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Hearing of the Senate Budget Committee - The President's Fiscal Year 2010 Budget and Revenue Proposal

CHAIRED BY: SENATOR KENT CONRAD (D-ND)

WITNESS: SECRETARY OF THE TREASURY TIMOTHY GEITHNER

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SEN. CONRAD: (Strikes gavel.) The committee will come to order.

I'd like to welcome the secretary of the Treasury, Tim Geithner, here this morning. Good to have him back before the Budget Committee.

Today's hearing will focus on the president's budget and revenue proposals. I've described the president's budget as a good beginning. The key priorities of the budget -- focusing on reforming health care, excellence in education, reducing our dependence on foreign energy -- I believe, are the right priorities.

I also think it's critically important to be cutting this deficit dramatically over the first five years. We all understand we have inherited a very serious economic situation that requires an extraordinary response, and that means increased deficits and debt in the short term. And I think it's also critically important that we recognize, over the longer term, we're on an unsustainable course, and it's absolutely essential that we return to a more fiscally prudent path in the future.

And I want to say what I have said before: that while I think the president's budget is a good beginning, especially over the first five years, I am very concerned about the second five years.

I've said this directly to the president. I've said it to every representative of the president that has come to see me. I am very concerned about the second five years.

We know that the president has been handed an extraordinary set of crises. I've thought often what it must be to be president of the United States at this time, to face a housing crisis, a fiscal crisis, a banking crisis, on top of that, an overall economic crisis, with the explosion of joblessness of this country -- the worst conditions since the Great Depression -- and in the midst of it all, two wars.

The president's budget includes, I believe, a number of key improvements. I certainly salute his transparency, putting on the table things we know are going to be expenditures but in the past have been left out. I also very much agree with the fundamental priorities on education, energy and health care and cutting the deficit in half over the first five years.

On the issue of taxes, some critics of the president's plan argues it represents a tax increase. And for some, clearly it does. That is accurate.

On an overall basis, I see something quite different. And I think CBO, when they will score this budget, will also conclude something quite different, because under the traditional scoring rules that we use around here, this budget represents over a $2 trillion tax reduction.

How do I get there? Well, this budget extends the 2001 and 2003 tax cuts for everybody earning below $250,000 a year. That is a very significant tax reduction from what current law provides.

And number two, this budget extends the Alternative Minimum Tax so that it doesn't affect 20 or 25 million taxpayers that would otherwise be affected. And that, too, is not contemplated under current law. That represents a very dramatic tax reduction.

And the estate tax, the extension of the provisions at $3-1/2 million exemption -- current law would take it back to a million dollars. That represents significant tax reduction.

And I could go on and on, but I won't. My colleagues know what's in this budget.

The president's budget also contains the "Making Work Pay" tax cuts and other provisions for individuals and businesses.

When you net it all out -- and I include the provisions on climate change, because while that is not strictly considered a tax, nonetheless it has the same effect economically. And so if you rack that up as a tax increase and you net it all out, this budget has $2.2 trillion of tax reduction. And I believe that will be the CBO's scoring.

I would like to particularly commend the president for committing to pay for the cost of health care reform. This is an area that gives many of us great pause, because we are already spending one in every six dollars in this economy in health care. We've had testimony before this committee that as much as 30 percent of that is being wasted. When we've got a circumstance in which the UCLA Medical Center's costs are 100 percent more than the costs of the Mayo Clinic health care system, we know there is room for dramatic savings, and still have quality health care outcomes, because the Mayo results are actually better than the UCLA results, even though they cost half as much.

Now, we see that across the country. So some of us have real pause about the notion of putting substantially more money into the health care system, when we've already got a bloated system.

What I am most concerned about, as I said at the beginning, is the debt outlook for the nation. In the previous administration, we saw the debt more than double, from 5.8 trillion (dollars) to 12.7 trillion (dollars) this year. I've never held the president -- the previous president or this one -- responsible for their first year. It's always they're inheriting a situation.

But when I look at this budget, I see the debt doubling again, and that gives me great concern. Again, based on testimony before this committee -- Democratic witnesses, Republican witnesses, some of the finest economic minds in this country and, indeed, the world, coming before this committee day after day after day, warning us of the danger of a buildup of debt. And I believe it.

I want to make very clear, I believe that buildup of debt fundamentally threatens the economic security of this country. I -- I believe it in my bones. Now, maybe part of that is I'm Danish. I find that Steny Hoyer over in the House -- he's Danish, too -- seems to have the same views. I looked at the Danish debt, the GDP ratio; see it's the lowest. So maybe I come by this honestly. Maybe it's genetic. But I must say, I am concerned about it. Excuse me?

SEN. : Can you skate?

SEN. CONRAD: Can I -- oh, yes, I can skate. North Dakota boy? (Laughter.)

So I want to emphasize I feel it's critically important we do better in the second five years. We need to keep in mind what is at stake here. We are on, as a nation, an unsustainable fiscal course. That's not the fault of this administration. It's not the fault of this administration. But we are inheriting a situation that we have to grapple with and we have to -- we have to address.

And as I say, I think the president's done a very commendable job (on ?) the first five years. I'm much more concerned about the second five.

Now I'll turn to Senator Gregg.

One other thing I should mention, and that is, I also believe that the first TARP, as imperfect as it was -- and I believe it was very imperfect -- I believe had we not done the first TARP that we would have faced an economic collapse. Senator Gregg and I were in the room as the reports were delivered to us that night. We were there all night. We heard the reports of financial institutions going down all across Europe. We heard the reports very directly of major enterprises in America that were on the brink of going down. There is no question in my mind that if we had not done the first TARP we would have faced an outright economic collapse.

With that said, was it done as best it could have been done? No. And, unfortunately, we're living with the results of that now: deep anger in our constituencies. And let me just say, anybody that doesn't understand the anger of the American people is not paying very close attention.

Every day I get the letters that come to me from my constituents, and the anger level is extraordinary. I have never -- in the 22 years I've been here, I've never seen such anger, with the sense of betrayal, that people in positions of responsibility took advantage of them. And they -- no fault of their own now are getting stuck paying part of the bill. The outrage of people cannot be dismissed.

Senator Gregg?

SEN. JUDD GREGG (R-NH): Thank you, Mr. Chairman. And let me pick up there, because I want to praise the secretary. I recognize he's come in to -- for a fair amount of constructive thought -- (laughter) -- since he's become secretary.

But I want to praise his efforts and the commitment of this administration on their -- the secretary, Larry Summers, Chairman Volcker, to try and to stabilize the financial institutions of this country. It's very obvious that unless we stabilize the financial institutions of this country we cannot recover. And as we recover, if we do not have a robust and functioning financial system, the recovery will be stunted.

And we all recognize that not everything you've tried has worked. Not everything that Secretary Paulson tried worked. But you're trying. And you're pulling the levers, along with Chairman Bernanke, to try to get -- to settle out the financial structure of this country.

And I have my specific disagreements with some of your initiatives and I have my specific agreements. I agree with many who feel that we should have more aggressively and more actively focused on the underlying problem, which was real estate, and I still don't think we've done it adequately.

But the fact is that the initiatives such as TARP, TALF, the mortgage initiatives, the initiatives which are putting some meat on the bone right now, relative to how you're going to orchestrate getting the private sector to come in and pick up bad debt off the books, of some of these institutions, I think, on balance have been more than constructive.

And if it is true that our most problematic, largest financial institution has actually made money in the first two months, I haven't looked at the books and I don't know how they've accounted for that. But if that's true, that's good news. And maybe we have begun to turn a corner, although there's still a tremendous way to go. So I want to thank the secretary for his energy in this area. I do hope there is more specifics to come however.

Now, on the budget, I can't praise you. And in fact, I pick up again where the chairman left off, which is that this budget, as it's presently constructed, passes on to our children a nation which they will not be able to afford and which will potentially drive the country into bankruptcy.

I recognize the fact, because it's obvious, that in the short term, there is a need for the government to step in, with huge amounts of money, because the government is first and foremost the last source or liquidity. And therefore the spending that is occurring in the short run is -- we don't want to do it but we're going to have to.

Some of it has been very unfocused and not all that constructive, such as the stimulus bill. But after two or three years, this budget should be talking about getting things under control. And it doesn't. It's proposing a public-debt-to-GDP ratio of 67 percent for the next 10 years, starting in 2013. Before that, it's higher.

It's proposing deficits of 3 to 4 percent post-2013 to the end of the budget period. It proposes expanding the size of the government, as a percentage of gross national product, up to 23 percent, from its historical role of about 20 percent.

The practical implications of this are that we are essentially putting on the books of our children, on our children's backs, a debt which they can never get out from underneath of and a debt which, as it's presently being proposed to be accomplished, involves a radical expansion of the size of the federal government, as a percentage of our economy.

And as a result, I think, we're putting at risk not only our children's future. We're clearly putting at risk the value of the dollar and our ability to sell debt. Because if I'm in the international marketplace and I'm looking at this budget, I'm saying to myself, where's the discipline; where's the containment? There isn't any, so why would I invest in the debt of this country?

Because I know that in the out years, they've got a budget which has no fiscal discipline. And there are only two ways out of that. On is inflation, which is not acceptable. And the other is massive increases in the tax burden, which will significantly reduce the productivity of the economy and as a result undermine the quality of life of everyone in this country.

And so this is a budget which has fundamental flaws. The argument that it cuts the deficit in half, in four years, is truly spurious. Because when you take the deficit and quadruple it and then you cut it and half, that's like taking four steps back and two steps forward.

You're not making any progress. You're still going backwards.

The argument that this budget doesn't have tax increases is, I think, an "Alice in Wonderland" view of the budget. It may be the CBO view of the budget and that may be the way they score it, but CBO doesn't really score taxes in a very constructive way.

You're raising the effective tax rate from 35 percent to 41, 42 percent, eliminating itemized -- eliminating itemized deductions on things like mortgages and on charitable deductions. Those are the -- those are the small businesses of this country that are going to be hit. Those are the people who go out there and take the risk, create the jobs. That's the people that that tax burden's going to fall on, mostly. Sure, it'll fall on the wealthy, but the largest percentage of it's going to fall on people who run sole proprietorships -- that little grocery store, the little restaurant, the small software company. They're not going to be able to expand, because their tax burden's going to eat up their expansion dollars. They're not going to be able to create jobs.

And then you've got this carbon tax, which is represented as being $646 billion of new revenue. That's a huge amount of revenue, but it's a gross understatement. Every independent group that's looked at this, beginning with MIT, which is the most objective, and CBO has said that this carbon tax, in its form as proposed, represents a $300 billion a year increase in revenues. That's a massive sales tax -- national sales tax on everybody's electric bill, especially people from the Midwest and the Northeast.

And what do you do with that revenue? You don't use it to contain the size of government. You use it to expand the size of government. There's a representation that a part -- 80 percent of the first 64 billion (dollars) is going to go to -- for your "Make Work Pay" tax credit, but the next 20 percent goes to raise the size of the government.

And then on top of that, you're going to get another $200 billion, potentially. And there's no representation that that's coming back to taxpayers. In fact, there's specific language which makes it pretty clear that that's going to be used as walking-around money for various constituencies who are interested in spending it. They may be worthwhile constituencies, but it's a heck of a tax burden to put on the American people, and it represents a massive expansion in the size of government.

What -- I guess that's my big problem here. I join with the chairman in being concerned about the effects of this budget on our children, because what this budget is passing on to our children is a debt that's not sustainable, a deficit that's not sustainable, and a government which has grown too fast, too far and which is not sustainable.

And so I'm going to be interested to hear your thoughts on that, Mr. Secretary.

Thank you very much.

SEN. CONRAD: Welcome. (Laughs.) You know, there's nothing quite like it, is there?

SEC. GEITHNER: (Off mike.)

SEN. CONRAD: But this is a debate that we owe the American people.

SEC. GEITHNER: We do.

SEN. CONRAD: And you said it very clearly as you came in. This is a debate we need to have. So we're delighted that you're here, Mr. Secretary.

We very much appreciate the extraordinary responsibilities that are on your shoulders and the effort that you have extended to address the multiple crises facing the country. Please proceed.

SEC. GEITHNER: Thank you, Mr. Chairman. Happy birthday. Ranking Member Gregg, members of the committee, it's a privilege to be here today. As I said coming in, this is a -- important debate to have. We need to do this openly, honestly, for the American people. And I look forward to our conversation.

I just want to briefly summarize my written statement. And I look forward to having a chance to respond to the concerns you both raised in your opening statements. But let me just start with where we are today. We start the administration, just seven weeks old, with an economy that's been in recession for over a year, an intensifying housing crisis and a financial system under stress.

Now, since the recession began, 4.4 million Americans have lost their jobs, millions have lost or are at risk of losing their homes or are struggling to obtain loans to finance the purchase of a car, a house or a -- their kid's education. Businesses are finding it harder to get credit. The fourth-quarter GDP numbers shown -- our economy declining at the rate -- annual rate of 6.2 percent.

What you're seeing here you're now seeing around the world. And that's being reflected on greater pressure in our financial system, again, both here and around the world.

Now, the obligation we share is to make sure that our government does as much as we can to get Americans back to work, to help stimulate private investment and help get credit flowing again. We have to move together to try to do this as rapidly and effectively as possible.

Now, as this committee knows, this crisis has helped -- caused a dramatic deterioration in our fiscal position. We start -- again, we start this Congress, this administration, with a $1.3-trillion budget deficit, the largest deficit as a share of GDP the nation has faced since the end of the second world war.

These are extraordinary challenges, and these challenges require extraordinary actions. Now, in passing the Recovery and Reinvestment Act, the administration and the Congress have put in place a very powerful mix of programs to help get Americans back to work and to support private investment. The combined effect of these investments and tax measures will be to save or create between 3 or 4 million -- 3 and 4 million jobs and to increase real GDP growth by 3.2 percentage points by the end of 2010 relative to what would have occurred in the absence of this package.

Now, alongside the recovery act, the administration is moving to repair our financial system so that it can provide the credit necessary for businesses across the country to expand and for families to finance critical needs. The deepening recession is putting greater pressure on banks, and in response, many banks are pulling back on credit. And right now, as a result, critical parts of our financial system are damaged and are working against recovery.

This is a very dangerous dynamic, and to arrest it we need to make sure our financial system has the resources necessary to get credit to the economy. We need to act to get the broader credit markets working again.

Now, to address this financial crisis we have launched a very powerful program to help jump-start lending to small businesses, student loan markets, consumer credit markets, auto finance markets.

This joint Treasury/Federal Reserve program goes around the banking system to try to get the securities markets working again. We've initiated a forward-looking assessment of the potential capital needs of our major financial institutions, and we've outlined the very detailed terms of a capital assistance program that will provide a backstop for these institutions so that they can raise the capital necessary to support economic recovery.

Now, alongside these initiatives, we will outline an innovative program that uses market mechanisms to help clean up the legacy assets on bank balance sheets. This program will be designed to bring in private capital alongside government financing to help restart markets for these assets.

Now, as we go through this process, as the president said, we will bring the full force of the federal government to ensure that the major banks which Americans depend on have enough confidence and enough resources to lend even in more difficult times. And when these institutions require exceptional assistance, we will hold accountable those responsible, force the necessary adjustments, provide the support to clean up their balance sheets, and assure the continuity of a strong, viable institution that can serve our people and our economy.

All of these actions are necessary to lay the foundation for recovery. And the president's budget builds on this foundation to set us on a path toward long-term growth and to a path where we are again as a country living within our means.

The first step in addressing these problems is to be honest about them. And the president's budget honestly and transparently presents the fiscal challenges facing the American people. We include, as you know, the cost of fixing the AMT each year, reimbursements for Medicare physicians, the likely future costs of foreign wars and natural disasters, and, in an abundance of caution and realism, the potential needs for additional financial crisis funding.

We offer a 10-year rather than a five-year budget presentation. The budget proposes to carefully but substantially address the most critical challenges facing our economy in health care, in energy and in education -- again, within a framework that puts us on a path to fiscal responsibility and fiscal sustainability.

On the tax side, the budget rewards work, encourages savings and promotes growth. Important provisions include making -- the Make Work Pay tax credit for 95 percent of working Americans, the expansion of the Earned Income Tax Credit, a zero capital gains tax provision for small businesses, and a permanent extension of the R&E tax credit.

Now, receipts in the president's budget average about 18.7 percent of GDP over the 10-year budget window, just slightly above the 40-year historic average, returning us to the same taxation rates that applied during the economic prosperity of the late 1990s.

The budget addresses the tax gap by tackling tax shelters and other efforts that permit abuse of our tax laws. Over the next several months the president will propose a very substantial package of legislative and enforcement measures to reduce tax avoidance.

I want to emphasize again that we propose no new revenue increases in our budget, none, until we are safely into recovery in 2011. And at that point, when the consensus of private forecast projects significantly positive growth for the overall economy, the budget restores tax rates to the pre-2001 tax levels for families making more than a quarter of a million dollars.

The soaring cost of health care is hurting families, businesses and our long-term budget prospects. There is no path -- there is no path -- to addressing our long-term entitlement challenges that does not require major health care reform, and our budget begins this process by reducing costs and inefficiencies, increasing quality and prevention, and moving towards affordable coverage for all.

Just to cite one example -- and there are many -- the hospital quality improvement program proposes to pay for performance and reimburse hospitals for the quality of their care, rather than merely for the quantity of the services they provide.

Health care reform is a moral imperative, an economic imperative and a fiscal imperative for our nation.

The budget makes a significant commitment to our energy security that will strengthen our economy, our environment and our national security. Investments in renewable energy and energy efficiency will create new American jobs and industries, and lead the way to a new green economy.

And if we are truly committed to making our nation both more prosperous and more just, we must recognize that it defies both our basic values and economic common sense to deny any child in America the quality education they need to compete in the global economy. And this budget calls for more resources for early childhood education, new incentives for teacher performance and a significant increase in the Pell grant, together with President Obama's American Opportunity Tax Credit, which provides up to $10,000 of tax relief for a single student going to four years of college.

Now I want to emphasize this. Even with these critical long-term investments, the president's budget keeps overall non-Defense discretionary spending well below its long-term average as a share of the economy. I want to emphasize this point. Under the president's budget, non-Defense discretionary spending would average 3.6 percent of GDP over the next decade, and by the end of the budget window we've proposed to bring it down to 3.1 percent of GDP, the lowest level since the 1960s.

Overall outlays return to a historical norms once you account for the interest costs associated with higher deficits and the impact of the baby boom retirement on entitlement costs. So just let me say this again. Once you take out the interest costs associated with the inherited deficits and the cost of fixing this crisis, and you account for the costs of demographic change, aging of the baby boom generation on entitlement costs, overall outlays return to historical norms -- critically important point.

The president and I share a commitment to working with the Budget Committee to put our nation back on a path to fiscal sustainability once recovery has been firmly established. And we do this by making the tough choices to cut the deficit in half in four years and to put -- reduce the deficit to a level where the overall debt is no longer growing as a share of the economy. If we do not do this, then you are absolutely right, then we face the risk that government borrowing will crowd out private borrowing in the future and weaken growth.

Now, when I last served at the Treasury Department in the 1990s, fiscal responsibility helped create a virtuous circle of greater confidence, strong private investment, very strong productivity growth, higher overall gains in income for all Americans more broadly shared across the American economy.

We are a strong and productive country. This is about our will, not about our ability. The great thing of America is that, when confronted with extreme challenges, we come together and confront them and lay out a path forward. The American people want to see us do that together. The world is watching us. They want to see us come together and work to solve these problems and get the economy back on track.

And I look forward to working with you in this endeavor, and I very much look forward to answering your questions.

SEN. CONRAD: Thank you, Mr. Secretary, and thank you for that excellent opening statement. And again, I want to recognize the extraordinary responsibility that's on your shoulders and what I am sure is an extraordinary workload. And we appreciate very much your coming before this committee for what is a very important conversation about the document that is going to be the blueprint for our country going forward. And what should that blueprint reflect?

One thing I wanted to put up is, looking at credit markets, the most encouraging thing that I have seen -- this is something that we monitor very closely in our office -- is the TED spread, the difference between the London interbank overnight rate and the Treasury borrowing rate. And what we saw last fall was truly stunning and of deep concern, because the TED spread spiked very dramatically at nine times its typical difference -- nine times its typical difference. That told us that banks' perception of borrowing from one another had gone off the charts.

And we have now seen a very dramatic improvement in the TED spread. By the way, this difference in the TED spread had led me to believe a year ago in December that we might be headed for trouble, because we saw a spike then in this critical rate.

If we look at commercial paper spreads, we see the same thing: a very dramatic improvement -- very dramatic improvement -- in the commercial spreads.

In fact, if I had a chart showing that, it would -- it would very closely mirror this chart. Commercial spreads have come way down.

With that said, we still have this issue of the toxic assets ricocheting around the global financial system, continuing to put at risk institutions and continuing to lock up credit markets. I have had -- I had a very distinguished businessman call me, had a $12 million credit line, never late on a payment, never missed a payment. And his credit line was pulled, not because of anything wrong with his business, but because the bank's own balance sheets were so impaired that the regulator insisted they start to pull back on some of their lending.

So what can you tell us, first of all, with respect to this measure that I have closely watched for a long period of time and I find very encouraging, that has almost returned to normal? It's not -- still not normal, but dramatically improved from where it was. How important do you take that to be, as well as the commercial market spread's improvement? And what can you tell us about the toxic assets and the plan to deal with that?

SEC. GEITHNER: Thank you. Let me just start by saying you're both absolutely right that recovery depends on getting credit flowing again. And without very forceful action to make sure banks have the ability to lend, even in a deeper recession, and without continued action to get these credit markets working again, then recovery will be undermined and the effect of the very powerful recovery investment act will be not as powerful as it needs to be in that context. You're absolutely right in this context.

Now, you're right that those measures of risk, in some sense, have come down dramatically. One other thing I'd cite in this context is that if you look at what's happened to mortgage interest rates, they've also come down dramatically. And that's, of course, critically important to families across the country.

Now, it's going to take more, though. We haven't seen enough progress. And you've heard from your constituents across the country that businesses with -- good businesses, viable businesses are seeing lines cut and withdrawn. It's for exactly the reason you said.

One qualifying point, though, before I come to the toxic asset thing: It's important to recognize that our financial system -- you know, we have 9,000 banks in the country. We have thousands of community banks. The vast majority of these institutions were not part of the problem, and they're going to be an important part of the solution. And you're seeing the stronger, well-managed institutions expand, as they should in this context. And just to be -- it's important that we not tar the system with the basic broad brush we're seeing expressed in much of the commentary in this context.

Now, you're absolutely right that the basic dynamic at work here is that many institutions made a lot of bad loans. Those loans are still on their books. They can't sell those loans, because the markets aren't working. There's no financing available.

One example that I think is helpful to use is if you had to sell your home tomorrow in a market where nobody could get a mortgage, the price you would get for your home would be far, far below what you would normally expect it to get in a growing economy where financing is available.

And that's part of what's causing this system to be so defensive and pull back.

Now, markets look forward. And part of the uncertainty you're seeing in markets is the markets are looking ahead to the scale of potential losses on those bad loans that might occur in a deeper recession. And that's, in some sense, forcing behavior by some banks that's making them defensive and pulling back.

And to arrest this we have to do two things. We need to make -- we have to make sure that we provide a more careful, transparent, realistic assessment of the potential losses might -- banks may face if we go into a deeper recession. When you look under the hood a little more carefully, which we're doing, we need to make sure there is capital available to them for those that need it. And some will need more capital.

Government has to provide a backstop in that context, and we need to provide a mechanism to help them sell these bad assets, get them off their books, clean up their institutions. That'll put them in the position where it's going to be easier for them to raise private capital and replace the government's investments with private capital as soon as possible. So the mechanism we're going to use is to provide government financing alongside private capital that will make it easy for banks to get rid of and unload these assets. And again, that'll make it easier for them to present a cleaner, stronger institution and bring private capital into their (institutions ?) going forward.

And this is something -- because this crisis is so different from past crises, it requires different approaches. And to solve it we're going to have to work with the market, because we don't want the taxpayer and the government taking all those risks on the government's balance sheet and leaving the government with huge, incalculable losses, risks we cannot manage effectively. So we need to find a way to work with the market to help solve that problem. That's what our plan's designed to do.

SEN. CONRAD: All right. I'm -- we're going to have six-minute rounds. Given the level of interest here today, I think that's the only fair way to do it. And I'll impose that limit on myself.

Senator Gregg?

SEN. GREGG: Thank you, Mr. Chairman. Let me just respond quickly to your statement -- your opening statement, not the one you just made, which I want to get some questions on -- and not in a -- in a -- just make a statement relative -- what you said relative to your budget. Because I really have fundamental disagreements with the way that you characterized it. You said, essentially, that you're controlling spending. Well, you're not. (To staff.) Can you put up the spending chart?

When we get into your budget in the out years, spending as a percentage of gross national product is at 23 percent. Now, your argument is you controlled this discretionary spending, you maintain it at 3.1 percent or 3.2 percent of the total budget, or whatever your calculation was, which was less than the historical number. Well, maybe you do, but if you do it, it's primarily because you're moving things from discretionary spending over to entitlement spending. You're taking the Pell grants and moving $100 billion off of the discretionary accounts into the entitlement accounts.

And then you said, well, and we really do manage the spending, except for the fact that we don't address the issue of entitlements being impacted by the retirement of the baby boom generation.

Well, if you don't stress that issue, you're not addressing the spending of the United States. I mean, that is at the core of our spending problems. And so -- I'll give you a chance in a second. I want to make these points. You cannot claim that you're being disciplined if you leave off the table the most significant item that has to be addressed.

Now, maybe your argument is, well, we're going to address health care, and therefore we're going to address the entitlement issues. Well, how do you address health care? Health care today takes 17 percent of the gross national product. You're suggesting that it be increased as a percentage of gross national product. You're adding another $664 billion in your budget, which you say is a down payment on the entitlement accounts relative to health care, which is -- probably your down payment is only about half of what you're really calculating. It's probably closer to a trillion and trillion-two.

So you're exploding the size of health care spending, on top of the health care spending which already exceeds any other industrialized country in the world by about 5 percent.

So there's no discipline there. In fact, there's a massive expansion of the government.

And in the area of revenues, you're claiming, well, we're going to go back to the 1990 revenue levels. We're going to get to 18.2 percent of gross national product. Well, that gives you a structural deficit of 5 percent. If you're at 23 percent spending and you're only going to get revenues up to 18.2 percent, you've got a structural deficit of 5 percent.

And if you look at what -- why are you going back to the 1990s? Why don't you go back to the Bush years, when revenues was up to -- were up to 18.9 percent? Why were they at 18.9 percent? Because we had a revenue structure in this country which encouraged productivity, which allows people to take risk capital and make money on it and thus create jobs and thus create revenues for the federal government.

What are you doing? You're clubbing -- clubbing -- risk capital. You're taking and creating a 30 percent increase on capital gains. You're saying to the people who are small-business people, we're going to increase your taxes from 35 percent to 42 percent effective rate. And then you're claiming, "Oh, we're going to have to be more productive." Of course we're not going to be more productive. That's why you can't get your tax revenues up, because you're basically saying to the productive side of the ledger, we're not going to allow you to be productive.

SEC. GEITHNER: Senator, could we go through these? I'd like to --

SEN. GREGG: Just a second. I got one more point here before we go through them. They're going to run out my time.

You say the markets look forward. The markets are looking forward. They're looking forward and saying: Why would we invest in the United States, when we're going to see a massive expansion of the government that will burden this country in a way that it can't afford?

This creates a -- go to the next chart -- it creates a doubling of the national debt in five years and a tripling of the national debt in 10 years. Why would we invest in a country where the debt is going to be unsustainable, where the deficits are unsustainable and where they're basically saying, if you're a productive individual, a small businessman who wants to take a risk, we're going to penalize you. We're going to go out and club you with a massive new income tax. And then when you try to sell your little, small business -- you know, the little restaurant that you wanted to sell to the guy -- to the big restaurant chains, we're going to hit you with a 30 percent increase on your capital gains rate. Get you twice, you know?

I don't see how your budget does anything other than put us on a road to producing a nation -- or putting us in a position where we get a nation that our children can't afford and that is not productive.

SEC. GEITHNER: Senator, can I respond now?

SEN. GREGG: Of course.

SEC. GEITHNER: Could we go back to that first chart?

SEN. GREGG: Yes. Okay, let's go back to the spending chart.

SEC. GEITHNER: So this is a very important thing to go through. Okay, a significant part of that -- the resulting level of spending to GDP, I just want to say, is interest cost based on the -- that are the essential result of the inherited deficits and the cost of fixing this crisis.

Now, you're right that part of that increase is the effect of aging of the population and rising health care costs on entitlement spending. Now, as you know, the president brought the leadership of the Congress together as part of the --

SEN. GREGG: Well, then doesn't that -- may I just ask, doesn't that require you to do -- take action which reduces interest costs in the out-years?

SEC. GEITHNER: Absolutely. And what the budget does --

SEN. GREGG: And you're indicating --

SEC. GEITHNER: No, and again --

SEN. GREGG: But it doesn't --

SEC. GEITHNER: No, what the budget does is propose to bring the deficits down to 3 points -- 3 percentage points of GDP, five years out, and to keep it in that range over the next five years. And what that means is the debt-to-GDP ratio will stabilize. And that ultimately is a test of sustainability.

SEN. GREGG: No --

SEC. GEITHNER: Now, you're right, if we do not --

SEN. GREGG: If you stabilize it at 67 percent of GDP it's not -- a public debt -- it's not sustainable.

SEC. GEITHNER: No, in --

SEN. GREGG: And if you look at the last 20 years, deficits ran at about 2 percent of GDP.

SEC. GEITHNER: No, but the judgment of sustainability in all economists across the spectrum is, what level of deficit stabilizes the debt-to-GDP ratio at reasonable levels? And 3 percent is roughly the band which achieves that. And that's the test of what the economy can bear.

Now, you're absolutely right, this is a proposal for how this nation can be fiscally responsible and live within our means. It's a proposal. It requires Congress to come together and agree to make these tough choices. Now, you're absolutely right that we then need to bring down entitlement costs, but as you acknowledge and your colleagues have acknowledged, the only way to do that, and the necessary condition for doing that, is to reduce the growth of health care spending.

Now, you've said several times this is a dramatic expansion in the size of the government relative to the economy. Now, again, if you take out interest costs and you take out the modest increase forced by aging the Baby Boom, this is a change in priorities for the country, but it's not a significant growth in the overall size of the government to GDP.

And again, the critical test for long-term growth is, is that deficit going to be brought down and held at a level where the debt burden is manageable and stable? Now, that's something that we can't do alone as an administration. It requires Congress, both sides of the aisle, coming together and saying, yes, we're willing to commit to that path of responsibility.

So we have to start with that -- with that path, and it has to come with meaningful reductions in non-defense discretionary spending. Now, you're right that that's not going to be sufficient, but it's the necessary test of it. And this is a very ambitious, fiscally responsible deficit.

One last, very quick point. You said several times in your opening statement that the tax increases that this budget proposed on the most affluent Americans, that will come only after recovery is established -- not this year, not next year; only beginning in 2011, when private economists all believe recovery will be in place -- those increases in taxes, again, only restore us to the level that prevailed in 2001, and they will affect only 2 to 3 percent of small-business owners across the country -- only 2 to 3 percent.

Now, you can look at independent assessments of that and we can debate that impact. Those are not our estimates. Those are estimates of independent economists.

Now, to say that this budget proposes to substantially increase the tax burden on any meaningful fraction of small business in the country is just not a fair representation.

Now, we'll have different priorities, different judgments about what's going to get the economy growing again, but there's very few economists who would not agree that addressing the growth in health care costs, improving educational outcomes, improving our infrastructure and moving us to a cleaner energy economy are not absolutely necessary conditions for improving long-term growth potential of this economy.

SEN. GREGG: And reducing death and debt -- debt and deficit to a sustainable level is at the core of accomplishing that --

SEC. GEITHNER: Is absolutely the core -- completely agree.

SEN. GREGG: -- which is not accomplished under this budget. (Gavel strikes.)

SEC. GEITHNER: But Senator, if you -- if your proposal is we should go -- try to go lower in terms of deficits-to-GDP in the out years, lower than 3 percent of GDP, then we would be happy to work with the Congress on how to achieve that.

SEN. GREGG: Start with entitlements.

SEC. GEITHNER: And that's a -- but that's a reasonable proposition. But 3 percent of GDP is a fiscally sustainable deficit path. The hard thing is to achieve it, not to propose it. The hard thing is to achieve it.

And again, what this deficit -- budget does is it outlines very concrete, very specific ways for doing that. And that's why you're seeing so much concern raised about some specific -- (inaudible word). A test of credibility is, are we proposing things that are going to be hard? And these will be hard things to do, and they require the Congress to come together to act.

SEN. CONRAD: All right.

Senator Nelson.

SEN. BILL NELSON (D-FL): Thank you, Mr. Chairman.

Mr. Secretary, the chairman gave an example that has happened to a lot of us. He gave the example of a constituent that had a $12 million loan, never missed a payment, had perfect credit throughout his life. And suddenly the bank is calling the loan. Now, this is happening to every one of us.

You made a statement that it was the regulators that are coming in there and requiring --

SEC. GEITHNER: That was -- that was chairman's statement. But I'd like to address that.

SEN. NELSON: Okay.

SEC. GEITHNER: But, sorry, please --

SEN. NELSON: Then my question to you -- and please, we're all interested in this -- what do you do to control the regulators so that they're not working at cross-purposes with what we're trying to do to restore the economy? And the regulators, I assume, work for the Treasury Department.

SEC. GEITHNER: Well, as you know, we have a rather complicated supervisory structure.

We have something like 64 bank regulators across the country.

But your point is absolutely right; we need to make sure that strong banks are lending to strong, viable companies.

Now it's very important to step back and recognize that, you know, we had a huge unsustainable growth in borrowing across our country. And we're living with the consequence of gravity being restored. And that means that demand for credit will fall, necessarily. But what we have to make sure is that you don't have the supply of credit constricted and therefore pushing businesses to the point where they can't meet payroll, can't make the investments, are at greater risk of failure.

And everything we're doing to the financial system is designed to arrest that dynamic and again make sure that you don't have -- you have enough credit for viable businesses to do what they need to do.

Now the regulators face a very difficult balance. And it is very important that the supervisors across the country are not making it harder, again, for strong banks to lend to viable businesses. And I know that my colleagues and counterparts at the national level responsible for bank supervision are being -- are trying to be as careful as they can in sending out that guidance. They issued a statement together back in the fall. We've been encouraging them to stay on it, to be very careful they're sending a balanced message. And I agree with you completely that's important path -- important part of way to get small business lending to the point where it's supporting recovery.

SEN. NELSON: So does that mean that the regulators are going to start being more realistic about the poor guy who has never missed a payment and they're not going to require the bank to call the loan on him?

SEC. GEITHNER: You're -- again, you're absolutely right; you want to make sure the supervisors are not making this thing harder than it already is.

SEN. NELSON: Well, they have been in my state and, I assume, in the chairman's state.

SEC. GEITHNER: Well, I know there's a lot of concern about this. And again, I think that we -- we've tried to make it clear to the supervisors that they need to send a clear -- a more careful, clear, consistent message across the country, so that we're not amplifying those challenges.

SEN. NELSON: Well, I don't know how you do what you do, and you don't have a lot of your subordinates in place. But I would think that that would be a very important message for you to get out to all of these supervisors, that we ought to all be in the harness pulling in the same direction. And they're pulling in the opposite direction right now.

Now let me tell you one thing that is a problem in your proposed mortgage relief for my state. You only allow mortgage relief for a mortgagee if their mortgage is only up to 105 percent of value.

That's not the case in Florida. The real estate market has dropped like a rock, and therefore a person's home is worth a lot less than a mortgage being underwater that much.

So what can we do for places like Florida and Nevada and California? And, of course, I have, in one part of my state, the highest mortgage foreclosure rate in the country. And we want to help them, but your regulations are not going to help them.

SEC. GEITHNER: Senator, thank you for raising that. It's very important to start by recognizing that what's happening in housing requires recovery. To arrest it, it really does require that we reduce the risk unemployment rises more than it's already likely to rise and that we get the credit markets, mortgage markets working again. Those are necessary conditions; they're not sufficient.

But the president's plan does three very important things. One is it's designed to get -- help get mortgage interest rates lower. And even since the announcement, those rates have come down significantly further. That benefits all Americans who own a home, would like to own home, need to borrow, to refinance.

The second thing is to make it easier for Americans to refinance, to take advantage of lower interest rates, even if the loan-to-value ratio of their house has gone up beyond the normal 80 percent threshold that the GSEs can finance. And what you were referring to specifically is this refinancing program. And you're right that that program is only open to people who have loan-to-value ratios between 80 and 105.

But the third piece of the president's program would provide strong incentives to reduce mortgage payments through principal and interest reductions for a set of Americans that could potentially have much higher loan-to-value ratios in their house. And that third part of the program is the first time we brought the entire arms of the government together, the GSEs, the FHA, the FDIC, the bank regulators. And we issued just last week -- I think last week -- a set of standard modification provisions that will help provide substantial payment relief to millions of Americans, even with Americans whose loan-to- value ratios are above 105.

Of course, you want to make sure that's going to produce a viable, economically affordable mortgage payment. And it will not benefit many Americans who really borrowed way, way beyond their means.

And just let me end with this: Of course, you know, the tragic thing about financial crises is they cause damage not just to those who were irresponsible, but to those who were very careful and prudent in their financial decisions and through no fault of their own are left facing the prospect of diminished access to credit, lower home values. And that's why, in a case like this, there's such a powerful imperative for the government to act forcefully.

I hope that was responsive. But the core part of this more affordable payment scheme will reach a broader class of Americans -- not all Americans, but a broader class of Americans than the refinancing program.

SEN. CONRAD: I thank the Senator.

Senator Sessions.

SEN. JEFF SESSIONS (R-AL): Thank you, Mr. Chairman.

And Mr. Secretary, I appreciate your work. You've got a lot of challenges and a lot of difficult problems to deal with.

I would just say to you, in my opinion, your statement today is a disappointment. I don't think it's a honest and responsible appraisal of the condition that we're facing today. And I do believe that the secretary of Treasury, to kind of have the power that you need to exercise, need to get out of the campaign mode.

I know you have responsibilities to the administration. But it sounds a lot like David Axelrod, to me, rather than a fundamental appraisal.

So we will work together. I think you should listen to Senator Gregg. What he's saying is that we're not going to accept numbers that we don't think are responsible. We're going to have to deal with the reality. I think Wall Street is expecting that. And they're not confident that they've got it yet.

This budget at its base is more taxes, more spending and more debt. I don't think anybody can (debate that ?). You cannot have, as Senator Gregg suggested, an 18 percent GDP revenue base while we're looking at a 23 percent spending rate. That's the problem that's -- face us.

Could I ask you one thing? But first I want to say to my distinguished chairman and ranking member, I know that you were in meetings and you were told that this TARP had to pass so we could buy toxic assets. My question is, who told you that? And was the economy in total collapse, facing total collapse?

You weren't, I don't think -- you may have been in that room. You were certainly with Mr. Paulson. But I'm -- Mr. Paulson told us he was going to buy toxic assets with it. A week later, he was buying stock in banks. And so their credibility from the beginning is not with me. I don't -- I have doubts about it.

With regard to that particular item, Mr. Secretary, I'm hearing that some Main Street banks that are participating in the TARP program -- I'm talking about Main Street banks, not the Wall Street crowd, where you're from -- that they are being -- were forced to the table, strongly encouraged to participate in the first phase of this capital purchase program. It was sold to them as one thing, and the rules changed.

But many of these Main Street banks would like to pay back their TARP money to the government and terminate their relationship with the government. This would seem to me to be a good goal for the country and the taxpayers and would be a signal of some progress.

However, I understand you're proposing a second injection of capital from the federal government into these banks, and I think many of them don't want it. My question is, what is the government's objective in conducting the stress test that the government is currently conducting on the banks? And what is the ultimate goal? And what if some of these more well-managed Main Street banks want to pay back their phase one capital and get out from under the federal government? What's the position there?

SEC. GEITHNER: Senator, thank you. Can I just start with one point? I've been in public service my entire professional life. Never worked on Wall Street. Never worked for a financial institution. Worked in --

SEN. SESSIONS: Well, you supervised Wall Street, sort of, as a Federal Reserve --

SEC. GEITHNER: You're absolutely right. As part of my responsibilities, I've --

SEN. SESSIONS: (Inaudible) -- that you were part of. I accept your response.

SEC. GEITHNER: But my obligation to the American people is to protect the financial security of this country and to protect our financial system, not because we're here to do anything for banks. Wouldn't give a penny to help a bank.

Only thing we're doing is, we're trying to make sure that credit is available on the scale and terms necessary for recovery to come back. And there is no way we're going to get recovery, in the speed and force we need, unless we do a better job of achieving that outcome.

Now, you're absolutely right. And nothing would make me happier to see strong banks repay the government the capital they took. And we would love to see banks go out there and replace that capital, with capital from the private sector, repay us and allow us to use that, for where it can be targeted next.

One thing I really want to say, you know --

SEN. SESSIONS: Is there hesitation? Is there any reluctance, on the part of Treasury, whatsoever to have that happen?

SEC. GEITHNER: No reluctance again as long as they replace that with private capital, so that they're again able to provide lending to the economy, then there would --

SEN. SESSIONS: What do you mean, as long as they replace it with private capital? What if their stress test report indicates they don't need more private capital and they're willing to pay you back?

SEC. GEITHNER: Well, then they're in a good -- then they're going to be in a good position to repay the government and replace that capital. So that is a -- if that -- to the extent that happens, that will be a good thing.

Now --

SEN. SESSIONS: Wait a minute. And if they don't replace that capital, are you then going to tell them, no, they can't give back the money to the government and get out from under your boot?

SEC. GEITHNER: Well, you know, Senator, I just want to say one thing. I was not secretary of the Treasury until about six weeks ago.

SEN. SESSIONS: I understand that.

(Cross talk.)

SEC. GEITHNER: And although I support many of the actions that were taken by the Congress, over that period of time, and you're absolutely Mr. Chairman and Ranking Member, what was done back then was a necessary thing, to stabilize our system. But I was not secretary of the Treasury then.

Now, my job now is to make sure that where it is necessary for banks to have additional assistance, so they can provide, do what they need for recovery, that we do so on conditions that they're going to make sure there is more credit available and that they emerge from this stronger.

That's my basic responsibility. And I want to say, just to -- can I come back on the stress test thing? Or do you want me to come back later, Mr. Chairman?

SEN. CONRAD: Well, the senator's time has expired. If you have just --

SEN. SESSIONS: But the question was ongoing.

(Cross talk.)

SEN. CONRAD: Senator, time has expired. If you have -- if you have some final point that you wanted to make, in response, we can do that.

SEC. GEITHNER: Just very quickly we're doing what I think, as any American would understand, which is that we want to make sure that we understand and the world can see how strong these institutions are and where some may need an additional buffer of capital, to get through this challenging economic environment.

To do that, you have to look carefully under the hood and bring a more consistent, realistic, forward-looking assessment of what potential losses may occur, across the system.

That is a necessary, completely sensible, reasonable thing for your government to try to do. And it's in the interest of these institutions, because right now they're living with a cloud of uncertainty, which is causing them to be more defensive and withhold lending.

And we need to arrest that basic dynamic. But I hope and expect, and I believe it will be possible, that many banks will be able to repay the government the capital they initially took.

SEN. CONRAD: (Gavels.) Let me just say this to my colleagues. We're not going to make it at this rate -- (chuckles) -- because people are going over their times. And, I mean, not just a little bit over.

SEN. NELSON (?): I was just one minute.

SEN. CONRAD: No -- but, you know, the -- I know, it's one minute here and two minutes there, and pretty soon we -- we're not going to make the --

SEN. : (Sort of like the billions ?)?

SEN. CONRAD: (Chuckles.) Yeah, sort of like that. So the -- I just ask of our colleagues, and I'd ask the secretary -- you have a full right to respond. I want to absolutely give you every chance to respond here. And the colleagues, please respect our other colleagues.

We have next in order on our side Stabenow, Cardin, Sanders, Murray, Warner and Whitehouse. On the other side, Senator Bunning will be next, Senator Crapo, Senator Graham, Senator Alexander.

Senator Stabenow?

SEN. DEBBIE STABENOW (D-MI): Thank you, Mr. Chairman.

And welcome, Mr. Secretary. This discussion or debate going on reminds me very much of the debate we've had for the last eight years -- ninth year of my being in the Senate and on the committee. And with all due respect, I would say that I welcome an administration and a secretary of the Treasury that's putting forward an honest budget that shows all of our debts, doesn't pretend that the war doesn't cost anything and is including all of the challenges that we have.

I remember when our previous vice president said that deficits don't matter. And, in fact, we all know that they do. But to me this is a -- very much about the old -- the old solutions that were in place, that were tried with a different administration, a different majority; and trying to do something new, having a different view, a different set of values and priorities.

And so I want to just start out by commending you for having a budget that's a net tax cut for the middle class of this country, for putting together the true costs and issues that deal with economic competitiveness for businesses and families. When someone sits around a kitchen table, they don't compartmentalize their health-care bill, the cost of sending the kids to college and what's happening when they're trying to pay for gas or their energy costs. It's all part of their budget. It's all part of the challenges.

And unfortunately, you find yourself in a -- where you've inherited a terrific mess -- economic mess and inaction on all of these issues. And so I commend you for pulling this all together, which is very, very tough to do. I also want to indicate that we've said for years that we have to invest on the front end to get savings.

And it's always hard -- hard to do prevention, even though it saves money. It's hard to do up-front costs like health information technology, even though you know it saves, it creates quality, saves on costs. It's hard to deal with issues around energy on the front end. But I want to thank you for that as well, because this budget really does reflect being responsible about how we get where we want to go to save dollars.

I want to ask you a question, though, related to up-front costs. You have in here, in the overall budget, a national infrastructure bank, which I commend you for, to deal with long-term infrastructure investments.

And also there are dollars in the budget that deal with alternative energy investments, new technologies, which I also commend you, as a state where we can make those technologies, and I see that very much a part of our future.

My question to you is, the clean energy piece is tied to the cap- and-trade program -- $15 billion tied to cap-and-trade. And I very much want to see that separate, not because I'm not supporting doing something on cap-and-trade, because I am and have very specific ways I believe that we can work together to get there. But I also believe that we can't wait, that the alternative energy, clean energy investments on the front end are critical for us to be able to meet cap-and-trade.

And so my question is, if we put forward -- and I'd like to work with you in this budget -- putting forward a clean energy fund that would be within the context of this budget but would not be tied to the cap-and-trade regime specifically, in case this takes a little bit longer to get done, and I'm wondering -- your thoughts about that.

SEC. GEITHNER: Senator, thank you. I think I should start by saying in the recovery act which you passed, there are very, very substantial investments already in --

SEN. STABENOW: Absolutely.

SEC. GEITHNER: -- in clean energy technologies. And in fact they're much larger, I believe, if you account for them correctly, than the proposed $15 billion piece of use of resources potentially raised by cap-and-trade. And so we're not waiting. And I think you're right that it's very important not to wait -- this is too important to wait -- and need to move now. And the Energy Department and other arms of the administration, working with Treasury, are trying to move very, very quickly to put those programs in place, because it's important to do.

SEN. STABENOW: Well, what I would ask that you look at, again, is that in the recovery plan -- and I was pleased to -- on the Finance Committee to be a part of putting together the manufacturing credit and extending the investment tax credit and production tax credit -- there is a cap, and particularly on the manufacturing credit, in terms of the value of the credit that will be allowed overall. And we will exceed that on the manufacturing credit. There is an explosion there in jobs, in green energy and interest that's going to exceed that cap very quickly. And so I would just ask that you work with us in order to expand that.

Thank you, Mr. Chairman.

SEN. CONRAD: Thank you.

Senator Bunning is next.

SEN. JIM BUNNING (R-KY): Thank you, Mr. Chairman.

Secretary Geithner, I see in the press that you have a plan to save the world's financial system. Where is your plan to rescue the United States' system? We've been waiting for that.

SEC. GEITHNER: Senator, thank you for raising that. We have moved --again, we've been in office six weeks. In that period of time we have --

SEN. BUNNING: No, but you -- excuse me --

SEC. GEITHNER: But I just want to say this --

SEN. BUNNING: But --

SEC. GEITHNER: Let me explain what we've done.

SEN. BUNNING: -- but don't -- no, I'm going to let you do that, because you were part of the problem. You were the head of the Federal Bank of New York. You sat in on the meetings on TARP, on TARP. when it was decided. In fact, they give you credit for it being your plan! The former secretary of the Treasury does.

SEC. GEITHNER: Senator, lots of people --

SEN. BUNNING: And Ben Bernanke has not denied that before our committees.

SEC. GEITHNER: Senator, lots of people are going to be -- credit, and lots going to -- people are going to be blamed for lots of different things, but let me say --

SEN. BUNNING: I didn't blame you for it. I said you're credited for it.

SEC. GEITHNER: But let me just respond to your initial question. We have got to move and we are moving very quickly -- you have not seen a government move this quickly to address a crisis of magnitude ever before. Remember, it's been roughly six weeks since I took office, and in that period of time we have launched this very powerful housing program, get to the heart of this crisis. We've started this very powerful program with the Fed to get lending going again to small businesses and consumers. We've laid out a program for strengthening our nation's banks, with detailed terms on the capital they have the potential ability to get from the government, all in this short period of time. We've proposed very substantial reforms to the conditions that come with our assistance, not just on dividends, on compensation, but on lending and transparency and accountability.

SEN. BUNNING: Mr. Secretary, I've got six minutes, and I want to ask some questions.

SEC. GEITHNER: And -- and this is a global crisis. It is in the interests of the United States that we have a global response. And export prospects for American businesses across the country will depend in part on how effective we are at getting other countries to move with us.

SEN. BUNNING: Thank you. Last week, AIG's bailout bring a total to about $180 billion. I don't understand how one company is worth propping up to $180 billion worth of taxpayers' money, and I don't think the American people understand it, either. So tell us, why do you keep bailing out AIG? What is the risk? And who are the counterparties that we're really trying to save?

SEC. GEITHNER: I agree, it is an outrageous thing for our government to be in the position where a company was allowed to get to the point, with no constraints, that their future is critical to the future of the financial system. Now --

SEN. BUNNING: Have you seen this report?

SEC. GEITHNER: I don't see what it -- what it --

SEN. BUNNING: Well, it's a strictly confidential report, "AIG Is the Risk Systemic." And it was supposed to be the document they presented to you all, or the Treasury, for the fourth tranche of money that they got.

SEC. GEITHNER: Senator, I --

SEN. BUNNING: I got it from the New York examiner of insurance.

SEC. GEITHNER: I'm happy to look at it, but I'll tell you my judgment. AIG is systemic. I wish it were not the case, but AIG is systemic. And the least-cost way to the American taxpayer and the American people for dealing with that risk is to help this company restructure and get to the point where --

SEN. BUNNING: Where's the bottom line, Mr. Secretary?

SEC. GEITHNER: The bottom -- the bottom line is, is that our job and my responsibility is to protect the security of the American financial --

SEN. BUNNING: Where's the bottom line for the American taxpayer, dollar-wise?

SEC. GEITHNER: The bottom line is that we have to make sure, given the severity of this crisis and the fragility of this system, that we do everything necessary to protect against the risk that we have a disorderly failure of a major financial institution. I mean, you just look back to what happened in the fall --

SEN. BUNNING: I did.

SEC. GEITHNER: -- and look how that --

SEN. BUNNING: And disagreed completely with what you did.

SEC. GEITHNER: No, but remember, I was -- if you -- if you look at the consequences for the American economy --

SEN. BUNNING: I've looked at the consequences.

SEC. GEITHNER: But if you look at the --

SEN. BUNNING: I looked at Bear Stearns. I looked at Lehman Brothers. I looked at all the things that were going on at the time, and disagreed completely with what was happening.

SEC. GEITHNER: And Senator, I do respect your views on this, and I understand your concerns about it. But this is a -- this is a basic judgment about what is necessary to protect the stability of the American financial --

SEN. BUNNING: Thank you.

SEC. GEITHNER: And that's my job --

SEN. BUNNING: Thank you.

SEC. GEITHNER: -- and responsibility. And AIG is systemic.

SEN. BUNNING: The first thing that France did when they went socialistic was nationalize the banks. We have skirted nationalization of the banks, under you and the amount of money that we have been putting in banks all over this country. Now, we won't call it nationalization, because that's a bad word, but if you tell me how many banks have accepted money from the federal government, I'll give you a little better idea on what nationalization is.

SEC. GEITHNER: Senator, are you speaking in favor of nationalization, or against it?

SEN. BUNNING: No, no, I'm -- (chuckles).

SEC. GEITHNER: Against it.

SEN. BUNNING: That's really funny. (Laughter.)

SEC. GEITHNER: No, I wasn't trying to be funny.

I just want to make sure I understand.

You said we skirted it, but you were not praising me, I thought, for skirting it.

SEN. BUNNING: No, I'm not.

SEC. GEITHNER: Okay. So the information on who's taken money from the government in terms of capital and the amount of capital --

SEN. BUNNING: How many banks?

SEC. GEITHNER: It's publicly available on the website. It's in the hundreds. But what matters is the amount in terms of that capital --

SEN. BUNNING: Now -- okay, I understand all those things.

I have a community banker who attacked me out in Paducah, Kentucky, on FDIC assessment. Their assessment went up 1,000 percent. They're getting charged -- and didn't have any failures -- for those who failed. Explain that to me.

SEC. GEITHNER: You're absolutely right. I think this is a deeply unfair thing, and it causes concern across community banks across the country. You're absolutely right.

The way our system is designed is the FDIC is obligated under law to assess a tax over a period of time -- to raise the premium over a period of time across the entire --

SEN. BUNNING: Right.

SEC. GEITHNER: -- bank, financial -- and that does create this problem that people, again, who were responsible, ran well-managed banks are bearing the cost of the decisions made by others. And that's a deeply unfair thing, but that's the way the systems designed by the Congress is applied. And I think it's very important that we work together to make sure --

SEN. BUNNING: We'll work together to change it. Thank you.

SEN. CONRAD: Thank you, Senator.

Senator Cardin.

SEN. BEN CARDIN (D-MD): Thank you, Mr. Chairman.

Secretary Geithner, first let me tell you what I like about the Obama budget. I think it's an honest budget. You have included in the budget the real cost of government, and that is refreshing. It's aggressive in dealing with our short-term problems that you inherited, including large deficits and an economic crisis. And it invests in America's future so that our long-term prognosis will be much better with health care reform and your energy policies and education.

But let me share with you the concerns that the chairman has raised on the long-term financial viability of the economic plan that you have presented. And I say that because, first, it depends upon the Congress responding to your requests on health care, energy and education. And I certainly hope the budget resolution that passes Congress and the actions of our committees will accomplish that. And I will do everything I can to give the best possible chance for that to achieve -- be achieved. But it's a heavy lift. And if we don't achieve those objectives, then the long-term prognosis is not going to be as good as you have presented.

And secondly, it depends upon an effective strategy to deal with this economic crisis. And let me talk about that, if I might, for one moment.

We've heard over and over again that the economic engine of America and creating new jobs is small businesses. That's where most of businesses are located. That's where most of the job growth will take place. That's where innovation -- we find the best prospects for innovation in America.

Now, before President Obama was inaugurated the president of the United States, Larry Summers made a commitment that we would have a strong program to help small businesses. I've asked questions at hearings before as to when are we going to start to see small businesses be able to get the help that they need.

And there was a commitment to use the federal government and the secondary markets to ease up SBA loans. I know that you've said that you're going to be coming out with a program to help small businesses. I was concerned by Assistant Secretary Neel Kashkari's comments yesterday where he said that we're not going to interfere with the banks' lending of money. It's going to be their independent judgment.

Can you tell me specifically when small businesses in Maryland and around the nation can get some help from these programs? They don't see it to date.

SEC. GEITHNER: Very important -- very important objective. And I completely share your commitment for us moving aggressively to fix this.

Now, let's just start with -- in the stimulus package there's a range of very important provisions for small business, including a substantial increase in the SBA guarantee program. Now, to make that work fully effectively, we need to make sure that these lending programs we announced two weeks ago are also up and running operationally. And they are coming onstream (sic) very, very quickly. That'll help make sure there's liquidity available to help support those (issuances ?). But that's not enough. We also need to make sure the community banks are getting access to capital where they need so (sic) as quickly as possible, and we're committed to doing that.

And as I said, as one of your colleagues said earlier, it's very important that supervisors are working in support of this objective, not against it. And we are looking at other ways and are open to suggestions on other things we can do quickly to help reinforce these (basic ?) objectives.

But you're absolutely right that getting credit available to small businesses who are viable, can support strong businesses, is a -- is a -- absolutely critically important priority. And you've seen a lot in stimulus and recovery. You see additional things in the budget, which we hope will pass quickly. And you see it -- we've already started these lending programs that are necessary for the SBA program to work.

SEN. CARDIN: I know the tools are there. We just haven't seen the results. I'll tell you -- I -- I'm --

SEC. GEITHNER: Right, and the -- yeah -- you're right --

SEN. CARDIN: I can tell you, I meet with small business people in my state frequently, and the credit is just as tough as it was four months ago.

SEC. GEITHNER: I agree with that.

SEN. CARDIN: I would just urge you -- first of all, keep us informed as to what is happening, what the facts are. And secondly, do some visible things to show that we are concerned about small businesses. We need their help. And they really do believe this is more aimed at the big guys and not the -- and if you're small you're not getting help. So --

SEC. GEITHNER: Understand that concern. And we're very committed to fix this and we're moving very aggressively, and we'll give as much prominence and (forethought ?) to these initiatives as (we can ?).

SEN. CARDIN: I appreciate that.

Let me just talk for a moment, if I might, about these toxic assets, because I'm not exactly sure I understand the mechanism that you have. Are you -- are we -- are you trying to get them sold and off the books of these banks that are not as healthy as they should be?

SEC. GEITHNER: Yes.

SEN. CARDIN: Or are you trying to get a -- just a better evaluation?

SEC. GEITHNER: No, we're --

SEN. CARDIN: You're trying to get them off the books. So you're going to have a private partner -- private-public partnership to have investors purchase these assets?

SEC. GEITHNER: To provide an opportunity for them to sell these assets.

SEN. CARDIN: And then a private entity would own that -- the toxic asset, and the bank would get the --

SEC. GEITHNER: Sharing the upside with the government, managed by people who are good at managing these assets.

SEN. CARDIN: And are the specifics of this proposal now well --

SEC. GEITHNER: No, we're outlining within the next couple weeks the details of these proposals so everybody can see them and see how they're going to operate.

SEN. CARDIN: As you know, predictability is important --

SEC. GEITHNER: Very important.

SEN. CARDIN: -- in all of our businesses, and there's a lot of speculation out there as to how much risk the private investors are going to have to take and whether this is viable or not. I would just urge you to have as much transparency as this is -- as this is developed, because there's, I think, some good ideas out there, and there's a lot of money sitting on the sidelines that are prepared to make investments if they believe that this is going to be a process that is fair.

And I couldn't agree with you more, we've got to get these toxic assets off of those banks that balance sheets will not allow them to make loans today.

SEC. GEITHNER: And you're absolutely right that it has to come with absolutely clear, full transparency for people to have confidence in the program.

SEN. CARDIN: And the last thing I'll just underscore is the real estate situation. The foreclosures -- February's numbers were shocking. I mean, we've got to be able to stop the hemorrhaging of people losing their homes. And I just underscore that point.

Thank you, Mr. Chairman.

SEN. CONRAD: Thank you. And Senator, you get a prize. You were right on time. (Laughter.) What a good example.

Senator Crapo.

SEN. MIKE CRAPO (R-ID): Thank you very much, Mr. Chairman.

And Secretary Geithner, thank you for coming today. I want to try to make three or four points during my six minutes. I'll try to talk fast.

First, could we put the chart up on the deficits?

I want to return to one of the issues that Senator Gregg raised with you, and that is just a question of where we're headed with our deficits in the country. And with the chart that we have up there, I want to focus on the blue line first. The blue line is, as I understand it, what CBO's assessment is of the baseline; in other words, what would happen with our deficits if we simply follow current law and do not do anything different for the next five years or so.

And what that line shows is that if we just follow the current law, our deficits by 2012 would be down in the 200 billion (dollar) range and declining over time. And it shows with regard to the president's budget that although there are some spikes, and I understand those spikes as a result of the -- I assume the stimulus act and some of the other things that we've been doing -- but it also declines rapidly, basically as a result of, I understand, the way that we will be phasing out the excessive spending and the stimulative actions in the TARP funding and so forth that we're engaged with right now.

My point is not to -- at first, at least, to make the comparison between the two lines, but to make this point. When the president says he wants to reduce the deficit by half by 2012, isn't he basically saying that -- I mean, that's going to happen anyway as a result of current law. That's not correct?

SEC. GEITHNER: Well, Senator, this is very important to point out. That blue line --

SEN. CRAPO: Yes.

SEC. GEITHNER: -- for that to happen, you would have to have no extension of the AMT, you would have to have taxes on 95 percent of Americans would rise substantially, there would have to be, I think, no foreign wars. It would be peace and prosperity across the world tomorrow. And so it's not actually anything like a realistic expectation about what is a sensible economic path for the country.

SEN. CRAPO: I understand that. And leaving out the potential for another war, I am one of those who, I'm sure you know, doesn't believe we should let the tax cuts expire and that we should maintain our current tax policy. And my understanding is that if we did maintain tax policy and didn't have tax increases on the American public, is that that line would be somewhere between these two lines.

But my point still is, shouldn't we -- and again, I'm not trying to make a comparison between the two lines. Others can make that point.

I think it's maybe a valid point to argue about. But my point is this.

As we talk about trying to reduce the deficit, admitting that we need to do something on tax policy, and we may disagree on that -- we do agree on the AMT -- shouldn't we try to do much more than simply allow our current trends to take us back to a much smaller deficit?

In other words, shouldn't we be much more aggressive on deficit reduction than simply allowing the trendlines to bring us back to a normal reduction, in about half of what we have?

SEC. GEITHNER: I want to just underscore this, that it is absolutely imperative that we lay out a path that brings us back to sustainability. And that requires more than just letting the temporary increases in spending, in the Recovery Act, expire.

It requires more action by the government and the Congress to do that. And the president's budget proposes a number of specific measures necessary, to bring that deficit down to 3 percent of GDP over time. It's not enough just to sit back and let those temporary things expire. You have to do more things.

But it's very important to recognize, the tax increases that are proposed, in this budget, again only come when the recovery's in place. And they only go into effect on a small fraction of the most affluent Americans, a very limited number of small businesses, and only restore those rates again to a level that prevailed, during a period where you had remarkably strong --

SEN. CRAPO: You just got to my second point that I wanted to make. And that is, you say that the tax increases will only happen when the economy has recovered. I understand that a lot of economists are saying we're going to be recovered by 2011.

Frankly I think there are economists who are saying that maybe our recovery will not be so strong by then. My question to you is, are these tax increases contingent on a recovery? Or are they going to happen regardless of what happens in 2011?

SEC. GEITHNER: Senator, I think, it's a very important question. I think that again we need to lay out an ambitious path, for bringing those deficits down, commit to achieving that with a mix of measures, on the resource side and the spending side, that do the best possible job of leaving our economy stronger. And that's what the president's budget tries to do.

Now, of course, we're going to have to watch how the economy evolves. And I want to underscore that one of the mistakes governments have made over time, in dealing with economic crises, is putting the brakes on too quickly or in ways that, you know, hurt growth just as it's starting to take hold.

SEN. CRAPO: So are you saying --

SEC. GEITHNER: We just want to be careful not to do that.

SEN. CRAPO: So are you saying that if we don't see the more rosy picture, in 2011, that we may not see the administration suggest that we --

SEC. GEITHNER: No. I'm just saying that recovery requires that we keep stimulus sustained until growth is in place. But we have to do it --

SEN. CRAPO: But what about the tax policy? Are you including tax policy in that?

SEC. GEITHNER: Well, again I would say generally of course, we've got to keep watching things, as they develop. But what we need to do together is lay out a path that brings those deficits down. And we have to agree on what the right mix of measures, on the resource side and the expenditure side, to do that.

Now, we're going to have slightly different priorities in that context. But I believe that this is the best package of policies, to leave our economy stronger in the future.

And I think, again, if you look at the record, just going back to the second half of the '90s, there's a pretty strong empirical -- very strong empirical case that that produced a level of private investment and productivity growth that is the envy of the world.

SEN. CRAPO: Well, I ran out of time. I only got to two points. So -- (inaudible) -- another round.

SEC. GEITHNER: I apologize, Senator.

SEN. CONRAD: I thank the senator. He gets a prize, as well.

Senator Sanders.

SEN. BERNIE SANDERS (D-VT): Thank you, Mr. Chairman.

Welcome, Mr. Secretary.

Mr. Secretary, as you well know, there is a huge sense of outrage in our country at what Wall Street has done through their greed, through their recklessness and perhaps their illegal behavior in plunging us into this deep recession and bringing us to the cusp of a depression, all of which has impacted tens and tens of millions of people, hurt so many people.

I want to express my view that I am concerned that the same people on Wall Street who were part of the problem are still in office. And they still have all of the power and all of the money that they used to. I am concerned there has not been a serious investigation explaining to the American people who caused this crisis. I have not seen the kind of prosecutions that I think should be done.

So I would hope from your -- from the Treasury Department, we will begin to give confidence to the American people -- you know, they talk about Wall Street wanting confidence from you. The question is, the American people have no confidence on Wall Street. So I would hope that we would see a more aggressive posture on the part of the Treasury Department in expressing the outrage that the American people feel about the greed on Wall Street.

Now, of the many issues that all of us hear about, one of them that I hear a whole lot about is that at a time when the taxpayers of this country are providing hundreds of billions of dollars to bail out Wall Street, Wall Street is saying, "Thank you. We are going to charge you 15, 20, 25, 30 percent interest rates on the credit cards that we are issuing to you." That's very nice of those guys. We're bailing them out. They're getting zero loan interest loans from the Fed and then they charge our people 25 or 30 percent interest.

I am introducing today legislation that would cap interest rates in this country at 15 percent, cosponsored by Secretary Durbin (sic). It emulates, actually, what the Federal Credit Union Act does for credit unions. Many people don't know this, but credit unions cannot charge more than 15 percent interest rates with certain exceptions -- then go up to 18 percent. Credit unions are not coming in here to be bailed out.

So my question is, do you think it is time in this country for legislation to cap interest rates -- to go back, maybe, to where the Bible took us that says that it is immoral for financial institutions to charge middle-class people 25, 30 percent. Would you support a cap on interest rates?

SEC. GEITHNER: Senator, I want to begin by saying I completely share your sense of basic outrage and angry -- and anger. I understand how powerful it is across the country. You're absolutely right that the judgments made by the leaders of our financial institutions have caused a catastrophic loss of basic confidence.

It's making everything worse. Everything we need to do to get recovery back on track, it's made it worse by those basic judgments. Could not feel more strongly about this issue. And that's why the things we do have to be directed at making sure that we're getting more credit to the American people, not less.

Now, on your -- excuse me -- I'd like to look at your proposal in detail, and give you a more thoughtful response. The basic test that we would have to apply to any proposal like that is, again, is it going to make it more likely that credit is available on reasonable terms, or less likely? That's the basic balance we have to strike. But I'll be happy to take a careful look at your --

SEN. SANDERS: Mr. Secretary, all I would say is it has -- this concept has been in existence under the National Credit Union Administration, and our credit unions are doing pretty well. They're lending out money to people who need it. They're not asking for bailouts of hundreds of billions of dollars. I think we should emulate what they are doing.

Second point, you have raised with AIG, all of us know, this absurd concept of "too big to fail." What I have said from the very beginning of this crisis is that if an institution is too big to fail, it is too big to exist.

What are we doing now to break down and break up these organizations, so that we're never again placed in a position to have to bail them out because of the systemic damage that would occur if they failed? Are we starting right now an investigation to say: Sorry, Bank of America, sorry, Citigroup, sorry AIGs of the world, we no longer can sustain institutions that are just so large, that could cause so much damage if they failed?

SEC. GEITHNER: Senator, you're absolutely right that we have to create a system that is less vulnerable to the kind of risks we see in this crisis. And part of that's going to require that we have much stronger oversight, with much greater constraints on institutions that pose some potential damage to the system. And a critical priority of the president, working with the Congress, will be to put in place legislation which will achieve that objective.

Now, right now, as you know, the government's assistance in AIG is conditioned on there being a very dramatic substantial restructuring of that entity. And where we have to, if we have to take additional actions to help stabilize the system, we will make sure that those actions come with conditions that achieve --

SEN. SANDERS: Okay, very briefly -- I mean, we don't have much time here. You know, I voted against the repeal of Glass-Steagall. I argued with Greenspan every time he came before the House Financial Institutions Committee. I don't believe in unregulated financial institutions, et cetera. But on this key issue of "too big to fail," I think we've got to go back to where Teddy Roosevelt was. Do you agree? And start saying, sorry, we're going to break 'em up.

SEC. GEITHNER: I completely agree that we don't want to put this country in the position in the future where we are vulnerable again, where the weakness in one institution causes the risk of great damage to the fabric of the American financial system. That basic objective has to underpin every we do -- everything we do in the reform agenda. And we have to get it right.

SEN. SANDERS: Okay. Thank you, Mr. Chairman.

SEN. CONRAD: I thank the Senator.

SEN. SANDERS: And I'm giving you back 17 seconds. Do I get some credit for that?

SEN. CONRAD: You are rising to a whole new position. (Laughter.)

Senator Graham.

SEN. LINDSEY GRAHAM (R-SC): Thank you, Mr. Chairman.

Do you support a biblically-based 10 percent flat tax? (Laughter.)

SEC. GEITHNER: (Laughs.) I -- I don't like to respond --

SEN. GRAHAM: If you don't have the answer --

SEC. GEITHNER: I do not. (Laughter.)

SEN. GRAHAM: Well, do you support a temporary suspension of the mark-to-market rule?

SEC. GEITHNER: Senator, that is the prerogative of the SEC. I want to say one basic thing --

SEN. GRAHAM: Okay.

SEC. GEITHNER: -- which is that we're in a period where investors do not have a lot of confidence in their capacity to judge the risks in --

SEN. GRAHAM: From your personal point of view, is it a good idea or a bad idea?

SEC. GEITHNER: My personal point of view is that we have to be very careful not to do things that would erode confidence --

SEN. GRAHAM: Okay.

SEC. GEITHNER: -- in the people's ability to assess the risks in exposure to a bank.

SEN. GRAHAM: Okay. Well, let's look at -- and you think that might do that?

SEC. GEITHNER: There are some versions of those proposals that would have that risk.

SEN. GRAHAM: Okay.

SEC. GEITHNER: And like many things, these are complicated, careful judgments. And -- but I know that my colleague Chairman Schapiro is looking carefully, as she should be, at all reasonable proposals.

SEN. GRAHAM: Okay. Let's look at some assumptions that are being made in this budget process and about the economy in general. Under President Obama's budget, there assumes -- he assumes a 3.2 percent GDP growth in 2010. Do you think that's accurate?

SEC. GEITHNER: I think that's a reasonable judgment, based on the evidence available when the budget was put together.

SEN. GRAHAM: Do you think it's a reasonable judgment now?

SEC. GEITHNER: I do think it's a reasonable judgment. But as you know, that's the kind of judgment we have to assess carefully. There's an established rhythm --

SEN. GRAHAM: Would you like to change that judgment?

SEC. GEITHNER: Not today I would not.

SEN. GRAHAM: Okay. The assumption also was made that unemployment would peak at 8.1 percent in 2009. Do you stand by that assumption?

SEC. GEITHNER: Senator, I'll just say it again. I mean, I know what you're asking, and --

SEN. GRAHAM: It's a simple question. (Chuckles.)

SEC. GEITHNER: (Chuckles.) Again, I've said that that forecast, done with the independence and integrity that always underpins --

SEN. GRAHAM: Right. Given what you know today, do you think that's a reasonable assumption to make?

SEC. GEITHNER: Senator, I still believe if you look at the consensus for private forecasts, they project recovery starting to take hold the latter part of this year into next year --

SEN. GRAHAM: Well, let's try this again. Do you believe that the assumption that unemployment will peak in this nation at 8.1 percent in 2009 is still reasonable?

SEC. GEITHNER: Senator, I'll -- I'm going to say it exactly the same (this time ?)

SEN. GRAHAM: Fair enough. We'll move on.

SEC. GEITHNER: (Chuckles.) Okay.

SEN. GRAHAM: Do you believe that if we put limitations on charitable giving where the maximum deduction would be 28 percent, versus what it would be today, 35 percent -- the independent tax policy council has estimated that $9 billion would be lost in terms of charitable giving. Do you agree with their assumption or not?

SEC. GEITHNER: You know, I'll have to look more carefully at it, but as we've said before -- and I think this is true in independent estimates -- those proposals, again, which would only take place if we agree on comprehensive health care reform --

SEN. GRAHAM: Okay --

SEC. GEITHNER: -- in years out there, it would affect a very small fraction of the American --

SEN. GRAHAM: It's just the concept I'm trying to drive at, that if we begin to limit the charitable deduction write-off, does it have an adverse impact on charities?

SEC. GEITHNER: You know, Senator, it depends, as you know, on what else is happening. And the most important thing you can do to affect charitable giving is to get this economy back on track and a stronger basis for giving --

SEN. GRAHAM: I think the most important thing you can do is to reward it when it's done.

Now --

SEC. GEITHNER: But --

SEN. GRAHAM: That's just my assumption.

Let's move on now to the stress test. And number one, thank you for taking the job. I know it's tough. And you're doing a lot of things.

And I agree with Chairman Gregg that this is not easy and you don't have your team in place. And if you're looking for a way to serve the country, join the Marines or go to Treasury. (Laughter.) I think they're both very difficult --

SEC. GEITHNER: I'm very glad you said that and I completely agree.

SEN. GRAHAM: -- very, very difficult assignments. But --

SEC. GEITHNER: No more important, no more noble opportunity.

SEN. GRAHAM: The few, the proud, the brave, the Treasury people. Yeah. (Laughter.)

But where was I at? Oh, okay.

SEC. GEITHNER: Just don't want to say "the few."

SEN. GRAHAM: Yeah, yeah. That's right.

SEC. GEITHNER: Want to say "the many" and the proud and the brave.

SEN. GRAHAM: That's right.

The bottom line about the stress test is that we're going to put some of these banks under stress and see if they're adequately capitalized. That's the goal, right?

SEC. GEITHNER: Yeah. I'm not sure the word "stress" is the best used in this context. Again --

SEN. GRAHAM: Well, that's what y'all call it.

SEC. GEITHNER: Well, that's the sort of standard term. Remember, every institution --

SEN. GRAHAM: Well, whatever you're doing, you're trying to find out if in some reasonable scenarios, banks are adequately capitalized. To me, that's a good thing. You're doing that, right?

SEC. GEITHNER: That's the objective, yes.

SEN. GRAHAM: You're testing these banks.

SEC. GEITHNER: Yes.

SEN. GRAHAM: To determine adequate capitalization, is it the Tier 1 regulatory standard you'll be using?

SEC. GEITHNER: We're leaving the regulatory standards in place. But, you know, as you know, what matters is not just the amount of capital you have, but the quality of that capital.

SEN. GRAHAM: Sure. That's the risk. But what will you be using to judge adequate capitalization?

SEC. GEITHNER: We're going to look at the existing regulatory requirements, both in terms of the overall amount and the quality of capital, meaning how much of -- how much equity --

SEN. GRAHAM: Will it be the Tier 1 system?

SEC. GEITHNER: Yeah. The existing framework will remain in place.

SEN. GRAHAM: Okay.

SEC. GEITHNER: What matters is to look forward --

SEN. GRAHAM: Sure.

SEC. GEITHNER: -- at what might happen in a more adverse recession.

SEN. GRAHAM: Okay. If a -- if the government owns 36 percent of common stock of a company calls -- a bank called Citibank and virtually makes every decision or has every decision of that bank run by the government, what would you call that?

SEC. GEITHNER: Senator, that's not the case today, although under the proposal that they presented to their private investors and the Treasury, that would happen. But I want to underscore this --

SEN. GRAHAM: Is that free market?

SEC. GEITHNER: I would say that we're going to do what is necessary in the interest of the American financial system to make sure there's -- (inaudible) -- for recovery.

SEN. GRAHAM: Okay. I've got 18 seconds left. Are you assuming that TARP III would pass this Congress to put new capital into banks?

SEC. GEITHNER: You know, my operating assumption, Senator, is that there is widespread recognition across the country that getting the financial system back to the point where it recovers and provides credit is critical --

SEN. GRAHAM: Do you think TARP III will pass this Congress if you made a request?

SEC. GEITHNER: Our hope is that the Congress will come together and do what's necessary to make sure the financial system is strong enough.

SEN. CONRAD: Senator Murray. Thank you, Senator.

Senator Murray.

SEN. PATTY MURRAY (D-WA): Thank you, Mr. Chairman. And happy birthday to you. I can't think of anybody else who'd rather spend their birthday chairing a budget hearing. (Laughter.)

Welcome, Mr. Secretary. I have a couple of questions relating to Bank of America and Merrill Lynch. Both of those have -- firms have received TARP money. Correct?

SEC. GEITHNER: Yes.

SEN. MURRAY: And do you know how much it is?

SEC. GEITHNER: Senator, I'd be happy to get back to you with the specific numbers, but it's a lot of money.

SEN. MURRAY: In the hundreds of billions.

SEC. GEITHNER: No.

SEN. MURRAY: More than 150 billion (dollars).

SEC. GEITHNER: For Bank of America and --

SEN. MURRAY: And Merrill Lynch.

SEC. GEITHNER: No.

SEN. MURRAY: Including guarantees -- debt guarantees?

SEC. GEITHNER: But the right -- I mean, again, people have different assessments. What we want to look at is the risk and exposure to the government in that context. And I don't think that's quite the right -- we'd be happy to provide a detailed assessment of those.

SEN. MURRAY: Okay. If you could -- but it is a substantial amount of --

SEC. GEITHNER: It's a very substantial amount of money.

SEN. MURRAY: And that was necessary because we needed to make sure we were stabilizing the industry. I understand that.

SEC. GEITHNER: That's right.

SEN. MURRAY: Okay. And Bank of America recently formalized the acquisition of Merrill Lynch in January. Correct?

SEC. GEITHNER: That's correct.

Now, Senator, can I just -- I just want to say one thing. I'm the secretary of the Treasury.

SEN. MURRAY: Yeah.

SEC. GEITHNER: I'm not, and nor would my predecessors have been, in the position of responding to detailed questions about individual institutions, given the basic constraints in which we all operate. But I'd be happy to be responsive as I could, but I want to just give you that one cautionary --

SEN. MURRAY: I appreciate it. Where I'm going with this is, they have received a large amount of money from the federal government at this point.

SEC. GEITHNER: A very substantial amount.

SEN. MURRAY: Correct. And have they been profitable since they received that money?

SEC. GEITHNER: Again, that's not a judgment I can make or share with you today, although I think you'll see in the public domain, in the context of then normal reporting period, a full answer to that question, like you will for institutions across the country.

SEN. MURRAY: Well, okay. Let me just ask you, do you think it's appropriate, given the financial condition of these firms -- and I assume that there are losses -- that bonuses were paid to their executives?

SEC. GEITHNER: Senator, I find it deeply offensive what happened, the compensation practices across this country and the role that played in contributing to this crisis. And I think it's made it much worse that even as the crisis intensified and the government was forced to do extraordinary things, that you saw some institutions make really terrible judgments about how to reward their executives, even as their institutions were facing extraordinary losses.

And as you know, the president proposed some very far-reaching, substantial reforms and some conditions which (would/should ?) come with assistance. In the stimulus bill, additional set of restrictions were -- conditions were passed. And we're in the process, have the obligation now to try to translate those requirements and proposals into detailed guidelines, and we're working on it.

SEN. MURRAY: Okay. I appreciate that, because my constituents are hurting. Families and businesses are really struggling. And they do not understand at all the fact that some of these companies are having lavish weekends and paying out bonuses and all of that.

So we know they're going to need additional capital. And I heard what you just said, that we're going to make sure that that's accountable. And we don't see this. But money's fungible. So how are we going to assure that taxpayer dollars are used not for lavish weekends or bonuses or these things that seem so out of line to ordinary citizens who are trying to pay their bills?

SEC. GEITHNER: Assistance comes with conditions. It's not a right, it's a privilege. Those conditions will require that banks use the resources we provide them to increase the amount of lending that would otherwise have been possible; that they report on what's happening in lending in a way that's transparent, accessible to the American people. That our assistance comes with appropriately tough conditions on compensation to senior executives. It's going to, you know, incent what we need to happen and make sure that taxpayer dollars are not going to benefit those senior executives in ways that don't make sense.

SEN. MURRAY: Okay.

SEC. GEITHNER: Those are our basic objectives. And I completely share your concern about it, understand how strong these opinions are across the country.

SEN. MURRAY: Okay. I appreciate that, and I think it's really important that we continue to send that message and hold them accountable.

Let me quickly flip to another question. And that's the impact of declining trade and exports. The Department of Commerce issued a revised GDP number for the fourth quarter of last year that showed that overall economic contraction was a lot more severe than originally projected. I've seen the minutes from the Federal Open Market Committee, their January meeting. It showed a consensus view among the participants that the declining global consumption abroad was the key contributing factor to declining exports and GDP.

Can you tell us, with this interdependent global economy, what the impact is -- this -- I mean, what we need other countries to be doing, not just ourselves, and how we're going to achieve that?

SEC. GEITHNER: Thank you very much for raising that. Very important to understand that our fortunes are closely tied, much more so than at any other time in our history with those of the rest of the world. And it's very important that all the major economies are moving together to strengthen demand, lay the foundation for recovery; that they're moving aggressively to fix their financial systems. And we need to make sure that the international financial institutions that provide great leverage on American assistance are using those resources to help those emerging market economies that are critical markets for U.S. exports get back on track more quickly.

And we are going to work very aggressively. The president's going to take a very active leadership role with the G-20 to try to make sure that we're all making a sustained commitment to recovery and we're providing assistance to make sure that those critical markets have a stronger foundation.

SEN. MURRAY: I think that's so important. We have to understand that this is having a huge impact. So I'm --

SEC. GEITHNER: You're absolutely right.

SEN. MURRAY: And I'm extremely concerned about some of our countries in Central and Eastern European who are seeing increasing financial instability. Can you talk a little bit about that region of the world and the impact on us? Is --

SEC. GEITHNER: You're absolutely right that they're facing a set of challenges far more acute; that's true in many other parts of the world. And it's just a symptom of how complicated and severe this crisis is. You know, a lot of people understand what happened in the United States. And it did start earlier in the United States. But many of the challenges in financial systems and the economies are much greater outside the United States. And it's going to require a lot of cooperative efforts to help them get through that process.

SEN. MURRAY: Particularly since our U.S. banks have invested in many of those countries. So longer conversation, but I hope that we can address that in the future.

Thank you, Mr. Chairman.

SEN. CONRAD: Senator Alexander.

SEN. LAMAR ALEXANDER (R-TN): Thank you, Mr. Chairman.

Mr. Secretary, thank you for being here, for your good humor and your resilience in all of -- all of this.

I'd like to shift gears a little bit, in terms of a conversation with you which I hope provides a constructive suggestion. I wonder if you're familiar with a book that Professor Ernest May at the Kennedy School at Harvard wrote called "Thinking in Time: The Uses of History for Decision-Makers."

SEC. GEITHNER: I'm not familiar with that book, but it sounds like I should be.

SEN. ALEXANDER: Well, it's an interesting book. It tries to compare as you face decisions to make, see if there are analogous decisions in the past that would illuminate anything. For example, if you're dealing with the Cuban Missile Crisis, is it analogous to look at Hitler coming into the Rhineland or is it not?

And I wanted to suggest a couple of examples in our history and ask you whether they suggest anything to us about how we might deal with what you've talked about today, which is fixing the banks and getting credit flowing again is our major challenge.

One is the bank holiday that FDR had in -- when he was elected to office. In March of 1933, two days after taking office, he declared a bank holiday.

It lasted four days. He closed the banks. He let certain ones open. He -- there was a big -- a bigger crisis there with banks -- there were 5,000 banks went out of business. There were different rules at the time. He had a fireside chat.

By the beginning of April Americans were confidently returning a billion dollars to the banking system. According to this report, the bank crisis was over. That would be one example.

What I think might be a little more analogous is President Eisenhower in October of 1952 and his view on Korea. And I'm going to read just a paragraph from his speech, because it sounds like today a little bit to me. He says, "The first task of a new administration will be to review and to reexamine every course of action open to us with one goal in view: to bring" -- in this case -- "the Korean War to an early and honorable end. The reason for this is simple. The old administration cannot be expected to repair what it failed to prevent." Sounds familiar to me.

"Where will the new administration begin? It will begin with its president taking a simple, firm resolution. The resolution will be: to forego the diversions of politics and to concentrate on the job of ending the Korean War until that job is honorably done. I shall make that trip. I shall go to Korea." One of the most memorable lines in American history.

Now here's my suggestion. I believe that the American people -- I know that I am -- are persuaded that our new president is impressive, intelligent, and having watched his campaign and watched his first few days in office, I'm absolutely convinced he can do many things at once and do many things well.

I'm also convinced he doesn't need to scare the American people anymore -- they're scared enough in Tennessee about what's going on -- and that he doesn't need to explain the problem with banking and credit anymore. Most people understand the problem.

I wonder whether President Obama needs to borrow a lesson from President Eisenhower in '52 and simply say, as you announce your new plan for banking and credit next week, "I will fix the banks, and I will get credit flowing again, and I will make everything else second and subordinate until that job is honorably done. I will put the health summit aside, the fiscal responsibility summit aside, the education challenge, the energy challenge." All those other challenges are important, but in an Eisenhower sort of way, should he not say, "I will fix the banks, I will get the credit flowing again, and I will concentrate on that job until it is honorably done"? Otherwise, how will he regain the confidence of the American people for that one solution?

SEC. GEITHNER: Senator, very important to say at the beginning -- and the president has said this and he'll keep saying it -- is that our central obligation to the American people is to do what is necessary to get this economy on track, back on track, and to keep at it until we achieve that. And a necessary condition for that is to fix this financial system and get credit flowing again, and we will do what is necessary to achieve that outcome.

Now, you can't do it just by focusing on the financial system. You have to make sure the government is providing very, very substantial support for demand. That's a necessary way of doing it. And there will be other things, like you're seeing us do in housing, that are part of that solution.

Now, you're absolutely right, that is the central, most critical priority for our country. And the important message that he has said -- and we're committed to do it -- is that we will keep at it until we fix it. But we have a lot of challenges as a country. And just like it's so important, as many of your colleagues have said, that as we try to get recovery back on track, we're making it clear we're going to get us back to fiscal sustainability, we need to give American people the confidence that we're going to start to fix -- start today to fix these long-term problems that have been -- have been neglected, frankly, and are going to be really important to making sure our economy can grow again, too.

SEN. ALEXANDER: Well, I have -- I have just a few seconds left. And I respect what you're saying. And I -- I'm not unimpressed with our president, or with you and your abilities. I'm simply saying, from my vantage point, and looking at the example of FDR and the banking crisis in 1933 -- I mean, he had that fixed in three weeks. And he didn't do the TVA and the CCC and the WPA and the PWA and all the other things until after he had the banking part of that crisis fixed. The Depression went on for a while but -- and Eisenhower focused on one job, "I shall go to Korea," and he went to Korea on November 29th of 1952, within a few days of his being elected.

I guess what I'm saying is a part of the president's job is to see the strategy and let the country know about it. But he needs to persuade at least half the people he's right about it. And if you do have a plan, you haven't persuaded us yet. And until you persuade us, confidence won't come back.

SEC. GEITHNER: Yes, Senator, maybe I could just end by making one very important point.

You're absolutely right: If you look at the lessons of history and the lessons of financial crises, the most important thing is how quickly it is to move together quickly, comprehensively, and not to wait, and not to be too tentative.

And that basic lesson, which is in the American experience, it's the experience of Japan, many, many other countries, shapes everything we do. And you're right to invoke history in that context. And completely share that basic imperative.

SEN. ALEXANDER: Thank you, Mr. Secretary.

Thank you, Mr. Chairman.

SEN. CONRAD: Thank you, Senator.

Senator Whitehouse?

SEN. SHELDON WHITEHOUSE (D-RI): Thank you, Mr. Chairman.

And thank you, Mr. Secretary. I know it's been a long morning, and I appreciate that you're here and have worked so hard to help solve these problems.

The first thing I want to compliment you on is the directional changes in this budget. We spend an awful lot of time fighting around here about budget issues that are the equivalent of who gets to use the lighter first in the car and what belongs in the glovebox.

And you focused on where are we going and what have we got in front of us -- particularly with our energy policies, which have been self-defeating and largely dictated by big oil companies. Now we have the prospect of a new energy policy that serves the American people.

Education: equally self-defeating policies that have led us to decline in our status in international competition, which is really shameful for a country like ours that has the best educational institutions in the world.

And most particularly health care, which, as a former comptroller general has said, threatens to swamp the ship of state.

We have to address these things. And for the first time at least in my time here, this budget responsibly tries to do that. That, I think, is the key over-arching point that we should all think of.

Some of the fine aspects of it I also compliment you on. The outrageous tax loophole that allowed hedge fund barons to pay a lower tax rate than the guy loading the luggage into their private jets would pay was just frankly a disgrace to the country, and this cleans that up. And I appreciate it.

A couple of specific questions, though. You talked about your outrage about the compensation practices that preexisted this crisis and in a very -- an exercise in very bad taste and bad judgment actually continued into the crisis.

As you know, I have a concern about mummified compensation practices that took place during the gold dust era, when people were laying it on thick, and I think it was even pretty disgraceful then. But they got locked in because people created tax dodges and did deferred compensation, or they got special, you know -- like the old James Bond movie, it's where the bad guy gets to get away and everybody else in the boat goes into the hold, and he's got his escape pod. They have their escape pod, health care packages, retirement packages that were different than their employees'.

A lot of that stuff is now embedded. And under our legal system, which I fully support, it requires a hearing of some kind before you can even address that question. Because these institutions can't go into bankruptcy because of the systemic problem, that eliminates the only present way to get that hearing to do anything about the mummified costs.

And, you know, the mummy's going to walk at some point, and it's going to be really embarrassing, I think, to have $40 billion, as the Wall Street Journal reported, of taxpayer money go to pay deferred executive compensation that's been mummified on the books of these companies when people are suffering as badly as they are. I would urge you to take a look at working on a way to try to solve that problem. I think it will emerge as a serious one. And I have a proposal, as you know. Now may not be the moment for it, but I really do think that this is a problem that has to emerge.

The second thing I'd like to direct your attention to, we had a real nightmare in Rhode Island, a banking crisis about 15 years ago. It was a small, but very intense, situation. People were very, very angry. One of the things that helped a great deal was an investigative commission that governor Sundlun then put together to take a look at what had gone wrong, to bring people before the public.

One of the members is now a district judge, United States district judge. Others have gone on to -- it was a very distinguished group of people that did a very credible job, and it really helped people understand what was going on.

There is no present mechanism for anybody to understand what took place. And particularly with so much of the monies going back to the people who seem to cause it, I think it's important that we work on a strategy to really draw out and explain to the American public what went wrong and why this won't be repeated.

I know that as you're going through the fixes, that's an incidental and an important incidental.

But I think somewhere it should be somebody's first order of business to bring people in, take some testimony and sort that out.

Those are just two points I leave with you. The question is this. Back to what Senator Sanders was asking, about credit card rates, many years ago, the Supreme Court decided the Marquette decision, which was a technical decision about who had jurisdiction with a -- when you had a bank in one state and a consumer in the other. And the Supreme Court resolved it in favor of the bank's state.

Well, then economic development folks came along. And they figured out, wait a minute, if we can trash our banking laws, then we can attract banks who then are operating without any real restriction on them. And that's been the status quo since then.

It doesn't seem to have been a very deliberate policy choice. Is that status quo presently important to our economic recovery, in any respect?

SEC. GEITHNER: Senator, I want to -- I believe, I think, it's responsive to your question. But let me say it this way.

One of the problems, in our financial system, is that we let many financial institutions choose their regulator.

SEN. WHITEHOUSE: Yes.

SEC. GEITHNER: We let people structure a product, to take advantage of the optimal mix of tax, accounting and regulatory capital treatment. We've provided huge opportunities for arbitrage. And that lowered the overall quality of regulation, undermining the basic public policy objectives regulations are designed to address.

And one of the most important things we need to do, as we reform our system, is to address an end and change the basic judgment that that kind of competition produces acceptable outcomes for public policy. So I agree with your concern. And we share an obligation with you to fix that, as we reform the system. And I just want to underscore what you said.

I think you're right that, you know, sort of a test of credibility is the ability to look back honestly, independent judgment, about what exactly caused this crisis. And that will provide the necessary foundation, for us figuring out how to fix it going forward.

And the process that the Banking Committees and other committees are working through, in the Senate and the House, will begin the process of bringing in a whole range of outside experts that contribute testimony and analysis to that assessment. But it is a critically important thing to do. And a test of the credibility of any country. And we're generally good at that, at doing that, as a country.

SEN. CONRAD: Thank you, Senator.

Senator Merkley.

SENATOR JEFF MERKLEY (D-OR): Thank you very much, Mr. Chair. And I certainly applaud the administration on putting forward a budget that seeks to address the incredible mess created, over the last eight years, and to reposition American in terms of energy and education and health care, to be much more successful down the road.

I wanted to ask a couple questions as we go about that task. And one is, and I'm referring to an article. David Smick wrote an op-ed a couple days ago, in The Washington Post.

And he noted, one of the challenges we face, and it certainly would seem relevant to the public-private partnership goal, of removing toxic assets from the banking system, is that the five -- that the assets are worth, if you will, in a market sense, 5 to 30 cents, but that to make the banks stable and successful, one would need to pay 50 to 60 cents.

That's quite a gap. And how does one attract a private partnership into that kind of scenario, where they might need to pay far more than the assets are worth?

And how does one go about tackling that? Now, I recognize this is an inherent dilemma we're trying to -- you're working night and day to figure out.

SEC. GEITHNER: Well, and you're right about the problem. And the challenge is to try to make sure that with government financing -- which financing is not available in these markets now -- to provide a market clearing mechanism for these assets. And our judgment is that, again, we can provide some government capital and some government financing, but you cannot provide something that does not exist, which is a way for this to start to get clearing.

Now, again, what's sort of burdening the system now is the fact that there is really no financing available, no market for these assets, and therefore no real ability for banks that need to get rid of these things to do so in a way that's sort of sensible and effective. But then this plan will address that.

I wouldn't agree, though, with the precise examples you used, in terms about what the price is of this and what's necessary to achieve this. But we need to do it to get those market prices up again, by making financing available, in order to make sure banks have a greater incentive to get rid of those assets.

SEN. MERKLEY: If I understand your point, to some degree, the lower market valuation now is the result of the lack of demand, which is driven by the lack of credit to drive -- you know, clear the market. Is that what you're --

SEC. GEITHNER: You can take the mortgage example as a simple example. If you had to sell your house tomorrow -- not in three years, not after your kids go to college, but tomorrow -- and nobody could get a mortgage, the price you would get would be -- would bear no realistic resemblance to what you might get under normal conditions. And that's a simple explanation of what you're seeing across markets. And so providing the financing was a necessary, not fully sufficient, condition to do that.

You know, the things that are driving uncertainty about these valuations is partly just concern about how deep the recession is, and uncertainty about what the losses might be in that context. But a big part of this is the absence of financing.

SEN. MERKLEY: A second issue that has been raised is whether the bondholders -- the bank bondholders, if you will -- should participate in the pain, if you will; and on the positive side, that that participation is appropriate, given the risk associated with their investment and the current status of the banks. And the opposite side, as I understand it, is that if the bondholders take a haircut, that it might decrease investment in other commercial corporate bonds, damaging our effort to restore liquidity. How do you see that -- that balance in how we approach this?

SEC. GEITHNER: It's not a close call, Senator. It is necessary, to protect the financial system and get recovery back on track, for the markets to understand that we will do what's necessary to make sure that these major institutions can meet their commitments; and that everything we're doing, in terms of making capital available as necessary, providing support in terms of liquidity, funding and guarantees, is to underscore that commitment to make sure these institutions can meet their commitments.

That's necessary for them to be in a position to help provide the credit necessary for recovery, and that objective has to guide everything we do.

SEN. MERKLEY: I appreciate your analysis. It is a little difficult to explain this in talking to taxpayers about why their investment shouldn't necessarily -- to rescue the banks shouldn't necessarily have -- be in the front of the line, if you will, before the bondholders.

SEC. GEITHNER: But -- that's right. But you know, our basic obligation, again, is to help protect the overall economy, overall financial system at least cost to the taxpayer. And I'm very confident that that commitment I just described that the president said in public and we've all said publicly is THE most effective, least-cost way to the taxpayer for us to get out of this.

SEN. MERKLEY: To restore -- to sustain and improve liquidity --

SEC. GEITHNER: Exactly --

SEN. MERKLEY: -- we're supporting our economies everywhere?

SEC. GEITHNER: The president said it best. Economies recover a well-functioning financial system. Credit is the lifeblood of any economy.

SEN. MERKLEY: Yes.

SEC. GEITHNER: There is no path to recovery that doesn't start with a better foundation for the provision of credit.

SEN. MERKLEY: One of the things that is very frustrating to me, as, I think, many of the -- the circumstances we're in right now could be avoided, had we had reasonable rules of the road at both the retail mortgage market and in terms of Wall Street supervision. And at the retail level, something that was troubling is that folks going to their real estate brokers had a lot of protection against conflicts of interest, but when they went to their mortgage broker, their mortgage was -- their mortgage broker was often paid significant sums if they could steer their client, if you will, and our homeowner into a more expensive loan. Is it time to end and outlaw steering payments?

SEC. GEITHNER: You're absolutely right that, you know, this crisis in part was caused by basic failures of consumer protection, and for some of the reasons we just discussed, we allowed people in this country to evade basic protections. And it is very important that we put in place a stronger set of basic rules of the road, applied more evenly, enforced more carefully, so that this thing doesn't happen again.

I completely agree with you. Of course, you want to do that in a way that's sort of careful and going to be effective, but the basic principle's right.

SEN. MERKLEY: When you say you completely agree with me, does that include the detail that we should end steering payments? I like the word "completely," by --

SEC. GEITHNER: I would -- I meant to say that I completely agree with the broad objectives. I will look at that carefully. I do believe that the -- there are -- I have to go back and look, but the Federal Reserve, in cooperation with the other supervisors, put out some very important provisions in terms of new regulations in the fourth quarter of last year that go some distance to addressing that problem.

If they don't go far enough, we'll take a careful look at how to fix that.

SEN. MERKLEY: Thank you. I'd love to work with your team in terms of that rule of the road -- and I see I'm over time now -- and other -- some other pieces of that consumer rule of the road.

Thank you very much for your testimony.

SEN. CONRAD: Senator Wyden?

SEN. RON WYDEN (D-OR): Thank you, Mr. Chairman.

And Secretary Geithner, it's good to have you here. And I know you've been logging some serious hours, and I think that was what Senator Graham was talking about, and he's got my -- he's got my sentiments exactly.

Let me get into something that I think is positive news first. Yesterday I got into the question of the "make work pay" credit helping low-income people pay for the higher cost of fuel that results under a cap-and-trade approach, and I wasn't completely satisfied by the answers. But after the meeting I got some encouraging news, and I want to kind of review it with you.

This involves, essentially, what's going to happen to the very poor who, in effect, don't file a tax form, and what kind of relief would be available to them. Now, my understanding based on some discussions last night is that the administration would be open to modifying the president's "make work pay" tax credit and would be willing to consider adding a low-income component that could provide some additional help through state human services agencies to address these kinds of concerns. I found those kinds of reports encouraging last night. Want to give you a chance to convey some good news. Are you open to that kind of idea?

SEC. GEITHNER: Certainly open. I wasn't part of those conversations, but I'll catch up to where you are and confirm your understanding.

SEN. WYDEN: That'd be very helpful. I would especially appreciate your listening to the good folks at the Center for Budget and Policy Priorities. They have got some very sensible ideas that I think are consistent with the administration's approach in terms of the "make work pay" credit.

It's your desire to compensate people for the higher fuel cost. I'm with you on that. But I think Bob Greenstein and the people at the Center for Budget and Policy Priorities have some very good ideas to complement what you're doing (that ?) will resolve the matter that became controversial yesterday and that'll be very constructive.

Let me ask you now a couple of questions with respect to AIG. In your view, does the government have adequate legal authority to prevent future AIGs?

SEC. GEITHNER: No.

SEN. WYDEN: Give that, what steps are needed so that the government doesn't face yet another all-time-record bailout, in an area that to me is especially incomprehensible? When I think about the insurance function, I think about people selling insurance in my home state. It's all about managing risk, and they're stable operations. They're not investment houses, and nothing resembling what happened with AIG.

So you've said the government doesn't have adequate legal authority to prevent future AIGs. In your view, what is needed specifically to prevent a future debacle like this?

SEC. GEITHNER: Many things. You have to start by making sure that institutions that pose potential risk to the system in the context of a shock like this have a strong oversight over them, with sufficiently conservative constraints on risk taking so that they can withstand very severe stress. AIG was allowed to build up without any effective supervision, to choose their supervisor, to attach a very risky business to a set of underlying very profitable, healthy insurance companies, and that put us in the position where we should never have been as a country.

Now -- so you have to have a much stronger form of regulation over those institutions going forward, and you need to make sure that in the event, despite that, they get themselves in the position where they're vulnerable, that we have the capacity to deal with those situations in a way that has a more effective balance for the taxpayers as a whole.

So as Chairman Bernanke said -- was that two days ago, three days ago -- I've said publicly this many times in the past -- we need a more effective resolution regime as well to deal with situations like this that cause -- could cause potential risk to the stability of the system. Those two things are necessary (to challenge ?) in getting it right, and we're going to work very closely with the Congress on making sure there's adequate tools in place both to prevent it and to manage it more -- more effectively --

SEN. WYDEN: Will you propose a legislative and regulatory remedy to prevent future AIGs?

SEC. GEITHNER: Yes.

SEN. WYDEN: And if so, when?

SEC. GEITHNER: We are beginning a process -- we've begun a process of consultation with the relevant committees. I'm testifying in the House on the 26th of March. Before that, we plan to lay out a set of relatively detailed, concrete proposals to address just this issue.

SEN. WYDEN: One question that's immediate, and I started getting into this with Chairman Bernanke. For the life of me, I cannot understand why the American people should not know who the counterparties are that have gotten these billions and billions of dollars through AIG.

It's been pointed out in several places that it sure looks like some of this money is going outside the United States and the taxpayers are seeing billions sucked out this way. And for the life of me, I can't understand why the American people don't have a right to know who the counterparties are.

SEC. GEITHNER: I know -- I understand that view and I know that my colleague Chairman Bernanke and his colleagues are looking at how to be responsive to that concern. I know they're on it. They're looking at it. There's a delicate set of legal provisions around confidentiality which we have to figure out how to manage through, but I understand your concern. He's working on it.

SEN. WYDEN: All right. I'm going to be following up with you on that, because to keep the public in the dark on these counterparties does not pass the smell test, Mr. Secretary. And I'm going to follow up with you and again appreciate the enormous time commitment that you've given. And we need it now. Thank you.

Thank you, Mr. Chairman.

SEC. GEITHNER: Senator, could I -- Mr. Chairman, could I just say one last thing on this?

SEN. CONRAD: (Off mike.)

SEC. GEITHNER: It's very important to clarify this. You know, when the government has to act to preserve the stability of the system, we're not doing it for and did not in this context do it for those individual counterparties or because of concern about the direct effects on those counterparties if you were to see a disorderly unwinding of a firm that complicated and systemic. We're doing it because of the much harder to measure indirect effects on confidence and the confidence of all Americans, investors around the world in the basic stability of institutions, in the types of insurance savings protections they bought. And it is those effects that are much more important in making the judgment about the stability of the system.

But I understand your concern and I know that my colleagues are working on how to make sure there's a level of transparency responsive to the public concern.

SEN. WYDEN: If the chairman could just give me two seconds on that point -- I think that's a legitimate argument, but to keep people completely in the dark as to who's being rescued and why, in my view, Mr. Secretary, is going to undermine the credibility that you're going to need in order to make additional reforms in the financial sector. So we're going to keep working with you on it.

Thank you, Mr. Chairman.

SEC. GEITHNER: I feel strongly, as you do.

SEN. CONRAD: Let me -- a commitment we made to the secretary's people is we'd get him out of there at 12:15. And we're close to that.

I have one question that I'd like to ask. You've talked in the out years of the budget achieving deficits of 3 percent of GDP. It's about that range and it's necessary to stabilize the debt.

What would your recommendation be to us if the Congressional Budget Office comes back and say to us, the deficits aren't 3 percent of GDP in the out years but more like 4 percent of GDP?

SEC. GEITHNER: Of course, that would concern all of us. But you have to look at the source of the difference in estimates, and -- before you figured out how we try to narrow that gap. It depends a little bit on the source of the differences, and we'd have to work through whether those differences are bridgeable. But I think that, you know, what matters is the policies we commit to together with the Congress credibly achieve sustainability, and sustainability has to be defined in that envelope around 3 (percent).

SEN. CONRAD: I did say to you my expectation is CBO is going to come back and we will know in the days ahead what their prediction is. But my own view is it will probably be in that 4 percent of GDP as they do their own rescoring of all of this. And so I think we have to be prepared for that.

Senator Gregg had a final question.

SEN. GREGG: I have a series of quick questions. When you set up this effort, which is the public-private partnership to get toxic assets off the banks' books, I presume what you're saying is that the government will come in and essentially guarantee that the private sector will not lose on these assets and that the up side the government will benefit from in some way.

And my question is twofold. How big a number do you expect to take off the books? And how do you plan to value that -- those assets when you take them off the books and guarantee them?

SEC. GEITHNER: We've said that we think that we -- to be effective in this context, we need to be committed to do something in the range of financing available on the order of up to a trillion. We have to reexamine that over time. You'll see us explain the details of that --

SEN. GREGG: Is that to be done by guarantees?

SEC. GEITHNER: No, that would be the amount of financial --

SEN. GREGG: Or insurance?

SEC. GEITHNER: That's the amount of financing that we have to mobilize in this context.

Now, on the valuation -- on the valuation thing, and this is very important -- the virtue of this mechanism is that we're going to use a market-based mechanism to determine value of the assets. And that's important because we don't want to put the government in a position where we're setting a(n) artificially high price that will leave us with more risk than we think the taxpayer will bear.

And so the virtue in this - again, just to step back, if you only act after institutions fail, if you only act after you're in a much deeper crisis, you don't have to worry about the valuation problem, because as you saw in the S&L crisis, at that point it's not a complicated question, because at that point the government just has to resolve the institution.

What we're trying to do is much harder. It's to act much more preemptively way before we get to that point, for institutions that we believe are going to be viable, open, and a necessary part of our system going forward. But to do that effectively, we have to solve this valuation problem. And we think this market-based mechanism is going to be the best way to solve that problem, at least cost to the taxpayer.

SEN. GREGG: Well, that's good. You've given us a number that you're working with, a trillion dollars. What's the risk to the taxpayer in that trillion dollars? Are we going to guarantee the trillion dollars that comes in?

SEC. GEITHNER: No, no, no --

SEN. GREGG: Are we going to have to insure it? Or are we going to put a floor underneath?

SEC. GEITHNER: You know, that depends on the precise structure and the amount of capital that we put in alongside the private capital. But the basic principle is we want to limit the downside exposure of the government, and we want to make sure that we're sharing in any potential return on these assets. And that's a sort of simple, basic proposition, because we're doing something that's beneficial for the system and these institutions. We want the government to be able to share in the potential return on that and -- you know, as we do when we provide assistance to institutions, generally.

SEN. GREGG: Maybe I don't understand, but I presume the way you're going to get the private sector to participate is you're basically going to make it profitable to them, or at least potentially profitable to them, by assuring their downside risk with taxpayer insurance.

SEC. GEITHNER: They're going to have to take some risk, too. The precise mix of risk and return depends on the precise structure that we design and we lay out. And we're going to begin -- as I said, we're going to bring that -- begin that process relatively quickly by laying out publicly what we think is an appropriate structure for mobilizing as much private capital as we can, with an appropriate sharing of the risk and -- but you're right, it's going to be a complicated balance to strike. But they'll have to take risk, too, for it to work, and they're prepared to take some risk.

SEN. GREGG: Well, when you announce this, do you expect that you will -- that the public -- the market will immediately see that there will be participation of a trillion dollars worth of -- of effort to try to clear up the toxics balance sheet?

SEC. GEITHNER: I would say you'll be able to see immediately the basic -- basics of the structure, and you'll see a commitment to a level of financing which we think is very substantial. And our expectation is you're going to see -- again, because we're providing something the market can't provide now, which is access to financing, we're going to see private capital come in.

SEN. GREGG: To -- up to a trillion dollars?

SEC. GEITHNER: No, the amount of capital from the private sector won't be in the range of a trillion. A trillion is the amount of financing that we're going to make available generally. The amount of private capital, yes, depends a little bit on how -- on how -- on how -- on how we design --

SEN. GREGG: Will this be done by the Fed? Or will it be done by the Treasury?

SEC. GEITHNER: This will require, given the basic authorities we have together, that we're working together with the Fed and the FDIC. And you'll see us lay out the precise mix.

SEN. GREGG: And will this require the TARP 3 -- any TARP 3 money? Or will you be able to do this within the resources you have?

SEC. GEITHNER: We certainly can start it within the resources we have.

SEN. GREGG: Thank you.

SEN. CONRAD: Mr. Secretary, you know, you can see what this is like. You know, it's pretty intense at times but, I think, very productive. And this represents the best of our democracy, having a serious debate about serious things. And you've done a superb job.

Markets are up over a hundred. I don't know if we can actually attribute that to --

SEC. GEITHNER: That's because of our shared commitment to fiscal responsibility over the medium term.

SEN. CONRAD: Yes, sir. And you know how I believe in this very, very deeply as I know you do. And we've got an extraordinary responsibility; all of us collectively. And at some point in the future, we will be judged.

We will be judged, whether we were responsible or not. And I know you want to be judged favorably. So do I and, I think, every member of this committee. We've had very, very productive meetings yesterday, at the White House, with the president, the vice president. And I think this was a very constructive meeting this morning.

We're getting you out of here a little bit late. I apologize for that. We told your people we could get you out by 12:15. But it's 12:20. Thank you again for your excellent work. And we very much look forward to the unveiling of the additional plans and hope to have you back, to help us better understand them.

SEC. GEITHNER: I look forward to that. And thank you, for what you both said.

And Senator Gregg, we share more in common than you believe on --

SEN. GREGG: That's because you went to school at Dartmouth.

(Laughter.)

SEC. GEITHNER: We're going to disagree on some things. But on this basic imperative, of getting us back to the path of the sustainable fiscal position, we are absolutely committed to that, absolutely committed.

We may disagree on best to get there, but we share that commitment. And I completely welcome your personal commitment to that basic objective, as well as the chairman's.

SEN. GREGG: There is fertile ground here in this Senate, especially between myself and the chairman, for accomplishing that goal.

SEN. CONRAD: I thank the secretary very much, and the committee will stand in adjournment. (Strikes gavel.)

END.


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