U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

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

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

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

48–863 PDF 2009

PERSPECTIVES ON SYSTEMIC RISK 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS, 

INSURANCE, AND GOVERNMENT 

SPONSORED ENTERPRISES 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

MARCH 5, 2009 

Printed for the use of the Committee on Financial Services 

Serial No. 111–10 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

DAN MAFFEI, New York 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

ERIK PAULSEN, Minnesota 

LEONARD LANCE, New Jersey 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND GOVERNMENT SPONSORED

ENTERPRISES

PAUL E. KANJORSKI, Pennsylvania, Chairman 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

NYDIA M. VELA ́ ZQUEZ, New York 

CAROLYN B. MALONEY, New York 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

RON KLEIN, Florida 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

CHARLES A. WILSON, Ohio 

BILL FOSTER, Illinois 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

SCOTT GARRETT, New Jersey 

TOM PRICE, Georgia 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

EDWARD R. ROYCE, California 

JUDY BIGGERT, Illinois 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

ADAM PUTNAM, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

RANDY NEUGEBAUER, Texas 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

March 5, 2009 ................................................................................................... 1 

Appendix: 

March 5, 2009 ................................................................................................... 61 

WITNESSES 

THURSDAY, MARCH 5, 2009 

Baker, Hon. Richard H., President and Chief Executive Officer, Managed 

Funds Association (MFA) .................................................................................... 10 

Bartlett, Hon. Steve, President and Chief Executive Officer, The Financial 

Services Roundtable ............................................................................................. 12 

DiMuccio, Robert A., President and Chief Executive Officer, Amica Mutual 

Group, on behalf of the Property Casualty Insurers Association of America 

(PCI) ...................................................................................................................... 16 

Ryan, T. Timothy, Jr., President and Chief Executive Officer, Securities Industry and Financial Markets Association (SIFMA) ......................................... 18 

Vaughan, Therese M., Ph.D., Chief Executive Officer, National Association 

of Insurance Commissioners (NAIC) .................................................................. 14 

Williams, Orice M., Director, Financial Markets and Community Investment, 

U.S. Government Accountability Office .............................................................. 8 

APPENDIX 

Prepared statements: 

Bachmann, Hon. Michele ................................................................................. 62 

Klein, Hon. Ron ................................................................................................ 64 

Baker, Hon. Richard H. ................................................................................... 65 

Bartlett, Hon. Steve ......................................................................................... 73 

DiMuccio, Robert A. .......................................................................................... 100 

Ryan, T. Timothy, Jr. ....................................................................................... 127 

Vaughan, Therese M. ....................................................................................... 147 

Williams, Orice M. ............................................................................................ 156 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Kanjorski, Hon. Paul E.: 

Written statement of the American Academy of Actuaries .......................... 188 

Written statement of the American Council of Life Insurers (ACLI) .......... 193 

Written statement of the National Association of Mutual Insurance Companies (NAMIC) ............................................................................................ 200 

Biggert, Hon. Judy: 

Article from Investor’s Business Daily entitled, ‘‘For Banks, Help Isn’t 

On The Way,’’ dated March 4, 2009 ............................................................ 209 

Hinojosa, Hon. Ruben: 

Responses to questions submitted to Hon. Steve Bartlett ............................ 211 

Maloney, Hon. Carolyn: 

Letter to Hon. Ben Bernanke, dated March 4, 2009 ..................................... 219 

Royce, Hon. Ed: 

Article from The Wall Street Journal entitled, ‘‘AIG Increases Borrowings 

While Racing to Sell Assets,’’ dated October 10, 2008 ............................... 223 

Page

VI 

Royce, Hon. Ed—Continued 

Initiative on Business and Public Policy at Brookings report entitled, 

‘‘Regulating Insurance After the Crisis,’’ dated March 4, 2009 ................ 226 

Scott, Hon. David: 

Responses to questions submitted to Hon. Richard H. Baker ...................... 244 

(1) 

PERSPECTIVES ON SYSTEMIC RISK 

Thursday, March 5, 2009 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON CAPITAL MARKETS, 

INSURANCE, AND GOVERNMENT

SPONSORED ENTERPRISES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:03 a.m., in room 

2128, Rayburn House Office Building, Hon. Paul E. Kanjorski 

[chairman of the subcommittee] presiding. 

Members present: Representatives Kanjorski, Ackerman, Sherman, Capuano, McCarthy of New York, Baca, Lynch, Scott, Maloney, Bean, Perlmutter, Donnelly, Carson, Wilson, Foster, Adler, 

Kilroy, Kosmas, Grayson, Himes, Peters; Garrett, Price, Castle, 

Manzullo, Royce, Biggert, Hensarling, Campbell, McCotter, Neugebauer, McCarthy of California, Posey, and Jenkins. 

Ex officio present: Representative Bachus. 

Chairman KANJORSKI. This hearing of the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises 

will come to order. 

Pursuant to agreement with the ranking member, and to allow 

as much time as possible for members’ questions, opening statements today will be limited to 10 minutes on each side. Without 

objection, all members’ opening statements will be made a part of 

the record. 

We meet today to discuss the issue of systemic risk. The bailout 

of American International Group, the bankruptcy of Lehman 

Brothers, and the takeover of Bear Stearns each demonstrate that 

systemic risk is not just confined to the banking sector. We therefore will focus our examinations at this hearing on insurance, securities, and capital market issues. 

The ongoing turmoil in our financial markets has led us to a 

crossroads. Because our current regulatory regime has failed, we 

must now design a robust, effective supervisory system for the future. In doing so, we must move expeditiously in order to help restore confidence in our markets and to get our economy moving 

again. 

We must, however, also move carefully and take the time to do 

it right. We should not rush to judgment on developing a new systemic risk overseer. We must also put aside our partisan differences and aim at the onset to reach a genuine consensus. Perhaps most importantly, we must start at the beginning and ask 

some basic questions. 

2 

First, we must define ‘‘systemic risk.’’ Does a financial services 

company pose a systemic risk if it is too big to fail, too interconnected to fail, or too leveraged to fail? Could the independent 

actions of many small players compound and create a systemic 

risk? Do only financial services providers pose a risk? For example, 

could the technology used in our financial markets pose a risk to 

the broader economy? 

Moreover, are there certain financial products, business activities, or industry segments more likely to cause risk than others? 

How can we distinguish which is which? Today’s witnesses will 

help us to start answering these complex questions and to begin 

defining more concretely the amorphous concept of systemic risk. 

Second, we need to ask ourselves how the government can work 

to diminish systemic risk. Should we create an umbrella overseer? 

If so, how should such an entity operate? Alternatively, could existing regulators overtake this objective? If so, how should we address 

the products and parties that operate in the shadows of our financial system and outside of regulatory oversight? 

Third, and arguably most important, how can the government 

prevent an institution from becoming too important to fail, going 

forward? Should we impose a systemic risk test as part of a governmental review of mergers? Moreover, could the financial innovations of one company or one sector contribute to systemic risk? 

Today, we will spend much time studying insurance issues. Our 

panel has examined insurance regulation many times, but this debate is different. This debate is about recognizing that insurance 

is a part of an integrated financial services system. 

Insurance companies and their affiliates, in some instances, 

could pose risk to the broader system. American International 

Group is a perfect, and severe, example of this reality. In other instances, insurers could be negatively impacted by ratings downgrades, capital impairments resulting from external events, and 

the application of accounting standards. 

We will also learn more about credit default swaps, a product 

that sometimes operates as an insurance contract and sometimes 

as a securities product. Credit default swaps have generally fallen 

through the cracks of our fragmented regulatory system. Therefore, 

Congressman Bachus joined me in asking the Government Accountability Office to study credit default swaps, and an expert will 

share GAO’s findings today. 

Hedge funds, too, are largely unregulated. After the government 

organized the rescue of Long Term Capital Management in 1998, 

the President’s Working Group made legislative recommendations 

for preventing future systemic risk by hedge funds. I subsequently 

joined with then-Capital Markets Chairman Richard Baker in proposing the Hedge Fund Disclosure Act, and moving it through a 

subcommittee mark-up. 

Even though our bill did not become law, I welcome Mr. Baker 

back to Congress today in his role as the leader of the Managed 

Funds Association. At this time, he and I have another chance to 

ensure that hedge funds are appropriately regulated and our economy better protected from systemic risk. This time, we will hopefully succeed. 

3 

In closing, the work ahead of us is important and necessary. I 

look forward to the testimony of our witnesses and to engaging in 

a productive debate on these issues. 

I would like to recognize Ranking Member Garrett for 4 minutes 

for his opening statement. 

Mr. GARRETT. Thank you, Mr. Chairman. As always, it is a pleasure working with you on this subcommittee’s business and I look 

forward to today’s hearing and hearing different perspectives on 

these financial market regulatory systems. 

For me as with you, there are several fundamental questions 

that need to be answered as we embark on examining the potential 

future for such a systemic regulator. 

First, as you say, we still do not have a single agreed-upon definition of exactly what is a ‘‘systemic risk,’’ nor do we know exactly 

what a systemic regulator would be, what roles it would have, who 

would be under its jurisdiction, etc. 

Secondly, the committee needs to be careful not to get ahead of 

itself. We cannot come up with an appropriate solution in this area 

until we have a better understanding and more consensus on actually what are the causes of our current financial situation. 

This subcommittee and the full committee have a lot on their 

plates, and a lot is at stake on what this Congress ultimately decides to do in the area of regulatory reform. 

I cannot stress this point enough. We need to get this right and 

not move too quickly simply to illustrate that we are ‘‘doing something.’’ 

What we do know is that many areas of our financial services 

sector already are subject to significant regulation, some of the 

areas with most of the problems—Bear Stearns, Lehman Brothers, 

not to mention the Bernie Madoff situation. 

They were regulated by the SEC. Indy Mac and Washington Mutual were both regulated by the Office of Thrift Supervision. Additionally, OTS has oversight responsibility for the unit of AIG where 

most of its problems originated. 

The Federal Reserve itself, which is often mentioned as a potential candidate for a systemic risk regulator, certainly has a regulatory record that really leaves a lot to be desired. Its handling of 

monetary policy in the years leading up to the current crisis is 

often mentioned by many experts as enabling the events. 

Furthermore, the Fed already has the role of safety and soundness and prudential limits regulated for large banks, holding companies, companies such as Citi and Bank of America, which are two 

of the largest recipients, I should point out, of Federal TARP funds, 

and whose perceived uneasy state have led to much of the uncertainty in the rest of the market. 

If you think about it, all these and other regulators were already 

on the job but did not do a good job with the powers vested in 

them, so why should we have faith that a new super regulator of 

systemic risk will do any better than them? 

The Fed in particular raises certain concerns for me. It already 

has significant responsibilities in areas of monetary policy as well 

as its ongoing bank regulatory role. 

In addition, as an independent institution, there seems to be a 

certain lack of political accountability for its actions. I am not sure 

4 

it is really wise to consolidate so much additional responsibility in 

an entity that does not have to answer to the American people. 

Furthermore, the Fed has no particular expertise regulating entities outside the banking area such as insurance and securities, two 

potential areas that it would be asked to oversee if it was to become the regulator. 

There are other aspects that concern me about certain systemic 

risk regulator proposals that have come out. Chief among these is 

concerns in identifying institutions with systemic significance. 

If this were to be done, the market would likely view these institutions as having de facto guarantee of Federal Government support during times of financial stress. 

Does that sound familiar? Not only would this designation likely 

lead to unfair advantages in the marketplace such as lower cost of 

capital, but it also will socialize market failure while leaving profits 

in the private hands. 

This is exactly what happened with Freddie Mac and Fannie 

Mae and we have all seen how that ended up. 

In sum, Mr. Chairman, I am not convinced that there is a workable systemic regulator solution that would provide the net benefit 

to our economy going forward, but with that being said, we are just 

at the beginning and not the end, and I look forward to the testimony here as we go forward, and I thank all the witnesses for joining us here today. 

Chairman KANJORSKI. Thank you, Ranking Member Garrett. 

Next, we will hear from Mr. Ackerman of New York for 2 minutes. 

Mr. ACKERMAN. Thank you, Mr. Chairman. In my view, our examination of systemic risk must include both an in-depth analysis 

of the role that credit ratings and credit rating agencies played in 

creating the current economic crisis, as well as consideration of the 

mark-to-market accounting standard. 

I have long believed that allowing the SEC to grant the largest 

credit rating agencies nationally recognized statistical rating organization status is the equivalent of stamping a government seal of 

approval on the ratings that they issue. 

Unfortunately, as we know now, the SEC was woefully inattentive to the rating process over the last several years, and many 

AAA rated securities, particularly those that were mortgage 

backed, did not in fact exhibit the fundamental characteristics of 

a sound and safe investment. 

Mr. Castle and I have reintroduced legislation to institute a dual 

structure for credit ratings issued by NRSROs. Credit rating agencies would still be permitted to assign their own ratings to securities composed of different types of assets that are then consolidated 

within packages of different types of financial products. However, 

a new class of ratings would be created under which only homogeneous securities with proven track records could be rated. 

As the committee moves to consider reforming our country’s financial services regulatory structure, I would urge our colleagues 

to take a look at H.R. 1181. 

I am eager to hear our witnesses’ perspectives on the effect that 

mark-to-market has had on the current market conditions, and if 

not rescinded, their forecasts for the impact mark-to-market will 

have on systemic risk in the immediate future. 

5 

In the current economy, it makes no sense to compel companies 

to mark their assets to market since there often is no market. The 

drastic overnight write down’s that many companies have been 

forced to take because of mark-to-market has surely exacerbated 

systemic risk, and I am interested to hear from our witnesses how 

we can alleviate this effect while maintaining an effective and 

transparent standard for evaluating assets. 

I thank you, Mr. Chairman, and I look forward to hearing from 

our witnesses and welcome back our former colleagues, whom I 

think I have not seen in about 1 year. 

[laughter] 

Chairman KANJORSKI. One year? Thank you very much, Mr. Ackerman. Now we will hear from the gentleman from California, Mr. 

Royce, for 3 minutes. 

Mr. ROYCE. Thank you, Mr. Chairman. The fact that many of our 

financial institutions have become too big to fail or too interconnected to fail has become shockingly apparent. 

The steps taken by the Federal Government and the amount of 

tax dollars allocated because of systemic threats have not been 

seen in recent history, either here or in the U.K. or by other Central banks around the world or other democracies around the 

world. 

The long term effect of these actions will not be fully understood 

for some years to come. We cannot wait until then to act on the 

regulatory shortcomings that have been exposed so far by our economic downturn. 

The exact make-up of these reforms will be debated here in the 

coming months. As the President of the Richmond Federal Reserve 

has noted, the critical policy question of our time will be where to 

establish the boundaries around the public sector safety net provided to public market participants now that those old boundaries 

are gone. 

The moral hazard problem created by the implicit government 

guarantee of Fannie Mae and Freddie Mac is a perfect example of 

what not to do. This quasi-public model and the apparent market 

distortions it caused must become a thing of the past. 

Richard Baker is here with us today. He—along with the Federal 

Reserve Chairman and the Treasury Secretaries—came before this 

committee 16 times, I counted, and warned about the 

overleveraging at 100 to 1 at Fannie Mae and Freddie Mac, warned 

about the legislative mandates for those institutions to purchase 

subprime and Alt-A loans and package them into mortgage backed 

securities in order to drive affordable housing. 

They all warned of the systemic risk of this, and we all witnessed 

the central role these Government Sponsored Enterprises played in 

the run up to the housing bubble. Now all Americans are feeling 

the pain of the economic fallout that originated in our housing sector. 

The invitation for political and bureaucratic manipulation will 

remain as long as the line between the Federal Government and 

private institutions is blurred. 

Beyond re-establishing clear boundaries around the Federal Government’s safety net, it is critical that regulatory gaps in our current system be filled. 

6 

Our acting systemic risk regulator, Ben Bernanke, made his feelings known earlier this week in this committee when he expressed 

his frustration first over on the Senate side with AIG’s ability to 

exploit a huge gap in the regulatory system. This regulatory gap 

must be filled by a world class Federal regulator for insurance, a 

step supported here last week by Ben Bernanke, the Chairman of 

the Federal Reserve. 

The various State insurance regulators simply do not have the 

ability to oversee massive global financial firms like AIG. This void 

has gone unfilled for too long, and the problems that have resulted 

because of this gap are many. 

The Federal Government and now the American taxpayers have 

a vested interest in the ability of this Congress to establish a world 

class regulatory alternative to the fragmented 50 State system 

overseeing the insurance market. 

Again, thank you for holding this hearing, Mr. Chairman, and I 

yield back the balance of my time. 

Chairman KANJORSKI. Thank you, Mr. Royce. Now we will hear 

from the gentleman from California, Mr. Sherman, for 2 minutes. 

Mr. SHERMAN. Thank you. Systemic risk regulator—everybody 

knows that we need one, but nobody knows what it is. 

We ought to have many entities that are not regulated, particularly if they are not—when I say ‘‘not regulated,’’ not regulated by 

a systemic risk regulator—if they are not too big and they do not 

sell insurance. 

Other than the bond rating agency problem Mr. Ackerman pointed out, I think one of the key problems that got us into this mess 

is that companies issued insurance on portfolio’s without insurance 

regulation or insurance reserves. We discovered that a credit default swap is just as risky as earthquake insurance sold in the San 

Fernando Valley. 

I am concerned that we are seeing taxpayer money transferred 

to Wall Street based on the political power of the entities involved. 

We just saw $20 billion transferred to the AIG counterparties, billions of taxpayer dollars transferred to foreign entities. 

We are in effect providing Federal insurance to the general creditors because the counterparties of AIG have more political power 

than the uninsured depositors at Indy Mac Bank. 

I look forward to matching regulation with the needs of the market without seeing us prevent venture capitalists and others from 

providing some of the benefits of cowboy capitalism that we have 

enjoyed, particularly in my State of California. 

I yield back. 

Chairman KANJORSKI. Thank you very much. Now we will hear 

from the gentleman from Georgia, Mr. Price, for 2 minutes. 

Mr. PRICE. Thank you, Mr. Chairman. Certainly everyone on this 

committee believes that our existing financial regulatory structure 

has gaps, but that does not mean that more regulation will be better or that it is possible to create an effective systemic risk regulator to prevent financial crises down the road. 

What industry is more regulated than the U.S. financial industry? Despite layers of regulation, we still find ourselves in the 

midst of a major economic contraction. We ought not lose sight of 

this fact as we consider the best way to regulate while preserving 

7 

a growing and globally competitive U.S. market that will attract investors. 

The idea of a systemic risk regulator raises real concerns. If a 

specific institution is designated as systemically significant, it 

sends the message that the government will not let it fail. 

This clearly gives these institutions a huge competitive advantage over non-systemically significant institutions that will be unable to benefit from the implied Federal backing. 

This classification takes us even further into a political economy 

where the government picks winners and losers, not a market economy where the wonder of America thrives. 

To quote AEI’s Peter Wallison, ‘‘If we go forward with this idea, 

we will be creating an unlimited number of Fannie Maes and 

Freddie Macs, companies that are seen in the market as ultimately 

backed by the Federal Government. Given the fact that the government actually had to take over these entities because they were so 

unstable, I do not believe we should use them as business models 

for success.’’ 

This reminder should caution all of us as we consider a proposal 

that will completely change the way our financial system operates 

and is regulated. 

I look forward to an open, honest, and vibrant debate as we move 

forward. I thank the chairman. 

Chairman KANJORSKI. Thank you very much, Mr. Price. Now we 

will hear from the gentlelady from Illinois, Ms. Bean, for 1 minute. 

Ms. BEAN. Thank you, Mr. Chairman. Thank you for holding today’s hearing and yielding me the time and to those of our witnesses who are here to testify and share your subject matter expertise, we greatly appreciate it. 

Last Fall we learned the dangers of allowing antiquated, inefficient regulation of our financial system, and we have all suffered 

the consequences. 

While there is a difference in viewpoints on what actions are necessary moving forward to stabilize our financial system, most of us 

agree that we need to create a systemic risk regulator who can 

monitor the financial data of industry players and positions to prevent systemic wide risk. 

The values of our portfolios, homes, and businesses are in decline 

and there is no question that in good part, the lacking Federal 

oversight from a regulatory level has contributed, whether you are 

talking about the roughly $62 trillion unregulated credit default 

swap market or whether you are talking about the complex and 

growing insurance industry as an important financial service sector 

player, lacking any Federal oversight as well. 

Moving forward, I think the most important thing we can do is 

make sure we have a regulator in place who can detect and prevent 

potential risks and work to make sure that one financial service 

product, player, or sector’s downturn doesn’t turn into a problem 

industry-wide. 

Thank you. I yield back. 

Chairman KANJORSKI. Thank you, Ms. Bean. Now we will recognize the gentleman from Delaware, Mr. Castle, for 1 minute. 

Mr. CASTLE. Thank you, Mr. Chairman. I sort of believe that we 

should have a systemic risk regulator. I am not sure I can really 

8 

define ‘‘systemic risk’’ as well as I would like to or what that regulator should be. 

I also have questions about whether the Fed should do it or 

somebody else should do it. 

The bottom line is, I think, a year-and-a-half to 2 years ago, most 

of us on this committee could not define a ‘‘credit default swap.’’ 

There are other leverage financial investments that we really do 

not completely understand. 

I am not sure that the regulators who are looking at bottom line 

accounting numbers in the various institutions really understood 

all that as well. I think the bottom line is you need somebody who 

is looking at the new innovations, those things that are happening 

economically in our economy, and my sense is this could be a positive step for everybody. 

I do not know exactly what the position of all our witnesses is 

going to be, but I think we should be looking at this possibility. 

Maybe the role of the systemic risk regulator should be lesser rather than greater. 

I do not know what the answer is. At least information coming 

from that and letting us know what is going on would be important. 

I yield back the balance of my time. 

Chairman KANJORSKI. Thank you very much, Mr. Castle. 

Now I will introduce the panel. Thank you for appearing before 

the subcommittee today, and without objection, your written statements will be made a part of the record. You will each be recognized for a 5-minute summary of your testimony. 

First, we have Ms. Williams, Director of Financial Markets and 

Community Investment at the Government Accountability Office. 

Ms. Williams will outline the results of a study on credit default 

swaps that I requested last July, on which Ranking Member Bachus later joined me. 

Ms. Williams? 

STATEMENT OF ORICE M. WILLIAMS, DIRECTOR, FINANCIAL 

MARKETS AND COMMUNITY INVESTMENT, U.S. GOVERNMENT ACCOUNTABILITY OFFICE 

Ms. WILLIAMS. Thank you. Chairman Kanjorski and members of 

the subcommittee, I appreciate the opportunity to testify before you 

this morning on systemic risk in general and credit default swaps 

or CDS, in particular. 

While the work we initiated at the request of Ranking Member 

Bachus and Subcommittee Chairman Kanjorski is the primary 

focus of my written statement, I would like to highlight a few 

issues related to systemic risk as well as CDS and the lessons 

learned from recent events. 

While CDS have received much attention recently, the rapid 

growth in this over-the-counter derivative more generally illustrates the emergence of increasingly complex products that have 

raised regulatory concerns about systemic risk, which is the risk 

that an event could broadly affect the financial system and ultimately the real economy, rather than just one or a few institutions. 

While bank regulators may have some insights into the activities 

of their supervised banks that act as derivatives dealers, CDS, like 

9 

other OTC derivatives, are not regulated product markets. The 

transactions are generally not subject to regulation by SEC, CFTC, 

or any other U.S. financial regulator. 

Thus, CDS and other OTC derivatives are not subject to the disclosure and other requirements that are in place for most securities 

and exchange traded futures products. 

Although recent initiatives by regulators and industry have the 

potential to address some of the risk from CDS, these efforts are 

largely voluntary and do not include all CDS contracts. 

In addition, the lack of consistent and standardized margin and 

collateral practices continue to make managing counterparty credit 

risk and concentration risk difficult, and may allow systemically 

important exposures to accumulate without adequate collateral to 

mitigate associated risk. 

This area is a critical one and must be addressed going forward. 

Gaps in the regulatory oversight structure of and regulations 

governing financial products such as CDS allow these derivatives 

to grow unconstrained, and little analysis was done on their potential for systemic risk. 

Regulators of major CDS dealers may have had some insight into 

the CDS market based on their oversight of the entities, but they 

had limited oversight of non-bank market participants such as 

hedge funds or operating subsidiaries of others like AIG Financial 

Products, whose CDS activities appear to have contributed to its financial difficulties. 

This fact clearly demonstrates that risk to the financial system 

and even the economy can result from institutions that exist within 

the spectrum of supervised entities. 

Further, the use of CDS creates interconnections among these 

entities, such that the failure of any one counterparty can have 

widespread implications regardless of its size. 

AIG Financial Products, which had not been closely regulated, 

was a relatively small subsidiary of a large global insurance company, yet the volume and nature of its CDS business made it such 

a large counterparty that its difficulty in meeting its CDS obligations not only threatened the stability of AIG but of the entire financial system. 

In closing, I would like to briefly mention what the current 

issues involving CDS have taught us about systemic risk and our 

current regulatory system. 

The current system of regulation lacks a clear mechanism to effectively monitor, oversee, and reduce risks to the financial system 

that are posed by entities and products that are not fully regulated, 

such as hedge funds, unregulated subsidiaries of regulated institutions, and other non-bank financial institutions. 

The absence of such authority may be a limitation in identifying, 

monitoring, and managing potential risk related to concentrated 

CDS exposures taken by any market participant. 

Regardless of the ultimate structure of the financial regulatory 

system, a system-wide focus is vitally important. 

The inability of regulators to monitor activities across the market 

and take appropriate action to mitigate them has contributed to 

the current crisis and the regulators’ inability to address its fallout. 

10 

Any regulator tasked with a system-wide focus would need broad 

authority to gather and disclose appropriate information, collaborate with other regulators on rulemaking, and take corrective action as necessary in the interest of overall market stability, regardless of the type of financial product or market participant. 

This concludes my oral statement. I would be happy to answer 

any questions at the appropriate time. Thank you. 

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

156 of the appendix.] 

Chairman KANJORSKI. Thank you, Ms. Williams. 

Next, we have the distinct honor of hosting our subcommittee’s 

former chairman, the Honorable Richard H. Baker, President and 

Chief Executive Officer of the Managed Funds Association. 

Welcome, my friend. The floor is yours. 

STATEMENT OF THE HONORABLE RICHARD H. BAKER, PRESIDENT AND CHIEF EXECUTIVE OFFICER, MANAGED FUNDS 

ASSOCIATION (MFA) 

Mr. BAKER. Thank you, Mr. Chairman. I am honored to be here. 

I want to specifically note Mr. Ackerman’s kind affirmation on the 

record that I have not spoken to him for a year. That could be a 

value going forward. 

For the record, it has been 1 year and 1 month since my retirement. I am delighted to be back and engage my former colleagues 

in discussions as we go forward. 

Mr. Chairman, Ranking Member Garrett, I am here today in my 

capacity as President and CEO of the Managed Funds Association, 

which represents the majority of the world’s largest hedge funds, 

and is the principal advocate for sound business practice among my 

members. 

Over the last several months, our members have engaged in significant discussions on many of the topics that are of interest to 

members of this committee. 

First, a word about our industry. Hedge funds do provide liquidity to markets and enable effective price discovery and provide capital for businesses to succeed and grow. 

We also provide risk management tools to sophisticated investors 

such as managers of pensions and endowments. 

To perform these tasks, our Funds require sound counterparties 

and stable market conditions. The current lack of certainty with regard to large financial institutions inhibits investors’ willingness to 

put capital at risk in such market conditions. 

Establishing a regulatory system that will aid in restoration of 

market stability will be a service, I believe, to all market participants. 

I must also state that the current market circumstance was not 

initiated in proximate cause by our members, and in fact, some of 

our members are just as adversely impacted as any other investor 

in the market. 

In many cases, our members have been a vital source of liquidity 

in these times in helping to establish a supportive floor of value in 

a declining market. 

Notwithstanding these facts, the Association believes that smart 

regulation will improve overall functioning of the financial system. 

11 

Regulation by itself, I would quickly add, however, is not sufficient 

as past circumstances have clearly demonstrated. 

Our own industry best practices, which have been developed over 

years of market observation by the MFA, coupled with appropriate 

investor due diligence, will promote efficient capital markets, market integrity, and provide needed investor protection. 

Over the last several months, our members have engaged in discussion of what constitutes an appropriate systemic risk regulatory 

framework. Effective systemic risk regulation would require oversight of the entire financial system. A single regulatory entity 

should perform this task. Multiple systematic risk regulators would 

likely have coverage gaps or worse, overlapping and duplicative examination. 

To provide this regulator with the appropriate data for this enormous task, MFA supports confidential reporting to a systemic risk 

regulator of the required information. The substance of that report 

should be left for the regulator to determine and not, Mr. Chairman, established by statute; and that should be warranted by the 

current economic conditions at hand for the purpose of assessing a 

systemic risk potential. 

This authority should also enable a forward looking capability as 

waiting until the adverse event has occurred will protract time for 

recovery. 

We believe granting broad authority with respect to information 

reporting along with ensuring the regulator has sufficient resources 

to conduct effective analysis is an appropriate construct. 

It is essential, however, that with such a broad ground of authority for reporting virtually any aspect of financial conduct deemed 

appropriate, that this disclosure be granted full protection from 

public disclosure. 

This can be done and must be done without any adverse effect 

or in any manner inhibiting the ability of the regulator to conduct 

its important work. 

We also believe it is very important to establish legal clarity in 

this role of the regulatory mission. It is our recommendation that 

the singular duty of this office is to preserve and protect the integrity of the financial system. Market integrity and investor protection would remain the responsibility of the current regulatory entities. 

Further, the systemic risk regulator should not focus on preventing the failure of any single firm, unless it is determined that 

such failure would precipitate systemic consequences of grave concern. 

Authority to prevent systemic risk should be exercised very carefully, as not to create the moral hazard from the appearance of an 

implied government guarantee against future failure. 

Systemic risk concerns may arise from a combination of factors. 

Therefore, the regulator should implement its authority by taking 

an approach that focuses on all relevant sectors of the financial 

market as well as product. 

The regulator would therefore need clear authority to seek to 

prevent systemic risk in a forward looking manner, to address systemic concerns once they have been identified without hesitation, 

12 

and to ensure that a failing firm does not threaten the financial 

system in a systemic manner. 

Mr. Chairman, we are committed to being a constructive voice in 

this ongoing discussion, which we recognize will be difficult and 

complicated, but we stand ready to cooperate, and we look forward 

to responding to your questions. 

[The prepared statement of Mr. Baker can be found on page 65 

of the appendix.] 

Chairman KANJORSKI. Thank you, Mr. Baker. 

Next, the Honorable Steve Bartlett, President and Chief Executive Officer of The Financial Services Roundtable, here to discuss 

perspectives on systemic risk, especially with regard to the insurance industry, and, I may add, another former Member whom we 

welcome back. 

Steve? 

STATEMENT OF THE HONORABLE STEVE BARTLETT, PRESIDENT AND CHIEF EXECUTIVE OFFICER, THE FINANCIAL 

SERVICES ROUNDTABLE 

Mr. BARTLETT. Chairman Kanjorski, Ranking Member Garrett, 

and members of the subcommittee, there is no end to the theories 

and proposals as to exactly how to start the economic recovery, but 

the fact is that America’s economic recovery will start here with 

the financial services industry and in some ways, it starts today 

with this committee. 

The recovery starts with every new loan, with every new mortgage, with every mortgage modification, with every addition to a 

retirement portfolio. Most importantly, it starts today with a 

strong, stable financial services sector, and a coherent foundation 

of a consistent and coherent regulatory structure. 

Our current regulatory non-systemic structure, Mr. Chairman, 

was created in 20 separate pieces of legislation beginning in 1913, 

including 1933, 1934, 1989, 1999, 2003, and so on, in a way that 

often added another agency, structure, or feature, often unrelated 

to the previous structure. 

To say that the financial regulatory system is fragmented and 

uncoordinated would be an understatement. By 2008, the weight 

and inconsistency of the patchwork system could bear it no longer. 

On that note, The Financial Services Roundtable recommends 

that the Federal Reserve be created as a systemic risk regulator, 

but that would not be a super regulator or a new regulator or a 

regulator of individual institutions, and that it not be merely bolted 

onto the existing chassis as has happened so often in the past, but 

rather to be integrated into the system. 

Webster’s defines ‘‘systemic’’ as ‘‘related to a system,’’ and that 

should be the test for this committee. 

The Roundtable’s proposed systemic restructuring includes the 

following: 

First, by statute, expand the membership of the Executive Order 

Agency called the President’s Working Group, which has the right 

idea but no authority, and rename it the ‘‘Financial Markets Coordinating Council.’’ The Council should serve as a forum to coordinate national and State financial regulatory policies. 

13 

Second, the Federal Reserve be designated by statute as a market stability regulator with NIFO, what it is called in corporate 

board governance work, NIFO, or ‘‘nose in, fingers out’’ authority. 

The Fed would be authorized to act only through Federal prudential supervisors and not unilaterally. The Fed would be entitled to 

receive information from those primary regulators and act jointly 

through them when sanctions are required. 

The definition of ‘‘systemic risk’’ should not be size based and 

thus, avoiding the too big to fail syndrome. Rather, systemic risk 

would be any risk to the broader system that can arise from the 

collective actions of hundreds or from significant actions of a few. 

For example, recent example, a combination of bad underwriting 

of mortgages, mortgage insurance without proper reserves or oversight, securitizations based on credit ratings alone, little due diligence for mortgage backed securities pools, and off balance sheet 

vehicles combined collectively or systemically to create the systemic 

risk that we are now suffering from. That was across several, perhaps hundreds of regulatory agencies. 

The Fed would not be a super regulator but would work with and 

through other regulators. The only exception would be in the event 

of a well-defined emergency. 

That leads to a related point. A market stability regulator does 

indicate the need for a national insurance regulator. The Fed 

should work through a national insurance supervisor, not in a vacuum. 

A market stability regulator to reduce risk creates the additional 

need for a national insurance regulator to gather information and 

to act upon risky market activities in the Federal space in a timely 

and uniform manner. 

The third part of this is to consolidate existing Federal prudential supervisors such as the OCC and the OTS into a single national financial institutions’ regulator. The new agency would be a 

consolidated prudential and consumer protection agency for banking, securities, and insurance. 

Fourth, create the National Capital Markets Agency through the 

mergers of the SEC and the CFTC, and use that, to the point that 

was made earlier, to supervise or oversee FASB jointly with the 

Federal Reserve. 

Fifth, create the National Insurance and Resolution Authority for 

depository institutions from the basis of the foundation of the FDIC 

to create an uniform and coherent way of disposing of failed institutions. 

Finally, we proposed that the current Federal Housing Finance 

Agency remain in place temporarily, pending a full review of the 

role and structure of the housing GSEs in the future but near 

term. 

Mr. Chairman, thank you for the opportunity to discuss this 

overwhelming need for a market stability regulator as a necessary 

first step in a broader reform of our financial regulatory structure. 

[The prepared statement of Mr. Bartlett can be found on page 73 

of the appendix.] 

Chairman KANJORSKI. Thank you very much, Mr. Bartlett. 

Next, we will hear from Dr. Therese Vaughan, chief executive officer of the National Association of Insurance Commissioners. 

14 

Dr. Vaughan? 

STATEMENT OF THERESE M. VAUGHAN, Ph.D., CHIEF EXECUTIVE OFFICER, NATIONAL ASSOCIATION OF INSURANCE 

COMMISSIONERS (NAIC) 

Ms. VAUGHAN. Chairman Kanjorski, Ranking Member Garrett, 

and members of the subcommittee, thank you for inviting me to 

testify before the subcommittee on systemic risk. 

My name is Therese Vaughan. I am the chief executive officer of 

the National Association of Insurance Commissioners or NAIC. 

Prior to joining the NAIC, I was a professor of insurance and actuarial science at Drake University, where I focused on the management and regulation of financial institutions. From 1994 to 

2004, I was the insurance commissioner in the State of Iowa, and 

I was the NAIC president in 2002. 

I am pleased to be here today to discuss the NAIC’s activities in 

the area of financial stability regulation and to offer our assistance 

and expertise as the committee tackles the enormous challenge of 

developing legislative solutions to the current financial crisis. 

The NAIC is a full partner with Congress and the Administration in seeking ways to improve the financial regulatory system 

and promoting financial stability. 

The State-based insurance regulatory system is one of critical 

checks and balances. We have a long history of consumer protections, solvency, oversight, and market stability, so any system of financial stability regulation can and must build on this proven regime. 

While the current financial crisis illuminates the need for review 

of regulatory oversight, consumer protections and prudent solvency 

oversight must not be compromised in the effort to improve or enhance financial stability. 

In our view, an entity poses a systemic risk when that entity’s 

activities have the ability to ripple through the broader financial 

system and trigger problems for other counterparties such that extraordinary is necessary to mitigate it. 

The nature of the insurance market and its regulatory structure 

makes the possibility of systemic risk originating in this industry 

less than in other financial sectors. The insurance industry is more 

likely the recipient of systemic risk from other economic agents 

rather than the driving force that creates systemic risk. 

Most lines of insurance have numerous market participants and 

ample capacity to absorb the failure of even the biggest market 

participant. 

If the largest auto insurer in the United States were to fail, its 

policyholders would be quickly absorbed by other insurers, and 

backed up further by the State guaranty fund system. This would 

not pose systemic risk as the impact is isolated, does not ripple to 

other financial sectors, and does not require extraordinary intervention to mitigate. 

Risks in insurance are different from bank risks for three reasons. First, insurers tend to be less leveraged than banks. Second, 

insurers tend to have liabilities that are different from those of 

banks, more independent of economic cycles. Third, insurers tend 

15 

to have a longer time horizon. They typically do not have to sell 

assets on a regular basis to meet short-term demands. 

An insurance business having special interconnections to capital 

markets may be capable of generating systemic risk, however, but 

financial and mortgage guarantee lines have been stressed because 

of their coverage of mortgage related securities, and as has been 

well-documented, large, complex financial institutions with insurance operations, like AIG, have produced systemic risks within the 

economy. 

The insurance businesses in these holding companies have thus 

far been adequately protected by State insurance regulators. State 

insurance regulators recognize that action is needed at the Federal 

level to identify and manage systemic risk within the Nation’s financial marketplace. 

That should not be misconstrued, however, as simple acquiescence on our part to preemption. 

Recognizing the critical need for action in this area, the NAIC 

has developed a series of principles for systemic risk regulation as 

it relates to insurance, which we believe must be incorporated into 

any comprehensive systemic risk system. Our principles recognize 

that greater collaboration among financial services regulators is 

needed, preserving the principle of functional regulation. 

Any framework established to regulate financial stability must 

integrate but not displace the successful State-based system of insurance regulation. A Federal financial stability regulatory scheme 

must provide for sharing of information and formal collaboration 

among all financial regulators. 

In consultation with functional regulators, any financial stability 

regulator should develop best practices for systemic risk management. Preemption of functional regulatory authority, if ever appropriate or necessary, should be limited to extraordinary circumstances that present a material risk to the continued solvency 

of the holding company or threaten the stability of the financial 

system. 

For more than 150 years, State insurance regulators, working together with State legislators, have continued to improve, enhance, 

and modernize State-based insurance regulation for the benefit of 

consumers and industry alike. 

We want to bring the best regulatory minds to bear on the challenges ahead and to serve as your resource as you navigate and 

analyze the current financial landscape. 

I thank you for the opportunity to testify, and I would be happy 

to answer any questions. 

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

147 of the appendix.] 

Chairman KANJORSKI. Thank you very much, Dr. Vaughan. 

Next, we will hear from Mr. Robert A. DiMuccio, president and 

chief executive officer of Amica Mutual Group, on behalf of the 

Property Casualty Insurers Association of America. 

Mr. DiMuccio? 

16 

STATEMENT OF ROBERT A. DiMUCCIO, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, AMICA MUTUAL GROUP, ON BEHALF 

OF THE PROPERTY CASUALTY INSURERS ASSOCIATION OF 

AMERICA (PCI) 

Mr. DIMUCCIO. Thank you, Mr. Chairman. I thank you and the 

members of the subcommittee for this opportunity to present the 

PCI’s solutions for addressing our systemic risk crisis, and thank 

you for your leadership and that of your colleagues. 

I am appearing on behalf of the PCI, the leading property casualty insurance trade association, representing more than 1,000 insurers of different lines and sizes. 

I will address three points: One, the definition of ‘‘systemic risk;’’ 

two, that systemic risk legislation should be the critical first priority addressed to prevent another economic crisis from occurring; 

and three, how a systemic risk overseer would function. 

PCI has defined ‘‘systemic risk’’ of a financial institution as ‘‘the 

likelihood and the degree that the institution’s activities will negatively affect the larger economy such that unusual and extreme 

Federal intervention would be required to ameliorate the effects,’’ 

or simply stated, if the government has to step in to bail out a company to protect the larger economy, that is a systemic risk. 

Traditional antitrust analysis focuses on too big to fail. Recent 

government intervention decisions have shifted toward too interconnected to fail, which is measured by the degree a company’s activities are leveraged throughout the economy such that its impairment would cause additional failures, and the extent to which its 

failure risk is correlated with other systemic downturns. 

For example, even a large auto insurer failure would not create 

a ripple effect of company failures. Its market share would be 

quickly absorbed by competitors. Conversely, some small credit default providers have highly leveraged counterparties, with recessions increasing default rates and provider impairment exacerbating the recession. 

My written testimony lists the systemic risk characteristics of 

the different lines of property and casualty insurance, and a similar analysis could be applied to other financial products. 

To address the current economic crisis, restore investor confidence, and prevent another economic disaster from occurring, a 

systemic risk overseer should be created. 

The Federal Reserve Board should serve as the systemic risk 

overseer as it has the appropriate mission and expertise. However, 

the Federal Reserve Board’s systemic risk oversight should be completely separate from other bank holding company oversight powers. 

Jurisdiction would include any institution engaged in financial 

activities that in aggregate present a significant systemic risk. Also 

included would be any institution engaged in financial activities 

that chooses to submit to Federal systemic risk oversight such as 

for international equivalency treatment. 

Systemic risk oversight power should be flexible and include the 

authority to require the following: appropriate transparency and 

disclosure to overseers for all entities within the regulatory jurisdiction; escalating information sharing with other U.S. and international overseers as a company’s systemically risky activities inVerDate Nov 24 2008 15:34 Jul 20, 2009 Jkt 048863 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K:\DOCS\48863.TXT TERRIE
17 

crease; and risk management for specific entities whose financial 

activities present a significant systemic risk. 

However, systemic risk oversight powers would not include the 

following: solvency oversight for individual companies; business 

conduct oversight, such as licensing, market conduct, or product 

approval; duplicative disclosure or transparency information requirements; and general Federal compliance, such as privacy 

standards and other elements of bank holding company oversight. 

Regarding oversight of risk management, oversight standards 

could consist of: overseeing holding company capital standards and 

group risk management; monitoring of affiliate transactions and 

significant off balance sheet obligations; collecting and sharing information related to group systemic risk and holding company solvency; requiring coordination of examination and visits regarding 

systemic risk; and eliminating duplicative oversight of holding companies. 

PCI proposes increasing coordination to detect fraud and improve 

early risk monitoring through enactment of the Financial Services 

Antifraud Network that passed the House in 2001. 

PCI also proposes requiring the Presidential Working Group on 

Financial Markets to implement limited information sharing coordination with international overseers regarding potential threats 

to cross border market stability. 

These proposals are practical solutions to solving the systemic 

risk crisis that do not require a vast new bureaucracy. It does require filling regulatory gaps. 

Three final points. To address congressional imperatives, larger 

regulatory reform and oversight could be analyzed in a second 

phase. We should not confuse solvency with systemic risk. Solvency 

regulation is best done by functional regulators to ensure that companies have sufficient capital to fulfill their promises. 

Systemic risk regulation is macro oversight to prevent holding 

company failures from contaminating other markets in the larger 

economy. Merging solvency regulation into systemic risk oversight 

will simply create a regulator who is too big to fail. 

PCI is committed to working with this committee in advancing 

appropriate solutions to stabilize the markets and prevent another 

economic crisis from occurring. Addressing systemic risk is the best 

action to do so, and we stand ready to assist in any way. 

I thank the subcommittee for their time. We would be willing to 

answer any questions. 

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

100 of the appendix.] 

Chairman KANJORSKI. Thank you, Mr. DiMuccio. 

Now, we will hear from Mr. Timothy Ryan, Jr., president and 

chief executive officer of the Securities Industry and Financial Markets Association. 

Mr. Ryan? 

STATEMENT OF T. TIMOTHY RYAN, JR., PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION (SIFMA) 

Mr. RYAN. Thank you, Mr. Chairman, and members of the subcommittee. 

18 

The purpose of my testimony will be to detail SIFMA’s views on 

a financial markets stability regulator or systemic regulator, including the mission and the purpose of such a regulator, and to 

highlight certain powers and duties that you might want to consider providing to such a regulator. 

Systemic risk has been at the heart of the current financial crisis. We at SIFMA have, through committees of our members and 

roundtable discussions with experts, devoted considerable time and 

resources of thinking about systemic risk and what can be done to 

identify it, minimize it, maintain financial stability, and resolve a 

financial crisis in the future. Through this process, we have identified a number of questions and tradeoffs that will confront policy 

makers in trying to mitigate systemic risk. 

Although our members continue to consider this issue, there 

seems to be a consensus that we need a financial markets stability 

regulator as a first step in addressing the challenges facing our 

overall financial regulatory structure. 

At present, no single regulator or collection of coordinated regulators, has the authority or the resources to collect information system-wide or to use that information to take corrective action across 

all financial institutions and markets regardless of charter. 

We believe that a single accountable financial markets stability 

regulator will improve upon the current system. 

While our position on the mission of the financial markets stability regulator is still evolving, we currently believe that its mission should consist of mitigating systemic risk, maintaining financial stability, and addressing any financial crisis. 

In my prepared remarks submitted to the subcommittee, I have 

provided an outline of certain powers and duties of the financial 

markets stability regulator might have, and some issues you might 

want to consider in determining the scope of those powers and duties. 

I will briefly touch on those powers and duties, but note that my 

prepared remarks provide a very full discussion of these issues. 

The financial markets stability regulator should have authority 

over all financial institutions and markets regardless of charter, 

functional regulator, or unregulated status. 

In carrying out its duties, the financial markets stability regulator should coordinate with the relevant functional regulators as 

well as the PWG, in order to avoid duplicative or conflicting regulation and supervision. It should also coordinate with regulators responsible for significant risk in other countries. 

It should have the authority to gather information from all financial institutions and markets, make uniform regulations related to 

systemic risk that are binding on all, and act as a lender of last 

resort to all. 

It should probably have a more direct role in supervising systemically important financial groups, including the power to conduct 

examinations, take prompt corrective action, and appoint and act 

as the receiver or conservator of such systemically important 

groups. These more direct powers would end if a financial group 

were no longer systemically important. 

There are a number of options of who might be the financial 

markets stability regulator. Whomever is selected, the financial 

19 

markets stability regulator should have the right balance between 

accountability to and independence from the political process. 

It needs to have credibility in the markets and with regulators 

in other countries. It should have the tools necessary to identify 

systemic risk, take prompt action to prevent the financial crisis, 

and to resolve a financial crisis if it occurs. 

To be truly effective, the financial markets stability regulator 

would need to have the power to act as the lender of last resort 

or to provide emergency financial assistance to the markets, and 

have prompt corrective action and resolution powers over failed or 

failing financial institutions that are systemically important. 

I stand ready to answer any of your questions, Mr. Chairman, 

and members of the subcommittee. Thank you. 

[The prepared statement of Mr. Ryan can be found on page 127 

of the appendix.] 

Chairman KANJORSKI. Thank you, Mr. Ryan. 

I thank the panel for their testimony. I am sure we all have 

some interesting questions. Let me start off with my questioning 

period. 

The thing that sort of disturbs me is what my ranking member 

referred to in his opening remarks, and that is we have to get this 

one right. We cannot just hurry to expeditiously conclude something or pass something that appears to be a fix when in fact it 

does not really accomplish something of a significant nature. 

The thing that disturbs me is trying to get my arms around the 

idea of just what is a ‘‘systemic risk.’’ We have all talked about it, 

I can assure you, and we have heard you. 

I think when the question came up in 1964, Justice Potter Stewart, in trying to explain what was ‘‘obscene,’’ he said the following, 

‘‘I shall not today attempt further to define the kinds of materials 

I understand to be embraced, but I know it when I see it.’’ 

I think probably with systemic risk, after the fact, we seem to 

all know it when we see it, but before it arrives, we have no idea. 

If you make the proper conclusions, we would not be in the crisis 

we are in today, if people could have rapidly seen systemic risk 

would have occurred. We certainly have enough regulators who had 

eyes on the situation. They just were not analyzing or seeing the 

situation. 

I, myself, think we have in the past constructed some interesting 

areas, some of which now have been passed over, but the prior 

practice of the Justice Department to honestly decide whether or 

not there were antitrust violations in reviewing mergers and consolidations. 

With that in mind, it very often accomplished proactively responding to something before it happened, before it caused the occasion to cause something, monopolistic or otherwise, to occur in 

the system. 

That is what we are attempting to do. When I think of it, in most 

instances in our government at least, we regulate entities. We do 

not regulate conclusions or finalities that occur. 

When you think of it, almost anything could be a systemic risk. 

I was just talking to my staff and I said if you really think about 

it, a bad virus could be a systemic risk. Obviously, we are not going 

to try to regulate viruses so they do not cause systemic risk. 

20 

On the other hand, I see a big challenge ahead of us. That is why 

I agree with the ranking member. You know, we are treading very 

closely to government authority to encompass regulation of everything, under the excuse of well, it may grow into systemic risk, 

therefore, we have the right to inquire into it and possibly be an 

active Congress, we have the right to limit or control that action. 

That seems to be an unusually extended role of government, and 

we have to be very careful we do not carte blanche offer that. 

On the other hand, if we do not do something that is severe, we 

are going to run into the same problem we are in now, in terms 

of allowing things to grow. 

I just point out to the panel, we had the automobile industry 

here several weeks ago. Their argument to a large extent was they 

constituted a systemic risk in that if the U.S. Government allowed 

any one of the three American auto companies to fail because of 

their intertwined nature of having similar dealers and similar suppliers, those suppliers or dealerships would fail, and therefore, it 

would fail for all three of the auto companies, not just for the one 

that had to go into bankruptcy, and that would constitute a systemic risk for the auto industry. 

It makes sense. Could we have stopped that from happening? 

Would we have anticipated that? Is there some magnificent character out there who has the brain power to anticipate all those realities? 

I am not even certain in the auto industry that it was controlled 

by a thinking power, I think it just occurred. 

Is that what we are talking about with systemic risk, and now 

adding on this feature of going to a global economy. It is a frightful 

thing. I think you have a good idea there, Scott. We have to take 

our time. We have to make sure we get this right. 

Could some of the members of the panel give me an idea, do you 

see a very grave difficulty in defining what a ‘‘systemic risk’’ is and 

what part of that risk we really want to pay attention to in the nature of creating some laws? 

Mr. Bartlett? 

Mr. BARTLETT. Mr. Chairman, I do not think it will be difficult. 

It will require some thought by the committee, as you have, and 

by others. I think it is not difficult so long as the committee is looking for a systemic pattern and then the regulation is still by the 

principal supervisors, by the primary prudential supervisors at the 

national level. 

I heard the consistency on the panel that there is no call here 

for a new regulator or super regulator to take the place, but rather 

someone to connect the dots. 

A clear example, there were hundreds of regulators regulating 

thousands of regulated banks and tens of thousands of non-regulated mortgage originators, and those regulators collectively and individually concluded that those things that were called ‘‘subprime 

mortgages’’ were unsafe, unsound, and bad underwriting. 

But they had no connection like upstream to Wall Street to say 

by the way, so the regulators said you cannot own them, so they 

did not own them. They sold them. There was no connection to the 

rest of the system to say that somebody down here has concluded 

they were unsafe and unsound. 

21 

It is that connecting the dots’ system that we are calling for, not 

a new regulator. 

Chairman KANJORSKI. Mr. Bartlett, to connect those dots, would 

that not encompass authority for the existing various regulators 

that we have to share information and confidential information 

with one another, and is that not sort of dangerous? Is that not 

what we would worry about? 

Mr. BARTLETT. Mr. Chairman, it is not dangerous. It is dangerous not to. We have discovered that. It does require legislation. 

Let me say that crystal clear. This cannot just happen because the 

statutory authority is not there, but it requires the authority of the 

Federal Reserve and the prudential supervisors to collaborate and 

share information with one another. 

Chairman KANJORSKI. You would be perfectly agreeable to allowing a set of regulators, if we ever get around to regulating hedge 

funds—I am going to pick on Mr. Baker for a second—that the information they would obtain from the various hedge funds from 

around the country as to what their investment policy was, that 

should be disclosed across the regulatory network? 

Mr. BARTLETT. No, sir. Disclosed to the Federal Reserve or to the 

market stability regulator because it is a systemic regulation function. 

I think you could make other decisions on disclosure and non-disclosure, but the Fed needs the information to know what is going 

on. 

The first call on Bear Stearns did not come from the SEC and 

it did not come from Bear Stearns. It came from Treasury, who did 

not have a regulatory role. They called the Fed as the systemic regulator, even though there was no statutory mandate for the Fed to 

be a systemic regulator, but the Fed was all they had. It was outside the system, if you will. 

Chairman KANJORSKI. You are really talking there about the diagnostician, after a set of facts and circumstances occurred, somebody to blow a whistle, to connect the dots and blow a whistle. 

Are we not really talking about someone doing an analysis before 

the decisions are made, to make the review, so we are one step 

ahead of where it is easier to define what we are doing? 

Mr. BARTLETT. That is precisely the point. How would Bear 

Stearns have been different had the Fed been authorized to conduct some kind of systemic risk analysis a year or 2 years earlier? 

Would it have prevented the crisis? I do not know. 

The outcome would have been different, and I think better. The 

first call that there was a systemic problem came after the horses 

were out of the barn and running around in the pasture. 

Ms. VAUGHAN. Mr. Chairman, may I speak to this, please? 

Chairman KANJORSKI. Yes, I am going to let you speak, but I am 

already over my time. Go ahead, Doctor. 

Ms. VAUGHAN. Thank you. I used to teach a class at Drake, I 

mentioned when I started, on the regulation of financial institutions. It was a graduate class. 

We would spend some time talking about systemic risk. I find 

the evolution of this discussion very interesting because if you look 

at kind of the way systemic risk was thought about around the 

22 

time of the savings and loan crisis, way back when, that was very 

bank centric. 

It was because the banks are connected to the payment system, 

because of the way banks extend credit, that a contagion within the 

banking system creates systemic risk. 

When Long Term Capital Management happened, we began to 

think about hedge funds and the possibility for them having systemic risk. 

I think what we have learned with AIG is there is an issue about 

activities that create interconnectedness, that we have these credit 

default swaps that it would have been nice if someone had been 

looking at this and saying, boy, look at the amount of credit default 

swaps that the banks have, you know, going in both directions, and 

where is this stuff going, and who is watching the way this is playing out through the marketplace, and making a decision as to 

whether these should be regulated. 

It strikes me that going back to your suggestion that we are talking about someone who is looking at the marketplace and trying to 

identify problems before they happen, I think that is one of the 

things that is very consistent with what the regulators have been 

saying. It is not the only model but that is consistent with what 

we have been saying. 

We have seen because of AIG—we have a better recognition of 

how systemic risk impacts our ability to protect our policyholders. 

We think it would be helpful to have some mechanism that is 

monitoring systemic risk within the industry so that we can work 

with them to make sure that it is not interfering with our ability 

to do what we do. 

Chairman KANJORSKI. Thank you, Dr. Vaughan. 

Mr. Garrett? 

Mr. GARRETT. Thank you, all, and thank you, Mr. Chairman. I 

appreciate your comments with regard to the auto industry and as 

to what the systemic risk is there. 

I am thinking at the same time about the technology industry as 

well, the electronic industry, and all the other ones outside the financial sector that we would have to begin to throw into this mix. 

Any one of these, if they ever were to fail, could have a systemic 

problem. 

It was prior to everything blowing up in August of last year 

when Chairman Bernanke said with regard to setting up a regulator, ‘‘Some caution is in order. However, as this more comprehensive approach,’’ which has basically been described by some of you, 

‘‘would be technically demanding.’’ 

He went on to say, ‘‘We should not underestimate the technical 

and information requirements of conducting such exercises effectively.’’ 

I think he hit it right on the point. How do you do that? When 

you look to see what the track record has been already for our regulators, who would you suggest that we take to put into this sort 

of regulator or just a council or what have you? 

Should we take it from the SEC, in light of their experience with 

the Madoff situation and some of these other situations that they 

have been involved in? Should we take it from the OTS, with respect to what they have done with the banks and AIG subs? Should 

23 

we take it from the Federal Reserve, with their experience with 

setting monetary policy, and their experience with the national 

banks as well? 

Should those be the people whom we are drawing from in order 

to be able to sit back and get a more comprehensive approach? 

On the Federal Reserve, just remember, and I appreciate your 

comments, Mr. Bartlett, about them looking at one area, but was 

it not the Boston Federal Reserve back in the early 1990’s who 

said, ‘‘The banks could consider such things as welfare payments 

and unemployment insurance when they decided whether or not 

they should be giving bank loans to individuals.’’ 

Should it be those same individuals that we call upon to be our 

super regulator in the future, to be able to make these decisions? 

If they were not able to do it for the narrow area that we have 

charged them with, that they had the authority to do, who on the 

panel thinks we should be drawing from them to be making the decisions for us on an overarching responsibility? 

[show of hands] 

Mr. GARRETT. You do. Who do you think? 

Mr. BARTLETT. Mr. Garrett, I understand your question. The 

Federal Reserve gathers information and it has for a decade on the 

production and distribution of corrugated box containers to help 

them with information about the economy and what is happening 

in the economy. They are not permitted to gather information 

about the reserves against the hundreds of billions of dollars of 

CDS because that is excluded to them. 

The Federal Reserve was given the responsibility by regulation, 

rightly or wrongly, to regulate as a small regulator, HOEPA, and 

they were busy doing that and regulating it as a consumer protection issue, when the entire system of subprime mortgages collapsed, because they were not authorized to look at that system, 

but they could look at HOEPA and consumer protection. 

We are not, and I do not believe anyone is advocating a super 

regulator. Rather, we are advocating someone to connect the dots. 

Mr. GARRETT. I understand that. In your experience in Congress 

in the past, when is it ever the case where you have a regulator 

in place that does not try to grow in its extent of authority? Do 

they ever just sit and say, ‘‘This is our realm of responsibility here 

and we are not going to exert it more so.’’ 

Is that your experience? 

Mr. BARTLETT. That is why God made oversight committees. 

Mr. GARRETT. Ms. Williams, I have a question. I just need a better picture on this. It is on one of the points I just raised, and I 

appreciate your testimony. 

When OTS is out there, and you used the expression ‘‘making 

their examinations,’’ and you said they had a problem—not a problem—they had the aspect that they were not able to get into the 

hedge funds and they were not able to have information more particularly with regard to the AIG situation, as far as their offline 

business and what have you. Can you in a sentence or two elaborate on that? What should have been their authority there? Did 

they not have the ability to at least look at that and say here is 

an area where we know something is going on, but we do not have 

24 

the authority to look at it, we want to investigate it more, or they 

just simply did not know that at all? 

Ms. WILLIAMS. This is the challenge with holding company oversight, because they have the authority to look at the holding company. In this case, it is a thrift holding company that we were talking about in the case of AIG. 

They could look at the holding company and any threats to the 

holding company, but it creates an issue of they can go in if they 

believe there is a threat to the holding company, but if you are not 

looking at all of the subsidiaries within the holding company, how 

are you going to identify the threat? 

Mr. GARRETT. Could they look at all the subsidiaries? 

Ms. WILLIAMS. To the extent it poses a threat to the holding company, there are specific cases that they could go in and look at it. 

My understanding is that is what they did once the internal 

auditor raised concerns about risk management of AIG Financial 

Products. They went in once those concerns were raised because 

that raised an issue for the holding company. 

Mr. GARRETT. I appreciate it. I might have additional questions 

later. Thank you. 

Chairman KANJORSKI. Thank you, Mr. Garrett. 

Now, we will have the gentleman from New York, Mr. Ackerman. 

Mr. ACKERMAN. Thank you, Mr. Chairman. 

Before I ask my questions, I just want to respond to some of the 

things some of my colleagues put forth as statements or theories 

or postulates, in saying that the problem that we face really is 

there is too much regulation. Some of them said it in different 

ways. 

I would just like to analogize that if we had a super highway system for use of mixed vehicles, different kinds, cars, trucks, etc., and 

there were speed regulations, a lot of speed regulations, but nobody 

was enforcing the speed regulations because the State Police just 

neglected to patrol or fine anybody who was speeding. Suddenly, 

systemically, the entire highway system is filled with crashes and 

carnage. Is the problem: (a) there are speed requirements; (b) the 

police are not patrolling; (c) the people trying to figure it out are 

from outer space; or free feel to add, (d) all of the above. 

I think we are getting into an area here where we are talking 

about philosophy versus fact. That is my observation. 

A question: Mark-to-market, where there is no market, and arguably sometimes there is no market, how do you require companies 

to mark down the value of their company setting off all kinds of 

crises in the economy and expect there not to be problems? 

Anybody? 

Mr. BAKER. I will take a pass at it, Mr. Ackerman. I come at it 

from the experience of the savings and loan debacle, the creation 

of the RTC and the resolution of property owned by the U.S. taxpayers as a result of closure of significant numbers of institutions. 

Real property was sold for about 20 cents on the dollar, notes 

and securities for 12 and 13 cents. It was a contained geographic 

downturn in Louisiana and Texas, and the residual economic effects of that distress sale in that environment caused a decade long 

downturn in those regional economies. 

25 

To a great extent, it was brought on by in essence a mark-tomarket philosophy, let’s get the stuff out the door at an emergency 

price. 

At the same time, I would be quick to add, however, efficient 

market function only comes with accurate disclosure of values. 

There will be a very difficult decision to be made by someone in an 

administrative agency as to how to proceed with government-owned 

resources in the current environment. 

If a bank is to liquidate an asset and it is below whatever value 

was on the books, they will have to raise capital in a very tough 

marketplace to offset that material loss. 

If they expect to have it sold and— 

Mr. ACKERMAN. Which is why the banks are holding onto all that 

money we gave them. 

Mr. BAKER. To a great extent, that is a contributing factor. There 

would be others better able to respond to that observation than I, 

but I would also suggest that in order to sell that asset in a difficult market at above book value, it is very problematic for the 

acquirer because he knows he is not paying market value. 

This is going to be a continued and long term problem of resolution. I cannot dispute the fact your observations have merit, although I would say to act without true valuations and allowing 

parties to come to a negotiated price on any asset disposition, we 

could not expect that to be the end conclusion either. 

Mr. ACKERMAN. Dr. Vaughan? 

Ms. VAUGHAN. If I can just speak to this from an insurance perspective a little bit, I have found myself for the last year or so rethinking myself around this subject of mark-to-market. I would say 

that a couple of years ago, I tended to be thinking that movement, 

that direction, was a good thing. 

When you have a world like we are in today where the liquidity 

situation is so difficult, and we know that the market values of 

these assets are depressed for two reasons, one is there are real 

credit losses coming down the road, but second, there is a depression in market values simply because of the liquidity of the market. 

We do not know what the mix of those two is, but to force companies that are going to hold these assets long term that do not have 

to sell in this illiquid market, to force them to write down to a 

value that reflects current illiquidity, I am wondering, again, just 

sort of thinking through it, whether it is sending the wrong signal 

to the marketplace, and particularly, I think about consumers, is 

it sending the wrong signal to consumers about the capital that is 

in these companies and how strong these companies are. 

One of my colleagues likes to say the greatest risk we have right 

now is a crisis of confidence. It is that people are scared. We know 

our policyholders are scared. 

That is one of the reasons that the insurance regulators have 

really been struggling with what kind of reporting requirements 

should we be having in this environment right now where the markets are not anything that we have ever lived with before, not in 

my lifetime. 

Mr. ACKERMAN. We cannot address or we certainly cannot legislate the confidence in the market. We are going to do a lot of 

cheerleading to do that. 

26 

In addition to that, if I may for a couple of seconds, Mr. Chairman, just say among the risk to the system, I would think, you 

have loopholes, which we can do something about, and greed, 

which we can do nothing about. 

Within greed, there are things that we can do to eliminate the 

loopholes, which include things like reinstating the uptick rule, 

where people, for reasons of their own, beat down the value of a 

company to take advantage of the system to make lots of money 

while distorting the real value that there might be in a company 

or in the marketplace. 

Thank you, Mr. Chairman. 

Chairman KANJORSKI. Thank you very much, Mr. Ackerman. 

Now, we will hear from the ranking member of the full committee, 

Mr. Bachus. 

Mr. BACHUS. First of all, let me commend Director Williams for 

her report. I would mention to all of the committee members that 

Mr. Kanjorski and I requested a GAO study on credit derivatives, 

and more specifically, CDS. This report was actually filed today. 

That is what she was giving testimony about. It is something I 

would direct all our attention to. 

Let me make one comment and then I am going to ask questions. 

Mr. Royce and Mr. Bartlett, you both called for a Federal regulator 

for insurance. 

I think at least implied is that the regulation in insurance had 

failed, but I really do not see any evidence of that. Our national 

insurance markets are the strongest component of our financial 

services market now. 

If they are having problems, and they are, it is because of the 

economy, failures in the banking system and other parts of our financial system. 

In fact, one member specifically said the failure of insurance regulators to do anything on AIG. Well, that was actually—that was 

an alternative investment vehicle that operated, really the only 

regulation you could say of that was in London, a 300-employee 

group, AIG Financial Products. There was no insurance regulation 

of it because it was not an insurance business. You could say CDS’ 

are. 

The only Federal regulator was the regulator for a holding company, and that was a bank regulator. It was not an insurance regulator. 

I am not sure that other than New York with the bond insurers 

that you could—I could find literally thousands of instances where 

we had failures in our bank regulators, but I find very few in insurance. 

I am not sure that is a very fair argument to say that what has 

happened—in fact, I think what has happened has shown that 

probably our State insurance regulators have done a better job 

than most everybody else. 

Now, we are asking the Fed—Mr. Bartlett, I think you will agree 

that the President’s Working Group in 1988 and then this Congress 

in 1991 actually directed the Treasury and the Fed to look at systemic risk and see what sort of powers they ought to have to deal 

with it. Now, we are going to appoint the Fed. 

27 

I would associate myself with Mr. Castle’s remarks, I think most 

closely, and Mr. Price’s, as to how we address this systemic regulator. 

The Congress said that in 1991, a year before I got here. 

Having said that, are any of you troubled by giving the Fed so 

much power with their monetary policy right now? If they are regulating somebody but they are also given the right, as some of you 

said in your opening statements, to bail them out—I will use those 

words, you did not use those words, but some of you did use ‘‘rescue’’—they have been rescuing one institution after another. 

Are you troubled by that? Dr. Vaughan, I am going to ask Mr. 

Ryan. I know how you feel. Mr. Ryan? 

Mr. RYAN. I would like to first of all make a general comment 

and maybe I am dirtied up because I was the Director of the OTS, 

first Director of OTS. 

As a former Federal bank regulator, I can tell you—this is true 

basically of all former bank regulators. You can take them from all 

over the globe. 

Right now, as the chairman said, we know what systemic risk is 

and we are living through it right now as we see it. 

We know there is no Federal regulator fully equipped with the 

tools and the information to help us avoid this type of problem in 

the future. What we are looking for here is we are looking for 

someone who has the tools, has the information, has the power to 

hopefully to look a little bit over the horizon. Bank regulators are 

rear view mirror type people. It is all looking back. 

That is why we call it not systemic risk regulator, we call it a 

financial markets stability regulator. That is what we want this entity to do. 

We need someone to do that job. 

Mr. BACHUS. I guess what I am asking, Mr. Ryan, is should it 

be the Fed to do all of that? 

Mr. RYAN. We have not really decided that, Mr. Bachus. That is 

why we kind of dodge that. I think having all these hearings— 

every time you have a hearing, I will come, to any one of these 

committees, I will come. We need input, and you all need to make 

a decision in a timely fashion, and to me that is before the end of 

this year. 

We need a restoration of confidence and a component piece of the 

restoration is having a regulator who can do this job. 

Mr. BACHUS. Let me go back and say this: If you look at most 

of the institutions that failed, they were not regulated at all. Option One. They were non-banking affiliates, but they were not insurance affiliates. They really were non-regulated institutions. 

Even GE. They had a non-regulated WMC. 

You can just go down the line and probably 70 percent of the 

losses were in companies that were not regulated by bank regulators or insurance regulators. 

Those are the gaps. 

Mr. RYAN. We have talked about the shadow banking system and 

basically unregulated. We need someone who can look over the horizon, not limited by charter, and can pull the information together, 

and then take action, and the action, as I said in my testimony, 

28 

goes from the more simplistic setting standards to also the resolution. 

Mr. BACHUS. Let me say this. Dr. Vaughan, I know how you feel. 

I think I was favorable to your point of view. 

What about as opposed to rescuing these institutions, what about 

two options? One would be an orderly liquidation. Two would be 

not allowing them to become a systemic risk. Are those not two better options than injecting taxpayer dollars or guarantees into the 

system? 

Mr. BARTLETT. Mr. Bachus, that is what we are proposing. The 

Fed has a lot of power but they do not have the power to prevent. 

They are called upon, whether they have the statutory power or 

not, they are called upon to resolve with a lot of money what they 

did not have the power to prevent. 

Mr. BACHUS. Could Dr. Vaughan just briefly respond? You wanted to answer the first one. I am sorry. 

Ms. VAUGHAN. The first one, good. Not to the question about 

whether we should put taxpayer money into— 

Mr. BACHUS. Whichever one. 

Ms. VAUGHAN. I would rather do the first one. Thanks. 

I appreciate that because it gives me a little bit of an opportunity 

to make a couple of points I wanted to make. 

First of all, the discussion about creating a Federal regulator, a 

couple of years ago when I was an insurance commissioner, it was 

all about efficiency, the inefficiency of the State system. 

I find it interesting that suddenly this has morphed into we need 

a Federal regulator so that we have effective insurance regulation, 

when as you pointed out, there is no evidence that the system has 

not been effective. In fact, we do not have any policyholders who 

have lost any money yet. 

The credit default swap problem was not in the insurance company because we would not let them do it in the insurance company. 

We were regulating that company to protect policyholders. Unfortunately, we are getting hit by things outside the system. 

The point I wanted to make is this idea of creating one ‘‘uber regulator.’’ We are absolutely not in favor of that, are absolutely opposed to that. We do not want a system that preempts our ability 

to protect our policyholders, and we think that a system of checks 

and balances is a very good thing, and that having a lot of eyes 

on the problem is a very good thing. 

The story that I have told many people in the last couple of 

weeks is that what has happened in the world over the last couple 

of years has crystallized for me an appreciation of the fact that regulators make mistakes. 

I think that is the most important lesson we can draw from this. 

Regulators will make mistakes. A regulatory system will fail. When 

you build a regulatory system, you should build that to withstand 

those kinds of failures. 

Bernie Madoff was a big failure. I am absolutely not pointing fingers at the SEC for that failure because I will tell you, the insurance regulators have had failures also. We have been the recipient 

of several GAO studies, thank you very much, that pointed to problems in our system, and that we then went and fixed. 

29 

There was a man named Martin Frankel who, while I was an insurance commissioner, took control of seven insurance companies. 

He was a fraudster. He began bleeding the insurance companies, 

stealing money from them. 

He got through several insurance commissioners and when he 

got to the State of Mississippi, which was maybe the 4th State he 

got to, Commissioner George Dale of Mississippi looked at it and 

said, this does not look right, and he brought him down. What that 

illustrates to me is the value of having multiple eyes on the problem. That is what we have in the State system, multiple eyes on 

the problem. 

We do not want our eyes taken away when you build this system. 

If you want to add another set of eyes, that is great, but do not 

take our eyes away and our ability to protect our policyholders. 

Mr. BACHUS. Thank you. 

Chairman KANJORSKI. Thank you very much, Doctor. 

As I understand it, we have three votes. We have at least 5 minutes in which Mr. Sherman get his examination in before we recess. 

Mr. SHERMAN. Thank you. I will start with kind of a rhetorical 

question that you should respond to for the record. 

A number of those on the other side of the aisle have said, wait 

a minute, you get this systemic risk regulator and those big enough 

to be subject to it get this implication of Federal stamp of approval, 

maybe they are viewed as too big to fail, which means they will get 

bailed out, and this gives them an advantage in the marketplace, 

lower interest rates, and worse of all, if they do need to get bailed 

out and there is an implication that we are going to bail them out, 

we might bail them out. 

One issue is instead of having too big to fail, regulating it in a 

way that has all the problems that are pointed out by Republican 

colleagues, we could prohibit too big to fail. Say any financial institution over a quarter of a trillion dollars in size, that is as big as 

you get. It is time to give your shareholders the joy of a spin off. 

We do not have to put ourselves in a position where we have to 

endure too big to fail or we have to insure too big to fail. 

I would now like to shift to AIG, which recently transferred, I be- lieve, $20 billion of our money to their counterparties as cash collateral. 

I am going to ask first Mr. Bartlett, what portion of those 

counterparties are likely to be foreign entities? Do you have an understanding of the customers that AIG would have had for its credit default and similar products? Should I as a taxpayer assume 

that a substantial portion of that is going to foreign entities? 

Mr. BARTLETT. I have no idea. It is a global market. 

Mr. SHERMAN. It is a global market in which the rest of the 

world is a very substantial part. 

Mr. BARTLETT. And we are a substantial part of the rest of the 

world also. 

Mr. SHERMAN. We would expect that if you are sending $20 billion to AIG counterparties, you are sending a lot of it overseas. 

Dr. Vaughan, I realize that the AIG entity involved is the one 

non-insurance AIG entity. Do you have any understanding as to 

what portion of that money would be going overseas? 

30 

Ms. VAUGHAN. I really do not. 

Mr. SHERMAN. Dr. Vaughan, if I went to an investment house 

and I said, your building may burn down and that could be a problem for you, and I will offer you insurance against that risk, you 

would probably say that I would have to get registered with my 

State insurance and have reserves and really be an insurance company. But if I go to them and say, your portfolio may burn down, 

apparently, I do not need an insurance charter. 

What is the definition of ‘‘insurance’’ under the various State 

laws that says that insuring a portfolio is not insurance subject to 

State regulation, when clearly most investment houses were more 

worried about their portfolios burning down than their buildings 

burning down? 

Ms. VAUGHAN. That is a very interesting question that you raise, 

and one that there is a fair amount of discussion going on about 

right now in regulatory circles. 

At one point recently, the New York Superintendent had suggested that a credit default swap that was actually covering a portfolio, that was insuring a portfolio, would be treated as insurance. 

Much of what is being transacted, however, are what you call 

‘‘naked credit default swaps,’’ where there is no underlying asset 

that is being ‘‘insured.’’ 

Mr. SHERMAN. Wait a minute. If I sell life insurance on somebody’s husband, they have an insurable interest. That is called ‘‘insurance.’’ 

Ms. VAUGHAN. That is right. 

Mr. SHERMAN. If I sell insurance in my State to somebody who 

does not have an insurable interest— 

Ms. VAUGHAN. That is called ‘‘gambling.’’ 

Mr. SHERMAN. That is called ‘‘gambling,’’ but it would be insurance. It would be the insurance regulator who would say no, I cannot do that. The life insurance companies in my State are in fact 

told what life insurance they can sell and who they can sell it to. 

Ms. VAUGHAN. Right. Actually, the concept of insurable interest 

is a fundamental concept in insurance. In property and casualty insurance, in order to collect on a claim, you have to have insurable 

interest at the time of the loss. 

In life insurance, in order to buy a policy, there has to be an insurable interest, and it is a little complicated how it can arise, but 

there has to be one at the time you buy the policy. That concept 

of insurable interest is fundamental to what we think of as insurance, and then the other part, of course, is risk transfer. 

In the issue of credit default swaps, there has been some discussion, and I know they are frequently called insurance— 

Mr. SHERMAN. They serve the role of insurance. They may not 

technically be insurance. As to who would regulate them, one argument would be well, it is insurance and we will have the State regulators insure. 

The concern I would have is which State, and would there be a 

race to the bottom? What protects me as a Californian in the race 

to a bottom is even if an insurance company is created in the Cayman Islands or in some State that races to the bottom, my insurance regulator can protect me, and I am not going to move to anVerDate Nov 24 2008 15:34 Jul 20, 2009 Jkt 048863 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 K:\DOCS\48863.TXT TERRIE
31 

other State. I am not going to move to the Cayman Islands to get 

an insurance policy. 

In contrast, these markets can be moved anywhere. Transactions 

can be anywhere. 

I know you believe in State regulation of insurance for consumers, for those who are in a fixed place. I am not sure we could 

have the States regulate the insurance of financial interests and/ 

or the gambling on financial interests. 

Ms. VAUGHAN. Yes. I said there has been a lot of discussion 

about this in insurance regulatory circles. I would say there has 

not been a resolution of where the regulators are. 

I share your concern that there are some differences between 

credit default swaps and other kinds of insurance that we are used 

to dealing with. 

One of the major differences is that credit default swaps are so 

pervasive now with the banks, with the hedge funds, throughout 

the system. I think personally that this would be a challenge for 

the insurance regulators to say we are going to regulate that massive marketplace in addition to what we already do and by the 

way, do a very good job. 

Chairman KANJORSKI. There are three votes, and we will be back 

in approximately 30 minutes. The subcommittee stands in recess. 

[recess] 

Chairman KANJORSKI. The subcommittee will come to order. I 

now recognize the gentleman from Delaware, Mr. Castle. 

Mr. CASTLE. Thank you, Mr. Chairman. 

I was a little surprised with what I thought was almost unanimity that we need some sort of a systemic risk regulator out 

there. I do not disagree with that. One of my concerns is exactly 

who should be doing this. Several of you mentioned the Federal Reserve. 

Mr. Baker, my recollection of your testimony and I may have it 

wrong, is that you thought it should be an independent agency or 

somebody different than the Federal Reserve. I have some concerns 

about the Federal Reserve taking on much more at this point. That 

is why I asked the question. 

Mr. BAKER. Congressman, we as an association have not taken 

a position on the specific location of the regulatory responsibility. 

I would quickly add that your concerns and echoed by others relative to the Fed being engaged in monetary policy activities and potentially taking on this role as well, it is a task of enormous responsibility, and significant new resources would have to be made 

available. 

I do not know whether a different shop, a coordinating shop, 

some have suggested a coordination role, might be sufficient in 

order to perform the task. 

We have focused more on the elements that should be identified 

and what should be done once those are found. The actual mechanics of who should do it is not a recommendation we have made. 

Mr. CASTLE. Does anybody else have any concerns about the Fed 

doing it? A lot of you expressed the thought they should be able 

to do it. 

Mr. BARTLETT. Mr. Castle, we addressed that issue and thought 

about it. We find the role of systemic risk regulator or market staVerDate Nov 24 2008 15:34 Jul 20, 2009 Jkt 048863 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 K:\DOCS\48863.TXT TERRIE
32 

bility regulator, as I have described, to be very consistent with the 

Fed’s role in terms of the economy and monetary policy. 

It is their job to understand and to strengthen the economy, and 

that is really what this is all about. We find it to be very consistent. 

Mr. CASTLE. Mr. DiMuccio? 

Mr. DIMUCCIO. The PCI also feels that it was consistent with the 

role of the Federal Reserve Board, so we would in fact support that 

position. 

Mr. CASTLE. Mr. Ryan? 

Mr. RYAN. We have not decided, but I think the most important 

issue for us is that it be done in a timely fashion and that the regulator be fully equipped to handle the role which will be complicated 

and difficult, and trying to create some new agency will be difficult 

and will provide delays. 

It is going to be a difficult choice for the committee and for Congress as to who should do this role. 

Mr. CASTLE. Dr. Vaughan, I want to ask you a question, and it 

pertains to AIG. Of all the consternation from what has happened 

in the last several months, AIG is at the top. We have—I am going 

to say, ‘‘thrown money at them’’ with loans or whatever. It seems 

to repeat. They reported a $62 billion loss quarterly, in the last 

quarter of last year. 

Part of what I hear is—I do not really know all this—this is just 

anecdotal to me to a degree, that they have a separate financial 

arm and that really caused a lot of the problems. 

I listened to your testimony about being less leveraged and 

longer time payouts and things, and I guess that is basically correct for the insurance industry, but then you wonder how did AIG, 

which at its heart was an insurance operation, get into this whole 

separate financial arm and all the credit default swaps and all the 

other things that led to its financial demise, and the great taxpayer 

dollars that are going into it and the continuing losses. 

Should we have some sort of separation of the insurance industry 

from even being able to get into things such as that? Is there some 

way this could have been prevented or we could prevent it in the 

future? 

Ms. VAUGHAN. I think that is an excellent question. I guess I 

would answer it this way. I read something recently that Chairman 

Bernanke said, I think it was Chairman Bernanke, that AIG was 

basically a hedge fund on top of an insurance company. 

The problem is that we did have this—I would say AIG was not 

an insurance company. It was a large complex financial institution, 

large globally complex financial institution. 

We as insurance regulators have authority that is clearly laid out 

in McCarran-Ferguson to regulate insurance, so we were protecting 

those insurance entities. 

As I have said already, the insurance companies still remain solvent. What we did was say that these insurance companies cannot 

do this credit default swap business or have limitations around 

what they could do, and constrained their ability. 

There was nothing that then prevented this large complex financial institution from creating an arm that was unregulated to do 

that. That is where we come to the problem. A lot of what was 

33 

going on here was unregulated activities that then led to further 

issues. 

My members are as interested in solving this as you are because 

we would like to find a structure where if you have a large complex 

financial institution, we can regulate our insurance companies in 

cooperation with other groups that are regulating other operations 

in that holding company, in a collaborative, working together kind 

of way. 

Mr. CASTLE. My time is up but it seems to be an argument for 

a systemic risk regulator, somebody who can step in and take a 

look at what they are doing. I yield back, Mr. Chairman. 

Chairman KANJORSKI. Thank you very much, Mr. Castle. The 

gentleman from Georgia, Mr. Scott, is recognized for 5 minutes. 

Mr. SCOTT. Thank you very much, Mr. Chairman. This is a very 

timely and important hearing. 

I would like to ask a series of questions, but let me try to start 

out with Ms. Williams with GAO. Could we talk for a moment 

about your report on credit default swaps? 

It seems to me that in the process of dealing with this, they seem 

to have fallen into the crack. Could you give us an idea as to how 

do we best regulate these credit default swaps? 

Ms. WILLIAMS. I think I would start with kind of focusing on how 

the product is defined and the definition for CDA was basically set 

up in the Commodities Futures Modernization Act. Rather than 

how it functions economically, the definition of the product lies in 

a statutory definition. 

I think if you back away from that and look at this, it is an example of what happens when you focus on a product and regulating 

a product market versus institutions. 

You had OTC derivative dealers who were selling CDS and depending on the type of entity that sold the product, that dictated 

the type of regulation and oversight it received. 

If it is a bank dealer, then it was subject to some level of oversight by its bank supervisor, but if the dealer was affiliated with 

a conglomerate, AIG, for example, then it was not overseen. 

The same would be the case if you had an affiliate that was associated with a broker-dealer, for example, so it illustrates the gaps 

that exist in the current structure and the inability to have a system-wide view of this particular product. 

I think the focus has to be system-wide. 

Mr. SCOTT. The best example of that would be AIG being under 

the risk regulator at the holding company level when underneath 

it in many of these sub-institutions, financial institutions underneath that, were not under risk regulation. 

They did not look down that far? 

Ms. WILLIAMS. Correct. With the holding company regulator, the 

holding company regulator has the ability to go into any part of 

that structure that has the potential to impact the holding company, but if you are not going in on a regular basis—if there is a 

concern, you can go in, but if you are not going into the subsidiaries on a regular basis, how do you then identify if a subsidiary 

is posing a threat to the holding company. 

Mr. SCOTT. I see. Thank you, Ms. Williams. 

34 

Mr. Baker, good to have you here, my former colleague and good 

friend. While I have you here, Mr. Baker, I would like to get some 

clarification on your thoughts on hedge fund operators. Could I do 

that for a moment? 

Mr. BAKER. Certainly. 

Mr. SCOTT. Why should not the income from those hedge fund 

operators who use other folks’ money to make money, why should 

not they be viewed and taxed as regular income as opposed to capital gains, when in fact, if I take my direct money, I should be valued on capital gains, but if I am making money from using somebody else’s money, why should I not be evaluated on regular tax 

structure? 

Mr. BAKER. Mr. Scott, the shortest and probably most responsive 

answer I can give would be when 5 of our largest firms appeared 

before Chairman Waxman in the last 2 months. They were specifically asked a question about tax increases and all, save one, I 

think, expressed the view that they would not be surprised to see 

some adjustment in the taxation system, but I think they made it 

pretty clear as well that they would hope that any taxable recommendation would be neutral between financial market participants so that the outcome of any tax proposal would not be prejudicial to the hedge fund industry but treated similarly as you were 

suggesting. 

I would be happy to provide you with additional information and 

will do so following the hearing. 

Mr. SCOTT. Do you see the need for any additional legislation 

along those lines for hedge fund operators or should we leave it 

alone? 

Mr. BAKER. I am sorry. Could you be more specific? Regulation 

in the context of the funds and how they operate? 

Mr. SCOTT. In how they report that income. I think that is the 

fundamental issue, how hedge funds’ income is regulated and reported. 

Mr. BAKER. If I can, let me provide, I think, the shism you are 

referring to. Any U.S.-generated income for a hedge fund manager 

is fully taxable under ordinary income standards. 

Some of the issues have related to a nonprofit’s ability or foreign 

investors to invest in a facility provided by a U.S.-based hedge fund 

offshore. If you did not have that offshore capability, those currently prohibited investors in U.S. transactions, we would lose that 

capital to other jurisdictions, London or wherever else they may 

choose to go to make those investments. 

You have the UBIT issue for pensions and endowments that we 

would need to revisit. 

You have touched on a pretty complicated set of relationships 

that I certainly want to be responsive and knowing your interest, 

I will get you something back that clearly outlines the concerns. 

I do not think at the end of the day, Congress wants to see net 

revenues to the U.S. Government go down as a result of tax policy. 

Mr. SCOTT. My final point is this, Mr. Chairman, if I may, there 

seems to be some confusion as to what is and who is and who is 

not a hedge fund operator. Is that true? 

35 

Mr. BAKER. Yes, sir. At this time, there are an estimated in excess of 15,000 companies that would call themselves hedge funds. 

The MFA represents about 1,800 of those associations. 

There are many people who fly under—companies—who fly 

under the banner of hedge fund that may be long only shops or not 

utilizing hedge fund strategies in their investment practice. 

There is a bit of lack of clarity in what constitutes a hedge fund 

in the current market. 

Mr. SCOTT. Thank you, sir. Thank you, Mr. Chairman. 

Chairman KANJORSKI. Thank you very much, Mr. Scott. Next, we 

will have the gentleman from California, Mr. Royce. 

Mr. ROYCE. Thank you, Mr. Chairman. 

Earlier, Mr. Bachus alluded to this notion that the underwriting 

side of AIG overseen by the State insurance regulators was somehow walled off from the abstract securities lending division. 

Unfortunately, news reports, such as the Wall Street Journal article that was dated October 10, 2008, which I would like to insert 

into the record, detail the inaccuracy of this perception. 

The gentleman from Alabama and I have disagreed in terms of 

this issue of systemic risk regulation. For example, the need to 

have Fannie Mae and Freddie Mac under a regulator who could deleverage those institutions, for systemic risk. 

There was an amendment I had that I brought to the Floor. The 

gentleman from Alabama opposed it. Mr. Baker supported it. It 

failed to pass. I think in retrospect, the fact that we did not give 

the Federal Government the right to regulate for systemic risk 

with respect to Fannie and Freddie was clearly a mistake. Now, we 

are looking at the situation with respect to AIG. 

Let me just read from the article from the Wall Street Journal: 

‘‘Securities lending has long been a reliable side business for life 

insurers, approved by state regulators. But Moody’s warned in 

April about the risks that insurers were taking related to these 

programs. 

‘‘Hampton Finer, a deputy to New York State Insurance Superintendent Eric Dinallo, said policyholders in AIG’s life-insurance 

subsidiaries weren’t at risk due to the securities-lending program. 

But, he said, New York will review what types of assets insurers 

are allowed to invest securities-lending collateral in. 

‘‘Mr. Slape said his team is keeping a close watch on three AIG 

insurance units because of the securities-lending exposure. Ohio’s 

Department of Insurance said it is investigating the securitieslending activities of at least one life insurer. Darrel Ng, a spokesman for the California Department of Insurance, said the state is 

‘looking at the securities-lending practices of those insurers domiciled in California,’ along with AIG’s.’’ 

The Wall Street Journal story is accompanied by a graph indicating the model AIG used to invest in subprime residential mortgage backed securities, which ultimately led to their demise. 

The collapse of AIG was an unfortunate episode, but facts are 

stubborn things. As I laid out in my opening statement, the various 

State insurance regulators simply do not have the ability to oversee 

large, complex financial firms like AIG. 

I would like to ask a quick question of Mr. Bartlett, and that 

goes to the issue on the ideal of insurance regulation as it relates 

36 

to systemic risk, financial regulatory restructuring efforts are going 

to be high on the list on the upcoming London Summit of the G– 

20, and as part of those talks, the issue of the U.S. 50 State insurance regulatory model is going to arise as other countries criticize 

what they see as the inefficiencies and anti-competitiveness of this 

system. 

As a member of the Foreign Affairs Committee, I have often 

dealt with foreign regulators and parliamentary members, and I 

have heard firsthand the frustration many of them have with the 

piecemeal regulatory structure for insurance. All of Europe has one 

regulator; we have 50-plus regulators. 

As other countries move forward, what might we learn from our 

foreign counterparts when it comes to insurance regulation and 

who is representing the interests of the U.S. Government on insurance in these ongoing discussions that we are having basically with 

our competitors overseas? 

Mr. BARTLETT. Thank you, Congressman. I concur with your 

point. I would also hope that you would include into the record the 

underlying report from Brookings entitled, ‘‘Regulating Insurance 

After the Crisis’’ that was part of that. 

Mr. ROYCE. Yes, I would like to ask the chairman to include the 

Brookings’ report, ‘‘Business and Public Policy,’’ and their initiative 

‘‘Regulating Insurance After the Crisis’’ for the record. 

Mr. BARTLETT. Mr. Royce, the fact is our European allies do believe that our 50 State regulation without the opportunity for a national charter is a significant trade barrier. We concur with that. 

It is clearly a significant trade barrier. It is a trade barrier that 

the Europeans are rightfully angered about. It is also quite a high 

risk to our system and to the global system. 

The fact is that AIG failed. It was not as if AIG is still walking 

around. It has cost the Federal taxpayers so far $145 billion and 

counting. It did fail. It failed because there was neither a national 

regulator of the company nor was there a systemic risk regulator 

involved. It failed, and it failed under the current system. 

If you keep the current system, then there will be future failures 

that will be similar. 

Mr. ROYCE. Thank you, Mr. Bartlett. Thank you, Mr. Chairman. 

Chairman KANJORSKI. Thank you, Mr. Royce. 

Our next gentleman is Mr. Perlmutter for 5 minutes. 

Mr. PERLMUTTER. Thank you, Mr. Chairman. 

I have not been able to sit through all of your testimony, but I 

appreciate everybody being here today. 

We have now had, I think, about a year’s worth of hearings, sort 

of dealing kind of around and about systemic failures, systemic regulation. I appreciate everybody really bringing their thoughts to 

the floor on this. 

We have asked our taxpayers to carry a heavy burden to get us 

through this mess. Mr. Baker, it is good to see you. I wish you were 

still on this committee to help us with this chore. 

Mr. Bartlett, I would like to start with you. I am concerned even 

if we have the most brilliant person at the top of the pyramid here 

trying to figure out what is the next thing that could cause trouble 

to our system, because our system is so connected. 

37 

Should we not be putting some brakes and barriers back into the 

system? That may take away from the efficiency of the system to 

some degree, you cannot make the last buck but the bottom does 

not fall out either. 

Just throwing a Glass-Steagel kind of approach where you try to 

maintain some degree of separation between insurance and banking and the stock market, question number one. 

Question number two, I think you said size should not be a factor, but I do think size does count in dealing with this kind of problem. 

I am just sort of throwing that open-ended question to you and 

to the other members of the panel. 

Mr. BARTLETT. First, Congressman, size does matter but what we 

are saying is size should not be the criteria that decides whether 

it is systemic. Systemic is deciding whether it is systemic or not, 

not how large the individual company is. 

Secondly, again, our proposal is not to create someone at the top 

of the pyramid, but rather to mandate or authorize someone to look 

at the systemic risk or the gap in coverage, but look at that not 

through the eyes of a new regulator or an uber regulator, but 

through the eyes of the prudential supervisors. 

Just as the Fed does collect information on the corrugated container industry, the Fed should be authorized much more importantly to collect information on the total financial services industry. 

As far as separation, Congressman, that would be quite harmful 

to the American consumer, harmful to our economy, harmful to job 

creation because financial services is interrelated. We cannot put 

that genie back in the box nor should we try. If we were to try, 

the leakage would be much greater than the container to start 

with. 

A systemic regulator working through the existing prudential supervisors, the national Federal prudential supervisors, plus the addition of a national insurance regulator, working through their 

powers in order to provide better regulation, and second, in order 

to prevent occurrences before they happen instead of responding 

after they happen. 

Mr. PERLMUTTER. Dr. Vaughan, do you have a comment? 

Ms. VAUGHAN. Yes, I do. I really liked Mr. Bartlett’s comments 

about looking at it through the eyes of the existing functional regulator. I do believe that it is important not to lose the things that 

we have that work, and the expertise that we have to try to solve 

this problem. 

It is a very complicated problem. At least let’s leave what is 

working, which gets me to the securities lending, if I could just 

take 2 minutes to talk about what happened with AIG. 

Mr. PERLMUTTER. How about 1 minute? 

Ms. VAUGHAN. Okay, 1 minute. AIG did have securities lending 

operations; a number of life companies have securities lending operations. No life insurance has gone insolvent because of its securities lending operations. 

The New York Superintendent had been working to address the 

issue of securities lending in AIG, and the insurance company had 

reduced the amount, and was in the process of reducing it further, 

38 

when it was overtaken by the problems with the credit default 

swap operation. 

Credit default swaps led to a downgrade in AIG, it led to liquidity calls in the insurance company. Still not insolvent but there 

was a liquidity issue. 

What have we learned from this? Well, we have learned two 

things. One, we are looking at our securities, our regulations 

around securities lending. We have disclosures. We have strengthened those disclosures. Even before this all happened in 2007, I 

think, we adopted a risk based capital charge related to securities 

lending. We have been working on this for several years but the 

whole credit default swap situation overtook some of the work that 

we were doing. 

Second, the fact that the credit default swap operation at AIG 

again impacted our insurance company is why we believe that this 

discussion around systemic risk regulation is worth having, but not 

to use it as an opportunity to gut a system that has worked, which 

is we protected the insurance companies and the insurance policyholders. 

Mr. PERLMUTTER. Thank you. I yield back, Mr. Chairman. 

Chairman KANJORSKI. Thank you very much, Mr. Perlmutter. 

Mr. Posey of Florida. 

Mr. POSEY. Thank you very much, Mr. Chairman. 

I think fundamentally we all agree that the whole crisis was 

caused by greed, pure and simple, and there is more than enough 

blame to go around. We can point fingers in all directions for the 

rest of our lives and not get everybody who is due some blame and 

probably include a bunch of people who were not. 

Fundamentally, I do not think we had a problem with not 

enough regulation. I think we had too much regulation, too much 

interference by Congress. I never knew a banker who wanted to 

make a bad loan until Congress injected itself into the process of 

determining who should get them and for what. 

Ken Lay is in prison because he caused severe losses to a lot of 

non-risk adverse investors, and yet we have a lot of people walking 

around free who have caused immeasurable financial harm to 

every person living in this country and future generations of persons living in this country. 

I think every one of you at this table and I will be dead before 

our country pulls out of this crisis or completely recovers from the 

doldrums that were caused. 

I align myself a lot with the remarks made by Mr. Ackerman 

earlier. I think it is not a matter of too few regulations. I think it 

is a matter of regulations we had not being enforced. 

I like the analogies he made about crime. If your local police did 

not arrest and investigate criminals in your neighborhoods, I guarantee crime would be rampant. 

We heard the SEC story with Madoff for a decade ago. Basically, 

no heads fell. Nobody lost their job. Total lack of accountability and 

responsibility on the government’s part, equal, I think, in guilt as 

Madoff was. 

I believe the best regulation that we could have is add some people with accounting degrees to the Justice Department. We need to 

39 

make sure this fits into RICO statutes. I think that self regulation 

would be the best regulation. 

I think when people commit these horrendous acts of greed and 

cause harm to other people—if they cause physical harm, they go 

to jail. If they cause financial harm, you get a big bonus and you 

do not care whether you work another day in your life or not. 

I would like just a yes or no from each one of you as to whether 

or not you think that is a good idea conceptually. 

Ms. Williams? 

Ms. WILLIAMS. Self regulation needs to be part of it and it also 

has been part of the current structure. 

Mr. BAKER. Our industry does not perform well where markets 

are manipulated. We would like fair and efficient markets. 

Mr. BARTLETT. If you commit a crime, you ought to go to jail. We 

do think there should be more effective regulation. We think the 

regulation that was in place clearly failed, as there were a lot of 

other failures, but we look for more effective regulation. 

Ms. VAUGHAN. Enforcement is critical and a system of checks 

and balances increases the chances that will happen. 

Mr. DIMUCCIO. We think there should be better coordination of 

regulation with the help of a systemic risk regulator. 

Mr. RYAN. We believe there should be a financial stability regulator. 

Mr. POSEY. I got one clear ‘‘yes’’ out of six. That is probably pretty good for up here. Thank you, Mr. Chairman. 

Chairman KANJORSKI. Thank you, Mr. Posey. The gentlelady 

from Ohio, Ms. Kilroy. 

Ms. KILROY. Thank you, Mr. Chairman. I appreciate it. 

I would like to ask the panel some questions about credit default 

swaps and your view of those in this overall topic of systemic risk. 

I have heard credit default swaps described as a way for institutions to manage their credit risk. I have also heard them called a 

dangerous side bet by those with no skin in the game, no ownership interest, in terms of stocks or bonds, that has played a role 

in this economic downturn. 

I would like to know how you come down on credit default swaps 

and their role in our financial markets. Are they good for us? Are 

they bad for us? Which way do they tilt? 

Mr. RYAN. Our view is that CDS are not insurance products. 

They are trading products. They do not require an insurable interest. It is not an insurance product. It is trading. It is a very useful 

product in today’s environment. 

Ms. KILROY. If they are not an insurance product, what is their 

functional good use then? 

Mr. RYAN. People trade risk on specific names and typically they 

are trading risks around embedded additional investments. Sometimes they are not, and that is called ‘‘naked CDS.’’ 

Ms. KILROY. Are they more useful products than offside betting, 

if they are not an insurance product? 

Mr. RYAN. For most global financial institutions, they are very 

useful hedging products. 

Ms. KILROY. Anybody else want to offer on opinion on the usefulness? 

40 

Mr. BARTLETT. I would comment they are another example, a 

very large example of the gaps in regulatory coverage. CDS are just 

riding the gap. There is no regulation on either side of them. That 

is why we think a systemic regulator should be able to look at the 

gaps as well as the coverage. 

Ms. KILROY. I understand that we have gaps in regulations, but 

as I understand it, credit default swaps were not permitted until 

about a decade ago. Is that correct? 

Steve Kroft reported that on CBS News, 60 Minutes, that credit 

default swaps had been illegal during most of the 20th Century. 

Mr. BARTLETT. It had been unheard of before, I suppose. I had 

never heard of them. 

Ms. KILROY. I guess my question is, should we return to that last 

decade, return to a situation where credit default swaps are at a 

minimum unheard of? 

Mr. BAKER. If I may respond, Congresswoman, I certainly think 

that the role that credit default swaps play has a structural material business reason for existing. 

If I am doing business with you and you have a train of suppliers 

that enable you to make your product that I am relying on purchasing, but I have a concern that one of the downstream providers 

of, let’s say, the engine for the car you are manufacturing, and the 

engine manufacturer may be impaired, I cannot enter into a financial transaction and be responsible to my shareholders without ensuring against identified potential risks. 

If I take that credit default swap out so in case something does 

happen to that engine provider, I can be made whole. 

Ms. KILROY. Should we limit a credit default swap then to those 

with some business reason like that, someone with ownership interest, where it is a guarantee? 

Mr. BAKER. There is another complicating factor that is unfortunately the result of our credit rating agencies’ missteps. The CDS 

market is increasingly becoming the de facto rating agency because 

the spreads on credit default swaps are an indicator of the underlying financial condition as determined by the broad market. 

All I am suggesting is cautionary action. We certainly want to be 

involved in the discussion. We have concerns that prejudicial action 

at this time without fully understanding the consequences would 

not help our economic recovery. 

Ms. KILROY. That is why I am asking questions so we can understand. 

Mr. BAKER. Thank you. 

Ms. KILROY. Should credit default swaps be regulated then since 

they are a form of a guarantee as an insurance product? 

Mr. BAKER. If I may further continue, the risk with credit default 

swaps in the current market environment is settlement risk. 

There is considerable work done by the New York Fed with significant market participants to create future clearinghouses or exchanges for the purpose of trading standardized CDS contracts. 

The difficulty in pursuing that path alone is there are many 

credit default swaps which are very unique to the two business interests that are involved, called ‘‘one off’s.’’ 

You cannot run one off’s through an exchange because of the fact 

they are unique, so there will be a continued business reason to 

41 

have credit default swaps continue to be agreed to that are not exchange or clearinghouse traded. 

It will help greatly with some of the concerns I think I have 

heard expressed about the potential downside risk of a failure to 

settle. 

Ms. KILROY. What you are suggesting would certainly give us 

more ‘‘transparency’’ in the system, but does that answer the need 

for regulating credit default swaps? 

Let’s move from insurance to the banking industry. Banks are 

the major credit default swaps’ dealers, but banks which are subject now to regulation, the regulators do not take a look at credit 

default swaps. 

Is that something that bank regulators should take a closer look 

at? 

Mr. BAKER. I think that would come under the purview of the 

systemic regulator’s responsibilities and to determine where there 

was aggregation or exposures that warranted some intervention. 

In the current market, I do not respectfully see a reason to regulate the instrument. There may be concerns about the counterparties’ capital standing or their inadequacy to meet their obligations, 

which perhaps could be best handled by either the prudential regulator of the counterparty or by the systemic risk regulator. 

Ms. KILROY. I have to express some real concern about AIG and 

the amount of money that our taxpayers have had to pony up for 

AIG and the continuing saga there, and AIG and AIG FP’s role, an 

unregulated entity engaging in hundreds of billions of dollars in 

credit default swaps. I have a real concern about this area. 

Mr. BAKER. I think that would be certainly addressed by a systemic regulator, particularly in the case of AIG. 

Ms. KILROY. Dr. Vaughan? 

Ms. VAUGHAN. Thank you. Back to your original question about 

is there value to these and should they be regulated, the theory always was that the use of credit default swaps would allow this risk 

to be spread throughout the marketplace, and therefore, it reduced 

the systemic risk because credit risk was not being held by one 

bank now. It was being held broadly by lots of people, and that was 

a good thing. 

What we found was that it did not spread the risk. It concentrated it, and it concentrated it in places where we did not see 

it and we did not regulate it. 

I would fall on the side of we need to regulate it, and we need 

to deal with it, and how you do that, that is for the experts to figure out. 

The issue is making sure, to go to what Mr. Baker said about 

settlement risk, when you have concentrations of this, making sure 

that they are able to pay off on these losses, and even more, avoid 

concentrations. 

Chairman KANJORSKI. Thank you very much, Ms. Kilroy. Ms. 

Biggert of Illinois. 

Mrs. BIGGERT. Thank you, Mr. Chairman. Before I begin, if for 

Ranking Member Garrett, I can put in the record an article by Investors Business Daily, ‘‘For Banks, Help Isn’t On The Way.’’ 

Chairman KANJORSKI. If there are no objections, it is so ordered. 

42 

Mrs. BIGGERT. You know, until the last few years, we have had 

a market that has had a lot of innovation and a lot of new products 

that have come in, with the hedge funds and credit default swaps. 

I wonder how we are going to find the balance between smart 

regulation, effective regulation, and really, overregulation. We have 

been through Sarbanes-Oxley and some other things like that. 

How would we structure sensible regulation to manage the risk 

posed by the credit default swaps? 

Mr. Ryan? 

Mr. RYAN. As to your first question, the reason our industry has 

not given you specific answers to many of the questions is that they 

are very complex. This type of hearing, and I am sure there will 

be a series of hearings on many of these specific issues, should be 

part of the dialogue back and forth so that you hopefully get to an 

answer that provides the comfort and confidence that the marketplace requires without stifling innovation. 

Mrs. BIGGERT. Thank you. Mr. Baker, it is great to see you back 

here. I wish you were still sitting up here. You really provided so 

much expertise to our committee. 

Kind of the same question, how do we judge the credit default 

swaps? What do we look at? Do we look at the leverage ratios? 

What would we look at as far as regulation? 

Mr. BAKER. Congresswoman, certainly attention ought to be 

given to where inappropriate aggregation occurs in the market. As 

a related matter, for example, if we had known the number of people who had Lehman as their broker-dealer counterparty, perhaps 

some action might have been taken—I cannot say for sure—that 

would have at least mitigated some of the effects. 

As to the settlement responsibility on a CDS exchange, you go 

to the capital adequacy of the person holding the obligation. 

Has the company, as in the case of regulated insurance companies, had adequate reserves to meet its obligations using some sort 

of reasonable man standard. 

Obviously, in a very frothy economic market where outlooks were 

very positive for continued upswing in values, the pricing of the 

CDS was under market in relation to the risk they were actually 

assuming, but it does not mean the economic relationship of acquiring a credit default swap to protect your own business interest is 

something that is inherently wrong. 

It is a way to diversify risk, to spread risk, and to hedge against 

your own losses. Any instrument inappropriately used can bring 

about financial dislocation, which regrettably has happened here. 

I go back to the purpose of the hearing in suggesting this proposed systemic risk assessment office, if that is what we are going 

to call it, should have some role in looking at where people are inappropriately concentrating. 

Concentration issues are always of concern. 

Mrs. BIGGERT. If we do that, with Bear Stearns and the collapse 

of the two hedge funds in 2007, should there not have been a warning sign to regulators that if not properly managed, even though 

they were operating within a regulated entity, that there would be 

a systemic risk? 

Mr. BAKER. I think that is what brings most of us here today, 

to observe that there were regulatory gaps and that we generally 

43 

agree that some sort of overview of the system that enables some 

office somewhere to have that aggregated view of all the interrelationships would be very helpful. 

It will not prevent business failure. It will not prevent a bank or 

a hedge fund from closing its doors, but it will perhaps limit the 

losses to those appropriately assessed and not to innocent third 

parties. 

Mrs. BIGGERT. Specifically, how do we address the inappropriate 

behavior that you described? 

Mr. BAKER. Well, first the systemic regulator has to intervene as 

appropriate. Then the prudential regulators who are charged with 

the enforcement, market discipline and investor protections, who 

are there today, would continue to need to do their role. 

I suspect all those who have been previously identified as engaging in inappropriate conduct are in deep conversations with a lawyer somewhere. 

I do not know how quickly the resolution will come, but I suspect 

it will be appropriate. 

Mrs. BIGGERT. Thank you. I yield back. 

Chairman KANJORSKI. Thank you very much, Ms. Biggert. Now, 

the gentlelady from Illinois, Ms. Bean. 

Ms. BEAN. Thank you, Mr. Chairman. I apologize for running 

late. I had another meeting I had to attend. Thank you all for your 

patience with us today. 

My question is for Dr. Vaughan. I missed part of your testimony. 

I guess my question is, is it your opinion from what you have testified to thus far that the insurance subsidiaries of AIG are solvent, 

and if that is the case, why has the latest round of Federal dollars 

gone to the life insurance side of the business? 

Ms. VAUGHAN. The insurance companies are solvent. The insurance companies before they got the round of Federal funds had 

positive capital and surplus. There was a question about at what 

level did you want that risk based capital to be, and I think that 

was a determination that was made outside of the insurance regulatory system. 

We were fine. Had AIG not gotten that money, no policyholders 

would have lost money, is my understanding. 

Ms. BEAN. You are saying the latest round of Federal monies 

going to the insurance companies is not necessary? 

Ms. VAUGHAN. What I am saying is it is increasing their risk 

based capital ratios. It is not taking an insolvent company and 

making it solvent. 

Ms. BEAN. The $30 billion additionally is necessary for the insurance companies? 

Ms. VAUGHAN. What I am saying—I will try again. Sorry. The 

AIG insurance company is solvent. They got additional capital 

through this latest round but it did not take an insolvent company 

and make it solvent. It took a solvent company and made it more 

solvent. 

Ms. BEAN. I have another question, if I still have time, and I do. 

What if AIG did not have a thrift company and then would not 

have OTS oversight? Who would be involved? 

Are you also stating that the New York State Commissioner 

would have had the ability and the processes in place to detect the 

44 

challenges of AIG, and does AIG have processes in place to make 

sure that State commissioners cannot? 

Ms. VAUGHAN. That is an excellent question. The insurance commissioners regulate the insurance subsidiaries, and the insurance 

commissioners work together when there are multiple insurance 

subsidiaries in an— 

Ms. BEAN. Who regulates the holding company? 

Ms. VAUGHAN. No one does, and that is part of our problem. The 

insurance commissioners are regulating the insurance companies, 

protecting the policyholders in the insurance companies. 

They are looking at the relationship between the holding company and the affiliates and the insurance company to make sure 

it does not impair the insurance company and does not affect negatively the policyholders. 

What happened here were unregulated affiliates that created the 

problem, and we agree that is a problem that needs to be solved. 

Ms. BEAN. Clearly, there is no Federal oversight at the holding 

company level to actually see what is going on. 

Ms. VAUGHAN. Right. Had there not been a thrift, that is correct. 

Ms. BEAN. Thank you. I yield back. 

Chairman KANJORSKI. Thank you very much, Ms. Bean. Mr. 

Campbell? 

Mr. CAMPBELL. Thank you, Mr. Chairman. I also wish to issue 

my apology for coming in late. I had a conflicting committee hearing, which some of you are familiar with. 

I have two questions, and what I will do is kind of explain my 

thoughts and background on them, lay them out and let you kick 

them around, answer them as you will. 

My questions will be specifically oriented toward insurance, since 

that is where many of you have at least some focus. 

To me, there are two great distinctions in the insurance market 

today. One is between those things where we are insuring tangible 

assets, and those things that are insurance of financial products, 

that have no nexus in any State or anywhere in particular. 

Financial products, insurance financial products would include 

such things as life insurance or annuities, but also such things as 

credit default swaps and any other financial insurance products. 

Within that financial insurance product bin, I agree with my colleague from California, Mr. Sherman, earlier, that there are some 

products which I would say are in the nature of gambling, and not 

actually in the nature of real insurance or investment. 

To use life insurance as an example because it is something we 

are all familiar with, Mr. Baker and I enter into a contract for the 

life of Mr. Baker. He has an interest in the life of Mr. Baker, and 

we enter into that contract, and that is insurance. That is life insurance. That is the way it works. 

If, however, Mr. Kanjorski and I enter into a contract about the 

life of Mr. Baker and neither one of us have any particular—we are 

not the company that employs you or whatever and neither of us 

has any particular interest, most life insurance companies will not 

go for that because we are just gambling. We are just betting. 

He is taking one side of a bet and I am taking the other side of 

a bet on the life of Mr. Baker and we have no interest in his life 

other than the bet. Those to me, are gambling. 

45 

From this world view that I have, I have two questions. First of 

all, in my view, these financial products which are insurance in nature and which have no nexus in any State should have some Federal regulator. 

Should that Federal regulator be a separate regulator or should 

it be a part of a larger systemic regulator that looks not only at 

insurance things, but also at the banking system and all the other 

systemic issues that we are talking about, or do you think either 

one of those ideas is bad. 

My second question is, do you agree with the viewpoint that 

there are financial insurance products, and frankly, there are other 

types of financial products, not insurance, which are in the nature 

of gambling, and although in my view should not be banned or 

made illegal, but should be segregated, and there should be a number of restrictions on who can and is allowed to engage in that kind 

of gambling. 

Those are my questions. I would like to hear answers from 

whomever wants to throw them out. 

Mr. BARTLETT. I will try just quickly. We believe that first of all 

there should be a systemic risk regulator, a market stability regulator, whether it is an insurance product or other kinds of financial 

services, who would examine the systemic risk and examine the 

gap in coverage, if you will, of regulators, working through the Federal prudential supervisors, working through their eyes, and with 

their authority. 

We think that covers the systemic side, if these products you describe are systemic, create a systemic risk, the Federal Reserve 

should have some oversight over identifying the risk, but then 

working through the prudential supervisors to take action, not taking action unilaterally. Otherwise, you create two new regulators 

that at best on a good day could conflict, and on a bad day, avoid 

the question altogether. 

We also believe there clearly should be for a Federal company 

with interstate, with large systems, whether it is an insurance 

product or other similar kind of product, they should have a national charter, at least be allowed to have a national charter because it is in the national government’s best interest to have someone who can regulate those large national companies. 

Mr. CAMPBELL. Would that charter be managed then by the systemic risk regulator? 

Mr. BARTLETT. No, it should be managed similar to banks, it 

should be managed by a national insurance regulator who is actually supervising the activities of that company as opposed to the 

systemic. 

Mr. DIMUCCIO. May I? 

Mr. CAMPBELL. Yes, the question is open for whoever wishes to 

answer. 

Mr. DIMUCCIO. We believe there should be a systemic risk regulator. We believe there are some immediate needs to bring confidence back to the markets. 

However, our Association has a concern that there are many regulatory issues that are being brought into this round, and they 

need to be talked out. They need to be discussed. 

46 

However, putting them together, the systemic risk regulator and 

the regulation of insurance, into one process that needs to get done 

quickly may possibly hurt or affect a system that has worked very 

well up through now. 

There has been an insignificant number of P and C insolvencies 

in the last couple of years, and the vast majority of P and C companies are strong and have worked through this crisis serving their 

markets. 

To disturb a working market and a system that is performing 

very adequately, at this point, we think that is not the right answer. We think a systemic risk regulator with principles based regulation that allows it to evolve its regulatory oversight to take into 

account changes in the markets is the necessary infrastructure that 

we need to put in place. 

Mr. CAMPBELL. Mr. Ryan and then Dr. Vaughan. 

Mr. RYAN. I would like to associate myself with Mr. Bartlett and 

our Association, the Securities Industry and Financial Markets Association, believes there should an optional Federal insurance charter. 

Mr. CAMPBELL. Dr. Vaughan? 

Ms. VAUGHAN. I have said it before and I do not want to sound 

like a broken record, but to repeat what Mr. DiMuccio said, we 

have a system that works. 

We are used to working in a collaborative way with other regulators. This State-based system is often presented as a system 

where you have Alabama doing one thing and North Dakota doing 

another and New York doing another. In fact, we have a highly coordinated system with lots of oversight of each other and nationally. 

I am the CEO of the National Association of Insurance Commissioners. My number one job is to make sure that the system works 

together. I have a staff of over 450 people who do that. 

We make sure that groups are coordinating, that if there is a 

company like—pick any insurance company that has companies in 

five States, that they are working together and they are gathering 

information. 

We have an office in Kansas City that does its own analysis of 

financially significant companies, and then creates a peer review 

process for other States to look at what is going on when they see 

a problem with that company. 

We are used to working together as regulators. We really think 

that works. We like that model. We would love to have a model 

where we could work with the banking regulators and the securities regulators, and let’s all get together and work on what is going 

on in this complex financial institution together. 

We do it. We know how to do it. We would be happy to work with 

other people on that kind of a model. 

Mr. CAMPBELL. I guess nobody wanted to touch the gambling 

issue. Thank you, Mr. Chairman. 

Chairman KANJORSKI. Thank you, Mr. Campbell. Mrs. Maloney 

of New York. 

Mrs. MALONEY. Thank you. I thank all the panelists and I particularly thank our colleague, Richard Baker. It is good to see you 

47 

again. Thank you for coming to see us. We served together for 

many years. 

I would like to follow up on the chairman’s and others’ questioning on AIG, which has now received over $200 billion in taxpayer money, 10 percent of the TARP money, $80 billion from the 

Fed. We continue to use taxpayer dollars to keep AIG from going 

under, an additional $30 billion was allocated last Monday. 

Yet, in the words of Fed Chairman Bernanke, ‘‘This was a hedge 

fund basically, that was attached to a large and stable insurance 

company that made huge numbers of irresponsible bets and took 

huge losses. There was no regulatory oversight because there was 

a gap in the system.’’ 

Today, it was reported in the press that Hank Greenberg, a 

former CEO of AIG, has stated publicly that we should separate 

AIG out from the risky arm that was added to it, and move it 

apart. 

As Dr. Vaughan pointed out, the insurance arm of AIG is 

healthy, strong, well-functioning, and respected worldwide. 

It is this risky arm that is pulling us down. I would suggest even 

better to the systemic regulator, which I support, I would not let 

these risky functions be tied onto core services that are needed by 

the American people. 

When people try to support AIG, it is because of the insurance 

arm. We need insurance. Our businesses and our people need insurance. 

Why can we not just separate out this risky arm? I would like 

to begin with Dr. Vaughan, but also add that with $200 billion of 

taxpayer dollars in AIG, the American public deserves to know, as 

do researchers in government and out of government, where did 

this money go? 

They are telling us it is systemic risk, but how do we know it 

is systemic risk if we do not even know where the money went? 

I respectfully would like to place in the record a letter that I 

have continued to request from the Federal Reserve to get this information, so that we can make better policy decisions in the future. 

My question, beginning with Dr. Vaughan, and anyone can answer, is why not just separate right now by regulation, just take 

that risky arm out of it, and let the healthy arm continue to serve 

the American public and the world with a fine insurance product, 

but let’s put this risky arm over on the side. Let’s see if that is 

really systemic risk. 

Maybe we do not need to be pouring billions in. We put in $200 

billion. Once they said they did not need any money. Then they 

said they needed a certain amount. It keeps going and going. 

That is my question, and my final question to Mr. Bartlett and 

others and Mr. Baker is, could we have prevented the crisis that 

we are in now, our current economic crisis? 

Do you think it could have been avoided or mitigated if a systemic risk regulator had been in place during that period? Would 

that have prevented the crisis that we have? 

What I find so upsetting is that 9/11, which was another crisis 

in our country, I truly do not believe we could have prevented it, 

48 

but we could have prevented the financial meltdown that we are 

in today with better regulation and more responsible oversight. 

If you could begin, Dr. Vaughan. Why do we not just separate out 

this risky arm as Hank Greenberg said, who should know, he is the 

former CEO, he said just separate it out and let that be over in 

one area and let the insurance be strong and serving the public. 

Dr. Vaughan? 

Ms. VAUGHAN. That is an interesting idea and I have not had a 

chance to look at what Mr. Greenberg is suggesting. 

I guess I would start by saying that to some extent, we have 

been separating the insurance operations from the risky activities, 

and that is the reason that the insurance companies are still 

healthy, because we walled off the insurance companies. 

That is the way our system of regulation works. They are walled 

off. 

Mrs. MALONEY. Might I add, when people come to us to bail out 

AIG, they say we have to bail them out because of the insurance, 

the insurance product. If it is off on the side, then that is a whole 

different element of risk. 

Ms. VAUGHAN. I am not sure I agree with that argument. I guess 

I would have to talk to whomever it is. I think it is an interesting 

idea. Do you just spin the insurance companies off and kind of let 

them go on their way and do their thing. 

We have been trying to work, recognizing that if you spin the insurance companies off, that does not solve the bigger problem that 

you have, which is these unregulated entities that are soaking up 

these taxpayer dollars. 

We have been really trying to work with the Federal Reserve and 

the folks who are trying to solve this bigger problem and trying to 

be partners, and trying to do what is going to be helpful to the bigger problem. 

If keeping the insurance companies in there is part of the solution long term, if it is going to help everyone, then we want to work 

to try to figure out a way to make this work. 

We do go into this knowing that our regulatory structure has 

walled off those insurance companies and we are going to be focused on making sure that the policyholders stay protected as this 

happens. 

I appreciate what you are saying. 

Mrs. MALONEY. The systemic risk, would that have prevented the 

crisis we are in, Mr. Bartlett? 

Mr. BARTLETT. I think it would either have prevented it—yes. 

Mrs. MALONEY. Mr. Baker? 

Mr. BAKER. If I may take just a second, Mr. Chairman. I would 

respond affirmatively to the gentlelady’s question about systemic 

risk. I do feel the need just to respond to the reference to Chairman 

Bernanke, referencing AIG as just merely a hedge fund. 

Frankly, I wish it had been a hedge fund. It would have been 

better run. Some have expressed surprise about the depth of loss. 

It is the leveraging that took place that magnifies the depth and 

scope of losses that are yet still being identified. 

The reason why I wanted to bring this up, I made it a point because I hoped somebody would bring up this comment, and we in 

the industry took considerable affront in that characterization. 

49 

This perhaps will come as some surprise: 26.9 percent of hedge 

funds use no leverage, zero. Up to 42 percent of hedge funds have 

a leverage ratio of 2 to 1. Media reports that we have dug out in 

the last few weeks indicate—this is technical news reports coming 

from industry surveillance—fund leverage may be down to 1.15 industry-wide from last April’s 1.4. 

This notion of hedge funds being wild cowboys in the economic 

west is just ridiculous. I do not know what caused the Fed Chair 

to come to that conclusion. 

Thank you for giving me the opportunity to address it. 

Chairman KANJORSKI. Thank you very much. Thank you, Mrs. 

Maloney. The gentleman from California, Mr. McCarthy. 

Mr. MCCARTHY OF CALIFORNIA. Thank you, Mr. Chairman. I appreciate having the opportunity. 

We all realize we need to modernize an outdated system. My 

questions kind of stem from looking in the future, and wanting to 

make sure we get it right. We only get one bite of the apple. 

I am a firm believer that structure dictates behavior. You will either adapt to the structure or not. 

Being from California, and picking up on what Mr. Baker said 

earlier to Congresswoman Biggert, you said if you had the regulator, it still would not prevent failure. Then I started looking on 

the other end, how someone would design this. 

When I look at all the IPOs that were created in California, and 

if you looked at an IPO when it first came out, companies that are 

wildly successful today, but if you looked at them when they were 

entered, the market determined, but they were very risky. Not 

making profit for quite some time, and business model people did 

not understand because it was new innovative. 

My fear would be would it not prevent failure, but would it also 

prevent innovation in a way. 

Would you view a new regulator, that IPOs would have to be 

measured or go through a regulator as well? 

Mr. BAKER. It certainly would not be our recommendation that 

an IPO or any start up be subject to immediate supervisory review 

by a systemic risk regulator. 

Very small enterprises can in fact cause potential systemic risk 

because of concentration in certain business activities. 

As Mr. Bartlett previously said, assets under management 

should not be the sole criteria by which one is judged to be systemically relevant. It is your interconnectivity, concentration questions, 

and it may also be dependent on current market conditions. You 

may not have been systemically relevant 6 months ago, but in the 

current liquidity crisis, you may be. 

It would be a large investment of authority and discretion in the 

hands of the systemic regulator to make that judgment. 

I will use one quick example because it reflects how complicated 

this can get. In the 1970’s, there was a bank in Germany engaged 

in significant international currency swaps. In between the time of 

accepting a large deposit of Deutsche marks and making settlement in U.S. dollars in New York banks, they went bankrupt. It 

was a very significant and adverse event which led the Bank of 

International Settlements to ultimately develop a clearing process 

for currency exchange. 

50 

That is an example of how something no one in New York was 

thinking about a little rural bank in Germany causing that complication. It can happen. 

That is the reason why our apparent description of the systemic 

regulator’s role is more nebulous than you may like. It is very, very 

difficult to describe what will always be appropriate. 

Mr. MCCARTHY OF CALIFORNIA. Mr. Bartlett, just before you answer, the only other thing, and it kind of stems from Mr. Baker’s 

answer, we have some of these functional regulators already, the 

SEC and the Fed. 

When you answer, also think from the perspective, and I am just 

looking forward, would one trump the other if you had a new regulator, and would one new regulator look back at decisions of these 

past functional regulators’ decisions and could that trump another? 

Mr. BARTLETT. Our proposal, and this is after a great deal of 

thought and debate, is that the systemic risk regulator or the Fed 

should be a regulator to gather information, to consult with the primary regulators, with the Federal financial regulators, and then to 

act through the Federal financial regulators with the addition of an 

insurance national regulator, but act through their authority and 

not with additional conflicting authority. 

Mr. MCCARTHY OF CALIFORNIA. Is the Fed trumping the new one 

then? 

Mr. BARTLETT. There is no trump. They work jointly. The Fed 

would not have the authority to regulate a particular company but 

to work with the supervisors that do have the authority over that 

company. 

The Fed has the authority to look at the system and to bring 

that to the attention of the prudential supervisor. The prudential 

supervisor, the OCC, if you will, the national insurance regulator, 

would have the authority over that company. They would have the 

cease and desist orders, if you will. That way, you do not have the 

conflict. 

This has changed in terms of sort of the body politics thinking 

over the course of the last year, and it seems to be the right way 

to solve it. You end up without a new uber regulator. You end up 

with a systemic look at the system, gathering all the information. 

Mr. MCCARTHY OF CALIFORNIA. What if those two are in disagreement and you are working through one another? One says A 

and one says B. At the end—I am just thinking long term, what 

are the hurdles, what are the challenges. 

Mr. BARTLETT. As a practical matter, the Fed always wins, but 

that is a practical matter, not in a statute. That happens today. 

Today, the Fed always wins. I am not contemplating a change in 

statute. 

I think if it is a joint examination and joint finding of fact and 

if the Fed says to a prudential supervisor we believe you need some 

additional action here on this company or these sets of companies, 

then in fact they would work together to accomplish it. 

It is way better than what we have now in which the prudential 

supervisors do not have any access to information outside that one 

company or outside that one sector. 

Mr. MCCARTHY OF CALIFORNIA. Thank you. I yield back. 

51 

Chairman KANJORSKI. Thank you very much, Mr. McCarthy. It 

looks like we are getting awfully close to establishing the FSA, if 

I follow your logic. We will see about that. 

Mr. Foster from Illinois. 

Mr. FOSTER. Thank you. My first question has to do with complexity and whether part of the solution to making a more stable 

system is to limit the complexity. A lot of people talk about the 

complexity of financial instruments, where people are trading in 

things that they frankly do not understand. 

I would like to ask a question about a second kind of complexity, 

that is organizational complexity. If you look from a regulator’s 

point of view, the difficulty of regulating a diversified entity—you 

touched on it, Ms. Williams, to do with holding company regulations and the difficulties there. 

If you look at the difficulties in unwinding AIG, for example, because it was tremendously diversified and a complex organization, 

and you can imagine a different world, maybe a future world in 

which AIG was allowed to exist as an insurance company, well understood by a regulator whose only job was to look at it as an insurance company, and if it wanted to go play in credit default 

swaps, there would be a credit default swap trading house regulator who really understood that market, and to deliberately segment the markets. 

Say you can play in this sandbox or you can play in that sandbox, but you cannot be a big diversified mass because frankly, we 

do not have the intellectual and manpower in the regulators to 

handle a big diversified thing. 

We are in a situation where it looks like the regulators are always going to be intellectually and manpower outgunned, simply 

because of the salaries they can give to their employees. 

It seems to me there is a big benefit in compartmentalizing 

things. I was wondering if any of you have a reaction to that. 

Mr. BARTLETT. In my view, there are a lot more negatives to try 

to compartmentalize because it is a complex world and a complex 

financial services world, and to try to put the finances back into individual boxes, it would do great harm and do not reduce the risk. 

I think rather you would want to elevate the statutory authority 

of the regulators to be able to look across the system, rather than 

create a smaller system. 

Mr. FOSTER. Are there studies that have been done that actually 

indicate you have more efficient capital markets when you have diversified entities that span many boxes compared to specialized 

companies that live and work very effectively in their own boxes? 

Mr. BARTLETT. Many specialized companies serve their customers 

well, but the diversified company, yes, there are ample studies for 

the efficiencies. More importantly for the convenience to the consumers or to the market. 

I would be happy to make those available to you for the record. 

Mr. FOSTER. Okay. It is very interesting. The tradeoff as I see 

that is there are perhaps more efficient markets from diversified 

entities and a whole lot of wealth that was destroyed by the failure 

to understand the diversified entities. 

I would like to see some of the principles we talk about look at 

that tradeoff of complexity versus reliability. 

52 

The second question I have has to do with confidential reporting 

that was mentioned by Mr. Baker and Mr. Bartlett, I think. 

How does it extend overseas? Is it realistic that we are going to 

ask Russian billionaires and Saudi princes, I am sorry, we have 

looked at your books, and you have an unbalanced position in some 

very complicated derivative or something like this? 

How is that actually going to happen, both in terms of reporting—do we have to band together all the well-regulated economies 

and say okay, we are going to have full disclosure among a group 

of countries that agree to be well-regulated, and then all these 

black pools of capital are just not allowed to touch us? 

How do you anticipate that might work? 

Mr. BAKER. That effort really is ongoing. Our counterpart, the 

Alternative Investment Management Association domiciled in London is actually working with the MFA, working through regulatory 

harmonization as to standards of conduct for the hedge fund industry. We have much work to do. It is a very difficult task. 

I do believe, however, that the U.S. regulatory system has every 

right to ask of those who do business here to comply with the rules 

of the road as you designed them. 

I would suspect that given the global nature of the financial marketplace today and the worldwide nature of this economic downturn, that for the first time maybe ever, you see an appetite for 

having global standards of conduct so there will not be great variance from one jurisdiction to the other. 

There is one significant difference I would like to point out, however, between us and the U.K. We tend to wall off our hedge funds 

from taking investments from anyone other than an institutional 

investor or a person of significant net worth. We do not engage directly with working families. 

In the FSA and in the U.K., they are contemplating more 

retailization, taking it the other direction. That is one significant 

point of departure where I would want to make you aware. 

On the questions of safety and soundness and business conduct, 

we are rapidly trying to move our standards to look more alike 

than different. Of course, that would require congressional actions 

in order for us to be able to do that. 

Mr. FOSTER. Mr. Ryan? 

Mr. RYAN. This effort of global harmonization is probably the 

most current issue in the financial markets today. I am sure you 

have seen this, if you would look at the G–30 report, you look at 

the recent study by de Larosiere, you look at the financial stability 

form. 

Our people in London spend huge amounts of time trying to coordinate what is going to happen between the United States and 

Brussels and other developed countries. 

You will find in our testimony, Securities Industry and Financial 

Markets Association, we have to get this right, not just in the 

United States. These markets are totally global. They are totally 

interconnected. That is a word we keep using here. 

We need insight into it, and that is one of the reasons we are 

firmly behind a regulator that has this power and information. 

Mr. FOSTER. You are optimistic it will happen this year? That is 

interesting. 

53 

Mr. RYAN. That is really up to you and your colleagues. What I 

have said is the confidence in the system and in the financial markets requires that we take action this year. It is really up to you. 

Mr. FOSTER. I yield back. 

Chairman KANJORSKI. Thank you very much, Mr. Foster. The 

gentleman from Connecticut, Mr. Himes. 

Mr. HIMES. Thank you, Mr. Chairman. Thank you to the panelists for bearing with us and being patient on this very important 

topic. 

You may have noticed this House has a tendency to conduct an 

unedifying debate about whether there is too much regulation or 

too little regulation. 

We have seen that many markets had no regulation. CDS has 

auction rate securities, non-bank banks. They screwed up. We have 

seen heavily, heavily regulated entities like our commercial banks 

and our broker-dealers, also made mistakes that we are paying for 

now. 

To me, this is a question really of intelligent regulation, which 

is driven in my way of thinking by a couple of principles. Very good 

transparency, the concept that risk stays with those who make the 

decision to take the risk, and be very, very careful about leverage. 

With those principles in mind, I have two questions for Mr. 

Baker and one for Mr. Ryan. 

Mr. Baker, you said something that caught my attention, which 

is that the hedge funds in particular would be willing to disclose 

their positions but confidentially to a regulator. I understand the 

proprietary nature of the trades that are taken, but why should we 

not demand they be publicly disclosed with some reasonable period 

of time so that there really is good transparency and information 

in the market? 

Mr. BAKER. First, and thank you for the question, there is no at 

least identifiable from my perspective public value to a disclosure 

of confidential information currently by a fund to a regulator 

through to the public. 

In fact, there is a perverse potential where selected disclosures 

of pertinent information may in fact skew the understandings in 

the public and cause great harm. 

We, for example, would not want to disclose our short positions, 

although we do not mind disclosing whatever information the regulator tells us he wants in whatever form the regulator wants it in 

order to make the judgments about improper conduct, concentration questions or other matters that may be of importance to the 

regulator. 

Mr. HIMES. Why would you not want to disclose that? 

Mr. BAKER. Much of our work has its value in its intellectual 

content. Reverse engineering, in fact, disclosing the trades would 

not require reverse engineering. 

The sophisticated work that is done by our members and behind 

which they place significant financial investment is all research. It 

is academic work. You would be requiring us to disclose our 

Church’s fried chicken, Popeye’s fried chicken recipes to Colonel 

Sanders. 

Mr. HIMES. At what point in time does it cease to be proprietary? 

A month? A week? Two months? 

54 

Mr. BAKER. There are varying opinions on that, frankly. Some 

feel after a semi-annual period of time, perhaps that would no 

longer be of value. Some of my members have very strong opinions 

that their analytical skills, once you determine their positions, you 

can then deploy their particular tactical strategy in the marketplace. 

I tend to understand. My entities that I represent have intellectual value based on hard work. That equally has a right to be protected much like not causing a car dealer just to give cars away. 

It is their real asset. 

Mr. HIMES. Thank you. Question number two is about leverage. 

You indicated that the levels of leverage in the hedge fund industry 

in particular are down substantially. 

Many hedge fund players have assumed in the past substantial 

leverage, either through the use of debt or through derivatives. 

Long Term Capital Management happened to be domiciled in my 

district. 

Is this something we should be focused on when the credit markets return and will in fact start lending to hedge funds again? 

Mr. BAKER. That should be an element of this systemic regulator’s responsibility to assess and judge. When LTCM went down, 

they were 32 to 1. When Fannie Mae went down, they were 70 to 

1. Fannie was quite heavily regulated and overseen by any number 

of entities. 

I am reminded of a comment by someone, I think it may have 

been a former CEO of Citibank, who said as long as the music is 

playing, how do you quit dancing? As long as the market is moving 

forward, people deploy leverage to take absolute advantage of that 

positive market environment, and the art form becomes when do 

you begin to limit your risk taking to prevent the downside risk. 

In our industry, we think our guys do that very well. That is why 

we hedge. We hope it goes well, but if it does not, we limit our exposure on the downside. 

Mr. HIMES. Thank you. Quick question for Mr. Ryan. Mr. Ryan, 

in your testimony, I noted that you included private equity funds 

as a group or category of entities we should consider for systemic 

risk. 

I do not usually think of private equity funds as employing certainly at the fund level or the partnership level a lot of leverage. 

What do you see there that I am not seeing? 

Mr. RYAN. The testimony is intended to be all encompassing, 

principally so that the regulator has the authority should a private 

equity firm be deemed to be systemically important to have authority to ask for information to regulate that entity. That is the intent 

of the testimony. 

We do not have all the answers as to who is in and who is out, 

your question on transparency. I think you are going to have to 

work through many of these issues. I would suspect that Congress 

is going to have a very difficult time also trying to figure out how 

specific do you want to be and how much authority do you want 

to give to the regulator to make some of these decisions. 

In our testimony, we were trying to say in the beginning here, 

we need to look broadly. We are not sure who is systemically imVerDate Nov 24 2008 15:34 Jul 20, 2009 Jkt 048863 PO 00000 Frm 00060 Fmt 6633 Sfmt 6633 K:\DOCS\48863.TXT TERRIE
55 

portant today and they may be important today, they may not be 

important tomorrow. 

Mr. HIMES. Thank you. Thank you, Mr. Chairman. 

Chairman KANJORSKI. Thank you, Mr. Himes. The gentleman 

from Florida, Mr. Grayson. 

Mr. GRAYSON. Thank you, Mr. Chairman. 

There has been a lot of discussion today about how we should 

deal with systemic risk in the future. I am concerned about how 

we are dealing with it now. 

What I am seeing is a massive transfer of wealth from the taxpayers to the banks in the name of systemic risk. I am concerned 

about that. 

Can you tell me if there is any response to a threat to the system, a systemic risk, that does not involve the transfer of hundreds 

of billions of dollars out of the taxpayers’ pocket to the banks? 

Mr. Ryan? 

Mr. RYAN. I do not know where you are really going with your 

question. I am just going to give you my answer. 

In our industry, we are in a very tough situation. I think government at all levels has done an excellent job on balance with no real 

play book, and quite frankly, most of the regulators with inadequate information. 

In order to keep this system stable, the government needed and 

did make funds available to core financial institutions and they are 

essential to our economic health. I am very pleased they have done 

it. 

What we are talking about here is how do we make sure in the 

future that we have the ability to look over the horizon and to 

make some decisions to limit the possibility that we run into this 

situation again. 

Mr. GRAYSON. I understand that. Many people seem to regard 

the fact that we have already taken trillions of dollars and made 

them available to certain financial institutions who have failed to 

be sort of a happy coincidence, that we are bailing these people out 

for the good of the country. 

I understand that is the view of many. I am wondering if there 

is any other way to do it. That is my question. Is there another 

way to deal with the systemic risk problem that does not involve 

the transfer of funds from the government, from the taxpayers, to 

private entities? In other words, Wall Street socialism. 

Mr. Bartlett? 

Mr. BARTLETT. There is one way and that is for this committee 

and the Congress to pass systemic risk legislation and provide for 

statutory authority to regulate systemic risk. 

As far as the current crisis, we are in a crisis. The financial services industry is largely illiquid, has a crisis, and that crisis then 

has spread to the rest of the economy, whether it is through foreclosures or unemployment. 

The government has taken a number of actions that are costly. 

TARP, the new toxic assets thing, the money market guarantees, 

FDIC guarantees, in order to stabilize the system so the economy 

can recover. 

For the economy to recover, the recovery starts with the financial 

institutions and financial services industry, or it does not recover. 

56 

That is why this Congress is authorized and the regulatory agencies have taken steps to stabilize the situation. 

Mr. GRAYSON. Right. What people are sensing is the idea that 

they are not getting anything in return. They are being threatened 

with this idea that the financial system will collapse or is collapsing, and therefore, money has to be taken from the taxpayers 

and given to the financial system, basically in return for nothing. 

What I am asking is, is there an alternative to that because 

frankly, a lot of people are beginning to see it as extortion. 

Ms. Williams? 

Ms. WILLIAMS. I would say part of this has to do with the investment that is being made. I think it is important to look at this in 

terms of an investment. In particular, if you look at TARP and the 

capital purchase program, the government has made an investment. 

We have yet to see what the return will be on that investment, 

but that was the approach that was taken. 

Mr. GRAYSON. When we talk about systemic risk, it seems that 

we are always talking about letting people off the hook for the mistakes they made in the past. 

It seems to me that is the opposite of another concept that we 

have tried to preserve here in Congress, which is moral hazard. Is 

there a way to deal with systemic risk that does not involve compromising on moral hazard? 

Dr. Vaughan? 

Ms. VAUGHAN. Others have mentioned this issue about creating 

a systemic risk regulator and then publicly branding institutions 

and saying this company, this is systemically risky, and therefore, 

does that create an impression of too big to fail. 

I do think that is a risk. I really think that is a risk. I do not 

know how to deal with it. I have talked to a lot of people and I 

have had some people say to me, look, the horse is already out of 

the barn and you cannot get it back in. 

I am equally outraged. I am a taxpayer. I am outraged at what 

is going on, this sort of ‘‘heads I win, tails you lose’’ that we seem 

to have evolved to in the last decade. 

I am not a bank regulator. I am an insurance regulator. I cannot 

tell you how to fix the problem, but boy, I would sure like to find 

a way so it does not happen again. I am with you on that. 

Mr. GRAYSON. Thank you, Mr. Chairman. My time is up. 

Chairman KANJORSKI. Thank you very much, Mr. Grayson. 

Ms. Williams, you sat there primarily not getting involved, but 

you just completed a study on CDS. After you have heard all this 

discussion, is there anything you would like to disclose to the public, the press, and to the panel, that your study has uncovered that 

may help us with this problem? 

Ms. WILLIAMS. Just that I think the study really provides a status of CDS, what they are used for, how the industry as well as 

the regulators are trying to deal with certain issues. 

I think one of the things that we really point out is that with 

the exception of some oversight being provided by the bank regulators, and it is really focused on bank OTC derivatives’ dealers, 

there really is not a view of the overall market. 

57 

CDS to us—it is one of the pieces that we highlight in the report 

we issued in January in terms of creating a framework for financial 

regulation—is to look specifically at products like CDS because 

they illustrate the lack of having any type of system-wide focus, 

and to also stress that we not get caught up in the types of entities 

when we talk about regulation or the particular type of product, 

but to really look to the underlying risk that it may pose to the 

overall system and make that the focus when you start thinking 

about a systemic risk regulator. 

Chairman KANJORSKI. Thank you very much. 

Mr. GARRETT. Just to follow up since I said it at the very beginning, along that line, what is it that currently precluded them from 

either going down that road and making that investigation in the 

AIG situation, or if they were precluded, you just do not have the 

authority, what precluded them from saying here is an area that 

we know there is something out there, we just do not have the authority, we are going to raise a red flag? 

Ms. WILLIAMS. It kind of goes back to the conversation about the 

holding company oversight structure. The holding company regulator has authority when it comes to the holding company, but 

there are conditions that they have to go beyond the regulated 

pieces. 

To the extent if there is a national bank or a thrift or a brokerdealer involved, then there is clearly a functional regulator already 

existing. 

If you have a subsidiary or an affiliate that is not subject to regular regulation, there has to be some concern about that affiliate 

for the holding company regulator to then go in and say okay, this 

is posing a threat to the holding company. 

I go back to the point that if you are not going into the institution on a regular basis, how are you going to identify the fact that 

it may pose a threat to the holding company? 

Mr. GARRETT. They are not going into the subsidiary institution 

on a regular basis? 

Ms. WILLIAMS. Right. 

Mr. GARRETT. How are they going to identify that threat? 

Ms. WILLIAMS. Yes. They have the authority to do it, but if you 

are not going in there on a regular basis, how do you know that 

it poses a threat to the holding company. 

Mr. GARRETT. They have the authority? 

Ms. WILLIAMS. Yes. 

Mr. GARRETT. They just do not execute that authority because 

they say we really do not know what is going on over there and 

we are not there on a regular basis, so— 

Ms. WILLIAMS. I do not know if it is an issue of that is what they 

are saying. It is that they do not know. It is an issue of you do not 

know what you do not know. Yes, you have the authority but until 

something comes to light to raise an issue, and I go back to AIG, 

my understanding is with OTS, once the internal auditors raised 

a concern about risk management with AIG FP in particular, then 

OTS went in because it posed a threat to the thrift holding company. 

Mr. GARRETT. I have been an auditor, never for something like 

that, but an insurance company. Where there were aspects of the 

58 

business that we were looking at that we did not know about, we 

did not just step back and say well, there is an area of the company 

that we do not know about, and maybe somebody else is looking 

at it, we are just going to leave it alone until somebody says there 

is a problem there. 

We would go to somebody else in the company and say there is 

a black hole over here that we are not too sure about, and we have 

question marks. That is the way we handled it in the insurance aspect. 

Ms. WILLIAMS. That is a valid question. 

Mr. GARRETT. Thanks a lot for following up from the very beginning. 

Chairman KANJORSKI. None of your clients or customers failed, 

did they? That is the answer right there. 

I first want to take the opportunity to compliment the panel. I 

did not hear the expression, ‘‘so this does not happen again’’ used. 

I think we should send the message out wide and clear, the disaster that happened this time is not going to be replicated. It is 

going to be a new disaster. 

What we are trying to do is prepare, as someone said, to look 

over the horizon. With that, I agree. 

Also, a caveat should be entered in there. We ought to recognize 

and accept there is no perfect system and there is nothing we can 

do to prevent future disasters. Maybe we can arm regulators with 

analysis to forestall those potentials, but after all, we have been 

pretty successful for 65 to 70 years under the present regimentation of regulation. 

If we can get another 70 years out, none of us will be here, so 

we will not have to worry about it. 

That is what we are going to strive for. 

I want to thank you all very much. I found it very enlightening, 

your testimony. I look forward to you participating in very big ways 

with us in the future, if you can. I invite you not to hesitate to send 

us ideas and information that you have. 

One other question, we have a lot of pressure to get this done, 

and you heard some of the opening statements, so that the President has a concept paper to take over to the G–20 with him or do 

things in 30 to 60 days. 

Do you believe we should rush to formulate legislation and create 

this potential regulator in that short of time, with the ideas particularly of the two Members of Congress, can we really do that 

successfully? 

Mr. BARTLETT. Mr. Chairman, in the view of our industry, no, 

you should not rush, but this has some urgency to it. You should 

concentrate all of your intellectual and capacity resources on examining this, thinking about it, but then moving right along to get it 

done. 

The other half of my testimony was that Congress in our view 

should act in a comprehensive way and not piecemeal it one step 

at a time, because Webster’s says it is systemic, it is related to 

each other, and to take out one piece and try to handle that, it 

means you have neglected the systemic nature. 

There is some urgency to it; yes, sir. 

59 

Mr. BAKER. Mr. Chairman, I would suggest you at least beat my 

20-year record with Fannie Mae and Freddie Mac. 

[laughter] 

Chairman KANJORSKI. I spent some of those years with you. 

Mr. BAKER. You were right there. I would say, as Mr. Bartlett 

has indicated, this does, however, have some extreme importance 

and serious effects. 

We have not talked much today about our unfunded pension liabilities and what it has done to endowments across the country. 

The residual effects of this will be long lasting unless you can help 

us get investor confidence back into these markets. 

Chairman KANJORSKI. Thank you. Would anyone else like to add 

anything? 

Ms. WILLIAMS. I would say that you have to proceed with deliberate speed, but do not lose sight of the fact that deliberation has 

to be an important part of the process. 

Chairman KANJORSKI. Very good. Do you agree with that, Doctor? 

Ms. VAUGHAN. Yes. I think that was well said. 

Chairman KANJORSKI. Mr. DiMuccio? 

Mr. DIMUCCIO. We believe addressing the systemic risk issue 

first and on a timely basis is important. We also believe that bringing in other regulatory aspects too soon to be resolved or debated 

while we are fixing the systemic risk regulatory issue could lead to 

unintended consequences. 

We think they should be separated. There are a lot of regulatory 

issues that can be debated down the road, but we believe the systemic risk issue is important and that should be addressed first. 

Chairman KANJORSKI. Very good. Mr. Ryan? 

Mr. RYAN. I am a little bit of a broken record on this, but our 

hope is that you complete work on a financial stability regulator 

before the close of this year. Our main reason for saying that is not 

only do we need it, but the confidence in the financial markets and 

among our citizens, we think, requires it. 

Chairman KANJORSKI. Thank you very much. Thank you all. The 

Chair notes that some members may have additional questions for 

this panel, which they may wish submit in writing. Without objection, the hearing record will be remain open for 30 days for members to submit written questions to these witnesses and to place 

their responses in the record. 

Before we adjourn, the following will be made a part of the 

record of this hearing: Documents provided by the American Council of Life Insurers; and the written statements of the National Association of Mutual Insurance Companies and the American Academy of Actuaries. 

Without objection, it is so ordered. 

The panel is dismissed and this hearing is adjourned. 

[Whereupon, at 1:53 p.m., the hearing was adjourned.] 

(61) 

A P P E N D I X 

March 5, 2009 

62 


48863.001
63 


48863.002
64 


48863.003
65 


48863.004
66 


48863.005
67 


48863.006
68 


48863.007
69 


48863.008
70 


48863.009
71 


48863.010
72 


48863.011
73 


48863.012
74 


48863.013
75 


48863.014
76 


48863.015
77 


48863.016
78 


48863.017
79 


48863.018
80 


48863.019
81 


48863.020
82 


48863.021
83 


48863.022
84 


48863.023
85 


48863.024
86 


48863.025
87 


48863.026
88 


48863.027
89 


48863.028
90 


48863.029
91 


48863.030
92 


48863.031
93 


48863.032
94 


48863.033
95 


48863.034
96 


48863.035
97 


48863.036
98 


48863.037
99 


48863.038
100 


48863.039
101 


48863.040
102 


48863.041
103 


48863.042
104 


48863.043
105 


48863.044
106 


48863.045
107 


48863.046
108 


48863.047
109 


48863.048
110 


48863.049
111 


48863.050
112 


48863.051
113 


48863.052
114 


48863.053
115 


48863.054
116 


48863.055
117 


48863.056
118 


48863.057
119 


48863.058
120 


48863.059
121 


48863.060
122 


48863.061
123 


48863.062
124 


48863.063
125 


48863.064
126 


48863.065
127 


48863.066
128 


48863.067
129 


48863.068
130 


48863.069
131 


48863.070
132 


48863.071
133 


48863.072
134 


48863.073
135 


48863.074
136 


48863.075
137 


48863.076
138 


48863.077
139 


48863.078
140 


48863.079
141 


48863.080
142 


48863.081
143 


48863.082
144 


48863.083
145 


48863.084
146 


48863.085
147 


48863.086
148 


48863.087
149 


48863.088
150 


48863.089
151 


48863.090
152 


48863.091
153 


48863.092
154 


48863.093
155 


48863.094
156 


48863.095
157 


48863.096
158 


48863.097
159 


48863.098
160 


48863.099
161 


48863.100
162 


48863.101
163 


48863.102
164 


48863.103
165 


48863.104
166 


48863.105
167 


48863.106
168 


48863.107
169 


48863.108
170 


48863.109
171 


48863.110
172 


48863.111
173 


48863.112
174 


48863.113
175 


48863.114
176 


48863.115
177 


48863.116
178 


48863.117
179 


48863.118
180 


48863.119
181 


48863.120
182 


48863.121
183 


48863.122
184 


48863.123
185 


48863.124
186 


48863.125
187 


48863.126
188 


48863.127
189 


48863.128
190 


48863.129
191 


48863.130
192 


48863.131
193 


48863.132
194 


48863.133
195 


48863.134
196 


48863.135
197 


48863.136
198 


48863.137
199 


48863.138
200 


48863.139
201 


48863.140
202 


48863.141
203 


48863.142
204 


48863.143
205 


48863.144
206 


48863.145
207 


48863.146
208 


48863.147
209 


48863.148
210 


48863.149
211 


48863.150
212 


48863.151
213 


48863.152
214 


48863.153
215 


48863.154
216 


48863.155
217 


48863.156
218 


48863.157
219 


48863.158
220 


48863.159
221 


48863.160
222 


48863.161
223 


48863.162
224 


48863.163
225 


48863.164
226 


48863.165
227 


48863.166
228 


48863.167
229 


48863.168
230 


48863.169
231 


48863.170
232 


48863.171
233 


48863.172
234 


48863.173
235 


48863.174
236 


48863.175
237 


48863.176
238 


48863.177
239 


48863.178
240 


48863.179
241 


48863.180
242 


48863.181
243 


48863.182
244 


48863.183
245 


48863.184
246 


48863.185
247 


48863.186
248 


48863.187