S. HRG. 111–197 

HEARING WITH HERBERT M. ALLISON, JR., 

ASSISTANT SECRETARY OF THE TREASURY 

FOR FINANCIAL STABILITY 

HEARING 

BEFORE THE

CONGRESSIONAL OVERSIGHT PANEL 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

OCTOBER 22, 2009 

Printed for the use of the Congressional Oversight Panel 

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HEARING WITH HERBERT M. ALLISON, JR., ASSISTANT SECRETARY OF THE 

TREASURY FOR FINANCIAL STABLILITY 


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54–131 2009

S. HRG. 111–197 

HEARING WITH HERBERT M. ALLISON, JR., 

ASSISTANT SECRETARY OF THE TREASURY 

FOR FINANCIAL STABILITY 

HEARING 

BEFORE THE

CONGRESSIONAL OVERSIGHT PANEL 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

OCTOBER 22, 2009 

Printed for the use of the Congressional Oversight Panel 

( 


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(II) 

CONGRESSIONAL OVERSIGHT PANEL 

PANEL MEMBERS

ELIZABETH WARREN, Chair 

PAUL S. ATKINS

J. MARK MCWATTERS

RICHARD H. NEIMAN

DAMON SILVERS


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C O N T E N T S 

Page 

Opening Statement of Elizabeth Warren, Chair, Congressional Oversight 

Panel ..................................................................................................................... 1 

Statement of Damon Silvers, Deputy Chair, Congressional Oversight Panel .... 5 

Statement of Richard Neiman, Member, Congressional Oversight Panel .......... 9 

Statement of Herbert M. Allison, Jr., Assistant Secretary of the Treasury 

for Financial Stability .......................................................................................... 12 

Responses of Herbert M. Allison to Questions for the Record ............................. 46 


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(1) 

HEARING WITH HERBERT M. ALLISON, JR., 

ASSISTANT SECRETARY OF THE TREASURY 

FOR FINANCIAL STABILITY 

THURSDAY, OCTOBER 22, 2009 

U.S. CONGRESS, 

CONGRESSIONAL OVERSIGHT PANEL, 

Washington, DC. 

The Panel met, pursuant to notice, at 10:03 a.m., in Room SD– 

562, Dirksen Senate Office Building, Elizabeth Warner, Chair of 

the Panel, presiding. 

Present: Elizabeth Warren, Richard Neiman, and Damon Silvers. 

OPENING STATEMENT OF ELIZABETH WARREN, CHAIR, 

CONGRESSIONAL OVERSIGHT PANEL 

Chair WARREN. This hearing of the Congressional Oversight 

Panel is now in session. 

I would like to start by welcoming you, Mr. Allison. The first 

time you came to see us, you had been in your office for one week 

and yet already were full of information. So we are glad to have 

you back and hope you will be able to update us on TARP. 

As you know, TARP was able to accomplish direct and immediate 

help for the largest financial institutions, but smaller financial institutions, small businesses, and homeowners facing foreclosure 

have waited much longer and received much less help. People who 

funded the bailout, the American taxpayers, are bombarded with 

news that Wall Street firms that benefitted from TARP with windfall quarterly profits are now preparing to reward their executives 

handsomely with hefty bonuses. On the other hand, unemployment 

remains close to 10 percent. Loan defaults continue to rise, and the 

foreclosure crisis has no apparent end in sight. 

I worry not only because of where we are in this crisis, but that 

the factors that led us to this crisis have not yet changed. The financial sector that we talked about a year ago as too consolidated, 

too big to fail, is more consolidated than it was back then. When 

we talked about toxic assets on the books of the banks, those toxic 

assets remain on the books of the banks. There is little to inspire 

confidence in the balance sheets of the banks, and the health of 

small and mid-sized banks remains a very serious concern. That 

concern is doubled because they are truly the lifeblood of small 

business lending. Ninety-nine of these banks have failed so far, as 

you know, and we have more than 400 on the watch list. And many 

are dangerously overexposed to commercial real estate. We continue to face a grim picture. 


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On regulatory reform, the very rules that will prevent this crisis 

from happening again, that process is just starting. 

So I think taxpayers are concerned about what this means for 

their economic security. We hope you can provide some answers 

today and put TARP in the proper context and help us understand 

where we go from here. The panel’s core mission, as always, is to 

ensure that TARP operates with transparency and accountability. 

We thank you. We thank your staff for working with us very closely on that. And we look forward to hearing from you today. 

[The prepared statement of Chair Warren follows:] 


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Chair WARREN. Now I call on the Deputy Chair, Damon Silvers, 

for an opening statement. 

STATEMENT OF DAMON SILVERS, DEPUTY CHAIR, 

CONGRESSIONAL OVERSIGHT PANEL 

Mr. SILVERS. Thank you, Chairwoman Warren. 

Good morning. It is a pleasure again and an honor to welcome 

Herb Allison to be with us. I am very grateful for your willingness 

both to appear before us in these formal settings and the extent to 

which you and your staff have been available to the panel informally since you arrived at Treasury. 

This hearing convenes as the Office of Financial Stability and the 

Treasury Department and the administration more broadly are undertaking a number of initiatives that appear to be efforts to respond to concerns raised by, among others, this panel regarding the 

provision of credit to business, particularly small business, the continued excessive and, at least to my mind, somewhat perversely 

structured executive compensation at major TARP recipient institutions, and finally, as our chair referred to a moment ago, the continued escalation of the home foreclosure crisis. 

While my sense of these initiatives is that they are all directionally correct, I look forward to hearing today about the scope 

and design of these initiatives in some greater detail. 

I also want to compliment you, Assistant Secretary Allison, on 

the OFS’ handling of the cancellation of the Bank of America asset 

guarantee. Bank of America clearly benefitted from the perception 

on the part of the markets that this guarantee was effectively in 

place for a time, and it was only appropriate that it should pay a 

fee for having done so. I do not think it was a foregone conclusion 

that that would, in fact, occur and I attribute that to you and your 

staff’s leadership. I think you should take some public credit. 

Mr. ALLISON. Thank you. 

Mr. SILVERS. However, I remain extremely concerned that as a 

result of having a strategy with the TARP program that it is fundamentally about buying time, in the hopes that the financial system will earn its way back to health, that we are at risk of a vicious cycle. Persistent high unemployment, in part generated by 

the initial financial crisis, breeds more foreclosures and a continuing housing depression, which in turn keeps our major financial institutions weak and causes continued high rates of failures 

of small banks. Weakness in the banking sector then threatens to 

act as a powerful headwind, preventing the revival of employment 

outside those firms that can access the public debt markets. We 

discussed this matter with Treasury Secretary Geithner when he 

last appeared before this panel. 

With this concern in mind, I hope that you will be able to discuss 

with us with some specificity the current state and future prospects 

of the largest financial institutions that are continuing recipients 

of TARP assistance and I believe are at the core of the threat of 

continued headwinds from the financial sector, those being AIG, 

CitiGroup, Bank of America, and Wells Fargo. I recognize, of 

course, that AIG is a special case. 

Ultimately, the Wall Street bonuses that got so much attention 

this past week make tangible and specific the growing feeling 


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among the public that we are back to business as usual on Wall 

Street, while the financial system is failing to play its proper role 

in supporting the real economy on Main Street. I am interested in 

the immediate steps Treasury is taking to counter this perception 

in areas like executive pay, but the real test will be whether we 

really repair the banking system so that it can function again or 

whether we repeat the unpleasant experience of long-term economic stagnation Japan went through in the 1990s. 

Again, I look forward to hearing your testimony this morning, 

and I again extend my thanks to you for joining us once again. 

[The prepared statement of Mr. Silvers follows:] 


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Chair WARREN. Superintendent Neiman. 

STATEMENT OF RICHARD NEIMAN, MEMBER, 

CONGRESSIONAL OVERSIGHT PANEL 

Mr. NEIMAN. Mr. Allison, thank you very much for being here 

today. You know more than anyone how important today’s hearing 

is to the American public. It was about a year ago that the U.S. 

Government told the American taxpayer that the financial system 

faced possible collapse if taxpayers did not provide $700 billion to 

rescue it. 

The taxpayers did what was asked, and they did it even though 

it meant swallowing what some perceive as a very bitter pill. I also 

do not have to tell you about the reluctance and, in some cases, the 

outrage of providing financial support to some of the very institutions that helped cause the crisis, many of which pay their employees more money in one year than many Americans make in a lifetime. 

So the stakes of the effectiveness of Treasury’s use of that $700 

billion are very high. Treasury’s programs have to work to stabilize 

the financial system, but they also have to work so people feel they 

have also gained from this massive capital infusion. Treasury’s programs must restore credit for small businesses that promote entrepreneurship and create jobs, and the programs must keep people 

in their homes by preventing avoidable foreclosures. Success in 

these endeavors goes beyond just restoring confidence in our financial system. Success is critical to maintaining confidence in our 

democratic system. 

Remembering back to our first meeting with Secretary Geithner 

in April, I am glad to say that we can have a different conversation 

today than we had then. The Department of the Treasury deserves 

credit for making substantial progress. We are by no means out of 

this crisis, but yours and Secretary Geithner’s efforts averted a disaster and that should be recognized. 

But our gains remain fragile, particularly as they apply to the 

people who need Treasury’s programs the most. As you and I discussed in our last meeting together over the summer, it is critical 

that we redouble our efforts to help the millions of homeowners facing foreclosures. I am grateful to the Treasury and to you personally for participating and arranging the participants at the hearing 

last month in Philadelphia. It was the first time, to my knowledge, 

that Treasury, Fannie Mae, and Freddie Mac came together in a 

public forum with housing advocates and mortgage lenders to discuss the progress of the administration’s foreclosure prevention 

programs. I intend to follow up on several of the issues that came 

out of that hearing with you today. 

I also intend to ask you about improving access to credit for tens 

of thousands of small businesses that employ the vast majority of 

our economy’s workers. I would like to commend your office and the 

administration for announcing initiatives just yesterday to provide 

capital for community banks that are substantial lenders to small 

businesses. One year later, the financial system needs to start 

working better for small businesses and for all Americans. 

I look forward to our discussion. 

[The prepared statement of Mr. Neiman follows:] 


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Chair WARREN. Thank you, Superintendent Neiman. 

Congressman Hensarling, I hope will be able to join us later, and 

Mr. Atkins, our fifth panelist, is traveling and not able to be with 

us today. 

So that concludes the opening remarks of the panel. 

Mr. Allison, I recognize you for five minutes. Your entire written 

statement will be made part of the record, but if you could take a 

little time, no more than five minutes, to bring us up to date, I 

think that would be helpful. 

STATEMENT OF HERBERT M. ALLISON, JR., ASSISTANT 

SECRETARY OF THE TREASURY FOR FINANCIAL STABILITY 

Mr. ALLISON. Thank you very much, Chair Warren and members 

of the panel. Thank you for the opportunity to testify today. I welcome this occasion to update you about the progress we have made 

in restoring financial stability and to discuss the impact of TARP 

programs. 

The government actions taken last year, including the first phase 

of TARP, are widely acknowledged as helping to avert catastrophic 

failure of our financial system. When President Obama took office, 

the financial system was still extremely fragile and the economy 

was contracting rapidly. Measures taken by the Congress and this 

administration have helped bring stability to our financial system, 

are assisting responsible homeowners, and are getting credit flowing to consumers and businesses—all at a lower cost to taxpayers 

than was anticipated. 

With these improvements, it is time to set a new direction for 

TARP. We will begin to wind down and terminate TARP programs 

that were launched at the peak of the financial crisis and cap programs to purchase legacy assets and to securitize credit at lower 

levels than anticipated. Now, the administration will reshape targeted assistance to the key challenges of helping responsible families keep their homes and helping small businesses get better access to credit. 

Yesterday, President Obama announced new steps to improve access to credit for small businesses by providing lower cost capital 

to community banks. Small business lending represents 56 percent 

of business loans from small banks, compared to only 21 percent 

from larger banks. Therefore, community banks with less than $1 

billion in assets will be eligible to receive new capital at an initial 

dividend rate of 3 percent when submitting a plan to increase 

small business lending. The corresponding rate will be 2 percent 

for community development financial institutions. In the coming 

weeks, Treasury will work with community banks and the small 

business community to finalize program terms to best support 

small business lending. 

The other continuing focus will be our efforts to help responsible 

homeowners. Treasury’s Home Affordable Modification Program 

has now provided immediate relief to more than 500,000 homeowners who have entered into trial mortgage modifications. Family 

in permanent modifications are saving over $500 a month on average, as this panel noted in its October 9th report, ‘‘An Assessment 

of Foreclosure Mitigation Efforts After Six Months.’’ The panel 

made a number of findings and recommendations in that report. I 


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have tried to address them in my written statement so will only 

touch on two of them now. 

First, the panel recommended several areas to improve HAMP 

effectiveness and transparency. Treasury recently released guidance that streamlines and standardizes the paperwork needed for 

a modification. To make the process more transparent for borrowers who have been turned down for a modification, we have established denial codes that require servicers to report the reason 

in writing to Treasury and soon to borrowers as well. We are also 

improving transparency of the net present value, or NPV, model, 

a key component of eligibility, by increasing public access to the 

NPV methodology and encouraging a wider understanding of the 

model among housing counselors and borrowers. 

Second, the panel recommended that Making Home Affordable 

should try to address a wider population, including borrowers of option ARM loans with negative equity and those who are unemployed. Treasury recognizes that these situations can be particularly challenging. As the panel’s report reflected, our current program does permit borrowers with pay option ARMs to use HAMP 

when they meet other eligibility criteria. HAMP can also help 

homeowners with negative equity to reduce their mortgage payments to affordable levels with the Hope for Homeowners refinance 

from the servicer if the borrower qualifies. 

Finally, as the recession deepened, unemployment became an increasing contributor to the ongoing foreclosure crisis. Therefore, 

unemployed borrowers that will receive at least 9 months of unemployment benefits are eligible for a modification under HAMP. 

As our efforts progress, we will continue to study ways to meet 

the challenges of reducing total foreclosures. We are pleased to be 

winding down certain TARP programs, but recognize there are lingering weaknesses in housing markets and small business lending. 

We remain committed to helping American families and small businesses and building a broad economic recovery. 

Thank you, and I look forward to answering your questions. 

[The prepared statement of Mr. Allison follows:] 


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Chair WARREN. Thank you, Assistant Secretary Allison. We appreciate your remarks. 

I must say I am encouraged to hear that Treasury is talking 

about winding down large parts of this program and shifting much 

of its focus to foreclosures and small business lending. I will be 

even happier the day when we are put out of business because this 

process is complete and there is no more TARP. 

This also changes oversight, obviously. We have to go where you 

go. So let me focus first on foreclosure and the foreclosure mitigation programs, if I can. I just want to make sure that we are tracking the correct numbers here. 

We put the numbers together, as you saw, in the report suggesting that the current mortgage foreclosure mitigation program 

or programs, when they are fully operational based on the most optimistic assumptions that Treasury has given us, that nonetheless 

foreclosures will likely outrun modifications by about two to one. 

Does that fit with the numbers you are seeing? 

Mr. ALLISON. Thanks for the question, Chair Warren. 

I think we have to keep in mind that this program, Making 

Home Affordable, was designed to help people who are in their primary homes, and these are working Americans. The program was 

not designed for second homes or investment homes. So one has to 

look at the foreclosure rate among the eligible population. And we 

believe we made great strides in at least matching the rate of foreclosures or potential foreclosures in that category with trial modifications. 

Chair WARREN. I understand the point, but surely you are not 

suggesting that the half of all people, even on the most optimistic 

assumptions, who are still going to lose homes are all investors and 

vacation homeowners. I understand you have tried to target more. 

There will still be a substantial number of homeowners who will 

be left out of the program. Is that right? I just want to make sure 

that we are dealing with the same set of numbers here. 

Mr. ALLISON. Well, we are obviously trying to reach as many people as we can in this program. We are now able to reduce the debtto-income ratios of people who qualify from above 38 percent all the 

way down to 31 percent. So we are reaching a very large number 

of people. There are some people who will not qualify for this program. For instance, if you have a jumbo mortgage, you do not qualify for the program. 

Chair WARREN. I understand. 

Mr. ALLISON. Or, people with extremely low incomes can receive 

other forms of relief. But this program will be able to serve, we 

think, a very large number of working Americans who are having 

trouble staying in their homes. 

Chair WARREN. So then let me see if I can understand this the 

other way. You give many reasons why there still may be many 

foreclosures. But if we think of this problem from a step-back perspective, and that is, the problem of dealing with foreclosures in 

our economy, the impact on neighbors, the impact on communities, 

we can still expect substantial numbers of foreclosures over the 

next few years? 

Mr. ALLISON. Well, actually there are other measures underway 

as well. Under the ARRA legislation, about $12 billion has been apVerDate Nov 24 2008 01:16 Jan 23, 2010 Jkt 054131 PO 00000 Frm 00030 Fmt 6633 Sfmt 6602 E:\HR\OC\A131.XXX A131

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propriated to help especially distressed neighborhoods where many 

people are at risk of losing their homes. So there are a number of 

other programs in addition to the HAMP program that have been 

instituted by the Obama administration to try to deal with the 

broader housing crisis that the country is facing. 

Chair WARREN. So let me just then, if I can—I want to drill in 

a little bit on the principal program here, though, for homeowners. 

And that is, Treasury has estimated that it will bring—in fact, has 

announced that it has brought 500,000 homeowners into the first 

program, into the HAMP program. Now, of that 500,000 who are 

brought in, those are people who just have what are called temporary modifications that last for only three months. What is the 

rate at which those people are making it into what are called permanent modifications? 

Mr. ALLISON. Let me first say that we have extended the trial 

modification period up to 60 days for people who are having difficulty submitting their paperwork. And we are doing our best to 

streamline the paperwork so that more people can get through this 

process and receive a permanent modification. 

Chair WARREN. And we are very glad to see those changes. We 

are very pleased. 

Mr. ALLISON. Thanks. 

Chair WARREN. But the question is, of the 500,000, how many 

are likely to make it into permanent modifications? What are your 

numbers so far and what are your projections? 

Mr. ALLISON. Well, so far, the numbers are low because we are 

still in the trial period for most of these people, and it is going to 

be some months—I would say sometime in the first quarter of next 

year—before we have a really good idea statistically of what the 

conversion rate seems to be. 

Chair WARREN. But I thought they were only in the trial part for 

three months. So why can we not tell it on the 91st day how many 

people are making into permanent modifications? 

Mr. ALLISON: As I mentioned, we have actually extended that 

trial period for many people to five months. 

Chair WARREN. To five, all right. So I will just do the math. On 

the 151st day, why is it that we cannot tell what the conversion 

rate is to permanent modifications? 

Mr. ALLISON. The reason is that they are small numbers to date. 

We have less than 10,000 people who have moved into permanent 

modifications out of the 500,000 because the program was ramped 

up rapidly, and given the three- to five-month delay before they are 

given a permanent modifications 

Chair WARREN. All right. But from this point going forward, it 

cannot take you more than a couple of months. I mean, they are 

into the pipeline. 

Mr. ALLISON. That is right, a couple of months, and then we will 

be into the new year. So we are figuring that early in the new year, 

we will have a much better idea statistically of how many people 

are moving from trial to permanent modifications. 

Now, let me say our biggest concern in the program right now 

is making sure that as many people as possible are able to convert 

to a permanent modification. 


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Chair WARREN. Are you using any projections on this number? 

Surely, Treasury is doing its own modeling and using some internal projections. 

Mr. ALLISON. Yes. Well, we had projections before the program 

even started. Now we are interested in the actual rates. 

Chair WARREN. So what were your projections? 

Mr. ALLISON. Well, the projections were—— 

Chair WARREN. From temporary to permanent. 

Mr. ALLISON. Yes. The projections were very rough at the time 

and—— 

Chair WARREN. What were they? 

Mr. ALLISON. They were—it depended on the type of individual 

we are talking about. So it was a very complex set of calculations. 

Chair WARREN. But you had a number. 

Mr. ALLISON. I would not go with any one number as an overall 

rate. 

Chair WARREN. So give me a range of numbers. 

Mr. ALLISON. Well, as you know, in the past where there were 

not actual deep reductions in expenses, the rates could be as low 

as 50 percent. Given the nature of these modifications, which have 

not been done before on a large scale, that is, where there are large 

reductions in people’s monthly payments, we do not have good statistics. 

Chair WARREN. I understand, but you have designed the program. So you surely must have some model. How many people is 

Treasury projecting will make it from these temporary, short-term 

modifications into a so-called permanent modification? 

Mr. ALLISON. Well, the estimate is significantly more than 50 

percent, but I do not want to place overdue emphasis on any one 

number. 

Chair WARREN. Surely you are already using a model internally. 

You are not using a model that says significantly more than 50. 

You must have a number. 

Mr. ALLISON. The reason is, as you know, models are simply 

models, and they do not reflect the outcome. 

Chair WARREN. I know. So I am asking just a model number. 

Mr. ALLISON. It is ranging up to 75 percent, somewhere between 

50 and 75. But again, the real issue—— 

Chair WARREN. That was not so painful. 

Mr. ALLISON. Well, the real issue for America—because I do not 

want to give overdue emphasis to any one particular number because I think we can focus on the wrong thing. The real issue—— 

Chair WARREN. But you do understand to engage in oversight, 

we need to understand your numbers and the projections here so 

we can see if this is working even on your assumption. 

Mr. ALLISON. The real issue, though, is converting people as fully 

as possible to the permanent modifications. And that is why we are 

taking these steps to try to make it simpler. 

Last week, we brought in, again, the main servicers in this program and we sat down with them to discuss the issue of trying to 

increase conversion rates and maximizing those. We have also told 

them that we are going to start publishing service metrics for the 

servicers starting in early December, and they will provide measures such as how long does it take between the time that someone 


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applies for a modification and the time they actually receive a permanent modification. Also, how long does it take for the servicers 

to answer the phone and provide answers to people who are very 

concerned about whether they will qualify or not? So we are trying 

to—— 

Chair WARREN. And you will be naming names. 

Mr. ALLISON. We will be naming names. We will be naming individual banks against more than five of these different service 

measures starting in early December. The banks are on notice, and 

we think by providing sunlight on the data around services, that 

these banks will try even harder to meet the highest standard. 

Chair WARREN. Thank you. I look forward to it. 

I apologize to both of you, and I will skip my next round of questions if need be. Mr. Silvers. 

Mr. SILVERS. Thank you. I am all for thoroughness. So you have 

no problem with me. 

Assistant Secretary Allison, you have heard a bit about mortgages. I understand my colleague, Superintendent Neiman, is going 

to talk to you a bit about small business. I would like to focus on 

very big business, but do not take that as a lack of interest in the 

other two subjects. 

Yesterday, I think, although it is a little hard to tell with the 

combination of official announcements and leaks, but it appears 

that yesterday the pay czar, Ken Feinberg, announced a plan to require that the very largest recipients of TARP funds cut their executive pay significantly, particularly in relation to the cash component of that pay. There have been some anonymous quotes in the 

press this morning from executives at these firms pointing out that 

a lot of what Mr. Feinberg has in mind is to shift that pay toward 

long-term compensation, equity-based compensation. I hope you 

will tell me if what I am saying is not true. I am gleaning it from 

the published accounts. 

There is a concern I want you to address about this, which goes 

right to the statements that have been made by the Federal Reserve about the proper way to do executive pay in financial institutions. On the one hand, it appears that Mr. Feinberg is moving in 

the direction of lengthening the time horizons of pay, and I think 

that is a very good idea. 

On the other hand, I am very concerned, and I would like you 

to address the question of whether or not we have got the risk element correct particularly in the context of banks with very low 

stock prices, that in pushing pay into equity form where the stock 

price is low, it is not clear these folks really have that much downside exposure. And so as a result, I am concerned that we are 

incentivizing a certain amount of risk-taking with the public’s 

money as a backstop. And I wonder if you could comment on that. 

Mr. ALLISON. Well, as you know, the Special Master will soon be 

announcing his compensation determinations and will be explaining to the public how he made those determinations. So I will leave 

some of that explaining to him. And he has operated in a very independent way. He is making his own decisions. 

But it is important that we protect the interests of the taxpayers 

who have invested so much of their money into these companies 

over the past year. Therefore, these programs are being designed 


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in a way that will provide that most of the pay will be long-term 

in nature. Some of the pay will be conditioned on returning TARP 

money to the taxpayers. They are designed to discourage excessive 

risk-taking. At the same time, under the interim final rule that 

governs the Special Master, he is encouraged to consider the need 

for the long-term survival and competitiveness of these institutions 

in the interest of taxpayers getting their money back while ensuring that the pay is not excessive, taking away from the overall profitability of the banks and their ability to rebuild capital. 

Mr. SILVERS. I guess my question—let me hone my question. If 

you pay an executive—I think this problem is most severe at Citi 

and potentially at AIG, depending on exactly what the Special 

Master does. If you pay an executive at Citi with a package that 

is stock-based primarily—the stock is at $4, as I believe it is roughly today—there is just not that much downside in that package. 

And what downside there is is going to be absorbed frankly by us, 

by the public, because we all know if Citi takes large losses, the 

pressure to try to do something on the part of the government will 

be profound. 

What is your view—I know you are not the Special Master, but 

you are in front of us today—as to how we avoid and incent a situation where those people have all the upside of risk but none of the 

downside? 

Mr. ALLISON. Well, let me, first of all, say that since the United 

States Government is a significant shareholder in CitiGroup, we 

are aligning the interests of those employees with the interests of 

taxpayers. And if the stock price of CitiGroup does go up, the 

American taxpayer will benefit as well. 

Mr. SILVERS. I am worried about what happens if it goes down 

because if you are thinking about this from the taxpayer perspective—we have the downside. They do not, they being the executives 

we are incentivizing. I recognize this is not a simple problem to 

solve in compensation design, but I want you to focus on it. 

Mr. ALLISON. Well, sir, the executives do have considerable 

downside because, as you mentioned, much of their compensation 

is paid out over the long term and is dependent upon performance 

metrics, including the stock price—— 

Mr. SILVERS. But you recognize, do you not, that the downside 

for the executive is counted at zero. When the value of the stock 

hits zero, that is as low as they can go. We will take the rest of 

it, and it is the full value of all Citi’s liabilities potentially. 

Mr. ALLISON. Well, first of all, these banks did undergo the stress 

test last spring. They raised a considerable amount of equity capital. In fact, the total raised by the large banks was about $80 billion. Their capital positions are far better today than they were 

then, thanks to the stress test initiated by the Secretary of the 

Treasury and conducted by the Fed and other regulators. So, I 

think the banks are in a much stronger position today and we hope 

in a position to start repaying the Federal Government before too 

long. 

Mr. SILVERS. My time has expired. I will pass on. 

Chair WARREN.. Thank you 

Mr. Neiman. 

Mr. NEIMAN. Thank you. 


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So I would like to come back to the initiatives to enhance and 

promote small business lending that were announced yesterday. I 

was pleased to see the inclusion of capital for smaller community 

banks who provide a substantial amount of credit to small businesses. I was particularly pleased to see that the extension of capital to community banks is contingent on a submission of a business plan to demonstrate the amount and type of lending where 

that capital would go to support small businesses and that there 

would be a follow-up requirement of quarterly reporting detailing 

those lending transactions. I think you would not be surprised that 

many of us would have liked to have seen a similar contingency 

and requirements earlier in the CPP when that was announced by 

the prior administration. 

There are a number of questions that I think still remain and 

many which I think you acknowledged are final decisions that will 

take time as you roll out the specifics of the program. But some of 

the questions I have—and there seems to be some inconsistent reports in the press as to, in addition to the three percent dividend, 

are there other charges for the capital that would be provided to 

the banks. For example, will there be a requirement of issuing warrants? There was a report in the American Banker today that it 

would include warrants. 

Mr. ALLISON. Well, there is a de minimis exception for issuing 

warrants, and the exception is that those banks that receive less 

than $100 million. Virtually every bank in this program would be 

receiving less than $100 million. Now, these have yet to be fully 

worked out. We are going to be issuing detailed guidance on this 

program after we discuss the program features with the banks, as 

well as small business. But it is very likely that these banks will 

not be subjected to the same degree of a warrant requirement as 

was in the case of CPP for the larger banks, for example. 

Mr. NEIMAN. Now, one of the other program provisions is modeled after the CPP program that requires that it be based on a determination that the institution is deemed viable without the capital. Have you or the administration considered modifying that program to permit under certain circumstances banks that would be 

deemed to be viable after receipt of that capital? 

What we are seeing and what we have heard from others is that 

in order to attract private capital, a determination by the administration that an institution is not viable serves as a red letter to discourage private capital. So I would be interested if you had considered under certain circumstances—it is my understanding, in fact, 

that FDR’s program did have specific categories of those banks that 

would be viable without and those banks that would be viable only 

after a contribution of capital. 

Mr. ALLISON. First, we want to make sure that the capital is 

used for the intention of the program, to stimulate lending, and not 

simply to fill a capital hole on the bank’s balance sheet that will 

not produce additional lending. And we have considered this issue 

very carefully, Mr. Neiman, because we have been asked this question many times and it is an important question. But we believe 

that this program, to be most effective, should be aimed at viable 

banks so they can use the additional capital to promote lending; 


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With the additional capital, they can leverage that capital and lend 

quite a bit more than the amount of the capital itself. 

Secondly, we have to protect the interests of the taxpayers. Their 

interests are better protected if we are lending to viable banks, and 

there are a very large number of these. By the way, this program 

covers about 91 percent of all the banks in America, about 7,500 

banks. So it is a very broad program. But we think that for it to 

be most effective, every dollar of this additional capital should go 

to additional lending. 

Mr. NEIMAN. So there was internal discussion and analysis of 

whether that viability test should be reconsidered. 

Mr. ALLISON. Yes, sir, there was. 

Mr. NEIMAN. And was there the same analysis and discussion around the $1 billion cap? Should it be increased to $5 billion or 

even $10 billion in terms of the contributions to small business 

lending? 

Mr. ALLISON. We did consider that very carefully for a number 

of months actually, and we determined that because of the outside 

role that the smaller community banks play—up to $1 billion of assets. Because of their outside role, we think it is important to direct the funding to them, and they have the highest rates of small 

business lending of all the different segments of banks. So we think 

this is the best use of taxpayers’ dollars to get this economy rolling, 

especially in communities all across the country. 

Mr. NEIMAN. Do you have an estimation of the timing? There has 

been a clear level of concern around the number of banks and the 

time it has taken to process these applications. Do you expect that 

these will be approved by the end of the year, or will it be dependent whether the TARP program is extended beyond the end of the 

year? 

Mr. ALLISON. Well, the good news is we have the infrastructure 

for this program already in place. We do not have to build it. We 

can use the existing Capital Purchase Program infrastructure since 

we have the procedures and the policies largely in place already. 

So we can roll this program out very rapidly. 

We are anxious to get going. We want to meet with bankers and 

small business people just as soon as we can to finalize the program and then get it moving. So we feel a sense of urgency to roll 

this out rapidly. 

Mr. NEIMAN. Any estimates on the timing of receipt of applications? 

Mr. ALLISON. Well, we want to begin to take the applications 

very soon. I cannot give you an exact date when we will be doing 

that, but we will be announcing that very shortly. 

Mr. NEIMAN. Thank you. 

Mr. ALLISON. Thank you. 

Chair WARREN. Thank you. 

Okay. I am still on the hunt for some numbers on foreclosure. So 

I want to make sure I understand this. We talk about the HAMP 

program, 500,000 people into it by mid-October. We raised the 

question about whether or not this will be enough to slow down the 

rate of foreclosures so that we can get some stabilization in the 

housing market. We then asked if the people who come into the 

program, the 500,000, just to use that example, how many will 


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make it into permanent modifications. And you said somewhere between a quarter and a half are unlikely to. 

So I want to ask the next part, and that is, of the people who 

make it into so-called permanent modifications, what are Treasury’s projections on how many people will actually be able to make 

those payments and still be in those houses at the end of the 5– 

year period and make the transition back into their permanent 

mortgages? In other words, I just want to draw as fine a point on 

it as I can. Are we preventing foreclosures or are we simply delaying them? 

Mr. ALLISON. Well, first of all, I would like to correct the record 

on this. I did not say that we expect that one-quarter to a half of 

the 500,000 trial modifications will not be converted. 

Chair WARREN. I thought that was our 50 to 75 percent success 

rate. I was doing the math the other way. 

Mr. ALLISON. What I was saying was that we had looked at some 

modeling last winter and early spring. In fact, it was before I arrived. What we are interested in, now that we are actually operating and growing rapidly, is looking at the actual conversion rates 

and trying to maximize those as much as possible. 

Chair WARREN. Of course. 

Mr. ALLISON. So I am not prepared to say what we think the rate 

will be of successful conversions. All I can say is that we will have 

much better information and much better estimates based on real 

experience by early in the first quarter. 

Chair WARREN. Right. But you are also not telling that Treasury 

is flying here with no projections on how this program works in 

terms of numbers. You cannot be telling me that. There must be 

projections on how this program will work. 

Mr. ALLISON. What we have projected is what we will be able to 

do within the three-year period of this program when we are actively bringing people in and modifying mortgages—we expect to be 

able to succeed with about 3 million to 4 million people, which is 

a very large portion. We also believe that, given the eligible population of people for this program today, that we are about keeping 

pace at least, and maybe ahead of, the foreclosure rate for that 

population. 

Chair WARREN. You do not mean foreclosure filings because the 

foreclosure filings are accelerating. 

Mr. ALLISON. I am referring to what the rate would be without 

this program. And so I think we are making tremendous progress. 

Now, we are not satisfied with the place we are at today. We are 

working with the servicers to increase, as much as possible, the 

rate of trial modifications. Some banks still have a long way to go 

to reach their eligible populations here. We want them to move as 

rapidly as possible. And then the challenge is going to be—and you 

are absolutely right, to minimize the failure rate of getting people 

from a trial modification to an actual modification. 

Chair WARREN. So let me ask so that I do not have to run 4 minutes over again. 

Mr. ALLISON. Okay. 

Chair WARREN. What projection is Treasury using for the proportion of homeowners who will be able to make it from a trial modification to a permanent modification? 


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Mr. ALLISON. Well, again, we would like to have as many people 

as possible. If we were to achieve—— 

Chair WARREN. And I would like all the children to be above average, but that is not the world we live in. You must have a projection here. 

Mr. ALLISON. I think if we can get this rate to something like 

three-quarters then, that is a very ambitious success rate. 

Chair WARREN. So are you telling me that that is what you are 

projecting? As you are working this program out—— 

Mr. ALLISON. No, I am not. 

Chair WARREN. You must have a projection for what number you 

are using for the conversion rate from temporary modifications to 

permanent modifications. Treasury must. You cannot have a program for which you are not projecting how many people will be in 

it and how many will be in at each stage. 

So the question I am asking is what is your projection on the 

proportion that will make it from temporary modifications to permanent modifications so that we can evaluate this program, whether or not it is likely big enough to deal with the problem. 

Mr. ALLISON. Right. Again, based on past experience with different types of modifications, which were not materially reducing 

people’s monthly payments, you saw a failure rate of about fifty 

percent. So we could use that as a bare minimum success rate, but 

we would like to achieve a much higher rate. If we were to get to 

something like 75 percent, which is an aspiration, we would deem 

this quite a successful program. 

Chair WARREN. So I just want to make sure I am understanding. 

The projection is that the floor will be that you will have at least 

fifty percent of those who get into a trial modification will make 

it—I am sorry. I did the wrong one. Fifty percent of those who 

make it into a permanent modification will actually be able to 

make their mortgage payments for five years. 

Mr. ALLISON. No, actually we would say that the bare minimum 

of getting from a trial modification to an actual modification should 

be above, and then the failure rate—— 

Chair WARREN. I am sorry. I also confused it. 

Mr. ALLISON. Yes. 

Chair WARREN. I confused it. 

Mr. ALLISON. I understand. 

Chair WARREN. The redefault rate, the rate at which those people who get these so-called permanent modifications actually stay 

in their homes for at least five years, and we are not simply delaying foreclosures. We are actually preventing them. What is the rate 

there? How many people who make it to permanent modifications 

does Treasury anticipate will actually be able to pay those mortgages? 

Mr. ALLISON. Well, there is not a historical basis for a program 

like this. What is so important about the program is that we are 

materially reducing people’s payments. 

Chair WARREN. I understand. The Panel has been quite complimentary about the approach. The question is what is the number 

you are using in your projection. Of those who make it to permanent modifications, what proportion in fact will still end up in foreclosure? 


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Mr. ALLISON. Well, we are really not sure what proportion will 

end up in foreclosure. 

Chair WARREN. You must have a projection. We all have looked 

at numbers. We have been looking at numbers now for a year in 

terms of what are called redefault rates, that is, people who get a 

modification and then it does not work. You must have a projection 

for this. Treasury has put this program forward. What is the projection you are using based on all the data you have read? I understand the programs are different. I understand there are lots of different studies that use lots of different information. 

Mr. ALLISON. Right. 

Chair WARREN. What is your projection? 

Mr. ALLISON. Well, I think, again, what I can do is to come back 

to the panel with our best estimate on what that might be. 

But I think, our goal is to get beyond the projections to reach 

real Americans who are in trouble and try to have as many of them 

succeed in this program as possible. 

Chair WARREN. I am sure that is everyone’s goal. 

Mr. Silvers. 

Mr. SILVERS. Assistant Secretary Allison, can you tell us what is 

the dollar amount assigned to the small business program you were 

discussing with Superintendent Neiman a moment ago? 

Mr. ALLISON. Well, at this point, we are going to be working with 

the communities that are going to be helped by this program to try 

to estimate the potential eligible population for it. So we will be in 

a better position to estimate for you what the actual expenditure 

might be once we have completed that work because we are going 

to try to tailor the program as much as we can to the actual needs. 

Instead of designing the program in the abstract, finalizing every 

aspect of it, and rolling it out, we have announced the broad 

metrics of the program. Now we want to work with them to see 

how we can maximize the potential eligible population. Then we 

will be able to give you a better estimate. 

Mr. SILVERS. We are using TARP money here. Right? 

Mr. ALLISON. Yes, we are. 

Mr. SILVERS. So it cannot be more than the amount of TARP 

money that is left. 

Mr. ALLISON. That is absolutely correct. 

Mr. SILVERS. Can you give me any further insight into your 

thinking as to what the range might be? I do not want to get into 

a 10-minute discussion of it, but I am interested. Can you scale it 

for me in any respect? 

Mr. ALLISON. Yes. Well, it would be a fraction of the amount of 

remaining money. I would say it would be somewhere between $10 

billion and as much as $50 billion. 

Mr. SILVERS. That is very helpful. 

Mr. ALLISON. And the answer could be somewhere in between. 

Again, we want to be responsible here when using taxpayers’ 

money, by providing an accurate estimate as possible. 

Mr. SILVERS. There have been some suggestions. I believe Senator Warner in particular suggested the idea of essentially, as we 

have done in some of the credit markets, just effectively bypassing 

the bank credit system and moving TARP money directly to small 


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business with private sector managers. Can you explain to me why 

you appear to have decided to go this route instead of that route? 

Mr. ALLISON. Yes. We have decided to go through the community 

banks. We think that is by far the most effective and efficient way 

of reaching large numbers of small businesses since these banks already have relationships with these companies throughout the 

country. 

Mr. SILVERS. No, that is not the question. I think the proposal 

Senator Warner had was actually to go through those same banks. 

The way you are proposing to do it is you are going to give the 

banks some equity capital and then they are going to give you a 

plan for how they are going to lend, you assume, that money plus 

other money to small business. 

Mr. ALLISON. If I may say, the program is structured in reverse. 

The banks are going to give us the plan. Then, we are going to give 

them the money. 

Mr. SILVERS. All right. I was not implying an order. 

You have to have a certain confidence that they are actually 

going to do that and not as you suggested—your concern might be 

that they were going to fill capital holes and the like. On the other 

hand, if you did what was done with TARP in more financialized 

markets, which was to go directly into the markets in the TALF 

program—— 

Mr. ALLISON. I see. 

Mr. SILVERS. Right? Senator Warner was talking about going directly into the small business lending market, hiring the community banks to manage it for you, thereby ensuring that the money, 

in fact, ended up where you wanted it to end up. 

I am just curious that you made a choice to use the bank’s capital structure, not just their managerial capacity, but their capital 

structure. 

Mr. ALLISON. Right, and the reason is because by providing capital, they can leverage the capital to do much more lending. Perhaps eight to ten times the amount of the capital can be lent out. 

Mr. SILVERS. So your hope is that, for example—just a take a number—that if you put $25 billion into this, that you might be 

able to generate between $100 billion and $200 billion of net—— 

Mr. ALLISON. That is correct. 

Mr. SILVERS. That is the hope. I think that is very thoughtful. 

Mr. ALLISON. Thank you. 

Mr. SILVERS. Let me shift back for a moment to big business. 

When our last round ended, you were telling me about the perception that Treasury believes in the growing strength of the large 

banking sector. I am curious. If each of Wells Fargo, Citi, and BofA 

showed up this morning with a check for the balance of their TARP 

funds, would you accept it? 

Mr. ALLISON. Well, that is really a matter for the regulators to 

determine because they are responsible for the financial soundness 

of those institutions. 

Mr. SILVERS. All right. I hope you would correct me if I am 

wrong. My perception is that at least Wells Fargo, of those three 

banks, has almost begged in public to be allowed to return the 

money, which suggests that they have got the check, and yet they 

are not being allowed to return it. Why in your view is that so? 


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Mr. ALLISON. Well, again, I would not speak for the regulators 

of Wells Fargo. So I would defer to them and their determination 

of whether Wells Fargo is ready to repay. Obviously, on behalf of 

the taxpayers, we would be delighted to receive our money back 

from these banks. But we also have to recognize that the money 

was put out there to enhance financial stability. The regulators are 

far better qualified than the U.S. Treasury Department as to when 

those banks will be able to repay. 

Mr. SILVERS. If I can ask the indulgence of my fellow panelists 

just to express a final thought here. 

It seems to me that you and the regulators are behaving wisely 

here, that this is the real test of whether or not we have repaired 

our large financial institutions, whether or not, in the privacy of 

whatever rooms that these decisions are made, people, fully informed individuals, presumably acting in good faith with the public 

interest in mind, are willing to allow these banks to return the 

money. And I think the evident fact that they have not returned 

the money suggests that in truth there is not a comfort level with 

doing that. I think that is very good. I would urge you not to submit to any kind of pressure to allow banks that are fundamentally 

not yet sound to return the money. 

But I think it raises a larger issue which goes back to my concerns in my opening statement and to the backdrop to your views 

about the weakness of the small business lending market and to 

the backdrop to the sort of end game around mortgages, which is 

these institutions do not appear to really be healthy. And that is 

a very dangerous thing, given the size of those institutions. And it 

seems to me that that remains a continuing challenge. 

Mr. ALLISON. Mr. Silvers, first of all, these banks have raised 

large amounts of capital, in some cases very large amounts of capital, since last spring since the stress tests. They are far better capitalized than they were then. So they are in a better position to 

begin considering, I think but the regulators have to be the arbiters 

of that. Of course, we are in dialogue with the regulators as well. 

So I would not characterize these banks as being impaired today. 

They are far healthier than they were before. They have taken a 

number of steps to reduce risk on their balance sheets as well. So 

I think the day is nearing when they will be able to begin repaying. 

It is closer than it was last spring. 

Mr. SILVERS. My time has far expired. 

Chair WARREN. Mr. Neiman. 

Mr. NEIMAN. So I had intended to use this round of questioning 

to focus on conversion rates from trial mods to permanents and redefaults. But considering the time we spent on that, I will just 

make a few points. In my additional views in the October report, 

I did note that in my opinion it was too early to calculate those 

conversions and because of the very low statistics, it could be 

skewed for a number of reasons. 

However, I think those kinds of projections would be helpful, and 

there are already press reports. BofA—it has been reported in the 

New York Times that they have estimated a 50 percent conversion 

rate. So I was going to frame my question that it would be helpful 

to Treasury to provide its own guidance. And my question was 


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going to be, when do you expect to be in a position to project conversion rates and redefault rates and ongoing volumes for HAMP? 

Mr. ALLISON. We are trying to continually improve this program 

to increase the conversion rates. We are going to be, as I mentioned 

before, in a better position to estimate what the goals for conversion should be when we have further experience and have made 

further improvements in the program, and that should be early in 

the first quarter. And, I think we will be revising those estimates 

as we go forward. 

Mr. NEIMAN. Now, also in the October report—and you responded briefly to the issue in your written testimony—we pointed 

out that the Administration’s housing foreclosure prevention program was designed six to eight months ago, and unemployment has 

continued to grow since then and the crisis has certainly extended 

and foreclosures extended from subprime into prime. 

So my question is really focusing on what is the Treasury doing 

on the issue of targeted foreclosure relief for the recently unemployed. I have suggested both in our last report and in other meetings with you and personally with the Secretary to explore Federal 

funding for State programs that are modeled after Pennsylvania’s 

successful program, the HEMAP program, Housing Emergency 

Mortgage Assistance Program, that provides, in a sense, short-term 

secured bridge loans for people who are recently unemployed. A 

program of this nature could be funded either possibly through 

TARP or through legislation. 

So my question is, is there a reason not to pursue this approach 

to explore whether TARP or legislative proposals, which my understanding is there are some that have been proposed on the Hill, 

should not be pursued as part of the Administration’s program? 

Mr. ALLISON. We are familiar with the Pennsylvania program, 

and we have high regard for what has been done in Pennsylvania. 

Also, a number of other States have initiated foreclosure prevention measures as well. 

Let me mention again that our own program now allows people 

to qualify who have expected unemployment payments for at least 

nine months to come. We are still studying what more we might 

do in that area. We think that our program, as it is designed today, 

is the most efficient one to reach a large number of people while 

at the same time protecting taxpayer dollars. 

But we are open to suggestions, as we have been all along. We 

are looking further at the Pennsylvania model as well to see what 

more might be done. 

And let me also mention that there are, other federal programs 

underway such as for state housing finance agencies, for cities or 

other areas that are impacted more than average. Already these 

programs are in place. So we cannot look just at the HAMP program as the only federal program. 

Let me also mention that outside of the TARP program, the Government-sponsored entities, Freddie Mac and Fannie Mae, also 

have their own program which is identical to ours to reach their 

borrowers as well. 

Mr. NEIMAN. Well, to the extent that the analysis around that 

program continues and a decision is made one way or another, I 


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would appreciate it if you would get back to our panel and provide 

us any analysis or decisioning around it. 

Mr. ALLISON. Thank you. We will. 

Mr. NEIMAN. Thank you. 

Chair WARREN. I am going to start by following up on the previous two lines of questioning. I just want to make sure in following on Mr. Silvers’ question, as I understand it, in the small 

business lending, you will be asking the banks to propose plans for 

using this money, which I think is a substantial advance over 

where we were a year ago. But I just want to make sure. Unlike 

the TARP funding for the big banks a year ago, this time will we 

be tracking the money? 

Mr. ALLISON. Well, first of all, with the program that already exists, the Capital Purchase Program, we have voluminous information on our Web site, financialstability.gov, about the actual lending by all these banks. And we think it is very important that the 

public be able to see for themselves. What is very important is how 

much lending they are doing. We also have indications that this 

program has been quite successful in producing lending rates in 

the banks that are higher than they would have been without the 

program. So we think we are being quite transparent about actual 

lending activity. 

Chair WARREN. That was not my question. 

Mr. ALLISON. In terms of tracking how the money is being utilized, we are asking the banks to provide their goals, then we will 

look at their goals, and measure their performance, for instance, in 

lending, which is the main objective of the program, in a way that 

the American public can judge for themselves how each of these 

banks is performing. 

Chair WARREN. So we will be verifying that they use the tax dollars for small business lending. 

Mr. ALLISON. They will be verifying and—— 

Chair WARREN. We will look at their lending rates before they 

take the money. 

Mr. ALLISON. That is correct. 

Chair WARREN. And we should expect to see essentially either a 

dollar-for-dollar improvement in their lending or with leverage 

from private investment, a better than dollar-for-dollar improvement in small business lending. 

Mr. ALLISON. Absolutely, we hope there is a better than dollarto-dollar improvement. But I think that it is important to judge 

them against the plans that they submit as to how much additional 

lending they are doing, which should be more than the dollars we 

are putting into the banks. 

Chair WARREN. All right, and we will be documenting that. 

Mr. ALLISON. Yes. 

Chair WARREN. That sounds good. That sounds very good. 

Mr. ALLISON. Thank you. 

Chair WARREN. Let me ask a follow-up to Mr. Neiman’s question. 

We were talking about all these programs, the various programs, 

some obviously underway on mortgage foreclosure mitigation, some 

perhaps in the wings to try to deal with the problem. 

I just want to ask about the other half. These are all questions 

about using taxpayer money in order to bail out homeowners and 


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in particular the investors who bought those mortgages, who invested in those mortgages for high profits. How much are we talking about programs where the investors have to acknowledge their 

losses and come to the economically rational place in dealing with 

foreclosures? 

I worry about two facts. 

The evidence suggests that $120,000 is lost in every mortgage 

foreclosure. That would seem to me to be an enormous incentive for 

the mortgage lenders themselves, frankly, with no government 

help, to come in and modify those mortgages. 

But the second part is for every dollar of federal money that goes 

in and ultimately makes it into the hands of the mortgage lenders, 

there is an increased incentive for them to sit on the sidelines and 

hope that more federal dollars are coming and not come to the 

table and negotiate with their homeowners. 

So I just want to hear about the part of the program that encourages the lenders to acknowledge their losses rather than taxpayers 

having to pick that up. 

Mr. ALLISON. As you point out, foreclosure is very expensive. It 

is expensive to everybody, to the homeowner, as well as to the 

original lender. We believe that our program, which is designed for 

situations in which there is a positive net present value to modifying the mortgage, has caused banks to take a hard look at whether they might be better off by modifying the mortgage. 

As to principal relief, the Making Home Affordable program does 

allow for principal relief. It provides the same types of incentives. 

We also have now coupled the Hope for Homeowners program, 

which involves principal relief, into our waterfall of alternatives. 

And the individuals who run the Hope for Homeowners program 

are working on revised rules and guidance that will soon be rolled 

out. So, we should see more activity in the Hope for Homeowners 

program as well. 

In addition, the Obama Administration has long advocated responsible reform of bankruptcy rules to encourage affordable modifications. That is, bring lenders together with borrowers to try to 

prevent bankruptcy, which is expensive to all sides. 

Chair WARREN. Thank you. 

Mr. Silvers. 

Mr. SILVERS. I want to pick up on this line of questioning a little 

bit. 

As Superintendent Neiman mentioned, we had a hearing in 

Philadelphia and your office was very helpful in providing witnesses. At that hearing, there was a great deal of focus on these 

two issues you just mentioned: the question of negative equity and 

the reform of our bankruptcy laws, on the one hand, and secondly, 

the issue of the unemployed. 

In respect to reform of the bankruptcy laws—and I just draw this 

to your attention—it was acknowledged by our expert witness from 

the Federal Reserve Bank of Boston that really bankruptcy reform 

was the only way anybody could think of to target relief in the area 

of negative equity. There is a problem if you just throw money at 

negative equity, that it goes to lots of people who can actually afford to pay their mortgages. But with the bankruptcy process, there 

is kind of a gatekeeper mechanism there. Bankruptcy is unpleasant 


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and has real consequences for the person going bankrupt, but you 

target the relief that way. 

Secondly, I want to come back to unemployment. There was a 

near universal—I think actually universal view among our witnesses that the Treasury’s programs did not adequately address 

the unemployment-driven foreclosure wave, and as Superintendent 

Neiman suggested, a deep interest in the HEMAP program, the 

Pennsylvania program. Do I take from your testimony that you are 

looking at further actions in this area. Am I hearing your testimony right? 

Mr. ALLISON. We have been looking at a wide variety of actions, 

including to help people who are unemployed. As I mentioned, this 

program now makes it possible for people who have the prospect 

of another 9 months or more of unemployment insurance to take 

part in the program, and we will continue to look at what else we 

might do in balancing the interests of the taxpayers with the 

needs, the very serious needs, of people who become unemployed. 

And, we are looking at various models. I am not committing that 

we will be able to instigate any particular method at this point, but 

we—— 

Mr. SILVERS. I did not hear you commit. 

Mr. ALLISON [continuing]. Are certainly actively looking at it. 

Mr. SILVERS. But you are actively looking. 

Mr. ALLISON. Absolutely. 

Mr. SILVERS. I mean, I think you know this, but I would urge you 

to not just consider this as a balance between the interests of the 

taxpayers and the interests of people facing unemployment and 

foreclosure, but the systemic consequences of the unemploymentdriven foreclosure wave. 

Mr. ALLISON. The Obama Administration takes this very seriously. It has initiated a wide variety of measures, again, beyond 

the HAMP program. The entire economic stimulus program is intended to create jobs and to preserve jobs as much as possible during the most serious recession we have had in at least 50 years. 

Mr. SILVERS. At least I personally am aware and supportive of 

much of that work. I think that the particular problem of unemployment-driven foreclosures is one that I think was underestimated through no one’s particular fault early on in the development of the Making Home Affordable program. I am glad to hear 

that you are looking at what options are available. I would urge 

you to do that. 

Mr. ALLISON. Thank you. And we certainly understand the importance of this issue. 

Mr. SILVERS. Very good. 

I want to then turn back to the small business piece for a moment. There is a tradeoff, it seems to me, between the potential of 

leveraging small business lending versus the certainty of a direct 

TARP pipeline, that you would be certain that that money was 

going to small business lending if you did it directly. I think that 

I would urge you to focus on our chair’s comments about the need, 

given the choice you have made, to very closely monitor not just 

the plan at the front end, but the implementation of the plan at 

the back end from these banks. 

Mr. ALLISON. Thank you, and we fully agree with you. 


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Mr. SILVERS. Very good. 

I will stop here and pass it on to my colleague. 

Chair WARREN. Mr. Neiman. 

Mr. NEIMAN. Thank you. 

I want to focus on the stress tests and pick up on commercial 

real estate lending, which we really have not touched on yet. The 

stress tests required that the largest banks carry and in some cases 

raise additional regulatory capital. When those tests were conducted last spring, many of the concerns revolved around the markto-market securities. Now it appears that those securities may have 

stabilized somewhat and now the concerns have really shifted to 

portfolio loans on bank balance sheets particularly commercial real 

estate. 

Is your office looking at or considering any programs other than 

PPIP and TALF for CMBS programs, commercial mortgage-backed 

securities, or an expansion of those programs to address the particular issues around commercial real estate loans? 

Mr. ALLISON. We have looked at many alternatives. This is a 

problem that is considerable across the country, both because the 

securitization markets are not as robust as they were before and 

because banks have a large amount of commercial real estate loans 

on their books. In fact, the smaller banks tend to have a larger proportion of commercial real estate on their books than do the bigger 

banks. That is another reason why we have launched this program 

aimed at community banks. A lot of their small business lending 

is connected with commercial real estate lending. So by providing 

them access to additional capital, we can help them to withstand 

a deterioration in the value of those assets on their books. 

Now, we think that providing capital is more efficient and more 

effective than trying to directly intervene to support prices in the 

commercial real estate market, which would be very expensive and 

impractical. By providing capital, the banks are better able to deal 

with the problems on their books by, for instance, extending loans 

or modifying loans over time. And we think that already there is 

a lot of creativity in the commercial real estate market. Some investors are entering this market. We are seeing somewhat more activity in the securitization markets, and banks’ earnings also can 

help them to withstand this problem over the next several years. 

So I think the banks are well aware of the problem, as are the regulators, and they are working actively to deal with it. 

Mr. NEIMAN. Are there any proposals around addressing the 

commercial real estate problem that you could share with us, particularly projects that support affordable housing, multi-family 

housing? 

They are a great concern in many urban areas, including New 

York. Large commercial lenders who use those funds to purchase 

low- and medium-income housing projects, now that they are facing 

possible default, are cutting back on maintenance and services and 

it is becoming a real community concern. Are there any programs 

that you can share with us today that may have some level of real 

interest to confirm that there are programs under consideration? 

Mr. ALLISON. Well, we have been in dialogues with community 

leaders and also with housing finance agencies and others to look 

at this problem. So overall, there have been measures taken to supVerDate Nov 24 2008 01:16 Jan 23, 2010 Jkt 054131 PO 00000 Frm 00046 Fmt 6633 Sfmt 6602 E:\HR\OC\A131.XXX A131

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port the housing finance agencies and to work with them on this 

problem. As you know, there are different situations for different 

housing projects, and in some cases, the banks are stepping in to 

deal with this or other new investors as well. So there are a variety 

of ways of dealing with that problem. But again, right now, our 

focus is going to be on providing capital to the community banks 

to help them with their widespread concerns about commercial real 

estate and to support small business. These two factors are intertwined in the communities across the country. 

Mr. NEIMAN. Still on the stress tests, is there any consideration 

being given to rerunning any of those stress tests on large or regional banks with a particular focus on commercial real estate 

loans and to extend the time horizon on those tests out another 

year? In New York we have utilized stress tests on an ad hoc basis 

in situations where we feel a bank may have issues. But is there 

any consideration? We have recommended it in past reports that 

the Administration and the regulators consider expanding out either on an ad hoc or systemic basis the stress tests. 

Mr. ALLISON. As you know, the regulators are well aware of 

these issues and they are the ones who determine how to administer stress tests to those institutions. And I am sure that they 

have had extensive dialogues with these banks to understand their 

current situation. 

Mr. NEIMAN. Thank you. My time has expired. 

Chair WARREN. I would like to ask some questions about the 

winding down. I was interested to see that on September 18th the 

money market guarantees were permitted to expire. Is the guarantee really gone? 

The next time money market managers face big losses and the 

money market account breaks the buck, is there anyone in America 

who does not believe that the American Government will rush back 

in and support the money markets? 

Mr. ALLISON. Well, the need for that program went away. 

Chair WARREN. It has gone away for today. I am asking about 

tomorrow, the next time we hit a financial crisis. So do we have, 

in effect—the question I am asking—do we have a pre-guarantee 

out there? That is, we will not call it a guarantee in boom times 

and when there is a bust, then we will move in. So unlike FDIC 

insurance, for example, which you have to pay for all the time, it 

is just an insurance policy that you pay for only when you’re sick. 

Mr. ALLISON. Well, that is another reason why the Administration has been proposing comprehensive reform of the financial industry and also adequate disclosure by institutions about their financial situations. So I think you are asking whether there is a 

moral hazard with regard to the design here. The intention of the 

Administration’s programs is to reduce drastically the need for 

Federal intervention going forward. 

Chair WARREN. Through regulatory reform. 

Mr. ALLISON. Absolutely. 

Chair WARREN. Good. 

So let me ask another one then. Will CPP, CAP, and TIP—I am 

learning the acronyms of Washington. Will those three programs be 

closed by the end of the year? 


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Mr. ALLISON. Let me just mention that is the Capital Purchase 

Program, the Capital Access Program, and the program for just a 

few banks. 

Chair WARREN. And the TIP. 

Mr. ALLISON. The TIP, Troubled Investment Program. 

Those programs are, in effect, going away. They are being 

capped. 

Chair WARREN. So they will be gone by the end of the year. 

Mr. ALLISON. At the end of the year. 

Chair WARREN. Are we planning any new programs to launch? 

Mr. NEIMAN. The programs that are planned are the ones I have 

talked about today. 

Chair WARREN. Okay. So that means that going forward, just if 

you could, describe what TARP will be starting in January. What 

is left? 

Mr. ALLISON. Well, we have the homeowners program. 

Chair WARREN. So the homeowners program will be ongoing. The 

new small business lending program. 

Mr. ALLISON. The small business/small bank program, absolutely. We will still have the investments that we have made that 

have not yet been repaid. 

Chair WARREN. But surely, we do not need a whole TARP apparatus to be—— 

Mr. ALLISON. Well, actually, we are going to need people who are 

looking after those assets, asset managers, as well as accountants 

and many other—— 

Chair WARREN. I am actually sorry to hear that. We are still not 

considering the panel recommendation to put those shares of stock 

in trust. I should say Treasury is still not considering the panel’s 

recommendation to put the shares of stock of the auto industry and 

the large financial institutions in trust? 

Mr. ALLISON. Most of our holdings are in preferred stock. We are 

common stockholders in a few companies. 

Chair WARREN. And the recommendation is to take our common 

stock and put it in trust. 

Mr. ALLISON. Under the EESA, the Emergency Economic Stimulus Act, the Treasury Secretary has the responsibility for overseeing those investments. He cannot shed that responsibility. Even 

if we put them in a trust or a limited liability company, the Treasury Secretary still has that responsibility under the law. 

Chair WARREN. I am sorry. I am not quite understanding. Are 

you saying it is not lawful for the Secretary of the Treasury to put 

the shares of stock in Chrysler and GM into trust? 

Mr. ALLISON. No, I am not. I am saying that even if they are put 

into a trust vehicle or a limited liability company, the Treasury 

Secretary still has the responsibility for overseeing those assets. It 

is possible to do that. The question is whether that is an efficient 

use of taxpayers’ dollars to create that administrative infrastructure since the Treasury Secretary still has the responsibility for 

oversight. 

Chair WARREN. Good. I am going to quit early this time. 

Mr. Silvers. 

Mr. SILVERS. Thank you. 


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I want to circle back to where we started on executive pay. 

Thinking about this, it seems to me that this week we have seen 

a fair amount of public anger about bonuses in the financial sector, 

most of which are actually not to top executives and most of which 

are across a number of firms not all of which will be subject to Mr. 

Feinberg’s recommendations. 

So what do you say to the public who are expressing the view 

that firms like JP Morgan, Goldman Sachs, Morgan Stanley are 

alive today because of the combination of CPP funds and Federal 

Reserve dollars, that they have now handed out vast sums to a relatively small number of people, sums that would simply not have 

been there absent government support? And they are not going to 

be affected by Mr. Feinberg’s recommendations because they apply 

only to the banks we were discussing earlier. What do we tell the 

public? 

Mr. ALLISON. Well, the Administration and the Treasury Secretary have been outspoken about the need for financial institutions to structure their compensation in ways that promote a longterm view for the health of those companies and responsible risktaking. Obviously, the public is angry about the pay levels in the 

financial industry among some institutions, not all by any means. 

I am sure that the boards and the managements of those institutions must be aware of this. 

We have also, as you know, imposed the interim final rule on the 

institutions receiving special assistance from the Federal Government and the results of those determinations will be out very 

shortly. Other banks that are still in the Capital Purchase Program, for instance, and these other programs that we mentioned 

are still subject to the rules that govern those companies on compensation as well. 

What we need is comprehensive reform of financial institutions 

and the regulations that cover them. Boards have to be responsible 

in making sure that their pay programs are reasonable, that they 

are paying for real economic performance and not just spurts in 

market prices. In addition, they are creating incentives for their 

employees to think about the long term and to manage risks responsibly. 

Mr. SILVERS. It seems to me that in respect to the bonuses that 

were just announced, the horse has left the barn. And my question 

is, would the Administration consider looking at tax policy as a 

way of roping that horse? 

Mr. ALLISON. Well, I am sure that Congress and the Administration are equally concerned about this, but I cannot speak for tax 

policy. 

Mr. SILVERS. With some of your colleagues at Treasury, you 

might want to have a chat together. 

Mr. ALLISON. I am sure that others will have more to say about 

this in the future. 

Mr. SILVERS. Let me move from that. 

Earlier this week, Neil Barofsky issued his report as the Special 

Inspector General. He raised an issue. His report talked about a 

sort of confidence deficit or something of the like. I forget the exact 

term he used. And he cited particularly the statements made by 


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your predecessors about the fact that all the banks that were getting CPP money were healthy and that that was clearly not true. 

I have noted in the past that I think one of the achievements of 

your team and Secretary Geithner was to reverse that position, 

that the stress tests were effectively a reversal of that. 

I would like you to address what other steps you are taking to, 

shall we say, reverse this confidence deficit, with particular reference to what plans you have to be forthcoming about the destiny 

of these large banks that were the subject of this misrepresentation, according to Mr. Barofsky, around their health. 

Mr. ALLISON. Well, first, let me make clear that as we expressed 

in a letter that I sent to Mr. Barofsky some time ago, we fully 

share his concern that the Government operate with transparency 

and accountability. And that has guided us during this administration. 

And we have published voluminous information about the TARP 

program on our Web site, financialstability.gov, about the lending 

practices of the banks, about every transaction that we have done, 

and about the models we use in valuing warrants and valuing our 

investments. We are going to be reporting a full accounting of the 

value of these investments by the end of this year so that the public can see for themselves what the returns have been on the 

money they have invested through TARP. So we are trying to be 

as open as possible. 

I have dialogues with Mr. Barofsky every week and sometimes 

more than once a week. For example this week we met several 

times. We, I think, share the same goal: to try to protect the interests of taxpayers while also promoting financial stability. We have 

adopted at least three-fourths of the Special Inspector General’s 

recommendations, as we have your own recommendations, which 

we welcome, the GAO, and the Financial Stability Oversight Council. So, we are trying to be as open and responsive as we can possibly be, and we understand our substantial responsibility to the 

American public. 

Chair WARREN. Mr. Neiman. 

Mr. NEIMAN. Thanks. 

To give you a heads up for our future reports, in our December 

report we are going to look back over the last 12 months and really 

look at how effective—what are the measurements, what are the 

metrics that we should be looking at, what measurements that the 

American taxpayer should be looking at to see the state of the 

economy and the effectiveness of the Treasury’s program. And credit availability will be an important part of that analysis. 

As you know, though, measuring credit availability in this environment is very complex, and we know that credit contracts in a 

recession as banks and consumers deleverage, and we know that 

underwriting standards become tighter as banks strive to conserve 

capital. 

So I am looking to you as we grapple with this question. How 

should the American taxpayer be assessing the effectiveness of the 

Treasury’s programs to promote bank lending? Should they be looking at credit spreads or bank origination levels or portfolio holdings? What would be helpful and meaningful for the American taxpayers? 


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Mr. ALLISON. Thanks for your question. Actually we do a lot of 

thinking and work on that subject. We have many different measures that we use to assess the effectiveness of these programs as 

well as the activity in the financial markets. We would be glad, by 

the way, to sit down with members of your staff to go over our 

metrics, as you produce your own report. 

But I have to say that for all the measures of debt spreads and 

prices capital ratios, what is important to the American public is 

whether the job market is getting better, can I afford to stay in my 

home, and are businesses able to get credit. And even though these 

programs have helped to alleviate these problems, we are not by 

any means satisfied. We have to keep on striving to make these 

programs as relevant and as useful to the American public and 

produce real results. 

That is why we are altering the thrust of the TARP program 

today from having helped the large financial institutions survive, 

which was important to the financial system given their role, but 

now get into what is happening with the American public. Can the 

small businesses get capital? Can small banks be helpful, and can 

people stay in their homes? So that is where we are focusing our 

effort today. 

We can give you the financial metrics, the more sophisticated 

measures that we use, but I think ultimately these programs will 

be judged by their impact on the American economy as felt by the 

American public. 

Mr. NEIMAN. Are there any plans to expand the monthly lending 

snapshot? I know you have extended it beyond the largest 19 to include 200 banks, though it is a monthly snapshot. I have been recommending for a while that it should include trend information, 

comparisons to earlier periods such as 2006 when credit was running high and even the fall of 2008 when credit markets were frozen. And I think those kind of trends would provide perspective for 

the American public as to where we are in comparison to where we 

were. 

Mr. ALLISON. I think that is a great suggestion and let us see 

what we can do there. 

Mr. NEIMAN. Great. 

Mr. ALLISON. Thank you. 

Chair WARREN. Assistant Secretary, thank you very much. 

Thank you for your time. Thank you for your service. 

Mr. ALLISON. Thank you. 

Chair WARREN. We appreciate your coming here today. 

The record will remain open for additional questions from the 

Panel and from our members who could not be here today. With 

that, this hearing is adjourned. 

[Whereupon, at 11:30 a.m., the hearing was adjourned.] 


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