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Hearing Of The Senate Banking, Housing And Urban Affairs Committee - Oversight Of The Troubled Asset Relief Program

Witness: Treasury Secretary Timothy Geithner

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SEN. DODD: The committee will come to order.

Let me welcome the secretary and the audience that's gathered here this morning to hear testimony from the secretary of the Treasury. The hearing this morning is on the continuing oversight of the Troubled Asset Relief Program.

We thank you, Mr. Secretary, for joining us here this morning.

I intend, as chairman of this committee, for this to be something of a regular date with us over the coming weeks and months. A number of my colleagues have raised the issue in the past, and I know your recent comments about transparency at the department.

In a sense, you have a lot of important jobs to do, and I know that coming before congressional hearings all the time can be seen by some as a distraction from the daily routines. But obviously at times like this, where so much of our constituents' tax money is at play, having you come before us with some regularity to talk about these issues, I think, is a critical component of a job.

And so while we'll try not to abuse the relationship between the Congress and the executive branch, I think, unlike other times, this moment requires that we have more of an ongoing public conversation about these issues. So there we'll be, with some regularity, be asking you to be here before this committee in the coming weeks and months.

I intend for this to be something of a regular date. The American people have a lot on the line right now, as all of us know, and it's their money we're talking about. So, Mr. Secretary, with so much on the line, I would like to have you before this committee on a monthly basis.

Today the committee meets to continue its oversight of the troubled assets program and explore the program's effectiveness in addressing the financial crisis. When the secretary was last before this committee in February, only a few short weeks after President Obama took office, I said that we needed a sharp change in the direction of the TARP program.

In particular I wanted to see a commitment to three things: First, extending credit to families so that families could pay for a home, a car, college tuition for their children, and to businesses, so they could stock inventory and meet payrolls. Secondly, I wanted to see a commitment to restoring confidence, a clearly articulated plan for the prudent commitment of TARP funds and a renewed focus on lending. And third, I wanted to see clarity for the American people, who have a right to know where our economy is headed and how government assistance is being used.

Since that time, we've seen several major initiatives, many of which the secretary here played a very key role in developing. And to be sure, we've seen progress in certain areas. In February, the administration unveiled its Homeownership Preservation Program, which consists of two parts -- the first, a refinance program, which will help, we hope, 4 (million) to 5 million homeowners, many of whom owe more on their homes than they are worth and can get into stable mortgages.

The second component draws upon $50 billion in TARP funds to help between 3 (million) and 4 million at-risk homeowners modify their home loans. And I would like to know what additional tools, if any, the secretary may need to ensure that the program works to the best of its ability.

The Center for Responsible Lending projects that some 17,000 homes in my home state will go into foreclosure in 2009. That'll be 60,000 in the small state of Connecticut over the next four years, reminding us that the housing crisis remains at the root of our underlying financial crisis.

We need to get to the bottom of the housing crisis, I think all of us acknowledge. And I believe this program, supplemented by the legislation that passed by the Congress, both houses, just yesterday, offering banks a safe harbor to do modifications -- and I thank Mel Martinez, our colleague and former HUD secretary, for his efforts in that regard -- provides a mechanism by which we can.

But in other respects, it's still too soon to tell whether we're seeing the progress that we need. Much of the mortgage market and our financial system remain dependent on the government to function at all. Lending remains down, way down. And my hope is that the legislation that I've just mentioned, which also increases the permanent borrowing authority of the FDIC, the Federal Deposit Insurance Corporation, and the National Credit Union Administration, and increases in deposit insurance limits will continue -- or contribute, rather -- to the healthier banking system our communities need in order to thrive.

Along the same lines, I'm pleased that your department recently announced it will use some $15 billion to free up money for lenders to make new loans to small businesses. This is a major concern of ours. I hear this every day from our colleagues. The SBA program -- when is small business going to get money? When can they get help? They're struggling. A major source of employment in this country comes, obviously, from small business. And they are struggling, Mr. Secretary.

Just yesterday The Wall Street Journal reminded us again of the troubled commercial real estate sector and what that poses to our financial system. That report found that such loans, which fund the construction of shopping malls, hotels, office and apartment buildings, could generate losses of $100 billion by the end of next year at some 940 small and mid-size banks.

Indeed, while the results of the stress test administered to the 19 largest U.S. bank holding companies returned largely encouraging results, in the rush to address concerns facing the institutions that are too big to fail in this crisis, we must not forget about the threat posed by those that many may well prove to be too small to survive, the smaller institutions on which families and businesses across our nation depend for credit.

Perhaps the biggest step the secretary has taken is the Public- Private Investment Program the Treasury Department rolled out in March, which I hope will, at long last, put an end to the lurching interventions in the banking system that were part and parcel of the previous administration's approach.

Drawing upon $75 (billion) to $100 billion of TARP funds, the program seeks to engage private investors, in partnership with the FDIC, to purchase from banks and other institutions so-called legacy assets, which have fallen sharply in value and put enormous strain on our financial system.

The question now would appear, will this program work? Many questions have been raised. The committee will be monitoring that program carefully. And I'm interested to hear how the secretary believes the results of the stress test will affect the program and whether the banks will still be willing to sell those assets at discounted prices, given the better-than-expected results of the stress test.

We've also seen Treasury's continued administration of the automotive industry financing program under TARP and the presidential task force on the auto industry to help stabilize the auto industry, upon which one in 10 American jobs depend. Now, we know June 1 is a big date, but I want to let my colleagues know on the committee that my intention is, shortly after June 1, to have either the secretary or Mr. Rattner or whoever is appropriate to come before this committee to report on the results of that effort and where we stand with Chrysler and GM as well.

The president and the secretary appreciate the risk that the failure of any one of the big three automakers could pose to our economy, and right now GM is working to beat the June 1 deadline for an agreement with management, the UAW, creditors and suppliers. Chrysler, we all know, is in the midst of bankruptcy. And clearly we are still a ways away from knowing how successful those efforts are at helping these companies achieve long-term viability. But again, transparency demands, I think, that we have a public disclosure of how those programs are working.

And so I think the picture remains mixed, Mr. Secretary. After losing some 5.1 million jobs since the recession began in December of 2007, with almost two-thirds of those losses occurring in the recent five-month period, there's no question about the barrage of initiatives undertaken by the administration and the Congress for these last several months to aggressively combat this crisis that have produced some results. And the TARP has played a critical role in virtually all of those efforts, I might add.

Now, having apparently stanched much of the bleeding, the challenge now is how we pump new life into the patient. We hope to explore the further role the TARP can play in this process and what other tools we must provide to our financial system and the country in order to get us back on our feet again.

And with those questions the committee has this morning, I now turn to my colleague from Alabama, Senator Shelby.

SEN. RICHARD SHELBY (R-AL): Thank you, Mr. Chairman.

Welcome to the committee, Mr. Secretary. As Senator Dodd indicated, I think we'll be spending a lot of time together in the next year or so.

Mr. Secretary, review of the Troubled Asset Relief Program, or TARP, reveals a record that is mixed at best. Since TARP's hasty conception last September, the Treasury Department has repeatedly stumbled in its efforts to turn it into a workable program. Rather than taking the time to devise a credible plan, Treasury and the Fed, I believe, simply demanded that Congress write a blank check. Unfortunately, Congress panicked and quickly passed the TARP, giving Treasury and the Fed exactly what they wanted.

Secretary Geithner has been -- you have been, first as president of the New York Fed and now as Treasury secretary, a key architect and now an implementer of the program.

Since TARP's creation, Treasury has vacillated about how to spend the funds. Initially Treasury was to purchase toxic assets from banks through government-run auctions. When that approach proved unworkable, Treasury decided to make direct capital injections into banks. When that approach still left large institutions without sufficient resources, Treasury embarked on a series of ad hoc financial bailouts.

Now, today, we have come full circle. Once again the Treasury plans to purchase toxic assets, this time, as you've told us, using public-private partnerships.

All of these plans, Mr. Secretary, have one thing in common: Government intervention on a massive scale into our economy. While the government has an important role to play in stemming a financial crisis, in my opinion, the programs laid out thus far by you, Mr. Secretary, go well beyond what is appropriate and necessary. As a result, TARP has become one big bailout fund, and not just for banks.

When a few insurance companies ran into trouble due to bad business decisions, Secretary Geithner, you announced that they could access TARP funds and avoid the consequences of their actions. When the automakers needed cash, Mr. Secretary, you were there with a check.

And what has Treasury accomplished so far? That's part of this hearing today. Its principal achievement over the past year has been, in my judgment, to spark the greatest financial panic this country has seen in 70 years. The Treasury and the Fed's desperate calls last September for the passage of the TARP legislation spooked investors and consumers alike. In response, the market plummeted and the economy contracted sharply.

I believe that had the Treasury, as we look back, and the Fed exercised different judgment and proceeded in a more deliberative and measured manner, the most severe aspects of this financial crisis could very well likely have been avoided, probably (not ?) without pain.

The failure to devise a clear, Mr. Secretary, and credible plan for employing TARP has also resulted in a massive waste, some people believe, of taxpayer dollars. Today the problems with our banking system remain unresolved despite Treasury having committed approximately $600 billion.

Lending is still severely depressed, and questions remain about the financial health of many of our banks, despite the result of the stress test. While the TARP has created many -- has treated -- while TARP has treated many sick banks, it certainly has not cured them. And as long as the integrity of our financial institutions remain in question, economic recovery will continue to elude us.

I believe that this uncertainty would not exist had Congress taken the time to provide a clear legislative mandate for the TARP rather than leave the program to the discretion and to the whims of Treasury's ever-changing policy preferences. That, of course, did not happen, and most of our biggest banks today continue to hold large tranches of TARP funds, allowing them to avoid making, I believe, Mr. Secretary, difficult decisions.

I fear this situation sets the stage for the creation of the American version of the zombie banks that were a principal cause of Japan's so-called lost decade. During that period, as you well know, Japan's economy stagnated because government bailouts propped up banks and sheltered them from making the changes that the free markets would have demanded and made on their own.

Another thing that the TARP has accomplished is covering up the egregious failures of our banking regulators over the past decade. TARP funds have saved financial institutions whose failures would have cast a bright light on many of our banking regulators. This should come as no surprise to many, as many of those bank regulators are now running TARP programs, including you, Mr. Secretary, yourself.

As president of the New York Fed, Mr. Secretary, you were the chief regulator of many of the financial institutions with the most serious problems, including Citicorp. Unfortunately, the Treasury also appears to be using the TARP to advance its regulatory reform agenda by replacing your prior employer -- by placing your prior employer, the Federal Reserve, at the apex of our financial regulatory regime.

I would point out to the secretary today that there's serious, serious, Mr. Secretary, unexamined questions regarding the Fed's failure to fulfill its pre-existing regulatory responsibilities. You've acknowledged some of those failures.

With that in mind, I will view with great skepticism any move to give the Fed expanded authority. In the meantime, we should be under no illusions about how difficult it will be to unwind the massive funding facility that Treasury and the Fed have constructed. The longer the TARP and these programs exist, the more markets will depend on them. As a result, it's very likely that the greatest challenge posed by this financial crisis still lies ahead, Mr. Secretary. If the Treasury and the Fed stumble in dismantling these facilities, they risk sparking another and potentially more severe crisis.

This is especially true if the Fed promises its ability to conduct monetary policy in the process. If done well, the withdrawing of government intervention will likely go unnoticed. If done poorly, we could be facing a serious inflation problem or a prolonged economic downturn.

I look forward to hearing from you, Mr. Secretary, on how you propose to retract TARP facilities and how quickly you believe it could be done and under what circumstances. In addition, I hope to learn today whether you believe that the Fed and the Treasury need to formulate a clearer framework for the administration of existing facilities to ensure that the Fed remains focused on its core mission of monetary policy.

Looking ahead, Mr. Secretary, I hope the TARP can be wound down in the right way, at the appropriate time, in a manner more deliberative and well thought out than the process by which it was created and implemented.

Thank you, Mr. Chairman.

SEN. DODD: Thank you very much, Senator.

Let me ask my colleagues, if any of you feel so compelled, you'd like to make an opening statement. If not, I'd like to get right to the secretary. But I certainly don't want to deprive anyone of the chance.

Bob, do you have --

SEN. ROBERT MENENDEZ (D-NJ): Mr. Chairman, I don't have an opening statement. I have a question for the chair, and that is, do you intend at some point today to pursue the FTA administrator's nomination, or is that not on the agenda?

SEN. DODD: Well, I have to talk to Senator Shelby.

SEN. MENENDEZ: I would just urge the chair and the ranking member to consider it if it's possible. There are a whole host of projects that are --

SEN. DODD: We're talking to the minority, and this is a person who I can tell you is highly regarded and respected. In fact -- we'll try and get that done.

SEN. MENENDEZ: Great. Thank you, Mr. Chairman.

SEN. DODD: I wasn't sure what you --

SEN. SHELBY: Yeah, thank you.

SEN. DODD: Anybody else want to make an opening comment at all or suggestion here before we start with the secretary?

Hearing none -- no takers, Mr. Secretary, so we welcome you to the committee once again.

SEC. GEITHNER: Thank you, Chairman Dodd.

SEN. DODD: (Inaudible) -- statements, documents and so forth that you want to be made a part of the record will be included.

SEC. GEITHNER: I just have a few brief opening remarks, and I look forward to getting a chance to respond to your questions and concerns. And let me just say that I would be happy to come up here as often as would be helpful. And I agree with you that these are deeply important issues to the future of the country, and they require careful public oversight and debate.

And I'm committed to sitting before you as much as would be helpful and help work through the difficult choices we're making; make sure you understand how we're balancing those choices. People aren't going to agree with all the choices we make, but we'll give you a chance to make sure you have as much exposure to our process as possible.

SEN. DODD: I welcome that very much, and I know my committee members do as well. So we appreciate that --

SEC. GEITHNER: And Senator Shelby, could I just say at the beginning that in my statement today, in my remarks, I'm not going to talk about what you call exit strategy, but I want to say that I agree very much with you that one of the biggest challenges we face, not just on the fiscal front but in the financial sector, is how we lay the foundation for walking back and unwinding these extraordinary interventions. And doing that carefully and well will be one of the most important things facing us. So I agree with you about that challenge, and I very much look forward to the chance to sit before you and talk through how best we can do that.

SEN. SHELBY: We'll have to do that to have a real market economy, will we not?

SEC. GEITHNER: We will. And, you know, you cannot -- you know, my view, Senator, as you know, is that crises don't burn themselves out. Crises this severe don't burn themselves out. To fix them requires the action of government. But for the thing to work, there need to be (credible limits ?) to walk this back, unwind it as quickly as conditions permit. That's central to the effectiveness of the strategy. And I agree with you, it's a very important (thing to do ?). But I just wanted to warn you that I'm not prepared to talk to that today. It's not quite time yet.

SEN. DODD: We all agree with that.

SEC. GEITHNER: We're not quite there yet.

SEN. DODD: Go ahead, Mr. Secretary.

SEC. GEITHNER: Thank you. And thank you to all of you on the committee today.

Last time I was here was early February. Today I'm pleased to report that there are encouraging signs that the financial system is starting to heal. Concern about systemic risk has diminished, and overall credit conditions have started to improve. These are welcome signs, but we have a long way to go. Across the country, families and businesses are still facing the most challenging economic environment they've seen in decades. And we're only at the beginning of laying the foundation for recovery.

I want to provide an update today on the status of the programs we've put in place to help repair the financial system. This administration, working very closely with you and your colleagues in the Congress, have moved very quickly. Alongside the passage of the Recovery Act, we've outlined a comprehensive set of initiatives to help restore confidence in the financial system and to restart the flow of credit.

We began with reforms to establish strong standards of transparency, accountability and oversight. We redirected the program to focus on getting the essential challenge for lending and credit working again. We launched new programs focusing on the housing market, on consumer and small business lending, and we put in place a strategy to help strengthen, recapitalize, clean up and restructure the major banks so that private capital would flow to where it was needed in the financial system.

Just a few examples of progress. Just starting on transparency, we've established a number of new online resources so that Americans can see the precise financial terms of the assistance we're providing, who's receiving assistance, what they're doing with that assistance, what's actually happening to lending across the major banks.

The president's housing program alongside actions by the Federal Reserve has helped bring down mortgage interest rates to historic lows, refinancing has surged, and the new loan modification program is just starting -- just starting to get some traction. The Federal Reserves churn asset-backed lending facility, which the Treasury supports with capital is helping to restart the asset backed securities market which is critical to consumers and businesses. To date there's been about $25 billion in total new asset backed securities issuance since the program was launched. As issuance of securities as under this program has resumed, interest rates have come down substantially.

The stress test led by the Federal Reserve has brought an unprecedented level of transparency and disclosure to the major banks, helping improve confidence in the financial system as a whole. This assessment showed that some banks needed additional common equity to ensure they could comfortably absorb extreme losses. And many were now -- but it also showed that many banks are now in a position where they could choose to begin to repay the government's investments.

To date, more than 56 billion (dollars) in additional capital funds have been raised or announced by the 19 banks, included $34 billion of common equity capital -- I think these numbers are a day behind actually -- and banks have raised more than $8 billion in non- FDIC guaranteed bonds. We're making substantial progress in supporting fundamental restructuring of GM and Chrysler. In the coming weeks, we'll be moving to put in place additional pieces of our program to help small banks get additional access to capital, to help catalyze more small business lending, to put in place our public/private investment programs to help restart the market for legacy real estate loans and securities and to finalize regulations to clarify conditions on compensation for firms receiving capital assistance from the government.

And while this is not the subject of today's hearing, we've been working very closely with this committee and your counterparts in the House to enact comprehensive regulatory reform. We've announced programs -- proposals to reduce systemic risk; to establish comprehensive oversight of derivatives markets; to give the government better tools to manage future crises with resolution authority to help contain the damage caused by the perspective failure of a large complex financial institution; we detailed plans to improve consumer and investor protection. And I want to compliment Chairman Dodd and Ranking Member Shelby for their strong leadership, not just in the housing area but in advancing important credit card reform legislation.

Just a brief update on resources committed under the Emergency Economic Stabilization Act. At the time the president was sworn in, over half of the $700 billion allocated to Treasury had already been committed. I've included a detailed table of commitments in my written testimony. As the table shows, we estimate that we still have about $100 billion in resources authorized under the EESA still available, and an additional $25 billion in estimated repayments over the next year. These are estimates only. They may overstate the amount of likely take up under these programs we've announced. They may understate the amount of repayments we're going to receive, and I want to emphasize that we still face a very challenging economic and financial environment and we need to be careful to preserve substantial resources and flexibility to deal with future contingencies.

The combined impact of these programs to date, alongside, actions by the Fed, the impact of the recovery program, the president's initiatives in the G20 to lay the foundation for global recovery -- these actions have helped improve conditions in the financial system materially. The cost of credit is starting to ease, interest rates on mortgages have dropped to historic lows and refinancing has surged, as I said, putting additional money into the pockets of millions of Americans; businesses are finding it easier to raise money in the capital markets, securities markets, asset backed securities markets are starting to open up again; state and local governments are finding it somewhat easier to finance investments in their communities in rebuilding their infrastructure; the cost of borrowing by banks has fallen substantially reflecting greater confidence.

We've already seen very substantial amount of adjustment in our financial system. Leverage has diminished. The more vulnerable parts of the non-bank financial system, banks too have diminished substantially and banks are funding themselves much more conservatively.

This is all welcome news, but I want to emphasize this is just the beginning. The cost of credit for businesses and families is still unusually high, remarkably high. Credit terms are very tight still. Bank lending is falling to both consumers and businesses. Much of this of course is the unavoidable consequence of a recession following a long period of excess borrowing and lending. But we still face ahead a prolonged period of repair and adjustment. There are still very substantial risks to recovery, and it's very important that financial institutions take advantage of the recent modest improvement in markets to strengthen their institutions and raise capital.

We need to continue to work to improve the capacity of the financial system to support a strong recovery, greater confidence in the stability in the system is an important part of this, a necessary part of this, but we need to make sure that banks are able to expand lending as demand for credit starts to increase and we need the broader securities markets working better for the same reason. And this is what our programs are designed to do. We'll continue to work to make sure they meet that objective. I look forward to working with this committee on how best to do that.

Thank you very much.

SEN. DODD: Thank you very much, Mr. Secretary. We appreciate that. And what I'm gong to do is ask the clerk to give us about five or six minutes apiece and I won't be too rigid on the time but -- so we all get a chance to raise questions with you.

Let me start off if I can. I suspect this will be a question that everyone of us would raise with you -- I'll raise it -- others may want to expand on the question. But everyone of us go back Mr. Secretary to our respective states with some regularity and when we do I suspect everyone on this side of the dance is getting questions from their businesses, small, large, medium, where's credit, how can I get credit? You guys are pushing a lot of my tax money in this.

The very bank that received my tax dollars is turning around and telling me I can't get a loan, or I can't refinance my home. That's a pretty basic question we're all getting. And they don't understand why since we're providing so much of the resources to keep these institutions afloat -- and you've made a good case why we should do that, for the well being of all of us -- but they don't understand why these institutions are not being more forthcoming at a time we're providing substantial dollars to them to keep them alive.

And so the question be are we doing all we could to get credit flowing? Are there more things that you could be doing, the Department could be doing, that we ought to be doing? But the frustration level mounts on an hourly basis with people's lack of access to credit, despite the billions that we've made available to these institutions.

SEC. GEITHNER: I hear you, Chairman, and I hear that too across the country and I agree that in many parts of the country, people don't feel they're getting better yet, they don't really feel that the availability of credit is improving materially. Small businesses who were careful, did not get overextended, did not borrow too much, still face two types of challenges. Some of them had relationships with banks that took on too much risk and are having to shrink substantially. They were unlucky in their choices of banks.

Some of them are in industries and they're seeing demand for their products shrink dramatically, as happens in any recession, and they're under a lot of pressure because of those two things. Now what we have done working with the Congress -- and I just think this is important to enumerate -- their recovery program has very substantial tax credits for small businesses, the recovery program includes a substantial increase in guarantees and a reduction in fees for small business lending programs. And we've seen lending under those programs increase 25 percent since the Recovery Act was passed.

We have proposed and laid out and are close to putting in place additional programs to provide -- to come in and have the government directly buy small business loans off the balance sheets of the banks, creating more headroom for them to lend to small businesses. Those programs have been delayed a bit partly by concerns about participation in these programs but we're close to being able to launch those programs. Those alongside the Fed facility will help reopen markets for small business lending.

We are looking at ways to get more capital into community banks. I announced two weeks ago that we're going to reopen the window for small banks to come to the Treasury and apply for additional capital, reopen the ability of some banks to establish as bank holding companies which will help as well, and I think the combined effect of these programs when in place will help.

Now they will not make it easy for a lot of businesses across the country still again because we're going through a very traumatic financial crisis that was caused in large part by too much borrowing and too much lending and the adjustment process of that will be difficult. The demand for credit is falling substantially as businesses repair their balance sheets; that process has a long ways to go. But I think our obligation is to make sure that the financial system has the capacity to make credit available to viable businesses. These programs will help. We'll continue to look at new ways to reinforce these programs. We're looking very closely with the SBA and with the Fed and we're open to new suggestions, to look at any good idea.

SEN. DODD: I want to dwell on the SBA but I got to tell you. You mentioned the word SBA and all of us have done this to audiences back home, and you get a roll of the eyes; that's the mild response. And I say this respectfully about the SBA -- I know they try hard. but the fact is that this program -- and I know some efforts have been made to increase to 90 percent the guarantees and do other things under the 7A program, but it basically is not seen as a great friend in a moment like this. So I would urge you to be --suggest that you've got bright people down there, how could we make that program be far more aggressive and supportive of what's going on out there?

If this is going to take a time for the normal private commercial lending operations to open up their doors, something better needs to be done by the SBA because it's just not seen as an ally and a friend on their side in this matter. So I just raise that with you because I can just tell you when I've raised the SBA program I get the roll of the eyes, so that's the polite response when you bring it up.

Let me if I can jump to commercial real estate, because I don't want to -- we all have limited time here. The Wall Street Journal reported on Tuesday that when it applied the stress test worst case assumptions to 940 small and midsized banks total losses would exceed $200 billion in those banks, those 940 banks through 2010 with commercial real estate loans accounting for half the losses. Two thirds of the 940 banks would fail to meet the common equity capital threshold that was applied to the 19 largest banks in the stress test.

Now we all know that over $1 trillion in commercial mortgages are coming up for renewal over the next several years, certainly it is no financing available to role these loans over. So what impact will these commercial loans have on the banking sector the broader economy, and again -- and we don't say this enough, we talk about the banking sector. I think most of us have been impressed with how our local community banks in our states have been prudent, have been conservative, have handled themselves well over the last few years, and yet they find themselves feeling tremendous pressure and stress at a time like this. So how are we going to handle this? Will this -- this light at the end of the tunnel is beginning to look like a train not relief.

SEC. GEITHNER: Like I said, this is a major challenge for banks across the country and for real estate developers and people with existing projects they're trying to refinance. You also like to say that, in general, community banks across the country came into this recession with higher capital ratios, higher quality capital in a stronger position. They were not generally part of the problem and they will be able to be a greater part of the solution because of that.

I think the best thing we can do and the most effective way we can deal with this apart from trying to get the economy back on track through the efforts in the recovery program is to make sure, again, we're providing capital where it's necessary in the financial system and that we're getting those security markets working again.

The Fed announced yesterday the very important step that it's going to extend this lending program to commercial mortgage-backed securities, both newly -- newly-issued securities and legacy assets in that area. Market responded quite favorably because the availability of financing in those markets will help get the capital markets (of those areas ?) going again. So the combination of more capital where it's necessary and getting the securities markets back to the point where they can help refinance viable projects are two very important steps to take. But you're right to say this is a significant challenge ahead still and the supervisors are going to be busy trying to make sure that the system can manage through that problem.

SEN. DODD: I have one additional question. I'm going over a little bit of time but I don't want to -- I don't want to -- I don't want this matter not to be raised. I understand that the GAO recommended in March that AIG seek concessions not only for management and employees but also from derivatives, counterparties, and creditors in return for receiving -- (inaudible) -- additional $40 billion in TARP funds allocated to the company.

SIGTARP also announced plans to review Treasury's efforts to obtain concessions from these AIG stakeholders. I understand that to date we have required no concessions at all from AIG's derivative, counterparts, and creditors, and while I accept the concerns about systemic risk consequences --that's not an illegitimate issue -- I find it hard to understand why we have to go on indefinitely paying off these companies at 100 percent in a time when AIG's not worth 100 percent -- (inaudible). And -- and -- and so where's the negotiation going on here? Why aren't we pressing back? Hell, we own about 80 percent of this company. It seems to me we ought to be pursuing this more aggressively than paying 100 percent on -- on the dollar to this.

SEC. GEITHNER: Senator, I agree. It's frustrating and it's hard to explain why this is necessary and fair. But let me just -- (inaudible) -- as we can. We do not have the authority as a government and came into this crisis without the authority to intervene to manage better the risk posed to the (system and the economy ?) of an institution like AIG. Didn't have the authority -- (our ?) system didn't prevent it taking on too much risk. I do not have the authority to manage its unwinding in a carefully measured way.

That makes it incredibly difficult for us to allocate or to negotiate effectively to reduce the value of those claims. We have no option now to selectively diminish the value of those claims without taking risk that you would have a default and its consequences for this institution at this time, and I do not believe that the system today can withstand the effects of a failure of this institution to meet its obligations. I wish it were not the case.

Nothing would make me happier than if we were not in the position today where we can start to draw -- (walk back ?) that support and diminish the government's involvement in this institution. But we do not have that ability today. If I felt we did I would do it in a second, and we are working very, very hard with the trustees and the Fed and the management of that company for them to put in place a restructuring plan which will de-risk the most risky parts of the institution and preserve and separate those underlying insurance businesses which are very good businesses still. And we have a big interest as taxpayers now in their success in maximizing value in the disposition of those companies.

That's the balance we're trying (to stake ?). If I thought there was a better way to maximize benefits to taxpayers then we would do it in a second. But without better authority -- better resolution authority -- we have very limited options in the AIG case.

SEN. DODD: Well, my time is expired. I've gone over a bit and I apologize to my colleagues. But with all due respect, Mr. Secretary, I -- there's going to need to be a better answer on this because that's -- it's too much exposure at this. So I will end on that particular note and others may want to raise questions about this. But let me turn to Senator Shelby.

SEN. SHELBY: Thank you. Mr. Secretary, I just want to pick up on where Senator Dodd was on AIG. It seems to me that this is a black hole. In other words, we keep pumping billions of dollars into AIG. It seems that from even some of your statements you hadn't -- you hadn't got all our hands around this bear, so to speak, and it's still hemorrhaging money. Some people believe that some of the companies were worth a lot more -- the insurance companies -- six months ago than they're worth today.

I don't know what they're worth today. So what -- where is the -- how are you going to back out of this? How are you going to -- to liquidate or sell parts or all of AIG and -- and -- and quit using the taxpayers' money? Because the taxpayers are upset with this, as you know, and it's a difficult situation. But you've got the bear now in the -- in the -- in the house with you. What are you going to do with it?

SEC. GEITHNER: I wish we didn't have it, Senator --

SEN. SHELBY: I know that.

SEC. GEITHNER: -- and -- and -- and, Senator, you can't feel more strongly than me that -- about the need to get the government out of this company, get the company to the point where it poses less risk to the system and those underlying insurance businesses are on a path where they can be viable going forward, and I think you're right that this -- there's no doubt that this company, not just to the Fed and the Treasury but to its board and management, proved much more complicated, much more risk than people thought, and it's proved much harder to disentangle and separate.

SEN. SHELBY: (Perhaps ?) harder than the government thought when it took it over?

SEC. GEITHNER: Much harder than the government thought. But I should just say for the beginning -- for the record much more -- (inaudible) -- than the management and board of the company felt as well, and they were the ones that led this firm to the edge of the abyss. Now, the only way forward, just to say it (sharply ?), is to bring down the risk as quickly as possible in the AIG Financial Products company that -- (inaudible).

SEN. SHELBY: How long do you think it's going to take?

SEC. GEITHNER: They brought it down very substantially. They're working very hard to bring it down.

SEN. SHELBY: What -- what do you mean by substantial? Forty percent?

SEC. GEITHNER: About half. If you look at half -- if you look at gross notionals. But that's a -- that's a start. But we want it to come down --

SEN. SHELBY: Uh-huh.

SEC. GEITHNER: -- as quickly as possible and we need to separate those underlying businesses from the risk posed by that company so they're less burdened by those losses, and again, can get back to the point where they can be a viable and the taxpayer can recoup some of the investments it's made, and we want that to go as quickly as possible. But the -- to be fair, I think the management and board of this firm are finding it incredibly difficult to unwind and disentangle those basic companies.

That's what's caused the delay, and one more thing that's very important. Again, the -- this is a -- you know, it's the worst financial crisis in 50 years. It's not an understatement, and all companies are finding it harder to sell, raise money to finance purchases in this market, and that's one other reason what's caused the delay. But the businesses are more stable today. The bleeding has slowed very substantially.

The money we made available in the last package is there as a contingency. We're going to make sure that's used as carefully as possible if it has to be used, and again, Senator, you can't feel more strongly than me about the importance of getting this company on a path -- (inaudible) -- a restructuring plan that -- (inaudible) -- can execute over a reasonable period of time so we reduce the risk it poses to the system.

SEN. SHELBY: How would the AIG bailout have been different, Mr. Secretary, if a new resolution authority that we talk about and you talk about that -- that would have -- had been in place? In other words, how -- how could you have dealt with it if you had the so- called authority that you claim you didn't have, and how fast would it be?

SEC. GEITHNER: Well, the great virtue of the model put in place by the Congress for small banks in the country which the FDIC administers is it gives the government the ability to come in more quickly and a much greater set of options for unwinding, cleaning up, separate the bad from the good, putting the good back into the market. It gives the FDIC the authority to guarantee, temporarily, to put capital in, to do other steps that, again, help facilitate a quicker, more surgical separation, let the government get -- to get out more quickly.

Without that authority, the Fed and the Treasury were (opposed to ?) were forced to do a very complicated mix of funding and capital things with -- with less authority to provide temporary guarantees -- other things that would have been more effective, allow quicker disposition. Now, our options were substantially constrained though, Senator, by the complexity of this firm and by the fact that the world is -- was in such a fragile state that the ability to sell these businesses quickly was very -- was very limited.

SEN. SHELBY: Will you be involved in AIG, say, a year from now?

SEC. GEITHNER: A year from now?

SEN. SHELBY: You hope not, I hope.

SEC. GEITHNER: I think realistically this is going to take time, and I think that's true. You know, you -- you said at the beginning what's very important which is you want us to begin to plan for a credible exit from the extraordinary interventions we've taken, but in some parts of the financial system it's going to take a longer period of time than that, probably in AIG too.

SEN. SHELBY: I -- I -- I hope we're going to have another round, but the Fed's role -- in your last job before you became secretary of the Treasury, as president of the Federal Reserve Bank of New York you had bank examination enforcement responsibilities and monetary policy responsibilities with your permanent vote on the Federal Open Market Committee. You also, as president of the Federal Reserve Bank of New York, you reported to a board of directors, two-thirds of whom are elected by your member banks.

That's a system which, I think, is conflicted. In other words, an inherent web of conflicts is built into the DNA of the Fed as it now exists. You proposed, Mr. Secretary, now to complicate the web further, I think, by making the Fed the systemic risk regulator. In light of the Fed -- and you played a role in it -- of the Fed's track record, don't you think there is a significant risk that in the name of systemic risk regulation the Fed would subordinate its bank regulatory and monetary policy functions in order to protect and perhaps preserve the biggest institution? Does that concern you?

SEC. GEITHNER: I don't -- I don't think there is a significant risk of that and I would not want to --

SEN. SHELBY: Why not?

SEC. GEITHNER: -- I would not want to take a significant risk of that happening. But can I go through -- this is really a complicated question, Senator. Let me go through a few pieces of your question. Congress designed the Federal Reserve System almost a century ago. As a part of that system, it created this network of 12 Reserve banks set up as a complicated mix of public-private institutions with boards as Congress designed by law requiring there'd be three banks, three directors elected by banks, and three directors representing the public interest appointed by the Board of Governors. That's the system the Fed has operated under the laws of the land for many, many decades.

SEN. SHELBY: Do you believe that's a fair system in today's 21st century -- considering all the conflicts?

SEC. GEITHNER: I believe -- and I wanted to get this, because I'm trying to get to your question.

SEN. SHELBY: Go ahead.

SEC. GEITHNER: I believe that as part of regulatory reform, as part of our effort to fix this system and make sure we don't face a threat like this again, we're going to take a -- have to take a comprehensive look at every aspect of our system, the full mix of authorities, how supervision is conducted.

And it will require not just legislative changes, like what we're discussing with your colleagues on the committee, but it will require that we fundamentally reexamine how supervision is conducted. And where there are appearances of conflicts or actual conflicts across the system, we're going to want to carefully look at those and see we fix them.

But I just want to say that the Fed has an enormously elaborate set of protections in place against any conflicts. Those directors play no role in supervision. They play no role in the Fed's lending programs, because for the reasons you said -- it would be inappropriate for them to do so.

But as I said, I think it's important we take a fresh look at these things. I've been very open with the committee and honest with the committee. I think that in all aspects of supervision -- including those areas the Fed was responsible for -- we did not get many things right and we need to do better going forward. And we need to work with you to make sure we put in place a framework that does that.

SEN. SHELBY: Mr. Secretary, but when banks have a role in selecting who their regulator's going to be, that seems a problem in the making.

SEC. GEITHNER: I understand about the awkwardness of that structure. But again, the system as designed by the Congress and applied over the decades --

SEN. SHELBY: I understand that. The Congress makes mistakes --

SEC. GEITHNER: No. But I think it's a -- a lot of protections in place against that risk. They have no role in setting policy in applying supervision.

SEN. SHELBY: But they have role of selecting the president -- like you or anybody of the Reserve Bank.

SEC. GEITHNER: They have a role, but the board of governors has to approve that selection process.

SEN. SHELBY: I know.

SEC. GEITHNER: There's a lot of checks and balances. But as I said, we should take a fresh look at conflicts across this. And because you do not want to have anybody in public office have their actions viewed through the prism of concern that they're motivated by anything but the broader interests of the system.

So I share that basic objective.

SEN. DODD: Thank you, Senator.

And this is a subject matter that's going to consume a lot of this committee's time and attention -- obviously with the secretary and others -- as we move forward on the architecture.

Let me turn to Senator Reed of Rhode Island.

SEN. JACK REED (D-RI): Thank you very much, Mr. Chairman.

Welcome, Mr. Secretary.

As Senator Dodd and Senator Shelby were talking, and you were responding about your lack of leverage regarding AIG securities, but tonight -- this afternoon the president will sign a bill giving you some leverage with respect to the warrants that you hold, because now you will have the opportunity to hold those warrants. And I'm told now they are worth to taxpayers about $5 billion. So there's some return to the investment the taxpayers have made.

And I would suspect in the days going forward, you will let us know how you will proceed in general with respect to your ability now to hold or to sell or to sell publicly these warrants. That's just an initial point.

There is a significant issue of raising private capital in the banking system. But one of the issues that may be a potential problem is the role of the private equity companies. The Federal Reserve has determined that these companies may not directly invest in banks and their regulatory instructions.

A few days ago, OTS accepted the direct investment of a private equity company with little fanfare and I think with little documentation. This raises, in my mind, the issue of regulatory arbitrage. The Federal Reserve has made a careful decision that this is not consistent with their policy. Another federal agency has said it's okay.

OTS, for the record, regulative AIG, regulated WAMU. Countrywide changed its charter from a national bank under Federal Reserve and comptroller supervision to become a regulated entity under OTS. So this, I think, is a problem in the making. It requires, I think, a consistent policy across all regulatory -- the Federal Reserve, OCC, FDIC and OTS.

And it requires, I think also, ventilating that policy with the Congress and the public so that we understand the transparency that's required; we understand that the conflicts of interest will not be tolerated; we understand who are the investors are in these entities. Many of them have sovereign funds from countries that we'd at least be interested in knowing about.

So Mr. Secretary, I would hope you would take very aggressive action, very timely action. I understand under the statute that you cannot proceed in the matter or proceeding of the OTS, but you have general supervision of OTS. I would urge you to use that supervisory authority in conjunction with the Federal Reserve and other regulators.

Would you like to comment?

SEC. GEITHNER: Senator, I think you're right that this is an important issue. And we have to balance the important objective of trying to make sure that we maximize the chance and we get new capital into this financial system.

But the specific question on the appropriate role of private equity in banks requires careful thought and care. I also very much agree that we should have one standard. A central part of what made this system weak was the opportunities we created and allowed for arbitrage to getting around a set of protections Congress put in place. So I very much agree.

And I would like to come back to you and maybe jointly have the Fed and the OTC and the supervisors -- we'll provide a little explanation, but we think policy is today what it should be going forward on this very important question.

SEN. REED: Well, I appreciate that, Mr. Secretary. But in the interim, there's a huge door that's been opened. And people will rush in. And they will rush in unless you take very prompt action to ensure that there's at least a standstill.

SEC. GEITHNER: Promptly come to the committee and report. And I think that --

SEN. REED: Well, promptly direct OTS that they have to be -- their conclusions have to be vetted by you, I would assume. This is a general policy matter. This is not a specific issue.

SEC. GEITHNER: Senator, we're on it. And I agree with you about the need for deliberate speed.

SEN. REED: Let me ask another question here is that I understand there is an acting director of OTS. When is the president going to appoint a director, which is subject to confirmation by the Senate?

We have the irony here of policy literally being made by an acting director -- and I believe the individual is the third director in the last, what -- six months?

SEC. GEITHNER: It's not a good situation, I agree. And transitions like this are challenging. And we are moving quickly to try to identify a credible leader for this important institution and hope to be able to nominate somebody relatively soon.

But in this case too, I agree with you about the need for speed.

SEN. REED: Well, again, this is a situation where this policy seems to be emerging from an organization that does not have a presidential appointee confirmed by the United States Senate.

So again, I think adding urgency to your role and making sure that you harmonize this policy -- whatever it may be. And again, I think we all recognize that the ultimate solution to our difficulties is a vibrant, privately capitalized bank institution, but well supervised. And the well-supervised part needs a lot of work.

SEC. GEITHNER: I couldn't agree more.

SEN. REED: Thank you.

SEN. DODD: (Off mike.) Senator Bunning.

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

There are so many things I'd like to ask you and I am not going to get the chance to do it all.

You mentioned community banks. And you mentioned that they would be in the lending business more. You haven't been to Kentucky. Kentucky's community banks attack me when I go into Kentucky, because of the new assessment of the FDIC.

Now, that will change under the new housing bill that we passed, but you say they're going to lend more money. They're not going to lend more money out very fast. You're looking about six months to a year down the road before they start. And none of those banks -- none of the community banks are part of the problem.

They did not -- I don't know if you know it or not, but Kentucky was in the lowest five states as far as repossessions are concerned. We're not in the lowest five of anything usually in Kentucky, but we were because of our community bankers.

So one community banker with the assessment of going from 40,000 (dollars) to 800,000 (dollars) with the new assessment -- now, that'll be changed, but she isn't going to make any loans until it is changed.

Don't we own 80 percent of AIG?

SEC. GEITHNER: In effect we do.

SEN. BUNNING: Okay. Then tell me why we don't control what AIG does.

SEC. GEITHNER: Well, we can have substantial influence on what they do, but that doesn't affect, really, the range of options we have for dealing with the issue raised by your chairman on how we treat AIG's counterparties and creditors.

That's a difficult issue that involves --

SEN. BUNNING: Well, but if you owned a company and you are in control by 80 percent ownership in that company, you don't have to pay a dollar for a dollar on those losses. You can say, we're going to try to settle with you for 50 cents on the dollar -- just like you've done with the losses that you forced the banks to take on Chrysler and General Motors!

SEC. GEITHNER: Senator, I understand everyone's frustration with this issue. And I would like nothing better than to be in a different position.

But unless we are prepared to contemplate the risks to the system of default by AIG on its obligations, then we have no choice but to help AIG meet those obligations.

And people may disagree about those judgments, Senator. But what the country of the United States went through in the last six months of last year is substantially due to what happened because of the failure of some of the largest institutions in the world, default by them on their obligations. And that caused a traumatic, enormously damaging loss of confidence, loss of wealth in our system, and a big part of why growth decline in our economy at 6 percent --

SEN. BUNNING: Well, we can disagree on that because we can disagree that the solutions proposed did not solve the problem, and the problem then exacerbated throughout the United States and the population in the United States when they saw no reaction in the markets. And the markets then created even a deeper spiral for our economy, and it was a self-fulfilling prophecy. So your solution to the problem may not have been the right solution.

SEC. GEITHNER: Well, that is, you're absolutely right that none of us can know with certainty, in retrospect even, whether we chose the best of the available options at that time. But one thing that I am quite confident is true, which is the damage caused by the failure and default by some of the largest institutions at that period of time made everything substantially worse, and our inability and failure to arrest that was part of the deepening recession in the United States and why there's so much damage coming into this.

Now AIG, if AIG had defaulted it would have been maturely worse across the country and the world. Now again, that's another judgment that everybody will disagree, will agree with, but I'm quite confident that's the case. And I think right today we're still in a position where --

SEN. BUNNING: Well, that's the way it was sold. I mean that's the way the TARP was sold that the sky was going to fall in if we didn't do something. That's the way you got --

SEC. GEITHNER: I don't, I believe that what Congress did at that point was absolutely essential to hold this system together, and without that authority and the actions to put capital in the system I think we would not have a financial system today.

SEN. BUNNING: I have some questions, just three quick questions on Chrysler and General Motors. Did anyone in your department or administration threaten or attempt to intimidate Chrysler or GM, creditors, to give up their contractual rights or priorities in bankruptcy?

SEC. GEITHNER: I do not believe anyone did what you suggested. I think what we did in that case was --

SEN. BUNNING: Well, there's another question. Has there been any influence by your department or the administration on which auto dealerships are being dropped by Chrysler and/or General Motors?

SEC. GEITHNER: We are trying very carefully not to be involved in those decisions. We think those are decisions for the board and management of these companies.

SEN. BUNNING: Has there been any influence by your department or the administration on which auto plants are to be closed or sold by Chrysler and/or General Motors?

SEC. GEITHNER: Same answer. Our job is to make sure that the overall plan leaves these companies in a position where over the longer term they're going to emerge viable. That's what we're focused on, that's what we're trying to facilitate. Those broad judgments you refer to we want to be judgments of management and the board.

SEN. BUNNING: Thank you.

SEN. DODD: Thank you very much. Senator Menendez.

SEN. ROBERT MENENDEZ (D-NJ): Thank you, Mr. Chair. Mr. Secretary, thank you for your service under incredibly difficult times. I certainly appreciate it. Let me ask you though, I listened to your statement and some of your responses as it relates to where we're at and liquefying the credit crisis. Lending is actually down. Part of that is because of the economy. But there's also still very significant demand for credit. And yet it's not acquirable.

And so I look at what Larry Summers sent to us when we were all contemplating the second tranche of TARP and saying that the administration was going to impose tough and transparent conditions on firms receiving taxpayer assistance including ensuring that resources are directed to increasing lending. And I hear where we're at, and I have two concerns.

One is, how are we going to get the lending to take place?

Secondly, based upon what still exists out there and your categorization of it, do you intend at this time to come back to the Congress and ask for anymore TARP funding?

And thirdly, as it relates to lending, community banks even though they are facing pressures are still the one entity, at least in New Jersey, that I find that are still engaged at a level that is really about Main Street. But it seems to me that all of our focus is on the 19 largest banks, and we have to be thinking about our policies in a way that ultimately also look at the community banks and thinking about how our policies affect them, not doing it in a macro way in which we're focusing on the 19 banks but not thinking about how that works for community banks.

So can you give me a sense, one, what are you doing about the actual lending, even though the economy is obviously still in significant challenges but there is still a demand for credit?

Secondly, do you think that you're going to be coming back to the Congress for TARP funds or similar funds?

And thirdly, how do we start looking at these community banks, and even under the capital purchase program on TARP how do we look at the conditions for community banks?

SEC. GEITHNER: Excellent questions.

SEN. MENENDEZ: I only ask excellent questions. (audience laughter)

SEC. GEITHNER: Let me try to go through them quickly. As you said, the dominant imperative, the only reason we're doing any of these programs are to try to make sure there's enough credit to support a growing economy. And as I said, I think the best way we know to do that is to make sure there's capital where it needs to be, people raise capital where they can. We put capital in where they can't. And we get the credit markets, asset-backed securities markets, going again.

I don't know a better way to do it than those two things. And you're right that as you said in a recession where the economy is going like this, demand for credit will fall. And we get volume go very, very high as the share of GDP and so demand for credit will fall more in this kind of a recession than it would in a normal recession. But still, and I think you're right and you can see this is in the fact that interest rates are still very high, demand for credit is greater than what looks like the available supply.

That's why it's so important that we get capital into these institutions, get those markets working again.

The dollar as capital produces about $12 of .lending capacity. The government before it came into office put about $200 billion of capital into banks. So that's about, say, more than $2 trillion of lending capacity otherwise would not exist. And without that capital you would have lending capacity shrink by more than $2 trillion.

As a result of this focus on the larger banks, you're right to say the large banks are not the entire banking system but they are about 50 percent of loans and about three-quarters assets in the banking system. Without stability in those institutions, the economy would be weaker. But community banks play a critical role in this stuff. We've been moving very quickly to try to make sure our applications are processed. We have more people processing those applications. They are concerned, frankly still, about participating in this program. They're worried about the stigma that comes with participation. We need to make it more comfortable for them to come and not feel they're going to be stigmatized and penalized for coming for capital.

As I said in my remarks, we believe we still have something a bit north of $100 billion in uncommitted resources available to deploy to these objectives to get the credit flowing again. We're going to use that as carefully as we can. At this point I have no plans to come to the Congress and ask for additional resources and authority. I don't know whether that's likely of not, but at this point I have no plans to do so.

But again, our biggest imperative because the economy is still going through such a challenging period is to make sure we're doing as much as we can so that the financial is not going to like slow recovery, arrested earlier, deep in the recession.

SEN. MENENDEZ: Well, I hear your qualifier at this point, and I understand that. And these are uncertain times. But I have to be honest with you. Some of us --

SEC. GEITHNER: You'd like us to come.

SEN. MENENDEZ: (laughs) I always welcome you before the committee. I don't know about coming to ask for money for TARP. I'll be honest with you about that. But no, some of us who have supported this because we thought it was essential to strengthen the financial institutions, not because for their sake but for what it meant to the overall economy and to Main Street. But that Main Street is still having challenges, it's still not getting access to the credit that it seeks even if that's overall reduced. But there's still a credit demand. And therefore the schoolteacher that's got a 720 credit score can't get a car that she needs to get to work, and the small contractor comes up to me and says, I don't have my credit line at my supplier anymore, and I can't get a credit line and get the supplies to do the work that keeps the people I have employed. And that's what I'm worried about.

We may have created $2 trillion of credit capacity. I don't know that we've used that credit capacity that you're described or that the institutions have used that credit capacity in this period of time.

SEC. GEITHNER: No, I agree. But I think you stated it exactly right. The real lifts to the economy is you had viable businesses that were relatively prudent, didn't over-extend themselves, get forced to shrink or close because there's not credit available for them to keep operating. That is the principal challenge we face still, something we've got to keep working very hard at.

And that's why I believe these programs are so important. We need to make sure that banks are willing to come and take capital where necessary, that they raise capital, and we get the securities markets working better. And we've got a pretty effective set of programs in place, but they're just beginning. And we've got to keep at it, make sure they're working to the maximum extent we can.

SEN. MENENDEZ: Thank you.

SEN. DODD: Thank you very much, Senator. Senator Martinez.

SEN. MEL MARTINEZ (R-FL): Mr. Chairman, thank you very much. And Secretary Geithner, again thanks for your service. I agree with Secretary Menendez: you're serving in very difficult and unusual times.

But let me follow up on Senator Menendez's question and the liquidity of local banks, the very problem he's talking about, the local contractor and that sort of thing. What I hear from bankers when I ask them, because that's the other side of the equation, they tell me, "Regulators are telling me not to lend. Regulators are telling me to increase my reserves. Regulators are telling me to grow my capital. But we're fine. We could be lending more, except they're coming back in two months, and they told us that we better not have so many real estate loans. Well, in Florida that's like telling a man in the desert that you can't drink water. What are we going to do? What is the issue there?"

SEC. GEITHNER: Because I've heard those concerns from banks across the country as well.


SEC. GEITHNER: And I know it's something that supervisors are the national level are trying to make sure they get the balance right. I'm not sure they have the balance right. But it's their responsibility to get that balance right. I think it's important to recognize that we are in the middle of a financial crisis that was caused by banks, significantly caused by banks being over-extended.

SEN. MARTINEZ: Well, maybe that's when they should have been telling them to lend less. Not now when the system needs the money.

SEC. GEITHNER: That's true, and it's a difficult balance. But I think we have a very diverse banking system. Many banks came into this with very strong capital and they will be growing and expanding. And they will be taking business away from their weak competitors. But there are some institutions and banks that probably got themselves a little over-extended, and they're going to probably have to be a little bit more conservative going forward.

There's probably no way around that, and we don't want to have a financial scene where those institutions are kept going on a level that they're not going to be viable over time. And that's why the balance is so difficult. But I agree with you about the concern. I hear it too. Supervisors put out a statement in November trying to be responsive to this concern, but I don't feel like it's gotten better.

SEN. MARTINEZ: It's not.

SEC. GEITHNER: And it's something I know they are trying to be attentive to.

SEN. MARTINEZ: Well, I appreciate if you'd continue to pursue that issue. Just as a follow-up to Senator Bunning, the issue of board of directors of these car companies. In an unusual time like this it's difficult to know exactly where the fiduciary responsibility lies. However, I still continue to believe that their fiduciary responsibility lies to the stockholders of the company, first and foremost. And therefore they should be acting as independent of government as they possibly could, with our government pressure to take actions or whatever. But it troubles me when I hear that the CEO has been removed by directions from government, or that boards of directors are being told that they're not going to be staying on but that new directors are going to come. That I find troubling, and I'd like a comment from you on that.

SEC. GEITHNER: I understand those concerns. But let me try to explain what the framework is we're using for making these judgments. When institutions get themselves to the point where they need to come to the government for assistance to restructure and there's no alternative for them, then it is our obligation to make sure they have a strong enough board of management so they're going to be able to emerge from this viable without government assistance over time. That is a very important obligation we have.

But I agree with you completely that we do not want to have the government involved in day to day management decisions. We want to structure these arrangements so that we get out as quickly as possible, and where we take action to help strengthen boards or management in that case, those new directors are going to have a fiduciary obligation to shareholders to maximizes shareholder value. That will be their obligation going forward.

SEN. MARTINEZ: Let me go into an area which is TARP transparency. Sen. Warner and I and Senator Brown have filed a transparency, Senate Bill 910, which has to do with TARP transparency, the idea being that we want to make readily information the information, where the funds have gone, how much of them remain, who has gotten them, what they're doing with them. And I hope you could support that type of legislation. I think it would give the public a great deal of confidence about what we are doing in government today with so many incredible amounts of dollars of their tax dollars.

SEC. GEITHNER: I'm committed to giving as much transparency in the public as we can. And I'm happy to take a close look at those proposals. And it's very important to me that we have as much explanation and detail in the public domain about the financial cost of these programs, their objectives, how much is being spent, how much is still available, what they are achieving, what they are not achieving. So I'd very much share that objective.

SEN. MARTINEZ: Mr. Chairman, I'd like to put on the record a letter from a number of consumer groups that are very supportive of this legislation and have that be part of the --

SEN. DODD: It will be so included.

SEN. MARTINEZ: Finally, let me just say that, with the remaining moments I have, one of the issues that I still see out there like the credit problem with banks and local banks is the TALF issue. There are areas of securitizing money that would be very, very helpful again to the system to put people to work and back to work. Two of the areas that would be very, very important in my state and I think in many others is the area of the timesharing industry where securitizing their mortgages would be of tremendous help to bring liquidity. You know, they have a marketplace where people want to buy these units. However, they can't do the financing because there is no secondary market for them at this moment in time.

The second one is foreplanning for recreational boats, watercraft. This is a huge industry in my state from the manufacturing to the sale to the use. And again there you see businesses that have a good business track record and what not but simply cannot stay open because their floor plants are being closed. These are two areas that I know might seem frivolous, but these are job creating industries in a state like Florida. And I would implore your attention to extending TALF so that these industries could be participants in that, just like we've done for car fore-planning and some of the other areas, credit card and other areas where we've done it.

SEC. GEITHNER: Senator, I'd be happy to take a careful look at that and talk to the fed about what's possible in that area. I do want to underscore as you did that this is a very effective program, very important program. It would not be possible without the Federal Reserve. Treasury can't do it on its own, and we'd like to make sure it works to the maximum benefit of this broad objective of making sure that it's getting credit flowing again. So I agree with you about the importance of the program. I'm happy to take a careful look at those suggestions.

SEN. MARTINEZ: Thank you, Mr. Secretary.

SEN. DODD: Thank you, Senator, very much. Senator Brown.

SEN. SHERROD BROWN (D-OH): Thank you, Mr. Chairman. Mr. Secretary, thank you for joining us. I want to follow up on a couple of questions that Senator Bunning mentioned about the auto industry. News reports tell us that the GM plants and their restructuring that they are now working through with the UAW to close 16 plants in the United States and cut more than 20,000 jobs. The same reports tell us that the company is planning to increase imports from plants in Mexico, South Korea and China, the emphasis has been especially on China, a country where GM has a major presence, do a lot of car assembly and production there and sell to that market.

But now they're talking about closing plants down here and opening plants in China and selling them back. You and the Automobile Task Force will decide whether to grant GM billions more in loans on top of the $13.4 billion. What gives here? The overall plan that you have to approve, you have to show you need a viable plan overall to approve. What gives here? What's going on here?

SEC. GEITHNER: Well, Senator, you know, it's a difficult balance. You know, our I think objective is, the present objective is to try to make sure that we help facilitate a restructuring that will leave this firm in existence, save it from bankruptcy, allow it to operate over time as a viable company without government support. That's what we're trying to do, and we're doing exceptional things to try to make that possible. But I do not believe that we can do that and also be involved in making detailed decisions about how they run their business and how they do that. And that's the balance we're trying to strike. We're trying to make sure those decisions are left to the board of management, and we leave our roles to try to make sure that the overall plan is sufficiently strong that it's going to leave them viable so the taxpayers interests will be protected.

SEN. BROWN: So are you raising -- it's a firestorm in this country when we give billions to banks and they pay huge bonuses. You haven't seen anything yet for what's going to happen if we put billions into auto companies and they shut down plants in this country and open plants in China at a dollar an hour or less. Are you pushing back on the auto industry in their restructuring? Is the government representing taxpayers and representing workers and communities pushing back on their including anything like this plan to shut down plants in the United States and move them abroad, open production, open plants and produce and sell back here?

SEC. GEITHNER: Well, then Senator, I think just to be probably fair to the facts in this case I probably should come back to you with more detail on exactly --

SEN. BROWN: We want to know the facts. Yeah. We only know that GM told us that, remember as a kid when I remember reading that Charles Wilson, an Ohioan I would add, a CEO of General Motors said, What's good for GM is good for the United States, and vice versa," however he said that. It's an interesting point to make. But if you were to ask GM they simply said, we're not going to use tax dollars to open plants in China, which really means absolutely nothing. They're not going to use these tax dollars or these dollars to open plants in China.

So in a way no, but we're counting on you as representatives of this government, and I understand GM -- I mean, GM helped to push through permanent normal trade relations with China. They write the rules; then they say, well the only place, way we can compete is to go to China. Sorry, those are the rules of globalization," even though their CEO was wandering the hall in the House and Senate getting votes one by one by one for this trade policy.

SEC. GEITHNER: Senator, I just want to -- the scale of what we're doing.

Because the president is committed to try to make sure these firms emerge viable over time, that they are saved from the prospect of going out of existence, we are doing exceptional things to try to help facilitate a restructuring that would not be possible without the government playing a temporary role as --

SEN. BROWN: I get that. Although let me ask you --

SEC. GEITHNER: And that will save -- that will save thousands and thousands and thousands of jobs in this country.

SEN. BROWN: Well, I get the economic argument. But, I also get that -- let me take it from another direction, and if you're doing exceptional and extraordinary things.

Chairman Bernanke said last year that China's currency misalignment is, quote, unquote, "an effective subsidy." Senator Obama -- then Senator Obama sponsored legislation that currency manipulation is a subsidy that should be offset with duties. The analysis in your -- in Treasury's April 15th report on exchange rates shows China is cheating by manipulating the currency. But then your report does not make the conclusion that China is manipulating its currency. And the Treasury and the government seem to push back on this whole currency issue.

So, you're saying, you're implying -- GM is saying, you have not affirmed that, but GM is saying, well, we, I think they're saying, 'We've got to, in order to cut costs and stay competitive and save American jobs, we've got to cut American jobs and open plants in China, and send them back.' But, then you're unwilling to stand up on currency and deal with that subsidy that makes it more attractive for China -- for GM to go to China and sell cars back to the United States.

SEC. GEITHNER: Senator, I don't agree with that characterization. That is not our policy with respect to China. And --

SEN. BROWN: What's not your policy?

SEC. GEITHNER: The way you just described.

SEN. BROWN: Which part -- the currency part, or the GM going to China, is not your policy?

SEC. GEITHNER: Neither are our policy. But, just from the China case, let me explain what the report laid out.

This is a -- it is an important issue. China has allowed their exchange rate to appreciate significantly. They are intervening substantially less. They're committed to moving to a more flexible system over time. They are moving very actively to help stimulate domestic demand, so their economy is growing more rapidly, is a growing market for U.S. exports and other markets around the world.

We are focused on this issue. We're going to continue to encourage further progress. But, that's what the report --

SEN. BROWN: Tell me how you define progress on their currency floating? Is it 3 percent --

SEC. GEITHNER: Well, again --

SEN. BROWN: -- 5 percent in the last five years?

SEC. GEITHNER: Well, again, if you look back there's been very substantial change over the last two years. They're committed to further evolution. We want --

SEN. BROWN: Mr. Secretary --

SEC. GEITHNER: -- to encourage that.

SEN. BROWN: Mr. Secretary, what does "substantial" mean, in percentage? When economists say 40 percent valuation differential in the Chinese currency, versus the floating world currency -- floating currencies around the world, what percent have -- has --

SEC. GEITHNER: I believe what's happened has been substantial, in percentage terms, relative to what people estimate is the potential undervaluation of their currency --

SEN. BROWN: I guess I really want more -- something more than "substantial." If you can at least --

SEC. GEITHNER: You'd like it to be more.

SEN. BROWN: No, I would like it to be more. I'd like a figure. "Substantial" to you probably doesn't mean substantial to me. I mean, is it 2 (percent), is it 5 (percent), is it 20 (percent), is it 30 (percent) of the floating --

SEC. GEITHNER: Well, I don't want to misstate the numbers, but those are just facts. I'd be happy to provide the --

(Cross talk.)

SEN. BROWN: Okay, I would like -- I would like that.

SEC. GEITHNER: I would be happy to.

SEN. BROWN: I don't think it's fair to characterize it as "substantial," because I think the numbers are a small percentage of the 40. But, --

SEC. GEITHNER: Look, I understand your concern in this, that's why we're working to encourage further progress. This is as important to us -- to the administration, to the president and to the country, and we want it to happen. And we're going to continue to encourage it.

But, again, it's important to play -- that what China is doing today is playing a very constructive, stabilizing role as the world goes through the worst recession in decades. And so you need to look at the full picture, in terms of what they're doing to strengthen their economy and their commitment to further evolution.

SEN. BROWN: Yeah, I've looked at the full picture for 10 years, Mr. Secretary, and I have not seen the progress. And I do think they play a major role. I appreciate what they've done on their own stimulus, in encouraging consumption in their country. They came to the table pretty late on that. There are lots of issues there. But, I thank you, Mr. Secretary.

SEN. DODD: I thank my -- you know, just to -- my colleagues will recall the very first hearing that I held as chairman of this committee in January of 2007, or maybe February, was on currency manipulation, and your predecessor was the first witness before the committee. So, this issue is with us.

And I just got to say to you, Mr. Secretary -- and I want to move then on to Senator Corker, when you see what access we have to Chinese markets, with U.S. products, it's terribly frustrating, to put it mildly. I think I saw the other day where 20 American films are allowed to be shown in China. That's the quota. And I don't know the number of automobiles, but it's rather limited of what we can export into that market.

So, in addition to the currency manipulation, this would be more warmly received, understanding where China is, if, in fact, they were willing to take a lot more of our products on their shelves than we do of theirs. And so it's just a sore, sore point with a lot of our people.

SEC. GEITHNER: I'm nodding because I agree with you, of course, about that important imperative.

SEN. DODD: Senator Corker.

SEN. BOB CORKER (R-TN): Mr. Chairman, thank you.

And, Mr. Secretary, thank you for being here. I do appreciate the timely forwarding of your testimony last night. I hope that will continue. I very much appreciate that.

And just a couple of editorial comments: On the AIG situation, we've heard now for six or eight months that there's no resolution authority to deal with that entity. My guess is that, on a one-off basis, if you were to ask for that, instead of pumping additional monies into a company that really has turned out to be a honey pot for many of the institutions that have relationships with it -- and my guess is that we've had numbers of vehicles come through this body, that would pass pretty quickly.

So, I don't know why the Treasury hasn't asked for conservatorship ability to deal with that entity. Again, my guess is it'd be, like, 100-to-zip in the Senate and 435-to-zip in the House. So, I think continuing to hide behind not having resolution authority for AIG, and continuing to pay out 100 cents on the dollar -- which we all know is a major honey pot for many -- my guess is we would work with you to give you that authority.

And I know you have particular authorship of that. My guess is you'd like to see it through in an orderly way. So I hope that --

SEC. GEITHNER: We'll welcome that, Senator. And could I just say, Mr. Senator, you know, we have provided draft legislation --

SEN. CORKER: For overall resolution authority. But, I think if you came to us today -- as, by the way, Paulson did with Fannie and Freddie, on a one-off basis, my guess it would be passed. So, I don't think that argument holds water anymore, okay.

I think you could get the authority for this one organization very, very quickly. So, to me, there's something else driving -- something else is driving this, if not --

And one other editorial comment. I know that we're going to have Auto hearings later. And I realize that those negotiations are underway now. I do want to offer one comment.

I know that you all have offered ownership stakes in most unusual ways. I imagine there are streets in our country where there's a retiree -- part of the Greatest Generation, those people who came before us, that bought GM bonds thinking that that was their ticket to retirement.

And sitting right beside them, a neighbor next door, might be a UAW worker that's being treated totally differently. I mean, the latest GM buy-out is now set with 50 percent ownership by the taxpayers; 40 percent ownership, 39 in change by the UAW, and yet the bondholder is basically becoming toast. To me, is something that's very politically, philosophically motivated in a way that shows no balance.

Now, I think most of us are aware up here that once this is done -- according to Steve Rattner, you're still going to have $80 billion in debt at GM. I'm not sure the public is fully aware of that yet. So, after the bond exchange there's going to be $80 billion in debt left, which is more debt than we began with -- GM had $62 billion when this all began, okay.

And so my guess is you're going to have to make additional offers, okay. The company cannot sustain $80 billion in debt. I'm asking that you consider (FNIS ?) when you make the offer again, because there's going to have to be another exchange offer made; that you treat other retirees that have invested in these bonds, thinking that GM would be something that they could -- and not do it in such a politically motivated way.

I've heard that -- there's concerns about strikes. I can't imagine a greater public relations disaster ever happening, would be a strike by the UAW if this, sort of, non-prorated bankruptcy structure isn't held to. But, I would just hope you would consider that.

So, let me just move on. Those are a couple of -- and I hear the word "trying." You're artfully using the word "trying" to stay out of those decisions. Look, I know that (Fretsel ?) is going over to see the Treasury -- and the UAW the day after meeting with us in a couple weeks, to make these major decisions. I hope that they will be done based on what is best for the company and not just certain parts of the country.

Let me just move to the resolution --

SEC. GEITHNER: Senator, could I -- you're not asking me to respond now, but as you said at the beginning of your question, I think it's very important we go through these things, Mr. Chairman, once we get -- we're through the first. Because, you're talking about a set of prospective concerns which (are) probably best addressed when we see the package that's announced, and then we can talk through that.

But, of course, we want to see a fair and balanced package that produces a viable company over the longer term. And I understand your point. So, I just want to say, not responding to your concern and suggestions, it's not because I think they're justified, it's just I think it's -- it's not possible to do it justice until we get to the other side of this.

SEN. CORKER: Well, I would hope you would not deem to first offer fair. And I would hope that you would intervene in some fashion, because it's obviously a strong philosophical and political motivation. When you look at $27 billion in debt being worth 4.5 percent of the company, and $10.5 billion in debt being worth 39 percent of the company, you know most students in our country would consider that to be unfair.

But let me just move on to a bigger philosophical issue.

SEC. GEITHNER: Why don't you let me come back and talk about that once we get through the first part -- (inaudible).

SEN. CORKER: And that's why we want it pressed. We know there's still, again, $80 billion that's got to be dealt with. After all this occurs, I think the taxpayers probably would be alarmed to know that. But there's still a lot to be done.

On the resolution authority, you came before us in sort of a private meeting and then since had sort of a public hearing in the House, talking about your resolution authority. And I have to tell you, I was greatly perplexed by the notion of giving the Treasury the ability in perpetuity to, in essence, codify TARP. I think entities that pose a systemic risk, what you have wanted to do is to have the ability that you now have under TARP in perpetuity for those entities and to actually designate certain entities, those that pose systemic risk, so that there be a bright line.

Sheila Bair came in the other day with something that was actually very market based and I think was applauded by many, certainly by me, here, which basically gave her the resolution authority to basically unwind these companies in an orderly way.

Huge philosophical differences in those approaches and, in essence, the possibility of causing systemically at-risk companies to be like Fannie and Freddie because the public would know which entities those were. I wondered if you might respond to that.

SEC. GEITHNER: I would like to respond, Senator. We're not going to do that, and we're not going to take that risk for exactly the reasons you've said, because it creates the expectation that there's a set of institutions that will enjoy government support without conditions in the future would leave our system more risky, recreate a kind of more vulnerableness in the future. We're not going to do that.

SEN. CORKER: (Inaudible) -- offer.


SEN. CORKER: (Inaudible.)

SEC. GEITHNER: I said what you described is our proposal was not our proposal, and we would not design a proposal that had those risks because I couldn't support it and you wouldn't support it. But what I was going to say is that -- let me step back for one sec. The proposal we've made and we will make for resolution authority will be based on and modeled on what Congress designed for the FDIC. It was designed for small banks and thrifts, not for a crisis like this, has not caught up to the dramatic evolution in the structure of our system.

We need to take that model and modify it so it works for a large, complex institution built around a bank or an institution, like AIG, could pose (greater ?) risk to the system. But the authority we're looking for would be replicated very closely on the authority you've given the FDIC. Same basic balance, same benefits, same constraints, same checks and balances, same protections against its being misused. That's the model we're looking at.

And I think that you will find that proposal to have all the benefits of the FDIC model and some of the same concerns and constraints in that model.

SEN. CORKER: I know I'm out of time. I'll look forward to a second round. Thank you.

SEN. DODD: Thank you very much, Senator.

Senator Tester.

SEN. JON TESTER (D-MT): Thank you, Mr. Chairman.

And thank you for being here today, Secretary Geithner.

During your conversations with the FDIC and with your dealings with the stress tests, what's your opinion on community banks? I know you talked about opening the credit window to them again. Do you believe that they need to raise significant capital to remain solvent? Yeah, go ahead.

SEC. GEITHNER: Well, you know, again, we have 9,000 banks in the country. Many of those, small community banks, their circumstances are very diverse. On average, they came into this crisis with, again, more healthy capital positions, higher levels of capital, better quality of capital because they were generally more careful. But in parts of the country with high unemployment, parts of the country where the focus of most of the real estate trauma has been concentrated, they're under a lot of pressure. And supervisors responsible for those institutions are, you know, working closely with them to make sure that where they need to be stronger, restructure, they're doing that.

SEN. TESTER: I think it was the chairman earlier talked about 940 banks that needed $200 billion. You think that's the exception, not the rule?

SEC. GEITHNER: Senator, I did not look at the details of that study, but I would caution anybody to draw any conclusions from a study like that, published in that way, because, you know, it's very, very hard for people to sort of step back without access to confidential supervisor information and provide a reasonable picture of health and weakness across the system. So I wouldn't encourage you to draw any conclusions from that particular report.

SEN. TESTER: So you don't anticipate any sort of wave of failures in that sector?

SEC. GEITHNER: Well, no, I would say, again, we're going through the most challenging financial crisis in decades. Community banks will not be immune to that. You've already seen significant distress across the banking system, outside the major institutions. And you know, our challenge is to make sure that's managed carefully so there's less damage to the communities affected.

SEN. TESTER: What kind of participation do you anticipate community banks will utilize the TARP dollars? Do you have -- (inaudible)?

SEC. GEITHNER: I don't have a sense of the magnitude. And as I said, you know, and I'm sure you've heard this, a lot of banks have withdrawn their applications, a lot of banks are reluctant to come. They feel like the capital is stigmatized, will come with conditions that will make it hard for them to run their business. And we need to try to counteract that because the insurance this capital provides is not valuable unless people are willing to come take it.

SEN. TESTER: All right. But you do believe that there's adequate resources out there with the community banks.

SEC. GEITHNER: I do. I do.

SEN. TESTER: Okay. The commercial mortgages, information is that the -- (inaudible) -- by the AAA-rated mortgages. How is that going to be helpful for a lot of those community banks because the commercial mortgages is actually where the rub is in my neck of the woods?

SEC. GEITHNER: Well, you know, you're absolutely right to say that this facility can't solve all those problems, will not relieve the market of, you know, a lot of the challenges ahead. But you know, we can't take on all that risk. It doesn't make sense for the taxpayer through the Fed and the Treasury to take on all that risk. We're trying to find the right balance that helps get the markets going again without the taxpayer taking on too much risk.

But doing the AAA piece of this can help get the rest of the markets going again. There's no market without the AAA piece finding a financier. And again, where those programs are now operational, they're having a meaningful difference on opening up those markets.

SEN. TESTER: Okay. I want to touch a little bit on TARP repayment. I've got one minute and 20 seconds, and you can burn this with your answer with not a problem at all. But could you concisely tell me what the Treasury's definition of well-capitalized is as far as repayment of the TARP dollars?

SEC. GEITHNER: Under the program the Fed designed, under the so- called stress test and capital assessment, they said institutions had to have a tier one regulatory capital ratio of six and tier one common equity ratio of four, even in the more adverse losses you might face in a deeper recession. That's the ratio the Fed established under that program.

SEN. TESTER: Okay. Real quickly --

SEC. GEITHNER: Just for the largest 19 banks. (Inaudible) -- clear that for the rest of the system that will leave the existing framework in place.

SEN. TESTER: Okay, all right. Very quickly, now we're getting into trade policy, but to kind of dovetail on what Senator Brown asked about it before. I will tell you that I want to keep the auto manufacturing business in this country because I think it's been an important part of our history and an important part of our manufacturing base, and I don't want to lose it.

On the other hand, trade policies aside, just as a dirt farmer would see it, I will tell you that if we're putting taxpayers into a company that's going to transfer those jobs to China, I don't want to do it. You want to comment on that?

SEC. GEITHNER: I understand your concern. And again, the reason why we're in this trying to figure out a way to help a restructuring is because we want to preserve these companies, part of the American economy and the substantial jobs they provide, not just directly but through the supplier relationships. And so we're going to do everything we can to make sure, again, that they're going to emerge viable over the longer term.

SEN. TESTER: What about everything as far as keeping those jobs here? And I will tell you that there are some that will say, you know, that if they can do it cheaper somewhere else they'll go somewhere else. I've got a decent standard of living. I want to keep it.

SEC. GEITHNER: Of course, I completely agree. And again, that's why we're engaged in this. And it's an enormously difficult set of challenges. And you know, we'll have a chance to come up and talk to the committee and the chairman about the plans as they are designed, once we get through the June 1st date.

SEN. TESTER: I appreciate that. And I just again want to thank you for being here today.

I think it is important, Mr. Chairman, that we do this with regularity. I think it's very helpful.

SEN. DODD: Thank you very much, Senator.

Let me just say on that point, too, by the way, and I know Senator Corker raised the issue about the UAW, this is an industry three years ago that employed through automakers 250,000 people. And the anticipation is it will be down to 90,000 pretty quickly. This is an industry that's been devastated in terms of employment.

And one suggestion on this I might make. We had Senator Cole at a conversation -- I know, I was a witness to it -- with Mr. Rattner about a plant in his state of Wisconsin, Mr. Secretary. And we'd like to at least see what offers are made to companies, divisions and so forth. I think this may have been a supplier, I'm not sure which. But the decision was to pack it up and move it, I think, to China. And at least the offer to say, can you meet this, can you somehow -- you know, before we just decide to make the decision to close it, give them a chance to determine whether or not they can compete or at least try to compete, those workers, before the decision is made to just close the operation down. It seems to me the minimum that we ought to do is that before making those decisions.

Jim DeMint -- (inaudible).

SEN. JIM DEMINT (R-SC): Thank you, Mr. Chairman.

And Mr. Secretary, thank you for being here. I'd just like to begin with a personal observation. I think until last year, most of us would agree that traditional understanding of the role of secretary of the Treasury would be the manage the federal Treasury, manage the collection of revenues, the paying of debt, protect our general fund and, by doing that, protect the value and stability of our currency, all on the government side of the equation.

The frightening thing for me today is that you're speaking and we're questioning you as the chief executive officer of America's financial system, of our banks, of our largest auto company, of our largest insurance company. So we're playing right along.

To me, this is not a mission creep, this is a stampede of any traditional understanding of Constitutional boundaries.

Now we could talk about this in the context that we had to do all this because we had a crisis. But we hear very little talk about any exit strategy and very little understanding that, at least what we're hearing on the ground, most of us, it's not working.

And I'll just repeat what we heard over here -- in talking to my bankers they don't understand, it doesn't make any common sense. We're throwing all this money and they say you're tightening the reins on us. The things we normally do to help our companies, our clients do business, rollover loans, allow them to defer payments, do interest only, anything they do to change the terms of a loan red flags it with our regulators, makes it nonperforming and essentially brings down the value of all the loans they have. And it seems that instead of throwing money that we just need to use some common sense.

But that's not my question. My bigger question gets back to this huge intervention in the private market, how we're going to get out. When we were told that we had to vote for this TARP bill or the whole world economic system would collapse the next day if we didn't go buy all these toxic assets. Of course, you know we never bought the toxic assets, the world economic system didn't decline but we still have the money on the line. But we were told don't worry, it's a loan. The government's actually going to make money on these TARP funds.

So, my question to you is as you begin to speak of, okay, we're going to allow these banks to pay this money back now, how much money in the next year, in five years, just what are your estimates at this point? As this money comes in how much is going to be returned to the general fund in the next year or five years?

SEC. GEITHNER: Very important question and hard to make that judgment now. The way the scoring rules work, as you know, the CBO and OMB make an estimate of what the potential loss might be or credit cost might be over time. That's just a very conservative general estimate, can't tell right now.

If we are successful in getting this economy back on track and helping repair the system, then there is a very, very good chance, very substantial probability that that money will come back with substantial interest and return.

But the government is taking risk here. We're taking risk because there is no other way to help get the economy back on track. We're taking risk because the markets won't take risk now where they would normally take risk. So I don't want to underestimate the amount of risk in this. But these are carefully designed to minimize risk to the taxpayer and there's a reasonable prospect that this money will come back.

SEN. DEMINT: If over the next six months $50 billion comes back, will $50 billion go into the general fund of the United States?

SEC. GEITHNER: The way the TARP is designed -- and I didn't design this -- but the way it's designed is every dollar that comes back goes into the general fund but that does still create additional head room under the $700 billion authority for us to make capital investments -- make investments.

So we have the ability to still use the 700 billion (dollars) if we think there's a strong case for doing that, but the way the program works is a dollar comes in and goes to the general fund but still creates additional room for us to make a new --

SEN. DEMINT: So your understanding of what we did is that the Treasury now has $700 billion that it can use permanently, rotating in and out of the capital markets as you see fit?

SEC. GEITHNER: Well, I'm not quite sure permanent, but you're right. But the way it was designed, as our lawyers look at it -- and I think this is clear in the interpretation of CBO and others that what I described is the way it works -- is a dollar comes back, goes in the general fund, still leaves us with the ability to make an additional commitment going forward. And that flexibility is important.

And just to emphasize what I said before you came in, I think, is that it is very important that these things be designed so that it's very likely that banks want to repay as quickly as possible, want to replace our investments as quickly as possible, that it's not economic for them to continue to use the government assistance. The Fed programs are designed that way. Our programs are going to be designed that way because we want these things to diminish, taxpayers be repaid, as soon as conditions normalize.

SEN. DEMINT: But instead of backing out of this whole intervention, you see now, instead of fixing the problem of the banks that were too big to fail, that you, the Treasury, is going to be a permanent player in financial sectors.

SEC. GEITHNER: No. I would not support that, would not want that to happen. We're going to do what it takes to fix this system. We're going to do no more than it takes. We're going to try to get out as quickly as possible because it is not going to be healthy for the system or the economy for the prospect of a sustain government involvement in either the automobile industry or the financial sector as a whole.

What we did, I'm sure, was essential and necessary. For it to work we want it to be temporary and exit quickly.

SEN. DEMINT: Are you working on a plan to show us of how you are going to move out of all this market, the ownership of General Motors, the ownership of AIG, all the money in the private banking? I mean, you've got a plan?

SEC. GEITHNER: Senator, as I said to Ranking Member Shelby at the beginning, this is a very important issue to me. We think about this a lot and there will be a time when we will be able to come to you and say here's how the unwinding process will work. But it's too early to do that now. You know, this is still a -- you know, we've got an economy that's still shrinking, financial system's still quite damaged and we'll get to that point but we're not quite there yet.

SEN. DEMINT: Thank you.

SEN. DODD: Thank you very much, Senator.

And Senator Bennet is next.

SEN. MICHAEL BENNET (D-CO): Thank you, Mr. Chairman, I appreciate it.

Mr. Secretary, welcome and thank you for everything you're doing.

I sent you a letter on last Friday with my colleague Mark Udall and Betsy Markey from the House about a bank in northeast Colorado called New Frontier which has failed and is in the hands of the FDIC right now and spent Saturday morning in a room of hundreds of farmers and ranchers and small business people and community bankers. And they're, from their perspective, if the argument is made that AIG was too big to fail this New Frontier would've been too big to fail. It already has failed and it has had huge implications across the region.

And the local banks are saying two things -- community banks. One, the reserve requirements are making it harder for us to lend, not easier to lend. You've been over that ground today and I accept the fact that part of what got us here in the first place is that credit was too easy. But that's -- but it is a balance and especially when you've got an environment like the one the people in northeast Colorado are facing.

The second thing they're saying is that we've applied for TARP money but we didn't get an enthusiastic response about that. And I guess I'd ask you whether or not in a context like that -- I'm not asking you about the specific case although we have in the letter -- in a context like that whether it's appropriate for the regulators to look at a situation and say this is a good candidate for TARP money because in this place, at this time, this institution is, in effect, too big to fail because it's dragging the entire regional economy down with it?

SEC. GEITHNER: I think you're right. It's a difficult balance, a difficult consideration. The TARP program was designed and the criteria designed by the supervisors, by my predecessor, to really only be open to what they call viable institutions in the eyes of the supervisors. The FDIC does --

SEN. BENNET: I'm sorry, Mr. Secretary, I'm not talking about getting TARP money into the failed bank.

SEC. GEITHNER: No, I know, I understand. But the challenge is those institutions at the margin, where some additional assistance would help, and in that context we designed a process -- I didn't design it -- but we designed a process where the supervisor would make a judgment about whether they met the terms for eligibility.

The FDIC does have flexibility in those cases where the impact would be very severe to make a different judgment and they have some discretion, they have to use that carefully. But I think you're absolutely right that costs of failure by what may seem to be modest institutions can be very substantial in parts of the country, parts of the community. And we need to be careful, supervisors need to be careful that they're not, again, sustaining the nonviable over time but still providing assistance where it will be helpful. And I think it is a difficult balance and they're not going to get it right every time but they're being careful.

You know, we're going to, again, we face in any financial crisis there's some people that want the government to take on a bunch more risk and there's a bunch of people who don't want to take any risk. And that's fundamentally what these choices are about. And in a world which is so uncertain, the path of the economy is going to be so uncertain, it's going to be even harder to make those judgments.

But I understand your concern and I believe the supervisor of trying to be as carful and sensitive as they can.

SEN. BENNET: I think part of the issue for people living in Colorado is that they can accept the fact that there's a balance to the risk and to the government's involvement in the economy.

The problem comes when their perspective is that we're only worried about the risk of these institutions on Wall Street, not about the institutions on Main Street. And I think that it's really important that the administration continues to drive policies that are really going to have an effect for small business in places like Colorado for community banks.

Every month we've come here and had testimony from somebody and what you've heard, what the people who have sat where you're sitting have heard from both sides of the aisle is the same thing, which is our community banks do not feel like they are participants in this program, that they're able to lend, that they're able to do roll over credit or do other kinds of things.

And again, it's a different credit environment, but that doesn't mean that we shouldn't have as strong a focus on those institutions that are on our Main Street businesses as we do these institutions -- important institutions.

SEC. GEITHNER: Completely agree. You know, we've given capital to more than 500 banks. You know, we have 8,000 banks. A bunch of those banks have withdrawn applications, because of the concerns I mentioned.

But as I said, I announced two weeks ago we want to reopen the window and make more capital available. We want it to be open for a longer period of time, for exactly the reason you pointed out, which is that they're going to -- small community banks are responsible for a disproportionate share of lending to small businesses. Small businesses account, as you know, for most of the job creation in the country. So that's a very effective way to help support recovery and that's why we're making sure these programs are expanded for them.

SEN. BENNET: Thank you, Mr. Chairman.

SEN. DODD: Thank you very much, Senator. I appreciate that.

Senator Vitter.

SEN. DAVID VITTER (R-LA): Thank you, Mr. Chairman.

Thanks, Mr. Secretary, for being here.

I want to go back to initially you touched on with Senator DeMint, which is that when TARP funds are paid back to the Treasury, the common understanding on Capitol Hill -- I think this is very fair to say -- is that that would be paid to reduce the federal debt and would be a permanent reduction of the initial $700 billion.

That is not how Treasury is interpreting or putting it into practice. And a lot of us are very concerned about that -- certainly me; Senator Gregg has written you. Many others think that this is clearly contrary to the law and to all the discussion we had on the topic when the law was passed. And I'd like your response to that.

SEC. GEITHNER: Senator, I wrote you a letter this morning or last night about just this issue.

I'm aware of that concern, but our reading of the law as designed -- we were very careful going over this again checked with my colleagues at OMB, it's consistent with what I put in the letter -- which as we read the law, and as we think it was designed, it works the way I described, which is a dollar that comes back to us goes in the general fund, but it does create additional room to make anther dollar of commitments.

Now, we are going to use that flexibility very carefully. We're only going to do it if we think there's -- it is very important to this broad objective of trying to make sure there is credit flowing across the financial system in the economy. But we think the law was designed with that. I didn't design the law, but that's what our fair reading of the statute is.

I'd be happy to talk through our interpretation with you, but we were pretty careful to check it and we went over -- very carefully over it. And we think we're doing a fair reading of the law.

SEN. VITTER: If I could help explore that: One of the relative provisions is 106(d), it says, quote, "revenues of and proceeds from the sale of troubled assets purchased under this act or from the sale, exercise or surrender of warrants or senior debt instruments acquired under section 113 shall be paid into the general fund of the Treasury for reduction of the public debt." Closed quote.

So what you're saying is while you do that when a bank repays TARP funds -- you do that with one hand, and then with the other hand, you take new public debt out to go up to the overall limit of $700 billion.


(Cross talk.)

SEN. VITTER: -- you do.

SEC. GEITHNER: Let me read from the statute: You read about 106(d), but 115(a) authorizes the Treasury to purchase troubled assets having aggregate purchases of up to $700 billion, quote, "outstanding at any one time", unquote. And section 106(e) authorizes the Treasury to continue to purchase troubled assets under commitments entered into by Treasury prior to the sunset date of the statute.

So again, we're happy to spend more time working through this with you. But that's our reading of the statute. I don't think we have it wrong and we were careful to check it again. I'm happy to spend some time with you walking through it, but that's our sense of it.

SEN. VITTER: Let me just ask you this: Normally, when you read two parts of a law together, one of the rules of statutory construction is you don't read it in such a way as to make either part meaningless.

Now, your reading of the law together makes 106(d) meaningless. Because yes, you pay down public debt for five minutes and then five minutes later you raise up debt, if in fact you issue the same amount of money to another institution.

SEC. GEITHNER: But we only -- but it doesn't quite work that way, Senator.

What I'm suggesting is that these resources come back. If they come back, they go into the general fund. We've already had some modest repayments. That's what's happened to those repayments.

We're left with authority, still, to go back and make new commitments with that. But whether we choose to exercise that depends on whether we think we can make a strong case -- (inaudible) -- willing to do.

SEN. VITTER: The point is, if you exercise it to the extent you exercise it, you make the repayment to reduce public debt under 106(d) completely meaningless.

SEC. GEITHNER: No, I don't think so. Because it means that temporarily --

SEN. VITTER: Yeah, you've reduced public debt for the 10 minutes between transactions.

SEC. GEITHNER: I'm not -- I think I understand your concern and why this is uncomfortable.

I didn't design the statute. We're trying to apply it as fairly as possible. But I think what we're -- and think we're doing that in this case. But I believe that any time we decide we're going to expand an existing commitment, make use of those repayments, we're going to have to make the case that it's consistent with the purpose of the statute and it's got the right balance of helping fix our system at acceptable risk to the taxpayer. So we'll have to make that case every time.

SEN. VITTER: Well, again, I think it was clearly the understanding here during the debate that we'd permanently reduce public debt with repayments and that's not going on.

SEC. GEITHNER: I didn't --

SEN. VITTER: My concern is that in a number of cases -- this case, the fundamental question of how the money is used. I mean, you cited the statute to buy troubled assets. Of course, we haven't started doing that. So that's a fundamental question.

The question of whether it's for financial institution or anyone else -- now, under the Bush administration, it went to manufacturing institutions.

SEC. GEITHNER: Right. But as I said, those are not my judgments, Senator.

And I'm being very careful to make sure -- and I will always be very careful -- that we're applying the letter and spirit of the law in this case. And again, I had -- we were very careful to check interpretations. So I talked last night again to the people who were there in October-September in drafting legislation, looking at this interpretation, and they confirmed our reading of that flexibility.

And I think it's important flexibility. And I think you want -- and I can't tell you what you want. I think it's important that the government, with the right checks and balances, has the ability -- has that flexibility -- because we are still in an enormously difficult, challenging, fragile period of time. And there may be circumstances where the necessary thing for the country is to use that authority carefully to support expanding these programs, because without our financing working better, our recovery will be arrested. It'd be weaker than we like, unemployment will be higher, there will be more damage to businesses.

So I think the flexibility in the statute was well designed. We're going to use it very carefully, but I think it is there.

SEN. VITTER: Well, again, I think your predecessor and you have been reading enormous flexibility into this statute that hasn't been there.

I think the political rational behind it is to avoid coming back to us for anything. My suggestion is you better be perfect in that execution, because if you ever have to come back, you've built up with a lot of members complete distrust of the next step, because of these interpretations.

SEC. GEITHNER: We will never be perfect in execution on anything, but we will be exceptionally careful.

And Senator, as you know, we have crawling all over us the Congressional Oversight Panel, the GAO, the special SIGTARP. And we are being extraordinarily transparent and laying out to the public the terms of what we're doing so the people can make their judgments about whether these are effective or not. And that's necessary and desirable and I welcome that.

But we will never be perfect. And we'll make mistakes. We'll get things wrong and we'll try to fix those. And we'll be as open and honest with you as we can with you.

And again, I think the flexibility here is important to retain it. We may not use it, but if we use it, we'll do so with as much care and justification as we can.

SEN. DODD: I thank the -- let me inform my colleagues, by the way, there's a vote that begins at 11:45. So we'll be able to stay here for close to another half an hour. So people keep that in mind as we go through this so we can get to everyone.

And just to point out, as well, by the way, having been involved back in September -- as several member of the committee were in this -- the major thrust in this was to try and get resources. That's why 75 members of this body, many of whom knew of the political consequences, but decided to get resources out to do what we could responding to the time.

People can have a different look at history going back, but the idea was to provide some flexibility in all of that. And as I recall very specifically, that was the intention at the time.

But I appreciate the discussion and debate. It's important.

Senator Warner.

SEN. MARK WARNER (D-VA): Thank you, Mr. Chairman.

Thank you, Mr. Secretary, for being here and the time and energy you're putting in in responding to our questions.

I want to go back where actually Chairman Dodd started the questioning about the issue of how we can help the small businesses. And that's a theme we've obviously come back to repeatedly by a lot of my colleagues and echo again, kind of, the chairman and I think others, that SBA programs, while good, many of the businesses do have concerns about them.

And two, there has been enormous concern -- and I hear repeatedly around my state -- that SBA programs that were announced in March, people are in the middle of May still waiting for the details so they can actually apply for the funds. So my hope is -- (inaudible) -- in place now that we can get the details out.

But one of the areas that you did touch on this morning that I think has great possibility is the question of buying up some of these small business loan portfolios to provide more headroom for the banks. And this can cut across not only large banks, but go to what Senator Bennet mentioned in terms of some community banks.

I know you've been talking about that generically, but is there anyway that you can put some specificity behind that -- what your dollar goal is going to be? Something that we could then take back out and say there's going to be X billions of dollars that are going to be committed to buying up these loan portfolios?

Which then, if the banks who were buying out those loan portfolios, would replace that with additional loan capacity, oftentimes to already existing prior relationships, we'd see great relief.

SEC. GEITHNER: Right. When we initially announced this program, we said we'd do up to $15 billion for this. It's possible we could do more. And you're right; it's not operational yet. And the reason why the delay is -- and it's a two-month delay, but these things are hard to get going -- is that there was just a huge amount of concern by the participants that they might be subjected to a whole bunch of conditions that they weren't comfortable with.

And so we've been trying to work through those concerns. I think we're close to resolving it. But the number we started with was $15 (billion), which is a pretty substantial fraction of the available loans outstanding. But you got the objective exactly right. You have the entity come purchase these off the balance sheet; then the bank has room to lend. So it has a direct increase in their capacity to lend.

SEN. WARNER: And (were ?) a piece of that detail -- (inaudible) -- be the expectation, but there has to be a requirement that says that if this additional headroom is created, that the bank -- the expectation is the bank will continue to lend out, that you -- (inaudible) -- back to small businesses. And would this be added capacity to the bank?

SEC. GEITHNER: Well, that's the objective. And we generally said that, you know, we want these programs, banks, committing to explain to us how they're going to use the resources, what they're going to do to expected lending going forward. And, at least for the larger institutions, we've got reports that they're required to submit every month that people can see what they do.

It is very hard, though, to force banks to lend. And it is, as you know -- and I know you're not suggesting that -- and some institutions, you know, may still feel like they're short of capital. And for those institutions, the impact of this program would be they're going to shrink less than they otherwise would. That still has the same benefit, because then you still have more credit outstanding than would have otherwise been available. So you still have, you know, a dollar of capital -- not quite this example -- a dollar of capital gets you $10 or $12 of additional lending capacity. And that's the --

SEN. WARNER: The faster we can get that out with more specificity, the better.

I've got two other questions. One is -- and there were two issues that Senator Reed raised earlier that I thought were quite appropriate. One, I want to associate myself with his comments around the concerns at OTS making policy about acquiring banks. But the second -- and I know Senator DeMint and others have raised this issue about funds coming back -- but one of the questions you're going to soon have to confront are the questions of the value of the warrants.

And my concern is, as you take back some of the -- as these banks try to rush to the window to repay, and you've already seen -- you've indicated some small banks have already done it; some of the 19 are anxious to do it -- my hope would be that, rather than having a policy that's kind of (worn off ?) -- and clearly you have to evaluate not taking back the money too quick because the bank is going to get itself back into trouble down the road -- but my hope would be, particularly as we evaluate the warrant policy, that you've got a macro policy here that says, "Here's our goal at the end of the day, to get back 90 cents on the dollar, 95 cents on the dollar, 100 cents on the dollar," but some macro approach that's going to say, "Here's what we, the Congress and the American people, can expect back from these TARP investments."

SEC. GEITHNER: Yeah, I think that you're raising an important issue. And I want to think about it a little bit before I come and explain to you what the policy is. But I think that, in general, our objective will be to sell these warrants as quickly as we can. We think that's probably going to be the best way to maximize value. And we've got a carefully designed program in place to make sure we're getting the best price for those warrants as possible.

What I'm -- you're not suggesting this, but what I'm a little reluctant to do is have the government be in a position where we hold these investments for a long period of time, longer than is desirable, in the hopes we're going to maximize value. I think that we're probably unlikely to be better at that than -- I know you're not suggesting that.

SEN. WARNER: But my hope would be that there are other options other than simply selling them back to the institution. You could sell them back to some third party, and you might have short appreciation where we're not calling the shots anymore, but we could still gain some downstream appreciation.

SEC. GEITHNER: Okay, I want --

SEN. WARNER: (Inaudible) -- taking the risk.

SEC. GEITHNER: I want to think about that. I'll reflect on those concerns, and I'm happy to come back --

SEN. WARNER: Let me -- one last point. And I apologize, Mr. Chairman; I'm going over my time a bit. But I want to follow up on an issue that you raised and Senator Corker raised.

I am very, very troubled by your comments on AIG and our obligation to maintain the 100 cents on the dollar in the counterparties. I think your comments about last fall, that the -- (inaudible) -- resolution of Lehman caused great systemic damage. But I think we're in a very different place right now.

And what I am unfortunately -- what I believe I've heard is that if we don't get one-off resolution authority on AIG -- and I would be happy to co-sponsor with Senator Corker if you ask for that one-off resolution authority on AIG; I think we could get it through very quickly.

But if we don't get that one-off resolution authority -- and by implication you're saying, "We're going to be continuing to pay out, even if we've taken down 50 percent of the exposure, the balance of that 50 percent of the exposure on these counterparties still at 100 cents on the dollar." And candidly, I just don't believe that the reaction of the market would be so traumatic at this point if we sent out warning signals that "Hey, we are thinking about not paying off 100 cents on the dollar on these counterparty obligations," because everybody's taking haircuts on the AIG situation.

And the notion that it's going to somehow affect the ability to give best value for the remaining insurance companies and all of the other challenges we've got with AIG, I just don't buy. So I hope that (we ?) would challenge us to do that one-off with AIG or think differently about the implication, which -- and correct me if I'm wrong -- that otherwise we're stuck with paying off 100 cents on the dollar on all these counterparties for as long as we're in AIG.

SEC. GEITHNER: I very much welcome the chance to work with this committee on passing resolution authority as quickly as possible. Everything we do in AIG going forward, we're going to try to balance what we think is the best way to reduce risk to the taxpayer over time, at least potential damage to the financial system as a whole. It is an incredibly difficult balance. And it is very hard to know if we're going to get that balance right, but we kind of had a good experience with what happens when people get that balance wrong.

SEN. WARNER: The balance at that point was in a moment of crisis.

SEC. GEITHNER: (Which is ?) different today. But again, many people would have said what you said -- you didn't say it at the time, but maybe they would have said what you just said in March of 2008, in August of 2008, in September of 2008, and just proves how hard it is to know.

SEN. WARNER: By implication --

SEC. GEITHNER: If you get it wrong, you're taking a lot of risk.

SEN. WARNER: But by implication, then, the taxpayer should be expected to continue to honor all of the AIG obligations, 100 cents on the dollar, for as long as we're in AIG. Isn't that --

SEC. GEITHNER: I think, Senator, I would say it differently. What my obligation is, again, is to try to manage through this incredibly difficult problem in a way that minimizes losses to the taxpayer and minimizes broader risk of damage to the rest of the financial system because, as we saw last year, the effects of getting that judgment wrong are deeply traumatic to people who were careful, responsible. Unemployment is substantially higher, pension values substantially lower. Businesses failed across the country in part because people got that balance wrong.

And I do not want -- my obligation is not to protect the counterparties of AIG. I would not give a penny to AIG to protect the counterparties at AIG. What I care about is trying to make sure that we reduce the risk of loss to the taxpayer and we reduce the risk of avoidable damage to the fabric of confidence in our financial system because of the effect it has on pension values, on business viability, on the cost of credit, on the ability to put your kids through college, on the viability of -- (inaudible) -- business (in ?) Main Street on level of unemployment. And I know that that connection seems remote, hard to appreciate. We cannot be certain we're getting that balance right. But again, look at what happened when reasonably careful people got that balance wrong.

SEN. WARNER: We all acknowledge we're in a 100-year flood, and we're taking extraordinary actions that cause us all great concern. But it does seem this is the one-off that seems like it's -- the counterparties at AIG seem to be the one-off that still seem to be coming out whole when everyone else across the board has been taking some -- (inaudible).

SEC. GEITHNER: There's nothing fair in it, and it's deeply frustrating, particularly for me personally, because I have to sit up here and explain and defend this. But again, what my obligation is is to try to make sure we get that balance right. And if I thought that was a better way, I will come up to explain it and I will support it.

SEN. DODD: (Inaudible.) Let me just say on this -- and I -- (inaudible) -- clarify, I've been under the impression you were going to try and craft something legislatively to deal with the resolution mechanism generally, not just for AIG but across the spectrum. And then there's the suggestion we might do something on a one-off basis.

First of all, do you think you need legislation? I mean, it seems to me -- is there some lack of existing authority that would prohibit you to begin a resolution of AIG, short of being some legislative response, even in a one-off situation? I can understand if you're trying to come up with a mechanism broadly for the long term, with a lot of unanticipated entities. But with AIG specific, why can't we do that?

SEC. GEITHNER: Without broad authority like what we have for small banks, we have limited options. We're forced to do the range of things we've been doing in AIG since the fall.

SEN. DODD: So you need some authority.

SEC. GEITHNER: Yeah. And I do not -- I don't -- I know that you've offered to -- you've suggested (that it could be ?) legislated for this specific thing. There's no -- (inaudible) -- hiding behind that, which I don't. I don't hide behind things, Senator.

I think it's hard to do as a one-off thing. I think this is important to do. It's a necessary part of the authority this country needs going forward. But I think, to do it right, you need to have it designed for a range of circumstances where you could face systemic risk of failure of a large, complex institution.

SEN. DODD: (Inaudible.) Can you give me some broad, ballpark number what we're talking about in terms of the counterparties? What is the exposure dollar-wise?

SEC. GEITHNER: Remaining exposure?

SEN. DODD: Yeah.

SEC. GEITHNER: I can't do it today, but I'd be happy to -- I think I can offer to commit to this -- I think (the Fed ?) has already done it -- to provide estimates of current value of those outstanding obligations. And there's, of course, lots of different types of obligations. AIG is --

SEN. DODD: Let me say the number I have, Mr. Secretary, and you tell me if I'm wrong. The national value of financial products contracts with counterparties is still $1.5 trillion.

SEC. GEITHNER: That's the notional value, and that's about half the level it was at the peak. But that's not the right way of speaking about risk or the exposure after collateral. That's a very different number. But I'd be happy to talk to the Fed and see if we can give you that number.

SEN. DODD: I wish you would because I want to get some sense of the magnitude of what we're talking about here, because (adding ?) 100 cents on the dollar obviously is (a massive ?) --

SEC. GEITHNER: No, that's nothing like the potential obligation that AIG has to its counterparties. It does show how complex it is to unwind this complicated amount of risk. But it's not a measure of actual credit exposure.

SEN. DODD: Okay.

Senator Johanns.

SEN. MIKE JOHANNS (R-NE): Thank you, Mr. Chairman.

Mr. Secretary, thank you for being here. It's been always very informative to listen to you. I want to zero in on something that I try to pay attention to, I think everybody here tries to pay attention to, and that is that not only that the private sector operate within a set of rules but that the government and its officials operate within a set of rules.

And so I want to talk about the rights of people here with you a second. I'll just be very blunt. I never personally thought I would live to see the day that a private CEO of a company could go to the White House and leave without their job. I never thought I'd see it. Soon after that, you gave interviews and even the president did saying, well, there could be others.

You've talked very boldly today about changing board membership of private companies, reconstituting boards. You have a feeling, I can tell, that that's within the purview of your power as a Cabinet member. I must admit, as a former Cabinet member I never imagined that I had the power to bring a company in that had been getting government money for whatever and suggest to the CEO that they were without work.

Tell me, if you would, Mr. Secretary, what specific, very specific statute gives you that power? What would you cite me to that leads me to the conclusion that legally CEOs can be dismissed, boards can be reconstituted, all of those things?

SEC. GEITHNER: Senator, I need to do that carefully. I'm going to have to respond in writing. But let me try and respond to the concerns you've raised about this. We would never, as a government, want to be in a position where it is necessary for us, for (broad policy ?) reasons, to come in and provide substantial financial assistance to avoid the prospect of bankruptcy by a major institution. Do not want to be in that position. It has been extraordinarily rare. Hopefully it will be rare in the future.

But when we face that situation, it is, I believe, necessary for the government and for the people providing financing in that context to make a judgment about whether the board and management are going to be able to preside over a restructuring which leaves the firm viable over time. And I'm (not ?) talking about non-regulated financial institutions.

In the context of banks, there's a whole set of existing authorities that operate now, that give supervisors very broad authority in circumstances like that. But I think this is an exceptionally sensitive, careful balance, should rarely, if ever, be used, don't expect to be in that situation in many cases going forward. I'm talking not about -- the banks is a different kind of framework.

But again, like in any situation where a company is going to get financing for its operations, that is a judgment any creditor would have to make. And I think for the government (or ?) taxpayer not to do that in that kind of context would leave us vulnerable to the charge that we're not meeting our fiduciary obligation to taxpayers. We would use this ability exceedingly carefully, with extreme reluctance, extreme care, as you would expect, because we do not want to have the country faced with the prospect of the government coming in and making those judgments without a very strong reason for doing so.

SEN. JOHANNS: You know, Mr. Secretary, here's what I would say. I think you're a careful person. But again, having been where you're at, in a much different role but where you're at, and having been a CEO of a state, one of the first questions I was asked is, what's my legal authority here? If I were to ask the GAO or your inspector general or whoever to audit this action, would I find a specific federal statute that allowed you to do this?

SEC. GEITHNER: Senator, I am completely confident that we acted as (provided ?) in the authority of the (executor ?) mentioned in this case. And again, would welcome the chance to lay that out for you. But let me try and get to the basic principle. And I said nothing today that I haven't said (in public ?) before, so don't interpret anything I've said today as anything about the prospects of future actions like this.

But again, I think the basic principle, just to restate, is an understandable principle. And if you look at what the government of the United States did in the fall, in the context of the interventions in Fannie and Freddie or even in the AIG case, you saw, in that context, your government act, as a condition of assistance, to make sure that the boards and management of those companies were going to be strong enough so that the taxpayer's obligation would be protected going forward.

So that framework, as you saw it enacted by your government in September in those three specific cases, you know, I do think it meets the reasonable test. Again, we've got obligations to the taxpayer, obligations where we're making financial assistance. And we have an obligation, in that context, to make sure that we're putting in place assistance that was going to come back.

SEN. JOHANNS: I'm going to suggest to you I don't believe it's a test of reasonableness. I think you're a reasonable guy. I think it's a test of -- (inaudible) -- statutory authority to take the action.

(Inaudible) -- (offer ?) on a related matter, and I'm out of time, and so I appreciate the chairman's indulgence. I didn't do a lot of bankruptcy when I was practicing law, but I did enough to know that there is a well set of established rights, and risk is priced based upon where you end up in that. And as I understand it, the bondholders in the Chrysler bankruptcy had certain rights. Those rights, whether we like it or not, were superior to the rights of the employees. How did they end up being subjected to a situation where they, in effect, lessened their rights in the bankruptcy court? What happened to make that occur?

SEC. GEITHNER: That package of commitments went through a bankruptcy proceeding, was reviewed and approved by a bankruptcy judge, as you would expect under the laws of the land. And that's the way our process works, it's the way it should work. So there was an independent check on whether the balance of (Friedman ?), of a range of creditors for that firm was fair and equitable.

SEN. DODD: I've got to try and get (them ?), Senator. I apologize to my colleague.


SEN. DODD: I know we have a lot of questions.

Senator Merkley.

SEN. JEFF MERKLEY (D-OR): Thank you very much, Mr. Chair.

And Mr. Secretary --

SEN. DODD: I'm trying to get this done before we --

SEN. MERKLEY: -- thank you so much for your testimony. So I'm going to ask my questions quickly and ask for quick responses.

First, in your testimony, you note that financial innovation has expanded financial products available. These have many benefits, but we have to make sure that households make choices to borrow or investor savings. When they do so, there are clear and fair rules to avoid manipulation, deception and abuse. Are you essentially making the case for Financial Products Safety Commission?

SEC. GEITHNER: I believe that as part of regulatory reform, we need to put in place stronger protections for consumers, that are enforced more effectively and evenly across institutions that offer those products. And as part of that, we are examining whether we should change the oversight structure so that we have better enforcement of stronger rules.

SEN. MERKLEY: Well, it sounded like yes, we're considering it. And certainly want to encourage that, because while we're considering legislation to take on specific challenges and abuses, the design always is changing. And just as we have commissions to address consumer products in general, I think that would be quite useful.

Turning to the Making Home Affordable program, you note in your testimony that it covers now 75 percent of all loans. And I think by that, you're referring to, in theory, the design of the loans, because on the ground, homeowners are still have extraordinarily difficult time reaching folks representing participants in the MHA program.

Your testimony notes 55,000 trial modifications with 14 servicers. How do we speed up this process? And just say, on the ground I have people calling my office every day who have loans with folks who are participating, who are being told, we're sorry, we can't talk to you until you have two or three months delinquent, or, no, our organization is not participating in the program, and we've told them, yes, they are, and so forth.

SEC. GEITHNER: Just beginning, can't judge it by its effectiveness yet. Secretary Donovan has got a very substantial program of assistance to counselors to help make sure that people who are eligible are able to get assistance, help them navigate the process. We're trying to create very strong incentives for services to participate and deliver and execute. It's just getting started. The benefits of the refinancing program, lower interest rates, people can see. And that's moved much more quickly. And this will take a little bit more time.

But I think it's going to benefit a lot of people. But we really won't know the full scale of the benefits and how successful the modifications are until we have a few more weeks and months behind us in this. But we're working very hard, have a lot of resources devoted to it.

Fannie and Freddie, which are implementing the program, are doing a lot. And I think you'll start to see more traction.

SEN. MERKLEY: Thank you. I certainly want to encourage that. And already, people -- I said to the secretary of Housing that any form of a hotline that bypasses hundreds of servicers who have no idea how this particular program works and helps us connect to people with representatives of those participants who understand the program, who know how to talk about it would save so much frustration. Because homeowners, after three or six or 10 calls, they give up.

SEC. GEITHNER: There is such a hotline. And there's also a website which is very careful. In fact, I think last week, Shaun Donovan and I together, to try to give more exposure to this program, used the example of a man from California -- I think he was from California -- he went on the website, found out about the program and got a modification that substantially reduced his interest payment simply through going through that process. And he stood up there and said on national television, these programs work, they will work for you, you need to just make sure you're eligible and you're working on it. But again, it's early days. We want to make sure it gets to as many people as we can.

SEN. DODD: Thank you.

Senator, we've got about two minutes left on our vote on the floor. They're going to call that vote. I get nervous about (going over ?). I apologize to my colleague from Oregon. He's been very patient in waiting until the end here.

Mr. Secretary, we thank you very much.

I'm going to leave the record open. I know members may have some additional follow-up questions. This has been very, very informative, very helpful today. And we'll follow up with you. But I thank you for being here.

SEC. GEITHNER: Thank you for having me.

SEN. DODD: The committee will stand adjourned.

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