Hearing Of The House Financial Services Committee - The Need For Comprehensive Regulatory Reform

Statement

Witness: Treasury Secretary Timothy Geithner

Chaired By: Rep. Barney Frank (D-MA)

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REP. FRANK: The Committee on Financial Services will now convene for the purposes of the hearing with Secretary Geithner.

I have an announcement to make regarding the order on the Democratic side. When Mr. Geithner and Mr. Bernanke were here the day before yesterday -- and I apologize for not having Mr. Geithner here on Wednesday, but sometimes we've got to do other things -- the following members on the Democratic side were here at a time when he and Mr. Bernanke had to leave, and I said at the time that they would get priority in questioning.

After myself and the chairman of the subcommittee, we will then go to the following Democrats: Mr. Ellison -- in the order of seniority -- Mr. Baca, Mr. Ellison -- Mr. Baca, Mr. Scott, Mr. Green -- what?

STAFF: (Off mike.)

REP. FRANK: Baca -- well, hang on one second. I have the list. (Confers with staff.) Yes, I'm sorry. The list is incorrect. I apologize. It'll be Mr. Scott, Mr. Green -- well, then in seniority order it's Mr. Donnelly, Mr. Klein, Mr. Ellison -- well, let me just read them. We'll do it in normal seniority order: Mr. Ellison, Mr. Scott, Mr. Green, Ms. Kilroy, Mr. Donnelly, Mr. Klein and Mr. Grayson, in the regular seniority order. They will be the first ones to ask. (Confers with staff.) We are going to do it in seniority order, as I explained.

We will now proceed to the opening statements. With a Cabinet member, the rules are five for each of the -- for the chair and the ranking member; three for the chair and ranking members of the subcommittee. I apologize for the disruption of the transition. We will now begin. I think announcements are over.

We have before us the job of dealing with whether or not there is existing in the federal government today sufficient authority to deal with systemic risk. There are several aspects to that. We talked considerably about one of them on Tuesday with the chairman and the secretary of the Treasury; namely, the need to have somewhere in the federal government the ability to use the bankruptcy authority given by the U.S. Constitution to wind down an important non-bank financial institution.

We have long had in our laws an adaptation of bankruptcy to wind down banks. And when banks have failed, while it has been sometimes painful, it has not been as disruptive as when the non-bank financial institutions have failed. And the two glaring examples are Lehman Brothers, where nothing was done, and AIG, where everything was done. And I believe we are looking for an alternative method to avoid those two polar extremes; that is, a bankruptcy authority which can honor some and not honor others, that it has some discretion. The question of compensation is part of that, as is the question of whether or not people should continue to be allowed to securitize 100 percent of loans.

Today our focus will be on the -- (inaudible) -- though obviously members are free to bring up whatever they wish -- and that is, do we need to increase the authority of some entity or entities in the federal government to restrict excessive leverage? We are talking in the resolving authority about what happens when there is a failure on the part of an institution that is so heavily indebted to so many parties that simply allowing it to fail without intervention could cause magnifying negative effects.

But obviously the preferential situation would be to keep that from happening. And this subsumes a lot of other issues, whether or not people are too big to fail or too interconnected to fail. The goal should be -- and obviously no system is going to prevent all failures, because it would then be too restrictive -- but the goal is to minimize the likelihood that entities will get so heavily indebted, so heavily leveraged with inadequate resources in case there is a need to make the payments, that their lack of success threatens the whole system.

I believe that we are in the third phase here of a set of phenomena we've seen in American economic history. It's a phenomenon in which the private sector innovates. And innovations which have no real value added die of their own weight. But innovations that add value thrive, as they should, because we are dependent on the dynamism of the private sector to improve our wealth, to increase our wealth.

But by definition, when this comes from significant innovation, there aren't rules that contain abuses. The goal of public policy is to come up with rules that set a fair playing field that constrain abuses, that protect legitimate and responsible entities from irresponsible competition that can draw them away from good practices, while having as little effect as possible on diminishing the value.

Thus, in the late 19th century, the trusts were created, and they were very important. We would not have industrialized without those large enterprises in oil and coal and steel and a number of other areas. But because they were new, they operated without restraint, so that Theodore Roosevelt and Woodrow Wilson -- with more help, I think, than he gets credit for from William Howard Taft -- set rules, the Antitrust Act, the Federal Trade Commission, the creation of the Federal Reserve. Those were rules that tried to preserve the large industrial enterprises. There were people who tried to get Woodrow Wilson to break them up. And he said, "No, they give value added that we need, but we need rules."

That led to a great increase in the importance of the stock market, because you now had enterprises that could not be financed individually. And the job of Franklin Roosevelt and his colleagues during the '30s was to set rules that allowed us to get the benefit of the finance capitalism in the stock market but curtailed some of the abuses.

I believe that securitization and the great increase in the ability to send money around the world that comes from both the pools of liquidity and the technology -- CDOs and credit default swaps -- these are a set of innovations on a par with the earlier set, and they have had great value. Securitization, which allows money to be relent and relent and relent without it having to all be repaid, greatly magnifies the value of money. But there are problems, as there were with the trust or with the stock market, when there are no rules.

Our job is to craft rules, as did Theodore Roosevelt and Woodrow Wilson and Franklin Roosevelt, that allow the society to get the benefit of these wonderful value-added financial innovations while curtailing some of the abuses.

The gentleman from Alabama.

REP. SPENCER BACHUS (R-AL): Thank you.

Secretary Geithner, earlier this week we had a hearing on AIG's bailout. And at that hearing, you acknowledged that AIG fully met its obligations to foreign banks and certain U.S. banks or financial companies. In fact, at that time you said that throughout this period of time -- and this is critically important to the stability of the system -- we wanted to make sure AIG was able to meet its commitments. I said to you, "To pensioners and retirees." And your response was "Also to municipalities and banks," and that you considered they had met the full range of their obligations.

Since that time, I have been informed that AIG is now attempting to force many of its creditors that are U.S. banks to accept severe reductions of more than 70 percent on the total debt owed to them. This disparity in the treatment between foreign banks within -- as you said in your response to my question, were paid dollar for dollar within hours of the bailout, and U.S. banks, many of them taxpayers who funded this bailout, have yet to receive any payment and are being asked to accept 70 and 80 percent haircuts.

This disparity in treatment between foreign banks and U.S. banks is very concerning to me. This morning I sent a letter to the chairman regarding this development and hope a hearing will be scheduled so that the committee can get to the bottom of this. And he has assured me that he will fully cooperate, and I think agrees with my concern.

Now let me talk about this hearing. In the last year, we have witnessed unprecedented interventions by the government to commit trillions of taxpayer dollars to save too-big-to-fail institutions. The taxpayer continues to be given the bill as the government continues this cycle of bailouts.

One way to end the cycle would be to allow for an orderly liquidation of complex financial institutions that are not subject to the statutory regime for resolving banks administered by the FDIC. At a hearing last July, I stated that our regulators must strive for a system where financial firms can succeed or fail without threatening the whole financial system and placing taxpayers at risk.

By creating this process, of which non-banks whose failures would have systemic consequences, could be unwound in an orderly fashion, we would restore balance and force firms to face the consequences of their actions. However, it is essential that any new regime for resolving or liquidating non-banks not rely on taxpayer funding.

However, the Treasury legislative proposal released yesterday suggests the administration is considering using taxpayer funding to pay the cost of resolving these failed financial firms.

This, to me, is unacceptable and would serve only to promote moral hazard and perpetrate a "too big to fail" doctrine that the American people have squarely rejected.

The proposal also leaves it to the secretary and the FDIC to decide whether the firm will receive financial assistance or be placed in conservatorship. This empowers federal regulators with incredible discretion. And some of the past experiences that I have witnessed indicates that this discretion is not always administered fairly or evenhandedly. If the goal of the resolution process is to end the "too big to fail" premise, why is a potential taxpayer subsidy part of the administration's solution?

Mr. Chairman, there are many more unanswered questions, like: Which firms will be designated as systemically important, and why? When will a liquidation be triggered? What happens if there is a disagreement between regulators on the need for a conservatorship? How will the regulators determine whether to provide financial assistance or place a firm in conservatorship? The details are important. Even more important is that we develop the right solution and not rush to poorly vetted legislation.

I do commend you, and agree with you, that we do need a resolution process. The modernization of our regulatory structure will be the most important task this committee undertakes this Congress. The complex and interconnected nature of our financial markets require us to engage in thorough analysis with all the major stakeholders.

I conclude by saying I hope that the committee will have additional hearings on this proposal so that we can hear from the stakeholders and regulators on their views, identify any unintended consequences in advance, and take a look at some past resolutions which have caused real questions and issues which I think have not been resolved. So, I appreciate your attendance today.

REP. FRANK: The gentleman from Pennsylvania.

REP. PAUL KANJORSKI (D-PA): Good morning, Mr. Chairman.

The committee will today consider the Treasury secretary's ideas related to regulatory reform, focusing in particular on his legislative proposal vesting the Executive Branch with a new power to wind down troubled financial institutions. Specifically, this resolution authority would permit the administration to place into receivership or conservatorship failing non-bank entities that pose systemic risk to the broader economy.

During the last seven months, the entire global economy has often stood in the balance as our government resorted to erratic, 11th-hour efforts to prevent a catastrophic economic collapse. Without a guidebook, policymakers could only rely on hurried, ad hoc solutions. Such options, however, are inherently flawed and regularly produce unintended consequences.

As we deal with the current financial crisis, we find ourselves facing the very difficult task of fixing a leaky regulatory roof while it is raining. We, therefore, need to provide the administration with a bigger hammer, a larger tarp and the other tools needed to step in sooner when institutions are unhealthy but not as close to death. Establishing resolution authority for all players in our financial markets has the potential to help lessen the severity of not only the present crisis but also to prepare us for as yet unknown calamities down the road.

Today's forum must also include a discussion of what to do about those entities that presently operate in the shadows of our financial system. Hedge funds, private equity pools and other unregulated bodies have the potential to unleash devastating consequences on our broader economy. Long-Term Capital Management and AIG Financial Products are two obvious examples here. And while the extent of regulation required is debatable, we must begin this crucial examination today and we must include them in the resolution authority.

We must also consider how the creation of a new federal power to wind down troubled financial institutions will affect insurance, which is currently only regulated at the state level. Insurance is part of our financial services system and is increasingly part of the global market, especially when it comes to products like reinsurance. Because insurance is a place of the puzzle -- a piece of the puzzle that we must have in order to complete the picture, I am very interested in discerning how the Treasury secretary currently envisions the resolution authority working in this market.

In sum, we now expect regulatory reform to play with at least three acts: establishing resolution authority, creating a system of risk regulator, and overhauling our regulatory authority. The gravity of this situation requires that the Congress deliberate and exercise patience so that we lay a thoughtful regulatory structure that will establish the basis of a strong economy for many years to come.

REP. FRANK: The gentleman from New Jersey, the ranking member of the subcommittee.

REP. SCOTT GARRETT (R-NJ): Thank you, Mr. Chairman.

And before I begin, Mr. Secretary, in light of the comments by both Russia and China with regard for a need for a new reserve currency, I would think today might be a good opportunity for you to issue a -- just a clarification on your past remarks.

But today's hearing, though, is on the issue of addressing the need for comprehensive regulatory reform. And I think it's important that we keep this in mind, that it's a comprehensive approach as opposed to a piecemeal approach because both the chairman and secretary have expressed support for a new systemic regulator for our market, but I really think that before we move forward on such a proposal on a separate track, we really need to have a comprehensive reform in place, because they're really linked together.

How could we possibly assign powers to a systemic regulator if we haven't fully examined the appropriate roles of the existing regulators? And even more fundamentally than that, before we get too down far the road of fixing certain problems, how do we do so before we actually identify what those problems are?

I think we should be mindful of advice offered by one of the president's other economic advisers, and that's Paul Volcker. He stated, in reference to financial regulatory reforms, quote, "All this will take time if the necessary consensus is to be achieved and a comprehensive, rather than a piecemeal approach is to be taken."

Now, Mr. Secretary, I know you've talked about the need for an FDIC-like resolution authority for large non-bank financial institutions, and I look forward to trying to delve into that a little bit more. But, I think this authority needs to be carefully -- really carefully structured to avoid a lot of unintended consequences, because if the entities that are subject to this authority were seen to be as "too big to fail," without clear signals indicating what the consequences are for the creditors and the counterparties, we could really end up doing a heck of a lot more harm than good.

But getting back to the systemic regulator, time after time in history we've heard the promise that, if we only we had more regulations we wouldn't find ourselves in the situation that we're in today. In fact, in your testimony the other day, you said, "We must ensure that our country never faces this situation again." We all agree with that.

But, you know, the Federal Reserve itself, they were created to ensure that asset bubbles and panics -- sort of like we have right now, don't happen. But, they do. And more recently we had FDICIA, which was passed in 1990 or '91, I think, and that was supposed to tighten regulations after the savings and loan situation, and they said it was never supposed to happen again. But it does.

So, forgive me if I'm still a skeptic when I hear, "If we only have a systemic regulator, that this will never happen again," especially if moral hazard is institutionalized with an entire new designation of systemically risk-free institutions that it will never happen again. We will only be encouraging that it will happen again in some future time.

I thank you. And I yield back.

REP. FRANK: Mr. Secretary, please begin your testimony.

SEC. GEITHNER: Thank you, Mr. Chairman, Ranking Member Bachus, and other members of the committee. I'm pleased to be here before you today again and to testify about this critical topic, about the financial regulatory reform.

Now, over the past 18 months we've faced the most severe global financial crisis in generations. Some of them world's largest institutions have failed; confidence in the overall system has eroded dramatically. As in any financial crisis, the damage falls principally on Main Street. It affects those who are conservative and responsible, not just those who took too much risk.

Our system today is wrapped in extraordinary complexity, but beneath it all the financial system serves an essential and basic function. Institutions and markets transform the earnings and savings of an American -- of American workers into the loans that finance a first home, a new car, a college education or a growing business. They exist to allocate savings and investment to their most productive uses.

Our financial system does this -- still does this better than any financial system in the world, but still our system failed in basic fundamental ways. Compensation practices rewarded short-term profits over long-term returns. Pervasive failures in consumer protection left many Americans with obligations they did not understand and could not sustain.

The huge apparent returns of financial activity attracted fraud on a dramatic scale. Market discipline failed to constrain dangerous levels of risk-taking throughout the system. New financial products were created to meet demand from investors, but the complexity outmatched the risk management capabilities of even the most sophisticated institutions in the world.

Financial activity migrated outside the banking system, relying on the assumption that liquidity would always be available. Regulated institutions held too little capital relative to their exposure to risk. Supervision and regulations failed to prevent these problems. There were failures where regulation was extensive and failures where it was weak and absent.

Now, while supervision and regulations failed to constrain the build-up in leverage and risk, the U.S. -- (inaudible) -- came into this crisis without adequate tools to manage it effectively. And as I discussed before this committee on Tuesday, U.S. law left regulators without good options for managing the failure of systemically important large complex financial institutions.

To address this will require comprehensive reform, not modest repairs at the margin but new rules of the game. And the new rules must be simpler and more effectively enforced.

They must produce a more stable system, one that protects consumers and investors, rewards innovation, and is able to adapt and evolve with changes in the structure of our financial system.

Our system, the institutions and the major centralized markets must be strong enough and resilient enough to withstand very severe shocks and withstand the effects of the failure of one or more of the largest institutions. Financial products in an institution should be regulated for the economic function they provide and the risks they present, not the legal form they take. We can't allow institutions to cherrypick among competing regulators and shift risk to where it faces the lowest standards and weakest constraints.

And we need to recognize that risk does not respect national borders. Markets are global and high standards at home need to be complimented by strong international standards enforced more evenly and fairly. Building on these principles, we want to work with Congress to create a more stable system with stronger tools to prevent and manage future crises. And in this context today, my objective today is to concentrate on the substance of reform rather than the complex and sensitive questions of who should be responsible for what.

Now our framework for reform will cover four broad areas -- systemic risk; consumer investor protection; eliminating gaps and streamlining our regulatory framework; and international coordination. But today, I want to discuss in greater detail the need to create tools to identify and mitigate systemic risk including tools to protect the financial system from the failure of large complex financial institutions.

Before I go into that, though, I just want to briefly touch on the critical need to reform in these other areas. Weakness in consumer and investor protection harm individuals, undermine trust in our system, and can contribute to the kind of systemic crisis that shakes the foundations of the system. We are developing a strong plan for consumer and investor regulation to simplify financial decisions for households and to protect people much better from unfair and deceptive practices. We have to move to eliminate gaps in coverage and in the practice of allowing banks and other finance companies to choose their regulators simply by changing their charters. Our regulatory structure must assign clear regulatory authority, resources and accountability. As I said, we need a simpler, more streamlined, more consolidated, broader supervisory structure.

And to match these increasingly global markets, we must ensure that global standards for regulation are consistent with the highest standards we will be implementing here in the United States. And we have begun to work with our international counterparts to reform and strengthen the role of the financial stability forum in enhancing sound regulation, strong standards, strengthening transparency, and reinforcing the kind of cooperation and collaboration we need.

In addition to this, we're going to launch a new initiative to address prudential supervision, tax havens and money laundering issues in weekly regulated jurisdictions. President Obama will underscore in London on April 2nd at the Leader's Summit the imperative of raising standards globally and encouraging a race to the top, a race to higher standards rather than a race to the bottom.

Now on systemic risk, I want to focus on this today not just because of its obvious importance to our future economic performance, but also because these issues about systemic stability will be at the center of the G-20 Summit agenda next week. This crisis has made clear that large interconnected firms and markets need to be brought within a stronger and more conservative regulatory regime. These standards cannot simply address the soundness of individual institutions, but they must also focus on the stability of the system as a whole.

The key elements of our program to reduce systemic risk in our system has six elements. I'm going to summarize these briefly. My written statement goes into them in somewhat greater detail, and then I'll conclude and look forward to responding to your questions.

Let me just go through these quickly, these six key points.

First, we need to grant a single entity responsibility for systemic stability over the major institutions and the critical payments and settlement systems and activities.

Second, we need to we need to establish and enforce substantially more conservative capital requirements for institutions that pose systemic potential risk to the stability of the system, requirements that are designed to dampen rather than amplify financial cycles.

Third, leverage private investment funds with assets under management over a certain threshold should be required to register with the SEC to provide greater capacity for protecting investors and market integrity.

Fourth, we should establish a comprehensive framework of oversight, protections and disclosure for the over-the-counter derivatives market, moving the standardized parts of those markets to central clearing, and encouraging further use of exchange-traded instruments.

Fifth, the SEC should develop strong requirements for money market funds to reduce the risk of rapid withdrawals of funds that could pose greater risks to market functioning.

And finally, as we've all discussed, we need to establish a stronger resolution mechanism that gives the government tools to protect the financial system and the broader economy from the potential failure of large complex institutions.

Let me just conclude by saying that these are very complicated, very consequential, very difficult sets of questions. You are absolutely right that we have to look at these together. Their interaction is important and it's very important we have a comprehensive approach.

The president has made it clear that we're going to do what's necessary to stabilize this system, to get credit flowing again, and restore the conditions for a strong economic recovery. And I look forward to working closely with the Congress to modernize our 20th century regulatory system and put in a place a system that meets the needs of our much more complicated, more risky 21st century financial system. And working together, I'm confident we have an opportunity we have not had in generations, to put in place a stronger more resilient system.

Thank you, Mr. Chairman.

REP. FRANK: Thank you, Mr. Secretary. And now, as I announced in the order of seniority, I'm going to start with the Democrats who were here at the end of the last hearing and did not get to ask questions. The gentleman from Georgia.

REP. DAVID SCOTT (D-GA): Thank you very much --

REP. FRANK: I will also announce as I did before a very full membership, five minutes is going to mean five minutes at the conclusion of five minutes, whoever is speaking will be allowed to finish a sentence or two, and that will be it.

REP. SCOTT: Thank you very much, Mr. Chairman. Welcome Mr. Secretary, good to have you back.

You have quite a task before you. Let me just ask you this because I think it's very important that as we move, that we move in a way that we do not -- that as we rush to save our economy that we do not suffocate our economy. And I commend you on the move that we've made to a private public partnership in terms of getting the toxic assets off and getting our credit markets, our credit forces unclogged.

But I do have some questions about this expansion of power, which I think is at the heart and soul of your efforts here. And as I said before, in our rush to save our economy we certainly don't want to suffocate it. And one example would be -- and I want to ask my first question -- is you used the AIG as an example of why we need this expansion of power. And in AIG, the problem that happened in AIG was not in the insurance area, but it was in the special division that they had set up dealing with the sort of the hedge fund like operations, credit default swaps and so forth, that truly fall without -- beyond the bounds of regulation and we do need to move on that and I applaud you for that.

But here we come with the insurance companies and insurance companies are already regulated by the states. So is there a conflict? How are you going to handle that conflict in dealing with the insurance companies, particularly in view of the fact that it's not been insurance that has caused the problems?

SEC. GEITHNER: Excellent question. Let me just start by saying you know what we need is better, smarter, tougher regulations --

REP. SCOTT: Mm hmm.

MR. GEITHNER: -- because we've seen that the cost of these weakness and gaps are catastrophic to the system as a whole. And we have an enormously complicated system in the United States with regulation at the federal and state level, multiple bank supervisors, multiple authorities, and it just didn't work, it did not deliver what it has to deliver. And I think that we have to start by making sure we have in place effective, consolidated supervision over those entities that could pose potential risk to the system.

Now that does not mean that we should supplant and take away the existing authorities that state insurance supervisors have over those institutions, or that the bank regulators have over depositories. So what we're suggesting is fully capable with maintaining their important role in supervising insurance companies. But again, for these core institutions you need to have much stronger, more effective supervision applied on a consolidated basis if you're going to get better results in the future.

REP. SCOTT: Okay. Well, let me ask you also this. A part of your approach is to rein in the hedge funds, and some of these areas that say they are unregulated. How do we respond to hedge fund operations so they are regulated? So you could very briefly explain how it will change from where we are now in terms of the regulations we have with, say, hedge funds and how it will be under your plan?

SEC. GEITHNER: Well, this is really the province of the SEC but what our proposal is built on something that the SEC considered for some time, which is to require registration by -- for hedge funds, similar institutions, if they get to be above a certain size. And that we believe will give the SEC more ability to do what they exist to do, which is to protect investors, contain the risk of fraud and make sure that they are more able to enforce the rules of the road on market integrity. That's the objective of it.

And we're not suggesting they be regulated like banks are regulated, their different institutions in this context. And I think it's the right balance.

REP. SCOTT: And in terms of this power that we are asking for, which is this great expansion of power to seize non-bank companies, where in the federal government should that power rest? Should it be with you in Treasury? Should it be in the Fed? Or perhaps in FDIC?

SEC. GEITHNER: Well, what we're proposing to do is build on the model established for the FDIC for banks' interests. That model we've a lot of experience with it, there's a whole range of important checks and balances in that system to limit discretion so the existence of this does not increase moral hazard as your colleague said. And we think that model offers a lot of promise. And we're basically suggesting a model which would substantially rely on the FDIC itself to run this new regime.

But you have to have some checks and balances in the system like that system has and so you don't want to vest in any single institution such broad powers. So the FDIC mechanism for example has this great virtue of an action requires a majority of the board of the FDIC, a majority of the board of governors, and a judgment by the Secretary of the Treasury on behalf of the president. And our suggestion is to build on that basic framework and put in place a similar set of checks and balances to limit discretion, again because of the concern your colleague raised about the risk you create too much uncertainty and moral hazard in putting in place a stronger resolution authority.

REP. SCOTT: All right.

REP. FRANK: The gentleman from California Mr. Campbell, on to the list provided by the minority.

REP. JOHN CAMPBELL (R-CA): Thank you, Mr. Chairman.

And thank you, Mr. Secretary. On Monday, you released a plan to bring private capital in to deal with the toxic assets. I'm generally supportive of that plan. The question I have is, it's a six-to-one leverage ratio, how did you come up with that number, and why did you come up with that number? As you just stated, a lot of the problem that we had was because there was too much risk taking and too much leverage. It seems to me that that six-to-one ratio encourages more risk taking and more leveraging and perhaps just moves the problem from bank to non-bank entities but doesn't necessarily help them that much.

SEC. GEITHNER: It's a very important concern, you're right. And that basic concern shaped the proposal we made. And the suggestion for that leverage is really what the FDIC suggested based on the range of experience they have with their existing mechanisms. Now, it is substantially less leverage than banks run with today. But you're right, you want to get the balance carefully right. And what we have put forward was a framework that we think leaves the taxpayer much better protected than the alternative. And we're trying, again, to stretch taxpayer resources prudently and, you know, use private investment effectively and still limit those risks to the taxpayer.

REP. CAMPBELL: So you're open to a little less leverage then?

SEC. GEITHNER: Well, you know, again, we want to get the balance right. We're not suggesting we get it perfect. We'll try to figure out a program that's going to -- again, what we want to do is help free up credit flows in ways that protect the taxpayer the best we can.

REP. CAMPBELL: Okay. When we talk about the receivership authority that you have discussed, are you asking for that authority now, prior to the comprehensive reform that I think there's universal agreement that we all want? There's not agreement on what it should look like, but is that something, this authority you're asking for, prior to that reform?

SEC. GEITHNER: You're raising a very important question, and I think that realistically you need to look t these provisions for better emergency powers for the government, resolution authority for the government, in the context of the proposals we're making for vesting more accountability and authority, responsibility in a single arm of the government for dealing with systemic risk. And (you need to do that viewed together ?), that's why we're presenting these together to you today for you to evaluate. But we'll work with the committee and with the Congress on what the best legislative vehicle is for looking at this as a whole.

I completely understand the judgment many people share that you can't do this piecemeal, you can't do it just element by element. Everyone is going to look at how they all fit together. But we'll be open to whatever process works best for the committee and the Congress as a whole.

REP. CAMPBELL: Because my concern, Mr. Secretary, would be that if you have -- that's a pretty extreme authority, receivership. And if you have that authority without the complete information and perspective of a full regulatory framework, wrong decisions could be made.

SEC. GEITHNER: We designed this proposal to fit within current law so that -- I mean, within the current regulatory structure. So you could move on this proposal alone. And once you do the broader regulatory redesign we're proposing to come back and make sure they fit, you could do it that way, but we want you to be able to see what we're proposing on the broader framework as you consider this specifically.

REP. CAMPBELL: Why would you want us to move on it separately and more quickly? Are you expecting some additional non-bank failures? Are you concerned about that?

SEC. GEITHNER: Look, you know, we are, as I said, I think it's a great tragic failure of the country that we can into this crisis without anything like the broad authority governments need to manage financial crises effectively and protect the economy from the trauma that comes. This is not just in the case of resolution authority. You know, until the Congress acted in the summer and the fall, the executive branch had no meaningful authority to put capital into a financial institution where that was necessary to protect the economy, to provide broader guarantees and assurance. And you know, we're still in the midst of a very challenging period. And so I think it would be in the interest of the country for Congress to do everything they can to make sure we've got broader tools so we can manage this effectively.

You know, there is a --

REP. CAMPBELL: Quickly.

SEC. GEITHNER: I think as quickly as you can because, again, this will be less costly for the economy and less costly for the taxpayer if we're able to contain this more effectively now.

REP. CAMPBELL: Last real quick question. You talked about an exchange force, CDOs or whatever. Are you talking about for fixed- income instruments in general, which, because of their lack of homogeneity, have not had an exchange in the past?

SEC. GEITHNER: No. Our proposal is really concentrated on the over-the-counter derivatives market, not just credit derivatives but a full range of other types of products where there's been a huge amount of standardization. And we think the system will be safer if those standardized products were moved into clearinghouses (where there's ?) greater trading of exchange-rated instruments in that context. But that would still preserve the capacity for the more specialized, tailored products which our system relies on to manage risk effectively. You want to have protections for those, too, but I think we're at the moment where if we had a maturation in standardization that we can get a more stable system by moving these things onto essential counterparties and to exchanges.

REP. CAMPBELL: Thank you. I'll yield back my time.

REP. FRANK: I thank the gentleman for his precision.

And the gentleman from Texas is now recognized for five minutes.

REP. AL GREEN (D-TX): Thank you, Mr. Chairman.

And I thank the secretary for appearing today, two times in one week. I know that you have many other things to do, but we're grateful that you're here.

Mr. Secretary, let me start by saying that you are doing the right thing. You are doing the right thing because the American people understand that too big to fail is the right size to regulate. Something that bears repeating. Too big to fail is the right size to regulate. And I'm concerned about a moral hazard as well. I'm concerned about the moral hazard associated with what Dr. King called the paralysis of analysis, analysis of paralysis. And I'm concerned about the notion that we may analyze to the point that we may become paralyzed.

I think that we have to consider what happens with long-term capital. Long-term capital was a clear indication that we needed to do something. But the paralysis of analysis prevented us from taking the actions that would have prevented AIG. AIG is, if you will, a prodigy of long-term capital. And if we had taken corrective action with long-term capital -- and I remember when the chairman when we were at a hearing concerning long-term capital, and I remember one of the comments that I made was that before there was a long-term capital there was no long-term capital because there were many people who wanted to convince us that long-term capital was an aberration, that it was not something that could happen again, that systems were in place, that we didn't need regulations.

Well, I'm here to tell you, Mr. Secretary, in a metaphorical sense, the foxes have raided the AIG hen house, and the foxes don't want us to secure the hen house. Now, I know a fox when I see one. And I want to let you know that there are no foxes in this room, no foxes in the room. But the foxes that exist don't want us to secure this hen house.

Mr. Chairman, Mr. Secretary, I'm elevating you to a lofty position, I assume, but Mr. Secretary, it's our job to secure the AIG hen houses of the world. We cannot allow the financial order to become disrupted when we have within our power to make a difference, and we did not. It is time for us to act. Don't allow the moral hazard associated with the paralysis of analysis to prevent us from acting.

More specifically, when it comes to the hedge funds, many of the employees are owners of the hedge funds. How are they acting in the best interests of persons who are non-employees who have an interest in the hedge funds when they have to take actions with regard to the hedge funds? We've got to deal with that. Many of these hedge funds have pensions in them. Hedge funds were designed for sophisticated investors. Many people who have their money in pensions are not sophisticated investors. I'm not sure that they understand (in total ?) what it means to have their money associated with a hedge fund. We've got to make some decisions about how pensions are going to be a part of hedge funds such that they are safe and secure. And again, I want it done such that we don't allow the paralysis of analysis to prevent us from acting.

Finally, I share this with you, Mr. Secretary. When we have the opportunity to make a difference, there will be naysayers. We need naysayers. There is safety in the counsel of the multitude. The naysayers are part of the multitude. But we cannot allow the naysayers to prevent us from dong what we know is the right thing for the American people and what the American people know is the right thing for this country.

Mr. Secretary, I salute you for what you are doing. God bless you. And I yield back the balance of my time.

REP. FRANK: Mr. Secretary, do you have a response?

SEC. GEITHNER: Well, I do want to (underscore ?), we have a moment of opportunity now. We don't want to waste this opportunity. And I do think that we need to act, but this is a complicated set of questions. We're going to do it carefully, but we need to move.

REP. FRANK: I thank you. I would just say, the gentleman has 13 seconds left, so I'll take him time and say that when he says the foxes don't want us to protect the hen house, I've been watching television some and I think that's right.

Now the other gentleman from New Jersey on the list given to me by the Republicans.

REP. LEONARD LANCE (R-NJ): Thank you, Mr. Chairman.

Good morning to you, Mr. Secretary. Let me say, from my perspective, I wish the president well and you well in your incredibly responsible positions. And I certainly wish you well next week in London.

My questioning regards two matters in your testimony -- credit- default swaps and other OTC derivatives and money market mutual funds. You indicated, regarding credit-default swaps, that in our proposed regulatory system, the government will regulate the markets for credit-default swaps and over-the-counter derivatives for the first time. Mr. Secretary, can that be done by regulation? Or will that require statutory change? And does it also require regulation or statutory change in London and in Asia and in other places in the world?

SEC. GEITHNER: We're examining right now the question about what requires legislation and what we can do with existing authority.

We actually can do quite a lot with existing authority. But right now, broad authority for decentralized parts of our payment systems are segmented and separated. No one's really accountable for looking at the whole and that's something we have to fix.

I do think it's very important that in these markets, which are global markets, you want to have a global solution. You don't want to have separate national --

REP. LANCE: I agree completely.

SEC. GEITHNER: And our hope is that we can work with the Europeans on a global framework, a global infrastructure which has appropriate global oversight, so we don't have a balkanized system at the global system like we had at the national level.

REP. LANCE: My concern of course is that if we engage in regulation or statutory change here and this does not occur in London or in Asia, that money will go to those centers of commerce and we'll be back in the situation where we have found ourselves.

SEC. GEITHNER: I completely agree with you. And at the center is, again, a recognition that we can't move here alone.

REP. LANCE: And then regarding money market mutual funds, which I had thought were safe -- and I think the American people felt safe regarding that instrument; clearly different from the sophistication of credit default swaps -- after the collapse of Lehman Brothers, we discovered -- and certainly I discovered for the first time -- that they could not be safe.

You indicate in your testimony that we believe that the SEC should strengthen the regulatory framework regarding money market mutual funds. And my question there is, can we do that alone or does this also have to occur in London and in Asia?

SEC. GEITHNER: Excellent question.

My sense is that we can do a lot here that would leave our system more protected. But of course, as in every area of this -- on the capital requirements and everything else -- we'll look at whether there would need to be complementary changes elsewhere.

REP. LANCE: And you will be discussing this, I assume, Mr. Secretary, next week when you are in London?

SEC. GEITHNER: Well, I'm not sure how detailed into each of these provisions we're going to go, but absolutely we're going to be discussing with our colleagues a common approach to efforts at the global level that focus on the stability of our national systems.

REP. LANCE: Thank you very much, Mr. Secretary.

I yield back the balance of my time.

REP. FRANK: The gentleman from Minnesota, Mr. Ellison.

REP. KEITH ELLISON (D-MN): Thank you, Mr. Chairman.

Mr. Secretary, thank you for your testimony and your work today.

Will the stress test that the Treasury plan is considering as a way to effectively require banks without adequate capital to sell their troubled assets into the administration's public/private investment program?

SEC. GEITHNER: No. I wouldn't frame it that way.

Could I step back and frame the broad objective?

REP. ELLISON: Sure.

SEC. GEITHNER: You know, right now we have a very resilient, diverse financial system. Parts of the system have a lot of capital. Parts of the system in the eyes of the market needs some more capital.

And what this assessment is designed to do -- and this assessment is run by the Fed, not by the Treasury -- is to assess what potential losses these institutions might face in the event we face a deeper recession. And to make sure the government's willing to give -- able to provide capital to backstop the system through this period of time.

Most institutions are going to want to go raise any additional capital they may need from the markets. But we're going to make sure that the markets understand that the government will be there with capital if that's necessary. In our judgment, that'll help reduce the risk that the system pulls back more from providing the credit that recovery needs.

We don't want the system sucking more oxygen out of the economy just as we're trying to lay the foundation for recovery. And providing capital to the system is an important part of that.

Giving these banks a chance to sell assets into a market will be helpful to restoring confidence in their financial soundness and make it easier, in our judgment, for them to go out and raise private capital as well.

REP. ELLISON: In your testimony, you indicated that capital requirements for systematically important firms must be more robust than other firms. However, many systemic entities like hedge funds currently face no capital requirements whatsoever.

Could you discuss in greater detail how a capital adequacy regime would work for these firms?

SEC. GEITHNER: We did not propose to establish capital requirements for hedge funds.

What we are saying, though, is that the large institutions -- principally the banks and the major large complex regulated financial institutions -- are held to a set of requirements on capital liquidity reserves, risk management, that are commensurate with the risks they pose. And because their risks are greater, and because the consequences of their failure are greater, they need to be subject to a higher set of standards and greater constraints on leverage.

But we're not proposing to establish capital requirements for the broad universe of hedge funds and private pools of capital that exist in our markets. We want them to register with the SEC if they reach a certain scale. And in the future, if some of them individually reach the size where they may be systemic, then at that point we believe they should be brought within a regulatory framework that's similar to that which exists for banks.

REP. ELLISON: Could you explain how you think consumer protection should be incorporated into comprehensive regulatory reform?

SEC. GEITHNER: You know, we're not at the position today where we want to lay out any details on the consumer side. I just want to underscore that that will be a critical part of our reform agenda. You know, the failures there were very consequential not just for the lives of millions of Americans, but for the whole system. They will be a critical part of what we propose.

REP. ELLISON: Are you familiar with Elizabeth Warren's concept of a financial products safety board?

SEC. GEITHNER: I am. And I --

REP. ELLISON: Could you offer us your thoughts on it?

SEC. GEITHNER: I think it's an interesting proposal. That's one of the many things we're looking at.

REP. ELLISON: Could you tell me why the Treasury would be given resolution authority over systemically significant financial institutions, such as bank holding companies, hedge funds and large insurance firms? Why would the Treasury be given such authority -- resolution authority?

SEC. GEITHNER: We're actually proposing a structure in which the FDIC would have a central role in managing this regime. But as is true now, in the existing process for banks and thrifts, the judgment by the Treasury is necessary. The concurrence of the Treasury is necessary for a range of actions -- as you would expect -- because, you know, the Treasury is responsible in some regarding the interests of the taxpayer.

REP. ELLISON: But why not an independent regulatory authority for those things?

SEC. GEITHNER: Well, again, in our structure -- like in the structure for banks now -- there's a complicated set of checks and balances. So there's an important role for the independent regulatory supervisor and for the FDIC and the Fed, but that's not authority that the executive branch can delegate or separate. Because ultimately, it relates to choosing important consequential judgments about the risks the taxpayers are exposed to and the degree of moral hazard in the financial system. And the Treasury has to be responsible for those judgments.

REP. ELLISON: Well, given that the FDIC already has resolution authority, wouldn't such authority be better suited for that?

SEC. GEITHNER: Well, as I said, what we're proposing to do is to expand the role they would play --

REP. ELLISON: Okay.

SEC. GEITHNER: -- with respect to a broader range of institutions and within a set of checks and balances that are similar to what now exists for banks.

REP. ELLISON: Okay. I think I'm about out.

Thank you, Mr. Secretary.

Yield back.

REP. FRANK: The gentleman from Texas, Mr. Marchant.

REP. KENNY MARCHANT (R-TX): Thank you, Mr. Chairman.

Secretary Geithner, I'd like to spend my time talking about the new public-private partnerships you've announced, which I am generally in favor of.

My concerns are that as it's been discussed, it's been announced now that PIMCO and I think BlackRock -- and I think several of the large institutional money managers -- are now emerging as some of the people that will be managing those funds.

SEC. GEITHNER: Not yet. They've expressed interest, but we haven't made any of those judgments yet.

REP. MARCHANT: My concern is that given the ratios of leverage involved here, my concern is that the actual investors have more skin in the game than is proposed here, because if they in fact just take their hedge fund partners out in America and put all of their money in and then they pull management fees off of that, then they don't have -- in my opinion -- don't have adequate incentive to make sure that those -- they don't have enough skin in the game, if you absolutely follow the hedge fund model when putting this money in. I'm very concerned about that.

SEC. GEITHNER: Well, we have the same concern. And we want them to have enough skin in the game that their interests are aligned with our interests.

But we've got the same objectives, recognize that we've got to find the right balance. But I think this is a better way of protecting the taxpayer than the alternatives.

REP. MARCHANT: The concept I agree with. I'm concerned about how the money gets raised for the equity partner.

The second thing I'm concerned about is the potential gap that is created if, indeed, once the auctions begin to take place and you begin to discover prices that you -- there will be gaps created between bid and ask.

And when those gaps are created and those banks -- and those deals are made, then you're going to have losses. You might have some gains to the banks, but I suspect that we'll read more about the losses and that those banks will then immediately have to put monies into the loan loss reserve and so they're going to have immediate needs for capital.

Now, is it in the plan -- is there enough TARP money, if necessary, to plug that hole? And are you going to allow, if a gap in fact is created, are you going to allow there to be a response time between the bank and the FDIC or the regulated entity to where that bank then says, okay, if I sell this at this -- I have a buyer -- then it's going to create this gap? Are you going to close me down instantaneously or are you going to give me -- or can we give you a plan as to whether we can raise additional capital or whether we're going to get TARP money? Because if we do this, we can't do the deal and you may end up freezing the whole system.

SEC. GEITHNER: A very important concern and you said it exactly right.

So we're going to establish a six-month window in which these institutions will have the ability to go raise capital from the markets or take capital from the government. Throughout that period of time, they have the ability to -- if they choose -- to sell assets into -- both loans and securities -- into these type of new funds.

And so they would have the ability to make a choice about what mix of asset sales would -- what implications for capital and how they would meet the capital needs created by that.

So that's how we'd work. And, you're right that any institution looking at this would have to sort of do those -- make those judgments together at the same time.

REP. MARCHANT: And the last concern is will you have the ability, will the market have the ability to take a look back and say -- will the regulator have any ability to say this sale can't take place, this sale, this auction is too devastating to the government or the FDIC fund? I mean, the FDIC's going to be the insurer here. Does the FDIC have any function in saying this is a sale that we can't bear the loss of in the fund, this is not -- because the FDIC fund, actually insurance fund, is going to actually be the ultimate insurer here, right?

REP. FRANK: Well, can I say if the gentleman wants an answer -- probably we ought to end the question. It's an important question I want to make sure we have time for the answer.

SEC. GEITHNER: I think this probably requires a bit more thought and care in responding to. And I'd be happy to have our staff with the FDIC come up and walk you or your colleagues through the details of this. But -- and your concerns are right, in this case, but the FDIC will manage and operate the auction process for the loan piece of it. They've got a lot of experience in doing this. They've got a huge interest in making sure they're not too exposed, just as I have a huge interest in making sure they're not too exposed, and we'll try to work out the right balance in this case. But your questions are good questions, thoughtful concerns. We share those concerns. We'd be happy to walk you through in more detail how we manage those concerns.

REP. FRANK: If the gentleman would permit me, and the secretary had suggested this to me because the gentleman from Texas has a very important point. This clearly calls for the cooperation and participation of all of the regulators and, on his suggestion, I will be consulting with the minority about having a hearing when we come back with all of those who will have a piece of the action here so that we don't want anyone to think that one agency is being left out or being committed over its objection. That was the secretary's suggestion that we'll be consulting and we'll have them all here precisely for the purpose of making sure that the -- no agency- specific mission will be in any way impinged upon by this. So I appreciate the gentleman's question.

Next, gentleman from Florida, Mr. Klein.

REP. RON KLEIN (D-FL): Thank you, Mr. Chairman. Thank you, Mr. Secretary. Good morning.

First I want to join the gentleman from Texas in his comments about the interrelationship between the markets overseas. A number of us in a few weeks are going to be meeting with the transatlantic dialog with European Union countries. So as we progress through this, I'd like to make sure we're all up to speed and can have those conversations with them so that we can, obviously, get it the way we want to get it but at the same time they're not doing something inconsistent.

We're obviously talking today about the importance of handling the insolvency of non-bank financial institutions and I fully support, first of all, the notion of an integrated system that looks at a systemic way of doing this. But I also note that, as I think you're correctly presenting, every day that passes and we don't do -- take necessary action or have the clear authority for our agencies to take the necessary action, more money is being spent, more, or less confidence is in place and those are the things that need to happen as quickly as possible. We want to get it right and I think we want to get a systemic point in place but I fully support the notion of working quickly to get this organized.

One of the points I want to make is as we get in to the breaking down, the merger, the acquisition, the selling off and liquidating, I want to make sure that there's been some criticism in the past that sometimes no big contracts were used, certain organizations were given priority. Very important to the American in terms of confidence that there is an open, competitive bidding process. There are a lot of qualified companies around the United States that can help assist in this area. And if you can make it absolutely clear that that will happen and if you can comment on that.

SEC. GEITHNER: Well I completely agree. And I think that you're right, confidence in the basic integrity of that process is critically important. And again, I really think the FDIC has great experience in designing procedures that meet that test. They are very sensitive to that concern too. We want to build on that model and, of course, open to any suggestions of how we do a better job of assuring that.

REP. KLEIN: I appreciate that.

And secondly, I think from a taxpayer point of view, everyone in the United States is concerned, they heard about the AIG payouts, it was -- yes, it was the amount of money but it was also the principle of fairness.

SEC. GEITHNER: Yes, it was.

REP. KLEIN: This just struck people as totally unfair. They're struggling in their own business, in their own personal lives, yet these payments took place. It is very important that these contractors, these parties that will assist us in helping this orderly liquidation, which in time will save taxpayer money. It's also important that, yes, there will be fees paid to these organizations, they should get a reasonable compensation. But the taxpayers have to feel that there's an upside in the sale and liquidation of these assets so they don't see money being paid to a private, you know, organization, which they're entitled to, but at the same time the taxpayers feel it's on our dime, we're not getting anything out of this. If assets don't have zero value, they have some value, we need to make sure that taxpayers feel like they're getting their fair share on the upside.

SEC. GEITHNER: I agree with you completely and that's why, in our proposal, there's a dollar of taxpayer capital alongside a dollar of private investment and so the taxpayer will share in any gains that come from the purchase of these assets management over time.

REP. KLEIN: And if we can make sure that's very clearly articulated every step of the way.

The next step I'd like to bring up is the whole notion of too big to fail, which is nauseating to most Americans -- this idea that businesses were allowed to get so big they couldn't fail and yet you have smaller banks, for example, that can't get TARP money, can't get assistance and they're on the edge, and yet other companies just on the clip of a dime they get a huge check.

This notion probably goes back to the chairman's comments about -- antitrust laws were created many years ago based on consolidation of economic power which drove anticompetitive activity. Antitrust laws, by and large, many of them have not been as enforced as many people would like to see and that allowed for large consolidations to occur, which in free enterprise we understand is fine as long as there aren't adverse consequences. Adverse consequences to anticompetitive activity, in this case, adverse consequences was this notion of a disaster that we have to put money into.

As we move forward with the systematic regulation there has to be a notion of definition of how we avoid organizations getting to the too big to fail category. Do you have some thoughts on how we're going to integrate that into our law and the regulation?

SEC. GEITHNER: We're a nation of 8 (thousand) to 9,000 banks. We are a much stronger country because of the hundreds and thousands of smaller institutions that operate in our communities across the country. This is -- they were not -- mostly not part of the problem, they're going to be part of the solution going forward. Very important, they have access to capital on the same terms as the large institutions do and we're moving very, very quickly, since we came into office, to try to make sure that we're accelerating the procedures at the Treasury to make sure they can have access to capital.

Now, in our proposal, as you saw, we want to hold the large institutions to stronger, tougher, more rigorous standards, tougher constraints on leverage. That will help counteract this risk that we have further consolidation over time to leave the system more risky. But you're absolutely right to underscore the importance of effective antitrust enforcement and we have significant -- we have these caps now on the scale of share of deposits that any single institution can have across the United States. We want to keep those in place because we want to have a system that still relies on, not just a few large institutions but hundreds and thousands of smaller institutions across the country.

And again, if you look at what's happening across the country, they're bearing a lot of the burden for filling the gap left by those institutions that have to pull back now and get smaller because they took too many risks.

REP. KLEIN: Well, I look forward to working with you on that notion to make sure we don't have another too big to fail scenario but we allow a free enterprise system that is healthy and allows banks and others to thrive.

I thank you, Mr. Chairman.

REP. FRANK: Gentleman from Alabama.

REP. BACHUS: Thank you.

Secretary Geithner, Mr. Klein talked to you about too big to fail and do you want to get away from that as quickly as possible?

SEC. GEITHNER: I do. And I think that, again, the critical test for any system should be is our system strong enough that we can handle failure, even of the large institutions. That is a critical objective and that's underpinned everything we do.

REP. BACHUS: Alright. You're draft legislation authorizes the FDIC to spend an unlimited amount of money of taxpayers cash to prop up or unwind a supposedly systemic important firm, or actually the words are, such sums as are necessary. Isn't that what we've been doing that the taxpayers and the American citizens are so upset about?

SEC. GEITHNER: You said in your opening remarks and you're saying again now that this question about who bears the losses, how you pay for these things is very important and complicated. And we are going to have to look carefully at how the cost of these interventions are shared across the system. Right now, in the current system, it's fundamentally unfair because smaller banks are forced to absorb a disproportionate cost of interventions needed to protect the system from often mistakes made by larger institutions.

But we would like to change that and put in place a fee structure that is a bit more just and fair in that context.

REP. BAUCHUS: But wouldn't a fairer structure be not to problem up with any taxpayer money?

SEC. GEITHNER: Well, I think, again, as this crisis reveals and as the crisis of the thrift and loan crisis, the S and L crisis in the early 90's revealed, there are circumstances in which it is cheaper for the taxpayer over time, and less damaging for the country over time, for the government to take some risk in preventing greater cost, not just to the deposit insurance fund, but to the rest of the system. That's the balance we have to strike.

REP. BAUCHUS: Well I'm talking about, is there really no alternative than saddling future generations of American's with perhaps hundreds of billions of dollars worth of losses for the mistakes of a few institutions that grow too large or too complex?

SEC. GEITHNER: In -- what has to guide what we do is how do we protect the system at least cost to the taxpayer. And in emergencies, in extremists, as we've seen, letting institutions fail can cause far greater damage, you know, acute catastrophic damage to the fortunes of all Americans. And so there may be circumstances in which with carefully designed constraints that it is more effective for the country and for the taxpayer for there to be carefully designed emergency authority to step in and prevent failure.

REP. BAUCHUS: I'd submit to you that such sums that are necessary is too open-ended.

Secretary Geithner, in my opening statement I talked about that within hours -- you said within minutes -- of the AIG intervention, billions of dollars went to the foreign bank.

SEC. GEITHNER: But -- can I just clarify that?

REP. BACHUS: Yes.

SEC. GEITHNER: What I said is the purpose of the action was to ensure they could meet their commitments, and therefore that had impacted --

REP. BACHUS: AIG?

SEC. GEITHNER: -- immediately on their ability to meet their commitments. I don't actually -- didn't mean to say minutes, they were making payments, but --

REP. BACHUS: Sure. Okay, within minutes they were -- or, you know, I mean I said hours and you said minutes. But I mean, you know, even if it was a few days. It was to allow them to not default on their obligation.

SEC. GEITHNER: That was the purpose of the action.

REP. BACHUS: Right. Now they have obligations to a lot of American banks. In fact, you know, I said "pensioners and retirees." You added "municipalities and banks." How about the U.S. banks that -- there were obligations of AIG that they are in default today; they were in default then.

SEC. GEITHNER: Mr. Bachus, I heard your question, and I need to understand a little bit more the precise examples you're referring to. I would be happy to look at that and get back with you.

REP. BACHUS: Yes.

SEC. GEITHNER: I know at the end if it seems unfair we'll have to fix it, but I want to take a more careful look at what you're suggesting.

REP. BACHUS: Sure. Sure. And what I'm talking about, let me tell you what was paid off dollar-for-dollar were these risky credit default swaps, in most cases, which was a financial products subsidiary that wrote those. That's what you paid off dollar-for- dollar. What is still not being paid off is the more traditional loans to AIG of actual money, and -- do you understand my concern?

SEC. GEITHNER: I completely understand your concern, but I want to look in more detail at the precise examples you speak of because they don't, I need to understand those better. And I'll give you a more thoughtful answer.

REP. BACHUS: And I'm talking about U.S. banks, federally insured U.S. banks that made secured loans to a subsidiary of AIG. And they're being told, they're being offered 20 (cents) or 30 cents on the dollar. U.S. company doing business in Florida, Alabama, Tennessee.

SEC. GEITHNER: As I said, we'll, I'll work with the chairman. We'll come back to you and give you a detailed --

REP. FRANK: Thank you, Mr. Secretary. The gentleman from Indiana, Mr. Donnelly.

REP. JOE DONNELLY (D-IN): Thank you, Mr. Chairman. Mr. Secretary, thank you for being here. When you read the papers today, you see there's continued work on getting General Motors and Chrysler squared away across the finish line. And as I'm sure you know, if the dealers aren't working, nobody is working. And so that brings up the issue of floor-plan financing. And I know the Treasury has been working on a solution.

Could you -- for all the dealers out there whether they are RV or marine or automotive -- could you tell us where you are and if there's a ray of hope for them?

SEC. GEITHNER: As I said, we're working on it. We've been looking at this very carefully over the last several weeks. We're exploring a range of options. I can't tell you today whether we found a way to solve it, but we agree it's important. We think it would be helpful as a part of the overall solution, and I'd certainly be able to tell you and your colleagues in the next couple days what we think is possible, what's not possible.

REP. DONNELLY: Okay. Because as I said, and I know I'm repeating myself, but if the dealers can't get floor plan financing, the whole point of General Motors and Chrysler working their way through this and other companies, there's no point to that if we can't fix this portion of it.

SEC. GEITHNER: Right. As you've seen, we've tried it, we tried it, and we found something we could do on the suppliers side. There are other things we need to do to make this work. But again, we want there be, we want to take our best shot in trying to see if there's a basis for a broader restructuring that would leave these firms viable in the future without government assistance.

REP. DONNELLY: When the chairman gave his opening statements, one of the things he said was that we want to have innovations with value added. And we saw naked credit default swaps caused extraordinary devastation to our economy. And I know regulation is coming. Do these naked credit default swaps provide any value added, or is this simply just gambling?

SEC. GEITHNER: I know there are strong opinions on this issue, so I say this with some trepidation. My own sense is that banning naked swaps is not necessary and wouldn't help fundamentally in this case. It's too hard to distinguish what is a legitimate hedge that has some economic value from what people might just feel is a speculative bet on some future outcome. If we could find a way to separate those two types of transactions from each other, we could do that. We'd have done that a long time ago across a whole range of financial regulations. But it is terribly hard to do. But we will listen carefully to any ideas in this area, and understand why people feel so strongly about --

REP. DONNELLY: I would love to see if there's something we can do in regulation in this area because to me those are just simple bets. And the American people have been required to take money out of our truck drivers' pockets, our waitresses' pockets, to pay off bets on Wall Street. And it's not that there was any real product there, it was simple -- at least to me, from the Midwest on Main Street -- it just seems like gambling.

SEC. GEITHNER: Our issue is not whether we want to protect the American economy from these in the future, which we do. The only question is, how best to do that. And our view is that the absolutely essential thing is to make sure there is more capital held against those positions so that we never again face the situation where those type of judgments could imperil the system and therefore leave Americans in the position where they are facing, you know, much lower pension values, higher borrowing costs, much greater risk of losing their job. That's our basic objective. The only question is, alongside what we do for capital and margin and these broad efforts to bring these things into central clearinghouses, whether we need to also look at banning certain instruments.

And my own judgment is, don't need to do that; very, very hard to do that. But I understand, there are other views on that, and I'd be happy to listen to any suggestions.

REP. DONNELLY: And we have seen IRA and 401K significantly affected. People open up their envelopes at the end of the quarter, and it takes their breath away. With the steps we are moving forward with, from what I understated and what I've read, mutual funds will be allowed to participate. Is that correct? Because that gives every one of the people in our country a chance to try to get back some of the money that they've lost. And so if mutual funds can participate in the programs that you have, as opposed to judge hedge funds and such, then actually the American people are part of it. And it should go in their pockets first.

SEC. GEITHNER: Absolutely.

REP. DONNELLY: Okay. Thank you.

Thank you, Mr. Chairman.

REP. FRANK: Thank the gentleman.

Thank you, Mr. Geithner. At the conclusion of Mr. Garrett's questions we'll break for the votes. A lot of votes, so we'll do the best we can in coming back.

Mr. Garrett?

REP. GARRETT: Thanks. And I appreciate your comment with regard to the need for the comprehensive regulator going forward. I'm just sitting here thinking, if we had something like that in place, if the Senate regulator and also this idea of being able to wind things down as well, prior to what happened with the GSEs and the problems that we have today with them, would be here where we are? Would they have done something different, what have you, with the GSEs?

SEC. GEITHNER: GSEs were allowed -- you're talking about moral hazard?

REP. GARRETT: Right.

SEC. GEITHNER: GSEs were allowed to build up huge exposure to risk with inadequate oversight over their risk-taking. We got the balance of the moral hazard and constraint completely wrong in that context.

REP. GARRETT: Right.

SEC. GEITHNER: And that's one reason why Congress acted to put in place the stronger framework of supervision going forward with a stronger conservatorship authority. And I think that like in many things, and I think it's true in lots of other parts of the system, I believe it would have been better for the country for that to happen sooner.

REP. GARRETT: Right. And now there's a case where I give credit where credit is due to the Federal Reserve was here on many times, past administration, this administration, this chairman has worked as well. We didn't get it done as quickly as some would have liked, but we did work together to try to get that done. But it didn't happen soon enough. So you're saying that had we had what you're looking for what you're looking for in place 10 years ago, this new entity, whether it's the Federal Reserve or I call it Hoover regulator, what have you, they could have taken some sort of action and put it into receivership or done something else to get us not where we are today.

SEC. GEITHNER: I see where you're going, but let me just make a broader point. Across the financial system --

REP. GARRETT: I'm just looking at that.

SEC. GEITHNER: No, I understand. But it is a bigger issue.

REP. GARRETT: I know. I'm just looking at that.

SEC. GEITHNER: Right.

REP. GARRETT: Would they have done something different than what Congress did with regard to the GSEs?

SEC. GEITHNER: You know, it's kind of a hard question to answer because you need hindsight to go back and say that if only X then Y.

REP. GARRETT: But you can say that they should have probably?

SEC. GEITHNER: More generally I would say that, again this country, our nation, did not have effective means to prevent the build-up of risk that would be threatening to the system, nor to protect the economy from the consequence of the unwinding of the bubble.

REP. GARRETT: I apologize, the time is short.

With regards to the FDIC, FDIC has a set class of people you're trying to protect. The depositors, right? Here, you're trying to do something else that's really not a class of depositors for these other institutions. It could be the equity holders, the bond-holders, what have you, that are not just like them. You have a situation there where it's not so clear who exactly it is that we're trying to protect; it's a systemic risk. If that's the case when it's not so clear which values or who you're going to weigh over, doesn't that potentially create some adverse or perverse incentives and create even more moral hazard?

I'll just throw one last little twinge to that too, and that is -- I watch my time -- is this. Some of said we regulate hedge funds now. I don't think we do. But if you set up a system like that, and they come into it, right? Even if you just regulate them and even if you regulate just the big guys, again don't you say now we've created an inverse, perverse incentive there because now there may be the same GSE implicit guarantee which is now specific.

SEC. GEITHNER: Yeah. I completely agree. There is real risk. But if you identify some classes as systemic, imply they are too big to fail, imply they will get support in extremis, that would create a huge amount of moral hazard, perhaps leaving our system more vulnerable even than it is today.

REP. GARRETT: Right.

SEC. GEITHNER: So we need to make sure we design this in a way that mitigates that risk. And I think you're right to be worried about that. The question is, how we balance that.

On the other hand, it is true that as we've seen firms can develop to the point where their fate --

REP. GARRETT: I understand that.

SEC. GEITHNER: -- could threaten system stability. And that creates moral hazard itself.

REP. GARRETT: Right.

SEC. GEITHNER: And so what we have to do is to make sure that those institutions are subject to a more effective set of constraints on leverage and risk-taking. I don't see any other way to do it because market discipline alone is not going to protect the system from that. But you're exactly right that you can do this in ways that will make the problem worse.

REP. GARRETT: One more quick question. And moving too quickly on this, with regard to AIG that the company has foreign subsidiaries, right?

SEC. GEITHNER: Right.,

REP. GARRETT: If we today set up a situation that says we're going to have to have a way to wind down companies and where they have foreign subsidiaries, I know you want to go with global, but if we don't do the global thing at the same time, might the other countries look at that and say, "Wait a minute; we're going to wind down these companies that are in the U.S. but they are over here in other foreign countries, those countries which I might say, We're going to seize these assets here before the United States does?"

SEC. GEITHNER: Part of the international agenda is that more effective, globally coordinated approach to resolution of globally active firms --

REP. GARRETT: So we have to do that at this exact same time before we have a wind-down system, don't we?

SEC. GEITHNER: Well, you know, we don't want to leave our country vulnerable because of the time it takes to build consensus globally. So you need to do these things together. But ultimately we have interests to the country we have to protect.

REP. GARRETT: Okay.

SEC. GEITHNER: And we can't be hostage to the difficulty of getting the rest of the world to move. We need to move as much as we can in this case, but an important part of the national agenda is more effective cooperation around the resolution of large, globally active financial institutions.

REP. FRANK: -- five minutes. The gentlewoman from Ohio. We'll get in as much as we can.

REP. MARY JO KILROY (D-OH): Thank you, Mr. Chairman. Thank you, Mr. Secretary for returning here. Certainly we've talked a little bit about what happened last fall and whether or not things could have, what you're proposing now could have prevented what happened then.

And certainly at that time, you know I was not here along with others. We could have watched and listened, the issues with Lehman, the failure with Lehman, Bear, Stearns and AIG, and we saw government officials scrambling to try to prevent collapse. So what it seemed to me is that Treasury at that time had no Plan B, had no preparation for what to do in that sense. And we're winging it, we're scrambling. So I appreciate the fact that you are engaging in this kind of process, taking a bigger picture look at it about what we need to do so that we don't get into a situation of housing bubbles and egregious credit default swaps and over-leveraged institutions and even fraud on a dramatic scale as you said in your earlier remarks.

And I certainly look forward to working with you on these issues of systemic risk and capital requirements and over-the-counter oversight. And like some of my colleagues here, I take a stronger view on credit default swaps.

And I also appreciate the public/private partnership that you announced with addressing the issue of toxic assets and cleaning up that mess.

But I think as we heard from Mr. Kline, that AIG bonus uproar did offend a sense of justice that's ingrained in the American people that those who broke their own company, broke the system, caused anguish and real hurt out here on Main Street, are also continuing to benefit from that. And what I think we need to hear a lot more is how this will help protect there, how this will help Main Street, the car dealers, the restaurant owners, the dry cleaners, the hard-working people here who are planning to retire and seeing their 401Ks they had hoped to use in a couple years disappear.

So what would you say to them that this is going to benefit them?

SEC. GEITHNER: "This" being the program of reforms we're announcing today?

REP. KILROY: Right.

SEC. GEITHNER: This will make our system more stable in the future with better protection for consumers and for investors. So we want to make it much less likely in the future that a working family in your district or anywhere else could be taken advantage of by a mortgage broker, could be sold a mortgage loan or some other type of financial product which they did not understand, could not afford to meet, leaving them vulnerable to losing their house. That we have to prevent. We have a deep moral obligation to prevent that more effectively in the future.

We won't be able to save all people from making bad judgments about their financial health, but we can try to do a better job of making sure they are not taken advantage of by predatory behavior at the basic level of the mortgage consumer lending market.

But that's necessary but it's not sufficient because even if we did that well but we still had large institutions taking on such risk, that when we go into a recession they suck the oxygen out of the overall economy, pushing smaller businesses to the brink of failure. Then we'll leave the system as a whole more vulnerable in the future. So we have to prevent that too, and that's going to require smarter, tougher, better design constraints on risk taking at the core of the financial system as well. You need to do both those two things.

And just finally, because we won't be able to prevent all financial crises, nothing we do here today or over the next six months will offer the prospect of preventing all future financial crises. We can make sure that when they happen in the future we can act more quickly, more effectively to contain the damage, to put a firebreak around the most weaker parts of the system. And not allow the fire to jump that firebreak and spread to parts of the economy that were more prudent and careful in their decisions. That's the core objective that has to guide what we do.

REP. KILROY: One of the issues that arose in the wake of the financial distress in terms of getting the toxic assets off is the issue of pricing them. And the proposal that you made earlier this week has had some criticism that if we could be over-pricing some of the toxic assets, then it would be a windfall for some of the hedge funds.

Would you address that issue for us, please?

SEC. GEITHNER: There's two types of concerns people raise. One is, this is going to be too generous to the bank. The other is, it's too generous to the investor. Both can't be true. So you could design a proposal which is very generous to the bank, has the government overpaying for these assets leaving the taxpayer bearing all the risk. We're not going to do that.

You could also design a proposal that leaves the private investors out there getting more reward than we're going to give the taxpayer. We're not going to do that.

So our proposal has a balance, leaves the taxpayer better protected, make sure that private investors are taking risks alongside the taxpayer, and that we share in those returns. We think that's the better approach, better balance.

REP. FRANK: We'll reconvene after the vote.

(Recess.)

REP. FRANK: Staff will please close the doors. We're about to reconvene. Could someone please close that door?

Mr. Secretary, thank you.

And I now recognize for five minutes the gentleman from Delaware, Mr. Castle.

REP. MICHAEL CASTLE (R-DE): Thank you, Mr. Chairman.

And thank you, Mr. Secretary, for being here and your judgment on all this. And let me say that I, by and large, agree with what you have stated. But I want to talk about what you didn't talk about a little bit, and that's what you refer to as the complex and sensitive questions on who should be responsible for what. I'm not trying to pin you down. I'm trying to sell you something, actually.

You may -- I'm sure you probably did see or read about Senator Collins's proposal, which I've also introduced here in the House, forming a financial stability council. And I'm not suggesting that's magic. Who knows? But I have looked at this issue, and I'm very concerned about where this all may rest.

I think there's majority agreement -- it's not unanimous agreement -- we need to do something. And the question then becomes, who's going to do it? And I think what you've outlined substantively is about what we have to do. But I'm worried about the powers we're going to give to any one entity in doing this. And I felt that this council, which would have an outside chairman, bring in the different agencies that do the regulating now, would be a good way to go.

And the word in the media is that the Federal Reserve is the natural entity to run this. And that's fine, and I have a lot of respect for Mr. Bernanke and the Federal Reserve, but they have some regulatory authority now in certain aspects of the economy. They also have other responsibilities for the economy -- (inaudible) -- about, you know, potential conflicts there.

On the other hand, having them at the table, having the other regulatory entities, including Treasury and FDIC and the others, I think is important. So I would hope that when we get down to that important question of how this is going to be organized, that careful thought is given -- for all I know, you've already given careful thought to this -- but careful thought is given to being inclusive, even having an advisory council, perhaps some of the entities that are going to be regulated to help in this.

I mean, after all, you know, the AIG people may have been a little more thoughtful if they'd been at the table hearing some of this. So there's a variety of things perhaps we can do, and I just don't want it to be so closed that all of a sudden you have that iron- fisted hand making all these decisions, perhaps without consultation with other people or groups, and maybe unintentionally, but in conflict with itself in terms of other things that they may have to do.

So I pose all that to you, and I'd be interested in your comments on it. Again, I'm not asking you to reveal something you're not ready for yet, but I'm just -- I just want to make sure that the administration is paying attention to the breadth of this issue as well as the substance of it in terms of how we're going to manage it.

SEC. GEITHNER: Thank you. I think there are three different issues involved here. One is the division of labor and the checks and balances on this resolution authority. And as I said in response to earlier questions from your colleagues, I think, in that context, as is now the case under FIDICIA with respect to the FDIC, the decisions involved there are of such consequence to the system that you can't vest authority for that within one entity.

And I think as the -- again, as FIDICIA reflects now, it requires a judgment by the majority board of the FDIC, majority board of governors of the Fed, as well as the secretary as the president's designee in this context. And I think there's a lot in that basic structure that's similar to what you might think a board might do.

There is another set of issues, which is just trying to make sure there is cooperation across regulatory authorities, so that we're doing more evenly enforced, more economically sensible incentives and constraints across financial activity. So it is very, very important, particularly given how Balkanized and segmented and siloed our system is today, that we have much more integration brought to bear across setting the rules of the game and enforcing them across those systems. And we do not want to design a system where we're going to vest all that authority in one place, one concentrated agency.

Can I go on to one --

REP. CASTLE: Yes, please do.

SEC. GEITHNER: There's a third question about who should be responsible for what we're calling here the systemic core responsibilities in the system. And as I said in my opening statement, there are a range of issues we're going to have to look at to deliver a more streamlined, consolidated financial oversight framework. And we want to make sure that we've got the right division of labor, there's clarity about responsibility, the responsibility is matched with authority, and the guys who are responsible are competent to execute that.

We are open to looking at a range of suggestions for how that authority should be framed and where that should be lodged in the system. But let me just give you a few basic principles for that. And this is, again, the authority we're calling the systemic risk authority.

It should not be the Treasury. It needs to be vested in an independent supervisory authority. I do not believe it should be pulled together in one independent agency. I think too much concentrated power for all that regulatory authority would be not a sensible thing for the country. I think it's probably best to build on the existing authorities that we have for holding companies under the current state.

And I want to end with just one basic example, which is that, you know, in a fire, the fire station needs to understand the neighborhood. It needs to know the neighborhood it's operating in. And you don't want it to be where you have to convene a committee before it can get the engines out of the station. So it's got to be able to move very, very quickly in extremis, with the knowledge so it can make sensible judgments.

And there is a good pragmatic case, I believe, looking at the lessons of crises in our country and around the world, to try to have that authority for crisis management matched with the authority for mitigating systemic risk; not too much concentration, not vested within the Treasury, appropriate checks and balances, but there's a range of those three different areas where we have to make some judgments about responsibility.

REP. FRANK: Thank you. That's obviously a very important question, so we let it go on a little bit.

The gentleman from Florida.

REP. ALAN GRAYSON (D-FL): Thank you, Mr. Chairman.

Thank you, Mr. Secretary. I think we all understand how difficult the decisions are that need to be made these days, and these are not decisions that we ever wanted to make. Sometimes we're probably afraid to know if we're right or wrong. But in any case, I have to ask a few questions.

On the balance sheet of AIG that was submitted earlier this month in their 10-K, the balance sheet showed that AIG had an exposure to the yield curve of $500 billion, which is five times greater than it ever had in equity. At what point is enough enough? Why didn't anybody stop AIG from accumulating that kind of risk and then turning it over to the taxpayers?

SEC. GEITHNER: Well, that's the great question. I mean, under the laws of the land, AIG was allowed to build up, through a variety of complex structures, huge amounts of risk relative to the capital they put up. And there was really no accountable, competent authority overseeing that broad process. And that's what put us to the point where, again, the government had no choice but to come in and try to unwind this in a sort of carefully measured way.

REP. GRAYSON: Well, if you look at the last 10-Q that Fannie Mae filed, the last 10-Q showed that Fannie Mae accumulated, just in the last six months before their 10-Q, from the beginning of last year to the middle of last year, over $250 billion in exposure to derivatives.

Again, at what point do people say, "Enough is enough; this is too dangerous to the system to be allowed"?

SEC. GEITHNER: Well, but again, this is not something I can respond to carefully and thoughtfully without looking at the particular issues in this context. In the context of Fannie and Freddie now, they are very large institutions. They've got a very complicated set of risks they have to hedge. They've got an elaborate risk management framework over them with a much more powerful supervisor now looking over those basic judgments.

But I wouldn't infer from looking at that one piece of their 10-K whether that's -- (inaudible). They're designed to make them safer, not more risky.

REP. GRAYSON: Well, in fact, the total exposure at that point in June of last year for Fannie Mae was over a trillion dollars, about one and a half trillion dollars of exposed derivatives. Is it fair to say that that contributed to its failure? And if so, at what point should someone have said, "Enough is enough"?

SEC. GEITHNER: Again, Fannie and Freddie were also not under a appropriately sophisticated oversight framework with adequate powers prior to the legislation Congress passed last summer.

But, again, we don't think you can measure the risk in their exposure by looking at that piece of the balance sheet.

REP. GRAYSON: If one's priority, at this point, were to say there should be no more need for taxpayer bailouts, that the way to deal with systemic risk is to prevent that risk from happening in the first place, what kind of substantive rules would you see being imposed on these kinds of institutions to prevent the taxpayer for being on the hook?

SEC. GEITHNER: That is all our objective.

Again, the most simple way to frame it is: capital, capital, capital. Capital sets the amount of risk you can take overall. Capital ensures you have big enough cushions to absorb extreme shock. You want capital requirements to be designed so that, given how uncertain we are about the future of the world, given how much ignorance we fundamentally have about some elements of risk, that there is a much greater cushion to absorb loss and to save us from the consequences of mistakes in judgment and uncertainty in the world.

That is the -- in a simple way, that's the best solution to these things. And that is not going to be something the market is going to provide on it's own, that's something we have to impose through standards set in regulations.

REP. GRAYSON: Is it fair to say that as (sic) an organization like AIG had been subject to margin calls, things never would have gotten as far along as they did and we wouldn't have had this kind of exposure today?

SEC. GEITHNER: I'm not quite sure that's fair. But, you're right, you want to make sure that the margin regime too -- margin is like capital, just to use a simple thing, you want to make sure that institutions like AIG hold much more capital against the risks they're underwriting and are exposed to. And you want to have -- in derivatives, in particular, you want to have a margin regime that is also much more conservative.

REP. GRAYSON: Give us some idea of a substantive rule that you see being put in place for, let's say, hedge funds, if hedge funds reach the size of posing systemic risk.

SEC. GEITHNER: If an entity that is not now a bank were to rise to the point in the future where -- because of its structure, because of how connected it is to the system, because of its relationships to -- (inaudible) -- in these markets, it could pose systemic risk, then, in our judgment, they should be brought within a framework similar to what we're going to impose on large, complex regulated financial institutions.

And that means a fully elaborated set of capital requirements -- requirements on liquidity, on risk management, that are applied and enforced on a consolidated basis by a competent authority.

REP. GRAYSON: And doesn't enforcement really mean that, at some point, somebody's going to say to an institution like AIG, enough is enough?

SEC. GEITHNER: Absolutely. That's what the, that's what the -- the great virtue of a capital requirement is it does constrain the amount of risk you can take. And the great virtue of the elaborate structure we have in place for banks in FDICIA is it forces intervention if they get to the point where capital erodes.

REP. GRAYSON: Thank you, Mr. Secretary, and Mr. Chairman.

REP. FRANK: The gentleman from California, Mr. Royce.

REP. ED ROYCE (R-CA): Thank you, Mr. Chairman.

Yes, Mr. Geithner, I think part of the issue here is the wind- down power -- the sheer enormity of it would be -- that would be given here, because, actually you'd be able to take over any firm, any large firm. You'd have basically permanent TARP authority. I wasn't a fan of TARP. I didn't vote for it, but.

If you had had this authority, let's say, in New York, when Lehman or AIG were an issue, what would you have done differently at that time? Because what we're -- what we're doing here is setting the rules, presumably for many, many years to come. We have to be very clear so people would know what to expect.

So, how would you have handled, let's say, the creditors, the counterparties at AIG? Would you have bailed out AIG? Would you have done specific actions? Because, if you just would have guaranteed it, you would have done the same thing that basically was done anyway --

SEC. GEITHNER: Exactly.

REP. ROYCE: -- go ahead with your analysis on that for a minute, if you would.

SEC. GEITHNER: You're raising a very important point, which is that the resolution authority we're proposing, like what exists for banks under FDICIA, gives you two types of authorities:

One, is to intervene, wind down the entity, separate the good businesses from the bad, and figure out the best way to absorb losses, allocate those losses across parts of the capital structure.

But, in the event default would cause systemic consequences, under FDICIA FDIC also has the authority -- subject to this set of constraints I outlined earlier, to take actions to put in capital to guarantee liabilities to protect all creditors.

But, that judgment has to be made as a very, very high threshold. We have to be able to demonstrate that the consequences of default would be systemic. So, in any of those cases --

REP. ROYCE: And --

SEC. GEITHNER: -- like Lehman, or AIG, or Bear Stearns, or any large, complex institution, you'd have to look at the state of the world at that point. You'd have to look at whether the cost to the economy as a whole would be so severe in the event of default that it was cheaper for the taxpayer, ultimately, to intervene to protect creditors from the consequences of default.

REP. ROYCE: And, of course, the one thing the economist have really been fretting about, in terms of a scheme, is all the moral hazard that goes with it; the overleveraging that could occur; all the borrowing that would be presumed in the market, that any large institution could suddenly obtain because the concept would be, "Hey, at the end of the day, this is going to, you know, be under the auspices of this systemic risk regulator. And so, at the end of the day, part of our investment here is going to be guaranteed, or our loan."

And, so they're going to be borrowing at a lower rate. They're going to be -- they're not going to have the market discipline, as you said, they're going to be overleveraging. So, it makes things more complex.

Let's take GE, you know, with GE Capital (where ?) you have a problem -- they own NBC, CNBC, MSNBC, just to discuss for a minute the consequences of this becoming a political issue over at Treasury; and now you do have this power -- you have this power over any large firm, you've got this permanent TARP authority, how do you, how do you handle -- have you thought through how you handle these decisions should this arise?

SEC. GEITHNER: You're exactly right. These are very complicated situations. We have to be very careful that what we're doing is not going to add to moral hazard in the system.

So, the regime has to come with clearly established rules for prompt corrective action, like what exists for banks. So, you constrain the discretion of the supervisor to let an institution slip towards the edge of the cliff without intervention. You have to have very high thresholds for a judgment that would allow the government to put in capital. It requires, you know, elaborate checks and balances to limit discretion there too. And you have to look at this on side -- alongside (with ?) proposing to raise fundamentally capital requirements and leverage constraints, on the system as a whole.

But, you're right that you have to be very careful that this mechanism does not add to moral hazard. And I think that -- but, the virtues of this is exactly that, that we're reducing moral hazard in the system because we're giving ourselves more choices. The system we have today -- the system we have today has the opposite risk, because today people fear that with no resolution authority our only choice, if it's systemic, is to come in and guarantee.

REP. ROYCE: I understand how you perceive this, but I don't think the market will perceive it the same way. And my presumption is that, instead, what we're going to do is guarantee basically that large firms borrow at a lower price than their competitors. I think that the consequence is going to be that they're going to crowd them out of the market.

But, in any event, let's move to a different issue I wanted to ask you quickly about, because in the text of the bill you have the FDIC as the appropriate federal regulator for insurance companies. However, the FDIC has very little authority over the insurance market. As you know, the regulatory structure overseeing the market is comprised now of 50-plus state regulators focused on their individual jurisdictions.

Would it make sense to establish a single federal regulatory alternative for insurance to coordinate with when it comes to unwinding these institutions?

REP. FRANK: Take the question, but it's got to be answered in writing, since we started right at the -- (inaudible). So, Mr. Secretary, please answer that one in writing for the record.

The gentleman from Idaho.

REP. WALT MINNICK (D-ID): Mr. Secretary, two questions:

As you're aware, the House Agriculture committee passed H.R. 977, which conveys to the Communities Futures Trading Commission, the SEC, and other qualified regulatory authorities some of the oversight, (the clearing ?) -- the regulatory authority that you were talking about, that would be subordinate to those exercise guidelines from a systemic regulator.

Do you think that the regimen opposed -- proposed by that legislation would be consistent with the regimen you're attempting -- (inaudible) -- that the administration will be attempting to implement?

SEC. GEITHNER: I'd have to take a careful look and get back to you in writing.

But, what we -- what we're trying to do is to provide a delicate balance which preserves the existing SEC and CFTC authority over those centralized markets, but still provide in an entity with broader systemic responsibility -- the capacity to look across these entities, make sure there's a level playing field, and that we're protecting the system as a whole by ensuring there's stronger safeguards in place where those risks are concentrated.

But, as I said in my remarks, there's a lot of complicated jurisdictional issues we'll have to sort through. And we wanted to start by proposing things (that will ?) the guide the substance of regulation. We'll have to step back at the end of this process and look at what the right division of labor is across the existing functional authorities.

REP. MINNICK: Please do, because there's an attempt, I think, to give you tools that would accomplish what I heard you say this morning.

A second question was with respect to the new mechanism for creating liquidity of asset-backed securities, that you discussed yesterday and will continue to discuss. I am concerned that, given the need for capital, which financial institutions of all types -- a critical need right now if they're going to become functional -- that this regime not under-price these assets. They need to be fairly priced, but not under-priced.

And the question I have for you: Under this regulatory scheme, if your initial auctions produce prices that in your judgment are at the low end of fair market value in a freely functioning market, are you prepared to provide additional leverage into the system which would have the impact, I think, of increasing bid prices to a point where the solution to the problem doesn't exacerbate the situation we have today where these institutions are -- tend to be badly under capitalized if they're going to perform effectively?

SEC. GEITHNER: You're right. Providing more leverage would help against that risk, but we have to worry about the other risk that we're not leaving the taxpayer too exposed in this context.

But this lacks -- better alternative. You have to think about this relative to the alternatives. This proposal is better than what exists today, because today you have a market where there's a very stark absence of financing, absence of leverage from private sources and that's leaving at least some of these markets with a large liquidity risk premium. And this will make that substantially better.

REP. MINNICK: We all want to make sure the taxpayer is treated fairly, but to the extent that the taxpayers -- the desire to ensure the taxpayer receives maximum prices leaves the financial institutions receiving less than a fair price. It will increase the need for you to induce capital directly and I think the taxpayers are going to be stuck with that alternative as well.

And this strikes me as a better-balanced and market-tested vehicle for providing the capital than a direct subsidy and it has as the advantage you're not nationalizing the system. And I would encourage you to look at your leverage and the experience of these initial auctions to see if it is yielding a fair to the taxpayers, but never-the-less full price to the institutions.

SEC. GEITHNER: Well, you've got the tradeoffs right. I mean, you exactly understand it and we have to figure out a delicate balance for those things. But you've got it exactly right.

REP. MINNICK: Thank you, Mr. Secretary.

REP. FRANK: The gentleman from Texas.

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

The chairman in his opening statement talked about the problem being excessive leverage, and I certainly agree with that. And others refer to that as pyramiding of debt. Then we run into trouble and we come up with the idea that regulations will solve this without asking the question: Where did all this leveraging come from; and how much of it was related to easy money from the Federal Reserve and artificially low interest rates?

So I'm very skeptical of regulations per se, because I don't think that solves that problem. And of course, everybody knows I'm a proponent of the free market and this is not free markets that got us into this trouble and this certainly won't solve it.

But you know, in other areas we never automatically resort to regulations. When it comes to the press, if we had regulations on the press we would call it prior restraint and we would be outraged. If we wanted to regulate personal behavior we would be outraged and call this legislating morality. But when it comes to economics, it seems like we've been conditioned to say, oh, that is okay, because that's good economic policy.

I accept it in the first two, but not in the third and therefore, I challenge the whole system. And it hasn't been that way forever. It's really been that way since the '30s -- about 75 years -- that we in the Congress have deferred to the executive branch to write regulations, which are essentially lost.

And yet, the Constitution is very, very clear all legislative power shall be vested in the Congress. So we write laws and we transfer this power. So essentially, we've done this for years. We have reneged on our responsibility. We have not met our prerogatives. And therefore, we participate in this.

But in your position, you've been trained throughout your life to be a regulator. And that is something I know you can't deal with. But there is one area that I think that you might be able to shed some light on and work toward the rule of law. Because you know, traditionally, under common law -- and our system has always assumed that we're innocent until proven guilty. And yet, when it comes to regulations, first we allow the executive branch to legislate, as well as the court, but in the administrative courts, we're assumed to be guilty until proven innocent. You're in charge of the IRS. The IRS does that.

So this is someplace where if there were a reasonable respect for the rule of law, that we could change that tone and assume that the taxpayer and the person that is on the receiving end of these regulations say, hey, at least now it's the burden on the government to prove that somebody broke these regulations. And yet, look at what we're doing endlessly, and yet I see that as the real culprit in all this, because we're assuming the citizen is guilty.

Would you comment on that and tell me what you might be able to do in changing the direction?

SEC. GEITHNER: That was a very thoughtful set of questions.

I just want to correct one thing: I've never been a regulator, for better or worse. And I think you're right to say that we have to be very skeptical that regulation can solve all of these problems.

We have parts of our system that are overwhelmed by regulation -- overwhelmed by regulation! It wasn't the absence of regulation that was the problem, it was despite the presence of regulation you've got huge risks that built up.

But in banks -- because banks by definition take on leverage, transform a short-term liabilities into long-term assets for the good system as a whole, they are vulnerable to runs. Because they're vulnerable to runs, governments around the world have put in place insurance protections to protect against that risk.

Because of the existence of those protections, you have to impose standards on them on leverage to protect against the moral hazard created by the insurance. That is a good economic case for regulation --

REP. PAUL: Excuse me. I only have a couple of seconds left.

But see if you can address the subject of giving more respect to that individual who is accused of a crime. Can't we assume that the government has the burden of proof?

SEC. GEITHNER: You're talking in the criminal context?

REP. PAUL: Well, any way. I mean, any time a regulator comes in and says that you're guilty of something, why doesn't the government have to prove he's guilty? Why can't we assume --

SEC. GEITHNER: Guilty of a criminal violation or --

REP. PAUL: Civil or criminal. Why not? I mean, that's a principle that's been around for more than 1,000 years or at least 800 years.

SEC. GEITHNER: I'm not a regulator or a lawyer, unfortunately. I'm not sure I could give you an adequate answer to that, but I'd be happy to think about it a little bit and get back to you with a view on --

REP. PAUL: Well, I don't think it's complicated to think about the principle of innocent until proven guilty.

How about the IRS? Can't you advise the IRS and say: Don't assume anything until you prove these guys did something wrong before we prosecute them and say that they owe $500,000?

SEC. GEITHNER: Mr. Chairman, again, if this is about the IRS, I'd be happy to come talk to you about that.

REP. FRANK: The gentleman's time is expired.

The gentleman from Pennsylvania -- the chairman of the subcommittee.

REP. KANJORSKI: Thank you, Mr. Chairman.

Mr. Secretary, I'm going to actually give you an opportunity to answer Mr. Royce's question, but I just want to preface it a little bit.

One, I want to congratulate you on your resolution authority suggestion here. Of course, it needs some work and whatnot, but I think there's no question in my mind it's a tool that's necessary in this convoluted world that we live in and certainly will be in the future -- maybe the immediate future.

Unfortunately, there are some gaps in there. And I think see the gaps, because there hasn't been a decision made that's going to be publicly announced until, I guess, April 20th when you come back with a blueprint.

But in your news release announcing the proposed legislation, you talked about covered institutions. And insurance companies were one of those add-ons, but not quite clearly defined. And then we go over to your proposed legislation, you again use insurance as an add-on. And the suggestion in the legislation is that it won't significantly change from what the present status is, because you're not giving us the idea of what you propose in terms of maintaining state jurisdiction or federal jurisdiction -- whether it'd be optional, whether it'd be involuntary, whether it'd be determined by size or product or location or amount.

And if you do have the opportunity, I would appreciate the answer to Mr. Royce's question.

SEC. GEITHNER: Well, let me make sure I understand the question. This is with respect to are we proposing through this to change the regulatory treatment of insurance companies?

REP. KANJORSKI: Will you have a position on the federal treatment of insurance companies? And if so, when; and what do you see as the likely parameters of that question? Simply because we're going to be undertaking hearings now and preparing, and I'd like to have some understanding of where Treasury will be.

SEC. GEITHNER: We'll come back soon in the context of more detailed proposals around the rest of the complicated issues that matter in this. I think there is a good case for introducing an optional federal charter for insurance companies. But we have to look at each of these things in the context of the broader whole, and I would welcome a chance to talk to you about those sets of questions in as much detail as you would like.

REP. KANJORSKI: Okay. Is there anyone in the department now that's designated to answer the questions of insurance or are we still in a hiatus there?

SEC. GEITHNER: Right now we have a terrific team of people working on all these kind of questions. We're trying to fill out our team, but I'd be happy to give you -- individually you can talk to directly about not just the insurance question, but how they fit into this broader structure.

REP. KANJORSKI: In the last Congress we almost succeeded in getting through the House a piece of legislation, which would have established the Office of Insurance Information. And it would be needless to do that if we're going to be able to get to insurance legislation very quickly, but I doubt we're going to get to it that quickly.

Would you be opposed to our pushing that legislation now, early, so we have some repository of insurance information to deal with?

SEC. GEITHNER: In the Treasury?

REP. KANJORSKI: Yes, in Treasury.

SEC. GEITHNER: I would not be opposed to that. Anything you can do to help us get more resources and talent in this area would be terrific.

REP. KANJORSKI: Very good.

REP. FRANK: If the gentleman would yield, could I just ask -- and it's something we talked about -- how would you respond -- and these are important questions.

I'd also be interested if you'd think there was any difference as to how we deal with life insurance on the one hand and property and casualty on the other, because that would be helpful.

REP. KANJORSKI: I thank you.

REP. FRANK: The gentleman (sic/gentlelady) from Illinois, by process of elimination.

REP. JUDY BIGGERT (R-IL): Thank you, Mr. Chairman. Last but not least, right?

Mr. Secretary, I want to go back to the legacy loans for a minute. Then I've got another question. But the FDIC, as I understand your plan, is going to have the five or six groups for managing the loans.

SEC. GEITHNER: Well, this program has a program for loans on bank balance sheets. And it has a program for securities --

REP. BIGGERT: Right.

SEC. GEITHNER: -- that are held across a range of market participants. There are different models for each of those because of the complex issues involved. But the proposal that you're referring to, which is to have five asset managers raise equity --

REP. BIGGERT: This is with the FDIC.

SEC. GEITHNER: That's on the securities side.

REP. BIGGERT: Okay.

SEC. GEITHNER: On the loan side, we're going to use an existing mechanism the FDIC now runs as part of the resolution process where they would give a bank the right to identify a pool of loans and to sell that into a fund, and the FDIC would run an auction process to give a chance for investors to come in and participate in taking the equity stake in that pool of loans.

REP. BIGGERT: Okay. Is there -- then that would -- the bidding, would that be -- how would the competition work? Would these investors have to have ability to successfully manage the legacy --

SEC. GEITHNER: Congresswoman, I think it would be probably the best -- this is a very complicated set of questions. I think the best thing for me to do is maybe, as the chairman suggested, as we get the range of entities that are going to be responsible for managing and designing this process, to come before you in whatever steps you would like and walk you through the details --

REP. BIGGERT: All right.

SEC. GEITHNER: -- because these are very complicated, and consequently they're hard to do in five minutes.

REP. BIGGERT: Okay. And I don't even have five minutes left. I will run to the next question.

I think that Mr. Castle mentioned the council rather than just having the regulator for the systemic risk over that. I would wonder if -- it seems like so much of our problem was the fact that the regulators didn't really catch it, and it could have been a lot of regulators and they didn't communicate with each other. So I think it's a failure of communication.

But we've seen this -- (inaudible) -- the same thing in Homeland Security. We saw it in Katrina with -- I know that I was involved with -- (inaudible) -- and we asked all of the agents with the Treasury to ask all the agencies come together, and they discovered that there was a lot of duplication in what they were doing and how important the communication was.

How about having, rather than just the agencies in a council, also making it a private-public partnership where you would have representatives from, let's say, the large financial institutions and then maybe the small financial institutions and the insurance, and have it be where they rotate representatives in there? Because it seems to me when we've asked the questions, like, of Greenspan, we didn't get the answers, and he really, you know, didn't know -- and he said he didn't know everything that was going on. And these are the people that are really in the industry and dealing with that, and it's not -- you know, it's set up so that they can bring their concerns, and then that can be addressed. And maybe there's a lot of others that realize that, under different regulations, that they're having the same concern.

SEC. GEITHNER: Mr. Chairman, do I have time to respond to that question?

REP. FRANK: Yes, you have actually 57 seconds.

SEC. GEITHNER: Fifty-seven seconds. Excellent.

REP. FRANK: And a little extra.

SEC. GEITHNER: I don't think you can let the regulated be part of their regulation, which is not quite what you're suggesting, but you can't put in a body that's designed to set the regulatory standards in which these companies operate and have people who are regulated part of that body.

I do think, though --

REP. BIGGERT: What about an advisory council that would then work with the regulators, but to have that communication that is lacking?

SEC. GEITHNER: I don't think our problem is a lack of communication between the regulator and the regulated, although I'm sure people can do better in this context. But let me just come back to emphasize one thing which I agree with you on. But I agree with you on this, too, but just I'm sure that I agree with the basic premise that we need these regulatory agencies working together.

We need somebody who's responsible for looking at the whole, not just the pieces, because a big part of our system was nobody was really looking at the whole and pulling it together. And there's a very strong case for trying to make sure there's better coordination and cooperation across the people that have expertise and experience they can bring to bear on this process.

REP. FRANK: I thank the secretary. I would just add to the gentlewoman, if anybody suffers from an absence of communication with those people who are regulators, I envy them. I wish I suffered from a lack of communication with them.

We're going to be able to do it, because the secretary has agreed to give us an extra 15 minutes. The gentlewoman from California and the gentleman from Missouri; my other colleague, the gentlewoman from California. Somehow, as things have worked out, she will be first --

REP. BIGGERT: Mr. Chairman?

REP. FRANK: Yes.

REP. BIGGERT: If I could just have one minute.

REP. FRANK: Certainly.

REP. BIGGERT: I think it was a lack of communication among the regulators that I was talking about.

REP. FRANK: Oh, I apologize -- among the regulators. Yes. Well, as a matter of fact, one of the things I mentioned -- I think that's absolutely right. And I think it's not -- people get busy and they just do their own stuff. That's why the secretary suggested -- I think it's a very good idea -- when we come back, we will have all the regulators who have a piece either of the resolution or of the impaired assets, all of them here, so that we can start out that conversation. That was a good suggestion by the secretary.

The gentlewoman from California will then be first to question --

REP. JACKIE SPEIER (D-CA): Thank you very much, Mr. Chairman.

REP. FRANK: Well, I meant the other gentlewoman will be first when we come back, because we're going to lose him at 1:15. So the gentlewoman from California.

REP. MAXINE WATERS (D-CA): Thank you, Mr. Chairman, for all the hard work that you're putting in all of these hearings. They're so very important. And I'd like to thank the secretary for coming back. He's holding up well. And we're appreciative for the time that you're putting in.

I want to ask about the products that are on the market in the various markets. I don't quite understand why it is we don't talk about the elimination of certain products. We talk about regulation. Whatever product somebody can dream up, we say, "Okay, we'll regulate it." Why don't we talk about Alt-A? Why is Alt-A a good product? Why are credit default swaps good products?

Is there such a thing as the elimination of products or not allowing certain products to come on the market after careful scrutiny rather than saying anything can come on the market and we'll regulate it?

SEC. GEITHNER: Well, I think it's a very good question. I think that, you know, people always innovate around what the government prohibits, and you will always be chasing the next thing (they're ?) trying to get around, just that new piece of legislation designed to ban a particular product.

So probably the more effective way to regulate, in some sense, is, again, to make sure the institutions are strong enough to survive a very bad storm and that people are protected from predatory behavior, because the predation could come in all sorts of forms. People will be endlessly innovative in how to take advantage of people if they think there's some gain at stake.

So I think that you need to have, you know, clearer standards, regulated and enforced much more effectively across our country, not allow people to come and get around those standards and offer people products that don't meet with those broad regulatory standards. But if you just do it by banning specific things, you'll always be chasing the next innovation.

REP. WATERS: Well, I'm not so sure that we shouldn't look at opportunities to give more scrutiny to products before they come on the market and really disclose to consumers that this -- (inaudible) -- may be hazardous to your economic health.

So let me go to the next one on asset management. I started out the other day talking about the five firms that are indicated in the plan. I am concerned about women-owned and minority-owned businesses. You know we're dumping a lot of money out into the economy, and we want everybody who has something to offer, that's legitimate and competent, to participate in all of this money that we're putting into the economy to create jobs and opportunity.

Why can't we look at this a little bit closer and figure out how we can get more women and small firms and minority firms involved in this asset management rather than having to go and knock on the doors and beg the five?

SEC. GEITHNER: We can look at it. And I will commit to look at it more carefully and come talk to you and your staff about how best we can do that.

REP. WATERS: Okay. All right. One other thing that I'd like to ask about in terms of how the dollars have been put out there. FDIC has a guarantee program, and the banks are doing their own underwriting. Is that unusual, rather than putting that out there for the firms, all of the small firms to get a crack at underwriting with this guarantee that comes from FDIC?

SEC. GEITHNER: You know, there's a lot I don't understand about how the FDIC operates, but I'd be happy to pass on that request to Chairwoman Bair and ask her to come back and walk you and your staff through their basic approaches in that area.

REP. WATERS: And lastly, let me just ask about credit default swaps. Why can't we just eliminate them?

SEC. GEITHNER: We could, but I don't think it would help anything and I think it would deprive people from the ability to do things that are probably going to make the system safer. What we're proposing to do is to bring them within a framework of oversight to put them onto clearinghouses and exchanges which will help contain the risk, help people manage their risk better, provide much more transparency and disclosure about those risks, and we think that will do a lot to make the system safer.

If you -- I'm not sure this is worth going into, but if you just ban them, something else will develop like that. The better approach is to try to bring them into a framework where the risks are better managed.

REP. WATERS: Now, Mr. Secretary, I wish that in the thinking that goes on about all of these markets, I wish than some deeper thought would go in to not allowing some products to come on the market rather than talking about regulating everything because I think even though you talk about how creative people can be and how innovative and they'll come with something else, it's better that you look at that than let something get out there that causes us a lot of pain that we haven't been able to control.

Thank you.

REP. FRANK: We have time for two more. The gentleman from Illinois and the gentleman from Missouri, Mr. Cleaver, who has been through here and got our commitment to go. Members who are here will get priority the next time around as we have done before.

The gentleman from Missouri. No, I'm sorry, the gentleman from Illinois and then the gentleman from Missouri. We'll hold to a very strict five minutes, Mr. Secretary, thank you.

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

Mr. Secretary, you would agree that the Fed's authority to govern mortgage instruments and to govern the documents that would be necessary to prove the income of an individual applicant are extremely important powers?

SEC. GEITHNER: The federal government or the Federal Reserve's?

REP. MANZULLO: Federal Reserve.

SEC. GEITHNER: I guess I believe they're important although I'm not -- I'm the secretary of the Treasury not the chairman of the Fed but I agree, they are important powers.

REP. MANZULLO: Okay, thank you.

They do have those powers, they did that by regulation. And the reason I bring that up is that here we have a very powerful federal agency that could've curbed a lot of the subprime abuse by eliminating the 327 and 228 teaser mortgages and by eliminating the so called cheater mortgages by requiring proof that a person has the income that he states on his mortgage application, yet they did not act. And the reason I bring that up is you wanted to start yet another large powerful federal agency and give it additional powers and yet we've -- I just gave you an example of a situation where a federal agency with the powers to have stopped a lot of the subprime bleeding had the power but simply did not act.

SEC. GEITHNER: You're right, that across this regulatory framework --

REP. MANZULLO: I'm not asking for an answer because it's -- it was more of a comment. But it leads into the next question is that now you want to set up this super regulatory system, give it the additional powers to even seize institutions. My question to you is how many entities or companies would you, can you envision having to be at a position where they could be seized because of their size? Would it be 100, 1,000, 10,000? Do you have any idea?

SEC. GEITHNER: No answer, I have no answer to that question, again, because as we laid out in the suggestion that Congress would have to establish broad standards that would describe what type of institute would pose these type of risks.

REP. MANZULLO: Right. But you're talking about generally all insurance companies, all large insurance companies.

SEC. GEITHNER: Well, no, again, what we're trying to do is make sure that those largest institutions, or those that are so connected or pose grave risk are subject to a framework which protects the economy from those risks.

REP. MANZULLO: All right, so you're going to have to go through company by company to see if they're important enough as to whether or not they should, they could be seized. Because you want to set their executive compensation so you've already got your eyes on it.

SEC. GEITHNER: Congressman, we have to do better. The system we have today does not work.

REP. MANZULLO: No, I understand that but what I'm trying to ask you is how many new companies would be involved in this? How intimate would be the relationship that's so intimate that you're going to determine what the executive compensation is? So I would think that before you can out with this plan you would have some idea of the number of companies that would be subject to this new regulation.

SEC. GEITHNER: We laid out a broad set of proposals in the legislation and a broad set of principle standards for determining what a systemic risk authority would cover in that context and those are things that we'll have to work out in consultation with the Congress.

REP. MANZULLO: No, I understand that but, I mean, do you realize how radical your proposal is?

SEC. GEITHNER: It's not a radical proposal.

REP. MANZULLO: Oh, it's absolutely. You're talking about seizing private businesses and you don't consider that to be radical.

SEC. GEITHNER: No, this is a prudent, carefully designed proposal to protect our financial system from the --

REP. MANZULLO: If it's prudently and carefully designed, Mr. Secretary, then you would have the answers to some of my questions such as what size business would be subject to this. I'm not giving you a hard time because I appreciate the fact that you came out with a guideline, with a framework, and it's a discussion framework, and those are good points on. But I'm just raising the concern that so many people in America have because of more intrusion.

Illinois does not regulate insurance rates. We are terrified, terrified that the federal government will get involved and so mess up Illinois insurance that we will have to go with some grand scheme, perhaps of worldwide, as to what insurance rates should be. That's the big concern with people that I have in -- and I want to thank you for your time. It doesn't require an answer but I just wanted to share the concerns with you. Did you have a response? It's not necessary.

SEC. GEITHNER: I was going to say the great strength of our legislative process is we'll together be able to work through those concerns. We don't get to decide, we'll have to work through those concerns with you.

REP. MANZULLO: Okay, thank you. I yield back.

REP. FRANK: I will take a little of the remaining time to reassure the gentleman, I think I'm due to be chairman until at least December of next year. There will be no legislation empowering anybody to regulate insurance rates while I am chairman of the committee. I will say to the gentleman, having been in the Massachusetts legislature I have a particular aversion to being responsible for the driving habits of my fellow citizens of Massachusetts and as long as I'm here then you never will.

The gentleman from Missouri will be the final question.

REP. EMANUEL CLEAVER (D-MO): Mr. Secretary, the day has been long. I have one question but earlier someone said they were reading from the legislation and I just want to make sure that people who are watching this understand that there was no legislation. They were reading from a document probably either your speech or something else. There is no legislation.

The other -- people have asked pieces of this and to the degree that you can answer this question, understanding that you don't have the specifics at this moment that some would like to see. As specifically as you can, can you let me know about the PPIF process of pricing the assets in each asset pool and whether or not the bid process can be conducted in a way that is auditable and verifiable and fair?

And then secondly, how do we handle to settlement process in a way that makes it transparent?

SEC. GEITHNER: Again, this is an issue where the best thing is to have the FDIC come up and walk you through all that. You know, they do this for a living. They have a lot of experience doing it. They're going to establish mechanisms and I really should let them walk you through that.

REP. CLEAVER: That's good enough for me.

SEC. GEITHNER: Okay.

REP. CLEAVER: Let's go to lunch.

REP. FRANK: The hearing is adjourned and the members who were here in the end will be given priority -- (inaudible) --

REP. SHERMAN: Mr. Chairman, can members submit questions for the record.

REP. FRANK: Members may always submit questions for the record. And members may always submit documents for the record.

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