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Panel I of a Hearing of the House Financial Services Committee - Oversight of Implementation of the Emergency Economic Stabilization Act of 2008 and of Government Lending and Insurance Facilities; Impact on Economy and Credit Availability

By:
Date:
Location: Washington, DC

REP. FRANK: The hearing will come to order. We'll need the photographers to stop obstructing; I'm a great believer in the freedom of information, but I think America is fully informed as to what these two gentlemen look like, so I don't feel like I'm interfering with First Amendment rights if I ask you to let us get on with the hearing.

This hearing is called to do oversight on one of the most important pieces of legislation this current Congress has adopted and one of the most important, in many ways, I think, that any Congress has ever adopted.

We were asked last September by the secretary of the Treasury, supported by the chairman of the Federal Reserve, to pass a very extraordinary piece of legislation, putting potentially at risk, although we hope in the end not, $700 billion of public money for purposes that go beyond what government has ordinarily done and what almost everybody, including, I believe, the two gentlemen at the table, think government should do. But it was a necessary response to a crisis.

Some questions have arisen about decisions that have been made with regard to the expenditure of those funds. We certainly want to hear from the secretary and the chairman their assessment of what's happened so far. And let me say, at the outset, we do have a problem with all of us that there tends to be a focus on those areas of disagreement. And so accomplishments, areas of agreement, things which worked well, tend not to get a lot of discussion.

It is important, so that we can understand what's happened, to evaluate what we did, that there be a full discussion today both of the successes of this program -- and I believe there have been significant successes -- and also of the concerns many of us have.

There are two that I hope we can address, and we've talked about these in a variety of ways publicly, privately, with these two officials. One, there was concern that the banks, which were the recipient of capital infusions under the capital purchase program, have not used the funding entirely for relending, which many people here understood would be the purpose.

There is both unhappiness at what would appear to be, on the part of some financial institutions, excesses in use of the money, although AIG attracted the most attention there, and that was initially not out of the $700 billion program. But even more substantively, there is concern that -- and we hear this anecdotally from people we represent -- that credit is still tighter than it ought to be and that the banks which received the money have not yet begun to lend it out.

The second major concern is over foreclosure prevention. And here I believe there's a very fundamental disagreement on the part of a lot of members with the decision recently made. But we understand that decisions are subject to re-examination, et cetera.

When the program was passed, very explicit language was included to provide for mortgage foreclosure diminution as one of the purposes. There's very specific language in there. And the question was, well, investment versus spending. But the bill itself specifically says that we should, as we buy up mortgage assets, reduce the amount that has to be paid to a reasonable level to avoid foreclosure. So no one can argue that it was not contemplated. Indeed, it was a very important part of, frankly, the effort to get votes for this bill that we would do mortgage foreclosure reduction.

The secretary's recent announcement was that none of these funds would go towards mortgage foreclosure reduction, although there are other programs on which we are working to do that. And I welcome recent evidence by several of the largest banks, all of whom were recipients of the capital funds. And there's no direct connection, but it is true; several of the largest banks have now begun to get active.

We also got an announcement by Freddie Mac of movement, although we have some concerns about how far they go and why they lag the programs that the FDIC has put in. But the fundamental policy issue is our disappointment that funds are not being used out of the $700 billion to supplement mortgage foreclosure reduction.

It is unfortunately not the case that all of our other efforts have been fully successful. I was a strong proponent of our Hope for Homeowners bill. I now believe if we were redoing that, we'd do it differently in some ways. We learned from experience.

There, I believe, is an overwhelmingly powerful set of reasons why some of the (top ?) money must be used for mortgage foreclosure. First of all, mortgage foreclosures continue at an excessive pace from the standpoint of the economy. The negative effect of this cascade of foreclosures goes far beyond the individuals who lose their homes. It has to do with neighborhood deterioration. It has to do with municipal inability to make their governments work. And it impacts, obviously, the macroeconomy.

Secondly, there's the matter of public confidence. A number of things need to be done to get us out of this recession, in my judgment -- fiscal stimulus, increased lending, which I talked to at first, but foreclosure reduction. And it may well be that further action has to be taken.

I have to say at this point that public confidence in what we have done so far is lower than anybody would have wanted it to be, to the point where it could be an obstacle to further steps. So because I want to keep time for everybody, I will just reiterate it is essential that we do something to use some of the TARP funds for the diminution of the rate of mortgage foreclosures. And the chair of the FDIC, whom we have invited, has been very much in the lead on this. No one here is endorsing any specific plan, but the need to use TARP funds, as the bill contemplates, to reduce foreclosures is paramount.

The gentleman from Alabama.

REP. SPENCER BACHUS (R-AL): Thank you, Mr. Chairman, for holding the hearing. And I welcome Secretary Paulson and Chairman Bernanke and Chairman Bair, and I appreciate your service to the country.

There have been some reports in the press recently that the use of the TARP funds for direct injection of capital into the financial institutions is somehow contrary to the intent of Congress. I actually think that is not correct. The legislation that we passed specifically authorized direct injection of capital into the financial institutions through the purchase of equity, of shares.

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

And I think what happened -- I think we would all, hopefully, agree on this -- is we simply found that it was quicker, simpler and, I think, safer for the taxpayers to purchase shares of stock. I've always had objections or at least reservations about the government purchasing what's been called troubled or toxic assets and having to manage them.

So I, for one, Secretary Paulson, applaud you and I think most economists applaud you for actually being flexible and taking an approach which was clearly authorized by the legislation.

As the chairman said, confidence is critically important to the financial markets and to the overall economy. And it is in the best interests of not only the economy but also of the public that as we shift and improvise, on occasions, that we clearly communicate the objective and the basis for what we're doing. And I think we all agree on that.

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

I have a particular concern, and that's that we don't appear to have an exit strategy. We continue to purchase assets, bring them onto the books of the government in the neighborhood of $1 trillion. And most of us, I think, on the Republican side have been troubled since day one about government intervention into the private markets.

One of our concerns has been that we're taking capital that could be used by more efficient, more successful companies and enterprises with better business models, and we're shifting that money to companies that are less efficient and whose business models need changing. And by putting capital into those companies, we almost enable them or allow them not to confront some of the inefficiencies in their own enterprises.

Let me close by saying this. There's been a lot of discussion about the greatest economic challenge since the Great Depression. One thing that I've tried to do is go back and look at the nine or 10 recessions we've had since World War II. What at least I find, and you may tell me that I'm wrong, is that the GDP in all but the last two of those recessions dipped by as much as 5 percent in at least one quarter.

In this quarter which many people are saying is the worst quarter, we expect maybe a 4 percent dip in GDP. So at least when you look at the history of the recessions since World War II, you find that this recession may in fact not be any greater, at least now. I don't know if it's something in the future, but at least right now, this recession, as far as a loss to GDP, is no greater than at least eight of our 10 recessions since World War II.

So the question that I would ask, and I'll close with this, is, if we are in a recession that is, at least from a GDP standpoint, is no greater than eight of the last 10, why are we, in this recession, having so much government intervention?

I thank you, Mr. Chairman.

REP. FRANK: The gentlewoman from New York is recognized for three minutes.

We're under the rule for Cabinet officials of two fives and two threes.

The gentlewoman from New York.

REP. CAROLYN MALONEY (D-NY): Thank you.

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

I particularly would like to commend Chairman Bair for her leadership in foreclosure prevention and particularly for developing a new loan modification guarantee program to refinance on a large scale, which would help us to save millions of people, help them stay in their homes.

And I'd like to be associated with the comments of both the ranking member and the chairman that our intention was to use some of the TARP monies to invest in our economy and to get it moving in the right direction. And certainly, stabilizing housing, as Chairman Bernanke has said repeatedly, that we must fix the housing crisis before we can get the economy back on track. So whatever the model, I firmly support using TARP money to stabilize housing in our economy.

Secondly, my constituents are telling me that many of them still cannot get access to credit. Given that bank lending is still basically shut down, we need to be asking whether and when we should expect at least some fraction of TARP funds injected into banks to be lent. After all, one of the primary purposes of the TARP program was to get credit moving.

I have non-bank lenders, who are my constituents, who lend money to small businesses and want access to the TARP to increase that activity. Today's Wall Street Journal talks about insurance companies that are buying up banks just to get access to the TARP money.

And we then read many articles that banks are using TARP monies for buying other banks. So we are basically funding mergers and acquisitions, not lending.

So my basic question is, why shouldn't we be giving TARP money out based on the activity it funds? Why don't we fund organizations that will lend it, whether it is a bank, an insurance company, so that we will be getting the credit out into the communities, which was the purpose of the TARP program?

Again, every article talks about how it's being used for capital formation, mergers, acquisitions, other activities, buying up swaps, buying other things, instead of getting the credit out into the communities.

So there are many questions before us today, but those are two of my prime focuses, that we should be helping people stay in their homes and we should be working harder to get credit out into the communities.

Thank you.

REP. FRANK: The gentleman from Texas is recognized for three minutes.

REP. : Thank you, Mr. Chairman. Thank you for holding this hearing. And it's certainly better late than never.

It appears that 80 percent of the funds that are currently available under the TARP program have already been committed, so I'm glad we're at least holding the hearing today.

The Washington Post reported last week, quote, "No formal action has been taken to fill the independent oversight posts established by Congress when it approved the bailout to prevent corruption and government waste." So I believe there is sufficient work for this committee at this time.

As many in this room know, I did not support the original Emergency Economic Stabilization Act. Clearly, as most, I recognize that we do have a legitimate crisis as opposed to those that occasionally get manufactured around here.

I embraced an idea I thought I would never embrace, and that was a government-insured model for mortgage-backed securities. I also preferred a secured-loan model. My ideas and those of other conservatives did not carry the day. This is the law of the land. We want to make sure that it works.

I had many reservations at the toxic asset purchase model, not the least of which was my belief that the federal government ultimately is not institutionally competent to purchase the right assets at the right price much less manage them in a proper fiduciary fashion.

But I recall being told at the time that this model had been studied at Treasury for a number of months and that the other alternatives, for a number of reasons, we discounted.

On October 3rd when the law was passed, the Dow closed at 10,325. Yesterday it closed at 8,273. To the best of my knowledge, any data that has come across my desk shows that consumer confidence remains low. So clearly, we have a ways to go.

I will be curious in this hearing to understand the reasons why the toxic asset purchase model has apparently been abandoned. If that is true, I, for one, applaud it. And I always thought the direct equity infusion model would be a preferred model, although I preferred debt as opposed to equity.

I fear though that some view it as a bait and switch. And I am curious to what extent regulatory and programmatic uncertainty are leading or exacerbating the economic woes that we face today as people wait to see what portion of the money they may be able to apply for.

I hope going forward that, number one, we measure the program by, is it working? Number two, 700 billion (dollars) is a lot of money. I haven't found anybody who doesn't want a piece of it as of yet. I hope that we look upon the program, that the recipients will be chosen by how it could impact our macroeconomy and not a political-driven process, picking winners and losers.

And last, but not least, taxpayer accountability and transparency must be paramount.

Thank you, Mr. Chairman, I yield back.

REP. FRANK: Mr. Secretary -- let me explain to members, we have, I believe, until noon. We will obviously not be able to accommodate all the members. I am going to hold very strictly the time limits for all of us.

Mr. Secretary.

SEC. PAULSON: Thank you very much, Mr. Chairman.

Mr. Chairman, Congressman Bachus and members of the committee, thank you for the opportunity to testify this morning. Six weeks ago, Congress took the critically important step of providing important authorities and resources to stabilize our financial system. Until that time, we faced a financial crisis without the proper tools. With these tools in hand, we took decisive action to prevent the collapse of our financial system.

We have not, in our lifetime, dealt with a financial crisis of this severity and unpredictability. We have seen the failures, or the equivalent of failures, of Bear Stearns, IndyMac, Lehman Brothers, Washington Mutual, Wachovia, Fannie Mae, Freddie Mac and AIG -- institutions with a (collective ?) $4.7 trillion in assets when this year began.

By September, the financial system had seized up, presenting a system-wide crisis. Our objective in asking Congress for a financial rescue package were to, first, stabilize the financial system on the verge of collapse; and then to get lending going again to support American consumers and businesses.

Over the next few weeks, conditions worsened significantly. Confidence in the banking system continued to diminish; industrial company access to all aspects of the bond market was dramatically curtailed. Small and middle-sized companies, with no direct connection to the financial sector, were losing access to the normal credit needed to meet payrolls, pay suppliers and buy inventory.

During that same period, the FDIC acted to mitigate the failure of Washington Mutual, and made clear that it would intervene to prevent Wachovia's failure. Turmoil had developed in the European markets. In a two-day period at the end of September, the governments of Ireland and the U.K., Germany, Belgium, France and Iceland intervened to prevent the failure of one or more financial institutions in their countries.

But the time legislation had cleared Congress, the global market crisis was so broad and severe powerful steps were necessary quickly to stabilize our financial system. Our response -- in coordination with the Federal Reserve, the FDIC and other banking regulators, was a program to purchase equity in banks across the country. We have committed $250 billion to this effort.

This action, in combination with the FDIC's guarantee of certain debt issued by financial institutions, and the Fed's commercial paper program, helped us to immediately stabilize the financial system. The capital purchase program for banks and thrifts has already disbursed $148 billion, and we are processing many more applications.

Yesterday, Treasury announced the terms for participation for non-publicly traded banks, another important source of credit in our economy. We have designed these terms to help provide community development financial institutions and minority depository institutions with capital for lending to low-income and minority populations. These institutions have committed to use this capital for businesses and projects that serve their communities. In addition, we are developing a matching program for possible future use by banks or non-bank financial institutions.

Capital strength enables banks to take losses as they write-down or sell troubled assets. Stronger capitalization is also essential to increasing lending -- which, although difficult to achieve during times like this, is essential to economic recovery. We expect banks to increase their lending over time as a result of these efforts, and this confidence is restored. This lending won't materialize as fast as any of us would like, but it will happen much, much faster having used the TARP to stabilize our system.

As we continue significant work on our mortgage asset purchase plan, it became clear just how much damage the crisis had done to our economy. Third-quarter GDP growth showed negative 3. -- .3 of a percent. The unemployment rate rose to a level not seen in 15 years. Home price data showed that home prices in 10 major cities had fallen 18 percent over the previous year, demonstrating that the housing correction had not abated.

The slowing of European economies has been even more dramatic. We assessed the potential use of remaining TARP funding against the backdrop of current economic and market conditions. It is clear that an effective mortgage asset purchase program would require a massive commitment of TARP funds.

In September, before economic conditions worsened, $700 billion in troubled asset purchases would have had a significant impact. But half of that sum, in a worse economy, simply isn't enough fire-power. We have therefore determined that the prudent course, at this time, is to conserve the remaining funds available from the TARP, providing flexibility for this and the next administration.

Other priorities that need to be addressed include actions to restore consumer credit. Treasury has been working on a program with the Federal Reserve to improve securitization in the credit marketplace. While this would involve investing only a relatively modest share of TARP funds and a Federal Reserve liquidity facility, it could have substantial positive benefits for consumer lending.

Finally, Mr. Chairman, Treasury remains committed to continuing to work to reduce avoidable foreclosures. Congress and the administration have made substantial progress on that front through HUD programs; the FDIC's IndyMac approach; our support and leadership of the Hope Now Alliance and our work with the GSEs, including an important announcement they made last week; establishing new servicer guidelines that will set a new standard for the entire industry. Our actions to stabilize and strengthen Fannie Mae and Freddie Mac have also helped mitigate the housing correction by increasing access to lower cost mortgage lending.

As some on the committee know, I have reservations about spending TARP resources to directly subsidize foreclosure mitigation because this is different than the original investment intent. We continue to look at good proposals, and are dedicated to implementing those that protect the taxpayer and work well.

Mr. Chairman, the access -- excuse me, the actions of the Treasury, the Fed and the FDIC have stabilized our financial system. The authorities in the TARP have used to strengthen our financial system and to prevent the harm to our economy and financial system from the failure of a systemically important institution.

As facts and conditions in the market and economy have changed, we have adjusted our strategy to most effectively address the urgent crisis and to preserve the flexibility of the president-elect and the new secretary of the Treasury to address future challenges in the economy and capital markets.

Thank you again for your efforts and for the opportunity to appear today. I would like to just make one last comment in response to a question that Congressman Bachus asked, because it's one I hear a lot of -- the distinction between the financial markets and the economy:

So, when we've talked about the crisis in the financial markets, and being unprecedented, and having to go back to the Great Depression to see anything of this magnitude and that presented this amount of difficulty -- we're talking about the financial markets. Now, when the financial markets have problems, they hurt the economy. So, the reason that it was very important to get in quickly and stabilize was to mitigate damage to the economy.

When we here before you we saw what was happening to the economy. We talked about it. We took the steps. The economy has continued to get worse. The American people look at the worsening economy -- and, as your chairman said to me yesterday, "In politics you don't get much credit for what might have happened, and didn't happen. What the American people see is what's happening to the economy." But, again, our purpose in coming to you was to take steps --

REP. FRANK: Mr. Secretary --

SEC. PAULSON: -- to protect the capital markets.

REP. FRANK: -- the (Chairman ?) will have his five minutes. Appreciate that.

Mr. Chairman.

MR. BERNANKE: Thank you.

Chairman Frank, ranking member Bachus and other members of the committee, I appreciate having this opportunity to review some of the activities, to date, of the Treasury's Troubled Asset Relief Program, or TARP, and to discuss recent steps taken by the Federal Reserve and other agencies to support the normalization of credit markets.

The legislation that created the TARP put in place a Financial Stability Oversight Board to review the actions of the Treasury in administering the program.

That oversight board includes the secretary of the Treasury, the secretary of Housing and Urban Development, the chairman of the Securities and Exchange Commission, the director of the Federal Housing Finance Agency and the chairman of the Federal Reserve Board.

We have met four times, reviewing the operational plans and policy initiatives of the TARP and discussing possible additional steps that might be taken. Officers for the oversight board have been appointed, and the Federal Reserve and the other agencies are providing staff support for the board. Minutes of each meeting are being posted to a special website established by the Treasury.

In addition, staff members of the agencies whose heads are participating in the oversight board have met with staff from the Government Accountability Office to explore strategies for coordinating the oversight that the two bodies are required to perform under the enabling legislation.

The value of the TARP in promoting financial stability has already been demonstrated. The financial crisis intensified greatly in the latter part of September and spread to many countries that had not yet been touched by it, which led to grave concerns about the stability of the global financial system. Failure to prevent an international financial collapse would almost certainly have had dire implications for both the U.S. and world economies.

Fortunately, the existence of the TARP allowed the Treasury to react quickly by announcing a plan to inject $250 billion in capital into U.S. financial institutions. Nine large institutions received the first 125 billion (dollars), and the remainder is being made available to other banking organizations through an application process.

In addition, the Federal Deposit Insurance Corporation announced that it would guarantee non-interest-bearing transaction accounts at depository institutions and certain other liabilities of depository institutions and their holding companies, and the Federal Reserve expanded its provision of backstop liquidity to the financial system.

These actions, together with similar measures in many other countries, appeared to stabilize the situation and to improve investor confidence in financial firms. Notably, spreads on credit default swaps for large U.S. banking organizations, which had widened substantially over the previous few weeks, declined sharply on the day of the joint announcement.

Going forward, the ability of the Treasury to use the TARP to inject capital into financial institutions and to take other steps to stabilize the financial system -- including any actions that might be needed to prevent the disorderly failure of a systemically important financial institution -- will be critical for restoring confidence and promoting the return of credit markets to more normal functioning.

As I noted earlier, the Federal Reserve has taken a range of policy actions to provide liquidity to the financial system and thus promote the extension of credit to households and businesses. Our recent actions have focused on the market for commercial paper, which is an important source of short-term financing for many financial and nonfinancial firms.

Normally, money market mutual funds are major lenders in the commercial paper markets. However, in mid-September, a large fund suffered losses and heavy redemptions, causing it to suspend further redemptions and then close. In the next few weeks, investors withdrew almost $500 billion from prime money market funds. The funds, concerned about their ability to meet further redemptions, began to reduce their purchases of commercial paper and limit the maturity of such paper to only overnight or other very short maturities. As a result, interest rate spreads paid by issuers on longer-maturity commercial paper widened significantly, and issuers were exposed to the costs and risks of having to roll over increasingly large amounts of paper each day.

The Federal Reserve has developed three programs to address these problems. The first allows money market mutual funds to sell asset- backed commercial paper to banking organizations, which are then permitted to borrow against the paper on a non-recourse basis from the Federal Reserve Bank of Boston. Usage of that facility peaked at around $150 billion. The facility contributed importantly to the ability of money funds to meet redemption pressures when they were most intense and remains available as a backstop should such pressures reemerge.

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

A third facility, expected to be operational next week, will provide a liquidity backstop directly to money market mutual funds. This facility is intended to give funds confidence to extend significantly the maturities of their investments and reduce over time the reliance of issuers on sales to the Federal Reserve's special- purpose vehicle.

All of these programs, which were created under section 13(3) of the Federal Reserve Act, must be terminated when conditions in financial markets are determined by the Federal Reserve to no longer be unusual and exigent.

The primary objective of these and other actions we have taken is to stabilize credit markets and to improve the access to credit of businesses and households. There are some signs that credit markets, while still quite strained, are improving. Interbank short-term funding rates have fallen notably since mid-October, and we are seeing greater stability in money market mutual funds and in the commercial paper market. Interest rates on higher-rated bonds issued by corporations and municipalities have fallen somewhat, and bond issuance for these entities rose a bit in recent weeks.

The ongoing capital injections under the TARP are continuing to bring stability to the banking system and have reduced some of the pressure on banks to deleverage, two critical first steps toward restarting flows of new credit. However, overall, credit conditions are still far from normal, with risk spreads remaining very elevated and banks reporting that they continued to tighten lending standards through October. There has been little or no bond issuance by lower- rated corporations or securitization of consumer loans in recent weeks.

To help address the tightness of credit, on November 12 the federal banking agencies issued a joint statement on meeting the needs of creditworthy borrowers. The statement took note of the recent strong policy actions designed to promote financial stability and improve banks' access to capital and funding. In light of those actions, which have increased the capacity of banks to lend, it is imperative that all banking organizations and their regulators work together to ensure that the needs of creditworthy borrowers are met in a manner consistent with safety and soundness.

As capital adequacy is critical in determining a banking organization's ability and willingness to lend, the joint statement emphasizes the need for careful capital planning, including setting appropriate dividend policies. The statement also notes the agencies' expectation that banking organizations should work with existing borrowers to avoid preventable foreclosures, which can be costly to all involved -- the borrower, the lender, and the communities in which they are located.

Steps that should be taken in this area include ensuring adequate funding and staffing of mortgage servicing operations and adopting systematic, proactive and streamlined mortgage loan modification protocols aimed at providing long-term sustainability for borrowers.

Finally, the agencies expect banking organizations to conduct regular reviews of their management compensation policies to ensure that they encourage prudent lending and discourage excessive risk- taking.

Thank you. I'd be pleased to take your questions.

REP. FRANK: Chair of the FDIC, Sheila Bair.

MS. BAIR: Thank you.

Chairman Frank, Ranking Member Bachus, and members of the committee, I appreciate the opportunity to testify on recent efforts to stabilize the nation's financial markets and reduce foreclosures.

Conditions in the financial markets have deeply shaken the confidence of people around the world in their financial systems. The events of the past few months are unprecedented to say the least. The government has taken a number of extraordinary steps to bolster public confidence in the U.S. banking system.

The most recent were measures to recapitalize our banks and provide temporary liquidity support to unlock credit markets -- especially interbank lending. These moves match similar actions taken in Europe. Working with the Treasury Department and other bank regulators, the FDIC will do whatever it takes to preserve the public's trust in the financial system.

Despite the current challenges, the bulk of the U.S. banking industry remains well-capitalized, but what we do have is a liquidity problem. This liquidity squeeze was initially caused by uncertainty about the value of mortgage-related assets. Since then, credit concerns have broadened considerably, making banks reluctant to lend to each other and to lend to consumers and businesses.

As you know, in concert with the Treasury and the Federal Reserve, we took a number of actions to bolster confidence in the bank system. These included temporarily increasing deposit insurance coverage and providing guarantees to new senior unsecured debt issued by banks, thrifts and holding companies. The purpose of all these programs is to increase bank lending and minimize the impact of deleveraging on the American economy.

As a result of these efforts, the financial system is now more stable and the interest rate spreads have narrowed substantially; however, credit remains tight and a serious threat to the economic outlook. Regulators will be watching to make sure these emergency resources are mainly used for their intended purpose: responsible lending to consumers and businesses.

In the meantime, we remain focused on the borrower's side of the equation. Everyone agrees that more needs to be done for homeowners. We need to prevent unnecessary foreclosures and we need to modify loans at a much faster pace. Foreclosure prevention is essential to helping find a bottom for home prices, to stabilizing mortgage credit markets and to restoring economic growth.

We all know there's no single solution or magic bullet, but as foreclosures escalate, we're clearly falling behind the curve. Much more aggressive intervention is needed if we are to curb the damage to our neighborhoods and to the broader economy.

Last Friday, we released the details of our plan to help 1.5 million homeowners avoid foreclosure. Our program would require a total of about 24 billion (dollars) in federal financing. The plan is based on our practical experience in modifying thousands of mortgages at IndyMac Federal Bank. As we've done at IndyMac, we would convert unaffordable mortgages into loans that are sustainable over the long term. The plan would set loan modification standards. Eligible borrowers would get lower interest rates and in some cases, longer loan terms and principal forbearance to make their monthly payments affordable.

To encourage the lending industry to participate, the program would create a loan guarantee program that would absorb up to half the losses if the borrower defaults on the modified loan.

While we applaud recent announcements by the GSEs and major servicers to adopt more streamlined approaches to loan modifications along the lines we have employed at IndyMac, the stakes are too high and the time is too short to rely exclusively on voluntary efforts. Moreover, these recent announcements do not reach mortgages held in private-label securitizations.

We need a national solution for a national problem. We need a fast-track federal program that has the potential to reach all homeowners, regardless of who owns their mortgages.

What we're proposing is a major investment program that can yield significant returns by attacking the self-reinforcing cycle of unnecessary foreclosures, placing downward pressure on home prices.

Average U.S. home prices have declined by more than 20 percent from their peak, and are still spiraling down. If this program can keep home prices from falling by just 3 percentage points less than would otherwise be the case, over half a trillion dollars would remain in homeowners' pockets.

Even a conservative estimate of the wealth effect this could have on consumer spending would exceed $40 billion. That would be a big stimulus for the economy, and nearly double our investment.

In conclusion, the FDIC is fully engaged in preserving trust and stability in the banking system. The FDIC stands committed to achieving what has been our core mission since we created -- we were created 75 years ago, in the wake of the Great Depression -- protecting depositors and maintaining public confidence in the financial system.

Thank you.

REP. FRANK: Thank you.

Before I start my testimony, I want to just put into the record a very thoughtful letter from our colleague Mr. Kucinich, who is chair of the Subcommittee on Government Reform, strongly arguing for help on foreclosures, a letter that was sent to me -- and a letter was also sent to the secretary, from Michael Fryzel, the presidential appointee to head the National Credit Union Administration, objecting strenuously on behalf of the health of the credit union industry to its decision not to buy up any assets, and also a statement from the National Association of Realtors.

I will now begin my five minutes, and I going to hold everybody to five minutes.

First, I -- welcome to the two chairs here. The interagency statement on meeting the needs of creditworthy borrowers -- and it's a very good statement. It will be an even better statement if somebody gets whacked for not following it. There's got to be some teeth. And it does talk about compensation, about dividends, and it is a very good statement.

I can't imagine that a month from now everybody will have complied, and so therefore, frankly, evidence that it meant something will be if there are at least some letters issued or some penalties.

Secondly, I just want to report on the oversight board -- and the gentleman from Texas referred to it -- my understanding is that the Senate majority leader and the speaker have appointed their members. The minority leaders have not appointed their members yet. So the board is not yet functional.

Earlier this week, three -- or, last week -- three members were appointed, as called for in the statute, by the majority leader of the Senate and the speaker.

Now, I want to get to the issue -- (request aside to staff) -- I want to issue of the mortgage foreclosure.

First, Mr. Secretary, I am going to also put into the record a four-page memo of sections of the law that we passed that mandate that if you buy assets, you do mortgage foreclosure. And make it very clear, when you say spending --

First I have to say this. We obviously all appreciate the concern for the taxpayers' money, but the chair of the FDIC talks about 24 billion (dollars). That's what, 40 percent of what we just gave to AIG out of this program. And you say this is for an investment, not spending.

I don't know what investment counselor, absent macro-economic conditions, would have advised you to invest in AIG. I suspect it does not rate highly as an investment these days.

I hope it goes well, going forward, and there's no question that this will be helpful to it. But 40 billion (dollars) for AIG, and then we can't find 24 billion (dollars) on the mortgage foreclosure is part of the reason we have the real problem with the country.

But let me just say there are pages -- it's four pages of specific authorization to buy up mortgages and write them down. Section 109(c), "upon any request arising under existing investment contracts, the secretary shall consent where appropriate in considering -- (inaudible) -- by the taxpayer to reasonable requests for loss mitigation measures."

In Section 110, homeowner assistance by agencies. "To the extent that the federal property manager holds on to controlled mortgages, they shall implement a plan that seeks to maximize assistance for homeowners."

The bill is replete with authorization to you, not simply to buy up mortgages, but in effect to do some spending -- because we are talking about writing them down.

So the argument that, frankly, of all the changes that have come with the program, this -- this wouldn't be a change. This was the program. And my colleague from California, who'll be -- you'll be hearing from shortly, made a big point of this on the floor.

So the argument that this is not part of the program simply doesn't wash. So -- would, do you agree, Mr. Secretary, that in fact the bill does authorize aggressive action, not simply to buy up mortgages, but in buying them up, take some action to reduce in some ways the amount owed so we diminish foreclosures?

SEC. PAULSON: Mr. Chairman, two things. First, I need to just say a word about AIG, because the primary purpose of the bill was to protect our system, protect our system from collapse.

AIG was a situation, a company, that would have failed, had the Fed not stepped in. Had we had the TARP at that time, this is right down the middle of the plate for what we would have used the TARP for.

As it turned out -- because it should have had preferred (and a ?) Fed facility, and as it turned out, we needed to come in again to stabilize that situation and maximize the chances that the government would get money back.

So I just wanted --

REP. FRANK: I'm not objecting to the AIG. I am just saying, though, that the standards of what we do -- and obviously foreclosure is also a serious problem for the economy.

SEC. PAULSON: I agree with you on the bill. There is no doubt that -- and so don't misunderstand what I say, that the --

We came to Congress with the intent to get at the capital program that banks were facing and the system was facing through purchasing large amounts of illiquid assets. And so the bill -- and it was to purchase those assets and then resell them.

And our whole discussion -- because that's what we were talking about, was how to use these and use this investment position to make a difference and mitigate foreclosures.

My only point is now that we haven't bought those assets, illiquid assets, that the -- that at least the intent is, I had seen it. At least all the discussions we had went to buying assets and reselling them. It didn't go to a direct subsidy. But --

REP. FRANK: No, Mr. Secretary, I have to interrupt you. No, you are talking legitimately about your intent. But we had to get the votes for the bill.

SEC. PAULSON: Right.

REP. FRANK: Our intent was also relevant. And I read you sections of the bill which says, write it down, give them assistance. So the bill couldn't have been clearer that one of the purposes --

And, by the way, we're talking about, what, 24 billion (dollars) out of 700 billion (dollars)? You're talking about 4 percent of the total amount.

But the point is that clearly part of this was not just to stabilize, but to reduce the number of foreclosures, for good macro- economic reasons. And so again, the intent couldn't be clearer, from what I've read.

SEC. PAULSON: Let me then, Mr. Chairman, say what you've heard me say a number of times before, that going back many, many months, before it was as topical as it is now, we've been working very, very aggressively at the individual, helping the individual. As recently as last week --

REP. FRANK: Mr. Chairman, I'm sorry -- Mr. Secretary -- we don't have a lot of time, and I don't usually do this, but --

SEC. PAULSON: Okay, well, let me just --

REP. FRANK: What -- the question is the language in the TARP. We understand that there are other activities going on. I don't accept them as a substitute for using the authority that we very specifically and carefully wrote into the TARP and that was essential to it getting passed.

SEC. PAULSON: Well, what you've heard from me, and what you heard from me last night, and which I will say again, that I am going to keep working on this and looking for ways to use the taxpayer money as they expect me to here, with regard to foreclosure mitigation.

We have been, you know, as recently as last week, taking a step which I think will have --

REP. FRANK: No, I'm sorry, Mr. Secretary. Those are not substitutable. Because I will tell you this, and I apologize for taking the time, it is nobody's view that we have been as successful as we need to be for the stake of the economy in reducing foreclosures.

SEC. PAULSON: Absolutely.

REP. FRANK: We have a very large pot, that was intended to be part of that effort, that's going untapped.

The gentleman from Alabama.

REP. SPENCER BACHUS (R-AL): He was responding to --

REP. FRANK: No, I -- we were out of time. He can respond with you --

REP. BACHUS: Thank you, Mr. Chairman.

You've just been told if you don't give assistance or lend to folks, you'll be waxed. That's sort of a continuation of what we've been hearing since the 1970s by federal policy and the GSEs, is lend and meet the needs of folks and assist them.

And I think, as a result of that, the financial system and the economy's been waxed by lending to people that weren't creditworthy. And I hope -- and I appreciate that your inter-government statement stressed "creditworthy" borrowers.

Secretary Paulson, I very much appreciate something that you did in your opening statement, and you -- I think you distinguished between the economy and the financial system. Because people did question some of the actions by saying well, the economy's strong.

And -- but the financial system, chaos or distress there, will affect the economy. It has that effect. And I think we've heard good news here, and there is stability returning to the financial system, and I think the good news is -- just like the instability in the financial system affected the economy going forward, and it may take a while to do -- but the stability that has returned to the system will, in the long term, strengthen the economy, and I think that's good news for all of us.

The TARP program, the capital purchase program, all of them had as a design two things. One was restoring the stability to the financial markets. And I think that we're well on the way to achieving that.

And as you said, you don't get credit for something that you avoid, and that would be a collapse of the financial system.

The second objective was to strengthen the economy by restoring lending to companies and borrowers. And on that score, it's been a -- it hasn't worked as well.

Would you comment on do you think we're on the right track in restoring lending?

SEC. PAULSON: Yes, Congressman Bachus. I think we're on the right track. This is -- remember, this is early days, in terms of the capital. It has just gone out, and a lot of it still hasn't gone out to the banks.

And the way I look at where we are today is I think we've turned the corner in terms of stabilizing the system, preventing a collapse. I think there's a lot of work that still needs to be done in terms of recovery of the financial system, getting it working again, getting credit flowing again. I think this is going to be key to getting the economy going, and it's going to take a lot of work and time.

I agree with what the chairman said about bank lending. And I just want to say one -- get to your point on foreclosure prevention.

I understand the chairman's point, and he expects and wants to see something in the TARP, specifically in the TARP, to deal with that. And we are continuing to work on that.

I did want to say, though, that because I was so aware of what the American people expected and what Congress expected and because I cared so much about this that I believe that the actions we took outside of the TARP, with regard to the GSEs and the national standard they set, has the potential to touch more and do more than we might have achieved if we'd used all $700 billion to buy illiquid assets.

So we are working. I understand the point. I know what you would like to see us do, but I just wanted to make that point there.

REP. BACHUS: Thank you.

Let me say this: There's been quite a lot of things said, Chairman Bernanke, that over 2 trillion dollars' worth of emergency loans to institutions and the identity of those assets that you've taken back.

You've always advocated, as -- (to ?) the secretary and this Committee, transparency. I know you're refusing to disclose the names of those institutions or the composition of those assets. Is that a short-term -- I'll call it a refusal to disclose, or is that -- when do you anticipate letting the public know?

MR. BERNANKE: Congressman, I think there's been some confusion about what this involves.

REP. BACHUS: Sure.

MR. BERNANKE: The Federal Reserve, like all other central banks, has short-term, collateralized lending programs to financial institutions. We've always had that.

The main difference is we've extended it to primary dealers as well as depository institutions. It's open to any bank that comes to our window. We take collateral; we haircut it. It's a short-term loan. It's very safe; we've never lost a penny in these lending programs.

Now, some have asked us to reveal the names of the banks that are borrowing, how much they're borrowing, what collateral they're posting. We think that's counterproductive, because -- for two reasons.

First, the success of this depends on banks being willing to come and borrow when they need short-term cash. There's a concern that if the name is put in the newspaper that such-and-such bank came to the Fed to borrow overnight for perfectly good reason, that others might begin to worry is this bank creditworthy? And that might create a stigma, a problem, and might cause banks to be unwilling to borrow. And that would be counterproductive for the whole purpose.

REP. BACHUS: So these are banks which have good, sound CAMEL ratings?

MR. BERNANKE: Yeah. We only lend to good-quality banks. We lend on a recourse basis; that is, they both post collateral, and if the collateral were to be insufficient, then the bank itself is still responsible. We've never lost a penny doing this.

I think it's a totally standard practice for central banks around the world, and it's very constructive to provide liquidity to the financial system.

REP. BACHUS: Thank you.

REP. FRANK: The gentleman from Pennsylvania.

REP. PAUL KANJORKSI (D-PA): Thank you, Mr. Chairman.

Mr. Secretary, I heard you use the comment, in a response to a question just a little while ago, "turning the corner." And it's a quotable phrase, I think. It reminds me of another famous phrase, "return to normalcy." And it sort of scares me, if you look at the context of when "return to normalcy" was used.

REP. KANJORSKI: I think there's a crisis of confidence that's in the general public, and within this body of the Congress. And we're trying to figure out, those of us that extended ourselves on the vote for the bailout, and the 180-degree change that you made in policy from buying bad assets to injecting investments of equity in banking institutions. I don't fault you for it.

It just was an extreme change, and rather shocking. And it wasn't your idea. It was the idea of the drafters of the legislation that you sent up in the form of a three-and-a-half-page draft, and we converted, after several weeks, to 400 pages. And part of those 400 pages gave you the authority to make that 180-degree change.

Now, my problem is that has happened once, and now suddenly I see other things occurring where you make 180-degree changes in policy. One example is this thing we're struggling with this week, the potential bankruptcy, or collapse, of our auto industry in the country.

And it seems that there's a dual idea, either at Treasury or at the White House, that if you take the 25 billion (dollars) out of a certain -- qualified funds, then it is necessary and should be used, and obviously would avoid systemic risk to the underlying principle we shouldn't do it unless there's systemic risk. But if you were to use monies from the TARP fund, that's unacceptable to the White House and Treasury and should not be done.

It seems to me, when you're treating a disease, you don't decide where the disease came from; you decide what is the prognosis, the likely prognosis, and then you take action.

So there's a lack of confidence, it seems to me, both in this body and in the general population. They want to get some idea, do we have a plan? Where are we going? To just say, "turning a corner" really is not terribly significant. It's no different than Herbert Hoover said, "return to normalcy." And it's getting frightful to the people.

Why can't this Treasury and this White House lay out a plan that takes into consideration all the contingencies that will happen or may happen and what our potential response will be, knowing full well mistakes will be made, money will be unreasonably or foolishly expended?

But we all tend to agree that if, in fact, we are on the precipice of a disaster, a meltdown, we're willing to take opportunities. But we don't want to walk into a room of darkness. We really want you to shed as much light in that room before we take the leap over the threshold.

So I -- I'm sort of calling upon you. Can you now give us some indication -- do you consider the loss of the American auto industry a significant and systemic risk, or don't you?

If we lose 3 million jobs, how will -- what would it cost to make it up? What would be the loss of revenue, and would it be worth spending $25 billion initially to stop that from occurring? And if we don't do that, what is our backup plan, and what do we intend to do?

It seems to me that if we're going to build confidence among our constituents, the American people, and confidence within this institution to respond to your requests and the White House requests just over the next 60 days and then the next administration, seems to me we have to be a little more forthcoming.

SEC. PAULSON: Then let me be very, very forthcoming to you, because the intent of the TARP, when we came here, was to stabilize the system to prevent a collapse.

That's what we talked about when we talked about the financial system. And what I've said today here -- I was very careful when I said what turning the corner meant. I said I believed that meant that we have stabilized the financial system and prevented a collapse.

I was also very clear in saying we have a lot of work ahead of us and the recovery of the financial system is -- it's a lot of work to get the markets going again. So now let's look at the TARP. When we came here, the purpose was that -- getting capital in the financial system. We came forward with the strategy, it was by illiquid assets. That was the strategy.

The purpose was clear. We worked with Congress and we wanted those additional authorities. Don't forever believe that we did not want -- we were working to maximize the authorities we have and the tools we have. And when the facts changed and the circumstances changed, we changed the strategy. We didn't implement a flawed strategy. We implemented a strategy that worked.

Now to get to your question -- and I think what the American people need in terms of confidence is a realistic assessment of where we are, sticking with what our objective was to begin with. Now look at the autos. Again, you haven't seen any lack of consistency on my part with regard to the autos. The TARP was aimed at the financial system. That's what the purpose is. That's what we talked about with the TARP.

Okay, now in terms of autos, I have said repeatedly I think it would be not a good thing -- it would be something to be avoided having one of the auto companies fail, particularly during this period of time. We have asked Congress -- you know, Congress has worked to deal with this. But I believe that any solution be a solution that leads to long term viability -- sustainable viability here. And so, again, I don't see this as the purpose of the TARP. Congress passed legislation that dealt with the financial system stability; and, again, you know, there are other ways. And, you know, you also appropriated money for the auto industry and the Department of Energy Bill, you know, 136. And, you know, one -- another alternative may be to modify that.

REP. Frank: The gentleman from -- who's next? The gentleman from Texas.

REP. JEB. HENSARLING (R-TX): Thank you Mr. Chairman. Mr. Secretary I think I would like to follow up on that line of questioning. I think what I hear you saying today and what I think I've heard you say is that as a matter of policy you do not believe that the TARP funds should be allocated to the Big 3 auto makers. But, to be specific, do you believe under the definition of financial institution in the underlying legislation that you are authorized to expend these sums if you so chose?

SEC. PAULSON: I -- Congressman, I think I'll just leave it where I left it. I don't think this is the purpose of the legislation.

REP. HENSARLING: Well I understand that, Mr. Secretary. Then let me follow up by asking what is your understanding of what qualifies for a financial institution under the legislation? For example, I read press reports recently that a group of plumbing contractors were applying for portions of the TARP funds in order to refurbish some foreclosed properties, making their case that qualifies them as a financial institution. So in your mind, since you are essentially in charge of dispersing the funds, can you give me a clearer black and white definition of what a financial institution is?

SEC. PAULSON: Congressman, I can't. We have a broad definition. We got very broad authorities and powers and I think that's appropriate. But we certainly are not going to give money to plumbing contractors and we're not going to give money to a lot of other people and institutions that are applying. We've had a very clear focus here right now. And, again, I feel a great responsibility, even though the powers may be very broad and appropriately so, I feel a great responsibility to stick with what the purpose is. And the purpose is stabilizing and strengthening our financial system. And I've said to you very clearly that I believe that the auto companies fall outside of that purpose.

REP. HENSARLING: Chairman Bernanke, the Federal Reserve has been very aggressive in developing new credit facilities, expanded facilities, reducing collateral standards for troubled financial services companies. But by some estimates we now have an exposure somewhere in the neighborhood of $2 trillion of commitments by The Federal Reserve. Can you tell us exactly how much exposure is out there? How much money has been lent?

MR. BERNANKE: Well, our balance sheet is about $2 trillion of which I'm guessing now 600 billion (dollars) is treasuries and agencies. The rest is some kind of credit extension of some type. The overwhelming amount, however, is of two classes: it's either lending, collateralized lending, to financial institutions that I described earlier. Those are loans made with recourse and on haircut collateral. They're short term loans and they're quite safe; we never lost a penny on one of those.

The other type of lending we've been doing is we've been doing currency swaps with some major central banks in order to try to address dollar funding problems in other jurisdictions. There the credit risk is of the foreign Central Bank, like The European Central Bank, and we consider that to be a zero risk essentially. So the overwhelming majority of our lending is at very low credit risk.

REP. HENSARLING: Well you appear to be going where perhaps no Federal Reserve chairman has gone before -- and this may be a very good thing given the crisis at hand. But just how much more are you prepared to commit and expose present and future taxpayers' liability to?

MR. BERNANKE: Well, I think what we need to do to keep the U.S. credit system working and to try to create a recovery in the financial system -- by law our lending has to be against fully collateralized, secure backing. We're actually making money on some of our programs. I don't see us as having a substantial exposure. It's a liquidity provision process, not a credit or a fiscal process.

REP. HENSARLING: At what point do you believe that these activities could undermine your ability to actually, on a prospective basis, impact monetary policies? And at what point might it adversely affect the credit rating of the U.S.?

MR. BERNANKE: Well, the size of the balance sheet has affected to some extent the amount of reserves in the banking system -- which makes it more difficult to control the Federal Funds Rate. It was a productive and useful feature of this same bill we're discussing that included the right for The Federal Reserve to pay interest on reserves to banks -- which has been helpful in keeping the Federal Funds Rate closer, you know, to the target than it otherwise would be. But that is still an issue that we're working on. Again, I see no significant credit risk in what we're doing, and I don't think it will have any benefit or any effect one way or the other on U.S. credit rating. That's my assessment. I haven't heard anyone give me a view to the contrary.

REP. FRANK: I thank the gentleman.

I do have to note, Mr. Secretary, there was a general response which I heard from several of the members after your last comment that the 15 minutes of fame for the plumbing industry appears to have ended. The gentlewoman from California.

REP. HENSARLING: Joe's had a rough month. I'll tell you that.

REP. MAXINE WATERS (D-CA): Thank you very much Mr. Chairman for this hearing. It's very much needed, and I welcome our representatives from our three agencies that are here today.

I come here very troubled about the direction that Secretary Paulson has taken as it relates to the $700 billion that we made available to him to help stabilize our economy. It is very clear, no matter how the secretary describes it, that we gave him the authority that you identified when you talked with him, Mr. Chairman, to deal with foreclosure mitigation efforts. As a matter of fact, the purchase of toxic assets was at the centerpiece of this program because everybody agreed at that time that the sub-prime meltdown was at the epicenter of the dislocation that we were experiencing in our economy.

So the fact that you, Mr. Paulson, took it upon yourself to absolutely ignore the authority and the direction that this Congress had given you just amazes me. I just could not believe it when I heard that somehow you had abandoned the whole foreclosure mitigation effort.

Now in addition to that I want you to know that I, and some others, worked very, very hard to pass this. As a matter of fact, I was looked at with great suspicion by members of my caucus, and the Congressional Black Caucus in particular, as I sold them this program and told them about my faith in your ability to carry out this program. I was asked over and over again: will the homeowners be helped? What are we going to do about Main Street, not just Wall Street? And we spent and I spent considerable time selling this program to those who were suspicious and did not want to do it.

Now, having said that, again, I'm disappointed that you have not utilized the authority and you have just divorced yourself from dealing with that.

On the other hand, in your testimony today you say, "And we need to continue our efforts to use a variety of authorities to reduce avoidable foreclosures. The government has made substantial progress on that front through HUD programs, through the FDIC's program with Indymac, through our support and leadership of the HOPE NOW Alliance, and through the new GSE servicer guidelines announced last week that will set a new standard for the industry."

Let me just relate to this statement. First of all, the HUD programs, working under HOPE NOW, have not been successful. It's a terrible failure. I convened in my office all of the HUD-backed counseling programs when we went on break, and I sat down and I talked with them to find out what kind of success were they having working with the HOPE NOW program.

And to a person, they have not been able to get in touch with the servicers in many cases. When they get in touch with them, many of the servicers are inexperienced. They don't have the ability to make good decisions. Nobody knows what formulas they're using in order to make decisions about a homeowner's ability to get a loan modification. And so they all work under HOPE NOW.

So HOPE NOW has been a failure. And even though you identify it as a success, I'm not going to challenge you, but I would dare say that you could not cite for this committee the number of modifications that have come through HOPE NOW because you don't know. You probably are not tracking them. And secondly, if you were, you would know that it's not working.

Secondly, the GSE proposal that was recently released you referred to, but it really hasn't gotten underway yet, and it only deals with a small portion of the market. You do refer to FDIC, and you're right. You're right about FDIC's program and what has happened with Indymac and Chairman Sheila Bair.

She has been able to come up with a way by which we could do credible loan modifications, and it's been ignored. Barney Frank and I sent a letter to you and everybody else asking that you should just give her the program and let her run with it, because she's discovered how you can do these loan modifications.

You can't do them one by one, Mr. Secretary, and get it done. I spent time -- I have 26 of them that I'm working on in my office right now, and I spend time, and I get a release from the homeowner and I get on the line with the servicer, and it is absolutely ridiculous.

And I have had to go all the way to the chairman, for example, of one of the banks, Mr. Stump over at Wells Fargo, to tell him about what his servicing company is and is not doing. They own America's Servicing Company. I stay on the line for one hour just trying to get to a servicer. They are understaffed. They don't take this seriously. And then when you talk with the servicers, they don't even know enough to be able to evaluate the income of those persons who are trying to get some help.

With that, I would like, Mr. Chairman, to go to Sheila Bair and ask her to please unveil for this committee what she's doing and what she's shown can be done with Indymac modifications that have been so successful.

REP. FRANK: I thank the gentlewoman, but that's going to have to wait till the next round, if someone will ask for it.

Briefly, Mr. Secretary.

SEC. PAULSON: Yeah, I will be brief, because there's no one whose disappointment --

REP. FRANK: Mr. Secretary, briefly and substantively.

SEC. PAULSON: I can be very -- I will just simply say that I know how hard the congresswoman worked on this legislation and was critical to getting it done. And this has been critical to saving the system.

Let me just say specifically to you, Congresswoman, that I have not said no to doing something here in the TARP aimed at foreclosure mitigation. We did not buy illiquid assets for a very good reason. We are going to continue to evaluate and look for programs that protect the taxpayer and are effective.

And I just would make one last point here. In designing programs, broad-based programs, there's a balance to getting money to those who need it, as opposed to those who don't need it, so things are going to be --

REP. FRANK: Thank you.

SEC. PAULSON: And there's also a balance to, you know, not providing a windfall to the banks. And we're working hard on this.

REP. FRANK: Thank you, Mr. Secretary.

The gentleman from Alabama has proposed -- and if we have unanimous consent, we'll ask the chair of the FDIC if she would respond in a couple of minutes. Is there objection? Hearing none, I'll recognize the chair of the FDIC to respond.

MS. BAIR: Well, thank you very much. At Indymac -- we became conservator of Indymac in mid-July. And they had a fairly sizable servicing portfolio with a number of delinquent loans. So we developed a systematic protocol for modifying them.

Basically we start -- we use a debt-to-income ratio. We go down to 31 percent, so that pretty much any borrower that's delinquent now, we verify income. And if their income can support a modified loan at 31 percent of pre-tax income, their principal, interest, taxes and insurance, they get that loan modification. And we lower their mortgage payment through first interest rate reductions, then extended amortization, and in some cases we do principal forbearance as well.

We do it on a systematic basis. We do it for everybody. We do run all these loan modifications through a net present value analysis. So we must demonstrate that the net present value of the modified loan exceeds the foreclosure value. And generally where there's reasonable income to support a modified loan, those loans will pass the test.

These fall within the authorities that we have with the pooling and servicing agreements that govern Indymac's servicing obligations. We did it both for Indymac's own loans as well as Indymac's service loans for private label securitization. After some strenuous talking and advocacy, we were able to get the investors. Even though it was legally authorized, we briefed them, obviously, and they are supporting the program now.

And specifically this loan modification protocol is designed to work within the framework of securitization trust. It has heavily been relied upon with the recent announcements by the GSEs, and some of the other larger originators also now announcing they're going to be doing systematic loan modifications as opposed to loan by loan.

We have suggested making this program national and providing a financial incentive for servicers and investors to adopt it with some loss-sharing. We found, in engaging in dialogue with the investors, that the biggest push-back, the biggest uncertainty for getting these loans modified, is uncertainty about the redefault risk. So what happens if you modify the loan and the borrower still down the road redefaults, and then you have to go to foreclosure later, as the home prices are going down and the losses would be exacerbated? So this is a big concern and uncertainty.

So we think, to address this, some loss-sharing by the government is appropriate. And we have, in fact, suggested that if servicers would agree and investors would agree to support servicers in modifying these loans to the Indymac protocol, that if there was a subsequent redefault, up to 50 percent of the losses would be shared by the government. We would exclude early payment defaults, so the loan would have to perform for six months before it would be eligible for this loss-sharing program. And very high loan-to-value loans also would have a declining loss-sharing.

We'd also provide for administrative expenses of $1,000 per modification for servicers. This is another impediment, we think, to systematic loan modifications. The pooling and servicing agreements generally do not provide for compensation for administrative expenses associated with loan lives. They will provide it for foreclosures, but not for loan lives. And it does -- even with a systematic approach, you need to go through and verify incomes. There's some administrative expense involved, so we think, as an additional incentive, that it would be appropriate to provide $1,000 per loan mod.

We think the combination of these steps could reduce foreclosures by about 1.5 million for loans that will be going delinquent through 2009, which is significant. We think it's about a 30 percent reduction in foreclosure rates that you will otherwise see. So it's not a silver bullet, but it would be a huge reduction in the foreclosures that you're seeing right now, which are creating significant downward pressure on home prices and lead to much broader economic problems.

And it promotes home ownership. It's only for owner-occupied properties, for people who have documented income. But, you know, we think for that category there should be concerted effort to preserve home ownership as well as to help our broader economy. So that was --

REP. FRANK: Thank you, Madame Chair.

I would note that in the TARP there is explicit authorization to provide funding for servicers in appropriate context. So we think it is (embraced ?).

The gentleman from California, Mr. McCarthy.

REP. KEVIN MCCARTHY (R-CA): Thank you, Mr. Chairman.

If I could just follow up one moment with the chairwoman, how many loans did you provide in the Indymac situation, and what was the value overall?

MS. BAIR: We had about 40,000 delinquent loans that were eligible. There are 60,000 delinquent loans total, but about 20,000 of those were either -- were investor-owned or been abandoned or were just too far gone. They were in bankruptcy or the homeowners had given up; so about 40,000 eligible.

We will -- as I indicated in my written testimony, we will do loan modification proposals for about 30,000 of those 40,000. So the letters are going out. They're still going out. And we've completed modifications, about 5,000; several thousand more in process. We do verify income --

REP. MCCARTHY: And how long did that take you? What's the time frame, a person starts to finish?

MS. BAIR: We started in late August with the first mailing of 7,000 and have made mailings throughout. So it's the -- we found that we have a streamlined process, and actually we've been in discussions with the GSEs. I think this is something you need to think about. The loan modification proposal goes out. It specifically says, "This is your current mortgage payment. We're going to reduce your mortgage payment by 'x' amount." And the average is about $380 a month. "If you want this loan modification, send us a check for your first month's payment and sign this form that allows us to document income," like on your tax return.

It's a very simple, streamlined procedure. It's easy for borrowers to understand. It's not a general, you know, "Call us, we're here to help you." This is the loan modification that you'll get. So we've had a very strong response rate.

If you want this loan modification, send us a check for your first month's payment and sign this form that allows us to document income, through like your tax return.

It's a very simple, streamlined procedure. It's easy for borrowers to understand. It's not a general, you know, call us, we're here to help you. This is the loan modification that you'll get.

So we've had a very strong response rate. Of the first mailing we did in late August, over 70 percent of the borrowers have responded. But it still takes time. You still have to document income. You still have to go and look at the tax returns and you have to establish that borrower contact to get the document. The income verification takes the most time.

REP. MCCARTHY: All right. Thank you.

Mr. Secretary, I understand you have to modify, things change. And the latest is no longer planning to purchase troubled assets. Have you taken a look since the last six weeks about part of the plan in there, the insurance program? Have you pursued that in any further way?

SEC. PAULSON: Yes. As we have a responsibility to develop an insurance program for implementation, we've gone out, public comment, got a number of proposals and comments. And we're in the process of developing a program there.

REP. MCCARTHY: When do you think that will come back?

SEC. PAULSON: I can't tell you when it will be completed, but we're working to complete it. And then when it's completed, it will be evaluated.

REP. MCCARTHY: All right. In listening to your statement, you said towards the end part that you found at the beginning 700 billion (dollars), you thought, would be a sufficient amount. Now within the troubled assets, you don't think that is a sufficient amount of what you have left to pursue going further. And then also, listening to your speech, I think it was November 12th, where you talked about maybe bringing in, attracting private capital which would create some synergy which I thought would be very positive. Maybe if you could expand on that, if that could be helpful using the private capital, how it would work who would receive it. How could you do the matching funding?

SEC. PAULSON: Well -- (off mike).

REP. MCCARTHY: I don't think your mike's on.

SEC. PAULSON: All right. What I said in my remarks on November 12th was that we needed to evaluate this capital program once it's completed and look at the markets and then be prepared to use another capital program if it's appropriate. And that we were working to develop other programs.

A matching program would work along the lines if an institution, whatever the scope of the program is, so whichever institutions might be eligible for this program, to the extent they can raise $1 of equity, let's say, common stock, that it might be matched by $1 of preferred. And so this would have the advantages of making the capital of the TARP go further. And it also has the advantages of being a filter so those healthy institutions that are able to raise money get a match.

Now, the disadvantage of a program like that is it doesn't work in a market where capital is not generally available. So that's why we didn't start that way. So there are some advantages and some disadvantages.

Another advantage might be that if we chose to go beyond institutions where there are federal regulators and we don't have regulatory capability here at the federal level or capability at Treasury to make the sorts of judgments that the regulators are making for us now with the banks, that the private market could be a filter. In other words, those institutions that are able to raise capital in the private market would have an ability to get matching funds.

But no decision has been made. It's just a matter of programs that we are working to develop.

REP. MCCARTHY: Has anyone approached you about coming forward, outside of the financial industry, being able to do the matching money? I mean, is there capital out there willing to make this investment?

SEC. PAULSON: There is definitely capital available now for certain institutions and certain industries. No doubt about it. And so we stay close to the market.

But again, you should take away -- the biggest part of what I'm saying is, given where we are now, capital is more powerful. And you can get more bang for $1 of capital investment than you could buying in $1 of illiquid assets. And so that is where the focus is. But I think it is premature to be starting another capital program while the current one is not even yet --

REP. MCCARTHY: There would be more capital out there --

REP. FRANK: I'm sorry. We're over the time.

The gentlewoman from New York.

REP. MALONEY: Thank you, Mr. Chairman.

First, I'd like to thank all the panelists for your leadership in stabilizing our financial markets.

And I congratulate Chairman Bair on an innovative program to help people stay in their homes. If it was expanded, she testified 1.5 million people could be kept in their homes without a financial loss to this nation, therefore helping to stabilize our economy which is now our major concern.

Chairman Bernanke, would you favor her program? Would you use TARP funds to expand FDIC's loan modification program to help stabilize our economy and help people stay in their homes?

MR. BERNANKE: Well, first let me say that I agree that we need to do a lot more on foreclosure prevention. It's very important for communities. It's important for our economy, for our financial system. So I very much commend Chairman Bair and the FDIC for the work they've done. And I think we need to build on these ideas.

There are a few points I'd like to make. First, I think a very strong point of the FDIC program is it's simple and it's run by the servicers rather than by the government. And that's a plus, certainly.

There are a couple of design issues that we would need to talk about, I think, in the context of the Congress. Let me mention two.

The first is that the FDIC program is focused on affordability, which is understandable getting the payment down to 31 percent of income. The Congress recently passed the HOPE for Homeowners which takes a different philosophy which is about principal writedown and getting mortgages out from under water.

Those are two different philosophies, and they depend on different views of what it is that keeps people in their homes. So an alternative approach would be to strengthen the HOPE for Homeowners approach, just to give one option there.

The second comment I would make is that, and we've discussed this extensively with the FDIC, is addressing the issue of, what is the best way to induce servicers to actually undertake these modifications? The suggestion by the FDIC is that the government would insure some portion of the loss if the mortgage redefaults after it's been modified.

And a concern that we've had about that is that, in some cases, that would be a very high cost if a borrower had had a large capital loss in their home and they pay for six months but then moved or left for whatever reason, the government might be liable for $100,000, depending on how much the loss had been.

So an alternative would be to consider other ways of subsidizing. But just in general, I want to say this is a very promising approach, and I think there's lots of interesting things to talk about here.

REP. MALONEY: Secretary Paulson and Chairman Bernanke, a large portion of the TARP monies have been used to pay off the AIG counterparties in the new AIG deal. Since the government is now running AIG, we should have full disclosure of what they are doing with the TARP monies so Congress can appropriately manage our oversight. Will you make public who those counterparties are and how much they received?

MR. BERNANKE: Well, I think that information can be made available. AIG had many, many counterparties, banks and other institutions, where they essentially wrote insurance on --

REP. MALONEY: Thank you. And if we can make it available, if you could get that to the committee, we'd appreciate it.

MR. BERNANKE: We'll see what we have.

REP. MALONEY: That would be wonderful. Thank you.

And on the credit default swaps, it's my understanding, following up on your statement, that they were originally like a form of insurance taken out by an investor to insure against loss on securities owed by that investor, sort of like insuring one's home against a fire. The homeowner deserved to get paid by the insurer should his house burn down.

It is also my understanding that a great number of investors in hedge funds bought swaps from AIG when they did not own the securities and were just betting on a default, like taking out an insurance policy on your neighbors house and hoping that it will burn down so you can get paid.

My question with respect to AIG is whether we are using taxpayer's funds to cover AIG's obligations to investors who have suffered real losses. Or are we using some of the taxpayer funds to pay the investors, who are basically gamblers, the billions of winnings that they earned at AIG's expense? And I personally do not think taxpayer's money should be used to help investors, who are gamblers, to collect their profits. Rather that taxpayer's funds, they should be used to help those who stand to suffer real economic losses.

And Chairman Bernanke, can we differentiate now between those two classes of swap purchases? Can we see where they are? Are we paying the gambling type or only those that are real losses?

MR. BERNANKE: Congresswoman, I don't think you can really differentiate. People use credit default swaps to hedge all kinds of positions. Even if you don't own the underlying credit, you might be hedging against a stock or some other thing that you own. Maybe you take a position that particular industry.

And moreover, these are legal contracts. If they're not paid, then the company is in default and there's a bankruptcy process. And the entire purpose here is not to pay off the creditors, per se. It's not to save AIG, per se. It's to avoid the contagion of losses and crisis that would occur if this huge financial institution with large exposures across the world were to fail and not to make good on its financial contracts.

REP. FRANK: The gentleman from Texas.

REP. RON PAUL (R-TX): Thank you, Mr. Chairman.

My question is directed to Chairman Bernanke. You know, for many years, the Austrian free market economists had predicted all these problems would come. And they were certainly correct in everything that they said. Of course, they're not very satisfying, including myself, with the so-called "solutions" because it looks like we're spending a lot of energy and a lot of money trying to patch a system together that is unworkable.

So we have Congress spending a lot of money; we have Treasury very much involved in trying to pick and choose which worthless asset we're going to buy; and of course, the Federal Reserve is involved in injecting trillions of dollars that nobody seems to be keeping track of. But what we're failing to do, I think, is to recognize that the system no longer works. But I can understand why we do this, because you know, if Congress couldn't do this and if the Fed couldn't do this and Treasury couldn't do this, it would make us all irrelevant.

And instead of looking at the causes of this and then finding the solutions aren't going to be found here, we have to make ourselves feel pretty important. But I think there's another reason why we think we're pretty important, is because in a way, our interference in the market corrections that tried to come about since 1971, seemed to work. I mean, the failure was established in 1971 with a system that had no way of automatically correcting the balance of payment and the current account deficits. And that's where the problems have been.

And the economists -- whether they were left or right or middle -- over the last several decades have always said this current account deficit is a big problem. And now it's totally out of hand. So here we are struggling with all these rules and shifting back and forth and really getting nowhere.

But my question is directed toward when we come to the full realization that the system is unworkable, what are we going to do? What have you thought about doing? And already, we see talk in the newspapers -- we see articles about a new, international world reserve currency. And to me, that's pretty important, because the fiat dollar reserve system is not going to work anymore. And that's the information that we have to accept and decide what we're going to do in the future.

Also, this is not new in history. Currencies have failed; financial systems have failed. And generally, to restore the confidence that everybody's talking about, they usually have to go back to a currency with integrity to it, rather than just fiat money. And you know, the stage is there. It's not impossible. Already, the central banks of the world still own 15 percent of the all of the gold that was ever mined in all of history. So they hold onto this gold for some reason. And therefore, something has to give or are we going to keep trying to waste more money and time patching the system together?

Just last week there was a report that Iran purchased $75 billion worth of gold -- took their reserves out of Europe, bought gold and put it in Asia. So is that a sign of the times and is that moving on?

My question is, in your meetings -- you had a meeting just recently with other central bankers -- does this thought come up about a new international world reserve currency? And if so, does the subject of gold ever come up? How do you restore the confidence?

Have you recently had conversation with any central banker and is there a move on to replace the dollar system, because the dollar system is essentially declared dead, because it's not working. But this indeed was predictable, because of these tremendous imbalances that were never allowed to be corrected and they were always patched up. We always came in. We'd spend; we'd inflate; we would, you know, run up deficits. And since '71, we've been able to correct these problems.

Could you tell me what kind of conversations you've had regarding a new reserve currency?

MR. BERNANKE: Yes, Congressman.

I don't think the dollar system is dead. I think the dollar remains the premier international currency. We've seen a good bit of appreciation of the dollar recently during the crisis, precisely because there's been a lot of interest in the safe haven and the liquidity of dollar markets.

And the Federal Reserve has been engaged in swap agreements to make sure there's enough dollar liquidity in other countries, because the need for dollars is so strong. So I think the dollar system remains quite strong.

I do agree with you very much on one point, which is about the current accounts. The current account imbalances have proved to be a very serious problem. It was, in fact, the large capital inflows from those current accounts which created a lot of the financial imbalances we saw and have led to some of the problems we're seeing. And one of the silver linings in this huge gray cloud is that we're seeing some improvement and greater balance in our current account deficits.

REP. PAUL: But does the subject of a new regime ever come up?

MR. BERNANKE: No, it doesn't.

REP. PAUL: And does the subject of gold ever come up at any of your conversations?

MR. BERNANKE: Only in terms of the sales that the central banks are planning.

REP. FRANK: (Sounds gavel.)

The gentlewoman from New York, Ms. Velazquez.

REP. NYDIA VELAZQUEZ (D-NY): Thank you, Mr. Chairman.

Gentlemen and gentlewoman, while we now spend more than $1 trillion on the bailout, every report shows that foreclosures increased 5 percent last month. We also know that 3 million more are likely to face foreclosure in the very near future.

In light of the Fed's extensive actions on taxpayers' expense, can you tell us why are foreclosures still increasing?

SEC. PAULSON: Okay, I will --

REP. VELAZQUEZ: Ms. Bair.

SEC. PAULSON: The question is why are foreclosures still increasing?

REP. VELAZQUEZ: Yes, sir.

SEC. PAULSON: I would say to you, it is hard to imagine -- no matter what program we have -- that we're not going to have a good number of foreclosures when you look at what we've gone through here and look at the excesses and look at the shoddy lending practices. And there are -- foreclosures take place for a number of reasons. Some of them take place because speculators no longer want to stay in their home.

But I think the question to really ask, which is the one we're all asking, is why are foreclosures taking place when people -- homeowners -- want to stay in their home and they're willing to make an effort to stay in their home and they can afford to stay in their home. And this, I will tell you --

REP. VELAZQUEZ: Sir, I'm the asking the questions here.

SEC. PAULSON: Okay. Well, I thought you asked me the question. I was trying to answer it!

REP. VELAZQUEZ: So let me ask you, to what extent are foreclosures causing our continuing economic instability? What is the relationship, Mr. Bernanke?

MR. BERNANKE: Well, they're both a symptom and a cause. Now that the house prices are falling and that the economy is weakening, people don't have the income to make their payments. The house foreclosures are going up. So that's a symptom of the downturn, but it's also a cause, because it's weakening house prices. It's hurting the value of mortgages, which hurts financial institutions.

REP. VELAZQUEZ: So there is --

MR. BERNANKE: And so it's part of the mechanism which is causing the economy to weaken.

REP. VELAZQUEZ: So can you tell me how much of the more than $1 trillion spent by the Treasury and Fed in the bailout has gone to prevent individual foreclosures?

MR. BERNANKE: Where do you get the $1 trillion from?

There's been 250 billion (dollars) by the Treasury and the Fed hasn't spent any money. We only lend money.

REP. VELAZQUEZ: Okay. So of the money that has been lent, how many foreclosures has been prevented -- individuals?

MR. BERNANKE: Well, as the secretary's described, there's been a whole number of programs including the HOPE for Homeowners and so on. And I also agreed with an earlier questioner that I think we need to do more.

REP. VELAZQUEZ: So you know, the trouble here, sir, is I supported the bailout package. I agonized with that vote. Still, Main Street America who -- the people that are watching this debate here or this discussion -- they're still waiting to hear an answer as to how this is benefitting them; how this is benefitting Main Street America.

You have a silver bullet. It seems to me that just by giving a blank check to financial institutions -- this is a partnership. This is taxpayers' money that is providing capital infusion to financial institutions, but we expect from the banks to do more to help families to keep their homes.

And so we're giving this money or lending this money without any string attached to it.

SEC. PAULSON: Let me just say three things here. First of all, the key to turning around the housing situation and avoiding foreclosures is going to be to keep lending going. If a bank -- if the financial system collapsed, we'd have many more foreclosures, number one.

Number two, you are seeing a number of big banks take extraordinary actions -- and they've announced them and you could just tick them off announcing actions they're taking. So they are doing things, number one. And number two, I would say that our actions to stabilize Fannie Mae and Freddie Mac, who are the biggest source of home financing in America today, have been critical.

So there have been real steps that have been taken that make a difference. More needs to be done. I hear your frustration. More needs to be done and we're going to keep working on it.

REP. VELAZQUEZ: Yes, you hear my frustration! And I hope that you understand the pain and the suffering of so many homeowners in this country that are losing their homes!

So it's just not enough to say to the banks: here is the money! And by the way, I trust you. Because they are not lending! They're not lending to small businesses. They are not working on loan modification strategy.

You just told Mr. Frank here that you are examining strategy to mitigate foreclosures. You don't have a strategy to mitigate foreclosures! You're examining. She does! Are you willing to support her plan?

SEC. PAULSON: What I have said very clearly is that the IndyMac protocol is an excellent protocol. We, as a matter of fact, with the GSEs -- the GSEs, with their whole guidelines -- endorsed the plan. What they've done, which I think will become the national model, is based upon that plan.

And I said that I am looking very hard to find programs to put in the -- into the TARP that I think strike the right balance between protecting the --

REP. FRANK: Could I --

(Cross talk.)

SEC. PAULSON: -- taxpayer, and are effective.

REP. FRANK: Could I -- I would ask unanimous consent for one minute because -- without objection.

Mr. Bernanke, you said the Hope for Homeowners, which this Congress passed, has some problems, and we were taking a first cut at it. I just want to advocate, what the Chairwoman has done in IndyMac has been superb; and the leadership elsewhere is important -- they were different models. There's interest rate reduction; there's -- (inaudible) -- reduction. About a hundred flowers bloomed. There were different motivations and different impacts.

And there were some things about Hope for Homeowners, which you have told us, and we agree, need to be modified, some of which can only be done statutorily. But the TARP lets you do that. So, I would recommend, Mr. Secretary, work together (on ?) another model, not in competition with, but give the modifications in Hope for Homeowners, through the TARP, that help work that out. Because these are not competitive, they are additive.

I thank the members.

The gentleman from Ohio.

REP. LATOURETTE: Thank you, Mr. Chairman.

And, Mr. Secretary, I'm going to let my colleagues be global, and I'm going to be very parochial and talk about one bank in particular, and that is that my frustration, and I guess anger that the TARP money has been used to -- about to be used to purchase National City Bank in Cleveland, Ohio by PNC in Pittsburgh, Pennsylvania.

It was never my understanding that the TARP program was designed to have the government pick winners and losers. I was struck by the Chairman Bernanke's observation that his window is open to everyone. I'm going to detail for you, in hopefully four minutes, and leave a minute to respond -- while the Treasury window was never open to National City Bank.

I wrote to you on the 30th of October. You were kind enough to send me a letter back yesterday. The last draft basically says -- well, the letter says you haven't received an application from National City Bank, the last (draft ?) says, 'well, and by the way, the documents that you want are in the possession of OCC, so please talk to OCC.' We talked to the OCC staff. They said, 'well, since you sent the letter to the secretary, we really don't have time to respond to your request for documents.'

But, it's funny because, on October the 28th, I did get a letter from the Comptroller of the Currency, Mr. Dugan, who expressed umbrage that I would dare suggest that he was a lawyer for PNC in private life before he became the Comptroller of the Currency. But he says that you make the decision on these applications, not him. And, by the way, he wished he could tell me about these communications and this transaction, but it's a secret.

National City Bank is one of the only -- I think the only top-25 bank in the country that is not permitted now to participate in the TARP program. It's my understanding that it's the only bank in the country that is being purchased with TARP money. And if you look at PNC's potential merger and acquisition agreement, they're not only going to get their share -- which is about $4 billion, but they've been told by the regulator they're also going to get National City's share, about $4 billion.

If you combine that with the tax changes that were made on September the 30th -- as to how losses are treated by acquiring banks, they're going to get an additional $5 billion. And so, basically, they're going to be able to purchase the seventh largest bank in the country for free. A bank that has existed since the American Civil War, survived the Great Depression, can't survive eight weeks of the TARP.

And I just want to go through with you the timeline that was in the Wall Street Journal -- and ask unanimous consent that it be included in the record --

REP. FRANK: Without objection.

REP. LATOURETTE: Peter Raskind, the CEO of National City Bank, talked to Mr. Dugan; said he wanted to apply for TARP. He said, 'Oh, I'm happy to do that, but first I want you to explore all M&A avenues.' He says, 'well, we've been doing that, but I want to apply for TARP.' He says, 'Just keep doing it. Trust me.'

Minutes later, as Mr. Raskind was to go into a meeting with his board of directors, he gets a telephone call from Richard Davis, who is the C.E.O. of U.S. Bancorp. Mr. Davis says, 'After talking with the OCC and other federal regulators, we have a new interest in buying your bank, and the regulators have indicated to us -- have assured us that the government would provide U.S. Bancorp with capital to finance the takeover, and we will buy you for $1.10 a share' -- which was less than half of what it was trading for on that particular day.

Mr. Dugan remained a constant presence, and his tone became increasingly assertive with National City Bank, "An M&A deal is your only alternative," he told Mr. Raskind on more than one occasion. Mr. Dugan warned National City Bank not to expect to take advantage of any new government programs. When Mr. Raskind said, 'Wait, I thought this was open to everybody.' He said, 'That's all discretionary, and right now your shouldn't be comfortable that it's available to you.' He said, 'I thought it was available to all banks.' 'No. It's discretionary.'

That evening the board met. They felt that they were being bullied. Talks continued with National City -- with U.S. Banc, under Mr. Dugan's supervision. And then all of a sudden PNC comes in, at this moment in time, when they're aware that they can get free money from the TARP to buy another bank.

And just a couple of analysts -- I ask that these be submitted for the record as well: A guy named Mike Mayo, who is a pretty renowned analyst of banks and their value, writes for Deutsche Bank, that "National City Bank maintained a leading tier-one ratio of 11 percent. PNC was substantially less than that.

Another fellow writing for Citibank indicates, under the section "Why Sell?," on October the 24th he says, "So, on face value, there was no immediate catalyst that would force them to sell, since National City had sufficient capital and liquidity. In our view it's possible that there was a change in management's outlook, or a push from the government."

Well, the "change in management's outlook" is also -- in an October the 25th article in the Cleveland Plain Dealer, that said that Peter Raskind went to his board and he laid out a scenario that -- he wasn't even able to apply, not even able to apply for TARP -- the board was presented with a downside scenario of deteriorating viability so horrifying that the Bank was almost forced to act now. And not only to act, but to sell its very solid, well-capitalized business at a significant discount.

And, Mr. Chairman, I'd ask for just one additional minute.

REP. FRANK: No, I'm going to -- we would ask for two additional minutes. The committee's been accommodating. This is very important to the gentleman. So, we'll take -- if the gentleman can wrap up the question, and we'll have time for an answer.

REP. LATOURETTE: I'm going to wrap-up the question. And so, the question is -- there's two questions that I want to ask, and give you time to answer. This isn't WaMu, and this isn't Wachovia. As I indicated, National City's tier-one capital ratio of 11 percent was amongst the highest of any bank in the United States. They had $18 billion of cash, more than their cash requirements. PNC was at 8.2 percent.

My question is: Why did you deny assistance to National City Bank, affecting 29,000 employees in nine states? But, first I'd like to ask, and make a request of you, that the legislation -- there's only one place that the OCC is, in that 300 pages, and said that you're going to act in consultation with the OCC. In my mind, you don't have an application because the OCC wouldn't send you one; wouldn't take one from National City Bank.

And so I'm asking you, Mr. Secretary, on behalf of those 29,000 people, and the City of Cleveland, and nine other states, will you look at this, under the authority that you have -- not Mr. Dugan, and reconsider that decision? And if not, why didn't you do it?

SEC. PAULSON: Okay, let me -- you took a long time for the question. It's important -- I'd like a little bit of time to --

REP. FRANK: This is of sufficient importance, that we will not be --

SEC. PAULSON: -- to answer this.

REP. FRANK: -- constrained here.

I should -- will announce to all the members, this panel has to leave at noon. At noon we will take the next panel, and we will begin the questioning on our side where we left off. So, we won't go back to the beginning.

Mr. Secretary.

SEC. PAULSON: Now, let me -- before getting into the specifics, let me just say that, in my experience, that I have seen institutions that have capital, that it meets certain ratios, but where the market loses confidence in them, and they fail, or are about to fail because of questions about the quality of the assets and the quality of the mortgages they hold.

And so now I'm going to get to the program and the way it's designed, and get to your question. We do have a program -- and, you know, you saw it with AIG. We have a program to make investments if there's a systemic issue. If there's an impending failure, we can step in.

But, this program, which we designed under our authority -- this program was designed for healthy banks. And what we did was we set out criteria, but the first criteria was that banks needed to provide -- needed to apply to their regulator, and applications needed to come from the regulator with a recommendation. We don't have regulatory capabilities at Treasury, but we have outstanding federal regulators.

REP. LATOURETTE: Mr. Secretary, let me --

SEC. PAULSON: -- (inaudible) --

REP. LATOURETTE: -- because I don't want to really bog --

SEC. PAULSON: Well, I just --

REP. LATOURETTE: -- I know your answering my question, but here's the problem: If the OCC tells the C.E.O. not to file an application, you never get to that point. And --

SEC. PAULSON: Well, --

REP. LATOURETTE: -- let me just say one other thing. I mean, I get the fact that there can be other factors, but the fact of the matter is the regulator told National City Bank to raise $3.5 billion of private capital. They raised $7 (billion). And they are one of the best capitalized banks in the country, and you guys wouldn't even take an application.

SEC. PAULSON: Well, let me then make two other points here, because you're dealing with consolidations. And I've heard a lot about using capital from the TARP for mergers. And, again -- and I'm not going to, I'm just not going to deal with this, I'll make the general point that if there's a bank that is in distress, and it is acquired by a well-capitalized bank, there is more capital in the system, more available for lending, better for communities, better for everyone. No doubt about that, in my mind.

And so when we get -- and the applications which come to Treasury, when they come to Treasury, we have not received an application for capital from either of the banks you've mentioned. When it comes to Treasury, we'll look at it and act on it.

But again, I just can't emphasize enough that this program, to me -- it was very, very important on this program that it -- this is general, I'm not speaking -- that it not be used to prop up failing banks or banks that might fail. That this be used for healthy banks.

And I look to the regulators. And as a matter of fact, we designed a process with the regulators. They would look at the applications as they would come in. There's even a peer review board with the regulators. And they submit them to us, and we make a decision.

REP. LATOURETTE: Mr. Secretary -- and thank you, Mr. Chairman -- the analysts that I referred to from Citicorp indicates that TARP changed the landscape because National City Bank was able to survive. But because it was not on the list, it was leaving itself open to possible unfavorable outcome, to market perception that it was not a survivor.

And my question was -- I appreciate your general answer -- will you personally look at the National City Bank situation and discuss it with Mr. Dugan?

SEC. PAULSON: I will tell you I have great confidence in John Dugan. And I'm very happy to discuss it with him. I have regular conversations with him. I have great confidence in his judgment. And I believe, based upon generally what I know, that he made the right decision. But I am perfectly happy to talk about it with him some more.

REP. LATOURETTE: Thank you.

REP. FRANK: The gentleman from North Carolina.

REP. MEL WATT (D-NC): Thank you, Mr. Chairman.

I'm not going down the same path, but I would just express to the secretary that there is a strong feeling out in the public that a number of the decisions that have been made have had the effect of not only picking winners and losers but influencing who is a winner and is a loser. And that's something that we have to deal with every day.

I'm dealing with it in my own community, not in the sequential fashion that Mr. LaTourette is. But there are a number of people in my community who believe that had a different set of decisions been made regarding Wachovia, Wachovia would still be a viable institution today.

But I'm going to leave that alone. It's a perception problem that unless we are provided the kind of information and assurance that people are looking at it and looking at it with integrity, we can't reassure the public about.

SEC. PAULSON: I --

REP. WATT: That's not a question, Mr. Paulson.

SEC. PAULSON: I just would just say with that, this is a --

REP. WATT: That's not a question, Mr. Paulson, because I don't even know how to frame a question that will get to it, but I think you all need to deal with the reality that a perception is out there and that we are having to defend these decisions. So I hope you will make the decisions.

Twenty-four billion dollars is the figure that I've heard used to do the FDIC foreclosure prevention program. How is that figure calculated? What does that figure consist of, Ms. Bair?

MS. BAIR: That is based on a no-greater-than-50-percent loss share for loans that are modified to a specific affordability metric and then end up redefaulting later on. We're assuming a 33 percent which we think is a fairly conservative assumption redefault rate.

And then the government would take 50 percent of the loss between the net present value of the modified mortgage versus whatever the recoveries were at resolution. So if the mortgage ended up going into foreclosure or a short sale or it might be that it would be remodified or refinanced.

REP. WATT: Okay. Where is that money? Is it in expenditure? Does it go to somebody? I guess what I'm trying to figure out is Secretary Paulson apparently doesn't think that's part of stabilizing the financial system as he reads the language. And I have the bill right here in front of me. That is what it is says -- stabilizing the financial system. How does that stabilize the financial system if we put up $24 billion?

MS. BAIR: It provides financial incentives to get loans modified that are not being modified now, that are going into unnecessary foreclosures. That's the bottom line.

REP. WATT: Okay. And how is that less important, Secretary Paulson, than basically telling some banks, you will take an equity investment, some of whom really didn't even have any interest in doing that and certainly didn't have the need for it according to their own public statements?

You've got $24 billion, as I see this list here, almost coming into banks in North Carolina, at least some of whom said, I don't need this money. How is that more important than what we've described here about helping stop the cascade of foreclosures?

SEC. PAULSON: I think I've been pretty clear. I believe it's important to stop the cascade of foreclosures. And I think the key --

REP. WATT: Well, let me rephrase the question. How does THAT stabilize the financial system more than stopping the cascading of foreclosures under a program that is projected to cost $24 billion?

SEC. PAULSON: Well, I would say that you're dealing with apples and oranges here. And the apple is a very, very big apple. Because the step that was taken to stabilize the --

REP. WATT: Well, the question I'm asking -- is the apple more important than the orange, or is the orange more important than the apple?

SEC. PAULSON: I'm saying that the forest for the trees here was that THE important step was the step that was taken to stabilize the banking system and the combined step taken by --

REP. WATT: And how does putting money in a bank that didn't ask for it help to stabilize the banking system?

SEC. PAULSON: Well, okay, to answer that question, there are no banks, when the system is under pressure, unless they're ready to fail, that are going to raise their hand and say, please, I need capital, give me some capital. What happens when an economy turns down and when there's a crisis, they pull in their horns, they say, I don't need help, they don't deal with other banks, they don't lend, and the system gets ready to collapse.

So the step that we took was very, very critical to be able to go out and go out to the healthy banks and go out before they became unhealthy and to increase confidence in the banks and of the banks so that they lend and that they do business with each other. That was absolutely what we were about. And when we came here to --

REP. FRANK: Mr. Secretary, please wrap it up. I will say we got a little metaphorically confused there. But I think the summary is that our accusation is that you can't see the orange grove for the apple trees. (Laughter.)

The gentlewoman from Illinois.

REP. JUDY BIGGERT (R-IL): Thank you, Mr. Chairman.

First of all, I'd like to associate myself with the remarks of Mrs. Waters as to the problems of the loan modification.

But I'd really like to turn to another subject that the gentleman from California Mr. McCarthy addressed briefly, and that is that Section 102 of the TARP authorized the Treasury to set up an insurance program. This is similar to the program, I think, that many members of this committee and members of the Congress really felt that the self-funded insurance program would be a better alternative to the purchase of the assets and the recoupment because I think that this alternative minimizes the risk to taxpayers and it charges premiums to the financial institutions and begins to determine a value for those toxic assets that are on the books of the financial institutions.

So Secretary Paulson, you said that you've had the comment period. I'd like to know, how many staff do you have dedicated to setting up an insurance program and evaluating the public comments that you've recently received?

SEC. PAULSON: I will have to get back to you on that because I don't have offhand how many staff. We have not a large staff, an overworked, hardworking staff.

SEC. PAULSON: (In progress after audio break) -- programs, but don't involve that big tradeoff.

I've talked about a program that uses a small amount of TARP assets to make it possible for the Fed to provide liquidity to consumer credit. We've talked about future capital programs.

Now, with regard to the automotive industry --

REP. FRANK: Quickly, Mr. Secretary, please.

SEC. PAULSON: Okay. Let me also say for the record strongly, there was no authority. There was no law that would have let us save Lehman Brothers. We did not have the TARP then. The Fed did not have any authority to lend if it was not properly secured.

So now with regard to the automobile --

REP. BIGGERT: Submitted I think on the comment period.

SEC. PAULSON: Yeah. I would say my staff currently is -- I'm sure, either reviewed or reviewing the proposal. I have not personally reviewed the proposal.

REP. BIGGERT: Okay. Then -- how then do you propose that we determine the value of these toxic assets or the mortgage-backed securities or the potential future mortgage foreclosures? Do you think that the insurance program would help to do that?

SEC. PAULSON: Well, an insurance program -- there are a number of programs that have the potential to help determine value and the insurance program would be if properly designed, insurance program has got the potential to do that. Clearly, the illiquid asset purchase program has the potential to do that.

We have a -- I might also add that as banks are well capitalized and they are able to write down and sell assets in the marketplace, market forces can also help determine the value.

REP. BIGGERT: Well, it seems like we haven't gotten anywhere and yesterday, Chairman Frank, who talked to you said that -- said yesterday that the insurance program is unlikely to be implemented because it would do little to restore the liquidity to cash-starved banks, but have you considered then the actuarial evaluation models proposed for the insurance program? Wouldn't that be one way to do it?

SEC. PAULSON: Well, I would say this is going to be a big part of what we're going to -- needed to do to develop the program and we're doing a lot of work developing a number of programs, and this will be one that deserves careful consideration and we need to develop the best program possible.

REP. BIGGERT: Do you agree with Chairman Frank that it's unlikely that this program will be implemented?

SEC. PAULSON: I'm not going to speculate about what will be -- is likely to be implemented in the future until we understand the program. And if we can develop a program that is a good, workable program, then we will comment on it at that time.

REP. BIGGERT: Have you considered any of the proposals by the credit bureaus to drill down into those toxic assets to determine likely mortgage loan default rates?

SEC. PAULSON: I have not personally done that, no, but again, we have a group of people that have been working hard analyzing many of these issues.

REP. BIGGERT: All right. Chairman Bair, do you think that there's -- if there's a compulsory loan modification provision in an insurance program that this would help to make sure that the loan modifications are effective and are made?

MS. BAIR: That's something I would want to take a look at. We based our program on the Section 109 authority outside the Section 102 insurance program, but I'd be happy to talk with the secretary about what they may be contemplating there to see if there would be some synergy between the two.

REP. BIGGERT: Thank you. I yield back.

REP. FRANK: The gentleman from New York.

REP. GARY ACKERMAN (D-NY): Thank you, Mr. Chairman.

During times of national crisis -- and we seem to be deeply in the midst of one -- people look for leadership in which they can place confidence. Unfortunately, I think, our president is not in a position to provide that right now and people are looking more strongly in the direction of yourself, Mr. Chairman, Mr. Secretary, Madame Chairman, and to the Congress. And it seems to me that with what's going on very recently, we seem to have a crisis in confidence.

You came to us with a plan and made a strong case for over $700 billion based on a particular premise and we, in turn, listened and asked some questions and, in turn, were asked questions by our constituents. And we answered those questions and basically sold them the plan. Not everybody agreed that we were doing the right thing and some of us here voted for it, not sure if it was the right thing, but confident that it was the direction in which we had to go. And then, suddenly, woke up one day to find out that $700 billion was going to be used for a different plan.

It appears that you seem to be flying a $700 billion plane by the seat of your pants. It seems to be that this is -- at least to me, and maybe it's the right direction to go -- but it seems to be the second largest bait-and-switch scheme that history has ever seen, second only to the reasons given us to vote for the invasion of Iraq.

I would like to know what the considerations are that you might have had in other ways to spend the $700 billion. Are there -- is there a Plan C or D that you considered and set aside because now Plan B is better than Plan A? And what those plans might be so that we might have some input into them? And what is your impression of the authority you have with regard to those other plans?

Also, I'd like to know, because choices are being made, what would be the impact on the economy if the automobile industry was allowed to fail? Certainly, choices were made back a month or so ago when a decision was made to allow Lehman Brothers to fail and perhaps there is some regret that that decision was made. I'm sure if we allow General Motors and the auto industry to fail, that there will be a lot of concern afterwards as to why we allowed that to happen. And if the airline industry, for example, would be teetering on the verge of failure, would we allow that to fail as well?

SEC. PAULSON: Okay. Let me, first of all, take your questions or comments one at a time. First of all, when we came to Congress, we came to Congress saying the financial system was on the verge of collapse and there was clearly a need to recapitalize the system. The strategy we laid out to do that was a strategy to buy illiquid assets. During the two weeks -- and I commend Congress for --and this is not a complaint on my part -- giving us the authority as quickly as they did. But during the two weeks, the situation changed materially during that two-week period, and I went through that --

REP. ACKERMAN: What was it that changed again?

SEC. PAULSON: -- I went through that -- the testimony. We had the situation worsen in the U.S. We had a couple banks fail or approximately fail. We had a whole series of banks in Europe go down. We had the credit spreads widen further and further. The situation froze up to the point that there was a marked serious change.

REP. ACKERMAN: And did we not anticipate that might happen?

SEC. PAULSON: We certainly did not anticipate everything that was going to happen. But what we did anticipate -- we got legislation that was broad enough in the authority so that what we came out -- I think, the way you should be looking at it is we gave -- we came and said there was a real crisis. There was a real crisis. We got the authorities we needed and we went to the heart of the problem and the heart of the problem was the financial system and capital and we used a strategy that would work more effectively and it has worked, number one, in stabilizing the system.

Now, you've asked what were the other things that we were considering or have considered Plan B or C or D?

SEC. PAULSON: (Audio break.) So now with regard to the automotive industry this administration has made it clear that through modifications to The Department of Energy Bill 136, we believe that there is a path to -- that leads towards a viability in the auto industry. And we think these funds should be tapped only if they lead to a long term viable solution. And, no, we do not believe that it is desirable to have an auto company fail in -- with the economy in this current situation.

Sen. Frank: The gentleman from Texas.

REP. HENSARLING: Thank you Mr. Chairman. Secretary Paulson, under the TARP plan would captive finance companies be eligible for TARP funds -- particularly for the automobile industry?

SEC. PAULSON: Well, there is broad powers under the TARP to make captive finance companies eligible under the TARP. Under the current plan we've outlined -- the only capital plan we have in place -- they're not eligible. If we were to implement the program we're working on with the Fed where we'd put a small amount of money into a Fed liquidity facility, that facility could provide support for AAA auto paper. And so that is one option that's being looked at.

REP. HENSARLING: Chairman Bernanke, you have allowed nontraditional entities to come to the Fed window currently -- is that correct you said that in your testimony?

MR. BERNANKE: We've opened the window to primary dealers as well as banks.

REP. HENSARLING: So captive finance companies -- currently do you have the authority to allow captive finance companies to come to -- ?

MR. BERNANKE: If we invoked our ability to lend under unusual and exigent circumstances and if we were fully collateralized we would have that power. We have not taken that decision to do that.

REP. HENSARLING: But you could do it?

MR. BERNANKE: Yes.

REP. HENSARLING: Okay. Now, then, to the three of you, I wrote you a letter, I think, on Friday. And one of the concerns that I have is that we keep focusing on $700 billion. I think in your testimony just a while ago where you answered a question, Chairman Bernanke, that your total assets are now about $2 trillion BETs. A year ago you were about 1 trillion (dollars), is that correct?

MR. BERNANKE: Eight hundred billion, something like that.

Rep. from Texas: Yeah. So you've doubled or more than doubled the size of the Federal Reserve in a -- really in the last six months. Is that correct?

MR. BERNANKE: In order to extend credit to currency swaps to allow dollar liquidity be provided around the world; to allow access to banks and primary dealers; to provide that security, that liquidity back stop, and to strengthen our financial system, yes, we've done that.

REP. HENSARLING: Yeah. If the OCC had a bank outside the Fed growing that fast I think there would be some concern. But the question I have: is anybody internally -- Secretary Paulson with the TARP programs and some of the other things that you've done -- Chairman Bernanke, with the things that you're doing -- Chairman Bair -- what is our contingent liability? Because we're not 700 billion (dollars) into this. When I just start doing a little bit of rough accounting it's over $2 trillion. Maybe it's a bigger number than that when we look at what the potential liabilities in Fannie and Freddie and what you're doing on commercial paper, what some of the things that Chairman Bair has done to facilitate the taking over the banks -- I think the American people, I think this Congress, I think this committee needs to -- we need a better accounting of where we are in this and not just be -- coming in here and say we need 24 billion (dollars) more for this and 50 billion (dollars) more for this and 100 billion (dollars) for this. I mean we really have to have -- and I'm hoping that I can get a fairly quick response from my letter from each one of you as to where you think we are, what is -- because certainly hopefully you're sitting in -- as you're making these decisions and looking at, you know, what's the potential downside here? Obviously we hope what the upside is that the economy and these markets start responding. But I wondered if any of you had an opportunity to put some numbers together before your testimony today?

SEC. PAULSON: Well let me make a general comment, which is I know what the downside was and the downside was a collapse of the financial system, which would have wrecked huge havoc on this economy for many years.

Now, part of the issue we have in answering the question precisely is because these programs are very different. For instance, let's just take the $250 billion bank capital plan. That is not an expenditure, it's an investment. I think it would be extraordinarily unusual if we -- the government did not get that money back and more. And so that gets accounted for as an expenditure against the deficit. That will be coming back, for instance.

The -- Fannie and Freddie, that is a -- you know, there is -- the government is standing up there for the credit of those entities and making good on what I believe our responsibilities were and what investors in this country and around the world understood our responsibilities to be in that situation. The liquidity programs by the Fed are not expenditures but they are impacting the markets. And right now -- for instance this year, we will issue roughly 1.5 trillion (dollars) of treasuries; roughly three times more than we ever have before. Now right now there's huge demand for those securities, huge demand all around the world. But that is to fund liquidity programs that are shorter in duration. But I don't know, Ben, what you --

MR. BERNANKE: Only that our programs are mostly short term lending and well-collateralized.

REP. HENSARLING: Well, I think the --

REP. FRANK: We're over time.

REP. HENSARLING: -- question, I just wanted to follow up in as you submit this response to me -- any time -- and we all know this, any time you're making an investment whether you call it an expenditure or an investment we also have to ascertain what is the risk and what is the potential downside loss of that? And so I understand what the economic downside is, but I think we need some numbers of kind of where we are in this process.

REP. FRANK: The gentleman from California.

REP. BRAD SHERMAN (D-CA): Thank you, Mr. Chairman. I'd like to associate myself with your statements, particularly those dealing with the mortgage foreclosure prevention and the use of TARP funds to achieve that goal.

Earlier in our discussion there was discussion of the intent of the Secretary of the Treasury and the intent of members of Congress being balanced in interpreting this law. I want to point out that under the Constitution Congress writes the law and legislative intent is the only intent that should govern the construction of a statute.

I have a question for the record that I hope all three of you would respond to and that is whether you'll use your influence over banks to remind them of how important it is to lend to credit worthy projects being done by charitable organizations. The work of charities is very important during this recession, and all too often banks refuse to lend or refuse to provide letters of credit to charitable projects because they are concerned about the bad public relations that they would have if they ever had to foreclose. I think it's important that they get some bad public relations for refusing to lend and some pressure from you folks in achieving that objective.

Secretary Paulson, I want to commend you for buying preferred stock rather than toxic assets. First, your approach ensures that we're only bailing out U.S. institutions and not buying toxic assets that were in safes in Beijing on September 20th. Second, you're buying a much more valuable asset. Any ninth grader would tell you -- any 9-year-old would tell you that a toxic asset is less valuable than preferred stock. But I can't commend you on accepting half the rate of return and one-sixth the number of warrants than Warren Buffett was able to get on similar transactions. Our children will be -- have a larger national debt because we have been so generous in the terms on the preferred stock.

I would also point out that, Mr. Secretary, this would bother me a lot except I wasn't in favor of buying toxic assets. But you've basically testified here that October 3rd, you had already decided to change your mind and not buy toxic assets and instead buy preferred stock, and you didn't tell Congress immediately before our vote that you would be going in a different direction. Perhaps I've misinterpreted your comments -- and if I have I'm sure the record will reflect that and if you hadn't made that decision until after our vote on October 3rd. And I gather from your facial expression that's what you're meaning to say.

SEC. PAULSON: Absolutely. This was a --

REP. SHERMAN: Then -- thank you, let me move on.

SEC. PAULSON: This was a rapidly changing --

REP. SHERMAN: Sir, let me move on. I'll accept --

SEC. PAULSON: -- and very seriously difficult situation.

REP. FRANK: Mr. Paulson, the members control the time. It's just -- there's no debate.

REP. SHERMAN: Then I did misinterpret your comments, and if you made the decision after October 3rd I fully understand.

Now under Section 111 of the bill you're supposed to put forward regulations limiting executive compensation to that which is appropriate. You've been remarkably liberal in that you've only imposed by regulations the minimum standard set forth in the statute. And you therefore allow unlimited regular salaries, unlimited bonuses to be declared by boards of directors.

But while you've been so liberal in defining that part of the bill, another part of the bill requires you to define financial institutions eligible for participation under TARP. In fact, the statute explicitly says that insurance companies are eligible, and yet the CPP has issued regulations saying that only depository institutions are eligible. The insurance companies have to go out and buy depository institutions, as noted on the first page of today's Wall Street Journal.

But the issue that I'd like you to address orally is bailing out or providing some sustenance to the automobile companies. We know how important that is to the economy. If you got rid of your CPP regulations and looked at the statute, you would see that auto companies do qualify since they are incorporated under the United States and they are regulated by the United States and its state governments. But instead your definitions in the CPP regulations limit you to just depository institutions.

So the question I have for you, Mr. Secretary, is if the bill, as properly interpreted, allows you to buy preferred stock from the three major auto companies, would you at least buy enough preferred stock to tide them over until the new administration could make a policy decision? Or do you think it's acceptable --

REP. FRANK: If the gentleman wants an answer, we're going to have to wrap that up now.

REP. SHERMAN: -- to have the Obama administration just look at three companies in Chapter 7?

SEC. PAULSON: I've answered this a couple of times. I'll answer it again. And I think it is very, very important to stay with the purpose of the TARP, because this is all about protecting the financial system, avoiding collapse, and recovery. And there is a good deal more that needs to be done before this system is recovered -- the market is functioning as normal; credit is flowing. And that will make a big difference.

Now, with regard to the auto companies, what we've said -- and I think you've heard me say it -- the Congress has acted. You have a bill that was passed, $25 billion bill, Department of Energy. And again, I urge you to modify that, to have a path for making an investment in a viable company.

REP. FRANK: The gentleman from Georgia is recognized for five minutes.

REP. TOM PRICE (R-GA): Thank you, Mr. Chairman. And I want to thank the panelists for their attendance here this morning and their oftentimes responsiveness.

I want to follow up a bit on the insurance companies purchasing banks issue. We learned over the past couple of days that that is indeed occurring. And I would ask you, Mr. Secretary, whether you believe that is appropriate or consistent with the mission of the program.

SEC. PAULSON: The mission of the program is focused on banks and bank holding companies and getting capital into the system. We don't have capability at the federal level looking at insurance. And so what we're going to do is applications -- if applications --

REP. PRICE: I understand the processes. But my question is about, is it appropriate for insurance companies to be forced, through the machinations of this program, to go out and purchase banks to gain access to this money?

SEC. PAULSON: I'm not sure that's going to be a successful strategy. We will -- we are going to look only at applications that we think make sense after they're forwarded to us by the regulator. Now, there are a number of insurance companies that already -- and have been bank holding companies for some time -- have been regulated at the federal level for some time. And in my judgment, it may make sense to put capital into those institutions who are playing a vital role in lending and keeping our economy going. But --

REP. PRICE: Let me ask a question and move on to some smaller entities. I have many constituents who are members of credit unions and small community banks, and they have real concerns about them being not eligible for participation in the TARP. How are you working to address the concerns of these smaller financial institutions, which are oftentimes the keys to their local communities?

SEC. PAULSON: I think they are keys, and I think they will do a lot of lending. And I said in my opening testimony that we have published regulations yesterday which have now extended the term sheet for private banks, C Corps. There are thousands of them. We expect to get applications from a number of community banks and banks that are going to be very vital to this economy, and we are expecting regulators to forward many of those applications to us, and we're expecting to put capital into many of them.

REP. PRICE: Let me -- I think the general concern that many of us have voiced on both sides, and that is, the federal government picking winners and losers in this process, and there's a general angst up here, as there is across the nation, about a relative lack of confidence in the federal government to be able to get this right.

There are some fundamental principles that many of us believe have resulted in the remarkable success of the United States over hundreds of years. I might broaden this to the chairman as well. What fundamental principles do you believe are consistent with the TARP program?

SEC. PAULSON: I will answer briefly and then go to Ben.

The purpose of the TARP program is, as I said, fundamentally about preserving our system here, keeping it from collapsing and then helping it recover. Now, once you have the government intervene, that is by definition going against many of the principles we believed in for a long time in terms of markets. We're doing this to preserve our markets.

So we have -- there are two programs we've outlined to date. One program, if there's a failing institution and the failure would be big enough to be systemic, we need to come into that. With regard to the healthy bank program, my concern was the exact opposite of yours, just to be candid. My concern was I thought if we're going to -- looking back in history, the biggest concern I might have would be government intervened and put money into institutions that weren't viable and weren't going to be competitive long term. Now, we at Treasury don't --

REP. PRICE: I'm running out of time --

SEC. PAULSON: We at Treasury don't have the capability to handle that, and that's why --

REP. FRANK: The gentleman from Georgia is recognized.

REP. PRICE: Mr. Chairman, if you would comment as to what fundamental principles you believe are consistent with TARP.

MR. BERNANKE: Certainly. This situation has sometimes been represented as a failure of capitalism. I don't think that's right. The problem is that our financial system -- there have been problems of regulation and problems of execution that have created a crisis in the financial system. We've seen, in many cases, historically in other countries that a collapse of the financial system can bring down an otherwise very strong economy.

And so our efforts have been very focused on stabilizing the financial system. And then, as the situation is rectified going forward, we need to really think hard about our supervision and regulation to make sure we get it right. But I don't think that this is an indictment of the broad market system.

REP. PRICE: And I would just very briefly echo some of the comments from the other side that said we need to also specifically define an exit strategy so that we return to those fundamental principles.

REP. FRANK: The hearing is -- briefly, Mr. Secretary. I'm getting you out of here, so if you want to talk --

SEC. PAULSON: (Off mike.)

REP. FRANK: I thank the three witnesses. There will be -- the gentleman from California had a unanimous consent request.

REP. JOE BACA (D-CA): Yes. Thank you very much, Mr. Chairman, for holding this meeting. I'd like to submit my questions for the record and thank you. And I know that I wanted to ask --

REP. FRANK: The questions will be submitted without objection.

REP. BACA: The African-Americans and Latinos -- (inaudible) --

REP. FRANK: The gentleman from Texas had -- (bangs gavel) -- the gentleman from Texas had a request.

REP. RANDY NEUGEBAUER (R-TX): Mr. Chairman, unanimous consent to submit two letters, one from the National Association of Federal Credit Unions, and the other from the Credit Union National Association.

REP. FRANK: Without objection.

Any other information, material, questions that members want to submit, without objection, will be submitted.

This panel is now excused.

We will now call up the next panel. And let's move quickly here.

We will begin on our side the questioning where we left off. So the first question will be with Mr. Meeks.

END.

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