired. 

Mr. MOORE OF KANSAS. Thank you. 

Chairman GUTIERREZ. Mr. Bachus, you are recognized for 5 minutes. 

Mr. BACHUS. Thank you, Mr. Chairman. Mr. Austin, we hear 

from local bankers that they’re being told by examiners in certain 

cases to require what they consider excessive principal payments 

that the bankers believe will cause borrowers to default. In other 

words, they’re told, ‘‘You need to have a payment on principal,’’ and 

the bank is actually just collecting interest. 

And the banks, you know, a lot of them feel like if they had exercised forbearance until the economy improved, that the borrower 

could have been able to meet those things. But we hear that examiners are sometimes requiring collateral write-downs, and that both 

of these things are causing unnecessary loan defaults. Would you 

like to comment on that? 

Mr. AUSTIN. Yes, sir. Thank you for asking that. What you’re 

hearing is reality. I can cite several examples of where we have 

had good paying customers, we have known them for a long time, 

they’re paying as agreed and on time. But we may—for example, 

we may have a loan that may be based on a 20-year amortization 

with a 5-year balloon payment. When it comes time to renew that 

payment, that amount, examiners are asking us now for a new appraisal. 

Let me use an example. Say you purchased a farm for $120,000; 

we financed $100,000. Maybe you have paid down to $95,000. But 

when that 5 years comes up, we obtain a new appraisal, as required, but it comes back at $70,000. We’re going to have to write 

that down by creating a reserve of an additional $25,000. 

The real heartbreak in this situation comes when we come back 

to you, as a customer, and we say, ‘‘Mr. Customer, would you bring 

us another $25,000 or $30,000 to pay down, so we can be within 

the loan limit, or will you bring us additional collateral?’’ And this 

comes at a time when many customers are strapped for cash, 

they’re trying to expand, they’re trying to keep their own households afloat. 

May I add? A lot of these valuations in real estate are also 

caused by the forensic exams after banks are closed, where, in 

many parts of the country, even in east Texas, bankers are being 

asked by the regulators to include—and by the FDIC—to include 

a liquidation value on real estate. That is depressing the local real 

estate markets. It is dumping real estate that is really—it’s not 

helping the communities, and it’s not helping the banks, and we’re 

creating reserves against unrealized losses. 

Mr. BACHUS. Thank you. Yes. I think, in many cases, the regulators or examiners are making underwriting decisions that I think 

the bank ought to make. And— 

Mr. AUSTIN. Yes, sir. 

Mr. BACHUS. —as you say, I think it is causing all kinds of problems. 

21 

Mr. Kelly, I noticed that a week after your bank was taken over, 

President Obama signed into law a bill easing the rules on how 

Fannie and Freddie losses can be realized. 

Mr. KELLY. Right. 

Mr. BACHUS. Would that—and I know the Chicago Tribune article says that would have dramatically reduced the amount of 

money that you would have had to have raised. 

Mr. KELLY. That’s correct. That was worth as much as $200 million in capital to us. It would have raised our capital levels, and 

it also would have vastly improved our chances to raise outside 

capital. 

Mr. BACHUS. Did— 

Mr. KELLY. We knew that was pending, the regulators knew it 

was pending. We asked for an additional week. It was not granted. 

We had always been a top-rated bank, one and two in all categories 

in banking. We had excellent rapport with our regulators prior to 

the GSE issue. And why we got no accommodation, I still have no 

answer. 

Mr. BACHUS. Yes, that was going to be my next question, you 

know. You knew it was coming, they knew it was coming. It would 

have reduced our cost, and yet they didn’t extend you a one-week 

extension. 

Mr. KELLY. No, that’s a good question. I do not have the answer 

to that question. 

Mr. BACHUS. Yes, I don’t, either. I can’t imagine. 

Mr. Hartnack, when U.S. Bank took over—and I notice you all 

have taken over several failed institutions—the FDIC took a $2.5 

billion write-down. Is that correct? 

Mr. HARTNACK. I think those are the numbers that they estimated at the time, yes, sir. 

Mr. BACHUS. Yes, and I don’t know that you can answer this, but 

Mr. Kelly was offering a plan that would have cost $600 million. 

And maybe less, had they waited another week. But it cost $2.5 billion, the deal they made. Is that— 

Chairman GUTIERREZ. The ranking member— 

Mr. BACHUS. Is that kind of— 

Mr. HARTNACK. Yes, I really wouldn’t be in a position to address 

that. I think, you know, we came in after the fact, and— 

Chairman GUTIERREZ. The time of the gentleman has expired. 

The FDIC witness will be here, and I am sure we will ask him 

those questions. 

Mr. BACHUS. Thank you. 

Chairman GUTIERREZ. Mrs. McCarthy from New York is recognized for 5 minutes. 

Mrs. MCCARTHY OF NEW YORK. Thank you, Mr. Chairman. I appreciate you holding this hearing. I apologize for not being here for 

the first part of your testimony, though we did go through all the 

testimony last night. 

One of the things, Mr. Austin, that I want to ask you is, in your 

testimony, you discuss the many hurdles facing the survivors of the 

recession, and one of them is dramatically higher capital requirements. What are the capital requirements imposed on community 

banks versus the larger financial institutions? What would you conVerDate Nov 24 2008 16:24 Jun 09, 2010 Jkt 056240 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 K:\DOCS\56240.TXT TERRIE
22 

stitute as a fair capital requirement for community banks versus 

the large banks? 

Mr. AUSTIN. Congresswoman, thank you for the question. The 

capital requirements for FDIC-insured institutions are really basically the same. 

Some of the differences are going to be based on the risk 

weighting of our assets. And I think that is what we need to turn 

around and look at—for example, some banks maybe are more 

highly concentrated in commercial real estate versus one-to-four 

family real estate. One-to-four family real estate has a lower risk 

weighting than an investment property. And I think that’s something—when we look at the—this is one thing that the regulators 

do come in and review with great intensity, our balance sheets. 

In regards to capital standards, one concern that we are seeing 

is listening to some investors and some others that may want to 

charter new banks. The FDIC is—we have heard—I have not tried 

directly, but from some of our members and colleagues—are not allowing new banks to be chartered until they can recapitalize and 

increase the FDIC Fund. 

One consequence from this is that with the new banks that have 

recently been chartered, they are requiring substantially higher 

capital ratios. 

Mrs. MCCARTHY OF NEW YORK. Thank you. Mr. Austin, the ranking member had actually asked the kind of questions that I was 

going to be—I’m sorry, Mr. Kelly—what I was going to be asking. 

But one of the things—we will have the opportunity this afternoon—is going to be with the regulators, and I think that we can 

follow up. I think that was one of the reasons we reversed it. We 

wanted to hear from all of you before we started talking to the regulators because, obviously, the regulators are the ones who are putting you through the hoops, as we say, so that we can take your 

testimony and then ask the questions. 

But on one of the parts that we were looking at, were you given 

any guidance on how to modify your application, or any changes 

that were necessary, given the new Administration—going with 

your testimony to Mr. Bachus earlier? 

Mr. KELLY. I would have to say that the Office of the Comptroller 

of the Currency, our primary regulator, was very supportive, they 

were very helpful, they were very sympathetic. Right from the beginning, they acknowledged that our issue was GSE only. They referred to us as a well-managed bank with strong asset quality and 

a good track record. 

And they strongly recommended us for TARP approval in October. We were approved for TARP approval by the regulatory committee. But because we were not a publicly traded bank, they had 

no rules in place to deal with private banks that did not have a 

stock price. 

Therefore, we were deferred, and that deferral took us into January and February. The rules totally changed. The rules became so 

restrictive that the only way you could get TARP is you had to be 

well-capitalized. We, by virtue of the GSE losses, were not well-capitalized. Therefore, we didn’t qualify. The rules were vastly different for the larger, publicly traded banks than they were subsequently for the smaller banks and privately-traded. And also, the 

23 

guidelines were done at a period well into the economic downturn, 

when everyone’s numbers looked much more difficult, as far as loan 

loss provisions and delinquencies. 

Mrs. MCCARTHY OF NEW YORK. And I’m sorry if I missed this 

part. Could you tell me what happened to your customers? What 

was the results to your customers? 

Mr. KELLY. I think that has yet to be seen. I think we’re concerned. We hope that U.S. Bank will step forward and meet the 

commitments that we had in place, both the donations, the financial institutions—many of our institutions, many of our not-forprofit companies, are totally dependent on the commitments we 

made to support them. And I am hopeful, and I believe that U.S. 

Bank will step forward and do that. 

But the effect on our customer base, U.S. Bank has a vastly different model than our model. They’re a very efficient bank; they 

run with fewer people. We had 2,400 people, and I am very concerned about how many people will be employed by U.S. Bank a 

year from now. 

Mrs. MCCARTHY OF NEW YORK. Mr. Hartnack, could you follow 

up on that, on what was just said? 

Mr. HARTNACK. I’m sorry. Say it again. 

Mrs. MCCARTHY OF NEW YORK. Could you follow up? I was asking what happened to the customers of the banks. It was mentioned that U.S. Bank was now taking over. Could you tell me 

what’s going to affect— 

Mr. HARTNACK. Sure. I think we would look at the depositors 

first, and assure you that we continue to offer the same products. 

In fact, the products are unchanged at this point. They will be 

modified during computer conversion, but will be substantially the 

same. 

Interest rates have come down, so depositors are seeing lower 

rates, but they would have seen those lower rates, even if— 

Chairman GUTIERREZ. The time of the gentlelady has expired. 

Thank you very much. 

Mrs. MCCARTHY OF NEW YORK. Thank you, Mr. Chairman. 

Chairman GUTIERREZ. Mr. Neugebauer for 5 minutes. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. I thank our witnesses. 

Mr. Austin, I want to go back to something you said, because it’s 

something I have heard from my community bankers not just during this period, but for a number of years, which is that during 

good times, when earnings were good, and the economy was stable, 

growing, that attempts to increase, you know, kind of beef up the 

balance sheet were resisted by the examiners. 

But yet they were very quick to come in, when the economy 

turned down and the asset quality diminished some because the 

economy, to tell you you needed to build your capital back up. Am 

I repeating that correctly? 

Mr. AUSTIN. Yes, sir. It’s capital in reserves, as well. And if I 

may answer part of that based on our loan loss reserve, I think 

back many years ago when we, after an exam, we would ask our 

examiners for what is called a certification letter. That certification 

letter, on their letterhead—FDIC, State Department of Banking, or 

24 

OCC—would really state that, ‘‘We’re declaring your reserve adequate.’’ 

We would, in return, take that to our CPAs to defend, in case 

of an IRS audit. Because, under the current rules, we’re only able 

to deduct from income taxes the amount that—to the extent of our 

losses, based on the reserve. That would not allow us to build up— 

and it was a disincentive to build back up our reserves. 

Today, when we are trying to build them back up, it’s at the 

worst time, with depressed earnings. When anything takes a hit to 

earnings, that takes away from money that we can loan back into 

our communities, which is what we are geared to do. 

Mr. NEUGEBAUER. And, in fact, banks are—like most small businesses—is that the best source and most ready source of capital is 

earnings, and retaining those earnings. Is that correct? 

Mr. AUSTIN. Capital is king, yes, sir. 

Mr. NEUGEBAUER. And so, what would be some of your suggestions that we take, moving forward here, to take care of both sides 

of the ledger there, one, the regulatory side, and the tax side, to 

allow financial institutions to, in fact, build up those loan loss reserves so that in the event the storm comes again, that they are 

able to weather those better? 

Mr. AUSTIN. There is more than one solution, and this is the 

beauty of this, but it is going to take working with the SEC, the 

IRS, and FASB to allow us to do this. By us being able to increase 

these reserves within a prudent amount by using the banker’s 

judgement, based on their characteristics, their level of risk tolerance, we would like to put that back in the hands of the banks and 

the bank management, regardless if you’re publicly traded or not. 

I know of one recent exam from a colleague. One of the examiners asked them, ‘‘Well, is your excess or unallocated reserve going 

to be greater than $15,000? And the reply was, ‘‘No, we will get it 

down to $12,000,’’ because either they were going to find something 

else to charge off, or they have to back it back into earnings. 

Mr. NEUGEBAUER. Thank you. Mr. Kelly, I want to go back to 

something you said, that except for the portfolio of the preferred 

stock that you had in Fannie, the rest of your asset quality was 

found to be acceptable to the examiners. Is that correct? 

Mr. KELLY. That’s correct. In fact, in August of 2008, one month 

before the Fannie and Freddie Mac investments were rendered 

worthless, we were approved by all three regulatory agencies to acquire a $3 billion problem institution in California. They only give 

that approval to well-managed, well-run banks with good numbers. 

We received that within 48 hours expedited time. They knew we 

were a bank that was capable of dealing with problems. But when we had the $900 million—almost $900 million—impact 

of the Freddie and Fannie losses, it wiped out more than half of 

our capital, we had to cancel that acquisition, and we were in a 

tailspin. 

Mr. NEUGEBAUER. If you would have gotten the same deal that 

some of the people who were holding some of that AIG instrument—you might have come out a little better, mightn’t you? 

Mr. KELLY. We would have been quite happy just to get our allocation of TARP money, as most of the other banks our size or larger received. That’s all we wanted. We were initially approved. Why 

25 

we didn’t qualify, I have no idea why that was deferred. That will 

be my question— 

Mr. NEUGEBAUER. But if the government had made you whole on 

those Fannie Mae preferred stock, it would be a different day for 

you, right? 

Mr. KELLY. That would have been nice, yes. Our issues were related to the Fannie and Freddie investments. 

Mr. NEUGEBAUER. Yes, and that’s the reason that many of us on 

this side of the aisle are very concerned about the government picking winners and losers. And, unfortunately, this bank was chosen 

to be a loser, where other financial institutions were chosen to be 

winners, instead of letting the marketplace do that. And we cannot 

allow that to continue in the future. It does not promote good behavior, market behavior. And, quite honestly, it’s not the right 

thing to do. And so I hope that— 

Chairman GUTIERREZ. The time of the gentleman is expired. 

Mr. NEUGEBAUER. —we will do things to prevent that from happening in the future. 

Chairman GUTIERREZ. Mr. Clay, you are recognized for 5 minutes. 

Mr. CLAY. Thank you, Mr. Chairman, and thank you for conducting this hearing. And let me start with Mr. McCullough. Mr. 

McCullough, can you share with this committee your take on the 

accelerated home foreclosures in and around the Chicago area? 

Was it attributable to certain financial institutions steering certain 

customers to subprime loans instead of conventional mortgages? I 

would like to hear what you think about that. 

Mr. MCCULLOUGH. It’s no surprise in our community, like many 

other communities across the country, that many residents are in 

distress. Either they have been foreclosed on, or are in the process. 

In our community, on the west side of Chicago, there are thousands 

of families who are either in multi-family housing or single-family 

who have either been foreclosed on or are in process. 

In terms of banking—banks and other financial institutions, you 

know, doing subprime lending, there is a long list. I am just here 

to say that Park National Bank was not one of them. In fact, Park 

and Bethel, the organization that I run, have specifically designed 

banking products to meet the needs of very low-income residents 

in the community, as well as homeowners. And we were active 

partners to really address the issues that face the residents in our 

community. 

Mr. CLAY. And in your testimony, you also point out that U.S. 

Bank—you compare the charitable giving of U.S. Bank versus Park 

National Bank and FBOP, where you take a number like 27 percent of your profits went back into charitable giving, and then you 

compared U.S. Bank with a 0.7 percent. And I think that speaks 

volumes about the service that Park National Bank gave, compared 

to a company like U.S. Bank. 

Mr. MCCULLOUGH. Well, just like all politics is local, all banking—really good banking—is local. And I think to Park National 

Bank’s credit, you know, Mr. Kelly and his staff knew our community, and knows our community, and knows what the challenges 

and the needs are, and was able to be very targeted, in terms of 

26 

not only loans and business transactions, but also charitable giving. 

It is yet to be seen what U.S. Bank’s commitment is to our community. They do have an existing branch and footprint on the west 

side of Chicago, but obviously not to the same caliber as Park has 

been. 

Mr. CLAY. Does that charitable giving—does that also include 

loan modification? 

Mr. MCCULLOUGH. It does. 

Mr. CLAY. It does? 

Mr. MCCULLOUGH. Yes. 

Mr. CLAY. In other words, you work with the borrower to make 

the modification reasonable and something that they can accomplish? 

Mr. MCCULLOUGH. Yes. I mean Bethel itself is a HUD-certified 

counseling agency. We work with homeowners across the area. And 

Park was, you know, definitely a partner. And some of the members of the coalition who also do homeowner counseling, as well, 

share the same experience. 

Mr. CLAY. Thank you for your response. Mr. Hartnack, tell me, 

did FBOP have a large number of subprime loans, and was that 

one of the reasons for its failure? 

Mr. HARTNACK. Certainly not in the first mortgage arena, no, sir. 

Mr. CLAY. No? 

Mr. HARTNACK. Nor did U.S. Bank, for that matter. 

Mr. CLAY. Okay, okay. You didn’t have anything to comment 

about the charitable giving, did you? 

Mr. HARTNACK. If you looked at it on an apples-to-apples basis, 

and included our extensive community development—lending, tax 

credit lending and new market tax credit investing—then the percentages would be a great deal larger than the .7 that was discussed. But we certainly would never have given away 27 percent 

of our profits. 

Mr. CLAY. Okay. Let me move on to Mr. Austin. Mr. Austin, can 

you share with us your opinion on the treatment by the FDIC with 

smaller community banks versus banks that are considered too-bigto-fail? 

Mr. AUSTIN. We are all governed by a lot of the same rules and 

regulations. If we were to show you everything that we had, it 

would fill up this table and probably four or five more. 

In regards to too-big-to-fail, I really do not feel any institution is 

too-large-to-fail, especially in a capitalistic, free market enterprise 

system like the United States was founded. We need to look at the 

risk weighting of the different types of these activities that the 

banks are engaged in. 

You know, I appreciate the question to the previous witness regarding communities and contributions. I think if we start looking 

at those types of measurements, compared to looking at what 

banks are really doing to lending, that’s where we are getting away 

from our focus. 

You know, we are governed by the Community Reinvestment 

Act, which I think goes too far— 

Chairman GUTIERREZ. The gentleman’s time has expired. Mr. 

Paulsen, you are recognized for 5 minutes. 

27 

Mr. PAULSEN. Thank you, Mr. Chairman. Mr. Hartnack, I was 

just curious. It seems like banks are getting a mixed message. Mr. 

Austin has related this already in some of his comments, too. But, 

you know, obviously there is encouragement to lend, to provide capital in the marketplace for the business community that wants to 

expand and grow jobs right now. 

But there is also the message out there, at least from the regulators and the anecdotal stories I have had, in terms of communicating with some of my bankers locally—I know you’re based in 

Minnesota, too—but the mixed message is that they’re being encouraged to hang on to capital, actually. And that has been discussed a little bit. 

I talked to one individual, a small business owner actually, who 

was going out to get a loan with a bank he had a long-time relationship with. And the bank actually came back and said, ‘‘We 

would like to provide the loan for you. But in order to do that, 

you’re going to have to have 50 percent capital, or 50 percent of 

your money down.’’ 

Well, of course, we commented to each other, ‘‘Then you might 

as well be a bank on your own,’’ when you’re in that type of a situation. And I think that expresses some of the frustration people 

have. But I’m just sort of curious. 

You know, one other anecdote too, real quick, is that the regulators then come in and they’re putting the squeeze on the banks 

with some really tough requirements, in terms of new standards. 

And one community bank I talked to not long ago mentioned that 

he had some examiners in. I asked, ‘‘Was that just three people? 

Were they in for a week?’’ 

And he said, ‘‘No, it’s like 14 people, and they were in there for 

a month-and-a-half.’’ And it seems very overburdensome and a high 

threshold to cross. So, I’m just curious. 

Right now, in general, given the current economic climate, what 

can banks do to try and be effective partners in their local communities with these challenges that are truly out there? 

Mr. HARTNACK. It clearly is a different circumstance in every 

bank. There are 8,000 community banks in America. And, frankly, 

many of them are still very strong, financially. But if a bank is in 

a circumstance where they don’t have enough capital, clearly, lending is a very difficult deal for them. If they lend, every dollar they 

put out requires roughly 10 percent of capital. If you don’t have the 

capital, you’re simply digging a deeper hole for yourself. 

What we do—and we’re in a lucky position of having adequate 

capital, good earnings to keep replenishing our capital, we just announced quarterly profits yesterday, and we’re able to embellish 

our capital—is we tell our story in every possible place, and try to 

let the communities that we serve know that we’re open for business for good loans. And the terms are, in many cases, not very different from a while back. 

In some cases, it is not different at all. It depends on, obviously, 

the purpose of the loan. And the economy is not as strong, so sometimes additional protection is required. But, you know, what banks 

in America can do to help their communities is make loans. And 

as Mr. Austin said, telling a bank to make loans is like telling a 

McDonald’s guy to cook hamburgers. This is what we do for a livVerDate Nov 24 2008 16:24 Jun 09, 2010 Jkt 056240 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 K:\DOCS\56240.TXT TERRIE
28 

ing. Our CO constantly talks to us about the fact that we make 

dreams come true in America, and we do that by lending people the 

money to build their business, grow their business, start their business, to educate a kid, to buy a house, all the things that Americans do and want to do. And I think our industry’s role is to make 

that happen to the extent our capital allows us to do it. 

Mr. PAULSEN. Mr. Austin, maybe you could provide some additional comments, as well? 

Mr. AUSTIN. Absolutely, and thank you. We want to make loans. 

A joke among bankers is that when we make loans, they’re all 

good. But some bad things happen to good borrowers. 

I know, just thinking back to the subprime debacle—and we 

should note—the overwhelming majority of the subprime loans 

were made outside the traditional banking industry. And I want to 

equate this back to after 9/11. One thing the automobile companies 

did was create special financing units to push and sell their excess 

inventory, also known as zero percent financing. They took on excessive risk, and they also took on borrowers who normally would 

not be able to repay. 

Today, if you’re looking at some of the subprime loans, some in 

the housing industry also created special financing units, and they 

packaged those loans and sold them as securitized investments— 

again, outside the traditional banking system. 

We still have—I will quote my grandfather. He told me, ‘‘Son, 

there is a preamble to every promissory note, ‘And I do hereby 

promise to pay.’’’ We have to keep that in mind to make prudent 

decisions when we make loans, because our regulators are looking 

at them, and we also don’t want to do something wrong for our customers in extending too much credit. 

Mr. PAULSEN. Well, I will just comment, Mr. Chairman, but we 

need a strong traditional banking system, so I appreciate it. 

Chairman GUTIERREZ. Mr. Scott, you are recognized for 5 minutes. 

Mr. SCOTT. Thank you, Mr. Chairman. And thank you for this 

hearing. It’s a very timely hearing. I represent a State where we 

all—I think it’s really the epicenter of this entire situation, regarding the bank closings. And I would like to focus on that for a moment, as we move forward to find solutions. And my State is Georgia. 

Over the past year, we have had 25 bank closings. Nationwide, 

we have had 140. That means that, in my State, 20 percent of the 

banks that closed—clearly, one-fifth of all the banks—happened in 

my State. So it might be good for us to look at Georgia to try to 

figure out what went wrong, and how we correct this. 

I guess it focuses on my first question, which is this: We have 

300 banks in Georgia. About 100—I think 103—of them were established in the last 10 years. Ninety percent of the banks are 

small, State-chartered banks, which are overseen by both the FDIC 

and the State regulators. Seventy percent of their portfolios are all 

devoted to real estate loans. And they went into this overexuberance, and I think that’s what caught them. 

But I wonder if you would tell me if it’s possible that there were 

just too many banks to begin with. And did the rise in subprime 

lending lead to a banking bubble in which banks were established 

29 

that lacked the stability and the experience to sustain through the 

natural cycles of boom and bust, expansion and contradiction? 

Should we put some sort of regulation on how much of the portfolio could go into real estate, or could go into one area? Is that 

risky behavior? And where you have the mixture of State and Federal regulations, what falls where? Should Congress act first, or 

should States act first? 

These are a series of questions I would like to get some answers 

on. Should we not put some kind of standards on too much going 

into one area, 70 percent of your portfolio going into one area, putting some kind of criteria on too many banks, and looking at our 

Georgia case to see how we could use this as some examples of 

what went wrong to correct? 

Right now, in my State of Georgia, there is contemplation of 

whether or not our State legislature should do anything at all. And 

many are saying, ‘‘Well, let’s wait on the Feds to do this.’’ 

So, I think this brings us right dead center to answering some 

of these certain questions, and that’s what I would like to put before you today. If you could, respond to my questions. 

Mr. HARTNACK. Was that directed to any one of us? 

Mr. SCOTT. Yes, either one. I would like to get both of your comments on this. I mean— 

Mr. HARTNACK. Real quickly, so I don’t take everybody else’s 

time, I would say that the principle of diversification of assets, so 

there is as little correlation between the behavior of assets on the 

balance sheet as is practical, is a rock-solid part of prudent banking, and certainly one of the reasons our bank is in good shape 

today. And I think the regulators understand that. 

Whether it was enforced among small new banks or not effectively, I will let you find that out from the regulators. But clearly, 

the principle of diversification is absolutely rock foundation of good 

banking. 

Mr. AUSTIN. I would like to also share that competition is 

healthy, I think for everyone, not just in the banking industry, but 

every industry in our communities. 

In regards to your question about what should be done, and what 

are the regulators doing, one, we appreciate and support a dual 

banking system, where we have charter choice. 

A few years ago, we were up here with the Texas Bankers Association, visiting with the FDIC. And I want to defend them, because they made a very pointed comment to the banking industry: 

‘‘We see some trends that are beginning to emerge in some sectors 

of the country. Beware. Let’s fix the roof while the sun is shining.’’ 

They did send us the warnings. Some chose to listen, some chose 

not to. 

In their defense, there are ample regulations and guidance that 

have been sent out that we look at for commercial real estate limits 

and construction limits. So we are managing, and they are managing us when they examine us, based on the risk weighting. 

Mr. ELLISON. [presiding] Mr. Marchant from Texas is recognized. 

Mr. MARCHANT. Thank you, Mr. Chairman. It’s good to see you 

here, Mr. Austin. And it seems to me that when regulators leave 

your banks these days, the greatest concern is not whether you are 

equipped and motivated to loan money into the community, but 

30 

that the FDIC Insurance Fund will have little or no exposure to 

loss. 

In the old days, they were there to help guide you on how to stay 

healthy and profitable. It’s my contention that until that approach 

is moderated, adjusted, changed, and we get more back to the original purpose, that we will not have a recovery, we will not have new 

jobs, and we will—and our banks will remain on the sidelines, investing in treasuries and offering .65 percent on a 5-year CD, and 

making their spreads the safest way possible that presents the absolute least risk to the FDIC Insurance Fund. 

Now, it seems to me like that is the issue that we are dealing 

with. 

Mr. AUSTIN. Wow, there is a lot there. I could speak for hours 

on that. Let me say, when the examiners come in, the primary 

focus is safety and soundness to protect the Fund. And we don’t 

disagree with a lot of that. 

But I will say our bank is fortunate. We have extremely good relations with our examiners because, one, we have reached out and 

they have reached out to listen, help give us guidance. We meet 

with them. We have taken a proactive approach to visit with them 

on a quarterly basis. We would encourage many banks to do that. 

But not everybody can say that. 

If you talk about competition and .65, the treasuries—in some 

cases lower—one area that we’re competing against is you, the government. Specifically, I call it a ward of the government, which is 

GMAC’s new bank, also known as Allied Bank, which advertised 

at all the football games. They’re paying exorbitantly high rates because of their backing from the government. That’s hard for us to 

compete against. 

Mr. MARCHANT. Let me ask you for my second question—both 

you and U.S. Bank—about the policy that the FDIC is using now, 

as far as acquisition of banks that they are closing. 

I know that in this—I believe it was in this recent transaction— 

there were three small banks in Texas that didn’t have anything— 

that really weren’t in the geographical areas—I think they were 

your banks, weren’t they, Mr. Kelly? Yet the FDIC, instead of saying, ‘‘Let’s keep U.S. Bank in this area, and let’s let these three 

banks in Texas—let’s find a legitimate buyer there,’’ instead they 

just take the position, ‘‘You have to take everything.’’ And then I 

think, in this case, U.S. Bank turned around and sold those three 

banks off. 

It seems to me that the FDIC needs to take a little bit more flexible position on that. And I believe that they try to match up the 

sales of the banks with entities that are healthy and have some 

proximity to the market. And I would encourage them—and I will, 

the next panel—to give some consideration to not having that be 

a two or three-step process, where local banks end up having the 

opportunity to take over local banks. 

Mr. AUSTIN. I would like to comment. I know we—one of our affiliate banks was within 60 or 70 miles of one of those institutions 

that was well-capitalized. We did contact the FDIC and ask if that 

particular bank could be sold separately. The response was, ‘‘No, 

we prefer to sell them as one group.’’ 

31 

The advantage, by allowing someone to purchase that locally, or 

with closer proximity to that community, would be the great advantage, one, to the customers in that community, because they know 

who they are. In Texas, that means we have lost three charters. 

And I think we look at a lot of—we hear a lot of bankers who are 

discouraged by what’s going on, and probably want to exit out of 

banking. And that’s not good for the local communities— 

Mr. MARCHANT. It seems like a local bank might give a higher 

bid to the FDIC for that, and actually benefit the Fund. 

Mr. ELLISON. The gentleman from Texas, Mr. Green, is recognized. 

Mr. GREEN. Thank you, Mr. Chairman. And I thank the witnesses for appearing today. I would like to take just a moment to 

see if I can provide a limited amount of ocularity to this obviously 

difficult problem. 

The community banks are of the opinion—and there seems to be 

some body of empirical evidence to support their contention—that 

they were not the cause of the crisis. That seems to be the prevailing opinion among community bankers. They also seem to be of 

the opinion that, because they didn’t cause the crisis, they should 

not have to account for the sins of those who did cause the crisis. 

Community banks did not engage in 3/27s, 2/28s, teaser rates that 

coincided with pre-payment penalties. 

Generally speaking, community banks make the argument that 

they knew who they were dealing with. They were dealing with 

people who were regular customers, to a great extent, people that 

they knew in the community, people that they have to meet in the 

shopping center, and so they had a better understanding of who 

they were working with. And, as a result, they made better loans. 

Many of their loans, they contend, were maintained on their portfolio. They didn’t engage in a wholesale pushing of loans to someone else, such that they would qualify persons for teaser rates but 

would not qualify them for adjusted rates. 

And, generally speaking, they maintained a good capital ratio. 

The capital ratio is important, because you don’t lend money from 

the capital. The money that you lend comes from the money that 

you take in by way of deposits. So you have to be well-capitalized 

to lend money. 

So, the community banks find themselves in the position of saying, ‘‘Someone ought to look at our circumstance and understand 

that there should be a greater degree of flexibility as it relates to 

what we do.’’ 

The example that I encounter most regularly is that of a good 

loan that was made in good times, but now the borrower finds himself with an inability to make a payment or two. And the contention is that when the examiners come in, they don’t accept the notion from the community banker that, ‘‘I know this person. This 

person is going to catch up. This person is going to maintain this 

loan, such that this is not really a bad loan, it’s just that these are 

bad times.’’ 

And somehow, this ought to be considered, so that we don’t find 

the bank having to increase its capital, and if it does not, then it 

can’t do as much lending. And apparently, this concern is someVerDate Nov 24 2008 16:24 Jun 09, 2010 Jkt 056240 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 K:\DOCS\56240.TXT TERRIE
32 

thing that a number of my colleagues have heard, because I hear 

colleagues on both sides talking about it. 

So, my question is this, with reference to the community banks. 

When you differ with the examiner, tell me about the process that 

allows you to appeal to an ombudsman or someone such that you 

may—your opinion that is different, for reasons that you contend 

are legitimate—how does that process serve you? 

And I will start with, if I may, Mr. Austin. Do you have an opinion on the appeal process, please? 

Mr. AUSTIN. Yes, sir. And, Congressman Green, thank you. I 

know you have always been a leader in listening. And I want to 

say thank you for your efforts in financial literacy and working 

with banks. 

There is a difference—we have not really gone through the appeal process, because we try to work it out locally with the examiners. And I think that’s usually the best practice. We do ask for 

them to rely on our judgement, because we know the customers, 

and are familiar with them, and we are sitting on the desk, looking 

at them eyeball-to-eyeball. We are also visiting their businesses, 

looking at their trends, and knowing what’s going on. 

Where we have some issues are the conflicting types of accounting policies and practices, from regulatory accounting—I call it 

RAP. You have GAAP, and there is probably another one that applies that rhymes with it pretty well. 

Mr. GREEN. Would someone else care to give a comment? 

[No response.] 

Mr. GREEN. I will conclude by thanking you, Mr. Chairman, for 

the time. Thank you. 

Mr. ELLISON. The gentleman from Colorado. 

Mr. PERLMUTTER. Thanks, Mr. Chairman. And I thank the panel 

for being here today. Mr. Kelly, I am sorry for the plight. We are— 

I am working on some pieces of legislation to take a look at capital, 

to take a look at TARP being available to community banks, smaller banks, to take—you know, to look at the regulations that really 

now say you have too much concentration in real estate or too 

many restaurant loans, or you’re working with too many auto dealers, because this financial crisis—which was because of a lot of 

gambling on Wall Street, in my opinion—caught everybody short, 

you know, whether you’re the restaurant owner or you’re the auto 

dealer, or you’re the banker—unless you were the guys on Wall 

Street, and I don’t think any of you were. 

And I don’t know what we can do to unring the bell in your situation, but I’m trying, and we are going to work on ways to provide 

some cushion to local banks and smaller banks, so that they can 

give a little cushion to their borrowers, as we work our way 

through this mess. 

Do you feel—and I would say that I don’t think you were the 

only one caught short with Fannie Mae and Freddie Mac pieces of 

paper. A lot of credit unions, central credit unions, particularly in 

California, Nevada, and the southwest had a lot of that paper and 

they went down. 

What—let me ask you a question, then I want to talk to my 

friend from U.S. Bank, Mr. Hartnack—and I do want to say to 

some of my friends on this side of the aisle that U.S. Bank and its 

33 

predecessor, Colorado National Banks, have a long history in Colorado of community service and community involvement. And so I 

just want to have that on the record and make it clear that they 

are considered to be a good neighbor in our area. 

So, what would you have us do, Mr. Kelly? Today, as legislators 

trying to get, you know—your situation is what it is. What would 

you have us do to correct things? 

Mr. KELLY. This could be corrected very easily. Treasury has the 

ability, under TARP, they have total latitude as to what type of 

program they want to create. 

If the Treasury Department would take a small percentage of the 

dollar amount that was advanced in the first few weeks to the largest banks—over $125 billion—if they would reserve only 20 percent 

of those funds for viable community banks that have a shortage of 

capital, and change the rules that exist right now—right now, there 

was a tremendous reaction, community reaction, public reaction, 

negative, to the large dollars being given to the larger banks. As 

a result of that, all of the rules were tightened up very tightly. 

The problem was, all the big banks— 

Mr. PERLMUTTER. Before it got to the community banks? 

Mr. KELLY. All the money had already gone out. Now the community banks are there. Now there is a whole different set of regulations. 

Mr. PERLMUTTER. Okay. 

Mr. KELLY. That has to be changed. And that can be done. The 

regulators—the test should be: if they receive TARP, will they be 

a viable institution? 

Nobody wants to give money to a bank that is ultimately going 

to fail. But right now, you have to prove that you’re viable before 

you qualify for TARP, which basically means you have to show that 

you don’t need the money at the outset. What bankers have always 

been accused of, ‘‘You prove that you don’t need the loan, and then 

I will make it,’’ this is basically what is happening. 

Mr. PERLMUTTER. Okay. Mr. Hartnack? 

Mr. HARTNACK. I think that the situation is so complex. But if 

I was a legislator, what I would be looking for is to make sure the 

prudential regulation keeps an eye on the ball all the way along. 

Where things went wrong was organizations were inventing 

products, selling the products to people who couldn’t repay it, and 

packaging the resulting loan and selling it to people who shouldn’t 

have been investing in it. And that just should never happen again. 

And, you know, for the record, U.S. Bank wasn’t involved in that. 

Mr. PERLMUTTER. Mr. Austin? 

Mr. AUSTIN. None of our banks actually applied, the banks that 

we’re involved with, and we did not want to. I will be honest with 

you. We didn’t want the government intervention, additional regulation and oversight. We wanted to try to raise capital privately, 

if we needed to. 

Mr. PERLMUTTER. Okay. 

Mr. AUSTIN. And I agree—I concur with the previous comments. 

Mr. PERLMUTTER. What about just some of the regulatory—not 

just the TARP piece, but capital requirements. Do you see, in your 

area, capital going from 10 percent—in the old days, capital, statutory capital, was 5 percent. Now, regulatory capital is 10 percent, 

34 

and then you have risk-based capital, which I still don’t understand, at 13 percent. 

Are you seeing capital moving? And what would you have me do 

about it? 

Mr. AUSTIN. This is a complex question with multiple answers. 

I think, one, you look at the different capital components that you 

just mentioned. That also dictates how we are assessed on our 

FDIC premiums. Let me give you an example— 

Mr. ELLISON. The gentleman from Illinois, Mr. Davis, is recognized. 

Mr. DAVIS OF ILLINOIS. Thank you very much, Mr. Chairman. 

And let me, first of all, thank Chairman Gutierrez and Ranking 

Member Hensarling for giving me the opportunity to be here, although I am not a member of this subcommittee. 

I also would like to note that Congressman Bobby Rush, whom 

I left at something else, expects to join us in a few minutes, and 

I know that he is on his way. 

Let me also thank all of the witnesses for coming, and all of the 

people who have traveled all the way from Chicago, most of whom 

live in my congressional district, where Park National Bank is located, which sort of spearheaded the interest and the concern, and 

the whole business of trying to take a look at what has happened 

in this situation. 

As we interacted and interfaced with the problem, we were a bit 

concerned, basically because Mr. Kelly, who is a member of the 

panel, is recognized by our community as simply an outstanding 

banker, a tremendous civic leader, a man of great astuteness, from 

a business vantage point, and of tremendous community interest. 

And while we knew that there were problems existing and troubles 

brewing, we also were hopeful that we would be able to experience 

I guess what one calls a ‘‘work-out.’’ 

Mr. Kelly, could I ask you, from your vantage point, what do you 

think perhaps could have happened, or could have happened differently, that would have generated the ability of you and your associates to retain control and ownership of Park National? 

Mr. KELLY. Thank you. We were approved for TARP funds in October. TARP funds would have been adequate for us to put back 

capital, and also would have enabled us to have access to other outside capital. 

Although we were approved, we were not a publicly traded bank. 

The rules did not exist at that time for a non-publicly traded bank. 

We were deferred, we were deferred, and we were deferred, to the 

point where new rules were put in place, and we no longer qualified. 

All of the other, larger institutions were funded without the requirements in place that we were later held to. The fact that 

TARP—before TARP came out, we were in the public markets in 

New York. We were out soliciting private capital. We had a preliminary $600 million capital injection available to us. But when 

TARP was announced, that was all obsolete. 

Once you had—once the TARP fund was there, everybody would 

say, ‘‘Well, why wouldn’t you get the TARP money?’’ And so that 

was our sole goal. For 5 months, our only capital plan was the receipt of TARP, and that was with the full approval of our primary 

35 

regulator, the OCC. And then, in February, we were told we didn’t 

qualify for TARP. At that point, we were dead. We had no other 

option. We had to go out and find private equity in the worst capital markets available, and with the stigma that we had not been 

eligible for TARP. That was the kiss of death. 

After that, we tried a number of things, but we came up short 

at the end. 

Mr. DAVIS OF ILLINOIS. Are you of the opinion that, should the 

regulations be changed that would encompass institutions like 

yours, that it would be very helpful to them, perhaps in the future, 

even if it’s not helpful to Park National? 

Mr. KELLY. Absolutely. I think the Treasury has the ability to 

change the rules with no further legislation, or legislation can be 

passed to encourage that, that funds can be available to banks 

that, after the receipt of TARP, with their qualifying TARP 

amount, would be viable institutions. If they meet that test—and 

that should be a test that the regulators primarily make—that 

then they should be eligible for TARP. 

There is basically a bar right now. You have to be a top-rated 

institution and well-capitalized to qualify for TARP. Any bank that 

meets that requirement doesn’t want TARP. 

Mr. DAVIS OF ILLINOIS. Thank you very much. Mr. Hartnack, as 

you can see, the primary location of Park National sits in a hotbed 

of community activism. That is, I often say that the people in my 

congressional distract are more proactive than what you will find 

in many places throughout the country, which healthy, good, and 

creates tremendous movement. 

Based upon your interactions already—and I am sure that there 

have been many recommendations that they have provided, I am 

sure they have tried to understand— 

Chairman GUTIERREZ. The time of the gentleman— 

Mr. DAVIS OF ILLINOIS. My time has expired? Thank you very 

much, Mr. Chairman. 

Chairman GUTIERREZ. We recognize the gentlelady from Illinois, 

Mrs. Biggert. 

Mrs. BIGGERT. Thank you, Mr. Chairman. You know, it seems— 

it’s nice to see you, Mr. Kelly. I had three of your banks that were 

in my district, so I—regulators are adding to the problem by insisting on tighter credit standards, mark-to-market in what is not a 

normal market, by any acceptable standard, increased reserves for 

loan losses, and capital increases. 

And all the while, the banks’ earnings are dramatically down, 

and the cost of obtaining additional capital is upwards of 10, 12 to 

14 percent, with a prime rate of 3.25 percent, and Federal funds 

are at a rate of 0 to 0.25 percent. Qualified buyers are scared off, 

and not borrowing. 

What are we going to do with these issues, like mark-to-market 

and just the increased regulations? And this is something that a 

community banker in my district wrote in a letter. Have the regulators overreacted? Whomever would like to talk about that? 

[No response.] 

Mrs. BIGGERT. It’s not a problem? 

Mr. AUSTIN. I will take it. 

Mrs. BIGGERT. Yes, Mr. Austin. 

36 

Mr. AUSTIN. Some of these issues are beyond our control. When 

FDIC/OCC comes into our bank, they are actually reviewing, based 

on FASB policies. And I think that’s where we need to really work 

with them to try to come up with some reasonable policies. 

You know, just like with overregulation, we’re marketing to market loans based on a perceived value that has not actually been realized, or liquidation values for loans. We are setting up additional 

reserves. That is a problem. 

Mrs. BIGGERT. But, as you do that, then it cuts out credit. And 

how are we going to jump-start this economy? We have been trying 

to do it. Is it us who should be saying—you know, changing the 

law? Is it—one reason maybe that cash flow isn’t being counted, or 

does mark-to-market need an overhaul? 

Mr. AUSTIN. I think we need to look at a multitude of issues, and 

that’s something that we would be happy to work with your office 

and the committee, to come back and bring some viable recommendations. 

Mrs. BIGGERT. Okay, thank you. I yield back. 

Chairman GUTIERREZ. The gentlelady yields back. Mr. Bobby 

Rush. 

Mr. RUSH. Thank you, Mr. Chairman. I want to say to you how 

delighted I am that you have convened this hearing. I used to be 

on this committee, and I haven’t been here in this room for quite 

a while, but it’s certainly good to be back. 

I want to associate my remarks with—most of my remarks—with 

my colleague from the seventh congressional district, although I 

want to make sure that he understands that I am not in agreement 

with him when he talks about his district. I don’t want him to 

leave my district out. We are vying for where the hotbed of activism really lies, in the first or the seventh district. But that is a 

good competition, and I think all the people benefit from that. 

I only have limited time, so I want to, first of all—Mr. Kelly, 

good to see you. And, as you know, in the final hours, we worked 

together quite vigorously to try to get the governmental institution—at the Federal level—to respond. I think the request was a 

simple request, and to me it was a doable request. All you needed 

was another week to present your case to the Federal regulators. 

And they would not even grant you that week. And they had the 

authority to grant you that week extension before they made a 

final decision. 

I have learned—and others have indicated—that your investment 

in Fannie Mae and Freddie Mac was mainly at the behest of the 

Federal Government, that they encouraged you, and highly encouraged you to make that type of investment. 

And I am also confused—not confused, but astounded at the fact 

that, at 10 a.m., the Federal Government and the Secretary of the 

Treasury was in town, giving you a check for $50 million at 10 

a.m., and at 10 p.m., he was putting padlocks on your door. So that 

was sending some kind of a mixed message of the worst sort, in my 

estimation. 

As you reflected on that, is there anything that this Congress can 

do that could—that you would recommend, so that we would have 

more consistency at the level of Treasury, especially as it relates 

to community banks? 

37 

And before you answer that question, I want to just take a moment just to say how much your bank has meant to the people of 

the south side of the City of Chicago. You know I—Inglewood, 

which is a fine organization here, friends of mine, they do a great 

job. And you have been there, you know, the heart and soul of that 

effort. 

And I have been assured—I’m going to ask this question as a follow-up—that we don’t want to leave a gaping hole in our communities, especially those communities that are struggling. We don’t 

want to leave a gaping hole. And I am not in any way casting any 

kind of predictions on U.S. Bank or anything like that. But we 

know what you—what Park National has done, and you set a 

standard very, very high for banks. And we want to make sure that 

whoever, be it U.S. Bank or anybody else, that they meet that particular standard, because these are hurting communities. 

Again, my question is, as you reflected on this over a period of 

weeks now, what do you think could have been done by the Federal 

regulators that would have—that would guarantee that, going into 

the future, no other good community-based, community-related 

bank with the community at the heart of its interests, that they 

have to undergo the same kind of experiences? 

Mr. KELLY. I have thought about that quite a bit, obviously. We 

had asked for a one-week extension from the FDIC. It was not 

granted. We had asked for a meeting with the FDIC in Washington 

with the investors that we had lined up in the last weeks before 

the closure. That meeting was not granted. 

I believe—and this is strictly my perception—that the regulators 

already had U.S. Bank lined up. They had marshaled the forces, 

they were ready to close the bank. They have a big job to do, there 

are lots of banks out there, and they basically just did not want 

to extend more time. 

I don’t understand, with one week later, knowing that there was 

a change that would make up to $200 million difference in our capital structure, why we couldn’t have been granted one more week 

extension. I don’t have the answer to that. 

Mr. RUSH. I want to ask—okay. I yield back the balance of my 

time. 

Chairman GUTIERREZ. We have votes going on, on the House 

Floor. I wanted to say thank you to the first panel, to all of the 

members of the first panel. I want to thank Congressman Danny 

Davis and Congressman Bobby Rush and Congresswoman 

Biggert—she’s a member of the Financial Services Committee—for 

coming, and for speaking to me and bringing the issue of Park National Bank to my attention. 

We are going to recess until after the votes—that could take 

probably a good 45 minutes to 60 minutes before we vote—and 

come back. When we do reconvene, we are going to have the regulators come before the committee. And I assure you, I have some 

interesting questions to ask them about Park National Bank, especially the FDIC. 

Thank you so much. We will be back. We are at recess until immediately after the votes. 

[recess] 

38 

Chairman GUTIERREZ. We will reconvene at this point. And we 

will have the second panel. 

First, we have David Miller, who is the Director of Investments 

for the Department of the Treasury. Jennifer Kelly is the Senior 

Deputy Comptroller for Midsize and Community Bank Supervision 

at the Office of the Comptroller of the Currency. And last, but certainly not least, Mitchell Glassman is the Director of the Division 

of Resolutions and Receiverships at the Federal Deposit Insurance 

Corporation. 

Mr. Miller, you are recognized for 5 minutes. Please proceed. 

STATEMENT OF DAVID N. MILLER, ACTING CHIEF INVESTMENT OFFICER, OFFICE OF FINANCIAL STABILITY, U.S. DEPARTMENT OF THE TREASURY 

Mr. MILLER. Chairman Gutierrez, Ranking Member Hensarling, 

and members of the subcommittee, thank you for the opportunity 

to testify today regarding participation of small banks in the trouble asset relief program. 

Small and medium-sized banks play a vital role in the economic 

fabric of our society, and will be essential to the long-term success 

of the economy as a whole. As such, the Administration has strived 

to recognize the importance of, and protect the health of smaller institutions throughout the implementation of TARP. 

Treasury designed the Capital Purchase Program, the first and 

largest program implemented under TARP, to provide capital to financial institutions of all sizes with equal treatment on economic 

terms. Smaller financial institutions make up the vast majority of 

participants in CPP, which is consistent with smaller financial institutions constituting the majority of financial institutions in the 

country. 

Of the 707 CPP applications that were approved and funded, 473, or 67 percent, were institutions with less than $1 billion in 

total assets. In May 2009, the Administration reopened the application window for CPP only to institutions with less than $500 million in assets. And to ensure adequate funding levels, Treasury also 

increased the amount of capital these institutions could receive to 

5 percent of risk-weighted assets, up from 3 percent. 

Let me now turn briefly to CPP eligibility and the application 

process. CPP was designed to promote financial stability, while also 

protecting the taxpayer, by injecting capital into viable financial institutions. An institution wishing to participate in the program applied to its primary banking regulator, which then made a viability 

assessment for the financial institution. 

If a financial institution is deemed viable by its primary regulator, the regulator forwarded the application it recommends for 

funding to Treasury’s office of financial stability for further review. 

In certain cases, applications were first forwarded to a council of 

Federal banking regulators for review, prior to submission to 

Treasury. 

Once an application was received by Treasury, experienced examiners from the various Federal banking regulators onsite at Treasury assisted in reviewing the application. Applications were then 

presented to an internal Treasury investment committee, consisting of high-level officials who reviewed the application in its enVerDate Nov 24 2008 16:24 Jun 09, 2010 Jkt 056240 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 K:\DOCS\56240.TXT TERRIE
39 

tirety, and recommended an action to the Assistant Secretary for 

Financial Stability. 

Treasury has not approved any application for funding without 

a determination of viability from the primary regulator. This approach ensures program consistency and fairness to institutions, 

regardless of size. Treasury has invested in 650 small and mediumsize financial institutions through the CPP. 

The Administration believes that more can be done to build upon 

these important efforts. On October 21, 2009, the President outlined a new program designed to provide lower-cost funds to viable 

small banks, with the goal of increasing lending to small businesses. As President Obama explained, to spur lending to small 

businesses, it is essential that we make more credit available to the 

smaller banks and community financial institutions that these 

businesses depend on. 

Administration officials have been working diligently to design a 

program that will provide the maximum benefit to small businesses, while simultaneously providing taxpayer protection and encouraging credit markets. We plan to release the full details of the 

program soon. 

In addition to the small business lending initiative, Treasury is 

also developing a program that will make low-cost capital available 

to community development financial institutions, which provide 

more than 60 percent of their lending in economic development 

services to low-income and underserved communities. 

We look forward to finalizing these programs in the near future, 

and working with you to meet the challenge of helping our businesses and communities flourish. Thank you. 

[The prepared statement of Mr. Miller can be found on page 147 

of the appendix.] 

Chairman GUTIERREZ. Thank you. 

Ms. Kelly, you are recognized for 5 minutes. 

STATEMENT OF JENNIFER KELLY, SENIOR DEPUTY COMPTROLLER FOR MIDSIZE AND COMMUNITY BANK SUPERVISION, OFFICE OF THE COMPTROLLER OF THE CURRENCY 

(OCC) 

Ms. KELLY. Chairman Gutierrez, Ranking Member Hensarling, 

and members of the subcommittee, my name is Jennifer Kelly, and 

I am the Senior Deputy Comptroller for Midsize and Community 

Bank Supervision at the Office of the Comptroller of the Currency. 

I appreciate the opportunity to describe the OCC’s role in the supervision of national banks, and in the resolution of severely troubled banks. 

The primary mission of the OCC is to ensure that national banks 

remain safe and sound, comply with applicable laws, and support 

the needs of their customers through fair access to credit and financial products. We recognize the important role that credit availability and prudent lending play in our Nation’s economy, particularly in the current environment. 

However, banks cannot support their communities unless they 

operate in a safe and sound manner, and have sufficient capital to 

support lending to creditworthy borrowers. Even in today’s strained 

economy, most national banks are in sound condition, and have the 

40 

capacity to weather the current economic environment. Some, however, are experiencing significant difficulties. While most banks 

that develop problems are restored to a safe and sound condition, 

some are not. 

When a bank cannot be rehabilitated, the OCC has a statutory 

responsibility, as do the other Federal banking agencies, to work 

with the FDIC to minimize both the cost to the Deposit Insurance 

Fund, and disruption to the bank’s customers. 

With regard to the FBOP banks, the circumstances and events 

surrounding their failure were unique and extremely complex. My 

written testimony provides a detailed account of OCC’s actions and 

decisions that I will briefly summarize for you. 

FBOP was a financial holding company that owned 6 national 

banks and 3 State banks, with combined assets of approximately 

$19 billion and operations in California, Illinois, Arizona, and 

Texas. The FBOP banks were an interrelated enterprise with business strategies largely determined on a corporate-wide basis. 

Beginning in late 2007, FBOP made several strategic decisions 

that exposed its banks to elevated risk, and ultimately led to their 

failure. Specifically, the company invested heavily in the stock of 

Fannie Mae and Freddie Mac, as well as the securities of Washington Mutual Bank and other financial sector firms. At the same 

time, as the credit and real estate markets began to deteriorate, 

FBOP embarked on a strategy of aggressive loan growth. This was 

a business model that had proven very successful for the organization during previous market downturns. 

In the third quarter of 2008, the GSEs were placed into conservatorship. And shortly thereafter, WaMu failed. The loss to 

FBOP as a result of these 2 events represented 63 percent of the 

consolidated bank’s tier one capital. 

Over the course of the following 14 months, the OCC worked 

closely with FBOP, as it pursued a variety of plans for obtaining 

the capital it desperately needed. These options included attracting 

new outside investors, applying for TARP capital, and selling one 

or more of the banks in the group. Despite intensive efforts, FBOP 

was not able to reach any definitive agreement to recapitalize the 

banks. 

FBOP’s inability to raise new capital, coupled with the rapidly 

deteriorating condition of all six national banks, triggered regulatory requirements under prompt corrective action. Two of the 

FBOP banks became critically undercapitalized on July 30, 2009, 

requiring that they be placed into receivership within 90 days. We 

also determined that deterioration of two of the other national 

banks had reached the point where it was necessary to close them, 

as well. 

Park National Bank and Citizens National Bank were in a somewhat different status. Their condition was seriously deteriorating. 

But at that time, it was not clear that there were grounds to close 

them. On October 30, 2009, the OCC and the States of Illinois and 

Texas placed 7 of the 9 FBOP banks into receivership. 

Then, under its cross-guarantee authority, the FDIC presented 

the two remaining national banks with orders to immediately pay 

assessments equal to the anticipated losses to the Deposit Insurance Fund. Since this cross-guarantee liability greatly exceeded 

41 

their capital, Park and Citizens became overwhelmingly insolvent. 

On that basis, the OCC appointed the FDIC as a receiver for both 

banks. 

The OCC’s decisions to place FBOP’s national banks into receivership were made only after thorough internal deliberation, extensive efforts to work toward a solution with FBOP management, and 

close consultation with the FDIC. Our actions were consistent with 

not only the requirements of prompt, corrective action, but also 

with the statutory framework Congress put in place to resolve the 

failure of banks at the least cost to the Deposit Insurance Fund. 

Again, I appreciate the opportunity to appear before the subcommittee today, and look forward to your questions. 

[The prepared statement of Ms. Kelly can be found on page 98 

of the appendix.] 

Chairman GUTIERREZ. Mr. Glassman? 

STATEMENT OF MITCHELL L. GLASSMAN, DIRECTOR, DIVISION OF RESOLUTIONS AND RECEIVERSHIPS, FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC) 

Mr. GLASSMAN. Thank you. Good afternoon, Chairman Gutierrez, 

and Ranking Member Hensarling. I appreciate the opportunity to 

testify on behalf of the FDIC on our bank resolution process and 

related matters. 

My first experience with a closed depository institution was in 

1975. I was working at Swope Parkway National Bank in Kansas 

City, Missouri, when that bank failed and the FDIC was named receiver. Because I worked for this bank, like many of the people in 

this hearing room today, I know firsthand the importance of a community bank. 

The FDIC normally uses two basic resolution techniques: a purchase and assumption transaction, known as a P&A; and a deposit 

payoff. A P&A occurs when a healthy institution purchases some 

or all of the assets of a failed bank or thrift, and assumes some or 

all of the liabilities, including insured deposits. In a P&A transaction, the acquirer usually reopens the institution the next business day, and the customers of the failed institution automatically 

become customers of the acquiring institution, with full access to 

their insured deposits. Almost all of our resolutions are structured 

as P&A. A deposit payoff occurs when there are no potential 

acquirers for the failing institution. 

When an institution gets into trouble, and is at risk of becoming 

insolvent, the FDIC works closely with the primary Federal regulator or State regulator, and often participates with that regulator 

in an onsite examination. 

Once the FDIC receives notice that the chartering authority is 

closing the institution, the FDIC contacts the CEO of the failing institution, gathers necessary data and information to value the assets, determines the resolution options to be offered, and prepares 

an information package for potential bidders. Based on recommendations by the FDIC staff, the FDIC Board approves the 

least costly resolution options to be used for the failing institution. 

In 1989, Congress adopted amendments to allow the FDIC to recoup losses to the Insurance Fund by assessing a claim against the 

insured institutions under common control for losses caused by the 

42 

failure of an affiliated insured depository institution. The crossguarantee authority allows the FDIC to recover losses on a failed, 

commonly-controlled financial institution by assessing any of the 

commonly-controlled depository institutions that remain open. The 

FDIC’s cross-guarantee authority is designed to result in a leastcost to the DIF for resolving the problems of a commonly controlled 

group. 

On October 30, 2009, the FDIC entered into a P&A agreement 

with U.S. Bank of Minneapolis, Minnesota, to assume all the deposits, and purchase essentially all of the assets of the nine failed 

banks owned by FBOP. The FDIC received notification of intent to 

close seven of the nine subsidiary banks from the chartering authorities. 

The resolution transaction was a culmination of a marketing 

process where the banks were offered on a stand-alone basis, or 

linked with any combination of the seven. The FDIC later offered 

Park National Bank and Citizens National Bank on a stand-alone 

basis without loss share, or as a linked bid for all nine institutions 

with loss share. 

Neither Park nor Citizens National Bank would have qualified 

for a waiver or any delay in the assessment of a cross-guarantee 

liability, because this would have resulted in a higher cost to the 

DIF, since both banks had serious problems, and were in deteriorating condition, and were very likely to fail. As a result, the crossguarantee assessment was made, and the OCC closed the institution and appointed the FDIC as receiver. The overall least costly 

bid was received from a single bank to acquire all nine institutions. 

We expect a continued high level of failures during 2010. Over 

the past several years, the Division of Resolutions and Receiverships of the FDIC has enhanced in staffing levels, in response to 

the increased workload. I know that our staff has the full backing 

of our Board of Directors to provide us with the resources to do the 

job. 

Fortunately, the FDIC is well-positioned to carry out its responsibilities to protect and insure depositors, and maintain stability 

and public confidence in our banking system. 

Thank you. I would be pleased to answer any questions. 

[The prepared statement of Mr. Glassman can be found on page 

81 of the appendix.] 

Chairman GUTIERREZ. Thank you. We will now open up for a 

round of questions from the members. 

First of all, I would like to welcome you all here. Mr. Glassman, 

do you ever talk to Mr. Miller? 

Mr. GLASSMAN. This is the first time I have met Mr. Miller. 

Chairman GUTIERREZ. Okay. Do you talk to anybody at Treasury 

before the FDIC closes down a bank? 

Mr. GLASSMAN. No, I do not talk with anybody at Treasury. 

Chairman GUTIERREZ. You don’t? Do you talk to Ms. Kelly? 

Mr. GLASSMAN. I do have conversations with Ms. Kelly. 

Chairman GUTIERREZ. Did you talk to Ms. Kelly about Park National Bank and the other affiliated banks? 

Mr. GLASSMAN. Not directly, but staff would have had a lot of 

conversations with the OCC. 

43 

Chairman GUTIERREZ. So, in other words, we ask for a hearing 

to talk about this, and we have two other people who have come 

here that you haven’t spoken to about this transaction. 

And, Mr. Miller, you didn’t say a darn word about the whole 

thing in your testimony. That surprises me. Do you usually come 

to hearings, Mr. Miller, in which you’re asked questions about a 

specific transaction, such as Park National, and then not speak to 

the issue? 

Mr. MILLER. The— 

Chairman GUTIERREZ. Or did I miss something? Because I listened to you attentively, and at least— 

Mr. MILLER. Yes, I think it’s— 

Chairman GUTIERREZ. —Ms. Kelly and Mr. Glassman, at least 

they attempted to try to talk about what they did vis a vis Park 

National Bank. But you didn’t say a single word. 

Mr. MILLER. The issue of Park National—the Troubled Asset Relief Program is obviously not a banking regulator. And so their application to TARP, as I tried to describe in our process— 

Chairman GUTIERREZ. How long have you been at Treasury, Mr. 

Miller? 

Mr. MILLER. Since December 2008. 

Chairman GUTIERREZ. Since December of 2008. So you were 

there when the former Treasury Secretary was there. 

Mr. MILLER. Correct. 

Chairman GUTIERREZ. All right. And he said—I remember—that, 

‘‘If you have Fannie Mae and Freddie Mac, and you have just lost, 

I, the Treasury Secretary, am going to make sure that you don’t 

suffer any undue hardship, in terms of what that money does to 

the viability of your financial institution.’’ Do you remember that? 

Mr. MILLER. Yes, I believe it’s in section 103.6. 

Chairman GUTIERREZ. Okay, so it wasn’t something that Mr. 

Kelly and the rest of us just kind of remembered, but maybe didn’t 

happen. It actually did happen? 

But it didn’t seem to happen here in this case. And I think that’s 

part of the problem, as I see it. I listened to the three of you, and 

there is this large institution that was sold to U.S. Bank, and different people aren’t speaking to different people. 

So, once you decided, Mr. Glassman of the FDIC, you decided 

that—just so that we have this clear, how many of them? There 

were seven different banks all involved in this thing, seven? 

Mr. GLASSMAN. In the FBOP family, there were nine institutions. 

Chairman GUTIERREZ. There were nine. 

Mr. GLASSMAN. We were notified— 

Chairman GUTIERREZ. And there were two in Illinois, Citizens 

and Park National, that were still operating, that you couldn’t find 

a reason to shut down. But then you said, ‘‘Oh, we want those two 

that are still alive to pay,’’ right, ‘‘the assessments for the other 

seven that we have declared dead,’’ is that correct? 

Mr. GLASSMAN. Under the statute, we are required to conduct a 

least-cost resolution. 

Chairman GUTIERREZ. You applied that statute— 

Mr. GLASSMAN. —to protect the Deposit Insurance Fund. 

44 

Chairman GUTIERREZ. Okay. You applied that statute. You are 

not required to apply that statute. That’s a statute that you decided to apply to this case. 

Mr. GLASSMAN. The statute asks us to protect the Deposit Insurance Fund. 

Chairman GUTIERREZ. I understand that. But you see, you didn’t 

have to apply that statute. Is that correct? 

Mr. GLASSMAN. In order to protect the Fund— 

Chairman GUTIERREZ. I understand. You made a decision that, 

in order to protect the taxpayers—your way of looking at it—that 

you would apply that statute. Is that correct? You made that determination. 

Mr. GLASSMAN. We made a determination— 

Chairman GUTIERREZ. But that’s a subjective determination that 

you made. There isn’t a law that said, ‘‘Voila, there are these nine 

institutions. We must apply this statute to them.’’ There isn’t. You 

made that subjective decision. I’m not saying you’re right or wrong, 

but you made that decision. 

Mr. GLASSMAN. We made a decision to apply the assessment— 

Chairman GUTIERREZ. Very good. 

Mr. GLASSMAN. —against these two banks— 

Chairman GUTIERREZ. You made the decision to apply it in a 

subjective manner. The law did not require you in this instance to 

do that. What you said was, ‘‘There are these seven institutions, 

they are not doing well, so we are going to make the two institutions that are already wobbling on the brink of disaster pay for the 

assessments of the other seven.’’ 

Okay. So you are asking two people—it’s like asking two people 

who are almost drowned to come and help the other seven who 

have already drowned. That’s what you, in essence, did, killing any 

opportunity. 

The reason I raise that is because when you did that, it’s like 

this chain of events that just destroyed an institution that maybe 

didn’t—because in your determination, it was the most effective. 

How much did we lose? How much money did we lose? 

Mr. GLASSMAN. Well, when the 7 banks did fail, $1.8 billion was 

lost. 

Chairman GUTIERREZ. How much? 

Mr. GLASSMAN. $1.8 billion. 

Chairman GUTIERREZ. $1.8 billion was lost— 

Mr. GLASSMAN. —lost to the Insurance Fund for this transaction. 

Chairman GUTIERREZ. —in this transaction. So, $900 million— 

Mr. GLASSMAN. For the seven banks. 

Chairman GUTIERREZ. I’m sorry? 

Mr. GLASSMAN. I’m sorry, for the seven banks that failed. 

Chairman GUTIERREZ. The seven banks that did fail. And Park 

National and the other, what was the total amount? 

Mr. GLASSMAN. We went out for individual bids for Park, and the 

inherent loss in Park and Citizens was close—approximately $1 billion. 

Chairman GUTIERREZ. So, $2.8 billion, total? That’s what it cost? 

Mr. GLASSMAN. Approximately $2.5 billion, thereabouts. 

Chairman GUTIERREZ. Okay, $2.5 billion. And you see, here is 

my problem. And here is why, in the future, I am not going to 

45 

delay in calling the FDIC. I am not going to delay in calling the 

OCC and Treasury. Because you guys don’t like it when Members 

of the House, particularly Members who have jurisdiction over you, 

call you and ask you. But it is clear that somebody has to watch 

the people who are watching. Somebody has to watch the regulators. 

Somebody has to call you, because, oh, we’re going to talk about 

the Chicago Tribune article—and, Mr. Kelly, what a nice article— 

I know what the Chicago Tribune does if Congressman Bobby Rush 

and I call you. All the sudden there is an article, ‘‘Oh, Gutierrez 

and Bobby, they’re meddling in the affairs, the internal affairs.’’ 

Well, maybe we need to meddle a little more in the internal affairs of the executive part of government, because I really think 

what you did was really unfair, unfair to an institution that was 

handing out tens of millions of dollars every year, doing their job. 

And you know something? Almost $900 million they lost, because, 

between the 3 of you, you told them it was okay to have 25 percent 

of their money. And we voted to give big banks lots of money, and 

they couldn’t get the TARP money. 

There were a lot of instances, but in the very instance when you 

could put that dagger right through their heart, you decided to do 

the cross-thing on them with the other seven institutions and say, 

‘‘Pay for the other seven institutions.’’ So that’s it, because I am 

over my time. 

Mr. Hensarling, you are recognized for 5 minutes. 

Mr. HENSARLING. Thank you, Mr. Chairman. I would like to ask 

the panelists all one question. Did you hear the witnesses from the 

earlier panel? Mr. Miller, were you here? 

Mr. MILLER. Yes. 

Mr. HENSARLING. So you heard it. Ms. Kelly? 

Ms. KELLY. Yes. 

Mr. HENSARLING. Mr. Glassman? Okay. So, then, you are well acquainted with the subject matter of today’s hearing. 

Mr. Miller, my first question is for you. Mr. Kelly had testified— 

well, actually, about the concentration of his bank holding company 

in Fannie and Freddie preferred stock. That, number one, he was 

incented to do so by the FDIC, so I have a question for the FDIC. 

But my question to you, Mr. Miller, is this is not the only bank 

in America that has either become insolvent, had troubles because 

of their concentration in Fannie and Freddie preferred stock. Already, as you are well aware, the taxpayer has been called upon 

to bail out Fannie and Freddie with $110 billion. They were, according to the testimony of the gentleman who headed up the bank 

holding company, they were the reason that this bank failed, and 

all the good things they had done throughout the community. 

Why, Mr. Miller, on Christmas Eve, did the Treasury Department of this Administration lift the limit on taxpayer exposure to 

Fannie and Freddie, and simultaneously announce bonus packages 

of $6 million apiece for the CEOs, $42 million of bonuses—oh, by 

the way, to be paid in cash, not stock, as everybody else is supposed to be incented, but in cash? Why did they announce that on 

Christmas Eve, to reward an institution that is costing the taxpayer billions and billions of dollars, and caused the failure of this 

bank? 

46 

Mr. MILLER. Thank you for the question. 

Mr. HENSARLING. I’m not sure you really mean that, but please, 

I’m interested in the answer. 

Mr. MILLER. I think you are raising some important issues. I do 

have to remind you that the Office of Financial Stability is not responsible for the GSEs, does not have an investment in them, and 

so we play no role in those decisions. 

Mr. HENSARLING. Well, I guess, unfortunately, you just have 

Treasury on your business card. We will certainly ask this question, then, of other representatives of the Treasury. I would like to 

get to the bottom of this, and understand why this is happening. 

Mr. Miller, you spoke about protecting smaller banks under the 

TARP program. I have the testimony before me of Jeff Austin, who 

is the chairman-elect of the Texas Bankers Association. I represent 

a district in Texas. One of the aspects of his testimony—I know you 

don’t have it in front of you, and I do—he talks about the concern, 

specifically, that GMAC ‘‘took away some of the bread-and-butter 

consumer loans from traditional banks.’’ I might point out that in 

recent months, TARP money has been channeled to automotive financing, to keep this unfair practice going.’’ 

So, I have at least one community banker who has been elected 

to represent all community banks in my home State saying that, 

at least with respect to your bailouts of GMAC, you’re not helping 

the community banks, you’re hurting the community banks. What 

is your response? 

Mr. MILLER. We do not get involved in the day-to-day operations 

of the companies with which we have an investment—that goes for 

TARP banks, or—as well as GMAC. I think the issue you’re referring to is they were paying slightly higher levels of interest on 

their deposits to their customers. I believe the FDIC looked into 

this, discussed it with them. But again, we do not manage, as an 

active shareholder, we’re not managing their day-to-day decisions 

on what they set interest rates at. 

Mr. HENSARLING. Okay. Finally—I see my time is starting to 

wind down—I know that recently the President has announced a 

new bank tax. 

Now, let me read further from the testimony of Mr. Austin: ‘‘I 

want to point out that while the proposed bank tax is initially 

aimed at penalizing larger banks, it will also have an impact on 

smaller ones. When the big banks sneeze, we run the risk of catching pneumonia. We rely on them for correspondence services, check 

clearing, wire transfers, letters of credit, and many other services. 

And this will only increase the prices for these services, which will 

be passed on to consumers and small business.’’ Again, a gentleman who has been in banking for four generations, now has 

been elected to represent all the community banks in Texas. 

Did the Treasury, in announcing this particular new proposed 

tax, consider its impact on smaller community banks and small 

businesses? 

Mr. MILLER. The issue of the responsibility fee, I would like to 

point out, under section 134 of the Emergency Economic Stabilization Act, there is specifically a section that instructs the President 

to put a fee on the financial industry in place to recoup TARP 

funds. I think that’s the purpose of this fee. 

47 

The structure of it is specifically on institutions that are large in- stitutions, greater than $50 billion in assets. I think the purpose 

here is to target those that have the highest leverage, that were 

taking the excessive risks, and therefore— 

Mr. HENSARLING. Mr. Miller, I see I’m out of time. But if you 

quit bailing them out, you don’t have to recoup the cost. I yield 

back. 

Chairman GUTIERREZ. The gentleman yields back. Mr. Perlmutter is recognized for 5 minutes. 

Mr. PERLMUTTER. Thanks, Mr. Chairman. And I would like to 

ask the panel—I just want to go back a year-and-a-half to July of 

2008, when the Bush Administration and Secretary Paulson, sitting where you are sitting, asked for some additional powers with 

respect to Fannie Mae and Freddie Mac, even though they had sort 

of coddled Fannie Mae and Freddie Mac for years, according to the 

prior chairman of this committee, Mr. Oxley—and we can get into 

that. 

But they came and said, ‘‘We would like to be able to put Fannie 

Mae or Freddie Mac into either conservatorship or receivership, but 

we’re not going to use those powers.’’ One month later, Secretary 

Paulson places Fannie Mae and Freddie Mac into conservatorship. 

And Mr. Kelly, who testified earlier, he and his bank, as well as 

other financial institutions across the country, had worthless 

paper. At that point, that caused them to immediately become 

undercapitalized. 

So, Secretary Paulson and President Bush felt that was an appropriate step. Fine. We went forward, and we did TARP, to be 

made available to banks to help them stabilize themselves, and 

keep the banking system in place. 

Now, Mr. Kelly’s testimony—and I think you all heard it—was 

that originally his bank was approved for TARP in October of 2008. 

I want to ask just a very straightforward question. Why, in October 

of 2008, after he had been approved for TARP, was he then denied 

TARP? Mr. Miller? 

Mr. MILLER. I think it is important to clarify the sequence of 

events. I think the term ‘‘approved’’ that he was using was being 

used incorrectly. He was originally recommended by his primary 

regulator. At the time, there was no program for private institutions. Several weeks later, there was a term sheet put out. At that 

time, the regulator who was recommending it brought it to what’s 

called the council of regulators for more due diligence and review. 

At that point, they went and did other work, but we did not get 

their recommendation where we would then go forward and fund 

the institution. Their recommendation— 

Mr. PERLMUTTER. The council—OCC recommended that the bank 

receive TARP, but the council— 

Mr. MILLER. Yes, there is a council— 

Mr. PERLMUTTER. —declined? 

Mr. MILLER. There is a council of the other regulators— 

Mr. PERLMUTTER. Who makes up the council? 

Mr. MILLER. There is a council of the OCC, the Fed, the OTS, 

and the FDIC. 

Mr. PERLMUTTER. Okay. And do you know what the reason was 

that the OCC, which—you know, when they have been in front of 

48 

this committee, they have been pretty hard-nosed about the banks 

under their jurisdiction. So I’m surprised that if the OCC is making 

the recommendation that this bank get TARP money, that under 

the Bush Administration, they would be denied TARP money. 

What caused that? 

Mr. MILLER. We followed a very consistent process over 1,000 applications. And a recommendation from either the primary regulator or the council forwarding the application up was a requirement for us to move forward. 

Again, as I said, if you did not get a recommendation and a 

statement that said, ‘‘This institution is viable without TARP 

funds,’’ we did not review the application and fund. And that was 

consistently— 

Mr. PERLMUTTER. Do you know whether that statement was 

made as to Mr. Kelly’s bank? 

Mr. MILLER. My understanding is the council could never make 

that statement, and so we did not have any further involvement in 

the institution, going forward. 

Mr. PERLMUTTER. All right. Let’s now move forward in time. So, 

over time, they’re trying to get capital, because they have $900 million of worthless Fannie Mae and Freddie Mac paper. They’re trying to do that. They were working with the FDIC, as I understood 

the testimony. 

When did the FDIC start this, you know, deciding that this is a 

deteriorating—I think your term, it was deteriorating condition, 

and then, bang, close them and sell it to U.S. Bank? When did that 

all occur, Mr. Glassman? 

Mr. GLASSMAN. Conversations with the primary regulator, the 

OCC, were ongoing. But when the seven banks—seven out of the 

nine banks were told that they were going to become insolvent, and 

that they would be placed under receivership, we then had to take 

a look at the total family. But the conversations were ongoing. 

Mr. PERLMUTTER. Why? 

Mr. GLASSMAN. —with the OCC— 

Mr. PERLMUTTER. Why? Why do you have to take a look at the 

total family? Why can’t you save one or two banks out of nine 

banks? 

Mr. GLASSMAN. Well, our intent was never to try to look for any 

type of institution to fail. But the statute is very clear about protecting the Deposit Insurance Fund. 

Mr. PERLMUTTER. Right. 

Mr. GLASSMAN. With the two other banks that were part of the 

family—according to the statute—we have a right to assess liability 

for the losses. 

Chairman GUTIERREZ. Time has expired. Mr. Bachus, you are 

recognized for 5 minutes. 

Mr. BACHUS. The Chicago Tribune article says that when the 

government took over Fannie and Freddie in September 2008, it 

wiped out the value of the company’s equity overnight. FBOP suffered an $885 million loss, blowing a gaping hole in its reserves. 

That’s pretty—that’s true, is it not? Ms. Kelly? 

Ms. KELLY. Yes, that is. 

Mr. BACHUS. Okay. That’s true? Okay. Ms. Kelly, you all had a 

full-time examiner at FBOP? 

49 

Ms. KELLY. Yes, we had one examiner who was overseeing all six 

of the national banks that were part of that group. 

Mr. BACHUS. Right. At any time did that examiner, or did the 

OCC become concerned about Fannie and Freddie and their solvency? 

Ms. KELLY. We were well aware of the size of the concentration 

of the investment that they had in the Fannie and Freddie stock, 

and our examiner was having conversations with them. As the 

value of that stock was dropping before the conservatorship, we 

were obviously watching that closely. And the examiner had conversations with bank management about the need to develop capital contingency plans in the event the value fell even further. 

Mr. BACHUS. At any point did the Federal regulators—you had 

a regulation which allowed these banks to—really, a regulatory 

bias towards holding Fannie and Freddie preferred stock. You acknowledge that? 

Ms. KELLY. I’m not sure what you mean by a ‘‘regulatory bias.’’ 

Mr. BACHUS. Well, you allowed them to count the preferred stock 

in Fannie and Freddie as if it were Treasury. 

Ms. KELLY. It had a 20 percent risk weight. 

Mr. BACHUS. That’s true? 

Ms. KELLY. Yes, that’s true. 

Mr. BACHUS. Yes, which—now you would agree, in hindsight, 

that was almost a foolish assessment of their risk, would you not? 

Ms. KELLY. Well, we certainly have a different view now, given 

events that have transpired, yes. 

Mr. BACHUS. Right. At any time did you all change your regulations and tell the banks that was no longer going to be the case, 

or try to back out of that—what I call, you know, a terrible regulation? 

Ms. KELLY. The 20 percent risk weight? 

Mr. BACHUS. Yes. 

Mr. KELLY. No. 

Mr. BACHUS. Okay. Well, you saw the value of the stock, and you 

know, Treasury was seeing it, and the FDIC. I’m sure you all were 

at some point all aware, prior to becoming—September 2008—into 

the perilous condition of Fannie and Freddie. In fact, you know, by 

that time Secretary Paulson had come before the Congress and 

asked for as much as $300 billion to inject into Fannie and Freddie. 

Well, you know, you didn’t—there was no advance warning by 

the regulators. You all were here in Washington. You acknowledge 

that? No change in regulation? And I’m not just talking about Ms. 

Kelly. Mr. Glassman? 

Ms. KELLY. No, we didn’t make any change in our risk weighting. 

Mr. BACHUS. All right. And that caused a tremendous problem 

for them. 

They also—you know, the Tribune points out that just the 

week—you took them over, and in that same week legislation was 

going to the President’s desk that would have allowed them to realize the Fannie and Freddie losses immediately, which would have 

greatly helped them, would it not, Mr. Glassman or Ms. Kelly? 

Ms. KELLY. I think you’re speaking about the loss carry-back— 

Mr. BACHUS. That’s right. 

50 

Ms. KELLY. Yes, this could have generated some additional capital. However, the way that would have worked is the benefits 

would have had to have been spread across the nine charters and— 

Mr. BACHUS. Right. 

Ms. KELLY. —the two banks that were critically undercapitalized, they needed $178 million— 

Mr. BACHUS. Oh, I know. But it would have helped the group 

substantially. Right? 

Ms. KELLY. I know $200 million seems like a lot of money, but— 

Mr. BACHUS. Yes, it does. 

Ms. KELLY. —given the situation that those charters were in, it 

was insignificant to helping them fix the problem. 

Mr. BACHUS. Well, yes. Now, Mr. Kelly apparently offered you all 

a deal which would have cost about $600 million. Is that correct, 

Mr. Glassman? 

Mr. GLASSMAN. Go ahead. 

Ms. KELLY. He didn’t offer—he was trying to raise capital. 

Mr. BACHUS. This article says that he actually made a proposal 

that a private equity group would inject $600 million, and the 

FDIC would either contribute a similar amount or share losses up 

to $600 million. Is that accurate or not accurate? 

Ms. KELLY. That was not something the OCC was involved in. 

Mr. GLASSMAN. And I am not familiar with it. 

Mr. BACHUS. So, would—did you read that article? Was that the 

first time you were aware of this proposal? 

Chairman GUTIERREZ. The time of the gentleman has expired. 

Mr. BACHUS. Thank you. 

Chairman GUTIERREZ. Mr. Minnick, you are recognized for 5 

minutes. 

Mr. MINNICK. My concern is procyclical regulation. I have a number of financial institutions that do business or are headquartered 

in my district that have been through a scenario where they will 

have an examination by the FDIC or the OCC. The asset values 

supporting commercial lending are in the examinations based upon 

the latest distress sale, which may be at $.20 or $.30 on the replacement cost because they are valued—assets are valued so low. 

The loan is then classified, and they have to take additional reserves, which eats into their tier one capital. They are then required to go out and raise substantial additional capital, and the 

request is usually not just the capital required to get them up to 

the regulatory minimum, but, in light of the bad experience they 

have just had with commercial lending, let’s raise another 2 or 3 

percent above that lending. 

My question to Mr. Glassman and Ms. Kelly is, do you think it 

is reasonable for your fair market value bank examinations, evaluations of collateral values in this market, to be based only at the 

last distressed sale price for comparable property when that bears 

no relationship, either to a normal functioning fair market valuation or to replacement value? 

Ms. KELLY. That’s a very complicated issue that you are raising. 

We previously sent a letter to you explaining our position on this. 

We are trying to take a very balanced approach in our supervision. 

However, we have to be cognizant of the environment that we’re in 

51 

now, and the problems that the banks are having. And it’s important for us to ensure that banks are— 

Mr. MINNICK. But the problems are largely of your creation, because of this valuation. You are driving banks that would otherwise 

be perfectly sound and functioning and lending in our community 

into bankruptcy. You are the cause of the problem, to a substantial 

extent. 

Ms. KELLY. Well, we— 

Mr. MINNICK. In my opinion. 

Ms. KELLY. Do you want me to respond to that? 

Mr. MINNICK. Yes, please. 

Ms. KELLY. Okay. We need to look at the quality of the assets 

that the bank has. And if borrowers are having trouble repaying 

their loan, then bankers need to recognize that, and they need to 

work with the borrowers to try to have the loans repaid. But just 

ignoring the problems doesn’t make them go away. 

Mr. MINNICK. Many of these loans are fully performing. And the 

problem is your valuations being so far below any reasonable market value or replacement value or likely value, if they are allowed 

to be sold over a meaningful period of time, that you are forcing 

banks to set up reserves that bear no relationship to what they 

really need against fully performing loans. 

Ms. KELLY. I would say that’s an oversimplification of the way 

that our OCC examiners look at loans. 

If there is a specific situation that we could discuss further, we 

would be happy to get into the details. Every situation is different, 

and we need to look at it. 

But if a borrower has full ability to repay the loan, just the fact 

that the value of the collateral declined is not going to force us to 

take action on that loan. We’re looking at the ability of the bank 

to collect that loan. And if the borrower can repay it, regardless of 

what has happened to the value of the collateral, then that’s what 

we are focusing— 

Mr. MINNICK. So, whether or not the lender can repay the loan 

is relevant to the issue of fair market value? 

Ms. KELLY. A— 

Mr. MINNICK. Because I don’t think that, in fact, is what is happening. But I am delighted if that is the case, because that is a 

way of dealing with this issue and keeping some banks from 

being—going insolvent that are teetering on the very edge right 

now, because of your regulatory focus. 

Ms. KELLY. If the loan can be repaid on reasonable terms, that’s 

what we are looking for. But again, there are a lot of nuances to 

these situations. We would really have to talk in more specifics to 

get at some of the cases that you may be hearing about. And we 

would be happy to provide more information, and have that conversation. 

Mr. MINNICK. Mr. Glassman? 

Mr. GLASSMAN. I am not on the examination side, but I would 

like to have a response provided to you by our examiners and the 

folks who deal with the safety and soundness issues regarding your 

question. So if you would allow us to give you a written answer 

back, I will make sure it gets done. 

52 

Mr. MINNICK. Well, it’s a complaint. And it may be an oversimplification, but we have limited time. But it’s a complaint that 

has been brought to me by the CEOs of a whole host of banks in 

my district. And what we hear from you, at your level, is quite different from the experience they are having on the ground with your 

field personnel. 

Your field personnel never get criticized for being overly conservative. They only get criticized if they are not— 

Chairman GUTIERREZ. The time of the gentleman has expired. 

The gentleman from Georgia, Mr. Price. 

Mr. PRICE. Thank you, Mr. Chairman. I want to follow up on the 

comments that were just being made. 

The American people are angry, and they are fearful, and they 

are concerned about what’s going on, because they don’t believe 

their government gives a hoot about them any more. I mentioned 

in my opening statement the FDIC is destroying communities, and 

that is what you are doing. You are destroying communities. And 

it’s wrong. It’s wrong. 

All the failures in our State, the State of Georgia now, with 25 

bank failures last year, all those failures were community banks. 

Now, some of them were young, undercapitalized, and appropriately, in this environment, probably should have been closed. 

But now you all are moving into more and more of the older, established banks, some banks that are very well-capitalized with performing loans that would be an envy to some other banks that are 

allowed to stay open right now. Private capital is sitting on the 

sidelines, because you all are changing the rules day in and day 

out, and it’s wrong. 

I have read statements, Mr. Glassman, from you, and you have 

testified before our committee that you believe there are too many 

banks, too many banks. I also read your 53-page statement last 

week to the Financial Crisis Inquiry Commission where you made 

not one single reference to community banks. 

So, what I would like you to do for us, please, is to clarify whether it is the FDIC’s position, on why you feel that we have too many 

banks, and what obstacles, either legislatively or by rule, tie your 

hands to keep you from providing more flexibility to these struggling, established community banks. Does the FDIC believe we 

have too many banks? 

Mr. GLASSMAN. Congressman, this is the first time I have been 

on the Hill in some time, so I’m not certain who has testified or 

whether that was our Chairman. But, again, I would like to get 

back with you on that, on the particulars of your question. The 

staff behind me will do that. 

Mr. PRICE. Does the FDIC believe there are too many banks? 

Mr. GLASSMAN. I do not believe there are too many banks. 

Mr. PRICE. From banker after banker after banker, as Mr. 

Minnick has said, they are being required to come up with real 

capital to cover theoretical losses in communities all across this 

Nation. And when they are unable to come up with that real capital because private capital is sitting on the sidelines because of 

what you all are doing, then you sell them to one of the big boys. 

And that may be a good solution for the government, but it’s not 

a good solution for that community, because the people in that 

53 

community will no longer have access to local resources, local 

money. And those communities will die. These are real people out 

there that you are harming with the decisions that you are making. 

I understand that the reserve over losses timeline that is being 

used currently for community banks is now down to 6 months, and 

that is something that apparently you all have control over. Is that 

correct? 

Ms. KELLY. Are you referring to the reserve for loan losses? 

Mr. PRICE. Yes. 

Ms. KELLY. Those are accounting standards. That was what was 

talked about on the previous panel quite a bit, and that’s something that the Comptroller has been outspoken about, that we 

would like to see some changes in how that’s done. 

Mr. PRICE. Is the OCC unable to change that right now of your 

own accord? 

Ms. KELLY. Banks have to operate in compliance with accounting 

standards, and we have to honor those accounting standards. We 

are working closely with the standard setters. 

Mr. PRICE. Do you have any flexibility with those standards right 

now? 

Ms. KELLY. We certainly work with the banks to ensure that 

they have a good calculation for their loan loss reserve. But they 

still have to be in compliance with the accounting standards. 

Mr. PRICE. And is there any accounting standard that says that 

the timeframe for which properties need to be evaluated in this instance for these, for the reserves, is a 6-month period of time for 

the valuation of the property? 

Ms. KELLY. No, it’s not stated that way. 

Mr. PRICE. Is that what you’re using? 

Ms. KELLY. No. 

Mr. PRICE. You’re not using 6 months? 

Ms. KELLY. I’m not entirely sure what you are referring to. Six 

months’ anticipated losses, or what? 

Mr. PRICE. The timeframe under which a property is valued, to 

determine whether or not there is appropriate capitalization within 

the bank itself. 

Ms. KELLY. A property that the bank has lent money on? 

Mr. PRICE. Yes. 

Ms. KELLY. So the collateral underlying— 

Mr. PRICE. Yes. 

Ms. KELLY. Oh, the value of the underlying collateral. 

Mr. PRICE. Yes. 

Ms. KELLY. That’s what we’re talking about. 

Mr. PRICE. Yes. 

Ms. KELLY. Okay. I’m sorry. I misunderstood your question. 

Mr. PRICE. I’m sorry I wasn’t clear. 

Ms. KELLY. In Georgia, as you know, there are areas of the country where the real estate markets have— 

Chairman GUTIERREZ. The time of the gentleman has expired. 

Mr. Bobby Rush is recognized for 5 minutes. 

Mr. RUSH. Thank you, Mr. Chairman. And, again, I want to 

thank you for your courtesy in allowing me to, as a non-committee 

member, to be a part of this hearing. 

54 

I think this question should be directed to Ms. Kelly. Ms. Kelly, 

there are severely and moderately unbanked communities throughout this Nation. And, has been indicated by various testimony earlier today and on—by my colleagues who are on the committee 

here, communities are hurting. 

Is there a policy that the OCC has that would take into consideration the lives and interests of those residents of communities 

where there is meager and non-existent banking services? What 

kind of proactive policies do you all have to address the concerns 

of citizens in minority—mostly minority, low income, and moderately or severely unbanked communities? 

Ms. KELLY. We examine banks’ compliance with the Community 

Reinvestment Act in a variety of our offices around the country. We 

have community affairs officers who work with both the community 

groups and national banks to try and help banks— 

Mr. RUSH. Did the Community Reinvestment Act play any role 

in the decision in Park National? 

Ms. KELLY. Our decision to place Park into receivership? 

Mr. RUSH. Right. 

Ms. KELLY. No. 

Mr. RUSH. It didn’t? 

Ms. KELLY. No, it didn’t. 

Mr. RUSH. So— 

Ms. KELLY. The bank was insolvent. 

Mr. RUSH. So the Community Reinvestment Act becomes silent 

when you close banks, community banks, is that correct? 

Ms. KELLY. Our objective is to ensure banks operate in safe and 

sound conditions so they can service their communities. The Community Reinvestment Act is how well they service their communities— 

Mr. RUSH. So, sometimes you find yourself at cross purposes with 

the Community Reinvestment Act, is that correct? 

Ms. KELLY. But if a bank is not in a safe and sound condition, 

it impairs its ability to service. 

Mr. RUSH. Okay. If there are any ancillary conditions or responsibilities, shared responsibilities other than the decisions of the 

local banker—if the—if you, as the Federal agency, or any other 

Federal agency, is culpable, in terms of the decisions of that bank, 

do you assume any responsibility for that bank not being safe and 

sound, or is it strictly up to the bank? 

Ms. KELLY. We work with the bank to ensure they are operating 

in a safe and sound manner. If the bank’s condition deteriorates, 

then we have various tools we can use, enforcement acts and 

such— 

Mr. RUSH. Okay. Let me ask you this question, speaking specifically to Park National. When did the FDIC make their decision 

about the closure of Park National? What date? 

Ms. KELLY. To— 

Mr. RUSH. To close— 

Ms. KELLY. To assess them for the liability? Or when did they 

make the decision— 

Mr. RUSH. To close it. 

Ms. KELLY. You would really have to ask the FDIC when that 

decision was made. 

55 

Mr. RUSH. Okay. Mr. Glassman, when did you all make that decision? 

Mr. GLASSMAN. That decision was not made until late October, 

before its failure. And it was only made after we had put both 

Park—and there was another bank called Citizens—out for bid to 

see if there was value. But the bids came back, the market came 

back and said that there was not any value. 

We were already looking at a $1.8 billion loss to the Insurance 

Fund. 

Mr. RUSH. So do you know specifically what date in October? 

Mr. GLASSMAN. I don’t have it on my notes, but it was shortly 

before the closure. 

Mr. RUSH. Okay, when did you begin— 

Mr. GLASSMAN. I’m— 

Mr. RUSH. When did you begin discussions with U.S. Bank of the 

possibility of the close of PNB’s seizure? When did you begin those 

discussions with U.S. Bank? What date? 

Mr. GLASSMAN. Well, that would have been October 30th, when 

the banks were declared insolvent. 

Mr. RUSH. Was that prior to your making the decision to seize 

Park National? 

Mr. GLASSMAN. October 30th was the day that the banks’ charters were going to be pulled. But the seven banks that were part 

of the family had failed. 

Mr. MINNICK. [presiding] The Chair grants the gentleman one 

additional minute. 

Mr. RUSH. Thank you. 

Mr. GLASSMAN. The seven banks had failed first, and we then applied the guarantee to both Park and Citizens, asking for reimbursement for those losses. And on that basis, the OCC then had 

to pull the charter for those two national banks on October 30, 

2009. 

Mr. RUSH. Thank you, Mr. Chairman. I yield back. 

Mr. MINNICK. The Chair grants the gentleman from New Jersey, 

Mr. Lance, 5 minutes. 

Mr. LANCE. Thank you, Mr. Chairman. I yield my time to Dr. 

Price. 

Mr. PRICE. I thank the gentleman. And I want to follow up on 

the line of questioning that we were on before in a little different 

light. 

It’s my understanding that community banks now are required 

to determine the appraised value of a property within the last year, 

the worst year of performance. And that results in the need for 

higher capitalization, for them to not get in the cross-hairs of OCC 

and FDIC. 

It’s also my understanding that you all have the ability to decouple the accounting of those assets from the capitalization requirements for the bank. Is that true? 

Ms. KELLY. I’m sorry, I’m not clear on what the question is. 

Mr. PRICE. Because the OCC and the FDIC are requiring greater 

capitalization, more—the raising of greater capital because the assets on a bank sheet are decreasing in their value— 

Ms. KELLY. Okay. 

56 

Mr. PRICE. —banks that are—the loans that are performing normally—the only thing that’s different is the value of the property 

that you all are requiring the banks to assign to it—bring the bank 

into jeopardy of being foreclosed. 

It’s my understanding that you all have the ability to divorce, to 

decouple, the determination of the value of an asset from the capitalization requirements. Is that true? 

Ms. KELLY. Well, we do have the ability to set individual capital 

requirements for banks, based on our assessment of their risk profile. And, obviously, the volume of problem assets they have, meaning loans that are in danger of not being collected, that maybe have 

to be charged off— 

Mr. PRICE. And on loans that are performing— 

Ms. KELLY. Yes. 

Mr. PRICE. —how do you determine, on loans that are performing, that they will not perform in the future, and therefore use 

them as your justification for saying that the bank is in danger? 

Ms. KELLY. Well, that determination about the likelihood of a 

loan performing in the future is based on an analysis of the available financial information on the borrower— 

Mr. PRICE. And— 

Ms. KELLY. —the value of the collateral, if that is a repayment 

source. It is a complex process. The banks do it themselves, and 

then the regulators come in and check the bank’s assessment of the 

quality of its assets. 

Mr. PRICE. And that’s where the rub is coming, because what you 

all are deciding in bank after bank after bank—this isn’t an isolated incident. 

We have one billion plus banks—banks with one billion plus capitalization—that are in your cross-hairs right now, and with performing loans. And then you all close it down, you sell it to somebody else, and you expose the taxpayer to $200 million to $300 million in liability, when if you just worked with the bank they would 

work it through. They have done it before. 

Ms. KELLY. And we do encourage banks to work with their borrowers who are troubled, and try to find a way to work it out. 

But— 

Mr. PRICE. That’s not what is happening. Ms. Kelly, in your testimony you stated, ‘‘Where rehabilitation is not achievable, it’s the 

OCC’s goal to affect early and least cost resolution,’’ etc. How do 

you determine whether resolution is achievable or not? 

Ms. KELLY. We have to make a determination about the likelihood that the bank can be rehabilitated, that it’s going to be able 

to get more capital, it’s going to be able to overcome the problems 

it has. 

Some banks have been purchased by other banks and merged together. There are a variety of ways that problems can be worked 

out. 

Mr. PRICE. You understand that the consequences of closing a 

community bank that is functioning well, that is well-capitalized, 

the consequences of that destroy communities. 

Ms. KELLY. We do not close banks that are well-capitalized. 

Mr. PRICE. Ms. Kelly, that is not true. That is simply not true. 

And when we raised that issue with the FDIC, and asked for a speVerDate Nov 24 2008 16:24 Jun 09, 2010 Jkt 056240 PO 00000 Frm 00062 Fmt 6633 Sfmt 6633 K:\DOCS\56240.TXT TERRIE
57 

cific meeting of a bank with the FDIC, we were told by the FDIC— 

Mr. Glassman, I would be interested in your comment on this—told 

by the FDIC that it was inappropriate for a Member of Congress 

to ask for a meeting between the bank and the FDIC. Do you believe that? 

Mr. GLASSMAN. I’m not familiar with that, but the FDIC is the 

insurer of the banks. I just can’t imagine why we would not speak 

to any bank that has our deposit insurance. 

Mr. PRICE. Well, we will get back with you on that. But this is 

a very troubling situation, and you all are affecting real lives and 

real people in an adverse way. And it’s wrong. 

Ms. KELLY. I would just like to say if you feel that we are closing 

banks that are well-capitalized— 

Chairman GUTIERREZ. The time has expired. Mr. Danny Davis, 

you are recognized for 5 minutes. 

Mr. DAVIS OF ILLINOIS. Thank you very much, Mr. Chairman, 

and I certainly want to thank you again for the opportunity to participate in this hearing. 

Mr. Glassman, let me ask you, do you feel that Park National 

was given ample time to correct its deficiency before engagement 

took place with the U.S. Bank? 

Mr. GLASSMAN. My colleague from the OCC may be in a better 

position to respond, but the history of this institution showed that 

there was a lot of involvement by the primary regulator for over 

14 months to try to raise capital, and to try to put the bank in a 

healthy posture. By the time it got to where the FDIC had to be 

involved, it was inevitable that it was a potential near failure 

where insured depositors were being placed at risk. 

Mr. DAVIS OF ILLINOIS. Ms. Kelly, let me ask you, based upon information that was going back and forth, and information that I 

had received, and I guess others had received, and—the feeling 

that we had gotten was that Park National was on the verge of 

being able to rectify its financial situation with a new private investment. And the investment was basically agreed to, except the 

T’s had to be crossed and the I’s dotted. All of the nuances of the 

agreement had to be worked out, but the basic agreement and the 

basic ability had occurred for a new investor to come in with the 

resources that they needed. 

Was that inaccurate information that was coming out, or was 

there any accuracy to that, or— 

Ms. KELLY. Our assessment of the situation was that it was not, 

at that point, close to just dotting I’s and crossing T’s. There certainly were discussions under way, but it had not reached the point 

of a definitive agreement that the new capital was coming in, 

which is what we had made clear we needed. 

Mr. DAVIS OF ILLINOIS. Oh, so there was—the question of flexibility also was a question under discussion by interested entities 

and interested parties at that time, relative to—what kind of flexibility did the OCC, did the FDIC—what kind of flexibility existed, 

if any, that this one week of time that was being asked for by Park 

National—or had it reached the point where the decision had really 

already been made, that U.S. Bank was going to be the receiver, 

and that they were just kind of blowing in the wind at that point? 

58 

Ms. KELLY. I’ll start with that, and then perhaps Mr. Glassman 

would like to follow up. But from the OCC perspective, it’s important to understand we had been working with the bank for almost 

14 months, since the time the GSEs were placed into conservatorship and they had that immediate need for capital. 

And I feel, in terms of flexibility, we had been working closely 

with the FBOP management. We had been looking at numerous 

proposals, providing feedback on those proposals. We did support 

their TARP application. We did everything we could to try and find 

a solution for this group of banks. 

When we got to the point where two of the banks went under the 

critical undercapitalized level, that triggers the 90-day clock that 

we have to put the banks in receivership. And so, we were operating under that 90-day clock at that point in time, and we made 

it clear that the only thing that would allow us to stop that was 

a signed, definitive agreement, and we did not have that. 

Do you have anything you want to add to that? 

Mr. GLASSMAN. You know, the other point, as far as flexibility, 

is also the fact that we are the deposit insurer. This family of 

banks had close to a half-a-million accounts. A lot of them needed 

to have the deposit insurance applied so they would be able to continue their banking needs. 

So, for us, the fact is that— 

Chairman GUTIERREZ. The time of the gentleman has expired. I 

would encourage the witnesses to answer in writing any questions 

that they might not have had the time or opportunity to answer. 

I want to thank the witnesses and the members for their participation. The Chair notes that some members may have additional 

questions for the witnesses, which they may wish to submit in 

writing. Therefore, without objection, the hearing record will remain open for 30 days for members to submit written questions to 

the witnesses, and to place their responses in the record. 

This subcommittee hearing is now adjourned. 

[Whereupon, at 2:07 p.m., the hearing was adjourned.] 

(59) 

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