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51–566 2009

S. HRG. 111–111 

TARP ACCOUNTABILITY AND OVERSIGHT: 

ACHIEVING TRANSPARENCY 

HEARING 

BEFORE THE

JOINT ECONOMIC COMMITTEE 

CONGRESS OF THE UNITED STATES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

MARCH 11, 2009 

Printed for the use of the Joint Economic Committee 

( 

(II) 

JOINT ECONOMIC COMMITTEE 

[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress] 

HOUSE OF REPRESENTATIVES 

CAROLYN B. MALONEY, New York, Chair 

MAURICE D. HINCHEY, New York 

BARON P. HILL, Indiana 

LORETTA SANCHEZ, California 

ELIJAH E. CUMMINGS, Maryland 

VIC SNYDER, Arkansas 

KEVIN BRADY, Texas 

RON PAUL, Texas 

MICHAEL C. BURGESS, M.D., Texas 

JOHN CAMPBELL, California 

SENATE 

CHARLES E. SCHUMER, New York, Vice 

Chairman 

EDWARD M. KENNEDY, Massachusetts 

JEFF BINGAMAN, New Mexico 

AMY KLOBUCHAR, Minnesota 

ROBERT P. CASEY, JR., Pennsylvania 

JIM WEBB, Virginia 

SAM BROWNBACK, Kansas, Ranking Minority 

JIM DEMINT, South Carolina 

JAMES E. RISCH, Idaho 

ROBERT F. BENNETT, Utah 

NAN GIBSON, Executive Director 

JEFF SCHLAGENHAUF, Minority Staff Director 

CHRISTOPHER FRENZE, House Republican Staff Director 

(III) 

C O N T E N T S 

MEMBERS

Hon. Carolyn B. Maloney, Chair, a U.S. Representative from New York .......... 1 

Hon. Sam Brownback, Ranking Minority, a U.S. Senator from Kansas ............. 3 

Hon. Maurice Hinchey, a U.S. Representative from New York ........................... 5 

Hon. Kevin Brady, a U.S. Representative from Texas ......................................... 5 

Hon. Amy Klobuchar, a U.S. Senator from Minnesota ......................................... 7 

Hon. Robert P. Casey, Jr., a U.S. Senator from Pennsylvania ............................ 8 

Hon. Michael C. Burgess, M.D., a U.S. Representative from Texas ................... 9 

WITNESSES

Damon Silvers, Associate General Counsel, AFL–CIO; and Deputy Chair, 

Congressional Oversight Panel for The Emergency Economic Stabilization 

Act, Washington, DC ........................................................................................... 9 

Richard H. Neiman, Superintendent of Banks, New York State Banking Department, New York, NY; and Member, Congressional Oversight Panel 

for The Emergency Economic Stabilization Act, Washington, DC ................... 12 

Nicole Tichon, Tax and Budget Reform Advocate, U.S. Public Interest Research Group, Washington, DC ........................................................................... 14 

Alex J. Pollock, Resident Fellow, American Enterprise Institute for Public 

Policy Research, Washington, DC ....................................................................... 16 

SUBMISSIONS FOR THE RECORD

Prepared statement of Representative Carolyn B. Maloney ................................ 36 

Letter from Representative Maloney to Ben Bernanke ................................ 37 

Letter from Joseph E. Stiglitz to Representative Maloney ........................... 39 

Prepared statement of Senator Sam Brownback .................................................. 41 

Article entitled ‘‘Too Big Has Failed’’ ............................................................. 41 

Prepared statement of Representative Kevin Brady ............................................ 46 

Prepared statement of Michael C. Burgess, M.D. ................................................. 47 

Prepared statement of Damon Silvers ................................................................... 48 

Supplemental statement on two factual matters ........................................... 51 

Prepared statement of Richard H. Neiman ........................................................... 51 

Prepared statement of Nicole Tichon ..................................................................... 53 

Prepared statement of Alex J. Pollock ................................................................... 75 

(1) 

TARP ACCOUNTABILITY AND OVERSIGHT: 

ACHIEVING TRANSPARENCY 

WEDNESDAY, MARCH 11, 2009 

CONGRESS OF THE UNITED STATES, JOINT ECONOMIC COMMITTEE, Washington, DC. 

The committee met at 10:34 a.m. in Room 106 of the Dirksen 

Senate Office Building, The Honorable Carolyn B. Maloney (Chair) 

presiding. 

Senators present: Klobuchar, Casey, Brownback, and Risch. 

Representatives present: Maloney, Hinchey, Snyder, Brady, 

Burgess, and Campbell. 

Staff present: Eleni Constantine, Nan Gibson, Colleen Healy, 

Justin Ungson, Andrew Wilson, Chris Frenze, Bob Keleher, Lydia 

Mashburn, Robert O’Quinn, Jeff Schlagenhauf, and Jeff Wrase. 

OPENING STATEMENT OF THE HONORABLE CAROLYN B. 

MALONEY, CHAIR, A REPRESENTATIVE FROM NEW YORK 

Chair Maloney. The meeting will come to order. Thank you all 

for coming today. I really would like to read my opening statement. 

I would like to welcome the witnesses, Superintendent Richard 

Neiman, head of New York’s Banking Department, Damon Silvers, 

Associate General Counsel of the AFL–CIO; Nicole Tichon, Tax and 

Budget Advocate for USPIRG; and Alex Pollock, Resident Fellow at 

the American Enterprise Institute, to this hearing on the Trouble 

Asset Relief Fund, or TARP. 

Mr. Silvers is Deputy Chair of the TARP Congressional Oversight Panel, and Superintendent Neiman is a member of that fivemember panel. We are very fortunate that they could both be with 

us today. Thank you so much for coming. 

Ms. Tichon is the author of a newly-released independent report 

on the TARP: Failing the Bailout, Lessons for President Obama 

From Bush’s Failure on TARP. 

Mr. Pollock, an experienced banker, has written frequently on 

TARP issues. Thank you all for coming. 

The focus of this hearing is on the need for better information 

on the use and beneficiaries of TARP funds. As has become alarmingly clear, we have very little idea where the money has gone or 

what good it has done, and not knowing, is not acceptable. 

The efforts of the panel and of the independent advocates such 

as PIRG, to get this information, are critically important to the 

ability of this Congress to ensure that taxpayer money is used as 

intended to restore financial stability, so that our economy can recover. 

2 

Last week, I wrote to Federal Reserve Chairman Bernanke, reiterating a request I had made in a November 2008 Financial Services Committee Hearing, for a full accounting of the Fed’s purchase 

of assets on which AIG had written credit default swaps, insuring 

the performance of those assets as part of the bailout of AIG. 

I requested this information on who the Fed purchased the assets from, how much each of them received, and how the prices for 

the assets, collateralized debt securities, credit default swaps, and 

residential mortgage-based securities, were determined in a frozen 

market. 

I attached a letter I had just received from Nobel laureate and 

noted economist, Joseph Stiglitz, also requesting release of this information. As he said, the provision of this information is absolutely essential to the informed discussion of how the TARP is 

doing in achieving its goals of restoring stability to our financial 

system, getting credit flowing, and reducing foreclosure rates. 

So far, I have not received an answer. However, the Wall Street 

Journal seems to have gotten some of the information I asked for, 

from a confidential source. On Saturday, they published a list of 

some of the banks that have reportedly received the money, and 

some information about how much they have received. 

Now we have a situation where elected representatives of the 

taxpayers are denied this information, even when it’s leaked by 

confidential insiders to major publications. 

This raises serious questions about how decisions on the use of 

TARP funds are being made, and who, exactly, is accountable to 

the American people. 

The reports done by the Congressional Oversight Panel, to date, 

including the most recent on foreclosure mitigation, and the report 

on valuation of Treasury’s purchases of preferred stock, show that, 

due to poor design and execution of the Bush Administration, we 

have almost no information about where the TARP funds have 

gone and whether they are making any difference. 

The two GAO reports likewise note that the TARP lacks adequate systems of tracking and accounting for expenses. We are in 

desperate need of information and data in order to make informed 

decisions. 

Last week, I introduced a bill that will take one step in the direction of getting more data. H.R. 1242 would create a central government database for the use of TARP review bodies, with real-time 

financial information on TARP recipients, from municipal government entities to which these financial institutions presently report, 

putting all of the information the government has now, in one 

place, so it can be effectively analyzed and studied. 

My bill will require this data to be translated into a standard format that would enable a comparison of information, so that trends 

or totals can easily be seen. 

The fact that this data would be available in real time, would enable the oversight bodies to spot misdirection of the program, before it’s irreversible, so that preventive action could be taken. 

We would not be here months after the fact, asking how much 

the government paid who for what; we would have known right 

away and been able to decide whether to let other similar purchases go forward or not. 

3 

There are other legislative proposals, as well, that call for greater 

accountability and transparency, such as the bill that passed the 

House in January, H.R. 384. These bills lay down in no uncertain 

terms, the marker that this Congress expects better use of the second tranche of TARP funds than was made of the first. 

We have to find a better balance between how the TARP is being 

administered and the public’s right to know how this money is 

being spent. Transparency and accountability must be transformed 

from slogans into achievable actions. 

I look forward to the testimony. 

[The prepared statement of Representative Maloney appears in 

the Submissions for the Record on page 36.] 

[Letters from Representative Maloney to Ben Bernanke and from 

Joseph E. Stiglitz to Representative Maloney appear in the Submissions for the Record on pages 37 and 39, respectively.] 

Chair Maloney. I recognize my colleague and good friend, Ranking Member Senator Brownback. 

OPENING STATEMENT OF THE HONORABLE SAM BROWNBACK, RANKING MINORITY, A U.S. SENATOR FROM KANSAS 

Senator Brownback. Thank you very much, Chairwoman 

Maloney. I appreciate your statement, I appreciate your holding 

this hearing. I think it’s really important that we look at these 

issues on transparency and accountability of the TARP. 

It was created as a $700 billion program under the Emergency 

Economic Stabilization Act of 2008. My understanding of the Oversight Panel’s report, thus far, is that Treasury has been less than 

forthcoming in its explanations of what it has accomplished with 

an allocation of up to $700 billion of taxpayer money. 

This is certainly unfortunate. Ordinary taxpayers would like to 

know what the taxes are doing, that are financing Treasury’s efforts, are being used effectively. 

Taxpayers and financial markets worldwide would also like to 

know that there’s a definitive plan to address our ongoing financial 

crisis. When we look at that, I think there’s a real question of 

whether there is. 

A constituent of mine is President and CEO of the Federal Reserve Bank of Kansas City, Mr. Thomas Hoenig, and he did a 

speech recently that I think should be read by everybody interested 

in this particular problem that we have today. 

It was done over this past weekend. The title of the speech is 

‘‘Too Big Has Failed.’’ It’s about the financial system and efforts to 

deal with the financial crisis. 

He delivered this on March 6th, and he said—he identified that, 

quote, ‘‘We have been quick to provide liquidity and public capital, 

but we have not defined a consistent plan.’’ 

I agree with President Hoenig, and I believe that there is a large 

amount of uncertainty about how we will deal with the pressing 

problems in our financial system. 

This uncertainty is preventing us from moving forward. Until 

there is resolution of uncertainty about how we are going to shore 

up our financial system, there is little reason to expect private capital to flow into our financial system. 

4 

Private money is simply waiting on the sidelines until there is 

a resolute signal about who will absorb losses and how the banking 

system will be structured, moving forward. 

President Hoenig identifies that while we prefer not to use the 

term, ‘‘nationalize our major financial institutions,’’ we are nevertheless drifting into a situation where institutions are being nationalized piecemeal, with no resolution of the crisis. 

The term, ‘‘nationalization,’’ is not well defined. We have, by 

some definitions, already effectively nationalized some major financial institutions such as AIG. It seems to me that it would be prudent to avoid fascination with the term, ‘‘nationalization,’’ and 

move to definitive steps to address the difficulties of our nation’s 

financial institutions and resulting credit crunch, which involves 

severely interrupted credit flows and the negative consequences 

such as businesses’ inability to finance payrolls and expansion, and 

households’ inability to weather our current severe economic downturn, thus the term, ‘‘zombie banks,’’ that is floating around so 

much. 

Rather than arriving at definitive steps to address our financial 

problems, it seems that the Treasury, under past and current Administrations, has chosen to adopt half-measures and incomplete 

plans. 

Financial markets are certainly not buying it. Judging by stock 

prices, generally, and stock prices of potentially troubled financial 

institutions, in particular, there is little to no confidence in the 

plans of Treasury and the Administration to move us out of our financial malaise. 

Today’s hearing is useful in helping to identify both what has 

been done with massive amounts of taxpayer money to address our 

challenges in financial markets, and what is planned by Treasury 

and the Administration, as we move forward. 

My hope is that the Treasury and the Administration will come 

forward with a resolute plan to face up to the difficulties in our financial markets. 

We need a plan that offers hope to markets, and not a plan that 

raises more questions and more uncertainty. We also, as the Kansas City Fed Chairman pointed out—or Fed President has pointed 

out, has clearly articulated, we need to move definitively away from 

a system of finance subject to the threat of ‘‘too big to fail.’’ 

In his insightful words, he said, ‘‘Too big has failed.’’ I ask that 

his speech be placed in the record at the end of my comments, and 

I look forward to the panel’s presentation. Thank you for the hearing. 

[The prepared statement of Senator Brownback along with the 

report ‘‘Too Big Has Failed’’ appear in the Submissions for the 

Record on page 41.] 

Chair Maloney. Thank you for your thoughtful statement. Congressman Hinchey, for three minutes, to be followed by Congressman Brady for three minutes. 

5 

OPENING STATEMENT OF THE HONORABLE MAURICE 

HINCHEY, A U.S. REPRESENTATIVE FROM NEW YORK 

Mr. Hinchey. Well, thank you very much. I’m anxious to hear 

the testimony of all four people here today, because they have a 

very good insight into what is going on here. 

I’m sure that they are going to be focused on the most important 

aspects of it, and I thank you all very much for being here with 

us. We’re looking forward to hearing from you. 

The issues that we’re concerned about, are how the so-called 

TARP bill is being handled, how that money is being spent. What 

is the accountability and the context of that spending? 

Who has gotten the money? What have they done with it after 

they received it? Why was it given to them in the first place? 

And with what they did, what were the results? Have they 

achieved anything significantly, as a result of that spending? We know that under the Bush Administration, about $380 billion 

were provided to the banking institutions, and that was done very, 

very quickly. 

We also know that there are some serious issues with regard to 

the accountability of those funds. All of these things are very critical. 

There is an interesting, sort of ironic amount of attention being focused on the two percent of the so-called ‘‘earmarks’’ in the $410 

billion budget bill that was passed by the Senate yesterday, and a 

lot of attention being given to that little two percent, while very little attention is being given to the $700 billion in the TARP bill, the 

$380 billion that has already been spent and given to banks, and 

the lack of accountability with regard to how that $380 billion already has been spent. Actually, the number now is higher than 

$380 billion. 

So all of these things are very critical issues for the economy and 

the deep and dire economic circumstances with which we are dealing and which we are supposed to be solving. 

So, again, I thank you all very much for being here, and I’m very 

interested and very anxious to hear what you can tell us about the 

way in which this situation is being dealt with. Thank you very 

much. 

Chair Maloney. Congressman? 

OPENING STATEMENT OF THE HONORABLE KEVIN BRADY, A 

U.S. REPRESENTATIVE FROM TEXAS 

Mr. Brady. Thank you, Madam Chairman, for holding this 

meeting. I am pleased to also welcome the panel of witnesses before us. 

But today, I think there is a great level of frustration about the 

TARP program. When President Bush first proposed it and the 

Democrat Congress led the effort to approve it, it was believed that 

the Congressional Oversight Panel would be the eyes and ears of 

this nation and of this Congress. 

Yet, here it is three months after the panel was formed, and, to 

my knowledge, you have no approved budget, no approved oversight plan, have yet to hold any public meetings with Treasury officials. The basic question of how is our money being spent and what 

are the results, is still unresolved. 

6 

I’m hopeful that you’ll address that today, and if there are road 

blocks, if you have a lack of resources, or if there is some problem 

with doing your job, I think it needs to be raised. I appreciate having private meetings with Treasury, but the truth of the matter is, 

there’s too much secrecy in this TARP as it is, and we need transparency and accountability and results from the Congressional 

Oversight Panel on this important issue. 

TARP certainly raises a number of very troubling issues, but the 

central one, is why we still do not have a credible, effective, and 

transparent financial rescue plan in place. 

Economists and financial experts agree that nothing else we do 

will matter much, until the issue of how to dispose of toxic bank 

assets is resolved. 

The Treasury proposal unveiled last February 10th, has not been 

well received, because it did not clearly address this issue. The 

Economist Magazine, for example, characterized it as ‘‘timid, incomplete, short on detail.’’ 

Over the last several weeks, the financial press had daily noted 

how the lack of specifics, undermines confidence and is contributing to more uncertainty and more financial market instability. 

As observed by Business Week, following the announcement of 

the Treasury plan, the stock market was down on sketchy details, 

and, last week, the Financial Times noted that since the Treasury 

plan was unveiled, the S&P has declined 20 percent. 

So the lack of details is hurting, not helping our recovery. Despite the fact that a timely economic recovery is entirely dependent 

on an effective and credible plan for dealing with the toxic assets, 

the Administration, so far, has failed to provide one. 

The lack of a clear policy framework, raises fears about undue 

political influence and meddling, and is deterring new private investment in banks. 

Financial decisions regarding bank lending, investment, and capital structure, shouldn’t be politicized. Policymakers do have an important role to play in setting appropriate ground rules, but this 

should not include micromanaging the banks. 

There’s much to criticize in the TARP, as well as other financial 

bailouts, but the key question facing the country, is, is the government policy regarding these toxic assets. 

The Administration so far has been focused on other priorities, 

whether it be tax increases or climate change, instead of the critical and pressing need for a clear resolution to the banking crisis. 

And while the Administration devotes its attention to pushing its 

budget with huge increases in deficit spending and federal debt, financial markets and the economy seem daily in greater distress. 

However, a financial recovery plan may cost Treasury up to a 

trillion dollars more, this means that Congress should not enact 

costly new deficit spending measures that the country cannot afford. 

I am afraid that we have misplaced priorities in the budget that 

is based on rosy economic forecasts that simply cannot come true. 

In fact, in recent days, the new blue chip consensus forecasts a 

2009 GDP decline of 2.6 percent. That’s twice the rate that is included in the President’s budget. The unemployment rate has already hit their estimate for the entire year. 

7 

I think we need to focus on the resolution of the banking crisis 

as the best way to establish a reasonable prospect for economic 

growth. That’s the key issue before us. Thank you, Madam Chairman. 

[The prepared statement of Representative Brady appears in the 

Submissions for the Record on page 46.] 

Chair Maloney. Thank you so much. Senator Klobuchar, for 

three minutes? 

OPENING STATEMENT OF THE HONORABLE AMY KLOBUCHAR, 

A U.S. SENATOR FROM MINNESOTA 

Senator Klobuchar. Thank you very much, Madam Chair. 

Thank you and thank you to our witnesses for being here. Thank 

you for holding this hearing today to talk about the oversight and 

the transparency of the federal programs that use American taxpayer money to stabilize our financial system. 

Since this financial crisis erupted in the Fall of 2008, our Government has distributed hundreds of billions of dollars to a variety 

of programs and initiatives that are intended to stabilize the banking system, intended to stimulate the credit markets to resume 

lending. 

They are intended to help homeowners prevent foreclosures, and 

they are intended to create jobs in our communities. 

I, for one, believe that we need to do this, so that we can’t just 

put our heads in sand and pretend that this is isn’t happening. But 

with this decision and with these bold moves, comes a responsibility, and that responsibility is to make sure that we protect the 

American taxpayers’ money and that we get back as much as we 

can every step of the way. 

And my concern from the very beginning, when we first—when 

this first came up in the Fall, is that there has been too little accounting for how this money has been distributed and how the taxpayer assistance is being spent. 

I likened it the other day to the Wall Street—driving down Wall 

Street in their Ferraris and the Government sort of following behind in a Model T Ford. 

I think we can improve that, and I believe that this Administration is devoted to improving that, so that we can show exactly— 

I like the President’s idea to put on the Internet, where these funds 

are being spent, the TARP funds. 

I like the idea of showing a timeline to the taxpayers, of when 

and how some of this money is going to be paid back. We have one 

bank in Minnesota, Twin City Federal, that got hundreds of millions of dollars, that is now wanting to pay that back now. 

There are small banks in our state that I have pointed out many 

times, and credit unions, that either didn’t take money, but are 

being really tainted by the brush of some of the other banks. I 

think it’s very important for the accountability and for the trust of 

the taxpayers, as we go forward, that we show how this money is 

spent, show if there have been failures—and we know there have— 

and show how we’re going to do this going forward. 

Because if we do that and we’re able to better regulate the financial markets and we’re able to better show what’s going on, so the 

people of this country understand it, then I think some of this 

8 

broad brush that has been struck on so many of our banks that 

really didn’t do anything wrong, can be lifted, and we’re going to 

be able to get this country on track. 

So I really see this not as much as posturing, but as much as 

accountability for the money, but also getting this straight, so that 

we can move on and allow the economy to start working again. 

Thank you very much. I look forward to hearing from you. 

Chair Maloney. Thank you. Senator Casey, for three minutes. 

OPENING STATEMENT OF THE HONORABLE ROBERT P. 

CASEY, Jr., A U.S. SENATOR FROM PENNSYLVANIA 

Senator Casey. Madam Chair, thank you very much for calling 

this hearing. We appreciate the witnesses. Your testimony is going 

to be very important today, for a number of reasons: 

Principally because there are an awful lot of Americans who 

don’t have confidence with what we did in the Emergency Economic Stabilization Act, what we’ve done since then on a whole series of oversight initiatives, and the oversight votes that were 

taken in the Congress on the recovery bill. It all goes back to concern about what the Treasury was doing in the prior Administration, which has led to concerns about where we’re headed in this 

Administration. For all those reasons, we have to give the American people a clearer sense of where this is oversight headed. 

Unless we do that, we will not be able to sustain support for any 

initiative, whether it’s what we do with regard to banks, or broader 

efforts to jump-start the economy. 

It is not that we don’t have enough legislation or enough programs or enough oversight or transparency, it’s that we have 11 

different entities required to prepare and submit a total of 18 different types of reports to six different entities, and the complexity 

causes confusion and concern. 

If we continue along the path that we’re on right now, we’re 

going to erode confidence that the American people have a right to 

expect in our—not just our financial system,—but in our government. We need to display that we can get it right, that we can 

streamline the oversight, that we can have clear and identifiable 

transparency, which is, and that there’s one place that people can 

go to for information about how their government is spending their 

money. 

Until we get this right, we’re not going to have the confidence of 

the American people; and those of us in government need their confidence to sustain these policies over time. 

So we have a long way to go, in terms of exploring how the Economic Stabilization Act has been implemented, what was right or 

wrong with the law in the original drafting and the implementation 

of the policy. 

Today’s hearing will help us, but will not solve all of our problems. Until we give the American people a better sense of where 

we’re headed, there’s still going to be real concern, and, frankly, a 

lack of confidence in what their government is doing. Thank you. 

Chair Maloney. Thank you. Congressman Burgess, for three 

minutes. 

9 

OPENING STATEMENT OF THE HONORABLE MICHAEL C. 

BURGESS, M.D., A U.S. REPRESENTATIVE FROM TEXAS 

Mr. Burgess. Thank you, Madam Chairman. I won’t take the 

whole time, but I will submit an opening statement for the record. 

I would just like to point out that Bill Clinton, when he took office—and I was no great fan—he talked about focusing like a laser 

beam on the economy. 

I truly believe that we need that type of activity right now, and 

constantly going from one social program to another, right now, the 

economy is the main issue that the American people want us to 

concentrate on. 

I’m grateful to have the members of the Oversight panel here 

today, and I’m anxious to hear what has been happening with the 

funding that was provided last October, and if we are asked to provide yet additional funding, what we can look forward to. 

Thank you, Madam Chairman. I will submit my statement for 

the record. 

[The prepared statement of Representative Burgess appears in 

the Submissions for the Record on page 47.] 

Chair Maloney. Thank you so much. The Chair recognizes Mr. 

Silvers for five minutes, to be followed by Superintendent Neiman, 

then Ms. Tichon and then Mr. Pollock. Please proceed. 

STATEMENT OF MR. DAMON SILVERS, ASSOCIATE GENERAL 

COUNSEL, AFL–CIO; AND DEPUTY CHAIR, CONGRESSIONAL 

OVERSIGHT PANEL FOR THE EMERGENCY ECONOMIC STABILIZATION ACT, WASHINGTON, DC 

Mr. Silvers. Thank you. Good morning. 

Chair Maloney. Good morning. 

Mr. Silvers. I would like first to express my thanks to you, Representative Maloney, for inviting me and my colleague, Richard 

Neiman, to appear today before the Committee. 

I should note at the outset, that my testimony today is mine 

alone, and does not necessarily reflect the views of the Congressional Oversight Panel, as a whole, or its staff. 

I’m going to speak briefly about the general role of the Panel, 

and then address the Panel’s work in valuing the preferred stock 

purchased by the Treasury under the TARP program, which is the 

vast majority of the expenditures made, literally, of taxpayer dollars. 

Superintendent Neiman will address our latest report on the 

mortgage crisis. 

The Congressional Oversight Panel was created as part of last 

year’s Emergency Economic Stabilization Act, or EESA. 

The Panel began our work in our first report issued in December, 

by asking ten basic questions about TARP, starting with the question, what is Treasury’s strategy, and including the question, is the 

public receiving a fair deal in TARP transactions? 

This first report had only one substantive recommendation; that 

the public has a right to know how financial institutions that have 

received public money, are using that money, and, quote, ‘‘that the 

Treasury should be responsible for holding individual institutions 

accountable for how the use the public’s money.’’ 

10 

While the Treasury Department, under both the current and 

prior Administrations, has committed to the concept of tracking the 

use of TARP money by financial institutions, in principle; the specific plans for doing so, have not been released, to date. 

The Panel thought that it was not possible to begin to answer 

questions like, ‘‘did the public get a fair deal,’’ without understanding first, exactly what deal the public did get in the transactions completed under TARP last year. 

The Panel retained Duff and Phelps, the world’s largest independent valuation firm, to assist us in this inquiry overseen by 

Professors William Goetzelman of the Yale School of Management, 

and Deborah Lucas of Northwestern’s Kellogg School of Management. Professor Lucas is the former Chief Economist of the Congressional Budget Office. 

They were joined by Adam Blumenthal, the former Deputy 

Comptroller of New York City. 

In parallel, the Panel engaged a legal team with experience in 

both bank rescues and preferred stock transactions, to review the 

legal terms of the TARP transactions. 

This valuation and legal analysis, had a limited purpose: To understand and place before the public, the extent to which the TARP 

transactions had been investments that obtained fair value for the 

taxpayer and the extent to which they were subsidies to the recipient banks and their shareholders. 

We did not attempt to answer the question of whether subsidies 

were a good idea or a bad idea; whether the TARP transactions created public benefit that made them worthwhile, or whether that 

same public benefit could have been created without the subsidy. 

In their 700-page report, Duff and Phelps found that the 2008 

TARP transactions ranged from preferred stock purchases that delivered close to full value to the government, in the case of the 

strongest banks at the time, where the discounts were five and 

seven percent in the case of USBanCorp and Wells Fargo, to purchases that at the time they were made, delivered 50 percent or 

less of their face value to the government in the case of the purchase of AIG preferred stock and the second purchase of Citigroup 

preferred stock in November 2008. 

The Panel found that the key structural reason for the failure to 

obtain securities that were worth their purchase price on a marketvalue basis, was the decision to offer the same price to all the 

banks in the initial purchase and the apparent decision to only 

vary the terms of the second Citi investment to a small degree, 

from the terms of the investments in, quote, ‘‘healthy banks,’’ made 

under the Capital Purchase Program. 

Once the decision was made to offer all banks the same terms, 

in order to attract the participation of relatively healthy banks, 

those terms had to be ones that would be attractive to healthy 

banks, and, thus, would offer a subsidy to weaker banks. 

The Duff and Phelps study led to the conclusion that through the 

end of December, the TARP program had involved a $78 billion 

subsidy to all 311 Capital Purchase Program recipient banks at the 

time of the report. 

11 

However, Duff and Phelps found that more than half of the subsidy in the program, as a whole, went to two institutions—AIG and 

Citigroup. 

This analysis has clear implications for future TARP transactions 

with weak financial institutions. Because we are not trying to 

drain cash from banks, there is no way to protect value for taxpayers by charging interest in the form of preferred dividends adequate to compensate the taxpayers for the very real risk of further 

losses in the preferred. 

The only way to do so, is to take a large percentage of the upside 

in the form of common stock, warrants for common stock, or other 

equity-linked instruments. In the case of the weakest banks, it appears to me that even if the government took 100 percent of the 

future upside, we would still not be able to receive securities worth 

the value of the funds we would infuse into such weak banks. 

It may still be in the public interest to do such transactions, but 

we should not fool ourselves or the public, that we are receiving, 

in the form of securities, full value for the public’s money, and the 

less we ask in terms of common equity, the greater the subsidy will 

be. 

Our valuation report relied entirely on publicly-available data. 

The Panel did make a broad request of the Treasury Department, 

pursuant to our authority under Section 125 of the EESA, on December 17th. 

In a letter dated December 24th, the Department declined to provide the material we requested, and raised concerns about our 

newly-formed panel’s internal controls over confidential documents. 

Despite extensive discussions between our staff and the Treasury 

Department, Treasury has only produced a small number of the 

documents the Panel requested. 

To Congressman Brady’s question, we have sought, from the beginning of our existence as a Panel, to have the Secretary, the prior 

Secretary and the current Secretary, appear before us in a public 

hearing. 

We made a formal request of the prior Secretary, which was 

never responded to formally. We have made a request of the current Secretary and that request is being discussed with the Department. 

It is of significant and prime importance to us that the Secretary 

appear before us in a public hearing. 

Finally, this matter relates to a matter of concern to this Committee. Although it was not the primary purpose of our document 

requests, I had expected that our December request, would result 

in the Panel being informed as to the identities of the counterparties to derivative transactions who were made whole as a result of 

the funds provided, both by the Federal Reserve Bank of New York 

and the TARP, to AIG. 

The Panel currently does not know for certain, the identity of 

those counterparties or the amounts they received, although, like 

the Committee, we are aware of press accounts on this matter. 

The Congressional Oversight Panel is seeking to expand the 

scope of its analysis of the larger impact of TARP and related programs. The Panel is particularly interested in looking at transactions under the Term Asset–Backed Securities Loan Facility, the 

12 

TALF, and potential transactions involving public/private partnerships. 

The Panel is also working to define its role in relation to activities undertaken by the Board of Governors of the Federal Reserve, 

and the Federal Reserve Bank of New York, that are linked to actions undertaken by the Treasury Department, pursuant to EESA. 

We are honored to have been asked to appear before you and to 

assist the Congress in this matter. I apologize for running over, 

and I thank you for your indulgence. 

[The prepared statement of Damon Silvers appears in the Submissions for the Record on page 48.] 

Chair Maloney. Superintendent Neiman? 

STATEMENT OF MR. RICHARD NEIMAN, SUPERINTENDENT OF 

BANKS, NEW YORK STATE BANKING DEPARTMENT, NEW 

YORK, NY; AND MEMBER, CONGRESSIONAL OVERSIGHT 

PANEL FOR THE EMERGENCY ECONOMIC STABILIZATION 

ACT, WASHINGTON, DC 

Mr. Neiman. Thank you, Chairwoman Maloney and distinguished members. I’m Richard Neiman, Superintendent of Banks 

in New York, and a member of the Congressional Oversight Panel. 

I very much appreciate the opportunity to comment on Treasury’s implementation of the EESA. I think this is a very important 

hearing. I appreciate you including members of our Panel. 

As you know, the Panel is charged by statute to provide monthly 

reports to Congress, assessing the effectiveness of the Treasury’s 

implementation. 

Damon discussed the five prior reports that we issued, and I’ll 

be happy to answer any questions on those. But given my limited 

time this morning, I will focus on the Panel’s most recent report 

that was issued last Friday, on foreclosure mitigation, which I took 

a lead role in preparing. 

As the only bank regulatory on the Panel and as one who has 

led his state’s foreclosure prevention efforts, I believe I bring a 

unique perspective to this critical issue. I look forward, however, to 

the questions from the Committee on the full range of our Panel’s 

responsibilities. 

The Panel’s March report highlights the symptoms that gave rise 

to the housing crisis, as well as the major impediments to finding 

a solution. 

The report provides a road map for successful foreclosure prevention going forward, so let me just summarize some of the major impediments that we highlighted in the report. 

Affordability: The key to any sustainable modification program is 

whether the borrower can afford the monthly payments. 

A problem that began with exploding mortgage products that 

may have been inappropriate at inception has now expanded to 

borrowers who are falling behind for many reasons, such as illness, 

divorce, or job loss in the economic downturn. 

Existing modification efforts have not adequately addressed the 

critical impediment of affordability, leading to high rates of re-default. 

13 

The voluntary modification efforts often leave the borrower with 

the same or even higher monthly payments, through repayment 

plans or capitalization of amounts past due. 

The Panel is concerned that the commonly-used housing payment 

ratio of 38 percent of the borrower’s gross income remains too high 

to be affordable, and is encouraged by President Obama’s foreclosure plan that targets a 31 percent housing ratio. 

Negative equity is another impediment that can occur when 

property values decline or if appraisals are overstated. Borrowers 

in this situation, are unable to refinance and cannot sell the home, 

unless the lender agrees to reduced payoff in a short sale. 

Panel data shows a strong correlation between high negative equity and default, however, this is not necessarily evidence of a 

causal relationship. 

Further, I should note that the survey data that we relied on, received from the federal banking agencies, was limited by the lack 

of current borrower income information, which may have underestimated the importance of affordability in this result. 

Securitization: Mortgages that have been securitized are subject 

to the terms of pooling and service agreements that may present 

obstacles to loan modifications. These PSAs often contain restrictions on the number of loans within the pool that may be modified 

and the circumstances under which modification is permissible. 

As modification and other loss mitigation outcomes may impact 

various tranches of investors, litigation risk does exist and is a disincentive for investors to engage in modification. 

A safe harbor from litigation for servicers that modify loans, as 

contained in the House bill, would help to overcome this impediment. 

Service incentives: The fee arrangements for servicers can also 

create misaligned incentives. In particular, servicers need incentives to engage in intervention while borrowers are still current, 

but when default is imminent. 

The Obama plan does address this issue by providing incentive 

payments to services for early outreach, as well as pay-for-success 

incentives to both servicers and borrowers, based on performance 

of the modified loans. 

Other impediments that I have highlighted in my testimony go 

to borrower outreach, capacity of the servicer, the resources used 

by the servicer to handle the millions of mortgages that we’re dealing with, as well as issues around junior mortgages. 

The President’s plan addresses many of these critical elements, 

particularly those focused on affordability and servicer incentives, 

and it estimated to help seven to nine million homeowners at risk. 

Now, while these projections are encouraging, the Panel has additional areas of concern that are not fully addressed. In particular, 

the plan does not include a safe harbor for servicers operating 

under pooling and service agreements, to address the potential litigation risk. 

And while the modification aspects of the plan will be mandatory 

for banks receiving TARP funds going forward, the level of broader 

industry acceptance remains unclear. 

We will continue to monitor implementation of the plan and advise Congress and the American people accordingly. 

14 

Now, there is one more important recommendation that I would 

like to highlight to this panel that we included in our report, and 

that goes to the adequacy of mortgage loan performance data. 

Access to complete information on foreclosures and loans in default is currently unavailable, and the reason is simple: There is 

no mortgage loan performance data requirement for the industry. 

Congress and the regulators need to have much better data 

available, so they can ensure the smooth and efficient functioning 

of the national housing finance market, and to prevent future crises. 

This is why the Panel believes that Congress should create a national mortgage loan performance reporting requirement applicable 

to banking institutions and others who service mortgage loans, to 

provide a source of comprehensive intelligence about loan performance, loss mitigation efforts, and foreclosures. 

This is something that you did when you adopted HMDA with 

respect to new mortgage originations. 

Federal banking or housing regulators should be mandated to 

analyze such data and share the results with the public. We cannot 

solve this financial crisis without dealing with the root of the problem the millions of American families who at risk of losing their 

homes to foreclosure. 

I appreciate the opportunity to share my views, and hope the dialogue between the panel and this Committee becomes a regular occurrence. Events are developing rapidly, and many of the tools 

needed to respond are best accomplished with the support of progressive legislation. 

I’d be pleased to provide more details on the Panel’s work to 

date, or answer any questions. Thank you. 

[The prepared statement of Richard H. Neiman appears in the 

Submissions for the Record on page 51.] 

Chair Maloney. Thank you so much. Ms. Tichon? 

STATEMENT OF MS. NICOLE TICHON, TAX AND BUDGET REFORM ADVOCATE, U.S. PUBLIC INTEREST RESEARCH 

GROUP, WASHINGTON, DC 

Ms. Tichon. Thank you, Madam Chair Maloney, Committee 

members, and distinguished panelists. Good morning. 

We, too, are very pleased to be part of this critical conversation. 

My name is Nicole Tichon and I am the Tax and Budget Reform 

Advocate for the U.S. Public Interest Research Group. 

We serve as a federation of state PIRGs, which are nonprofit, 

nonpartisan, public interest advocacy groups that take on powerful 

interests on behalf of our members. 

Taxpayers have lost a lot of their own investments, their pensions, retirement savings, and education savings, and in their first 

mass investment into the banks that failed them, they were 

undersold by $78 billion, according to the Congressional Oversight 

Panel, and, so far, we get approximately 67 cents on each dollar 

they have invested so far. 

That gap is likely to get larger, as we learn more and more about 

the truth of the financial health of these companies. This hardly inspires confidence that taxpayers will be seeing much of a return on 

their investment, and prompts more questions than answers. 

15 

A number of bills and amendments have surfaced in the House 

and Senate, with respect to what was known as the Troubled Asset 

Relief Program, TARP, to get to these answers, but few have made 

it to law. 

This tell us quite a bit about the outstanding concerns over these 

programs. USPIRG’s position is very straightforward: Congress 

should take specific action to make transparency and accountability 

requirements law. 

This would give the Treasury Secretary and the Administration, 

a comprehensive tool set to help them manage these programs, and 

also to make sure that the oversight of these activities, ensures 

that they are applied completely and consistently across all institutions. 

Transparency and accountability requirements, should not be 

viewed as punitive. This not a ‘‘gotcha’’ game. This is the future of 

our economy, and, quite frankly, if CEOs insist that they are gaining strength and momentum, then we want to know what’s working. 

And, on the flip side, if the situation does not improve, then Congress and the Administration, should demand to know what’s not. 

Making these requirements, law, is the most fair way to approach this, for both the government and the participants. Everyone starts with the same information and the same expectations. 

That way, if an institution is not complying, the law can require 

them to return the funds. 

Government leaders and financial institutions should see this as 

an opportunity, if anything else, to restore some of the confidence 

back to the American taxpayers. 

In February of this year, PIRG issued our first quarterly report 

card to track progress on transparency and accountability. Since 

then, there have been varying degrees of progress on several line 

items. 

Some of the key reforms where progress has been made, include 

Treasury’s use of online resources to provide information and reports, as well as eligibility assessments for the public, however, 

taxpayers and consumers would prefer something more dynamic 

and searchable for contract agreements. 

Treasury has also begun the process of sending monthly surveys 

to the 20 largest fund recipients. USPIRG agrees with the general—we agree with GAO that this request for information, should 

be program-wide and not limited to the largest recipients only. 

A request by the Special Inspector General for reports on the initial disbursement of funds, was made to all of the recipients in the 

first tranche. Taxpayers are very anxious to know these results. 

In addition, consumers and taxpayers would like to know that 

the following requirements be included in any new accountability 

and transparency efforts: With respect to reporting, we’d like any 

reporting and oversight activities to be consistently applied; to relate—to make sure that they relate to the goals and objectives and 

to the original program and that they are posted online. 

Finally, we would like these reports to make every effort to 

equate outcomes to things that help taxpayers and are meaningful 

to them. 

16 

From a strategy and operations perspective, taxpayers would like 

to see the following items addressed: The public is still unclear as 

to the reasons for the initial, seemingly ad hoc programs created 

for the first $350 billion disbursement, and would like the public 

provided with a more detailed explanation for the most recent 

shifts described in the Financial Stability Plan. 

The restructuring agreements with Citigroup and AIG, demonstrate another change in strategy, and one that may put taxpayers at additional risk. 

Finally, we would like to see additional governance guidance 

around internal operations, accountability, leadership, strategic 

planning, and items such as that, which would make the banks 

more accountable for achieving success and help us feel more confident that they are not going to repeat the mistakes of the past. 

Taxpayers and consumers deserve an open and fair government 

that will not take them nor their investment, lightly. Thank you, 

and I look forward to your questions. 

[The prepared statement of Nicole Tichon appears in the Submissions for the Record on page 53.] 

Chair Maloney. Thank you. Mr. Pollock? 

STATEMENT OF MR. ALEX J. POLLOCK, RESIDENT FELLOW, 

AMERICAN ENTERPRISE INSTITUTE FOR PUBLIC POLICY 

RESEARCH, WASHINGTON, DC 

Mr. Pollock. Thank you, Madam Chairman, Ranking Member 

Brownback, Congressman Brady, Members of the Committee. 

The United States and many other countries once again now 

demonstrate the dilemmas of the recurring historical experience of 

using public money to offset the losses of banks in the name of economic stability. As I noted in my written testimony, debates about 

this go back at least to 1802. 

In my view, it’s imperative to have a clear accounting for the financial results of all such bailout operations. As we know, government bailouts make the 60 percent of households who actually pay 

federal income taxes, into involuntary investors, either investors in 

bank equity, in distressed assets, or both. 

How can these involuntary investors and their Congressional 

representatives figure out what’s happening to the money? Senator 

Casey rightly pointed out the overlapping complex reporting we’ve 

got, so, first and foremost, I believe we need something really simple and powerful. 

This is that all the activities of the TARP program, should be isolated in a separate accounting entity, preferably a government corporation, one that would be Treasury-guaranteed. This entity, in 

my view, should have to borrow on its own balance sheet to finance 

the investment it makes. 

All investments and other assets, all related borrowings, other liabilities, all expenses, and all income, should be clearly measured 

as if TARP were a corporation. This would be most straightforward 

if it were, in fact, a corporation like the Reconstruction Finance 

Corporation of the 1930s was. 

An audited balance sheet and income statement should be regularly produced. The bailout operation’s retained earnings or accumulated losses, will show its results life to date. In my view, ConVerDate Nov 24 2008 14:16 Oct 13, 2009 Jkt 051566 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 C:\DOCS\51566.TXT SHAUN PsN: DPROCT
17 

gress should require such a regular and disciplined accounting by 

TARP. 

Looking forward, as well as measuring backwards, should also be 

businesslike. Congressman Hinchey mentioned the large TARP outlays. It seems clear to me that Congress should certainly demand 

a clear forecast of next year’s TARP activity and results, before it 

approves any federal budget. 

The investments the taxpayers are involuntarily making might, 

in the end, have an overall positive return, as asset prices recover, 

as they inevitably will. 

It’s my view that if there is a profit in the end, 100 percent of 

any such profit should be earmarked as explicit dividends to the 

taxpayer investors. These could be in the form of cash or specific 

tax credits. 

It seems to me that this would be a well deserved recompense 

for the majority of the citizens who bought houses they could afford, paid their mortgage loans on time, didn’t engage in leveraged 

speculations, paid their taxes, and then paid for and took all the 

risk of the bailout efforts. 

That would represent real accountability to the real investors. 

Looking back a good way, it seems to me that a fruitful historical 

comparison can be made between TARP and the Reconstruction Finance Corporation, the bank bailout operation of the 1930s, which 

made investments in more than 6,000 banks in its day. 

Set up under President Hoover, then expanded by President Roosevelt, the Reconstruction Finance Corporation, or RFC, was run 

for most of the time by a forceful and very experienced character 

named Jesse Jones (a successful entrepreneur from Texas, and, of 

course, a Democrat, by definition, in those days), whose formal 

schooling had ended in the eighth grade. 

So, since he never started high school, Madam Chairman, he 

didn’t get the chance to be a high school dropout. 

As described in my written testimony, the RFC had a logical crisis model. This model is also discussed in Fed President Hoenig’s 

speech, Senator Brownback, which you cited. At one point, the RFC 

held capital in about 40 percent of all the banks there were, but, 

in the end, it had no net cost to the taxpayers. 

A key lesson of this experience, in my view, is that organizations 

are important, but more important for accountability, is who [emphasis added] is running them. In addition to making sure TARP 

has disciplined accounting, I think we need to find a modern day 

Jesse Jones to run our bailout operation. 

Thank you very much again for the opportunity to share these 

views. 

[The prepared statement of Alex Pollock appears in the Submissions for the Record on page 75.] 

Chair Maloney. Thank you, thanks to all of the panelists for 

your testimony. 

I’d like to ask this to Mr. Silvers and Superintendent Neiman. 

There has been substantial controversy, because $60 billion federal 

funds was reportedly used by the Fed to buy collateralized debt obligations, or CDOs, that were insured by AIG credit default swaps. 

18 

Do you know whether TARP funds were used for these purchases, and do you think the government should be covering the 

bets of the CDO buyers this way? 

Mr. Silvers. Madam Chair, I do not know for certain that no 

TARP funds were used. I believe that those purchases occurred, 

using Fed Funds, using Federal Reserve Bank of New York Funds, 

but I am not certain. 

The structure that is being contemplated today for TALF, involves a slice of TARP funds supporting a large Fed funding structure, and there would be an issue—and it’s also an issue of kind 

of the fungibility of money here. The TARP fund were provided to 

the Federal Reserve Bank of New York on behalf of AIG and were 

disbursed from there. 

Again, I believe those were largely used to—based on press reports, I believe those were largely used to cover counterparty obligations in credit default swaps and other derivatives transactions, 

and not to purchase CDOs, which—the purchase of CDOs has a 

similar effect. That’s the extent of my knowledge. 

In respect to your question of whether that’s a good idea or not, 

here is the—I think there are several issues in play here. 

One of them is the question of systemic risk related to AIG’s inability to meet its obligations broadly in the derivatives markets. 

Based on the size and the scale of their derivatives obligation, it 

seems to me there is a significant systemic risk issue embedded in 

that problem. 

The second question is: What is the best way to deal with that? 

Those expenditures raise a question as to whether—to the extent 

the operations with AIG with counterparties are having the effect 

of propping—of really significantly focusing federal funds toward 

specific counterparties, whether it was wiser to do that indirectly 

through AIG or whether perhaps we ought to have looked directly 

at those counterparties. 

There is no way to answer that question without knowing exactly 

how much money was disbursed on behalf of AIG to counterparties, 

information we don’t have despite those press reports many of 

which are inconsistent with each other. 

Chair Maloney. I think you’re pointing out the need to get this 

information so we can make informed decisions. 

Superintendent Neiman, would you like to comment on this? 

Mr. Neiman. I would just like to clarify and distinguish the program under which those Fed funds were provided to AIG, and to 

distinguish the fact that that was done under the systemically significant failing institution program which has different and broader 

objectives than the capital purchase plan. 

In a program to assist AIG, we can’t lose sight of the fact that 

it was to prevent a disorderly failure of systemic institutions as 

well as the tag-along effect it would have on counterparties and 

other institutions. 

So I think when we come back and look at these programs, we 

do have to keep in mind the objectives of the program. 

Having said that, I think the transparency issues that you raise 

are a separate issue. And I did listen to Mr. Kohn’s testimony, Vice 

Chairman Kohn’s, and that was something they said they would 

take back to the Federal Reserve. 

19 

As a regulator, I certainly understand the issues around confidentiality of individual information, but I think in this day and 

age that is something that all regulators should be revisiting. 

I am not going to opine on how they should come out at this 

stage, but it is certainly an issue that regulators are revisiting. 

Chair Maloney. Mr. Silvers? 

Mr. Silvers. Yes. My colleague’s comments raise an additional 

point that I would like to expand on for a moment, if you will indulge me. 

I think it is important for the Committee to be fully aware of the, 

currently the three programs under which the funds have been disbursed to financial institutions under TARP, and their differences. 

The Capital Purchase Program was the initial TARP Program. It 

was the program under which all of the initial October disbursements were made, in the form of purchases of preferred stock. And 

all of the purchases of preferred stock from smaller banks have 

been made under this program. It has only one criteria, which may 

seem a little odd. The criteria is that you have to be healthy. You 

have to not need the money in order to get it. Because the purpose 

of—the stated purpose of the program is to provide liquidity to 

banks who are in a position to then pass that liquidity on to the 

larger economy. 

It is somewhat—it raises questions that money was provided 

under this program in October to banks which very quickly became 

not so healthy. The ones that are obvious are Citigroup and Bank 

of America. 

The second program, as Superintendent Neiman mentioned, is 

the Systemically Significant Failing Institutions Program. Only one 

institution has received money under that Program, and that institution is AIG. 

The Panel raised questions in its second report as to why other 

institutions that appeared to fit the definition of a ‘‘systemically 

significant failing institution’’ were not funded under that program 

when they came back to Treasury seeking additional funds. 

Those institutions are Citigroup and Bank of America. 

Citigroup and Bank of America got funding in November of 2008, 

and then Bank of America got funding in January of 2009, additional funding and guarantees of assets in their portfolios. 

In the case of the Citigroup funding in November, it was not 

done under either existing program. It had no programmatic home 

when it was done. At the end of December, the Treasury Department created a new program, the Targeted Asset Program, whose 

criteria are, shall we say, more general than either the Capital 

Purchase Program or the Systemically Significant Failing Institutions Program. 

The Citigroup transaction was placed in that program after the 

fact, and then the Bank of America transaction in January was put 

in that program. 

I should note that one striking content—one striking distinction 

of the Systemically Significant Failing Institutions Program is that, 

as the Committee has noted in this hearing, that the government 

took 80 percent of the upside of AIG as part of that program 

through obtaining warrants in AIG stock. 

20 

The upside that was taken under the CPP Program in Bank of 

America and in Citigroup when they were deeply troubled was no 

greater than the upside taken in healthy institutions under the 

Capital Purchase Program as a percentage of the preferred stock 

purchased in those programs. 

Chair Maloney. Thank you. My time is expired. 

Senator Brownback? 

Senator Brownback. Thank you, Madam Chairwoman. 

I am old enough to remember the pieces of old acts like even on 

The Ed Sullivan Show, and there is one that comes to my mind of 

what we’ve been doing lately, the one where the guy has a stick 

and he puts a plate on top of it and starts twirling the plate, and 

then he starts another one, starts another one, starts another one, 

and he starts about ten of these, and by the time he starts the 

tenth one the first one is getting ready to fall off, so he runs back 

and he twirls that one again, and then the third one, and he’s 

bouncing back and forth, and that is what really reminds me of 

what we’ve been doing, it seems like, since this thing first started 

falling apart last year. 

It is like we’re going from one crisis, lurching to the next one, 

and we’ve got to do this, got to do that. We rush bills through. We 

don’t do proper oversight on it. And at the end of the day all the 

plates come crashing down. And that it’s—that we’re not—we 

haven’t developed something that is a sustainable, or set, or consistent, or predictable model for the marketplace to look at. 

And at the end of the day it seems like we have driven private 

capital out of the system by this ad hoc system and its unpredictability. 

We have got more—if I remember my numbers correctly—we 

have got more private funds sitting on the sideline right now than 

at any time we have had in the past 20 years, and it is sitting 

there. The market is plummeting, and the financial institutions are 

as well, and this was all supposed to be stopped by us jumping in 

and fixing it and doing it, and doing it now. 

I really think it is time for us to sit back and get to a predictable 

type of system. And that is what Chairman—the Fed Chairman in 

Kansas City, or president in Kansas City was writing about, was 

he looked at the prior models of what we have done when we have 

had financial institution problems, and we’ve had a fair number of 

these happen in the history of the country and in the history of the 

world. 

This is not a new type of crisis. It’s a big one, and it is a bigger 

one than we have seen in the past, but it is not a new type of crisis. And he points to the number of times that we have gone in in 

a pretty aggressive but predictable and clear way removed management, put in our management to run a place over a period of time, 

keep the institution running, and then deal with the institution at 

that point in time at a later phase, or at a time when it can be 

sold. 

And he also points out the Japanese model that he believes was 

a failed model, which is kind of what it seems like to me we’ve 

been following, ‘‘too big to fail,’’ we can’t let it fail, don’t let it fail, 

don’t let it fail, but without any predictable institutional setting. 

21 

Mr. Pollock, I presume you have read Mr. Hoenig’s paper. I gather from your testimony you agree with that analysis and do you 

think now is an appropriate time? It’s past time in my estimation. 

But to get to some sort of established, stabilized, predictable system for these institutions that have been heretofore deemed too big 

to fail? 

Mr. Pollock. Senator, I think that paper makes a lot of good 

points. In it is the summary of the approach of the old RFC, which 

I mentioned in my comments. I would just like to run through the 

four steps, because I think they are quite consistent with your comments. These are as described by Jesse Jones in his most instructive memoirs: ‘‘Fifty Billion Dollars: My Years With The RFC.’’ 

First, you go into the bank and write the assets to economic 

value. Congressman Campbell, that is not panic market value; that 

is what you are really going to collect on the assets. Having done 

that, you may find the institution is insolvent. 

The second point, according to Jesse Jones, is make a decision 

about the management. Now this is happening before you are putting any money in, and you either decide you have the right people 

there or you decide they have to be changed. Only after those two 

steps have been taken do you then put in an investment. The point 

of that investment should not be, as Mr. Silvers said earlier, to 

drain cash out of the institution, but to bridge the bust. 

And then you look to the private market as soon as possible to 

recapitalize and refloat the organization. I think that is a really 

logical approach. 

It takes a hard-minded director of the program, like Jesse Jones 

was. And it takes, in my judgment, an institutional format of a focused institution, which is why I favor the government corporation 

with a head and a board of directors. It seems to me the right place 

for a lot of the discussions about who is getting what and why, 

what is the rationale, would logically take place between a rightly 

constituted board of such a bailout corporation and its director. 

I think if we did that, a lot of the points that President Hoenig 

makes could be actually implemented. 

Senator Brownback. Thank you. Thank you, Madam Chairwoman. 

Chair Maloney. Mr. Hinchey. 

Mr. Hinchey. Thank you, Madam Chairman. 

And thank you very much, once again, gentlemen, and Ms. 

Tichon, for the testimony that you have given. We very much appreciate it. It is insightful and I think very, very helpful. 

There has been a great deal of skepticism about this situation 

from the very beginning. A number of us here in the Congress were 

skeptical about the plan that was put forth by Secretary Paulson 

originally in the form of this TARP bill, and that skepticism for 

some of us turned into opposition, including in the two bills that 

passed both Houses here subsequently. 

And I think, looking back on it, that opposition is now very much 

justified. We still don’t know how this money was being spent. And 

furthermore, we have gotten apparently false information from the 

Treasury Department saying that, in terms of the money that was 

given to the banks, that there was a return, a complete return on 

each of those so-called ‘‘investments.’’ But the investments have 

22 

turned into subsidies, and those subsidies have been made clear by 

Professor Warren in statements that she has made, and in the response she has given to questions that she has been asked on this 

particular subject. And I think she has done it very well and very 

effectively, and I thank you for being here today and talking about 

the same kind of thing. 

Last month the Congress passed a TARP Reform and Accountability Act of 2009, which is in many ways a misnomer of the bill. 

In addition to other amendments, I introduced one which was 

passed in the House, which required that information be given as 

to how much money was given to the banks, where that money was 

given, what the money was used for, and how effective that use 

was. 

Unfortunately, that amendment, although it passed the House, 

was not successful and has not yet come into law. But I think we 

need to continue to engage in that effort in order to get that done. 

We need to know where this money is going. And it is getting 

closer and closer to $700 billion, and probably will end up even 

higher than that over the course of time. 

With regard to the falsification of information—which I say that 

because it is apparent falsification of information with regard to 

the return on the so-called ‘‘investments‘‘—it seems to me that the 

Special Inspector General of the Troubled Asset Relief Program 

ought to engage in an investigation as to how this money was allocated, what it was used for, and how it is only coming back on an 

average at about 66 percent. In some cases I understand that 8 

percent is being lost. In other cases, more than 50 percent is being 

lost. It varies from place to place. 

So I would wonder what you would think about that, about having that investigation initiated and carried out so we can begin to 

figure out what is actually going on here? Mr. Silvers? 

Mr. Silvers. Congressman, well first let me say that I have no 

intention of telling the Inspector General, Neil Barofsky, what he 

should or should not investigate. That is his determination to 

make. 

I would like to clarify just for a moment the nature of the Panel’s 

finding which you referred to. I should say that Superintendent 

Neiman and I are here in Elizabeth Warren’s absence. We do not 

speak for her, but we hope that we have some commonality of 

views. 

The nature of what we found, Congressman, was that the market 

value of these securities on the day purchased was substantially 

less than the purchase price paid for them, in some instances. And 

in some instances only a small degree less. 

There is the possibility—in fact perhaps with some of the more 

secure banks the distinct likelihood that taxpayers will be made 

whole, that money will come back. 

There is also the distinct possibility that, that it will turn out 

that it will not be possible for the money to be repaid without further infusions of government funding. In fact, if you look at the 

first set of transactions in October money was provided to 

Citigroup and to Bank of America, and both of those institutions 

returned and had to get more money. 

23 

It is hard not to look at those circumstances and conclude that 

the value of the initial infusions into those banks had declined between October, the first transaction, and the second transactions in 

November and January. 

The terms of the transactions—and this is in my written testimony—the terms of the transactions, the legal terms, are what 

Treasury said they would be. That was what our legal analysis 

found. 

But the issue is that an independent valuation did not find that 

the economics matched the face value on the date of the transaction. And let me just give you one example of the sort of numbers 

that drive this sort of thing. 

Today the market rate for preferred stock in Citigroup is around 

20 percent. If you purchased preferred stock today, the implicit rate 

of return—or the implicit coupon on that is around 20 percent. The 

November Citigroup infusion paid a coupon rate of I think it was 

either 8 or 9—I’m afraid I’m slipping on that—but it was substantially below the market rate. That means that in terms of the 

cash—in terms of the interest rate we are receiving on that preferred stock, which is really what a preferred stock dividend is, it’s 

interest rate—the interest rate is not comparable to what the markets require for compensate—to compensate for the possibility that 

we might not receive those interest payments in the future should 

that particular bank weaken further. 

That’s the nature of the problem. And like I said, I can’t—I can’t, 

I can’t offer you an opinion as to whether that’s a problem that is 

deserving of the attention of the Inspector General or not. But we 

did not find—our report does not find that the terms of the bonds 

were not what they were represented—the terms of the preferred 

stock, I’m sorry—our report does not find that the terms of the preferred stock were different from what they were stated to be by the 

Treasury Department. 

We found that the economics appear to have been different than 

what they said. 

Chair Maloney. The gentleman’s time has expired. Congressman Brady for five minutes. 

Mr. Brady. All right. Thank you, Madam Chairwoman—— 

Chair Maloney. And we are going to be called for a vote shortly. 

Mr. Brady. Right, Madam Chairman. Thank you so much. Appreciate all the testimony from the panel. Very helpful. 

Mr. Pollock, I should note Jesse Jones comes from Houston, the 

region that I live. Amazing man. Not so certain there are any Jesse 

Joneses left in the financial world. Some Jessie James, perhaps, 

left in the financial world— [Laughter.] 

But I’m not sure about the Jones. I appreciate the comment by 

Mr. Silvers and Superintendent Neiman about the need for direct 

Treasury oversight. I wish our last Secretary would have met with 

you. I am hopeful, and would urge the new Treasury Secretary to 

do the same, in a public forum where you can really be the eyes 

and ears for this Congress. 

Let me ask you this: The public is asking, how is my money 

being spent and what is the result? The financial markets are basically asking, where’s the plan? Where is the clear plan for dealing 

with toxic assets? 

24 

Congressional Oversight Panel began with the first question: 

What is the strategy? So the question still ought to be: What is the 

strategy? Can anyone on this panel explain exactly what is the Administration’s plan for dealing with toxic assets? Because the whole 

world wants to know. 

Mr. Neiman. You know the question comes down to building 

confidence. I think there are two critical efforts to restoring confidence in our markets. That is, one, having investors believe that 

the capital numbers that banks report are real numbers. 

And as those toxic assets remain on those large banks, that will 

always be an issue. The President’s and Secretary’s plan to develop 

a private and public trust to acquire those assets where the government is alongside the private investors is a sound and reasonable 

plan which we are all, as you are, awaiting the details of how that 

will be implemented. 

Mr. Brady. And I agree with you, but that is the problem. That 

outline has been around now for a month. The market is getting 

worse by the day, everyone—each hour and day we wait for those 

details, because as you said it is so critical. Shouldn’t coming up 

with a clear plan be the top priority of the Administration? Does 

anyone disagree with that? 

Yes, sir. 

Mr. Silvers. Congressman, I think that (a) I think it would be 

inappropriate—the panel has not received, in our view, an answer 

to your question from the current Administration, which is our 

question. We have not received a detailed strategy. 

Mr. Brady. And you have made that request? 

Mr. Silvers. We have made that request. 

Now in fairness to the Administration, they are—the Treasury 

Department is clearly enormously challenged both in terms of the 

people they have in place, in terms of the events that they are trying to manage in the larger markets and internationally. 

The panel is not in my view, of the view that the Treasury Department is remiss in not having communicated with us to date. 

But I would like to make an observation about strategic considerations here, and I think it goes to what you said about things are— 

conditions appear to be deteriorating. Now from day to day all sorts 

of different things happen and stock markets—I think to a certain 

extent stock markets are over—there is an over-reliance on stock 

markets as the measure of what is going on here. Credit markets 

are probably much, much more important. It is just harder to get 

good data on many of the credit markets. 

But here is my strategic observation: I believe it is hard not to 

look at what occurred in the initial months of TARP and not conclude that the strategic thinking at that time was that we faced 

fundamentally a liquidity problem and a problem of market irrationality, and that—— 

Mr. Brady. Sure. And, Mr. Silvers, I agree with you on all that, 

and I am sort of running out of time and I still have another question for the panel. I think the point is that things are changing; 

it is difficult to stay ahead of it, as it has been from day one; but 

my point is still every day it gets worse. Every day it is more confusing. A clear, detailed, workable plan both for the markets and 

for panels like you I think would be very helpful. 

25 

Can I ask this very quickly, because I have 33 seconds left—30, 

29— [Laughter.] 

Mr. Brady [continuing]. TARP I, first half, $300 billion, second half another $350 billion. The President’s budget has the equivalent of $700 billion for another TARP effort. Do you think that will 

be the cap? Does anyone on the panel believe that that will be the 

cap of more investment in this effort? Or will it likely go beyond 

that? And I will yield. 

Mr. Silvers. Sir, Nouriel Roubini, who has done what most people acknowledge to be the deepest empirical academic work in this 

area, estimates that the hole in U.S. bank equity is $1.8 trillion, 

and the hole in U.S. non-bank financial equity is $1.8 trillion. 

There is no way I think to look at those numbers and not conclude 

that there is a reasonable chance more money will be needed. 

Mr. Brady. Mr. Pollock. 

Mr. Pollock. I think whatever the number is, Congressman, 

that Congress should not be about approving a budget until a good 

estimate of the TARP number going forward is delivered to you all. 

Mr. Brady. 

Okay. Thank you very much. 

Chair Maloney. Senator Klobuchar. 

Senator Klobuchar. Thank you very much, Madam Chairman. 

Thank you all. 

I have five minutes, Mr. Silvers, so I will let you finish your 

point. You were talking—I found it very helpful as you looked at 

this historically, and you were making a point about when you look 

back at the original TARP funds that were directed at this liquidity 

problem, and why don’t you complete that thought. 

Mr. Silvers. Thank you, Senator. 

What I was saying was it is hard not to look at what happened 

in the fall and winter and not conclude that the strategy was to 

buy time to allow liquidity to return and rationality to return to 

the markets. 

Senator Klobuchar. Right. 

Mr. Silvers. The fundamental assumption was that financial institutions really were healthy, and that the purpose of the capital 

infusions was to provide sort of a semi-federal guarantee, mostly 

for psychological purposes, and I think if you go back and look at 

statements made during that period during September and October 

by the Bush Administration you would I think pick up that thread. 

Senator Klobuchar. Um-hmm. 

Mr. Silvers. While that may be true of some institutions, I believe that there is no way to conclude at this point anything other 

than that time is not on our side in respect to this problem; that 

the phenomenon of undercapitalized and crippled financial institutions in a financial sector which is now extraordinarily concentrated, there are more than 50 percent of the deposits are in 

four institutions in this country, that that is exerting a profound 

downward pressure on our economy; and that if we allow that to 

continue that it will not right itself automatically. 

And I am very interested in, and intend to read, both Chairman 

Hoenig’s speech and at least something about Jesse Jones, because 

I think that the notion that we need decisive action here to reverse 

a downward cycle seems to me to be hard to deny at this point. 

26 

Senator Klobuchar. So what do you think needs to be done, 

then, Mr. Silvers? I mean, you can see that the Administration now 

is looking at these institutions. They’re giving these stress tests to 

try to figure out which ones need the help, which ones don’t. I believe that there are some banks and credit unions, and I know that 

they don’t have that 50 percent of the market you’re talking about, 

but on the other 50 percent side there are some that are healthier 

than others. 

And one of my concerns is that the longer this goes on without 

a clear definition of how we are going to help those institutions 

that are clearly having issues and we know what we are doing with 

some of them now, that it is bringing down some of these other institutions in the market. 

And that balance I find very hard. Because I know even a few 

months ago some of them were doing better than they are now, and 

not necessarily because of the bad deals they made but because of 

the way the stock market is doing. 

Mr. Silvers. I think that—and here again I emphasize this is 

just me; I am not speaking for the Panel—I believe that the basic 

outline that my co-panelist Alex Pollock referred to historically, 

which is to determine what the true health of the balance sheets 

of financial institutions are, which is not the same thing as what 

the mark-to-market is, and it is also not the same thing as what 

the par value is, right? It tends to be something in between, to (a) 

determine that. 

And then (b) to determine—and I think it would not be a bad 

idea, to the extent we are investing the kind of capital—public 

money we are investing in many of these institutions—to make 

some assessment of the management. And then to figure out what 

a plan is for bringing the institutions we need to bring back to life, 

and to do so at the least cost to the taxpayer. The key issue is 

bringing institutions back to life. 

With respect to smaller institutions, it must be—let me just observe that it must be enormously frustrating to be the CEO, or the 

director, or a stockholder of a smaller financial institution and to 

have an application pending before the capital purchase program 

in which your health, your survivability is going to be passed on 

by regulators. And to look in your newspaper and read about the 

rather extraordinary series of circumstances in which clearly 

unhealthy institutions receive money under the same terms. That 

must really get you. 

Senator Klobuchar. Yes. I know some of them. It is frustrating. 

Mr. Silvers. And—anyway. 

Senator Klobuchar. And again, I thank you for your testimony 

here. I guess my other piece I wanted to ask both of you is just 

what more information you need to do your oversight, because that 

is what you are supposed to be doing, and we want that piece to 

work. Because as Senator Casey was saying, I think this trust that 

you get out of having the oversight, I don’t think the American people are unsophisticated here. I think they know that some of this 

is not going well, and they know that some of the institutions are 

hanging in there and that they want to get that lending going. 

So what do you need to do your job? 

27 

Mr. Neiman. I would like to respond to that, and also to just 

pick up on one of the comments that Damon talked about. We can 

never lose sight of the fact, with all the focus on the balance sheets 

and the capital of our institutions in this country, we cannot lose 

sight of another critical factor: and that is restoring confidence in 

the securitization market that has shut down, and that has played 

such a critical role in funding consumer and other lending in this 

country. 

And until that market is restored, banks will never be able to 

make up for the lending that has been withdrawn as a result of 

that market. 

So back to your question on what else can we do? Data. Being 

able to assess both the use of those funds, how those funds were 

used, as well as the impact that those funds are having both on 

that institution, both on the financial industry as a whole, and 

then on the economy and the capital markets. 

I do not think we have at this stage the proper metrics to be able 

to evaluate the effectiveness of the plan. I know the Treasury has 

talked about both transparency and accountability. They just started issuing their monthly snapshot with quantitative and qualitative analysis, which we are now assessing that I think will be 

very helpful. And we also will be in a position to assess whether 

there should be more information. 

I commend Chairwoman Maloney on her bill that is going to create more debate and discussion as to what else is needed. Are there 

more technological means for banks and government and the Oversight Panel to gather data in order to assess the effectiveness of 

the program? 

Mr. Pollock. Madam Chairman, could I just make a quick comment—— 

Chair Maloney. Sure. 

Mr. Pollock.—on what to do? I would recommend three points: 

One, get rid of so-called ‘‘fair value’’ or ‘‘mark-to-market’’ accounting for banks, which is driving the banking system in a downward, 

negative spiral. 

Two—— 

Chair Maloney. We have a hearing on that tomorrow, and we 

are looking at flexibility in that program. 

Mr. Pollock. I have submitted written testimony for that hearing, and I hope you will take a look at it. 

Chair Maloney. I will. 

Mr. Pollock. Two, get rid of toxic assets. What is the definition 

of a ‘‘toxic asset’’? It is an asset whose price you do not like. Every 

asset is a good asset at some—— 

Chair Maloney. But the question is how do you get rid of it? 

Mr. Pollock. You get rid of it by getting it to the right price. 

And then you can do the Jesse Jones plan. 

And three, I believe the Government of the United States should 

be systematically encouraging the creation of new banks to engage 

the new capital, which is on the sideline, to provide new credit. 

These would be banks which are not burdened down, weighed down 

by the mistakes of the past. The opposite is happening: the regulatory bodies are discouraging the creation of new banks. We need 

28 

to turn that completely around and have a national program for 

bringing new banks and new private capital into the market. 

Thank you. 

Senator Klobuchar. Thank you. 

Chair Maloney. But couldn’t we just use our regional banks and 

our community banks that are healthy and don’t have the toxics? 

Is there really a need to create a new bank when there are many 

healthy banks that are out there that could provide the services? 

Mr. Pollock. They should do whatever they can. But in my view, 

we should have investors willing to put new capital—and some of 

these might be quite large—into banks coming into the market at 

a time when spreads on credit spreads are wide, and credit standards are high. It is the ideal time to start anew and we ought to 

be encouraging that. 

Chair Maloney. Thank you. 

Mr. Campbell for five minutes. 

Mr. Campbell. Thank you, Madam Chair. 

Mr. Silvers, I first want to ask, you said something that was 

news to me, and maybe I just have not been listening, but you said 

50 percent of all deposits? Are you talking about all deposits in all 

regulated institutions, thrifts, credit unions, whatever, are in four 

institutions? No? 

Mr. Silvers. It’s FDIC-insured deposits. 

Mr. Campbell. So 50 percent of all FDIC-insured deposits are 

in four institutions? 

Mr. Silvers. Yes. 

Mr. Campbell. So in other words, if there is a deposit which is 

greater than the FDIC insurance, then it is not included in that? 

Mr. Silvers. No, I believe that number covers all deposits, not 

insured deposits, but in FDIC-insured institutions. 

Mr. Campbell. In FDIC-insured institutions. And those four institutions are? 

Mr. Silvers. They are J.P. Morgan Chase, Citigroup, Bank of 

America, and Wells Fargo. 

Mr. Campbell. Okay. The next question I have, which is for all 

of you, is something Mr. Silvers brought up that I think is a good 

point, and you said three. I’ll say there’s basically kind of two different pools of money here within the TARP. 

One has been to those, call them healthy banks, or call them institutions which are not insolvent, or not currently insolvent, or not 

expected to be significantly insolvent, or whatever, from which I 

think there is at least an expectation, if not a likelihood, that the 

money will eventually be repaid to the taxpayer perhaps with some 

investment earnings. 

Then there is this money that has been put essentially for system risk, that has been put in an institution not necessarily—to an 

insolvent institution, not necessarily to invest in that institution as 

much as it is to cover that institution’s obligations to other institutions that create a systemic risk. 

It would seem to me that the expectation for the taxpayer to get 

that money back has to be very low. If you even take the healthy 

parts of let’s say an AIG, the traditional insurance, for them to 

earn that kind of money back, same with a Fannie or a Freddie, 

29 

or whatever, over time would take a tremendous amount. Am I 

wrong on that? 

And this is a question to anybody on the panel. Am I wrong on 

that? And if I am not wrong, then should we be treating these two 

things in terms of disclosure completely differently? 

Mr. Pollock. I would say your comments are very much on target, Congressman. 

Mr. Neiman. I think it raises the issue as to what the public 

benefit is with respect to those systemic investments. And it is 

broader than just a return on those individual investments. 

The impact it has on our financial system is so critical to the 

overall economy—and I think when we talk about the valuation report, the value at the time of those investments, we cannot lose 

sight of the fact that there was a specific strategy not to distinguish the risk factors in those nine institutions in which those 

original nine CPP investments were made. 

It was so critical at the time. We talk about going back in history 

to the 1930s, so I do not think we can forget what the time was 

like in October the crisis that we feared and the need to get this 

money in quickly to stabilize the market. The big question that so 

many economists are struggling with is what would have happened 

had we not made those investments on those standardized terms? 

Recognizing that some of those banks were healthier than other 

banks. 

Mr. Campbell. You know what, Mr. Neiman, at this point I am 

not trying to argue whether it is the right thing to do, was the 

right thing to do, or will be the right thing to do again in the future. We are looking at oversight here today, and we will have 

other times for that. 

So what I am trying to figure is, if we have a different expectation for that money, what is it? I mean, if we do not necessarily 

expect to get a return, what do we expect? And how do we measure 

whether we are getting the expectation out of that? 

Mr. Silvers. May I respond? 

Mr. Campbell. Please. 

Mr. Silvers. I think that, (a), any time you talk about spending 

government money to prevent a systemic crisis, as my colleague, 

Richard Neiman says, you are seeking to achieve a broader public 

good. 

I think we as a Panel are trying to figure out a method for trying 

to assess whether that was done. It is very difficult. It is very difficult to assess that question because there are so many different 

factors in play. 

However, I think there are a couple of metrics one can use—a 

couple of questions one can pose about those types of expenditures. 

And I say ‘‘expenditures’’ acknowledging that we are getting something for them, right? We are getting in the case of AIG, we have 

some of the Fed’s money in the form of a loan; some of that is still 

a loan. There is preferred stock that the TARP received. There are 

warrants. It is not that we are getting nothing. 

But the question that we need to ask is: One, is the strategy an 

effective strategy for achieving the goal of systemic stabilization? 

Two, to the extent that we are talking about institutions that we 

believe, one of the goals in relation to is to bring them back to 

30 

life—not necessarily clear whether that is the case with AIG, but 

it would appear to be the case with the very large banks that we 

were just discussing a moment ago—is the strategy we are adopting going to bring them back to life? Or is it going to lead them 

to be perpetually under-capitalized? 

The third question is the question of whether we are doing so in 

a cost-effective manner? Is the way in which we are doing the 

intervention effectively the cheapest way of doing it from the taxpayer’s perspective? 

Those questions seem to me to be the questions to pose about the 

AIG matter, which is the only TARP expenditure that has explicitly 

been justified as a systemic-risk intervention. 

Mr. Campbell. So far. 

Mr. Silvers. So far. It is also I believe the way to think about 

plans going forward, and proposals for dealing with the zombie 

bank problem. Because there clearly today are two kinds of risks 

in play. 

One is the risk, the continuing risk of a systemic freeze, which 

was very much present in October and September. 

The other risk is the risk of sort of frozen financial institutions 

that are now very large and macro economically significant pulling 

our economy downward. And I think all of us, certainly in my day 

job I hear about this all the time, all of us are hearing out in the 

real economy that that’s what’s happened. 

Chair Maloney. Thank you. The gentleman’s time has expired. 

Congressman Burgess. 

Mr. Burgess. Thank you. Thank you, Madam Chairwoman. 

Mr. Silvers, let me if I could just continue on what you were discussing about plans going forward, and I realize that your role is 

oversight on the Oversight Board, but are you satisfied that the 

Administration is doing everything that it can do? Are you satisfied 

the United States Congress is doing everything it can do to get us 

through this crisis? 

Mr. Silvers. My, Congressman, that is some question. 

Mr. Burgess. Well then I can just narrow it down. And you 

heard my complaint at the beginning. President Clinton—and I 

was no great admirer of President Clinton, I will stipulate that up 

front—but he came to office at a time of perhaps more modest economic crisis, and said: ‘‘I am going to focus like a laser beam on 

the economy.’’ 

Mr. Silvers. Yes. 

Mr. Burgess. Do we need that kind of focus on our economic recovery? We are facing a crisis perhaps as great as Pearl Harbor— 

Warren Buffett made that analogy—certainly as great as 9/11 that 

President Bush faced early in his office—do we need to be focusing 

on that greater? And our former colleague Rahm Emanuel, the 

White House Chief of Staff, who says, ‘‘you don’t want a good crisis 

to go to waste.’’ Are they seeing this as an opportunity to be doing 

other aspects of social evolution, societal evolution in health care, 

and carbon tax, and all of these things that they want to do, are 

they taking their eye off the ball and trying to do too much? And 

should we just get back to basics and try to fix the economy? 

Mr. Silvers. Congressman, it is very helpful for you to clarify 

where the focus of your question is. I believe that, (a) from what 

31 

I can tell in both this Administration and in the last Administration, and in Congress, that an awful lot of people are working extremely hard and are trying their very best to have a laser-like 

focus, as you describe. 

I have great respect both for the current team in the Administration and for the prior Administration’s team that worked on this. 

I think that when you talk about a laser-like focus on the economy, I think we have to recognize that the financial sector, which 

is of course the focus of this hearing, is not the economy. It is extremely important. And if it does not function properly, it makes 

it very hard for the real economy to function, but it is not the 

whole picture. 

And that some of the issues that you mentioned, that I understand that you may feel are extraneous, are—in my view at least— 

are fundamental to whether we will be able to have a healthy longterm economy. 

Mr. Burgess. Let me just—I do not want to interrupt there, but 

‘‘extraneous’’ was probably not a word that I would use—but still, 

we are pushing full-speed ahead in my other Committee on Energy 

and Commerce for the carbon tax, we call it Cap and Trade, but 

it is in its simplest form going to be a carbon tax; we are pushing 

full-speed ahead with creating what is going to be called a Public 

Option Plan in health insurance. The reality is, it is a vast expansion of Medicare and Medicaid-type structure. 

And is it appropriate to be doing those things this spring while 

so many American families are hurting and our job losses are 

mounting? And even in a State like Texas where we have been 

blessed with a fairly stable economy, we are feeling it significantly 

back home, is it appropriate to be doing those things? 

Or is it more like Mr. Emanuel said, look, everything is in crisis 

so no one is going to notice that we tax carbon, that we socialize 

medicine, that we do all of these other things that we have wanted 

to do for some time? 

Mr. Silvers. Congressman, I do not believe it will be possible, 

say, to revive the banking system unless the stimulus effort works. 

From what I can see, the stimulus effort, despite what everyone 

says about it, is underpowered; that in relation to the downward 

force on our economy, there is not enough Keynesian stimulus 

being applied. 

In relation to issues like energy and health care, they seem, to 

me at least, to be fundamental to whether or not we get the longterm future of our economy correct; and that the problems in those 

areas have contributed substantially to why we are in the mess we 

are in today. 

Mr. Burgess. But those are long-term issues, and we have got 

a serious short-term crisis in the months and weeks ahead. 

Mr. Silvers. Congressman, my view is that they are intertwined. 

Mr. Burgess. Let me just—yes, sir. Please. 

Mr. Neiman. I was going to comment on long-term versus shortterm in the financial sector. Because of the singular focus on solving the banking crisis, we have to address the regulatory reform 

and restructuring at the same time. 

32 

To the extent that that is viewed as long-term, it is critical. It 

does present challenges. It is like putting out the fire at the same 

time you are rebuilding the fire department—— 

Mr. Burgess. Right, or the front porch. Let me just ask, before 

I lose my time, Ms. Tichon, are you satisfied with the level of oversight that your—is your group satisfied with the caliber and level 

of oversight that is being provided currently on the TARP funding? 

Mr. Neiman. Well, the—— 

Mr. Burgess. I was asking Ms. Tichon. 

Mr. Neiman. Oh, I’m sorry. 

Ms. Tichon. Well as we said in our testimony, there are a number of improvements that we would like to see with respect to the 

program. 

I think that, you know, thinking about what is going to restore 

some of the confidence back into the American people that we 

know—well not ‘‘we,’’ but that the government knows what it is 

doing, I think opening up the process from beginning to end so that 

we know exactly what is the criteria, and why are certain banks 

and institutions getting this money, what is their strategy, what is 

their business plan going forward, how are they going to achieve 

the goals that were set by the original EESA? 

So from our perspective, we have a list of specific reports and 

specific line items that we would like to see reported on from anyone who is receiving these funds that we are not seeing so far. 

So we have been promised, or we have seen, you know, some 

guidelines and some recommendations around a monthly report for 

the top 20 recipients. We have seen reporting going forward. However, I think we need to look at it from the beginning to the end, 

where we are looking at transparency on the financial health of the 

banks or the institutions straight through the execution of their 

program. 

Mr. Burgess. Are you going to make those available to the Committee? 

Ms. Tichon. Yes. We have, actually. Within my written testimony we have created a list of not only recommendations that we 

would like to see within any sort of TARP reform legislation going 

forward; we will be publishing a quarterly report card that will say: 

Here are the list of reforms. And then rating for a consistency, 

completeness, useability standpoint where we fall on those particular items. 

So we are very interested in this, and very interested in communicating it back to the American people. 

Mr. Burgess. Thank you. Thank you for your involvement. 

Chair Maloney. Thank you so much. Votes have been called, so 

the last question will be asked by Congressman Snyder from Arkansas. It really has been very instructive. You have given us a 

number of really constructive recommendations. 

Mr. Snyder. Thank you, Madam Chair. I am sorry I missed the 

discussion. I was actually at our Armed Services Committee hearing in which we were having a discussion about how the world financial crisis affects our national security, which is going on simultaneously. 

I am new to this Committee, so I take advantage of it to try to 

figure out things I don’t understand, and this is not exactly related 

33 

to the topic of the hearing today, but two questions, and then you 

can comment on them any way you want, and then we have to go. 

When we talk about toxic assets, I have a banker back home who 

says whether you are dealing with accounting rules, or whatever 

you are doing, what you are terming toxic assets, I have some 

things that would probably fall in that category but they are performing. The people are going to continue to pay on those. They 

don’t want to be messed with. I don’t want to be messed with. They 

are performing loans. 

Where do those fit into this discussion? 

My second question is on executive pay. I wasn’t very excited 

about the executive pay limitation that was put onto the stimulus 

bill. I don’t think there was enough discussion about it. But again, 

if we have small banks that are doing reasonably well around the 

country, and their traditional way of doing business has been 

they’ll have employees that have a base pay of $130,000, $150,000, 

you know, $160,000 with some kind of an incentive, if a bank, even 

if it participates in one of these programs, continues to make a 

profit, are we making a mistake by not allowing some kind of incentive pay perhaps up to 5 or 10 percent of whatever the profit 

is for that year of a bank? 

Otherwise, it changes the way a bank executive is given pay. Any 

comments you have on those two questions, and I’m done. 

Mr. Pollock. Congressman, I would say on your first point, the 

fundamental question is what principal and interest are we going 

to collect? 

If we are going to collect all the interest and all the principal, 

then that is a good asset. We are trapped, I said a little bit before 

you got here, unfortunately in a so-called fair value or mark-tomarket accounting system—— 

Mr. Snyder. Well that is the essence of the question, because if 

it is a performing loan to the end of time then it does not matter 

what it is valued at today, does it? 

Mr. Pollock. No. And one of the recommendations I made previously was we need to get rid of this so-called fair-value accounting and replace it with something based on the money we are actually going to collect as valuation. 

On your comments on compensation, I fully agree with them. 

There are about 7,000 banks and 1,000 thrifts in the country. Some 

people project 400 or 500 may fail over this cycle, but that means 

7,500 will not fail. 

Mr. Snyder. Right. 

Mr. Pollock. And they need to keep managing their business. 

Any investors, including the government as investors, should be 

looking at the business as to what will make it successful, including compensation. 

Mr. Neiman. I think you have raised a topic that probably deserves a panel all to itself. The issue of the impact that fair-value 

accounting has on bank capital where you have performing loans 

I think this is one that is hard to explain and really deserves much 

thorough revisiting by all, both at the accounting side, but particularly at the bank regulatory side. 

Chair Maloney. Mr. Silvers. 

34 

Mr. Silvers. Just two points in relation to your question from 

our Panel’s reports. In our Regulatory Reform Panel when we 

looked at executive compensation and financial institutions, the 

points that we made were that, more than the amounts involved, 

what mattered was the structure and the incentives created. 

Were they short term, or long term? 

Was there an equal exposure to the down side as to the up side? 

In relation to accounting, as I said earlier, perhaps before you 

came in, I think that the appropriate accounting here is to look not 

at par value, and not perhaps at markets that have liquidity problems and are in other ways maybe not representative of fair value, 

but to have a really thoughtful kind of auditing, an independent 

auditing of the assets of troubled banks. 

But there are a couple of caveats here: 

One of them is that a loan may be performing today. That may 

describe say an Alt A mortgage, right, that has not reset, but it 

may be extremely clear that in some very short period of time it 

will not be, or at least as a body it will not be. 

Secondly, I am convinced personally that the way our banks are 

accounting for mortgage assets has created a set of incentives not 

to restructure the loans; that there are circumstances in which 

banks are able to carry the loans at par or close to par, including 

not holding—not making them available for sale, that enable them 

to carry them at a value which is actually above their foreclosure 

value, even as the loan is not performing. And that if they were 

to restructure—but that that loan is headed for foreclosure. And if 

they were to restructure it, they would have to mark it down. 

Now I am not expert enough to be able to do this at a more precise level than I just did, but we ought to be creating incentives for 

rational behavior, meaning for restructuring mortgage loans rather 

than foreclosing on them. 

Chair Maloney. We are—— 

Mr. Snyder. Thank you, Madam Chair. 

Chair Maloney [continuing]. Thank you so much. You have 

given us so much to think about. We are having a hearing literally 

tomorrow on mark-to-market, and looking at ways to make it more 

flexible and to reflect the value. 

Senator Risch, we welcome you. He has indicated he does not 

have a question. We have been called for a vote, so this is adjourned so we can vote. 

Thank you very much for coming. It was very informative. Thank 

you. 

[Whereupon, at 12:19 p.m., Wednesday, March 11, 2009, the 

hearing was adjourned.] 

(35) 

SUBMISSIONS FOR THE RECORD 

36 

PREPARED STATEMENT OF REPRESENTATIVE CAROLYN B. MALONEY, CHAIR

The focus of this hearing is on the need for better information on the use and 

beneficiaries of TARP funds. As has become alarmingly clear, we have very little 

idea where the money has gone or what good it has done. Not knowing is not acceptable. The efforts of the Panel and of independent advocates such as PIRG to get this 

information are critically important to the ability of this Congress to ensure that 

taxpayer money is used as intended—to restore financial stability so that our economy can recover. 

Last week, I wrote to Fed Reserve Chairman Bernanke, reiterating a request I 

had made in November 2008 for a full accounting of the Fed’s purchase of assets 

on which AIG had written credit default swaps insuring the performance of those 

assets as part of the bailout of AIG. I requested information on who the Fed purchased the assets from, how much each of them received, and how the prices for 

the assets—collateralized debt obligations, credit default swaps, and residential 

mortgage backed securities—were determined in a frozen market. I attached a letter 

I had just received from Nobel laureate and noted economist Joseph Stiglitz, also 

requesting release of this information. As he said, the provision of this information 

is essential to informed discussion of how the TARP is doing in achieving its goals 

of restoring stability to our financial system, getting credit flowing, and reducing 

foreclosure rates. 

So far I have not received an answer. 

However, the Wall Street Journal seems to have gotten some of the information 

I asked for from a confidential source. On Saturday they published a list of some 

of the banks that have reportedly received the money and some information about 

how much they have received. Now we have a situation where elected representatives of the taxpayers are denied this information even when it is leaked by confidential insiders to the Wall Street press. It raises serious questions about how decisions on the use of TARP funds are being made and who exactly is accountable 

to the American people. 

The reports done by the Congressional Oversight Panel to date—including the 

most recent report on foreclosure mitigation and the report on valuation of Treasury’s purchases of preferred stock—show that, due to poor design and execution by 

the Bush administration, we have almost no information about where the TARP 

funds have gone and whether they are making any difference. The two GAO reports 

likewise note that the TARP lacks adequate systems of tracking and accounting for 

expenses. Advocates from PIRG to Mr. Pollock seem to agree. We are in desperate 

need of data. 

Last week, I introduced a bill that will take one step in the direction of getting 

more data. H.R. 1242 would create a central government data base for the use of 

the TARP oversight entities with real time financial information on TARP recipients 

from the multiple government entities to which these financial institutions presently 

report such data. My bill would require this data to be translated into a standard 

format that would enable compilation and comparison of the information so that 

trends or totals can be easily seen. The fact that this data would be available in 

real time would enable the oversight bodies to spot misdirection of the program before it is irreversible, so that preventive action could be taken. We would not be here 

months after the fact asking how much the government paid who for what. We 

would have known right away and been able to decide whether to let other similar 

purchases go forward or not. 

There are other legislative proposals as well that call for greater accountability 

and transparency, such as the bill that passed the House in January, H.R. 384. 

These bills lay down in no uncertain terms the marker: this Congress expects better 

use of the second tranche of TARP funds than was made of the first. 

We have to find a better balance between how the TARP is being administered 

and the public’s right to know how their money is being spent. Transparency and 

accountability must be transformed from slogans to achievable actions. 

I look forward to the testimony. 

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PREPARED STATEMENT OF SENATOR SAM BROWNBACK, RANKING MINORITY

I wish to thank Chairwoman Maloney for arranging today’s hearing and thank 

members of the panel for their testimonies. 

Today’s hearing looks at achieving transparency and accountability in the Troubled Asset Relief Program, known as TARP. TARP was created as a $700 billion 

program under the Emergency Economic Stabilization Act of 2008. 

My understanding of the oversight panel’s reports thus far is that Treasury has 

been less than forthcoming in its explanations of what it has accomplished with an 

allocation of up to $700 billion of taxpayer dollars. This is unfortunate, because ordinary taxpayers would like to know that the taxes that are financing Treasury’s efforts are being used effectively. Taxpayers and financial markets worldwide would 

also like to know that there is a definitive plan to address our ongoing financial crisis. 

When I try to understand the difficulties presented by our current financial circumstances, I look to experts from my constituency. Fortunately, I can tap into the 

wisdom of the President and CEO of the Federal Reserve Bank of Kansas City, Mr. 

Thomas Hoenig. 

In a recent speech about our financial system and efforts to deal with the financial crisis, delivered on March 6 of this year, President Hoenig identified that: ‘‘We 

have been quick to provide liquidity and public capital, but we have not defined a 

consistent plan . . .’’ I agree with President Hoenig, and believe that there is a large 

amount of uncertainty about how we will deal with the pressing problems in our 

financial system. This uncertainty is preventing us from moving forward. Until 

there is resolution of uncertainty about how we are going to shore up our financial 

system, there is little reason to expect private capital to flow into our financial system. Private money is simply waiting on the sidelines until there is a resolute signal 

about who will absorb losses, and how the banking system will be structured moving 

forward. 

President Hoenig identified that, while we would prefer not to ‘‘nationalize’’ our 

major financial institutions, we are ‘‘nevertheless drifting into a situation where institutions are being nationalized piecemeal with no resolution of the crisis.’’ 

The term ‘‘nationalization’’ is not well defined. We have, by some definitions, already effectively nationalized some major financial institutions, such as AIG. It 

seems to me that it would be prudent to avoid fascination with the term nationalization and move to definitive steps to address the difficulties in our Nation’s financial 

institutions and the resulting ‘‘credit crunch,’’ which involves severely interrupted 

credit flows and the negative consequences such as businesses’ inability to finance 

payrolls and expansion, and households’ inability to weather our current severe economic downturn. 

Rather than arriving at definitive steps to address our financial problems, it 

seems that the Treasury, under past and current administrations, has chosen to 

adopt half-measures and incomplete plans. Financial markets are certainly not buying it. Judging by stock prices generally, and stock prices of potentially troubled financial institutions in particular, there is little to no confidence in the plans of 

Treasury and the Administration to move us out of our financial malaise. 

Today’s hearing is useful in helping to identify both what has been done with 

massive amounts of taxpayer money to address our challenges in financial markets 

and what is planned by Treasury and the Administration as we move forward. 

My hope is that Treasury and the Administration will come forward with a resolute plan to face up to the difficulties in our financial markets. We need a plan that 

offers hope to markets, and not a plan that raises more questions and more uncertainty. We also, as Kansas City Fed President Hoenig has clearly articulated, need 

to move definitively away from a system of finance subject to the threat of ‘‘too big 

to fail.’’ In President Hoenig’s insightful words, ‘‘Too Big Has Failed.’’ 

TOO BIG HAS FAILED

(By Thomas M. Hoenig, President and Chief Executive Officer, Federal Reserve Bank of Kansas City) 

Two years ago, we started seeing a problem in a specialized area of financial markets that many people had never heard of, known as the subprime mortgage market. At that time, most policymakers thought the problems would be self-contained 

and have limited impact on the broader economy. Today, we know differently. We 

are in the midst of a very serious financial crisis, and our economy is under significant stress. 

Over the past year, the Federal government and financial policy makers have enacted numerous programs and committed trillions of dollars of public funds to adVerDate Nov 24 2008 14:16 Oct 13, 2009 Jkt 051566 PO 00000 Frm 00045 Fmt 6601 Sfmt 6621 C:\DOCS\51566.TXT SHAUN PsN: DPROCT
42 

dress the crisis. And still the problems remain. We have yet to restore confidence 

and transparency to the financial markets, leaving lenders and investors wary of 

making new commitments. 

The outcome so far, while disappointing, is perhaps not surprising. 

We have been slow to face up to the fundamental problems in our financial system and reluctant to take decisive action with respect to failing institutions. We are 

slowly beginning to deal with the overhang of problem assets and management 

weaknesses in some of our largest firms that this crisis is revealing. We have been 

quick to provide liquidity and public capital, but we have not defined a consistent 

plan and not addressed basic shortcomings and, in some cases, the insolvent position of these institutions. 

We understandably would prefer not to ‘‘nationalize’’ these businesses, but in reacting as we are, we nevertheless are drifting into a situation where institutions are 

being nationalized piecemeal with no resolution of the crisis. 

With conditions deteriorating around us, I will offer my views on how we might 

yet deal with the current state of affairs. I’ll start with a brief overview of the policy 

actions we have been pursuing, but I will also provide perspective on the actions 

we have taken and the outcomes we have experienced in previous financial crises. 

Finally, I will suggest what lessons we might take from these previous crises and 

apply to working our way out of the current crisis. 

In suggesting alternative solutions, I acknowledge it is no simple matter to solve. 

People say ‘‘it can’t be done’’ when speaking of allowing large institutions to fail. 

But I don’t think that those who managed the Reconstruction Finance Corporation, 

the Resolution Trust Corporation, the Swedish financial crisis or any other financial 

crisis were handed a blueprint that carried a guarantee of success. I don’t accept 

that we have lost our ability to solve a new problem, especially when it looks like 

a familiar problem. 

CURRENT POLICY ACTIONS AND PROBLEMS

Much has been written about how we got into our current situation, most notably 

the breakdowns in our mortgage finance system, weak or neglected risk management practices, and highly leveraged and interconnected firms and financial markets. Because this has been well-documented, today I will focus on the policy responses we have tried so far and where they appear to be falling short. 

A wide range of policy steps has been taken to support financial institutions and 

improve the flow of credit to businesses and households. In the interest of time, I 

will go over the list quickly. 

As a means of providing liquidity to the financial system and the economy, the 

Federal Reserve has reduced the targeted federal funds rate in a series of steps from 

5.25 percent at mid-year 2007 to the present 0 to 25 basis-point range. In addition, 

the Federal Reserve has instituted a wide range of new lending programs and, 

through its emergency lending powers, has extended this lending beyond depository 

institutions. 

The Treasury Department, the Federal Reserve and other regulators have also arranged bailouts and mergers for large struggling or insolvent institutions, including 

Fannie Mae and Freddie Mac, Bear Stearns, WaMu, Wachovia, AIG, Countrywide, 

and Merrill Lynch. But other firms, such as Lehman Brothers, have been allowed 

to fail. 

The Treasury has invested public funds, buying preferred stock in more than 400 

financial institutions through the TARP program. TARP money has also been used 

to fund government guarantees of more than $400 billion of securities held by major 

financial institutions, such as CitiGroup and Bank of America. In addition, the Federal Reserve and the Treasury Department have committed more than $170 billion 

to bail out the troubled insurance company AIG. 

Other actions have included increased deposit insurance limits and guarantees for 

bank debt instruments and money market mutual funds. 

The most recent step is the Treasury financial stability plan, which provides for 

a new round of TARP spending and controls, assistance for struggling homeowners, 

and a plan for a government/private sector partnership to buy up bad assets held 

by financial institutions and others. 

The sequence of these actions, unfortunately, has added to market uncertainty. 

Investors are understandably watching to see which institutions will receive public 

money and survive as wards of the state. 

Any financial crisis leaves a stream of losses embedded among the various participants, and these losses must ultimately be borne by someone. To start the resolution process, management responsible for the problems must be replaced and the 

losses identified and taken. Until these kinds of actions are taken, there is little 

43 

chance to restore market confidence and get credit markets flowing. It is not a question of avoiding these losses, but one of how soon we will take them and get on to 

the process of recovery. Economist Allan Meltzer may have expressed this point best 

when he said that ‘‘capitalism without failure is like religion without sin.’’ 

WHAT MIGHT WE LEARN FROM PREVIOUS FINANCIAL CRISES?

Many of the policy actions I just described provide support to the largest financial 

institutions, those that are frequently referred to as ‘‘too big to fail.’’ A rationale for 

such actions is that the failure of a large institution would have a systemic impact 

on the economy. It is emphasized that markets have become more complex, and institutions—both bank and nonbank entities—are now larger and connected more 

closely through a complicated set of relationships. Often, they point to the negative 

impact on the economy caused by last year’s failure of Lehman Brothers. 

History, however, may show us another experience. When examining previous financial crises, in other countries as well as in the United States, large institutions 

have been allowed to fail. Banking authorities have been successful in placing new 

and more responsible managers and directors in charge and then reprivatizing 

them. There is also evidence suggesting that countries that have tried to avoid taking such steps have been much slower to recover, and the ultimate cost to taxpayers 

has been larger. 

There are several examples that illustrate these points and show what has 

worked in previous crises and what hasn’t. A comparison that many are starting 

to draw now is with what happened in Japan and Sweden. 

Japan took a very gradual and delayed approach in addressing the problems in 

its banks. A series of limited steps spread out over a number of years were taken 

to slowly remove bad assets from the banks, and Japan put off efforts to address 

an even more fundamental problem—a critical shortage of capital in these banks. 

As a result, the banks were left in the position of having to focus on past problems 

with little resources available to help finance any economic recovery. 

In contrast, Sweden took decisive steps to identify losses in its major financial institutions and insisted that solvent institutions restore capital and clean up their 

balance sheets. The Swedish government did provide loans to solvent institutions, 

but only if they also raised private capital. 

Sweden dealt firmly with insolvent institutions, including operating two of the 

largest banks under governmental oversight with the goal of bringing in private 

capital within a reasonable amount of time. To deal with the bad assets in these 

banks, Sweden created well-capitalized asset management corporations or what we 

might call ‘‘bad banks.’’ This step allowed the problem assets to be dealt with separately and systematically, while other banking operations continued under a transparent and focused framework. 

The end result of this approach was to restore confidence in the Swedish banking 

system in a timely manner and limit the amount of taxpayer losses. Sweden, which 

experienced a real estate decline more severe than that in the United States, was 

able to resolve its banking problems at a long term net cost of less than 2 percent 

of GDP. 

We can also learn a great deal from how the United States has dealt with previous crises. There has been a lot written attempting to draw parallels with the 

Great Depression. The main way that we dealt with struggling banks at that time 

was through the Reconstruction Finance Corporation. 

Without going into great detail about the RFC, I will note the four principles that 

Jesse Jones, the head of the RFC, employed in restructuring banks. The first step 

was to write down a bank’s bad assets to realistic economic values. Next, the RFC 

would judge the character and capacity of bank management and make any needed 

and appropriate changes. The third step was to inject equity in the form of preferred 

stock, but this step did not occur until realistic asset values and capable management were in place. The final step was receiving the dividends and eventually recovering the par value of the stock as a bank returned to profitability and full private 

ownership. 

At one point in 1933, the RFC held capital in more than 40 percent of all banks, 

representing one-third of total bank capital according to some estimates, but because of the four principles of Jesse Jones, this was all carried out without any net 

cost to the government or to taxpayers. 

If we compare the TARP program to the RFC, TARP began without a clear set 

of principles and has proceeded with what seems to be an ad hoc and less-thantransparent approach in the case of banks judged ‘‘too big to fail.’’ In both the RFC 

and Swedish experiences, triage was first used to set priorities and determine what 

institutions should be addressed immediately. TARP treated the largest institutions 

44 

as one. As we move forward from here, therefore, we would be wise to have a systematic set of principles and a detailed plan to guide us. 

Another example we need to be aware of relates to the thrift problems of the 

1980s. Because the thrift insurance fund was inadequate to avoid the losses embedded in thrift balance sheets, an attempt was made to cover over the losses with net 

worth certificates and expanded powers that were supposed to allow thrifts to grow 

out of their problems. A notable fraction of the thrift industry was insolvent, but 

continued to operate as so-called ‘‘zombie’’ or ‘‘living dead’’ thrifts. As you may recall, 

this attempt to postpone closing insolvent thrifts did not end well, but instead added 

greatly to the eventual losses and led to greater real estate problems. 

A final example—our approach to large bank problems in the 1980s and early 

1990s—shows that we have taken some steps to deal with banking organizations 

that are considered ‘‘too big to fail’’ or very important on a regional level. 

The most prominent example is Continental Illinois’ failure in 1984. Continental 

was the seventh-largest bank in the country, the largest domestic commercial and 

industrial lender, and the bank that popularized the phrase ‘‘too big to fail.’’ Questions about Continental’s soundness led to a run by large foreign depositors in May 

of 1984. 

But looking back, Continental actually was allowed to fail. Although the FDIC put 

together an open bank assistance plan and injected capital in the form of preferred 

stock, it also brought in new management at the top level, and shareholders, who 

were the bank’s owners, lost their entire investment. The FDIC also separated the 

problem assets from the bank, which left a clean bank to be restructured and eventually sold. To liquidate the bad assets, the FDIC hired specialists to oversee the 

different categories of loans and entered into a service agreement with Continental 

that provided incentive compensation for its staff to help with the liquidation process. 

A lesson to be drawn from Continental is that even large banks can be dealt with 

in a manner that imposes market discipline on management and stockholders, while 

controlling taxpayer losses. The FDIC’s asset disposition model in Continental, 

which used incentive fees and contracts with outside specialists, also proved to be 

an effective and workable model. This model was employed again in the failure of 

Bank of New England in 1991, the failures of nearly all of the large banking organizations in Texas in the 1980s, and also for the Resolution Trust Corporation, which 

was set up to liquidate failed thrifts. 

RESOLVING THE CURRENT CRISIS

Turning to the current crisis, there are several lessons we can draw from these 

past experiences. 

• First, the losses in the financial system won’t go away—they will only fester 

and increase while impeding our chances for a recovery. 

• Second, we must take a consistent, timely, and specific approach to major institutions and their problems if we are to reduce market uncertainty and bring 

in private investors and market funding. 

• Third, if institutions—no matter what their size—have lost market 

confidenceand can’t survive on their own, we must be willing to write down 

their losses, bring in capable management, sell off and reorganize misaligned 

activities and businesses, and begin the process of restoring them to private 

ownership. 

How can we do this today in an era where we have to deal with systemic issues 

rising not only from very large banks, but also from many other segments of the 

marketplace? I would be the first to acknowledge that some things have changed 

in our financial markets, but financial crises continue to occur for the same reasons 

as always—over-optimism, excessive debt and leverage ratios, and misguided incentives and perspectives—and our solutions must continue to address these basic problems. 

The process we use for failing banks—albeit far from perfect in dealing with ‘‘too 

big to fail’’ banks—provides some first insight into the principles we should establish in dealing with financial institutions of any type. 

Our bank resolution framework focuses on timely action to protect depositors and 

other claimants, while limiting spillover effects to the economy. Insured depositors 

at failed banks typically gain full and immediate access to their friends, while uninsured depositors often receive quick, partial payouts based on expected recoveries. 

To provide for a continuation of essential banking services, the FDIC may choose 

from a variety of options, including purchase and assumption transactions, deposit 

transfers or payouts, bridge banks, conservatorships, and open bank assistance. 

45 

These options focus on transferring important banking functions over to sound 

banking organizations with capable management, while putting shareholders at 

failed banks first in line to absorb losses. 

Other important features in resolving failing banks include an established priority 

for handling claimants, prompt corrective action, and least-cost resolution provisions 

to protect the deposit insurance fund and, ultimately, taxpayers and to also bring 

as much market discipline to the process as possible. 

I would argue for constructing a defined resolution program for ‘‘too big to fail’’ 

banks and bank holding companies, and nonbank financial institutions. It is especially necessary in cases where the normal bankruptcy process may be too slow or 

disruptive to financial market activities and relationships. The program and resolution process should be implemented on a consistent, transparent and equitable basis 

whether we are resolving small banks, large banks or other complex financial entities. 

How should we structure this resolution process? While a number of details would 

need to be worked out, let me provide a broad outline of how it might be done. 

First, public authorities would be directed to declare any financial institution insolvent whenever its capital level falls too low to support its ongoing operations and 

the claims against it, or whenever the market loses confidence in the fine and refuses to provide funding and capital. This directive should be clearly stated and consistently adhered to for all financial institutions that are part of the intermediation 

process or payments system. We must also recognize up front that the FDIC’s resources and other financial industry support funds may not always be sufficient for 

this task and that Treasury money may also be needed. 

Next, public authorities should use receivership, conservatorship or ‘‘bridge bank’’ 

powers to take over the failing institution and continue its operations under new 

management. Following what we have done with banks, a receiver would then take 

out all or a portion of the bad assets and either sell the remaining operations to 

one or more sound financial institutions or arrange for the operations to continue 

on a bridge basis under new management and professional oversight. In the case 

of larger institutions with complex operations, such bridge operations would need 

to continue until a plan can be carried out for cleaning up and restructuring the 

firm and then reprivatizing it. 

Shareholders would be forced to bear the full risk of the positions they have taken 

and suffer the resulting losses. The newly restructured institution would continue 

the essential services and operations of the failing firm. 

All existing obligations would be addressed and dealt with according to whatever 

priority is set up for handling claims. This could go so far as providing 100 percent 

guarantees to all liabilities, or, alternatively, it could include resolving short-term 

claims expeditiously and, in the case of uninsured claims, giving access to maturing 

funds with the potential for haircuts depending on expected recoveries, any collateral protection and likely market impact. 

There is legitimate concern for addressing these issues when institutions have significant foreign operations. However, if all liabilities are guaranteed, for example, 

and the institution is in receivership, such international complexities could be addressed satisfactorily. 

One other point in resolving ‘‘too big to fail’’ institutions is that public authorities 

should take care not to worsen our exposure to such institutions going forward. In 

fact, for failed institutions that have proven to be too big or too complex to manage 

well, steps must be taken to break up their operations and sell them off in more 

manageable pieces. We must also look for other ways to limit the creation and 

growth of firms that might be considered ‘‘too big to fail.’’ 

In this regard, our recent experience with ad hoc solutions to large failing firms 

has led to even more concentrated financial markets as only the largest institutions 

are likely to have the available resources for the type of hasty takeovers that have 

occurred. Another drawback is that these organizations do not have the time for 

necessary ‘‘due diligence’’ assessments and, as we have seen, may encounter serious 

acquisition problems. Under a more orderly resolution process, public authorities 

would have the time to be more selective and bring in a wider group of bidders, and 

they would be able to offer all or portions of institutions that have been restored 

to sound conditions. 

CONCLUDING THOUGHTS

While hardly painless and with much complexity itself, this approach to addressing ‘‘too big to fail’’ strikes me as constructive and as having a proven track record. 

Moreover, the current path is beset by ad hoc decision making and the potential for 

much political interference, including efforts to force problem institutions to lend if 

46 

they accept public funds; operate under other imposed controls; and limit management pay, bonuses and severance. 

If an institution’s management has failed the test of the marketplace, these managers should be replaced. They should not be given public funds and then micromanaged, as we are now doing under TARP, with a set of political strings attached. 

Many are now beginning to criticize the idea of public authorities taking over 

large institutions on the grounds that we would be ‘‘nationalizing’’ our financial system. I believe that this is a misnomer, as we are taking a temporary step that is 

aimed at cleaning up a limited number of failed institutions and returning them to 

private ownership as soon as possible. This is something that the banking agencies 

have done many times before with smaller institutions and, in selected cases, with 

very large institutions. In many ways, it is also similar to what is typically done 

in a bankruptcy court, but with an emphasis on ensuring a continuity of services. 

In contrast, what we have been doing so far is every bit a process that results in 

a protracted nationalization of ‘‘too big to fail’’ institutions. 

The issue that we should be most concerned about is what approach will produce 

consistent and equitable outcomes and will get us back on the path to recovery in 

the quickest manner and at reasonable cost. While it may take us some time to 

clean up and reprivatize a large institution in today’s environment—and I do not 

intend to underestimate the difficulties that would be encountered—the alternative 

of leaving an institution to continue its operations with a failed management team 

in place is certain to be more costly and far less likely to produce a desirable outcome. 

In a similar fashion, some are now claiming that public authorities do not have 

the expertise and capacity to take over and run a ‘‘too big to fail’’ institution. They 

contend that such takeovers would destroy a firm’s inherent value, give talented employees a reason to leave, cause further financial panic and require many years for 

the restructuring process. We should ask, though, why would anyone assume we are 

better off leaving an institution under the control of failing managers, dealing with 

the large volume of ‘‘toxic’’ assets they created and coping with a raft of politically 

imposed controls that would be placed on their operations? 

In contrast, a firm resolution process could be placed under the oversight of independent regulatory agencies whenever possible and ideally would be funded through 

a combination of Treasury and financial industry funds. 

Furthermore, the experience of the banking agencies in dealing with significant 

failures indicates that financial regulators are capable of bringing in qualified management and specialized expertise to restore failing institutions to sound health. 

This rebuilding process thus provides a means of restoring value to an institution, 

while creating the type of stable environment necessary to maintain and attract talented employees. Regulatory agencies also have a proven track record in handling 

large volumes of problem assets—a record that helps to ensure that resolutions are 

handled in a way that best protects public funds. 

Finally, I would argue that creating a framework that can handle the failure of 

institutions of any size will restore an important element of market discipline to our 

financial system, limit moral hazard concerns, and assure the fairness of treatment 

from the smallest to the largest organizations that that is the hallmark of our economic system. 

PREPARED STATEMENT OF KEVIN BRADY, SR. HOUSE REPUBLICAN

BANKING SECTOR CLEANUP MUST BE TOP PRIORITY

I’m pleased to welcome the panel of witnesses before us today. TARP certainly 

raises a number of very troubling issues, but the central one is why we still do not 

have a credible, effective, and transparent financial rescue plan in place. 

Economists and financial experts agree that nothing else we do will matter much 

until the issue of how to dispose of toxic bank assets is resolved. The Treasury proposal unveiled last February 10th has not been well received because it did not 

clearly address this issue. The Economist magazine, for example, characterized it as 

‘‘timid, incomplete, and short on detail.’’ 

Over the last several weeks the financial press has daily noted how the lack of 

specifics undermines confidence and contributes to more uncertainty and financial 

market instability. As observed by Business Week, following the announcement of 

the Treasury plan, ‘‘the stock market [was] down on sketchy details.’’ Last week the 

Financial Times noted that since the Treasury plan was unveiled, the S&P had declined 20 percent. 

47 

Despite the fact that a timely economic recovery is entirely dependent on an effective and credible plan for dealing with banks’ toxic assets, the administration has 

failed to provide one. The lack of a clear policy framework raises fears about undue 

political influence and meddling and is deterring new private investment in banks. 

Financial decisions regarding bank lending, investment, and capital structure 

should not be politicized. Policymakers do have an important role to play in setting 

appropriate ground rules, but this should not include micromanaging the banks. 

There is much to criticize in the TARP as well as other financial bailouts. But 

the key question facing the country is government policy regarding the toxic assets 

of the banking system. The administration seems to be focused on other priorities 

instead of the critical and pressing need for a clear resolution of the banking crisis. 

While the administration devotes its attention to pushing its budget with huge increases in deficit spending and federal debt, the financial markets and the economy 

sink into greater distress. However, a financial recovery plan may cost the Treasury 

up to a trillion dollars more. This means that Congress should not enact costly new 

deficit spending measures that the country cannot afford. 

The misplaced priorities in the budget are one aspect of this problem, while the 

optimistic economic assumptions underlying the budget policies are another. Last 

week Secretary Geithner responded to my questions about the latter by assuring me 

that the economic assumptions were realistic, but they are not. For example, the 

new Blue Chip Consensus forecasts a 2009 GDP decline of 2.6 percent, relative to 

the 1.2 percent decline in the President’s budget. The unemployment rate has already reached the level projected by the administration for the entire year. The unrealistic assumptions in the budget mean that deficit spending will be closer to $2 

trillion in 2009. No wonder The Economist called the assumptions in the administration’s budget ‘‘deeply flawed’’ in an article entitled, ‘‘Wishful, and dangerous, thinking.’’ The Congress should not carelessly enact policies based on such an unsound 

foundation. 

The administration needs to focus on the resolution of the banking crisis as the 

best way to reestablish a reasonable prospect for economic growth. This is the key 

issue in economic policy right now. The longer the administration fiddles with halfmeasures, the longer the economy will burn. 

PREPARED STATEMENT OF MICHAEL C. BURGESS, M.D. 

Anxiety is a simple word to describe what Americans are feeling when we hear 

about the situation our banks are in today, but frustration and anger are more appropriate words to describe the way American’s feel about the government’s lack of 

response to the banking crisis. 

The first Congressional Oversight Panel report came out in December 2008 and 

started with the question, ‘‘what is Treasury’s strategy?’’ Unfortunately, the fifth 

Panel report, due in early April, could plausibly start out with the same exact question. We need a significant and clear plan to come out of the Troubled Asset Relief 

Program, and we need it now. 

I am glad we have members of the Congressional Oversight Panel here today because I want to tell them that serious damage continues to occur in our banks with 

the word ‘‘insolvency’’ lurking throughout each firm. Since January 16, 2009, Bank 

of America is down 56%; Citigroup down 70%; PNC 51%; Suntrust 53%; and US 

Bank down 52%, this year alone. These are losses that have occurred with TARP 

money, yet, I have not heard any tough questions about these losses coming out of 

the Congressional Oversight Panel. The January report talked about accountability, 

the February report talked about evaluating acquisitions, the March report focused 

on home foreclosures. Right now we need the TARP to operate like emergency financial trauma specialists in order to address the banking crisis but they cannot operate without a focused and clear plan. Where’s the plan? 

Everyone is talking about confidence, confidence, confidence in our banks and between our banks, but clearly our banking institutions are not buying what the government is selling them. They are not willing to free the credit markets because 

they are either insolvent themselves or they are operating under a fiduciary responsibility to respect the money invested by their shareholders and cannot risk losing 

money by making more bad investments. They don’t see a bottom to this economic 

trough and until they see a bottom, or see a plan to turn this around, we will not 

begin to see a freeing up of the credit markets. 

According to Committee Memos, $197 billion has been used to purchase preferred 

stock in 496 banks under the TARP Capital Purchase Program as of March 5th. I 

would like to ask the panel members here today, ‘‘How much more money is Treasury going to invest in these banks without asking for some control? Do we know? 

48 

1 U.S. Department of the Treasury, Statement by Secretary Henry M. Paulson, Jr. on Capital 

Purchase Program (Oct. 20, 2008) (online at www.treas.gov/press/releases/hp1223.htm). 

Do we even have the ability to find out? Is there a limit, or a ballpark window, say 

between one and two trillion dollars?’’ 

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

PREPARED STATEMENT OF DAMON A. SILVERS

Good morning. I am Damon Silvers, and I am the Deputy Chair of the Congressional Oversight Panel. I am also Associate General Counsel of the AFL-CIO. I 

would like to express my thanks to the Chair, Representative Maloney, for inviting 

me to appear today before the Committee. I should note at the outset that my testimony today is mine alone, and does not necessarily reflect the views of the Congressional Oversight Panel as a whole, its staff, or its Chair, Professor Elizabeth Warren. I am going to speak briefly about the general role of the Congressional Oversight 

Panel, and then address the Panel’s work in valuing the preferred stock purchased 

by the Treasury Department under the TARP. My fellow Panel member Richard 

Neiman will focus his testimony on our most recent report on the mortgage crisis. 

The Congressional Oversight Panel was created as part of the TARP in last year’s 

Emergency Economic Stabilization Act (‘‘EESA’’). The job of the Panel is to ‘‘review 

the current state of the financial markets and the financial regulatory system’’ and 

report to Congress every 30 days. The Panel has submitted reports to Congress on 

December 10, January 9, and February 6, and March 6, and is beginning now to 

prepare its fifth report for early April. The Panel also submitted a special report 

on regulatory reform to Congress, as required by the legislation, at the end of January. 

The Oversight Panel is one of three organizations to which the TARP legislation 

gives oversight responsibilities: the Panel, the Special Inspector General, and the 

GAO. The Special Inspector General for the TARP has a broad responsibility, and 

matching authority, to audit and investigate any part of the Program. GAO is given 

an even more detailed set of instructions for ‘‘ongoing oversight of the activities and 

performance of the TARP,’’ as well as responsibility for an annual audit of the 

TARP’s financial statements. Panel staff meets regularly with IG staff and with 

GAO staff assigned to TARP in an effort to see that we are coordinated and that 

the results of our efforts are more than the sum of our parts. The Oversight Panel 

sees our role in this landscape as oriented toward broad policy considerations. In 

the Emergency Economic Stabilization Act, Congress specifically asked that the 

Oversight Panel conduct oversight on: the use of Treasury authority under the 

TARP; the Program’s effect on the financial markets, financial institutions, and 

market transparency; the effectiveness of foreclosure mitigation efforts; and the 

TARP’s effectiveness in minimizing long-term costs and maximizing long-term benefits for the nation’s taxpayers. Our ultimate question is whether the TARP is operating to benefit the American family and the American economy. 

The Panel began our work in our first report issued in December by asking ten 

basic questions about TARP—starting with the question, ‘‘what is Treasury’s strategy?,’’ and including the question, ‘‘(i)s the public receiving a fair deal?’’ This first 

report had one substantive recommendation—that ‘‘the public has a right to know 

how financial institutions that have received public money are using that money’’ 

and ‘‘that Treasury should be responsible for holding individual institutions accountable for how they use the public’s money.’’ While the Treasury Department has committed to the concept of tracking the use of TARP money in principle, the specific 

plans for doing so have not been released. 

In asking these questions, we were influenced by statements by then Treasury 

Secretary Henry Paulsen at the time of the first nine major TARP transactions that 

‘‘(t)his is an investment, not an expenditure, and there is no reason to expect this 

program will cost taxpayers anything.’’1

The Panel recognized in asking these questions that they raised complex issues, 

and that the answers would be multilayered. However, we thought it was not possible to begin to answer questions like ‘‘did the public get a fair deal,’’ without understanding exactly what deal the public did get in the transactions completed 

under TARP last year. 

The Panel sought the advice of leading valuation experts, and concluded that the 

way to ask the question ‘‘what did the public get’’ was to ask what was the value 

of the preferred stock purchased by the Treasury on the date it was purchased, 

based on the prices of related securities and based on transactions undertaken by 

49 

the TARP recipient institutions with private parties. The Panel did a search for 

valuation firms that had minimal conflicts and the requisite expertise and resources 

to undertake this task, and we retained Duff and Phelps, the world’s largest specialty valuation firm. Duff and Phelps were supervised by a team of experts consisting of Adam M. Blumenthal, Managing Partner in Blue Wolf Capital Management and the former Deputy Comptroller of New York City, William N. Goetzmann, 

the Edwin J. Beinecke Professor of Finance and Management Studies and the Director of the International Center for Finance at the Yale School of Management, and 

Deborah J. Lucas, Donald C. Clarke HSBC Professor of Consumer Finance at the 

Kellogg School of Management at Northwestern University and the former Chief 

Economist of the Congressional Budget Office. 

In parallel, the Panel engaged a legal team with experience in both bank rescues 

and preferred stock transactions to review the legal terms of the TARP transactions. 

The Panel sought to compare those terms with the terms obtained by private parties 

during the same period, the terms typically obtained by private parties making preferred stock investments, and the terms obtained by the British government during 

its parallel efforts to support its banking system during the last quarter of 2008. 

The legal effort was led by Catherina Celosse, an attorney formerly with the firm 

of Davis Polk and Wardwell, with experience representing the Indonesian government during the Indonesian bank crisis, and Timothy Massad, a senior partner at 

Cravath, Swaine and Moore who took a leave to assist the Panel on a pro bono 

basis. 

The valuation and legal analysis had a limited purpose—to understand and place 

before the public the extent to which the TARP transactions had been investments 

that obtained fair value for the taxpayer, and the extent to which they were subsidies to the recipient banks and their shareholders. We did not attempt to answer 

the question of whether subsidies were a good idea or a bad idea—whether the 

TARP transactions created public benefit that made them worthwhile, or whether 

that same public benefit could have been created without the subsidy. The Panel 

continues to do work in the area of trying to formulate ways of answering these 

much more complicated and vitally important questions. 

Duff and Phelps used three methods of valuing the preferred stock—(1) a discounted cash flow methods, where the likely payments over time are discounted at 

a rate reflecting the risks of not receiving those payments derived from market 

yields, (2) a discounted cash flow analysis where the likely payments over time are 

discounted based on survival probabilities derived from Credit Default Swap 

spreads, and (3) a contingent claims method, that treated the preferred stock as a 

claim against the assets of the TARP firms, a claim whose value is determined by 

the volatility of those assets, much as the price of an option does. Duff and Phelps 

then looked for the convergence of the values derived from each method to set a 

valuation range for each security. 

Duff and Phelps looked at each of the ten initial major TARP investments separately, and the 700 plus page report they provided the Panel contains a detailed 

analysis of the market conditions associated with each major recipient bank at the 

time of the transaction. Duff and Phelps also examined each feature of the preferred 

stock designed by Treasury, including the impact of several options embedded within the terms of the security. 

Duff and Phelps found that the 2008 TARP transactions ranged from preferred 

stock purchases that delivered close to full value to the government in the case of 

the strongest banks at the time (5% and 7% discounts in the case of U.S. Bancorp 

and Wells Fargo), to purchases that at the time they were made delivered less than 

50% or less of their face value to the government in the case of the purchase of AIG 

preferred stock and the second purchase of Citigroup preferred stock in November 

2008. 

I should emphasize here that the Panel’s findings reflected the value of the preferred stock Treasury purchased on the date the transactions were announced. We 

have not attempted to value these securities on an ongoing basis, but it seems very 

likely that they have declined in value since then, and in the case of Citigroup and 

Bank of America, declined precipitously. 

Duff and Phelps found that by comparison, private parties received somewhat better deals. Mitsubishi obtained essentially 88–94% of face value for its investment 

in Morgan Stanley, compared to 58% for the Treasury Department’s investment in 

the same firm. Warren Buffett, not surprisingly, was able to get above market value 

(108–112%) for his investment in Goldman Sachs, while Treasury’s investment in 

Goldman Sachs was worth 75% of what Treasury paid for it on the transaction date. 

The Panel found that the key structural reason for the failure to obtain securities 

that were worth their purchase price on a market value basis was the decision to 

offer the same price to all the banks in the initial purchase, and the apparent deciVerDate Nov 24 2008 14:16 Oct 13, 2009 Jkt 051566 PO 00000 Frm 00053 Fmt 6601 Sfmt 6621 C:\DOCS\51566.TXT SHAUN PsN: DPROCT
50 

sion to only vary the terms of the second Citigroup investment to a small degree 

from the terms of the investments in ‘‘healthy banks’’ made under the Capital Purchase Program. Once the decision was made to offer all banks the same terms, in 

order to attract the participation of relatively healthy banks, those terms had to be 

ones that would be attractive to healthy banks. Offering the same terms to much 

weaker institutions like Citigroup and AIG ensured that those firms would receive 

a substantial subsidy. 

Duff and Phelps extrapolated from its findings with respect to the nine largest 

transactions, and extended the same total subsidy rate to the smaller transactions 

under the Capital Purchase Program. Using this methodology, the Panel estimated 

that in total through the end of December the TARP program had involved an $78 

billion subsidy to all 311 Capital Purchase Program recipient banks at the time of 

the report. However, Duff and Phelps found that more than half of the subsidy in 

the program as a whole went to two institutions—AIG and Citigroup. 

This analysis has clear implications for future TARP transactions with weak financial institutions. Currently, the preferred stock of weak banks like Citigroup is 

trading at prices that imply a market interest rate in excess of 20%. Since the purpose of TARP is to strengthen financial institutions, and not to drain cash from 

them, there is no way to protect value for taxpayers by charging interest in the form 

of preferred dividends adequate to compensate taxpayers for the very real risk of 

further losses in the preferred. The only way to do so is to take a larger percentage 

of the upside in the form of common stock, warrants for common stock or other equity linked instruments. In the case of the weakest banks, it appears to me that 

even if the government took 100% of the future upside we would still not be able 

to receive securities worth the value of the funds we would infuse into such weak 

banks. It may still be in the public interest to do such transactions, but we should 

not fool ourselves or the public that we are receiving in the form of securities full 

value for the public’s money. And the less we ask in terms of common equity, the 

greater the subsidy will be. 

The legal review found that Treasury modeled its term sheet for Capital Purchase 

Plan transactions on the deal documents used by Warren Buffett in his investment 

in Goldman Sachs. We found that the terms were consistent across the Capital Purchase Plan transactions. However, the Panel’s legal analysis found that the terms 

obtained by the Treasury were in places both more and less advantageous than the 

Buffett terms, and than the terms typically found in preferred stock deals. There 

were however a number of major areas where the terms obtained by the Treasury 

were not as favorable to the government as terms obtained by the British government in the course of their bank rescue efforts. 

Our valuation report relied entirely on publicly available data. The Panel did 

make a broad document request of the Treasury Department pursuant to our authority under Section 125 of the EESA on December 17, 2008. Our purpose was to 

obtain any non-public information that Treasury possessed that would go to issues 

of valuation, in addition to contributing to our general ability to oversee the TARP 

program. In a letter dated December 24, 2008, the Treasury Department declined 

to provide the material we requested, and raised concerns about our newly formed 

Panel’s internal controls over confidential documents. Despite extensive discussions 

between our staff and the Treasury Department, Treasury has only produced a 

small number of the documents the Panel requested. The Panel ultimately concluded it was unlikely, in view of TARP recipients’ legal obligations to disclose material financial information to the public, that the accuracy of the valuation report 

would be affected by the Treasury Department’s failure to produce the requested 

documents. 

This matter relates to a matter of concern to this Committee. Although it was not 

the primary purpose of our document request, I had expected that the request would 

result in the Panel being informed as to the identities of the counterparties to derivative transactions who were made whole as a result of the funds provided both by 

the Federal Reserve Bank of New York and the TARP to AIG. The Panel currently 

does not know the identity of those counterparties or the amounts they received. We 

are aware of press accounts of this matter, which have not been consistent with respect to issues such as how much money Goldman, Sachs, a direct recipient under 

TARP’s Capital Purchase Program, received indirectly through the AIG TARP transaction. 

The Congressional Oversight Panel is seeking to expand the scope of its analysis 

of the larger impact of TARP and related programs. The Panel is particularly interested in looking at transactions under the Term Asset Backed Securities Loan Facility (TALF) and potential transactions involving public-private partnerships. The 

Panel is also working to define its role in relation to activities undertaken by the 

51 

Board of Governors of the Federal Reserve that are linked to actions undertaken 

by the Treasury Department pursuant to the EESA. Thank you. 

SUPPLEMENTAL STATEMENT ON TWO FACTUAL MATTERS: 

In the Hearing, Chairwoman Carolyn Maloney asked if TARP funds were used to 

purchase collateralized debt obligations (CDO’s) insured by AIG credit default 

swaps. I have confirmed my tentative statement in the hearing that these purchases 

were funded by the Federal Reserve System, and were not directly funded by TARP. 

Secondly, there was some discussion in the hearing about the percentage of U.S. 

bank deposits held by the four largest banks. During the hearing, I stated that ‘‘4 

banks that hold more than 50% of insured deposits.’’ The information I was referencing was actually the portion of the deposits at Citigroup, Bank of America, 

Wells Fargo and JP Morgan compared to the total deposits at the top 50 largest 

U.S. commercial banks. It did not include insured deposits at institutions that were 

not commercial banks, such as savings and loans, or smaller commercial banks. 

It is very difficult to determine what the actual percent of U.S. deposits that are 

held at these four banks. Looking at the banking profile from the FDIC, the total 

domestic deposits of FDIC insured institutions at the end of December 2008 was 

$7,505,354,000,000 of which $3,991,272,000,000 was in insured commercial banks. 

The $7,505,354,000,000 includes commercial banks and savings institutions as well 

as thrifts and FDIC-insured state banks. The total insured deposits at the end of 

December was $4,759,995. 

On 12/31/08, the 4 largest BHCs had the following domestic deposits: 

Institution Deposits* ($) % of deposits at 

insured institutions 

BofA: ............................................................................................................................ 792,272,230 10.56 

Citi: .............................................................................................................................. 289,818,000 3.86 

JPM: ............................................................................................................................. 721,976,000 9.62 

Wells: ........................................................................................................................... 742,900,000 9.90 

TOTAL ................................................................................................................. 2,546,966,230 33.94 

*In thousands 

This is about 1/3 of domestic deposits. 

However, these four institutions appear to have more than 50 percent of the assets of U.S. banks. Martin Wolf had a piece in the Financial Times on March 3, 

2009 citing Fed data that showed that Bank of American, Citi, JP Morgan and 

Wells Fargo have more than 60% of U.S. Commercial Bank Assets (http:// 

www.ft.com/cms/s/0/f24fc392-082a-11de-8a33-0000779fd2ac.html). 

In terms of the discussion we had at the hearing, the data quoted by Martin Wolf 

would be the best measure of the relative importance of the four largest banks to 

the U.S. banking system. 

PREPARED STATEMENT OF RICHARD H. NEIMAN

Chairwoman Maloney, Vice Chairman Schumer, and distinguished members of 

the Committee: I am Richard H. Neiman, the Superintendent of Banks for the State 

of New York. I am also a member of the Congressional Oversight Panel, and I appreciate this opportunity to comment on the ongoing evaluation of the Treasury Department’s implementation of the Emergency Economic Stability Act (EESA). I 

should note that the views expressed in this testimony are my own, and do not necessarily reflect the opinion of the Panel or any other members. 

OVERVIEW OF PANEL REPORTS

The Panel is charged by statute to provide monthly reports to Congress assessing 

the effectiveness of the Treasury’s implementation of the Troubled Asset Relief Program (TARP), including foreclosure mitigation efforts. 

The Panel’s first report was issued in December, and set out a framework for future inquiry through a set of ten tough but fair questions. These questions cover 

fundamental issues, including: is the strategy working to stabilize markets and reduce foreclosures? What have banks done with the money? And is the public receivVerDate Nov 24 2008 14:16 Oct 13, 2009 Jkt 051566 PO 00000 Frm 00055 Fmt 6601 Sfmt 6621 C:\DOCS\51566.TXT SHAUN PsN: DPROCT
52 

ing a fair deal? The regular monthly reports have explored these issues in more 

depth, in addition to a Special Report on regulatory reform issued in January. 

Given the limited time for prepared remarks, I will focus on the Panel’s most recent report on foreclosure mitigation which I took a lead role in preparing. As the 

only bank regulator on the Panel and as one who has led his state’s foreclosure prevention efforts, I believe I bring a unique perspective to this critical issue. I look 

forward, however, to questions from the Committee on the full range of the Panel’s 

responsibilities. 

PANEL REPORT ON FORECLOSURE MITIGATION

The Panel’s March report highlights the symptoms that gave rise to the housing 

crisis, as well as major impediments to a solution. The report provides a roadmap 

for successful foreclosure prevention going forward. Let me summarize the major 

impediments. 

1. Affordability. The key to any sustainable modification program is whether the borrower can afford the monthly payments. A problem that began 

with exploding mortgage products that may have been inappropriate at inception has now expanded to borrowers who are falling behind for many 

reasons, such as illness, divorce, or job loss in the economic downturn. Existing modification plans have not adequately addressed this critical impediment of affordability, leading to high rates of re-default. Voluntary 

modification efforts often leave the borrower with the same or higher 

monthly payments through repayment plans or the capitalization of 

amounts past due. The Panel is concerned that the commonly used housing 

payment ratio of 38% of the borrower’s gross income remains too high to 

be affordable, and is encouraged that the President’s Homeowner Affordability and Stability Plan targets a 31% housing ratio. 

2. Negative equity. Negative equity can occur when property values decline 

or if appraisals were inflated. Borrowers in this situation are unable to refinance, and cannot sell the home unless the lender agrees to a reduced payoff in a short sale. Panel data shows a strong correlation between high negative equity and default; however, this is not necessarily evidence of a causal relationship. Further, the survey data received from the federal banking 

regulators was limited by the lack of current borrower income information 

which may under-estimate the importance of affordability in this result. 

3. Securitization contracts. Mortgages that have been securitized are subject 

to the terms of pooling and servicing agreements (PSAs) that may present 

obstacles to loan modifications. These PSAs often contain restrictions on the 

number of loans within the pool that may be modified and the circumstances in which modification is permissible. As modification and other 

loss mitigation outcomes may impact the various tranches of investors differently, litigation risk may be a disincentive for servicers to engage in 

modification. A safe harbor from litigation for servicers that modify loans, 

as outlined in the Helping Families Save Their Homes Act of 2009, would 

help to overcome this impediment. 

4. Servicer incentives. The fee arrangements for servicers can also create 

misaligned incentives. In particular, servicers need incentives to engage in 

intervention while borrowers are still current but when default is imminent, to preserve the borrower’s credit history and retain a fuller range of 

workout options. The President’s Homeowner Affordability and Stability 

Plan does address this issue by providing incentive payments to servicer for 

early outreach, as well as ‘‘pay for success’’ incentives to both servicers and 

borrowers based on performance of the modified loan. 

5. Borrower outreach and servicer capacity. The Panel’s report documents 

the lack of servicer capacity to reach borrowers at-risk. There is a clear distinction between the regular work of servicers in payment processing and 

collections, which is largely automated, and loan modification efforts, which 

are labor-intensive and involve highly trained staff. Servicing firms are set 

up for payment processing, but many are not as well-equipped to handle 

the volume of individual modification cases. 

6. Junior mortgages. Multiple mortgages on the same property also complicate the foreclosure prevention effort. In the case of a refinance or of a 

modification that involves an increase in the loan amount, the second lien 

holder must consent to subordination or the first lien holder loses priority. 

Some junior lien holders are charging high fees to subordinate or extinguish 

their liens. The President’s Plan provides fee incentives to first lien holders 

to extinguish subordinate liens in the course of modifying the primary 

53 

mortgage, but more needs to be done to ensure all mortgage payments are 

stabilized. 

These are the principal impediments to successful avoidance of foreclosure. The 

President’s Plan addresses many of these critical elements, particularly affordability 

and servicer incentives, and is estimated to help 7 to 9 million homeowners at risk. 

While these projections are encouraging, the Panel has additional areas of concern 

that are not fully addressed. In particular, the Plan does not include a safe harbor 

for servicers operating under pooling and servicing agreements to address the potential litigation risk. And while the modification aspects of the Plan will be mandatory 

for banks receiving TARP funds going forward, the level of broader industry acceptance remains unclear. 

The more detailed guidelines on the President’s Plan were just released on March 

4, and the Panel will continue to monitor implementation and advise Congress and 

the American people accordingly. 

NEED FOR EXPANDED DATA ON FORECLOSURE AND DELINQUENCIES

One important recommendation to Congress in the report goes to the adequacy 

of mortgage loan performance data. Access to complete information on foreclosures 

and loans in default is unavailable and the reason is simple: there is no mortgage 

loan performance data reporting requirement for the industry. Congress and the 

regulators need to have much better data available so they can ensure the smooth 

and efficient functioning of the national housing finance market and prevent future 

crises. 

That is why the Panel believes that Congress should create a national mortgage 

loan performance reporting requirement applicable to banking institutions and others who service mortgage loans, to provide a source of comprehensive intelligence 

about loan performance, loss mitigation efforts and foreclosure. Federal banking or 

housing regulators should be mandated to analyze such data and share the results 

with the public. A similar reporting requirement exists for new mortgage loan originations under the Home Mortgage Disclosure Act. Because lenders already report 

delinquency and foreclosure data to credit reporting bureaus, it would be feasible 

to create a tailored performance data standard that could be put into operation 

swiftly. 

CONCLUSION

We cannot solve the financial crisis without dealing with the root of the problem: 

the millions of American families who are at risk of losing their homes to foreclosure. I appreciate the opportunity to share my views, and hope that dialogue between the Panel and this Committee becomes a regular occurrence. Events are developing rapidly, and many of the tools needed to respond are best accomplished 

with the support of progressive legislation. I would be pleased to provide more details on the Panel’s work to date or answer any questions. Thank you. 

PREPARED STATEMENT OF NICOLE TICHON

Madam Chair Maloney, Vice Chair Schumer, Committee Members and distinguished panelists. 

Good morning. My name is Nicole Tichon and I am the Tax and Budget Reform 

Advocate for the U.S. Public Interest Research Group. We serve as the federation 

of state PIRGs, which are non-profit, non-partisan public interest advocacy groups 

that take on powerful interests on behalf of our members. 

We are pleased to be part of this critical conversation. We look forward to the 

Committee and other interested parties to restore confidence to the taxpayers who 

have already invested so much in what is now collectively known as the Financial 

Stability Plan, which we’ve been referring to as TARP, and the public thinks of as 

‘‘the Wall Street bailout.’’ 

SUMMARY AND RECOMMENDATIONS

In February, U.S. PIRG released its first Report Card on the transparency and 

accountability of the TARP program. The implementation at that point was failing 

by most measures. U.S. PIRG’s position is that TARP accountability, oversight and 

transparency should be addressed and mandated by law. Congress should give the 

Administration as many tools as possible to manage TARP and related programs. 

U.S. PIRG calls for more specific, consistently applied and frequent reporting. This 

reporting should account for the use of the funds and how the activities associated 

with their use meet the goals and objectives of the program. This information should 

54 

1 http://www.guardian.co.uk/commentisfree/2009/mar/06/useconomy-useconomicgrowth 

be made public and easily accessed. These requirements should be retroactive, including a full accounting for the first disbursement of funds. In addition, provisions 

to protect the taxpayer and subject recipients to the same operational requirements 

as those imposed in the auto industry bailout should also be instituted to make 

banks more accountable to their investors. 

DISCUSSION

Leading economists and my fellow panelists have offered many policy recommendations on how to restore stability to the economy and provided potential 

strategies for assisting banks and financial companies. We’ll respectfully yield that 

territory to them. U.S. PIRG seeks a consistent, transparent and accountable implementation of the Financial Stability Plan from the standpoint of taxpayers who have 

watched billions of dollars poured into what appears to be a failing and flailing system. 

Taxpayers have lost their own investments - their pensions, retirement savings 

and education savings. And in their first mass investment into the banks that failed 

them, they were undersold by $78 billion according to the Congressional Oversight 

Panel, and so far would get approximately 67 cents on each dollar invested.1 That 

gap is likely to get larger as we learn more about the truth of the financial health 

of these companies. This hardly inspires confidence that taxpayers will be seeing 

much of a return on their investment. Our goal is to make sure that any program— 

especially one of this magnitude—has a clear strategy and is transparent to those 

paying for it. 

One of the questions posed by the Congressional Oversight Panel to both the 

former and current Treasury Secretary gets to the heart of this matter: ‘‘What is 

Treasury doing to help the American family?’’ Taxpayers—real people who are feeling the impact of the stalled economy—deserve answers. We hope that the new Administration will provide them. 

THE REPORT CARD

U.S. PIRG released a report in February, ‘‘Failed Bailout: Lessons for Obama 

from Bush’s Failures on TARP’’ (attached) to try to piece together what little was 

known about the then misnamed Troubled Asset Relief Program (TARP), recommend changes to make the program more accountable and transparent, and then 

develop a simple set of benchmarks to assess progress. The information used to 

make the assessment was based on a wide range of reports and accounts. In the 

absence of reporting the only information available about the TARP spending or recipients were from news stories. The U.S. PIRG report told the story of just how 

little we knew about the first disbursement of funds. For the first quarter of fiscal 

year 2009 (the fourth quarter of calendar 2008), the Report Card revealed failing 

grades on transparency, oversight and accountability. 

Our aim is to continue to publish a very simple quarterly Report Card to show 

progress on the reforms we’ve recommended. The Report Card assesses the implementation of the reform in terms of completeness, consistent application across programs and its usability or accessibility. 

Since issuing our first Report Card last month, there have been varying degrees 

of progress on several line items. We will provide a full assessment in our next Report Card at the end of the quarter. Some of the reforms where progress has been 

made include: 

• Posting the fund recipients, amounts and contracts on the Treasury website is 

a good first step. U.S. PIRG would like this information to be made more accessible as the files are large and difficult to navigate. The summary tables are 

in the form of static pdfs, which is not as useful as a dynamic searchable online 

database would be. In this era of Google, people rightly expect that government 

will provide navigation tools to find needles in a haystack of data. 

• Treasury has begun process of sending monthly surveys to the 20 largest fund 

recipients. U.S. PIRG agrees with the Government Accounting Office that this 

request for information should be program-wide, not limited to the largest recipients only. 

• The Special Inspector General has sent a request to all TARP recipients asking 

what was done with the first disbursement. U.S. PIRG is anxious to see the results. 

55 

2 http:/lfinancialstability.gov/docs/fact-sheet.pdf 3 http://financialstabilitv.gov/docs/fact-sheet.pdf 4 http://www.washingtonpost.com/wp-dyn/content/graphic/2009/02/24/GR2009022401373.html 5 http://online.wsj.com/article./SB123629999083146775.html#articleTabs=article 6 http://www.treas.gov/initiatives/eesa/agreements/02272009/1st%20Enterprise%20Bank.pdf 

(example) 

• The Financial Stability Plan (FSP)2 proposes increased transparency and disclosure around bank balance sheets. U.S. PIRG is interested in additional details 

as to how this process will work across financial regulators and the agencies. 

• The FSP proposes specific reporting requirements around plans for the use of 

funds and monthly reports on lending. It is not clear to U.S. PIRG whether or 

not these requirements only apply to those who receive ‘‘exceptional assistance’’ 

and how ‘‘exceptional assistance’’ is defined. 

• The FSP established a website (FinancialStabilitv.gov) that posts information 

about the new programs and promises to also post any reports from the recipients of capital assistance. 

• The FSP proposes ‘‘strong oversight requirements’’ and ‘‘robust data’’ to evaluate the success of the Administration’s foreclosure mitigation program.3

• The American Recovery and Reinvestment Act of 2009 (Pub. Law No. 111-5) includes the strongest language we’ve seen on limiting executive incentive pay. 

U.S. PIRG would like to know how this will be reconciled in conjunction with 

the FSP’s previously-announced executive compensation language and what the 

Treasury Secretary’s plan is for implementing the new law. 

In addition, PIRG recommends that the following requirements be included in any 

new accountability and transparency efforts: 

• In general, the new conditions around reporting, transparency and executive 

compensation should be retroactive. 

• Monthly reports should not just focus on lending—but on ALL activities associated with the use of the funds, and should extend to all participants, not just 

the top 20. 

• Reporting requirements should be extended to the Federal Reserve disbursements—which are projected to be $3.8 trillion.4

• In terms of a clear strategy, PIRG is still unclear as to the reasons for the initial ad hoc programs created after the first $350 billion disbursement and would 

like the public provided with a more detailed explanation for the most recent 

shifts described in the FSP. The restructuring of the agreements with Citigroup 

and A.I.G. demonstrates another change in strategy, and one that may put taxpayers at additional risk.5

• The information currently offered around the contracts is hard to access.6 It is 

hard to find pertinent information. Again, establishment of a publicly available 

online, searchable database would be much more useful. 

• Additional governance guidance around internal operations, accountability, 

leadership, and strategic planning would make the banks more accountable for 

achieving success. 

• Metrics should be communicated by Treasury to Congress and the public to 

demonstrate that the stated goals or strategies (once clearly ’ established) are 

working and that the programs contribute to stabilizing the economy. 

It is our hope that in the coming weeks, the reports requested by Special Inspector General requested will shed light on what so far has been a very murky and 

expensive program. 

WHAT’S NEXT

U.S. PIRG’s position is very straightforward. We support the enactment of reform 

legislation. A strong law providing for oversight, accountability and transparency is 

the best tool that Congress can offer as help to the Administration—and to the program participants. If we have clarity, then everyone starts with the same information and expectations. Our Report Card includes these recommendations for reform. 

Several bills have been introduced that address some of U.S. PIRG’s recommendations. While U.S. PIRG does not necessarily endorse all of these bills in their entirety, there are provisions within them that reflect the recommendations of our Report. 

For example, the House of Representatives passed a comprehensive TARP Reform 

and Accountability Act of 2009 reform bill (HR 384), earlier this year. We urge the 

Senate to pass a similar comprehensive package. 

56 

Key provisions of this and other legislation to provide for greater transparency, 

such as two bills introduced by Chair Maloney (HR 1095, on reporting and governance, and HR 1242, to set up an electronic database), include: 

• Quarterly reporting that is accessible to the public for all TARP recipients (HR 

384, Rep. Frank) 

• Reporting on all activities—with specific requirements around relating activities 

to the original goals of the EESA (stabilization of economy, lending, consumer 

credit) (HR 1095, Rep. Maloney; S 195, Sen. Dorgan) 

• Retroactive reporting on the first disbursement (HR 384) 

• An online, searchable database of reports provided by recipients (HR 1242, Rep. 

Maloney) 

• An online aggregation of data from other agencies to get the most holistic picture of the impact of TARP funds (HR 1242, Rep. Maloney) 

• Governance guidelines (HR 1095, Rep. Maloney) 

• Additional reporting/collection of data with a full description of collateral or 

other interests to ensure that taxpayers are repaid to the maximum extent possible (S 195, Sen. Dorgan) 

• Subjecting all firms receiving assistance to the same conditions as the automotive industry; failure to comply resulting in a return of the funds (S 195, Sen. 

Dorgan) 

• Requiring the Federal Reserve to report on its financial assistance (S 513, Sen. 

Sanders) 

A number of other bills and amendments have surfaced in the House and Senate 

with respect to TARP, many directly responding to the public concern over certain 

corporate expenditures, such as Rep. Cummings’ bill (HR 846). All of these TARPrelated bills and amendments reflect the fact that your constituents want to be 

heard. 

U.S. PIRG encourages Congress to take specific action in making reporting, transparency and accountability requirements law so that Congress, taxpayers, researchers and the public can see who is getting bailout money, where it is going and 

whether the programs are working. We urge Congress to give the Treasury Secretary and the Administration a comprehensive tool set to help them manage these 

programs. And make sure that the oversight of these activities ensures that they 

are applied completely and consistently across all of the institutions benefiting from 

this enormous taxpayer investment. Thank you and I am happy to answer any questions. 

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PREPARED STATEMENT OF ALEX J. POLLOCK

Madam Chairman, Ranking Member Brownback, Vice Chairman Schumer, Senior 

House Republican Member Brady, and members of the Committee, thank you for 

the opportunity to be here today. I am Alex Pollock, a resident fellow at the American Enterprise Institute, and these are my personal views. Before joining AEI in 

2004, I spent 35 years in banking, including 12 years as President and CEO of the 

Federal Home Loan Bank of Chicago. I am a director of three financial services companies. 

My testimony considers the context in which to understand banking bailouts, the 

clear accounting for them we should demand, and relevant lessons from Jesse Jones 

and the Reconstruction Finance Corporation. 

THE CONTEXT OF BANKING BAILOUTS

The United States and many other countries once again demonstrate the dilemmas of the recurring historical experience of using public money to offset the losses 

of banks in the name of economic and social stability. Debates about this go back 

at least to 1802, when Henry Thornton (in The Nature and Effects of the Paper 

Credit of Great Britain) clearly discussed the ‘‘moral hazard’’ and the ‘‘systemic 

risk,’’ as we now call them, involved in financial rescues. 

At the end of the last big U.S. depository institution bust, in 1989–1992, Americans seemed relieved to have the government present the bill for the cost of its deposit guarantees to the taxpayers. As the RTC liquidated the failed thrifts, and 

helped investors and commercial banks by selling them cheap assets, the thrift depositors were protected with funds from the Resolution Funding Corporation 

(Refcorp). Refcorp sold 30- and 40-year non-callable bonds on the Treasury’s credit, 

with some coupons of over 9%, to raise money. These borrowings are still outstanding, so we are still paying on the bailout of 20 years ago. 

The Japanese in the 1990s, and many other countries before and since, have had 

similar bailouts. Why should this keep happening? 

Because there is an unresolvable conflict in financial systems between the political desire to have deposits for the public which are riskless, combined with a banking business which is inherently risky. Anything levered 12 or 15 or more to 1 is 

very risky. So we observe that banking is subject to recurring losses of capital which 

turn out to be much greater than anyone imagined possible—just like now. 

The combination of riskless funding with a risky business is in fact impossible: 

the risk simply moves to the government guarantor. Governments are periodically 

put in the position of transferring losses from the banks to the public, and money 

from the public to the banks—as once again today. 

CLEAR ACCOUNTING FOR THE FINANCIAL RESULTS OF BAILOUT OPERATIONS

Government bailout operations make the 60% of households who actually pay federal income taxes into involuntary investors: either investors in bank equity, investors in distressed assets, or both. How can we, the involuntary investors and their 

Congressional representatives, figure out what is happening with the money? 

First, all the activities of the TARP program should be isolated in a separate accounting entity, preferably a Treasury-guaranteed government corporation. This entity should have to borrow on its own balance sheet to finance its investments or 

expenses in excess of income. 

All investments and other assets, all related borrowings and other liabilities, all 

expenses, and all income should be clearly measured as if TARP were a corporation. 

This would be most straightforward if it were in fact a corporation—like the Reconstruction Finance Corporation was. 

An audited balance sheet and income statement should be regularly produced. 

This would allow the operators of the bailout program, the administration, the Congress in its oversight responsibilities, and most importantly, the taxpayers as investors, to judge its performance over time. Its retained earnings or accumulated losses 

would show its results life to date. 

In my view, the Congress should require such a regular and disciplined accounting. 

Looking forward, as well as measuring backwards, should be businesslike, with 

regular budgets and forecasts. For as long as TARP represents such large outlays, 

the Congress should certainly demand a clear forecast of the next year’s TARP activity and results before it approves any federal budget. 

The investments the taxpayers are involuntarily making might have an overall 

positive return in the long run, when asset prices recover. With yield on the preVerDate Nov 24 2008 14:16 Oct 13, 2009 Jkt 051566 PO 00000 Frm 00079 Fmt 6601 Sfmt 6621 C:\DOCS\51566.TXT SHAUN PsN: DPROCT
76 

ferred stock investments being made, and the possible future upside of warrants 

and common stock, the TARP program might in the end make a profit. Or it might 

break even, or make a loss, or a big loss—we need to know which one it is. 

It is my view that if there is a profit in the end, 100% of any such profit should 

be earmarked as explicit dividends to the taxpayer-investors. These dividends might 

be in the form of cash or specific tax credits. This would be a well-deserved recompense to the majority of citizens who bought houses they could afford, paid their 

mortgage loans on time, did not engage in leveraged speculations, paid their taxes, 

and then paid for and took all the risk of the bailout efforts. 

Prudence, moderation and virtue are their own reward, yes, but if the bailout 

should make money in the end, let’s declare dividends for the investors. 

LESSONS FROM THE RFC

A fruitful historical comparison might be made between TARP and the Reconstruction Finance Corporation (RFC)—specifically the RFC of the 1930s financial 

crisis (not the war finance RFC of the 1940s). The RFC was one of the most important and powerful agencies created to cope with the greatest U.S. financial crisis 

ever; it made investments in more than 6,000 banks in its day. 

Set up under President Hoover, and expanded by President Roosevelt, the RFC 

was run for most of the time by a forceful and very experienced character named 

Jesse Jones, a successful entrepreneur from Texas (a Democrat by definition in 

those days), whose formal schooling had ended in the eighth grade. 

The basic pattern of RFC bailout equity investing was described by Jones in his 

instructive memoirs, Fifty Billion Dollars: My Thirteen Years With the RFC. There 

were, he wrote, four principal steps: 

1. Write down the bad assets to realistic economic values, and consequently 

write off book equity. 

2. Make a judgment about the character and capacity of management and 

make any appropriate management changes. 

3. Based on realistic asset values and capable management, have the RFC 

buy new equity in the bank in the form of redeemable, dividend-paying preferred stock. 

4. Receive dividends and ultimately the par value of the preferred stock 

back, as the bank returns to profitability and recapitalizes in the private 

market over time. 

This summarizes a sensible and tough-minded program, easier said than done 

well, but a logical crisis model. Note a key difference between the equity investments of TARP and Jones’ rule #1: first the write-downs, only then the recapitalization. This strikes me as the right order. 

As the President of the Kansas City Federal Reserve Bank, Tom Hoenig, pointed 

out in a recent speech, ‘‘Too Big Has Failed,’’ the RFC at one point held capital in 

about 40% of all banks, but in the end had no net cost to the taxpayers. 

A final thought: organizations are important, but more important is who is running them. In addition to making sure TARP has disciplined accounting, we need 

to find another Jesse Jones to run the bailout operation. 

Thank you again for the opportunity to share these views. 

Æ