U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

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

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

76–106 PDF 2012

INVESTOR PROTECTION: THE NEED TO 

PROTECT INVESTORS FROM THE GOVERNMENT 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS AND 

GOVERNMENT SPONSORED ENTERPRISES 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

JUNE 7, 2012 

Printed for the use of the Committee on Financial Services 

Serial No. 112–135 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

JAMES H. CLINGER, Staff Director and Chief Counsel 

(III) 

SUBCOMMITTEE ON CAPITAL MARKETS AND GOVERNMENT SPONSORED ENTERPRISES

SCOTT GARRETT, New Jersey, Chairman 

DAVID SCHWEIKERT, Arizona, Vice 

Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

JUDY BIGGERT, Illinois 

JEB HENSARLING, Texas 

RANDY NEUGEBAUER, Texas 

JOHN CAMPBELL, California 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

NAN A. S. HAYWORTH, New York 

ROBERT HURT, Virginia 

MICHAEL G. GRIMM, New York 

STEVE STIVERS, Ohio 

ROBERT J. DOLD, Illinois 

MAXINE WATERS, California, Ranking 

Member 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

RUBE ́ N HINOJOSA, Texas 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

CAROLYN B. MALONEY, New York 

GWEN MOORE, Wisconsin 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

AL GREEN, Texas 

KEITH ELLISON, Minnesota 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

June 7, 2012 ...................................................................................................... 1 

Appendix: 

June 7, 2012 ...................................................................................................... 41 

WITNESSES 

THURSDAY, JUNE 7, 2012 

Fiorillo, Vincent A., Trading/Portfolio Manager, Doubleline Capital, LP, on 

behalf of the Association of Mortgage Investors (AMI) ..................................... 8 

Goodman, Laurie S., Senior Managing Director, Amherst Securities Group, 

L.P., on behalf of the Association of Institutional INVESTORS ...................... 10 

Levitin, Adam J., Professor of Law, Georgetown University Law Center .......... 12 

Lubben, Stephen J., Harvey Washington Wiley Chair in Corporate Governance & Business Ethics, Seton Hall University School of Law ........................ 14 

Olson, Hon. Theodore B., Partner, Gibson, Dunn & Crutcher LLP, on behalf 

of the American Task Force Argentina .............................................................. 16 

Skeel, David A., Jr., S. Samuel Arsht Professor of Corporate Law, University 

of Pennsylvania Law School ................................................................................ 17 

APPENDIX 

Prepared statements: 

Fiorillo, Vincent A. ........................................................................................... 42 

Goodman, Laurie S. .......................................................................................... 47 

Levitin, Adam J. ............................................................................................... 59 

Lubben, Stephen J. ........................................................................................... 72 

Olson, Hon. Theodore B. .................................................................................. 79 

Skeel, David A., Jr. ........................................................................................... 87 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Garrett, Hon. Scott: 

Written statement of the American Council of Life Insurers (ACLI) .......... 94 

Peters, Hon. Gary: 

Research Memorandum of the Center for Automotive Research (CAR), 

entitled, ‘‘The Impact on the U.S. Economy of the Successful Automaker Bankruptcies,’’ dated November 17, 2010 ....................................... 97 

(1) 

INVESTOR PROTECTION: THE NEED 

TO PROTECT INVESTORS FROM 

THE GOVERNMENT 

Thursday, June 7, 2012 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON CAPITAL MARKETS AND

GOVERNMENT SPONSORED ENTERPRISES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 2:34 p.m., in room 

2128, Rayburn House Office Building, Hon. Scott Garrett [chairman of the subcommittee] presiding. 

Members present: Representatives Garrett, Schweikert, Lucas, 

Neugebauer, Pearce, Posey, Hayworth, Hurt, Grimm, Stivers, Dold; 

Waters, Miller of North Carolina, Maloney, Donnelly, Carson, 

Himes, Peters, Green, and Ellison. 

Chairman GARRETT. Good afternoon. This hearing of the Subcommittee on Capital Markets and Government Sponsored Enterprises is called to order. Today’s hearing is entitled, ‘‘Investor Protection: The Need to Protect Investors from the Government.’’ 

I thank the panel for being here. We are on a little bit of a schedule, since we are starting 34 minutes late, so I will be pretty exacting with the time for each of the witnesses and also the members 

of the subcommittee. We will begin with opening statements, and 

I will yield myself about 5 minutes for my remarks. 

As I indicated, today we are holding a hearing to further examine a number of measures advocated for by the Obama Administration that have basically negatively impacted a wide variety of U.S. 

investors, including pension funds, 401k plans, university endowments, mutual funds, insurance companies, foundations, and municipal entities. 

Specifically, the Administration has taken a variety of actions 

where they have sided with the bigger banks, deadbeat foreign governments that we know of, and big labor, all at the expense of our 

own U.S. investors. 

These actions include, first, the recent National Mortgage Settlement Agreement. In this instance, the Administration worked out 

an agreement with the Nation’s four largest servicers in the wake 

of the robo-signing controversy, where the banks agree to pay a significant penalty but with funds purportedly going to help homeowners. As part of the agreement, the Administration allows the 

banks to get credit on what they owe by literally taking money out 

2 

of securitization trusts owned by private investors, including again, 

pension funds, 401k plans, university endowments, and the like. 

So in this case, we actually have the Administration advocating 

policies that directly take money from the investors who committed 

absolutely no wrong whatsoever in order to pay, at least partially, 

for the problems admitted to by the banks. To ensure that this terrible outcome doesn’t occur again, I offered an amendment to the 

Fiscal Year 2013 Department of Justice’s appropriations bill to 

block the use of any funds by the Justice Department from entering into similar agreements or settlements in the future, where 

money is forcibly removed from residential mortgage-backed 

securitization trusts. This amendment passed, and it is my hope 

that it will remain in the final fiscal year funding bill. 

Next, we have the Argentina default issue. In 2001, Argentina 

was the third largest economy in South America. Now, it is the 

largest sovereign debt default in history, with hundreds of U.S. investors taking billions of dollars in losses, despite Argentina having 

the money to pay the bill. 

Since the 2001 announcement, U.S. and other foreign creditors 

have won more than 100 judgments against the Argentine government and it has continued to ignore these judgments, despite its 

promise to respect U.S. law. In February, the U.S. District Court 

for the Southern District of New York handed U.S. investors that 

they had still not settled a significant victory by agreeing that Argentina violated a key provision of the bond agreement and that it 

should treat obligation to all the bondholders, at least equally to 

the obligation of others. Argentina then appealed the decision to 

the U.S. Court of Appeals for the Second Circuit. 

This now is where the Administration could not resist intervening against U.S. investors. On April 4th, at its own discretion, 

without being asked by the Court, this Administration submitted 

an amicus brief weighing in on the side of Argentina and against 

U.S. investors. So I hope to learn more today from our panel as to 

why the Administration felt that they had to interfere, as opposed 

to just allowing the matter to go through the courts impartially. 

Finally, let us turn to the crisis-secured bondholder write-down. 

In 2009, the Administration took the unprecedented action of forcing secure creditors to take a backseat to unsecured labor unions. 

Regardless of how someone feels about the appropriateness of the 

Federal Government bailing out the big auto companies, at the 

very least, there would be some agreement that secured bondholders, who have a legal priority, should not have their claims superseded by those who may be politically connected—the unsecured 

labor unions. 

This breaking of private contracts and the harming of secured investors is really a blow then to the rule of law in this country and 

it has set a dangerous precedent, a political intervention on behalf 

of politically favored constituencies. Investor protection, therefore, 

is tantamount to ensuring healthy and well-functioning capital 

markets. The Administration should be working to protect the investors, not harm them. 

It is unfortunate that I have yet to hear a peep of concern after 

any of these actions from any of the usual groups that claim to 

cherish the role and importance of protecting investors, but we 

3 

haven’t. I guess, from their perspective, it is only bad when investors get harmed by the private sector and not by the government. 

I, however, fail to see the difference. In fact, because the government is usually perceived by many people to be on their side, I feel 

that it is even more incumbent upon the government to go that 

extra mile to ensure that none of the actions are negatively impacting the American investor. 

Also, it is important to recognize the severe negative effect these 

various actions will have on investors and these markets going forward. We are now introducing a new type of risk to the U.S. investment market decision. Usually, investors have to determine a narrow set of risks, such as credit and interest rates. Now, we are adding an additional layer—government risk. 

Unfortunately, over the last several years during this Administration, we have seen a dramatic rise in crony capitalism, where 

the government picks the winners and the losers, based on political 

connections. This must end. 

With that, at this time, when our economy continues to be sluggish, it will be appropriate among the savings to last through those 

golden years, this Administration should be taking actions to protect these investors and savers, not taking actions to harm them 

and making them worse off. 

And with that, I will now yield to Mr. Peters for 21⁄2 minutes. 

Mr. PETERS. Thank you, Mr. Chairman. As we sit here today, we 

have had 27 straight months of private sector job growth, with the 

auto sector leading the way, adding more than 231,000 new jobs 

since General Motors and Chrysler emerged from bankruptcy. Yet 

here we are 3 years later and we are debating the bipartisan effort 

undertaken by both the Bush and Obama Administrations to help 

General Motors and Chrysler restructure. 

Let us put aside for the moment that the auto rescue saved hundreds of thousands of jobs. Let us put aside that the bankruptcy 

was far more successful than anyone would have expected. And let 

us take a moment to ask what investors were actually harmed by 

the government’s actions. 

Here are the facts. Chrysler’s debt was trading at about 30 cents 

on the dollar prior to bankruptcy, which is about what the creditors 

received. And 90 percent of Chrysler’s creditors agreed to the bankruptcy sale. Critics of the auto rescue offered no facts to demonstrate that GM or Chrysler’s investors were actually harmed. Instead, they alleged the company’s workers received a bailout. Nothing could be further from the truth. 

The UAW sacrificed billions of dollars in earned benefits. Workers accepted a 50 percent pay cut for newly hired employees and 

thousands lost their jobs as a result of plant closures. Most importantly, there was no private financing available to fund the bankruptcies of General Motors and Chrysler. Had the government not 

intervened, they would have been liquidated and this would have 

had a devastating impact on the economy, causing widespread failures in the supply base and resulting in major losses to investors. 

The government’s decision to intervene was designed to avoid 

this nightmare scenario. The money that went to the UAW was not 

taken from investors. It was money designed to ensure that General Motors and Chrysler had a workforce. Giving the investors 

4 

anything beyond what they would have received or recovered 

through liquidation would have amounted to a bailout and it would 

have been a windfall for those who had purchased their investments for pennies on the dollar. 

So what is the real purpose of this hearing today? A cynic might 

argue that it is nothing more than a partisan attempt to discredit 

one of President Obama’s greatest economic success stories in order 

to harm his chances at being reelected. I look forward to testimony 

of the witnesses today to see if there is any evidence presented that 

would lead to a less cynical conclusion. 

Thank you. 

Chairman GARRETT. The gentleman yields back time. I don’t believe we have any on our side right now. 

So, Mr. Donnelly for 21⁄2 minutes. 

Mr. DONNELLY. Thank you, Mr. Chairman. 

At the height of the recent economic crisis, our Nation’s auto industry faced serious financial problems, putting the jobs of more 

than 3 million hard-working Americans in jeopardy. The failure of 

the domestic automobile industry would have had a devastating 

impact on Indiana’s economy, America’s economy, and the American workforce. 

The potential failure of Chrysler and General Motors threatened 

the jobs of nearly 150,000 Hoosiers, from transmission workers in 

Kokomo to parts suppliers and dealers from the Ohio River to Lake 

Michigan. The threat to our auto industry wasn’t just a threat to 

Hoosier jobs. It was a threat to our way of life and would have 

plunged Indiana into a depression. 

In December 2008 and January 2009, the Bush Administration 

stood behind our automakers and their financial arms, providing 

temporary assistance and arguing that not providing any assistance to companies like Chrysler would make the recession even 

worse. When the new Administration took office in 2009, they built 

on that precedent to keep the industry alive, working to secure 

Chrysler’s first lien creditors a greater return than they would 

have ever received under the liquidation, while keeping Chrysler 

and the thousands of Hoosier jobs that support it alive. Shortly 

after, the Chrysler Group began repaying those funds and reinvesting in the American auto industry and our Nation’s communities. 

Chrysler Group has since paid back all obligated loans to the 

government. At a time when private capital is scarce, I strongly 

supported this temporary assistance, as did the Democratic Administration and the Republican Administration. Chrysler’s spring 

2009 sale to Fiat prevented the company from facing total collapse, 

an action which would have been devastating to an already fragile 

economy. This was not an easy decision, but it was a necessary 

one. 

I saw a clear choice: to either bet on American automobile workers, American industry, and American investors; or to bet against 

them. We bet on American workers and we will continue to do so 

every single time we are presented with that choice. 

Today, we know we made the right decision, which was upheld 

at every stage by our Federal courts, to stand behind American 

workers and families because Chrysler and the American autoVerDate Nov 24 2008 16:49 Nov 06, 2012 Jkt 076106 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K:\DOCS\76106.TXT TERRIE
5 

motive industry have bounced back from near collapse. In 2011, the 

sales of Chrysler vehicles worldwide increased by 22 percent. 

Chrysler Group’s U.S. market share rose 10.5 percent, up from 9.2 

percent a year prior. This was driven by a 43 percent increase in 

U.S. retail sales. Most recently, Chrysler Group reported a 30 percent increase in sales from May of 2012 over sales from May of last 

year. These are the best sales since 2007. 

We will continue to stand with our American automobile industry today, now, and long into the future. And we will also stand 

with American investors and American workers. This was an extraordinary success story. 

Chairman GARRETT. That is fine. The gentlelady from California 

for 21⁄2 minutes. 

Ms. WATERS. Thank you, Mr. Chairman. 

I think that there are likely some areas where we will agree 

today, and I appreciate your holding this hearing. But before I get 

into the substance of my remarks, I must say that the title of this 

hearing—‘‘The Need to Protect Investors from the Government’’— 

does cause me some concern. I think that the overwhelming message of the financial crisis 4 years ago was that investors need 

more legal protections and more enforcement from our regulators, 

not less. That is why we devoted all of Title IX of the Dodd-Frank 

Act to investing in protection and the regulation of securities. 

Additionally, Mr. Chairman, I think that we agree that we both 

have concerns with the joint Federal and State settlement with the 

five largest mortgage servicers. But before we get into that, I think 

it is important not just to focus on the government role in negotiating the settlement, but to remember that investors also obviously 

need protection from the servicers that caused this problem to 

begin with. 

I have been following this issue for quite some time. When I 

chaired the Housing Subcommittee, I held the first hearing in the 

House on the issue of robo-signing and chain-of-title problems. In 

fact, Professor Levitin, who is here today, testified at that hearing 

almost 2 years ago. 

And while we have achieved some important victories, most notably, the standup of the Consumer Financial Protection Bureau, I 

am afraid that we still haven’t adequately responded to the systemic mortgage servicing fraud that has taken place in recent years 

on the consumer side. I think the settlement will help too few borrowers and won’t help them deeply enough. 

And on a related point, I am concerned that the OCC and the 

Federal Reserve allowed servicers to hire their own investigators 

under their consent orders. I also understand the concerns of investors that servicers can satisfy a portion of the settlement through 

a system that gives them credit for writing down loans that they 

service on behalf of others. While I am a supporter of the principal 

write-downs, it doesn’t make good sense that servicers should satisfy the robo-signing and other claims against them through actions 

that don’t cost them anything or that they should be doing away 

with. 

On the other two issues we will discuss today—the auto rescues 

and litigation involving Argentine sovereign debt—I think that the 

Administration generally acted in a way that was consistent with 

6 

the law on both of these issues. In fact, the Administration continued policies that had been established by the Bush Administration. 

And specifically in the case of the auto rescue, I think the Administration did the best they could to save a critical U.S. industry 

in the midst of an historic financial crisis. Also, I should note that 

the structure of those rescues has been upheld in the courts. 

I sincerely thank you. I yield back the balance of my time. 

Chairman GARRETT. And the gentlelady yields back the balance 

of her time. The gentleman from Connecticut is recognized for 21⁄2

minutes. 

Mr. HIMES. Thank you, Mr. Chairman. Mr. Chairman, the title 

of this hearing today caught my eye. This premise that investors 

need protection from the government is interesting for two reasons. 

One, it is a novel concept. Centuries of experience with bubbles and 

crashes have shown us the need for smart regulation—how important that is to well-functioning markets. 

But also, in my 3 years here, I have watched as the Republican 

Majority has seized each and every opportunity to remove and 

erode every protection that is there in the law for our investors as 

well as to damage the SEC and ECFTC to reducing their budgets. 

And so I ask myself, why are we here? 

We are obviously here for political reasons. If you read the summary of this testimony, this is all about pinning these couple of 

purportedly and allegedly dastardly acts on President Obama. So 

let us evaluate the claims on the merits. Let us ask two questions: 

who are the investors that we are talking about here; and how 

have all American investors fared during the Obama Administration? 

Now, who are the investors in Venezuelan sovereign bonds and 

in Chrysler’s senior debt? The answer of course is tremendously sophisticated institutional investors in private funds who, in law, are 

deemed to not require the kind of oversight that retail investors 

have. I pulled the offering circular for the Venezuela offering and 

it yielded 11 and 12 percent interest. Why? Of course, because 

these are enormously risky investments that should not be undertaken other than by sophisticated people. 

Page one of this offering circular reads, ‘‘Argentina is a foreign 

sovereign state. Consequently, it may be difficult for you to obtain 

or realize upon judgments of courts in the United States against 

Argentina. In no way do I wish to imply that the investors deserved what happened to them, but they were the swashbucklers 

of the investment world who knew what they were getting into, 

which brings me to the question—and if I will bring the committee’s attention to the graphic on the wall right now. How have investors in this country fared over the Obama Administration? Let 

us add up the maximum possible loss of three of the investors or 

the investor categories in the session today. And you get something 

on the outside, around $100 billion. 

Since March 2009, shortly after the President took office, the 

stock market alone has restored $7.2 trillion in household wealth 

to U.S. investors. The amount of money we are talking about today 

is less than 2 percent of that restoration. Now, because I care about 

logic, I am not going to offer 100 percent of the credit for that to 

the President of the United States. But if I can watch the RepubVerDate Nov 24 2008 16:49 Nov 06, 2012 Jkt 076106 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 K:\DOCS\76106.TXT TERRIE
7 

lican Majority blame gas prices entirely on the President, and the 

slow job growth numbers on the President, I would ask anyone in 

the Republican Majority if there is a good reason why we should 

not give entire credit for this $7.2 trillion gain on the part of 121 

million American investors entirely to President Obama? 

I yield back the balance of my time. 

Chairman GARRETT. And the gentleman yields back the balance 

of his time. I will yield myself 2 minutes just to respond to a couple 

of those points. 

First, the gentleman makes some sort of references as far as cuts 

or reductions—regulators— 

I know of no data to show of any cuts to regulators. In fact, the 

facts of the matter are, you would see year over year increases in 

the regulators’ budget. 

Secondly, to the gentleman’s point that these type of investments 

are risky investments, they may well be, but now, thanks to legislation out of past years’ legislation and this Administration, add 

one other factor of risk to it. Not only the risk that this is a South 

American country that may have some variables down there, but 

now, you have the added risk of political cronyism, as this Administration gets involved in it. 

So an added risk—we talked about liquidity risk, credit market 

risk, and the other risks involved there, as the gentleman from 

Connecticut just cited. Now, you have the risk of the Federal Government—getting involved with it. That was not the intention of 

the Federal Government, being able to involve itself in this matter. 

Thirdly, to your chart which is now gone. How do you argue in 

a counter-factual? Your point being—creditors did a lot better 

under the situation where the Federal Government got involved 

with the auto company bailouts. 

If you want to do a true apples-to-apples comparison, as opposed 

to your chart, which I guess is an apples-to-oranges comparison, 

your chart basically says—on the one hand, this is where—what— 

when the Federal Government gets involved and spends taxpayers’ 

money to pick its winners and pick its losers, under your scenario 

that the creditors did better than under the second scenario where 

no taxpayer dollars would have gone into a bankruptcy proceedings. That is not really a fair comparison. 

If you wanted to do a fair comparison, one would be putting taxpayer dollars into both situations—into the situation that occurred 

(a)—where the government picked winners and losers; or (b) into 

a bankruptcy scenario. Had you done that, I would assume that the 

honest creditors would have actually done better. They would have 

then known what the rule of law would be. And those parties who 

had no secured interest whatsoever in this matter—namely, the 

unions—would not be represented on your chart whatsoever. 

So let us be fair about it. Let us compare apples-to-apples, as opposed to apples-to-oranges. And let us also be fair to the investors, 

and remember who the investors are. The investors are not some 

big Wall Street conglomerate or those sophisticated people that you 

are talking about, making these swashbuckling risky investments. 

The investors are the people down the street—the pension funds, 

the university funds, the 401k plans. It is the retirees down in 

Florida. Those are the investors who have been harmed in each one 

8 

of these cases, not by the investment per se, but by the involvement of the Federal Government. 

With that, I yield back the balance of my time. And I believe all 

time has expired. So with that, we now look to our panel. And 

again, we are on a hard deadline here. 

I would like to welcome the panel. Mr. Fiorillo, you will be first 

up. And for all the witnesses who are here today, we thank you for 

being a member of our panel. We thank you for your complete testimony, which will be made a part of the record. You will be recognized for 5 minutes, of course. And I will say this once, although 

I will probably say it one, two, three, four, five more times: make 

sure you push your button on your microphone and make sure you 

pull it as close as you possibly can so that people like me can hear 

you. 

Good afternoon. You are recognized for 5 minutes. 

STATEMENT OF VINCENT A. FIORILLO, TRADING/PORTFOLIO 

MANAGER, DOUBLELINE CAPITAL, LP, ON BEHALF OF THE 

ASSOCIATION OF MORTGAGE INVESTORS (AMI) 

Mr. FIORILLO. Chairman Garrett, Ranking Member Waters, and 

distinguished members of the subcommittee, thank you for the opportunity to testify. 

My name is Vincent Fiorillo and I am a 35-year veteran of the 

housing, finance, and mortgage securities industry. Currently, I 

serve as a portfolio manager at Doubleline Capital in Los Angeles. 

However, in my testimony, I am representing the Association of 

Mortgage Investors. The AMI represents the managers of mutual 

funds, long-term investors for State and local pensions, and retirement funds for a range of institutions, including unions, teachers, 

and first responders. 

In truth, many of you and your constituents are probably mortgage investors through your 401ks and other retirement savings, 

such as the TSP program. For decades, the system for private financial mortgages worked very, very well, in part because this system relied on the rule of law, execution of contracts, and the understanding that borrowers would repay their mortgages. 

In recent years, these concepts have been challenged by some 

government actions, including and then being introduced into the 

markets. We attribute these government policies to a lack of understanding of what the system requires to remain vibrant. For decades, fixed-income investing in mortgage securities was one of the 

safest and most secure vehicles for long-term retirement savings. 

Likewise, it brought private capital to the mortgage market, and it 

thus enabled people to get credit and expanded opportunities for 

homeownership. 

Today, the U.S. mortgage market operates at a drastically reduced level. And this privately financed mortgage market has 

largely ground to a halt, as a result of actions taken over the last 

4 years. These changes now require investors to quantify and assess a political risk premium to the purchase of mortgages. 

Please let me emphasize that AMI members are fiduciaries for 

their clients, such as pensions and retirement funds. Mortgage investors understand that many hard-working middle-class Americans were economically harmed by the financial crisis. We have 

9 

thus strived to work with all parties on long-term effective solutions to the mortgage crisis. AMI is on record for supporting many 

kinds of relief for responsible borrowers and providing a helping 

hand, including things like cash for keys, fees in lieu, and, when 

appropriate, principal reduction. The settlement, unfortunately, 

has the potential to be a retirement tax, a 401k tax, because it will 

place a portion of the cost of the settlement on the public who are 

victims of the alleged robo-signing and anti-consumer activities. 

Further, investors were not a participant in any of the negotiations. It is incomprehensible that the mortgage servicers receive 

credit for modifying mortgages held by third parties, which are 

often pension plans, 401ks, and endowments at Main Streets. This 

is why many of the left and the right are looking at this as a bank 

bailout. As it stands, it will damage the RMVS market further by 

adding yet another risk premium due to government intervention. 

It will further restrict the ability of deserving Americans to obtain 

credit for homes for generations to come. 

Please understand we are not saying no to modifications. 

Servicers have the right and obligation to make modifications to 

mortgages they service. They should do so, irrespective of an AG 

settlement. But they certainly should not be able to reduce the cost 

of their settlement by modifying mortgages they service but don’t 

own. 

Our hope was that the final settlement would be designed to address such alleged wrongdoing while not settling with the money 

of innocent parties. The retirement security of innocent parties will 

be impacted by this settlement as it is currently filed. The final settlement is now the responsibility of the Oversight Committee for 

the next 31⁄2 years. 

AMI asks for the following four changes to be made on behalf of 

all stakeholders, including retirees and the public at large. Number 

one, transparency. The net present value model incorporated into 

the settlement must consider all of the borrowers’ debts, including 

mortgage debt, credit card debt, and student loan debt. A borrower’s total debt-to-income ratio is a significant factor in the analysis. 

Two, monetary caps to protect public institutions. As intended, 

this settlement causes financial loss for the abusers—the bank 

servicers and their affiliates. Unfortunately, the settlement is expected to also draw billions of dollars from innocent parties including public institutions, unions, and individual investors, rather 

than to servicers. It places first and second lien priority in conflict 

with its original construct, thereby increasing future homeowner 

mortgage credit costs. 

Number three, public reporting. We ask that the settlement administrator be required to make reports public and available on a 

monthly basis, reporting progress on clearly defined benchmarks 

and detailing on both a dollar and percentage basis, whether the 

mortgages modified are owned by mortgage servicers or the general 

public. 

And fourth, investors stakeholder participation. Our clients and 

the general public are important stakeholders of this settlement, 

yet we were excluded from the negotiation. Investors must be included in any further negotiation with additional servicers in the 

10 

future. The consequences and the mechanisms underlying this settlement greatly concern investors, including the establishment of a 

precedent that condones the bad deeds of others being paid by innocent responsible parties. And this settlement will undo contractual obligations that have second liens treated in a pari passu matter with other senior debt. 

And lastly, we wish to thank Chairman Garrett and his House 

colleagues for his recent appropriations amendment, which passed 

the full U.S. House of Representatives last month. We believe that 

the dual goals of protecting seniors and savers across this country 

and providing relief to responsible distressed homeowners are bipartisan and these efforts on a Federal level should be bipartisan 

as well. 

And again, we thank you for the opportunity to testify. 

[The prepared statement of Mr. Fiorillo can be found on page 42 

of the appendix.] 

Chairman GARRETT. Great. Thank you, Mr. Fiorillo. 

Ms. Goodman, welcome to the panel today. You are recognized 

for 5 minutes. 

STATEMENT OF LAURIE S. GOODMAN, SENIOR MANAGING DIRECTOR, AMHERST SECURITIES GROUP, L.P., ON BEHALF OF 

THE ASSOCIATION OF INSTITUTIONAL INVESTORS 

Ms. GOODMAN. Thank you very much, Chairman Garrett, and 

members of the subcommittee. I thank you for your invitation to 

testify today. My name is Laurie Goodman, and I am a senior managing director at Amherst Securities Group, a leading broker/dealer 

specializing in the trading of residential and commercial mortgagebacked securities. 

I am testifying on behalf of the Association of Institutional INVESTORS. Collectively, the members of this Association, all longterm investors, manage investments on behalf of more than 100 

million American workers and retirees. Thus, the concerns I express are not just those of a group of institutional investors. They 

are also those of the 100 million individuals they ultimately serve. 

I will focus on the mortgage market, discussing three specific 

topics where the government has taken action contrary to the interests of investors with no investor input—the State Attorney 

General settlement, the treatment of second liens mortgage modifications, and the unwillingness of the government to recognize 

that the cost of delay in the foreclosure process are borne by investors, not the servicers that were responsible. 

To reiterate the points made by Congresswoman Waters and 

Vince Fiorillo, the $25 billion settlement between the State Attorneys General and the five largest servicers allowed the servicers to 

use investor funds to pay for servicer wrongdoings. Out of this $25 

billion, at least $10 billion must be used for principal reductions. 

With servicers receiving a dollar of credit for each dollar of portfolio 

loans written down, 45 cents of credit for each dollar of private 

label securities is written down. 

We believe principal reduction is the most effective form of modification, but are concerned about the potential for abuse under the 

terms of the settlement. In particular, if the affected servicers are 

unable to economically modify a sufficient number of portfolio loans 

11 

to meet their targets, they might choose to more aggressively write 

down principal on investor loans. For example, they may have to 

do a larger write-down when a smaller write-down would be sufficient. 

Speaking on behalf of the Association of Institutional INVESTORS, we recognize the settlement is done, but have three pragmatic requests. First, servicers should provide investors with information on modification activity performed on loans and private 

label securities under the settlement. We have included the information request in our written testimony. This should not be too 

much of a burden, as investors have been assured that most banks 

intend to rely exclusively on principal reduction on portfolio loans 

to meet their settlement targets. 

Second, going forward, servicers should be unable to use investor 

money to settle charges of servicer wrongdoing. We understand 

there is discussion on other mortgage settlements and want to ensure investors are protected. We are vocal supporters of the Garrett 

amendment to the DOJ appropriations bill. Thank you, Mr. Garrett. 

And third, provide transparency to investors on servicing fees 

during foreclosure delinquency, mirroring the disclosure to borrowers under the terms of the AG settlement. This is especially 

critical as some bank servicers own pieces of the foreclosure process 

such as forced place insurance and property preservation services. 

When investors purchased private label securities, they assumed 

lien priority would be respected. The second lien would be written 

off before the first lien suffered any diminution of cash flows. 

HAMP was originally designed by Treasury, aided by servicer 

input, with no input from investors. It required only the first lien 

to be modified. This reflected the fact that banks often own the second lien and service the investor-owned first lien. Modifying the 

first lien increase the value of the second lien. 

In response to investor outrage, the 2MP program was introduced, which requires that the modification on the first and second 

lien be done in a proportionate manner, essentially making the 

liens pari passu. This treatment shows a flagrant disregard for the 

legal concept of lien priority. 

Neither borrowers nor investors want to see foreclosure. However, some foreclosures are inevitable and quick resolution is in the 

interest of both parties. The government has shown no recognition 

that there is a real cost to investors of needless delay in the foreclosure process. In particular, investors must pay taxes, insurance, 

and maintenance on the property, or accept a lower sales process 

if not maintained. 

The timelines have extended considerably. The average loan is 

now 26 months delinquent at the time of liquidation, up from 16 

months 3 years ago. This increase was initially due to the banks’ 

struggles to implement HAMP. Then, the robo-signing issue 

emerged, further extending timelines. And we fear the AG settlement will extend timelines still more. 

Members of the Association of Institutional INVESTORS have a 

fiduciary duty to the organizations and individuals whose money 

they manage to strive for the highest risk-adjusted returns. Governmental realignment of the risk will force institutional asset 

12 

managers to either demand higher returns for those risks or reduce 

mortgage holdings, which entail credit risk. These governmental 

actions certainly make it more difficult to bring private capital 

back to the mortgage market. 

It is therefore critical that the government explicitly acknowledge 

the role of investors as a very important group of stakeholders in 

the mortgage market and ensure their interests are addressed. 

I appreciate the opportunity to share the Association of Institutional INVESTORS’ views and I am happy to answer any questions. Thank you. 

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

47 of the appendix.] 

Chairman GARRETT. And I thank you as well. 

Mr. Levitin, welcome to the panel. 

STATEMENT OF ADAM J. LEVITIN, PROFESSOR OF LAW, 

GEORGETOWN UNIVERSITY LAW CENTER 

Mr. LEVITIN. Chairman Garrett, Ranking Member Waters, and 

members of the subcommittee, good afternoon. My name is Adam 

Levitin. I am a professor of law at Georgetown University, where 

I teach courses in financial regulation and bankruptcy. 

The three episodes highlighted by this hearing are entirely 

unconnected and in no way indicate an anti-investor bias from the 

Obama Administration. Rather, two of them—the Chrysler bankruptcy and the filing of an amicus brief in the Argentine debt litigation—are consistent with reasoned, responsible stewardship of 

the State. 

The third episode—the mortgage servicing settlement—is problematic. But it is indicative of the Administration being held hostage by the too-big-to-fail banks, rather than evincing animus toward mortgage investors. 

Let me address each of these episodes in turn. There are four 

points to be made in regard to the Chrysler bankruptcy. First, the 

Chrysler bankruptcy was done according to law. The asset sale underwent significant judicial review, all the way to the Supreme 

Court, and was found to be kosher, while the plan of liquidation 

was overwhelmingly approved by Chrysler’s creditors and by the 

bankruptcy court. 

Second, it is unfair to claim that the UAW received a greater return than Chrysler’s senior lien holders. In the formal bankruptcy 

distribution itself, the lien holders received 29 cents on the dollar 

and the UAW got nothing. If we want to account for the UAW receiving an ownership stake in new Chrysler, we must broaden our 

view to include events outside the formal bankruptcy distribution. 

If we do so, however, there is no reason not to account for the fact 

that many Chrysler senior lien holders bought their claims at a 

discount in the secondary market for less than 29 cents on the dollar or for the UAW’s pre-bankruptcy concessions. 

The UAW had previously accepted a 40 percent reduction in this 

pension retiree benefit claim, as well as made enormous concessions in its contract going forward, namely reducing the cost of all 

future workers by over 50 percent and eliminating pension and retiree health care provisions for those workers. Taking a larger view 

13 

then, the senior bondholders came out of Chrysler’s restructuring 

substantially better than the UAW. 

Third, the UAW’s pension obligations were not funded by the 

senior lien holders in the bankruptcy, but by the United States and 

Canadian Governments in fiat. While one can question this funding 

decision, its only effect on investors was positive. Absent the funding of the UAW Viva, there would not have been a sale of Chrysler’s good assets because there was no other bid. Chrysler shopped 

the company for a year and the bidding window was held open for 

3 weeks in the bankruptcy court. No other bidder emerged. Chrysler is an example of the free market, not the government, at work. 

Fourth, absent the funding of the UAW Viva, Chrysler would 

have been liquidated. This would have resulted in a lower return 

for Chrysler’s bondholders and the likely failure not only of Chrysler but of GM, Ford, and most of the U.S. auto industry. As it happens, Chrysler has been a success story post-bankruptcy. And there 

are hundreds of thousands of your constituents who owe their continued employment to the Obama Administration’s responsible support for the auto industry. 

Moving on, the fact that the United States filed an amicus brief 

in the Argentine sovereign debt litigation is hardly novel or evidence of an anti-investor bias. The Bush Administration filed a 

substantially similar amicus brief in 2004, supporting Argentina’s 

position. Moreover, the Obama Administration has done more to 

help American investors collect on Argentine debt than the Bush 

Administration ever did. The Obama Administration imposed trade 

sanctions on Argentina for its failure to pay a judgment regarding 

its debt. 

Whatever one thinks of the substantive arguments about the Argentine debt litigation, it is entirely reasonable for the United 

States to have filed an amicus brief, given that the case has implications for the stability of global financial markets and for the ability for the United States to enjoy sovereign immunity abroad. To 

characterize this amicus brief as the coddling of a deadbeat state 

is risible. 

Finally, there is little to like about the mortgage servicing settlement. It was concluded without any real investigation, despite over 

a year-and-a-half of dithering. The settlement provides too little relief for too few homeowners. It will not clear housing markets. It 

will not deter future consumer fraud by the too-big-to-fail banks. It 

does not even force the banks to disgorge their wrongful profits. 

And then, there is the possibility that the cost of the settlement 

will be borne largely by mortgage investors. 

The Administration has boasted that $20 billion in homeowner 

relief required under the settlement will actually result in $32 billion of relief. This amplification is premised on the assumption that 

the banks will write down principal only on mortgages that they 

service for others and not on the mortgages they own themselves. 

It is hard to square this boast with the Administration’s insistence that the settlement will not result in harm to mortgage investors. It is possible that the Administration’s claims are merely spin 

to make the settlement look more meaningful. If the Administration’s boasts are correct, however, then either the servicers will get 

settlement credit for modifying mortgages they were already obliVerDate Nov 24 2008 16:49 Nov 06, 2012 Jkt 076106 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\76106.TXT TERRIE
14 

gated to modify or servicers will get credit for modifying mortgages 

that they are contractually prohibited from modifying. Either way, 

the settlement is a sham. Either no additional modifications are 

being required or the cost of the additional modifications is being 

shifted to investors who have not engaged in any wrongdoing and 

who are not even at the negotiating table. 

That said, framing the Obama Administration’s actions as antiinvestor misses the real problem, namely that the Administration 

is hostage to the big-to-fail banks. The Administration was forced 

to take action in the wake of the robo-signing scandal, but it knew 

it could not impose a serious and proper penalty on the too-big-tofail banks. The only possibility was the sham settlement of one 

form or another. 

Too-big-to-fail tied the Administration’s hands. And while it may 

be convenient in an election season to frame the issue otherwise, 

the only way investors will avoid being shafted again by the big 

banks’ misbehavior is by eliminating too-big-to-fail. 

I look forward to your questions. Thank you. 

[The prepared statement of Professor Levitin can be found on 

page 59 of the appendix.] 

Chairman GARRETT. Thank you, Mr. Levitin. 

Dr. Lubben, welcome. 

STATEMENT OF STEPHEN J. LUBBEN, HARVEY WASHINGTON 

WILEY CHAIR IN CORPORATE GOVERNANCE & BUSINESS 

ETHICS, SETON HALL UNIVERSITY SCHOOL OF LAW 

Mr. LUBBEN. Thank you, Chairman Garrett, and distinguished 

members of the subcommittee. I am the Harvey Washington Wiley 

Chair in Corporate Governance & Business Ethics at Seton Hall 

University School of Law in Newark, New Jersey. I was asked to 

address two issues: Argentina; and the automotive bankruptcy 

cases. 

First, with Argentina. At heart, Argentina’s bonds, and the interpretation thereof, are a matter of New York State contract law, not 

really a matter of Federal law. It is pretty clear—and I think we 

all have to concede—that Argentina has breached its obligations 

under those bonds. 

Nonetheless, we have this issue that when you buy sovereign 

debt, you also buy the issue of sovereign immunity. Knowing all 

this, the holdout bondholders nonetheless decided to decline Argentina’s restructuring offer earlier on and take their chances with a 

litigation strategy. But in the process of implementing this strategy, they have advanced an interpretation of the pari passu clause 

in those—in that debt instrument that is inconsistent with the understanding of that clause in both corporate and sovereign context 

under New York State law. 

A pari passu clause basically reaffirms the idea that the unsecured debt is not subordinated. In a corporate context, this is obviously extremely important because, while it is a corporation’s 

issue—subordinated debt. 

It is quite clear, however, in the corporate context, that the pari 

passu clause does not protect bondholders from preferential payment of other equally ranked creditors. The only protection against 

preferential payment of other equally ranked creditors comes under 

15 

the Federal Bankruptcy Code. There is no such protection under 

State contract law. Obviously, there is no Federal bankruptcy system that is applicable in the sovereign debt context. 

So what we have here in this litigation strategy is an attempt 

to convert the pari passu clause from a rule of rank into basically 

a rule of equality. The problem is that is going to have some serious implications even outside of the sovereign debt context. I have 

concerns that it will make it very hard to do out-of-court workouts 

and out-of-court debt restructurings in the corporate context, because I have no idea how you can cabin their proffered interpretation of the pari passu clause to solely the sovereign debt context. 

So given that background, it seems to me entirely appropriate for 

the Obama Administration to intervene in the Second Circuit case 

and alert the Second Circuit to this state of affairs. 

Turning to the bankruptcy cases, the automotive cases—these 

cases involved a quick sale of the debtor’s assets under Section 363 

of the Bankruptcy Code. This would have been a novel deal structure. When I graduated from law school—but, of course, e-mail was 

novel at that time, too—it really has become quite routine in most 

large corporate bankruptcy cases. Nevertheless, we still have several commentators who continue to argue that Chrysler, in particular, was defective because senior creditors received partial payment, while the unions and former employees received a greater 

payment. 

Importantly, these payments happen outside of the bankruptcy 

process. So there isn’t any real connection, as Professor Levitin has 

already noted, between those payments and what happened in the 

bankruptcy process. 

It is not even clear that it was a bailout, per se, because it is 

quite common for senior creditors to pay junior creditors as part of 

a Section 363 sale to basically ensure peace following the sale. 

They buy the assets and want to make sure that those assets retain their value. It is not uncommon to pay certain trade creditors 

that you need. And it is also not uncommon to pay employees, because they also contribute a lot to the value of the assets. 

In the absence of any bidder interested in buying either of these 

automotive companies, the argument that any of the funds going 

to the unions amounts to a bailout really means that the government should have overpaid for the debtors’ assets, or provided a 

bailout to the secured creditors. That is not really a question of 

bankruptcy law that results in a violation of the rule of law. 

I think we also need to note that 90 percent of the creditors in 

this case did approve the Chrysler sale. And at heart, Chapter 11 

is always about a negotiated deal. And furthermore, that the Indiana funds in this case bought into a syndicated loan agreement. 

Every single syndicated loan agreement that I have ever seen has 

a majority rule provision. That is what happened in this case; 90 

percent of the creditors agreed to go with it. They were bound by 

the terms of the instrument they invested in. And I see no reason 

why that shouldn’t be so. 

The government stepped in, in these cases, to provide needed financing when none was available. It is sometimes argued that 

some could have been available in some hypothetical world. I will 

just, as my final point, note that General Motors had a DIP loan 

16 

of about $30 billion. That is more than 4 times larger than any privately organized DIP loan ever. And that wasn’t in the middle of 

a financial crisis. 

Thank you. 

[The prepared statement of Dr. Lubben can be found on page 72 

of the appendix.] 

Chairman GARRETT. Thank you. Mr. Olson, I would like to recognize you and welcome you to the committee. 

STATEMENT OF THE HONORABLE THEODORE B. OLSON, 

PARTNER, GIBSON, DUNN & CRUTCHER LLP, ON BEHALF OF 

THE AMERICAN TASK FORCE ARGENTINA 

Mr. OLSON. Thank you, Chairman Garrett, Ranking Member 

Waters, and members of the subcommittee for having a hearing on 

an issue of great importance to American investors. 

My firm and I represent NML Capital Limited, which is one of 

many investors that has won substantial judgments from U.S. 

courts against the Republic of Argentina. NML is part of a family 

of funds that manages capital for dozens of U.S.-based organizations including colleges, universities, hospitals, and pension funds. 

My firm and I have also recently represented victims of Hamas-orchestrated and Iranian-supported terror against the government of 

Iran. 

In these representations, I have been troubled by our government’s eagerness to side with lawless nations against the interests 

of Americans. For example, just last month our government filed 

a brief in the United States Supreme Court supporting the position 

of the government of Iran that it can refuse to disclose to American 

victims of Iranian-sponsored terror the location of Iranian assets 

needed to satisfy victims’ judgments. 

I have been particularly troubled by positions our government 

has taken recently against investors in U.S. markets. For example, 

the government recently intervened in an appeal in favor of Argentina, in a case where the trial court had ruled that Argentina must 

abide by a contractual obligation to treat one set of bondholders no 

less favorably than another. Dr. Lubben has mentioned that that 

is a question of New York law, and the United States intervened 

without being asked to by the court to express an opinion on State 

law, not Federal Government law. 

The government intervened voluntarily without any invitation 

from the court, and the issues primarily, as I said, involved New 

York law. Not only did the government gratuitously intervene, but 

it also did so after showing no interest in this case for a year-anda-half after the trial court was considering these important issues. 

In the appeals court, it largely repeated Argentina’s arguments, 

adding only unsubstantiated and vague allegations and assertions 

about U.S. policy. The brief was signed by top officers of the Treasury Department, the Justice Department, and the State Department. Just 1 year ago, the United States Court of Appeals for the 

District of Columbia Circuit admonished the government that the 

gratuitous, last-minute filing of such a brief in an appellate court 

was patently unfair to the litigants and disrespectful to the district 

judge. 

17 

The broader context of the Argentina case raises grave concerns 

and grave questions about why our government should repeatedly 

choose to side with Argentina, and this is not the first time. And 

it is not specifically limited to this Administration. I hasten to 

make that point. It has happened before, but in different circumstances. But it seems to be happening with increasing frequency. It has involved support for the government of Iran, support 

for the government of the Congo, support for the government of Argentina—lawless nations that do not abide by the rule of law. 

In this case, Argentina unquestionably has the ability to pay its investors. It is sitting on $47 billion in foreign currency reserves in 

a Swiss bank. Yet, it refuses to pay and has used every means 

imaginable to avoid paying its judgments and paying the judgments of the United States Court and has spirited its assets out 

of the United States. It has declared it will never pay a single 

penny on these debts. A Federal judge who heard this case said, 

what is going on between the Republic of Argentina and the Federal court system is an exercise of sheer willful defiance of the Republic to honor the obligations and judgments of a Federal court. 

Our government’s decision to invest taxpayer resources in supporting such defiance—when the courts have not even asked for its 

views—is disappointing, to say the least. It is all the more disappointing in light of Argentina’s recent actions. Nationalizing an 

oil company, defying international arbitral awards, inciting tensions with Great Britain—these actions have drawn the rightful 

condemnation of the international community. Yet, when the 

United States filed its brief in support of Argentina, the Argentine 

finance secretary celebrated the filing of our government’s brief, declaring that it validated the arguments used by Argentina and the 

general strategy of the Argentine government against American investors. 

The time has come for our government to concern itself with the 

rights of American investors, the rule of law, thoughtfully drawn 

congressional limits on sovereign immunity, and the enforceability 

of contracts under U.S. laws voluntarily entered into by foreign 

sovereigns to induce investments by our citizens. These considerations should not be overridden by vague, inarticulate, and expedient concepts of foreign policy. The lawful contractual and statutory rights of our citizens should be paramount over the unlawful 

defiance of our laws by governments that have no respect for the 

rule of law or the laws of nations. 

[The prepared statement of Mr. Olson can be found on page 79 

of the appendix.] 

Chairman GARRETT. I thank the gentleman. Mr. Skeel, welcome 

to the committee. 

STATEMENT OF DAVID A. SKEEL, JR., S. SAMUEL ARSHT PROFESSOR OF CORPORATE LAW, UNIVERSITY OF PENNSYLVANIA LAW SCHOOL 

Mr. SKEEL. Thank you. And thank you for the opportunity to testify before you today on investor protection. I have had the privilege of coming here for hearings like this one from time to time, 

and I must say it gives me goose bumps every time I walk into this 

building. It is a real thrill to be here. 

18 

Chairman GARRETT. We will adjust the temperature. 

Mr. SKEEL. We’ll see if that works. I suspect I won’t give you 

goose bumps with what I have to say. 

The past few years have been an extraordinary time, and the 

government has taken a variety of extraordinary actions. Like 

many Americans, I believe that some of these actions have been essential, while others have been deeply mistaken. 

I would be happy to share my views on these issues—I am after 

all a law professor and we share our views about everything—and 

about the substance of these decisions. But that is not what I 

would like to talk about today. What I would like to focus on today 

is what I believe is a very dangerous pattern that has emerged during the crisis. And that is the undermining of basic rule of law 

principles in ways that have injected uncertainty into the markets. 

In my initial remarks, I would like to briefly discuss two of the 

most egregious examples of this: the Chrysler bailout; and the recent national mortgage settlement. I would also be happy to give 

other illustrations of what I see as a very dangerous pattern or to 

talk about the Argentine litigation, if you all are interested. 

In Chrysler, the Obama Administration commandeered the bankruptcy process so that it could decide which creditors got paid and 

which didn’t. As you can see, I have a slight difference of opinion 

on this from Professors Lubben and Levitin. 

Rather than use the ordinary reorganization process, the Administration structured the transaction as a sale of all of Chrysler’s assets—all its good assets—to a new company that looked suspiciously like the old company, except that some investors were invited to participate in the new Chrysler and others were not. Now 

as Professor Lubben said, sales of assets as an alternative to using 

the normal reorganization process, have been a problem in Chapter 

11. Not everybody loves them. Professor Lubben himself has criticized the common use of the sale of assets, rather than ordinary 

reorganization. 

But whatever you think about sales of assets in many current 

Chapter 11 cases, the Chrysler bankruptcy was highly irregular 

and highly unusual. It was not like other cases. It was structured 

so that new Chrysler—the shell company that the assets were 

being sold to—and any potential competing bidder were essentially 

required by the terms of the transaction agreement and by the bidding rules in the bankruptcy case, to make the same deal that the 

government did—to protect the creditors that the government 

wanted to protect and not to protect other creditors. 

Defenders of the transaction have argued that if another bidder 

came along, it would not have had to do what the government 

wanted it to do, but this is not accurate. There were bidding rules 

in the case that essentially required any bidder to do the same 

things for the UAW and for Chrysler’s trade debt that the government wanted to do. 

As far as the point that Professor Lubben made that payments 

to the UAW and to trade creditors were made outside of the bankruptcy process, that is not accurate either. They were required as 

conditions of the sale agreement. The sale agreement had these as 

terms of the sale. 

19 

I have one last thing to say about Chrysler, which is that a number of people have made the comment that the Chrysler transaction 

was approved by every court that looked at it. That is not accurate 

either. I think this misconception has stemmed from op eds that 

Steve Ratner, the former car czar, has written, which have included this mistake. Actually, the Supreme Court threw out the appellate court decision in Chrysler, vacated the opinion, but decided 

not to go further because it felt that it was too late to do anything. 

So it is not true to say every court blessed this transaction. 

Very quickly on the mortgage settlement, I believe that the settlement is an abuse of the litigation process and a usurpation of 

the proper role of the legislature—that it is a legislative action 

masquerading as a litigation settlement. The basis for the mortgage litigation was robo-signing and related abuses. The settlement 

has almost nothing to do with robo-signing. What the settlement is, 

is a way to try to deal with the mortgage crisis a little bit—a very 

badly structured way to try to deal with the mortgage crisis and 

a small bailout to the States. And that is the way the States have 

been treating it. 

I believe that these examples and other examples like them reflect a serious erosion of the rule of law in this country, and that 

it is a threat to our markets. It is also a threat to the recovery that 

we are all hoping to see. 

[The prepared statement of Professor Skeel can be found on page 

87 of the appendix.] 

Chairman GARRETT. Thank you. 

And with that, I thank the panel for all of their testimony and 

their comments and their opinions. We will now turn to questions. 

And I will recognize myself for an initial 5 minutes. 

The first question will go to, I guess, Mr. Fiorello, and Ms. Goodman, if you want to chime in as well, or any members of the panel. 

Political risk with regard to the issues that we are talking about 

here—this is an additional component now of two investors and 

how will that affect the price of bonds? 

Mr. FIORILLO. I will go first, and Laurie will follow up. 

Chairman GARRETT. Okay. 

Mr. FIORILLO. Basically, when we look at bonds—when we look 

at mortgage bonds—we have some assumptions we have to make: 

how many folks will default; how many folks will not default; how 

many will pay on time; and how many will be late. And we take 

all that information and we put it into a yield table, if you will, 

or calculate what the return should be. 

Now, not only do we have to do that, we have to understand that 

the Federal Government could stand up and say, I am disallowing 

something that we have been relying on several years—maybe 30 

years or so. And they are going to change the rules in the middle 

of the game. 

Changing the rules in the middle of the game adds basis points 

to the individual borrower. And if it is a small change, it is 20 basis 

points. If it is a big change, it is 100 basis points. But your constituents pay more for their mortgages. And I think that is what 

you need to hear. 

Chairman GARRETT. Ms. Goodman? 

20 

Ms. GOODMAN. Yes, and it influences not only the mortgages that 

are outstanding, because the recovery is going to be lower, there is 

some probability of principal write-downs of what is necessary. But 

it also affects the mortgages going forward, because it builds in the 

possibility that the government can change the rules of the game 

going forward. So there is an extra risk premium on mortgages 

that haven’t yet been made. 

Chairman GARRETT. Mr. Skeel made a comment about the lack 

of the rule of law—the uncertainty of the rule of law. This is something I heard repeatedly during each one of these cases going 

through when I talked to stakeholders. And stakeholders are simply investors and investors are simply pension funds and charities 

and municipalities and the rest, from the lowest level to the most 

sophisticated level. They are all saying, ‘‘I don’t know what the rule 

is going to be anymore.’’ So what you are saying is, ‘‘When you 

don’t know what the rules are of the road anymore, how do you 

drive?’’ I use that analogy—you drive slower. Okay. And maybe you 

don’t invest in much at said cost. 

Now, on the Argentine situation, I guess I will address this to 

Mr. Olson. I understand that Argentina’s economy minister is coming here to D.C. next week to hold a press conference. And supposedly it is to help the fact about—as you gave in your testimony—that there is a refusal to pay U.S. investors. 

When I heard about that, I said that is sort of an undiplomatic 

thing to do on the first front—to come to our country and say, hey, 

we are doing something that is going to hurt U.S. investors and we 

are proud about that. But what doubly gets to me is that this is 

part and parcel because the Administration became involved in this 

suit. And you said this is maybe some involved in past Administrations, though, as well. But clearly, it is—but they have—Argentina 

has been emboldened. Is that the correct way to look at it in this 

situation? 

Mr. OLSON. They say so. I would say that this official is coming 

1 week too late, Mr. Chairman. Because if he would have come this 

week instead of next week, he could have been here today to answer your questions about— 

Chairman GARRETT. There you go. 

Mr. OLSON. —this very thing. And I would— 

Chairman GARRETT. It would have been interesting. 

Mr. OLSON. Maybe you can invite him to testify and answer 

these questions. If he wants to tell American investors what Argentina is doing to American investors, he ought to tell them under 

oath before this committee. 

The fact is that Argentina lured American investors into buying 

their bonds by waiving sovereign immunity, submitting to the jurisdiction of New York courts, promising to pay obligations on an 

equal basis among all of its unsubordinated bondholders. They 

have offered 27 cents on the dollar and then said, they passed a 

law saying that anybody who didn’t accept that 27 cents on the dollar would never be paid. 

Argentina is now defying the judgments of U.S. courts. It has 

spirited money out of the United States. It has all the money it 

needs to pay the judgments of United States courts and it is 

21 

defying the United States courts and the rule of law. They should 

answer those questions about why they are doing that. 

Chairman GARRETT. Yes, I agree with you. I don’t know whether 

they would come to the panel, but I guess we could ask them sometime. 

I will close with a question to Mr. Levitin. In your written testimony, you state that the Obama Administration is not anti-investor, because ‘‘actions that are unfavorable to one set of investors 

are frequently favorable to another set. In at least two of the episodes involved, the Administration’s actions were favorable to 

many more investors than they were unfavorable.’’ 

I think that goes to the question that we are raising today. And 

that goes to the political nature of the investment, if you will, by 

the Federal Government. That you are picking one set of investors 

to be more favorably treated than another set of investors. And 

that goes to Mr. Skeel’s comment that coming into it as an investor, I have no idea which way the government is going to happen 

to come down on the situation; whereas, you would know it in a 

bankruptcy. 

Mr. LEVITIN. I think it is important to know why the Administration chose particular sets of investors. It is not because the Administration liked one group of investors or another. I think it would 

be very wrong to characterize this as some sort of a crony deal. 

Instead, I think that in both the Chrysler case and the Argentine 

bond litigation, you have the Administration looking out for a larger interest than any group of investors. In Chrysler, you have the 

Administration looking out for the entire country, trying to make 

sure that the United States did not lose its industrial base. 

In the Argentine situation, the Administration has an interest in 

ensuring that we can have workouts of sovereign debt, so that we 

don’t have problems like what is going on in Greece right now. 

Chairman GARRETT. Thank you. I see my time has expired. The 

gentlelady from California? 

Ms. WATERS. Thank you very much, Mr. Chairman. 

I have a question for Mr. Levitin. When you testified in front of 

my Housing Subcommittee nearly 2 years ago, you were one of the 

early commentators to point out the real scale of the abuse that is 

happening in servicing and securitization. The major mortgage 

servicers at that time—at that same hearing—downplayed all of 

the allegations being made, even though they had initiated a voluntary foreclosure moratorium because of press reports about their 

foreclosure practices. Months later, of course, we finally saw a settlement emerge over these practices. 

First, do we know if the settlement amount of $25 billion is a fair 

penalty? As I understand it, the Consumer Financial Protection 

Bureau (CFPB) came out with an analysis before the settlement, 

saying that servicers had saved $25 billion by deliberately underresourcing in their servicing. And we know that servicers can satisfy the settlement amount through all sorts of activities that 

might not actually cost them anything, including write-downs of investor-owned loans. 

Can you talk about both the $25 billion overall number and the 

credit schedule that guides how servicers can comply with the settlement? 

22 

Mr. LEVITIN. It is, unfortunately, really impossible to figure out 

if the settlement figure is in any way fair, because there was no 

investigation done. We don’t know if the Administration settled the 

case where it didn’t know what it was settling. And that makes it 

very unlikely that we got to a reasonable settlement figure. 

What we do know is that there was a CFPB analysis that was 

leaked, there was an internal document and that it showed, without showing the methodology, that the CFPB was estimating that 

servicers saved somewhere in the neighborhood of $25 billion 

through various corner-cutting in the foreclosure process. It is not 

clear exactly what was included there. And therefore, it could have 

actually been a much larger number, but the CFPB’s estimate from 

a—and this is on PowerPoint deck that got—that somehow got 

leaked—was that there was $25 billion in savings. 

So the best-case scenario here is that we have seen disgorgement 

of these wrongful—of these savings. I don’t even think that is taking into account time value, which is considerable on $25 billion. 

So in the end, the banks were probably coming out ahead with this. 

Ms. WATERS. Thank you. You described the national mortgage 

settlement as the conclusion to round one of an ongoing struggle 

for accountability and reparations for the enormous damage the 

housing bubble did to the United States. 

You note that round two is marked by the creation of the residential mortgage-backed securities (RMBS) working group, which 

was announced in January of 2012 during the President’s State of 

the Union. How would you assess the progress of the RMBS working group so far? Now that we have settled the servicing issue, 

should the public be confident that they are going to seriously investigate the securitization aspects of the recent financial crisis? 

Mr. LEVITIN. Given what we know publicly about the workings 

of the RMBS fraud taskforce, we should not be encouraged. There 

are two things in particular that come to the Floor. First, is that 

there is no appropriation for this working group. The Administration has, in my understanding, proposed something in the range of 

a $55 appropriation, which strikes me as rather small, but that appropriation has not been made. 

Secondly, there is the matter of the staffing of this taskforce. And 

at this point, it seems that a relatively small number of existing 

Federal employees have been detailed to this taskforce, such that 

its staffing is a fraction of the taskforce that existed to deal with 

fraud in the S&L crisis. 

Ms. WATERS. Finally, I have been very concerned with the parallel effort going on at the OCC and the Federal Reserve under 

their mortgage servicing consent order process. How would you assess the credibility of that process? 

Mr. LEVITIN. I think that process has very, very little credibility. 

The OCC never managed to actually find any problems with the 

servicing process until it was raised publicly. And somehow, its examiners entirely missed the process. 

What I know of the OCC’s internal investigation is that the OCC 

avoided asking many of the most important questions about the 

process. The supposedly independent outside consultants that have 

been hired by the servicers often have pre-existing relationships 

with those servicers and the conflicts have not been fully disclosed. 

23 

The disclosures of the contracts that the OCC have made have 

been heavily redacted. And in one case, actually, the OCC, after extreme pressure, finally announced that it was rescinding that independent consulting work for Allen Hill because of a conflict of interest. 

In all, I think that we are unlikely to see any meaningful relief 

for homeowners coming out of either these consent orders or the 

servicing settlement. And I think that is a real shame. 

Ms. WATERS. Thank you very much. I yield back. 

Chairman GARRETT. The gentlelady yields back. The gentleman 

from New York is now recognized for 5 minutes. 

Mr. GRIMM. I came into the hearing very interested in this subject matter. But as it progresses, I have gone from interested to extremely concerned. If we could just take a step back, Mr. Levitin, 

you had just mentioned that it is your belief that the President was 

making a decision in two areas in specific that were in the best interests of the country. He wasn’t picking because he liked one 

group over another, but it was in the interest of the country. 

Don’t you think that undermines the separation of powers to 

some extent, especially when you are talking about court cases? 

Isn’t that the court’s decision to decide the law? 

Mr. LEVITIN. I think it is the court’s decision to decide the law, 

but I don’t think that is what the President was doing. I don’t 

think he was usurping the court’s powers by filing an amicus brief. 

That is something that the United States does all the time. 

And the concern of the United States in the Argentine debt litigation is that if Argentina is found not to have sovereign immunity 

in American courts, the United States might lose its sovereign immunity in foreign courts. So therefore, when someone brings a tort 

suit against the United States— 

Mr. GRIMM. If I could just stop you there—but if the court decides that they did, in fact, waive their sovereign immunity, then 

that is the law. Is it not? 

Mr. LEVITIN. Of course. 

Mr. GRIMM. Even if it is bad for the United States. And sometimes things are bad for us. What makes us the United States and 

makes us great and gives us an innate advantage over most countries in the world is that rule of law. 

I would submit to you that it absolutely undermines that, even 

if it is bad for us. And I am not saying you shouldn’t want to protect—a parent wants to protect its child but they have to let them 

out into the world, as scared as they may be, or they are not doing 

their job as a parent. 

Mr. LEVITIN. But the United States does have a right to express 

its opinion on judicial appeals and that is what this is—that if the 

Second Circuit or ultimately the Supreme Court says that Argentina doesn’t have sovereign immunity, that is the law. And I don’t 

think there is any indication that the Administration would disagree with it. It is simply the Administration saying that, at this 

point, it thinks that the district court has the issue wrong. 

Mr. GRIMM. Okay. I was surprised to hear that there was this 

press conference. I was very, very surprised by that. I agree with 

the chairman. I don’t think that is a diplomatic thing to do. I think 

that Argentina has been emboldened by this amicus brief. 

24 

I thought that it was odd that the United States would side with 

Argentina, which isn’t a particularly poor country. Are they able to 

pay the investors? Do they have the means to pay the investors? 

Mr. LEVITIN. Are you asking me, sir? 

Mr. GRIMM. Sure, why not? 

Mr. LEVITIN. I believe they do, but again, I don’t think the 

issue— 

Mr. GRIMM. It is a yes-or-no question. Do they have the means 

to pay the— 

Mr. LEVITIN. Yes. I think they have the money, but I don’t think 

that is the issue in the litigation 

Mr. GRIMM. Okay. I didn’t ask you what the issue was. I asked 

you if they have the means, counselor. Thank you. They choose not 

to. I have a couple of minutes left. 

Let me ask—I can’t see everyone’s name from here—Mr. Olson. 

Do you know if the Administration considered the effect on the deficit of intervening in Argentina’s side against U.S. investors, because my understanding is, if U.S. investors are given back the 

money that they are owed, they are going to pay more in taxes. 

Doing rough math, wouldn’t it mean that the U.S. Treasury in tax 

revenue would receive close to a billion dollars if Argentina made 

good on the debt that it owes? 

Mr. OLSON. I don’t know whether the Administration took that 

into consideration or not. I think the most important thing is the 

rule of law. We have repeated judgments that Argentina is defying. 

They do have the money to pay it. They have $47 billion in reserve 

that they could use to pay these judgments of United States courts 

that have been rendered as a result of their submission to the 

United States courts as a part of inducing the people to invest. 

The United States Government has a right to file a brief. There 

is no question about that. Although they did that in this one case 

without any request from the court and after 2 years after the litigation had been going on, and they allowed the district court to 

consider all these issues, and never once said what their interest 

was and then they file this brief. 

I am bothered by the fact that the United States Government is 

filing briefs supporting the Congo—the government of the Congo. 

And in support of Iran—against terrorism victims, despite congressional legislation giving them the right to sue the government of 

Iran. And then, repeatedly, on the side of Argentina. And as I said, 

the Argentine government says this validates our strategy against 

United States investors. 

I kept asking, ‘‘Why is the United States Government constantly 

taking the side of tyrants against U.S. investors?’’ And someone 

said, ‘‘Ted, you don’t understand; at the State Department, there 

is no American desk.’’ 

Mr. GRIMM. And on that, I yield back. 

Chairman GARRETT. The gentleman yields back. Thank you. 

Mr. Miller, you are recognized for 5 minutes. 

Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Chairman. 

This hearing is an interesting exercise. I think the Majority wants 

to ingratiate themselves to Wall Street, but Wall Street is actually 

not a monolith. There are diverse interests, and in fact, adverse interests. And this is an exercise in how to let mortgage investors say 

25 

how they have been done wrong, when in fact their interests are 

very adverse to those of the biggest banks, by saying the hearing 

is about how mortgage investors have been done wrong by the government. 

Ms. Goodman, Mr. Fiorillo, do you agree with Mr. Levitin that 

the injustice in the mortgage servicing agreement—and I agree 

with you that there was an injustice in having investors pay for the 

sins of servicers and in having seconds treated the same, instead 

of behind firsts in line. But do you think that injustice was done 

to harm investors or was it done to advantage the servicers—the 

big banks—unjustly to your disadvantage? Do you really think the 

government wanted to hurt you? 

Mr. FIORILLO. It is funny. The banks have really good attorneys. 

And by the way, I would like to thank you personally for your support of investors through a lot of this. You have been very supportive. But I think it is really important to understand that without investors at the table, there was no one to raise the issue. 

Mr. MILLER OF NORTH CAROLINA. I did. 

Mr. FIORILLO. Okay. So what I think we have to deal with is, 

yes, the banks have done it, and we need the government’s backing 

to make sure that we get it right. 

Mr. MILLER OF NORTH CAROLINA. Right. Ms. Goodman— 

Ms. GOODMAN. Can I just say that there was a very simple way 

to structure the settlement, that was to require the banks to pay 

for it themselves. That is, no use of private investor money. It is 

your wrongdoing. You pay for it. And for that part, the government 

is responsible. 

Mr. MILLER OF NORTH CAROLINA. Okay. Your criticism is good 

when it is not that principal was reduced. In fact, in your testimony, you said that you support principal reduction. 

Ms. GOODMAN. I have been a huge supporter of principal reduction, even before it was cool to be that. 

Mr. MILLER OF NORTH CAROLINA. And your objection is that the 

principal reduction should have come from the pockets of the 

servicers, not the investors. Is that correct? 

Ms. GOODMAN. Even doing principal reduction on investor loans 

is fine because there are lots of instances where that is the highest 

net present value modification alternative. What I object to is the 

banks getting credit for their own wrongdoing for doing it because 

it encourages abuse. 

Mr. MILLER OF NORTH CAROLINA. Ms. Goodman, both you and 

Mr. Fiorillo talked about the conflict for servicers servicing firsts 

that are owned by somebody else by investors while holding or 

being an affiliate holding seconds that they do actually own. 

Ms. GOODMAN. Huge problem. 

Mr. MILLER OF NORTH CAROLINA. I had introduced legislation, as 

has Mr. Garrett, to prohibit that conflict of interest. 

Ms. GOODMAN. Thank you. 

Mr. MILLER OF NORTH CAROLINA. Do you support that legislation? 

Ms. GOODMAN. Absolutely. 

Mr. MILLER OF NORTH CAROLINA. Okay. It seems if the servicer 

was truly acting without a conflict on behalf of the investors, they 

would have a great deal of bargaining power to go the holder of the 

26 

second and say, ‘‘The homeowner is a couple of months past due. 

He says he can pay a mortgage if it is reduced some. We can foreclose and you will lose everything. Or we can talk.’’ 

It seems like there is a lot of bargaining power there. Do you 

agree with that? 

Mr. FIORILLO. Yes. I totally agree. I am sure Laurie agrees as 

well. 

Mr. MILLER OF NORTH CAROLINA. Mr. Levitin, I think you have 

written on this topic. What bargaining power would a servicer hold 

if they were truly acting on behalf of the firsts and had no conflict? 

Mr. LEVITIN. If a servicer is acting on behalf of the firsts and has 

no conflict, you should be seeing a lot more principal write-downs. 

Mr. MILLER OF NORTH CAROLINA. On the first without—on the 

seconds without— 

Mr. LEVITIN. I am sorry. I may be confused by the question. If 

the servicer is acting on behalf—is servicing the first known as the 

second or does not own the second? 

Mr. MILLER OF NORTH CAROLINA. Would they be going to the seconds and saying, let us reduce in pari passu, or would they be saying, let us talk about knocking yours down 90 percent before we 

knock mine down at all? 

Mr. LEVITIN. I think you would see them talking—looking to see 

reduction of the second before you would have a reduction of the 

first. 

Mr. MILLER OF NORTH CAROLINA. Okay. Mr. Chairman, I will 

yield back. 

Chairman GARRETT. The gentleman yields back. Now, the gentleman from Arizona is recognized for 5 minutes. 

Mr. SCHWEIKERT. Thank you, Mr. Chairman. 

Let us see if I can sort of paint this picture from being—I look 

at the world more from the finance side. And I am also one of those 

great believers that one of the reasons certain countries are 

wealthy and some are poor is one of the key factors is the rule of 

law. That we see rule of law allows capital to be created and flow 

and investment to work. 

Am I looking at maybe only the tip of the iceberg? But a series 

of things where the rule of law is being thrown aside for what is, 

at the moment, what appears to be the most convenient or the 

most politically charged, or even in some models, at that moment, 

it appears to be economically rational. 

I am going to start with Professor Skeel and sort of work through 

the panel. 

First, one of my fixations is outlier added risk premiums that 

will be added into the mortgage market. If we are ever able to start 

to rebuild a private MBS market again. We have already been 

doing a series of things that start to change pre-payment risk and 

how you would build a model. A number of the heart programs of 

those things, we have to deal with the reality we changed how you 

and I would build our statistics there. Have we just now started 

to add, with something such as the settlement, a whole new level 

of legal risks that actually now comes from government? And is 

there a way to calculate that type of risk premium or does it even 

exist? 

Mr. SKEEL. I definitely agree—I believe— 

27 

Mr. SCHWEIKERT. I beg you to pull the microphone closer. 

Mr. SKEEL. Sorry. People usually don’t have any trouble hearing 

my voice, but I will use the microphone. 

I absolutely believe that we now have a political risk factor in 

a variety of different markets. I think it is difficult to measure, but 

it is measurable. And people are trying to measure it. 

For instance, there were a couple of studies after the Chrysler 

case trying to measure the effect on credit rates as a result of 

Chrysler. And what ends up happening is, it depends on who you 

are and what industry you are in. 

I think it is true that these interventions affect people differently, and you can’t always tell who the winner and who the 

loser is going to be. But even if there is not a systematic distortion, 

there is going to be a distortion, an uncertainty distortion, and I 

think it is in principle measurable. 

Mr. SCHWEIKERT. Professor Levitin, convince me that I am off 

base that these types of interventions—and, Doctor, you are also 

welcome to comment on this, too—is that are we starting to create 

an environment where we are adding a risk premium to maybe all 

forms of credit markets. Because we are starting to head towards 

a world where—the agreement is the agreement up until someone 

wants to change their mind and has good friends in the government. 

Mr. LEVITIN. I certainly hope not. My sense is that the market 

is going to look at the events of the last few years as being sui generis, that they were in response to a particular crisis and that 

going forward, they are not something that we should expect to be 

repeated. 

That said, if we see a return to sort of a faux private mortgage 

securitization market, where we have an implicit guarantee, then 

we do have that risk. That is, but I think instead we are much 

more likely to see some kind of an explicit guarantee in the market 

and that will—that will take care of the political— 

Mr. SCHWEIKERT. And obviously, my fixation on the mortgage 

market is very, very small degrees of risk when you start to analyze it and you model it—can sometimes make fairly substantial 

differences in your cost. And it is not only the mortgage market, 

but I worry about sort of the stigma through the Bankruptcy Code 

to even engaging in foreign investments, particularly if there have 

been waivers of immunity. Is this a pattern or are we just looking 

at a handful of outliers? 

Mr. LEVITIN. In regard to the Bankruptcy Code in foreign immunity, I think there is a debate about how the law is supposed to 

be interpreted. And there is an easy solution to that. If you don’t 

like the way that the law was interpreted, Congress can clarify 

that. Congress can clarify what—can add additional protections to 

Section 363 of the Bankruptcy Code. Yes. 

Mr. SCHWEIKERT. With the concerns you have heard, particularly 

of the Chrysler servicers and some of the others that may have 

been better than other investors and holders, would you recommend that we go back and take a look at that section of the 

bankruptcy law? 

Mr. LEVITIN. Yes. And similarly, the Foreign Sovereign Immunities Act. If the concern is that Argentina is able to sort of snake 

28 

out of its debts—that clarify the extent of sovereign immunity 

under the FSIA. 

Mr. SCHWEIKERT. Dr. Lubben, I know we only have a couple of 

seconds, but did you also want to share on this? 

Mr. LUBBEN. I think on this specific issue, to answer your question about is this an outlier, on the specific issue of the auto cases, 

I think it is an outlier. Specifically, I think the syndicated loan 

market would have been very shocked if the Indiana pension funds 

actually had won that, because the standard terms of the documents are majority rule. 

Mr. SCHWEIKERT. All right. Thank you. And— 

Chairman GARRETT. Yes? 

Mr. SCHWEIKERT. Mr. Chairman, thank you. 

Chairman GARRETT. Thank you. The gentlelady from New York 

is now recognized. 

Mrs. MALONEY. Thank you very much. I will be brief. First of all, 

I want to direct my question to the Honorable Theodore Olson, and 

to thank you for your public service. I do want to mention that I 

worked with your wife on the Oversight and Government Reform 

Committee, and I would like to offer my condolences. All of us in 

New York are working every day responding to that tragedy. 

I would like to address some questions on the Argentina debt 

issue. And both Treasury and State officials have responded in recent months saying, Argentina must honor their international obligations and the United States will take necessary steps to make 

sure that they do so and send a clear message that they should. 

I just want to commend that approach. They should honor the obligations to U.S. lenders. 

What more should we be doing to ensure that Argentina is responsible and is true to its debt obligations to America? 

Mr. OLSON. One of the things—there can be more pressure put 

upon Argentina. Argentina has resisted every effort by the United 

States to require Argentina to submit to judgments of United 

States courts. The interpretations that the United States Government have given to this Foreign Sovereign Immunities Act—we 

have talked a little bit today about whether the Foreign Sovereign 

Immunities Act ought to be amended. But the Foreign Sovereign 

Immunities Act does not provide protection for the things that Argentina is doing. 

And I will recite from the bond agreement that the Argentine 

government offered when it enlisted American investors in this. It 

specifically agreed that it would irrevocably agree not to claim and 

has irrevocably waived such immunity to the fullest extent permitted by the laws of the State of New York. 

So what the Argentine government is doing is defying those judgments. It is refusing to live up to its waiver of immunity, its consent to jurisdiction in New York. And the United States Government is repeatedly filing briefs, supporting Argentina’s effort to do 

that. It filed a brief supporting Argentina’s effort in connection 

with its shielding of its central bank. It is using its central bank 

as an alter ego to transfer money in and out of the central bank 

to use funds from the central bank for its own purposes. And then 

when a judge found after 2 years of looking at it that the central 

bank was indeed the same thing as the government of Argentina. 

29 

When that case goes to the Supreme Court, the Government of the 

United States takes the side of Argentina and says the Supreme 

Court shouldn’t take the case—shouldn’t even consider the case. 

The same thing happened in connection with the other issues 

that we have been talking about today. It is incomprehensible to 

me. The government of Argentina has very, very fine lawyers and 

very sophisticated legal counsel with respect to this. When not even 

asked by the United States courts for the United States Government to come in and offer its legal assistance, and say that it is 

necessary to allow governments to work out their debt problems, 

when it has nothing to do in fact with the Greek obligations or 

other obligations, which have been solved by not including the 

clauses that we are talking about here today, and including collective action clauses in the indebtedness that those governments 

issue. It has nothing to do with the issue that the United States 

is raising. 

So it seems to me that at a minimum, the United States ought 

to stay neutral. But if it is going to intervene in legal proceedings 

on behalf of tyrants who are not obeying the rule of law, or American investors who are depending upon the rule of law, the answer 

is that it should be supporting United States investors, not the government of Argentina. 

Mrs. MALONEY. I couldn’t agree more. And I believe Judge 

Griesa, the judge overseeing the court cases with Argentina and 

the U.S. creditors in New York has said, ‘‘What is going on between 

the Republic of Argentina and the Federal court system is an exercise of sheer willful defiance of the obligations of the Republic to 

honor the judgments of a Federal court.’’ 

Do you believe that that is a fair assessment? 

Mr. OLSON. That is a fair assessment. Judge Griesa has handled 

scores of these cases against the government of Argentina. I have 

been in the court where the judge has looked at all of the evidence. 

He expressed his exasperation over and over again. He says, you 

do have the money. They have never denied that they have the 

money to pay these debts. These are judgments of the United 

States courts. 

He has been extremely patient. He has been extremely careful. 

And he has said over and over again that Argentina has the money 

to pay this debt. It is willfully defying the orders of the court. It 

is doing everything possible to spit in the face of United States law 

and United States courts. He has been very patient, but he has 

made these conclusions after an abundance of evidence has been 

presented to him. 

Mrs. MALONEY. So what do we do about it? 

Mr. OLSON. I think that the expression here today of this committee or this subcommittee and our United States Government 

that it will not tolerate rules of law frustrating the laws of the 

United States, which include the Foreign Sovereign Immunities 

Act. 

The other example I mentioned earlier in my testimony had to 

do with the government of Iran. Congress specifically authorized 

the victims of terrorism to sue state sponsors of terrorism and to 

get judgments against them. 

30 

The people that we represent are victims of terrorism. There is 

no doubt that Iran sponsors that terrorism. They are trying to find 

assets of Iran in the United States and the United States Government has taken the position that they can’t have discovery to find 

out what those assets are in the United States. It has already been 

decided that Iran is not immune. It is subject to the jurisdiction of 

the courts with respect to these victims of terrorism. 

And the history that you and Congress put in the bill that says 

that this law has nothing to do with discovery. The United States 

is taking the position that it indeed gives them immunity from discovery. I don’t find that comprehensible. 

Thank you. 

Mrs. MALONEY. My time is up. Thank you. 

Chairman GARRETT. The gentlelady’s time has expired. The gentleman from Texas is recognized. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. And by the way, 

thank you for having this hearing. I think this is an extremely important hearing. 

When I think about the credit markets right now and globally, 

if there is ever a market that needs more certainty, it is the credit 

markets and certainly less uncertainty. I want to go back to some 

of the earlier comments. I think a number of us have been working 

to try to figure out how we get the private mortgage-backed securities market back operating again. 

Right now, Freddie Mac, Fannie Mae, and FHA have over 90 

percent of the market. And as I have sat down with a number of 

market participants and they are saying—what does it take to get 

people back into the mortgage-backed business. One of the things 

they keep telling me is that all of the uncertainty that surrounds 

mortgage origination now, whether it is servicing with the regulatory risk of CFPB and all of these new rules coming out. 

And then, of course, obviously, one of the things that was 

brought up was the legislative risk. And now, I think there are 

these two new risk premiums that are creeping into the market. It 

is the legislative risk, but it is also the regulatory risk of all of 

these new regulations and whether these new products or are the 

existing products in compliance. 

So I think the question I would have, Mr. Fiorillo, for you, is 

what does it take for us to—what kinds of things do we need to 

send from a signal standpoint to the marketplace to get the private 

market back operating again, because we can never get the—wing 

the marketplace from Freddie and Fannie as long as there is no 

private participation? 

Mr. FIORILLO. Congressman, one of the things that frightens me 

after doing this for 35 years is that the head of a very large insurance company recently said she would never buy another non-agency mortgage-backed security ever again. Okay, that is a pool of a 

couple of hundred billion dollars in dollars that could go into this 

market. 

You know the ‘‘KISS’’ symbol, the ‘‘Keep It Simple Stupid.’’ We 

have to keep it simple. We can’t have 400-page prospectuses. We 

have to have an investor who can trust the servicer to do what is 

necessary for the benefit of the security holder. We need a borrower 

who is going to put some equity into the game. That doesn’t necVerDate Nov 24 2008 16:49 Nov 06, 2012 Jkt 076106 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 K:\DOCS\76106.TXT TERRIE
31 

essarily exclude those folks who need extra help. We have FHA. 

We can use that vehicle to get there and to do that. 

But for the basic $600,000 to $800,000 mortgage, that shouldn’t 

be a government product. The U.S. taxpayer shouldn’t be financing 

millionaire holders. Okay? We can do that. Investors know how to 

price risk. So if you allow us to tell you we need a minimum downpayment. We need to know the foreclosures are done properly. We 

need to know that the titles have transferred properly and there 

are ways to do that. And finally, we need to know that when someone says, I make ‘‘X’’ amount of dollars, I can trust that servicer 

and that originator actually checked that out. And more importantly, when that loan is made, that first lender should have something to say about someone adding a second lien. If you do all of 

those things—it is not hard—we can get back, I think. 

Mr. NEUGEBAUER. Ms. Goodman. 

Ms. GOODMAN. Yes, I think the first thing you need is regulatory 

certainty in terms of what the origination landscape looks like; that 

is, QM, QRM, HOEPA, disparate impact. You have a bunch of different sets of rules that have interactions that haven’t been fully 

appreciated. They have to be made consistent. You need simple, 

clear rules. 

Second, you have to address the second lien issue, as Vincent 

mentioned, which means you have to change that clause in GarnSt. Germain, which does not—which essentially prohibits a first 

from allowing the placing of a second. 

And third, investors have to be assured that the conflicts of interest that are inherent in the securitization process. To the extent 

the rules are spelled out now, they are not going to be changed 

later. 

Mr. NEUGEBAUER. So if I can clear up those and assure the investor that somebody can’t come in there and just arbitrarily give 

them a 5, 10, 16 percent haircut because somebody didn’t like the 

way the policy was implemented, or that is another part of that. 

I think the important thing here—this is the last point I want 

to make, and I think one of you on the panel made this point—ultimately, who pays for these additional risks and uncertainty? Who 

is penalized for that? 

Mr. FIORILLO. The borrower—the new borrower coming into the 

marketplace. 

Ms. GOODMAN. Yes. 

Mr. FIORILLO. The more constituents. So they are paying more 

for the consumer. They are getting more government, but they are 

getting higher interest rates. 

Ms. GOODMAN. Absolutely. 

Mr. FIORILLO. No doubt about it. 

Chairman GARRETT. The gentleman’s time has expired. Now, it 

is the gentleman from Connecticut. 

Mr. HIMES. Thank you, Mr. Chairman. 

Mr. Olson, thank you for appearing before us today. And though 

I don’t always agree with the causes on which you advocate, I have 

a lot of respect for the way in which you do it. An exception to that 

is your work in California, which I thought was superb and courageous on your part. 

32 

I am not a lawyer, so I just want to clarify a few things here in 

your testimony. We heard you talk quite a bit about the Congo, 

about Iran, and about terrorism. I wonder with sovereign states, 

many of which you listed, is it your contention that just because 

a sovereign state may be a bad actor that they are not entitled to 

due process within a court of law? 

Mr. OLSON. They are entitled to the protection of the Foreign 

Sovereign Immunities Act, which was enacted by Congress. With 

respect to terrorist states— 

Mr. HIMES. Let us not address terrorist states. Sovereign states, 

regardless of how we feel about their activities or motivations, are 

entitled to protection under sovereign immunity and to due process. 

Mr. OLSON. They are entitled to those things in different ways. 

Mr. HIMES. So it would be—and just, again, principles of law. I 

might—we would all agree that, for example, a lawyer for one of 

those States wouldn’t be held accountable or wouldn’t somehow be 

regarded as bad for advocating on behalf of that State. 

The question I am trying to get at is you don’t want this committee to take away the impression that because the President and 

his Administration have filed amicus briefs on behalf of Argentina 

or anyone else that they somehow are fellow travelers with the 

Congo, or that they somehow validate or endorse the positions of 

those governments. That is not your intention. Am I correct in 

that? 

Mr. OLSON. That is correct. And I might say this: I specifically 

said in my testimony that it is not specifically focused on this Administration. It has happened in other Administrations. 

What I am concerned about is that the governmental entities are 

looking at this from the perspective or through the lens of the foreign sovereign, as opposed to seeing the perspective of the American investor trying to seek vindication of his or her rights in 

American courts. Those foreign sovereigns are getting due process 

in the rule of law and they are represented by very sophisticated, 

very successful lawyers. 

Mr. HIMES. I understand. I just wanted to really clarify that you 

don’t want this committee, out of your testimony, to draw the conclusion that somehow this Administration is—we heard the term 

‘‘crony capitalism.’’ You are not trying to leave the impression that 

somehow this Administration is cronies with Argentina, the Congo, 

or— 

Mr. OLSON. No, I did not mean that at all. 

Mr. HIMES. Okay. Thank you. Is the filing of an amicus brief, 

unrequested by a court, which you have highlighted a couple of 

times here today, very unusual? Do people file amicus briefs when 

they are not requested to do so by courts? 

Mr. OLSON. Circumstances vary. And the United States Government from time to time does that without being invited to by the 

court. But I quoted, particularly, the United States Court of Appeals for the District of Columbia, which last year chastised the 

government for waiting until the appellate level, then coming in 

gratuitously and what the Judge—Judge Silberman—said for the 

court, in that case, was that this was unfair to the litigant, to come 

in at this late date and disrespectful of the district court. 

33 

Mr. HIMES. No, I understand and appreciate that. And frankly, 

I am sort of willing to stipulate that it was unfair and disrespectful, but I guess my final question is, would you contend that the 

Administration has, in any way, usurped or acted extra-legally in 

any of its actions with respect to these States? 

Mr. OLSON. I am not saying they are violating the law. No. 

Mr. HIMES. Okay. Thanks. So, sharp-elbowed, disrespectful, but 

there is no usurpation of the rule of law here by— 

Mr. OLSON. Utilizing the power of the United States Government 

to come in on the side consistently of foreign tyrants, as opposed 

to United States citizens—I am disappointed that is happening. I 

think it is the wrong approach. I don’t say it violates the law. 

Mr. HIMES. You are much more familiar with this case than I 

am. Do you think that it is likely that the Administration has 

taken the position that it has because it is somehow a—and again, 

the Majority’s word—‘‘crony’’ of these countries? Or is it possible 

that the Administration has taken the position and filed the briefs 

that it has because it has competing interests of international diplomacy or strategy that might, in fact, be driving the Administration’s position here? 

Mr. OLSON. I am not saying—I didn’t say and I didn’t intend to 

imply, and at no point did I say that it was cronyism. 

Mr. HIMES. I am just asking whether it is possible. 

Mr. OLSON. What I said is they are looking at this from the perspective of the foreign government, as opposed to from the perspective of the citizens who need their help as much as the foreign governments do. 

Mr. HIMES. Thank you. 

Professor Skeel, a quick question for you. You raised the specter 

of a risk premium, if I may use my words, associated with the aggressive activities of the Obama Administration in these three 

cases. Mr. Olson said that this is not a purely Obama thing. And 

in fact, we have seen this over a substantial time. 

So my question for you is, is there any academic proof of any 

kind that suggests that the kind of risks that might be—and by the 

way, I haven’t opined on the merits of any of these cases. They are 

actually quite interesting and complicated. My question for you— 

is there any proof at all, any analytically supportable proof that in 

fact in the market today, investors are demanding a risk premium 

associated clearly with this activity, rather than the destruction of 

our financial markets or the housing markets, the economy? Is 

there any evidence out there that that may in fact be true? 

Mr. SKEEL. We do have some early studies of the Chrysler case, 

in particular. And they can be interpreted in different ways. One 

of the studies finds that the cost of credit for heavily unionized industries went up significantly as a result of Chrysler. Another 

study finds that bond prices went up, bond costs went down, as a 

result of Chrysler in unionized industries, presumably because of 

the expectation of a bailout in those kinds of industries. 

So what I would say is we are still at the early stages. It does 

look like there is an effect as a result of these cases, particularly 

in industries that look like them. 

Mr. HIMES. Thank you, Mr. Chairman. Thank you. 

34 

Chairman GARRETT. The gentleman yields back. Mr. Stivers is 

recognized. 

Mr. STIVERS. Thank you, Mr. Chairman. 

My first question is for Mr. Olson. I want to kind of follow up 

on something the gentleman asked you a minute ago. It is my understanding that you testified that U.S. investors have won over 

100 judgments against the government of Argentina, yet the government of Argentina is still not making any effort to satisfy those 

judgments. Can you help me understand, while it is not illegal, 

why the Administration would choose to interfere and file an amicus brief on behalf of the government of Argentina? And clearly, 

they have the right to file an amicus brief on anything they want, 

but what would be a motivation for that? And maybe you can’t get 

into motivation, but I am just curious. 

Mr. OLSON. I don’t know the motivation, and I certainly do not 

want to suggest any improper or illegal motivations by the lawyers 

in our government. I think they are all honorable people. I am disappointed. And I think the American citizens would be disappointed that when there are these close interpretations, and we 

are talking about provisions of contracts that are very clear. The 

provision that we are talking about in the one case in the Second 

Circuit says that the payment obligations under these bonds shall 

be treated at least equally with other payment obligations. And 

what Argentina has done is refuse to do that. 

The judge, after listening to all this, finds that it is clearly violating those provisions, and now the United States Government is 

coming in with an interpretation that is not consistent with any 

court decisions and not consistent with what the scholars have 

said. And it is unaccountable to me. I would think that as an 

American citizen, if I was a pension fund and so forth, I would ask, 

why isn’t our government coming in on our side of the interpretation of that, rather than the foreign government, which is defying 

the rule of law? 

Mr. STIVERS. Sure. And one follow up to that. Earlier this year, 

the U.S. Trade Representative announced that the decision to suspend the general system of preferences eligibility for Argentina because of their unwillingness to try to meet the court’s decisions to 

repay the awards that were found by U.S. courts for these U.S. investors. Yet, then the Administration files this amicus brief that 

supports Argentina. Does that send mixed signals to the government of Argentina? 

Mr. OLSON. It sends a signal to the—here is how the government 

of Argentina saw it. And I quoted this in my earlier statement— 

the government of Argentina, as soon as that brief was filed, says 

that vindicates our position. It vindicates our strategy against the 

American investors. Their strategy is defiance and they even 

passed a law prohibiting their payment of this indebtedness or responding to this judgment. That is their strategy. So they took the 

filing of that brief as support for their strategy against American 

investors. 

Mr. STIVERS. And it is my understanding that Argentina has $45 

billion in reserves. So it is not like they can’t pay these judgments. 

Mr. OLSON. The judge asked them—District Judge Griesa asked 

them over and over again, are you taking the position that you 

35 

can’t pay? Is there any evidence that you cannot pay these judgments? Argentina never once took the position that it couldn’t pay 

them. They have $45, $46, $47 billion in reserves in Switzerland. 

They can pay this indebtedness and, in fact, it will help them ultimately because they might restore some credibility in the financial 

markets. But they will not pay. 

Mr. STIVERS. One last question for Mr. Olson, and then I want 

to get to Professor Skeel. 

What impact will this have on investors’ willingness to look at 

sovereign bonds if they think that an American Administration is 

going to back the foreign country over the American investor? 

Mr. OLSON. It is very devastating for foreign governments who 

wish to issue bonds to U.S. investors. U.S. investors and any investor needs to know that it will be backed by the rule of law. That 

is why when Argentina issued these bonds, they said they would 

submit to the jurisdiction of New York courts under New York law. 

Because they knew that if they did that, investors would be secure 

in New York law and in American law. Now, when they don’t pay 

any attention to it, that sends a signal to investors—stay away 

from this kind of indebtedness, which costs those foreign governments a lot of money. 

Mr. STIVERS. Thank you. And to Professor Skeel, a similar question. What kind of impact do you think that the actions of the 

mortgage servicer settlement will have on investors’ appetite for future private label mortgage-backed securities? 

Mr. SKEEL. I think it is going to interfere with them detrimentally. I think you can’t do something like this and pass on a cost 

without it having an effect on the market. 

Mr. STIVERS. Thank you. My time has expired. 

Chairman GARRETT. Thank you. The gentleman yields back. 

Mr. Peters is recognized for 5 minutes. 

Mr. PETERS. Thank you, Mr. Chairman. I want to move back to 

the auto side of the discussion here. 

I think it is easy to pass judgment now that we are here in 2012 

and make up some stories about hypothetical investors who were 

somehow harmed by the government’s intervention in the auto industry, but I think the facts are fairly clear. The rescue of GM and 

Chrysler has been a huge success for investors. It has been a success for workers, as well as taxpayers. 

The Center for Automotive Research has done extensive research 

on this topic. And in 2010, they issued a research paper entitled, 

‘‘The Impact on the U.S Economy of the Successful Automotive 

Bankruptcies.’’ And in this memorandum, they discuss how the orderly bankruptcy saved 1.14 million jobs and that this has had a 

substantial benefit on government receipts. Rescuing the auto industry avoided a much deeper and longer recession and saved the 

government tens of billions of dollars in lost revenue and increased 

unemployment payments. 

Mr. Chairman, I would like to ask for unanimous consent that 

this report be made a part of the record. 

Chairman GARRETT. Without objection, it is so ordered. 

Mr. PETERS. Thank you, Mr. Chairman. 

Professor Skeel, I listened to you with intent to your testimony 

in talking about other parties bidding in this process. Can you 

36 

identify, for the committee here, any other party that wanted to bid 

on the assets of General Motors or Chrysler? 

Mr. SKEEL. In the actual transaction, as you know, the ultimate 

recipient of Chrysler was Fiat. I think if we had had an ordinary 

bankruptcy process where there was actual non-governmental 

money exchanging hands, I think it is quite likely that Fiat would 

have made a bid for at least some, maybe most, of Chrysler’s assets. There may have been other bidders as well. 

Mr. PETERS. But you don’t know of any other bidders that had 

any interest in this at the time? At the time when we were in a 

financial crisis, these companies were in desperate shape. You have 

no other people who are out there. This is just hypothetical that 

there were people out there? 

Mr. SKEEL. Chrysler certainly had been talking to Fiat for a good 

period of time. 

Mr. PETERS. Other than Fiat. 

Mr. SKEEL. Other than Fiat, there were rumors in the market of 

people who might be— 

Mr. PETERS. But nothing substantial? 

Mr. SKEEL. But I do not have a specific bidder that I am confident would have been. 

Mr. PETERS. Right. Thank you. 

Mr. Levitin, do you agree with Professor Skeel that there may 

have been other private interests out there interested in purchasing these companies that were somehow crowded out because 

the government was involved? 

Mr. LEVITIN. We don’t know of any. 

Mr. PETERS. Right. So if there is no private financing available 

for bankruptcy, what is the alternative with restructuring? Is that 

liquidation? 

Mr. LEVITIN. Liquidation was really Chrysler’s only alternative to 

the sale. And that would have cost not just jobs at Chrysler, but 

it would have cost jobs at GM. It would have cost jobs at Nissan. 

It would have cost jobs at Ford. It would have cost jobs at all of 

their suppliers. 

Mr. PETERS. But catastrophic, do you have any sense of what the 

cost—or I should say, what the value of those companies would 

have been in early 2009, during the height of this crisis? 

Mr. LEVITIN. In liquidation? 

Mr. PETERS. Yes. 

Mr. LEVITIN. I have no sense, but I think it would be very low. 

I think the Chrysler secured lien holders would have been lucky if 

they had received anywhere close to 29 cents on the dollar. 

Mr. PETERS. Anywhere close to 29 cents. That would have been 

a generous amount of money in liquidation. 

Mr. LEVITIN. Yes. 

Mr. PETERS. Mr. Lubben, investors were in fact buying and selling debt right up to the point of bankruptcy, weren’t they? 

Mr. LUBBEN. Yes, they were. 

Mr. PETERS. And is it true that at the time that is where Chrysler was selling—was around 30 cents on the dollar? 

Mr. LUBBEN. Around 30 cents and the pension funds had bought 

in a few months before, at a little higher than that. 

37 

Mr. PETERS. And that is basically what the investors ultimately 

received? 

Mr. LUBBEN. That is what they ultimately received. They received 29 cents on the dollar. 

Mr. PETERS. So they received what the value would have been. 

In fact, Mr. Levitin’s testimony is that, likely, it was even lower 

when you are trying to sell off abandoned auto plants, there wasn’t 

a real high value in the marketplace at that time. Nor were there 

many willing buyers to go in to do that. 

Mr. LUBBEN. Yes, if the company had been liquidated, was no 

longer a going concern, the recovery would have been a lot less. 

And as it turned out, the recovery was very close to what the market estimated it would be. 

Mr. PETERS. So Mr. Lubben, based on the value of those assets 

at the time, would you say that investors got a fair deal? 

Mr. LUBBEN. I think they got a fair deal. I think they got exactly 

what the market expected they would get. 

Mr. PETERS. Now, could you also talk a little bit about what the 

courts who have reviewed this matter—there has been—Mr. Skeel 

mentioned that there is some contention as to what the courts have 

said. I think that is different than your testimony. How have the 

courts viewed this bankruptcy? Was this an aberration or consistent with bankruptcy law? 

Mr. LUBBEN. No, I just—I quote in my written testimony, Judge 

Gonzalez in the Chrysler opinion, who said that this case is just 

like any other 360 sale, except for the identity of the Debtor-in-Possession (DIP) lender, namely it is the U.S. Treasury, as opposed to 

Chase or Bank of America. 

So two bankruptcy courts, two different bankruptcy judges approved those two cases. And so far, all the cases have been—when 

the courts have gotten to the merits, all the cases have been affirmed on appeal. Now, Professor Skeel did note that the Supreme 

Court vacated the Second Circuit’s decision, but they vacated as 

moot, which basically means the case is over at that point. There 

wasn’t any actual decision on the merits. 

Mr. PETERS. Thank you. I believe my time is up. I yield back 

Chairman GARRETT. The gentleman yields back. The gentleman 

from California has joined us. That is great. Mr. Ellison. 

Mr. ELLISON. I yield 1 minute to Brad Miller. 

Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Ellison. My 

question is one in which Mr. Ellison has the same interest. 

Ms. Goodman, you said in your testimony that principal modification was good for the investor and that the interest—the principal reduction was good for the investor and that homeowners and 

investors’ interests were aligned on that point. 

There has been a great deal of debate about whether the Federal 

Housing Finance Agency (FHFA) should allow principal reductions 

by Fannie and Freddie. FHFA says they are different. Their mortgages are better and they are worried that if they allow modifications, people who can pay will stop paying. 

Have you done any analysis of whether principal modification 

makes sense for Fannie and Freddie’s loans as well? 

Ms. GOODMAN. There are clearly cases in which it does. The 

FHFA has done a couple of pieces of analysis where they have 

38 

shown that it hasn’t. But in fact, what they haven’t allowed for is 

using principal forgiveness on some loans and principal forbearance 

on others. And had they done the analysis properly, they would 

have found that principal reduction, under some circumstances, 

makes a lot of sense. 

And as to their moral hazard criticism, it is important to realize 

that you can put gating around the situation to eliminate the moral 

hazard. You have to be delinquent before a certain date or you 

can’t get the reduction. 

Mr. MILLER OF NORTH CAROLINA. Right. Mr. Ellison? 

Mr. ELLISON. Thank you. I just want to make a quick comment 

before I ask a question. I know we are running low on time. I think 

the framing of this hearing is really unfortunate. And the reason 

why is because if we were to take any one of these three issues 

that have been set forth today, I think we would be perfectly legitimate to question the settlement. Is that right or is it not right? 

Does it make sense—should it not make sense? This Argentine 

bond issue—clearly, I think it is fair to raise questions here. Different people can disagree. 

But to frame the whole hearing as harm the government is doing 

to the people or to the investors—I guess, let me get the exact title 

of this hearing—‘‘The Need to Protect Investors from the Government’’—is just like flagrant political ideology and I just think it is 

a misuse of the gavel. And I am very disappointed. 

I hope that when we get together back, we don’t engage in this 

kind of just base ideological fighting. Because I think it just lowers 

the whole Congress when we do it that way. And again, this is 

without any disrespect to any of the testimony we have heard 

today. I thank the witnesses for coming in. I think it is important 

that we have this kind of testimony. I think it is unfortunate that 

the three issues are grouped this way, as just as sort of general 

framing of the government or the Obama Administration, quite 

specifically, as being out to hurt investors or Americans, generally. 

It is just not true and it is an abuse of this process. 

Anyway, Professor Levitin, I just want to ask you a question. In 

your testimony, you said that investors are not likely to be harmed 

by this AG settlement if servicers are complying with the pulling 

servicer agreement. And you state that investors will only be 

harmed if modifications are being done that are not permitted to 

be performed by the contract. Can you expand on that? 

Mr. LEVITIN. Some pulling and servicing agreements prohibit 

modifications of various sorts or place restrictions on loan modifications, including principal write-downs. There is variation among 

pulling and servicing agreements on what servicers may or may 

not do. In some cases, those servicers are actually instructed to 

take steps to manage the loans as if for their own account. And if 

a servicer were doing that, it would be trying to maximize the 

value of the loan. In some cases, that would mean doing a principal 

write-down, rather than having a foreclosure. 

So following the pulling and servicing agreements in some cases 

would mean doing principal write-downs, and in other cases would 

mean not doing them. And it is not clear what is going to happen 

in terms of the settlement. Generally, if servicers are going to be 

complying with the pulling and servicing agreements, and thereVerDate Nov 24 2008 16:49 Nov 06, 2012 Jkt 076106 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 K:\DOCS\76106.TXT TERRIE
39 

fore, simply and not doing modifications on them, or if they are 

going to violate them and do modifications when they aren’t supposed to be doing them. Or if they are going to do modifications 

they are already obligated to do. 

So basically, there are two possibilities: either servicers are going 

to be doing things they are already obligated to do, in which case, 

they shouldn’t be getting any credit for it under the settlement— 

that is just a sham; or they are going to modify loans they 

shouldn’t be modifying. And it is going to be done at the expense 

of investors. That is wrong, too. Either way, it doesn’t come out 

well. 

Chairman GARRETT. The gentleman yields back. And at this 

point, we look for the final word on the matter. The gentleman 

from California, and congratulations, also, on your recent win the 

other night as well. The gentleman is recognized for 5 minutes. 

Mr. SHERMAN. Only in California does your congratulations on 

win need to be followed by a ‘‘good luck, we hope you defeat the 

same candidate in the second’’— 

Chairman GARRETT. It is temporary. Yes, I understand. 

Mr. SHERMAN. We have a unique system in California. We are 

the only State with an exhibition season as part of our— 

Chairman GARRETT. We will restart your clock at 5 minutes. 

Mr. SHERMAN. That is okay. I won’t be long. As to the GM settlement, it is pretty apparent that the Federal Government provided 

a subsidy for—or an investment for the auto companies as part of 

the overall deal. If the Federal Government had just stayed out, 

the companies would have gone bankrupt. 

Ms. Goodman, is there any reason to think that if the Federal 

Government had done absolutely nothing, and the bond holders 

were picking through the carcasses of these two former auto companies, that the bond holders would be any better off? 

Ms. GOODMAN. I am going to actually defer to someone else who 

has more expertise in that matter. 

Mr. LUBBEN. I can give it a shot. So the question, as I understand it, was if the government— 

Mr. SHERMAN. If they had gone into a freefall bankruptcy at the 

worst possible time for our economy, at least in my lifetime, with 

no Federal involvement whatsoever, why would the bond holders 

have been better off than they are today? 

Mr. LUBBEN. They would have been, I think, far worse off. Because given that there was no liquidity, no financing available at 

that point in time, and financing—debtor in position financing is 

vital to continue operating during Chapter 11, because your creditors—your trade creditors, who previously would have extended 

you trade credit are not going to do that after you file Chapter 11. 

So it is vital to have that financing. No financing was available at 

the time. You file bankruptcy with no financing. You pretty much 

have to liquidate. 

Mr. SHERMAN. But the bond holders would be the proud owners 

of vacant auto plants. 

Mr. LUBBEN. Non-operating auto plants. 

Mr. SHERMAN. Non-operating auto plants in the Midwest in the 

height of a financial crisis. 

Mr. LUBBEN. Right. 

40 

Mr. SHERMAN. I am glad the Federal Government did protect the 

bond holders from that eventuality. But obviously what the Federal 

Government did was not focused on trying to help the bond holders, and if the subsidy had been equally proportioned among all the 

stakeholders, then the bond holders would have been better off. 

Now, as to Argentine bonds, Mr. Olson, I have had an interest 

in these China bonds. I don’t know if you have focused on that at 

all. Britain was able to force Beijing to provide some settlement to 

those who held the bonds and who are British Nationals. Has the 

U.S. Government helped or hurt Americans’ efforts to collect on 

those bonds? 

Mr. OLSON. I think—I am not aware of anything that the Federal 

Government has done to help. 

Mr. SHERMAN. In contrast to how the British government helped 

its— 

Mr. OLSON. I can’t speak to that. I am not sufficiently versed in 

that, but what I have said is that the consistent taking of legal positions supporting the Argentine government has hurt. So when the 

United States says it is important to our foreign policy interests or 

that sort of thing, that a contract be interpreted in a certain way, 

that is inconsistent with the rule of law and not very helpful. 

Mr. SHERMAN. I forget which British prime minister said this but 

he said, ‘‘The home interests have the home office and the foreign 

interests have the foreign office.’’ Whether the State Department 

represents us to the world or represents the interests of the world 

or foreign governments here in the United States is perhaps a subject for another hearing. I yield back. 

Chairman GARRETT. The gentleman yields back. And that bell 

means that votes are upon us at this time. Without objection, we 

will enter into the record a letter from the American Council of Life 

Insurers (ACLI). 

Without objection, it is so ordered. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for Members to submit written questions to these witnesses and to 

place their responses in the record. 

And with that, this hearing is adjourned. 

[Whereupon, at 4:36 p.m., the hearing was adjourned.] 

(41) 

A P P E N D I X 

June 7, 2012 

42 


76106.001
43 


76106.002
44 


76106.003
45 


76106.004
46 


76106.005
47 


76106.006
48 


76106.007
49 


76106.008
50 


76106.009
51 


76106.010
52 


76106.011
53 


76106.012
54 


76106.013
55 


76106.014
56 


76106.015
57 


76106.016
58 


76106.017
59 


76106.018
60 


76106.019
61 


76106.020
62 


76106.021
63 


76106.022
64 


76106.023
65 


76106.024
66 


76106.025
67 


76106.026
68 


76106.027
69 


76106.028
70 


76106.029
71 


76106.030
72 


76106.031
73 


76106.032
74 


76106.033
75 


76106.034
76 


76106.035
77 


76106.036
78 


76106.037
79 


76106.038
80 


76106.039
81 


76106.040
82 


76106.041
83 


76106.042
84 


76106.043
85 


76106.044
86 


76106.045
87 


76106.046
88 


76106.047
89 


76106.048
90 


76106.049
91 


76106.050
92 


76106.051
93 


76106.052
94 


76106.053
95 


76106.054
96 


76106.055
97 


76106.056
98 


76106.057
99 


76106.058
100 


76106.059
101 


76106.060
102 


76106.061
103 


76106.062
104 


76106.063
105 


76106.064
106 


76106.065
107 


76106.066
108 


76106.067