House Financial Services Committee

House Financial Services Committee

The Future of Financial Services: Exploring Solutions for the Market Crisis

September 24, 2008

Members Present: Chairman Barney Frank (D-MA),Paul Kanjorski (D-PA), Maxine Waters (D-CA), Carolyn Maloney (D-NY), Luis Gutierrez (D-IL), Nydia Velazquez (D-NY), Gary Ackerman (D-NY), Gregory Meeks (D-NY), Ruben Hinojosa (D-TX), Brad Sherman (D-CA), Andre Carson (D-IN), Rep. Lincoln Davis (D-TN), Rep. Ed Perlmutter (D-CO), Bill Foster (D-IL), Joseph Crowley (D-NY), Melvin Watt (D-NC), Dennis Moore (D-KS), Emanuel Cleaver (D-MO), Al Green (D-TX), Ron Klein (D-FL), Ranking Member Spencer Bachus (R-AL), Jeb Hensarling (R-TX), Scott Garrett (R-NJ), Gresham Barrett (R-SC), Deborah Pryce (R-OH), Peter King (R-NY), Steven LaTourette (R-OH), Walter Jones (R-NC), Tom Feeney (R-FL), Ginny Brown-Waite (R-FL), and Ed Royce (R-CA).

Witnesses: This was a two-part hearing. At noon, various Members of Congress presented statements, and at 2:30 p.m. the Honorable Henry M. Paulson, Jr., Secretary, U.S. Department of the Treasury and the Honorable Ben S. Bernanke, Chairman, Board of Governors of the Federal Reserve System testified.

Part One: STATEMENTS OF MEMBERS

Brad Sherman. It’s important to remember that this bill is not limited to $700 billion of assets- it’s $700 billion of losses. The problem with the rescue plan is the lack of supervision over the Secretary of Treasury. He gets to make all the decisions. These transactions are so complex that what we need is a cosigner. Someone to say you can or can’t complete the transaction. Executive compensation needs to be addressed in this bill.

Jeb Henserling. We are on a slippery slope to socialism. Inaction in this case is not an option, but we need to consider possible solutions that differ from Paulson’s plan. House conservatives believe by temporally suspending capital gains taxes would free up enough capital to keep the markets moving. I have introduced legislation that would ultimately take away the monopoly powers of Fannie Mae and Freddie Mac. Executive compensation limits have to be a part of the legislation we consider this week.

Mel Watt. Administration has not been transparent with the public. If they told the truth, they would have to admit this Administration has driven the economy off the cliff and that would be embarrassing. It could also create a frenzy in the market that would be counterproductive. Two concerns they were worried about, the market and the big fellows, and two, the taxpayers. There was no mention of homeowners.

Scott Garrett. SOX is a prime example of troubling legislation stemming from rushed Congressional action. We need to rework the financial services regulatory structure. On April 7, I and my colleagues sent a letter to Chairman Frank asking for a hearing on the Bear Stearns decision and the Chairman Frank replied saying, “I don’t think it’s necessary.”

Dennis Moore. In the long term we need to punish those that caused the crisis we’re currently in. It’s appropriate that the FIB is investigating firms for fraudulent activity. We must restore market confidence and ensure that credit is available to any consumer who needs it.

Al Green. The American public has to understand why it is essential we take immediate action on what is a Wall Street situation. It’s unbelievable that the Secretary originally wanted full authority to purchase securities as he wishes and to take action on whatever he deems necessary

Emmanuel Cleaver. 100% of constituents calling my office want me to vote no on the proposed legislation. We need the President to address the nation and tell them what would happen if we do nothing.

Ron Klein.We have to have independent oversight of how the Treasury will spend the money. We should phase in money rather than pile it on right away; we can always go back later if the process is working. In the future we need to update our financial structure.

Ed Perlmutter.We need to proof that the proposed plan will stabilize the market, protect the taxpayer.

Part Two: OPENING STATEMENTS OF MEMBERS AND WITNESSES

Chairman Frank. We will follow our protocol when there’s a Cabinet level witness. The Chairman and Ranking Member will present five-minute statements and the Chair and Ranking Member of the relevant subcommittee will have two minutes. At this point I don’t think the world is in desperate need to hear more from me on this subject so I’ll now recognize the ranking member. . . who’s not here. We’ll hear from Congresswoman Pryce.

Deborah Pryce. I’m worried about the nation’s economy. What I want to hear from you are answers to why this plan and why now. You can’t make a move this large without the consent of the American people. We don’t have it yet. Are we better off following your advice, someone else’s advice or letting the free markets work its will? Right now we have a “trust me”proposal; you are a far cry from having the American people on your side. I want you make the case to me so I can make the case to my constituents. Yours is a sale job. I’m here with open ears.

Paul Kanjorski. The 700 billion proposal is the subject of much debate, but the American taxpayers remain in the dark. The current dire circumstances necessitatethe American people receiving more information rather than less. The President must address the American people. If we do decide to go with the Treasury plan it must be revised to protect taxpayers. I amtired of enabling corporate excess. We must find a pay to pay for it through such things as surcharges or fees on securities transactions. We need significant regulatory reform in the next Congress. The era of deregulation is over.

Spencer Bachus. We can’t kill the messenger. Secretary Paulson and Chairman Bernanke are alerting us to serious problems in the economy. Some tend to blame them as messengers, and they are capable public servants. They arrived in their positions long after the problems manifested themselves. Over the past year the Treasury has done what we have failed to do and that is to seek a change in our regulatory structure and suggest a systemic risk regulator. If the American people knew the situation we’re in they would want us to stay in to find a solution. We should find a solution as Americans not as Democrats or Republicans.

HIGHLIGHTS FROM WITNESS TESTIMONY

Honorable Henry M. Paulson, Jr., Secretary, U.S. Department of the Treasury

• Let me make clear – this entire proposal is about benefiting the American people; because today’s fragile financial system puts their economic well-being at risk….I am convinced that this bold approach will cost American families far less than the alternative – a continuing series of financial institution failures and frozen credit markets unable to fund everyday needs and economic expansion.
• When we get through this difficult period, which we will, our next task must be to address the problems in our financial system through a reform program that fixes our outdated financial regulatory structure, and provides strong measures to address other flaws and excesses. I have already put forward my recommendations on this subject. Many of you also have strong views, and we must have that critical debate, but we must get through this period first.

Honorable Ben S. Bernanke, Chairman, Board of Governors of the Federal Reserve System

• Action by the Congress is urgently required to stabilize the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy. In this regard, the Federal Reserve supports the Treasury’s proposal to buy illiquid assets from financial institutions.
• Looking forward, the Federal Reserve is committed to working closely with the Congress, the Administration, other federal regulators, and other stakeholders in developing a stronger, more resilient, and better regulated financial system.

Barney Frank. You mentioned that you arrived after the problems developed. You got caught in the worst of both worlds. You arrived after the problems developed but before they manifested themselves.

Barney Frank. Community banks will be victimized because of Fannie Mae and Freddie yet they were the ones who were least involved in creating this mess. I would hope that we could get an agreement all those who held preferred stock in Fannie and Freddie would get a tax break. I think the community banks should be given special consideration. Paulson: I think this is something that we haven’t communicated as clearly as we could have. Frank: There’s a lot of that going around. Paulson: This program is not one that is aimed at just big fin inst. We are looking at is to get price discovery and transparency with very complex mortgage andmortgage related assets and to design a process to get hundreds and thousand of institutions to participate. Frank: I’m glad you clarified that the community banks will be amongst those who will participate and the assets they hold will be eligible. I do believe the too big to fail thing is putting community banks as a disadvantage. Next year, I will work to raise the FDIC deposit limit.

Spencer Bachus. You’ll be buying assets and will sell at a later date. How do you ensure that the taxpayers are protected and money will be recovered when there’s a sale of the assets? Paulson: This is not a traditional expenditure, it’s purchasing assets. When assets are sold, the money comes back to the taxpayer. Benefits will include improved credit, increase in stock prices, and money market values. Bernanke: This is working capital, but the risk to taxpayer is far less than the purchase amount. We should be using whatever market mechanisms will yield the true value of the assets.

Paul Kanjorski. Those inside the Congress are way ahead of the general public. A lot of people are wondering about the panic in Washington. It’s necessary for the President to set the stage for this package. It will cost less than the alternative – what does that mean? You need to tell us so the American public understands what does less than the alternative really mean. Paulson: We’ve been thinking of alternatives for a long time. This situation unfolded very quickly. People stayed up all night and we didn’t roll it out as we should.

Deborah Pryce. There’s now a blog called “Why Paulson is Wrong,”explain to us why you aren’t wrong. Why are the alternatives of other economists wrong? Paulson: Our main goal is to encourage lenders to keep lending. There are a number of plans that want to put capital into institutions we think are troubled, but that is about dealing with failure, which is the Japanese solution. They put capital in banks, then the government is running them.What we want to do is put price discovery in illiquid assets that encourages private capital to follow. Banks can then recapitalize themselves. Bernanke: Historically these situations have dealt with already failed or will fail institutions, in this case we have a banking system that for the most part is working it’s just not extending credit to the extent we would like. Another problem is the difficulty we are having to accurately determining how much these complex securities are worth, which in turn makes it difficult to determine what the institutions are worth.

Maxine Waters. I’m concerned about the servicers and the lack of speed in loan modifications. It’s just not good enough. It doesn’t appear that servicers are paying out. Will you entertain some of the creative options for how to do this? Paulson: it’s very important to deal with foreclosures. As the government owns more of these securities, we should be able to deal with servicers and loan modifications. Waters: Will you be opening up opportunities to include minorities and woman-owned businesses? What efforts are you taking to encourage minorities and women owned businesses to participate in this program? What are we going to do about lack of participation? Paulson:There’s a lot of work to implement this program. By far, the program must be successful. We are aware of your concerns and interests as we work through this. Waters: We have database of qualified minorities and women who are willing to get involved in the program and don’t know how to get in the door. Paulson:I got the message.

Pete King. I hope to vote for the final package I am convinced the credit arteries are clogged. I am concerned that this will give the Secretary of Treasury extraordinary power. Could you assure us what precautions you would build in that the power will not be abused? Will you be working with transition teams in next administration? Paulson: I am not looking for extraordinary power. Congressional leaders told us to give us your ideas and we’ll work together. That’s why we sent up only three pages. We want oversight, transparency, and taxpayer protection. Paulson:We have ideas on how to execute this program. Clearly, we will work with next Administration and with the transition.Bernanke: I have some guiding principles for this program. Taxpayers must be protected, there must be no unjustified benefits given to people or firms involved with the problem, and there needs to be an oversight board.

Nydia Velasquez. Will this proposal limit Treasury’s authority to purchase real estate assets or any type of asset you would like? Paulson: The focus should be largely on mortgage and mortgage related assets but we asked for broader authority because we don’t know what might be necessary. Velasquez: Do what degree are interest rates impairing liquidity in the commercial credit market? Bernanke: We’re seeing losses in a variety of things: car loans, business loans, school loans and more pressure on banks.

Gresham Barrett. With this plan, do we fundamentally change the free market as we know it? Bernanke: This is an emergency plan with an impact on the real economy out there. Barrett: if there’s no fear of failure (too big to fail), I think we do change it. Daddy always said you can’t borrow money to pay off debt. Bernanke: Obviously this has fiscal consequences. What’s the alternative? If issues aren’t addressed, the American economy will be weaker. I don’t think the economy can recover with markets in such dire straights.

Carolyn Maloney. Two concerns: to get new credit into market and make sure taxpayers aren’t taking an undue hit. First, rather than buying bad assets and hoping banks will make available, some have suggested we need to extend new credit into the economy. What is the disincentive for banks to just sit on the new infusion of cash? Who will determine hold to maturity price? Why should taxpayers buy the management out?

Steven LaTourette. A man in Cleveland, Ohio comes home from work and is sitting on his couch. He’s mad, the Browns are 0 – 3, his daughter wants to have her nose pierced and he’sscared. If we don’t do this, will he have a job, will his ATM work? I need to tell my guy on the couch what happens to him, not to the market? Bernanke: Lot of the slowdowncomes from the credit crunch. If the financial situation doesn’t improve it will mean higher unemployment, few jobs, slower growth and a much slower economy. Paulson: Your person on the couch should be angry and he should be scared. No one likes to be painting an overly dire picture. If the financial markets aren’t stabilized, the situation can be very severe.

Luis Gutierrez. Please elaborate on executive compensation. I didn’t get a MBA but even I could have run Merrill into the ground and would have done it for $90 million. Please explain to me what we’re going to do about executive compensation when these people have been lining their pickets at the expense of others. It should be embarrassing politically and substantively. People understand pay for success; no one understands pay for failure. Paulson: We need to figure out how to incorporate into this plan and still make the plan effective. We need broad participation from big institutions to make it work. Gutierrez: Obvious we’re not going to get a direct answer today.

Walter Jones. Taxpayers in EastCarolina who make about $40,000 gross do not see why we should be bailing out those who got themselves in trouble. Why in the world could not this Congress take two more weeks to come forward to help this market? Why do we have to do this in seven days? Paulson: I would only say that we have dealt with a series of problems and dealt with them effectively but we now have to take a systemic approach. I think the situation is such that we need a quicker answer.

Gary Ackerman. How do we in the 110th Congress speak to the 101st congress and tell them we are willing to cede your power to one person without oversight, without juridical review, without the protections they put in. If this is such a good idea why don’t we require Wall Street, who gambles so well, why don’t we require them to be 10% partners if it is such a good bet? Paulson: We need to get the right balance and we’ll arrive at that together. The decisions you make or don’t make will be momentous. What we come up with has to be workable. Why don’t we ask Wall Street to put up 10%? It’s pretty hard to get them to invest when the markets are as fragile as they are. Ackerman: Many believe that suspending the uptick rule is allowingcompanies to fix the market. Why can’t we restore it? Paulson: The SEC has addressed it. They have taken actions and continue to review it.