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FINANCIAL STABILITY OVERSIGHT COUNCIL 

ANNUAL REPORT TO CONGRESS 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

ON 

EXAMINING THE FINANCIAL STABILITY OVERSIGHT COUNCIL ANNUAL 

REPORT TO CONGRESS 

OCTOBER 6, 2011 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.fdsys.gov/ 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

TIM JOHNSON, South Dakota, Chairman 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

HERB KOHL, Wisconsin 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

MICHAEL F. BENNET, Colorado 

KAY HAGAN, North Carolina 

RICHARD C. SHELBY, Alabama 

MIKE CRAPO, Idaho 

BOB CORKER, Tennessee 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

JERRY MORAN, Kansas 

ROGER F. WICKER, Mississippi 

DWIGHT FETTIG, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director 

CHARLES YI, Chief Counsel 

LAURA SWANSON, Policy Director 

CATHERINE GALICIA, Counsel 

PAT GRANT, Counsel 

COLIN MCGINNIS, Professional Staff Member 

MARC JARSULIC, Chief Economist 

JANA STEENHOLDT, Legislative Assistant 

ANDREW OLMEM, Republican Chief Counsel 

MIKE PIWOWAR, Republican Chief Economist 

DAWN RATLIFF, Chief Clerk 

RIKER VERMILYE, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

(II)

C O N T E N T S 

THURSDAY, OCTOBER 6, 2011 

Page 

Opening statement of Chairman Johnson ............................................................. 1 

Opening statements, comments, or prepared statements of: 

Senator Shelby .................................................................................................. 2 

WITNESS 

Timothy F. Geithner, Secretary, Department of the Treasury ............................ 3 

Prepared statement .......................................................................................... 30 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Financial Stability Oversight Council 2011 Annual Report ................................. 33 

(III)

(1) 

FINANCIAL STABILITY OVERSIGHT COUNCIL 

ANNUAL REPORT TO CONGRESS 

THURSDAY, OCTOBER 6, 2011 

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Committee met at 10:11 a.m., in room SD–538, Dirksen Senate Office Building, Hon. Tim Johnson, Chairman of the Committee, presiding. 

OPENING STATEMENT OF CHAIRMAN TIM JOHNSON 

Chairman JOHNSON. Today we hear from Secretary Geithner on 

the first ever Financial Stability Oversight Council Annual Report 

to Congress. FSOC was created to be an early warning system for 

our financial system, and the timing of today’s hearing could not 

be more appropriate as the global economy faces real systemic 

threats as the European Union struggles with its sovereign debt 

crisis. 

As the Committee continues its oversight of the Dodd-Frank Wall 

Street Reform and Consumer Protection Act, I welcome this opportunity to receive updates on FSOC as efforts to identify systemic 

risk and enhance financial stability and the possible impacts of the 

European situation on our economy and financial system. In addition, I look forward to hearing about FSOC’s progress as it continues to work on rules to designate large risky, nonbank financial 

institutions for enhanced supervision. 

It is also important to note that as this Committee votes on the 

nomination of Rich Cordray to be CFPB Director, Mr. Cordray will 

also be the tenth member of FSOC. This is the last remaining voting spot on the FSOC to be filled. 

Having all hands on deck at FSOC is important, especially when 

we consider that our last financial crisis was caused in part by 

widespread lack of consumer protections. CFPB has an important 

role to play on FSOC, and Mr. Cordray needs to be confirmed. 

While we will never be able to anticipate every possible cause of 

a future crisis, I believe the creation of FSOC was an important 

step toward a better understanding of the threats facing our interconnected financial system. 

Secretary Geithner, I hope that the interagency cooperation that 

we have seen on FSOC to this point will continue in the coming 

months and years. 

Senator Shelby. 

2 

STATEMENT OF SENATOR RICHARD C. SHELBY 

Senator SHELBY. Thank you. Thank you, Mr. Chairman. Welcome 

again to the Committee, Mr. Secretary. 

Today Secretary Geithner appears before this Committee as the 

Chairman of the Financial Stability Oversight Council to discuss 

the Council’s annual report. It has been over a year since the 

Council was established as the centerpiece of Dodd-Frank. The 

Council is charged with three primary tasks: to identify risks to 

U.S. financial stability, the so-called systemic risk; to promote market discipline; and to respond to emerging threats to the stability 

of the U.S. financial system. 

Secretary Geithner will have an opportunity to tell the Committee here how he and his Council are fulfilling these ambitious 

mandates. I had hoped that the Council would have provided the 

information in their annual report. Unfortunately, the report fails 

to address these significant areas. Rather than being a forwardlooking study of the risks to the U.S. financial system, the report 

is largely a lengthy summary of statistics with lots of colorful 

graphs. 

For example, the annual report does not provide much evidence 

that the Council was ahead of the euro zone crisis. The countries 

of Spain and Italy are not even mentioned in a discussion of sovereign credit risk. In addition, the report does not address or even 

attempt to address many of the key economic issues that we presently face. 

Perhaps the most fundamental question left unanswered by the 

Council is: What is systemic risk? The term ‘‘systemic risk’’ is mentioned 37 times in Dodd-Frank. It is among the most important 

concepts embodied in the new law because any firm designated systemically significant is to receive additional scrutiny by the Federal 

Reserve. If the Council cannot define ‘‘systemic risk,’’ it will be 

hard pressed to identify growing risk to the U.S. financial system, 

making it exceedingly difficult to make sure that those risks do not 

threaten the health of the economy as a whole, to use your words, 

Mr. Secretary. Consequently, the promise of Dodd-Frank and its 

creation of the Financial Stability Oversight Council I believe could 

go largely unfulfilled. 

In the year since the passage of Dodd-Frank, it has become clear, 

I believe, that the Administration and the regulators exaggerated 

their ability to measure and to regulate systemic risk in the rush 

to pass the legislation. The Council devotes only one page in its 

149-page annual report to ‘‘measuring systemic risk’’ and admits 

that directly measuring systemic risk is challenging and that the 

development of systemic risk measures and models is in the early 

stage. 

Secretary Geithner himself stated, and I will quote, ‘‘You will not 

be able to make a judgment about what is systemic and what is 

not until you know the nature of the shock.’’ 

I hope that we can all agree that it would be a bit too late by 

then. I hope not. 

This sentiment was echoed by the Federal Reserve Board Governor Daniel Tarullo at a recent Fed conference on systemic risk, 

where he spoke on the need for additional academic research in 

this very area. He admitted, the Fed Governor said, ‘‘The comVerDate Nov 24 2008 15:26 Jun 01, 2012 Jkt 048080 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 L:\HEARINGS 2011\10-06 FINANCIAL STABILITY OVERSIGHT COUNCIL ANNUAL REPOR
3 

plexity of some of these issues will require continuing attention by 

researchers who are still at the very early stages of defining systemic risk and analyzing the Government’s role in reducing it.’’ 

These difficulties arise from the fact that Congress instructed the 

Council to mitigate all systemic risk before it bothered to determine whether they could identify such risks, let alone mitigate 

them. This is a recurring theme with the passage and implementation of Dodd-Frank. Practically speaking, this means that regulators will be making ad hoc decisions about which firms should be 

designated as systemically significant and how they should be regulated. Accordingly, I hope to hear from Secretary Geithner today 

whether he believes the Council can establish a framework for effective systemic risk regulation that provides clear mandates for 

regulators and legal certainty for market participants, Mr. Secretary. 

In the interim, the present challenge is whether the Council can 

clearly assess the risks posed by politically sensitive problems like 

the European debt crisis, the mounting Federal debt, or the excessive regulation of the U.S. economy. If the annual report is an accurate representation of the Council’s progress, I remember skeptical of its chances of success, as I was when my friends on the 

other side of the aisle proposed the legislation. 

Much of the Dodd-Frank Act was focused on the idea that if financial regulators are given broad enough grants of authority, they 

can prevent any harm and avoid any crisis. I do not believe that 

you can write enough regulations or build a bureaucracy big 

enough to achieve that goal. It would be ideal. Nevertheless, Secretary Geithner sits at the head of a new Government body whose 

promise is just that. Perhaps today he can allay my fears and the 

fears of others and tell us how he intended to prevent all future 

financial crises. It will be a big chore. 

Thank you for appearing with me, Mr. Secretary. 

Chairman JOHNSON. Thank you, Senator Shelby. 

I want to remind my colleagues that the record will be open for 

the next 7 days for opening statements and any other materials 

you would like to submit. 

Welcome back to the Committee, Mr. Secretary. You may begin 

your testimony. 

STATEMENT OF TIMOTHY F. GEITHNER, SECRETARY, 

DEPARTMENT OF THE TREASURY 

Secretary GEITHNER. Mr. Chairman and Ranking Member Shelby, thanks for inviting me to come testify on this, and I want to 

just start by thanking the Committee for approving or forwarding 

the nominee recommendations you acted on this morning. In that 

context, I want to encourage you, those of you who did not vote for 

Mr. Cordray, to spend some time with him. I think you are going 

to find he is an exceptionally talented and thoughtful leader, an excellent record. And I know some of you have said that there is no 

person you would confirm to this job ever without fundamental 

changes in the structure of the Bureau, and, again, I would encourage you to spend some time with him and take a look at him and 

ask a lot of questions, and I think you will find yourself reassured. 

4 

I would just remind you that if the Senate fails to confirm a Director for the CFPB, then what will happen is we will leave a vast 

array of nonbank institutions, financial institutions, and consumer 

finance companies outside the scope of consumer protection, which 

was exactly the same mistake that left us so vulnerable to the financial crisis we went through. So delay in confirming a nominee 

does not help close that fundamental gap in the financial system, 

and as I said, I think if you could spend time with him, you will 

find him an exceptionally qualified, thoughtful person. 

In setting up this Council, Congress asked us to provide each 

year a comprehensive view of financial market developments and 

potential threats to the financial system. Let me just start with a 

few comments on the broad backdrop of the global economy, which, 

of course, is the fundamental determinant of financial stability. 

In 2011, the world economy, like the U.S. economy, is still healing from the devastating effects of the financial crisis. On top of 

those basic challenges, we experienced a series of additional challenges to recovery early this year from high oil prices and the disaster in Japan. Europe’s protracted economic and financial crisis 

has added to these pressures on global growth. And the destructive 

debate we saw in the United States this summer about whether 

the United States as a country should meet its obligations was very 

damaging to consumer and business confidence. 

Just to give you an anecdote, if you talked to businesses across 

the country, as I did, particularly in the month of August, they 

said, ‘‘Why should we make an investment, hire a new a person, 

if Congress is debating whether to meet its obligations as a country?’’ It was a very damaging vote of confidence in the United 

States, and you feel it now in terms of how slow growth is. 

Some of these factors have eased in recent months, as oil prices 

have fallen and Japan has begun to recover. But the cumulative effects of the pressures have resulted in slower growth in the United 

States and around the world and lowered expectations for growth 

over the next 18 months to 2 years. 

The crisis in Europe presents a very significant risk to global recovery. We are working alongside the IMF to encourage European 

leaders to move more forcefully to put in place a comprehensive 

strategy to stabilize their crisis. The critical imperative is to ensure 

that the governments and the financial systems that have been 

under pressure have access to a more powerful financial backstop, 

conditioned on policy actions that can credibly address the underlying causes of the financial pressures they are facing. 

Now, in the face of the situation in Europe and the general slowdown in growth around the world, the most important thing we can 

do here in the United States is to act to strengthen our economy. 

And in our judgment, the most effective strategy for doing that is 

to enact steps now that will accelerate economic growth and tie 

those to long-term reforms to restore fiscal sustainability. 

The American Jobs Act which the President proposed provides a 

substantial package of tax cuts and investments that, according to 

estimates by outside economists, would raise economic growth by 

1 to 2 percentage points and help create 1 to 2 million jobs. And 

in the President’s proposal to the Joint Committee of Congress that 

is charged with recommending reforms to reduce our long-term 

5 

deficits, he outlined a comprehensive package of reforms to spending programs and to our tax system that would bring our deficits 

down to the level where our overall debt burden starts to decline 

as a share of the economy. 

Now, this Council is comprised of each of the agencies at the 

Federal level responsible for oversight of the financial system and 

the firms and markets that make up our financial system. And it 

is the judgment of this Council that the United States’ financial 

system is in a significantly stronger position today and better able 

to withstand the new risks we face in the global economy because 

of the actions we took at an early stage of the crisis to repair and 

reform our system: 

The weakest parts in our financial system, the ones that took the 

most risk, no longer exist or have been fundamentally restructured; 

The largest banks in the country, the largest 19, have increased their common equity, their capital buffers, by over $300 billion 

since the beginning of 2009; and the level of common equity to riskweighted assets across these banks is now approximately 10 percent, up from roughly 6 percent at the beginning of 2009; 

Banks are funding themselves more conservatively and are maintaining much larger cushions of safe and liquid assets. 

These improvements are very significant. Together they represent much more progress on the path to a more stable and resilient financial system than has been achieved in the other major 

economies that were caught up in this crisis. 

U.S. financial institutions, including our major banks and the 

money market funds as a group have substantially reduced their 

exposure to the economies of Europe that have been under the 

most pressure. Our direct financial exposure to these governments 

and their institutions is quite small, but it is important to recognize that Europe is so large and so closely integrated with the U.S. 

and world economies that a severe crisis in Europe could cause significant damage to growth here and around the world. And this 

makes it even more important that Congress act to strengthen 

growth now and put our fiscal position on a more sustainable path. 

Economic and financial developments since the release of our report reinforce the importance of the Council’s recommendations, 

and let me just summarize those recommendations quickly. 

First, the Council recommends—and it will always recommend 

this, in my judgment—that the core institutions in our system and 

the basic institutions critical to markets continue to act to 

strengthen their financial position over time. We want the largest 

institutions in the country to manage their businesses so that they 

have the ability to withstand more challenging future environments without Government assistance in crisis. And toward this 

objective, the responsible regulators will gradually phase in, over 

a period of several years, the much tougher standards we have negotiated for capital and liquidity with the other major financial 

centers around the world. 

Second, the Council recommends reforms to strengthen a number 

of key funding markets in the United States, markets that were a 

critical source of vulnerability, a source of contagion in our crisis. 

The most important of these recommendations relate to the triparty repo markets, repurchase markets, and the money market 

6 

funds. The essence of these recommendations is to make these markets—the tri-party repo markets and the money market funds— 

less vulnerable to the classic dynamic in which an abrupt rush for 

the exits forces a damaging spiral of asset sales, deleveraging, and 

broader contagion. We have made very substantial progress toward 

this objective, but we have some more work to do. 

Third, the Council recommends reforms to the housing finance 

system. It recommends actions to establish national standards for 

mortgage servicing, and the Council, of course, emphasizes the importance of broader reforms—these reforms will require legislation—to return private capital to the housing market, strengthen 

mortgage underwriting, and reduce over time the Government’s 

role in the housing markets. As we proceed with these reforms, 

however, we want to make sure that we are encouraging, not undermining, the prospects for broader recovery in the housing market. 

Finally, the Council emphasizes the importance of closer cooperation and coordination in the implementation of financial reforms, 

both here in the United States and around the world. This is crucial because if we allow large gaps to emerge as we did in the years 

before the crisis, risk will migrate to those gaps, leaving the system 

as a whole more vulnerable to crisis. 

Differences in the design of standards create opportunities for 

firms and investors to take advantage of weaker standards. And as 

we act to contain risk in the United States, we want to minimize 

the chances that risk simply moves to other markets around the 

world, which could also make us more vulnerable. The hardest 

thing in this area, in this challenge of building a level playing field, 

and the hardest challenges lie in the design and application of capital requirements and the framework over derivatives. 

Although our system today is much stronger than it was before 

the crisis, we have more work to do on reform of the system. And 

as we proceed with these reforms, we are going to adopt a balanced 

approach, weighing the benefits of regulation against the costs of 

excessive restraint. We need to move at a pace that fully recognizes 

the fragility of the global economic recovery, phasing in reforms 

over time so that we limit the risks to economic growth. 

Mr. Chairman, in closing, I just want to thank the other members of the Council and their staff for the work they have done over 

the past year in building an institution for closer cooperation and 

in creating a very substantive, very strong first report to provide 

this overview of potential challenges to the system. 

Thank you. 

Chairman JOHNSON. Thank you for your testimony. Good morning. As we begin the questions, I will ask the clerk to put 5 minutes on the clock for each member. 

Secretary Geithner, what are the risks to the U.S. economy if financial turmoil in the EU? Are there policies steps that we ought 

to take to limit any negative impact on the U.S.? 

Secretary GEITHNER. Well, as we have already seen, developments in Europe can have big effects on the United States economy, big effects on confidence, big effects on financial markets; and 

we are living with the pressures today. They have hurt growth 

here and they have reduced expectations about future growth. 

7 

The three most important things we can do are the following. 

The first, of course, is to help Europe get on top of this. We cannot 

want it more than they do. We cannot compel them to act, but we 

have a strong interest as a country. 

We do not want to see Europe weakened by a protracted financial crisis. They have invited the IMF in. They are taking advantage of swap lines provided by the Federal Reserve, and we have 

a strong stake in seeing them act more forceably to address this. 

The second thing we can do is act to make our economy stronger 

at home. As I said in my testimony, we have given the Congress 

what we think is a very strong, very powerful set of tax incentive 

and investments, proposals that have always enjoyed quite broad 

bipartisan support in this body, and that is our best protection as 

always against developments outside of the United States, act to do 

things to make this economy stronger. 

And finally, of course, the supervisors are watching very closely 

the broad financial linkages between our institutions, our markets 

and Europe. 

And as I said in my testimony, you have seen a very substantial 

reduction in our direct exposure, and our institutions hold substantial cushions of capital against the potential risk they might face 

ahead. But of course, that is something we have to keep monitoring 

closely. 

But those are the things I would focus on. 

Chairman JOHNSON. Secretary Geithner, FSOC continues to 

work on rules to designate nonbank financial institutions as systemically important financial institutions or SIFIs. 

Can you provide us an update on this practice? 

Secretary GEITHNER. The Council meets next week, and it will 

consider at that point a new piece of guidance that we would make 

public that, if adopted, would lay out a framework for making these 

judgments. 

But let me just explain what we are trying to do. We had a financial crisis that was caused in significant part by the fact that 

this country allowed a huge amount of risk to buildup outside the 

banking system without constraints on leverage, without the basic 

types of protections that all financial systems require. 

And that was very damaging to us because when the crisis hit, 

markets just sucked all of the oxygen out of that parallel shadow 

financial system that came crashing down, put enormous pressure 

on the rest of the system and that was one of the huge accelerants 

and amplifiers of our crisis. 

So, one of the most important things that this legislation did was 

to give us authority we did not have to make sure we can apply 

a prudential framework of safeguards on capital liquidity leverage 

for institutions that pose that type of risk to the system. 

Senator Shelby is absolutely right that it is very hard to judge 

who can be systemic in a crisis, but we have a basic obligation to 

make sure that institutions that operate like banks, provide the 

same function as banks to the economy, are large and leveraged 

and vulnerable to liquidity pressures and the basic utilities markets require, are subject to very strong prudential safeguards. 

And the framework that the Council is going to consider on Tuesday is designed to give the markets more guidance, more clarity 

8 

about what types of institutions, what types of structures we would 

want to consider making sure that they are subject to these kind 

of prudential safeguards. 

Chairman JOHNSON. In addition to international bodies who are 

working on efforts to designate globally systemically important financial institutions, or G–SIFIs, how is FSOC working with global 

entities to ensure that SIFIs designation guidelines both domestically and globally are coordinated and do not put U.S. nonbank financial insurance committees at a disadvantage? 

Secretary GEITHNER. A very important point and I thank you for 

raising it. 

There are two things we need to do to make sure there is a level 

playing field. One is to make sure we have uniform standards for 

required capital ratios and liquidity requirements that are applied, 

set at the global level, agreed at the global level, and enforced at 

the global level. That is not enough though. 

We need to make sure that they are designed in a way that they 

are going to be applied in a way that is as uniform. And we are 

very concerned that we make sure we build in additional protections into the system so the playing field will actually be level. 

I will just give you an example. There is a lot of evidence that 

the major financial centers apply the risk weights that are critical 

to determining how much capital you have to hold against risk 

with varying degrees of rigor. 

So, you want to make sure that as we proceed, and we have the 

time to get this right, that these countries are not just committing 

to meet the letter of the requirement but the actual enforcement 

of that requirement is as vigorous outside the United States as we 

expect it to be here. 

And this proposal to make sure we have the largest institutions 

hold enough capital is something we are going to phase in over 

time, quite a long period of time. So, we have time to make sure 

now that as we apply them in the United States, they will be applied as uniformly as possible outside the United States. 

Chairman JOHNSON. Senator Shelby. 

Senator SHELBY. Thank you. 

Mr. Secretary, Dodd-Frank, as I understand it, establishes the 

council to, quote, ‘‘identify risk to the financial stability of United 

States.’’ 

In your written testimony, you state, and I will quote you, ‘‘We 

cannot predict the precise threats that may face the financial system.’’ I understand that. 

But what types of threats can the council predict? I think it is 

very important. 

Secretary GEITHNER. Essentially, it might surprise you to find 

that I agree with a lot of what you said in your opening statement, 

and I agree and very much endorse your skepticism about the capacity of people who sit in my job or my counterparts on the council 

to look to the future and anticipate the types of sources of risk we 

face. 

And so, the basic strategy that underpins the design of this 

framework is not a strategy that depends on the wisdom and foresight of governmental officials. It is a strategy that relies on buildVerDate Nov 24 2008 15:26 Jun 01, 2012 Jkt 048080 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 L:\HEARINGS 2011\10-06 FINANCIAL STABILITY OVERSIGHT COUNCIL ANNUAL REPOR
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ing much stronger shock absorbers, safeguards in the system so 

that we are protected against a whole range of potential risk. 

Senator SHELBY. Like capital for example? 

Secretary GEITHNER. Capital is the most important of those. Liquidity is another. Those things go together. 

So, of course, we want to do the best we can to look at emerging 

risks but we are quite humble in our capacity as anyone would be 

looking at the history of financial crises, and we want to have a 

system that recognizes the basic limits on the capacity to anticipate 

and preempt. 

Senator SHELBY. But you also want to do no harm too, do you 

not? And that is a dangerous thing. 

Secretary GEITHNER. Yes, there is a risk. I think if you look at 

the U.S. economy today, I would say the biggest risk we face is institutions not taking enough risk, not taking too much risk at the 

moment. That is a natural aftermath of crises when people are still 

scarred by the trauma of the crises. 

But I agree, you want to make sure that people are willing to 

take risks. You do not want to lose that capacity. 

Senator SHELBY. Mr. Secretary, Chairman Johnson got into this 

some, but I will ask you again. What are the two top, two or three 

potential emerging threats as you see it to the financial stability 

of the United States? I know debt is one. 

Secretary GEITHNER. Well, the list I would say is you have to 

start with the European crisis. Because Europe is big—— 

Senator SHELBY. OK. That is right on us now. 

Secretary GEITHNER. And slower growth globally matters because 

with growth now in the United States somewhere in the 2 percent 

range it is not strong enough, and we are more vulnerable with 

growth this week, to other things happening that we can anticipate 

that would make it weaker. 

I would focus overwhelmingly on those two things. But you are 

absolutely right that if the United States does not put in place the 

framework to reduce our long-term deficits over time, that too in 

the future, it will not happen soon but that too in the future could 

reduce growth and hurt the financial strength of the United States. 

Senator SHELBY. So basically, the failure to stabilize the Federal 

Government’s debt burden if we don’t do not get on the right trajectory in the next few years could represent a threat to the financial 

stability of our whole country, could it? 

Secretary GEITHNER. It could if Congress, and I do not think 

Congress would do this, if Congress sits here and lets—— 

Senator SHELBY. If we did not do our job. 

Secretary GEITHNER. If you did not do anything, if you do not do 

your job, then at some point—— 

Senator SHELBY. If we rock along like we are doing now, with 

huge deficits piling up debt after debt—— 

Secretary GEITHNER. I would be a little more optimistic in the 

sense that what Congress did in August, even though it was a bit 

messy, was a pretty good down payment on fiscal reform. But they 

only did about a quarter of the problem, and so we have about 

three quarters of that problem left to define. That is why the super 

committee is so important. 

10 

Senator SHELBY. If I could for a minute just get into the derivatives area. One of the unfortunate side effects, I believe, of the 

Dodd-Frank derivatives clearing mandate is that market participants could possibly stop doing their own credit analysis because 

clearinghouses will take on all of the credit risk. 

Instead of hundreds of analysts that we have today trying to 

analyze the credit risk, only a few clearinghouses, as I understand 

it, would be monitoring credit risk. 

Does this create any systemic risk or could it by concentrating 

so much credit risk in so few clearinghouses? And are clearinghouses too big to fail? We would hope they would never fail. And 

would the Administration bail out clearinghouses? 

We have talked about this before but this could be an important 

part. We hope we never go down this road. 

Secretary GEITHNER. Senator, you are right that clearinghouses 

do not eliminate all risk. And you are right that they do centralize 

and concentrate risk for products that they can clear. 

But they provide a lot of offsetting benefits, and we think on balance the system will be more stable if you see the standardized 

products move through clearinghouses. 

You know, we have had the experience with a market that was 

primarily bilateral, and it was a very messy, damaging experience 

because in the world where it is all bilateral, all the risk is off 

clearinghouses, not all of it, but a substantial part of it. 

Then we found, and you saw this, firms did not really know what 

their exposure was, and the virtue of moving the standardized stuff 

to clearinghouses is it is much more simple to understand what 

your exposure is and how protected you are against that. 

So, we think, on balance, if you get the safeguards right, the system is more stable with central clearing. 

Senator SHELBY. Mr. Secretary, my time is limited here. Has the 

council thought about or discussed whether Operation Twist or 

other monetary policy actions could create systemic risk? 

Secretary GEITHNER. That is an excellent question, and we do 

not, have not in the Council talked about the implications of monetary policy judgments and partly just out of deference to protect the 

independence of the Fed. 

But to say it a little bit more carefully, as you saw in the report, 

the Council members did make the sensible observation that one 

thing you want to make sure banks do is not just be careful of 

managing their credit risk but their interest rate risk over time. 

We are in a really extraordinary period with rates where they 

are today and it is very important that over time this is not the 

biggest risk we face right now that banks are careful to look at 

those risks. 

Senator SHELBY. Thank you. 

Thank you Mr. Chairman. 

Senator REED [presiding]. Thank you very much, Senator Shelby. 

Thank you, Mr. Secretary. 

Mr. Secretary, let me follow-up with one of the, I think, very 

thoughtful insights that Senator Shelby raised in his opening statement and reiterated, and that is, part of the FSOC’s mission is to 

understand systemic risk, to try to anticipate growing risk. 

11 

It would seem to me from my recollection that the operational 

agency most capable of doing it is the Office of Financial Research. 

If you have an apolitical, analytical organization that are thinking 

carefully along with their colleagues in academia and on the financial sector that you will have a much better chance of doing this. 

And I would again urge you, and you’ve been doing I think yeoman’s work to try to get a nominee up here to do that soon. 

Secretary GEITHNER. Coming, and we have talked about this. I 

am glad that you remind us of the importance of this office. 

You cannot effectively oversee a financial system without much 

better information than we had access to before the crisis about 

where risk is and where it shapes. 

One of the key roles of this office is to make sure there is better 

data available not just to supervisors but to the markets as a whole 

so markets can make better judgments about where risk is, and of 

course, that will not happen until we have a confirmed director. 

But we expect to give a nomination to the Senate relatively soon, 

and we are, of course, not waiting. We are starting to build the institutional capacity and the people, and we have seen an extraordinary amount of academic interest and support for this project. 

And so I am really quite confident we are going to have, we are 

going to be able to take advantage of lot of the best talent in the 

country to build this. 

Senator REED. Well, we need the nomination so then we can go 

along with the confirmation process. 

Just in an abundance of caution is that, and I think Senator 

Shelby is exactly right about the need for this type of very thoughtful approach, and I would just regret immensely if that nomination 

was not moved with deliberate speed, and we get this office up and 

running fully so that the burden is on you initially and then it becomes on us. If we are really sincere about the need to get good 

knowledge and good information, then we will do it quickly and we 

will get it done. 

Let me change direction is just a bit, and again, it is another 

comment that Senator Shelby made that one of the most challenging aspects today is trying to regulate the derivatives market 

place. 

The clearinghouse he talked about, definitions of swaps, exemptions particularly when you get into the era of synthetic derivatives. I am still trying to get my hands around good old-fashioned 

derivatives, and there is a whole other world of synthetic and exprime synthetic derivatives. 

If we cannot effectively sort of deploy these regulations in a timely way, it seems to me the only stopgap for the uncertainty is increased capital levels in those firms that deal extensively with derivatives. 

Is that the FSOC view too, because you certainly through your 

agencies have the ability to do that? 

Secretary GEITHNER. That is right but, you know, we are very 

confident that we are going to be able to put in place a regime, for 

example, that mandates margin requirements in derivatives, and 

that combined with the stronger capital buffers and the move to 

central clearing with stronger safeguards in the clearinghouses, 

that that mix of factors will leave us with a much more stable sysVerDate Nov 24 2008 15:26 Jun 01, 2012 Jkt 048080 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 L:\HEARINGS 2011\10-06 FINANCIAL STABILITY OVERSIGHT COUNCIL ANNUAL REPOR
12 

tem than we had, not immune to any crisis, not immune to any 

shock, but much more stable than we had. 

You know, we are trying to get that balance right. This is a terminally complicated task, and we are slower than we had hoped to 

be, but we are slower because we are trying to err on the side of 

getting it right and not to rush it. 

And we want to make sure that we not just get the substance 

right but we have the SEC, the CFTC, and the Fed aligned so we 

have a better chance of getting London, Frankfurt, Paris, Zurich, 

Singapore, Hong Kong aligned too, because we cannot put ourselves in a situation where the stuff just moves to markets where 

there is more risk. 

So, if we are a little slower than we hoped, it is because we are 

trying to make sure that we land sensibly and on a more level 

playing field. 

Senator REED. Well, I concur. I think you have to be careful and 

deliberate. This is very, very complicated. But I think if you reach 

your point where you cannot pull together all of these very difficult 

aspects, in an abundance of caution, I think the only remedy is capital. 

Secretary GEITHNER. Use capital, and that is the way the system 

works. If you have margin and collateral, you do not have to hold 

as much capital against it. 

So, it works that way. We have that basic safeguard built in. 

Senator REED. One of the issues you raised in your testimony is 

your concern about the reliance on short-term funding by major financial institutions, and with tri-party repos market, money market funds, et cetera, particularly in the wake of the European crisis 

which many of their institutions depend, as you point out, more so 

on short-term money than we do we. We learned a very painful lesson in 2008 and 2009. 

What is FSOC doing in terms of trying to deal with this issue? 

And this might be in the category some of my colleagues suggested, 

what is the biggest new threats approaching us? 

Secretary GEITHNER. Well, a very important issue. The Fed and 

the principal supervisors have been very effective in getting banks 

to fund themselves much more conservatively. 

So, the reliance on short-term funding in the United States has 

fallen very dramatically, and in the repo markets and the money 

market funds, there has been substantial shift toward a more conservative regime in that context. 

What the FSOC has done is to ask the competent agencies to lay 

out a comprehensive plan for improving the basic resiliency of 

those markets, and we get regular updates on progress against that 

plan. 

And because these things matter to the system as a whole, we 

are trying to make sure, and the Fed and the SEC is doing a great 

job. They are the ones in charge of this. They are being very careful 

and good about making sure they are sharing their judgments with 

us in advance. 

And so, we try to make sure we are looking at the overall interest of the system, not just the interest of those particular parts of 

the system. 

13 

Senator REED. Well, Mr. Chairman, I am in the rare circumstance where I am ready to yield but my colleagues are all voting. So, I do not need much more of an incentive to keep asking 

questions so bear with me. 

The housing market is instrikibly and inevitably linked to our 

progress as a Nation economically in growth. It is underperforming. 

Frankly, my impression was that there was a sense a year or so 

ago that we were turning the corner, but I think there is another 

corner. 

And until, from my view, until we stabilize housing prices, begin 

to deal with the foreclosure issues, we are not going to have the 

foundation. I mean, that is certainly the perception on Main Street 

when you see your neighbor’s house, the grass has not been cut in 

2 months and you know they have been foreclosed, that is a daily 

reminder that things are terrible. 

So, FSOC, this is a systemic issue. You have got to provide the 

leadership and I can ask you what are you doing both in terms of 

the programs that are in place now but the next steps because we 

have not done enough. 

Secretary GEITHNER. Senator, I agree with you that things are 

still terrible, and this is going to take time, it is going to take years 

still. 

What you see now is two things. You see the broader weakness 

in the economy. Unemployment above 9 percent, income growth 

slower. That is putting additional pressure on the housing market 

as a whole, hurting housing demand, slowing the pace, making 

more people vulnerable to losing their homes. 

But even apart from that, we still have this foreclosure process 

essentially broken, a servicing framework that is not doing a good 

enough job of helping people stay in their home or transition to 

other forms of housing. 

And we are doing as much as we can with the authority we have 

to help people caught up in this crisis still. You are right to say 

it is still terrible. 

I think the most important things we can do now, apart from trying to do anything we can to make the economy stronger, is to help 

more people refinance, even people underwater, and to help transition more of the empty, vacant properties that exist across the 

country into rental housing, and to make financing more available 

is what we are working on. 

But we need to continue to make sure that as many people as 

we can have a chance to stay in their home if they can afford to. 

And we need to see banks and servicers and everybody do a much 

better job, more aggressive job of reaching out to them and trying 

to make that possible. 

As you know, I cannot comment on the details of this but there 

is, you know, a very complicated effort to try to bring to earth a 

global settlement of the legal problems in the foreclosure process. 

If that is done well and sensibly, that could make a big difference 

too. 

Senator REED. Just a comment, Mr. Secretary, your efforts and 

your colleagues’ efforts have been intensive and extensive but we 

do not have ears. 

Secretary GEITHNER. But disappointing. 

14 

Senator REED. Yes. And we do not have ears. If the tools that 

you have in the toolbox will help us a bit to get this problem fixed 

in 2 or 3 years, then we have got to get new tools. We have to think 

beyond the traditional, and we have to do this. I will rest my case 

there. 

Since there are no of my colleagues from our Republican side, I 

am going to ask Senator Bennet to chair the hearing for questions 

and then to recognize the first Republican that returns. 

Secretary GEITHNER. Senator, can I mention one quick thing on 

housing that I forgot to mention? 

Senator REED. Yes. 

Secretary GEITHNER. This is important. You are right to say if 

we need more authority, we should ask for it. And one of the pieces 

of the American Jobs Act is a proposal to provide substantially 

more resources into neighborhoods most affected by the foreclosure 

crisis. That is expensive but we cannot afford not to do it, and it 

is a good use of scarce resources. 

Senator REED. I concur. 

Senator BENNET [presiding]. I must have been here longer than 

I thought, Mr. Secretary. Thirty years is what it takes to get into 

this chair. 

Secretary GEITHNER. Congratulations. 

Senator BENNET. Thank you very much. I am not leaving. Lets 

you and I solve all of the world’s problems. 

I apologize because I was voting but, and I may have missed 

some of the discussion. But on the economy just stepping back just 

for a second, the last estimates that I saw were that there was 

something like $2.3 trillion of cash sitting on balance sheets of 

companies in the United States not being invested in the economy, 

not producing jobs in the economy. 

I wonder if you could give your thoughts on why that is. It seems 

to me that until that capital is deployed, we are going to have a 

very hard time bringing this unemployment rate down and creating 

jobs. 

Secretary GEITHNER. You are right that corporate balance sheets 

are very strong. People are sitting on a lot of cash still. 

But I think the best measure, the best measure of how corporations feel about the outlook is to look at what they are spending. 

And in the early stage of this recovery, if you look at what corporations, businesses across the country are doing in terms of spending 

on capital goods and software, equipment and software, they are 

spending at a rate roughly triple the rate of growth in the economy 

as a whole. 

So even though they have a lot of cash, they are investing in 

things that will make us stronger in the future. What businesses 

say is that—— 

Senator BENNET. Although, just on that point, a lot of that investment that you are talking about is investments in IT and other 

things that are actually making people more productive, the companies more productive. 

It may not be creating jobs because as they become more productive they figure out how to do what they are doing with fewer people. 

Secretary GEITHNER. That is true. 

15 

Senator BENNET. And we still have to figure out what we are 

going to do. 

Secretary GEITHNER. That is true although again not to just temper the darkness a bit, I mean we are in a very tough economy 

still. But if you look at private-sector job growth since job growth 

started to recover, it is faster than the last two recoveries. 

So again, if you look at how corporations are behaving, they are 

obviously cautious because growth is slower and they are more 

worried about risk out there. 

But they are investing, and you see in the private investment 

numbers and in the export numbers other signs of underlying resilience and strength here which is important. We want to foster 

those things. 

I do think that it would be good for Congress to put in place 

some permanent reforms to the tax system that would give corporations more certainty, better incentives for investing in the 

United States. We are hoping that the Super Committee can start 

to lay the foundations for a corporate tax reform that would make 

it more compelling economically for corporations to put that money 

at work in the United States, and for foreign companies to invest 

more here at home too because ultimately we are going to be 

stronger as a country if we meet more of the huge demand we are 

going to see from the rest of the world. 

Senator BENNET. Let us talk about that for a second. The New 

York Times had a front page story that said one afternoon that the 

House was going to pass a 4-day extension to the continuing resolution and then we would come back and pass the Times called a 

more ambitious 7-week extension of the continuing resolution. I 

thought I was reading in The Onion, not the New York Times. 

You mentioned in your testimony at the outset the damage that 

had been done by debate this summer over the debt ceiling. I know 

you cannot prove it but my sense in talking to people is that it was 

a real confidence destroyer. 

And I wonder in that context, and just, by the way, at the moment when we needed that least that is what we managed to deliver. I wonder if you could talk a little bit in that context about 

the importance of what the Super Committee is doing and more 

broadly how important it is to get to a more comprehensive approach to deal with his fiscal problem than the charge we have 

given the committee which I know is an objective that both the 

Senator Tennessee and I care a lot about. 

Secretary GEITHNER. I agree with everything you said. The U.S. 

economy in general in most times has a much longer view than 

Washington. It can withstand prolonged periods of Washington 

doing nothing. 

We are not in one of those moments now because the things that 

are burdening the economy, making growth weaker are things that 

only Congress can solve, and the basic sense that you see across 

the country that the political institutions in this country are not up 

to the challenges we face, unable to act, unable to solve problems, 

is absolutely weighing on confidence. There is really no doubt about 

it. 

16 

I think to help that you have to show you can do some things. 

Passing these trade agreements would be good. Passing some tax 

incentives, investments to help strengthen growth, would be good. 

But as you said, to lay out a longer-term framework for fiscal 

sustainability with entitlement reform and tax reform would be 

very good for confidence as long as it is designed sensibly and 

phased in over time. That would be very good for confidence at a 

time when the world is watching us and, you know, the world 

needs the U.S. to be stronger. And we cannot be stronger without 

a political system in Washington, DC, the core institutions, and on 

the economy that is the Congress, demonstrating they can solve 

some problems. 

Senator BENNET. Thank you, Mr. Secretary. 

Mr. Chairman, I will turn it back over to you and Senator Corker 

is in line. 

Chairman JOHNSON [presiding]. Senator Corker. 

Senator CORKER. Thank you, Mr. Chairman, and, Mr. Secretary, 

thank you for being here. I know you made a comment on the front 

about consumer protection, and I agree with you that those things 

outside the normal financial system, you know, will not be regulated in the way that the bill attempts to regulate them without 

somebody being put into this position. 

I know that you, on the other hand, have come from a world, at 

the New York Fed and other places, where you really focused on 

checks and balances and those kinds of things. And I would just 

say to you with good spirit that I think with a Treasury Secretary 

weighing in and just causing there to be some appropriate checks 

and balances put in place in this position—you do not even have 

to make a comment on it—I think things would sail through. And 

we have reached out to the Administration and other places. I actually think there is a lot of sympathy toward that. It has sort of become a political issue. I understand that, by the way. But I would 

just say that there is an easy way of resolving this that would institutionalize the Department instead of making it personalitybased. And I think there are a lot of folks even on your side of the 

aisle that would not think that would be such a bad idea. But let 

me move on to the FSOC. 

Secretary GEITHNER. Could I just say quickly—I will say it quickly. 

Senator CORKER. I really did not want you to, but go ahead. 

[Laughter.] 

Secretary GEITHNER. We did propose initially in the bill a different set of checks and balances than what Congress adopted, and 

it is very important we have good checks and balances. But I believe—I know that you disagree, but I believe that the bill has very 

strong protections in place, good checks and balances, checks and 

balances that do not exist through other parts of the system, and 

that is why I think you have got a pretty good framework. But I 

know you—— 

Senator CORKER. But, you know, the checks and balances, I 

think we talked about, in no way dissipate the ability of this organization to function in a sound manner. I do not want to debate 

that much longer. You and I spent a lot of time last March on this, 

and I appreciate it. Maybe two Marches ago, I cannot remember. 

17 

The FSOC, as set up, just give me a sense of—you know, this is 

your first annual meeting. I know Congress has all kinds of formal 

annual things that in many cases mean nothing. Is this organization actually functioning in a way where there is a real discussion, 

not just at the staff level but among folks like you and Bernanke 

and others, about real systemic risk that is taking place in a real 

fluid manner? 

Secretary GEITHNER. I think it does. I think the other test of this 

Council, though—that is one important test. Another test of the 

Council is does it help engender closer cooperation and integration 

in the design of the rules so we do not have this hugely complicated 

network of different rules over what are essentially the same types 

of activity, because that is enormously burdensome for the economy 

and complicates life for everybody and makes it probably harder to 

manage risk. 

So one of the things we are trying to do is not just make sure 

there is much more integration to keep out future risk, but that the 

rule-writing process is done in a way that leads to better outcomes 

across the system. 

Senator CORKER. You know, there is a lot of discussion about 

jobs bills right now, and I know much of it from my perspective is 

sort of a distasteful political exercise. To me, you know, as you look 

out and you talk with most employers, the thing they are concerned the most about is the structural long term. Would you not 

agree that maybe there are some things that could be done short 

term? I do not want to take away from your side of the aisle in any 

way, but isn’t the best thing we could possibly do here for our country’s economy and the world economy is to go ahead and tackle 

some of the long-term structural issues that we have like tax reform, like entitlement reform, like going ahead and putting in place 

a long-term highway bill, those kinds of things that would just give 

confidence to the economy that we here in Washington have the 

ability to actually take on the bigger issues? 

Secretary GEITHNER. I agree with you, you should do that, but 

it is not enough. Again, just to point out about, you know, the thing 

about in the long run we are all dead. If Congress does not act on 

these tax provisions or on the investments and infrastructure 

things, then what happens to the American economy? What happens is that every American who has a job will see their taxes go 

up by $1,000 on average next year. That is without action on a jobs 

act. Without action, businesses will see taxes go up. So as many on 

your side argued last December when we were facing the expiration of the Bush tax cuts, there are things we have to do in the 

short term to make sure the economy is not weakened by the inaction of Congress. 

And you are right that that is not enough and we should be 

doing the long-term things, too, but you cannot just do the longterm things if you want to make sure the economy comes out of 

this more strongly. 

Senator CORKER. Yes, we actually tried to vote on the President’s 

jobs bill yesterday and were denied that ability. 

Secretary GEITHNER. I think you will have another chance. 

Senator CORKER. Yes, well, thank you. 

18 

Let me ask you about some of the proposals around housing. 

There have been lots of things, and I know that that is one of the 

areas that the FSOC addressed recently. There have been discussions about a massive refi where instead of having, you know, appraisals and all of that take place, people that are actually current 

and paying their mortgages, not those that are delinquent, would 

be able to go ahead and just refi from 6.4 to 4, and I wonder if you 

might give a brief comment. And, Mr. Chairman, I would like to 

ask one more question, if that is OK. 

Secretary GEITHNER. Right now, as you know, as you said, mortgage interest rates are very low, as low as 4 percent, a little lower 

in some cases. But you are not seeing as much refinancing to take 

advantage of that as you might, for a whole range of reasons. And 

the Director of the FHFA, Ed DeMarco, is examining a set of proposals that would make it much easier for people to refinance to 

take advantage of the lower rates, including people who at the moment have loans that are worth less than their outstanding mortgage obligations. 

We are very supportive of those reforms. We think that would 

make a big difference. They are like a tax cut. It is like a larger 

tax cut on average for people than even the tax cuts that are now 

before the Congress. But we need to see them move to make it easier for it to happen, and they seem to be moving in that direction, 

and we are hopeful that we are going to be able to lay out some 

clarity—he is going to be able to lay out some clarity to the broader 

markets and to homeowners in the next few weeks. 

Senator CORKER. We had one of the major hedge funds in our office last night, and we were seeking guidance on how to work 

through the GSEs. You know, there are all kinds of models out 

there, and I think all of us, you know, agree with your opening 

comments that we need to move away from as much Government 

involvement and maybe to almost none, but we certainly need to 

do it in a way that does not implode our economy, and we need to 

be thoughtful about it. 

But in the conversation, we began talking about the European 

crisis, and he asked me this question. He said, ‘‘What would happen if that contagion spreads here and it affects numbers of banks? 

Would you all use the resolution mechanism?’’ And I said no, the 

resolution mechanism is basically for one-off situations. It is not for 

systemic issues. 

I want to talk to you more in private about this whole issue, and 

our office is working on an enhanced bankruptcy code, which I 

think you actually support. I am not sure about that. But are we 

worried right now we are getting to a point—and I know you have 

to keep a stiff upper lip on these issues, but on the European crisis 

that is unfolding and just our exposure to it, 17 different countries, 

very difficult for them to act in unison, are we beginning to think 

about, should that contagion come here, how we might respond 

since the mechanisms we have in place are not adequate? 

Secretary GEITHNER. Of course, but the best thing we can do is 

to get the Europeans to move and to do things to make growth 

stronger here. Those are the best protections we can have. But 

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19 

tections that, you know, of course, we hope never to use again, but 

they exist for a purpose. 

Senator CORKER. Thank you, Mr. Secretary. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Kirk. 

Senator KIRK. Thank you, Mr. Secretary. I just want to quickly 

lay down a marker because I think the Committee has a hearing 

on Iran next week. Is that right, Mr. Chairman? 

Chairman JOHNSON. Yes. 

Secretary GEITHNER. In fact, my colleague David Cohen I think 

is going to testify. 

Senator KIRK. Correct. So you got a letter from 92 Senators saying collapse the central bank of Iran, and you wrote us back basically saying, ‘‘Call you back,’’ which is not—— 

Secretary GEITHNER. I think ‘‘Stay tuned’’ was the—— 

Senator KIRK. Yes, ‘‘Stay tuned,’’ correct. That is music to my 

ears, and so I just want to lay down the marker for next week, if 

you could work with David. 

I want to focus on the subject du jour today, which is euro contagion. According to the CRS, our exposure, U.S. bank exposure to 

Greece, $1.5 billion in direct loans to the government, $7.3 billion 

in direct loans to the economy, $34 billion in other exposure, so 

about $42 billion in exposure by U.S. banks to Greece. 

The CRS memo highlights Italy, about $36 billion in direct loans 

from U.S. banks, $230 billion in other exposure, about $256 billion 

total to an Italian problem for U.S. banks. 

CRS added up exposure in Greece, Ireland, Italy, Portugal, and 

Spain with other exposures. It is a $641 billion problem, and yesterday we saw this with problems at Morgan Stanley. Can you talk 

about the Morgan Stanley problem and whether we are seeing a 

potential Lehman Brothers situation with regard to a major U.S. 

financial institution and euro contagion? 

Secretary GEITHNER. No, absolutely not, but I would just say the 

following: As I said in my testimony, the direct exposure of the financial system to the countries under the most pressure in Europe 

is very modest. Europe as a whole, though, is a big deal, and our 

firms—and this is true across the largest institutions in the United 

States—again, are in a much stronger position if you look at their 

capital levels, levels of leverage, how they are funded, they are in 

a much stronger position to withstand the pressures we are seeing 

there. But, of course, you know, we want Europe to move, and we 

want to make sure that they move more aggressively to address 

this because, you know, Europe is big enough to matter. 

But I would just caution you. Those numbers are—you know, it 

is very hard to just look at the direct exposure you can see and capture how these things unfold. But the overall picture is very limited direct exposure, a lot more capital in the system, a much 

stronger, more resilient financial system in the United States. We 

are very fortunate because we moved so aggressively at the beginning, and that is going to serve us well. 

Senator KIRK. I would just note here, the BIS latest data, your 

point is exactly well taken. It shows our direct exposure is, for example, significantly less than U.K., Germany, and France, but if 

20 

you add our direct and other exposure, we are actually far more exposed than the U.K. and as exposed as Germany. 

Secretary GEITHNER. No, I do not think that is right because that 

does not still capture the full balance of it. I think, again, the simple way to say it is Europe is big. And the countries under the most 

pressure are not that large, but Europe as a whole is big. And 

when Europe is weaker, growth is going to be weaker, and that will 

matter for us. But, you know, it is very important to recognize this. 

This is a complicated crisis for them, there is no doubt, and it is 

politically difficult. But this is not—the costs of resolving this are 

not large relative to the resources of Europe, and they have committed at the highest levels of Europe to hold the system together, 

to make sure they protect their broader banking system, and to 

make sure they can support the governments that are under the 

most pressure, as they are actually doing now. And they recognize 

they need to do more to make that credible, and we have an interest in them doing that. 

Senator KIRK. We do. I want to turn to one other thing, which 

is I read the report, the FSOC report, what this hearing is concerning, and while they did not identify up front State and municipal debt as a systemic risk, at least they had a section about it 

in the enabling environment. But I represent the State of Illinois 

that is now in the throes of a classic debt spiral, where the Governor increased taxes by 66 percent on individuals and 46 percent 

on corporations. 

Secretary GEITHNER. From a low level, I think, is my recollection 

but—— 

Senator KIRK. Well, unfortunately, now he is higher than all his 

Midwest competitors, and so we now see that, for example, unpaid 

bills in the State of Illinois have grown tenfold in 10 years, now 

totaling over $8 billion, with a steadily deteriorating credit rating 

and an increasing margin that the State has to pay. 

I am worried that systemically the FSOC is not—maybe it is too 

politically correct and we have a Democratic administration so we 

cannot talk about State debt. You know, we want to grow the size 

of the Government, and so we talk about State governments that 

have overgrown and are in death spirals. And my worry is this: 

Have you contemplated a State defaulting? Because the State of Illinois is now—all the classic symptoms are there. 

Secretary GEITHNER. Senator, let me just say a few things about 

your question. You are right to say that States are under enormous 

pressure across the country, not just in Illinois. And although some 

of those pressures are easing as recovery continues, it is going to 

take years for them to get themselves in a better position. 

The people in the FSOC are very sensible people, and they look 

at everything, and they know that debt matters. And they look at 

all the basic fiscal challenges we face going forward. You said one 

thing, though, that I just want to correct. The proposals the President has laid out for the role of Government in the economy and 

the size of Government in the economy would reduce the level of 

Government spending relative to the economy very substantially if 

Congress were to hold to those proposals over a 10-year period of 

time. That is true across Government. The only exception to that 

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igible for health care and Social Security, and those basic benefits—which Congress sets, not us—those grow with aging, with eligibility, and with rising costs of health care. 

But if you look outside those basic benefits Congress sets, under 

the President’s plan, even with the investments we want to make 

in education and infrastructure and a lot of things like that, Government spending falls as a share of the economy. 

Senator KIRK. But I will say creditors do not look outside. Creditors do not—— 

Secretary GEITHNER. No, no, but—— 

Senator KIRK. Creditors simply ask the question: Do you need to 

borrow more money next year than last? 

Secretary GEITHNER. And, again, if Congress were to—I know we 

are not holding our breath, but if you were to enact the President’s 

proposals, our deficits would fall very dramatically over the next 3 

to 5 years, and our debt burden would start to fall as a share of 

the economy. So we agree with that basic imperative—— 

Senator KIRK. Right, but you switched to Federal, and I want to 

focus you on State. I am very worried because I think the FSOC 

should say that States pose a systemic risk to the system. I think 

that FSOC should then generate—— 

Secretary GEITHNER. Well, I do not think they do, but we will 

look at them and pay attention to them, as we always do, and look 

at the implications of scenarios, as we always do. And we are not 

underweighting, underappreciating any of the broad threats we 

face out there. 

Senator KIRK. Right, because we do not want political correctness 

to say that we do not want to issue financial guidelines that would 

cause States to reduce their payroll. But if they are borrowing too 

much and representing a systemic risk to municipal bonds—— 

Secretary GEITHNER. Senator, let me just reassure you, if you 

look at the members of this Council and you look at them and you 

spend time with them, there is no risk of political correctness interfering with the broad judgment of these members. But I take your 

question and, of course, will be careful and cognizant of those 

things. 

Senator KIRK. Thank you. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Merkley. 

Senator MERKLEY. Thank you very much, Mr. Chair, and welcome, Mr. Secretary. I want to follow up on a question Senator 

Kirk was asking about Europe, but a little more of a point on derivatives themselves. 

We had members of the bond rating council or bond rating companies that met with us a couple weeks ago, and they said basically they had no idea of who is writing and who is holding and 

what American exposure is and that they were not sure if any one 

of their firms did, which for a group that specializes in understanding the exposure on bonds took us right back to America’s experience with not knowing the American Insurance Group, what 

they were writing and what was being held where. This is a big 

problem. 

Secretary GEITHNER. These were rating agencies you referred to? 

Senator MERKLEY. Yes, rating agencies. 

22 

Secretary GEITHNER. Well, as you have seen, they do not have 

perfect foresight in these judgments but—— 

Senator MERKLEY. No, they are in the business of studying these 

issues, so—— 

Secretary GEITHNER. I would offer the following judgment, and, 

you know, we are all careful and cautious about things we cannot 

know and you want to be conservative about these things. But I 

think the Federal Reserve and the primary supervisors or overseers of our system have a pretty good feel of the overall exposure, 

not just directly but through derivatives and hedging, and have a 

pretty good sense about how good those hedges are. 

Now, there is inherent uncertainty in these things, and, of 

course, it ultimately depends on how effectively Europe acts in this 

context. But I think we are in a better position than they are, the 

rating agencies, and I think they are reasonably encouraged by 

what they have seen. 

Senator MERKLEY. I think it would be helpful if we could get the 

Fed to give us their vision of that transparent world out there so 

that we could share the same sense of confidence about not being 

as linked as we might fear to the European troubles. 

I wanted to turn to the housing system, and I appreciate your 

support for national servicing standards, which I think are hugely 

needed. And as you were answering as I came in here, I believe, 

you support the strategy the President mentioned in his jobs 

speech of having a strong effort to reduce the interest rate on 

loans, to put more money in folks’ pockets. But we have not seen 

details of the President’s plan, and it strikes me as strange a bit 

that on something so important in terms of the huge tsunami of 

foreclosures that we are facing, we still do not have details this far 

after the speech. Will we see those details soon? And can we create 

a program that will affect enough Americans to make a difference 

not only in terms of those families but in terms of our national 

economy? 

Secretary GEITHNER. I think we can make a big difference, and 

you are going to see from the FHFA Director, I think in the next 

couple weeks, very detailed proposals. This is their authority. That 

is why you have not seen details yet. It is not within my power or 

the President’s power. They are an independent agency established 

by Congress with that authority. But they are going to lay out 

some specific proposals next week, and I think that they will make 

a difference. 

Now, we have been very careful not to estimate the number of 

Americans who could be reached by this because, as you have seen, 

we dramatically overestimated at the beginning of all our housing 

programs, the number of people we could reasonably reach who 

could qualify and be eligible. So we will be cautious. But my sense 

is, based on what I have seen and what he has told us, it is going 

to make—it is meaningful enough to make a difference. 

Senator MERKLEY. Is there any sense to using soft seconds for 

the balance that is underwater as a way to create loans that could 

re-enter the marketplace? 

Secretary GEITHNER. That is one of the issues that they are looking at trying to fix because that is one of the things that stands 

in the way of allowing more people to take advantage of lower 

23 

rates. But I cannot tell you today, I do not know yet, to what extent they feel they have a fix to that. 

Senator MERKLEY. Yes, that is one way of—one possibility of certainly taking the whole—saying refinance the whole thing regardless of the amount that you are underwater, and that is easier and 

simpler. 

Secretary GEITHNER. Yes, that is true, but they are looking at a 

range of things, and you will see more details in a couple weeks. 

Senator MERKLEY. OK. I look forward to that. 

Finally, in terms of rules related to implementing the Volcker 

Rule, certainly the goal is to say that commercial banks are in the 

business of making loans to businesses and families, that that is 

extremely important. If you want to be a hedge fund, become a 

hedge fund, but not mix the two to the detriment or the increase 

in systemic risk. 

There is some concern out there in regards whether the rules are 

going to have substantial loopholes. Is this something that you are 

engaged in? And can I sleep well knowing we will have a clear distinction? 

Secretary GEITHNER. I think you can, and I should say—and I 

think you are aware of this—there has already been a very substantial change across that industry moving away from dedicated 

internal hedge funds—not to use the pejorative—in anticipation of 

the rule. But you are going to see the agencies, I think this week 

and next, lay out detailed proposals. Those will go out for comment. 

Everybody will have a chance to look at where the balance is. They 

are going to ask some questions about issues we have not resolved 

yet. And so we will have a chance at that point to make sure we 

get the balance right. But I am very confident this is going to meet 

the objectives of the legislation. 

Senator MERKLEY. I think that the plans on compensation for 

market-making trades is very, very helpful because it creates a 

huge distinction between one business and the other. 

Thank you very much. 

Secretary GEITHNER. Thank you. 

Chairman JOHNSON. There are a couple other members who tell 

us they are coming back, and in the meantime, the claim has been 

made that the standard for the FSOC to set aside a final CFPB 

rule is ‘‘a pretty high threshold.’’ Would you please explain the appropriateness of the standard? comments 

Secretary GEITHNER. Well, as one of the checks and balances that 

exist in the law—and as I said, I think that combined with the others make it a pretty strong set of checks and balances—I know that 

some members up here would like to alter them. But that specific 

provision allows the Council to, in effect, block or overrule a judgment by the Bureau if it is inconsistent with safety and soundness. 

I think that is the basic standard. As I said, that is a quite unique 

safeguard check and balance, a very strong check and balance, but 

not the only one. And as I discussed earlier with Senator Corker, 

I think the balance is pretty strong. 

Chairman JOHNSON. Last year the SEC adopted new rules to 

strengthen money market funds, and last October the President’s 

Working Group recommended several possible reforms to reduce 

the potential systemic risk of money market funds. Do you and the 

24 

FSOC members agree that further reforms are needed to make 

money market funds more resilient and less susceptible to runs? 

What risks are we currently facing? 

Secretary GEITHNER. The Chairman of the SEC agrees with that, 

that more reforms are necessary, and I think the broad sense of the 

Council—and I share this—is that she is right. She is examining 

a range of ideas. Some of those have elicited a lot of opposition and 

concern; some of them more support. They are working through 

those. 

But my sense is that although we have more work to do, we have 

made quite a lot of progress, and we want to build on that 

progress, do so carefully, and I think the Chairwoman of the SEC 

is supportive of a careful balanced look at further reforms to make, 

as you said, those funds more resilient. 

Chairman JOHNSON. In the FSOC Annual Report, you noted that 

the U.S. is leading a global effort to develop minimum standards 

for margins on swaps. Could you provide us an update on the 

progress of international coordination to harmonize swap rules in 

a way that both reduces systemic risk and promotes U.S. competitiveness? 

Secretary GEITHNER. Absolutely. You know, we have three decades of experience with global capital standards, trying to make 

those better; there is no precedent, no previous attempt to make 

sure we have in place common rules on margin around the world 

for derivatives. So what we have proposed is a major international 

effort to establish those. We have formed a special international 

task force that is led by the Federal Reserve, I believe, or led jointly by the Federal Reserve, that brings together central banks, bank 

supervisors, market regulators to try to design a common framework that will match what we are doing in the United States. We 

are at the early stage of that process, but my sense from talking 

to the European officials and those in Asia and U.K. officials that 

there is very broad support for that and they share our interest in 

making sure there is a global level playing field in that area. 

Chairman JOHNSON. Senator Shelby, do you have additional 

questions? 

Senator SHELBY. Thank you, Mr. Chairman. I do have a few. 

First of all, Mr. Secretary, I want to try to answer what you— 

you made a pitch for the nominee, the former Attorney General, to 

be confirmed. Forty-four of us have sent a letter that you are very 

familiar with to the President, and—— 

Secretary GEITHNER. And I think you sent it to me, too. 

Senator SHELBY. If I could finish. 

Secretary GEITHNER. Yes. 

Senator SHELBY. And we have not heard one word about that, 

asking for some modifications to this. It is not the nominee. I think 

the nominee, as far as I know, is probably a well-qualified, very 

honorable, very smart man. But we are waiting for that dialog, and 

I hope we hear from you. But short of that, I think the nominee 

is not going anywhere. But I wanted to answer that. Go ahead, sir. 

Secretary GEITHNER. Well, I understand that position, and we received that message. You have been very clear about it, and you 

had a pretty powerful show of strength. But I was just encouraging 

you to reconsider because I think that—— 

25 

Senator SHELBY. Well, we would hope you would consider, you 

and the President, changing three modest things in the DoddFrank bill, and if you do, I am sure that we will have a good piece 

of legislation, at least a better piece, and we will go from there. But 

short of that, I do not believe that we are moving that nomination. 

Secretary GEITHNER. I am always optimistic. I do think the three 

things you suggested—— 

Senator SHELBY. Do not get optimistic on that. 

[Laughter.] 

Secretary GEITHNER. I would say the three things you suggested, 

Senator, in combination I think would be a significant weakening 

of the Bureau. 

Senator SHELBY. Well, we do not think so. We think it would 

strengthen the Bureau. But, you know, we have a difference of 

opinion. But I thought I would answer that. I have a few questions 

I—— 

Chairman JOHNSON. What comes around goes around. 

Senator SHELBY. Absolutely, and that is why we plan on coming 

around. 

Secretary Geithner, the Bank of England Governor, Mervyn 

King, as well as some prominent academic economists have said 

that Basel III capital standards they believe are insufficient to prevent another crisis. Do you agree with them? Or do you have second thoughts—— 

Secretary GEITHNER. I do not. 

Senator SHELBY. I have thought myself that Basel III to 

strengthen the capital standards was positive. 

Secretary GEITHNER. The framework that we call Basel III is a 

dramatic increase in the basic conservatism of the capital regime 

in the United States and around the world. A substantial increase 

in capital relative to what was required before the crisis, combined 

with the liquidity provisions in place, too, creates better protections. 

Now, just one quick qualification. We have proposed that the 

largest institutions hold—and this was required by the legislation, 

too—an additional buffer of capital reflecting the greater risk they 

pose to the system. And our judgment is the combination of those 

two things, as long as you phase them in—you want to phase them 

in carefully over time. 

Senator SHELBY. But not too much time. I mean, not 25 years 

from now. 

Secretary GEITHNER. No, you do not want to wait too long. But 

you do not want people building capital too much too quickly or 

having to sell assets to meet those requirements too quickly when 

the recovery is still trying to get—— 

Senator SHELBY. They have got to get on the right road, have 

they not? 

Secretary GEITHNER. And they are, and U.S. firms are very, very 

far along to meeting those new standards? 

Senator SHELBY. Do you have confidence that the European 

banks and the regulators there will comply with Basel III, the spirit as well as the letter of it? 

Secretary GEITHNER. Well, we are going to do everything we can 

to make sure they do, of course, and as I said, we have the time 

26 

to try to make sure we are confident that is going to happen, because these rules only start to bite over the next several years. And 

so we are working very hard to make sure we have better protections in place. 

Senator SHELBY. Mr. Secretary, do you know of a financial institution—you have been around a while—that has been adequately— 

in other words—and I will not say adequately well capitalized and 

had liquidity that has failed? 

Secretary GEITHNER. That is a very interesting question. I think 

that in a really systemic financial crisis, just to think back to the 

experience of this country in 2008, for example, certainly it was the 

case in the Great Depression and other examples of this stuff, you 

can have a situation when even very well capitalized financial institutions are subject to acute pressure. In some sense, that is the 

best way of thinking of your definition of what is a systemic crisis. 

Senator SHELBY. But if they have liquidity, doesn’t that help? 

Secretary GEITHNER. It does help. But, you know, this is an interesting conversation, but you cannot—it is not sensible to try to 

force the system to hold capital and reserves that would cover any 

foreseeable, imaginable risk or shock. 

Senator SHELBY. Well, that makes no sense. 

Secretary GEITHNER. Exactly. So in a really systemic financial 

crisis, even the strong will be affected by the pressures you see 

more broadly. 

Senator SHELBY. This week—— 

Secretary GEITHNER. But to be clear, that is no comment on the 

present. We are in, I think, as I said—and you could look at capital 

liquidity, classic measures—in a really strong relative position. 

Senator SHELBY. This week, earlier this week, the Bank of America—I guess it is our largest bank; I know it is in deposits—announced that it would charge a monthly fee to consumers, I guess 

on credit cards. When asked about the fee, the President stated, as 

I understand it, that the banks do not have a right to get a certain 

amount of profit. Mr. Secretary, how much profit should the Government allow a bank to make? And does the President’s comments 

mean that this Administration supports Government-mandated 

price controls on financial products? Or is it taken out of context, 

what he said? Or is that just political rhetoric? 

Secretary GEITHNER. The President does not believe that we get 

to determine how profitable individual financial institutions are or 

other companies across the country. That is not the system we believe in or—— 

Senator SHELBY. The market should determine a lot of that, 

should it not? 

Secretary GEITHNER. It should, of course, but what we do believe, 

though, is that you want to have a system of oversight in consumer 

protection where consumers have the ability to understand what 

they are being charged for financial services, what they are being 

charged to borrow. And part of what we are trying to do is encourage much more transparency and clarity so that consumers are a 

little less vulnerable to being taken advantage of. 

Senator SHELBY. So the consumer can make the decision and not 

a bureaucrat, right? 

Secretary GEITHNER. That is exactly right. 

27 

Senator SHELBY. OK. 

Secretary GEITHNER. Now, there are things that Government officials have to do, though, it is our responsibility to do. But the 

basic strategy we have adopted that the President supported, and 

the CFPB is designed to establish, puts the overwhelming burden 

on better transparency and disclosure as a way to make sure consumers have the better chance to protect themselves. 

Senator SHELBY. But you are basically saying this Administration is not in any way coming out for any type of wage and price 

controls of any kind? 

Secretary GEITHNER. No. 

Senator SHELBY. OK. 

Secretary GEITHNER. Or yes, I am saying we are not. 

Senator SHELBY. Thank you. 

Mr. Secretary, the Council’s annual report that we have been 

talking about all morning, the efforts to coordinate Dodd-Frank implementation, it goes across a number of agencies, as you well 

know. The CFTC and the SEC have consistently, a lot of people believe, failed to harmonize some of the substance and the time frame 

of the Dodd-Frank rules. 

Has the Council been involved in this? Are they making any success here in improving the coordination of the SEC and the CFTC? 

I think that is important that they are drinking out of the same 

cup, so to speak. 

Secretary GEITHNER. I completely agree with you, although Congress did leave in place this complicated set of independent agencies with independent statutory requirements. Our basic approach 

has been to say that as you meet those requirements, we would 

like you to do so in the way that is as closely aligned as the law 

permits. Where the law permits you to be aligned, you should be 

aligned, because if you are not, all you are going to do is leave a 

complicated system with big distortions, opportunities for arbitrage, and gaps. And that matters for us here, but it also makes 

it harder for us to get the world to come to a more level playing 

field. If we are in different places, it is harder to get the world to 

come to a sensible place. 

Senator SHELBY. Thank you. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Vitter. 

Senator VITTER. Thank you, Mr. Chairman. Thank you, Mr. Secretary. 

I wanted to focus in my questions on the housing finance agencies and market and the need to bring reform there, including a return of the private capital and the private market into that now 

very Government-dominated sector. 

My concern for a while, including all through the Dodd-Frank 

discussion, is that that was put on the side with the promise that 

we will get to that, we will get to that next year. Well, it is now 

next year, and I do not particularly see us getting to it. 

Now, I do know the FSOC report includes the statement that the 

member agencies need to strengthen the system, ‘‘which includes 

developing a framework for the return of private capital to the system.’’ What does that mean exactly? And what is the timetable for 

concrete action? 

28 

Secretary GEITHNER. I just want to start with one observation, 

which is that Congress did enact a fundamental change to the basic 

framework of oversight of the GSEs and the home loan bank system in September of 2008 ahead of Dodd-Frank. But you are right 

that with that foundation, which did not solve our problems, DoddFrank did not go further and lay out this fundamental challenge 

of fixing the broader housing finance system. That is still ahead of 

us. 

So what are we trying to do? We want to set up a framework 

where private capital, private investors, the private system plays 

the more dominant role in housing finance once again, and that we 

gradually phase down the Government’s role to a more limited, 

more targeted, more sensible role. For that to happen, we need to 

have a clearer set of rules in place across the securitization markets, clarity on the amount of capital you have to hold against a 

mortgage loan if you are a private institution, and we need to 

gradually wind down the exceptional measures, the exceptional expansion of Fannie and Freddie and the FHA’s rule that happened 

in the crisis as private capital withdrew. 

We laid out a comprehensive set of options, proposals, and objectives last February. We are in the process of designing legislative 

proposals to present to Congress. We have been consulting very 

broadly with academic experts in the industry and Members of 

Congress on how best to do that. And I do not know what is going 

to be possible in terms of legislating in this environment in the 

next 18 months or so, but we would like to get that process moving. 

And as we said last February, we are going to take the burden of 

initiative in laying out to the Congress a proposal for how to get 

us to a better place. And you are right to point out—and I say this 

all the time—that we are at only the very earliest stages in trying 

to put in place a better housing finance system. 

Senator VITTER. So that work will include a concrete legislative 

proposal? 

Secretary GEITHNER. Well, we might—we have not quite decided 

how to do it. We might start with another—we had options. We 

might start with a proposal and get comment on it before we give 

legislation. We have not decided yet. But we are going to propose 

something to you so that you have something you can consider. 

Senator VITTER. And what is the timetable for all of this, broadly? 

Secretary GEITHNER. We have not decided. As you know, we are 

kind of busy. But we have got a team of people who have been 

working on this all summer, and they are making a lot of progress, 

and we are getting closer. 

Senator VITTER. There were elements of Dodd-Frank which in 

my opinion pushed that sector in the wrong direction, further protecting or advantaging the GSEs. Will that—— 

Secretary GEITHNER. Such as? 

Senator VITTER. Will that be directly addressed? Such as the exemptions for the GSEs for certain standards and requirements in 

Dodd-Frank. 

Secretary GEITHNER. I do not think those stand in the way of us 

proposing very substantial reforms, but we will look at them if they 

do. 

29 

Senator VITTER. And the risk retention provision, the exemption, 

things like that? 

Secretary GEITHNER. Again, when I referred generally to the set 

of rules on securitization, that is what I was referring to. Those we 

are trying to start to define. We laid them out for comment. There 

have been a lot of comments. We are taking a look at those rules. 

But what you need is those set in a sensible place, and then we 

need to change the basic economics of the GSEs’ role. We need to 

do those things together, and over time that will pull private capital back in. 

Senator VITTER. There has been some suggestion, I have read, 

that there is a specific working group on this topic. Is that specifically defined? And who is a part of that? 

Secretary GEITHNER. I do not know if we call it a specific working group, but we have a team of very talented people at Treasury 

and the Fed—sorry, Treasury and HUD. We consult with the Fed 

very actively. We work very closely with the FHFA, the overseer 

of Fannie and Freddie, and there is a team of talented people in 

the NEC in the White House that are involved in those discussions. 

Senator VITTER. And does that formal or informal team include 

folks from outside the Administration? 

Secretary GEITHNER. Well, that team does not. That is just people in—well, it includes some of the independent agencies like 

FHFA and the Fed. But they do not meet as a team always like 

that. But we have been very active in looking to academic experts, 

people in the real estate market, the housing community, the banking system, and the financial system to make sure we are taking 

advantage of all the other ideas out there. 

Senator VITTER. OK. Thank you, Mr. Chairman. 

Chairman JOHNSON. Thank you again, Secretary Geithner, for 

being here today. The Financial Stability Oversight Council is important to the overall stability of this country’s financial economy. 

Your work and the work of all the members of the Council is greatly appreciated. 

Thanks again to my colleagues and the panelists for being here 

today. This hearing is adjourned. 

[Whereupon, at 11:41 a.m., the hearing was adjourned.] 

[Prepared statements and additional material supplied for the 

record follow:] 

30 

PREPARED STATEMENT OF TIMOTHY F. GEITHNER 

SECRETARY, DEPARTMENT OF THE TREASURY

OCTOBER 6, 2011 

Chairman Johnson, Ranking Member Shelby, and Members of the Committee, 

thank you for inviting me to testify today on behalf of the Financial Stability Oversight Council (the ‘‘Council’’). 

In setting up this Council, you asked us to provide in a public, annual report a 

comprehensive view of financial market developments and potential threats to our 

financial system. My testimony today will review the conclusions and recommendations made by the Council in its first annual report, which is being submitted in 

full alongside this testimony. 

In 2011, the world economy is still healing from the devastating effects of the financial crisis. On top of those challenges, we experienced a series of additional 

shocks early this year, including high oil prices and the disaster in Japan. Europe’s 

protracted economic and financial crisis has added to these pressures on global 

growth. And the destructive debate surrounding the debt limit this summer has 

damaged the confidence of American businesses and consumers. 

Some of these factors have eased in recent months, as oil prices have fallen and 

Japan has begun to recover. But the cumulative effect of the pressures has resulted 

in slower growth in the United States and around the world, with lowered expectations for growth next year. 

The crisis in Europe presents a significant risk to global recovery. We are working 

closely alongside the IMF to encourage European leaders to move more forcefully 

to put in place a comprehensive strategy to stabilize the situation. The critical imperative is to ensure that the governments and the financial systems under pressure 

have access to a more powerful financial backstop, conditioned on policy actions that 

credibly address the underlying causes of concern for a sustained period of time. 

In the face of the situation in Europe, and the general slowdown across the world, 

the most important thing we can do is take strong steps to strengthen our economy 

at home. The most effective strategy for doing that is to enact steps now that will 

accelerate economic growth, tied to long term reforms to restore fiscal sustainability. 

The American Jobs Act provides a substantial package of tax cuts and investment 

that, according to estimates by outside economists, would raise economic growth by 

one to two percentage points and help create one to two million new jobs. And in 

the President’s proposal to the Joint Committee of Congress charged with reducing 

our long-term deficits, we outlined a comprehensive package of reforms to spending 

programs and the tax system that would bring our deficits down to the level where 

our overall debt burden starts to decline as a share of our economy. 

The Council is composed of each of the agencies responsible for oversight of the 

financial system and the firms and markets that comprise it. In the judgment of 

this Council, the United States financial system is in a significantly stronger position and better able to withstand the new risks we face in the global economy. 

Because of the actions we have taken to repair and reform our system: 

• The weakest parts in our financial system—the entities that took the most 

risk—no longer exist or have been significantly restructured. 

• The firms that survived are better capitalized—large banks have increased common equity by over $300 billion since the beginning of 2009. And the level of 

common equity to risk weighted assets across these banks is now approximately 

10 percent, up from 6 percent at the beginning of 2009. 

• Banks are funding themselves more conservatively and are maintaining much 

larger cushions of safe and liquid financial assets. Debt maturing in 1 year or 

less at the largest institutions, as a share of total liabilities, has declined dramatically to roughly 40 percent of the precrisis level. 

• The major banks have reduced the size and overall risk in their balance sheets, 

resulting in a substantial decrease in leverage—a major source of risk—compared to precrisis levels. 

• The ‘‘shadow banking system’’—the financial firms that operate outside of a 

framework of oversight and prudential regulation—is much smaller, with assets 

at roughly half the level of 2007. 

These improvements are very significant. Together they represent more progress 

on the path to a more stable and resilient financial system than has been achieved 

in the other major economies. 

The European financial crisis has placed significant pressure on its financial institutions and slowed growth significantly in Europe and around the world. U.S. finanVerDate Nov 24 2008 15:26 Jun 01, 2012 Jkt 048080 PO 00000 Frm 00034 Fmt 6621 Sfmt 6621 L:\HEARINGS 2011\10-06 FINANCIAL STABILITY OVERSIGHT COUNCIL ANNUAL REPOR
31 

cial institutions, including our major banks and money market funds have substantially reduced their exposure to the economies of Europe that are under the most 

pressure. Our direct financial exposure to those governments and their financial institutions is quite small, but Europe is so large and so closely integrated with the 

U.S. and world economies that a severe crisis in Europe could cause significant 

damage by undermining confidence and weakening demand. 

This makes it even more important that Congress act to strengthen growth now 

and put our fiscal position on a more sustainable path. 

Economic and financial developments since the release of the Council’s report reinforce the importance of its recommendations. Here are those recommendations in 

summary form. 

First, the Council emphasizes the importance of further actions to strengthen the 

financial position of the core of the U.S. financial system, particularly the largest 

institutions. We want the largest institutions to manage their businesses so that 

they have the ability to weather more challenging future environments without Government assistance in crisis. 

Toward this objective, regulators will gradually phase in, over a period of several 

years, the much tougher standards for capital and liquidity we have negotiated with 

the other major financial systems around the world. 

These efforts focused on the largest banks are complemented by recommendations 

designed to make other key market participants more resilient to future challenges 

to growth and financial stability. 

And the report draws attention to new market structures and financial products, 

such as exchange traded funds and structured notes, where we have seen very rapid 

growth and innovation. A robust financial system should encourage and foster innovation, but not at the expense of overall financial stability. 

Second, the Council recommends reforms to strengthen a number of key funding 

markets in the United States, markets that were a critical source of vulnerability 

in the crisis. The most important of these recommendations are directed at the triparty repo markets and the money market funds. The essence of these recommendations is to make the tri-party repo markets and money funds themselves less vulnerable to the classic dynamic in which an abrupt rush for the exits forces a damaging 

spiral of asset sales, deleveraging and broader contagion. Substantial progress has 

been made toward this objective, but we have more work to do. 

Third, the Council recommends reforms to the housing finance system. In this 

context, it recommends action to establish national standards for the mortgage servicing market, in order to better align incentives and help reestablish confidence in 

the integrity of the housing market. And the Council emphasizes the importance of 

broader reforms to help return private capital to the housing market, strengthen 

mortgage underwriting, and reduce over time the role of the Government in the 

housing markets. As we proceed with these reforms, we want to make sure that we 

are encouraging, not undermining, the prospects for broader recovery in the housing 

market. 

Fourth, the Council emphasizes the importance of closer cooperation and coordination in the implementation of financial reforms, both here in the United States and 

around the world. This is crucial because if we allow large gaps to emerge as we 

did in the years before the crisis, risk will migrate to those gaps, leaving the system 

as a whole more vulnerable to another crisis. 

Differences in the design of standards in particular areas create opportunities for 

firms and investors to take advantage of those weaker standards. As we act to contain risk in the United States, we want to minimize the chances that it simply 

moves to other markets around the world, ultimately endangering our own system. 

The most important challenges we face in building a level playing field lie in the 

design of new capital standards and liquidity rules for the largest institutions and 

reforms to the derivatives markets. 

The Council’s recommendations are designed to address the challenges we see 

today, but also those inherent in a dynamic, innovative financial system. We cannot 

predict the precise threats that may face the financial system. The best way to prepare for this uncertainty is to continue to build the shock absorbers and safeguards 

that improve the resilience of the financial system. We need to recognize that policy 

and regulation will often be behind the curve of financial innovation. The best 

course is to plan for constant change and the potential for instability and to recognize that the threats will come in ways we cannot predict or fully understand. 

Although our financial system today is much stronger than it was before the crisis, our work is not complete. To preserve the gains we have achieved and to reduce 

both the risk of and the damage from future crises, we must continue to implement 

financial reform, pass comprehensive housing finance reform, and move forward 

with the other recommendations of the Council. 

32 

We will do this with a balanced approach, weighing the benefits of regulation 

against the costs of excessive restraint. We need to move at a pace that fully recognizes the fragility of the global economic recovery, phasing in reforms over time so 

that we limit the risks to growth. 

As we move forward, I encourage Congress to strengthen our capacity to continue 

repairing our financial system and to make sure that investors and consumers are 

afforded better protections against abuses and unfair practices. This means making 

sure that qualified people are in place to run the financial agencies. And it requires 

that Congress provide sufficient funding for enforcement agencies to do their jobs 

in today’s complicated and challenging financial environment. If we leave the agencies responsible for enforcement underfinanced, then we will leave the American 

consumers, investors, and businesses that depend on our financial system more vulnerable. 

In closing, I want to thank the other members of the Financial Stability Oversight 

Council, as well as the Council’s staff, for the work they have done over the past 

year and their efforts to produce this annual report. 

We look forward to working with this Committee, and with Congress as a whole, 

to build on the substantial progress we have made to create a stronger financial system. 

33 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

FINANCIAL STABILITY OVERSIGHT COUNCIL 2011 ANNUAL REPORT 

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