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PERSPECTIVES ON REGULATION 

OF SYSTEMIC RISK IN THE 

FINANCIAL SERVICES INDUSTRY 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

MARCH 17, 2009 

Printed for the use of the Committee on Financial Services 

Serial No. 111–14 

( 

(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) 

C O N T E N T S 

Page 

Hearing held on: 

March 17, 2009 ................................................................................................. 1 

Appendix: 

March 17, 2009 ................................................................................................. 63 

WITNESSES 

TUESDAY, MARCH 17, 2009 

Bartlett, Hon. Steve, President and Chief Executive Officer, Financial Services Roundtable .................................................................................................... 8 

Jorde, Terry J., President and Chief Executive Officer, CountryBank USA, 

on behalf of Independent Community Bankers of America (ICBA) ................. 13 

Plunkett, Travis, Legislative Director, Consumer Federation of America .......... 15 

Ryan, Hon. T. Timothy, Jr., President and Chief Executive Officer, Securities 

Industry and Financial Markets Association (SIFMA) ..................................... 10 

Silvers, Damon A., Associate General Counsel, AFL–CIO ................................... 17 

Wallison, Hon. Peter J., Arthur F. Burns Fellow in Financial Policy Studies, 

American Enterprise Institute ............................................................................ 12 

Yingling, Edward L., President and Chief Executive Officer, American Bankers Association ...................................................................................................... 19 

APPENDIX 

Prepared statements: 

Bartlett, Hon. Steve ......................................................................................... 64 

Jorde, Terry J. .................................................................................................. 91 

Plunkett, Travis ................................................................................................ 101 

Ryan, Hon. T. Timothy, Jr. .............................................................................. 115 

Silvers, Damon A. ............................................................................................. 136 

Wallison, Hon. Peter J. .................................................................................... 159 

Yingling, Edward L. ......................................................................................... 171 

(1) 

PERSPECTIVES ON REGULATION 

OF SYSTEMIC RISK IN THE 

FINANCIAL SERVICES INDUSTRY 

Tuesday, March 17, 2009 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 10 a.m., in room 2128, 

Rayburn House Office Building, Hon. Barney Frank [chairman of 

the committee] presiding. 

Members present: Representatives Frank, Kanjorski, Waters, 

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

Capuano, Hinojosa, Lynch, Miller of North Carolina, Scott, Green, 

Cleaver, Ellison, Klein, Perlmutter, Donnelly, Foster, Carson, 

Speier, Driehaus, Grayson, Himes; Bachus, Castle, Royce, Manzullo, Biggert, Hensarling, Garrett, Barrett, Neugebauer, Price, 

McHenry, Campbell, Marchant, McCarthy of California, Posey, Jenkins, Lee, Paulsen, and Lance. 

The CHAIRMAN. The hearing will come to order. The purpose of 

this hearing is to continue to focus even more on a very broad question, the importance of an effect that has been undermined by recent events and by the considerably larger crowd we will have here 

tomorrow when we deal with the apparently three most fearsome 

letters in the English language: ‘‘AIG.’’ We will deal with that tomorrow. But what we need to do is to figure out how we avoid ever 

again being in this situation. ‘‘Ever again’’ overstates it. How do we 

make it much less likely that we are not again in this situation? 

So this begins a set of hearings that we are going to be having 

on what, if anything, should be done at the legislative level and 

then carrying through obviously to the executive level to prevent 

some of the problems that we are now dealing with from recurring. 

There will be a series of hearings. As you know, the Secretary of 

the Treasury will be testifying at our hearing on March 26th. But 

we want to hear from a wide range of people on the consumer side, 

on the labor side, and on the financial industry side, former regulators, other commentators, and people in the industry. We will 

have a series of hearings on this. We have several hearings 

planned between now and the break. We will resume and continue 

the hearings, and it is my hope that we will be able to begin the 

drafting of legislation sometime in early May. That is when we 

come back and have a couple more weeks of hearings. 

I urge people to be thinking seriously about what we are doing. 

This will be a lengthy process. It will go through all of the regular 

2 

order. The Senate also is engaged in this. The White House and the 

Treasury are engaged in it. It is a very important task, and we will 

be addressing it with great seriousness and with full input. I am 

not at this point going to get into anything substantive because I 

really hope that we will have a full and unfettered conversation 

with a variety of people about this, and I would hope people would 

feel totally free to make whatever recommendations they may 

have. Everyone who is here will, I am sure, be asked again to comment on this, but you don’t have to wait to be asked. We have as 

important a task as we have had in this general area, I believe, 

since the 1930’s. 

But I will just say briefly what seems to me to be the situation. 

We are a society that understands the value of free enterprise in 

a capitalist system in creating wealth. Some political rhetoric to 

the contrary, that is not in question now, and won’t be in question 

in the future. No one is seriously talking about diminishing the 

role of the private sector as the wealth creator, and for this committee’s jurisdiction of the financial services industry as the intermediary, as the entity that helps accumulate wealth from a wide 

variety of sources and makes it available for those who will be taking the lead in the productive activity, that is the intermediation 

function, and it is a very important one. 

From time to time in economic life, the private sector, which is 

constantly innovating, but achieves the level of innovation that is 

almost a qualitative change when a very new set of activities comes 

forward. Now, by definition, if those activities do not provide value 

to the society, they die of their own weight. Only those that are in 

fact genuinely adding significant value thrive. But also by definition because they are innovative, as they thrive they do a lot of 

good, but there is some damage because they are operating without 

rules, they are new, and that is why I think the problem here is 

not deregulation, but nonregulation. It is not that rules that had 

been in place were dismantled, it is that as new activities come forward there need to be new rules that are put in place that to the 

maximum extent possible provide a structure in which the value of 

these innovations can continue but some of the abuses are restricted. 

I will give two examples where it seems to me we went through 

that process. In the late 19th Century, the formation of the large 

industrial enterprises, then called trusts. This country could not 

have industrialized. The wealth could not have spread to the extent 

that it has here or elsewhere without large enterprises. But because they were new, there were not rules. So while they were 

formed and thrived in the late 19th Century and on into the next 

century, the presidencies of Theodore Roosevelt and Woodrow Wilson were aimed at preserving the value while containing the damage that could be done. The antitrust acts, the Federal Trade Act, 

even the Federal Reserve Act itself came out of that situation. 

Because you had the large enterprises you then had the stock 

market become so important, because you had now gone beyond 

what individuals could finance. And the stock market obviously 

provided an important means of support for this process, but with 

some abuses. So in the New Deal period and then after we had 

3 

rules adopted that gave us the benefits of this finance capitalism 

but tried to restrain some of the abuses, the SEC and other factors. 

I believe that securitization, the ability to use pools of money not 

contributed by depositors, and are therefore relatively unrestricted, 

to finance activities and to sell the right to be repaid, obviously has 

a lot of advantages. If mortgage loans can be made, securitized, 

and remade, that money can support a lot more activities. 

Securitization greatly increases the ability to use the money. But 

like these other innovations it comes in an area without regulation. 

And our job now I believe is in some ways comparable to what happened under Franklin D. Roosevelt or Theodore Roosevelt and 

Woodrow Wilson, to come up with a set of rules that create a context in which a powerful, valuable tool can go forward in its contributions but with some restriction on the negative side. And that 

is never easy to do and you never do it 100 percent. 

I regard it, by the way, as very much a pro-market enterprise, 

because one of the problems we have now is an unwillingness on 

the part of many who have the money to make it available. We 

have investors who are reluctant to get involved. That is a great 

problem. It is nice from the standpoint of calculating our interest 

costs to have Treasuries be so popular. But it is not healthy for the 

economy for Treasuries to be disproportionately the investment 

people want to make. 

One of the advantages of this being done properly is to get a set 

of rules that will tell investors that it is safe to get back into the 

business of investing. So we regard this again as very pro-market, 

of taking a market-driven innovation, in this case securitization, 

and trying to preserve its value while limiting some of the harm 

that comes when it acts in a totally unregulated atmosphere and 

in a manner that will give a great deal of confidence to investors 

so that we can resume this function of intermediation of gathering 

up resources and making them available for productive uses. 

The gentleman from Alabama. 

Mr. BACHUS. Thank you, Mr. Chairman. I yield 11⁄2 minutes. 

The CHAIRMAN. I am sorry. Whatever time you want; 11⁄2 minutes. 

Mr. BACHUS. Thank you. 

Mr. Chairman, done in the right way, a systemic risk entity can 

be a positive step. However, if done in the wrong way, it can be 

a very bad idea. Let me be very clear. It is time that we extricate 

ourselves from the cycle of multi-billion dollar taxpayer-funded 

bailouts. Before we agree on the creation of a systemic risk regulator or observer, we need to agree on one important precondition, 

and that is that this so-called systemic risk regulator should not 

have the power to commit or obligate billions or hundreds of billions of dollars of taxpayer money to bailing out the so-called ‘‘too 

big to fail’’ institutions. If it does, I can’t support it. 

In the event of a failure of one of these too big to fail institutions, 

I believe that this newly created entity’s role should be to advance 

an orderly resolution, not to add taxpayer funding. If we have 

learned one lesson in the last year it is this: When the government 

tries to manage and run these large corporations, no one wins. 

Government ownership and management of the private sector 

didn’t work in Russia, it didn’t work in China, it is not working in 

4 

Cuba, it is not working in North Korea, and it is clearly not working here. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Does the gentleman have a second member, because I did 5 minutes? You have a minute-and-a-half. The gentleman from California, Mr. Royce, for a minute-and-a-half. 

Mr. ROYCE. Thank you, Mr. Chairman. I would like to thank our 

witnesses for coming and also, considering the topic of today’s hearing, systemic risk, I would like to briefly welcome Mr. Wallison 

from AEI who for years warned and wrote about the systemic risk 

posed by Fannie Mae and Freddie Mac to our system. And with 

trillions of dollars being allocated to prop up our financial system 

we must begin to rethink, I think, the relationship between the 

Federal Government and private companies. If we allow this line 

to be permanently blurred, the invitation for political and bureaucratic manipulation will remain, as we saw with the GSEs. Further, the market distortions caused by the implied government 

guarantee of Government-Sponsored Enterprises allowed them to 

operate as a duopoly, walled off from forces such as market discipline that would have significantly lessened the ability of these 

firms to play their part in inflating the U.S. housing market and 

allowed them eventually to overleverage by over 100 to 1. 

With that said, I believe that we have to reevaluate our financial 

market’s regulatory structure. That is what this hearing is about. 

We need a thoughtful reevaluation. We have a patchwork system 

put together over the last 75 years in this country, and we cannot 

discuss systemic risk regulation in a vacuum. Duplicitous and ineffective regulatory bodies must be consolidated or eliminated, and 

gaps exploited in recent months by AIG must be filled. 

Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from California for 2 minutes. 

Mr. SHERMAN. Thank you. I think the ranking member points 

out something interesting, and that is if the Fed is the systemic 

risk regulator, or any kind of regulator, they could see their regulation called into question, ‘‘Oops, you made a mistake.’’ And they 

could cover themselves by using their powers under section 13(3) 

to make unlimited loans from the Fed. I think we need to divorce 

the rescue authority from the regulatory authority or a regulator 

may do a rescue in order to cover up the fact that their regulatory 

authority was not used all that prudently. 

Secondly, if the Fed is going to be a systemic risk regulator we 

ought to make sure that all of its officers and decisionmakers are 

appointees of the President or appointees of appointees of the 

President, that none are appointed by committees of private bankers. The Fed needs to be clearly just a government agency and not 

also an association of banks. 

As to systemic risk, it can be prevented perhaps by higher capital 

requirements, but when we do confront systemic risk that has to 

be acted, this systemic risk regulator needs to be respond with receiverships, not with bailouts. Never again should the taxpayer be 

called upon to bear risks or to bear costs. And no activity which 

is too big to be covered by a receivership should be allowed because 

nobody should be allowed to bet if the taxpayer is going to be called 

upon under the theory of systemic risk or any other theory to bail 

5 

them out. No casino should be too so big that we can’t let those 

who break the bank deal with it in the private sector. 

Finally, and this is off point, I look forward to working with 

other colleagues on a tax law that would impose a substantial surtax on excessive compensation paid to executives at bailed-out 

firms, especially AIG. It is clear that we have until April 15, 2010, 

to act on the 2009 Tax Code, and I think we could act on 2008 as 

well. 

The CHAIRMAN. The gentleman from Illinois for 11⁄2 minutes. 

I apologize. The gentleman from Texas for 11⁄2 minutes. 

Mr. HENSARLING. Thank you, Mr. Chairman. No doubt we would 

all love to figure out a way to properly end systemic risk, but it 

kind of begs the question who, what, how, and at what cost? I have 

a number of questions. Number one, do we have any other examples where this has been tried before and tried successfully? Has 

it worked? And if not, why not? Who are the so-called experts on 

the subject? Second of all, what is our accepted definition of systemic risk? Is it too big to fail, too interconnected to fail? I note 

that mutual funds have worldwide assets of $26.2 trillion at the 

end of the last fourth quarter. Are they too big to fail? Are they 

representative of systemic risk? Next, which of our regulators is to 

be trusted with this responsibility? Should it be the Federal Reserve that many economists view helped lead us into this housing 

bubble in the first place? Perhaps it should be the SEC, who apparently knew about the Madoff fraud and did nothing about it. Perhaps OTS, who is responsible for IndyMac, the largest bank failure 

in American history. If not them, who? 

The next question is to what extent does this become a self-fulfilling prophecy? Once you designate a firm too big to fail, then is 

this not Fannie and Freddie revisited with only the taxpayers left 

to pick up the tab? 

There are many questions to be asked. I look forward to hearing 

from our witnesses, and I yield back the balance of my time. 

The CHAIRMAN. The gentleman from New Jersey, Mr. Garrett, 

for 11⁄2 minutes. 

Mr. GARRETT. Thank you, Mr. Chairman. And while we look at 

systemic risk, and there are some who are calling for consolidating 

even more regulator power and risk within the Fed to look at systemic risk, I find myself on the other side increasingly adverse to 

the idea. Now, the Fed has already been the de facto systemic regulator for at least much of our banking sector, which by the way is 

already the most regulated portion of our economy. Institutions like 

Citigroup and other large banks have some of the thorniest problems that we are facing in our financial markets. So instead of giving Fannie even more problems, despite its regulatory failures, I 

am convinced that we should actually reduce the regulatory powers 

and maybe at best let it concentrate on its monetary policy. The 

Fed’s regulatory role, if it were to be increased, compromises its 

independence and threatens to undermine the value of the dollar. 

The reason for the Fed’s independence in the first place is its 

monetary policies duties, not its regulatory role. It is difficult to see 

a scenario where the Fed is responsible for the health of our Nation’s largest financial institutions would be reluctant to raise inVerDate Nov 24 2008 17:53 Jul 28, 2009 Jkt 048867 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\48867.TXT TERRIE
6 

terest rates in order to assist financial institutions under its regulatory purview. 

Furthermore, in addition to my concerns about the conflictive nature of the Fed’s role, as I mentioned at last week’s hearing, I also 

have concerns about consolidating so much additional power in any 

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

Finally, beyond my specific concerns about the Fed, I have broader concerns, as Mr. Hensarling raises, about a new systemic regulator. What powers would it have? Would it be able to say what it 

is and what it is not allowed to invest in? And in its zeal to eradicate risk, and remember, this is a capitalist economy, would it fundamentally alter the nature of the American economy, the greatest 

economic engine in the history of the world by doing so? 

I thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from Massachusetts is recognized 

for 2 minutes, Mr. Capuano. 

Mr. CAPUANO. Thank you, Mr. Chairman. Mr. Chairman, I was 

going to comment on your comment about AIG being the word of 

the week, and you are right about that, but that is short term. The 

biggest word we dealt with for 30 years, and I think the reason you 

are here, is the word ‘‘regulation.’’ It has been a swear word in 

Washington for 30 years. We don’t regulate anything. We haven’t 

overseen anything or anybody, and the few regulators we have 

have chosen not to do anything with the powers they have. 

Yet I have to be honest; I think you just heard the major problem 

that we in Congress will have. I don’t think anybody in America 

today thinks there is too much regulation in the financial services 

industry except some of my friends on the other side of the aisle. 

And I have to be honest, I thought that debate was over. I think 

it is over for most of us and for most of America. What I want to 

hear today and what I want to hear from the next point forward 

is not whether regulation is a swear word, but how do we do it? 

Who should be included? Who should be excluded, if anyone? 

I can’t imagine any arguments why anybody would say that bank 

SIVs, Special Investment Vehicles, should be excluded from regulation where the bank isn’t. I can’t imagine anybody today telling me 

that hedge funds should have absolutely no regulation. I can’t 

imagine anybody today telling me that private equity firms should 

have absolutely no regulation. I can’t imagine anybody today certainly not telling me that credit rating agencies shouldn’t be regulated by anybody. 

Those things are past. The lack of regulation is unequivocally, 

clearly, undebatably the reason that we have the economic crisis 

we have today. The fair and only question left is, how do we regulate in a reasonable and thoughtful manner? No one wants to overregulate, but no one in their right mind wants to under regulate 

anymore. It is a fair question and a moving question as to how to 

do it in format, how to structure this, and who should be included, 

and to what degree. Those days of lack of regulation, of somehow 

the government is always the problem, always in the way, are over, 

and I would suggest that anybody who doesn’t get that should just 

read any paper any day anywhere in America today. 

Mr. Chairman, I yield back. Thank you. 

7 

The CHAIRMAN. The gentleman from South Carolina for 11⁄2 minutes. 

Mr. BARRETT. Thank you, Mr. Chairman. 

Panel, recently we have been hearing a lot about a systemic risk 

regulator, but it is the details, guys, that matter. Before evaluating 

any proposal we need to know who that regulator will be, what the 

regulator will do, and who or what the regulator will oversee. We 

need reform, not more regulation. And we need to ensure that our 

current regulators are fulfilling their current mandates before we 

assign them new duties. 

I look forward to hearing your insights on how we can ensure 

that any changes to the regulatory system can bring certainty and 

trust back into the economy, but do not prevent American families 

and small businesses from getting the capital that they sorely 

need. 

I yield back, Mr. Chairman. 

The CHAIRMAN. The gentleman from Georgia, Mr. Price, for 11⁄2

minutes. 

Mr. PRICE. Thank you, Mr. Chairman. I am struck by the certitude of some of my friends on the other side of the aisle that may 

only be exceeded by their potential lack of appreciation for the dangers of a political economy. I would ask all of us to think about 

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 that fact. 

I am extremely concerned with the idea of a systemic risk regulator. If a specific institution is designated as ‘‘systemically significant,’’ it certainly sends the message that the government will not 

let it fail. This clearly gives these institutions a huge competitive 

advantage over nonsystemically significant institutions. This classification takes us even further into the realm of a political economy, 

and I would suggest that is the wrong road. 

A market-based economy allows institutions to fail for a number 

of reasons. Allowing the government to prop up systemically significant institutions that would otherwise fail doesn’t improve competition or efficiency in our financial system. This reminder should 

caution all of us as we consider a proposal that might potentially 

completely change the way our financial system operates, who 

wins, who loses and who decides. 

I yield back. 

The CHAIRMAN. The gentleman from Texas, Mr. Green, for 11⁄2

minutes. 

Mr. GREEN. Thank you, Mr. Chairman. Mr. Chairman, I believe 

that our affair with invidious laissez-faire is over. We don’t expect 

football teams to regulate themselves, we don’t expect self-regulation in basketball. I don’t think that we can expect it in the economic order with reference to economic institutions. I believe that 

too big to fail is just right to regulate, because when we don’t regulate too big to fail, the potential to decimate society exists. We have 

to have an Office of Systemic Risk Analysis if for no other reason 

than to identify institutions that are too big to fail so that they can 

be properly and positively regulated. 

I yield back the balance of my time. 

8 

The CHAIRMAN. And finally, the gentleman from Texas, Mr. 

Neugebauer, for 11⁄2 minutes. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman, for holding these 

hearings. 

A lot of changes are being proposed in the regulatory structure 

in our country, and we have to be very careful that we get this 

right. One of the questions that comes up is, did we have systemic 

risk because we didn’t have the proper regulatory structure in 

place and the fact that there were holes in that system created systemic risk within our economy, or did we have systemic risk because we didn’t have a systemic risk regulator? I will tell you that 

I believe that we have a regulatory structure that allowed systemic 

risk to begin to transpire in our economy. But quite honestly, I believe that the actions that we are taking today, unprecedented actions, are also creating major systemic risk in our economy. 

What does this all point to? It all points to the fact that we must 

go very carefully and very slowly here as we look at reforming our 

financial markets because we have to get this right. Because some 

people believe if we get this right we will take risk out of the market. It is not the role nor can government take risk out of the market. But we can make sure that there is integrity and transparency 

in the market as we move forward. 

And so, Mr. Chairman, I would hope that as we move down this 

road of regulatory reform, that we will be extremely careful here. 

It is not going to be the speed at which we do our work, but the 

quality of the work we do, because it is important to the American 

people that we get this right. 

The CHAIRMAN. We will now begin the testimony in the order in 

which they are printed here, which is probably random, unlike the 

testimony. We will begin with Mr. Bartlett, Steve Bartlett, President and Chief Executive Officer of the Financial Services Roundtable, and a former member of this committee. 

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

Mr. BARTLETT. Thank you, Mr. Chairman. 

Beginning about 3 years ago, the Roundtable began to examine 

the questions of our current regulatory system, many of which are 

raised today. This dialogue over that time has, over those 3 years, 

has evolved into a focus on how the current system also undermines the stability and the integrity of the financial services industry. I provided in my written testimony a format that provides at 

least our answer to many of the questions that were raised today 

and previously questions and comments. I want to summarize our 

conclusions as follows: 

One, the financial services industry is regulated by hundreds of 

separate independent regulators at various levels. It is a system of 

fragmentation, inconsistency, and chaos. It is a fragmented system 

of national and State financial regulation that is based on functional regulation within individual companies, and those companies 

are also regulated according to their charter type. There is limited 

coordination and cooperation among different regulators even 

though firms with different charters often engage in the same, 

9 

similar, or sometimes exact activities. No Federal agency is responsible for examining and understanding the risk created by the 

interconnections between firms and between markets. This chaotic 

system, our conclusion, of financial regulation was a contributing 

factor to the current crisis. 

Number two, that is not to say that the fragmented regulation 

is the only cause. The financial services industry accepts our share 

of responsibility: badly underwritten mortgages; compensation 

packages that pay for short-term revenue growth instead of longterm financial soundness; failure to communicate across sectors, 

even within the same company; and sometimes even downright 

predatory practices. All of those and more have been part of this 

crisis. 

Since early 2007, the industry has formally and aggressively 

taken actions to correct those practices. Underwriting standards 

have been upgraded, credit practices have been reviewed and recalibrated, leverage has been reduced, and firms have rebuilt capital, incentives have been realigned, and some management teams 

have been replaced. We are not seeking credit for that. Clearly the 

horses are all out of the barn running around in the field. But 

those are the steps that have been taken in the last 2 years. But 

the regulatory system that was in place 2 years and 5 years ago 

is still in place. An absence of coherent comprehensive systemic 

regulatory structure did fail to identify and prevent the crisis, and 

we still have the same regulatory system today. 

Number three, reforming and restructuring the regulatory system in 2009 should be Congress’ primary mission moving forward 

to resolve the crisis and prevent another crisis. Achieving better 

and more effective regulation does require more than just rearranging regulatory assignments. Better and more effective regulation requires a greater reliance on principle-based regulation, a 

greater reliance on a system of prudential supervision, a reduction 

in the pro-cyclical effects of regulatory and accounting principles, 

and a consistent uniform standard of which similar activities and 

similar institutions are regulated in similar ways. 

Number four, we are proposing a comprehensive reform of the 

regulatory structure that includes clear lines of authority and uniform standards across both State lines and types of business. Within our proposal, we recommend: the consolidation of several existing Federal agencies into single agencies, a single national financial institutions regulator that would be consolidated prudential 

and consumer protection agency for banking, securities, and insurance; a new capital markets agency through the merger of the SEC 

and the CFTC to protect depositors and shareholders and investors; 

and to resolve failing or failed institutions, we propose a creation 

of the national insurance and resolution authority to resolve institutions that fail in a consistent manner from place to place. 

Number five, we also advocate a systemic regulator, what we 

prefer to call a market stability regulator. The market stability regulator would be, as I said in subcommittee testimony, ‘‘NIFO—nose 

in and fingers out.’’ That means a market stability regulator should 

not replace or add to the primary regulators, but should identify 

risks and act through and with a firm’s primary regulator. We believe that designating the Federal Reserve is the natural comVerDate Nov 24 2008 17:53 Jul 28, 2009 Jkt 048867 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\48867.TXT TERRIE
10 

plement to the Federal Reserve Board’s existing authority as the 

Nation’s central bank and the lender of last resort. The market stability regulator should be authorized to oversee all types of financial markets and financial services firms, whether regulated or unregulated, and we propose an exact definition of at least our proposal of that system of regulation of systemic regulator. 

And number six, the U.S. regulatory system should be the U.S. 

system of course, but it should be coordinated and consistent with 

international standards. 

Mr. Chairman, the time to act is now. We believe that these reforms should proceed in a comprehensive fashion rather than a 

piecemeal fashion. The key is to do this correctly, not rapidly, but 

to do this with the sense of urgency for which the crisis calls. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Bartlett can be found on page 64 

of the appendix.] 

The CHAIRMAN. I do note that our former colleague retains a respect for the 5-minute rule that we don’t always get from witnesses, and I appreciate it. 

Our next witness, a former official, Timothy Ryan, is here as the 

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

STATEMENT OF THE HONORABLE T. TIMOTHY RYAN, JR., 

PRESIDENT AND CHIEF EXECUTIVE OFFICER, SECURITIES 

INDUSTRY AND FINANCIAL MARKETS ASSOCIATION (SIFMA) 

Mr. RYAN. Thank you, Chairman Frank, Ranking Member Bachus, and members of the committee. My testimony will detail the Securities Industry and Financial Markets Association’s view on the 

financial market stability regulator, including the mission, purpose, 

powers, and duties of such a regulator. 

Systemic risk has been at the heart of the current financial crisis. While there is no single commonly accepted definition of systemic risk, we think of systemic risk as the risk of a systemwide 

financial breakdown characterized by a probability of the contemporaneous failure of a substantial number of financial institutions 

or of financial institutions or a financial market controlling a significant amount of financial resources that could result in a severe 

contraction of credit in the United States or have other serious adverse effects on global economic conditions or financial stability. 

There is an emerging consensus among our members that we 

need a financial market stability regulator as a first step in addressing the challenges facing our overall financial regulatory 

structure. We believe that the mission of a financial market stability regulator should consist of mitigating systemic risk, maintaining financial stability, and addressing any financial crisis. 

Specifically, the financial market stability regulator should have 

authority over all financial institutions in markets regardless of 

charter, functional regulator, or unregulated status. We agree with 

Chairman Bernanke that its mission should include monitoring 

systemic risk across firms and markets rather than only at the 

level of individual firms or sectors, assessing the potential for practices or products to increase systemic risk, and identifying regulatory gaps that have systemic impact. 

11 

One of the lessons learned from recent experience is that sectors 

of the market, such as the mortgage brokerage industry, can be 

systemically important even though no single institution in that 

sector is a significant player. The financial market stability regulator should have authority to gather information from all financial 

institutions and markets, adopt uniform regulations related to systemic risk, and act as a lender of last resort. 

In carrying out its duties, the financial market stability regulator 

should coordinate with the relevant functional regulators, as well 

as the President’s Working Group, in order to avoid duplicative or 

conflicting regulation and supervision. It should also coordinate 

with regulators responsible for systemic risk in other countries. 

Although the financial market stability regulator’s role would be 

distinct from that of the functional regulators, it should have a 

more direct role in the oversight of systemically important financial 

organizations, including the power to conduct examinations, take 

prompt corrective action, and appoint or act as the receiver or conservator of such systemically important groups. 

These are more direct powers that would end if a financial group 

were no longer systemically important. We believe that all systemically important financial institutions that are not currently subject 

to Federal functional regulation, such as insurance companies and 

hedge funds, should be subject to such regulation. We do not believe the financial market stability regulator should play the dayto-day role for those entities. The ICI has suggested that hedge 

funds could be appropriately regulated by a merger of SEC and 

CFTC. We agree with that viewpoint. 

The collapse of AIG has highlighted the importance of robust insurance holding company oversight. We believe the time has come 

for adoption of an operational Federal insurance charter for insurance companies. In a regulatory system where functional regulation is overlaid by financial stability oversight, how the financial 

market stability regulator coordinates with the functional regulators is an important issue to consider. As a general principle we 

believe that the financial markets regulator should coordinate with 

the relevant functional regulators in order to avoid duplicative or 

conflicting regulation and supervision. We also believe the Federal 

regulator for systemic risk should have a tiebreaker, should have 

the ultimate final decision where there are conflicts between the 

Federal functional regulators. 

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

market stability regulator. Who is selected as the financial 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 and, 

most importantly, with the U.S. citizens. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Ryan can be found on page 115 

of the appendix.] 

The CHAIRMAN. Thank you, Mr. Ryan. 

Next, Peter Wallison, who is an Arthur F. Burns Fellow in Financial Policy Studies in the American Enterprise Institute and 

with whom I have a connection, because Mr. Burns and I—you may 

12 

not know this—are both from Bayonne, New Jersey. So I claim Mr. 

Burns as an alumnus. 

Mr. Wallison. 

STATEMENT OF THE HONORABLE PETER J. WALLISON, ARTHUR F. BURNS FELLOW IN FINANCIAL POLICY STUDIES, 

AMERICAN ENTERPRISE INSTITUTE 

Mr. WALLISON. Thank you, Mr. Chairman, and Ranking Member 

Bachus, for this opportunity to testify about a systemic risk regulator. There are two questions here, it seems to me. First, will a 

systemic regulator perform any useful function? And second, should 

a government agency be authorized to regulate so-called systemically significant financial institutions? I am going to start with the 

second question because I believe it is by far the most important. 

Giving a government agency the power to designate companies 

as systemically significant and to regulate their capital and activities is a very troubling idea. It has the potential to destroy competition in every market where a systemically significant company is 

designated. 

I say this as a person who has spent 10 years warning that 

Fannie Mae and Freddie Mac would have disastrous effects on the 

U.S. economy and that ultimately the taxpayers of this country 

would have to bail them out. Because they were seen as backed by 

the government, Fannie and Freddie were relieved of market discipline and able to take risks that other companies could not take. 

For the same reason, they also had access to lower cost financing 

than any of their competitors. These benefits enabled them to drive 

out competition and grow to enormous size. Ultimately, however, 

the risks they took caused their collapse and will cause enormous 

losses for U.S. taxpayers. 

When Fannie and Freddie were taken over by the government, they held or guaranteed $1.6 trillion in subprime and Alt-A mortgages. These loans are defaulting at unprecedented rates, and I believe will ultimately cost U.S. taxpayers $400 billion. There is very 

little difference between a company that has been designated as 

systemically significant and a GSE like Fannie or Freddie. By definition a systemically significant firm will not be allowed to fail because its failure could have systemic effects. As a result it will be 

seen as less risky for creditors and counterparties and will be able 

to raise money at lower rates than its competitors. This advantage, 

as we saw with Fannie and Freddie, will allow it to dominate its 

market, which is a nightmare for every smaller company in every 

industry where a systemically significant company is allowed to operate. 

Some will contend that in light of the failures among huge financial firms in recent months, we need regulation to prevent such 

things in the future, but this is obviously wrong. Regulation does 

not prevent risk-taking or loss. Witness the banking industry, the 

most heavily regulated sector in our economy. Many banks have 

become insolvent and many others have been or will be rescued by 

the taxpayers. 

It is also argued that since we already have rescued a lot of financial institutions, moral hazard has been created, so now we 

should regulate all financial institutions as if they will be rescued 

13 

in the next crisis. But there is a lot of difference between de jure 

and de facto, especially when we are dealing with an unprecedented situation. 

Anyone looking at the Fed’s cooperation with the Treasury today 

would say that the Fed de facto is no longer independent. But after 

the crisis is over, we would expect that the Fed’s independence will 

be reestablished. That is the difference between de jure and de 

facto. 

Extending regulation beyond banking by picking certain firms 

and calling them systemically significant would, in my view, be a 

monumental mistake. We will simply be creating an unlimited 

number of Fannies and Freddies that will haunt our economy in 

the future. 

Let me now turn to the question of systemic regulation in general. Why choose certain companies as systemically significant? 

The theory seems to be that the failure of big companies caused 

this financial crisis or without regulation might cause another in 

the future. But is the U.S. banking system in trouble today because 

of the failure of one or more large companies? Of course not. It is 

in trouble because of pervasive losses on trillions of dollars of bad 

mortgages. So will regulation of systemically significant companies 

prevent a recurrence of a financial crisis in the future? Not on the 

evidence before us. An external shock that causes asset prices to 

crash or investors to lose confidence in the future will have the 

same effect whether we regulate systemically significant companies 

or not. And regulation, as with banks, will not even prevent the 

failure of systemically significant companies; it will only set them 

up for bailouts when inevitably they suffer losses in their risk taking. 

Finally, the Federal Reserve would be by far the worst choice for 

systemic regulator. As a lender of last resort, it has the power to 

bail out the companies it is supervising, without the approval of 

Congress or anyone else. Its regulatory responsibilities will conflict 

with its central banking role, and its involvement with the politics 

of regulation will raise doubts about its independence from the political branches. 

We will achieve nothing by setting up a systemic regulator. If we 

do it at the cost of destroying faith in the dollar and competition 

in the financial services market, we will have done serious and unnecessary harm to the American economy. 

Thank you, Mr. Chairman. 

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

159 of the appendix.] 

The CHAIRMAN. Next, Terry Jorde, the president and CEO of 

CountryBank USA. She is here on behalf of the Independent Community Bankers of America. 

STATEMENT OF TERRY J. JORDE, PRESIDENT AND CHIEF EXECUTIVE OFFICER, COUNTRYBANK USA, ON BEHALF OF 

INDEPENDENT COMMUNITY BANKERS OF AMERICA (ICBA) 

Ms. JORDE. Thank you, Mr. Chairman, Ranking Member Bachus, 

and members of the committee. My name is Terry Jorde. I am 

president and CEO of CountryBank USA. I am also immediate past 

chairman of the Independent Community Bankers of America. 

14 

My bank is located in Cando, North Dakota, a town of 1,300 people, where the motto is, ‘‘You Can Do better in Cando.’’ 

CountryBank has 28 full-time employees and $45 million in assets. 

ICBA is pleased to have this opportunity to testify today on regulation of systemic risk in the financial services industry. 

I must admit to you that I am very frustrated today. I have spent 

many years warning policymakers of the systemic risk that was 

being created in our Nation by the unbridled growth of the Nation’s 

largest banks and financial firms. But I was told that I didn’t get 

it, that I didn’t understand the new global economy, that I was a 

protectionist, that I was afraid of competition, and that I needed 

to get with the modern times. 

Well, sadly, we now know what the modern times look like, and 

it isn’t pretty. Excessive concentration has led to systemic risk and 

the credit crisis. Banking and antitrust laws are too narrow to prevent these risks. Antitrust laws are supposed to maintain competitive geographic and product markets. So long as the courts and 

agencies can discern that there are enough competitors in a particular market, that ends the inquiry. This often prevents local 

banks from merging, but it does nothing to prevent the creation of 

giant nationwide franchises. 

Banking regulation is similar. The agencies ask only if a given 

merger will enhance the safety and soundness of an individual 

firm. They generally answer bigger is almost necessarily stronger. 

A bigger firm can, many said, spread its risk across geographic 

areas and business lines. No one wondered what would happen if 

one firm or a group of firms jumped off a cliff and made billions 

in unsound mortgages. 

Now we know; our economy is in crisis. The four largest banking 

companies control more than 40 percent of the Nation’s deposits 

and more than 50 percent of U.S. bank assets. This is not in the 

public interest. A more diverse financial system would reduce risk 

and promote competition, innovation, and the availability of credit 

to consumers of various means and businesses of all sizes. 

We can prove this. Despite the challenges we face, the community bank segment of the financial system is still working and 

working well. We are open for business, we are making loans, and 

we are ready to help all Americans weather these difficult times. 

But I must report that community bankers are angry. Almost 

every Monday morning, they wake up to news that the government 

has bailed out yet another too big to fail institution. On many Saturdays, they hear that the FDIC summarily closed one or two too 

small to save institutions. And just recently, the FDIC proposed a 

huge special premium to pay for losses imposed by large institutions. This inequity must end, and only Congress can do it. The 

current situation will damage community banks and the consumers 

and small businesses that we serve. 

What can we do? ICBA recommends the following strong measures: Congress should direct a fully staffed interagency task force 

to immediately identify systemic risk institutions. They should be 

put immediately under Federal supervision. The Federal systemic 

risk agency should impose two fees on these institutions that would 

compensate the agency for the cost of supervision and capitalize a 

systemic risk fund comparable to the FDIC. The FDIC should imVerDate Nov 24 2008 17:53 Jul 28, 2009 Jkt 048867 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\48867.TXT TERRIE
15 

pose a systemic risk premium on any insured bank that is affiliated with a systemic risk firm. The systemic risk regulator should 

impose higher capital charges to provide a cushion against systemic 

risk. 

The Congress should direct the systemic risk regulator and the 

FDIC to develop procedures to resolve the failure of a systemic risk 

institution. The Congress should direct the interagency systemic 

risk task force to order the breakup of systemic risk institutions. 

Congress should direct the systemic risk regulator to block any 

merger that would result in the creation of a systemic risk institution. And finally, it should direct the systemic risk regulator to 

block any financial activity that threatens to impose a systemic 

risk. 

The current crisis provides you an opportunity to strengthen our 

Nation’s financial system and economy by taking these important 

steps. They will protect taxpayers and create a vibrant banking 

system where small and large institutions are able to fairly compete. ICBA urges Congress to quickly seize this opportunity. 

Thank you, Mr. Chairman. 

[The prepared statement of Ms. Jorde can be found on page 91 

of the appendix.] 

The CHAIRMAN. Thank you. And next, we have Mr. Travis 

Plunkett, the legislative director of the Consumer Federation of 

America. 

STATEMENT OF TRAVIS PLUNKETT, LEGISLATIVE DIRECTOR, 

CONSUMER FEDERATION OF AMERICA 

Mr. PLUNKETT. Thank you, Mr. Chairman, Ranking Member 

Bachus, and members of the committee. I am Travis Plunkett, legislative director of the Consumer Federation of America, and I appreciate the opportunity to testify today about how to better protect 

the financial system as a whole and the broader economy from systemic risk. I would like to make three key points: 

First, systemic regulation isn’t just a matter of designating and 

empowering a risk regulator, as important as that may be. It involves a comprehensive plan to reduce systemic risk, including immediate steps both to reinvigorate day-to-day safety and soundness 

in consumer and investor protection regulation of financial institutions and to address existing systemic risk, in particular by shutting down the shadow banking system once and for all. 

Second, systemic risk regulation should not rely only on a crisis 

management approach or focus on flagging a handful of large institutions that are deemed too big to fail. Rather, it must be an ongoing day-to-day obligation of financial regulators focused on reducing 

the likelihood of a systemic failure triggered by any institution or 

institutions in the aggregate. 

Third, CFA has not endorsed a particular systemic regulatory 

structure, but if Congress chooses to designate the Fed as a systemic regulator, it must take steps to address several problems inherent in this approach, including the Fed’s lack of transparency 

and accountability and the potential for conflicts between the roles 

of setting monetary policy and regulating for systemic risk. 

The fact that we could have prevented the current crisis without 

a systemic regulator provides a cautionary lesson about the limits 

16 

of an approach that is just focused on creating new regulatory 

structures. It is clear that regulators could have prevented or 

greatly reduced the severity of the current crisis using basic consumer protection and safety and soundness authority. Unless we 

abandon a regulatory philosophy based on a rational faith in the 

ability of markets to self-correct, whatever we do on systemic risk 

regulation is likely to have a limited effect. 

The flip side of this point, the positive side, suggests that simply 

closing the loopholes in the current regulatory structure, reinvigorating Federal regulators in doing an effective job of the day-to-day 

task of soundness and investor and consumer protection will go a 

long way to eliminating the greatest threats to the financial system. 

Chairman Frank and several members of this committee have 

been leaders in talking about the importance of a comprehensive 

approach to systemic risk regulation and have focused on executive 

compensation as a factor that contributes to systemic risk. We 

agree about the compensation practices that encourage excessive 

risk-taking and about the need to bring currently unregulated financial activities under the regulatory umbrella. 

The experiences of the past year have demonstrated conclusively 

the ineffectiveness of managing systemic risk only when the Nation 

finds itself on the brink of a crisis. It is of paramount importance 

in our view that any new plan provide regulators with ongoing dayto-day authority to curb systemic risk. 

The goal of regulation should not be focused only or even primarily on the potential bailout of systemically significant institutions. Rather, it should be designed to ensure that all risks that 

could threaten the broader financial system are quickly identified 

and addressed to reduce the likelihood that a systemically significant institution will fail and to provide for the orderly failure of 

nonbank financial institutions. 

Regardless of which structure Congress chooses to adopt, we urge 

you to build incentives into the system to discourage institutions 

from becoming too big or too interconnected to fail. One way to do 

this is to subject financial institutions to risk-based capital requirements and premium payments designed to deter those practices 

that magnify risks, such as growing too large, holding risky assets, 

increasing leverage, or engaging in other activities deemed risky by 

regulators. 

To increase the accountability of regulators and reduce the risk 

of groupthink, we also recommend that you create a high level systemic risk advisory council made up of academics and other independent analysts from a variety of disciplines. 

Once again, I appreciate the opportunity to appear before you 

today and look forward to answering questions. 

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

101 of the appendix.] 

Mr. KANJORSKI. [presiding] Thank you very much, Mr. Plunkett. 

Mr. Silvers. 

17 

STATEMENT OF DAMON A. SILVERS, ASSOCIATE GENERAL 

COUNSEL, AFL–CIO 

Mr. SILVERS. Thank you, Congressman Kanjorski. Good morning, 

and good morning to Ranking Member Bachus and the committee. 

My name is Damon Silvers. I am associate general counsel of the 

AFL–CIO, and I am the deputy chair of the Congressional Oversight Panel. My testimony today though is on behalf of the AFL– 

CIO, and though I will refer to the work of the panel on which I 

am honored to serve together with Congressman Hensarling, my 

testimony does not reflect necessarily the views of the panel, its 

chair, or its staff. 

The AFL–CIO has urged Congress since 2006 to act to reregulate 

shadow financial markets, and the AFL–CIO supports addressing 

systemic risk. The Congressional Oversight Panel made the following recommendations with respect to addressing systemic risk, 

recommendations which the AFL–CIO supports: 

First, there should be a body charged with monitoring sources of 

systemic risk in the financial system. The AFL–CIO believes that 

systemic risk regulation should be the responsibility of a coordinating body of regulators chaired by the Chairman of the Board of 

Governors of the Federal Reserve System. This body should have 

its own staff with the resources and expertise to monitor diverse 

sources of systemic risk in institutions, products, and markets 

throughout the financial system. 

Second, the body charged with systemic risk management should 

be a fully public body, accountable and transparent. The current 

structure of regional Federal Reserve banks, the institutions that 

actually do the regulation of bank holding companies, where the 

banks participate in the governance, is not acceptable for a systemic risk regulator. 

Third, we should not identify specific institutions in advance as 

too big to fail but, rather, have a regulatory framework in which 

institutions have higher capital requirements and pay more on insurance funds on a percentage basis than smaller institutions 

which are less likely to be rescued as being too systemically significant. 

Fourth, systemic risk regulation cannot be a substitute for routine disclosure, accountability, safety and soundness, and consumer 

protection regulation of financial institutions and financial markets. Consequently, the AFL–CIO supports a separate consumer 

protection agency for financial services rather than having that authority rest with bank regulators. And here we see this consumer 

protection function as somewhat distinct from investor protection, 

which the SEC should do. 

Fifth, effective protection against systemic risk requires that the 

shadow capital markets, institutions like hedge funds and private 

equity funds and products like credit derivatives, must not only be 

subject to systemic risk-oriented oversight, but must also be 

brought within a framework of routine capital market regulation 

by agencies like the SEC. We can no longer tolerate a Swiss cheese 

system of financial regulations. 

And finally, there will not be effective reregulation of the financial markets without a global regulatory floor. That ought to be a 

primary goal of the diplomatic arms of our government. 

18 

The Congressional Oversight Panel urged that attention be paid 

to executive compensation in financial institutions. This is an issue 

of particular concern to the AFL–CIO that I want to turn to now 

in the remainder of my testimony in relation to systemic risk. 

There are two basic ways in which executive pay can be a source 

of systemic risk. When financial institutions’ pay packages have 

short-term pay horizons that enable executives to cash out their incentive pay before the full consequences of their actions are known, 

that is a way to generate systemic risk. 

Secondly, there is the problem that is technically referred to as 

risk asymmetry. When an investor holds a stock, the investor is exposed to upside and downside risk in equal proportion. For every 

dollar of value lost or gained, the stock moves proportionately; but 

when an executive is compensated with stock options, the upside 

works like a stock but the downside is effectively capped. Once the 

stock falls well below the strike price of the option, the executive 

is relatively indifferent to further losses. This creates an incentive 

to focus on the upside and be less interested in the possibility of 

things going really wrong. It is a terrible way to incentivize the 

managers of major financial institutions, and a particularly terrible 

way to incentivize the manager of an institution the Federal Government might have to rescue. 

This is highly relevant, by the way, to the situation of sick financial institutions. When stock prices have fallen close to zero, stocks 

themselves behave like options from an incentive perspective. It is 

very dangerous to have sick financial institutions run by people 

who are incentivized by the stock price. You are basically inviting 

them to take destructive risks, from the perspective of anyone like 

the Federal Government, who might have to cover the downside. 

This problem today exists in institutions like AIG and Citigroup, 

not just with the CEO of the top five executives, but for hundreds 

of members of the senior management team. 

A further source of assymetric risk incentive is the combination 

of equity-based compensation with large severance packages. As we 

have learned, disastrous failure in financial institutions sometimes 

leads to getting fired but rarely leads to getting fired for cause. The 

result is the failed executive gets a large severance package. 

If success leads to big payouts and failure leads to big payouts 

but modest achievements either way do not, then there is a big incentive to shoot the moon without regard to downside risk. These 

sorts of pay packages in just one very large financial institution 

can be a source of systemic risk, but when they are the norm 

throughout the financial services sector, they are a systemwide 

source of risk, much like unregulated derivatives or asset-backed 

securities. Consequently, this is an issue that the regulators of systemic risk ought to have the authority to take up. 

I thank you for your time. 

[The prepared statement of Mr. Silvers can be found on page 136 

of the appendix.] 

The CHAIRMAN. Thank you. 

Finally, Edward Yingling, who is the president and CEO of the 

American Bankers Association. 

19 

STATEMENT OF EDWARD L. YINGLING, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, AMERICAN BANKERS ASSOCIATION 

(ABA) 

Mr. YINGLING. Thank you, Mr. Chairman, Ranking Member 

Bachus, and members of the committee. The ABA congratulates 

this committee on the approach it is to taking to the financial crisis. There is a great need to act, but to do so in a thoughtful and 

thorough manner and with the right priorities. That is what this 

committee is doing. 

Last week, Chairman Bernanke gave a speech which focused on 

three main areas: First, the need for a systemic risk regulator; second, the need for a method of orderly resolution of systemically important financial firms; and third, the need to address gaps in our 

regulatory system. 

Statements by the leadership of this committee have also focused 

on a legislative plan to address these three areas. We agree that 

these three issues: A systemic regulator; a new resolution mechanism; and addressing gaps, should be the priorities. This terrible 

crisis should not be allowed to happen again, and addressing these 

three areas is critical to make sure it does not. 

The ABA strongly supports the creation of a systemic regulator. 

In retrospect, it is inexplicable that we have not had such a regulator. 

To use a simple analogy, think of a systemic regulator as sitting 

on top of Mount Olympus, looking out over the land. From that 

highest point, the regulator is charged with surveying the land, 

looking for fires. Instead we have had a number of regulators, each 

of which sits on top of a smaller mountain and only sees part of 

the land. Even worse, no one is effectively looking over some areas. 

While there are various proposals as to who should be the systemic regulator, most of the focus has been on giving the authority 

to the Federal Reserve. It does make sense to look for the answer 

within the parameters of the current regulatory system. It is doubtful that we have the luxury, in the midst of this crisis, to build a 

new system from scratch, however appealing that might be in theory. 

There are good arguments for looking to the Fed. This could be 

done by giving the authority to the Fed or by creating an oversight 

committee chaired by the Fed. ABA’s one concern in using the Fed 

relates to what it may mean for the independence of the Federal 

Reserve in the future. We strongly believe in the importance of 

Federal Reserve independence in setting monetary policy. 

ABA believes that systemic regulation cannot be effective if accounting policy is not part of the equation. That is why we support 

the Perlmutter-Lucas bill, H.R. 1349. 

To continue my analogy, a systemic regulator on Mount Olympus 

cannot function if part of the land is held strictly off limits and 

under the rule of some other body, a body that can act in a way 

that contradicts the systemic regulator’s policies. That is, in fact, 

exactly what happened with mark-to-market accounting. 

I want to take this opportunity to thank this committee for the 

bipartisan efforts in the hearing last week on mark-to-market. 

Your efforts last week will significantly aid in economic recovery. 

20 

We hope that the FASB and the SEC will take the final action you 

clearly advocated. 

ABA strongly supports a mechanism for the orderly resolution of 

systemically important nonbank firms. Our regulatory body should 

never again be in a position of making up a solution to a Bear 

Stearns or an AIG or not being able to resolve a Lehman Brothers. 

The inability to deal with those situations in a predetermined way 

greatly exacerbated this crisis. 

A critical issue in this regard is too-big-to-fail. Whatever is done 

on the systemic regulator and on a resolution system will in a 

major fashion determine the parameters of too-big-to-fail. In an 

ideal world, there would be no such thing as too-big-to-fail; but we 

know that the concept not only exists, it has grown broader over 

the last few months. This concept has profound moral hazard and 

competitive effects that are very important to address. 

The third area of our focus is where there are gaps in regulation. 

These gaps have proven to be a major factor in the crisis, particularly the role of largely unregulated mortgage lenders. Credit default swaps and hedge funds should also be addressed in legislation 

to close gaps. 

There seems to be a broad consensus to address these three 

areas. The specifics will be complex and in some cases contentious. 

At this very important time, with Americans losing their jobs, their 

homes and their retirement savings, all of us should work together 

to develop a stronger regulatory structure. The ABA pledges to be 

an active and constructive participant in this critical hour. 

Thank you. 

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

171 of the appendix.] 

The CHAIRMAN. Thank you all. This is all very useful, and I 

think we are having—I mean, we have a crisis, and the crisis is 

not conducive to kind of calmness, and I am pleased that we appear to be able to separate that out, and we deal with the crisis 

under a lot of sturm und drang. We can have rational conversations about where to go forward. I appreciate everybody’s approach. 

A couple of brief points. Ms. Jorde, as you know, if we are able 

to get through the Senate, and we would then concur an increase 

in the FDIC’s lending authority to deal with potential problems up 

to the $500 billion mark, the increase in the assessment will be 

substantially reduced. They are talking now about a 13-cent increase, and it would go down to a 3-cent increase. 

So that is on the community banks, as you correctly point out, 

being hit with the assessment that is based on some others. Whether or not that should be risk-based, many of us think it is. If that 

could be worked out, that is separate. But we are on track, I think 

it is now 6.3 cents. Instead of going to 20 cents, it would go to 10 

cents, which is a very substantial reduction, and we will try to do 

that. 

Mr. Wallison, on the insurance issue, an important one, you mentioned the problem with the regulated AIG entities, the insurance 

companies. Then the money went to an unregulated entity. And 

you said an optional Federal charter, and that would be very much 

on the agenda of this committee. There are members who have 

pushed for it. 

21 

But what would you do for those who opted not to opt? Would 

you give some Federal power—and you pointed out a problem here 

that, with AIG, you had regulated companies but an unregulated 

entity on the top. If you had an optional Federal charter and the 

entity became a Federal charter that could be federally regulated, 

what would you do for situations where the companies did not opt 

for Federal charter? Would you extend some Federal regulation at 

that top level? 

Mr. WALLISON. First of all, Mr. Chairman, AIG is regulated. It 

is regulated by OTS. It is a thrift holding company. Now, it might 

not have been effectively— 

The CHAIRMAN. Well, I thought you were calling—maybe I misunderstood your testimony. I thought you were calling for a change 

and saying that we should have an optional Federal charter that 

should improve regulation of insurance. I apologize if I misinterpreted that. 

Mr. WALLISON. I didn’t actually speak about an optional Federal 

charter. I happen to favor that, but I didn’t speak about it in this 

testimony. 

The CHAIRMAN. Oh, it is Mr. Ryan. I apologize. 

Mr. WALLISON. We look so much alike, I guess. 

The CHAIRMAN. From here, I apologize then. Let me ask that to 

Mr. Ryan. I am sorry, Mr. Wallison. 

Mr. RYAN. The direct answer is that if a company did not opt for 

a Federal charter, but it was systemically important or involved in 

systemically important activities, then under our proposal the regulator would have authority. 

The CHAIRMAN. So is that an option of—the Federal charter 

would be the Federal insurance regulator, but it would go up. 

Let me ask one other issue, and Mr. Silvers made an important 

point about the compensation. And I have one other question that 

I hear everybody talking about, and that is, it is my impression 

that part of the problem—Mr. Yingling mentioned the subprime 

loans—if enough bad decisions are made at the outset, it seems to 

me it is very hard to recover from that. The ability to securitize 100 

percent of the loans appears to me to be part of the problem. 

Should we explore some limitation on the ability to securitize? 

Should there be some risk-retention requirement in that area? 

Mr. Bartlett, let’s begin with you. 

Mr. BARTLETT. We concluded—and this is a reversal of our previous position—that there should be some risk retention. We think 

that is going to happen in Europe, and it is the prudent thing to 

do, risk retention of some type. 

The CHAIRMAN. Mr. Ryan. 

Mr. RYAN. We think it is practical that, at least here and in Europe, there will be some risk retention. So we are cozied up to that 

requirement. How much, we are still debating. 

The CHAIRMAN. I agree with both. How much, and is it first dollar or what percentage? Is it proportional? I mean, obviously saying 

that, but that begins an inquiry. Mr. Wallison. 

Mr. WALLISON. I think there is good reason to at least make sure 

that someone is bearing a risk at every level, but we also ought to, 

Mr. Chairman, begin to look at other methods of financing our 

mortgage system, covered bonds, for example. 

22 

The CHAIRMAN. I agree with that, and we will be getting to that, 

but I did want to give—and I appreciate that. Ms. Jorde. 

Ms. JORDE. I certainly can understand the philosophy of retaining risk. I think the one caveat would be how that would affect the 

community banking industry in terms of servicing. For example, we 

don’t have the mortgage departments geared up to handle servicing, so most of the banks of my size will sell their mortgages with 

servicing released. I guess it would be whether or not the economies of scale would be sufficient enough that community banks 

would be able to continue to participate in that market. 

The CHAIRMAN. Well, thank you. It is theoretically possible that 

you could still sell off the servicing but retain a small percentage 

of the risk? 

Ms. JORDE. Certainly. 

The CHAIRMAN. Mr. Plunkett. 

Mr. PLUNKETT. Yes. We would support additional risk-retention 

requirements for securitization. And Mr. Chairman, on the question of an optional Federal charter, it just seems like a valuable 

lesson of the current crisis. If we have learned anything, it is that 

giving the regulated party their choice of regulator will lead to 

downward pressure on bank quality. 

The CHAIRMAN. Thank you. I do want to get to Mr. Silvers. 

Mr. SILVERS. Yes, I think that risk—retaining some skin in the 

game is a good idea, but not just for the originator. I think there 

has been a lot of learning about how damaging it has been that 

servicers, say in mortgages, are disconnected from the economics of 

the mortgage. And I think— 

The CHAIRMAN. I appreciate it. The gentlewoman from California 

is here, and she, early on, focused on the problem in the servicer 

model, and over and above the risk retention, but in dealing with 

the whole question of mortgages, I believe we will—it seems to me 

it is a great mistake for the law to allow important decisions that 

have to be made but can’t be made; that they should not be in a 

situation where nobody is in charge of some important decisions. 

And we will approach that. 

Mr. Yingling, on the risk retention. 

Mr. YINGLING. I would agree with your analysis, and I know you 

are well aware there are some very thorny accounting issues that 

we have to work our way through, but it is something we definitely 

all ought to look at to see if we can’t make people have some skin 

in the game. 

The CHAIRMAN. I thank the witnesses. The gentleman from Alabama. 

Mr. BACHUS. Thank you, Mr. Chairman. 

Let me pick up on Mr. Yingling’s analogy of the systemic risk 

regulator sitting up on Mount Olympus, you know, surveying the 

scene, putting out the fires. And one of my problems is that we 

are—he wouldn’t put out all the fires. He would only put out the 

big fires, as I understand it. Is that correct? 

Mr. YINGLING. That is correct; and more importantly, identify the 

fires and then decide who puts out the fires. 

Mr. BACHUS. The little fires would be allowed to burn? 

Mr. YINGLING. To some degree; or the regulator on the smaller 

mountain would be in charge of that. 

23 

Mr. BACHUS. But to me, that is one of the really unfair aspects 

of too-big-to-fail. It implies—and I have said this since September— 

it implies too-small-to-save. And as we say in Alabama, this is just 

flat-out unfair, and we seem to be endorsing, with legislation, a 

regulatory approach like that. 

The other thing is that you have a regulatory agency sitting up 

there on Mount Olympus, and they are not only putting out fires, 

but they are also repairing the structures at taxpayer expense. I 

mean, they go in and they are doing it with taxpayer dollars. And 

is that wrong? Or should we—you know, I said in my opening 

statement, let’s try to agree on something going in, so that we don’t 

have these multibillion-dollar taxpayer bailouts. 

I ask all the panelists, what is your position on giving the regulator—and all we are basing that on right now is a Federal Reserve 

Act, some language in there, and—but let me just start with you, 

Mr. Bartlett. Do you think that we ought to empower this—the risk 

regulator to use billions of dollars’ worth of taxpayer money. 

Mr. BARTLETT. No, Congressman, I don’t; other than what we 

now have, which is no analysis of systemic risk, no oversight of systemic risk, no one to notice systemic risk and the unlimited Federal 

Reserve dollars. So none of the systemic risk regulator proposals 

propose any additional authority on the solution problem. 

What we have proposed is the Federal Reserve as a systemic risk 

oversight, but then followed by a coherent, comprehensive resolution authority to resolve the failures in a coherent, consistent manner that does not now exist. 

Mr. BACHUS. I would agree with that and advance a resolution, 

but I think we ought to put a provision in there that they don’t use 

taxpayer dollars. 

Another thing that I think—what do you think about advancing 

local lending more? In the past several years with the consolidation, we are getting further away from sort of Main Street lending. 

Is that a problem? 

Mr. BARTLETT. Congressman, I don’t see it that way. I think 

lending is up. I think that the lending from all sizes of banks, both 

largest and smallest, is actually up. Regions in Birmingham and 

Compass Bank in Birmingham have, in fact, increased their lending. Whitney has increased their lending. So it is not size that either causes more commercial lending or less. It is the capital underneath at the bank. So I don’t see it as a size issue. 

Mr. BACHUS. Of course, size is an issue when it comes to too-bigto-fail I guess. 

Mr. BARTLETT. We haven’t seen—we are not ones who agree with 

too-big-to-fail. 

Mr. BACHUS. Oh, okay. 

Mr. BARTLETT. Wachovia failed, WAMU failed, National City 

failed. The issue is whether we can identify and prevent the problems earlier and then whether the resolution can be done in an orderly way. 

Mr. BACHUS. And I am on board with all that. 

Although I have to agree with Mr. Wallison, and I preface that 

by saying, could this be an incentive to take even more risk? I 

mean, when you have a perception out there that you have a government agency that is going to make sure that an institution 

24 

doesn’t fail, as he said, you identify them as systematically important. You are implying that there is some sort of guarantee. Now, 

even if you don’t give it, we saw that in Fannie and Freddie as 

soon as they began to fail, we all said there was an implicit guarantee. 

Mr. Wallison, do you—is there any way—without just simply 

saying that we are not—that the government is not going to bail 

these companies out, I don’t see any way to avoid at least an implicit guarantee, which I think we have learned is a bad thing. 

Mr. WALLISON. I think you are correct, Mr. Bachus. The markets 

are very clear about this sort of thing. And where the government 

seems to be backing a company in some way and making sure that 

the company will not fail through government resources, then the 

market follows that lead, and they will make it easier for these 

companies to raise Funds, and at lower rates than others they compete with. So we will have a Fannie and Freddie situation to deal 

with in every market. 

Mr. BACHUS. I think the government can guarantee things, and 

that is Treasury bonds and debt obligations of the U.S. Government, and that is where it ought to end. And if people think they 

are investing in something the government is going to back, they 

ought to invest in government bonds or securities or instruments. 

Ms. JORDE. Congressman Bachus, to go back to your fire analogy, 

I think really what we are looking at is whether we need a big, 

huge, large fire department, and I don’t think that is what we are 

talking about here. I think we need to figure out ways to keep 

these fires from starting. 

You know, if you look at the national—at the systemic risk of 

some of these largest institutions and the national dependence on 

those, I would question whether or not the—on failure of AIG and 

Bear Stearns, you know, if they had been allowed to go down, what 

would the impact have been on Citicorp and Bank of America? I 

mean, I think that is really what we are talking about is the interconnectedness of these huge financial institutions that are too large 

and they can’t fail, and if they do, everything else goes down with 

them. So we have to keep the fires from starting. 

Mr. BACHUS. Sure, and that was his analogy. That was Mr. 

Yingling’s analogy. But I appreciate that, and I agree with you. 

I think that is the—but once they start, I don’t think the government ought to put them out at taxpayer expense unless we have 

guaranteed deposits, and that is where it ought to end. We ought 

to guarantee deposits. Whether that level is $250,000 or $500,000, 

it ought to end wherever that guarantee ends. 

Mr. KANJORSKI. [presiding] Thank you very much, Mr. Bachus. 

I will take my 5 minutes while we are waiting for the Chair to return. 

First of all, let me thank the panel for their testimony and for 

their unanimous support of having skin in the game. That really 

is a revolutionary concept that we would have seven members of 

panelists, diverse as this panel is, and everybody agreeing. It is 

time we do put skin in the game. I think it is very responsible for 

us to do that. 

Mr. Yingling, I think that you have made an observation to this 

committee on these issues that we have attempted to, as best as 

25 

possible, remove ourselves from the temptation of talking to political issues but, in fact, look at these questions in a much more bipartisan way and I hope that continues. 

And if it does, I would think that to a large extent we may be 

able to get some progress yet unappreciated by the general public. 

On that question, though, of systemic risk, I am still one of the 

slight doubters. It sounds to me that it is structured to be able to 

say, ‘‘so this shall never happen again,’’ and every time I hear that 

phrase, I shudder because we all know it is not going to happen 

in the same way. This is capitalism’s attempt to escape the confines of control and regulation that proved very healthy for 80 

years, until in the last decade the escape was there. And I think 

it has a lot to do with the unregulated banking system that allowed 

this leveraging to occur, allowed the situation to get out of hand 

to the extent that I think most of us saw this potential happening 

maybe 2005, 2006, that it was going to be clear something was 

going to happen that was not necessarily intended or desirable for 

the public. 

Now my question is, though, so that we do not run down this 

road very quickly to create a ‘‘systemic risk regulator,’’ have you all 

given deep thought as to what powers a systemic risk regulator 

would have to have and how deep could they go, and what could 

they inquire into, and that it would not necessarily be limited just 

to ‘‘financial institutions,’’ it would go into other institutions? 

Because as you all may recall, just several weeks ago, we had the 

auto industry in here testifying to the fact that they were going to 

be a systemic risk situation, because if any one of the three American auto manufacturers were to go down, it would bring the other 

two down because it constituted systemic risk insofar as they were 

coordinated and intertwined with their dealers and with their suppliers. And it has almost been a given up until this time that if one 

company goes down, all three American companies go down, and 

possibly even the entire industry. Even foreign manufacturers in 

the United States would be gravely if not totally disadvantaged by 

that occurrence. 

Now that being the case, and adding to that, that there is a financial structure that exists in the auto industry; that is, the arms 

of financing—Chrysler Financial and GMAC and Ford Financial— 

again, blend right into the fact—I don’t know, is this—would you 

all consider the automobile manufacturing companies just auto 

manufacturing, or are they financial institutions, or are they an 

ugly blend of the two that are very difficult to separate, if not impossible to separate? That is just a side question. 

But now, how far do you want us to go down this path of empowering a ‘‘systemic risk regulator’’ who would have to have tremendous information, almost clairvoyance, in terms of determining 

what the ambitions of certain people in the financial market were, 

to determine whether at some future event these actions that were 

contemplated would cause systemic risk? Anybody who wants to— 

Mr. SILVERS. Congressman, I think there are three ways of answering your question. 

First, if we are going to be serious about watching systemic risk 

across the financial system, in a realm where people innovate—and 

the people who do most of the innovating in this area are lawyers— 

26 

then you really do have to have a pretty sort of comprehensive writ 

of authority to look where you need to look. GE Capital is clearly 

an institution capable of generating systemic risk, although GE is 

a manufacturing enterprise. 

Secondly, though this is not sufficient, I think much of the problem here in terms of shadow markets comes from not giving routine regulators the ability to follow the action, and I think that it 

will be very difficult for some of the reasons you were alluding to, 

to capture the full range of market activity if the day-to-day regulators don’t have the kind of broad jurisdiction that they enjoyed 

in the post-New Deal era and that was taken away gradually over 

the last 20 years or so. 

But there is a trick here, and I am not sure what the answer to 

it is, but I think the committee ought to be well aware of it. It is 

one thing to give oversight and surveillance power; it is another 

thing to give the systemic risk regulator the ability to override 

judgments of day-to-day regulators, and particularly this is true in 

relation to investor and consumer protection. There is a natural 

and unavoidable tension between anyone charged with essentially 

the safety and soundness of financial institutions and agencies 

charged with transparency and investor protection and consumer 

protection. That tension has always been there. If you give a systemic risk regulator the authority to hide things, there is a real 

danger they will use it, and that will actually not—that will actually not protect us against systemic risk but, rather, do the opposite. 

Mr. KANJORSKI. Mr. Yingling. 

Mr. YINGLING. First, Congressman Kanjorski, I really want to 

thank you for your efforts last week in holding that a hearing on 

mark-to-market. It was so important. 

I think from our point of view, the systemic regulator has somewhat limited authority in the sense that they—that the regulator 

can broadly look and have information, but we don’t see that as the 

ultimate authority, the regulator of regulators. So that primarily it 

is an information gatherer, and has some ability to go in and say, 

okay, we have a problem, now let’s coordinate it. 

But one part of this equation that I think gets too little emphasis 

is the method for resolving systemic failures in the future. That is 

so important. If you look at the mess we are in today, a lot of it 

is because we did not have a good system for resolving—let’s take 

the big example, AIG. We had a system for resolving Wachovia and 

WAMU, and I think if we really focus our efforts on getting that 

resolution mechanism there in advance, it not only affects how you 

resolve institutions, it has ripple effects back on what it may mean 

or not mean to be too-big-to-fail. And so that resolution mechanism 

is very, very important in all of this. 

Mr. KANJORSKI. Very good point. Yes, Mr. Wallison? 

Mr. WALLISON. Thank you, Congressman. Your point about auto 

manufacturers, I think, suggests how plastic and unclear this 

whole idea of systemic risk really is. We all talk about it as though 

it is something that we understand. But it is highly theoretical, 

and we don’t really have an example yet of systemic risk being created by anything other than, as I said in my oral testimony, anyVerDate Nov 24 2008 17:53 Jul 28, 2009 Jkt 048867 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 K:\DOCS\48867.TXT TERRIE
27 

thing other than some kind of external factor affecting the entire 

market. 

The market—the financial system around the world, and especially in the United States—is seriously troubled now, but not because of the failure of any particular company; rather, because of 

all of the bad mortgages that were spread throughout the world. 

Regulation did not prevent that from happening. We had a very 

strong regulatory system in place. The banks were subject to it. 

FDICIA, which I think you would remember well from your service here at the time, was intended to be the end of all bad banking 

crises. It is a very strong law, and yet we now have the worst 

banking crisis of all time. 

So I think before Congress acts on the question of systemic risk, 

there ought to be some understanding of what we are really talking 

about. Because if an agency is empowered to regulate systemic 

risk—it could apply to auto manufacturers as well as anyone else— 

Congress is handing over a blank check to a government agency, 

and that would be a very bad precedent. 

Mr. KANJORSKI. Thanks. I know I am taking up a little extra 

time, but I think your answers are important for us to get. 

Mr. RYAN. I would like to make a comment that goes to the 

chairman’s question and your comment about the uniqueness of all 

of us having a view on retention, and put this in perspective. 

Securitization, as the chairman noted, is an essential ingredient 

in how we provide financing for consumers in this country. In 2007, 

about $2.8 trillion. We are now inching along at very little; the 

business is basically dormant. So when people are complaining 

about credit availability for consumers, a large part of that is because securitization is basically dormant. 

As you approach whatever you are going to be doing on 

securitization, I would urge you to think through not only the retention issue—and retention is very complicated, how much, by 

whom—and we all know what we are trying to achieve here, which 

is basically to incent people such that they are not originating or 

underwriting for assets. But when you look at retention, think 

more broadly. Think about transparency. Think about how these 

securities are structured, valuation. Think also about the credit 

rating agencies, because that is an integral part of fixing this situation. We need modification there. Thank you. 

Mr. KANJORSKI. Thank you. No one else? Oh, yes. 

Ms. JORDE. Thank you. I think one more thing that is important 

to consider when we look at systemic risk is that it is being exacerbated as we move toward more mixing of banking and commerce. 

We refer to the auto manufacturers, but the auto manufacturers 

are also making mortgage loans and financing their own vehicles. 

We talk about GE Capital and GE. You know, as we have moved 

towards more mixing of banking and commerce, certainly we are 

creating more systemic risk. It was what ruined the Japanese financial system back in the 1990’s, and it is something that we need 

to look very closely at as we move forward; close the IOC loophole 

and keep banking and commerce separate. 

Mr. KANJORSKI. Thank you very much. Mr. Royce, I am sorry I 

took the extra time. 

28 

Mr. ROYCE. Thank you, Mr. Chairman. I wanted to just start 

with the observation that it was Mr. Wallison who warned us many 

years ago about the systemic risk to the broader financial system. 

In 1992, we passed the GSE Act in Congress, and as a consequence 

of passing that Act, we set up goals, affordable housing goals, and 

when the Federal Reserve looked at the consequences of that, they 

began to see the same thing that Mr. Wallison saw, and they 

sought to get Congress involved in this because, as was observed, 

banks are regulated and so they can only leverage 10 to 1, right? 

But we were allowing Fannie Mae and Freddie Mac to leverage 

100 to 1 and to go into arbitrage, and the reason they were allowed 

to do that was because there was an attempt to have them meet 

these goals. Somebody had to buy those subprimes from Countrywide, and it was Fannie and Freddie that had the requirement in 

terms of the goals to buy these subprime loans and these faulty 

loans. 

In 2005, I brought an amendment to the Floor of the House of 

Representatives to regulate these GSEs or to allow the Fed and 

allow OFHEO, allow the regulator to regulate them for systemic 

risk, because the regulator had asked for this ability to regulate 

them for systemic risk to the wider financial system. And at that 

time that amendment was voted down. 

In the meantime, as you know, we also passed legislation here 

that allowed the government basically to bully the market, to bully 

the banks in terms of the types of loans that they would make, and 

to rig the system so that originally what was 20 percent down became 10 percent down, became 3 percent down, became 0 percent 

down, because we had to meet those goals for very-low-income and 

low-income affordable housing. 

Now, the reason I think it is important that Mr. Wallison be here 

is because through all of this debate, he and the Federal Reserve 

were the ones coming up here warning us that because of the 

power they had in the market they were crowding out the competition. They were becoming the majority holder of and purchasers of 

these mortgage-backed securities, securitization. They were the 

market. And as a consequence of the risks they were taking and 

the excessive leverage, we had a situation where it was helping to 

balloon the market and create a situation where once these standards had been lowered, 30 percent of the market participants were 

now flippers. In other words, we did it for a good cause, Congress 

did it for a good cause. We lowered these standards. We pushed affordable housing. But we forgot, or some of us forgot, that flippers 

would come in and take advantage of those new 3 percent down or 

0 percent down programs and would be able to eventually constitute 30 percent of the entire market, which is what happened 

come 2005, according to the Federal Reserve, 2006, 2007, and that 

further, of course, you know ballooned up this problem. 

Now, understanding the potential implications of labeling certain 

companies as systemically significant, as you explained in your testimony, Mr. Wallison, do you believe it is important to take steps 

in overhauling our regulatory structure because, you know, the previous Treasury Secretary issued this Blueprint for Regulatory Reform in March of last year, and in many respects, at least from my 

perspective, that would close systemic gaps in the system. It 

29 

merged duplicative regulatory bodies. It ended those who were redundant, who weren’t necessary anymore as a result of consolidating them, and central in that Treasury plan was that in many 

respects banks, security firms, insurance companies, actually represent a single financial services industry, not three separate industries, and ought to be regulated as such. And these firms are 

all competing with one another and, as long as this is true, it 

makes no sense to regulate them separately from the standpoint of 

Treasury. While the Treasury Blueprint was not perfect, I believe 

it was a step in the right direction. 

It is important this this Congress not talk about systemic risk 

regulation in a vacuum but, rather, consider the regulatory framework as a whole. So I would ask if you agree with this sentiment: 

Should Congress be looking at the broader structure that has been 

in place for 75 years when it debates systemic risk in looking at 

a way to give—well, anyway, let me ask your response, Mr. 

Wallison. 

Mr. WALLISON. Yes, I absolutely agree with that, Congressman 

Royce. I think it is exceedingly important that we understand what 

is happening in the financial services industry as a whole. Those 

companies, all the different industries, are competing among themselves. It makes no sense anymore to try to regulate them in separate silos. So the Treasury Blueprint was a very sensible way, I 

think, for Congress to begin to look at how the financial services 

industry would be regulated. And I certainly agree with everything 

you said. 

Mr. ROYCE. Thank you. I yield back. 

The CHAIRMAN. The gentlewoman from California is now recognized for 5 minutes. 

Ms. WATERS. Thank you very much, Mr. Chairman. I would like 

to thank all of our witnesses who have appeared here today. I am 

particularly pleased about the testimony of Ms. Terry Jorde, president and chief executive officer of CountryBank U.S.A., on behalf 

of the Independent Community Bankers of America. 

Let me just say, Ms. Jorde, that I heard your testimony about 

your bank. The only thing wrong with your bank is it sounds too 

much like Countrywide, and you ought to be worried about that because, despite all of the testimony about Fannie and Freddie, it 

was Countrywide who threatened Fannie, that if they didn’t take 

their products, that they would just kind of squeeze them out of the 

market. And of course, Countrywide was a nonbank that was unregulated by anybody. 

I am from California. I think we have at least repaired part of 

the problem where we require the licensing of all these brokers. 

Countrywide had only had one license, and it had anybody who 

could breathe to go out and initiate loans. And there is a lot of 

fraud that was involved in that, and I appreciate the testimony of 

all of those who understand that it is not simply a systemic regulator, someone who I think, as was indicated, sitting on the top of 

all of this that is going to make it work. 

We really do need consumer protection, and if we think we are 

going to get it from the same people who have been in the system, 

I don’t think so, not because they are evil people, they just don’t 

think that way. 

30 

All of our regulators think about how to notice the banks, how 

to warn the banks, how to talk with the banks but they never talk 

about how to stop them because of the way that they think they 

absolutely believe that you should let the marketplace work. All of 

those exotic products that were placed on the market, whether they 

were, Alt-A loans or adjustable rate, option loans, etc., as long as 

these kinds of products can be put on the market without any scrutiny, without any real interference by regulators, we are going to 

have a problem. 

The mailboxes of citizens are being swamped now with new products because of the foreclosure meltdown. Now, the insurance companies, many of them I guess owned by maybe some of these 

banks, I don’t know, are flooding the mailboxes with mortgage protection. What is it? How does it work? I don’t think the regulators 

have been here to talk about it. And out of this crisis that we have, 

now we have all of the loan modification companies that have 

sprang up, and all they need is $3,500 to start to work to help 

someone get a loan modification. No regulator has said a word 

about this. 

And so we sit here and, of course, we think that they know what 

they are doing, but I am afraid that if we have a systemic regulator 

they are going to come from Goldman Sachs; and it seems to me 

Goldman Sachs is everywhere. Not only was it our past Treasurer, 

it is our now present Treasurer. 

I understand that Edward Liddy over at AIG worked for Goldman Sachs, and we find that Goldman Sachs was kind of taken 

care of when they were brought in to snatch up Bear Stearns for 

pennies on the dollar. And then we find that now Goldman Sachs 

is taken care of, again, through AIG; and of course we took care 

of them in our TARP program with the capital purchase program, 

and I guess they are sitting on top of all of this. 

Am I to expect that this systemic regulator who will probably 

come out of the same market that caused this problem is going to 

cure all of this? We need a consumer protection agency to deal with 

all of this. Don’t forget, it was the activists and the consumers who 

went before every bank merger attempt and went to the hearings 

held by the Fed and everybody else, saying, ‘‘Don’t do that.’’ And 

they talked about the problems that would be caused. 

Now, I want to ask again the idea of the consumer protection 

agency that came from Labor, to please explain what you are. 

The CHAIRMAN. We will have time for a brief answer. 

Mr. SILVERS. The Congressional Oversight Panel recommended a 

consolidation of consumer protection and financial services, by 

which we meant financial services like mortgages, credit cards, 

commercial bank deposits, perhaps insurance; that those functions 

should not be with the same institutions charged with safety and 

soundness, because there is an inherent tension. And, Congresswoman, as you put it, the safety and soundness arguments always 

win out over the consumer protection arguments in those institutions. 

So we recommended in our report, the AFL–CIO supports that 

recommendation strongly. We see that function as distinct from the 

kind of work that is done with investments that are at risk by the 

SEC. We see those as two separate important functions. And by the 

31 

way, with respect to the Paulson Blueprint, though I have great respect for the former Secretary, that Blueprint clearly envisioned 

dismantling investor protection. It clearly envisioned, in the guise 

of reregulation, actually weakening regulation of our financial markets, and in that respect would be a terrible thing to follow. 

The CHAIRMAN. The gentleman from Texas, Mr. Hensarling. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

Just to set the record straight, if I heard my colleague, the 

gentlelady from California correctly, speaking that Countrywide 

was not regulated, that will come as news to both the OCC and the 

OTS who at different times during Countrywide’s existence regulated those institutions. 

Mr. Wallison, you have a lot of your written testimony that you 

were unable to speak about in your oral testimony. I thank you for 

being here. I thank you for your very thoughtful op-ed in the Wall 

Street Journal today. Certainly you bring a wealth of credibility to 

this panel as being one to have the clarity and call that Fannie and 

Freddie were presenting a huge amount of systemic risk to our 

economy. 

In your testimony, you say that the design of a systemic regulator could cause more Fannie and Freddies to take place in the future. Although I don’t remember the exact quote, our President, in 

his State of the Union address, said something along the lines of 

before we can correct our economy going forward, we have to understand how we got into this situation in the first place. That is 

a paraphrase. 

Can you speak exactly how significant was the role of creating 

a federally sanctioned duopoly in Fannie and Freddie, giving them 

affordable housing goals that ultimately brought down their lending standards? What role do you believe that played in the economic debacle we see today? 

Mr. WALLISON. I think that structure is largely responsible for 

the financial crisis that this country is experiencing. And that is 

because Fannie and Freddie essentially were a distortion of the 

credit system. 

Congress had a good idea, it seems to me, in intending to support 

homeownership in the United States. There are a lot of benefits 

that come from homeownership and it is a good idea to support it. 

But Congress chose to support it through Fannie and Freddie and 

CRA by distorting the credit system and asking private organizations—private profit-making organizations—to bear the cost and 

hide the cost in their balance sheets and in their income statements. 

And so we never really understood the risks that they were required to take in order to support this congressional objective. If 

Congress wants to accomplish something, it should accomplish it by 

appropriating funds so the taxpayers can understand what the objectives of this government are and what it is spending on those 

things, and not push all of those costs on to private sector balance 

sheets and income statements. 

Mr. HENSARLING. So in many respects, in retrospect, the market 

viewed Fannie and Freddie as systemically significant inasmuch as 

they had an implicit government guarantee which we all know now 

is explicit? 

32 

Mr. WALLISON. Yes. 

Mr. HENSARLING. Can you elaborate on your fear of having a systemic regulator designate other firms as—I will try to say that— 

as systemically significant, and how that might further exacerbate 

future Fannies and Freddies? 

Mr. WALLISON. It offers the opportunity to create an unlimited 

number of future Fannies and Freddies. The essence of Fannie Mae 

and Freddie Mac, the reason they became so powerful, so large, 

and ultimately were able to take so much in the way of risk, is that 

they were seen by the markets as backed by the government. And 

no matter what the government said about whether it was backing 

them, the markets were quite clear about this: The government 

was going to back them if they failed. 

Now, that is the kind of situation that we are creating when we 

are talking about systemically significant companies, because if we 

create such companies, if we have a regulator that is blessing them 

as systemically significant, we are saying they are too big to fail. 

If they fail, there will be some terrible systemic result. And therefore, the market will look at that and say, well, we are going to be 

taking much less risk if we lend to company ‘‘A’’ that is systemically significant rather than lending to company ‘‘B’’ that is not. 

Mr. HENSARLING. Mr. Wallison, you may have to have a very 

short answer to this question, as I see the yellow light is on, but 

the risk of making the Federal Reserve the systemic regulator, can 

you elaborate upon your thoughts? 

Mr. WALLISON. Well, the problem with that is it just adds credibility to what I just said: the market will believe that systemically 

significant companies are backed by the government. But if they 

are regulated by the Fed, the Fed has the money available already, 

without congressional by-your-leave, without any kind of further 

authority, to cover up any problems that occur in the regulation of 

these systemically significant companies by providing the funds 

under its existing authority to deal with special exigent circumstances of various kinds. 

So making the Fed the regulator would be the one thing that 

would cap the whole question of whether we are creating companies that are backed by the Federal Government. You would make 

it perfectly clear, without doubt. 

Mr. HENSARLING. Thank you. 

The CHAIRMAN. The gentlewoman from New York. 

Mrs. MCCARTHY. Thank you, Mr. Chairman. Since we are discussing a systemic risk regulator, it would be appropriate to see 

how systemic risk is being evaluated now by our government. And 

most recently, or very much in front of us today, is AIG which was 

saved because it was a systemic risk to the American economy. Yet 

when we saw the counterparties that were released this week because of the constant requests from this committee, we find out 

that a significant amount, billions and billions, tens of billions of 

dollars, went to foreign banks. 

Now I would like to ask the panelists, do you feel that bailing 

out foreign banks is important to systemic risk of the financial institutions of our country? I would think that bailing out foreign 

banks would be important to the governments of their country, but 

why is our government bailing out foreign banks? 

33 

And the reason I ask this is when we are talking in a general 

sense about systemic risk, we have an example before us in concrete terms of how it is being interpreted by our own government. 

I do not believe we should be bailing out foreign banks. I believe 

other governments should bail out their own banks. 

I would like to ask the panelists, do you feel that that is a proper 

use of taxpayers’ money, under the guidelines that it protects the 

systemic risk of the financial institutions of America? Do you believe we should be bailing out foreign banks? Are they a systemic 

risk to the American economy? 

Mr. WALLISON. Let me try to start on that, Congresswoman, and 

just say that if you were to bail out any U.S. bank of any size, you 

are going to be bailing out foreign banks, because banks are all 

interconnected. They make loans to one another. And that is, in 

fact, the essence of the financial system; banks and others are all 

intermediaries; they are moving money from one place to another. 

Mrs. MCCARTHY. So are you saying we should be bailing out all 

foreign banks because they are interconnected with our banks? 

Mr. WALLISON. I am saying the opposite. I am saying that if we 

were to create a systemic regulator—a systemic risk regulator that 

has the power to bail out U.S. banks, you would in effect always 

be bailing out foreign banks, because all banks, especially at the 

international level, are interconnected. 

Mrs. MCCARTHY. My question was not American banks, such as 

Citibank and JPMorgan Chase that are international banks. Obviously we have a huge stake in saving these financial institutions. 

My question is, should we be bailing out the Bank of Germany, 

which is owned by the German Government, or a French-owned 

bank, in their countries? So personally I don’t feel that is systemic 

risk to the American financial system. Maybe we could go down the 

line and people could give their opinions. To me, I don’t believe 

that, in my opinion, bailing out a French or a German bank poses 

systemic risk to the financial security, safety, and soundness of financial institutions. 

If anyone else would like to speak, Mr. Silvers, Mr. Plunkett, Mr. 

Ryan, Mr. Yingling, I would like to hear your opinion, too. 

Mr. SILVERS. I think your question raises a somewhat broader 

question, which is what do we mean when we say ‘‘saving?’’ If we 

mean by ‘‘saving’’ that we are going to make good on every obligation of a financial institution with taxpayer dollars and keep the 

stock of that institution alive, when left to its own devices it might 

have to file Chapter 11; if that is what we mean, we are always 

in every case talking about enormous expense and, frankly a transfer of wealth from the public at large to what are essentially 

wealthier parties within our society. 

Historically, and I think this goes to the comments of the panelists here, historically we have had a resolution process for financial 

institutions that where we were worried that there would be systemic or larger societal consequences if they did not make good on 

obligations. So we insured deposits and we have a resolution process for insured depository institutions. We have the same thing at 

the State level for insurance companies. 

When we move, as we did last fall, into a world in which we 

guarantee everything—and at AIG, we actually didn’t guarantee 

34 

everything. AIG is not the most extreme example of this. AIG, we 

just guaranteed all the fixed obligations. But when we move into 

a world where we guarantee everything, we inevitably end up guaranteeing institutions, such as perhaps foreign banks, but perhaps 

we might not be comfortable doing so if we had more of a resolution process. 

Perhaps on a resolution process, it would be possible to sit down 

with foreign governments who obviously have a stake in the same 

matter and work that out. But when you begin with the assumption that ‘‘rescuing’’ a financial institution means that everyone 

gets made good at taxpayer expense, then you have a problem. 

The CHAIRMAN. The gentleman from New Jersey. 

Mr. GARRETT. Thank you, Mr. Chairman. 

And I think that the bankers who sit on this panel are probably 

astonished and shocked at the opening of today’s hearing when you 

heard from the other side of the aisle—what did they say—we don’t 

regulate anything in this country anymore. You were probably 

wondering, who are those guys with green eye shades who call 

themselves examiners, who come into your banks every so often? 

Who are they if we are not regulating anything? But I digress. 

Mr. Silvers, on the line of deregulation and what have you, you 

did make a comment to one of the questions that we have deregulated, and in the last dozen or so years there has been a taking 

back of so many powers. 

Just very briefly, aside from Gramm-Leach-Bliley, which we 

know some people say is deregulation—other people argue it allowed for the diversification which is helping these big banks out 

there to stay afoot—can you just run down four or five of the major 

acts of Congress we passed in the last dozen years that you are referring to where we deregulated the financial situation in this 

country? 

Mr. SILVERS. Well, you certainly mentioned one which is GrammLeach-Bliley. The second was the Commodities Act—and I can’t recall the formal title—which deprived the CFDC of the ability to 

regulate financial futures—financial derivatives and other derivatives. A third was not Congress, at least Congress didn’t act formally. It was the court decision that took away from the SEC the 

ability to regulate hedge funds. Congress then failed to act in response to that. 

Fourth was—here is an instance where Congress acted responsibly but the regulators didn’t act, where Congress gave the Fed 

the ability to regulate mortgages comprehensively, and the Fed 

didn’t use it. 

The fifth is somewhat older, which is—and I think goes to the— 

Mr. GARRETT. Both of these are not taking away. This is not congressional action. And the action on the hedge funds, which I think 

was number three, hedge funds really aren’t in as much problems 

as all the other areas in the banking sector which have been continuously regulated. 

Mr. SILVERS. I don’t see it that way. 

Mr. GARRETT. The losses are certainly less. 

Mr. SILVERS. They are less because the taxpayers have propped 

them up. A key issue in Bear Stearns, for example, was the interweaving of Bear Stearns’ business with some large amount of 

35 

hedge fund money. No one really knew for sure how much because 

it wasn’t regulated. My point about deregulation is the responsibility doesn’t rest solely with Congress in this matter. The courts 

have contributed, the failure of agencies to act when they have 

been given powers have contributed. 

Mr. GARRETT. Okay. And I appreciate that. And it is on that last 

point on not acting is maybe where I will make my main point. 

Mr. Plunkett, I will just say on your point I was with you on 

most of what you were saying. And you are saying that we can do 

a lot of this, what we need to do, with the existing regulations and 

sharing the information. And I think I was following you, and I 

agree with you on a lot of those points. You lost me when you 

talked about solving it by regulating salaries or executive compensation. Up to that point, I was right with you. But I appreciate 

a lot of your testimony. 

Ms. Jorde, a quick question. The suggestion that was made here 

with regard to requiring the banks to hold a portion of it on their 

books on securitization. Wouldn’t that be actually problematic for 

some of your smaller banks who right now have to sell it all and 

that is how they are able to lend? Just very briefly, could that 

cause a little bit of a problem for some of the small banks? 

Ms. JORDE. And that was my point initially, is that to hold a part 

of it, then you are in effect servicing it. 

Mr. GARRETT. Not even the servicing it. As the chairman said, 

you might be able to get rid of that somehow. But even just the 

fact you have to hold it, your ability to loan might be constrained 

somewhat. 

Ms. JORDE. Well, certainly the more that you can sell off, it 

leaves your capital available for lending. But for the most part we 

are portfolio lenders. It is whether or not you can give the advantage to the borrower as far as 30-year fixed rate mortgages, how 

you price those things, so that a community bank doesn’t end up 

with asset liability issues. I think those are the things that would 

need to be worked out. 

Mr. GARRETT. I really appreciate that. And finally, Mr. Yingling, 

you always have to be careful when you bring in an analogy like 

that, because somebody is going to jump on it, about Mount Olympus. Who was on Mount Olympus was Zeus, And I came up with 

the acronym of ‘‘zero errors under supervision’’ that this person 

would have to be providing us with, that there be no errors anymore. 

But the problem is we have all these regulators and they haven’t 

been able to provide us with that lack of errors. As a matter of fact, 

in the Wall Street Journal we have this comment from Scott 

Polakoff, who is the Acting Director of the Office of Thrift Supervision, and he said it is a myth about AIG, about them not being 

regulated, that regulation was regulated by a collage of global bureaucrats and the Financial Products Division did not slip through 

the regulatory cracks. He goes on to say that the agency should 

have taken an entirely different approach in regulating the contracts written by their product. 

So, this goes back to Mr. Silvers’ comments, we have the regulators there, they were sitting up on high, they were working with 

the global folks, as Mr. Silvers also suggested that we need to do 

36 

on a global perspective, but still they couldn’t see it, and it is only 

in retrospect that they were able to look back now and say, ah, this 

is what we should have done. 

And I guess, Mr. Wallison, isn’t that the ultimate problem that 

we are going to get to, that even if you have all this in place, the 

regulators will always be saying after the fact that is what we 

should have done? 

The CHAIRMAN. Mr. Wallison, very quickly. We are over time. So 

if you want to respond, it has to be very quick. 

Mr. WALLISON. I will say yes, that is exactly correct. 

Mr. GARRETT. He said it was exactly correct, I think. 

The CHAIRMAN. Yes, but your microphone is off. 

Mr. WALLISON. We keep thinking that we have solved the problem, like with FDICIA. It is never going to happen again. But in 

fact, regulation is not an effective way of preventing risk-taking. 

The CHAIRMAN. Thank you. The gentlewoman from California 

asks unanimous consent to speak for 1 minute. 

Ms. WATERS. Thank you very much, Mr. Chairman. I asked for 

time so that I could make a correction and a clarification, that Bear 

Stearns was actually purchased by JPMorgan, and on Countrywide, yes, they were formally regulated but they didn’t do a very 

good job of it. 

The CHAIRMAN. The gentleman from North Carolina. 

Mr. WATT. Thank you, Mr. Chairman. If there is one thing I am 

learning pretty quickly about this whole subject area is this kind 

of discussion is important and don’t necessarily buy in to the first 

reaction that you usually have on these issues. 

Two examples I can give you right quick. I am not so sure that 

I am ready to jump onto the retention of risk, the skin in the game 

philosophy. Although it sounded very intriguing initially, it seems 

to me at some level there is a tradeoff between regulating so that 

people stay out of these risks and incentivizing people to stay out 

of it by requiring that they have skin in the game. And I would 

hate to think that we would get to the point where we cease to look 

at the regulatory side using as an excuse that you have a market 

incentive because we are requiring you to keep skin in the game. 

It also seems to me as you go on down the line if you are going 

to require the original lender to have skin in the game, you have 

to have the first securitizers and the second securitizers, and the 

impact of that would be to in some fashion reduce the amount of 

credit that is out there in the market. 

So I am not going to ask you to comment on that because I want 

to go to the second reaction that I initially got to, is that it might 

be a good idea to have the Fed be the systemic regulator, and I am 

beginning to have second thoughts about that, too. I don’t know 

how you have a systemic regulator who also has day-to-day regulatory authority without shielding that regulatory authority in 

some way or compromising it. I don’t know how you have a systemic regulator who does monetary policy without shielding monetary policy, insulating it from the systemic regulation function. I 

don’t know how you have a systemic regulator and have that regulator have responsibility for consumer protection without insulating 

it. And if you are going to insulate it to the extent that it seems 

to me it needs to be insulated, you basically have taken some deVerDate Nov 24 2008 17:53 Jul 28, 2009 Jkt 048867 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 K:\DOCS\48867.TXT TERRIE
37 

partment or part of the Fed if it is all inside the Fed and created 

a separate entity anyway. And I am not sure that it wouldn’t make 

more sense to actually go ahead and create a separate entity. 

Mr. Bartlett and Mr. Wallison, react to my concerns about the 

prospect that putting systemic regulation on the Fed would compromise in some way monetary policy responsibilities of the Fed 

and consumer protection responsibilities of the Fed. 

Mr. BARTLETT. Thank you, Congressman. And like you, our 

thinking has evolved on this over the course of 3 years, and specifically in the last 6 months. First, we do not propose to create additional day-to-day regulatory authority by the Fed. In fact, we would 

move— 

Mr. WATT. So you take some of the regulatory, day-to-day regulatory authority from the Fed and give it to somebody else? 

Mr. BARTLETT. That is right. We would not create additional regulatory authority. We would take some of it. And then second is 

that we would give— 

Mr. WATT. But you can’t take the monetary policy from the Fed? 

Mr. BARTLETT. That was the second point. We see monetary policy and systemic regulation as quite consistent because they are 

both engaged in trying to provide for an orderly economy, economic 

issues, and so they have very consistent goals. We don’t see that 

as inconsistent at all. 

Third, I take the point that we specifically reject the idea that 

there should be created a list of systemic companies or a list of 

firms or we reject a size criteria. We think 6 months ago we were 

in those same conversations, but I have to tell you after the same 

considerations with some of the same comments made by Mr. 

Wallison and others, the idea of creating a list of companies that 

are systemic is the wrong approach. Instead it should be those activities and practices that cross over lines that affect the entire financial sector. 

And then last is we think that if you give the power to regulators 

who have the safety and soundness power and then you give them 

the power and the authority and the mandate to act for consumer 

protection, you can profoundly provide a great deal more consumer 

protection than we are getting with a separate agency. 

The CHAIRMAN. Mr. Neugebauer. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. I think one of the 

things that I want to follow up on, I think some of my colleagues 

have made this point and I think it is in a more simplistic point 

of view, is you can talk about crime. And you have a crime problem 

in your city, and so the first inclination is we need to add more police officers. And many cities have tried that model. They added 

more police officers. But the bottom line is maybe crime statistics 

went down but you still had crime. While other cities have implored a system where they change the patrol patterns and other 

activities and basically got the same results. 

And Mr. Wallison, I tend to agree with you. I think what we 

have to be careful here is did we just have an oversight problem 

in some respects at the regulatory area, but we also just had quite 

honestly a corporate governance problem. We had people taking 

risk that there didn’t seem to be consequences for. And now what 

I am afraid of is that we are almost creating more systemic risk 

38 

in the patterns and activities that we are doing right now by showing that the government will step up and take away the consequences if the bill gets too big. 

And so I think I share the same concerns that once you—in fact 

I told Secretary Paulson this on a telephone conversation last fall. 

I said, Secretary Paulson, I don’t want to be a Triple A credit, I 

just want to be on your systemic risk list. Because what that allowed me to do is not to have to behave in any particular way because the marketplace knew right away if I was on the big boys 

list that I was going to be okay and it was all right to do business 

with me. 

I don’t want to recreate that scenario in this country where people say, you know, our whole business model here is we are trying 

to get on the systemic risk list. It needs to be a punitive list, if anything. 

But the question I have to the panel is, isn’t a part of the safety 

and soundness analysis that the current regulatory structure 

should be looking at as these entities get extremely large and get 

into extremely complex types of investment activities, shouldn’t 

that in fact trigger some additional capital requirements or leverage requirements that in fact begin to manage that company in a 

way that we don’t let it get to ‘‘systemic risk.’’ 

And I will start off with you, Steve. 

Mr. BARTLETT. A quick answer is, yes, it should. And we think 

that a systemic regulator then in working with and through the 

powers of a primary supervisor could accomplish exactly that. 

If I could take 30 seconds on crime, because when I was mayor 

of Dallas we faced something similar, and it is a great analogy. The 

City of Dallas had had an increase in the numbers of violent crimes 

every single month for 20 years, hadn’t missed one. And it tried everything they thought; incarceration. But it was more police on the 

beat and such as that. And then we tried systemic prevention. We 

identified the locations, times of day, times of week, and individuals who were engaged in crime and went out and talked with 

them and had a 42 percent reduction of violent crime within 2 

years. So a systemic approach to these problems can work. It 

worked in that case, to use your example, Congressman. 

Mr. NEUGEBAUER. Mr. Ryan. 

Mr. RYAN. As I have said before this committee before, we are 

in favor of a systemic risk regulator so that we have someone who 

has the capacity to look over the horizon. Right now regulators are 

restricted either by charter or geography. We need a regulator that 

has all of the information so that they can look at all of these interconnected entities, notwithstanding their charter, what activities or 

products. That does not exist today. 

Mr. NEUGEBAUER. Mr. Wallison. 

Mr. WALLISON. I think there is no reason why we couldn’t have 

some organization that looked over the entire economy and looked 

for questions like systemic difficulties. The question would be 

whether there is then any authority in that body to actually regulate, and that I think would raise some very serious questions. I 

think we ought to keep our eye on the ball in one respect, and that 

is that regulation is not a panacea. It does not cure problems. We 

have to regulate all those companies that are backed by the governVerDate Nov 24 2008 17:53 Jul 28, 2009 Jkt 048867 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 K:\DOCS\48867.TXT TERRIE
39 

ment. But when you are not backed by the government, you should 

be allowed to fail. It is one of the most important things we have 

in our economy that makes sure that the bad managements go out 

of business, the bad business models go out of business, and they 

are replaced by better managements and better business models. 

Mr. NEUGEBAUER. Failure may be the best regulator that there 

is? 

Mr. WALLISON. Exactly. 

The CHAIRMAN. The gentleman from California. 

Mr. SHERMAN. Thank you, Mr. Chairman. 

Mr. Bartlett, you have suggested in your opening statement principle-based standards, which tends to mean that we just have 

vague standards that say do the right thing, don’t take unnecessary risks, treat people fairly. And we rely on the conscience of the 

individuals to interpret those terms and apply them. Do you think 

that we can get away from explicit standards and rely on loudly 

proclaimed broad principles. And do you think that those who have 

been attracted to the financial services industry and Wall Street 

have evidenced recently a willingness to just do the right thing and 

act in the national interest? 

Mr. BARTLETT. Well, Congressman, I will review my testimony to 

make sure I didn’t say it that way. I didn’t call for vague standards. I called for principle-based regulation. So you establish the 

principles. Our first principle is treat your customers fairly. But 

then the regulations themselves are promulgated consistent with 

those principles. So you would still have regulation. 

Mr. SHERMAN. All regulations should reflect the values and principles of the country. So you are not suggesting that we shouldn’t 

also have numerical standards, detailed regulations, etc.? 

Mr. BARTLETT. I am suggesting that all regulations should reflect 

uniform standards, but they don’t because the Congress has not established uniform standards or uniform principles. I think that the 

principles should come from consideration by Congress and then 

the regulation should be developed to enforce those principles. 

Mr. SHERMAN. Okay. Let us move on to Mr. Silvers. 

Do you think that it makes sense to have the Fed simultaneously 

be the regulator who occasionally will make mistakes. And I know 

the chairman has pointed out that regulators try not to admit mistakes, none of us do, and also be the agency that can spend billions 

and trillions of dollars to rescue firms and in effect sweep the mistakes under the rug, delay the explosion, and maybe hope for the 

best. 

Mr. SILVERS. I think that we should have learned a lesson from 

the last year, which is that there are times and circumstances in 

which no matter whom is in political power that certain institutions to some degree, whether that is in a form of a restructuring 

or a conservancy or in the form of a flat out rescue of the kind that 

we have been offering recently, that some institutions are going to 

be rescued in certain circumstances. And that given that is the 

case, that Republicans and Democrats, conservatives and liberals, 

seem to do it, that given that that is the case, that we ought to 

have clear criteria for when to do it, that the people who make the 

decisions ought to be clearly publicly accountable and that these 

things ought to be set up in advance and not ad hoc. 

40 

Mr. SHERMAN. I couldn’t agree with you more on those things. 

Shouldn’t we have the same entity be the regulator and the ‘‘bailer 

outer?’’ 

Mr. SILVERS. And so consequently the Fed as it is currently 

structured does not meet those tests. Now, if it was structured to 

be a fully public agency, would it still be appropriate for it to be 

the regulator and the bailer outer? And my view, although I don’t 

think there is a perfect answer to this, is that there are some reasons to have the people who have to foot the bills have to think 

about what structures you want to have in place beforehand to ensure they don’t have to pay. In doing so one runs the risk, and I 

think, Congressman, you have pointed that out very clearly, that 

particularly if you have government structures that are essentially 

self-regulatory you run the risk of essentially a partnership developing between the failed institutions and the regulator to keep 

those institutions—to fully ensure and pay off everyone involved in 

those institutions at taxpayer expense and to ignore the fundamental lesson I think of the last year, which is that while some institutions may be systemically significant, not all layers of the capital structure of those institutions are. 

Mr. SHERMAN. Thank you. I am going to try to squeeze in one 

more question for Mr. Bartlett. 

A number of us are working on tax legislation designed to impose 

a surtax on excess executive compensation of those who bailed-out 

firms. Now, putting aside how we would define excess compensation, can you see a reason why we should allow executives to retain 

without paying any particular surtax compensation that you and I 

would agree is excessive. 

Mr. WATT. [presiding] I am afraid the gentleman’s time has expired. Go ahead and answer the question briefly, quickly, if you 

can. 

Mr. BARTLETT. No. 

Mr. WATT. I think that is a pretty quick answer. 

Mr. SHERMAN. I will take that as a maybe. 

Mr. WATT. If you want to follow-up, you can do so in writing. Mr. 

Castle is recognized. 

Mr. CASTLE. Thank you, Mr. Chairman. I will throw up two questions, and then I will just duck and let you try to deal with them. 

And I think Mr. Bartlett touched on this a little bit in his opening 

statement, maybe not too definitively. But it is a little bit off systemic risk regulation, but bank regulation in general. We have 

many entities, both at the Federal level and you have State entities 

too, who regulate different financial institutions in this country, depending on what they do. And my question is, do you believe that 

there should be some consolidation in that area? Should there be 

more of a reaching out in terms of some of the leverage type of circumstances that exist today in hedge funds, etc., in terms of what 

we are regulating, or are we okay in terms of our basic regulation? 

So that is one question I have. The other question is more pertinent perhaps to the hearing today. And that is the Federal Reserve 

in general. I mean, whenever we talk about systemic risk regulation, which I basically believe in, we talk about the Federal Reserve. But I worry about the Federal Reserve in that they have responsibilities in terms of some regulation now and they have other 

41 

responsibilities that relate to our economy in a great way. First of 

all, if you have wild objections to the Federal Reserve, I would like 

to hear that. And secondly, if you feel the Federal Reserve perhaps 

should give up certain powers if they were to take on a systemic 

risk regulation component, I would like to hear about that as well. 

So those are my two areas of concern. I open the floor to whomever is willing to step forward. 

Mr. BARTLETT. Congressman, let me take them one at a time. We 

do think that there should be some basic reformulation and convergence, that there should be a prudential supervisor that should supervise banks, insurance, and securities at the national level with 

uniform national standard. It should follow the ‘‘quack like a duck’’ 

theory. If it quacks like a duck, walks like a duck, and talks like 

a duck, then it is a duck, and should be regulated like a duck, the 

same with banks, insurance companies, or securities. And today we 

have a hodgepodge of chaotic hundreds of agencies that regulate 

the same kinds of activities in widely different ways. 

We found, and there is nothing perfect, we think that the Fed is 

the best equipped to be a systemic regulator, as we have described 

it, which is no list of—not a list of specific firms, but rather the 

systemic oversight. We think that is very consistent with their 

monetary policy, which is the strengthening and the stability of the 

economy. We do recommend that the regulation of State chartered 

banks be moved over to the bank regulator. And we have struggled 

with this. We do think that the bank holding company regulation 

should stay at the Fed. Probably the main reason for that is just 

they do it very well and we don’t see a reason to change it. 

And then last is the Federal Reserve has the breadth and the 

scope and the institutional knowledge of almost a century of understanding both the economy and the financial markets, and we don’t 

think that that can be duplicated or replicated in the space of half 

a dozen years perhaps. So we think we should use that to the government’s advantage. 

Mr. CASTLE. Mr. Yingling. 

Mr. YINGLING. Mr. Castle, I think as I listen to this panel and 

a lot of the concerns of the members, we have to define what systemic regulation means. And I think a lot of us are talking not 

about detailed in-depth regulation, we are talking about looking 

out and seeing where the problems are and then using the regulatory system as it exists to solve those problems and then 

supplementing the regulatory system where we have gaps. So that 

we would not get into all the problems of having some super, super 

regulator out there. That is not what we are talking about. 

Again, I think it is critical to look at that resolution process because that is going work backward and affect who is considered too 

big to fail. And I think I have heard everybody here say we 

shouldn’t have a list that identifies people as too big to fail. 

One thing I do think the Fed could give up is the holding company regulation of small banks. It really makes no sense to have 

the Fed regulate the holding company of a $100 million bank that 

is regulated by the FDIC, the State, or even the Comptroller. A lot 

of times they go in and that holding company is nothing more than 

a shell. So as they get the new authority I think they can give up 

the holding company authority over smaller institutions. 

42 

Mr. CASTLE. Thank you. 

Yes, sir, Mr. Wallison. 

Mr. WALLISON. Just two points that you made handled very 

quickly. The Fed would be a very poor choice as a systemic regulator if the purpose of systemic regulation is to identify and regulate individual companies. I think I hear that most people here do 

not favor that. But should that happen the Fed would be very bad 

from that perspective because it compounds the problem of making 

it look as though those companies have been chosen by the government not to fail and it has the financial resources that can actually 

bail them out. 

So depending on what the systemic regulator is chosen to do, the 

Fed could be a very bad regulator. 

The second point you have asked is do we have the right amount 

of regulation now, should we extend regulation beyond the banking 

industry. And my view is no. That regulation is appropriate and in 

fact necessary, essential, when companies are backed by the government because then there is no market discipline, there is moral 

hazard, etc. Where they are not backed by the government regulation tends to add moral hazard. And so what we ought to do is 

leave these companies alone and let them fail, because that is exactly the way we preserve good managements and we finance good 

managements and good business models, because they survive the 

tough periods. 

Mr. CASTLE. Thank you. I yield back, Mr. Chairman. 

The CHAIRMAN. The gentleman from New York, Mr. Meeks. 

Mr. MEEKS. Thank you, Mr. Chairman. 

And I want to thank all of you for testifying today. I think that 

your testimony lends to the fact that we really need to think this 

thing through. It has been very thought-provoking for me. 

And I think that everyone will probably agree to, at least, surely 

the way I look at it, that our regulatory system did work. We now 

have a problem because we have a new train running on old tracks. 

And so it worked for a period of time until now, and then that train 

ran off the track. 

And what we are talking about now, when we are talking about 

a systemic risk regulator or however we are doing it, to create new 

tracks for the train. I don’t want to get rid of the train, because 

capitalism ultimately evolves, and I think that we are evolving. But 

we need some type of regulation to make sure that the train 

doesn’t go off the track, which then causes damage to society in 

general. 

And so we have to figure out who do we need and what do we 

need. Whether it is someone in the Fed or whether it is an entirely 

new regulator, a systemic risk regulator, combining others. You 

know, I don’t know. That is why I find some of your testimony intriguing, and I want to consider to listen and learn and move forward. 

But, also, I think that—and I think that Mr. Silvers spoke on 

this a little bit, and of course Mr. Bartlett also—we are in this new 

world that we currently live in. It is global; it is indeed global. And 

the question that comes to my mind is, are there areas—unless we 

can fix our own system, you know, create these tracks for our own 

43 

train, will we be running right off the track again if we don’t have 

some kind of a global regulator? 

Because I keep hearing consistently how everything is now intertwined, they are all running into one another at some point. You 

are selling one thing to another bank. My colleague, Carolyn Maloney, was talking about banks across the ocean. And one of the answers was, well, when you help an American bank, you are helping 

a foreign bank, because they are all interrelated. 

Well, if that be the case, then isn’t there an urgent need for also 

talking either simultaneously or trying to figure out what a global 

regulator would be? Do you think that we need to have one? 

I guess I will direct that question initially to Mr. Silvers and 

then to Mr. Bartlett and then to Mr. Ryan. 

Mr. SILVERS. Congressman, I think it is a very good point. You 

know, Angela Merkel, the Chancellor of Germany, came to Hank 

Paulson in 2007 and suggested that perhaps we ought to have 

more regulation of hedge funds. The Bush Administration didn’t 

like that idea and thought that we didn’t need more transparency. 

And then they found themselves in the middle of the night thinking about what to do about Bear Stearns without the very transparency that they could have had when Angela Merkel brought it 

to them. 

We are now back facing the G20 meeting coming up where, once 

again, the proposition is going to be put on the table by Europeans, 

of all people, that we ought to be more serious about transparency 

and regulation of shadow markets on a routine basis. And we have 

the opportunity not to be the drag on that process but to lead. 

It is not necessary to lead to have a global regulator. A global 

regulator is a thing that may be far in the future, but it is necessary and quite possible to have coordinated action. And if we 

don’t have coordinated action, poor practices in other countries may 

leak into our markets, and we may be perceived as being the 

source of poor practices elsewhere, as we were, say, in Norway 

when our subprime loans blew up their municipal finance. 

That challenge is right in front of us, and we can lead. And it 

ought to be a priority of the Administration, and I am hopeful it 

will be, to do just that. 

Mr. MEEKS. Thank you. 

Mr. Bartlett, quickly. I want to have Mr. Bartlett, then Mr. 

Ryan. 

Mr. BARTLETT. Quickly, and then I think that Mr. Ryan might 

have something. 

I think that we shouldn’t have one global regulator, but we 

should harmonize our systems, for our benefit as well as the 

world’s. And, specifically, we should harmonize the accounting systems of IFRS and GAAP accounting. We have found that to be an 

increasingly problematic area. 

Mr. MEEKS. Mr. Ryan? 

Mr. RYAN. Yes, sir. Clearly, we have global financial institutions, 

we have global capital markets. We have been talking about 

securitization. We spent an awful lot of time in Brussels and 

around Europe, talking with regulators. This whole issue of retention is actually far afield, far ahead in Brussels. That market is totally globalized. 

44 

So we have already seen the effects of global regulation and impact on some of our markets. And, clearly, we are going to have to 

be in sync on a global basis. Whether that means one regulator, we 

have not really faced that issue yet. We are more concentrated on 

what happens here right now. 

The CHAIRMAN. The gentleman from Georgia. 

Mr. PRICE. Thank you, Mr. Chairman. 

I want to thank the panelists, as well, for their testimony today 

and their forbearance with the questions and the time. 

I think it is important to remember that our Nation has provided 

the greatest amount of freedom and opportunity and success for 

more people than any nation in the history of mankind. And I 

think it is incumbent upon us to appreciate that we haven’t done 

that by virtue of excessive regulation. It would seem that it would 

be important for us, as Members of Congress, to attempt to define 

what has allowed that success—if you define that as success—what 

has allowed that success to occur and attempt to embrace those 

fundamental principles. 

Everybody has talked about systemic risk, but I don’t know that 

we have a definition of it. Anybody care to give me a definition of 

systemic risk? 

Mr. BARTLETT. Dr. Price, I would share the one that we have 

come up with, and this is about our 18th draft: 

‘‘Systemic risk is an activity or a practice that crosses financial 

markets or financial services firms and which, if left unaddressed, 

would have a significant material and adverse effect on financial 

services firms, markets, or the U.S. economy.’’ 

Mr. PRICE. So somebody has to decide what has a significant adverse effect on—the rest of that sentence. 

Mr. BARTLETT. Yes. 

Mr. PRICE. That, you would suggest, ought to be the systemic 

regulator. 

Mr. BARTLETT. Yes, or market stability regulator, yes. 

Mr. PRICE. So somebody in the wonderful buildings around here 

will determine whether or not a financial institution ought to have 

explicit support of the Federal Government. Is that what you are 

saying? 

Mr. BARTLETT. No, Congressman. We are not calling for explicit 

or implicit support of the Federal Government. We are not calling 

for identification— 

Mr. PRICE. Excuse me, I only get 5 minutes. Tell me how that 

isn’t a consequence of that definition. 

Mr. BARTLETT. Because the outcome of identifying systemic risk 

is to go to the prudential supervisor and then supervise that firm 

in a different and a better way. That is the outcome. It is not to 

provide the implied bailout or the support. 

Mr. PRICE. Anybody disagree with that being the outcome? 

So we all agree that systemic risk institutions no longer get explicit government support. Is that correct? 

Mr. BARTLETT. Congressman, I guess what I am trying to say is 

that we don’t see the outcome of this as identifying systemically 

significant institutions. We see it as identifying systemic risk 

across those institutions so that a poorly underwritten mortgage is 

45 

not simply sold up to someone elsewhere where it is still a bad 

mortgage. 

Mr. PRICE. No, I understand that. But at some point there has 

to be a consequence for the decisionmakers here. We have determined, somebody has determined that there is an entity that is a 

systemic risk. So what ought to occur to that entity? It has to be 

something. 

Mr. PLUNKETT. If you keep the entity from becoming a systemic 

risk through the kind of regulation Mr. Bartlett is talking about, 

then you don’t have to face that problem. That is the prevention 

strategy. 

Ms. JORDE. Well, and I think you are exactly on track. We first 

have to design what systemic risk is. We have to figure out— 

Mr. PRICE. What is your definition? 

Ms. JORDE. What is my definition? Well, one is that the CEO 

doesn’t know what the right hand and the left hand is doing. If the 

organization is so large that the very people at the top and the 

board of directors has no control over the organization— 

Mr. PRICE. So you believe it is appropriate for the government 

to determine whether or not a CEO knows whether the right and 

left hand know what they are doing? 

Ms. JORDE. Well, I think it is important that the company is not 

so large that their failure will bring back everybody under the 

house of cards. That is what I am facing as a community banker. 

I am paying hundreds of thousands of dollars now for FDIC insurance premiums to cover the risks of the systemically largest institutions. 

And I think that, before we figure out who is going to be the regulator, we need to identify the criteria of what this regulator is 

going to do— 

Mr. PRICE. I would agree. And I think that is almost an impossibility. And I would suggest that community banks, independent 

community banks, might find themselves out in the cold; that the 

Federal Government may determine that all those big boys are systemically risky, systemically significant, community banks aren’t, 

and then, therefore, how are community banks going to compete. 

Mr. Wallison, I would appreciate it if you would just discuss that 

unequal or unlevel playing field when one defines something as 

systemically significant. 

Mr. WALLISON. That is the thing that bothers me more than anything else, and worries me. And that is just from what I have experienced with watching Fannie Mae and Freddie Mac. 

When the government chooses a winner, when the government 

chooses an institution that it is going to treat specially, different 

from any other institution, then the market looks at that and decides, quite practically, that I will be taking less risk if I make 

loans to such a company. And when that happens, those companies 

then become much tougher competitors for everybody else in the industry. 

The result will be a collapse of the very competitive financial system we have today and the consolidation of that system into a few 

very large companies that have been chosen by the government— 

whether they are banks, securities firms, insurance companies, 

hedge funds, or anything else. 

46 

Mr. PRICE. Thank you, Mr. Chairman. 

I think that is a concern that many of us share. Thank you. 

The CHAIRMAN. The gentleman from Kansas. 

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

And thanks to the witnesses for testifying. 

Like my constituents, I am angry at the recent news reports of 

AIG handing out bonuses, or what they call retention payments, totaling $165 million. And this happens after the Federal Government has committed $173 billion in taxpayers’ money to support 

AIG. 

As I understand it, these bonuses are going to employees of the 

same division that made hundreds of billions of dollars’ worth of 

very risky credit default swaps that fell apart and contributed to 

the financial meltdown. 

We also learned this week that Citi’s CEO, Mr. Pandit, who testified before this committee on February 11th, made $10.82 million 

in 2008. When responding to my questions of how much the eight 

CEOs of the big banks made, Mr. Pandit told this committee that 

he was to receive a salary of $1 million with no bonus in 2008, but 

that he was going to take his salary of just $1 per year and no 

bonus until the company returns to profitability. Mr. Pandit neglected to tell this committee that he received a sign-on and retention award in January 2008 that was valued at the time at over 

$34 million. 

Mr. Yingling, Mr. Ryan, and Mr. Bartlett, in the context of creating a systemic risk regulator, should that regulator review executive compensation practices and submit guidelines to ensure incentives are properly administered? What else, if anything, should this 

committee consider doing to address this concern? I would like to 

hear your thoughts on these. 

Mr. BARTLETT. Not with regard to Citi, but on the broad question, one of the items that I think a systemic risk regulator or 

other regulator could and are looking at are short-term compensation strategies that reward short-term revenue growth, as I said in 

my testimony, rather than long-term value to the company. I think 

boards of directors but also other regulators are looking at that, 

and I think we will see a lot more of that. 

I think that is the systemic risk, as opposed to the outrage over 

somebody is making more money than you think that they should. 

I think it is a systemic risk—there is a systemic risk question without regard to the politics. 

Mr. MOORE OF KANSAS. Very good. Thank you, Mr. Bartlett. 

Others? Yes, sir? 

Mr. RYAN. I see executive comp as a very complicated issue right 

now for you, for the public, for us, specifically for directors. The 

real responsibility on compensation lies with the directors, who 

have been placed in their job by shareholders and that is their job. 

Mr. MOORE OF KANSAS. Yes, sir? 

Mr. YINGLING. I would recommend to you a report by a group 

called the Institute for International Finance, which is the large financial institutions all around the world, including the United 

States. And they have a chapter on executive compensation. 

And the industry, I think, is committed to addressing these 

issues where compensation is just out of line, where the incentives 

47 

are wrong, and you need to have a longer-term perspective so that 

you don’t have incentives that you can get a lot of money for something that blows up 2 years later. 

And I think that is an issue that the industry believes needs to 

be addressed. And I would suspect that any regulatory agency is 

also going to want to have discussions with members of the industry on that topic. 

Mr. MOORE OF KANSAS. Any other witnesses care to comment? 

Mr. SILVERS. Congressman, this was the substantial part of my 

oral testimony earlier this morning. 

There are two directions in which I think Congress ought to look 

to a solution in this area. I am not sure what the solution is to people who mislead you, but I can tell you what I think the broader 

policy solutions are. 

Mr. MOORE OF KANSAS. Well, I will talk to you later about that. 

Mr. SILVERS. First, as was indicated, there is a responsibility 

with boards of directors here, but one that boards don’t carry out 

when they are dominated by the CEOs themselves. And there 

needs to be an effective way for long-term investors to influence 

who is on those boards. And that is the proxy access issue with the 

Securities and Exchange Commission. 

Secondly, with respect specifically to systemic risk and the issues 

of short-termism and asymmetry, which were identified by the representatives of the industry here, these are matters which, at specific large firms and across the industry as a whole, must be a subject for which the day-to-day safety and soundness regulator is 

aware of and monitors and which a systemic risk regulator monitors. 

I will finally say to you that there is no issue right now—and I 

am sure you know this as well as I—there is no issue right now 

which the general public, working people, or union members are 

more concerned about or are more outraged about. And statements 

that we can’t somehow get the money back just don’t cut it. 

Mr. MOORE OF KANSAS. Thank you, sir. 

Any other witness care to comment? 

I thank the witnesses for their testimony. 

And I yield back, Mr. Chairman. 

Mr. GREEN. [presiding] Mr. Campbell is now recognized for 5 

minutes. 

Mr. CAMPBELL. Thank you, Mr. Chairman. 

And thank you, panel. 

Everyone generally is supporting the idea of systemic regulators, 

as we discussed. And I would like to pursue something Mr. Kanjorski talked about and Dr. Price followed up on, which is, what 

does this regulator do? If an entity is deemed to be systemically 

significant and, thereby, either too big or too interconnected to fail, 

what do we do? 

Now, Mr. Bartlett suggested, I believe, that there should be regulation—that what the powers that this regulator should have would 

be regulation to keep it from getting too systemically important or 

too big to fail. If that is the case, then my question would be, who 

do you apply it to then? 

If, instead, we determine that some entity is too big or too interconnected to fail and is systemically important, do we regulate it, 

48 

or do we break it up? Do we look at this as an antitrust situation— 

and this would address some of your concerns, Mr. Wallison—do 

we look at this as an antitrust situation and say that there are two 

types of antitrusts now: There is monopolistic antitrust, which we 

have had in law for decades and decades; and now there is a new 

type of antitrust, a situation where an entity is so big and so interconnected that it can’t fail, which means that the government 

would have to support it, keep it from failing, which means that 

there is a moral hazard, some of which we are witnessing out there 

today. 

And I would welcome comments from any of the panel on those 

two alternatives that I see or a third one, if you see one. 

Mr. Silvers? 

Mr. SILVERS. The Congressional Oversight Panel, in looking at 

this, took the view that we ought definitely not to name systemically significant institutions. And what we ought to do instead is 

to have a regulatory structure that, essentially, as you get bigger, 

as an institution gets bigger, it becomes more expensive to be there 

in our financial system, because you would have to have higher levels of capital and more expensive, essentially, deposit insurance or 

perhaps other forms of insurance that effectively pay into a systemic risk fund. 

That approach would not be the approach of necessarily using 

legal action to break up firms, but it would be a potent disincentive, properly structured, for firms to grow to a level at which we 

then would have no choice but to rescue them, in which we would 

be faced with the Blazing Saddles problem, if you know what I 

mean. 

And that, I think, is the—that notion, in which becoming more 

likely to be a systemically significant institution is something that 

is painful, is, I think, the appropriate approach. 

And we ought to recognize, in this respect, that we don’t really 

know who is systemically significant until the moment hits; that in 

very good times very large institutions may not be, and in very bad 

times rather small institutions may be. 

Mr. PLUNKETT. There is a hearing this morning by a House Judiciary subcommittee on this very topic. We are testifying there. And 

while in extreme situations a consumer organization like mine 

might say, ‘‘Yes, break them up,’’ the more effective approach is 

what Mr. Silvers is talking about, which is to use prudential regulation, not antitrust regulation, to keep an entity from getting too 

big to have to deal with that problem. 

Mr. CAMPBELL. Mr. Bartlett? 

Mr. BARTLETT. Congressman, I suppose I understand why the 

discussion keeps, sort of, trending over towards identifying specific 

firms, but let me try to offer some clarity. That is not the goal. It 

is a set of practices and activities across the markets, it is the system that we should focus on. There is no—at least we don’t have 

a proposal to identify, ‘‘systemically significant firms.’’ That should 

not be done. It should not be size-mattered. It should be related to 

whether their system or the practices create systemic risk. 

Now, let me give you a real-life example of one that we just went 

through. Hundreds of thousands of mortgage brokers, not big companies but hundreds of thousands, had a practice of selling mortVerDate Nov 24 2008 17:53 Jul 28, 2009 Jkt 048867 PO 00000 Frm 00052 Fmt 6633 Sfmt 6633 K:\DOCS\48867.TXT TERRIE
49 

gage products not related to whether they were good mortgages or 

not, without the ability to repay. Thousands of lenders—42 percent 

were regulated banks; 58 percent were unregulated by anyone— 

had a practice of originating those loans, even though they were 

systemically a major risk, as it turned out, and then selling them 

to mortgage-backed securities on Wall Street, who then put them 

into pools, who then had them insured, that were regulated by 50 

State insurance commissioners. 

So the system itself was the systemic failure. It wasn’t any one 

of those firms. And so the goal here, I think, is to create a regulatory system that can identify those patterns or practices that 

then can result in a systemic collapse before it happens. 

Mr. CAMPBELL. Mr. Ryan and then Ms. Jorde? 

Mr. GREEN. We will hear the answer, and the gentleman’s time 

is expired. 

Mr. RYAN. Just as to the role, as we see the role here, it is really 

early and prompt warning, prompt corrective action. The systemic 

regulator needs a total picture of all of the interconnected risks. As 

I have said, this regulator needs to be empowered with information 

to look over the horizon. We do not do that job well as regulators 

right now. And it also needs the power to be the tiebreaker, because there are differences of opinion between primary regulators, 

and if there is a systemic issue, we need someone to make that determination. 

Just one last comment here. We were talking about failure of institutions. As Ed Yingling said, we already have a system set up 

for banks in this country under the FDIC. We had no such system 

for securities firms, we have no such system for large insurance 

companies, and we have no such system for other, what I would 

call, potentially systemically important entities. And we need to address that. 

Thank you. 

Mr. CAMPBELL. Mr. Chairman, can Ms. Jorde answer? 

Mr. GREEN. The time has expired. I am sorry. We will have to 

get the response in writing. The Chair wants us to move along. 

We will now recognize Mr. Scott for 5 minutes. 

Mr. SCOTT. Welcome. Let me ask you a couple of questions, if I 

may. 

If Congress ultimately chooses not to create a systemic regulator, 

what suggestions would each of you have for improving our current 

regulatory system? 

Mr. BARTLETT. Congressman, the fastest and the easiest one— 

well, one would be for the President’s working group to either obtain statutory authority, which they do not have, or exert greater 

executive authority to coordinate the regulation among the various 

regulators. 

And then secondly is just to provide some type of relief on procyclical accounting principles, fair value accounting, which we 

think is a major contributor to the problem right now. 

Mr. PLUNKETT. I would say empower prudential regulators to 

stop these problems before they start through better product-level 

regulation to prevent risk from being created, first and foremost. 

Ms. JORDE. And I would add to expand regulation to cover nonbank financial firms, which really have been largely outside the 

50 

banking regulatory system, even those subsidiaries of banks that 

were regulated from the banking side but not the non-bank side. 

Mr. SILVERS. Congressman, covering the shadow markets and 

giving full jurisdiction to the relevant regulators to regulate those 

activities, meaning to the extent that shadow markets are really 

credit-granting functions; the bank regulators, to the extent that 

they are really in the securities markets; the securities regulators. 

That is a critical thing to do here. 

And, secondly, to create a consumer protection agency so that we 

put an end to giving that function to agencies that don’t want to 

do it. 

Mr. WALLISON. Congressman, if I can respond, the idea of regulating additional parts of our economy is a simple idea but one that 

seems totally ineffective. The problem is that we have strong regulation already in the banking area. It has failed. And why it is 

that, when we confront a situation like this, the first reaction that 

so many people have is to extend a system that has failed is beyond me. This is something— 

Mr. PLUNKETT. Congressman, we have heard this several times 

today, we have heard that we have strong regulation. I just want 

to correct the record. When it comes to consumer products, we have 

extremely weak regulation— 

Mr. WALLISON. Yes. I am talking here not about consumer products— 

Mr. PLUNKETT. —and that creates systemic risk, and that is why 

we need an agency. 

Mr. GREEN. Excuse me, please. The gentleman, Mr. Wallison, is 

speaking, and we will have to ask, sir, that you withhold comments 

until you are requested to speak. 

You may continue. 

Mr. WALLISON. I was responding, really, to the question of safety 

and soundness regulation, not consumer products regulation. And 

on the question of safety and soundness regulation, banking regulation has failed completely. And so, we ought not to have a kneejerk reaction that says, ‘‘Well, we have a problem. Let’s regulate 

it.’’ We ought to step back and see what is wrong with the regulation, why it isn’t working. 

And one of the ideas that I think we ought to look at, at least, 

is the notion of making sure that we help the private sector to understand the risks that companies are undertaking. And one of the 

ways to do that is to assure that companies put out financial information that responds to what the needs of the private-sector lenders are. 

Now, one of the things that analysts can do is to supply the regulators with indicators or metrics of risk-taking, because that is the 

thing that has been causing most of the trouble. And if the private 

sector were to have that information, they could make much better 

decisions about where to make their— 

Mr. SCOTT. Okay. Mr. Wallison, I don’t want to interrupt you, 

but I only have a few more minutes. I did want to get two more 

in. 

Mr. Plunkett, I know you are itching to get into this fight, so 

please do. 

51 

Mr. PLUNKETT. Well, the only thing I would add is I have heard 

this now several times, and the flaw in the safety and soundness 

approach is that the quality of the product wasn’t evaluated. It 

turns out that, if you protect consumers, you will better protect 

safety and soundness, you will better protect the economy. 

So that is the flaw in looking at this very narrowly in terms of 

just what is traditionally defined as safety and soundness regulation. And that is why we need an agency that is focused solely on 

protecting consumers. 

Mr. SCOTT. Good point. 

Mr. Ryan? 

Mr. RYAN. I am going to take a very different tack. We have the 

Group of 30, chaired by Chairman Volcker; we have the Chair of 

the Fed, Mr. Bernanke; and we have the new Secretary of the 

Treasury; and we have a very unique situation here. We have most 

of the people sitting here who represent the industry asking for 

something which is really new regulation. That is a good sign that 

we need it. And I think we need it in a very timely fashion, sir. 

Thank you. 

Mr. SCOTT. Thank you very much. 

Thank you, Mr. Chairman. 

Mr. GREEN. Mr. Cleaver is now recognized for 5 minutes. 

Mr. CLEAVER. Thank you, Mr. Chairman. 

The European Union is presently considering establishing a systemic risk council, the E.U. Systemic Risk Council. And from all 

that I have been able to read, it appears as if that is going to be 

established. 

Do we find ourselves—this is for any of you—do we find ourselves in an awkward spot as a nation if we fail to connect in some 

kind of way with an international systemic risk operation? I mean, 

if Europe or maybe then there comes an Asian systemic risk council, what happens to us if we are over here in some kind of isolation? 

Yes, Mr. Timothy Ryan? 

Mr. RYAN. Thank you. That is what my mother calls me sometimes too, ‘‘Mr. Timothy.’’ 

We think that there is a need for strong global coordination. The 

college approach in Europe is principally a result of an inability of 

them to agree on one central entity to be the systemic risk regulator for the entire E.U. or E.C. 

So you have the, I would say, unique authority within the United 

States to set something up. It would be the first. If done correctly, 

it would add an awful lot of value. And part of its function would 

be to coordinate with other groups around the world, whether it is 

a college or a specific regulator. 

Mr. WALLISON. One of the reasons, Congressman, I think the 

United States is the engine of the world is that we are not subjecting our businesses to excessive regulation. It is clear that the 

E.U. wants more regulation; they can have it. And they can have 

systemic regulation, if they want it. But the effect of that is going 

to reduce economic growth within the E.U. The United States— 

Mr. CLEAVER. Why? I hear people say that all the time. 

52 

Mr. WALLISON. Because regulation imposes costs, it suppresses 

innovation, it reduces competition, all of the things which make our 

system work better. 

Mr. CLEAVER. All of the things you just declared, how do you 

know that? I mean, it suppresses creativity and all that—I mean, 

how? 

Mr. WALLISON. There have been lots of academic studies that 

have shown that costs are increased by regulation. And it should 

be clear that happens, because you have to respond to the regulator, you have to provide a lot of reports, you have to make sure 

that the regulator is approving what you are doing. All of these 

things add costs to businesses, which are ultimately imposed on 

consumers. 

Mr. CLEAVER. Mr. Silvers? 

Mr. SILVERS. I really appreciate that this is my friend Peter 

Wallison’s religion, but I think that the facts are that when we had 

well-regulated financial markets they channelled capital to productive activity, they were a reasonable portion of our economy and 

they were not overleveraged and we did not suffer from financial 

bubbles. And that describes the period from the New Deal until 

roughly 1980. 

And then we started deregulating, and the result was financial 

markets that grew to unsustainable size, excessive leverage in our 

economy, an inability to invest capital in long-term productive purposes, an inability to solve fundamental economic problems, and escalating financial bubbles. 

That is the history of our country. When we had thoughtful, proportionate financial regulation, it was good for our economy. 

Now we are in a position, pursuant to your question, where we 

have global financial markets and where a global financial regulatory floor is an absolute necessity if we are going to have a stable 

global economy. If we choose to be the drag on that process, it is 

not only going to impair our ability to have a well-functioning global financial system, it will damage the United States’s reputation 

in the world. 

This question is immediately before us. And I would submit to 

you that while systemic risk regulation is important here, underneath that are a series of substantive policy choices which will define whether or not we are serious about real reregulation of the 

shadow markets or not. And if we choose to be once again the defender of unregulated, irresponsible financial practices and institutions, that the world will not look kindly upon us for doing so, as 

they did not look kindly upon us for essentially bringing these 

practices to the fore in the first place. 

Mr. CLEAVER. Our children won’t either. Our children won’t look 

kindly on us. 

Ms. Jorde? 

Ms. JORDE. I think the point was made earlier that a vast majority of the taxpayer funds that went to AIG were used to make payments to foreign banks, and I don’t think anybody here really understands why. Is it because foreign banks have a big stake with 

our U.S. banks? We really don’t know. 

And I think that, at the end of the day, we need to get to the 

bottom of how interconnected is our entire economy, how much are 

53 

we dependent on those foreign banks, what stake do they have 

with us. 

Mr. GREEN. The gentleman’s time has expired. Mr. Ellison is recognized for 5 minutes. 

Mr. ELLISON. Let me thank the entire panel, but my first question is to Mr. Bartlett. 

Mr. Bartlett, particularly given that Goldman Sachs and Morgan 

Stanley are now holding companies, what are your thoughts on the 

recommendation of the G30 report on financial reform that strict 

capital and liquidity requirements be placed onproprietary trading 

activities? 

Mr. BARTLETT. I guess I am not familiar with that exact recommendation. I think the G30 report was, by and large—we don’t 

agree with all of it—was, by and large, a step in the right direction. 

Those two institutions became bank holding companies. As I understand, they have several years with their primary regulator to 

conform with all the capital requirements. It is clear that more capital is one of the trends in this, or less leverage. And that is one 

of the outcomes of becoming a bank holding company. 

Mr. ELLISON. Mr. Ryan, what are your views on this? 

Mr. RYAN. Excuse me? 

Mr. ELLISON. Do you have any reflections on this? 

Mr. RYAN. I do have views on this. I think this issue of rules applying to specific activities or products within bank holding companies or within systemically important institutions is within the domain of the existing regulator today, so the Fed has authority to 

deal with this, from a bank-holding-company standpoint. And, 

under our proposal, the systemic regulator, who we think is a more 

appropriate entity, with all of the information, should be making 

those determinations. 

Mr. ELLISON. Thank you. 

Mr. Wallison, you know that in 1999, I believe, legislation was 

passed in our Congress which exempted credit default swaps from 

regulation. Do you agree that it is the fact that these derivative instruments were not regulated that has created part of the financial 

crisis we find ourselves in today? 

Mr. WALLISON. No, I do not. 

Mr. ELLISON. Well, let me ask you this question then. Mortgage 

originators, who were largely unregulated—as you know, most of 

the mortgages, the what we call subprime, predatory mortgages 

were not originated by banks but by unregulated mortgage originators. Do you agree that they contributed significantly to the problem and were unregulated? Do you agree with that? 

Mr. WALLISON. Well, yes, I agree with the fact that unregulated 

mortgage originators did originate a lot of mortgages. But the reason they originated a lot of these mortgages is that they had a 

place to sell them, which was Fannie Mae and Freddie Mac. 

Mr. ELLISON. Well, do you agree that if they had certain requirements on, you know, continuing education, bonding, some standards of behavior, professional standards, that we may not be in this 

situation to the degree we are in it right now? 

Mr. WALLISON. I think that is entirely possible, but— 

Mr. ELLISON. Oh, so you agree with regulation at least in that 

way? 

54 

Mr. WALLISON. That is consumer product regulation, and, yes, I 

think that in many areas consumers need protection, and that 

might certainly be one of the areas. But the point is that all these 

things were originated because the money was available through 

Fannie Mae and Freddie Mac. 

Mr. ELLISON. Reclaiming my time, Mr. Silvers, are Fannie Mae 

and Freddie Mac responsible for this financial crisis we are in now? 

Mr. SILVERS. The way Fannie and Freddie were managed, particularly since 2003—and that date is very important—is a substantial contributing factor. 

However, the narrative that has been put forward by, essentially, 

people who have a, sort of, principled disagreement with regulation, that Fannie and Freddie are the primary cause of this problem, is completely and utterly wrong. And specifically, it is completely and utterly wrong because Fannie and Freddie functioned, 

for example, for 10 years, almost, following the strengthening of 

the Community Reinvestment Act without bringing on systemic crisis. 

They began to do what my friend Peter was talking about when 

deregulated mortgage markets began to encroach on their market 

share and in a context in which credit was available broadly without regard to risk because of policies of the Fed and the Bush Administration. And that began in 2003, and that is when you saw 

the explosion of subprime. 

Fannie and Freddie were participants in that conduct starting in 

2003. But their existence and the existence of GSEs, the existence 

of the Community Reinvestment Act are not primarily responsible 

for this crisis, and to assert so is to fundamentally distort the 

record. 

Mr. ELLISON. Mr. Bartlett, in returning back to you, in a speech 

that FDIC Chairwoman Bair made recently, she expressed serious 

concern about the implementation of Basel II internationally, and 

it might allow for reduction in regulatory capital requirements at 

the height of a global financial crisis. To address this concern—I 

think I am all done there, Mr. Chairman. 

Mr. GREEN. We will receive a quick answer to the question. Time 

is up. 

Mr. ELLISON. Okay. Can I finish the question? 

Mr. GREEN. Yes, sir. 

Mr. ELLISON. Okay. 

She advocated the application of a global leverage capital requirement, which we already have in the United States. 

Could you express your thoughts on those requirements for 

banks both in the United States and internationally? 

Mr. BARTLETT. I think both we and our regulators—our government in Basel II has taken a whole new look at Basel II to determine what to do with it going forward. I think the world has 

changed in the last 2 years. And so I think we are all just taking 

a brand-new look at it, including Sheila Bair. 

Mr. GREEN. The gentleman’s time has expired. Mr. Perlmutter is 

now recognized for 5 minutes. 

Mr. PERLMUTTER. Thank you, Mr. Chairman. And I would note 

for the record that different regulators, such as yourself now in the 

55 

chair, adhere to the 5-minute rule, whereas other regulators, some 

of the other Chairs didn’t quite adhere to the 5-minute rule. 

So I just want to say to the panel, many of you have been here 

before. The information you are providing today and the way you 

have been thinking about this, the way this has been evolving, 

really for all of us, over the course of the last year, year and a half, 

I think we are really developing a lot of agreements. 

And now, Mr. Wallison, as much as I want to debate you on a 

lot of things, I do agree with you on your point about regulation 

can add to cost and potentially the loss of innovation. But I don’t 

think that is the end of the question. Because, as we have been 

here and have had hearing after hearing on this subject, the banking system, the financial system, in my opinion, is a different animal that we have to look at in a different way. Because, as we relieved ourselves of regulations, whether it was Glass-Steagall or, 

you know, change mark-to-market or different kinds of things, people may have been able to make that last buck, but the bottom fell 

out, so that the taxpayers are paying a ton of money, because the 

system itself is so critical to how our economy runs and the world’s 

economy runs. I mean, we are obviously seeing how interconnected 

everything is. 

So I agree with you. That is why there has to be reasonable regulation. And the pendulum always swings to too much, and we have 

seen too little, in my humble opinion, and it is costing us a ton of 

money. 

So, having said that—and it may be that I am just going to give 

a statement and not ask questions. I generally ask questions, but 

I want to say—is it Ms. ‘‘Jorde?’’ 

I think you had—you made a couple of points that, in my opinion, are critical to this whole discussion. That is, you know, the 

product mix, what do banks—what is their trade, what is their 

business, and has there been too much commerce and banking together so that we have products that get outside of a banking regulator’s expertise, and then also the size of the institution. 

And Congressman Bartlett and I have had this conversation, 

about the size of the institution. In my opinion, things can get too 

big. But within the system—so I think we have to look at the product mix. The regulator has to look at the product mix, has to look 

at the size of the institutions, because they can get too big and outstrip whatever insurance we put out there. 

And then there is, sort of, the systemic peace of this, which is 

the group think, Mr. Plunkett, you talked about, where in Colorado 

in the 1980’s, the savings and loans were not that big, but they all 

started thinking the same way, they all started doing the same 

things, and a lot of them got themselves in trouble. Now, if we had 

had mark-to-market back then, we would have lost every bank in 

Colorado. Thank goodness we still had at least half of them. So Mr. 

Yingling’s dead on the mark on the mark-to-market stuff. 

Mr. Silvers, your points about the stock options and that you can 

go for the gusto because you have no downside, I really hadn’t 

added that to the whole mix of this. And when it comes to financial 

institutions, we may have to look at that piece. I think that we do 

need a super-regulator because there are too many gaps within the 

system. So whether it is, you know, on top of Mount Olympus, Mr. 

56 

Yingling, as you have described, or something, there are too many 

gaps within the system. We need to have somebody looking at this 

as a whole. 

And so all of you have brought a lot of information to us in a 

very cogent fashion, and I appreciate it. I mean, this is what it is 

going to take for us to develop this. 

Yes, Mr. Ryan? 

Mr. RYAN. I would just like to comment on this issue of too large 

financial institutions. 

Mr. PERLMUTTER. Go for it. 

Mr. RYAN. Because I spent a lot of time before this committee 

when I was a regulator of the OTS and a director of the RTC. And 

we have large financial institutions for a lot of different reasons. 

We have them because of consolidation, some of it voluntary, some 

of it not. Some of our largest institutions are really large because 

we had to resolve small banks, and the small banks became part 

of, like, a Bank of America. Think of it back to NCNB. 

The idea that we should not have large financial institutions will 

cut into productivity. It will cut into technology. It will make up 

us— 

Mr. PERLMUTTER. I understand that. And I agree with you. And 

I think Mr. Wallison is on the same—it is the same point, just a 

little different. It will cut into it. It will make it more inefficient. 

But, on the other hand, smaller institutions will compete with one 

another, and it won’t be so hard for the regulator to figure out everything that is going on within the institution. Even if you had 

to resolve them all together, at some point, you know, they are too 

big, in my humble opinion. 

But thank you. I appreciate it. 

Mr. GREEN. The gentleman’s time has expired. 

Mr. PERLMUTTER. Yes, sir. Thank you, Mr. Chairman. I am glad 

you are keeping watch on the clock. 

Mr. GREEN. We will now recognize Mr. Grayson for 5 minutes. 

Mr. GRAYSON. Thank you, Mr. Chairman. 

Gentlemen, if you were interested in increasing lending at a time 

when the general perception is that credit is in short supply and 

that we need to expand credit in order to keep the economy afloat, 

and you had a choice, and that choice was between bailing out 

huge institutions that have proven that they were not good at allocating credit by the fact that they lost billions upon billions of dollars versus providing additional credit or even relaxing reserve requirements for healthy institutions that had shown they could take 

that money and make a profit with it, which would you choose? 

Mr. Silvers? 

Mr. SILVERS. Well, you know, one of my observations from being 

on the Oversight Panel for TARP, which I think is, sort of, what 

you are getting at, is that what is a healthy institution can be a 

puzzling thing. Every recipient, with the exception of AIG, of TARP 

money has in some respect been designated a healthy institution 

by the United States Government. So perhaps your question is, 

well, we are just giving money to healthy institutions already. I am 

not sure that is a very plausible statement, but it is, more or less, 

what the record shows. 

57 

The question of increasing lending, I think, is complex. There is 

no question that there is a need for more credit in our economy 

right now. On the other hand, the levels of leverage we had in our 

economy during the last bubble are not ones we ought to aspire to 

returning to or sustaining. Getting that balance right is extremely 

important. 

And, furthermore, it is also the case, I believe, that allowing 

very, very large institutions to come apart in a chaotic fashion 

would be very harmful to our economy. 

The punch line is I think that we have not learned enough about 

to what extent TARP’s expenditures have produced the increased 

supply of credit that your question indicates and to what extent 

that is because of, I think as you put it, the fact that a majority 

of that money has gone to a group of very large institutions. Those 

are questions that I know the Oversight Panel is interested in and 

questions that I am very interested in. I can’t tell you what I believe the answer to them to be today. 

Mr. GRAYSON. Ms. Jorde, should we be helping healthy institutions help us, or should we be bailing out institutions that have a 

history of failure? 

Ms. JORDE. Well, we should be helping healthy institutions help 

us, certainly. I don’t anybody is advocating that we allow large institutions to come apart chaotically. 

I think that, certainly, if we start to work toward making these 

institutions smaller—I am not saying we are going to have 100,000 

community banks with less than $50 million in assets, but we can 

certainly make these institutions of such size that capital will come 

back into them from the sidelines. 

I don’t think that investors out there are very anxious to be investing in these systematically risky institutions. And I think, 

going forward, we can have a lot of lending start up again if we 

plan this right. 

Mr. GRAYSON. Mr. Plunkett, if our goal is simply to extend credit 

and give people the credit that they are used to getting and the 

credit that they need and to keep the economy as a whole afloat, 

is it more effective to help healthy institutions expand their lending or is it more effective to give money to failed banks and see 

that that money goes directly to having them meet their alreadyoverwhelming credit needs internally? 

Mr. PLUNKETT. Well, I am going to talk about one aspect of this 

issue that hasn’t been addressed: the need to assure that attempts 

to spur credit availability, whether through larger institutions or 

smaller institutions, are offered on a sustainable basis. The TARP 

program, the TALF program—we are concerned, particularly with 

the TALF program, that it may end up subsidizing, for instance, 

credit card loans with terms and conditions that are not sustainable for consumers. 

So I think that is an important aspect to the issue that we 

should think about. 

Mr. GRAYSON. I am wondering if there is any way to meet systemic risk threats that does not involve transferring hundreds of 

billions of dollars from the taxpayers to failed banks. 

Mr. Ryan? 

58 

Mr. RYAN. Do you mind if I answer the question that you posed 

to everybody else just for a second, then I will answer this question? 

Mr. GRAYSON. Sure, that is fine. 

Mr. RYAN. The key to credit availability for consumers right now 

is securitization. That market is dormant. That market provided 

over half of the funding for consumers. And if there is anything we 

could do right now to move that market back to its vibrancy, that 

would directly impact consumers. 

And I think the government could do something. I think they 

should have used TARP for its original purpose. I think they 

should have purchased troubled assets, most of which would have 

been mortgages. They could have also restructured those mortgages 

and resecuritized them, which would have jump-started this system. 

Mr. GRAYSON. Well, fine, but I still would like, with the chairman’s indulgence, an answer to my question. 

Mr. GREEN. Mr. Grayson, sir, the time has expired. We will have 

to receive that response in writing. 

Mr. RYAN. And I will do that for you. 

Mr. GREEN. We will now recognize Mr. Himes for 5 minutes. 

Mr. HIMES. Thank you. 

And, to the panel, thank you and congratulations. Unless my colleagues from Michigan and New York show up, you are done in 4 

minutes. 

I have a small question and a large question. The small question 

is for Mr. Wallison. 

Mr. Wallison, I have heard you say on a number of occasions 

today, ‘‘Let them fail.’’ I wonder, knowing what you know about the 

millions of contracts, insurance contracts, written by AIG, and, of 

course, now that we know who the counterparties were to many of 

their CDSs, would you have applied that advice? Would you have 

simply let AIG fail? 

Mr. WALLISON. Yes. I think the Fed panicked on AIG. They 

should have let it fail. They panicked because, right after Lehman 

Brothers failed, the market froze, and the Fed thought, at that 

point, that they had to step in and stop a further disintegration of 

the market by covering AIG. 

The facts are not very well-known—but some substantial portion 

of what AIG was committed to were credit default swaps. Others 

were other kinds of obligations. Most of the newspaper commentary 

and media commentary has been about the credit default swaps. 

Now, when an insurance company fails and your house is insured 

by that company, what you have to do is go out and get another 

insurance company. You haven’t suffered any loss yet until you 

have that fire or that burglary or whatever it is. So if AIG had 

failed, the people who were protected by the credit default swaps, 

the companies that were so protected would have had to have gone 

out and gotten other credit default swaps if they still thought they 

were at risk on particular obligations. So that would not have 

caused any serious problem. 

Mr. HIMES. Thank you. And let me reclaim my time because I 

actually have a larger question. I appreciate that explanation. 

59 

My larger question is, with the exception of Mr. Wallison, there 

is some consensus that we will form and should form a systemic 

regulator. I get really interested in the question of, how do we 

make sure that that systemic regulator has the flexibility, the ability to range over the financial landscape, the ability to adapt to 

what we know is a very rapidly evolving industry? 

What attributes, what characteristics, what incentives could we 

put into the systemic regulator to get it to act in a way that regulators don’t typically act, which is entrepreneurial? 

Given the limited time, I would ask if we have time to hear from 

Mr. Bartlett, Mr. Ryan, and Mr. Yingling very briefly on that question. 

Mr. BARTLETT. Congressman, I think you give it a broad mandate, and you make the mandate systemic and not individual firms. 

I think placing this mandate of a market stability regulator at 

the Fed is important, because the Fed has that breadth of institutional knowledge. They count the shipment of—or the ordering of 

corrugated containers. So this would be consistent with the breadth 

that they look at the economy. 

I think those two things: broad mandate and then putting it at 

an institution that is big enough. 

Mr. RYAN. Our view is that one of the most important things for 

this systemic regulator—and you have heard me say this before— 

is the ability to see over the horizon, which means information. 

They need information about all interconnected and important systemic institutions so that we can help the system and help the citizens avoid this type of problem in the future. 

And I don’t think this is a cure-all for everything, but it certainly 

would give us something that does not now exist anyplace in the 

world. And I think we need it now. 

Mr. YINGLING. I think your question is very, very important, because, as you are pointing out, there is a tendency in regulatory 

agencies to fight the previous war. 

We talk about the Fed being the systemic regulator. There is another option, and that is you have a council that is headed by the 

Fed. And whether you use that model or the Fed, I think this 

needs to be a different group. It needs to be a smaller group. It 

needs to be people that are not there to fill out forms or read forms 

or read reports. It has to be people who are looking out and looking 

at statistics and going out and talking to people. And a prime example is somebody that would look at the growth in subprime 

mortgages and the 3/27s and 2/28s and look at that chart and say, 

that is a big fire. 

And so, whether it is in the Fed or within a committee headed 

by the Fed, it ought to be a group that has that role. They don’t 

have a regulatory day-to-day role. Their role is to be entrepreneurial, as you are saying. 

Mr. HIMES. Thank you. 

I yield back. 

Mr. GREEN. The gentleman yields back his time. I will now recognize myself for 5 minutes. 

And, in so doing, let me thank all of the witnesses for appearing 

today. I think your testimony has been most valuable and will 

surely help us to come to some conclusions. 

60 

Let’s not talk about a systemic regulator for just a moment, and 

simply talk about systemic risk, because I think there has been 

some confusion that has developed. I think Mr. Bartlett, for example, has talked about a methodology by which we can ascertain 

whether or not systemic risk exists. 

And, Mr. Bartlett, I think you have been a little bit misunderstood. Now, that may have been by accident, or it may have been 

by design. But you have been a little bit misunderstood, because 

some have tried to attribute to your comments the notion that, 

once you do this, you are somehow going to bail out an entity or 

you are going to spend government money. 

I don’t think that is what you are saying. Is it at all what you 

are saying, sir? 

Mr. BARTLETT. We Texans listen to each other very carefully, Mr. 

Green. No, you have it exactly right. I said exactly the opposite, 

that it is identifying the risk so you can avoid the consequences 

that we are suffering today. 

Mr. GREEN. And, Mr. Yingling, I think that you, too, have been 

a proponent of risk identification. Without simply saying, ‘‘This entity is the entity that poses a risk,’’ you, too, have talked about risk 

identification. 

I think, Mr. Silvers, that seems to be your position, as well, risk 

identification. 

Is this correct, as it relates to the two of you? If you have a difference of opinion, kindly extend your hand. 

Okay. So, now, given that we have talked about risk identification, let me just ask this: If we do see that a systemic risk exists, 

is there a belief that we ought to take some action, that we ought 

to take some action? My suspicion is that most would say yes. 

But I am going to move now to Mr.—and the camera is in my 

way—Mr. Wallison, is that correct? 

Mr. WALLISON. Yes. 

Mr. GREEN. Mr. Wallison, I seem to have concluded that you, 

after having identified systemic risk, may not want to take systemic action. 

Mr. WALLISON. No. On the contrary, I don’t believe that it is possible to identify systemic risk. 

Mr. GREEN. You don’t think that it is possible to identify it? 

Mr. WALLISON. No, I don’t. 

Mr. GREEN. With AIG—well, let’s go back to the GSEs. I got the 

impression that you were the person who came forward, and, while 

not using this specific terminology, ‘‘systemic risk,’’ you identified 

them as entities that might provide some risk, significant risk, or 

considerable risk. Is that true? 

Mr. WALLISON. I thought they could, in fact, create systemic risk, 

of course. 

Mr. GREEN. All right. 

Mr. WALLISON. Because they were backed by the government. 

Mr. GREEN. Let’s pursue this. If you conclude that an entity can 

cause systemic risk, as you came forward with your clarion call, 

then do you not want to see some action taken to prevent that 

cause from moving forward, from becoming the cause of the systemic risk? 

Mr. WALLISON. Yes. 

61 

Mr. GREEN. All right. Well, if you conclude that you want—as 

you did; you came forward. You, in fact, were sort of a systemic analyzer, if you will. You performed a systemic analysis, in a sense. 

Do you agree? 

Mr. WALLISON. Yes. 

Mr. GREEN. Okay. If you conclude that you want to do something 

about the GSEs, if they may be the cause of systemic risk, can you 

not conclude that AIG may have been the cause of systemic risk, 

as well? 

Mr. WALLISON. Yes, it is entirely possible that AIG could have 

been a cause of systemic risk. 

Mr. GREEN. All right. And if you realize that AIG is a cause of 

or may be a cause of systemic risk, would you not want to prevent 

AIG from being a systemic risk, creating a systemic risk? 

Mr. WALLISON. If we were sure that any entity is a cause of systemic risk large enough to have an effect, theoretically, on the rest 

of the economy, yes, of course, we should do it. But the downside 

of that— 

Mr. GREEN. All right. You are— 

Mr. WALLISON. Congressman, the downside of that— 

Mr. GREEN. Excuse me, please. I am reclaiming my time. 

Mr. WALLISON. Okay. 

Mr. GREEN. You are with us, then, because that is what I think 

most people are saying today. If we identify an institution that may 

pose systemic risk, then we ought to do something about it. 

Which, by the way, is what the taxpayers are saying, too. We all 

have our opinions, but the taxpayers will probably have the last 

word. And they want to see institutions, for whatever reasons, that 

are identified as systemic risks, they want to see us to do something about that. That is what this is all about. 

Mr. WALLISON. Yes, I understand. This is your problem. Congress— 

Mr. GREEN. I agree. And because it is my problem— 

Mr. WALLISON. Congress is required to act. 

Mr. GREEN. Hold on, because you have just said something that 

is exceedingly important. It is my problem. 

Mr. WALLISON. Yes. 

Mr. GREEN. And because it is my problem, I cannot allow the 

foxes that have allowed the raid on the henhouse to prevent me 

from securing the henhouse. It is time for us to secure the henhouse. 

Now, this is not directed at you, sir, but those foxes that allowed 

the raid on the henhouse, they will have a voice. But what I have 

to do, because it is my problem, is not allow those voices to prevent 

us from securing the henhouse. 

Sorry I had to go back to my bucolic and rustic roots, but I 

thought it appropriate to make that— 

Mr. WALLISON. I think you ought to be aware of unintended consequences that— 

Mr. GREEN. And I will be, but I will have to do it and voice it 

at another time, because my time has expired. 

And, recognizing that my time has expired, I now have to indicate that some members may have additional questions for these 

witnesses that they wish to submit in writing. And, without objecVerDate Nov 24 2008 17:53 Jul 28, 2009 Jkt 048867 PO 00000 Frm 00065 Fmt 6633 Sfmt 6633 K:\DOCS\48867.TXT TERRIE
62 

tion, the hearing record will be held open for 30 days so that members may submit written questions to these witnesses and place 

their responses in the record. 

I thank all of you for coming. Your commentary has been invaluable. 

The hearing is adjourned. 

[Whereupon, at 1:26 p.m., the hearing was adjourned.] 

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