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

Location: Washington, DC

REP. PAUL KANJORSKI (D-PA): If we will, we'll reconvene the second panel now. And we'll start our testimony with the Honorable Steve Bartlett, president and chief executive officer of Financial Services Roundtable.

MR. BARTLETT: Thank you, Mr. Chairman, and Mr. Neugebauer from Texas.

Mr. Chairman, I've submitted a testimony for the record. In addition, Mr. Chairman, I submitted two additional letters for the record that I'd like to have entered into the record.

REP. KANJORSKI: Without objection, so ordered.

MR. BARTLETT: Mr. Chairman, to summarize my written testimony, first, the TARP. We believe that the TARP has had a positive effect so far. It's only been six weeks, however, and so there's a long ways to go. We think that the implementation of the TARP has added to liquidity, particularly in the LIBOR market which was at critical levels and upon which most of the other financing globally is based.

Secondly, we think it's stabilized and provided a good deal of stability with depository institutions and with deposits. And we think it's strengthened the commercial paper market.

We also believe that the TARP has, by being used for the sale or to support the sale of weaker institutions to stronger institutions, we think that has generally helped the economy.

Secondly, we believe and I've submitted in the testimony some evidence that commercial lending has increased actually rather substantially. We did a survey of eight of the major lenders from their 10-Qs from the third quarter, showing an increase of lending from 12 percent. We've done some verbal interviews for September, October and November and concluded that lending during those months and going forward will also increase.

I would note, however, that the economy is generally down, so loan demand is down. But the banks have not changed or raised their underwriting standards.

Third, with regard to the difference between asset purchases and capital infusion, we think that the capital infusion method was right. We think it's had some positive effect. However, we do think that Treasury will and should look at both asset purchases and asset guarantees going forward. We think all of those are authorized by the legislation.

Fourth, Mr. Chairman, I've provided some information on mortgage rates. The Financial Services Roundtable believe that home mortgage rates are artificially high. And it is urgent that Treasury and the Federal Reserve and others take some action to reduce those home mortgage rates because until home mortgage rates come down then the economy cannot recover.

Our evidence indicates that mortgage rates for conforming mortgage-backed securities of GSEs are 165 basis points above comparable Treasuries, even though the GSEs are now in conservatorship and should be traded like Treasuries. What that means is that rates should be about 5.5 percent but in fact they're at 6.2 percent. And that prices out of the market large numbers of homeowners. We think at 5.5 percent, that would allow about 30 percent of current mortgages to refinance.

Fifth, we think that the fair value accounting continues to be an overwhelming problem. I've submitted for the record a letter from the Center for Audit Quality. The Center for Audit Quality which historically has been defending fair value accounting but which makes some very specific recommendations on ways to improve fair value accounting. And we think that this committee, this Congress and all of the players at the executive branch should take that letter and those suggestions seriously.

Sixth, Mr. Chairman, we are totally committed to foreclosure prevention. Foreclosures are too high. Our organization, through HOPE NOW and our specific lenders are producing about 200,000 loan modifications and repayment plans a month. We expect our new streamlined plan which is not dissimilar to the plan that the FDIC Chairwoman Bair has proposed, we think that that plan will increase it to another 100,000 a month. There's still a long ways to go. We have a total commitment that we are going to review the FDIC plan to determine ways to make that work.

And last, Mr. Chairman, we believe that the Federal Reserve, and we've communicated this to the Federal Reserve, should take specific and proactive and aggressive steps to expedite the application of bank holding companies. We think that if a company is seeking to be a bank holding company, if it's applicable, that would strengthen the system, not weaken it.

We think the Federal Reserve is taking those steps in three specific cases of very large institutions. That's good. But we think other institutions that are large and medium size would also strengthen the economy. We think that the Federal Reserve should take specific steps to be the quarterback to cause the bank holding company applications to be expedited.

And with that, Mr. Chairman, I yield back my remaining 52 seconds. (Laughter.)

REP. KANJORSKI: Thank you very much, Mr. Bartlett.

And now we will hear from our second witness, Mr. Edward Al Yingling, president and chief executive officer, American Bankers Association.

Mr. Yingling.

MR. YINGLING: Thank you, sir.

I appreciate the opportunity to testify on the current status of the Troubled Asset Relief Program. The TARP program has served to calm financial markets and does have promise to promote renewed economic growth. However, it is also a source of great frustration and uncertainty to banks.

Much of the frustration and uncertainty is because of the numerous, significant changes to the program and the misperceptions that have resulted on the part of the press and the public. Hopefully, this hearing will help clarify the situation.

ABA greatly appreciates the consistent statements by members of this committee, and particularly its leadership, that regulated banks were not the cause of the problem and have generally performed well. Not only did regulated banks not cause the problem, they are the primary solution to the problem as both regulation and markets move toward the bank model. Thousands of banks across the country did not make toxic subprime loans, are strongly capitalized and are lending.

As you know, TARP started out focused on asset purchases. But then after European countries announced they were putting capital in undercapitalized banks, everything changed. Overnight, nine banks were called to Washington and requested to take capital injections.

As this program has extended beyond the first nine to other banks, it was not initially clear that the program was to focus on healthy banks. And its purpose was to promote lending. ABA was extremely frustrated with the lack of clarity, and we wrote to Secretary Paulson asking for clarification. The press, the public, members of Congress and banks themselves were initially confused.

Many people understandably did not differentiate between this voluntary program for solid institution and bailouts. Bankers for a few days were not sure of the purpose. Although they were sure their regulators were making it clear it was a good idea to take the capital.

Put yourself in the place of a community banker. You are strongly capitalized and profitable. Your regulator is calling you to suggest taking TARP capital is a good idea. You the banker can see that it might be put to good purposes in terms of increasing lending, but you have many questions about what will be a decision that will dramatically affect the future of your bank. Questions like, what will my customers think? What will the markets think? What restrictions might be added?

Despite the uncertainty, banks are signing up. In my written testimony, I have provided examples of how different banks can use the capital in ways to promote lending.

One aspect of the program needs to be addressed further is the fact that it is still unavailable to many banks. Last night, the Treasury did offer a term sheet for private corporations, and we greatly appreciated that. However, term sheets for many banks, including S corporations and mutual institutions, have not been issued. This is unfair to these banks, and it undermines the effectiveness of the program.

In my written testimony, I have discussed the fact that while TARP is designed to increase bank capital and lending, other programs are actually in conflict and are actually reducing capital and lending. In that regard, I once again call to the attention of the committee the dramatic effect of current accounting policies which continue unnecessarily to eat up billions of dollars in capital by not understanding the impact of mark to market in dysfunctional markets.

Finally, in our written testimony, ABA also supports efforts to address foreclosures in housing. We've proposed a four-point plan. First, greater efforts to address foreclosures. Second, efforts to address the problems caused by securitization of mortgages that you have championed, Mr. Kanjorski. Third, the need to lower mortgage interest rates which are not following normal patterns. And fourth, tax incentives for purchasing homes.

Thank you.

REP. KANJORSKI: Thank you very much, Mr. Yingling.

And now we'll hear from the third panelist, Ms. Cynthia Blankenship, vice chairman and chief operating officer, Bank of the West, on behalf of the Independent Community Bankers of America.

MS. BLANKENSHIP: Thank you, Acting Chairman Kanjorski, and members of the committee. Thank you for allowing the Independent Community Bankers of America to testify today.

I'm Cynthia Blankenship. I'm chief operating officer and vice chairman of Bank of the West in Grapevine, Texas, and chairman of the Independent Community Bankers of America.

We want to express our appreciation to Chairman Frank, Representative Kanjorski and Representative Bachus and many others on the committee for their support of important community bank provisions in the Emergency Economic Stabilization Act.

ICBA commends the extraordinary efforts of Congress, Treasury and the Federal Reserve and the FDIC to address the current economic crisis. Given the speed and enormity of the undertaking, it is understandable that significant issues have come up regarding the Troubled Asset Relief Program's Capital Purchase Program.

The terms released by the Treasury several weeks ago were unworkable for privately held banks, Subchapter S banks and mutual institutions because of legal constraints and organizational structures peculiar to each of these types of institutions.

ICBA and others have provided Treasury concrete suggestions to overcome the obstacles. We've had a constructive dialogue with Treasury on these issues. And last night, Treasury released a term sheet for privately held C corporation banks. But a term sheet is still urgently needed fro the more than 3,000 Subchapter S and mutual banks. This represents one-third of most of the community banks -- privately-held banks -- in the United States that still have no access to the TARP.

While Treasury is working in good faith to produce term sheets, ICBA members are growing increasingly concerned about the rate the funds are flowing out of the program. At this point, only $60 billion is left uncommitted from the $250 billion Capital Purchase Program. And yet, more than 6,000 privately held Subchapter S and mutual institutions have not had the opportunity to apply.

There are more than 8,000 community banks nationwide, and they are well-positioned to extend lending to their communities should they choose to use capital from the Capital Purchase Program. Including them will stimulate lending in those communities.

ICBA applauds the FDIC's actions to unlock the credit markets through the Temporary Liquidity Guarantee Program. The guarantee provides unlimited deposit insurance in transaction accounts and will enhance depositor confidence in community banks and free up bank capital to guarantee large deposits.

The guarantee for senior unsecured debt, however, provides few benefits for community banks, as they do not issue much in the way of senior unsecured debt, other than federal funds purchased. The current pricing for the programs makes it unattractive for federal funds purchase transactions. Overnight federal funds pose little risk of default and at current prices for federal funds, the 75-basis point fee exceeds the interest rate.

We have suggested that FDIC adopt risk-based pricing for the guarantee so it will be more attractive for overnight transactions and consider allowing banks to separately opt out of the guarantee for overnight federal funds if the guarantee fee does not cover the cost of the program. Only banks and thrifts subject to a special assessment fee to make up that deficit -- yet, holding companies with significant nonbank subsidiaries -- can participate in the program. Some mechanism is needed to ensure these holding companies pay their fair share.

Community banks played no role in causing the current economic crisis -- the foreclosure crisis -- and by and large, they did not engage in subprime lending practices and they did not become entangled with toxic investment products. As a result, community banks are not experiencing unusual levels of mortgage defaults. When defaults do arise, community banks understand that foreclosure is the least attractive alternative and do everything they can to avoid it.

Our involvement in servicing loans and finding solutions for consumers extends beyond our own customers and we offer refinancing to many troubled borrowers and loans for other institutions.

Mr. Chairman and members of the committee, ICBA stands ready to work with you to maximize the participation in the programs authorized under the EESA and to promote the free flow of capital so essential to our economy.

I appreciate the opportunity to testify today.

REP. KANJORSKI: Thank you very much.

Now, a fourth member of our panel, the Honorable D. Cameron Findlay -- executive vice president and general counsel, Aon Corporation -- on behalf of the Council of Insurance Agents and Brokers.

MR. FINDLAY: Thank you, Congressman Kanjorski.

I'm Cam Findlay, the executive vice president and general counsel of Aon; and I appreciate the opportunity to testify today on behalf of the Council of Insurance Agents and Brokers.

My written testimony provides the details of an innovative proposal for the Department of the Treasury to exercise the authority you've granted under section 102 of TARP, so please permit me here just to summarize the high points.

We start with the premise that the insurance industry has a lot to offer in the efforts to stabilize the economy, because insurance is a critical but sometimes overlooked part of the financial services industry. Put simply, we believe that the Department of the Treasury should use its statutory authority -- the authority you've granted it -- to establish a program to insure a portion of the expected payment of principal and interest from troubled and illiquid financial instruments.

While Treasury's efforts to inject capital into financial institutions is important and has succeeded in some respects, this effort doesn't address a primary cause of the liquidity program: the hundreds of billions of dollars of illiquid assets that are on the books of America's financial institutions.

Our proposed approach is an insurance program that would combine risk pooling, risk retention by the financial institutions themselves and potential government backstop liquidity. In our view, such an approach would benefit all the stakeholders here -- taxpayers, financial institutions and homeowners.

The plan involves, first, the sharing of risk by participants in an asset stabilization pool. Participants in the pool would pay risk- based premiums and the pools would insure a portion of the principal and interest from illiquid assets on their books. Thus, the program would insulate an asset holder from having to immediately recognize a decline in value resulting for the nonpayment or expected nonpayment of principal and interest.

Second, our plan requires financial institutions to retain some risk. Just as holders of insurance policies retain risk through deductibles, asset holders would be required to retain a percentage of the shortfall of principal and interest. Asset holders would be reimbursed from the pool for a shortfall only when the shortfall exceeds their retained amount in a single year. It's just like a deductible in your home insurance policy.

Third, our plan involves the potential of government loans as a backstop. That is, in the event that in the early years, payments from the pool exceeded premium collections, the government could loan the pool funds needed to make good on the guarantees. The government would then be reimbursed by premiums collections in subsequent years.

Let me illustrate the proposal by using a very simple example. Suppose an institution holds $1 million in mortgage-backed assets. Assume that the current lack of confidence in the liquidity of these assets has dropped the market value to, say, $600,000. Now, this $400,000 is not necessarily the result of a true decrease in the asset's intrinsic value. It may simply be the result, at best, of a lack of information about the value of the asset -- or at worst, in the current environment, sheer panic.

Let's assume in our example that the actual intrinsic value of the asset is $800,000. Without our proposed insurance program, the institution might have to mark the asset to market, resulting in an immediate loss of $400,000 in value -- or even worse, the institution might have to sell the asset into a panic market. But an insurance pool that guarantees the repayment of the principal and interest from these assets would, under proper accounting treatment, result in the institution holding assets worth 800,000 (dollars) not 600,000 (dollars.)

The insurance industry knows how to do this. Actuaries can set initial premiums based on the law of large numbers, and then after experience working with the proposed pool, actuaries could use the accumulated data about the performance of the assets to develop evermore accurate premium pricing models, reflecting the actual value of the underlying securities.

In our view, this program would have significant benefits for all the stakeholders, taxpayers, financial institutions and homeowners. For taxpayers, an insurance program would have significantly less short-term cash requirements than capital infusions. Also, because it would be funded by its direct beneficiaries, it would restore liquidity without requiring massive immediate outlays of government funds.

The insurance solution would also assist financial institutions. As an insurance program, it would provide asset holders the options to hold assets until maturity or until economic conditions permit the recognition of the assets real value. It would flood the market with distressed assets, which could have the effect of further depressing asset values. An insurance program would also prevent opportunistic purchases of depressed assets by predatory investors.

Finally, our plan helps homeowners as well -- homeowners facing foreclosure -- by proposing that participating companies have to agree to a plan to restructure individual mortgages as a condition of participation.

On behalf of Aon and the CIAB, I want to thank you again for the opportunity to testify today. We stand ready to work with you on our proposal and we would be pleased to take any questions that you have.

REP. KANJORSKI: Thank you very much.

Now, without objection, I ask unanimous consent that an exchange of letters between Federal Reserve Chairman Ben Bernanke and myself -- dated October 9th, October 20th and November 17th -- be submitted into the record. Are there any objection? The chair hearing none, so ordered.

I now recognize the gentleman from New York, Mr. Meeks.

REP. GREGORY MEEKS (D-NY): Thank you, Mr. Chairman. Good to see you.

Let me start off by asking this question. And there were some questions earlier to the first panel, initially by my colleague, Ms. Waters, where I think we are suffering from the same problem and that is when you look at the number of constituents who are being foreclosed upon and in trying to help them, it has been very difficult. It is very difficult working with servicers in getting final information, et cetera, so that we could make sure that we're preserving them and giving them every opportunity to stay in that home.

To that end, in my district, I joined hands with a local community organization -- CWE -- who every week they come in with lawyers and financial consultants. They speak to my constituents -- and the numbers have just gone astronomically -- and then they call the banks and work things out. And I've called them, my community banks, et cetera, to let them know when they hear from this group to make sure that -- see if there can be something worked out.

As a result, I can tell you, when we put this program in place as a pilot program about three weeks ago, there were about eight homes that I know was about to go into auction the next day. We were able to save those people -- save those people from foreclosure. They stayed in their homes.

So my first question therein is, as opposed to just relying on the Hope program, has there ever been any consideration, especially with community banks who've been to -- a great -- that are responsive, to partnering with some community-based organizations who are on the ground?

Because we find oftentimes with the -- a number of -- financial institutions, when they get something from them, it just goes right into the garbage can. And they need someone -- you know, they're trying to figure someone to trust. We found that they -- there's a trust factor that has been missing, and they trust someone else. They trust coming into my office.

So my first question is has there been any consideration about trying to partner with community-based organizations in communities to help people stay in their homes?

MS. BLANKENSHIP: I don't know of any formal effort that we have at this time, but I will tell you that most community banks have a personal relationship with that borrower.

And as I stated in my testimony, we do everything we can to avoid foreclosure. And I think if you would look at the statistics, that you will find that in the community banks, there are going to be a less percentage of foreclosures simply because we do have that relationship, if the customer will come in.

I think it would be beneficial to have an organization to which you speak that could encourage those borrowers who are sometimes intimidated when they go into default to communicate with the bank. Because once we get communication, then it would be rare that we couldn't find a solution.

MR. BARTLETT: I would just, one, commend you for your efforts and two, say that you hit on one of several very important factors here, and that is trust.

We know that many people give up, and they shouldn't give up. And having a group that they trust as an intermediary could be very valuable. And I think it's something we should do more with. I think it's an excellent idea.

MR. YINGLING: Congressman, in fact, we do partner with many organizations, a lot of organizations. Our principal partner on a national level is Neighbor Works. They have affiliates in virtually every community in the country.

And we find that working with those non-profit groups is the most effective way that we have of providing counseling that leads to the result of a loan modification.

Now, our goal here, counseling is nice, but counseling has to have the result of a loan modification, and that's what we set out to do. And frankly, we pay -- we pay the costs to those non-profit counseling organizations and find it to be the most effective way to negotiate.

I will say that it seems perhaps on the outside to be opaque. It's not. If someone is not able to pay their mortgage, then we have to figure out a way with that person to take their income and convert it into mortgage payments, and then see if -- it's not a gift. It has to be a mortgage to make sure that -- a mortgage is comparable to or better than a foreclosure.

REP. MEEKS: Let me ask this question real quick, because I wanted to ask this of Secretary Paulson. But let me ask you; maybe it has had effect with you.

Given that Secretary Paulson has unilaterally decided not to purchase the toxic assets, are you concerned at all with the position that may reverse, you know, not buying this, LIBOR rates?

You know, this is an international market now, and by not buying this, it could change. We had some stability, and now things have changed. Does that give you any concern?

MR. YINGLING: As it turns out, LIBOR rates have come down rather significantly, and are back to a stable level. We think that the Treasury did the right thing with their capital infusion, but we also think that they ought to review the other opportunities.

REP. FRANK: (Strikes gavel.)

The gentleman from California.

REP. MCCARTHY (?): Thank you, Mr. Chairman.

A question for Mr. Bartlett, Yingling, or Ms. Blankenship, whichever one of you.

Most of the TARP money thus far has been spent, as Mr. Bartlett just pointed out, for capital infusions into banks and financial institutions, or it will be by the time they finish the first tranche of money.

In your -- all of your view, is the banking system now adequately capitalized such that it can get further capital privately? Or do you think that more capital injections are necessary?

MS. BLANKENSHIP: Well, let me --

MR. YINGLING: More capital is always better than less capital, so --

REP. MCCARTHY (?): I understand that. (Laughter.)

MR. YINGLING: -- I would never say "adequate." And I think the capital has to come from private sources, so the Treasury's infusions was, in essence, to kind of put a foundation and a floor.

I think that we will see more capital -- we have seen and we will see more capital, as a result. But it's an ongoing process.

REP. MCCARTHY (?): The Treasury secretary today talked a little that they are studying an idea to leverage private capital so that when there's private capital, a new private capital investment stock issuance, that the Treasury would then have some kind of matching program.

Comments on that idea from any of you?

MS. BLANKENSHIP: Well, I would just like to comment that until they get the initial program fixed where all banks have access to capital -- because still there's, with the subchapter S and the mutual banks --

And they did issue the privately held term sheet last night, which is helpful. But you've got 8,000 community banks out there that would like access to this capital so they could expand lending in their communities.

Because frankly, that's the only way the capital is going to pay off as an investment in a community bank. It's not cheap capital, but it is access to capital. And that is very much necessary in today's market.

MR. YINGLING: I would just add that I must say I think the reaction of most of the banking industry on that -- in that 24-hour period where nine banks just overnight were called in a room and requested to take capital was one of shock and concern. It's not something we had asked for.

Having said that, as the program has rolled out and become clearer, we can see an advantage to it. I agree with what Ms. Blankenship just said, that at this point there is an equity question and a competitive issue. And all banks ought to be treated equally.

But beyond that, to the degree we can rely on private equity, we ought to, and to the degree that there are other excellent uses for money, such as foreclosure prevention, they ought to be considered.

REP. MCCARTHY (?): Thank you.

Let's talk about what the TARP did not do for the three of you, again, then I have one more final question for you, Mr. Findlay. I won't ignore you there.

Is -- what it did not do is buy troubled assets, which was, obviously, originally what we thought we were going to do. Are you seeing any liquidity in that market whatsoever? Are those trading at all? Has there been any thawing in that, as there has been a little thawing in commercial paper, a little thawing in interbank lending, a little thawing in a few of these other things?

Is there any liquidity in that market right now?

MR. BARTLETT: No. We think bringing down mortgage rates will help with that. We think, actually, that the capital infusion to the banks will help with that. LIBOR being reduced would help with that.

But in the six weeks' time, we haven't seen a thawing of the -- at this point, of the mortgage-backed security market. That has to happen. Nothing can recover until that does happen.

And we think that the steps have been taken to cause it to happen, but it hasn't happened yet.

REP. MCCARTHY (?): So those are still not tradable assets, basically, to the extent they sit on anyone's books?

MR. BARTLETT: I'd hate to say not tradable, but that's -- it's pretty close to not tradable.

I did -- I also suggested in my testimony that dealing with -- curing fair market -- fair-value accounting is a big part to that. So fair-value accounting continues to be kind of the heavy hand of government that is causing a large part of the problem at this point.

REP. MCCARTHY (?): Okay. Let me get to Mr. Findlay, if I may, with one final question.

How is the program you described, this insurance (wall ?), how is that different from what is actually in the bill that we passed, in the rescue bill in October, which the Treasury is studying, and insurance?

I -- in listening to you, I wasn't able to see a distinction between the two proposals.

MR. FINDLAY: No. In fact, the proposal we've got is one that we believe Treasury has authorized under Section 102 of the EESA. And our proposal is one that, as Secretary Paulson said, is being studied right now.

So -- and when we were talking about how much capital outlay is the right amount, I mean, one of the advantages of our program is it doesn't' require immediate infusions of capital.

REP. MCCARTHY (?): Okay, so you're simply expressing your support, I guess, for the idea that was put in the bill as an option for Treasury?

MR. FINDLAY: That's exactly right, Congressman.

REP. MCCARTHY (?): Thank you very much.

REP. FRANK: The gentleman from Massachusetts.

REP. STEPHEN LYNCH: Thank you, Mr. Chairman, and I want to thank you and the ranking member for continuing to hold these hearings, and I want to thank the panelists for helping the Committee with their work.

Mr. Yingling, I really appreciate the candor of your testimony this morning. And I want to just -- I'm just going to quote you a little bit, if you don't mind, here.

You talked about the great frustration and uncertainty to banks caused by the significant and numerous changes to the TARP program and the misperceptions by the public and the press. I just think you might want to add Congress to that list as well.

As you know -- and you've been a frequent flyer to this Committee in recent weeks -- Mr. Paulson had come here and in great detail described a toxic mortgage repurchase program that he put forward to Congress.

And much of our time here, and your time and those who are trying to protect the taxpayers, time was spent in examining that specific proposal, which was to clear these toxic mortgages off the bankers' balance sheets. And we probed that question in great detail.

And the benefit to both the banks and to these distressed homeowners and the communities that they're located in was quite apparent.

And then it seemed like just a matter of days after Secretary Paulson got the $700 billion, he went to plan B. He basically abandoned that original plan that was the basis of his request and went to plan B, which was, as you've described, getting those bankers in a room and then proceeding to, at least in the words of some of those bankers, give them forced money that they didn't need and didn't want, and in the process, nationalized a considerable percentage of those banks. And then, after the fact, he's gone to plan C, which is now to recapitalize some of these credit card issuers.

And I just want to know -- I mean, I think he had an obligation here to come to Congress and say, "Okay, here's plan A and I'm going to try this. Here's plan B." The problem with the banks wasn't unforeseen. He could have explained that to us. He never mentioned it. As a matter of fact, the only time it ever came up, he rejected the proposal of direct capitalization of the banks.

But I just want to know, what is the response of your constituents, your banking community, as well as Ms. Blankenship as well, the community banks? What's happening here? What has this done for confidence within the banking community, all these changes that the secretary has instituted?

MR. YINGLING: Well, it's been very confusing and very difficult. I think I would differentiate the question of what is the right policy, because it may be we've arrived at the right policy in terms of the best use of the money at this time, although, again, I think foreclosures is another important use of money.

But I can remember -- we didn't ask for capital infusions. And I can remember, when this was announced -- in my office now, I have to watch the news all the time to see what's going on and what the effect may be. The immediate response in the hours after this program was announced was a series of stories about the banking industry had thousands of banks that were going to fail.

It was completely misinterpreted. And it took several days for this to calm down. It took several days for banks to figure out what was going on. And that's why you saw some statements from bankers, I think, about the use of the funds. It was just because they didn't understand.

I think now people are beginning to understand. But I would think it's confusing for bankers. We've done -- starting to do some polling on "Do your customers think you're weaker or stronger if you take the money?" and it's split. Customers don't know how to react to it. All these things have ripple effects that are unforeseen. And as several of you have commented from your constituents' point of view, we could understand the anger and the concern and the confusion. And, of course, that affects us. We hear from the customers as well. And it can lead to policy mistakes.

REP. LYNCH: I understand. I'm running out of time. I just want to ask, what about the fact that Secretary Paulson basically -- and this is reflected widely in the press -- that the secretary basically forced people to take the money who didn't want the money; they didn't need the money. And now it looks like there won't be enough assistance to help some other banks that may indeed need a little bit of help.

MS. BLANKENSHIP: Well, that is the total frustration of the community banks, because, you know, the perception is that the big banks did take the (nine ?), and that's been well over a month ago. And still the deadline came and went, and community banks, the 8,000 that represent over 90 percent of the banks nationwide -- they represent Main Street -- they couldn't get access to the capital. And still, even today, we can't get total access to it. So push the equity.

REP. LYNCH: I appreciate that. No, thank you. I think that's very helpful to hear.

Thank you, Mr. Chairman. I yield back.

REP. FRANK: The gentleman from Illinois. And let me just say, if people are watching this on television and aren't here, members of the committee, don't come. We have about 16 minutes. We have three members who will be able to ask questions, and we're going to then break at 1:00. We'll come back at 2:30, because our academic witnesses had asked that they be allowed to testify in the afternoon. So we'll come back for Professors Feldstein and Blinder.

And the gentleman from Illinois is recognized.

REP. DONALD MANZULLO (R-IL): Thank you, Mr. Chairman.

I represent the 16th district of Illinois, which is right on the top of the state. And we have a lot of agriculture, a lot of manufacturing, a lot of small independent community banks. And the community bankers are extraordinary people, because they've not caused this problem -- their conservative principles; the fact that when you get a loan, you sit across a desk and you can judge a person's integrity by looking into their eyes. They represent institutions in this country which really serve to me as models.

And Mrs. Blankenship, I have a question for you. We're told that there's a need to use part of the $700 billion financial services package by the auto industry, in large part because the financial arms of the big three are unable to issue any more car loans except to customers with a FICO score of greater than 720. In many cases, they said that they just don't have any money at all.

I've been informed by several community banks in the district I represent, including my own banker, that they have plenty of money to lend for automobiles. They're very frustrated with the fact that people are saying -- and I've got to be very up-front. The last panel has done more to instill fear into America by some of the outrageous statements, are making it more and more difficult to recover. In fact, they're extending the recovery, starting with my good friend, Mr. Paulson from Illinois, the statements that he made in September about the world would collapse unless he was given $700 billion to buy bad assets.

People are not buying automobiles and they're not going and doing their regular Christmas shopping because of fear. And all along, the community banks have all kinds of money. And my question to you is, are community banks -- and I don't want to use the word "able to fill the gap," but are there enough community banks in this country that can work with dealerships and make sure that people receive appropriate and fair and reasonable financing for their automobiles and trucks?

MS. BLANKENSHIP: Well, I would --

REP. MANZULLO: Do you like that question?

MS. BLANKENSHIP: I'll take that question.

REP. MANZULLO: Go ahead.

MS. BLANKENSHIP: Of the 8,000 community banks, the banks that are on Main Street in the ag and rural communities and that represent 22,000 communities across the nation, by and large they're well- capitalized and they do have money to lend. Our own bank actually has increased in lending, our net lending, since this time last year.

The market confidence was a huge factor when there was the comments that thousands of banks would fail. You know, we had -- that's where you saw your customers pulling in. It wasn't the fact that the banks didn't have money to lend. The consumer confidence just went to the tank. And so we had to restore that. And coupled with that was the deposit insurance question and, you know, "Is your bank safe?" and the confusion over money market guarantees, where the mutual funds got unlimited and our banks had $100,000 still.

So it's hard to compete. And yet those customers know us. They know us by name, as you said. And the confidence -- we were able to rebuild that confidence. But it was a campaign. And we do have money to lend, and we'd be glad to lend it.

REP. MANZULLO: Mr. Yingling? Thank you.

MR. YINGLING: Just some brief numbers that I think would surprise most people. Consumer and industrial loans from banks are up 15 percent this year. Home equity loans, admittedly from a low base, are up 21 percent; asset-backed securities lending, not mortgage but other asset-backeds, down 79 percent. We have a chart on page 10 of our testimony that shows consumer and industrial business lending, and consumer lending is actually up for banks.

REP. MANZULLO: And this is all banks.

MR. YINGLING: Right. The world is coming back somewhat to the bank model, and we're ready to go.

REP. MANZULLO: The question I asked of you, Mrs. Blankenship, I just want to make sure that we have a lot of larger banks in our district with local branches and real live people there. They also are telling me the same thing that many of the community banks are saying.

Thank you.

REP. FRANK: The gentleman from Texas.

REP. AL GREEN (D-TX): Thank you, Mr. Chairman. And I thank the witnesses for appearing today.

Two quick questions. First is, having heard the plan that Chairwoman Bair has, is there anyone who is in disagreement with the plan -- anyone? And the chair has taught me that I'm to build the record by indicating that the absence of hands -- ah, we do have hands. Okay. (Laughs.)

All right, let's hear from you, please, Mr. Bartlett.

MR. BARTLETT: Well, we're in agreement with the direction of the plan and with the goals and the broad parameters. But the plan details weren't laid out today. There are some details of the plan that we'd like to work with either FDIC or Treasury to make sure is not counterproductive.

REP. GREEN: Let me be a little bit more specific. Do you agree with the notion of an incentive for the servicers --

MR. BARTLETT: We agree with the notion.

REP. GREEN: -- a monetary emolument?

MR. BARTLETT: Yes, although we're not asking for it, we can do it without that incentive, but we -- yes we agree with the plan, yes.

REP. GREEN: Now I have to ask you why haven't you done it without it? I wish you hadn't said that.

MR. BARTLETT: Well we believe we are but --

REP. GREEN: Okay. All right. Well the empirical evidence doesn't seem to indicate that you are. You may very well be, but I just haven't found anything to substantiate what I think is a fair position for you to make.

Let me go on to the next, Mr. Edward, I promised that I would be -- Mr. Yingling, excuse me.

MR. YINGLING: We generally agree with the approach and I talked to Sheila Bair about it five weeks ago. We like the idea of having the institutions that know the customer that are there to work with them rather than sending it to Washington and that type of delay. I just raise two caveats. One is -- and it's all a matter of calibration. We do have a concern that if it becomes a government program, say you're in a neighborhood in Texas and there are two or three foreclosures, potential foreclosures in your neighborhood, are others going to see this program and see that Bill or Mary got this and say okay, I'll stop paying so I can qualify. That's all a matter of the details and the communication. And the other is I think we need to sit down with real live lenders, community banks and others and design a program, make sure it works.

REP. GREEN: Thank you very much. I take it there were only two hands of persons who are in disagreement, and they've spoken. Is there a third? Yes.

MS. BLANKENSHIP: I would just like to qualify that the community banks didn't face the same problems that they dealt with with IndyMac because typically they make their mortgages just individually and they're working through this --

REP. GREEN: Ms. Blankenship if I may interrupt, because my time is short, let me just ask the plan itself however are you in agreement or disagreement with it? The concept that you've --


REP. GREEN: -- heard?

MS. BLANKENSHIP: -- the concept is good to work with the consumer.

REP. GREEN: And to have an emolument -- a payment of money for foreclosure avoidance?

MS. BLANKENSHIP: I don't think it should be a government mandated plan for the banks, but I think that a tool for the banks to work with would be okay.

REP. GREEN: Okay. It's not mandated, if you buy into the program --


REP. GREEN: -- then you receive the emolument, if you participate in foreclosure avoidance. That's the way it's established as I understand it.


REP. GREEN: Would you support that?



Let's go on to the last person and I'll be done.

MR. FINDLAY: Everyone keeps forgetting about me when you're from the insurance industry.

We don't have a position on behalf of the CIAB on it, but I think of the concept we believe that there ought to be relief for individual homeowners and we built something like that into our proposal.

REP. GREEN: Well, just in response to your question, there were many people who thought that this would not impact them. I say you're involved in it simply because life is an inescapable network of mutuality tied to a single garment of destiny whatever impacts one directly impacts all indirectly, that's Dr. Martin Luther King. So we're all in this together.

Thank you very much, Mr. Chairman. I yield back.

REP. FRANK: Let me, in the gentleman's remaining time, ask because I appreciated his asking that question, let me ask each of you if you'd indicate if we can work out the specifics, and I agree those are important, would you think it appropriate to use TARP money for the cost of this? Beginning with Mr. Bartlett.

MR. BARTLETT: Mr. Chairman, yes, I do if we can work out the details.

REP. FRANK: Mr. Yingling?

MR. YINGLING: I think it's important that foreclosures in housing be dealt with. Yes, I would.

REP. FRANK: Ms. Blankenship?

MS. BLANKENSHIP: Yes, I'd agree.

REP. FRANK: And Mr. Findlay?

MR. FINDLAY: I can't disagree.

REP. FRANK: That's I think very important. And we will note that to the secretary.

The gentlewoman from Illinois.

REP. BIGGERT: Thank you, Mr. Chairman.

Mr. Findlay you've talked about the theory of the current crisis is not a liquidity crisis but instead a transparency crisis as it relates to the pricing of illegal -- illiquid assets and your belief that the insurance program could help. How will the insurance program affect the financial statements of the participating entities?

MR. FINDLAY: I think the way we view this, Congresswoman, is that the fundamental problem in the marketplace right now is a lack of reliable information on the value of assets and indeed a sort of panic that sets in when you don't have reliable information. You don't want to be the last person holding a troubled asset. And all these financial institutions have on their books assets that they had valued a certain way in August, and it's a fraction of that value today. And we're fairly confident that the fire sale price at which assets are being held today is not the intrinsic value of the asset. And it wouldn't be a good thing to require institutions to mark assets down to that value.

So what we've tried to do is come up with an innovative way to take the panic out of the marketplace and allow information to get into the market place so we can determine what these asset's values are and essentially give a little breathing space to the market over the next year or two to bring these assets back to their intrinsic values which we know they're not at today.

REP. BIGGERT: Thank you. Then Mr. Yingling do you think that this insurance program would really help the banks and financial institutions and be able to -- you know we've got the mark to market which has lowered that --


REP. BIGGERT: -- but is the insurance program something that you could be -- would be to your benefit to be able to have what these mortgage backed securities really are worth?

MR. YINGLING: Well, I think it's very valuable to explore. I think we do have an issue of just how many programs we can have working at one time, but certainly it's a program in terms of its design makes sense.

REP. BIGGERT: But this really was a program that was one of three that was --


REP. BIGGERT: -- the secretary's proposal --


REP. BIGGERT: -- and in the alternative and it seems like I'm not sure that the secretary really wants it to be implemented. And it seems to me that the only way that we're really going to know what the value of these mortgage based securities is is by this program. I haven't heard of any other basis that they're really going to be able to find that out.

And Mr. Bartlett, is that important. Do we really have to know what these --

MR. BARTLETT: Congress --

REP. BIGGERT: -- all of these mortgage based assets are --

MR. BARTLETT: Congresswoman, we --

REP. BIGGERT: -- worth?

MR. BARTLETT: -- we support the program as outline by Mr. Findlay, and I put it actually in my written testimony. So we think that now that the capital infusion has been put in place then the Treasury should be looking at other alternatives of additional ways to provide liquidity back into the market of which the asset guarantee program, the asset purchase perhaps and perhaps the asset guarantee and the insurance program is a better more leveraged way of providing this same thing.

It is important to notice that all the money that's needed for liquidity in the market cannot come from the government, not even a small fraction of it. So the government money has to be used to cause the private money to come to the table and I think that's the basis of this insurance program, which is the right approach.

REP. BIGGERT: Thank you. Ms. Blankenship, do you look at this program as being helpful or is it -- apply to the community bankers?

MS. BLANKENSHIP: Yeah, I do think it would agree because anything that would help us alleviate the decline in those mortgage- backed securities' values because it affects the industry on all levels. So it would be helpful. Thank you.

REP. BIGGERT: Thank you. Thank you. I yield back.

REP. FRANK: (Off mike.)

REP. HENSARLING: Thank you Mr. Chairman and after reading about the supposed demise of my state's influence in the nation capital in the Hill Newspapers today, I'm very happy to see two fellow Texans on this panel representing 50 percent of the panel.

Obviously there's been a big discussion about foreclosure prevention and mitigation efforts. The gentleman from Texas who's no longer in the room that I'm friends had spoken that the -- had seen no, I believe I, hopefully I have the proper context, didn't see no empirical evidence that there was voluntary reworkings, refinancings of these mortgages. I haven't looked at numbers recently, but I thought as of a few weeks ago there'd been something around the neighborhood of 2-and-a-half million voluntary refinancings. Mr. Bartlett, do you know what the latest number may be?

MR. BARTLETT: Congressman, actually it's 2-and-a-half million since July of 2007 and those are real numbers. Those are a combination -- a little over half of them are modifications, the other is a repayment plans but they get people back in their houses and the mortgage reinstated so that they can afford it.

We believe that the streamlined mortgage which is -- we announced last week, which is similar but not identical to what Chairwoman Bair proposed, we think that should increase it by another 100,000 a month, so it's running about 200,000 a month and we think we can increase it to about 300,000 a month. Long ways to go but those are big numbers and they're real and those are real people that are being able to reinstate their mortgage and keep their house.

REP. HENSARLING: Well, there seems to be a belief by some on the committee that these refinancings are not taking place or that you apparently have no incentive to do it. Is it not true that the average foreclosure costs a financial institution somewhere in the neighborhood of 60 (thousand dollars) to $80,000? Does anybody feel qualified to answer that? Mr. Bartlett?

MR. BARTLETT: We did a survey a year ago and it was an average of $57,000.

REP. HENSARLING: 57 (thousand dollars).

MR. BARTLETT: So I suspect it's more like $80,000 by now. Foreclosures are financially as well as emotionally devastating for all -- and all. But having said that it it's a mortgage, it's not a grant and we all know that. So we set out to reinstate the mortgage and modify the mortgage if we can get it back to a basis of a mortgage with the homeowner able to pay that mortgage and stay in the house. And we do that 200,000 a month and we're doing it faster every month.

REP. HENSARLING: Mr. Yingling, in an answer to a previous question, I think you kind of brought up the moral hazard dilemma about incenting some people with federal funds to renegotiate their mortgages.

And I think it begs the question, how many people can't pay their mortgage, and how many people choose not to pay their mortgages? And can you speak to the moral hazard of a program that, if not properly structured, is going to incent people to purposely default?

MR. YINGLING: We do believe that we need very strong programs to address foreclosure. And one of the issues, I believe, that came up in a recent hearing at this committee, was the securitization issue and how that has been a roadblock to be able to do foreclosures in many cases.

What bankers have expressed is a concern -- and it's all a matter of communication and calibration of the program, but that it's one thing, for example, in IndyMac where the FDIC goes out with letters to IndyMac borrowers and says, 'You're an IndyMac borrower; here's what we can do for you.' And a more general, 'Okay, here is a government program that if you miss three payments, you qualify for, and you get your monthly payment cut by a third' -- and that goes around the neighborhood.

What you don't want are people to say, 'Okay, it's a government program; I should be able to participate; I won't pay my mortgage for the next three months.' Because then the cost to the taxpayers will just balloon. Now, this can be dealt with, but it's something that we really need to think through.

REP. HENSARLING: Ms. Blankenship, in your testimony -- and let me thank you for coming here and making the committee aware of the lack of access to many of our community financial institutions, their inability to access much of the TARP money -- you brought the lack of access to our attention, and you also stated that community bankers were not the cause of the financial crisis.

And perhaps it's the cynic in me pointing out maybe that's your problem. There tends to be a habit in the nation's capital of rewarding failure and punishing success. You might want to think about that for the next round.

Mr. Findlay, I don't know where your voice was six weeks ago; wish we could've heard it more loudly than we have today. I know that at least our chairman has been quoted in The Washington Post at the time the original legislation passed -- I believe I have this right, Mr. Chairman, that you did not "expect" the insurance program to materialize. And I hope that's "expect," as opposed to "hope." But I think it holds a lot of promise, and I'm glad the chairman had an opportunity to hear your testimony.

I see my time's out, and I yield back.

REP. FRANK: Would the gentleman yield?

REP. HENSARLING: I'd be happy to yield to the chair.

REP. FRANK: Yes, I did express that view after talking to the secretary of the secretary of the Treasury, who -- (inaudible).

I thank this panel. All members who -- (inaudible) -- submit further statements. (Inaudible.) (Gavel sounds.)


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