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OVERSIGHT OF IMPLEMENTATION OF THE 

EMERGENCY ECONOMIC STABILIZATION ACT 

OF 2008 AND OF GOVERNMENT LENDING 

AND INSURANCE FACILITIES: IMPACT ON 

THE ECONOMY AND CREDIT AVAILABILITY 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

NOVEMBER 18, 2008 

Printed for the use of the Committee on Financial Services 

Serial No. 110–145 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin, 

LINCOLN DAVIS, Tennessee 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES WILSON, Ohio 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

DON CAZAYOUX, Louisiana 

TRAVIS CHILDERS, Mississippi 

SPENCER BACHUS, Alabama 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

DEAN HELLER, Nevada 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

November 18, 2008 ........................................................................................... 1 

Appendix: 

November 18, 2008 ........................................................................................... 85 

WITNESSES 

TUESDAY, NOVEMBER 18, 2008 

Bair, Hon. Sheila C., Chairman, Federal Deposit Insurance Corporation .......... 11 

Bartlett, Hon. Steve, President and Chief Executive Officer, Financial Services Roundtable .................................................................................................... 46 

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

System ................................................................................................................... 9 

Blankenship, Cynthia, Vice Chairman and Chief Operating Officer, Bank 

of the West, on behalf of the Independent Community Bankers of America 

(ICBA) ................................................................................................................... 49 

Blinder, Dr. Alan S., Gordon S. Rentschler Memorial Professor of Economics 

and Public Affairs and Co-Director of the Center for Economic Policy Studies, Princeton University ..................................................................................... 64 

Feldstein, Dr. Martin S., George F. Baker Professor of Economics, Harvard 

University, and President Emeritus, National Bureau of Economic Research, Inc. ............................................................................................................ 68 

Findlay, Hon. D. Cameron, Executive Vice President and General Counsel, 

Aon Corporation, on behalf of the Council of Insurance Agents and Brokers 51 

Paulson, Hon. Henry M., Jr., Secretary, U.S. Department of the Treasury ....... 6 

Yingling, Edward L., President and Chief Executive Officer, American Bankers Association ...................................................................................................... 48 

APPENDIX 

Prepared statements: 

Bachmann, Hon. Michele ................................................................................. 86 

Brown-Waite, Hon. Ginny ................................................................................ 88 

Kanjorski, Hon. Paul E. ................................................................................... 90 

LaTourette, Hon. Steven C. ............................................................................. 91 

Manzullo, Hon. Donald A. ................................................................................ 97 

Perlmutter, Hon. Ed ......................................................................................... 99 

Bair, Hon. Sheila C. ......................................................................................... 100 

Bartlett, Hon. Steve ......................................................................................... 126 

Bernanke, Hon. Ben S. ..................................................................................... 139 

Blankenship, Cynthia ....................................................................................... 145 

Blinder, Dr. Alan S. .......................................................................................... 164 

Feldstein, Dr. Martin S. ................................................................................... 173 

Findlay, Hon. D. Cameron ............................................................................... 185 

Paulson, Hon. Henry M., Jr. ............................................................................ 190 

Yingling, Edward L. ......................................................................................... 194 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Frank, Hon. Barney: 

Memo regarding Treasury’s Loan Modification Authority, dated November 17, 2008 ................................................................................................... 215 

Letter from Michael E. Fryzel, Chairman, National Credit Union Administration, dated November 14, 2008 ............................................................ 219 

Page

IV 

Frank, Hon. Barney—Continued 

Letter from Hon. Dennis J. Kucinich, Chairman, Domestic Policy Subcommittee, Committee on Oversight and Government Reform, dated 

November 17, 2008 ....................................................................................... 220 

Written statement of the National Association of Realtors .......................... 225 

Kanjorski, Hon. Paul E.: 

Letter to Federal Reserve Chairman Ben Bernanke, dated October 9, 

2008 ................................................................................................................ 229 

Letter to Federal Reserve Chairman Ben Bernanke, dated October 20, 

2008 ................................................................................................................ 231 

Letter from Federal Reserve Chairman Ben Bernanke, dated November 

17, 2008 .......................................................................................................... 233 

LaTourette, Hon. Steven: 

Letter and information pertaining to National City Bank ........................... 235 

Neugebauer, Hon. Randy: 

Letter from the Credit Union National Association (CUNA), dated November 17, 2008 ............................................................................................ 241 

Letter from the National Association of Federal Credit Unions (NAFCU), 

dated November 14, 2008 ............................................................................. 244 

Bair, Hon. Sheila: 

Responses to questions submitted by Hon. Lincoln Davis ............................ 246 

Responses to questions submitted by Hon. Joe Donnelly ............................. 249 

Responses to questions submitted by Hon. Kenny Marchant ....................... 251 

Bartlett, Hon. Steve: 

Letter to SEC Chairman Christopher Cox from Robert P. Kelly, Chairman and Chief Executive Officer, The Bank of New York Mellon, dated 

November 6, 2008 ......................................................................................... 253 

Letter to Mr. Conrad Hewitt, SEC, from Citigroup, dated November 

12, 2008 .......................................................................................................... 255 

Letter to Acting Secretary Florence E. Harmon, SEC, from the Center 

for Audit Quality, dated November 13, 2008 .............................................. 258 

(1) 

OVERSIGHT OF IMPLEMENTATION OF THE 

EMERGENCY ECONOMIC STABILIZATION 

ACT OF 2008 AND OF GOVERNMENT LENDING 

AND INSURANCE FACILITIES: IMPACT ON 

THE ECONOMY AND CREDIT AVAILABILITY 

Tuesday, November 18, 2008 

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The committee met, pursuant to notice, at 10:33 a.m., in room 

2128, Rayburn House Office Building, Hon. Barney Frank [chairman of the committee] presiding. 

Members present: Representatives Frank, Kanjorski, Waters, 

Maloney, Velazquez, Watt, Ackerman, Sherman, Meeks, Moore of 

Kansas, Capuano, Hinojosa, Clay, McCarthy of New York, Baca, 

Lynch, Miller of North Carolina, Scott, Green, Cleaver, Bean, 

Moore of Wisconsin, Davis of Tennessee, Hodes, Ellison, Klein, 

Mahoney, Wilson, Perlmutter, Murphy, Donnelly, Foster, Speier; 

Bachus, Castle, Royce, Paul, LaTourette, Manzullo, Jones, Biggert, 

Shays, Hensarling, Garrett, Brown-Waite, Barrett, Gerlach, Pearce, 

Neugebauer, Price, Davis of Kentucky, Campbell, Putnam, Roskam, 

McCotter, and McCarthy of California. 

The CHAIRMAN. The hearing will come to order. We will need the 

photographers to stop obstructing. I have a great belief in the freedom of information, but I think America is fully informed as to 

what these two gentlemen look like, so I don’t feel like I am interfering with First Amendment rights if I ask you to let us get on 

with the hearing. 

This hearing is called to do oversight on one of the most important pieces of legislation this current Congress has adopted and one 

of the most important, in many ways, that I think any Congress 

has ever adopted. We were asked last September by the Secretary 

of the Treasury, supported by the Chairman of the Federal Reserve, to pass a very extraordinary piece of legislation, putting potentially at risk, although we hope in the end not, $700 billion of 

public money for purposes that go beyond what government has ordinarily done and what almost everybody—myself included—believe the two gentlemen at the table think government should do. 

But it was a necessary response to a crisis. 

Some questions have arisen about decisions that have been made 

with regard to the expenditure of those funds. We certainly want 

to hear from the Secretary and the Chairman their assessment of 

what has happened so far. And let me say at the outset, we do 

2 

have a problem with all of us that there tends to be a focus on 

those areas of disagreement, and so accomplishments, areas of 

agreement, things which worked well tend to not get a lot of discussion. It is important, so that we can understand what has happened and evaluate what we did, that there be a full discussion 

today both of the successes of this program, and I believe there 

have been significant successes, and also of the concerns many of 

us have. 

There are two that I hope we can address, and we have talked 

about these in a variety of ways, both publicly and privately, with 

these two officials. One, there is concern that the banks which were 

the recipient of capital infusions under the Capital Purchase Program have not used the funding entirely for re-lending, which 

many people here understood would be the purpose. There is both 

unhappiness at what would appear to be on the part of some financial institutions excesses in use of the money, although AIG attracted the most attention there, and that was initially not out of 

the $700 billion program. But even more substantively, there is 

concern that, and we hear this anecdotally from people we represent, that credit is still tighter than it ought to be and that the 

banks which received the money have not yet begun to lend it out. 

The second major concern is over foreclosure prevention. And 

here I believe there is a very fundamental disagreement on the 

part of a lot of Members with the decision recently made. But we 

understand that decisions are subject to reexamination, etc. When 

the program was passed, very explicit language was included to 

provide for mortgage foreclosure and mortgage foreclosure diminution as one of the purposes. There is very specific language in 

there. And the question was, well, investment versus spending? 

The bill itself specifically says that we should, as we buy up mortgage assets, reduce the amount that has to be paid to a reasonable 

level to avoid foreclosure, so no one can argue that it was not contemplated. Indeed, it was a very important part of, frankly, the effort to get votes for this bill that we would do mortgage foreclosure 

reduction. 

The Secretary’s recent announcement was that none of these 

funds would go towards mortgage foreclosure reduction, although 

there are other programs on which we are working to do that. And 

I welcome recent evidence by several of the largest banks, all of 

whom were recipients of the capital funds and there is no direct 

connection, but it is true; several of the largest banks have now 

begun to get active. We also received an announcement by Fannie 

Mae and Freddie Mac of movement, although we have some concerns about how far they go and why they lag the programs that 

the FDIC has put in. 

But the fundamental policy issue is our disappointment that 

funds are not being used out of the $700 billion to supplement 

mortgage foreclosure reduction. It is unfortunately not the case 

that all of our other efforts have been fully successful. I was a 

strong proponent of our HOPE for Homeowners bill. I now believe 

that if we were redoing that, we would do it differently in some 

ways. We learn from experience. 

There is, I believe, an overwhelmingly powerful set of reasons 

why some of the TARP money must be used for mortgage foreVerDate Aug 31 2005 16:48 Feb 20, 2009 Jkt 046593 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 K:\DOCS\46593.TXT TERRIE
3 

closure. First of all, mortgage foreclosures continue at an excessive 

pace from the standpoint of the economy. The negative effects of 

this cascade of foreclosures go far beyond the individuals who lose 

their homes. It has to do with neighborhood deterioration. It has 

to do with municipal inability to make their governments work. 

And it impacts, obviously, the macro economy. 

Second, there is a matter of public confidence. A number of 

things need to be done to get us out of this recession, in my judgment: Fiscal stimulus; increased lending, which I talked to first; 

and foreclosure reduction. It may well be that further action has 

to be taken. I have to say at this point that public confidence in 

what we have done so far is lower than anybody would have wanted it to be to the point where it should be an obstacle to further 

steps. So because I want to keep strictly to the time for everybody, 

I would just reiterate that it is essential that we do something to 

use some of the TARP funds for the diminution of the rate of mortgage foreclosures, and the Chair of the FDIC, whom we have invited, has been very much in the lead on this. No one here is endorsing any specific plan, but the need to use TARP funds as the 

bill contemplates to reduce foreclosures is paramount. 

The gentleman from Alabama. 

Mr. BACHUS. Thank you, Mr. Chairman, for holding this hearing. 

I welcome Secretary Paulson, Chairman Bernanke, and Chairman Bair, and I appreciate your service to the country. 

There have been some reports in the press recently that the use 

of the TARP funds for direct injection of capital into the financial 

institutions is somehow contrary to the intent of Congress. I actually think that is not correct. The legislation that we passed specifically authorized direct injection of capital into the financial institutions through the purchase of equity or shares. 

As I think the panel realizes, there was a debate during the entire legislative process in exactly how the situation would be addressed, and the final legislation it passed authorized both the purchase of distressed assets and capital injections. And I think what 

happened—I think we would all hopefully agree on this—is we simply found that it was quicker, simpler, and I think safer for the 

taxpayers to purchase shares of stock. 

I have always had objections or at least reservations about the 

government purchasing what has been called troubled or toxic assets and having to manage them. So I for one, Secretary Paulson, 

applaud you for—and I think most economists applaud you—for actually being flexible and taking an approach which was clearly authorized by the legislation. 

As the chairman said, confidence is critically important to the financial markets and to the overall economy. And it is in the best 

interest of not only the economy but also of the public that, as we 

shift and improvise on occasions, we clearly communicate the objective and the basis for what we are doing. I think we all agree on 

that. Conditions on the ground change. You must be agile and adjust, and I hope we all understand that. 

I have a particular concern, which is that we don’t appear to 

have an exit strategy. We continue to purchase assets and bring 

them onto the books of the government in the neighborhood of $1 

trillion. And most of us, I think, on the Republican side have been 

4 

troubled since day one about government intervention into the private markets. One of our concerns has been that we are taking capital that could be used by more efficient, more successful companies 

and enterprises with better business models, and we are shifting 

that money to companies that are less efficient and whose business 

models need changing. And by putting capital into those companies, we almost enable them or allow them not to confront some of 

the inefficiencies in their own enterprises. 

Let me close by saying this: There has been a lot of discussion 

about the greatest economic challenge since the Great Depression. 

One thing that I have tried to do is go back and look at the 9 or 

10 recessions we have had since World War II. What at least I 

find—and you may tell me that I am wrong—is that the GDP in 

all but the last two of those recessions dipped by as much as 5 percent in at least one quarter. In this quarter, which many people are 

saying is the worst quarter, we expect maybe a 4 percent dip in 

GDP. So, at least when you look at the history of the recessions 

since World War II, you find that this recession may, in fact, not 

be any greater, at least now. I don’t know if something in the future, but at least right now, this recession as far as the loss of GDP 

is no greater than at least 8 of our 10 recessions since World War 

II. 

So the question that I would ask is—and I will close with this— 

if we are in a recession that is, at least from a GDP standpoint, 

no greater than 8 of the last 10, why are we, in this recession, having so much government intervention? 

Thank you, Mr. Chairman. 

The CHAIRMAN. The gentlewoman from New York is recognized 

for 3 minutes. We are under the rule for Cabinet officials of two 

5-minute statements and two 3-minute statements. 

The gentlewoman from New York. 

Mrs. MALONEY. Thank you, Mr. Chairman. 

I welcome our distinguished guests and thank you for your leadership. 

I particularly would like to commend Chairman Bair for her 

leadership in foreclosure prevention and particularly for developing 

a new loan modification guarantee program to refinance on a large 

scale, which would help us to save millions of people and help them 

to stay in their homes. And I would like to be associated with the 

comments of both the ranking member and the chairman that our 

intention was to use some of the TARP money to invest in our 

economy and to get it moving in the right direction. Certainly stabilizing housing, as Chairman Bernanke has said repeatedly, that 

we must fix the housing crisis before we can get the economy back 

on track. So whatever the model, I firmly support using TARP 

money to stabilize housing and our economy. 

Secondly, my constituents are telling me that many of them still 

cannot get access to credit. Given that bank lending is still basically shut down, we need to be asking whether and when we 

should expect at least some fraction of TARP funds injected into 

banks to be lent. After all, one of the primary purposes of the 

TARP program was to get credit moving. I have nonbank lenders 

who are my constituents who lend money to small businesses and 

want access to the TARP to increase that activity. Today’s Wall 

5 

Street Journal talks about insurance companies that are buying up 

banks just to get access to the TARP money. And we then read 

many articles that banks are using TARP money for buying other 

banks. So we are basically funding mergers and acquisitions, not 

lending. 

My basic question is, why shouldn’t we be giving TARP money 

out based on the activity it funds? Why don’t we fund organizations 

that will lend it, whether it is a bank, an insurance company, so 

that we will be getting the credit out into the communities which 

was the purpose of the TARP program? Again, every article talks 

about how it is being used for capital formation, mergers, acquisitions, other activities, buying up swaps, buying other things instead of getting the credit out into the communities. 

So there are many questions before us today, but those are two 

of my prime focuses, that we should be helping people stay in their 

homes, and we should be working harder to get credit out into the 

communities. 

Thank you. 

The CHAIRMAN. The gentleman from Texas is recognized for 3 

minutes. 

Mr. HENSARLING. Thank you, Mr. Chairman. Thank you for holding this hearing. 

It is certainly better late than never. It appears that 80 percent 

of the funds that are currently available under the TARP program 

have already been committed. So I am glad we are at least holding 

the hearing today. 

The Washington Post reported last week that, ‘‘no formal action 

has been taken to fill the independent oversight post established by 

Congress when it approved the bailout to prevent corruption and 

government waste.’’ So I believe there is sufficient work for this 

committee at this time. 

As many in this room know, I did not support the original Emergency Economic Stabilization Act. Clearly, as most, I recognize that 

we do have a legitimate crisis as opposed to those that occasionally 

get manufactured around here. I embraced an idea I thought I 

would never embrace, and that was a government-insured model 

for mortgage-backed securities. I also preferred a secured loan 

model. 

My ideas and those of other conservatives did not carry the day. 

This is the law of the land. We want to make sure that it works. 

I had many reservations about the toxic asset purchase model, not 

the least of which was my belief that the Federal Government ultimately was not institutionally competent to purchase the right assets at the right price, much less manage them in a proper fiduciary fashion. But I recall being told at the time that this model 

had been studied at Treasury for a number of months and that the 

other alternatives, for a number of reasons, were discounted. 

On October 3rd when the law was passed, the Dow closed at 

10,325; yesterday it closed at 8,273. To the best of my knowledge, 

any data that has come across my desk shows that consumer confidence remains low. So, clearly, we have a ways to go. 

I will be curious in this hearing to understand the reasons why 

the toxic asset purchase model has apparently been abandoned. If 

that is true, I for one applaud it and always thought the direct eqVerDate Aug 31 2005 16:48 Feb 20, 2009 Jkt 046593 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\46593.TXT TERRIE
6 

uity infusion model would be a preferred model, although I prefer 

debt as opposed to equity. I fear, though, that some view it as a 

bait and switch, and I am curious as to what extent regulatory and 

programmatic uncertainty are leading or exacerbating the economic 

woes that we face today as people wait to see what portion of the 

money they may be able to apply for. 

I hope going forward that, number one, we measure the program by, is it working? Number two, $700 billion is a lot of money. I 

haven’t found anybody who doesn’t want a piece of it as of yet. I 

hope that we look upon the program as something that the recipients will be chosen by how it could impact our macro economy and 

not a politically-driven process picking winners and losers. And last 

but not least, taxpayer accountability and transparency must be 

paramount. 

Thank you, Mr. Chairman. I yield back. 

The CHAIRMAN. Mr. Secretary, let me explain to the members, we 

have, I believe, until noon. We will obviously not be able to accommodate all the members. I am going to hold very strictly to time 

limits for all of us. 

Mr. Secretary. 

STATEMENT OF THE HONORABLE HENRY M. PAULSON, JR., 

SECRETARY, U.S. DEPARTMENT OF THE TREASURY 

Secretary PAULSON. Thank you very much, Mr. Chairman. 

Mr. Chairman, Congressman Bachus, and members of the committee, thank you for the opportunity to testify this morning. 

Six weeks ago, Congress took the critically important step of providing important authorities and resources to stabilize our financial 

system. Until that time, we faced a financial crisis without the 

proper tools. With these tools in hand, we took decisive action to 

prevent the collapse of our financial system. We have not in our 

lifetimes dealt with a financial crisis of this severity and unpredictability. We have seen the failures or the equivalent of failures of 

Bear Stearns, IndyMac, Lehman Brothers, Washington Mutual, 

Wachovia, Fannie Mae, Freddie Mac, and AIG, institutions with a 

collective $4.7 trillion in assets when this year began. By September, the financial system had seized up, presenting a systemwide crisis. 

Our objectives in asking Congress for a financial rescue package 

were to, first, stabilize a financial system on the verge of collapse 

and then to get lending going again to support American consumers and businesses. Over the next few weeks, conditions worsened significantly. Confidence in the banking system continued to 

diminish. Industrial company access to all aspects of the bond market was dramatically curtailed. Small- and middle-sized companies 

with no direct connection to the financial sector were losing access 

to the normal credit needed to meet payrolls, pay suppliers, and 

buy inventory. During that same period, the FDIC acted to mitigate the failure of Washington Mutual and made clear that it 

would intervene to prevent Wachovia’s failure. 

Turmoil had developed in the European markets. In a 2-day period at the end of September, the governments of Ireland, the U.K., 

Germany, Belgium, France, and Iceland intervened to prevent the 

failure of one or more financial institutions in their countries. By 

7 

the time legislation had cleared Congress, the global market crisis 

was so broad and severe that powerful steps were necessary to 

quickly stabilize our financial system. 

Our response, in coordination with the Federal Reserve, the 

FDIC, and other banking regulators was a program to purchase equity in banks across the country. We have committed $250 billion 

to this effort. This action, in combination with the FDIC’s guarantee of certain debt issued by financial institutions and the Fed’s 

commercial paper program helped us to immediately stabilize the 

financial system. 

The Capital Purchase Program for banks and thrifts has already 

dispersed $148 billion, and we are processing many more applications. Yesterday, Treasury announced the terms for participation 

for nonpublicly traded banks, another important source of credit in 

our economy. We have designed these terms to help provide community development financial institutions and minority depository 

institutions with capital for lending to low-income and minority 

populations. These institutions have committed to use this capital 

for businesses and projects that serve their communities. In addition, we are developing a matching program for possible future use 

by banks or nonbank financial institutions. 

Capital strength enables banks to take losses as they write down 

or sell troubled assets. Stronger capitalization is also essential to 

increasing lending, which although difficult to achieve during times 

like this, is essential to economic recovery. We expect banks to increase their lending over time as a result of these efforts and as 

confidence is restored. This lending won’t materialize as fast as any 

of us would like. But it will happen much, much faster having used 

the TARP to stabilize our system. 

As we continue significant work on our mortgage asset purchase 

plan, it became clear just how much damage the crisis had done 

to our economy. Third quarter GDP growth showed negative threetenths of a percent. The unemployment rate rose to a level not seen 

in 15 years. Home price status showed that home prices in 10 

major cities had fallen 18 percent over the previous year, demonstrating that the housing correction had not abated. The slowing 

of European economies has been even more dramatic. 

We assessed the potential use of remaining TARP funding 

against the backdrop of current economic and market conditions. It 

is clear that an effective mortgage asset purchase program would 

require a massive commitment of TARP funds. In September, before economic conditions worsened, $700 billion in troubled asset 

purchases would have had a significant impact. But half of that 

sum in a worse economy simply isn’t enough firepower. We have 

therefore determined that the prudent course at this time is to conserve the remaining funds available from the TARP, providing 

flexibility for this and the next Administration. 

Other priorities that need to be addressed include actions to restore consumer credit. Treasury has been working on a program 

with the Federal Reserve to improve securitization in the credit 

marketplace. While this would involve investing only a relatively 

modest share of TARP funds in the Federal Reserve liquidity facility, it could have substantial positive benefits for consumer lending. 

8 

Finally, Mr. Chairman, Treasury remains committed to continuing to work to reduce avoidable foreclosures. Congress and the 

Administration have made substantial progress on that front 

through HUD programs, the FDIC’s IndyMac approach, our support and leadership of the HOPE NOW Alliance, and our work with 

the GSEs, including an important announcement they made last 

week establishing new servicer guidelines that will set a new 

standard for the entire industry. Our actions to stabilize and 

strengthen Fannie Mae and Freddie Mac have also helped mitigate 

the housing correction by increasing access to lower-cost mortgage 

lending. 

As some on the committee know, I have reservations about 

spending TARP resources to directly subsidize foreclosure mitigation because this is different than the original investment intent. 

We continue to look at good proposals and are dedicated to implementing those that protect the taxpayer and work well. 

Mr. Chairman, the actions of the Treasury, the Fed, and the 

FDIC have stabilized our financial system. The authorities in the 

TARP have been used to strengthen our financial system and to 

prevent the harm to our economy and financial system from the 

failure of a systemically important institution. As facts and conditions in the market and economy have changed, we have adjusted 

our strategy to most effectively address the urgent crisis and to 

preserve the flexibility of the President-elect and the new Secretary 

of the Treasury to address future challenges in the economy and 

capital markets. 

Thank you again for your efforts and for the opportunity to appear today. I would like to just make one last comment in response 

to a question that Congressman Bachus asked because it is one I 

hear a lot, the distinction between the financial markets and the 

economy. So when we have talked about the crisis and the financial 

markets and being unprecedented and having to go back to the 

Great Depression to see anything of this magnitude and be presented with this amount of difficulty, we are talking about the financial markets. Now, when the financial markets have problems, 

they hurt the economy. So the reason that it was very important 

to get in quickly and stabilize it was to mitigate damage to the 

economy. When we were here before you, we saw what was happening to the economy. We talked about it. We took the steps. The 

economy has continued to get worse. The American people look at 

the worsening economy. And as your chairman said to me yesterday, in politics, you don’t get much credit for what might have happened and didn’t happen. What the American people see is what 

is happening to the economy. But again, our purpose in coming to 

you was to take— 

The CHAIRMAN. Mr. Secretary, the gentleman will have his 5 

minutes. I appreciate that. 

[The prepared statement of Secretary Paulson can be found on 

page 190 of the appendix.] 

The CHAIRMAN. Mr. Chairman. 

9 

STATEMENT OF THE HONORABLE BEN S. BERNANKE, CHAIRMAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE 

SYSTEM 

Mr. BERNANKE. Thank you. 

Chairman Frank, Ranking Member Bachus, and other members 

of the committee, I appreciate having this opportunity to review 

some of the activities to date of the Treasury’s Troubled Asset Relief Program, or TARP, and to discuss recent steps taken by the 

Federal Reserve and other agencies to support the normalization of 

credit markets. 

The legislation that created the TARP put in place a Financial 

Stability Oversight Board to review the actions of the Treasury in 

administering the program. That oversight board includes the Secretary of the Treasury, the Secretary of Housing and Urban Development, the Chairman of the Securities and Exchange Commission, 

the Director of the Federal Housing Finance Agency, and the 

Chairman of the Federal Reserve Board. We have met 4 times, reviewing the operational plans and policy initiatives for the TARP 

and discussing possible additional steps that might be taken. 

Officers for the oversight board have been appointed, and the 

Federal Reserve and other agencies are providing staff support for 

the board. Minutes of each meeting are being posted to a special 

Web site established by the Treasury. In addition, staff members 

of the agencies whose heads are participating in the oversight 

board have met with staff from the Government Accountability Office to explore strategies for coordinating the oversight that the two 

bodies are required to perform under the enabling legislation. 

The value of the TARP in promoting financial stability has already been demonstrated. The financial crisis intensified greatly in 

the latter part of September and spread to many countries that had 

not yet been touched by it, which led to grave concerns about the 

stability of the global financial system. Failure to prevent the international financial collapse would almost certainly have had dire 

implications for both the U.S. and world economies. 

Fortunately, the existence of the TARP allowed the Treasury to act quickly by announcing a plan to inject $250 billion in capital 

into U.S. financial institutions. Nine large institutions received the 

first $125 billion, and the remainder is being made available to 

other banking organizations through an application process. In addition, the Federal Deposit Insurance Corporation announced that 

it would guarantee non-interest-bearing transaction accounts at depository institutions and certain other liabilities for depository institutions and their holding companies. And the Federal Reserve 

expanded its provision of backstop liquidity to the financial system. 

These actions, together with similar actions in many other countries, appeared to stabilize the situation and to improve investor 

confidence in financial firms. Notably, spreads on credit default 

swaps for large U.S. banking organizations, which had widened 

substantially over the previous 2 weeks, declined sharply on the 

day of the joint announcement. 

Going forward, the ability of the Treasury to use the TARP to inject capital into financial institutions and to take other steps to stabilize the financial system, including any actions that might be 

needed to prevent a disorderly failure of a systemically important 

10 

financial institution, will be critical for restoring confidence and 

promoting return of credit markets to more normal functioning. 

As I noted earlier, the Federal Reserve has taken a range of policy actions to provide liquidity to the financial system and thus 

promote the extension of credit to households and businesses. Our 

recent actions have focused on the market for commercial paper, 

which is an important source of short-term financing for many financial and nonfinancial firms. Normally, money market mutual 

funds are major lenders in commercial paper markets. However, in 

mid-September, a large fund suffered losses and heavy redemptions, causing it to suspend further redemptions and then close. In 

the next few weeks, investors withdrew almost $500 billion from 

prime money market funds. 

The funds, concerned with their ability to meet further redemptions, began to reduce their purchases of commercial paper and 

limit the maturity of such paper to only overnight or other very 

short maturities. As a result, interest rate spreads paid by issuers 

on longer maturity commercial paper widened significantly, and 

the issuers were exposed to the costs and risks of having to roll 

over increasingly large amounts of paper each day. 

The Federal Reserve has developed three programs to address 

these problems. The first allows money market mutual funds to sell 

asset-backed commercial paper to banking organizations which are 

then permitted to borrow against the paper on a nonrecourse basis 

from the Federal Reserve Bank of Boston. Usage of that facility 

peaked at around $150 billion. The facility contributed importantly 

to the ability of money funds to meet redemption pressures when 

they were most intense and remains available as a backstop should 

such pressures re-emerge. 

The second program involves the funding of a special purpose vehicle that purchases highly rated commercial paper issued by financial and nonfinancial businesses at a term of 3 months. This facility has purchased about $250 billion of commercial paper, allowing many firms to extend significant amounts of funding into next 

year. 

A third facility expected to be operational next week will provide 

a liquidity backstop directly to money market mutual funds. This 

facility is intended to give funds confidence to extend significantly 

the maturities of their investments and reduce over time the reliance of issuers on sales to the Federal Reserve special purpose vehicle. 

All of these programs, which were created under section 13(3) of 

the Federal Reserve Act, must be terminated when conditions in 

the financial markets are determined by the Federal Reserve to no 

longer be unusual and exigent. 

The primary objective of these and other actions we have taken 

is to stabilize credit markets and to improve the access of credit to 

businesses and households. There are some signs that credit markets, while still strained, are improving. Interbank short-term 

funding rates have fallen notably since mid-October, and we are 

seeing greater stability in money market mutual funds and in the 

commercial paper market. Interest rates and higher rated bonds 

issued by corporations and municipalities have fallen somewhat, 

and bond issuance for these entities rose a bit in recent weeks. 

11 

The ongoing capital injections under the TARP are continuing to 

bring stability to the banking system and have reduced some of the 

pressure on banks to deleverage, two critical first steps towards restarting flows of new credit. However, overall, credit conditions are 

still far from normal with risk spreads remaining very elevated and 

banks reporting that they continued to tighten lending standards 

through October. There has been little or no bond issuance by 

lower rated corporations or securitization of consumer loans in recent weeks. 

To help address the tightness of credit, on November 12th, the 

Federal banking agencies issued a joint statement on meeting the 

needs of creditworthy borrowers. The statement took note of the recent strong policy actions designed to promote financial stability 

and improve banks’ access to capital and funding. In light of those 

actions, which have increased the capacity of banks to lend, it is 

imperative that all banking organizations and their regulators 

work together to ensure that the needs of creditworthy borrowers 

are met in a manner consistent with safety and soundness. As capital adequacy is critical in determining a banking organization’s 

ability and willingness to lend, the joint statement emphasizes the 

need for careful capital planning, including setting appropriate dividend policies. The statement also notes the agency’s expectation 

that banking organizations should work with existing borrowers to 

avoid preventable foreclosures which can be costly to all involved: 

the borrower; the lender; and the communities in which they are 

located. 

Steps that should be taken in this area include ensuring adequate funding and staffing of mortgage servicing operations and 

adopting systematic, proactive, and streamlined mortgage loan 

modification protocols aimed at providing long-term sustainability 

for borrowers. 

Finally, the agencies expect banking organizations to conduct 

regular reviews of their management compensation policies to ensure that they encourage prudent lending and discourage excessive 

risk-taking. 

Thank you. I would be pleased to take your questions. 

[The prepared statement of Chairman Bernanke can be found on 

page 139 of the appendix.] 

The CHAIRMAN. Chairwoman Bair. 

STATEMENT OF THE HONORABLE SHEILA C. BAIR, CHAIRMAN, 

FEDERAL DEPOSIT INSURANCE CORPORATION 

Ms. BAIR. Thank you. 

Chairman Frank, Ranking Member Bachus, and members of the 

committee, I appreciate the opportunity to testify on recent efforts 

to stabilize the Nation’s financial markets and to reduce foreclosures. 

Conditions in the financial markets have deeply shaken the confidence of people around the world and their financial systems. The 

events of the past few months are unprecedented to say the least. 

The government has taken a number of extraordinary steps to bolster public confidence in the U.S. banking system. The most recent 

were measures to recapitalize our banks and provide temporary liquidity support to unlock credit markets, especially interbank lendVerDate Aug 31 2005 16:48 Feb 20, 2009 Jkt 046593 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 K:\DOCS\46593.TXT TERRIE
12 

ing. These moves match similar actions taken in Europe. Working 

with the Treasury Department and the other bank regulators, the 

FDIC will do whatever it takes to preserve the public’s trust in the 

financial system. 

Despite the current challenges, the bulk of the U.S. banking industry remains well capitalized. But what we do have is a liquidity 

problem. This liquidity squeeze was initially caused by uncertainty 

about the value of mortgage-related assets. Since then, credit concerns have broadened considerably, making banks reluctant to lend 

to each other and to lend to consumers and businesses. 

As you know, in concert with the Treasury and the Federal Reserve, we took a number of actions to bolster confidence in the 

banking system. These included temporarily increasing deposit insurance coverage and providing guarantees to new senior unsecured debt issued by banks, thrifts, and holding companies. The 

purpose of these programs is to increase bank lending and minimize the impact of deleveraging on the American economy. 

As a result of these efforts, the financial system is now more stable and interest rate spreads have narrowed substantially. However, credit remains tight and this is a serious threat to the economic outlook. Regulators will be watching to make sure these 

emergency resources are mainly used for their intended purpose— 

responsible lending to consumers and businesses. 

In the meantime, we must focus on the borrower side of the 

equation. Everyone agrees that more needs to be done for homeowners. We need to prevent unnecessary foreclosures, and we need 

to modify loans at a much faster pace. Foreclosure prevention is essential to helping find a bottom for home prices, to stabilizing 

mortgage credit markets, and to restoring economic growth. 

We all know there is no single solution or magic bullet. But as 

foreclosures escalate, we are clearly falling behind the curve. Much 

more aggressive intervention is needed if we are to curb the damage to our neighborhoods and to the broader economy. 

Last Friday, we released the details of our plan to help 1.5 million homeowners avoid foreclosure. Our program would require a 

total of about $24 billion in Federal financing. The plan is based 

on our practical experience in modifying thousands of mortgages at 

IndyMac Federal Bank. As we have done at IndyMac, we would 

convert unaffordable mortgages into loans that are sustainable over 

the long term. The plan would set loan modification standards. Eligible borrowers would get lower interest rates and, in some cases, 

longer loan terms and principal forbearance to make their monthly 

payments affordable. 

To encourage the lending industry to participate, the program 

would create a loan guarantee program that would absorb up to 

half the losses if the borrower defaults on the modified loan. While 

we applaud recent announcements by the GSEs and major 

servicers to adopt more streamlined approaches to loan modifications along the lines we have employed at IndyMac, the stakes are 

too high and time is too short to rely exclusively on voluntary efforts. Moreover, these recent announcements do not reach mortgages held in private label securitizations. 

We need a national solution for a national problem. We need a 

fast-track Federal program that has the potential to reach all 

13 

homeowners regardless of who owns their mortgages. What we are 

proposing is a major investment program that can yield significant 

returns by attacking the self-reinforcing cycle of unnecessary foreclosures that is placing downward pressure on home prices. Average U.S. home prices have declined by more than 20 percent from 

their peak and are still spiraling down. If this program can keep 

home prices from falling by just 3 percentage points less than 

would otherwise be the case, over half a trillion dollars would remain in homeowners’ pockets. Even a conservative estimate of the 

wealth effect this could have on consumer spending would exceed 

$40 billion. That would be a big stimulus for the economy and 

nearly double our investment. 

In conclusion, the FDIC is fully engaged in preserving trust and 

stability in the banking system. The FDIC stands committed to 

achieving what has been our core mission since we were created 75 

years ago in the wake of the Great Depression—protecting depositors and maintaining public confidence in the financial system. 

Thank you. 

[The prepared statement of Chairwoman Bair can be found on 

page 100 of the appendix.] 

The CHAIRMAN. Thank you. 

Before I begin my questioning, I want to just put into the record: 

A very thoughtful letter from our colleague Mr. Kucinich, who was 

chair of a Subcommittee on Government Reform, strongly arguing 

for help on foreclosures; a letter that was sent to me and a letter 

was also sent to the Secretary from Michael Fryzel, the Presidential appointee to head the National Credit Union Administration, objecting strenuously on behalf of the health of the credit 

union industry to the decision not to buy up any assets; and also, 

a statement from the National Association of Realtors. 

I will now begin my 5 minutes, and I am going to hold everybody 

to the 5 minutes. 

First, I welcome the two Chairs to the interagency statement on 

meeting the needs of creditworthy borrowers. It is a very good 

statement. It will be an even better statement if somebody gets 

whacked for not following it. There has to be some teeth. And it 

does talk about compensation, about dividends, and it is a very 

good statement. I can’t imagine that a month from now everybody 

will have complied, and so, therefore, frankly, evidence that it 

meant something will be if there were at least some letters issued 

or some penalties. 

Secondly, I just want to report on the oversight board, and the 

gentleman from Texas referred to it. My understanding is that the 

Senate Majority Leader and the Speaker have appointed their 

members. The minority leaders have not appointed their members 

yet, so the board is not yet functional. Earlier this week, or last 

week, three members were appointed, as called for under the statute, by the Majority Leader of the Senate and the Speaker. 

Now I want to get to the issue of mortgage foreclosure. 

First, Mr. Secretary, I am going to also put into the record a 4- 

page memo of sections of the law that we passed which mandate 

that if you buy assets, you do mortgage foreclosure. 

And make it very clear, when you say spending—first, I have to 

say this: We obviously all appreciate the concern for the taxpayers’ 

14 

money. But the Chair of the FDIC talks about $24 billion. That is, 

what, 40 percent of what we just gave to AIG out of this program. 

And you say this is for an investment and not spending. I don’t 

know what investment counselor, absent macro economics conditions, would have advised you to invest in AIG. I suspect it does 

not rate highly as an investment these days. I hope it goes well 

going forward. And there is no question that this will be helpful to 

it. But $40 billion for AIG, and then we can’t find $24 billion on 

the mortgage foreclosure, is part of the reason we have the real 

problem with the country. 

But let me just say, it is 4 pages of specific authorization to buy 

up mortgages and write them down. Section 109(c): ‘‘Upon any request arising under existing investment contracts, the Secretary 

shall consent, where appropriate in considering net present value 

to the taxpayer, to reasonable requests for lost mitigation measures.’’ 

In section 110, homeowner assistance by agencies: ‘‘To the extent 

that the Federal property manager holds onto, controls mortgages, 

they shall implement a plan that seeks to maximize assistance for 

homeowners.’’ 

The bill is replete with authorization to you not simply to buy 

up mortgages but in effect to do some spending because we are 

talking about writing them down. So the argument that—frankly, 

of all the changes that have come in the program, this wouldn’t be 

a change. This was the program. And my colleague from California, 

whom you will be hearing from shortly, made a big point of this 

on the Floor. So the argument that this is not part of the program 

simply doesn’t work. 

Would you agree, Mr. Secretary, that in fact the bill does authorize aggressive action not simply to buy up mortgages but, in buying 

them up, take some action to reduce in some ways the amount 

owed so we diminish foreclosures? 

Secretary PAULSON. Mr. Chairman, two things. 

First, I need to just say a word about AIG, because the primary 

purpose of the bill was to protect our system from collapse. AIG 

was a situation, a company that would have failed had the Fed not 

stepped in. Had we had the TARP at that time, this is right down 

the middle of the plate for what we would have used the TARP for. 

As it turned out—because it should have had preferred and a Fed 

facility. And as it turned out, we needed to come in, again, to stabilize that situation and maximize the chances that the government would get money back. So I just wanted— 

The CHAIRMAN. I am not objecting to the AIG. I am just saying, 

though, that the standards of what we do—and obviously foreclosure is also a serious problem for the economy. 

Secretary PAULSON. I agree with you on the bill. There is no 

doubt—and so don’t misunderstand what I say—that we came to 

Congress with the intent to get at the capital program that banks 

were facing and the system was facing through purchasing large 

amounts of illiquid assets. So the bill—and it was to purchase 

those assets and then resell them. And our whole discussion—because that is what we were talking about, was how to use them 

and use this investment position to make a difference and mitigate 

foreclosures. 

15 

My only point is, now that we haven’t bought those assets, illiquid assets, that the intent, as I had seen it, at least all the discussions we had went to buying assets and reselling them; it didn’t 

go to a direct subsidy. But— 

The CHAIRMAN. No, Mr. Secretary, I have to interrupt you. You 

are talking legitimately about your intent. But we had to get the 

votes for the bill. Our intent was also relevant, and I read you sections of the bill which says, write it down; give them assistance. So 

the bill couldn’t have been clearer that one of the purposes—and 

by the way, we are talking about, what, $24 billion out of $700 billion; you are talking about 4 percent of the total amount. But the 

point is that clearly part of this was not just to stabilize but to reduce the number of foreclosures for good macroeconomic reasons. 

So, again, the intent couldn’t be clearer from what I read. 

Secretary PAULSON. Let me then, Mr. Chairman, say what you 

have heard me say a number of times before, that, going back 

many, many months, before it was as topical as it is now, we have 

been working very, very aggressively at the individual—helping the 

individual. As recently as last week— 

The CHAIRMAN. Mr. Chairman, I am sorry—Mr. Secretary. We 

don’t have a lot of time. I don’t usually do this, but the question 

is the language in the TARP. We understand that there are other 

activities going on. I don’t accept them as a substitute for using the 

authority that we very specifically and carefully wrote into the 

TARP and that was essential to it getting passed. 

Secretary PAULSON. Well, what you have heard from me and 

what you heard from me last night and which I will say again, that 

I am going to keep working on this and looking for ways to use the 

taxpayer money as they expect me to here with regard to foreclosure mitigation. We have been, you know, as recently as last 

week, taking a step, which I think will have— 

The CHAIRMAN. No, I am sorry, Mr. Secretary. Those are not substitutable, because I will tell you, and I apologize for taking the 

time, it is nobody’s view that we have been as successful as we 

need to be for the sake of the economy in reducing foreclosures. We 

have a very large pot that was intended to be part of that effort 

that is going untapped. 

The gentleman from Alabama. 

Mr. BACHUS. He was responding to you. 

The CHAIRMAN. We are out of time. He can respond to you. 

Mr. BACHUS. Thank you, Mr. Chairman. 

You have just been told, if you don’t give assistance or lend to 

folks, you will be waxed. It is sort of a continuation of what we 

have been hearing since the 1970’s by Federal policy and the GSEs, 

is, lend and meet the needs of folks and assist them. I think, as 

a result of that, the financial system and the economy has been 

waxed by lending to people who weren’t creditworthy. And I hope— 

and I appreciate that your intergovernment statement stressed 

creditworthy borrowers. 

Secretary Paulson, I very much appreciate something that you 

did in your opening statement. I think you distinguished between 

the economy and the financial system, because people did question 

some of the actions by saying, well, the economy is strong. But the 

financial system, chaos or distress there will affect the economy. It 

16 

has that effect. I think we have heard good news here. There is stability returning to the financial system. And I think the good news 

is, just like the instability in the financial system affected the economy, going forward, and it may take a while to do, but the stability 

that has returned to the system will in the long term strengthen 

the economy. I think that is good news for all of us. 

The TARP program, the capital purchase program, all of them 

had as a design two things. One was restoring the stability to the 

financial markets. And I think that we are well on our way to 

achieving that. And as you said, you don’t get credit for something 

that you avoid, and that would be a collapse of the financial system. 

The second objective was to strengthen the economy by restoring 

lending to companies and borrowers. And on that score, it hasn’t 

worked as well. Would you comment on, do you think we are on 

the right track in restoring lending? 

Secretary PAULSON. Yes, Congressman Bachus, I think we are on 

the right track. Remember, this is early days. In terms of the capital, it has just gone out, and a lot of it still hasn’t gone out to the 

banks. The way I look at where we are today is, I think we have 

turned the corner in terms of stabilizing the system, preventing a 

collapse. 

I think there is a lot of work that still needs to be done in terms 

of recovery of the financial system, getting it working again, getting credit flowing again. I think this is going to be key to getting 

the economy going. And it is going to take a lot of work and time. 

I agree with what the chairman said about bank lending. And I 

just want to say, one, to get to your point on foreclosure prevention, 

I understand the chairman’s point. And he expects and wants to 

see something in the TARP, specifically in the TARP to deal with 

that. We are continuing to work on that. 

I did want to say, though, that because I was so aware of what 

the American people expected and what Congress expected and because I cared so much about this, that I believe that the actions 

we took outside of the TARP with regard to the GSEs and the national standard they set has the potential to touch more and do 

more than we might have achieved if we had used all $700 billion 

to buy illiquid assets. So we are working. I understand the point. 

I know what you would like to see us do, but I just wanted to make 

that point there. 

Mr. BACHUS. Thank you. 

Let me say this. There have been quite a lot of things, Chairman 

Bernanke, over $2 trillion of emergency loans to institutions, and 

the identity of those assets that you have taken back. You have always advocated—as the Secretary has—committee transparency. I 

know you are refusing to disclose the names of those institutions 

or the composition of those assets. Is that a short-term—I will call 

it a refusal to disclose? Or when do you anticipate letting the public know? 

Mr. BERNANKE. Congressman, I think there has been some confusion about what this involves. 

Mr. BACHUS. Sure. 

Mr. BERNANKE. The Federal Reserve, like all other central 

banks, has short-term collateralized lending programs to financial 

17 

institutions. We have always had that. The main difference is we 

have extended it to primary dealers as well as depository institutions. It is open to any bank that comes to our window. We take 

collateral. We haircut it. It is a short-term loan. It is very safe. We 

have never lost a penny in these lending programs. 

Now, some have asked us to reveal the names of banks that are 

borrowing, how much they are borrowing, what collateral they are 

posting. We think that is counterproductive for two reasons: First, 

the success of this depends on banks being willing to come and borrow when they need short-term cash. There is a concern that if the 

name is put in the newspaper that such and such bank came to the 

Fed to borrow overnight, even for a perfectly good reason, that others might begin to worry, is this bank creditworthy? And that 

might create a stigma, a problem, and it might cause banks to be 

unwilling to borrow. That would be counterproductive for the 

whole— 

Mr. BACHUS. So these are banks which have good sound CAMELS ratings? 

Mr. BERNANKE. Yes. We only lend to good quality banks. We lend 

on a recourse basis, that is post, post, post collateral, and if the collateral were to be insufficient, then the bank itself is still responsible. We have never lost a penny doing this. I think it is a totally 

standard practice for central banks around the world, and it is very 

constructive to provide liquidity to the financial system. 

Mr. BACHUS. Thank you. 

The CHAIRMAN. The gentleman from Pennsylvania. 

Mr. KANJORSKI. Thank you, Mr. Chairman. 

Mr. Secretary, I heard you use the comment in a response to a 

question just a little while ago, ‘‘turning the corner.’’ It is a 

quotable phrase, I think. It reminds me of another famous phrase, 

‘‘return to normalcy.’’ And it sort of scares me if you look at the 

context of when ‘‘return to normalcy’’ was used. 

I think there is a crisis of confidence that is in the general public 

and within this body of the Congress. We are trying to figure out, 

those of us who extended ourselves on the vote for the bailout and 

the 180-degree change that you made in policy from buying bad assets to injecting investments of equity in banking institutions. I do 

not fault you for it. It just was an extreme change and rather 

shocking. And it wasn’t your idea. It was the idea of the drafters 

of the legislation that you set up in the form of a 31⁄2 page draft 

and we converted after several weeks to 400 pages. And part of 

those 400 pages gave you the authority to make that 180-degree 

change. 

Now, my problem is, that has happened once. And now suddenly 

I see other things occurring where you make 180-degree changes 

in policy. One example is this thing we are struggling with this 

week, the potential bankruptcy or collapse of our auto industry in 

the country. And it seems that there is a dual idea, either at Treasury or at the White House, that if you take the $25 billion out of 

certain qualified funds, then it is necessary and should be used and 

obviously would avoid systemic risk. The underlying principle: We 

shouldn’t do it unless there is systemic risk. But if you were to use 

money from the TARP fund, that is unacceptable to the White 

House and Treasury and should not be done. 

18 

Now it seems to me, when you are treating the disease, you don’t 

decide where the disease came from. You decide, what is the prognosis, the likely prognosis, and then you take action. So there is 

a lack of confidence it seems to me, both in this body and in the 

general population. They want to get some idea, do we have a plan? 

Where are we going? To say ‘‘turning the corner’’ really is not terribly significant. It is no different than what Herbert Hoover said, 

‘‘return to normalcy.’’ And it is causing fright to the people. Why 

can this Treasury and this White House not lay out a plan that 

takes into consideration all the contingencies that will happen or 

may happen and what our potential response will be, knowing full 

well mistakes will be made, money will be unreasonably or foolishly expended, but we all tend to agree that if, in fact, we are on 

the precipice of a disaster or a meltdown, we are willing to take 

those opportunities. But we do not want to walk into a room of 

darkness. We really want you to shed as much light in that room 

before we take the leap over the threshold. 

So I am sort of calling upon you, can you now give us some indication, do you consider the loss of the American auto industry a 

significant and systemic risk? Or do you not? If we lose 3 million 

jobs, what would it cost to make it up? What would be the loss of 

revenue? And would it be worth spending $25 billion initially to 

stop that from occurring? And if we do not do that, what is our 

backup plan, and what do we tend to do? 

It seems to me that if we are going to build confidence among 

our constituents, the American people, and confidence within this 

institution to respond to your requests and the White House’s requests just over the next 60 days and then the next Administration, it seems to me we have to be a little more forthcoming. 

Secretary PAULSON. Well, then let me be very, very forthcoming 

to you. Because the intent of the TARP, when we came here, was 

to stabilize the system to prevent a collapse. That is what we 

talked about; we talked about the financial system. And what I 

have said today here, I was very careful when I said what turning 

the corner meant. I said I believe that meant that we have stabilized the financial system and prevented a collapse. I was also 

very clear in saying we have a lot of work ahead of us, and the recovery of the financial system is a lot of work to get the markets 

going again. 

So now let’s look at the TARP. When we came here, the purpose 

was that: getting capital in the financial system. We came forward 

with—the strategy was buying illiquid assets. That was the strategy. The purpose was clear. We worked with Congress, and we 

wanted those additional authorities. Don’t forever believe that we 

did not want—we were working to maximize the authorities we 

have and the tools we have. And when the facts changed and the 

circumstances changed, we changed the strategy. We didn’t implement a flawed strategy; we implemented a strategy that worked. 

Now, to get to your question—and I think what the American 

people need, in terms of confidence, is a realistic assessment of 

where we are, sticking with what our objective was to begin with. 

Now, look at the autos. Again, you haven’t seen any lack of consistency on my part with regard to the autos. The TARP was aimed 

at the financial system. That is what the purpose is. That is what 

19 

we talked about with the TARP. Okay, now, in terms of autos, I 

have said repeatedly I think it would be not a good thing, it would 

be something to be avoided, having one of the auto companies fail, 

particularly during this period of time. 

We have asked Congress—you know, and Congress has worked 

to deal with this. But I believe that any solution must be a solution 

that leads to long-term viability, sustainable viability here. 

And so, again, I don’t see this as the purpose of the TARP. Congress passed legislation that dealt with the financial system’s stability. And, again, you know, there are other ways. And, you know, 

you also appropriated money for the auto industry and the Department of Energy bill. Another alternative may be to modify that. 

The CHAIRMAN. The gentleman from—who is next? The gentleman from Texas. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

Mr. Secretary, I think I would like to follow up on that line of 

questioning. I think what I hear you saying today and what I think 

I have heard you say is that, as a matter of policy, you do not believe that the TARP funds should be allocated to the big three 

automakers. 

But, to be specific, do you believe, under the definition of ‘‘financial institution’’ in the underlying legislation, that you are authorized to expend these sums, if you so choose? 

Secretary PAULSON. Congressman, I think I will just leave it 

where I left it. I don’t think this is the purpose of the legislation. 

Mr. HENSARLING. Well, I understand that, Mr. Secretary. Then 

let me follow up by asking, what is your understanding of what 

qualifies for a financial institution under the legislation? 

For example, I read press reports recently that a group of plumbing contractors were applying for portions of the TARP funds in 

order to refurbish some foreclosed properties, making their case 

that doing so qualifies them as a financial institution. 

So, in your mind, since you are essentially in charge of disbursing the funds, can you give me a clearer, black-and-white definition of what a financial institution is? 

Secretary PAULSON. Congressman, I cannot. We have a broad 

definition. We got very broad authorities and powers. And I think 

that is appropriate. 

But we certainly are not going to give money to plumbing contractors, and we are not going to give money to a lot of other people 

and institutions that are applying. We have had a very clear focus 

here right now. 

And, again, I feel a great responsibility, even though the powers 

may be very broad, and appropriately so, I feel a great possibility 

to stick with what the purpose is. The purpose is stabilizing and 

strengthening our financial system. And I have said to you very 

clearly that I believe that the auto companies fall outside of that 

purpose. 

Mr. HENSARLING. Chairman Bernanke, the Federal Reserve has 

been very aggressive in developing new credit facilities, expanded 

facilities, reducing collateral standards for troubled financial services companies. But, by some estimates, we now have an exposure 

somewhere in the neighborhood of $2 trillion of commitments by 

the Federal Reserve. 

20 

Can you tell us exactly how much exposure is out there, how 

much money has been lent? 

Mr. BERNANKE. Well, our balance sheet is about $2 trillion, of 

which—I am guessing now—$600 billion is Treasury’s and agencies’. The rest is some kind of credit extension of some type. 

The overwhelming amount, however, is of two classes. It is either 

collateralized lending to financial institutions. I described earlier, 

those are loans made with recourse and on haircut collateral. They 

are short-term loans, and they are quite safe. We have never lost 

a penny on one of those. 

The other type of lending we have been doing is we have been 

doing currency swaps with some major central banks in order to 

try to address dollar funding problems in other jurisdictions. There 

the credit risk is of the Foreign Central Bank, like the European 

Central Bank, and we consider that to be zero risk, essentially. 

So the overwhelming majority of our lending is at very low credit 

risk. 

Mr. HENSARLING. Well, you appear to be going where perhaps no 

Federal Reserve Chairman has gone before. And this may be a very 

good thing, given the crisis at hand. But just how much more are 

you prepared to commit and expose present and future taxpayers’ 

liability to? 

Mr. BERNANKE. Well, I think we need to do what we need to do 

to keep the U.S. credit system working and to try to create a recovery in the financial system. 

By law, our lending has to be against fully collateralized, secure 

backing. We are actually making money in some of our programs. 

I don’t see us as having a substantial exposure. It is a liquidity provisioning process, not a credit or a fiscal process. 

Mr. HENSARLING. At what point do you believe that these activities could undermine your ability to actually, on a prospective 

basis, impact monetary policies? And at what point might it adversely affect the credit rating of the United States? 

Mr. BERNANKE. Well, the size of the balance sheet has affected, 

to some extent, the amount of reserves in the banking system, 

which makes it more difficult to control the Federal funds rate. It 

was a productive and useful feature of this same bill that we are 

discussing that included the right for the Federal Reserve to pay 

interest on reserves to banks, which has been helpful in keeping 

the Federal funds rate, you know, closer to the target that it otherwise would be. But that is still an issue that we are working on. 

Again, I see no significant credit risk in what we are doing, and 

I don’t think it will have any benefit or any effect, one way or the 

other, on U.S. credit rating. That is my assessment. I haven’t heard 

anyone give me a view to the contrary. 

The CHAIRMAN. I thank the gentleman. 

I do have to note, Mr. Secretary, there was a general response 

which I heard from several of the members after your last comment 

that the 15 minutes of fame for the plumbing industry appears to 

have ended. 

The gentlewoman from California. 

Mr. BACHUS. Joe has had a rough month, I will tell you that. 

Ms. WATERS. Thank you very much, Mr. Chairman, for this hearing. It is very much needed. 

21 

And I welcome the representatives from the three agencies who 

are here today. 

I come here very troubled about the direction that Secretary 

Paulson has taken, as it relates to the $700 billion that we made 

available to him to help stabilize our economy. It is very clear, no 

matter how the Secretary describes it, that we gave him the authority that you identified when you talked with him, Mr. Chairman, to deal with foreclosure mitigation efforts. As a matter of fact, 

the purchase of toxic assets was at the centerpiece of this program, 

because everybody agreed, at that time, that the subprime meltdown was at the epicenter of the dislocation that we were experiencing in our economy. 

So the fact that you, Mr. Paulson, took it upon yourself to absolutely ignore the authority and the direction that this Congress had 

given you just amazes me. I just could not believe it when I heard 

that somehow you had abandoned the whole foreclosure mitigation 

effort. 

Now, in addition to that, I want you to know that I and some 

others worked very, very hard to pass this. As a matter of fact, I 

was looked at with great suspicion by members of my caucus and 

the Congressional Black Caucus, in particular, as I sold them this 

program and told them about my faith in your ability to carry out 

this program. I was asked over and over again, will the homeowners be helped? What are we going to do about Main Street, not 

just Wall Street? We spent, and I spent, considerable time selling 

this program to those who were suspicious and did not want to do 

it. 

Now, having said that, again, I am disappointed that you have 

not utilized the authority and you have just divorced yourself from 

dealing with that. On the other hand, in your testimony today, you 

say, ‘‘And we need to continue our efforts to use a variety of authorities to reduce avoidable foreclosures. The government has 

made substantial progress on that front through HUD programs, 

through the FDIC’s program with IndyMac, through our support 

and leadership of the HOPE NOW Alliance, and through the new 

GSE servicing guidelines announced last week that will set a new 

standard for the industry.’’ 

Let me just relate to this statement. First of all, the HUD programs working under HOPE NOW have not been successful. It is 

a terrible failure. I convened in my office all of the HUD-backed 

counseling programs when we went on break, and I sat down and 

I talked with them to find out what kind of success were they having working with the HOPE NOW program. And, to a person, they 

have not been able to get in touch with the servicers, in many 

cases. When they get in touch with them, many of the servicers are 

inexperienced. They don’t have the ability to make good decisions. 

Nobody knows what formulas they are using in order to make decisions about a homeowner’s ability to get a loan modification. And 

so, they all work under HOPE NOW. 

So HOPE NOW has been a failure. And even though you identify 

it as a success, I am not going to challenge you, but I would dare 

say that you could not cite for this committee the number of modifications that have come through HOPE NOW because you don’t 

22 

know. You probably are not tracking them. And, secondly, if you 

were, you would know that it is not working. 

Secondly, the GSE proposal that was recently released you referred to, but it really hasn’t gotten underway yet, and it only deals 

with a small portion of the market. 

You do refer to FDIC, and you are right, you are right about 

FDIC’s program and what has happened with IndyMac and Chairman Sheila Bair. She has been able to come up with a way by 

which we could do credible loan modifications, and it has been ignored. Barney Frank and I sent a letter to you and everybody else 

asking that you just give her the program and let her run with it, 

because she has discovered how you can do these loan modifications. You can’t do them one by one, Mr. Secretary, and get it done. 

I spent time—I have 26 of them that I am working on in my office right now—and I spend time, and I get a release from the 

homeowner, and I get on the line with the servicer, and it is absolutely ridiculous. I have had to go all the way to the chairman, for 

example, of one of the banks, Mr. Stump over at Wells Fargo, to 

tell him about what his servicing company is and is not doing. 

They own America’s servicing company. I stayed on the line for 1 

hour just trying to get to a servicer. They are understaffed; they 

don’t take this seriously. And then when you talk to the servicers, 

they don’t even know enough to be able to evaluate the income of 

those persons who are trying to get some help. 

With that, I would like, Mr. Chairman, to go to Sheila Bair and 

ask her to please unveil for this committee what she is doing and 

what she has shown can be done with IndyMac modifications that 

have been so successful. 

The CHAIRMAN. I thank the gentlewoman, but that is going to 

have to wait until the next round, if someone will ask for it. 

Briefly, Mr. Secretary. 

Secretary PAULSON. I will be brief, because there is no one whose 

disappointment— 

The CHAIRMAN. Mr. Chairman, briefly and substantively. 

Secretary PAULSON. I will just simply say that I know how hard 

the Congresswoman worked on this legislation and was critical to 

getting it done, and this has been critical to saving the system. 

Let me just say specifically to you, Congresswoman, that I have 

not said no to doing something here in the TARP aimed at foreclosure mitigation. We did not buy illiquid assets for a very good 

reason. We are going to continue to evaluate and look for programs 

that protect the taxpayer and are effective. 

And I just would make one last point here. In designing programs, in broad-based programs, there is a balance to getting 

money to those who need it as opposed to those who don’t need it. 

And there is also a balance to, you know, not providing a windfall 

to the banks, and we are working hard on that. 

The CHAIRMAN. Thank you, Mr. Secretary. 

The gentleman from Alabama has proposed that, if we have 

unanimous consent, we will ask the Chair of the FDIC if she would 

respond in a couple of minutes. 

Is there any objection? 

Hearing none, I will recognize the Chair of the FDIC to respond. 

Ms. BAIR. Thank you very much. 

23 

At IndyMac, we became conservator in mid-July, and they had 

a fairly sizable servicing portfolio with a number of delinquent 

loans. So we developed a systematic protocol for modifying them. 

Basically, we use a debt-to-income ratio in the 31 to 38 percent 

range. We verify income, and if the borrower’s income can support 

a modified loan that includes their principal, interest, taxes, and 

insurance at 31 to 38 percent of pretaxed income, they get that 

loan modification. And we lower their mortgage payment through, 

first, interest rate reductions, then extended amortization and, in 

some cases, we do principal forbearance as well. 

We do it on a systematic basis. We run all these loan modifications through a net present value analysis, so we must demonstrate that the net present value of the modified loan exceeds the 

foreclosure value. And, generally, where there is reasonable income 

to support a modified loan, these loans will pass the test. 

These modifications are within the authorities we have under the 

pooling and servicing agreements that govern IndyMac’s servicing 

obligations. We have been able to do modifications both for 

IndyMac-owned loans, as well as for IndyMac-serviced loans, including private label securitization. After some strenuous talking 

and advocacy, we were able to get the investors on board. Even 

though the modifications were permissible under the pooling or 

servicing, we briefed the investors and they support the program. 

I would note that this loan modification protocol was designed to 

work within the framework of securitization trusts. 

Our modification plan has been heavily relied upon. The GSEs 

and some of the other larger originators are also announcing they 

will conduct systematic loan modifications now as opposed to a loan 

by loan approach. 

We have suggested making this program national by providing a 

financial incentive for servicers and investors to adopt it, along 

with some loss-sharing. We found, in engaging in dialogue with the 

investors, that the biggest pushback or the biggest uncertainty for 

getting these loans modified is uncertainty about the redefault risk. 

Specifically, what happens if you modify the loan and the borrower 

still, down the road, redefaults, and then you have to go to foreclosure later as the home prices are going down and the losses are 

exacerbated? This is a big concern and uncertainty. 

To address this, some loss-sharing by the government is appropriate. We have suggested that if servicers would agree and investors would agree to support servicers in modifying these loans to 

the IndyMac protocol, that, if there was a subsequent redefault, up 

to 50 percent of the losses would be shared by the government. 

We would exclude early payment defaults, so the loan would 

have to perform for 6 months before it would be eligible for this 

loss-sharing program. And very high loan-to-value loans also would 

have a declining loss-sharing. 

We also would provide for administrative expenses of $1,000 per 

modification for servicers. This addresses another impediment to 

systematic loan modifications. The pooling and servicing agreements generally do not provide for compensation for administrative 

expenses associated with loan mods, while they do provide it for 

foreclosures. And even with the systematic approach, you need to 

go through and verify incomes, so there is some administrative exVerDate Aug 31 2005 16:48 Feb 20, 2009 Jkt 046593 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 K:\DOCS\46593.TXT TERRIE
24 

pense involved. An additional incentive of $1,000 per loan mod 

would be appropriate. 

The combination of these steps could reduce foreclosures for 

loans that would be going delinquent through 2009 by about 1.5 

million, which is significant. We think it is about a 30 percent reduction in foreclosure rates that we would otherwise see. 

It is not a silver bullet, but it would be a huge reduction in the 

foreclosures we are seeing, which are creating significant downward pressure on home prices and adding to broader economic 

problems. 

And these measures together promote homeownership. The modifications are available only for owner-occupied properties, and 

where borrowers have documented income. For that category, there 

should be a concerted effort to preserve homeownership, which will 

help our broader economy. 

The CHAIRMAN. Thank you, Madam Chairwoman. 

I would note that, in the TARP, there is explicit authorization to 

provide funding for servicers in appropriate context. So we think it 

is embraced. 

The gentleman from California, Mr. McCarthy. 

Mr. MCCARTHY OF CALIFORNIA. Thank you, Mr. Chairman. If I 

could just follow up one moment with the chairwoman. 

How many loans did you provide in the IndyMac situation, and 

what was the value overall? 

Ms. BAIR. We had about 40,000 delinquent loans that were eligible. There were 60,000 delinquent loans total, but about 20,000 of 

those either were investor-owned or had been abandoned or were 

just too far gone. They were in bankruptcy or the homeowners had 

given up. So about 40,000 eligible. 

As I indicated in my written testimony, we will do loan modification proposals for about 30,000 of those 40,000. The letters are still 

going out. We have completed modifications of about 5,000, with 

several thousand more in process. We do verify income— 

Mr. MCCARTHY OF CALIFORNIA. And how long does that take 

you? What is the timeframe from start to finish? 

Ms. BAIR. We started in late August with the first mailing of 

7,000 and have made mailings throughout the months since. 

When the loan modification proposal goes out, it specifically says, 

‘‘This is your current mortgage payment. We are going to reduce 

your mortgage payment by ‘X’ amount.’’ The average is about $380 

a month. The proposal will go on to say, ‘‘If you want this loan 

modification, send us a check for your first month’s payment, and 

sign this form that allows us to document income through looking 

at your tax return.’’ It is a very simple, streamlined procedure. It 

is easy for borrowers to understand. It is not a general, you know, 

‘‘Call us, we are here to help you.’’ Instead, it says, this is the loan 

modification that you will get. 

We have had a very strong response rate. Of the first mailing we 

did in late August, over 70 percent of the borrowers have responded. 

But it still takes time. You still have to document income. You 

still have to go and look at the tax return, and you have to establish that borrower contact. The income verification takes the most 

time. 

25 

Mr. MCCARTHY OF CALIFORNIA. Mr. Secretary, I understand you 

have to modify, things change, and the latest is: no longer planning 

to purchase troubled assets. 

Have you taken a look since the last 6 weeks about part of the 

plan in there, the insurance program? Have you pursued that in 

any further way? 

Secretary PAULSON. Yes. We have a responsibility to develop an 

insurance program for implementation. We have gone out for public 

comment, got a number of proposals and comments, and we are in 

the process of developing a program there. 

Mr. MCCARTHY OF CALIFORNIA. When do you think that will 

come back? 

Secretary PAULSON. I can’t tell you when it will be completed, 

but we are working to complete it. And then when it is completed, 

it will be evaluated. 

Mr. MCCARTHY OF CALIFORNIA. In listening to your statement, 

you said toward the end part that you found at the beginning $700 

billion you thought would be a sufficient amount. Now, within the 

troubled assets, you don’t think that is a sufficient amount of what 

you have left to pursue going further. 

And then also, listening to your speech, I think it was November 

12th, where you talked about maybe bringing in, attracting private 

capital, which would create some synergy, which I thought would 

be very positive, maybe if you could expand on that, if that would 

be helpful, using the private capital—how it would work, who 

would receive it, how could you do the matching funding. 

Secretary PAULSON. Well, what I said in my remarks on November 12th was that we needed to evaluate this capital program once 

it is completed and look at the markets and then be prepared to 

use another capital program if it is appropriate, and that we were 

working to develop other programs. 

A matching program would work along the lines of, if an institution, whatever the scope of the program is, whichever institutions 

might be eligible for this program, to the extent they can raise a 

dollar of equity, let’s say common stock, then it might be matched 

by a dollar of preferred. And so this would have the advantages of 

making the capital of the TARP go further. And it also has the advantages of being a filter, so those healthy institutions that are 

able to raise money get a match. 

Now, the disadvantage of a program like that is it doesn’t work 

in a market where capital is not generally available. So that is why 

we didn’t start that way. So there are some advantages and some 

disadvantages. 

Another advantage might be that, if we chose to go beyond institutions where there are Federal regulators, and we don’t have regulatory capability here at the Federal level or capability of Treasury to make the sorts of judgments that the regulators are making 

for us now with the banks, that the private market could be a filter. In other words, those institutions that are able to raise capital 

in the private market would have an ability to get matching funds. 

But no decision has been made. It is just a matter of programs 

that we are working to develop. 

Mr. MCCARTHY OF CALIFORNIA. Has anyone approached you 

about coming forward, outside of the financial industry, being able 

26 

to do the matching money? I mean, is there capital out there willing to make this investment? 

Secretary PAULSON. Well, there is definitely capital available 

now for certain institutions and certain industries, no doubt about 

it. And so we stay close to the market. 

But, again, you should take away, the biggest part of what I was 

saying is, given where we are now, capital is more powerful. And 

you can get more bang for a dollar of capital investment than you 

could buying a dollar of illiquid assets. And so that is where the 

focus is. 

But I think it is premature to be starting another capital program while the current one is not even yet complete. 

Mr. MCCARTHY OF CALIFORNIA. But there would be more capital 

out there— 

The CHAIRMAN. I am sorry. We are out of time. 

The gentlewoman from New York. 

Mrs. MALONEY. Thank you, Mr. Chairman. 

First, I would like to thank all the panelists for your leadership 

in stabilizing our financial markets. 

And I congratulate Chairman Bair on an innovative program to 

help people stay in their homes, if it was expanded. She testified 

that 1.5 million people could be kept in their homes without a financial loss to this Nation, therefore helping to stabilize our economy, which is now our major concern. 

Chairman Bernanke, would you favor her program? Would you 

use TARP funds to expand FDIC’s loan modification program to 

help stabilize our economy and help people stay in their homes? 

Mr. BERNANKE. Well, first let me say that I agree that we need 

to do a lot more on foreclosure prevention. It is very important for 

communities, and it is important for our economy and for our financial system. So I very much commend Chairman Bair and the 

FDIC for the work they have done, and I think we need to build 

on these ideas. 

There are a few points I would like to make. 

First, I think a very strong point of the FDIC program is that 

it is simple. And it is run by the servicers rather than by the government, and that is a plus, certainly. 

There are a couple of design issues that we would need to talk 

about, I think, in the context of the Congress. Let me mention two. 

The first is that the FDIC program is focused on affordability, 

which is understandable, getting the payment down to 31 percent 

of income. The Congress recently passed HOPE for Homeowners, 

which takes a different philosophy, which is about principal writedown and getting mortgages out from underwater. Those are two 

different philosophies, and they depend on different views of what 

it is that keeps people in their homes. So an alternative approach 

would be to strengthen the HOPE for Homeowners approach, just 

to give one option there. 

The second comment I would make is that—and we have discussed this extensively with the FDIC—addressing the issue of 

what is the best way to induce servicers to actually undertake 

these modifications. The suggestion by the FDIC is that the government would ensure some portion of the loss if the mortgage redefaults after it has been modified. And a concern that we have 

27 

had about that is that, in some cases, that would be a very high 

cost. If a borrower had a large capital loss in their home, and they 

paid for 6 months but then moved or left for whatever reason, the 

government might be liable for $100,000, depending on how much 

the loss had been. So an alternative would be to consider other 

ways of subsidizing. 

But, just in general, I want to say this is a very promising approach, and I think there is lots of interesting things to talk about 

here. 

Mrs. MALONEY. Thank you. 

Secretary Paulson and Chairman Bernanke, a large portion of 

the TARP money has been used to pay off the AIG counterparties 

in the new AIG deal. And since the government is now running 

AIG, we should have full disclosure of what they are doing with the 

TARP money so Congress can appropriately manage our oversight. 

Will you make public who those counterparties are and how 

much they received? 

Mr. BERNANKE. Well, I think that information can be made available. AIG had many, many counterparties, banks and other institutions, which they essentially wrote insurance on— 

Mrs. MALONEY. Thank you. And if we can make it available, if 

you could get that to the committee, we would appreciate it. 

Mr. BERNANKE. We will see what we have. 

Mrs. MALONEY. That would be wonderful. Thank you. 

And on the credit default swaps, it is my understanding, following up on your statement, that they were originally like a form 

of insurance taken out by an investor to insure against loss on securities owned by that investor, sort of like insuring one’s home 

against a fire; the homeowner deserves to get paid by the insurer, 

should his house burn down. 

It is also my understanding that a great number of investors in 

hedge funds bought swaps from AIG when they did not own the securities and were just betting on a default, like taking out an insurance policy on your neighbor’s house and hoping that it will 

burn down so you can get paid. 

My question with respect to AIG is whether we are using taxpayers’ funds to cover AIG’s obligations to investors who have suffered real losses, or are we using some of the taxpayer funds to pay 

the investors who are basically gamblers the billions of winnings 

that they earned at AIG’s expense. I personally do not think that 

taxpayers’ money should be used to help investors who are gamblers to collect their profits rather than taxpayers’ funds. They 

should be used to help those who stand to suffer real economic 

losses. 

And, Mr. Bernanke, Chairman Bernanke, can we differentiate 

now between those two classes of swap purchases? Can we see 

where they are? Are we paying the gambling type or only those 

that are real losses? 

Mr. BERNANKE. Congresswoman, I don’t think you can really differentiate. People use credit default swaps to hedge all kinds of positions. Even if you don’t own the underlying credit, you might be 

hedging against the stock or some other thing that you own, or 

maybe you have taken a position in that particular industry. 

28 

And, moreover, these are legal contracts. If they are not paid, 

then the company is in default, and there is a bankruptcy process. 

And the entire purpose here is not to pay off the creditors per se, 

it is not to save AIG per se. It is to avoid the contagion of losses 

and crisis that would occur if this huge financial institution with 

large exposures across the world were to fail and not to make good 

on its financial contracts. 

The CHAIRMAN. The gentleman from Texas. 

Dr. PAUL. Thank you, Mr. Chairman. 

My question is directed to Chairman Bernanke. 

You know, for many years, the Austrian free market economists 

have predicted all these problems would come, and they were certainly correct in everything that they said. Of course, they are not 

very satisfied, including myself, with the so-called solutions, because it looks like we are spending a lot of energy and a lot of 

money trying to patch a system together that is unworkable. So we 

have Congress spending a lot of money; we have Treasury very 

much involved in trying to pick and choose which worthless asset 

that we are going to buy. And, of course, the Federal Reserve is involved in injecting trillions of dollars that nobody seems to be keeping track of. 

But what we are failing to do, I think, is to recognize that the 

system no longer works. But I can understand why we do this. Because, you know, if Congress couldn’t do this and if the Fed 

couldn’t do this and the Treasury couldn’t do this, it would make 

us all irrelevant. And instead of looking at the causes of this and 

then realizing that the solutions aren’t going to be found here, we 

have to make ourselves feel pretty important. 

But I think there is another reason why we think we are pretty 

important. It is because, in a way, our interference in the market 

corrections that tried to come about since 1971 seemed to work. I 

mean, the failure started in 1971 with a system that had no way 

of automatically correcting the balance of payment in the current 

account deficits. And that is where the problem has been. 

The economists, whether they were left, right, or middle over the 

last several decades, have always said this current account deficit 

is a big problem. Now it is totally out of hand. So here we are, 

struggling with all these rules and shifting back and forth and 

really getting nowhere. 

But my question is: When we come to the full realization that 

the system is unworkable, what are we going to do? What have you 

thought about doing? 

Already we see talk in the newspapers, we see articles about a 

new international world reserve currency. And, to me, that is pretty important, because the fiat dollar reserve system is not going to 

work anymore. And that is the information that we have to accept 

and decide what we are going to do with in the future. 

This is not new in history. Currencies have failed, financial systems have failed. And, generally, to restore the confidence that everybody is talking about, they usually have to go back to a currency 

with integrity to it rather than just fiat money. 

And, you know, the stage is there; it is not impossible. Already 

the central banks of the world still own 15 percent of all the gold 

that was ever mined in all of history. So they hold on to this gold 

29 

for some reason. And, therefore, something has to give, or are we 

going to keep trying to waste more money and time patching this 

system together? 

Just last week, there was a report that Iran purchased $75 billion worth of gold, took their reserves out of Europe, bought gold, 

and put it in Asia. So is that a sign of the times, and is that moving on? 

Now, my question is, in your meetings, and you had a meeting 

just recently with other central bankers, does this thought come 

up, about a new international world reserve currency? And, if so, 

does the subject of gold ever come up? How do you restore the confidence? Have you recently had conversation with any central 

banker? And is there a move on to replace the dollar system? 

Because the dollar system is essentially declared dead because it 

is not working. But this, indeed, was predictable because of these 

tremendous imbalances that were never allowed to be corrected, 

and they were always patched up. We always came in. We would 

spend, we would inflate, we would run up deficits. And, since 1971, 

we have been able to correct these problems. 

Could you tell me what kind of conversations you have had regarding a new reserve currency? 

Mr. BERNANKE. Yes, Congressman. I don’t think the dollar system is dead. I think the dollar remains the premier international 

currency. We have seen a good bit of appreciation in the dollar recently during the crisis precisely because there has been a lot of 

interest in the safe haven and the liquidity of dollar markets. And 

the Federal Reserve has been engaged in swap agreements to make 

sure there is enough dollar liquidity in other countries because the 

need for dollars is so strong. So I think the dollar system remains 

quite strong. 

I do agree with you very much on one point, which is about the 

current accounts. The current account imbalances have proven to 

be a very serious problem. It was, in fact, the large capital inflows 

from those current accounts which created a lot of the financial imbalances we saw and have led to some of the problems we are seeing. And one of the silver linings in this huge great cloud is that 

we are seeing some improvement in greater balance in our current 

account deficits. 

Dr. PAUL. But does the subject of a new regime ever come up? 

Mr. BERNANKE. No, it doesn’t. 

Dr. PAUL. And does the subject of gold ever come up in any of 

your conversations? 

Mr. BERNANKE. Only in terms of the sales that the central banks 

are planning. 

The CHAIRMAN. The gentlewoman from New York, Ms. Velazquez. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

Gentlemen and gentlewoman, while we now spend more than $1 

trillion on the bailout, a recent report shows that foreclosures increased 5 percent last month. We also know that 3 million more 

are likely to face foreclosure in the very near future. 

In light of the Fed’s extensive options on taxpayers’ expense, can 

you tell us why foreclosures are still increasing? 

30 

Secretary PAULSON. Okay, I will—the question is, why are foreclosures still increasing? 

Ms. VELAZQUEZ. Yes, sir. 

Secretary PAULSON. I will say to you that it is hard to imagine, 

no matter what program we have, that we are not going to have 

a good number of foreclosures when you look at what we have gone 

through here and look at the excesses and look at the shoddy lending practices. 

Foreclosures take place for a number of reasons. Some of them 

take place because speculators no longer want to stay in their 

home. 

But I think the question to really ask, which is one that we are 

all asking, is, why are foreclosures taking place when people, homeowners want to stay in their home and they are willing to make 

an effort to stay in their home and they can afford to stay in their 

home? 

And this is, I will tell you, a— 

Ms. VELAZQUEZ. Sir, I am the one asking the questions here. 

Secretary PAULSON. Well, I thought you asked me a question. I 

was trying to answer it. 

Ms. VELAZQUEZ. So let me ask you, to what extent are foreclosures causing our continuing economic instability? 

What is the relationship, Mr. Bernanke? 

Mr. BERNANKE. Well, they are both a symptom and a cause. Now 

that the house prices are falling and that the economy is weakening, people don’t have the income to make their payments, the 

house foreclosures are going up. So that is a symptom of the downturn. 

But it is also a cause, because it is weakening house prices, it 

is hurting the value of mortgages, which hurts financial institutions. So it is part of the mechanism which is causing the economy 

to weaken. 

Ms. VELAZQUEZ. So can you tell me how much of the more than $1 trillion spent by the Treasury and Fed in the bailout has gone 

to prevent individual foreclosures? 

Mr. BERNANKE. Where do you get the $1 trillion from? There has been $250 billion by the Treasury, and the Fed hasn’t spent any 

money. We only lend money. 

Ms. VELAZQUEZ. Okay. So, of the money that has been lent, how 

many foreclosures have been prevented, individuals? 

Mr. BERNANKE. Well, as the Secretary has described, there has 

been a whole number of programs, including HOPE for Homeowners and so on. But I also agreed with an earlier questioner that 

I think we need to do more. 

Ms. VELAZQUEZ. You know, the trouble here, sir, is I supported 

the bailout package. I agonized with that vote. Still, Main Street 

America, the people who are watching this debate here or this discussion, they are still waiting to hear an answer as to how this is 

benefitting them, how this is benefitting Main Street America. 

You have the silver bullet, it seems to me, that just by giving a 

blank check to financial institutions—this is a partnership, this is 

taxpayers’ money that is providing capital infusion to financial institutions. But we expect from the banks to do more to help families keep their homes. 

31 

And so we are giving this money or lending this money without 

any strings attached to it. 

Secretary PAULSON. Let me just say three things here. 

First of all, the key to turning around the housing situation and 

avoiding foreclosures is going to be to keep lending going. If the financial system collapsed, we would have many more foreclosures, 

number one. 

Number two, you are seeing a number of big banks take extraordinary actions, and they have announced them, and you could just 

tick them off, announcing actions they are taking. So they are 

doing things, number one. 

And number two, I would say that I believe that our actions to 

stabilize Fannie Mae and Freddie Mac, who are the biggest source 

of home financing in America today, have been critical. 

So there have been real steps that have been taken that make 

a difference. More needs to be done. I hear your frustration; more 

needs to be done. And we are going to keep working on it. 

Ms. VELAZQUEZ. Yes, you hear my frustration. And I hope that 

you understand the pain and the suffering of so many homeowners 

in this country who are losing their homes. 

So it is just not enough to say to the banks, ‘‘Here is the money. 

And, by the way, I trust you.’’ Because they are not lending; they 

are not lending to small businesses. They are not working on a 

loan modification strategy. 

You just told Mr. Frank here that you are examining strategy to 

mitigate foreclosures. You don’t have the strategy to mitigate foreclosures; you are examining. Chairwoman Bair does. Are you willing to support her plan? 

Secretary PAULSON. What I have said very clearly is that the 

IndyMac protocol is an excellent protocol. We, as a matter of fact, 

with the GSEs, if GSEs, with their whole guidelines, endorsed the 

plan, what they have done, which I think will become the national 

model, is based upon that plan. And I said that I am looking very 

hard to find programs to put into the TARP that I think strike the 

right balance between protecting the taxpayer and are effective. 

The CHAIRMAN. Without objection, I would ask for unanimous 

consent for 1 minute. 

Mr. Bernanke, you said HOPE for Homeowners, which this Congress passed, has some problems, and we were taking a first cut 

at it. I just want to advocate what the chairwoman has done and 

IndyMac has been superb. And the leadership elsewhere is important. They were different models. As interest rate reduction, as 

pension reduction—let 100 flowers bloom, there are different motivations and different impacts. 

And there were some things about HOPE for Homeowners which 

you have told us and we agree need to be modified, some of which 

can only be done statutorily. But the TARP lets you do that. So I 

would recommend, Mr. Secretary, work together on another model, 

not in competition with, but give the modifications in HOPE for 

Homeowners through the TARP that help work that out. Because 

these are not competitive; they are additive. 

I thank the members. 

The gentleman from Ohio. 

Mr. LATOURETTE. Thank you, Mr. Chairman. 

32 

Mr. Secretary, I am going to let my colleagues be global and I 

am going to be very parochial and talk about one bank in particular. And that is that my frustration and, I guess, anger that the 

TARP money has been used to—about to be used to purchase National City Bank in Cleveland, Ohio, by PNC in Pittsburgh, Pennsylvania. It was never my understanding that the TARP program 

was designed to pick winners and losers. 

I was struck by Chairman Bernanke’s observation that his window is open to everyone. I am going to detail for you in hopefully 

4 minutes and leave a minute to respond. 

While the Treasury window was never open to National City 

Bank, I wrote to you on the 30th of October; you were kind enough 

to send me a letter back yesterday. The last graph basically says— 

the letter says you haven’t received an application from National 

City Bank. The last graph says, and, by the way, the documents 

that you want are in the possession of OCC, so please talk to OCC. 

We talked to the OCC staff. They said, since you sent a letter to 

the Secretary, we really don’t have time to respond to your request 

for documents. 

But it is funny because, on October the 28th, I did get a letter 

from the Comptroller of the Currency, Mr. Dugan, who expressed 

umbrage that I would dare suggest that he was a lawyer for PNC 

in private life before he became the Comptroller of the Currency. 

But he says that you make the decision on these applications, not 

him. And, by the way, he wished he could tell me about these communications in this transaction, but it is a secret. 

National City Bank is one of the only—I think the only top-25 

bank in the country that is not permitted now to participate in the 

TARP program. It is my understanding that it is the only bank in 

the country that is being purchased with TARP money. 

And if you look at PNC’s potential merger and acquisition agree- ment, they are not only going to get their share, which is about $4 

billion, but they have been told by the regulator they are also going 

to get National City’s share, about $4 billion. If you combine that 

with the tax changes that were made on September the 30th as to 

how losses are treated by acquiring banks, they are going to get an 

additional $5 billion. 

And so, basically, they are going to be able to purchase the 7thlargest bank in the country for free, a bank that has existed since 

the American Civil War, survived the Great Depression, can’t survive 8 weeks of the TARP. 

I just want to go through with you the timeline that was in the 

Wall Street Journal. I ask unanimous consent that it be included 

in the record. 

The CHAIRMAN. Without objection, it is so ordered. 

Mr. LATOURETTE. Peter Raskind, the CEO of National City 

Bank, talked to Mr. Dugan, and said he wanted to apply for TARP. 

He said, ‘‘Well, I am happy to do that, but first I want you to explore all M&A avenues.’’ He says, ‘‘Well, we have been doing that, 

but I want to apply for TARP.’’ He said, ‘‘Just keep doing it. Trust 

me.’’ 

Minutes later, as Mr. Raskind was to go into a meeting with his 

board of directors, he gets a telephone call from Richard Davis, who 

is the CEO of U.S. Bancorp. Mr. Davis says, ‘‘After talking with the 

33 

OCC and other Federal regulators, we have a new interest in buying your bank. And the regulators have indicated to us, have assured us that the government would provide U.S. Bancorp with 

capital to finance a takeover. And we will buy you for $1.10 a 

share,’’ which was less than half of what it was trading for on that 

particular day. 

Mr. Dugan remained a constant presence, and his tone became 

increasingly assertive with National City Bank. ‘‘An M&A deal is 

your only alternative,’’ he told Mr. Raskind on more than one occasion. Mr. Dugan warned National City Bank not to expect to take 

advantage of any new government programs. When Mr. Raskind 

said, ‘‘Wait, I thought this was open to everybody,’’ he said, ‘‘That 

is all discretionary, and right now you shouldn’t be comfortable 

that it is available to you.’’ He said, ‘‘I thought it was available to 

all banks.’’ ‘‘No, it is discretionary.’’ 

That evening, the board met. They felt that they were being 

bullied. Talks continued with U.S. Bank under Mr. Dugan’s supervision. And then, all of a sudden, PNC comes in at this moment 

in time when they are aware that they can get free money from 

the TARP to buy another bank. 

And just a couple of analysts, I ask that these be submitted for 

the record, as well. A guy named Mike Mayo, who is a pretty renowned analyst of banks and their values, writes for Deutsche 

Bank that, ‘‘National City Bank maintained a peer-leading Tier 1 

ratio of 11 percent. PNC was substantially less than that.’’ 

Another fellow, writing for Citibank, indicates under the section, 

‘‘Why Sell?’’ on October 24th, he says, ‘‘So on face value there was 

no immediate catalyst that would force them to sell, since National 

City had sufficient capital and liquidity. In our view, it is possible 

that there was a change in management’s outlook or a push from 

the government.’’ 

Well, the change in management’s outlook is also in an October 

the 25th article in the Cleveland Plain Dealer that said that Peter 

Raskind went to his board, and he laid out a scenario that, when 

he wasn’t even able to apply, not even able to apply for TARP, the 

board was presented with a downside scenario of deteriorating viability so horrifying that the bank was almost forced to act now; and 

not only to act, but to sell its very solid, well-capitalized business 

at a significant discount. 

Mr. Chairman, I would ask for just 1 additional minute. 

The CHAIRMAN. We would ask for 2 additional minutes. The committee has been accommodating. This is very important to the gentleman. So if the gentleman can wrap up the question, and we will 

have time for an answer. 

Mr. LATOURETTE. I am going to wrap up the question. 

And so the question is—there are two questions that I want to 

ask you and give you time to answer. 

This isn’t WaMu, and this isn’t Wachovia. As I indicated, National City’s Tier 1 capital ratio of 11 percent was amongst the 

highest of any bank in the United States. They had $18 billion of 

cash, more than their cash requirements. PNC was at 8.2 percent. 

My question is, why did you deny assistance to National City 

Bank, affecting 29,000 employees in 9 States? 

34 

But first, I would like to ask and make a request of you that the 

legislation—there is only one place that the OCC is in that 300 

pages, and it said that you are going to act in consultation with the 

OCC. In my mind, you don’t have an application because the OCC 

wouldn’t send you one, wouldn’t take one from National City Bank. 

And so I am asking you, Mr. Secretary, on behalf of those 29,000 

people and the City of Cleveland and 9 other States, will you look 

at this under the authority that you have, not Mr. Dugan, and reconsider that decision? And, if not, why did you do it? 

Secretary PAULSON. Okay. Let me—you took a long time for the 

question; it is important. I would like a little bit of time— 

The CHAIRMAN. This is of sufficient importance that we will not 

be constrained here. 

I will announce to all the members, this panel has to leave at 

noon. At noon, we will take the next panel, and we will begin the 

questioning on our side where we left off. So we won’t go back to 

the beginning. 

Mr. Secretary? 

Secretary PAULSON. Now, let me, before getting into the specifics, 

let me just say that, in my experience, that I have seen institutions 

that have capital, that it meets certain ratios, but where the market loses confidence in them and they fail or are about to fail because there are questions about the quality of the assets and the 

quality of the mortgages they hold. 

And so now I am going to get to the program and the way it is 

designed and get to your question. 

We do have a program—and you saw it with AIG—we have a 

program to make investments if there is a systemic issue. If there 

is an impending failure, we can step in. But this program, which 

we designed under our authority, this program was designed for 

healthy banks. And what we did is we set out criteria, but the first 

criteria was that banks needed to apply to their regulator and applications needed to come from the regulator with a recommendation. We don’t have regulatory capabilities at Treasury, but we 

have outstanding Federal regulators. 

Mr. LATOURETTE. Mr. Secretary, I know you are answering my 

question, but here is the problem. If the OCC tells the CEO not to 

file an application, you never get to that point. 

And let me just say one other thing. I mean, I get the fact that 

there can be other factors. But the fact of the matter is the regulator told National City Bank to raise $3.5 billion of private capital. 

They raised $7 billion. They are one of the best-capitalized banks 

in the country, and you guys wouldn’t even take an application. 

Secretary PAULSON. Let me then make two other points here, because you are dealing with consolidations. I have heard a lot about 

using capital from the TARP for mergers. And, again—and I am 

just not going to deal with this—I will make the general point that, 

if there is a bank that is in distress and it is acquired by a wellcapitalized bank, there is more capital in the system, more available for lending, better for communities, better for everyone. No 

doubt about that in my mind. 

And so, when we get—and the applications which come to Treasury, when it will come to Treasury—we have not received an appliVerDate Aug 31 2005 16:48 Feb 20, 2009 Jkt 046593 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 K:\DOCS\46593.TXT TERRIE
35 

cation for capital from either of the banks you have mentioned— 

when it comes to Treasury, we will look at it and act on it. 

But, again, I just can’t emphasize enough that this program, to 

me, it was very, very important on this program that—this is general; I am not speaking—that it not be used to prop up failing 

banks or banks that might fail, that this be used for healthy banks. 

And I looked to the regulators. As a matter of fact, we designed 

a process with the regulators. They would look at the applications 

as they would come in. And there is even a peer-review board with 

the regulators. And they submit them to us, and we make a decision. 

Mr. LATOURETTE. Mr. Secretary—and thank you, Mr. Chairman—the analyst that I referred to from Citicorp indicates that 

TARP changed the landscape. Because National City Bank was 

able to survive, but because it was not on the list, it was leaving 

itself open to possible unfavorable outcome, to market perception 

that it was not a survivor. 

And my question was—I appreciate your general answer—will 

you personally look at the National City Bank situation and discuss it with Mr. Dugan? 

Secretary PAULSON. Well, I will tell you I have great confidence 

in John Dugan, and I am very happy to discuss it with him. I have 

regular conversations with him. I have great confidence in his judgment. And I believe, based upon generally what I know, that he 

made the right decision. But I am perfectly happy to talk about it 

with him some more. 

Mr. LATOURETTE. Thank you. 

The CHAIRMAN. The gentleman from North Carolina. 

Mr. WATT. Thank you, Mr. Chairman. 

I am not going to go down the same path, but I would just express to the Secretary that there is a strong feeling out in the public that a number of the decisions that have been made have had 

the effect of not only picking winners and losers, but influencing 

who is a winner and is a loser. 

And that is something that we have to deal with every day. I am 

dealing with it in my own community, not in the sequential fashion 

that Mr. LaTourette is, but there are a number of people in my 

community who believe that, had a different set of decisions been 

made regarding Wachovia, Wachovia would still be a viable institution today. 

But I am going to leave that alone. It is a perception problem 

that, unless we are provided the kind of information and assurance 

that people are looking at it and looking at it with integrity, we 

can’t reassure the public about. 

That is not a question, Mr. Paulson. 

Secretary PAULSON. I would just say with that— 

Mr. WATT. That is not a question, Mr. Paulson, because I don’t 

even know how to frame a question that will get to—but I think 

you all need to deal with the reality that the perception is out 

there and that we are having to defend these decisions. So I hope 

you will make the decisions. $24 billion is the figure that I have heard used to do the FDIC 

foreclosure prevention program. How is that figure calculated? 

What does that figure consist of, Ms. Bair? 

36 

Ms. BAIR. That is based on a no-greater-than-50-percent loss 

share for loans that are modified to a specific affordability metric 

and then end up redefaulting later on. We are assuming a 33 percent redefault rate, which we think is a fairly conservative assumption. The government would take 50 percent of the loss between 

the net present value of the modified mortgage versus whatever 

the recoveries were at resolution. The mortgage might end up going 

into foreclosure as a short sale, or it might be that it would be remodified or refinanced. 

Mr. WATT. Okay, who would get—I mean, where is that money? 

Ms. BAIR. That money would go to the— 

Mr. WATT. Is it an expenditure? 

Ms. BAIR. It is. 

Mr. WATT. Does it go to somebody? 

I guess what I am trying to figure out is Mr. Paulson, Secretary 

Paulson, apparently doesn’t think that is part of stabilizing the financial system, as he reads the language. And I have the bill right 

here in front of me. That is what it says, ‘‘stabilizing the financial 

system.’’ How does that stabilize the financial system if we put up 

$24 billion? 

Ms. BAIR. It provides financial incentives to get loans modified 

that are not being modified now that are going into unnecessary 

foreclosures. That is the bottom line. 

Mr. WATT. Okay. 

And how is that less important, Secretary Paulson, than basically telling some banks, you will take an equity investment, some 

of whom, really, didn’t even have any interest in doing that and 

certainly didn’t have the need for it, according to their own public 

statements? 

You have $24 billion, as I see this list here, almost coming into 

banks in North Carolina, at least some of whom said, I don’t need 

this money. 

How is that more important than what we have described here 

about helping stop the cascade of foreclosures? 

Secretary PAULSON. I think I have been pretty clear. I believe it 

is important to stop the cascade of foreclosures, and I think the 

key— 

Mr. WATT. Let me rephrase the question. How does that stabilize 

the financial system more than stopping the cascading of foreclosures under a program that is projected to cost $24 billion? 

Secretary PAULSON. I would say that these are—you are dealing 

with apples and oranges here, and the apple is a very, very big 

apple. Because the step that was taken to stabilize the system— 

Mr. WATT. The question I am asking is, is the apple more important than the orange, or is the orange more important than the 

apple? 

Secretary PAULSON. I would say that the forest through the trees 

here was—the important step was the step that was taken to stabilize the banking system, and the combined step taken by— 

Mr. WATT. And how does putting money in a bank that didn’t 

ask for it help to stabilize the banking system? 

Secretary PAULSON. Well, okay, to answer that question, there 

are no banks, when the system is under pressure, unless they are 

37 

ready to fail, that are going to raise their hand and say, please, I 

need capital; give me some capital. 

What happens when an economy turns down and when there is 

a crisis, they pull in their horns. They say, I don’t need help. They 

don’t deal with other banks. They don’t lend, and the system gets 

ready to collapse. 

So the step that we took was very, very critical, and to be able 

to go out and go out to the healthy banks and go out before they 

became unhealthy and to increase confidence in the banks and of 

the banks so that they lend and that they do business with each 

other, that was absolutely what we were about. And when we came 

here to— 

The CHAIRMAN. Mr. Secretary, we need to wrap it up. I won’t say 

we got a little metaphorically confused there, but I think the summary is that our accusation is that you can’t see the orange grove 

for the apple trees. 

The gentlewoman from Illinois. 

Mrs. BIGGERT. Thank you, Mr. Chairman. 

First of all, I would like to associate myself with the remarks of 

Ms. Waters as to the problems of the loan modifications. 

But I would really like to turn to another subject that the gentleman from California, Mr. McCarthy, addressed briefly and that 

is that section 102 of the TARP authorized the Treasury to set up 

an insurance program, and this is similar to the program that I 

think that many members of this committee and Members of the 

Congress really felt that the self-funded insurance program would 

be a better alternative to the purchase of the assets and the 

recoupment, because I think that this alternative minimizes the 

risk to taxpayers, and it charges premiums to the financial institutions and begins to determine a value for those toxic assets that 

are on the books of the financial institutions. 

So, Secretary Paulson, you said that you have had the comment 

period. I would like to know, how many staff do you have dedicated 

to setting up an insurance program and evaluating the public comments that you recently received? 

Secretary PAULSON. I will have to get back to you on that, because I don’t have, offhand, how many staff. 

We have, not a large staff, an overworked, hard-working staff, 

and I can tell you that we will develop a plan, because the legislation asked us to develop a plan, and we will develop a plan. 

Mrs. BIGGERT. Okay. 

Then, have you received the Aon proposal? We have someone testifying for the Council of Insurance Agents and Brokers in the second panel, Mr. Findlay. 

Have you reviewed that proposal, which was submitted, I think, 

in the comment period? 

Secretary PAULSON. Yes. I would say my staff currently is, as I 

am sure we have either reviewed or are reviewing the proposal. I 

have not personally reviewed the proposal. 

Mrs. BIGGERT. How, then, do you propose that we determine the 

value of these toxic assets or the mortgage-backed securities or 

their potential future mortgage foreclosures? Do you think that this 

insurance program would help to do that? 

38 

Secretary PAULSON. Well, an insurance program—there are a 

number of programs that have the potential to help determine 

value. And the insurance program would be, a properly designed 

insurance program has the potential to do that. Clearly, the illiquid 

asset purchase program has the potential to do that. 

We have a—I might also add, that as banks are well capitalized 

and they are able to write down and sell assets, and the marketplace, market forces can also help determine the value. 

Mrs. BIGGERT. Well, it seems like we haven’t gotten anywhere. 

And yesterday, Chairman Frank, who talked to you, said yesterday that the insurance program is unlikely to be implemented because it would do little to restore the liquidity to cash-starved 

banks. 

But have you considered, then, the actuarial valuation markets, 

models, proposed for the insurance program? Isn’t that one way to 

do it? 

Secretary PAULSON. This is going to be a big part of what we are 

going to need to do the develop the program, and we are doing a 

lot of work developing a number of programs, and this will be one 

that deserves careful consideration, and we need to develop the 

best program possible. 

Mrs. BIGGERT. Do you agree with Chairman Frank that it is unlikely that this program will be implemented? 

Secretary PAULSON. I am not going to speculate about what is 

likely to be implemented in the future until we understand the program. And if we can develop a program that is a good, workable 

program, then we will comment on it at that time. 

Mrs. BIGGERT. Have you considered any of the proposals by the 

credit bureaus to drill down into those toxic assets to determine 

likely mortgage loan default rates? 

Secretary PAULSON. I have not personally done that, no. But, 

again, we have a group of people who have been working very hard 

analyzing many of these issues. 

Mrs. BIGGERT. All right. 

Then, Chairman Bair, do you think that if there is a compulsory 

loan modification provision in an insurance program, that this 

would help to make sure that the loan modifications are effective 

and are made? 

Ms. BAIR. That is something I would want to take a look at. We 

have based our program on the section 109 authority, outside the 

section 102 insurance program. But I would happy to talk with the 

Secretary about what they may be contemplating. There may be 

some synergy between the two. 

Mrs. BIGGERT. Thank you. 

I yield back. 

The CHAIRMAN. The gentleman from New York. 

Mr. ACKERMAN. Thank you, Mr. Chairman. 

During times of a national crisis, and we seem to be deeply in 

the midst of one, people look for leadership in which they can place 

confidence. Unfortunately, I think, our President is not in the position to provide that right now. 

And people are looking more strongly in the direction of yourself, 

Mr. Chairman, Mr. Secretary, Madam Chairman, and to the Congress. 

39 

It seems to me that with what has been going on very recently, 

we seem to have a crisis in confidence. 

You came to us with a plan and made a strong case for over $700 

billion based on a particular premise, and we, in turn, listened and 

asked some questions and, in turn, were asked questions by our 

constituents. And we answered those questions and basically sold 

them the plan. Not everybody agreed that we were doing the right 

thing. Some of us here voted for it not sure if it was the right thing 

but confident that it was the direction we had to go, and then suddenly woke up one day to find out that $700 billion was going to 

be used for a different plan. It appears that you seem to be flying a $700 billion plane by the 

seat of your pants. It seems to be that this is, at least to me, and 

maybe it is the right direction to go, but it seems to be the second 

largest bait-and-switch scheme that history has ever seen, second 

only to the reasons given us to vote for the invasion of Iraq. 

I would like to know what the considerations are that you might have had in other ways to spend the $700 billion. Is there a plan 

‘‘C’’ or ‘‘D’’ that you considered and set aside because now plan ‘‘B’’ 

is better than plan ‘‘A,’’ and what those plans might be so that we 

might have some input into them? And what is your impression of 

the authority you have with regard to those other plans? 

Also, I would like to know, because choices are being made, what 

would be the impact on the economy if the automobile industry was 

allowed to fail? Certainly choices were made back a month or so 

ago when a decision was made to allow Lehman Brothers to fail, 

and perhaps there is some regret that that decision was made. 

I am sure, if we allow General Motors and the auto industry to 

fail, that there will be a lot of concern afterwards as to why we allowed that to happen. 

And if the airline industry, for example, would be teetering on 

the verge of failure, would we allow that to fail as well? 

Secretary PAULSON. Okay. 

Let me, first of all, take your questions or comments one at a 

time. First of all, when we came to Congress, we came to Congress 

saying the financial system was on the verge of collapse, and there 

was clearly a need to recapitalize the system. The strategy we laid 

out to do that was a strategy to buy illiquid assets. 

During the 2 weeks—and I commend Congress, this is not a complaint on my part, giving us the authority as quickly as they did. 

But during the 2 weeks, the situation changed materially during 

that 2-week period. And I went through that in my— 

Mr. ACKERMAN. What was it that changed again? 

Secretary PAULSON. I went through that in my testimony. We 

had the situation worsen in the United States, and we had a couple 

of banks fail or approximately fail. 

We had a whole series of banks in Europe go down. We had the 

credit spreads widen further and further. The situation froze up to 

the point that there was a market, serious change. 

Mr. ACKERMAN. And did we not anticipate that might happen? 

Secretary PAULSON. We certainly did not anticipate everything 

that was going to happen. 

But, what we did anticipate, we got legislation that was broad 

enough in the authority, so that what we came out—I think the 

40 

way you should be looking at it is we gave, we came and we said 

there is a real crisis; there was a real crisis. We got the authorities 

we needed, and we went to the heart of the problem. And the heart 

of the problem was the financial system and capital, and we used 

a strategy that would work more effectively, and it has worked, 

number one, in stabilizing the system. 

Now, you have asked, what were the other things that we were 

considering or have considered, plan ‘‘B’’ or ‘‘C’’ or ‘‘D?’’ And there 

are only—to deal with something in the magnitude we are dealing 

with, there has only been one trade-off we have made. And the 

trade-off we have made is between capital, which goes farther per 

dollar of TARP investment, and purchasing illiquid assets, which 

we would have to do in big size. 

We are also looking at a variety of other programs but don’t involve that big trade-off. I have talked about a program to use a 

small amount of TARP assets to make it possible for the Fed to 

provide liquidity to consumer credit. We have talked about the future capital programs. 

Now, with regard to the automotive industry— 

The CHAIRMAN. Quickly, Mr. Secretary, please. 

Secretary PAULSON. Okay. 

Let me also say, for the record, strongly, there was no authority, 

there was no law that would have let us save Lehman Brothers. 

We did not have the TARP then. The Fed did not have any authority to lend if it was not properly secured. 

So, now, with regard to the automotive industry, this Administration has made it clear that, through modifications to the Department of Energy bill, 136, we believe that there is a path that leads 

towards a viability in the auto industry. And we think these funds 

should be tapped only if they lead to a long-term viable solution. 

And, no, we do not believe that it is desirable to have an auto company fail with the economy in its current situation. 

The CHAIRMAN. The gentleman from Texas. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

Secretary Paulson, under the TARP plan, would captive finance 

companies be eligible for TARP funds, particularly for the automobile industry? 

Secretary PAULSON. Well, there are broad powers under the 

TARP to make captive finance companies eligible under the TARP. 

Under the current plan we have outlined, the only capital plan we 

have in place, they are not eligible. 

If we were to implement the program we are working on with the 

Fed, where we put a small amount of money into a Fed liquidity 

facility, that facility could provide support for triple-A auto paper, 

and so that is one option that is being looked at. 

Mr. NEUGEBAUER. Chairman Bernanke, you have allowed nontraditional entities to come to the Fed window currently, is that 

correct? You said that in your testimony? 

Mr. BERNANKE. We have opened the window to primary dealers 

as well as banks. 

Mr. NEUGEBAUER. So, captive finance companies currently, do 

you have the authority to allow captive finance companies to come 

to— 

41 

Mr. BERNANKE. If we invoked our ability to lend under unusual 

and exigent circumstances, and if we were fully collateralized, we 

would have that power. We have not made a decision to do that. 

Mr. NEUGEBAUER. But you could do it? 

Mr. BERNANKE. Yes. 

Mr. NEUGEBAUER. Now, then, to the three of you, I wrote you a 

letter, I think, on Friday, and one of the concerns that I have is 

that we keep focusing on $700 billion. 

I think in your testimony, just a while ago, or you answered a 

question, Chairman Bernanke, that your total assets now are about 

$2 billion—I mean, $2 trillion, BETs. A year ago, you were about 

a trillion, is that correct? 

Mr. BERNANKE. Eight hundred billion, something like that. 

Mr. NEUGEBAUER. So you have doubled, more than doubled the 

size of the Federal Reserve, really, in the last 6 months, is that correct? 

Mr. BERNANKE. In order to extend credit to currency swaps to 

allow dollar liquidity to be provided around the world, to allow access to banks and primary dealers, to provide that security, that 

liquidity backstop, and to strengthen our financial system, yes, we 

have done that. 

Mr. NEUGEBAUER. If the OCC had a bank outside the Fed growing that fast, I think there would be some concern. 

But the question I have, is anybody internally, Secretary Paulson 

with the TARP programs and some of the other things that you 

have done; Chairman Bernanke, with the things that you are 

doing; Chairman Bair, you know, what is our contingent liability, 

because this isn’t a—we are not $700 billion into this. 

You know, when I just start doing a little bit of rough accounting, it is over $2 trillion. Maybe it is a bigger number than that 

when we look at what the potential liabilities in Fannie and 

Freddie and what you are doing on commercial paper, what are 

some of the things that Chairman Bair has done to facilitate the 

taking over the banks—I think the American people, I think this 

Congress, I think this committee needs, we need a better accounting of where we are in this, and not just be coming in here and 

saying, well, we need $24 billion more for this and $50 billion for 

this and $100 billion for this. 

I mean, we really have to have—and I am hoping that I can get 

a fairly quick response to my letter from each one of you as to 

where you think we are. Because, certainly, hopefully, you are sitting in, as you are making these decisions and looking at, you 

know, what is a potential downside here? 

Obviously, we know, we hope, what the upside is in the economy, 

and these markets start responding, but I wondered if any of you 

had an opportunity to put some numbers together before your testimony today. 

Mr. NEUGEBAUER. Well, let me make a general comment, which 

is, I know what the downside was, and the downside was the collapse of the financial system, which would have wreaked huge 

havoc on this economy for many years. 

Now, part of the issue that we have in answering the question 

precisely is because these programs are very different. For inVerDate Aug 31 2005 16:48 Feb 20, 2009 Jkt 046593 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 K:\DOCS\46593.TXT TERRIE
42 

stance, let’s just take a $250 billion bank capital plan. That is not 

an expenditure; it is an investment. 

I think it would be extraordinarily unusual if we, the government, did not get that money back and more. And so that gets accounted for as an expenditure against the deficit. That will be coming back in, for instance. 

The Fannie and Freddie, that is a, you know, there is, the government is standing up there for the credit of those entities and 

making good on what I believe our responsibilities were and what 

investors in this country and around the world understood our responsibilities to be, in that situation. 

The liquidity programs by the Fed are not expenditures, but they 

are impacting the markets, and right now, for instance, this year, 

we will issue roughly $1.5 trillion of treasuries, roughly 3 times 

than we ever have before. 

Now, right now, there is huge demand for those securities, huge 

demand all over the world. But that is to fund liquidity programs 

that are shorter in duration. 

Ben, I don’t know, what about you? 

Mr. BERNANKE. Only that our programs are mostly short-term 

lending and well collateralized. 

The CHAIRMAN. We are over time. 

Mr. NEUGEBAUER. Well, I think—my intention is, I want to follow up as you submit this response to me. Any time, and we all 

know this, any time you are making an investment, whether you 

call it an expenditure or investment, now, we also have to ascertain, what is the risk, and what is the potential downside loss of 

that? 

So I understand what the economic downside was, but I think we 

need some numbers of kind of where we are in this process. 

The CHAIRMAN. The gentleman from California. 

Mr. SHERMAN. Thank you, Mr. Chairman. 

I would like to associate myself with your statements, particularly those dealing with the mortgage foreclosure prevention and 

the use of TARP funds to achieve that goal. 

Earlier in our discussion, there was discussion of the intent of 

the Secretary of the Treasury and the intent of Members of Congress being balanced in interpreting this law. I want to point out 

that, under the Constitution, Congress writes the law, and legislative intent is the only intent that should govern the construction 

of a statute. 

I have a question for the record that I hope all three of you 

would respond to, and that is whether you will use your influence 

over banks to remind them of how important it is to lend to creditworthy projects being done by charitable organizations? 

The work of charities is very important during this recession, 

and all too often, banks refuse to lend or refuse to provide letters 

of credit to charitable projects because they are concerned about 

the bad public relations that they would have if they ever had to 

foreclose. I think it is important that they get some bad public relations for refusing to lend and some pressure from you folks in 

achieving that objective. 

Secretary Paulson, I want to commend you for buying preferred 

stock rather than toxic assets. First, your approach ensures that 

43 

we are only bailing out U.S. institutions and not buying toxic assets that were in safes in Beijing on September 20th. 

Second, you are buying a much more valuable asset. Any 9th 

grader would tell you, any 9 year-old would tell you that a toxic 

asset is less valuable than preferred stock. 

But I can’t commend you on accepting half the rate of return and 

one-sixth the number of warrants that Warren Buffet was able to 

get on similar transactions. Our children will have a larger national debt because we have been so generous in the terms on the 

preferred stock. 

I would also point out that, as Mr. Secretary, this would bother 

me a lot except I wasn’t in favor of buying toxic assets, but you 

have basically testified here that October 3rd, you had already decided to change your mind and not buy toxic assets and instead 

buy preferred stock, and you didn’t tell Congress immediately before our vote that you would be going in a different direction. Perhaps I have misinterpreted your comments, and, if I have, I am 

sure the record will reflect that if you hadn’t made that decision 

until after our vote on October 3rd. 

I gather from your facial expression that is what you are meaning to say. 

Secretary PAULSON. Absolutely. 

Mr. SHERMAN. Then thank you, let me move on. 

Secretary PAULSON. This was a world changing— 

Mr. SHERMAN. Then thank you, let me move on. 

Secretary PAULSON. And very seriously different situation— 

The CHAIRMAN. Mr. Paulson, the members control the time. 

Mr. SHERMAN. That I did misinterpret your comments and if you 

made the decision after October 3rd, I fully understand. 

Now under section 111 of the bill, you are supposed to put forward regulations limiting executive compensation to that which is 

appropriate. You have been remarkably liberal in that you have 

only imposed by regulations the minimum standards set forth in 

the statute and that you therefore allow unlimited regular salaries 

and unlimited bonuses to be declared by boards of directors. 

But while you have been so liberal in that, defining that part of 

the bill, another part of the bill requires you to define financial institutions eligible for participation under TARP. In fact, the statute 

explicitly says that insurance companies are eligible, and yet the 

CPP has issued regulations saying that only depository institutions 

are eligible; the insurance companies have to go out and buy depository institutions, as noted on the first page of today’s Wall Street 

Journal. 

But the issue that I would like you to address orally is bailing 

out or providing some sustenance to the automobile companies. We 

know how important that is to the economy. If you got rid of your 

CPP regulations and looked at the statute, you would see that auto 

companies do qualify, since they are incorporated under the United 

States, and they are regulated by the United States and its State 

governments. 

But, instead, your definitions in the CPP regulations limit you to 

just depository institutions. 

So the question I have for you, Mr. Secretary, is, if the bill, as 

properly interpreted, allows you to buy preferred stock from the 

44 

three major auto companies, would you at least buy enough preferred stock to tide them over until the new Administration could 

make a policy decision? Or do you think— 

The CHAIRMAN. If the gentleman wants an answer, you are going 

to have to wrap that up now 

Mr. SHERMAN. Or to have the Obama Administration just look at 

three companies in Chapter 7. 

Secretary PAULSON. Again, I have answered this a couple of 

times. I will answer it again. 

I think it is very, very important to stay within the purpose of 

the TARP, because this is all about protecting the financial system, 

avoiding collapse and recovery. There is a good deal more that 

needs to be done before this system is recovered, the market is 

functioning as normal, credit is flowing, and that will make a big 

difference. 

Now, with regard to the auto companies, what we have said, and 

I think you have heard me say it, you, the Congress has acted. You 

have a bill that was passed, a $25 billion bill, the Department of 

Energy—and, again, I urge you to modify that, to have a path for 

making an investment in a viable company. 

The CHAIRMAN. The gentleman from Georgia is recognized for 5 

minutes. 

Mr. PRICE. Thank you, Mr. Chairman. 

I want to thank the panelists for their attendance here this 

morning and their, oftentimes, responsiveness. 

Now, I want to follow up a bit on the insurance companies purchasing banks issue. We have learned over the past couple of days 

that is, indeed, occurring. 

I would ask you, Mr. Secretary, whether you believe that is appropriate or consistent with the mission of the program? 

Secretary PAULSON. The mission of the program is focused on 

banks and bank holding companies and getting capital into the system. We don’t have capability at the Federal level looking at insurance. So what we are going to do is applications. If applications— 

Mr. PRICE. I understand what the process is. But my question is, 

is it appropriate for insurance companies to be forced through the 

machinations of this program to go out and purchase banks to gain 

access to this money? 

Secretary PAULSON. I am not sure that is going to be a successful 

strategy. We are going to look only at applications that we think 

make sense after they are forwarded to us by the regulator. 

Now, there are a number of insurance companies that already 

and have been bank holding companies for some time, have been 

regulated at the Federal level for some time. And in my judgment, 

it may make sense to put capital into those institutions who are 

playing a vital role lending and keeping our economy going. 

Mr. PRICE. Let me ask the question and move on to some smaller 

entities. I have many constituents who are members of credit 

unions and small community banks, and they have many concerns 

about them not being eligible for participation in the TARP. 

How are you working to address the concerns of these smaller financial institutions which are oftentimes the keys to their local 

communities? 

45 

Secretary PAULSON. I think they are keys, and I think they will 

do a lot of lending. And I had said in my opening testimony that 

we have published regulations yesterday which have now extended 

the term sheet for private banks, C corps, there are thousands of 

them. 

We expect to get applications from a number of community banks 

and banks that are going to be very vital to this economy, and we 

are expecting regulators to forward many of those applications to 

us, and we are expecting to put capital into many of them. 

Mr. PRICE. Let me—I think the general concern that many of us 

have voiced on both sides, and that is the Federal Government 

picking winners and losers in this process, and there is a general 

angst up here, as there is across the Nation, about a relative lack 

of confidence in the Federal Government to be able to get this 

right. 

There are some fundamental principles that many of us believe 

have resulted in the remarkable success of the United States over 

hundreds of years. I might have broadened this to the Chairman 

as well. 

What fundamental principles do you believe are consistent with 

the TARP program? 

Secretary PAULSON. Okay. I will answer it briefly and then go to 

Ben. 

The purpose of the TARP program is, as I said, fundamentally 

about preserving our system here, keeping it from collapsing and 

then helping it recover. 

Now, once you have the government intervene, that is by definition going against many of principles that we believed in for a long 

time in terms of markets. We are doing this to preserve our markets. 

So we have—there are two programs we have outlined to date. 

One program, if there is a failing institution, and the failure would 

be big enough to be systemic, we need to come into that. 

With regard to the healthy bank program, my concern was the 

exact opposite of yours, just to be candid. My concern was, I 

thought, if we were looking back in history, the biggest concern I 

might have would be government intervenes and puts money into 

institutions that weren’t viable and weren’t going to be competitive 

long term. Now, we at Treasury— 

Mr. PRICE. I am running out of time on that— 

Secretary PAULSON. I don’t have the capability to handle that— 

The CHAIRMAN. The gentleman from Georgia is recognized. 

Mr. PRICE. Mr. Chairman, if you would comment as to what fundamental principles you believe are consistent with TARP. 

Mr. BERNANKE. Certainly, this situation has sometimes been represented as a failure of capitalism. I don’t think that is right. 

The problem is that our financial system, there have been problems of regulation and problems of execution that have created a 

crisis in the financial system. 

We have seen, in many cases, historically and in other countries, 

that a collapse in the financial system can bring down an otherwise 

very strong economy. So our efforts have been very focused on stabilizing the financial system. 

46 

And as that situation is rectified, going forward, we need to really think hard about our supervision and regulation and make sure 

we get it right. But I don’t think that this is an indictment of the 

broad market system. 

Mr. PRICE. I would just very briefly echo some of the comments 

from the other side that said that we need to also specifically identify an exit strategy so that we can return to those fundamental 

principles. 

The CHAIRMAN. The hearing is—briefly, Mr. Secretary. 

I am getting you out of here, so if you want to talk. 

I thank the three witnesses. There will be—does the gentleman 

from California have a unanimous consent request? 

Mr. BACA. Yes, thank you very much, Mr. Chairman, for holding 

this hearing. I would like to submit my questions for the record 

and thank you. I know that I wanted to— 

The CHAIRMAN. The questions will be submitted without objection. 

Mr. BACA —ask about— 

The CHAIRMAN. The gentleman from Texas has a request. 

Mr. NEUGEBAUER. Mr. Chairman, I would ask unanimous consent to submit two letters: One from the National Association of 

Federal Credit Unions; and the other one from the Credit Union 

National Association. 

The CHAIRMAN. Without objection, it is so ordered. 

Any other information, material, or questions that members 

want to submit, without objection, will be submitted. 

This panel is excused. 

We will now call up the next panel, and let’s move quickly here. 

We will begin on our side, the questioning where we left off. The 

first question will be with Mr. Meek. 

Please don’t impede people’s ability to leave. People can socialize 

out in the hall. 

Will the panel please be seated. 

The gentleman from Pennsylvania will preside as we begin this 

next panel. 

Mr. KANJORSKI. [presiding] If we will reconvene the second panel 

now. We will start our testimony with the honorable Steve Bartlett, 

president and chief executive officer, Financial Services Roundtable. 

STATEMENT OF THE HONORABLE STEVE BARTLETT, PRESIDENT AND CHIEF EXECUTIVE OFFICER, FINANCIAL SERVICES ROUNDTABLE 

Mr. BARTLETT. Thank you, Mr. Chairman, and Mr. Neugebauer 

from Texas. 

Mr. Chairman, I have submitted testimony for the record. 

In addition, Mr. Chairman, I submitted two additional letters for 

the record that I would like to have entered into the record. 

Mr. KANJORSKI. Without objection, it is so ordered. 

Mr. BARTLETT. Mr. Chairman, to summarize my written testimony, first, we believe that the TARP has had a positive effect so 

far. It has only been 6 weeks, however, and so there is a long ways 

to go. 

47 

We think that the implementation of the TARP has added to liquidity, particularly in the LIBOR market, which was at critical 

levels and upon which most of the other financing globally is based. 

Secondly, we think it has stabilized and provided a good deal of 

stability with depository institutions and with deposits, and we 

think it has strengthened the commercial paper market. 

We also believe that the TARP has, by being used for the sale, 

there is a support the sale of weaker institutions to stronger institutions, we think that has generally helped the economy. 

Secondly, we believe, and I have submitted in the testimony, 

some evidence that commercial lending has increased, actually 

rather substantially. We did a survey of eight of the major lenders 

out from their 10Qs, from the third quarter, showing an increase 

of lending from 12 percent. We have done some verbal interviews 

for September, October, and November and concluded that lending 

during those months and going forward will also increase. 

I would note, however, that the economy is generally down, so 

loan demand is down, but the banks have not changed or raised 

their underwriting standards. 

Third, with regard to the difference between asset purchases and 

capital infusion, we think that the capital infusion method was 

right. We think it has had some positive effect. However, we do 

think that the Treasury will and should look at both asset purchases and asset guarantees going forward. We think all of those 

are authorized by the legislation. 

Fourth, Mr. Chairman, I provided some information on mortgage 

rates. Financial Services Roundtable believes that home mortgage 

rates are artificially high, and it is urging the Treasury, the Federal Reserve, and others take some action to reduce those home 

mortgage rates, because until home mortgage rates come down, the 

economy cannot recover. 

Our evidence indicates that mortgage rates are 165—for conforming mortgage-backed securities of GSEs, are 165 basis points 

above comparable treasuries, even though the GSEs are now in 

conservatorship and should be traded like treasuries. What that 

means is that rates should be about 5.5 percent, but in fact, they 

are 6.2 percent. That prices out of the market large numbers of 

homeowners. We think, at 5.5 percent, that would allow about 30 

percent of current mortgages to refinance. 

Fifth, we think that the fair value accounting continues to be an 

overwhelming problem. I have submitted for the record a letter 

from the Center for Audit Quality, which historically has been defending fair value accounting, but which makes some very specific 

recommendations on ways to improve fair value accounting. We 

think that this committee, this Congress, and all the players of the 

Executive Branch should take that letter and those suggestions seriously. 

Sixth, Mr. Chairman, we are totally committed to foreclosure 

prevention. Foreclosures are too high. Our organization through 

HOPE NOW and our specific lenders are producing about 200,000 

loan modifications and repayment plans a month. We expect our 

new streamlined plan, which is not dissimilar to the plan that 

FDIC Chairwoman Bair has proposed, we think that plan will increase it to another 100,000 a month. There is still a long ways to 

48 

go. We have a total commitment that we are going to review the 

FDIC plan to determine ways to make that work. 

And last, Mr. Chairman, we believe that the Federal Reserve, 

and we have communicated this to the Federal Reserve, should 

take specific and proactive and aggressive steps to expedite the application of bank holding companies. We think that if a company 

is seeking to be a bank holding company, if it is applicable, that 

would strengthen the system, not weaken it. 

We think the Federal Reserve has taken those steps in three specific cases of very large institutions; that is good. But we think 

other institutions that are large- and medium-sized would also 

strength the economy. We think that the Federal Reserve should 

take specific steps to be the quarterback to cause the bank holding 

company applications to be expedited. 

And with that, Mr. Chairman, I yield back my remaining 52 seconds. 

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

126 of the appendix.] 

Mr. KANJORSKI. Thank you very much, Mr. Bartlett. 

Now we will here from our second witness, Mr. Edward L. 

Yingling, president and chief executive officer, American Bankers 

Association. 

STATEMENT OF EDWARD L. YINGLING, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, AMERICAN BANKERS ASSOCIATION 

Mr. YINGLING. Thank you, sir. 

I appreciate the opportunity to testify on the current status of 

the Troubled Asset Relief Program. 

The TARP program has served to calm financial markets and 

does have promise to promote renewed economic growth. However, 

it is also a source of great frustration and uncertainty to banks. 

Much of the frustration and uncertainty is because of the numerous significant changes to the program and the misperceptions that 

have resulted on the part of the press and the public. Hopefully, 

this hearing will help clarify the situation. 

ABA greatly appreciates the consistent statements by members 

of this committee, and particularly its leadership, that regulated 

banks were not the cause of the problem and have generally performed well. Not only did regulated banks not cause the problem, 

they are the primary solution to the problem, as both regulation 

and markets move toward the bank model. Thousands of banks 

across the country did not make toxic subprime loans, are strongly 

capitalized, and are lending. 

As you know, TARP started out focused on asset purchases. But 

then after European countries announced they were putting capital 

in undercapitalized banks, everything changed. Overnight, nine 

banks were called to Washington and requested to take capital injections. 

As this program was extended beyond the first nine to other 

banks, it was not initially clear that the program was to focus on 

healthy banks and its purpose was to promote lending. ABA was 

extremely frustrated with the lack of clarity, and we wrote to Secretary Paulson asking for clarification. The press, the public, Members of Congress, and banks themselves were initially confused. 

49 

Many people understandably did not differentiate between this voluntary program for a solid institution and bailouts. 

Bankers, for a few days, were not sure of the purpose, although 

they were sure their regulators were making it clear it was a good 

idea to take the capital. Put yourself in the place of a community 

banker. You are strongly capitalized and profitable. Your regulator 

is calling you to suggest taking TARP capital is a good idea. You, 

the banker, can see that it might be put to good purposes in terms 

of increasing lending, but you have many questions about what will 

be a decision that will dramatically affect the future of your bank, 

questions like, what will my customers think? What will the markets think? What restrictions might be added ? 

Despite the uncertainty, banks are signing up. In my written testimony, I have provided examples of how different banks can use 

the capital in ways to promote lending. 

One aspect of the program that needs to be addressed further is 

the fact that it is still unavailable to many banks. Last night, the 

Treasury did offer a term sheet for private corporations, and we 

greatly appreciated that. However, term sheets for many banks, including S corporations and mutual institutions, have not been 

issued. This is unfair to these banks, and it undermines the effectiveness of the program. 

In my written testimony, I have discussed the fact that while 

TARP is designed to increase bank capital and lending, other programs are actually in conflict and are actually reducing capital and 

lending. 

In that regard, I once again call to the attention of the committee 

the dramatic effect of current accounting policies which continue 

unnecessarily to eat up billions of dollars in capital by not understanding the impact of mark-to-market and dysfunctional markets. 

Finally, in our written testimony, ABA also supports efforts to 

address foreclosures and housing. We have proposed a four-point 

plan: First, greater efforts to address foreclosures; second, efforts to 

address the problems caused by securitization of mortgages that 

you have championed, Mr. Kanjorski; third, the need to lower mortgage interest rates, which are not following normal patterns; and 

fourth, tax incentives for purchasing homes. 

Thank you. 

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

194 of the appendix.] 

Mr. KANJORSKI. Thank you very much, Mr. Yingling. 

Now, we will hear from the third panelist, Ms. Cynthia 

Blankenship, vice chairman and chief operating officer, Bank of the 

West, on behalf of the Independent Community Bankers of America. 

STATEMENT OF CYNTHIA BLANKENSHIP, VICE CHAIRMAN 

AND CHIEF OPERATING OFFICER, BANK OF THE WEST, ON 

BEHALF OF THE INDEPENDENT COMMUNITY BANKERS OF 

AMERICA (ICBA) 

Ms. BLANKENSHIP. Thank you, Acting Chairman Kanjorski, and 

members of the committee. Thank you for allowing the Independent Community Bankers of America to testify today. 

50 

I am Cynthia Blankenship. I am chief operating officer and vice 

chairman of Bank of the West in Grapevine, Texas, and chairman 

of the Independent Community Bankers of America. 

We want to express our appreciation to Chairman Frank, Representative Kanjorski, Representative Bachus, and many others on 

the committee for their support of important community bank provisions in the Emergency Economic Stabilization Act. 

ICBA commends the extraordinary efforts of Congress, Treasury, 

the Federal Reserve, and the FDIC to address the current economic 

crisis. Given the speed and the enormity of the undertaking, it is 

understandable that significant issues have come up regarding the 

Troubled Asset Relief Program’s Capital Purchase Program. 

The terms released by Treasury several weeks ago were unworkable for privately-held banks, Subchapter S banks and mutual institutions because of legal constraints and organizational structures peculiar to each of the types of these institutions. 

ICBA and others have provided Treasury concrete suggestions to 

overcome the obstacles. We have had a constructive dialogue with 

Treasury on these issues, and last night, Treasury released a term 

sheet for a privately held C corporation bank. 

But a term sheet is still urgently needed for the more than 3,000 

Subchapter S and mutual banks. This represents one-third of most 

of the community banks, privately-held banks, in the United States 

that still have no access to the TARP. 

While Treasury is working in good faith to produce term sheets, 

ICBA members are growing increasingly concerned about the rate 

the funds are flowing out of the program. At this point, only $60 

billion is left uncommitted from the $250 billion Capital Purchase 

Program. And, yet, more than 6,000 privately-held Subchapter S 

and mutual institutions have not had the opportunity to apply. 

There are more than 8,000 community banks nationwide, and 

they are well-positioned to extend lending in their communities 

should they choose to use the Capital Purchase Program. Including 

them will stimulate lending in those communities. 

ICBA applauds FDIC’s actions to unlock the market through the 

Temporary Liquidity Guarantee Program. The guarantee provides 

deposit insurance in transaction accounts and will enhance depositor confidence in community banks and free up capital to large deposits. 

The guaranteed program for our senior unsecured debt, however, 

provides few benefits for community banks, as they do not issue 

much in the way of senior unsecured debt, other than Federal 

funds purchased. The current processing for the program makes it 

unattractive for Federal funds to purchase transactions. 

Overnight Federal funds pose little risk of default. And at current prices for Federal funds, the 75 basis point fee exceeds the interest rate. We have suggested that the FDIC adopt risk-based 

pricing for the guarantee so that it will be more attractive for overnight transactions and consider allowing banks to separately opt 

out of the guarantee for overnight Federal funds. 

If the guarantee fee does not cover the cost of the program, only 

banks and thrifts will be subject to a special assessment fee to 

make up that deficit; yet holding companies with significant 

nonbank subsidiaries can participate in the program. Some mechaVerDate Aug 31 2005 16:48 Feb 20, 2009 Jkt 046593 PO 00000 Frm 00054 Fmt 6633 Sfmt 6633 K:\DOCS\46593.TXT TERRIE
51 

nism is needed to ensure these holding companies pay their fair 

share. 

Community banks played no role in causing the current economic 

crisis, the foreclosure crisis, and by and large they did not engage 

in subprime lending practices. And they did not become entangled 

with toxic investment products. As a result, community banks are 

not experiencing unusual levels of mortgage defaults. When defaults do arise, community banks understand that foreclosure is 

the least attractive alternative and do everything they can to avoid 

it. 

Our involvement in servicing loans and finding solutions for consumers extends beyond our own customers, and we offer refinancing to many troubled borrowers and loans from other institutions. 

Mr. Chairman and members of the committee, ICBA stands 

ready to work with you to maximize participation in the programs 

authorized under the EESA and to promote the free flow of capital 

so essential to our economy. 

I appreciate the opportunity to testify today. 

[The prepared statement of Ms. Blankenship can be found on 

page 145 of the appendix.] 

Mr. KANJORSKI. Thank you very much. 

Now, a fourth member of our panel, the honorable D. Cameron 

Findlay, executive vice president and general counsel, Aon Corporation, on behalf of the Council of Insurance Agents and Brokers. 

STATEMENT OF THE HONORABLE D. CAMERON FINDLAY, EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL, AON 

CORPORATION, ON BEHALF OF THE COUNCIL OF INSURANCE AGENTS AND BROKERS 

Mr. FINDLAY. Thank you, Congressman Kanjorski. 

I am Cameron Findlay, the executive vice president and general 

counsel of Aon, and I appreciate the opportunity to testify today on 

behalf of the Council of Insurance Agents and Brokers. 

My written testimony provides the details of an innovative proposal for the Department of the Treasury to exercise the authority 

you have granted under Section 102 of TARP, so please permit me 

here just to summarize the high points. 

We start with the premise that the insurance industry has a lot 

to offer in the efforts to stabilize the economy, because insurance 

is a critical but sometimes overlooked part of the financial services 

industry. 

Put simply, we believe that the Department of the Treasury 

should use its statutory authority, the authority you have granted 

it, to establish a program to insure a portion of the expected payment of principal and interest from troubled and illiquid financial 

instruments. 

While Treasury’s efforts to inject capital in financial institutions 

is important—and has succeeded in some respects—this effort 

doesn’t address a primary cause of the liquidity problem, the hundreds of billions of dollars of illiquid assets that are on the books 

of America’s financial institutions. 

Our proposed approach is an insurance program that would combine risk pooling, risk retention by the financial institutions themVerDate Aug 31 2005 16:48 Feb 20, 2009 Jkt 046593 PO 00000 Frm 00055 Fmt 6633 Sfmt 6633 K:\DOCS\46593.TXT TERRIE
52 

selves, and potential government backstop liquidity. In our view, 

such an approach would benefit all the stakeholders here, taxpayers, financial institutions, and homeowners. 

The plan involves, first, the sharing of risk by participants in an 

asset stabilization pool. Participants in the pool would pay riskbased premiums, and the pool would insure a portion of the principal and the interest from illiquid assets on their books. Thus, the 

program would insulate an asset holder from having to immediately recognize the decline in value resulting from the nonpayment or expected nonpayment of principal and interest. 

Second, our plan requires financial institutions to retain some 

risk. Just as holders of insurance policies retain risk through 

deductibles, asset holders would be required to retain a percentage 

of the shortfall of principal and interest. Asset holders would be reimbursed from the pool for a shortfall, only when the shortfall exceeds their retained amount in a single year. It is just like a deductible in your home insurance policy. 

Third, our plan involves the potential of government loans as a 

backstop. That is, in the event that in the early years, payments 

from the pool exceeded premium collections, the government could 

loan the pool funds needed to make good on the guarantees. The 

government would then be reimbursed by premium collections in 

subsequent years. 

Let me illustrate the proposal by using a very simple example. 

Suppose an institution holds $1 million in mortgage-backed assets. 

Assume that the current lack of confidence in the liquidity of these 

assets has dropped the market value to, say, $600,000. Now, this 

$400,000 drop is not necessarily the result of a true decrease in the 

asset’s intrinsic value. It may simply be the result, at best, of a 

lack of information about the value of the asset or, at worst, in the 

current environment, to sheer panic. 

Let’s assume in our example that the actual intrinsic value of the 

asset is $800,000. Without our proposed insurance program, the institution might have to mark the asset to market, resulting in an 

immediate loss of $400,000 in value or, even worse, the institution 

might have to sell the asset into a panicked market. 

But an insurance pool that guarantees the repayment of the 

principal and interest from these assets would, under proper accounting treatment, result in the institution holding assets worth 

$800,000, not $600,000. 

The insurance industry knows how to do this. Actuaries can set 

initial premiums based on the law of large numbers, and then after 

experience working with the proposed pool, actuaries could use the 

accumulated data about the performance of the assets to develop 

ever-more-accurate premium pricing models, reflecting the actual 

value of the underlying securities. 

In our view, this program will have significant benefits for all 

stakeholders: Taxpayers; financial institutions; and homeowners. 

For taxpayers, an insurance program would have significantly less 

short-term cash requirements and capital infusions. Also, because 

it would be funded by its direct beneficiaries, it would restore liquidity without requiring massive immediate outlays of government funds. 

53 

The insurance solution would also assist financial institutions. 

As an insurance program, it would provide asset holders the option 

to hold assets until maturity or until economic conditions permit 

the recognition of the assets’ real value. It wouldn’t flood the market with distressed assets, which could have the effect of further 

depressing asset values. An insurance program would also prevent 

opportunistic purchases of depressed assets by predatory investors. 

Finally, our plan helps homeowners as well, homeowners facing 

foreclosure, by proposing that participating companies have to 

agree to a plan to restructure individual mortgages as a condition 

of participation. 

On behalf of Aon and the CIAB, I want to thank you again for 

the opportunity to testify today. We stand ready to work with you 

on our proposal, and we would be pleased to take any questions 

that you may have. 

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

185 of the appendix.] 

Mr. KANJORSKI. Thank you very much. 

Now, without objection, I ask unanimous consent that an exchange of letters between Federal Reserve Chairman Ben 

Bernanke and myself dated October 9th, October 20th, and November 17th, be submitted into the record. 

Without objection, it is so ordered. 

I now recognize the gentleman from New York, Mr. Meeks. 

Mr. MEEKS. Thank you, Mr. Chairman. 

It is good to see you. 

Let me start off by asking this question. There were some questions earlier to the first panel, initially by my colleague, Ms. Waters, where I think we are suffering from the same problem, and 

that is, when you look at the number of constituents who are being 

foreclosed upon and trying to help them, it has been very difficult. 

It is very difficult working with servicers in getting the final information, etc., so that we can make sure we are preserving them 

and giving them every opportunity to stay in their home. To that 

end, in my district, I joined hands with a local community organization, CWE, who, every week, they come in with lawyers and financial consultants. They speak to my constituents, and the numbers have just gone up astronomically. And then they call the 

banks and work things out, and I have called them, my community 

banks, etc., to let them now, when they hear from this group, to 

make sure that—see if something can be worked out. 

As a result, I can tell you, when we put this program in place 

as a pilot program about 3 weeks ago, there were about 8 homes 

that I know were about to go into auction the next day. We were 

able to save those people from foreclosure. They stayed in their 

homes. 

So my first question is, as opposed to just relying on the whole 

program, has there ever been any consideration, especially with 

community banks, who have been, to a great deal responsive, to 

partnering with some community-based organizations who are on 

the ground, because we find oftentimes with the number, when the 

financial institutions, when they get something from them, it just 

goes right into the garbage can, and they need someone, they are 

trying to figure someone to trust; we found there is a trust factor 

54 

that has been missing. And they trust someone else; they trust 

coming into my office. So my first question is, has there been any 

consideration about trying to partner with community-based organizations in communities to help people stay in their homes? 

Ms. BLANKENSHIP. I don’t know of any formal effort that we have 

at this time, but I will tell you that most community banks have 

a personal relationship with the borrower. As I stated in my testimony, we do everything we can to avoid foreclosure. 

I think if you look at the statistics, you would find that in the 

community banks, there is going to be a lower percentage of foreclosures, simply because we do have that relationship if the customer will come in. I think it would be beneficial to have an organization to which you speak that could encourage those borrowers, 

who are sometimes intimidated, when they go into default, to communicate with the bank, because once we get communication, then 

it would be rare that we couldn’t find the solution. 

Mr. YINGLING. I would just, one, commend you for your efforts, 

and, two, say that you hit on one of several very important factors 

here. That is trust. We know that many people give up, and they 

shouldn’t give up, and having a group that they trust as an intermediary could be very valuable. I think it is something we should 

do more with. I think it is an excellent idea. 

Mr. BARTLETT. Congressman, in fact, we do partner with many 

organizations, a lot of organizations. Our principal partner on a national level is NeighborWorks. They have an affiliate in virtually 

every community of the country. We find that working with those 

nonprofit groups is the most effective way that we have of providing counseling that leads to the results of loan modification. 

Now our goal here is, counseling is nice, but counseling has to 

have the result of a loan modification. That is what we set out to 

do. And frankly, we pay the costs to those nonprofit counseling organizations and find it to be the most effective way to negotiate. 

I will say that it seems, perhaps, on the outside, to be opaque. 

It is not. If someone is not able to pay their mortgage, then we 

have to figure out a way with that person to take their income and 

convert it into mortgage payments and then see if—it is not a gift; 

it has to be a mortgage to make sure that a mortgage is comparable to or better than— 

Mr. MEEKS. Let me ask this question really quick, because I 

wanted to ask this of Secretary Paulson, but then let me ask you, 

maybe it will have an effect with you. 

Given that Secretary Paulson has unilaterally decided not to purchase the toxic assets, are you concerned at all with the position 

that may reverse—you know, not buying this—LIBOR rates? You 

know, this is an international market right now. By not buying 

this, it could change. We had some stability. And now, things have 

changed. Does that give you any concern? 

Mr. BARTLETT. As it turns out, LIBOR rates have come down 

rather significantly and are back to a stable level. We think that 

the Treasury did the right thing with their capital infusion, but we 

also think they ought to review the other opportunities. 

The CHAIRMAN. The gentleman from California. 

Mr. CAMPBELL. Thank you, Mr. Chairman. 

55 

A question for Mr. Bartlett, Mr. Yingling, or Ms. Blankenship, 

whichever one of you. Most of the TARP money thus far has been 

spent, as Mr. Bartlett just pointed out, for capital infusions into 

banks and financial institutions, or will be by the time they finish 

the first tranche of money. 

In all of your views, is the banking system now adequately capitalized such that it can get further capital privately, or do you 

think that more capital injections are necessary? 

Mr. BARTLETT. More capital is always better than less capital. So 

I would never say adequate. 

Mr. CAMPBELL. I understand that. 

Mr. BARTLETT. I think the capital has to come from private 

sources. So the Treasury’s infusions was, in essence, to kind of put 

a foundation and a floor. I think we will see more capital than we 

have seen and we will see more capital as a result. But it is an 

ongoing process. 

Mr. CAMPBELL. The Treasury Secretary today talked a little 

about the fact that they are studying an idea to leverage private 

capital so that when there is a private capital, new private capital 

investment, stock issuance that the Treasury would then have 

some kind of matching program. Comments on that idea from any 

of you? 

Ms. BLANKENSHIP. Well, I would just like to comment that until 

they get the initial program fixed where all banks have access to 

capital, because still there is—with the Subchapter S and the mutual banks and they did issue the privately held term sheet last 

night, which is helpful, but you have 8,000 community banks out 

there that would like access to this capital so they could expand 

lending in their communities. Because, frankly, that is the only 

way capital is going to pay off as an investment in a community 

bank. It is not cheap capital, but it is access to capital; and, you 

know, that is very much necessary in today’s market. 

Mr. YINGLING. I would just add that, I must say, I think the reaction of most of the banking industry in that 24-hour period where 

nine banks just overnight were called in a room and requested to 

take capital was one of shock and concern. It is not something we 

had asked for. 

Having said that, as the program has rolled out and become 

clearer, we can see an advantage to it. 

I agree with what Ms. Blankenship just said, that at this point 

there is an equity question and a competitive issue, and all banks 

ought to be treated equally. But, beyond that, to the degree we can 

rely on private equity, we ought to; and to the degree that there 

are other excellent uses for money, such as foreclosure prevention, 

they ought to be considered. 

Mr. CAMPBELL. Thank you. 

Let’s talk about what the TARP did not do for the three of you 

again; and then I have one more final question for you, Mr. Findlay. I won’t ignore you there. 

What it did not do is buy troubled assets, which was obviously 

what we originally thought we were going to do. Are you seeing 

any liquidity in that market whatsoever? Are those trading at all? 

Has there been any thawing in that as there has been a little 

thawing in commercial paper, a little thawing in interbank lending, 

56 

a little thawing in a few of these other things? Is there any liquidity in that market right now? 

Mr. BARTLETT. No. We think bringing down mortgage rates will 

help with that. We think, actually, that the capital infusion of the 

banks will help with that. LIBOR being reduced has helped with 

that. But in 6 weeks’ time, we haven’t seen a thawing at this point 

of the mortgage-backed security market. That has to happen. Nothing can recover until that does happen, and we think that the steps 

have been taken to cause it to happen. But it hasn’t happened yet. 

Mr. CAMPBELL. So those are still not tradable assets basically to 

the extent they sit on anyone’s books? 

Mr. BARTLETT. I would hate to say not tradable but pretty close 

to not tradable. 

I also suggested in my testimony that dealing with—curing fair 

value accounting is a big part to that. So fair value accounting continues to be kind of the heavy hand of government that is causing 

a large part of the problem at this point. 

Mr. CAMPBELL. Let me get to Mr. Findlay, if I may, with one 

final question. How is the program that you describe, this insurance program, how is that different from what is actually in the 

bill that we passed in the rescue bill in October, which the Treasury is studying, insurance? In listening to you, I wasn’t able to see 

a distinction between the two proposals. 

Mr. FINDLAY. In fact, the proposal we have is one that we believe 

Treasury has authorized under section 102 of the EESA; and our 

proposal is one that Secretary Paulson said is being studied right 

now. When we were talking about how much capital outlay is the 

right amount, I mean, one of the advantages of our program is it 

doesn’t require immediate infusions of capital. 

Mr. CAMPBELL. So you are simply expressing your support, I 

guess, for the idea that was put in in the bill as an option for 

Treasury? 

Mr. FINDLAY. That is exactly right, Congressman. 

Mr. CAMPBELL. Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from Massachusetts. 

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

and the ranking member for continuing to hold these hearings, and 

I want to thank the panelists for helping the committee with our 

work. 

Mr. Yingling, I really appreciate the candor of your testimony 

this morning; and I want to just—I am just going to quote you a 

little bit, if you don’t mind. 

You talked about the great frustration and uncertainty to banks 

caused by the significant and numerous changes to the top program and misperceptions by the public and the press. I just think 

you might want to add Congress to that list as well. 

As you know, and you have been a frequent flyer to this committee in recent weeks, Mr. Paulson had come here and in great 

detail described a toxic mortgage repurchase program that he put 

forward to Congress; and much of our time here and your time and 

those who are trying to protect taxpayers time were spent in examining that specific proposal which was to clear these toxic mortgages off the bankers’ balance sheets. And we probed that question 

in great detail, and the benefit to both the banks and to these disVerDate Aug 31 2005 16:48 Feb 20, 2009 Jkt 046593 PO 00000 Frm 00060 Fmt 6633 Sfmt 6633 K:\DOCS\46593.TXT TERRIE
57 

tressed homeowners and to the communities that they are located 

in was quite apparent. 

And then it seemed like just a matter of days after Secretary Paulson got the $700 billion, he went to plan ‘‘B.’’ He basically 

abandoned that original plan that was the basis of his request and 

went to plan ‘‘B,’’ which was, as you have described, getting those 

bankers in a room and then proceeding to—at least in the words 

of some of those bankers—give them—force money that they didn’t 

need and didn’t want, and the process nationalized a considerable 

percentage of those banks. 

And then, after the fact, he has gone to plan ‘‘C,’’ which is now 

to recapitalize some of these credit card issuers. 

And I just want to know—I mean, I think he had an obligation 

here to come to Congress and say, okay, here is plan ‘‘A;’’ and I am 

going to try this. Here is plan ‘‘B.’’ 

The problem with the banks wasn’t unforeseen. He could have 

explained that to us. He never mentioned it. As a matter of fact, 

the only time it ever came up, he rejected the proposal of direct 

capitalization in the banks. 

But I just want to know, what is the response of your constituents, your banking committee as well as—Ms. Blankenship as well, 

the community banks. What is happening here? What has this 

done for confidence within the banking community, all the changes 

that the Secretary has instituted? 

Mr. YINGLING. Well, it has been very confusing and very difficult. 

I would differentiate the question of what is the right policy, because it may be we have arrived at the right policy in terms of the 

best use of the money at this time. Although, again, I think foreclosures is another important use of money. 

We didn’t ask for capital infusions. And I can remember when 

this was announced sitting in my office, and I have to watch the 

news all the time to see what has been going on and what the effect may be, the immediate response in the hours after this program was announced was a series of stories about how the banking 

industry had thousands of banks that were going to fail. 

It was completely misinterpreted, and it took several days for 

this to calm down. It also took several days for banks to figure out 

what was going on, and that is why you saw some statements from 

bankers, I think, about the use of the funds. It was just because 

they didn’t understand. I think now people are beginning to understand. But I would think it is confusing for bankers. We have 

done—are starting to do—some polling on do your customers think 

you are weaker or stronger if you take the money? 

Mr. LYNCH. Right. 

Mr. YINGLING. Customers don’t know how to react to it. All of 

these things have ripple effects that are unforeseen. And as several 

of you have commented about your constituents’ point of view, we 

could understand the anger and the concern and the confusion; 

and, of course, that affects us. We hear from the customers as well, 

and it can lead to policy confusion. 

Mr. LYNCH. I understand. I am running out of time. I just want 

to ask, what about the fact that Secretary Paulson basically—and 

this is reflected widely in the press—that the Secretary basically 

forced people to take the money, when they didn’t want the money, 

58 

they didn’t need the money, and now it looks like there won’t be 

enough assistance to help some other banks that may indeed need 

a little bit of help? 

Ms. BLANKENSHIP. Well, that is the total frustration of the community banks. Because, you know, the perception is that the big 

banks did take it, the nines. And that has been well over a month 

ago, and still the deadline came and went. And the community 

banks, the 8,000 that represent over 90 percent of the banks nationwide, they represent Main Street. They couldn’t get access to 

the capital. And still even today we can’t get total access to it. 

Mr. LYNCH. I appreciate that. That is very helpful to hear. 

Thank you, Mr. Chairman. I yield back. 

The CHAIRMAN. The gentleman from Illinois. 

And let me just say, if people are watching this on television and 

aren’t members of the committee, don’t come. We have about 16 

minutes. We have three members who will be able to ask questions. 

We are going to then break at 1:00. We will come back at 2:30, 

because our academic witnesses had asked that they be allowed to 

testify in the afternoon. So we will come back for Professors Feldstein and Blinder. 

The gentleman from Illinois is recognized. 

Mr. MANZULLO. Thank you, Mr. Chairman. 

I represent the 16th District of Illinois, which is right on top of 

the State; and we have a lot of agriculture, a lot of manufacturing, 

a lot of small independent community banks. And the community 

bankers are extraordinary people because they have not caused 

this problem. Their conservative principles, the fact that when you 

get a loan you sit across a desk and you can judge a person’s integrity by looking into their eyes—they represent institutions in this 

country which really serve to me as models. 

And, Ms. Blankenship, I have a question for you. We are told 

that there is a need to use part of the $700 billion financial services package by the auto industry in large part because the financial arms of the big three are unable to issue any more car loans 

except to customers with a FICO score of greater than 720. In 

many cases, they said that they just don’t have any money at all. 

I have been informed by several community banks in the district 

I represent, including my own banker, that they have plenty of 

money to lend for automobiles. They are very frustrated with the 

fact that people are saying—and I am going to be very up front. 

The last panel has done more to instill fear into America and, by 

some of the outrageous statements, are making it more and more 

difficult to recover. In fact, they are extending the recovery, starting with my good friend Mr. Paulson from Illinois, the statements 

that he made in September about how the world would collapse unless he was given $700 billion to buy bad assets. 

People are not buying automobiles, and they are not going and 

doing their regular Christmas shopping because of fear. And, all 

along, the community banks have all kinds of money. My question 

to you is, are community banks—and I don’t want to use the words 

‘‘able to fill the gap,’’ but are there enough community banks in 

this country that can work with dealerships and make sure that 

59 

people receive appropriate and fair and reasonable financing for 

their automobiles and trucks? 

Ms. BLANKENSHIP. Well, I would— 

Mr. MANZULLO. Do you like that question? 

Ms. BLANKENSHIP. I will take that question. 

Of the 8,000 community banks, the banks that are on Main 

Street and in the agricultural and rural communities that represent 22,000 communities across the Nation, by and large they are 

well capitalized and they do have money to lend. Our own bank actually has increased in lending—our net lending since this time 

last year. The market confidence was a huge factor. 

When there were comments that thousands of banks would fail, 

you know, we had—that is where you saw your customers pulling 

in. It wasn’t the fact that the banks didn’t have money to lend. The 

consumer confidence just went to the tank. And so we had to restore that. And coupled with that was the deposit insurance question and, you know, does your bank save? And the confusion over 

money market guarantees where the mutual funds got unlimited 

and our banks had $100,000 still. So it is hard to compete. 

And yet those customers know us. They know us by name, as you 

said. And the confidence—we were able to rebuild that confidence. 

But it was a campaign. We do have money to lend, and we would 

be glad to lend it. 

Mr. MANZULLO. Thank you. 

Mr. Yingling. 

Mr. YINGLING. Just a few numbers that I think would surprise 

most people. Consumer and industrial loans for banks are up 15 

percent this year. Home equity loans, admittedly from a low base, 

are up 21 percent. Asset-backed securities lending—not mortgage 

but other asset backs—down 79 percent. We have a chart on page 

10 of our testimony that shows consumer and industrial business 

lending, and consumer lending is actually up for banks. 

Mr. MANZULLO. And this is all banks? 

Mr. YINGLING. Right. The world is coming back somewhat to the 

bank model, and we are ready to go. 

Mr. MANZULLO. The question I asked of you, Ms. Blankenship, I 

just want to make sure that we have a lot of larger banks in our 

district with local branches and real-life people there. They are also 

telling me the same things that many of the community banks are 

saying. 

Thank you. 

The CHAIRMAN. The gentleman from Texas. 

Mr. GREEN. Thank you, Mr. Chairman, and I thank the witnesses for appearing today. 

I have two quick questions. The first is, having heard the plan 

that Chairwoman Bair has, is there anyone who is in disagreement 

with the plan? Anyone? And the Chair has taught me that I am 

to build a record by indicating that the absence of hands—ah, we 

do have hands. Okay. All right. Let’s hear from you please, Mr. 

Bartlett. 

Mr. BARTLETT. Well, we are in agreement with the direction of 

the plan and with the goals and the broad parameters. But the 

plan wasn’t—the details weren’t laid out today. There are some deVerDate Aug 31 2005 16:48 Feb 20, 2009 Jkt 046593 PO 00000 Frm 00063 Fmt 6633 Sfmt 6633 K:\DOCS\46593.TXT TERRIE
60 

tails in the plan that we would like to work with either the FDIC 

or Treasury to make sure— 

Mr. GREEN. Let me be a little bit more specific. Do you agree 

with the notion of an incentive for the servicers? 

Mr. BARTLETT. We agree with the notion. 

Mr. GREEN. A monetary emolument? 

Mr. BARTLETT. Yes, although we are not asking for it. We can do 

it without that incentive. But we agree with the plan. 

Mr. GREEN. Now I have to ask you, why haven’t you done it 

without it? 

Mr. BARTLETT. Well, legally, we are. 

Mr. GREEN. The empirical evidence doesn’t seem to indicate that 

you are. It may very well be, but I just haven’t found anything to 

substantiate what I think is a fair position for you to make. 

Let me go on to the next. Mr. Yingling. 

Mr. YINGLING. We generally agree with the approach. I spoke 

with Sheila Bair about it 5 weeks ago. We like the idea of using 

the institutions that know the customer, that are there to work 

with them, rather than sending it to Washington and that type of 

delay. 

I just raise two caveats. One is—and it is all a matter of calibration—we do have a concern that if it becomes a government program—say you are in a neighborhood in Texas and there are two 

or three foreclosures, potential foreclosures in your neighborhood— 

are others going to see this program and see that Bill or Mary got 

this and say, okay, I will stop paying so I can qualify? That is all 

a matter of the details and the communication. 

And the other is, I think we need to sit down with real, live lenders, community banks and others, and design a program, make 

sure it works. 

Mr. GREEN. Thank you very much. 

I take it that there were only two hands, persons who were in 

disagreement; and they have spoken. Is there a third? 

Ms. BLANKENSHIP. I would just like to qualify that the community banks didn’t face the same problems as IndyMac because, typically, they make their mortgages just individually; and they are 

working through those. 

Mr. GREEN. Ms. Blankenship, if I may interrupt, because my 

time is short. Let me just ask, the plan itself, however, are you in 

agreement or disagreement with it? The concept that you heard. 

Ms. BLANKENSHIP. I think the concept is good to work with the 

consumer. 

Mr. GREEN. And to have an emolument, a payment of money for 

foreclosure avoidance. 

Ms. BLANKENSHIP. I don’t think it should be a government-mandated plan for the banks. But I think that a tool for the banks to 

work with would be— 

Mr. GREEN. It is not mandated; it is if you buy into the program. 

Then you will receive the emolument if you participate in foreclosure avoidance. That is the way it is established, as I understand it. 

Ms. BLANKENSHIP. Yes. 

Mr. GREEN. Would you support that? 

Ms. BLANKENSHIP. Yes. 

61 

Mr. GREEN. Let’s go on to the last person, and I will be done. 

Mr. FINDLAY. Everyone keeps forgetting about me here from the 

insurance industry. We don’t have a position on behalf of the CIAB 

on it. But I support the concept. We believe that there ought to be 

relief for individual homeowners, and we built something like that 

into our proposal. 

Mr. GREEN. Well, just in response to your question, there were 

many people who thought that this would not impact them. I say 

you are involved in it simply because life is an inescapable network 

of mutuality tied to a single garment of destiny. Whatever impacts 

one directly impacts all indirectly. That is Dr. Martin Luther King. 

So we are all in this together. 

Thank you very much, Mr. Chairman. 

The CHAIRMAN. If I may in the gentleman’s remaining time 

ask—because I appreciate him asking that question. Let me ask 

each of you to indicate, if we can work out the specifics—and I 

agree; those are important—would you think it is appropriate to 

use TARP money for the costs of this? Beginning with Mr. Bartlett. 

Mr. BARTLETT. Mr. Chairman, yes, I do, if we can work out the 

details. 

The CHAIRMAN. Mr. Yingling. 

Mr. YINGLING. I think it is important that foreclosures and housing be dealt with. Yes, I would. 

The CHAIRMAN. Ms. Blankenship. 

Ms. BLANKENSHIP. Yes, I would agree. 

The CHAIRMAN. And Mr. Findlay. 

Mr. FINDLAY. I can’t disagree. 

The CHAIRMAN. That is very important. We will note that to the 

Secretary. 

The gentlewoman from Illinois. 

Mrs. BIGGERT. Thank you, Mr. Chairman. 

Mr. Findlay, you have talked about the theory of the current crisis is not a liquidity crisis but instead a transparency crisis as it 

relates to the pricing of illiquid assets and your belief that the insurance program could help. How will the insurance program affect 

the financial statements of the participating entities? 

Mr. FINDLAY. I think the way we view this, Congresswoman, is 

that the fundamental problem in the marketplace right now is a 

lack of reliable information on the value of assets and indeed a sort 

of panic that sets in when you don’t have reliable information. You 

don’t want to be the last person holding a troubled asset. And all 

these financial institutions have on their books assets that they 

had valued a certain way in August, and it is a fraction of that 

value today. 

We are fairly confident that the fire sale price at which assets 

are being held today is not the intrinsic value of the asset, and it 

wouldn’t be a good thing to require institutions to mark assets 

down to that value. So what we have tried to do is come up with 

an innovative way to take the panic out of the marketplace, and 

allow information to get into the marketplace, so we can determine 

what these assets’ values are and essentially give a little breathing 

space to the market over the next year or two to bring these assets 

back to their intrinsic values, which we know they are not at today. 

Mrs. BIGGERT. Thank you. 

62 

Mr. Yingling, do you think that this insurance program would 

really help the banks and financial institutions and be able to—you 

know, we have the mark to market, which has lowered that. But 

is the insurance program something that would be to your benefit, 

to be able to have what these mortgage-backed securities really are 

worth? 

Mr. YINGLING. Well, I think it is very valuable to explore. I think 

we do have an issue of just how many programs we can have working at one time. But certainly it is a program in terms of its design 

that makes sense. 

Mrs. BIGGERT. But this really was a program that was one of 

three that was the Secretary’s proposal and the alternative— 

Mr. YINGLING. Yes. 

Mrs. BIGGERT. —and it seems like—I am not sure that the Secretary really wants it to be implemented. And it seems to me that 

the only way that we are really going to know what the value of 

these mortgage-based securities is by this program. I haven’t heard 

of any other basis that they are really going to be able to find that 

out. 

Mr. Bartlett, is that important? Do we really have to know what 

all of these mortgage-based assets are worth? 

Mr. BARTLETT. We support the program as outlined by Mr. Findlay; and I put it, actually, in my written testimony. So we think 

that now that the capital infusion has been put in place, then the 

Treasury should be looking at other alternatives of additional ways 

to provide liquidity back in the market of which the asset guaranteed program, the asset purchase perhaps and perhaps the asset 

guarantee and the insurance program is a better, more leveraged 

way of providing the same thing. 

It is important to note that all the money that is needed for liquidity in the market cannot come from the government, not even 

a small fraction of it. So the government money has to be used to 

cause the private money to come to the table; and I think that is 

the basis of this insurance program, which is the right approach. 

Mrs. BIGGERT. Thank you. 

Ms. Blankenship, do you look at this program as being helpful 

or does it apply to the community banker? 

Ms. BLANKENSHIP. I do think I would agree, because anything 

that would help us alleviate the decline in those mortgage-backed 

securities values, because it affects the industry on all levels, so it 

would be helpful. Thank you. 

Mrs. BIGGERT. Thank you. 

I yield back. 

The CHAIRMAN. The gentleman from Texas. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

After reading about the supposed demise of my State’s influence 

in the Nation’s Capital in the Hill newspaper today, I am very 

happy to see two fellow Texans on this panel, representing 50 percent of the panel. Obviously, there has been a big discussion about 

foreclosure prevention in mitigation efforts. 

The gentleman from Texas is no longer in the room, my friend, 

and spoken that he had seen no—I believe—I hope I had the proper context—had seen no empirical evidence that there was voluntary reworkings, refinancings of these mortgages. I haven’t 

63 

looked at numbers recently, but my thought is, as of a few weeks 

ago, there had been something around the neighborhood of 2.5 million voluntary refinancings. Mr. Bartlett, do you know what the 

latest number may be? 

Mr. BARTLETT. Congressman, actually, it is 2.5 million since July 

of 2007. Those are real numbers. There is a combination. A little 

over half of them are modifications; the other is a repayment plan. 

They get people back in their houses and the mortgage reinstated 

so that they can afford it. 

We believe that the streamlined mortgage, which we announced 

last week, which is similar but not identical to what Chairwoman 

Bair proposed, we think that should increase it by another 100,000 

a month. So it is running about 200,000 a month. We think we can 

increase it to about 300,000 a month. It is a long ways to go, but 

those are big numbers, and they are real, and those are real people 

that are being able to reinstate their mortgages and keep their 

homes. 

Mr. HENSARLING. Well, there seems to be a belief by some on the 

committee that these refinancings are not taking place or that you 

apparently have no incentive to do it. Is it not true that the average foreclosure cost to financial institutions is somewhere in the 

neighborhood of $60,000 to $80,000? Does anyone feel qualified to 

answer that? 

Mr. BARTLETT. We did a survey a year ago. It was an average of $57,000. So I suspect it is more like $80,000 by now. 

Foreclosures are financially as well as emotionally devastating 

for all involved. But, having said that, it is a mortgage. It is not 

a grant, and we all know that. So we set out to reinstate the mortgage and modify the mortgage if we can get it back to a basis of 

a mortgage with a homeowner able to pay that mortgage and stay 

in the house. We do that 200,000 a month, and we are doing it faster every month. 

Mr. HENSARLING. Mr. Yingling, in an answer to a previous question, I think you kind of brought up the moral hazard dilemma 

about incenting some people with Federal funds to renegotiate 

their mortgages. I think it begs the question, how many people 

can’t pay their mortgages and how many people choose not to pay 

their mortgages? And can you speak to the moral hazard of a program that, if not properly structured, is going to incent people to 

purposefully default? 

Mr. YINGLING. We do believe that we need very strong programs 

to address foreclosure, and one of the issues I believe that came up 

in a recent hearing at this committee was the securitization issue 

and how that has been a roadblock to be able to do foreclosures in 

many cases. What bankers have expressed is a concern. It is all a 

matter of communication and calibration of the program. 

But it is one thing, for example, in IndyMac, where the FDIC 

goes out with letters to IndyMac borrowers and says, you are an 

IndyMac borrower; here is what we can do for you. And a more 

general situation, okay, is where there is a government program 

that if you miss three payments you qualify for and you will get 

your monthly payment cut by a third, and that goes around the 

neighborhood. What you don’t want is for people to say, okay, it is 

a government program. I should be able to participate. I won’t pay 

64 

my mortgage for the next 3 months. Because then the cost to the 

taxpayers will just balloon. 

Now this can be dealt with, but it is something that we really 

need to think through. 

Mr. HENSARLING. Ms. Blankenship, in your testimony—and let 

me thank you for coming here and making the committee aware of 

the lack of access to many of our community financial institutions, 

their inability to access much of the TARP money. You brought the 

lack of access to our attention and you also stated that community 

bankers were not the cause of the financial crisis. And perhaps it 

is the cynic in me pointing out, maybe that is your problem. There 

tends to be a habit in the Nation’s Capital of rewarding failure and 

punishing success. You might want to think about that for the next 

round. 

Mr. Findlay, I don’t know where your voice was 6 weeks ago. I 

wish we could have heard it more loudly than we have today. 

I know that at least our chairman has been quoted in The Washington Post at the time the original legislation passed—I believe I 

have this right, Mr. Chairman—that you did not expect the insurance program to materialize. And I hope that is ‘‘expect’’ as opposed 

to ‘‘hope.’’ But I think it holds a lot of promise, and I am glad the 

chairman had an opportunity to hear your testimony. 

I see my time is out, and I yield back. I would be happy to yield 

to the Chair. 

The CHAIRMAN. I did express that view after talking to the Secretary of the Treasury. 

I thank the panel. We will reconvene at 2:30. 

[Recess] 

The CHAIRMAN. The hearing of this morning will reconvene. 

I apologize. A Democratic caucus was scheduled at the same 

time. I regret that more of our colleagues won’t hear our witnesses, 

but it will be on C–SPAN. There is nothing competing with it on 

the Floor of the House. And, obviously, the testimony will be available. It is a subject of continuing importance, I think, as a result 

of this morning’s hearing and the conversations we had, particularly with the Secretary of the Treasury, that this question of what 

more to do with regard to mortgage foreclosure is very much an 

open question. And so this testimony will be especially relevant in 

helping us shape what I think is going to be the next step. 

And, with that, we will begin in alphabetical order with Dr. Alan 

Blinder, who is a professor of economics and co-director of the Center for Economic Policy Studies at Princeton and a former Vice 

Chair of the Federal Reserve Board of Governors. 

Mr. Blinder? 

STATEMENT OF ALAN S. BLINDER, GORDON S. RENTSCHLER 

MEMORIAL PROFESSOR OF ECONOMICS AND CO-DIRECTOR 

OF THE CENTER FOR ECONOMIC POLICY STUDIES, PRINCETON UNIVERSITY 

Mr. BLINDER. Thank you, Mr. Chairman, and members of the 

committee. Thank you for the opportunity to testify here this afternoon. 

I have come here neither to praise the TARP nor to bury it, but 

rather to urge Congress to exercise its oversight authority to enVerDate Aug 31 2005 16:48 Feb 20, 2009 Jkt 046593 PO 00000 Frm 00068 Fmt 6633 Sfmt 6633 K:\DOCS\46593.TXT TERRIE
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sure that the Secretary of the Treasury pursues the stated goals 

of the legislation. Failing that, I think Congress should take the 

Secretary’s checkbook away and wait for a new Secretary of the 

Treasury. 

I note that the Secretary just said he is probably not going to ask 

for the second $350 billion anyway. So that last point might be 

moot. 

Mr. Chairman, I think you will remember that I was among the 

earliest voices calling for something akin to, though not exactly the 

same as, the TARP. Specifically, I recommended the establishment 

of two new institutions, one of which would purchase and refinance 

imperiled mortgages and the other of which would buy up some of 

what we now call troubled assets, that is, mortgage-backed securities and the like. 

The TARP was, in fact, established to serve both of those purposes. That is in the legislation. So it is with great dismay that I 

look at what has been done as of today and conclude that the 

TARP is not, in fact, performing its legislatively-mandated duties. 

I object to the decisions Secretary Paulson has made on at least 

three different levels: First, the choices he has made regarding how 

to deploy the money; second, the execution of those choices; and, 

third, what seems to me, although you ladies and gentlemen can 

judge this better than I, to be a pretty sharp deviation from congressional intent. Let me take each up in turn, starting with the 

last. 

Because the financial crisis has grown to be so complicated and 

multifaceted, it is worth remembering that it all began with falling 

house prices and defaults on mortgages or, to be more precise, fears 

that defaults on mortgages would become rampant. 

Foreclosures are personally painful and economically costly. They 

undermine property values, and they lead to fire sales of homes, 

which further depress house prices, thereby contributing to the vicious circle. It is difficult for me to see a way out of this mess without reducing foreclosures sharply. 

Understanding that, Congress wrote legislation that at numerous 

points exhorts, encourages, and even, I think, directs the Secretary 

of the Treasury to use TARP funds, at least some of them, to acquire mortgages and get them refinanced. But, as you all know, he 

has not done so. Nor has he purchased any of the so-called troubled 

assets; and he has recently said he does not intend to do so. 

The law that you passed in early October authorizes establishment of the TARP to purchase troubled assets, which are defined 

in Section 3.9. If you have my testimony, the exact words are reproduced on page 3. But they basically say, ‘‘A, residential or commercial mortgages and any securities, obligations or other instruments based on mortgages.’’ And then there is clause B, which basically says, ‘‘any other instrument that the Secretary deems to be 

essential to promoting financial market stability.’’ And it adds to 

that clause, ‘‘but only upon transmittal of such determination in 

writing to the appropriate committees of Congress.’’ I presume this 

is the appropriate, or at least one of the appropriate, committees. 

So I think of that language as defining three eligible classes of 

assets for the TARP to purchase: Mortgages; mortgage-related seVerDate Aug 31 2005 16:48 Feb 20, 2009 Jkt 046593 PO 00000 Frm 00069 Fmt 6633 Sfmt 6633 K:\DOCS\46593.TXT TERRIE
66 

curities; and then the catch-all, anything else that the Secretary 

deems important to financial stability. 

Well, I guess I am an old-fashioned believer in constitutional democracy. I followed from a distance—you ladies and gentlemen 

were right in the middle of it—a pretty rancorous congressional debate over the TARP. And I am pretty sure that Congress believed 

it was authorizing $700 billion mainly for the first two of those 

purposes: buying and refinancing mortgages and purchasing mortgage-related securities. 

Instead, as you know, almost all the money committed to date is 

for capital injections into banks, justified under that catch-all 

phrase, ‘‘any other financial instrument.’’ Were I a Member of Congress, I would be pretty unhappy about this turn of events. And, 

in fact, as a taxpayer shouldering his share of the $700 billion burden, I am unhappy about this turn of events. 

To be sure, I am not suggesting that Secretary Paulson overstepped his legal authority by making capital injections. They are, 

in fact, justified by Section 3.9(B). Nor do I question the wisdom 

of allocating some of the TARP money to recapitalizing banks. But 

I think we need to pay attention to the scoreboard, which so far, 

at almost half-time, reads, ‘‘mortgages: zero; mortgage-related assets: zero; other: 100 percent.’’ 

I don’t believe that such a lopsided allocation of funds is the optimal use of the public’s money. And to see why, I would like to review very briefly the arguments that support each of these three 

alternative uses of the funds, starting with mortgages. 

As I mentioned a moment ago, the financial crisis began with 

mortgages and fears of foreclosures. So, naturally, the legislation 

directs the Secretary to use TARP funds to get mortgages refinanced. Unfortunately for the country, he has chosen not to do so, 

and the mortgage problem has festered and worsened. 

Second, mortgage-related securities. Three main arguments were 

used to support the idea of buying these kinds of assets—an idea, 

as you will remember, that was very controversial. First, panic had 

virtually shut down mortgage-backed securities (MBS) markets, 

which had to be put back in working order to restore our mortgage 

finance system. Second, one of the reasons for the panic, though 

not the only one, was that nobody knew what these mortgage-related securities were actually worth. A functioning market would 

at least establish objective values. Third, and most importantly, 

many mortgages are tied up in complicated securitizations, so buying some of those securities would enable the government to get 

control of these mortgages and refinance them. In fact, that third 

objective was written explicitly into the law in several places, 

prominently in Section 109. 

The third purpose is recapitalizing banks or, more precisely, the 

catch-all, ‘‘any other financial instrument.’’ That was a wise addition to the Act because it gave the Secretary much-needed flexibility to respond to unforeseen circumstances. And I believe Secretary Paulson was right to decide that bolstering weak bank balance sheets was, and this is the phrase in the law, ‘‘necessary to 

promote financial market stability.’’ 

But this circumstance was hardly unforeseen. It makes one wonder why it wasn’t written into the legislation. I would also question 

67 

whether capital injections are the most appropriate, let alone the 

only appropriate, use of the TARP money. And I have serious questions about the details of the program, which I will come to in a 

moment. 

So was this a case of bait and switch? Secretary Paulson has appealed to the well-known Keynesian dictum that reasonable people 

can change their minds when the facts change. And there is no 

doubt that lots of facts have changed since October 3rd. 

But he has not, to my knowledge, explained what new facts invalidate the three arguments that I just gave and that were given 

in the congressional debate. Foreclosures are still coming en masse, 

and they still destroy value. The MBS markets are still in ruins. 

Furthermore, there is a natural symbiosis between buying up 

mortgages and buying up troubled assets. Purchasing the MBS 

helps the government acquire the mortgages to finance, mortgages 

that were otherwise buried in securitizations. And refinancing 

mortgages to avert foreclosures should enhance the values of mortgage-backed securities. 

And, by the way, each of those should also bolster the financial 

positions of the banks, which, of course, is the purpose of capital 

injections. 

So I conclude that the arguments for buying both mortgages and 

mortgage-related securities still stand, as they did on the day Congress passed the legislation. And I think it is a shame that neither 

of these are being done. 

But even given the decision to devote virtually all of the first $350 billion tranche of TARP money to capital injections, taxpayers 

might reasonably have expected a better designed program. 

I would fault the Treasury’s execution on at least six dimensions: 

First, the program is enshrouded in too much secrecy. 

Second, Secretary Paulson decided to purchase preferred stock 

with no voting or other control rights. So the government winds up 

providing money while acquiring virtually no influence over the recipient banks’ behavior. 

Third, taxpayers will receive only a 5 percent dividend rate on 

their preferred stock investments. Warren Buffet got 10 percent on 

a similar investment with Goldman Sachs. 

Fourth, participating banks are allowed to continue to pay dividends to their shareholders, which I found amazing. It raises the 

spectacle of banks borrowing money—cheaply, by the way—from 

the taxpayers in order to maintain dividends to the common stockholders. 

Fifth, contrary to many suggestions, Secretary Paulson did not 

require participating banks to raise private capital pari passu with 

the government’s capital injections, which I, among many, thought 

would have been a good idea because it at least would have provided a valuable market test of the viability of the institutions. 

Sixth, the capital injections are being made with no—I repeat, 

no—public purpose quid pro quo at all, such as, for example, some 

minimal lending requirements or maybe a pledge to refinance more 

mortgages. 

So the question is, why make the terms so favorable to banks 

and, by inference, so unfavorable to taxpayers? Based on what Secretary Paulson has said, I can only presume that he wanted to enVerDate Aug 31 2005 16:48 Feb 20, 2009 Jkt 046593 PO 00000 Frm 00071 Fmt 6633 Sfmt 6633 K:\DOCS\46593.TXT TERRIE
68 

sure the widest possible bank participation by avoiding stigma. Indeed, to this end, as you know, he even forced the money on several 

unwilling banks at that famous October 13th meeting at the Treasury. 

The CHAIRMAN. You have 1 more minute. 

Mr. BLINDER. One more minute? Okay. 

So, to put it mildly, the anti-stigma strategy didn’t work. Within 

minutes, the big banks that didn’t want or need the Treasury’s capital made that fact known to the markets, and more banks continue to do so daily. And, of course, that is exactly what we should 

have expected. It is in the interest of the healthy banks to demonstrate their health by saying, ‘‘We don’t need this money.’’ But 

by forcing it on recipients who don’t need it, the TARP is wasting 

what, to me, is a precious resource: taxpayer money. 

So where do we go from here? 

First, I think there has not been sufficient oversight over the 

TARP’s choices and operations. That is probably nobody’s fault; it 

is hard to get organized that fast. And I am glad to see that the 

congressional oversight panel is at least in sight, although not yet 

operating. 

Second, as I said, I question whether zero allocations of funds to 

buying and financing mortgages and to buying MBS is really consistent with either the spirit or the letter of the law. I don’t think 

it is. 

Thirdly, despite that, one might ask whether Secretary— 

The CHAIRMAN. You have to wrap it up. 

Mr. BLINDER. Okay—Paulson—finish the sentence? 

One might ask whether Secretary Paulson’s decisions to date 

have actually advanced the objectives of the law better than what 

the law itself called for. I don’t think they have. 

Thank you. 

[The prepared statement of Dr. Blinder can be found on page 164 

of the appendix.] 

The CHAIRMAN. And next, Professor Martin Feldstein, former 

chairman, I believe, of the Council of Economic Advisors and my 

classmate. 

So, Dr. Feldstein? 

STATEMENT OF MARTIN S. FELDSTEIN, GEORGE F. BAKER 

PROFESSOR OF ECONOMICS, HARVARD UNIVERSITY, AND 

PRESIDENT EMERITUS, NATIONAL BUREAU OF ECONOMIC 

RESEARCH, INC. 

Mr. FELDSTEIN. Thank you, Mr. Chairman, fellow classmate. 

I am very worried about the U.S. economy. I think this financial 

crisis and the economic downturn are mutually reinforcing and 

that, without further action from the Congress, this recession is 

likely to be longer and more damaging than any that we have seen 

since the 1930’s. 

The fundamental cause was the underpricing of risk and the creation of excess leverage. But the primary condition that now 

threatens the economy is the expectation that house prices will 

continue to decline, leading to more defaults and foreclosures. And 

those foreclosures put more houses on the market, driving house 

prices down further. 

69 

This potential downward spiral reflects the fact that in the 

United States, unlike every other country in the world, home mortgages are no-recourse loans. If someone stops paying his mortgage, 

the creditor can take the home but cannot take other assets or look 

to the individual’s income to make up any unpaid balance. This norecourse feature gives individuals whose mortgages exceed the 

value of their homes an incentive to default and to rent until house 

prices stop falling. 

Because the number of defaults is now rising rapidly and expected to go on increasing, financial institutions cannot value mortgage-backed securities with any confidence. That is what stops 

interbank lending and lending by financial institutions that cannot 

judge the value of their own capital. 

The actions, I think, of the Federal Reserve and the FDIC have 

done a lot to prevent a runoff of funds from the banks and from 

the money market mutual funds and to maintain the commercial 

paper market. 

In contrast, I believe that the TARP, itself, has not done anything to resolve the basic problem of the financial sector. The 

Treasury’s original plan to buy impaired loans as a way of cleaning 

the bank’s balance sheet simply couldn’t work. Even $700 billion is 

not enough to deal with more than $2 trillion of negative-equity 

mortgages. The plan to buy impaired assets by reverse auction 

couldn’t work because of the enormous diversity of those securities. 

And even if the Treasury had succeeded in removing all of the toxic 

assets from the banks’ portfolios, that would have done nothing to 

stop the flow of new impaired mortgages and the fear of more such 

toxic assets in the future. It was good that the Treasury abandoned 

this asset purchase plan. 

Injecting capital into selected banks is also not a way to resolve 

the problem and get lending going again. A bank like Citigroup has 

a balance sheet of $2 trillion. Injecting $25 billion of government 

capital does not provide a significant amount of loanable funds, nor 

does it give anyone confidence that Citi would have enough capital 

to cover any potential losses on its mortgage-backed assets. Although it does raise Citi’s Tier 1 capital, that was not a binding 

constraint. So it was good that the Treasury abandoned the equityinfusion plan, as well. 

Last week, Secretary Paulson announced that he will now concentrate on propping up credit for student loans, auto loans, and 

credit cards. He didn’t say how that would be done. But doing so 

will not stop the lack of confidence caused by the expected continuing meltdown of mortgage-backed securities that is driven by 

the process of defaults and foreclosures. 

In light of this poor record, the Treasury’s announcement yesterday that it will not seek any of the remaining $350 billion of the 

original $700 billion TARP funding seems to me to be quite appropriate. 

What needs to be done? Stopping the financial crisis and getting 

credit flowing again requires ending the spiral of mortgage foreclosures and the expectation of very deep further house price declines. To do that, I think, requires two separate new programs, 

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owners with negative equity. Here, briefly, is a possible way of 

dealing with each of these two groups. 

Consider first the problem of stopping homeowners who have 

positive equity from falling into negative equity as house prices decline to the pre-bubble level. Earlier this year, I suggested that the 

government offer all homeowners the opportunity to substitute a 

loan with a very attractive low interest rate but with full recourse 

for 20 percent of the homeowner’s existing mortgage. This mortgage-replacement loan from the government would establish a firewall so that house prices would have to fall more than 20 percent 

before someone who now has positive equity would decline into 

negative equity. 

The key to preventing further defaults in foreclosures among the 

current negative-equity homeowners is to shift those mortgages 

into loans with full recourse, allowing the creditor to take other assets or a fraction of wages if the homeowner defaults, as banks and 

other creditors do in Canada, in Britain, and, indeed, in every 

other country in the world. 

But the offer of a low-interest-rate loan is not enough to induce 

a homeowner with a substantial negative equity to forego the opportunity to default and, thus, escape his existing debt. Substituting a full-recourse loan requires the inducement of a substantial write-down in the outstanding loan balance. Creditors now do 

have an incentive to accept some write-down in exchange for the 

much greater security of a full-recourse loan. 

The government could bridge the gap between the maximum 

write-down that the creditor would accept and the minimum writedown that the homeowner requires to give up his current right to 

walk away from his debt. And I described this plan in some more 

detail in an op-ed piece in today’s Wall Street Journal that is attached to the written testimony. 

If these two programs are enacted, the financial sector would be 

stable, and credit would again begin to flow. But while that is a 

necessary condition for getting the overall economy expanding 

again, I am afraid it is not sufficient. To achieve economic recovery, 

the Nation also needs a program of government spending for at 

least the next 2 years to offset the very large decline in consumer 

spending and in business investment. To be successful, it must be 

big, quick, and targeted at increasing production and employment. 

I am, as you know, a fiscal conservative. I generally oppose increased government spending and increased fiscal deficit. But I am 

afraid that is now the only way to increase overall national spending and to reverse the country’s economic downturn. 

If these two things are done—that is, stopping the incentive to 

default on home mortgages and increasing government spending— 

I will be much more optimistic about the ability of the economy to 

begin expanding before the end of next year. 

Thank you, Mr. Chairman. 

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

173 of the appendix.] 

The CHAIRMAN. I thank you both. 

Let me ask Mr. Feldstein, the 20 percent swap, did you say that 

everybody now has the right to prepay? Are we clear that there are 

no restrictions on prepayment in anybody’s mind? 

71 

Mr. FELDSTEIN. No, what I would suggest is that, if you go that 

route, the legislation provide that individuals have the right to prepay. 

The CHAIRMAN. In abrogation of existing contracts? 

Mr. FELDSTEIN. To that extent. But I can’t believe that there are 

going to be many creditors who would find that unattractive. 

The CHAIRMAN. Well, that had been a problem, but, just what 

you say, since individuals now have the right to prepay, and they 

don’t. I mean, that is— 

Mr. FELDSTEIN. I don’t think—did I say that? 

The CHAIRMAN. Did somebody else say that? 

Mr. FELDSTEIN. I don’t think so. 

The CHAIRMAN. Yes, it is in your testimony. Well, it is not important. I am sorry; it was in the March 7th piece. 

Mr. FELDSTEIN. Oh, yes. Well, I have learned some things. 

The CHAIRMAN. Well, no, but it was true, in fairness, it was true 

that, under the HOPE NOW program, they did get a waiver of prepayment; it wasn’t legally binding. 

Mr. FELDSTEIN. I would say that they would have—they should 

be given the right to prepay. 

The CHAIRMAN. What about with recourse? What does this do 

with second mortgages? Which has turned out to be one of our 

problems in trying to resolve things, is that—and I say this in the 

spirit of cooperation. I welcome these cooperative things. What 

about the second mortgage issue? 

Mr. FELDSTEIN. I think that has to be done in proportion. In 

other words— 

The CHAIRMAN. That get their share— 

Mr. FELDSTEIN. —that they would share in this same thing. I 

would want to see— 

The CHAIRMAN. And I appreciate that. I think we undercompensated them in HOPE for Homeowners. And that is one of the 

things that I hope will get resolved. 

Mr. FELDSTEIN. Well, it is clear you are not getting the take-up 

in the HOPE for Homeowners— 

The CHAIRMAN. Yes. In fact, one of the things I hope they would 

do with the TARP would be to—if we were redoing HOPE for 

Homeowners, we have learned some things we would do differently. 

Some things could be done administratively; some would require a 

statutory change. But if they did it out of the TARP, they could, 

in fact, make those changes. But let me just get to the problem we have, which was the $156 

billion figure. That is for the people underwater. That would have 

to be regular spending? 

Mr. FELDSTEIN. Real money. 

The CHAIRMAN. Yes. And one of the things we are trying to deal 

with, and it is helpful to have two economists who don’t obviously 

share the same ideological position make the point, because we run 

into a lot of resistance with people saying, none of my tax dollars 

go to help people elsewhere. 

Now, you do, to some extent, respond to that with offering the 

20 percent repurchase to everybody, so all homeowners with this 

package could get some advantage. But the $156 billion at this 

point appears to be a large chunk. 

72 

And let me ask—and I welcome, obviously, your testimony about the need for a stimulus, and I think you talked about $300 billion. 

Is that in addition to the $156 billion, or would that be part of the 

$300 billion? 

Mr. FELDSTEIN. The $300 billion, I think, is a number that, in 

fact, is a kind of minimal number, and it would be required not 

just for the coming 12 months but probably for the 12 months after 

that. 

The CHAIRMAN. So that doesn’t include the $156 billion? 

Mr. FELDSTEIN. It doesn’t include the $156 billion. The $156 billion is not going to have a significant stimulus impact. 

The CHAIRMAN. It is prevents it from getting worse, is the issue. 

Mr. FELDSTEIN. Right. And to that extent, it helps every homeowner, because it stops other home prices from being— 

The CHAIRMAN. Yes, we have made that argument. It is a hard 

sell. 

One of the things I said to Chairman Bernanke yesterday, and 

I will say it with all respect as a, you know, former colleague, 

counterfactuals buy you more in more academic discussions than 

they do politically. Harm avoided is rarely something on which you 

can run for reelection. And that affects, I am afraid, some of my 

colleagues. 

Dr. Blinder, since you have been following this very closely, too, 

I know, the FDIC plan, would you modify it some? 

Let me put it this way. The Secretary of the Treasury has said, 

in partial criticism of it, that he thinks the way it is, with us guaranteeing half of the loss if there is a redefault, that you could wind 

up with a fairly small benefit for some homeowner and after 6 

months a disproportionately large one for the lender. A, do you 

think that is reasonable? And B, is it reparable, if it is? 

Mr. BLINDER. It is reasonable; it is definitely reparable. 

One sentence, and then let me address the question you asked 

more specifically. I think, at this stage, we have gone so far down 

the ‘‘let the foreclosures rip’’ road that I, for one, would be ready 

to board any train that is ready to leave the station. So I would 

certainly board the Sheila Bair train. 

I think her plan could be improved. One thing I don’t like about 

it—though this is in the context of being very favorable toward it 

compared to what is going on with the TARP—is that eligibility requires delinquency. Any plan that has that feature sort of incents 

people to stop paying their mortgages. So I would like the eligibility to depend on— 

The CHAIRMAN. No, I agree with that. And let me say this. Fortunately, you know, sometimes we get into the legal habit of we have 

to accept it or not accept it. The TARP is so written as to give, as 

we are now aware, a great deal of flexibility to the Secretary. The 

argument that there are this or that aspect of Sheila Bair’s very 

creative planning—she has been a very positive force here—needs 

modification is simply an argument to modify it. Under the TARP, 

they could do that. So I take that as encouragement. 

And, in fact, it would be good to have two models. The HOPE for 

Homeowners is a principal-reduction model; the other is an interest-reduction model. And they could both be made available depending on what is appropriate, with elements of Professor FeldVerDate Aug 31 2005 16:48 Feb 20, 2009 Jkt 046593 PO 00000 Frm 00076 Fmt 6633 Sfmt 6633 K:\DOCS\46593.TXT TERRIE
73 

stein. I mean, the nice thing about the TARP, its weakness could 

be its strength, in that it does allow for several approaches. 

The gentleman from California. 

Mr. ROYCE. Thank you. 

Let me ask a question of our two economists here. Because one 

of the occurrences that we listen to over and over again in this 

committee is the Federal Reserve coming up here and also Treasury Secretaries saying that there was a systemic risk to the economy because of the leveraging that was occurring in the system. 

And, specifically, they were identifying the leveraging, which I 

guess got up to about 100 to 1 at a point, with the GSEs, with 

Fannie Mae and Freddie Mac doing what somebody described as 

arbitraging, but borrowing at one rate and then—I guess they borrowed about $1 billion and then went out into the market and had 

$1.5 billion in these mortgage-backed securities in the portfolios. 

And, as they described it, one of the consequences of this was 

that the financial system worldwide was relying heavily on the 

mortgage-backed securities and, I guess, also, the debt a lot of the 

banks were holding as part of their collateral, these instruments 

from Fannie and Freddie. 

So maybe one of the things we weren’t thinking about at the 

time was that there was also all of this leveraging going on not just 

in the institutions themselves—maybe that got up to 100 to 1—but 

also, because it was collateral for loans, there was this additional 

leveraging that was leveraged into the system. 

And then, along the way, there was a little bit of nudging from 

Congress to Fannie and Freddie, in terms of the type of loans that 

they should be purchasing, the goals that they should have. And 

so, as a consequence, Alt-A loans, you know, and subprime loans, 

I mean, this was a place then that those who were writing those 

loans could get Fannie and Freddie to purchase them, as they got 

near the end of the year especially and needed to make that target. 

And so, as they ended up buying those back into their portfolio, 

and that being 10 percent of the portfolio, the argument that I 

have seen is that 50 percent of their losses at one point were these 

Alt-A loans and subprime loans that they had repurchased. 

And so one of the questions was: We have tried creating a charter, we have tried giving direction to a quasi-governmental entity 

or a private entity, however we want to define Fannie and Freddie, 

but might it be wiser, going forward, for us to just let market principles play out, rather than take a scheme like securitization 

through Fannie and Freddie and then disallow or prevent the regulator—in this case, OFHEO, because OFHEO testified here maybe 

a month ago or so, the Director of OFHEO. He said, if they had 

gotten the legislation that they wanted, which would have allowed 

them to regulate for systemic risk, they could have deleveraged the 

situation, forced more capital. And they felt that even as, you 

know, 16 months from today, if they could have gotten that authority, they could have deleveraged this problem and made it a lot less 

of a crisis for at least the GSEs. And that might have staved off— 

they said it would have staved off the GSE problem. 

Be that as it may—that is their opinion—I had carried legislation in 2005 that the Federal Reserve had asked for to try to give 

them the ability to regulate for systemic risk in this way. 

74 

But that is the question I wanted to ask you gentlemen. Do you 

think, going forward, that perhaps we should back off of the portfolio arrangement there that we have, or the leveraging arrangement, and look at simply market principles maybe, in terms of the 

way that Fannie and Freddie would conduct itself in the future? 

Because I can see, going out 4 years, 5 years from now as we get 

this thing resolved, that same dynamic occurring again as long as 

we have that— 

Mr. FELDSTEIN. I think there is a built-in flaw in a system that 

provides a government guarantee, even if it is with a wink, a government guarantee for a for-profit corporation. And I think we 

have seen the adverse consequence of doing that. 

So I would hope that gradually over time that gets wound down. 

The economic studies of the effects of Fannie and Freddie, in terms 

of helping the home mortgage market, is that it lowers the cost of 

mortgages by a very small amount. And so, for most individuals, 

the gain that comes from that is very small relative to what we 

now see was a major risk for the system as a whole. 

So my own view is the challenge going forward is to find a way 

to gradually reduce the role of Fannie and Freddie. 

Mr. ROYCE. Thank you, Dr. Feldstein. 

Mr. BLINDER. I don’t entirely agree with what Dr. Feldstein just 

said. So if I could just suggest something: Fannie and Freddie had 

their origins in the perceived need—and I don’t think the perception was wrong—to create some securitizations, mortgage-backed 

securities and so on. In our wisdom, we the United States gave 

them this rather odd duck character once they got privatized. They 

were sort of private companies but not quite private companies. 

They are now operating as nationalized industries, basically. I 

think that at the end of the day, once we can get out from doing 

that, this is a case where we need to go to one extreme or the 

other. One extreme is to make them public enterprises analogous 

to Ginnie Mae, so nobody questions that this is the government. 

And, by the way, that is where public purpose, low-income housing, 

affordable housing would naturally go. Or you go to the other extreme, which is what I think you were suggesting, sir, which is to 

make them just private companies. 

Mr. ROYCE. They do the securitization, but they aren’t leveraged 

100 to 1. 

Mr. BLINDER. They have no line to the Treasury, and, therefore, 

they could never operate with the kind of leverage that Fannie and 

Freddie did. They would have leverage, but not as much. 

Indeed, I can well imagine that, at the end of the day, we do 

both. Those are two very large institutions, so that out of the ruins 

of those institutions comes a new government enterprise—with no 

ambiguity. It doesn’t have shareholders to cater to. It is just a government enterprise. On the other hand, maybe more than one 

purely private company can also arise. A company or companies 

that are in the securitization business, with no line to the Treasury, no special privileges at all. 

The CHAIRMAN. I think time has expired. 

The gentleman from Pennsylvania. 

Mr. KANJORSKI. Thank you, Mr. Chairman. 

75 

Dr. Feldstein, just one point that I wanted to get from you. You 

have talked about no recourse in home mortgages. But in Pennsylvania we have a dual system; you sign a mortgage, and you also 

sign a judgment note. And the judgment note stands for any money 

not covered by the mortgage. So we have a very low default rate 

or foreclosure rate in Pennsylvania. 

Is that not common in a lot of States, that there is a judgment? 

Mr. FELDSTEIN. In general, it is not. In most States it is pure norecourse. In some States, like California, the creditor has the choice 

between taking the property or going after other ways of collecting, 

but then the property is taken out of the potential sources of funds. 

So I think it is something like 75 percent of mortgages are strictly no-recourse. But the de facto practice in many other places is not 

to pursue the individuals. 

Mr. KANJORSKI. Right. And in Pennsylvania, very seldom do I see 

any pursuit on the judgment— 

Mr. FELDSTEIN. Well, that is also true in Europe, in Canada, and 

elsewhere. The fact that they can pursue it is enough to discipline 

individuals to not default, and that avoids the foreclosure. 

Mr. KANJORSKI. Right. 

Now, I am rather enamored with your proposals, to tell you the 

truth. What I do not understand is, this is something that will take 

weeks or several months to finally put in language, statutory language, and to persuade the American people and the Congress to 

pass something like this. 

Why is it not advantageous—or is it advantageous—for us to remain in session, have these types of proposals, reduce them into 

legislation, so that at least with the new Presidency we are prepared from day one to be able to act, as opposed to waiting around 

for a blind piece of legislation to appear and then we are all forced 

to make an either/or selection, knowing full well there are many 

things we could add to the bill that would make it much more applicable to the situation? 

Mr. FELDSTEIN. I think that would be a good thing. I am very 

worried because of the state of the economy of saying, well, let’s 

just wait until the new President is sworn in, until he builds his 

team, until everybody discovers where their office is and starts 

working. That gets you to March, and a lot of damage gets done 

between now and March. 

Mr. KANJORSKI. So if you had your druthers— 

Mr. FELDSTEIN. I would keep you all working. 

Mr. KANJORSKI. —you would recommend to the leadership that 

we stay in, or at least establish a committee, whether it is a special 

committee or whether it is this committee, to start drafting the legislation that would be in total by the time the new President takes 

his oath of office? 

Mr. FELDSTEIN. Of course the President would want to have his 

input—the President-elect would want to have his input into that. 

But, again, I assume he is going to name his economic team within 

a matter of days, and so there is no reason why they couldn’t start 

working with the Congress on this well in advance of late January. 

Mr. KANJORSKI. In a way, I am sympathetic, particularly to you 

because I think I know your philosophical bent, and for you coming 

with a proposal like this and taking an argumentative position to 

76 

hold that proposal, I have great admiration for that. But it does set 

you up with a conflict with my friend from California, who believes 

that the market itself should be allowed to go forward. 

Why, being as free a marketeer as you are, why have you cancelled out the market really being able to resolve this problem? 

Mr. FELDSTEIN. Because of the no-recourse nature of loans, the 

market is not working as well as it should. Because of the mistakes 

that were made in extending excess credit during this past decade, 

allowing for very high loan-to-value ratios, I think we need to have 

some intervention to correct these problems. 

Mr. KANJORSKI. Would this require a nationalization of real estate law, basically? 

Mr. FELDSTEIN. Certain features of it Congress would have to 

override the existing contracts and existing State rules. Again, I 

am not a lawyer, I don’t know how broad that would have to be. 

Somehow I don’t think these are major changes in real estate law. 

But, for example, if an individual now pays down a piece of his 

mortgage, the typical practice is that reduces the principal but not 

the monthly payment, so they end up paying off their mortgage 

sooner. Well, my 20 percent mortgage replacement loan is intended 

to reduce their mortgage payments by 20 percent. So the legislation 

would have to provide for that. 

Mr. KANJORSKI. All right. Thank you. 

The CHAIRMAN. I would just say, legally, if it was a voluntary decision by a homeowner to accept the 20 percent in return for recourse, there is no problem. I do think you would have a problem, 

though, abrogating existing contracts unless you had mutual consent. I mean, that would be the legal thing. But substituting a recourse for nonrecourse in return for the 20 percent swap could easily be done. 

Mr. FELDSTEIN. And similarly for the negative-equity group, substituting full recourse on the entire thing, again, for the reduction. 

That is okay for them. The question is— 

The CHAIRMAN. I think you would have a hard time legally forcing it on others. 

The gentlewoman from Illinois. 

Mrs. BIGGERT. Thank you, Mr. Chairman. 

Mr. Blinder, you talked about, in your statement, that there had 

been zero purchases of the two asset classes, and it has just been 

capital injections into the banks. And you say, ‘‘Were I a Member 

of Congress, I would be pretty unhappy about this turn of events. 

In fact, as a taxpayer shouldering his share of the $700 billion burden, I am unhappy.’’ 

But there is still—and I don’t know if you were here for the prior 

panels—well, one of them was a plan for the insurance, which was 

actually in the bill. What do you think of the insurance plan? Is 

this something that we should look at? Which would then—you 

know, the actual financial institutions would carry the burden for 

paying for the premiums. 

Mr. BLINDER. I don’t rule it out. But I thought at the time and 

I still think that, being a different direction and given the complexities of starting from scratch, I would rather jump on the train that 

is leaving the station. 

77 

However, I don’t rule it out. The problem with the insurance plan 

that was being debated back in September—and, by the way, some 

insurance aspects come into a lot of these plans—was that it was 

too much like insuring the house after it had burned down. It is 

very hard to design an insurance plan for catastrophes that have 

already happened. But insurance is quite relevant to the ones that 

haven’t happened yet, and probably has merit in that regard. 

Indeed, a lot of these plans, such as the essence of HOPE for 

Homeowners, which passed this committee first and then passed 

the Congress back in July, was to bring in FHA insurance to close 

the deal. So it was, at its essence, an insurance plan. The government was becoming an insurer. So it really was a first cousin to 

that idea. Insurance is already in the law. 

If I was able to wave a magic wand here, which, of course, I cannot, I would make some amendments to HOPE for Homeowners to 

broaden it and enhance the eligibility. You need money for that. 

And I would take that away from the TARP. 

And further to your question, insurance is the essence of that. 

Mrs. BIGGERT. But we did pass the FHA reform, and we did put 

a lot of money into the housing bill, the $300 billion. Wasn’t that 

to help with FHA being able to raise the loan limits so that they 

would be able to participate in the market? 

Mr. BLINDER. Yes, but Congress didn’t actually put much money 

in it. That $300 billion was someone’s estimate, it might have been 

the staff of this committee, of the value of the mortgages that were 

hoped to be refinanced. The bill was carefully crafted, as I understand—I see the chairman has left the room, but other members 

of the committee are here—to get the CBO scoring down to basically zero. So the official budgetary expenditure was nil. 

Mrs. BIGGERT. Well, with the insurance that was talked about 

today and was in the bill, was really to let us know what the value 

of these mortgage-backed securities, what the intrinsic value is, 

what the true value of them is. Is this important or not? 

I mean, we have not really addressed that issue. And that was 

really—the purchase was supposed to be the start of that, that we 

would know what these mortgage-backed securities were about. 

Mr. FELDSTEIN. It is very important and impossible to do as long 

as there remains this risk of continued defaults driving foreclosures, driving house prices down further. So if you looked at an 

individual mortgage-backed security or even an individual mortgage, it is hard to know what that is worth if there is a risk that, 

at some point in the future, that is going to default. And that is 

what makes it so important. 

Mrs. BIGGERT. But it seems like we can’t solve the problem until 

we know what they are worth. 

Mr. FELDSTEIN. No, you have to stop the bleeding first, and then 

the market will put prices on it. 

Mr. BLINDER. But if I may interrupt, I do agree that it is important to find out what these things are worth. I may be one of three 

people left in America who thought the purchase of troubled assets 

made sense. And one of the reasons is exactly the point you are 

making: Get some semblance of a market going, and we might actually be able to put prices on these assets. 

78 

Mr. FELDSTEIN. I don’t think so. I think—of course, the Treasury 

can put a price on it. It can say, I am prepared to pay ‘‘X’’ for mortgages, adjustable-rate mortgages in California issued in 2007, and 

that will be a price. But is it a price that private individuals would 

be prepared to trade at if they couldn’t then hand it on to the government? I doubt it, I think, because they don’t know whether the 

foreclosure rate is going double again in the next year and make 

those assets worth a lot less. 

So I think that is the underlying problem here. We don’t know 

what the future foreclosures are going to be. 

The CHAIRMAN. The gentleman from North Carolina. 

Mr. WATT. Thank you, Mr. Chairman. 

Dr. Blinder was clear that he would, as an interim proposition, 

endorse the FDIC proposal. I am not sure we got on the record 

what Dr. Feldstein’s attitude would—I am assuming it would take 

a while to get the political will or whatever to move to your proposal. Would the FDIC proposal be at least a reasonable step to 

pursue in the interim? 

Mr. FELDSTEIN. Well, I tell you what I worry about with respect 

to the current version of the FDIC proposal. It would be very 

tempting for creditors to accept the terms, write down for people 

who are thinking about defaulting, write down the monthly mortgage payments so that they qualified, but knowing that at the end 

of 6 months, the individual would default and the government 

would pick up the— 

Mr. WATT. I understand you have reservations about the way it 

is drafted. I am asking, as an interim proposition between what we 

have now, which is nothing in this area, and the proposal that you 

have made, would some variation of that, addressing some of the 

concerns that everybody has addressed, be a step in the right direction? 

Mr. FELDSTEIN. Well, I guess the question is, would it be, as you 

said, something to do now as we move on to do other things? I 

think there is room for multiple things. Or would it block the political process? 

Mr. WATT. And, Dr. Blinder, I am not sure you are on the record 

yet as whether you support the approach that Dr. Feldstein has 

laid out. Is that something that you would endorse? 

Mr. BLINDER. I could in principle. But I come back to what I said 

before about trains that are leaving the station. I think it would 

take a long time to get from here to there. 

Mr. WATT. I understand that. But you think it would be a good 

place to get to if we could get there? 

Mr. BLINDER. Yes, certainly. If you compare it to the status quo, 

it is a good place to go. 

Mr. WATT. Now, could either one of you distinguished gentlemen 

explain to me what in the world Secretary Paulson is saying when 

he says that dealing with this mortgage situation is not important 

to stabilizing the financial system? 

Do you all have a clue what he is—I mean, he says this is not 

the purpose of what we passed. Can somebody—he couldn’t explain 

it to me this morning. I am trying to find somebody who can explain to me what in the world he is saying. 

Mr. BLINDER. I am baffled by that, frankly. 

79 

Mr. WATT. Okay. So you can’t explain it. 

What about you? 

Mr. BLINDER. If I may, just one more sentence? 

Mr. WATT. All right. 

Mr. BLINDER. In preparing to come to this testimony, I scanned 

through the Act. And there must be 15 places or something like 

that in the Act— 

Mr. WATT. The chairman was good at pointing those out to him, 

which makes it even more baffling. 

Explain it to me, Dr. Feldstein. 

Mr. FELDSTEIN. I am afraid I cannot. 

Mr. WATT. Okay. 

I don’t have any further questions, and I yield back. 

The CHAIRMAN. Having stumped the experts, the gentleman from 

North Carolina retires in triumph, and the gentleman from Alabama is recognized for 5 minutes. 

Let me just say to my colleagues, they are about to start the 

votes. I think we will be able to get all three questions in, and then 

we can go over and vote in the caucus. I appreciate it. 

The gentleman from Alabama. 

Mr. BACHUS. Dr. Feldstein, you are opposed to taxpayer money 

being used to bailout or to loan to GM and Chrysler, is that correct? 

Mr. FELDSTEIN. My first choice would be that they go through 

Chapter 11. My second choice would be that any money that is 

given to them be given under the kind of conditions that would 

make them long-term viable, which, to me, means a rewriting of 

the labor contracts, the fringe benefits, the retiree benefits. 

Mr. BACHUS. All right. And I think if some concessions by the 

union, management, and maybe the pension funds, would those be 

the three parties that would have to— 

Mr. FELDSTEIN. Exactly. And I think those—if the alternative to 

getting money and making those concessions was not getting 

money and going to a bankruptcy court, they might well be willing 

to make the kind of concessions that would make those companies 

viable. 

Mr. BACHUS. And without any assurance that they would become 

competitively viable, any loan would actually be very risky. So I 

agree with you totally. 

Mortgage foreclosures—let me ask you three or four things. The 

basic thing that I am struggling with is, mixed up with this issue 

of mortgage foreclosure mitigation is this idea of, ‘‘stabilizing housing prices.’’ And I am very skeptical that the government, number 

one, can stabilize housing prices and, even if they could, that it 

would be beneficial. 

Now, I understand that preventing a foreclosure—you know, a 

house in a neighborhood diminishes housing values. But, you know, 

the reason we are coming down and housing prices are coming 

down is, for decades, you loaned money to people about 3 times 

their income. And then 10 or 15 years ago, we lost our way and 

we started loaning 4 and 5 and 6 times as much. And then the closing costs went from 2 percent to 5 percent to sometimes 15 percent. 

And these were loans that they simply—I mean, they couldn’t afford these properties on their income. 

80 

So is supporting housing prices even—is it realistic that— 

Mr. FELDSTEIN. Housing prices have to fall further. So I don’t 

think that government should be trying to stabilize house prices at 

the current level. They overshot on the way up. They have come 

partly down. They have to come down further. 

The danger is that they can way overshoot on the way down. And 

that would be a bad thing. That would destroy financial institutions that are holding mortgage-backed securities. It would destroy 

household wealth, which, in turn, would make people cut back on 

their spending. That, in turn, would drag the economy down. 

So the ideal thing would be to see house prices come down to a 

sustainable level but not overshoot on the way down. And that is 

why I talk about this firewall as a way of stopping house prices 

from falling beyond the amount that is necessary to get back to 

pre-bubble levels. 

Mr. BACHUS. Dr. Blinder? 

Mr. BLINDER. I agree with that. But one of the main arguments, 

to my mind almost the main argument, for pushing foreclosure 

mitigation is that you can avoid, or minimize anyway, fire sales of 

houses, which do, almost by definition, overshoot on the way down. 

Mr. BACHUS. And I would agree with that. You know, I think 

many of us conservatives, our dilemma is that we don’t believe that 

government ought to intervene into some of these natural processes. But at the same time, we do care about the communities, we 

care about the families, and we care about the fire sale and the implications for all involved. And it is a dilemma. 

One thing I would like to say—and I am very glad that, Dr. Feldstein, you said, and, Dr. Blinder, I think you agreed—and I have 

said for the last 2 or 3 months putting a delinquency requirement 

in these different mortgage mitigation plans is the absolute wrong 

thing to do. I mean, people get delinquent. And I want to fully endorse and I applaud you for taking that stand. 

Let me ask you this: What about the homeowner who is underwater? You know, the house is worth $400,000, and he has a 

$600,000 mortgage. Now, you know, in that case, it is best for him 

to walk away, is it not? I mean, isn’t that why a lot of these people 

are walking away? 

Mr. FELDSTEIN. It is certainly in his interest now to walk away. 

But the proposal I described in today’s Wall Street Journal op-ed 

piece tries to address what we could do for that person. 

And, basically, the idea would be to take that shortfall between 

what the house is worth and what he currently owes and divide 

that, some of it being accepted by the creditor as a write-down and 

some of it paid by the government to bridge the gap, but then requiring the individual to carry on with that mortgage as a full-recourse mortgage, so that they wouldn’t be able to walk away from 

it. 

The CHAIRMAN. The gentleman from Massachusetts. 

Mr. BACHUS. Could he respond? 

The CHAIRMAN. Quickly. 

Mr. BLINDER. I was only going to say that you took an example 

of something that was really deeply underwater. And in cases like 

that, the best solution for everybody may just to be to walk away. 

81 

Most of the houses in America, thank goodness, are not that deeply 

underwater. 

The CHAIRMAN. Thank you. 

Mr. Lynch? 

Mr. LYNCH. Thank you, Mr. Chairman and the ranking member. 

I want to thank both of the witnesses here for your thoughtful 

testimony. 

Dr. Blinder, I do want to say that I think it is a double-edged 

sword, the fact that Secretary Paulson has said he is not going to 

ask for the other tranche of $350 billion. Instead, he has really, to 

use a football term, he has punted basically, or fumbled is another 

football term. He is basically telling us he is not going to ask for 

any more money. 

However, given our recent experience, I don’t think we should 

take him at his word. Not because he doesn’t mean it, but because 

we are having a crisis a week, and it may very well need to happen 

that he reaches out for more assistance. 

One aspect of the problem that we are dealing with here is the fact that we have somewhere in the area of $1.5-, $2 trillion in 

securitization pools. These mortgages are securitized, they are bundled. 

We have some very complex CDOs. There is an opacity, a lack 

of transparency that is really causing problems with even 

ascertaining what the value of some of these instruments are. To 

make matters worse, no one—the banks don’t want to lend to each 

other, because nobody knows what the value of these CDOs are on 

each other’s bank books. 

Because the—actually, the CDOs, because they are not liquidating more, no one wants to buy them. It is causing the assets 

within them and themselves within these banks to being written 

down, and it is causing a capitalization problem for the banks that 

are holding these. 

The problem for us is that we have seen some efforts so far to 

pluck, say, the lowest traunch, the equity traunch mortgages out 

of some of these CDOs. Because the way they are structured and 

the agreements that govern them, we have had senior traunches, 

or people with interest in the senior traunches, basically, stop that 

practice. 

How do we deal with this $1- to $2 trillion of securitized mortgages? How do we get at those in order to deal with homeowners 

who happen to be in that unhappy position? 

Mr. BLINDER. Yes, well, first let me say it is a very difficult problem, and we are not going to solve it fully. 

Having said that, one of the ideas of the original conception of 

the TARP, as I mentioned in my testimony was to buy some of 

these assets, MBS, CBOs, whatever, to get control of them inside 

the TARP. The government then would be the controlling investor, 

and the government could then go in and pluck out mortgages and 

refinance them. 

I thought that was a good idea, actually. It is not being done. 

Mr. LYNCH. I don’t know if you saw it this week, Gretchen 

Morgenson had a column about two gentleman, Thomas Patrick 

and Max Taylor, who have a pretty good plan to go in there. Do 

you have familiarity with that plan? 

82 

Mr. BLINDER. I read the article. I am not a good enough lawyer 

to know exactly what is the right point of attack. But the basic 

principle is clear, that if the government becomes the beneficial investor, it then can restructure the mortgages and wipe out the others. Now, you won’t be able to do this for every single one of them, 

but you can do it for some. 

Mr. LYNCH. Okay. Thank you both, gentlemen. 

I yield back the balance of my time. 

The CHAIRMAN. The gentleman from Missouri. 

Mr. CLEAVER. This is for both of you. We have to go. I wanted 

to talk about situational conservatism, but we don’t have time, Dr. 

Feldstein. I mean, it is always amusing that people are opposed to 

government involvement until they want government involvement, 

but that is just not what I am going to talk about now, because I 

don’t have time. 

But the question I want to ask is, do either of you find that there 

is something wrong with the fact that the banks are able to borrow 

cheap money from the government? The loan rate, the lending rate 

between banks is still unstable; and, at the same time, the consumers’ borrowing costs seem to be rising. I mean, is there something—does that bother you, trouble you at all, particularly when 

you consider the fact that we are putting money into these lending 

institutions? 

Mr. BLINDER. It does. I think that is part of the essence of the 

problem. The risk-free or virtually risk-free short-term interest 

rates are extremely low. The target Federal funds rate, as you 

know, is 1 percent and, in fact, the actual rate is trading at a quarter of a percent. The LIBOR has come way down, although it is not 

very low by historic standards. 

The essence of getting out of this broader financial problem is to 

get the risk spreads, that intervene between the risk-free rates and 

the rates that real borrowers have to pay, down. That is, in some 

sense, the overall uber goal of the whole thing, the whole effort. 

The specific issue that does bother me—you started to allude to 

it in your question, Congressman—is the low rate that the taxpayers are receiving on the preferred stock that it is injecting into 

banks. It is a bargain rate. 

Mr. CLEAVER. Dr. Feldstein. 

Mr. FELDSTEIN. I think what Alan said is essentially correct. The 

fact that mortgage rates have not come down at all, even though 

the Federal funds rate has come down to 1 percent, tells you how 

dysfunctional the credit markets are and how wide these risk 

spreads are. Until we get the financial institutions to a point where 

they are willing to buy long-term assets and take those kinds of 

risks, we are going to see the situation in which interest rates facing consumers are very high, despite the action by the Federal Reserve in bringing down the short-term rates. 

Mr. CLEAVER. Thank you. I wish we had more time. Thank you 

very much. I appreciate it. 

The CHAIRMAN. Witnesses, I very much appreciate this. This has 

been very useful. As I said, this is ongoing; and we will be doing 

more. 

We are now, the Democrats, going to have to go vote in caucus. 

83 

In closing the hearing, the ranking member had a statement he 

wanted to make, and he will close out the hearing. 

Mr. BACHUS. [presiding] Thank you, Mr. Chairman. 

In fact, going forward—and you two gentlemen may be aware of 

this—as we address the foreclosure delinquencies and our foreclosures and mortgage delinquencies, that next year we will face 

somewhere between 250,000 and 300,000 resets of mortgage interest rates, that is, people that can pay the mortgages now but can’t 

next year. And sometimes people hadn’t factored that in, as if that 

was not a problem. 

In the year 2010, we face approximately 700,000 of these, as I 

call them exploding mortgages. Of all the planning we need to do, 

that is something that we need to factor into our plans going forward. 

I don’t know if you have a comment on that as we close. 

Mr. BLINDER. I think you are 100 percent right. From the getgo, when I first started writing about this problem in January, that 

was one of the problems on my mind and on many other people’s 

minds. It is a prime argument for getting more of these mortgages 

refinanced so that the ticking time bomb doesn’t actually blow up 

when the time comes. Yes, absolutely. 

Mr. BACHUS. Dr. Feldstein? 

Mr. FELDSTEIN. Yes, I agree with that. 

Mr. BACHUS. It is one of the most disturbing challenges we face 

in going forward. 

Thank you very much for your attendance. The committee is recessed—or adjourned, actually. 

[Whereupon, at 3:58 p.m., the hearing was adjourned.] 

(85) 

A P P E N D I X 

November 18, 2008 

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