[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
PEELING BACK THE TARP: EXPOSING TREASURY'S FAILURE TO MONITOR THE WAYS
FINANCIAL INSTITUTIONS ARE USING TAXPAYER FUNDS PROVIDED UNDER THE
TROUBLED ASSETS RELIEF PROGRAM
=======================================================================
HEARING
before the
SUBCOMMITTEE ON DOMESTIC POLICY
of the
COMMITTEE ON OVERSIGHT
AND GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
MARCH 11, 2009
__________
Serial No. 111-18
__________
Printed for the use of the Committee on Oversight and Government Reform
Available via the World Wide Web: http://www.gpoaccess.gov/congress/
index.html
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COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM
EDOLPHUS TOWNS, New York, Chairman
PAUL E. KANJORSKI, Pennsylvania DARRELL E. ISSA, California
CAROLYN B. MALONEY, New York DAN BURTON, Indiana
ELIJAH E. CUMMINGS, Maryland JOHN M. McHUGH, New York
DENNIS J. KUCINICH, Ohio JOHN L. MICA, Florida
JOHN F. TIERNEY, Massachusetts MARK E. SOUDER, Indiana
WM. LACY CLAY, Missouri TODD RUSSELL PLATTS, Pennsylvania
DIANE E. WATSON, California JOHN J. DUNCAN, Jr., Tennessee
STEPHEN F. LYNCH, Massachusetts MICHAEL R. TURNER, Ohio
JIM COOPER, Tennessee LYNN A. WESTMORELAND, Georgia
GERRY E. CONNOLLY, Virginia PATRICK T. McHENRY, North Carolina
ELEANOR HOLMES NORTON, District of BRIAN P. BILBRAY, California
Columbia JIM JORDAN, Ohio
PATRICK J. KENNEDY, Rhode Island JEFF FLAKE, Arizona
DANNY K. DAVIS, Illinois JEFF FORTENBERRY, Nebraska
CHRIS VAN HOLLEN, Maryland JASON CHAFFETZ, Utah
HENRY CUELLAR, Texas AARON SCHOCK, Illinois
PAUL W. HODES, New Hampshire
CHRISTOPHER S. MURPHY, Connecticut
PETER WELCH, Vermont
BILL FOSTER, Illinois
JACKIE SPEIER, California
STEVE DRIEHAUS, Ohio
------ ------
------ ------
------ ------
Ron Stroman, Staff Director
Michael McCarthy, Deputy Staff Director
Carla Hultberg, Chief Clerk
Larry Brady, Minority Staff Director
Subcommittee on Domestic Policy
DENNIS J. KUCINICH, Ohio, Chairman
ELIJAH E. CUMMINGS, Maryland JIM JORDAN, Ohio
JOHN F. TIERNEY, Massachusetts MARK E. SOUDER, Indiana
DIANE E. WATSON, California DAN BURTON, Indiana
JIM COOPER, Tennessee MICHAEL R. TURNER, Ohio
PATRICK J. KENNEDY, Rhode Island JEFF FORTENBERRY, Nebraska
PETER WELCH, Vermont AARON SCHOCK, Illinois
BILL FOSTER, Illinois
Jaron R. Bourke, Staff Director
C O N T E N T S
----------
Page
Hearing held on March 11, 2009................................... 1
Statement of:
Kashkari, Neel, Acting Interim Assistant Secretary for
Financial Stabilization, Department of Treasury............ 38
Sanders, Anthony B., professor, W.P. Carey School of
Business, Arizona State University; Stephen Horne, vice
president, Master Data Management and Integration Services,
Dow Jones and Co.; Mark Bolgiano, president and CEO, XBRL
US Inc.; Neil Barofsky, special inspector general, Troubled
Asset Relief Program; and Richard J. Hillman, Managing
Director, Financial Markets and Community Investment, U.S.
Government Accountability Office........................... 199
Barofsky, Neil........................................... 264
Bolgiano, Mark........................................... 206
Hillman, Richard J....................................... 272
Horne, Stephen........................................... 237
Sanders, Anthony B....................................... 199
Letters, statements, etc., submitted for the record by:
Barofsky, Neil, special inspector general, Troubled Asset
Relief Program, prepared statement of...................... 266
Bolgiano, Mark, president and CEO, XBRL US Inc., prepared
statement of............................................... 208
Hillman, Richard J., Managing Director, Financial Markets and
Community Investment, U.S. Government Accountability
Office, prepared statement of.............................. 274
Horne, Stephen, vice president, Master Data Management and
Integration Services, Dow Jones and Co., prepared statement
of......................................................... 239
Kashkari, Neel, Acting Interim Assistant Secretary for
Financial Stabilization, Department of Treasury, prepared
statement of............................................... 42
Kucinich, Hon. Dennis J., a Representative in Congress from
the State of Ohio:
Article dated March 6, 2009.............................. 148
Article dated March 10, 2009............................. 27
Memo dated March 9, 2009................................. 174
News release dated December 14, 2008..................... 31
Prepared statement of.................................... 6
Press release dated November 17th............................ 144
Sanders, Anthony B., professor, W.P. Carey School of
Business, Arizona State University, prepared statement of.. 202
Towns, Hon. Edolphus, a Representative in Congress from the
State of New York, prepared statement of................... 17
Watson, Hon. Diane E., a Representative in Congress from the
State of California, prepared statement of................. 34
Welch, Hon. Peter, a Representative in Congress from the
State of Vermont, prepared statement of.................... 23
PEELING BACK THE TARP: EXPOSING TREASURY'S FAILURE TO MONITOR THE WAYS
FINANCIAL INSTITUTIONS ARE USING TAXPAYER FUNDS PROVIDED UNDER THE
TROUBLED ASSETS RELIEF PROGRAM
----------
WEDNESDAY, March 11, 2009
House of Representatives,
Subcommittee on Domestic Policy,
Committee on Oversight and Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 10 a.m., in
room 2154, Rayburn House Office Building, Hon. Dennis Kucinich
(chairman of the subcommittee) presiding.
Present: Representatives Kucinich, Towns, Jordan, Cummings,
Tierney, Watson, Kennedy, Welch, Issa, Souder, Burton, Turner,
and Fortenberry.
Staff present: Jaron R. Bourke, staff director; Claire
Coleman, counsel; Jean Gosa, clerk; Charisma Williams, staff
assistant; Ron Stroman, staff director; Leneal Scott,
information systems manager; Lawrence Brady, minority staff
director; John Cuaderes, minority deputy staff director;
Jennifer Safavian, minority chief counsel for oversight and
investigations; Charles Phillips, minority chief counsel for
policy; Dan Blankenburg, minority director of outreach and
senior advisor; Adam Fromm, minority chief clerk and Member
liaison; Kurt Bardella, minority press secretary; Seamus Kraft,
minority deputy press secretary; Christopher Hixon, minority
senior counsel; and Brien Beattie and Alex Cooper, minority
professional staff members.
Mr. Kucinich. Good morning. This is the Domestic Policy
Subcommittee of the Oversight and Government Reform Committee.
I am Congressman Dennis Kucinich, chairman of the subcommittee.
The subject of today's committee hearing is entitled,
``Peeling Back the TARP: Exposing Treasury's Failure to Monitor
the Ways Financial Institutions are Using Taxpayer Funds
Provided Under the Troubled Asset Relief Program.'' Our first
witness today will be Mr. Neel Kashkari, the Acting Interim
Assistant Secretary for Financial Stabilization, the Department
of Treasury.
We are joined today by a number of Members of Congress,
including the new ranking member, Mr. Jim Jordan of Ohio. I
want to welcome Mr. Jordan to this position on the subcommittee
and I want to let you know, sir, that I am looking forward to
working with you. It is very interesting, in this subcommittee
we have an Ohio connection, not only Mr. Jordan but Mr. Issa is
originally from Ohio, Mr. Turner is from Ohio. Ohio is well
represented.
Mr. Jordan. And our witnesses is from Ohio.
Mr. Kucinich. And our witness is from Ohio. So I suppose
this is Buckeye Day on Capitol Hill.
We are going to begin with an opening statement. I want to
thank Mr. Cummings for being here as well as the gentleman from
Vermont, Mr. Welch. The witness, with unanimous consent, the
witness Mr. Kashkari, when we get to his testimony, is going to
be given 10 minutes. He may not need it all, but given the
gravity of this subject, he is going to be given 10 minutes to
make his opening statement, without objection.
The Troubled Assets Relief Program has provided about $200
billion in capital injections to hundreds of banks. The money
was provided with virtually no strings attached. Most of the
banks didn't even bother to account separately for the Federal
moneys. It is debatable whether the efforts of those that did
amount to anything meaningful. Treasury does not even ask TARP
recipients for a detailed accounting of their use of TARP
funds.
Because some of the banks are multinational banks, the
kinds of transactions they are doing include billions in loans
and investments in other countries at precisely the time that a
liquidity shortage has impaired credit markets in the United
States, and a recession deeper than anything seen since the
great depression is impairing production and employment.
Nevertheless, several very large transactions conducted after
these banks received billions in a taxpayer-funded bailout
include an $8 billion financing arranged by Citigroup for
public authorities in Dubai, a $7 billion investment by Bank of
America in the China Construction Co., a $1 billion investment
by a J.P. Morgan subsidiary in expanding operations in India.
Unfortunately, the legislation Congress passed creating the
TARP required very little of the recipients to receive
taxpayer-funded subsidies. The Treasury regulations and
contracts crafted to implement the TARP did not require much of
anything other than someone sign for the money. It may be
argued that transactions such as these are beneficial to the
balance sheets of the banks that are making them, that they
have some indirect benefit to the U.S. financial system as a
whole. Really?
If the banking system is in serious enough trouble to
require massive amounts of Federal support, shouldn't that
Federal support be directed and channeled to the domestic
economy? Or are these examples of large investments and loans
to foreign entities among the kind of transactions the American
taxpayers should be supporting with TARP moneys, when we face
significant credit problems here at home?
How does a multi-billion dollar financing deal to Dubai
ease the liquidity crisis in the United States of America? What
about other kinds of uses of funds, corporate spending on
lavish parties? The continuation of contractual agreements to
pay for naming rights on professional sports stadiums?
Corporate sporting event sponsorships? Is this what the
taxpayers expect our Government to do with TARP funds?
Is this what Congress intended? If it was the business
judgment of the very same bankers in charge that governed their
decision before the financial crisis and arguably helped create
the crisis, is it tolerable to continue to defer to that
judgment and allow them to spend taxpayers' money with no
explanation, little accountability and no questions asked?
Under the precedent set by former Secretary Paulson, the
Paulson TARP program makes no demand on TARP recipients for
detailed information about their spending. Even though the
statute obligates Treasury to be able to prevent waste and
abuse of TARP moneys, Mr. Paulson's Treasury Department did not
even bother to set standards for waste and abuse of TARP funds.
``Trust them'' is essentially what seems to pass for oversight
of the capital purchase plan. Treasury has no concrete idea of
how TARP moneys are being used. They don't ask questions of
TARP recipients about their use of funds, and don't gather
sufficiently detailed information from TARP recipients to know
what to ask about.
The problem is not a lack of authority. Under the
agreements between Treasury and the TARP recipient financial
institutions, Treasury has brought contractual authority to
scour company books in search of, among other things, waste and
abuse by TARP recipients. But in practice, Treasury is not
doing so. The serious shortcomings in the creation and
implementation of the Emergency Economic Stabilization Act,
namely the absence of definitions of waste and abuse for
explicit conditions for the use of TARP funds resulted in the
inescapable conclusion that Treasury's oversight will not find
waste, fraud or abuse, because it isn't looking for it.
Now, to read Mr. Kashkari's testimony today, we find
nothing to contradict that conclusion, with all due respect. In
fact, Mr. Kashkari was asked to testify on the steps that
Treasury has taken to detect and prevent the waste of TARP
moneys. Mr. Kashkari's testimony does not address that
question. Rather, he describes Treasury's efforts to do
something else, to determine the impact of TARP moneys on the
bank's lending activity.
Treasury has submitted 90 pages, 90 pages, of
intermediation snapshots from the largest 20 TARP recipients.
But what does that prove? Perhaps very little. There are
significant shortcomings to Treasury's reliance on the monthly
intermediation snapshots. First, only the 20 largest TARP
recipients report anything at all. Obviously there can be
little monitoring of the impact of TARP moneys on the credit
activities of the 297 TARP recipients which do not file monthly
intermediation snapshots.
Second, the snapshots do not provide details about any
individual transaction, no matter how significant. Third, these
snapshots address the lending side, the lending side of the
recipient's business. They do not address any other investment
or expenditure. And fourth, and importantly, they address only
new lending and not the contraction of existing lending in the
form of foreclosures and elimination of credit lines.
If the amount of new lending does not more than make up for
the amount of lending contracted, and that's through
foreclosures, decrease in credit limits, calling back loans,
then the net amount of credit in the economy is shrinking.
Telling one side of the credit story without telling the other
does not give us a fair and balanced view of the realities
small businesses and individuals know so well.
At best, the snapshots might serve the purpose of
monitoring, at the most general level, some impact TARP funds
may be having on certain new lending activities. But they don't
reflect the net impact of contracting credit activities on
existing borrowers. And they tell us nothing about the use of
TARP funds, which is the focus of this hearing.
Unfortunately, Mr. Kashkari's testimony is not responsive
to the purpose of this hearing outlined specifically in the
letter of invitation sent to him on February 25th. And Mr.
Kashkari's silence on the subject of this hearing speaks
volumes. The inescapable conclusion is that Treasury is not
conducting oversight of the TARP moneys, disbursed through the
capital assets purchase program, to prevent wasteful use or
abuse of hundreds of billions in taxpayers' funds.
Perks for company management were considered sound business
judgment before the financial crisis and taxpayer bailout, and
they are considered sound business judgment now, using
taxpayers' money. Loans to foreign governmental authorities
were considered sound business judgment before the crisis and
bailout, and they are supposedly sound business judgment now,
using taxpayers' money. Investments in foreign company
operations, even if it results in more layoffs in the United
States, were sound business judgments before and they are sound
business judgments now using taxpayers' money.
In its current form, the capital purchase program of TARP
leaves recipient companies free to use Federal funds as they
would any other source of income before the crisis and before
taxpayers provided the bailout. Treasury's development of the
TARP program generally and the capital purchase program
specifically has introduced no new transparency or
accountability that did not exist before taxpayers were given
the bill for cleaning up the mess. It has perpetuated business
as usual. It defers to the so-called sound business judgment,
judgment of the same corporate management in many cases that
led to the crisis we are embroiled in now.
TARP was developed under a previous Secretary of the
Treasury. Nearly every observation that will be made today
originates on his watch. But if the new administration is to
avoid perpetuating the approach of the past, real change is
going to have to be necessary. It should start with the
collection of detailed information about how TARP recipients
are using taxpayer funds and the imposition of conditions and
standards for how they may use the moneys taxpayers have
provided and may be called upon to provide in the future.
My colleagues on this committee, with news reports
projecting that at least another $2 trillion will be requested
of taxpayers, it is my hope that this hearing today will help
propel the new Department of Treasury to reform the intolerable
deficiencies of the TARP program, thereby making recipients
accountable to the public for the use of taxpayer funds.
Finally, we owe it to the American taxpayers to provide a
complete, comprehensive accounting of all TARP funds that have
already been allocated. And after such a thorough accounting is
made available, then let the people decide if their hard-earned
tax dollars are being spent wisely and in the best interests of
the American economy and the best interest of the United States
of America.
I yield now to the ranking member, Mr. Jordan of Ohio.
[The prepared statement of Hon. Dennis J. Kucinich
follows:]
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Mr. Jordan. I thank the chairman, and I will be brief. Our
ranking member, Congressman Issa, will provide our opening
statement.
I was in the Judiciary Committee yesterday and I think
there were 15 opening statements, so we don't need two from our
side. But I did want to say to the chairman, I look forward to
working with you and this committee. Since the first time we
met, I think at an orientation session at the Ohio General
Assembly in 1994, I have always appreciated the chairman's
passion and intensity that he brings to the legislative
process.
So I do look forward to working with you this Congress and
in this committee. With that, I will turn it over to our
ranking member.
Mr. Kucinich. I thank the gentleman. I just want to say
that Mr. Jordan is a champion wrestler, and I look forward to
working with you as well.
Mr. Issa. Thank you, Mr. Jordan. Thank you, Mr. Chairman,
for holding this extremely important hearing.
Mr. Kashkari, welcome. It is not easy for us to hold a
hearing on the TARP, the Troubled Assets Relief Program, or as
some people think it is called, the Toxic Asset Relief Program,
because the TARP suffers from a lack of transparency and
accountability. In our previous hearing, we asked questions
such as, ``how much have you spent,'' ``where is the money,''
``what is it worth today.''
But as of February 6th, the Treasury Department has
verified that $300 billion in taxpayers' funds have been
provided to our Nation's financial institutions in the form of
preferred shares, warrants, loans and insurances against loss.
Now, that figure, of course, is outdated today, and we hope to
hear an update.
While the Treasury Department currently monitors aggregate
monthly levels of some banking activities, it does not require
any recipient of TARP funds to disclose the details of any
individual transaction that the recipient would not have
entered into but for the TARP money. In other words, we do not
know if $300 billion of taxpayers' money has changed anyone's
behavior. As a result, neither the Treasury Department nor
Congress nor the general public truly knows the outcome
achieved by injecting taxpayers' money.
Mr. Chairman, this lack of transparency simply is
unacceptable. We can certainly make the case that this level of
transparency and the need for it may not have been anticipated
prior to September of last year. But a government of the future
must be designed for transparency. We must ensure that all of
our institutions, whether receiving Federal funds or simply
operating on an interstate basis be in fact prepared to provide
transparency. That means interoperable systems and data bases.
We must understand, however, that true transparency
requires attention not only to what information is disclosed
but to how the information is disclosed. To illustrate this
principle, consider that we receive a deluge of information
from the SEC in the form of 10Ks and other documents. As a
matter of fact, my understanding is that there are about 15
million pages of text. If that is simply text, and in order to
figure out the state of the top 200 or so companies in America,
you would have to go through 10 million or more pages of
documents, then that information in fact is not information,
it's simply pages of text. Good luck sifting through it.
In this day and age, every American understands that if
they don't do it themselves, they could download from their
bank or other financial institution a monthly statement,
receive it online, import it into Quicken, into a spreadsheet,
into some other accounting system, home accounting system, so
they can quickly look at their financial statements, keep track
of them from month to month and do analyses of the trends in
their own investments.
So knowing that you can do this on a personal basis, one
would ask what can we do on a national basis? The answer is,
without a promising technology such as XBRL, that can
standardize all financial reporting for easy accessibility, we
will not be able to do the same on a global basis. More than 40
countries have already adopted this standard, including China.
The United States is currently requiring the disclosure of
information to the FDIC in XBRL format. However, the SEC has
been slow to act, took most of last year to consider it, and
only recently has approved a final rule that will mandate XBRL
for all public company reporting, with some companies required
to comply starting in June 2009.
Continuing with XBRL technology, it is clear to the public
that when we talk about lettered technologies and call them
technologies that they may ask, is this difficult. I am going
to say here today that although we will receive extensive
information later today, it is not difficult. It is simply the
Federal Government requiring that financial institutions, those
providing mortgages into the public market, those operating
with the public trust such as public corporations, and those
receiving TARP money provide information in a way that we do
not have to re-massage it, that it is transparent to a
computer. They still have the right, using this technology, to
withhold information or to be assured that the Government will
keep confidential information confidential.
But only with this sort of a common format can we in fact
begin to separate what is often called toxic assets, which in
fact is good assets mixed with bad with no ability to decide
which is which. Without it, we are back to where we were before
September.
Mr. Chairman, I absolutely look forward to Mr. Kashkari's
answers on what he can see today, what he knows today, but more
importantly, for both the first and second panel, I am
desperate, and America is desperate to ensure that we do not
come back to a hearing 3, 4, 5 months from now and find out
that we still don't know where the money went, we still cannot
quickly decide what assets are good and what assets are bad.
Last, Mr. Chairman, I believe that when we look at the
problem, and Mr. Kashkari has been looking at this in a huge
way, America had a debt level of about 300 percent of GDP, or
about $45 trillion, plus or minus, of debt. Historically,
American ran 100 to 120 percent of debt to GDP, meaning $15
trillion, maybe $20 trillion of debt. The unwinding of this
debt, even with the trillions of dollars that are either
pledged or the hundreds of billions of dollars that have been
delivered, still has a long way to go.
I look forward to hearing from Mr. Kashkari how they plan
to find the stabilized level of debt that America should be. I
believe that whether it is the international institutions that
have gone on business as usual, as the chairman said, providing
dollars to foreign investors, or it is our domestic spending,
that we have to come to grips with how much of the contraction
was appropriate because of an excess, an excess that we all
found interesting and valuable but in fact didn't realize that
when it unwound was inevitably going to give us huge problems.
For example, if in fact our 100 to 120 percent of GDP is
not the new norm, but rather 200 percent of GDP is the new
norm, we still have a $15 trillion or so contraction of debt
that will be permanent. I know that is not the subject for
today, but it is a subject that I look forward to people at
Treasury and others, working with economists, to discover.
Because we have to decide what portion of America's hard-earned
money is going to be put into stimuluses, TARPs, and others,
and how much in fact is going to have to be written off to, we
can't go back to the Roaring Twenties, and we can't go back to
the Roaring Oughts, if you will.
Mr. Chairman, thank you for your indulgence. I look forward
to this hearing and yield back.
Mr. Kucinich. I want to thank Mr. Issa, who is the ranking
member of the full committee, for his participation. I think
that all Members would agree that Mr. Issa's business acumen
brings a real strength to our deliberations, not only today but
always. So thank you, sir.
It is my honor now to introduce the chairman of the full
committee, who is our new chairman and under whose guidance we
helped to craft today's hearing and under whose guidance we
will go even deeper into the workings of this TARP program, as
well as the broad range of Government oversight and reform
issues facing the U.S. Congress and America. At this time, it
is my honor to introduce the distinguished gentleman from New
York, Mr. Towns, the chairman of the full committee.
Chairman Towns. Thank you very much, Congressman Kucinich,
the Chair of the subcommittee, and of course Ranking Member
Jordan, for convening this hearing.
Oversight of the Treasury's TARP program is an important
topic for this committee. I am pleased that Mr. Kashkari is
here today to update us on the program.
It is quite clear to me at this point that Treasury does
not have the information or personnel in place to conduct
vigorous oversight of the TARP program. That bothers me. The
information we have received about the types of data the
Government is tracking are far too vague to develop measures of
the program's effectiveness.
I am afraid we are reaching a point where Treasury just
does not know what Wall Street is doing with Government funds.
In fact, I don't think they even know how much they don't know.
In my view, Congress has been extraordinarily generous in
allowing the Treasury Department and the Federal Reserve
latitude in dealing with the current financial crisis. However,
the Federal Government's unprecedented investment of billions
of dollars demands further scrutiny. I am particularly
concerned about AIG. To date, the Government has invested $160
billion, that is B as in boy, in AIG, and stated last week that
AIG may require further support. It should come as no surprise
that Congress has expressed the need to know exactly how this
money has been spent, on what basis it has been spent and
exactly who are the beneficiaries of this record Federal
subsidy.
But we cannot take it on blind faith that Federal financial
support of AIG or other firms is being carried out in a
sensible manner. We just can't take that. This hearing should
tell us what information Treasury is collecting and what
information is being shared with the Congress and what
information is completely unknown to anyone responsible to the
American taxpayers. I hope we can come out of this hearing with
a plan for obtaining the information necessary to make
responsible decisions about our economy and the burden that the
American people are bearing to bail out Wall Street.
Let me just say, this is not a one-shot deal. We are not
going to go away. We owe it to the taxpayers.
Mr. Chairman, on that note, I yield back.
[The prepared statement of Hon. Edolphus Towns follows:]
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Mr. Kucinich. I thank the chairman of the full committee,
and it is an honor to serve with you.
At this time, of course, all members of this committee,
without objection, are going to have 5 minutes for an opening
statement. Any other Member who seeks objection? Mr. Souder of
Indiana, do you desire to have any opening statement?
Mr. Souder. No, thank you, Mr. Chairman.
Mr. Kucinich. Mr. Cummings of Maryland.
Mr. Cummings. Thank you very much, Mr. Chairman.
I want to thank you and I want to thank our chairman of the
full committee and ranking member for making this hearing take
place.
I was just sitting here thinking about our last hearing.
And during that hearing, Mr. Kashkari presented and there were
some issues that we brought up that he did not know about. And
I realize that there's a lot to get your arms around, I
understand that.
But I want us, the reason why this hearing is so important
is that we are in probably one of the worst economic
circumstances that we have been in in our lifetimes. I do
believe that President Obama is doing everything in his power,
along with Treasury Secretary Geithner, to straighten up this
mess, and it is just that.
The problem is that unless there is transparency and unless
there is accountability, it is going to be impossible to
maintain the trust of the public. And we need the public trust.
Right now, the people in my district are losing their savings,
their homes. As a matter of fact, I was at a town hall meeting
the other day, Mr. Chairman, and a gentleman said to me, ``You
know what, I stopped looking at my statement, because I am
afraid to look at it, it will put me in a bad mood for the next
month or so, so I don't even look at it any more.'' And they
are losing their jobs.
And at the same time, they turn around and they hear about
the AIGs of the world and they hear about the Citigroups, the
abuses of this money. And you know what they ask themselves?
The question they ask is, ``why is my tax dollar being used in
this way?'' But then the thing I think that really alarms them
is when they hear the oversight panel in its recent report say,
``The panel still does not know what the banks are doing with
the taxpayers' money.''
It is going to be very difficult for the President and for
Secretary Geithner to turn this ship around unless we have a
situation where there is that transparency and the
accountability. But if you don't know, if you don't know what's
going on, that's a real problem.
So we found out just recently that AIG was given retention
payments, these retention payments were supposed to be to
retain people, but these were the very people that they were
letting go. There is also something else that is happening
here, Mr. Chairman, and there is an arrogance on the part of
some of these company executives with regard to the American
taxpayers' dollars.
So I am hoping, in the words of Mr. Towns, that we will be
able to come up with a plan to address this. But the question
also becomes, does the Treasury Secretary have enough authority
to do the things that he needs to do. And I am hoping that
those questions will be answered today.
So I look forward to the testimony of Mr. Kashkari and the
other witnesses, and again, I thank you all for calling this
hearing.
Mr. Kucinich. Thank you very much, Mr. Cummings.
The Chair recognizes Mr. Fortenberry of Nebraska.
Mr. Fortenberry. Just briefly, Mr. Chairman, let me thank
you for the opportunity to join you on the subcommittee. I
think it is a critical subcommittee for the well-being of
overview of public policy in this country.
Also, I wanted to thank you for picking this particular
topic as the one that clearly sets a priority for the tenor and
the paradigm of this committee. Clearly, people want to know
where their money is going to. Mr. Chairman, if I could offer
this, I think it is very important to review back when the
taxpayers were asked to bail out financial institutions in the
name of resetting the economy, stabilizing the economy. There
was a question floating around or the suggestion that these
institutions were too big to fail. I think we should be asking,
are they too big to succeed.
One of the real problems that we have in this country is
financial consolidation, the liberalized credit system that
brought about the use of exotic financial instruments, as well
as what seems to be reckless behavior. So I am hopeful that
this subcommittee and this particular hearing delves deeply
into this issue to at least answer one question as to where the
money is going, and then second, if this is an appropriate
investment.
Mr. Kucinich. I want to thank our new committee member, Mr.
Fortenberry of Nebraska, for his presence on the subcommittee
and also for his observation. The question that you pose about
whether or not a company is too big to fail, and your further
question about the issue of consolidation and the economy and
its effect on the economy is something that is a proper subject
for this Domestic Policy Subcommittee.
So with the cooperation of our chairman, Mr. Towns, we
would look forward to delving deeply into that issue.
Mr. Fortenberry. I appreciate your comment, sir, thank you.
Mr. Kucinich. I thank the gentleman.
The Chair now recognizes Mr. Welch of Vermont for his
opening statement.
Mr. Welch. Thank you, Mr. Chairman.
There does seem to be clear unanimity here about the
absolute requirement that there be full accountability. I want
to focus attention on one specific area.
We have used a lot of money from TARP and other programs
for AIG. And there is going to be another $30 billion that
already has been authorized with no additional requirement that
AIG disclose to us how specifically that money is used. And
this new use of TARP funds is a significant departure from
previous TARP assistance to AIG. As long as it continues to be
given without requiring AIG to fully disclose how that money is
being spent, it is going to thwart our efforts to provide
answers to the American taxpayer.
AIG has been unwilling so far to provide significant
information on what financial institutions, either domestic or
foreign, are counter-parties, the counter-parties to its
outstanding credit default swaps. That is why, for example, we
still don't know who received much of the money that the
Federal Reserve gave to AIG.
I think we are all in agreement the taxpayers are entitled
to know how their money is being spent. And what I would like
to know, on behalf of the American taxpayer, is basically this:
One, does Treasury agree that AIG can use this money to fulfill
credit default swap obligations with taxpayer money from TARP?
Two, if so, does Treasury have a specific plan to track each
and every dollar that AIG uses to pay counter-parties? And
three, what plans does Treasury have to compel AIG to release
information to Treasury and the American taxpayer on what
counter-parties are paid?
Keep in mind, AIG is 80 percent taxpayer-owned. So in a
way, AIG is us.
Now, the justification, of course, for giving any aid to
AIG is the systemic risk that Treasury and the Fed have
concluded exist if we let it go under. It is one thing,
however, if that systemic risk and the funds that are
transferred are used to protect average Americans who have
annuities and insurance policies with AIG. It is quite another
if that money is being used basically to hedge the bets and
reward speculators, investment banks, hedge funds that simply
bet wrong on some of these credit default swaps.
So Mr. Chairman, my question really goes to getting
specific information on how money is being used to pay counter-
parties, and what counter-parties are on the receiving end of
this benefit. I yield back.
[The prepared statement of Hon. Peter Welch follows:]
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Mr. Kucinich. I want to thank the gentleman for his opening
statement, and to complement it, to introduce into the record
an article in yesterday's Washington Post by David M. Smick
called Tim Geithner's Black Hole, which discusses directly the
point you raise about AIG and the credit default swaps. So I
thank the gentleman.
[The information referred to follows:]
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Mr. Kucinich. The Chair recognizes a former chair of the
Government Oversight Committee, Mr. Burton of Indiana. Thank
you for being here, Mr. Burton.
Mr. Burton. Thank you, Mr. Chairman. Thank you for having
this hearing.
You look the same in person as you do on TV. [Laughter.]
I will tell you, Mr. Kashkari, I don't think there is a
Member of Congress that really knows where all this money has
gone. And I think that is one of the biggest problems we have,
is we go back to our constituents and they say, ``Well, where
are you spending all this money?'' And we can't give them an
answer. And we say, ``Well, you just have to trust Mr. Kashkari
and the Secretary of the Treasury and it will get done.''
Today I see here that $8 billion of the TARP money that was
given to Citigroup went to Dubai, a billion by J.P. Morgan
Treasury Services was used in development of cash management
and trade finance solutions in India, $7 billion investment by
Bank of America in China Construction Bank Corp. We need to
have a complete run-down, or as complete as possible, so we can
explain to our constituents why we are doing this and what the
end result is going to be. We can't do that right now. And we
are supposed to grant you and other members of the
administration the funds that are necessary to get this economy
moving. For us to be able to do that, we need to be able to
convince our constituents that it is the right thing to do.
And we can't do that right now. The people back home are
madder than hell about what is going on, and they need to have
the facts.
The other thing is currently only the largest 20 recipients
of TARP CP fund are required to file reports of any type with
TARP overseers. The other 297 financial institutions do not. I
think that should be much broader. I think there should be a
report that goes to the TARP overseers, but also to the
Congress of the United States. You are going to have a much
easier time when you come up here, Mr. Kashkari, if we have the
facts so we can go back home and at least make the case that
this Government is doing the right thing.
Every time I got home, people say, ``Gosh, you spent $700
billion on TARP, you spent $787 billion on the stimulus
package, you spent $408 billion or $10 billion yesterday, I
mean, we are talking about trillions of dollars.'' And then
Geithner over at Treasury says he's going to have to put $2
trillion or $3 trillion into the financial institutions to get
them up and running the way they should.
And we all want the economy to flourish. But we have to
have the facts. I really hope you will take this to heart. I
know that you hear all this stuff, and you say, ``Oh, my gosh,
I wish these guys would shut up.'' But if you want to have the
American people to be supportive, we have to have the facts.
With that, Mr. Chairman, I yield back the balance of my
time.
Mr. Kucinich. I want to thank the gentleman from Indiana. I
just want to say in support of your statement I have here a
news release from Citigroup with a headline, Citi arranges more
than $8 billion for Dubai. They received $25 billion in bailout
funds on, I believe it was October 26th. And this news release
is dated December 14, 2008. Without objection, this will be
submitted to the record.
[The information referred to follows:]
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Mr. Kucinich. The Chair recognizes, I think Mr. Kennedy is
next, Mr. Kennedy from Rhode Island. Thank you for being here.
You may proceed.
Mr. Kennedy. Thank you, Mr. Chairman.
Following up the former chairman from Indiana about Dubai,
Bank of America sent $7 billion to China Construction Bank
Corp. after it received funds from U.S. tax dollars, Mr.
Chairman.
I think the frustration that we all have here, and I heard
it from my constituents last week, was that they are prepared,
as one of my constituents said, ``We are prepared to take our
medicine. But we want to make sure we take it the same as
everybody else.'' They don't see themselves as taking their
medicine the same as everybody else. They see us aggregating
the profits of the very wealthy in this country, and
socializing the loss of the middle class in this mess that we
have here.
They see their tax dollars going to pay off those who have
savings, those who have dividends, those who have made out the
best in the 1980's and 1990's during this great wealth that has
been made and accrued over the last several decades, while
they, the people who are the wage earners in this country, the
people who don't have savings, the people who are paying
payroll taxes, are bailing out the very wealthiest in this
country.
There is something inherently wrong in this picture. And
they are not about to have the wealthiest in this country be
the only ones with a voice down here. What's inherently wrong
here is that we're aggregating the profits and socializing the
losses, and we're not making sure that the medicine is shared
equally amongst all the American people in terms of how we're
making sure that we're all getting back on track evenly here.
That, I think, Mr. Chairman, is what we need to get about
doing, so that we're not making sure that just a few of the
people, the American people are the ones who are left paying
the bill here, and left letting all these others get off scot-
free.
Mr. Kucinich. I want to thank the gentleman from Rhode
Island and thank him for being on the subcommittee.
The Chair now recognizes the gentlelady from California,
Ms. Watson.
Ms. Watson. I want to join with my colleagues in thanking
you for holding today's hearing.
The Emergency Economic Stabilization Act of 2008 authorized
the TARP program for the disbursal of $700 billion of
taxpayers' money in two tranches to attempt to restore
liquidity and stability to the financial system. To date, the
Treasury Department has committed approximately $299.6 billion
to the TARP funds to participating financial institutions.
With nearly half of the allocated TARP money drawn down,
and an economy which continues to shed jobs and capital daily,
it is crucial that today's hearing gives us an honest
perspective on the Treasury Department's efforts to regulate
the use of TARP funds and insight into how to guarantee that
these funds are effectively spent in a manner that maximizes
the eventual returns to taxpayers.
While increasing liquidity to our banking system is a key
consideration for the Treasury Department in orchestrating and
distributing the TARP funds, it is also a legally mandated
responsibility of the Treasury Department to maintain internal
control of these funds to prevent waste and abuse of the
taxpayers' money. The current global economy crisis is a result
of a systemic unwillingness on behalf of institutions and
individuals at all levels to routinely self-examine their
financial practices to verify that they are responsible and
sustainable in the long run. Now, as we continue to implement
an unprecedented reorientation of the relationship between
business and government, it is critical that we apply this
lesson to the actions of the Treasury Department and to all of
the TARP recipient institutions.
Mr. Chairman, I would particularly like to thank each of
today's panelists for cooperating with this committee. I
sincerely hope that the testimony we hear today will provide us
with a detailed assessment of the ways institutions have
utilized their TARP funds and the ability of the Treasury
Department to oversee the transactions.
When we go home to our districts, as other Members have
described, we get inundated with telephone calls and personal
visits, ``what is going on?'' ``When can I lower my mortgage
payment?'' ``When can I have the interest lowered?'' ``What are
you doing?'' And these angry calls are constant. So I would
like to take back information when I go back to the district
tomorrow based on what we hear from the witnesses that will
address their concerns.
So I thank you very much, Mr. Chairman, for this very
significant hearing today. I yield back.
[The prepared statement of Hon. Diane E. Watson follows:]
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Mr. Kucinich. I thank the gentlelady for her constant
participation in these subcommittee meetings.
The Chair recognizes Mr. Tierney of Massachusetts.
Mr. Tierney. Mr. Chairman, I am prepared to go to the
witness when we can. Thank you.
Mr. Kucinich. I thank the gentleman for his presence here.
If there is no other Member of Congress or of this
committee who is ready to proceed, we are going to now move to
introducing our first panel. Mr. Neel Kashkari was designated
as the Acting Interim Assistant Secretary of the Treasury for
Financial Stability on October 6, 2008. He was asked by the new
administration, the Obama administration, to stay on for the
sake of continuity and continues to serve in a difficult role
during this transition. In this capacity, Mr. Kashkari heads
the Office of Financial Stability, which oversees the Troubled
Asset Relief Program.
He is also the Assistant Secretary of the Treasury for
International Economics and Development. Mr. Kashkari joined
the Treasury Department in July 2006 as senior advisor to U.S.
Treasury Secretary Henry Paulson, Jr. In that role, he was
responsible for developing and executing the Department's
response to the housing crisis, including the formation of the
Hope Now Alliance, the development of the Sub-prime Fast Track
Load Modification plan, and the Treasury's initiative to kick-
start a covered bond market in the United States.
Prior to joining the Treasury Department, Mr. Kashkari was
a vice president at Goldman Sachs & Co. in San Francisco.
Mr. Kashkari, I want to thank you for being before this
subcommittee today. I know I speak for all the Members in
saying that. And we are looking forward to your testimony.
As you know, it is the policy of the Committee on Oversight
and Government Reform to swear in all witnesses before they
testify. I would ask that you please rise and raise your right
hand.
[Witness sworn.]
Mr. Kucinich. Thank you.
Let the record reflect that the gentleman answered in the
affirmative.
We have already, at the beginning of this hearing, I had a
unanimous consent for Mr. Kashkari to have 10 minutes if he
needs it, 10 minutes, if you need it, sir, so that you will
have sufficient time to make your statement.
STATEMENT OF NEEL KASHKARI, ACTING INTERIM ASSISTANT SECRETARY
FOR FINANCIAL STABILIZATION, DEPARTMENT OF TREASURY
Mr. Kashkari. Thank you, Mr. Chairman, good morning. Thank
you, Chairman Towns, Ranking Member Jordan, Ranking Member Issa
and members of the subcommittee. I appreciate the opportunity
to appear before you today.
As you know, I was appointed by the prior administration,
and the Obama administration asked me to remain at Treasury for
a brief period to help with the transition. I am honored to
provide whatever help I can to the new administration.
The American people provided Treasury with broad
authorities under the Emergency Economic Stabilization Act to
stabilize the financial system. And it is essential we
communicate our actions in a clear and transparent manner to
maintain their trust. Today I will briefly review the actions
Treasury has taken to stabilize the financial system and
describe the steps we are taking to monitor the activities of
recipients of Government capital.
Many years in the making, the credit crisis erupted during
the summer of 2007. Last year, the crisis intensified and our
major financial institutions came under severe pressure from
deteriorating market conditions and the loss of confidence. In
a short period of time, several of our largest financial
institutions failed. In March, Bear Stearns. In July, Indy Mac.
In September, we witnessed the conservatorship of Fannie Mae
and Freddie Mac, the rescue of AIG, the bankruptcy of Lehman
Brothers, the distress sale of Wachovia and the failure of
Washington Mutual. Eight major U.S. financial institutions
effectively failed in 6 months, six of them in September alone.
This stress was reflected in something called the LIBOR-OIS
spread. It is a key measure of risk in the financial system.
Typically, 5 to 10 basis points. On September 1st, the 1-month
spread was 47 basis points. By the 18th, when Treasury and the
Fed went to the Congress, the spread had climbed to 135 basis
points. By the time the bill passed, just 2 weeks later, the
spread had nearly doubled again to 263 basis points. Credit
markets continued to deteriorate and the spread, just 1 week
later, spiked to 338 basis points, almost 50 times normal
levels. Our Nation was faced with the potential imminent
collapse of our financial system.
So many people asked me, what if the financial system had
collapsed? Businesses of all sizes might not have been able to
access funds to pay their employees, who then wouldn't have
money to pay their bills. Families might not have been able to
access their retirement funds. Basic financial services might
have been disrupted. The severe economic contraction and large
job losses we are now experiencing were triggered by the credit
crisis. However, had the financial system collapsed, this
recession, including terrible job losses and numerous
foreclosures, could have been far, far more severe.
Now, a program as large and complex as the TARP would
normally take many months or even years to establish. But we
didn't have months or years. We moved as quickly as possible to
implement programs to rapidly stabilize the system and prevent
collapse. In the 159 days since Congress passed the law, we
have successfully implemented the capital purchase program,
having now invested in 489 institutions in 47 States and Puerto
Rico, 478 banks in 47 States. With approximately 30 new
investments each week, the median investment is $16 million.
The vast majority of these institutions are banks in our
communities.
Treasury also helped the Federal Reserve establish a
lending program to reduce borrowing costs for consumers,
including auto loans, student loans, credit cards, and small
business loans. And that will begin funding this month. We are
planning to expand this lending initiative to include other
asset classes, such as commercial mortgage-backed securities.
Under Secretary Geithner's new financial stability plan,
Treasury also announced a new capital assistance program and
launched a multi-part housing program to reduce borrowing costs
and to encourage long-term sustainable loan modifications.
Finally, we are developing a public-private asset fund to
purchase illiquid assets from banks, also to support new
lending.
Now, during this time, Treasury has unfortunately had to
step in to stabilize several large institutions whose failures
would pose a systemic risk to our financial system and to our
economy. We regretted having to take these actions, to put so
many taxpayer dollars at risk to support firms that had made
bad decisions. But our choice was clear, when the consequences
of inaction so severe, and the potential cost to the taxpayers
of inaction so much greater than the cost of intervention.
Today, that LIBOR-OIS spread which had peaked at 338 basis
points has now fallen to 34 basis points. We believe the
combined actions of Treasury, the Federal Reserve and the FDIC
have prevented a financial collapse. But we still have much
more work to do to get credit flowing to our communities.
Now, in terms of monitoring. In January, Treasury began
collecting data from the 20 largest recipients of capital under
the CPP, representing almost 90 percent of the capital deployed
under that program.
Mr. Kennedy. Mr. Chairman, could I just interrupt just for
a second here?
Mr. Kucinich. It is not customary to interrupt a witness.
So unless it is something urgent, I would prefer that Mr.
Kashkari proceed with his statement.
Mr. Kennedy. OK. Thank you, Chairman.
Mr. Kucinich. Thank you.
Mr. Kashkari. We published our first monthly lending survey
in February. This survey shows bank by bank the lending and
intermediation activities of institutions by category, such as
consumer, commercial and real estate loans. This survey is
published monthly on Treasury's Web site.
Now, in recessions, credit levels typically fall, as both
borrowers and lenders become more cautious. The first survey
shows that lending held up remarkably well despite one of the
most severe quarterly economic contractions in recent decades.
Without capital from Treasury, those lending levels would
likely have been much lower. And we are also developing a
narrower survey for smaller institutions that receive
Government capital to monitor their lending monthly. So we will
be serving all institutions.
And the new CAP program that Secretary Geithner has
announced will also require institutions to indicate their
expected use of funds and to increase and track lending against
a baseline so we can monitor that.
Now, with investments in almost 500 institutions and
hundreds more in the pipeline, we must ensure that our
investments are targeted at stabilizing the economy. But we
must also take great care not to try to micromanage recipient
institutions. However well-intended, Government officials are
not positioned to make better commercial decisions than lenders
in our communities. The Government must not attempt to force
banks to make loans they are not comfortable with, nor should
we try to direct the lending from Washington. Bad lending
practices were at the root cause of this crisis, and returning
to those practices will not help end the turmoil.
The EESA was one of several initiatives taken by the
Federal Government to stabilize the financial system, an
absolutely necessary precondition to economic recovery. We
believe the combined actions of Treasury, the Federal Reserve
and the FDIC have helped prevent a financial collapse.
Nonetheless, the current crisis took years to buildup and will
take time to work through. And we still face real economic
challenges.
There is no single action the Federal Government can take
to end the financial market turmoil and end the economic
downturn. But the authorities Congress provided last fall
dramatically expanded the tools available to address the needs
of our system.
Mr. Chairman, I would just add, I know many members of the
subcommittee have many questions. I have cleared my day, I am
happy to stay as long as you would like and answer all of your
questions in as thorough a manner as possible. Thank you, sir.
[The prepared statement of Mr. Kashkari follows:]
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Mr. Kucinich. We all appreciate your presence here, Mr.
Kashkari. Thank you for your testimony.
We are now going to proceed with questions. Members will
have 5 minutes each for the purpose of asking questions. I am
going to begin and then I will go to our ranking member, Mr.
Jordan. I would ask all Members to please, try to observe the
5-minute rule, because as Mr. Kashkari said, he will stick
around. So we are open to having several rounds of questions.
I would like to begin, Mr. Kashkari, with questions about
the foreign uses of TARP funds. When Congress created the TARP,
it was responding to a crisis in this country. U.S. businesses
couldn't get a loan, American consumers couldn't get a loan.
TARP was supposed to restore liquidity in the functioning of
the credit market for them.
So how do you justify to the American taxpayers a bank's
decision, made after receiving tens of billions of dollars in
TARP moneys, to make a $7 billion investment in a Chinese
construction company?
Mr. Kashkari. Mr. Chairman, thank you, sir. I will offer
two comments to answer your question. First, we must remember
that many of these financial institutions are global
institutions, and they take deposits from savers all around the
world and they make loans all around the world. While we may
isolate and identify one transaction here or one transaction
there, it is impossible, because money is fungible, I know you
have all heard this comment before, to track, did that money
come from U.S. deposits, did that money come from foreign
deposits.
We also have to be careful that if we set hard rules, not
letting our largest institutions do business abroad, other
countries may say, ``OK, they are going to reciprocate and not
let foreign banks then lend in America.'' So I understand your
concern. I absolutely do. But we also walk a fine line, let the
businesses make commercial decisions, support the system as a
whole, to get lending flowing.
Mr. Kucinich. Now, isn't it true that this loan was made
after Citigroup received TARP funds? Isn't that true?
Mr. Kashkari. I don't know the details of it, but it
appears to be the timing as such, yes, sir.
Mr. Kucinich. Excuse me, I want to go back to that, I want
to restate the question.
Isn't it true that this decision to make this purchase
happened after Bank of America made this purchase of stock?
Mr. Kashkari. Sir, I do not know.
Mr. Kucinich. And after they received the TARP funds?
Mr. Kashkari. Congressman, Mr. Chairman, I don't know when
Bank of America made various investment decisions. I do know
the dates of the announcements. And it appears the announcement
was after the TARP investment.
Mr. Kucinich. Right. I have here, for the record, the Bank
of America to exercise remainder of China Construction bank
option, and it is November 17th, they received the TARP funds
in October, Mr. Kashkari. When it is hard to get a loan in this
country, is it Treasury's opinion that a bank that received
TARP money is justified to arrange financing for an $8 billion
loan to the Government of Dubai?
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Mr. Kashkari. Sir, again, I want to provide a thorough
answer to you, Mr. Chairman. Our highest priorities are two-
fold. No. 1, stabilizing the financial system, and No. 2,
making sure these banks can pay the taxpayers back. And so we
have taken great care to not try to micromanage institutions,
to encourage them to use the capital in commercially reasonable
ways. We put specific protections in. We prohibited them from
buying back stock. We prohibited them from increasing their
dividends to create economic incentives for them to want to
lend the money and want to earn a return on that money.
Mr. Kucinich. But people back home, as Mr. Cummings always
likes to ask, people back home want to know, how does arranging
an $8 billion loan to Dubai, after someone gets TARP funds, how
does that benefit the U.S. taxpayers whose money is being used?
How does helping a construction company in China get $7 billion
after this Bank of America received TARP money, how does that
help the U.S. taxpayers? Could you explain this?
Mr. Kashkari. Sure, thank you, sir. When our global firms
do business abroad, and if they can make money and earn money
abroad, that makes those institutions stronger. It puts those
institutions in a better position to pay back the taxpayers,
because they are earning money, they are raising deposits
around the world.
Mr. Kucinich. So are these investments better, are you
telling the American people that it is better to invest in
another country than it is for these banks who have TARP money
to invest in our own country?
Mr. Kashkari. Absolutely not, Mr. Chairman. We absolutely
want our banks investing in the United States, lending in our
communities.
Mr. Kucinich. Did you know they were investing in China and
India and Dubai and God knows where else? Did you know that?
Mr. Kashkari. Well, I know that our large global financial
institutions do business around the world.
Mr. Kucinich. But do you know specifically that companies
got TARP funds, there was a credit freeze in this country, they
get the TARP funds and then instead of investing in American
businesses, many of whom are starved for investment capital,
they then export American taxpayers' dollars that were given
under emergency circumstances? Did you know that?
Mr. Kashkari. Again, Mr. Chairman, this comes back to one
of the hardest problems we have had, honestly, I have had in my
seat, is communicating this concept of tracking the dollars and
where did taxpayer dollars go versus other dollars they got
from deposits abroad, as an example. It is this fungibility
question that we keep coming back to.
Mr. Kucinich. Right.
Mr. Kashkari. So, Mr. Chairman, it has been very hard for
us to say, well, this dollar went for this purpose, the tax
dollars went for another purpose. We want our banks to be
healthy, we want them to lend in our communities. We want them
to use the capital appropriately. We want them to show judgment
in light of the economic crisis that we are facing. These are
tough issues, Mr. Chairman.
Mr. Kucinich. I thank the gentleman. My time has expired, I
am going to go now to the ranking member, Mr. Jordan. You may
proceed, Mr. Jordan. We will come back, there will be another
round of questions.
Mr. Jordan. Thank you, Mr. Chairman.
Mr. Kashkari, we appreciate your being here. I want to
attempt to, at least in my mind, cut to the chase. At the end
of your final sentence in paragraph six, you say, ``Finally, we
are developing a public-private investment fund to purchase
illiquid assets from banks to support new lending.'' I mean,
that in fact, wouldn't you agree, was the whole motive for
doing the bailout in the first place? As I said to a group of
farmers in my office this morning, I said, the $64,000
question, or more appropriately, the $700 billion question, is
when are we going to be able to go after these assets, these
mortgage-backed securities that caused the problem? That is how
it was packaged to Congress. That is why Members of both
parties voted for it and supported the plan.
And that was on October 3, 2008. To date, am I correct in
saying that not one mortgage-backed security has been
purchased?
Mr. Kashkari. Yes, sir.
Mr. Jordan. And so I want you to take as much time as you
possibly can to talk about this developing program to do
exactly what was supposed to happen 5 months ago. I think that
in my mind is the key question, the key focus, and what has to
take place if this is going to work. So take as much time as I
have left on my 5 minutes and walk me through that.
Mr. Kashkari. Absolutely, sir. This is a program that
Secretary Geithner is working on right now. We have teams at
Treasury working with the regulators to finalize the program.
It will combine private sector capital with Government capital
to go after and buy up these assets, sir.
Mr. Jordan. If I could just interject here. And we have had
Secretary Geithner in front of the Budget Committee, and he
said basically the same sentences you just said right there.
Can you give us an idea how quickly that is going to happen,
and, as the chairman alluded to, I believe, in his opening
comments, or someone on the panel did, is it a staffing concern
that is prolonging this decision or this program getting off
the ground? Talk about that as well.
Mr. Kashkari. I expect, I believe Secretary Geithner has
said he expects it to come out very quickly, as early as within
a few weeks. Again, people are doing a lot of work on that
right now, around the clock. It is not a staffing issue. These
are complex issues that involve not just Treasury, not just the
Federal Reserve, but the banking regulators. These are complex
issues that we need to make sure we get right.
Mr. Jordan. The public-private partnership you are talking
about, what kinds of encouraging statements, comments, what
kinds of comments are you getting from the private sector side?
Are they buying into this approach that you are floating out
there and talking about right now?
Mr. Kashkari. We believe they are. In fact, we had received
inbound unsolicited proposals from people in the private sector
saying, we have capital on the sidelines, we want to go after
these assets. One of the key challenges right now is, there is
no financing available for the private sector investors. So by
marrying Government capital, taxpayer capital, with the private
sector capital and providing financing, you can enable those
investors to then go after those assets at a price that makes
sense for the investors and a price that makes sense for the
banks. Because if the private sector capital doesn't have any
financing behind it, the returns they need will result in
prices that are too low and the banks won't want to sell.
So providing the financing is a key component, and it is
something that Treasury has to do with the regulators. It is
complex, but the right people are focused on it.
Mr. Jordan. OK, thank you. I yield to the gentleman from
California.
Mr. Issa. Mr. Kashkari, I wanted to followup on something
that Chairman Kucinich had gotten into. Yesterday it was widely
reported that Citibank had, I understand, 2 months in a row of
making positive money. If they cased overseas loans, my
understanding is, it is more than half of their total business,
what would have happened to those profits? In other words, as
much as we here on the dais want American taxpayer dollars to
go to American investment, if in fact we limited them from
continuing their overseas operations, what would be the effects
on the profitability of companies like even Bank of America,
but certainly Citibank?
Mr. Kashkari. I expect the profits would fall dramatically,
and they may in fact then need even more taxpayer dollars to
support them.
Mr. Issa. Thank you.
Mr. Jordan. Thank you, Mr. Chairman.
Mr. Kucinich. I thank the gentleman, and we will come back
on the Republican side to Mr. Issa. I am going to ask unanimous
consent, in connection with your line of questioning, to
introduce an article from the Washington Post on Friday, March
6th, relating to this public-private partnership, ``U.S. to
invite the wealthy to invest in a bailout'' by David Cho,
Consumer Lending, it discusses this very matter.
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Mr. Kucinich. Mr. Cummings, you are recognized for 5
minutes. You may proceed.
Mr. Cummings. Thank you very much, Mr. Chairman.
Mr. Kashkari, I just want to talk about AIG for a moment.
You realize they have these what they call retention payments,
are you familiar with that?
Mr. Kashkari. Yes, sir.
Mr. Cummings. And one of the disturbing things about these
retention payments was that they were supposed to, I mean, I
understood it at first that they wanted to retain key people
for certain units because it added value to those units. And if
they were to sell them, they would sell for less if those
people were to leave. But then the financial products division,
they were giving, they gave over $400 million worth of bonuses.
And this is the very unit that everybody admits pretty much
caused a lot of the problems for AIG.
Then later on they talked about, in SEC filing, recent
filing, they say they were giving retention payments for people
that were going to be terminated. Now, are you familiar with
that?
Mr. Kashkari. No, actually when you mentioned it earlier,
that was the first I had heard about it.
Mr. Cummings. That is shocking to the conscience, isn't it?
Mr. Kashkari. It sure is.
Mr. Cummings. See, that is the kind of thing. And when I
talked earlier about the public being concerned, this is bigger
than you. This is bigger than the Treasury. And the reason why
I say that is because when people begin to hear these kinds of
stories and they hear about retention payments being paid for
people who are leaving, for people who brought down the
company, what it does, and they are at the same time, they see
the moving van coming up to their house, taking their stuff
away. And they are afraid, like the man said in my district the
other day, to even look at their statement. Or they are getting
a pink slip. In some kind of way, we have to get around that.
And then you said something that I hadn't heard before,
when you talked about how, in your statement, you said we
should not, you said the Government must not attempt to force
banks to make loans whose risks they are not comfortable with
or attempt to direct lending from Washington. Bad lending
practices were the root cause. And I understand all that.
But there has to be, No. 1, transparency. And the American
people have to see that they are getting something out of the
deal. That is the problem. And they are upset about that. They
don't understand it. I know the President is doing a lot of
great things, and I believe that we are going to, I know we are
going to get through this, we have to get through it.
But the question then becomes, while the President and all
of you all are going in one direction trying to uplift the
American people and get this economy right, is it that, I mean,
it is already like going uphill. But I am wondering if you
don't see the problem that the transparency has, the lack of
transparency and accountability, what it does is it puts ice on
that hill that you are trying to get up. And what does that
mean? It means that it is going to take a longer time and it is
going to mean that a lot of people are not going to have the
trust.
We need to get out of this mess as fast as we can. I just
don't think a slippery slope helps it. You got me?
Mr. Kashkari. I do, Congressman. I couldn't agree more that
the communication challenge that we faced has been enormous. If
you look at what the President has done and what Secretary
Geithner has done around some of the new programs, they have
put in place requirements that the banks specify, here is
exactly how we are going to use the new funds, we are going to
track that, we are going to measure and increase our lending
relative to a baseline of what it would have been otherwise.
And so there will be increased transparency. As the
President said before the Joint Address to Congress, he gets
it. The challenge that we all face is how do we get these
programs to work, make sure we provide the right transparency,
strike the right balance.
Mr. Cummings. Listen to my question. At what point do we
say to the banks, ``We are giving you a billion, bank, why
don't you loan back a fourth of that or do something to help?''
In other words, you act like we have to sit by and say, ``Oh,
bank, here is our money, stay afloat,'' and while our people
can't get the kinds of loans that they want, and I know you are
doing some things with regard to loans, but I am just saying,
these are the banks that are getting the big bucks.
Mr. Kashkari. Well, Mr. Cummings, I am glad you raised
this. This is a really fundamental point that I think we don't
talk about enough, which is, the banks are a big part of the
story. Banks typically provide 60 percent of credit in our
economy. The non-banks, the securitization market provides the
other 40 percent. The banks are lending, not as much as we
would all like, but they are lending. The securitization market
is gone right now. It is completely frozen.
So we have now launched this new consumer business lending
initiative with the Federal Reserve specifically to get loans
to people buying cars, small businesses, credit cards, etc., to
get the lending going again. So part of it is the banks, part
of it is transparency for the banks. But a big part of it is
the non-bank market. And we have now launched a whole separate
program to get at that problem.
Mr. Cummings. Thank you very much, Mr. Chairman.
Mr. Kucinich. I thank the gentleman.
The Chair recognizes Mr. Issa.
Mr. Issa. Thank you, Mr. Chairman.
Mr. Kashkari, there are so many questions, and I appreciate
your willingness to stay for a very long day. First of all, you
don't know a lot about me, and people come in my office, they
see a bunch of patents and they think that means technology.
Long before I was fortunate enough to be in electronics, the
Army paid for me to go to deck school, as it was called back
then in Massachusetts. And I got to see early on how computers
were not interoperable but how they could be, and how, when you
needed to do big projects, you made them interoperable.
When we look at XBRL, you are very familiar with that
technology. In a nutshell, if everyone were reporting in an
XBRL-complaint fashion, so that various companies that are
developing software to read and to analyze were able to see
with that common set of, if you were reporting, would your
transparency that you don't have enough of today be virtually
absolute? This is assuming that mortgages were put in that
format, that credit cards were in that format, obviously that
10Ks and 10Qs were all in that format, something that is
coming. And of course, the FDIC, all the material that is
already in that format, in addition to the 40 countries or more
that are already reporting. If you had all that today here in
Washington, would you have the transparency you need to do your
job and do it well?
Mr. Kashkari. Congressman, I think it would definitely help
to provide common data formats and a seamless way to flow all
that data up to one interface that the American people could
look at easily. The only caution I will offer is, as a
businessman, you know, you are hesitant, business people are
hesitant to provide some of their details to their competitors.
So it may still not answer, well, how many individual loans or
to whom did this individual loan get. But it would certainly
help the transparency.
Mr. Issa. Assuming for a moment that where information goes
is separate from whether or not it is in that format, if every
one that you had or were willing to loan money to or were part
of the stabilization already had the data in that format and
could deliver it on your request, would you then have the
transparency you want?
Mr. Kashkari. I believe it would help. I don't know enough
about it to know if it would be perfect, but I believe it would
help.
Mr. Issa. Can I have your commitment today, you know, the
second panel, which we may not get to if we keep you all day,
includes the president of that organization.
Mr. Kucinich. If the gentleman will yield, we will get to
them.
Mr. Issa. OK. I am willing to stay into the night, too.
But the second panel includes the president of that non-
profit organization. And I am not touting any one format for
data, but I am concerned that unless we both go forward with a
common interface that you can at least avail yourself of, and
obviously find out, and I think we are going to hear that
retrospectively, they can in fact analyze many of the things
you are not analyzing, if we don't do both of those, you are
going to be back here in 2 or 3 months, not having yet skied,
and we are going to be asking you some of these same questions
about transparency.
Mr. Kashkari. I would be very happy to look into it, sir.
Mr. Issa. Thank you.
For the record, because I know it is not a fair question to
hit you with today, I would appreciate this committee getting
an understanding of where Treasury believes that if the figure
is correct that I have read, that we are at about 300 percent
of GDP in debt, historically, long-term historically, 100 to
120, where you believe we are going to settle out in sort of
the post-euphoria period, so that this committee could begin
understanding how much contraction you are not trying to fight
and how much contraction you are trying to fight in the loan
market.
Mr. Kashkari. Absolutely. I will work with our economist to
look at that. You are completely correct, de-leveraging is
taking place, it is necessary. We don't want it to over-
correct, and we don't want the adjustment to be too rapid or
disorderly.
Mr. Issa. I have one tough question, and I want to be fair,
I hope we are not blind-siding you, but you are familiar with
the Wall Street Journal report of the January 22, 2009 that
talked about political influence?
Mr. Kashkari. I am.
Mr. Issa. You are. I would like to give you a full
opportunity to talk in terms of the pressures that you or
others have been under, what effect they are having, whether
they provide guidance or whether that pressure is undue, coming
from Congress. The Journal talked both about Ohio, potential
influence, and it talked about Massachusetts influence. But I
would like you to talk more broadly, not necessarily just that
article, tell me what it is like when, for you, with various
groups, including perhaps some of us on the dais, being
concerned about our individual banks off of the dais.
Mr. Kashkari. Thank you very much for asking me that,
because that is a very important topic and I appreciate the
chance to set the record straight.
We have built a very robust process at Treasury for the
banks that are applying for TARP funds. They send an
application to the regulator, the regulatory submits a
recommendation to Treasury. We have a formal process of
reviewing that, getting more data if we need it, and then
making decisions.
I have certified, part of the Obama administration's
transparency initiative has begun, having the head of the
office, so I have certified to Congress now in January and at
the end of February, that all of our investment decisions from
the beginning October 3rd, through the current period, have
been made purely on the merits of the case, the economic
merits, and not due to any undue influence. And I feel
completely confident that we have a great track record of that.
Now, we do get calls from Members, we do get calls from
Governors who are concerned about their districts or their
businesses, etc. It is important for us to get that feedback of
what is happening around the country. Most of the time we just
refer people who call to the regulators, because the bank
regulators regulate these institutions. So I feel very
confident in saying there is no undue influence at Treasury. I
am the person who signs each of these, and I am positive of
that.
Having said that, I am concerned that these stories have
been out there because they serve to undermine confidence. So
if you would like to ask further questions about that, I would
love to go into it in more detail.
Mr. Issa. Perhaps on the second round. Thank you, Mr.
Chairman.
Mr. Kucinich. The gentleman's time has expired. I
appreciate his questioning.
The Chair recognizes Mr. Tierney from Massachusetts.
Mr. Tierney. Thank you, Mr. Chairman. Thank you for having
this hearing, as well.
Mr. Kashkari, thank you for being with us here today. May I
ask you a question that I think our constituents have raised?
We have extensive taxpayer money invested into these banks now.
Their feeling is that we are investing in banks that are
operated by individuals who were complicit in getting us into
this financial situation. Why are we not using the leverage of
our investment to change some of the boards of directors and
some of the principal officers of these corporations to get
them out and get other people in?
Mr. Kashkari. Thank you. Sir, we must segment our broadly
available programs. I mentioned we have 489 banks we have
invested in. The vast majority of those are healthy banks,
lending in their communities. There is no reason for us to go
in there and try to make any management changes there.
We also have these one-off institutions where we have had
to intervene to stabilize them. In the case of AIG, as an
example, we fired the management, brought in new management.
And we are trying to help them have enough time to pay back the
taxpayers.
In the case of Citigroup, our recent agreement with
Citigroup, they have agreed to change their board of directors
so that a majority of the board is made up of independent
outside directors. So we hear you, we agree with that
perspective. When we have to take extraordinary action, we are
coming in to make sure that these businesses are well managed
and that we do not reward failure.
Mr. Tierney. Is there an action that the Treasury can take
to amend the agreements, to define waste, fraud and abuse, and
then to put a provision in there that when we see it, and I
assume at some point you are going to send people out to these
banks as well as the surveys and things, when we see it, we can
take action, whether it is to reverse that expenditure or not?
People look, and they hear stories of money being invested in
conferences and sporting events and endorsements, things of
that nature, and perks and bonuses to people that ought not to
be getting them.
When we are going to have the position as investors here to
be able to just take those out, set them aside and recapture
that money, if it is happening?
Mr. Kashkari. Congressman, in the new program that the
administration has announced, we are going to make sure that
boards of directors adopt very clear and published expense
policies on things like airplane flights and conferences and
perks, etc., and then certify that they are meeting their
standards. The standards will be public for the world to see
and for the world to judge. We can offer our opinion on what
those standards look like, as well, when we see them, No. 1.
No. 2, remember in terms of fraud, there are very strong laws
in place for fraud already. And if anybody tries to defraud the
Treasury or the taxpayer, we are going to bring the full
arsenal of tools we have available to us to go after them.
Then third, Congress has provided four bodies of oversight
for the TARP: special inspector general, GAO, congressional
oversight panel, financial stability oversight board. Later
this afternoon, you are going to hear from the special
inspector general whose very mission is to go after waste,
fraud and abuse. So we are looking at it and there are
independent oversight bodies looking at it as well.
Mr. Tierney. And I think people do think that some of those
conferences, jets, perks and bonuses get to be waste, fraud and
abuse. As the definition of them is something, whether we will
term them in those words of not, that money can be prohibited
from being spent in that way during this interim period, or at
least reclaimed if it was. It would be very important for
people, I think Patrick made some good comments on that, about
the way people are feeling.
Let me ask you this as well. On the asset purchase program
that you are planning to do, Secretary Geithner is planning to
do, what will be the taxpayer assurance or protection for their
money on this? Will they form a partnership with these hedge
fund or other investment groups? How will they get their money
back? What will be the collateral in the interim? Because the
general impression of that now is going to be, here are these
people, the hedge fund people or like that benefited most from
a broken system that people think they are complicit in
breaking. And now they are going to be partners, using taxpayer
money to come in and get a tremendous profit, potentially, on
the other end. How do we tell people that is a good concept, if
you think it is? And tell people why that is being done, as
opposed to some alternative method, and what is their
protection that they will get their tax money back?
Mr. Kashkari. Congressman, as I indicated earlier, the
details are being finalized now. But one way of doing that,
because I don't want to commit to this, but one way of doing
that is if the taxpayer dollars are side by side, meaning exact
economic terms with the private sector dollars. So if the
private sector wins, the taxpayer wins. If the taxpayer loses,
the private sector loses. By perfectly aligning our interests,
we think that may be the best way to protect taxpayers.
At the end of the day, there is an aversion to taking risk
right now, because the markets are nervous. So we as the U.S.
Government, as the taxpayers, have to now step in and be
willing to take some risks.
Mr. Tierney. They are no less nervous. They are more
nervous, particularly playing what they think is a cast of
characters, if I can use that loosely, that may or may not even
be applicable or fair, but they perceive these people as being
part of the problem who are now going to benefit. Would you
just comment to that? And in the remaining time, what should
you tell people, that these are the people we are dealing with
now, they profited during the time that this was all being
driven into crisis, and they may have been responsible for some
of that, and now they are going to be our partners going
forward, and they are going to benefit greatly from that.
Mr. Kucinich. The gentleman's time has expired, but Mr.
Kashkari, please answer the question.
Mr. Tierney. Thank you, Mr. Chairman.
Mr. Kashkari. Thank you, Mr. Chairman.
We do not yet know which investors will come to the
partnership. But my expectation is you will see pension plans
coming, you will see people's retirement funds through mutual
fund type organizations that will be investing. So there may be
some well-known investors that people recognize. My assumption
is that most of the capital is going to come from the savings
of the American people.
Mr. Kucinich. I thank the gentleman, and we are going to
get more into that in the next round.
Mr. Souder of Indiana, you may proceed with your
questioning. Thank you.
Mr. Souder. Thank you, Mr. Chairman.
Mr. Kashkari, my district needs credit. It is the No. 1
manufacturing district in the United States. Elkhart County has
the RVs, we are at 18.3 percent unemployment there, LaGrange is
at 18. Typically 13 to 17 percent throughout all my 8 counties.
I have a couple of fundamental questions. It was a
tremendous insight, not very understood in Congress, that only
60 percent of the credit comes from banks. You said the
securitization group is 40 percent, that it has zero right now.
In the banks, do you know how much of that is going to
refinancing in the loans, as opposed to actual new purchases?
Mr. Kashkari. Congressman, I don't have that at my
fingertips. I believe some of that is included in our survey. I
can go back and find those numbers and get them to you.
Mr. Souder. As a fundamental question, because Congress and
the general public wants more transparency. Do you feel your
problem is transparency right now?
Mr. Kashkari. Forgive me, sir, which problem?
Mr. Souder. We are talking about us being able to see, and
transparency as we do oversight, building trust in the American
people. Do you feel that you don't know what is going on? In
other words, do you need more transparency?
Mr. Kashkari. I don't believe so. I think the challenges
that we are facing, this credit crisis has been unpredictable,
and it has gotten deeper along the way. So the challenges we
have are striking the right balance of taking aggressive action
that we know is going to work, but also protecting the
taxpayers.
It would be easy, if we were willing to just throw money
out the window and not care about protecting the taxpayers, we
could probably clean this up. But it would cost the taxpayers a
lot of money. Striking that balance is hard.
Mr. Souder. Following up with that, as you have heard
several times, we were told from the beginning that we were
going to get the toxic mortgages. Yet every person who comes
in, every angle that comes in, different Presidents say they
are going to do toxic mortgages and they didn't. When you got
into this, how much of this was actually toxic mortgages as
opposed to toxic credit cards, toxic student loans, toxic car
loans? And in the Troubled Asset, if you purchase this, is that
really going to fix the problem?
Mr. Kashkari. That is a good question. There is no question
the start of this was about mortgages. But the crisis in the
mortgage market, residential plus commercial mortgages is a $14
trillion market. So the crisis in the mortgage market put a
huge burden on the financial system, which made the financial
system pull back from all of these other markets.
So when we're doing things on student loans or credit cards
or auto loans, that is not to try to solve the root cause of
the problem. That is frankly dealing with the symptom to help
the American people get through this while we stabilize the
root cause, the mortgage market, the financial system. Does
that make sense?
Mr. Souder. Yes, because it would be much harder to take an
L.L. Bean sweater back as an asset that has been securitized
through a credit card than a mortgage. And that is why it is
important to know what is in what, that many of us believe
that, well, I want to ask the question about mark to market.
Because that is partly under your assumption that you needed to
get into the banking to provide capital when part of, at least
in the banking sector, it is not clear in the securitization
sector, that having a declining economy is turning things toxic
that weren't toxic. And the banks don't know where their bottom
is.
In my area, where the unemployment is accelerating, where
among the people who are employed are still the biggest GM
pickup plant in the world, 50 percent of the GM suppliers are
in my district, so if you are a lender right now, you don't
know where the bottom is. You don't know whose house is where.
And the mark to market has exacerbated that problem.
Now, it also started some of the problem by not having real
market values. And I understand that. But isn't there some way
that in today's accounting era, and computers, that there could
be some kind of a blending? Because a lot of these assets
aren't going to be sold. In Indiana, many people don't move all
that much. Yet the housing has just gone to nothing. So the
bank assets are declining.
What is going to happen to agricultural land if we don't
support the ethanol as that market changes? And the assets
don't have any value, so they don't know how to make a loan for
a pickup or an RV or the various things that we make. Until we
get that credit market, they don't even know how to do a credit
evaluation on an individual.
So why aren't we looking at some of this mark to market to
stabilize their asset valuation? Because how can they make a
loan when they don't know what their assets are?
Mr. Kashkari. Congressman, this is a very important point.
A lot of people have asked us about it. The challenge is, and
there is no question, mark to market is what we call pro-
cyclical. So it exaggerates the swings in both directions.
The challenge is right now, investors don't have confidence
in the statements that they are seeing, even with the mark to
market. So they are cautious. For us to go, in the middle of a
crisis and to change the accounting rules, it is not going to
increase confidence.
Mr. Souder. Let me interrupt you for just a second here,
because I have run out of time. Mr. Chairman, since I didn't do
an opening statement, can I have just a followup to this?
Mr. Kucinich. The gentleman's time has expired, but if you
have a quick question, you can respond.
Mr. Souder. In this challenge, it has been clearly
documented even from the transference that there is, that there
is really a small number of counties that got inflated from
where these toxic mortgages are, that when you have only had 2
percent inflation in your assets, the argument that they don't
know what the value is is just not there. That is why, 80/20
rule, 20 does 80 percent of your sales, that is clearly true
here in these mortgages. Why can't that be applied in some way
to these assets? It is not like there isn't a historical
tracking, that these things aren't computerized. I don't
understand why there is lack of confidence in everything all
over the United States, when in fact it tends to be localized
inflated markets.
Mr. Kucinich. If you could respond briefly.
Mr. Kashkari. Thank you. There is no question the housing
market is very regional. There are regions where the maximum
run-up and now the maximum run-down. But the crisis is so large
and so severe, it has affected the confidence of the American
people and investors. So they are all nervous right now. So
again, it is hard for us in the Government to say, you
shouldn't be nervous, go ahead and make that loan. What we need
to do is attack the root cause of the problem, get credit
flowing until confidence can return and then the system can
start functioning as it should.
Mr. Kucinich. I thank the gentleman.
The Chair recognizes the gentlelady from California, Ms.
Watson.
Ms. Watson. Thank you so much.
Mr. Kashkari, you might have answered this, but I am still
confused. And to quote your words again, you are saying to us
that we should not be involved in micromanaging recipient
institutions, you know, where did the money go. And you said,
however well-intended, Government officials are not positioned
to make better commercial decisions than lenders in their
community. Bad lending practices were at the root of the cause
of this crisis.
What would be your definitions of waste, fraud and abuse?
How do you determine that there were bad practices? How did we
get into this mess? And what are you going to do about it?
Would you try to clarify for me what you define as abuse and
fraud?
Mr. Kashkari. Absolutely. What got us into this mess were
banks making loans to borrowers who could not afford to pay.
Also, homeowners have responsibility as well, for taking on
loans that they couldn't afford to pay. Regulators had a role
to play, because they are the supervisors of these
institutions, allowing the banks to make bad loans.
And so those are the bad lending practices that I was
talking about. In a time when people are nervous, ordering a
bank to make a loan that they think is too risky is a dangerous
place to go.
Now, in terms of waste, fraud and abuse, I think fraud is
clear, especially when it relates to either banks lying to
borrowers or borrowers lying to banks, or banks lying to
Treasury and the U.S. Government. Again, we are going to come
down on them very, very hard.
In terms of waste, the administration has put out some
specifications around when we have our new capital program up
and running. The banks are going to have to define a very clear
expense policy on what they think is appropriate and what is
not appropriate. They are going to have to certify that they
are meeting that policy, and that policy will be available for
the American people to see.
Ms. Watson. If I write you a letter in regard to what I
just inquired about, would you respond, and can I put that up
on my Web site for my constituents to refer to?
Mr. Kashkari. Absolutely.
Ms. Watson. We are trying to get to the bottom of this
risky business. I am going to now give some of my time to my
colleague, because there was a question that he had.
Mr. Tierney. Thank you for yielding on that.
Just to followup on that, you talked about this is what you
are going to do on the next program. What about the money that
is already out there? That is a substantial amount of money.
How are we going to track that money and stop that practice
from either continuing or being started with the funds that are
already out there?
Mr. Kashkari. Congressman, again, we have to, I segment
those firms receiving exceptional assistance from the broadly
available programs. We have, and we can debate this, we have a
view that when we are lending to a small community bank that
wasn't part of the problem.
Mr. Tierney. Well, let's take them out of this.
Mr. Kashkari. OK, I'll take them out.
Mr. Tierney. Let's talk about the ones that are in the news
every day that grate at you and me and our constituents on
that. They are large firms, they have a big chunk of dough,
they continue to have a conference in a very fancy place, they
continue to fly like they are zillionaires, they continue to
sponsor sporting events in these big boxes, corporate boxes or
whatever. What about them?
Mr. Kashkari. Absolutely. And we have been pretty vocal
that we want the institutions to take prudent action and
reflect on the kind of economic environment we are in and the
help that they have already received.
Mr. Tierney. But other than reflection, is there any
enforcement mechanism? That's precatory language. I wish you
would do better. And that would be great, we all wish that. Can
we enforce them into doing better or has that train left the
station?
Mr. Kashkari. Well, I think we can. We have in many cases,
for the exceptional cases, we have asked banks to put together
expense policies that we are able to review, and that if they
want to make any changes to their expense policies, they have
to get Treasury's approval.
Mr. Tierney. That is all going forward, that is policy.
Mr. Kashkari. Some of that is going back as well.
Mr. Tierney. So you are telling me that we can't do
anything about the money that is out the door, that it can't be
recaptured and that people cannot be--if those are the people
that made those decisions and they have our money, maybe we
should have some impact on having that money invested and get
rid of them. These aren't the small community bankers, they are
not the problem. We are all comfortable with that. But these
fat cats that are running around and still wasting money in
that sense, and not listening to the precatory language about
what we wish they would do, why not use some leverage of us
being the investors to just off with those people, and in with
people that understand the gravity of the situation?
Mr. Kashkari. I will say that when we have seen things that
we thought were over the top and just really grated on us the
way it is grating on you and grating on your constituents, we
have let the banks know. And whether we have a legal ability to
force them to do something, they generally get the message and
say, ``we got it, sorry, it is not going to happen again.''
Now, the fine line we all have to walk, I mentioned two
objectives. There are many objectives, but our two biggest
objectives are stabilizing the system and having the taxpayers
paid back. So banks do need to market themselves. They
unfortunately do need to have sales conferences, so people want
to come in, learn their products, sell their products. Some of
the press stories that have really inflamed people, when we
have looked into them, they have been more ordinary core sales
conferences that actually didn't cost the banks much money.
I am not defending it. I am just saying, we have to walk a
fine line and allow the banks to run their business and compete
so that they can pay the taxpayers back.
Mr. Kucinich. I don't believe we disagree with that, sir. I
think we are talking about the ones that don't, the ones that
go over the line and getting back the money that they wasted on
that, and leaning on them legally or not to say, show good
faith, and to get any future assistance from us, you had better
find a way to get that money back into the till that the
taxpayers have invested.
The time is expired. I thank the gentlelady and the
gentleman.
The Chair recognizes Mr. Burton of Indiana. You may
proceed.
Mr. Burton. Thank you, Mr. Chairman.
When you first started dispensing the TARP funds, did you
have oversight procedures, definitions and allowable and
prohibited uses of TARP funds, and uniform disclosure and
reporting standards when you first started dispensing those? Or
did you just start saying, ``oh, my gosh, we have to get money
to this bank or this institution because it is about to go
under?'' I just wonder how prepared you were to start loaning
that money or putting that money out there?
Mr. Kashkari. Congressman, we, as you remember, when we
started out with asset purchases, then as the data that I
reflected in my testimony, conditions deteriorated very
rapidly, much more quickly than we had expected. So we moved as
fast as possible to put capital into the system.
One minor comment there is, remember, we are buying shares
in these companies, preferred stock, getting warrants. So it is
not literally giving cash, we are getting securities back, and
the banks are paying dividends. We have received over $2
billion in dividends in the first quarter.
Mr. Burton. If you bought Citigroup, so far you have lost a
ton. But the point I am trying to make is, did you have the
time or the inclination to put these procedures in place before
you started putting that money out there?
Mr. Kashkari. We did not put specific tracking procedures
in places in terms of----
Mr. Burton. So you were trying to find out as quickly as
possible and flying by the seat of your pants, so to speak?
Mr. Kashkari. Moving as quickly as possible.
Mr. Burton. Well, that is an old Hoosierism, flying by the
seat of your pants.
You were hesitant when Mr. Souder asked you the question
about did you know really what is going on. And my question is,
do you have the manpower over there? I have been told that Mr.
Geithner, Secretary of the Treasury Geithner doesn't have an
awful lot of the staff people in place or assistance in place
so that he can really start completing his task as quickly as
possible, because he doesn't have adequate staff. Do you have
adequate staff and does Mr. Geithner have adequate staff? And
if not, how long is it going to take?
Mr. Kashkari. Congressman, I do. The Office of Financial
Stability had zero people on October 2nd. We have more than 100
full-time employees and we are growing every day. The staff is
fully operational. It was one of our highest priorities, to
make sure that the program could run well and we would have a
smooth transition.
In terms of Secretary Geithner, he has a very strong team
of political appointees around him. And the Senate-confirmed
appointees, the White House is moving as fast as possible and
are making real progress, from what I understand.
Mr. Burton. Well, it was reported in, I think the Wall
Street Journal, that several of those slots that were very
important had not been filled, and with the seriousness of the
situation, I was wondering if you were up to speed. And you say
you are?
Mr. Kashkari. I am. Especially I can speak in great detail
to my office, the Office of Financial Stability. We have a
wonderful career staff of people who are passionate about these
issues and are working around the clock.
Mr. Burton. I have one last question. We have dispensed
total, I don't know how much of that you have already put into
the system, but $700 billion in TARP funds. How much more are
you going to need? This is very important.
Mr. Kashkari. I know it is.
Mr. Burton. Because every time we talk to anybody about
what is going on, we get kind of an ambiguous answer. When
Secretary Geithner was testifying on how much in funds he was
going to need to prop up the financial institutions, he said,
well, $1 trillion or $2 trillion, maybe $3 trillion. I mean,
you know, we are not talking about dollars here, we are talking
about trillions.
So what is the formula for letting us know how much more
you are going to need, and can you give us that?
Mr. Kashkari. We have enough. My staff just said that we
have deployed about $325 billion cash dollars out the door,
more than that has been obligated at this point.
Mr. Burton. Is that the second tranche or the first?
Mr. Kashkari. No, that is within the first tranche still.
Actual cash dollars that have left Treasury. Again, more than
that has been allocated to various programs. We have enough to
get Secretary Geithner's new programs up and running and
working. And as we get them up and running, we get them
working, when the banks capital, they are under this capital
assessment right now where the regulators are analyzing the
bank's capital positions under various economic scenarios, that
will give us a lot more information about how much more is
needed. And as we see our programs get up and running, we are
going to learn a lot. So Congressman, I cannot give you a
number today, nor can I give you a date. But we will let you
know.
Mr. Burton. As soon as you can get that, we would like to
have it.
One more question. Do you think if we had across the board
tax cuts plus capital gains tax cuts it would assist in
stimulating the economy and helping you out?
Mr. Kashkari. Congressman, I must respectfully defer to my
colleagues who focus on tax and budget issues. I am solely
focused on financial stability, sir.
Mr. Kucinich. The Chair thanks Mr. Burton. Mr. Burton, I
just want to let you know that at the beginning of the hearing,
we introduced into the record an article from the Washington
Post dated Tuesday, March 10, 2009, by David Smick that
predicts that the bailouts will run another, as much as another
$2 trillion. Here is a marked-up copy of it. We can go back to
that in the next round.
The Chair recognizes the gentleman from Rhode Island, Mr.
Kennedy. Thank you for being here, sir.
Mr. Kennedy. Thank you, Mr. Chairman. I appreciate your
holding these hearings.
Just to followup with my colleague from Indiana about the
staffing issues, if I could, could you answer for me what the
staff is at the Inspector General's office for rooting out
fraud and waste at the IG's office or Treasury's office for
this TARP program?
Mr. Kashkari. You will hear from Mr. Barofsky, I believe
his staff is on the order of 20 people or so right now. I'm
sorry, could you hear me? Mr. Barofsky, the Special Inspector
General, you will hear from him later today. He can give you an
updated number. My understanding is he has about 20 people in
his office right now, and is growing quickly as well.
Mr. Kucinich. If the gentleman would yield briefly, Mr.
Barofsky is on the third panel.
Mr. Kennedy. So 20 people for 8,000 banks in this country,
or how many banks have----
Mr. Kashkari. We have invested in 489 institutions through
the capital program.
Mr. Kennedy. And how many more banks are----
Mr. Kashkari. Several hundred, maybe 500 to 1,000 more are
in the pipeline.
Mr. Kennedy. But we are talking about banks also, top
several banks with assets, 75 percent of our Nation's assets
are in the top several banks, and we have 20 people? Twenty
people doing the audits of those things?
Mr. Kashkari. Well, again, sir, I will respectfully defer
to Mr. Barofsky. I know that he is growing his staff quickly
and is leveraging the resources of the other law enforcement
agencies.
Mr. Kennedy. See, I think that is where concerns come in,
because before we are going to be able to pass another nickel
in this Congress, we are going to have to get the due diligence
on these things. Because our constituents are going to demand
it.
The foreign entities that have received dollars, I asked my
first question, my Bank of America in Rhode Island received $45
billion from the capital purchasing program. And Ken Lewis, the
CEO of Bank of America, said taxpayers want to see how this
money is used to restart the economy. And then they went around
and laid off 121 employees at a facility in my district in
Rhode Island.
Then after they received $7 billion in TARP funds, they
went ahead and loaned it overseas to China. So we have
questions. And we want to know, where are these dollars going?
Are they going to foreign entities? What dividends are they
paying and to whom? I mean, are they going to paying little old
grandmas' annuities? Are they going to be paying those
bondholders? And what are the salaries that are being paid?
There is a lot of the culture on Wall Street, people have
gotten so accustomed to saying, they are worth $2 million a
year. And I don't know, but when people are earning on average
$40,000 a year in my district, and that is median wage, they
just don't get people in Wall Street asking for hundreds of
thousands of dollars, let alone millions. Yet that is the
culture in Wall Street, to just ask for these sums of money.
So I can tell you, we have to have a new kind of salary
type compensation system. I know some firms have put new
executive compensation systems in place. But that has to be
done, because, and we need to insist on it in terms of our
conditions in loaning these dollars, for no other reason than,
they are not going to receive any more dollars. Because once
our constituents learn that any one of these folks are earning
these kinds of salaries in the wake of our constituents earning
just what they are earning, they are just not going to be
satisfied with the way this is going.
So I might ask you to comment on that.
Mr. Kashkari. Thank you, Congressman. This is an area we
have done a lot of work on, beginning with imposing the
executive compensation requirements that were specified in the
EESA. We imposed those from day 1 in the program.
The Obama administration has now, in early February the
Treasury Department came out with new, tighter executive
compensation policies. And then in the stimulus bill, there is
an amendment that also has executive compensation policies. So
we have taken this issue very seriously. There is a team right
now at Treasury working on the stimulus, the new law, putting
that together with the administration's new policy to come out
with a robust set of new regulations that are going to govern
the banks that are taking the TARP funds and covering many of
their top executives on how much they can earn and what form
that compensation is.
So we heard it, we got the message, we are working hard on
it.
Mr. Kennedy. I understand it is a lot of mid-level
management, too. We are not just talking to be talking.
Mr. Kucinich. The gentleman's time is expired. I thank the
gentleman.
The Chair recognizes Mr. Turner of Ohio.
Mr. Turner. Thank you, Mr. Chairman.
Thank you, Mr. Kashkari. Appreciate your being here.
I will tell you up front, I voted against this program. I
voted against this program because of basically four reasons.
One, I didn't believe there was a very good definition or focus
on what the program was to do. We were first told it was toxic
assets, now it has not been. Two, I think there was a lack of
understanding of the process, what happens after the moneys are
made available, that process. Third, I didn't think it
addressed the practices that got us here to begin with, it
didn't stop the practices that were occurring. And four, it was
unclear as to where the money was needed and how much was
needed.
Now, you have been very forthcoming. I want to congratulate
you, you are doing a very good job in answering our questions.
But no one can still answer those four questions. We are now
several billion dollars, hundreds of billions of dollars into
this. And we are still where we don't have a clear focus of
what we are going to be doing with these funds, we are not
certain as to what the process is going to be. We have not
addressed at all any of the practices that got us in this
place. And still, you are unable to tell us how much money this
is going to take.
Now, I wanted to comment on one thing that you had said.
You had said, when someone asked you how did we get in this
situation, you said that banks loaned borrowers money that they
couldn't pay, homeowners have responsibility and regulators
have responsibility. I want to tell you that I come from Ohio.
Montgomery County, OH, is the place where I live, it is in the
center of my district. And we have the foreclosure crisis, and
we have had it for over a decade.
About 27,000 foreclosures have occurred in my county since
the 6\1/2\ years that I have been here in Congress, of a county
that has a population of around 500,000. Unbelievable numbers
of foreclosure. I believe that it is not just that banks loaned
money to people who couldn't pay. I believe, from the
experience that we have seen in our county of people who have
tried to address this issue that it is an actual structural
issue, it is a leverage ratio that predatory lenders and sub-
prime lenders were actually targeting homeowners and loaning
them money that was in excess of the value of the home, which
of course results structurally in a situation where, when there
is financial stress, that you have to go to foreclosure. If you
have no equity, you have no option other than to go to
foreclosure.
And the big banks initially would say, well, we are not
really part of that. But they were. Because what was happening
is, I believe, the structural aspect of loaning greater than
the value of the property, people didn't care because they were
selling these things as securities on down the stream. So they
didn't care if it was a workable loan or if the asset was over-
valued, because in the end, they weren't going to get stuck in
the musical chairs of these assets.
I think in the end, when we get these evaluated, we are
going to find that this is somewhat the largest theft in
history that has occurred, of people who over-valued assets,
sold them down the stream and the American taxpayers are
stepping in, unfortunately, with their own dollars to try to
make up the gap.
Here is my concern specifically about an issue that was
alluded to in the beginning of this discussion. Some of the
moneys that are being provided appear to assist in transactions
where the money is leaving the country. Now, I think everybody
up here understands that there are international practices of
the flows of capital, and that needs to happen for our economy
to be successful also. But the Fed chairman yesterday, Bernanke
stated this, asking about the crisis itself. He said, ``In my
view, however, it is impossible to understand this crisis
without reference to the global imbalance in trade and capital
flows that began in the latter half of the 1990's.''
Well, back to my concern about the practices haven't
changed. One of my concerns is that the manner in which this is
occurring does not have any protections or requirements that
the dollars address the issues of our economy and that large
portions of these dollars are leaving our economy. That would
put us on the wrong side of a ledger, and in the same types of
practices that Bernanke just said are underlining this.
We know that you can't, in providing dollars, stop
international flows of capital. We don't want that. But I am
concerned that what you are doing might facilitate or incent
additional dollars leaving our economy that are specifically
intended to prop up our economy. Could you please comment?
Mr. Kashkari. Sure, Congressman. Thank you. I didn't catch
all of Chairman Bernanke's remarks, but I believe he is
referring to, many economists think that there has been a glut
of savings around the world in developing countries that has
been coming into our capital markets. So the cash has actually
been flowing the opposite, it has been flowing to America,
which has given us very low borrowing rates and encouraged us,
some would say, to take on more debt, maybe more debt than we
can afford.
So I think we have to be careful, especially right now. We
want all the capital we can get to get through this crisis. And
we need to let the global economy restabilize to a new
equilibrium, where savings and all of these things are
balanced.
So I take your point, I hear it, and I agree with the
spirit of it. I am just offering a word of caution about
saying, let's stop money flowing in this one direction, because
it will end up stopping it coming back the way that we want it.
Mr. Kucinich. The gentleman's time has expired, but I do
want to say, we are going, I have two more Members to ask
questions, and then we will take a brief recess.
I also want to tell the gentleman from Ohio that since you
raised the question about Montgomery County, and of course
Dayton, and since my own community in Cleveland was the subject
of a New York Times Magazine article this past week, we are
going to go back to Ohio and we will come to your community as
well. Maybe we can get the hearings on the same day in
Cleveland and in Dayton.
So I just wanted to let you know that this committee is
going to be going deeply into these affected areas. I thank the
gentleman for raising the question, and the Chair recognizes
Mr. Welch.
Mr. Welch. Thank you, Mr. Chairman, thank you, Mr.
Kashkari.
Just a few things to establish where we agree. You would
agree, obviously, that the taxpayer is entitled to know how
taxpayer money is spent.
Mr. Kashkari. Yes.
Mr. Welch. And I assume you would agree that shareholders
would be entitled to know how shareholder money is spent.
Mr. Kashkari. Yes.
Mr. Welch. And of course, the biggest recipient of taxpayer
money to date, or one of the biggest, is AIG. And that is where
the taxpayer is fronting money and the taxpayer, in fact, is an
80 percent owner, correct?
Mr. Kashkari. Yes.
Mr. Welch. And we are providing that money in order to
avert a conclusion that has been reached at Treasury and the
Fed that to let AIG go down would cause systemic failure,
correct?
Mr. Kashkari. Yes.
Mr. Welch. Donald Kohn, who is the Vice Chair, as you know,
of the Federal Reserve, says that AIG has no obligation to name
the counter-parties who have been paid via taxpayer money that
has been transferred to AIG. Correct?
Mr. Kashkari. I read Vice Chair Kohn's testimony, but I
don't remember that exact quote. But I defer to you, sir.
Mr. Welch. Do you agree with him?
Mr. Kashkari. I believe institutions such as AIG that
receive extraordinary assistance have a moral obligation to
disclose as much as possible to the American people. If you
will permit me to give you a thorough answer, the challenge
here is as I indicated earlier, we want to prevent a financial
collapse, to stabilize the system, and we want to pay back the
taxpayers. So we have to be careful that, just as any business,
if you put, if you force businesses to expose all of their
business decisions, all of who their customers are, all of who
their counter-parties are, that may actually put them at a
competitive disadvantage and it makes it harder to pay back the
taxpayers.
Mr. Welch. I get it. So then you agree with Governor Kohn,
we will leave it to AIG to decide what information they will
disclose and they won't disclose, with them making the final
decision on whether that is a business interest or not,
correct?
Mr. Kashkari. No, I believe we can work with the Fed to
work with AIG and figure out, take a look from Treasury's
perspective and see what is appropriate to disclose.
Mr. Welch. Let me ask you this. Some of that AIG money that
is to avert the systemic failure is to make certain that
average Americans who have AIG insurance policies, AIG
annuities and AIG financial products in pensions don't get
hammered, correct?
Mr. Kashkari. Yes, correct.
Mr. Welch. But some of the counter-parties are eyes wide
open investors, some of the largest investment banks that we
used to have in this country, hedge funds and speculators who
made bets that turned out sour. Do you believe that it would be
of interest to the American taxpayer to know whether their
money is being used to protect those annuity holders, those
insurance policy holders, those pensioners on the one hand
versus the hedge fund speculators, investment banks on the
other? Just yes or no.
Mr. Kashkari. Congressman, I would like to provide you a
thorough answer, because it is important.
Mr. Welch. No, the question is a simple one. In your
opinion, do you think it would be of interest to taxpayers to
know whether it is the hedge funds, investment banks,
speculators, being assisted with their money, or annuity
holders, pensioners and insurance contract holders?
Mr. Kashkari. And the answer is, they are all being
benefited. Because unfortunately, there is no way we can go in
to stabilize an institution and say, just the policy holders
are stabilized.
Mr. Welch. Why not?
Mr. Kashkari. Because if we did that, the other counter-
parties would put the firm into bankruptcy and that would cause
the whole firm to fail. That is the unfortunate choice we don't
have. If we step in to support a systemic institution, all of
their customers, all of their counter-parties benefit, whether
we like it or not.
Mr. Welch. So if the taxpayer, it is their taxpayer money,
it is the shareholder money, and you believe they have a right
to know how taxpayer and shareholder money is being used.
Nevertheless, you are accepting allowing AIG to decide what we
will know, when we will know it, and under what terms?
Mr. Kashkari. Forgive me, sir, as I mentioned, I think that
Treasury can work with the Federal Reserve, work with the
company.
Mr. Welch. Well, why haven't they done it? There is a lot
of money out the door, a lot of time has passed. If they are
going to do it, why wouldn't they have done it before the money
is out the door, rather than after the fact?
Mr. Kashkari. Congressman, it is a good question. I think
that we are fighting a lot of fires at the same time and this
is a very important issue and I hear the feedback.
Mr. Welch. With all due respect, there is unanimous
agreement, I think, on both sides of the aisle that we want to
know how the money is being spent. There is an acknowledgement
on your part that will give the taxpayer some basis to have
confidence that we are doing something that really is a pretty
bitter pill to swallow, but we are doing it for a good reason.
Mr. Kucinich. The gentleman's time is expired.
Mr. Welch. I yield back, thank you.
Mr. Kucinich. Mr. Kashkari, if you want to respond briefly,
then we are going to go to Mr. Fortenberry.
Mr. Kashkari. Again, Congressman, thank you for the
comment. We got the message. We will look into it, sir.
Mr. Kucinich. Let me say to Mr. Welch, we are going to, on
the second panel, we are going to get into some specifics about
how the money has actually been spent. So just keep that in
mind.
We will go to Mr. Fortenberry for his 5 minutes and then we
will recess.
Mr. Fortenberry. Thank you, Mr. Secretary for appearing
today. I am sure there are other ways and easier ways you can
make a living. So I do want to say from the outset, I
appreciate your professionalism and dedication to public
service during these difficult times, and in spite of the
tensions around these policies.
Mr. Kashkari. Thank you.
Mr. Fortenberry. There is an article in today's Omaha World
Herald, it is basically the headline, it says ``Banks Remain
Strong,'' referring to our local banks, ``Despite Profit
Decline.'' And the director of our banking system in Nebraska
says on average, they are very soundly operated. Now, these are
fundamentally local banks, not the outside banks that are
there.
But an editorial comment before I start the questioning, I
believe it is these local institutions mainly owned by local
families that have proximity to their portfolio obligations
which by their very nature then are more transparent as well as
accountable. I think that is a lesson that we need to think
through as we look at the entire systemic crises, difficulty,
however you want to term it.
In that regard, as I said in my earlier statement, and I
appreciate the chairman's intent to unpack this further,
perhaps later, and maybe we will see you again, is our
financial system, are our financial institutions too
consolidated? You have nine banks now with approximately 50
percent of all deposited assets in this country. Five banks, if
I recall correctly hold about 37 percent. Are we vulnerable
because of that reason?
Mr. Kashkari. I think we clearly are. Look where we are
today. Look at the action we have had to take to support
systemic institutions.
There is no question that we must undergo as a country very
thoughtful regulatory reform to look at what our financial
system should look like in the future, to make sure that we are
not here again.
There is no question. There are benefits to scale. But when
the costs, because these institutions get to be so big, are
then going to be borne by the taxpayers, that is a real
problem.
Mr. Fortenberry. I appreciate that insight. Now let me move
to a second, more specific question. It is my understanding
that Goldman Sachs, the recipient of about $10 billion in TARP
funds, actually repurchased their own stock to the tune of $2
billion last December. Now, earlier you had said this is a
prohibited activity. Can you explain?
Mr. Kashkari. Sure. I don't have the details of the Goldman
transaction. My understanding of it, because I think the
chairman put out some data on this in the last few days, is
that in the case of Goldman, my understanding is those were
stocks that were repurchased over the course of a year, but
reported at the end of the year, is my understanding. We have
put in place restrictions, they cannot buy back their stock.
The only way they can buy back their stock is if it is part
of a normal, ongoing share plan for their employees. So if they
want to incentivize, some of these banks incentivize their
employees with, let's say, restricted stock, and they want to
maintain their share account, we enabled that one carve-out. So
if you want to incentivize your employees over the long term,
then you can buy back the shares that are, only those shares
that are associated with the long-term compensation agreements.
That is the only place where firms under the capital purchase
program are able to buy back their stock.
Mr. Fortenberry. Is that exception consistent with what
happened with Goldman Sachs?
Mr. Kashkari. In that case, I don't know. Because my
understanding of that, and I haven't looked at it in detail,
but I can, my understanding is the bulk of those share
repurchases were done before Treasury became an investor in
Goldman Sachs. And so because it happened before we went in, it
would not be subject to our agreements.
Mr. Kucinich. If the gentleman would yield, that is my
understanding, too.
Mr. Fortenberry. Is that right? OK, thank you.
The third question is related to Mr. Welch's question as
well. Please explain how extensively you actually review the
books of these companies receiving TARP funds.
Mr. Kashkari. We review applications as they apply to the
TARP. So they have an application that they submit to their
regulator. The regulator in many cases has been regulating
these institutions for many years. For the large institutions,
the regulators are physically onsite. The regulators look at
all of the data they have on these institutions and prepare a
recommendation to Treasury. We then review that recommendation
from the regulator and the data they provide us and we review
the application in making our decision on whether or not to
invest.
I can walk you through that decision process if you are
interested.
Mr. Fortenberry. Ongoing review.
Mr. Kashkari. For the vast majority of banks, I mentioned
we have invested in 489 banks so far, 30 more or 40 more each
week. We do not go in and do ongoing, going through their
books. Again, we have taken a policy perspective that the vast
majority of these are healthy, well-run institutions. We just
want them to make good commercial decisions and extend loans in
their communities.
It is the one-off cases that we have had to go in and look
at a lot of detailed analytics around their financial position,
their balance sheet, etc., when determining, are they systemic,
do we need to step in, how much do we need to step in.
Mr. Fortenberry. Can you name those institutions and then
how frequently you are doing this review?
Mr. Kashkari. Well, in the one-off cases, it has been the
auto companies, the auto finance companies, AIG, Citigroup,
Bank of America are the one-off cases that we have done
something extraordinary. In each case, we have gone in in a lot
of detail, remember, with the regulators, the regulators are
onsite. They are the ones sending us regular updates on what is
happening at the banks, what is happening with their
portfolios, etc.
Mr. Fortenberry. So they are embedded. Thank you, Mr.
Chairman.
Mr. Tierney. Mr. Chairman, may I ask unanimous consent to
ask Mr. Kashkari just two questions, not to be answered right
now, but since you have the whole day, can Mr. Kashkari come
back?
Mr. Kucinich. Mr. Kashkari has agreed to come back. The
Chair is declaring a recess for one half hour. I would remind
you, we have two more panels [remarks off microphone].
In the next panel, we are going to hear from some specifics
on the use of TARP funds. And we are going to hear, on the
third panel, from the Inspector General for the Troubled Assets
Relief Program. So stay tuned. Recess for one half hour. Thank
you.
[Recess.]
Mr. Kucinich. The committee will come to order. We will
begin a second round of questioning of Mr. Kashkari. Thank you
for remaining here. If necessary, we will have a third round.
We will soon be going to the second and third panels, and I
appreciate the patience of all of the witnesses. And I
appreciate the continued presence of all Members. The House is
just finishing up on votes, I expect we will have some more
questions.
I would like to begin, Mr. Kashkari, and point out that you
are familiar that GAO has testified and will testify today that
they are still concerned about the TARP's inability to track
the use of TARP funds and that the challenges are going to grow
as the TARP programs grow. The Special Inspector General will
testify today that, ``If by percentage terms some of the
estimates of fraud in recent Government programs apply to the
TARP programs, we are looking at the potential exposure of
hundreds of billions of dollars of taxpayer money lost to
fraud.'' That is a direct quote.
Can you, Mr. Kashkari, point to anything Treasury is
currently doing to prevent waste, fraud and abuse of funds from
the CPP program?
Mr. Kashkari. Thank you, Mr. Chairman. First, as I
mentioned previously, we rely very heavily on the regulators
when assessing banks who have applied to invest for funds. So
the banks apply to the regulators, the regulators make a
recommendation to Treasury. The regulators have been regulating
these institutions in most cases for years, in some cases they
have people onsite.
Mr. Kucinich. Isn't it true that regulators look for fraud,
they don't look for waste and abuse?
Mr. Kashkari. I think the regulators look at the entire
business operations, to look at how well managed the banks are.
Mr. Kucinich. But you are saying TARP doesn't look at it,
you defer to the regulators?
Mr. Kashkari. We work closely with the regulators, sir.
Mr. Kucinich. You work closely with it, but your mission as
you see it isn't to look for this, is that right?
Mr. Kashkari. Our mission is to look for waste, fraud and
abuse. We want to use the taxpayers' dollars efficiently and
protect the taxpayers. And so we do it a number of different
ways. In part, we do it in concert with the regulators, in part
we put contractual provisions in governing what banks can do
and cannot do.
Mr. Kucinich. But you don't look at uses. That is what I am
trying to get to. I really am looking at the function of the
TARP here. We understand that you have taken this
responsibility on and that you have agreed to stay to help with
the transition. I understand that. We are trying to understand
the systemic situation here, because if we don't know that
Treasury is currently doing something to prevent waste, fraud
and abuse from funds from the CPP program and we don't know for
sure that your operation is looking at it, then the question
comes, how can you find fraud if you don't know how they are
using the money? Is that a fair question?
Mr. Kashkari. Of course it is a fair question, Mr.
Chairman. Let me just give an example of some of the compliance
procedures we have built in. We have procedures that we are
putting in place where CEOs must certify to Treasury that the
statements they make to Treasury are correct, that they are
meeting----
Mr. Kucinich. I got the procedures. And excuse me for
interrupting you, but I have 2 minutes left. I understand that
Treasury is doing its best to understand impact. And I am sure
you are aware of GAO's skepticism whether or not you are going
to be able to do it. But as you know, promoting financial
stabilization is only one of two goals of the Emergency
Economic Stabilization Act. The other is public accountability.
I would like to read from a legal memo prepared by the
Congressional Research Service for this hearing. I call my
colleagues' attention to this. And I move to put the entire
memorandum in the record of this hearing.
According to this memorandum from the Congressional
Research Service, ``Given the objective of ensuring that the
authorities and facilities provided to the secretary of
Treasury, that is the TARP funds, are used in a manner that
`maximizes overall returns to taxpayer' and provides `public
accountability' the internal control system that TARP is
required to establish arguably should include monitoring how
those funds are being used by recipients.''
It goes on to say, ``Therefore, it appears that TARP
overseers will need to gather information on at least those
recipients' major financial transactions, particularly in those
areas that have been the primary areas of concern, executive
compensation, payment of dividends, purchase of other banks and
certain types of marketing promotions.'' This of course means
naming rights, for instance, which is mentioned in a memo. At
this time, does Treasury at least gather information on
recipients' major financial transactions on an individually
identifiable basis?
[The information referred to follows:]
[GRAPHIC] [TIFF OMITTED] T2883.126
[GRAPHIC] [TIFF OMITTED] T2883.127
[GRAPHIC] [TIFF OMITTED] T2883.128
[GRAPHIC] [TIFF OMITTED] T2883.129
Mr. Kashkari. Chairman, may I provide a thorough answer,
sir?
Mr. Kucinich. Can you give me a yes or no, though?
Mr. Kashkari. We do not ask for transaction by transaction
data.
Mr. Kucinich. OK, so the answer is no.
Mr. Kashkari. But if I may, sir, I would like to provide a
thorough response.
Mr. Kucinich. OK, you can respond, and my time has expired,
and then we will go to Mr. Jordan. But we are going to come
back on this question.
Mr. Kashkari. Thank you, sir.
The internal control provision that you are referring to in
the law, I have it in front of me, specifies that Treasury
shall establish an effective system of internal controls. We
have Price Waterhouse Coopers working with us developing the
internal controls within Treasury. We have spoken with both the
GAO, the Special IG and Treasury's own analysis. This provision
about the use of TARP resources is about Treasury's use of TARP
resources. The law does not direct us to impose internal
controls over the 500 banks that we have invested in, just to
be precise.
Mr. Kucinich. OK, thank you. I will come back to that in
the next round of questioning.
We are going to go to Mr. Jordan. Mr. Jordan, you are
recognized for 5 minutes.
Mr. Jordan. Mr. Kashkari, I want to go back to where I was
about an hour and a half ago with this whole concept. And
again, I was one of the individuals who did not vote for the
TARP program back last fall. But here is what I am trying to
understand. You are a sharp guy. Tim Geithner is a sharp guy.
Hank Paulson is a sharp guy. Ben Bernanke is a smart guy.
How was it that back in October, October 3rd, that all of
you were convinced, and the package was sold to the Congress
that you were going to be able to, what did you think then that
was going to allow you to go after the toxic assets, the
troubled assets, that since then you haven't been able to do?
It was this assurance that Members got, the public got,
taxpayers got, that you could in fact clear the bad stuff out
and things would get moving back toward normal. And yet now, 5
months later, still not there.
So tell me what you thought you knew but yet found out you
didn't really know. Walk me through that if you can.
Mr. Kashkari. Thank you. I would be happy to.
When we went to the Congress, you are right, we talked
about, and the plan was to purchase mortgage-related assets in
large volumes to get those markets moving again. The crisis
intensified so much just in the 2-weeks we were negotiating
with Congress and the 1 or 2 weeks that followed, that we had
to move even faster. Dollar for dollar of putting a dollar of
capital in goes much further, as I am sure you understand, with
leverage, than just buying a dollar of assets. So we had to
take the most aggressive action we could to stabilize the
system. So that is why we ended up leading with capital.
Now, for an asset purchase program to work, it must be done
in very, very large scale. Once we concluded in the fall that
we had to allocate almost half the money for a capital program,
and we had these one-off contingencies that we had to deal
with, we were left with fewer resources. And the question was,
if we only spent half the money on asset purchases, would it be
big enough in light of the $14 trillion residential and
commercial mortgage market.
What Secretary Geithner has done is say, look, let's take
the available resources, let's combine it with the private
sector and leverage it up so we can increase our purchasing
power and go make a big dent on a very big market. So it is
about speed of implementation, it is about impact, and it is
about scale with which to go at the problem.
Mr. Jordan. Let me ask you another question. In talking
with some folks, reading about this phenomenon, would you agree
that the mark to market concept is good in the framework of
disclosure, but not so good in the context of, in the
regulatory context? And if so, are there some reforms we can do
that kind of fit that statement that are going to help us as we
move forward?
Mr. Kashkari. I think the mark to market issue has a lot of
benefits. And I think it is good in terms of disclosure for
investors. But keep in mind, right now we have an environment
where investors are questioning the value and the meaning of
regulatory capital standards. So if we said, well, there is
going to be one set of standards for the books that the
investors get to see, but don't worry, there is a different set
of standards for regulators to use, that may not support more
confidence for investors as they look at the institutions.
I think mark to market is a very important issue. I know
the SEC has recently done a study on it. And I think we need to
look at it as we go after regulatory reform.
Mr. Jordan. You personally, what do you think, if any,
changes can be made to that, to the market to market rule that
can be positive? Do you agree that there is some potential with
what I just described, mark to market in a disclosure sense but
some amending in the regulatory context?
Mr. Kashkari. I think that is something that is worth
looking at. I will tell you, I am probably not the best, there
are better experts than me on the accounting treatment of mark
to market versus accrual accounting, for example, and in the
regulatory context. I think that these are things that we
should look at. But especially in the middle of the crisis that
we are in, I think we should be cautious about making changes
that seem like a good idea at the time. I think we need to get
through this crisis, we need to have a thoughtful discussion,
analyze these issues and then make the long-term changes that
we need to make.
Mr. Jordan. OK. Thank you, Mr. Chairman.
Mr. Kucinich. I thank the gentleman.
The Chair recognizes Mr. Tierney.
Mr. Tierney. Thank you.
Thanks for coming back, Mr. Kashkari. We appreciate it.
Earlier we talked about the fact that you are going to have
these partnerships that are going to be partly with taxpayer
money and partly with other investors going out and getting the
bad assets. I mentioned that some of them might be hedge fund
people, that taxpayers might think we are getting benefited
after already doing things that caused part of the problem.
You said that you thought instead that most of the money
would come from pensions or other investors. So given the
fiduciary responsibilities of people that run these pension
funds, and given the stressed nature of these troubled assets,
what is the sales pitch that you are going to make to them to
think that they can invest in them and still meet their
fiduciary responsibility? Because now I know there are a lot of
people that have an interest in those pensions, because they
are sitting out there going, ``oh, my God, that is where our
money is going to go?''
Mr. Kashkari. Thanks for providing me the opportunity to
followup. If you look at pension plans, big pension plans and
retirement programs for teachers or Government workers or
employees, they allocate different parts of that money to
different classes of investments. They will allocate some to
Government securities, some to equities, some to alternative
asset classes, such as private equity or even hedge funds.
Those are typically much smaller asset classes, much smaller
segments.
So it would not surprise me to see major pension funds
saying, OK, we are going to put a small slice of this toward
real estate assets, or mortgage-related assets, because we
think the prices for the long term are attractive. So I don't
want to give anybody the impression that huge pockets of
people's pension plans are going to be put at this. But I think
if you look at the amount of savings we have as a country,
retirement savings, small slices can add up to big dollars.
Mr. Tierney. So you are basically saying then that it will
be a good investment for that small slice to go in and buy
these toxic assets, so that with your other investments, one
little slice of it ought to go toward really troubled assets?
Mr. Kashkari. I think that is a reasonable position that
portfolio managers are going to be looking at and analyzing as
they make their decisions.
Mr. Tierney. I would think that you might get some of the
hedge funds to do it, but I think people, unless they can see a
bigger up side on that, it is going to be a stretch for them to
do that.
Just following up on another question you were asked
earlier about AIG, Mr. Welch had asked about, can we favor
those people that AIG is dealing with as co-partners or
whatever over certain other group that maybe ought not to be
favored as much. You said, if we do that, if we discriminate
with one set of people against another, then the remaining
people can bring the company into bankruptcy.
Can you explain to us how it is that they are able to do
that, and second, what would be the consequences of AIG's
bankruptcy?
Mr. Kashkari. Thank you. If I have a contract with a
financial institution and that financial institution just
decides not to honor my contract, I have recourse. I can sue
them, as a creditor, I don't know the different legal
requirements, a group of creditors could come together and say,
``OK, you haven't honored your obligation to me. You may have
paid off your policy holders, but you haven't honored your
commitments to me. I am going to go to the courts to try to get
my money,'' which may end up pushing the company into
bankruptcy.
So again, this is something that, as I indicated earlier,
nobody wanted to do. But the unfortunate consequence of bailing
out an institution is you help everybody in the institution.
You really don't get to pick or choose.
Now, if we had allowed AIG to go into bankruptcy, not only
would potentially, AIG has 30 million policy holders in the
United States; 30 million. Not only could those policy holders
be put at risk, but all of the businesses that AIG provides
insurance for, all of their business customers around the
world, I think they operate in more than 100 countries, could
all be exposed to some type of financial risk. There could be
various collateral calls from other institutions.
So the judgment was not, we like AIG or we want to help
AIG, it was, the system as a whole could be put at risk if this
were allowed to go into bankruptcy, especially at a time when
the financial markets are still in a state of low confidence.
Mr. Tierney. Your feeling is that all 30 million of those
people would lose their policies and the businesses would all
go under? That this whole thing would be such a tragedy you
couldn't risk it? Or did you just have an uncertainty that
nobody wants to risk?
Mr. Kashkari. I think that there is a large uncertainty.
And the down side, the risks of the down side are much larger
than even the large dollars that we are having to spend to
support the institution. I don't want to suggest that
everybody's policies would be gone. I think that is an
overstatement. But I think that is a lot of risk for everybody,
that is a customer or a counter-party or a partner of AIG in
any respect.
Mr. Tierney. Thank you. I yield back, Mr. Chairman, thank
you.
Mr. Kucinich. I thank the gentleman.
Mr. Souder, you may proceed for 5 minutes.
Mr. Souder. I wanted to followup again on some credit
questions. I have 58 percent of the RV market in the country in
my district. I have the Silverado and Sierra, biggest GM pickup
plant. And I need the credit opened up. And I wanted to
illustrate a couple of different things. Congressmen Donnelly,
DeFazio and I had an amendment to the Car, Truck, Motorcycle
that included RVs, on retail floor plan financing. Because part
of the problem in retail floor plan financing, and let me deal
with the RV, the auto has a similar, is that there were
basically three major companies that did it, Textron, GE
Capital. They pulled out. You can't sell anything if you can't
get it to the dealer. These are fairly large purchases,
particularly for motor homes, and nobody would take the market.
So we tried to get a trans-set, it didn't pass the Senate,
it was a House advisory. And the similar, one of the problems
there is is that in American manufacturing, because of legacy
class, because of health and pension and our wage rate, we make
bigger vehicles. The smaller stuff tends not to be American-
made. So they require bigger and longer term investments.
Let me give you one illustration. In one lot in a major
city in the south, they tried to clear their lot of some of the
RVs and motor homes. They sold eight, which was not a good sale
day. On those eight, two were in the $350,000 to $500,000
range, four were in the $100,000 to $250,000 range, and two
were used towables under $25,000. All had credit scores, the
buyers, of over 700. Only one was actually financed, and it was
a $15,000 used towable.
The reason is that nobody wants to take a 15-year, $500,000
mortgage right now, partly going back to the mark to market
question, which I need to point out, assumes that you are going
to liquidate, the premise underneath it. So the combination of
the retail floor financing and the lack for bigger purchases is
hammering the car, auto, truck, RV markets. Unless we can
figure out how to get some liquidity into that system,
Fleetwood declared bankruptcy this morning. They are going all
over the place, it is spilling into manufactured housing. And
we tried to address a little of the housing, with housing
credits.
But this is a huge double problem, compounded by, and one
other thing I wanted to raise to you as you look at how to
handle this is that there are buybacks, which the auto
companies are starting to get into, but the RV industry, that
aren't on the books. They have never had a problem before,
because when one dealer can't sell it, they move it to another
dealer. But if they can't get retail floor plan, all of a
sudden this stuff is coming back. Out they go, thousands of
people being laid off when in fact, there appears to be some
market.
How do we open that credit market up if they don't know in
the lending institutions what their assets are? That is why we
keep bringing up a variation of mark to market.
Mr. Kashkari. Congressman, thank you. This is a huge issue.
It is a huge issue that we have teams of people working on.
This goes back to the new facility under the consumer and
business lending initiative, it is called the TALF program that
the Federal Reserve has set up. It is going to start funding in
a couple of weeks, it is ready now, it is finally launched. It
is going to specifically bring down costs of borrowing for auto
loans, for credit cards, for student loans, for small business
loans.
Right now as a starting point, it is a $200 billion
facility. We have a plan to increase it to a trillion dollar
facility and to add other asset classes. So we are looking at
all different sorts of asset classes to see what else we can
put in there to get liquidity to the markets so that people can
buy motor homes and RVs and cars and trucks, etc., until we get
through this crisis.
So I assure you, Congressman, we are focused on this too.
We get the same calls that you get. Not as many as you get,
because it is your district. But we get the same calls you get.
We know it is a real problem, and we think we are on the right
track to bring down these borrowing costs. Because who can
afford today to go and buy a car and pay a 14 or 15 percent
loan? No one is going to do it. We need to bring these rates
down so that our businesses can continue to do business.
Mr. Jordan. And there needs to be some kind of addressing
of this. Size, volume of loan and length of loan question, some
of the RV people had talked to me initially about, could they
pool with a fee such to help share if some went bad. There has
to be some kind of risk-sharing on the longer term and sizable
loans, or that market will not free up. Those tend to be our
American manufacturers, because we are skewed to the higher
value ends. And those big areas, construction and auto truck, I
believe, are close to 50 percent of much of our American
economy. Retail sales, if you take a manufacturing job, or
value-added, which could be software or whatever, is going to
circulate at a different rate in a productivity multiplier
effect than a service job or a labor-intensive job. And that
sector is overwhelmingly tied to construction and auto. And it
tends to go boom-bust.
The way the financial markets have collapsed so deeply, it
is not clear how we get it restarted, especially if the debt
that the Government is taking on starts to crowd out private
borrowing and private equity, and mark to market is chewing
them up, which was a change, it is not, when you say it is a
problem changing back, it was a change to it that partly
triggered this, that it is not clear how we reopen the credit
market. Because capital is going to be so tight.
Mr. Kashkari. Congressman, we think the new facility that
the Fed has set up is going to help restart not just the market
and get rates down, but bring private capital back. Because the
way it is designed, it is designed that the private sector puts
in capital, the Government lends to it, gets the markets going
again. And then our hope is, as the credit markets heal
themselves that the private sector will be able to go back and
then the Government can step away. So we are focused on this.
The other thing I would add, don't forget the
administration has an auto task force, a whole team of people
focused just on the autos, to try to get them to a place of
long-term viability. And so there is a team working there,
Treasury, it is an inter-agency program, looking at autos,
looking at auto suppliers, looking at some of their financing
constraints as well. So we are coming at it from both
directions.
Mr. Kucinich. I thank the gentleman.
The Chair recognizes Mr. Cummings.
Mr. Cummings. Mr. Kashkari, there are a lot of banks that
are returning their money, is that right, they want to return
the money?
Mr. Kashkari. Yes.
Mr. Cummings. And they apparently want to return this TARP
money because of restrictions and the things that you talked
about a little bit earlier that the Obama administration is
demanding, and the public is demanding. How do you feel about
that? I am just curious, just in a few words, because I have
some other things I want to ask you.
Mr. Kashkari. I am concerned, because in many cases the
banks that want to return the money, well, we have 200 banks
that we have approved that have said, ``no, thank you.'' And in
most cases, the ones who are saying, ``no, thank you,'' or who
expressed an interest to return are the strongest, healthiest
of our institutions. Those are the very ones we want to take
more capital, because they are in the best position to extend
credit.
So I understand, well, in any case----
Mr. Cummings. Well, that leads me to something else, then.
So they are the stronger banks, they want to give the money
back, because they don't want to abide by the Obama rules,
President Obama's rules. And it seems like then they should be
in a better position, particularly if they had the money, to
make the loans. So it sounds like they are more, they might be
more interested in continuing to operate as usual, as opposed
to seeing our economy come out of this great slump that we are
in. I am just curious.
Mr. Kashkari. It is a tough problem to answer with
precision, because as I indicated earlier, 60 percent of our
credit is from banks, 40 percent is non-banks. I know the 40
percent is not working right now. We are trying to get that
going. If you look at the lending survey that we did do, which
covers the majority of the banks in the country in terms of
dollars, lending has held up remarkably well.
A lot of banks, especially the smaller banks, will say they
are just scared, because they are hearing so much noise out of
Washington, they are saying, ``do I really need the headache of
taking this additional money? I know if I took additional
money, I could put it to work.'' But there is so much coming
out of Washington right now, they are calling us and saying,
``you know what? No, thank you. I don't know what is coming, so
no, thank you.'' We are disappointed by that, because we want
the strongest banks to take more money, because they can turn
around and extend credit.
Mr. Cummings. So you already said in your statement that
you didn't feel that public officials like you have any
business telling banks how to lend, because they are in a
better position to do it, to make those determinations. And I
don't know how you can say that with a straight face. After
all, a lot of these banks did some poor decisionmaking and got
us into this mess.
So I am just wondering, and I know about that latitude that
you talked about. But I am wondering, the new program that you
are talking about with regard to the auto loans and freeing up
the money, how does that work? And how might that have an
affect on banks, negatively or positively?
Mr. Kashkari. This program is a Federal Reserve, we call it
a facility, where the Fed says they will lend money to people
who buy securities. So new securities, a bunch of auto loans
are packaged together, they meet certain standards, an investor
wants to buy those securities, they can get a loan from the
Federal Reserve to buy those securities. The investor has to
put in some of their own money. And then they will have that
for up to 3 years.
So it enables private capital to come off the sideline to
get money into these markets with the Federal Government
providing some of the lending to those investors. So it is
complicated. But the market, the investors have said they
really want it. The car companies and the student loan
companies and the small business companies have all said, this
should really help them by bringing down rates for borrowers.
At the end of the day, this program is all about bringing
down rates for our consumers.
Mr. Cummings. And how does that affect the banks?
Mr. Kashkari. Well, the banks, in this case----
Mr. Cummings. What is your hope?
Mr. Kashkari. The banks in this case, it is not the main
priority of this program. This program is about getting lending
to consumers. The banks have a role to play, because they are
the ones who buy all these auto loans, package them up and then
sell them to investors. So the banks have a role, but this is
not about the banks extending credit. This is about getting
credit going from the non-banking market to the consumers and
to the car buyers.
Mr. Cummings. I got you. But I was just wondering if this
then establishes some kind of competition. In other words,
these are people who are borrowing money from a non-bank?
Mr. Kashkari. Correct.
Mr. Cummings. So I was just wondering how much competition
that gives to the banks and whether that spurs any activity?
Mr. Kashkari. I think it a good thing.
Mr. Kucinich. You may respond, and then the gentleman's
time is expired, but please respond.
Mr. Cummings. Thank you, Mr. Chairman.
Mr. Kashkari. Thank you, Chairman. I think the more diverse
sources we have of credit in our economy, the better we are
going to be. So we need to get the non-banking market going. We
need the banks to do more. But we really need to get the non-
banking market going. That is where the big hole is right now.
We need all of it.
Mr. Kucinich. Thank you.
We are going to go to round three. Mr. Kashkari, picking up
where we left off, you said that Treasury's internal controls
need apply only to Treasury and not to the banks that have sold
equity to Treasury.
Mr. Kashkari. Yes, Congressman. I am referring to the
internal control provision in the EESA.
Mr. Kucinich. I understand, but I would gently remind you
that view is somewhat extreme, that is at odds with legal
analysis of our duties to monitor the use of TARP funds by the
banks that got them. CRS has spoken to this directly. And it is
not alone. The GAO is also of the opinion that your legal duty
is to monitor the use of TARP funds by the banks which receive
them. It seems to me that you may be alone in the view that
Congress didn't mean what it said in Section 116 of the EESA.
We told you in there that we wanted Treasury to safeguard the
TARP moneys from waste and abuse. That is the meaning of the
incorporation of the Federal Managers Financial Integrity Act,
Title 31, Section 3512(c).
I think that you are taking a position that is not tenable
and one that is pointedly lacking in responsibility for the
office that you hold. And that is that you just say it is not
your job. Now, granted, you have come in under extraordinary
circumstances. But we have a new administration coming in. And
I am hopeful they are going to take a fresh look at this law.
If you want to comment on what I said, feel free to, and then I
have some followup.
Mr. Kashkari. Thank you, Mr. Chairman.
We take protecting taxpayers' money extraordinarily
seriously. Extraordinarily seriously. What I was referring to
was the section you are referring to, the internal control
provision of the EESA. I personally spoke with the GAO and the
Special Inspector General about their interpretation of this.
And they agreed with me, you will hear from them on the third
panel, they agreed with our assessment that this internal
control provision is talking about Treasury's own internal
controls, within Treasury, and we are working, we have made a
lot of progress on our own internal controls.
Mr. Kucinich. You are saying that you publicly acknowledge
that you have a responsibility for the internal controls of the
TARP funds once they go to the banks.
Mr. Kashkari. No, I am saying we have a responsibility for
internal controls within the Treasury organization and we have
responsibilities to the taxpayers to make sure the money is
used appropriately and in the best policy interests of the
control. The internal control provision is very narrowly
focused. That doesn't mean we don't have to protect the
taxpayers. We have other mechanisms for protecting the
taxpayers.
Mr. Kucinich. Are you saying Congress was not specific
enough in its charge to you?
Mr. Kashkari. I have been advised, Mr. Chairman, forgive
me, I am not an attorney, I have been advised by our lawyers at
Treasury that Section 3512(c) of Title 31, United States Code,
is specifically about internal procedures within Federal
Government agencies. And that is what we are referring to. That
is what the law refers to right here on line 16.
Mr. Kucinich. We are going to hear more about this point in
the third panel. We don't think it is arcane, we think it
relates directly to your responsibilities. When we began this
day talking about how banks who got TARP funds are moving the
money out of the country, it is my opinion, and apparently the
opinion of some members of this panel, that there should be
accountability from the Treasury Department as to U.S.
taxpayers' funds being spent by TARP recipients in other
countries, especially when we have such dire straits here.
Now, in the time that I have remaining on this particular
round, I want to talk about the impact of the TARP funds.
Congress has heard repeatedly the representations of large TARP
recipients about the billions of dollars of new credit they are
creating. They are eager to tell the side of the story you
repeated today. You stated on page 10 of your testimony that
all loan amounts appear to be going up.
But the lending is much reduced compared to the period
before the crisis. Isn't that so?
Mr. Kashkari. Yes, as I indicated.
Mr. Kucinich. But then what about the other side of the
picture? Are you collecting data from the banks on the
contraction of existing credit that is occurring? Now, this
goes to some of the questions Mr. Souder has raised. Where have
you shown the decline in credit due to foreclosures and the
suspension of credit lines that our constituents are
experiencing? How do those numbers compare to past periods? And
Mr. Kashkari, if the new credit doesn't more than offset the
extinction of existing credit, does the economy experience a
net positive effect from credit activities, or a net negative
effect? If you can respond to that, and my time is expired.
Mr. Kashkari. Thank you, Mr. Chairman. There is no question
that in recessions, credit levels fall. Because both lenders
and borrowers are nervous about taking on new obligations and
extending credit. There is no question about that. When we look
at the lending levels that we are seeing, we know that they are
higher than they would have been absent the TARP funds. We
think they have held up remarkably well in light of the severe
economic contraction we had in Q4. But again, as I look at the
broader credit problem, the banking sector is part of it. A
much bigger problem at this point is the securitization market,
the non-banking sector.
So banking is not as high as we would like it to be,
securitization is zero. And it was 40 percent before this
started. So we need to get that going, too.
Mr. Kucinich. My time is expired, I just want to comment
that at no time in the history of this country have we ever had
a period where we were in a recession and there is massive
amounts of Federal dollars, by the time this thing is through,
maybe trillions of Federal dollars going in to prop up the
economy, and where is the money going in terms of a net new
credit to report to us?
Mr. Souder.
Mr. Souder. I want to continue along this a little bit.
Clearly, because of Enron, we had to look at what I guess is
called fair value measurements, which is mark to market. The
challenge here that we have, because that went in in November
2007.
So to talk about a change, it appears to be one of the
changes that helped trigger the credit crisis, with all due
respect. Because it exposed those who were not fair marketed
value and then caused a panic beyond that, because it was a
broad swipe at everybody's valuation, when in fact, in areas of
the country like mine, we had been having 2, 3 percent growth,
not 100 percent growth in housing. The national went up 200
percent while the economy was growing at about 3. It doesn't
take a rocket scientist, it takes Business 101 to see you have
a mismatch.
But that mismatch was not universal. So we did a universal
solution that in particular, and I am fascinated, because the
more you read, the more you study about this, there has been a
major changing in finances in the country in securitization and
moving outside the Fed regulated and into this 40 percent other
sector that you are talking about. Yet the banks are tightly
regulated and we slam fair market measurements on them.
Now, if we fund the securitization group, getting to Mr.
Cummings' question, are they going to have to play by the same
rules as banks, and then if they have to do fair market
measurements, we are right back to where we were. There has to
be some kind of addressing an underlying concern.
But let me first ask, in this trying to get the 40 percent
securitization, that was where the biggest problem was, if they
are going to compete on loans, are they going to come in under
similar banking rules? Some of them are converting to banks.
Mr. Kashkari. Correct.
Mr. Souder. Is this going to be a mandatory thing? Is there
going to be a supervisory? This is where transparency starts to
become a huge deal. Because if the problem sector, really for
the most part, it was not a bank, it was a division of a bank
to compete with this 40 percent.
Mr. Kashkari. The 40 percent part is made up of a lot of
different types of institutions. So you have big banks, like
CIT, non-banks, excuse me, like CIT or GE Capital, etc. You
have pension plans, insurance companies who need to buy assets
to match their liabilities, you have various kinds of funds all
around the world. So it is hard to define them as one category,
because there are all sorts of dogs and cats investing in the
non-bank market and buying these securities.
Most of them, to my understanding, are, in many cases, they
are marking those securities to market. And so they do see the
asset prices go up and down. So I think your points have a lot
of merit.
I would say the one other point, in terms of accounting and
transparency, that has been at the root cause of this problem
is it has been almost impossible to peer into these mortgage-
backed securities to figure out which loans are in there, who
wrote the loans, how are they doing. And because investors had
a hard time peering into the mortgage-backed securities, let
alone the CDOs, when they were bundled together, they didn't
know which mortgages were good, which securities were bad. So
they pulled back from all of them. And that is an example
where, like in your district, where their home prices didn't
take off, they are suffering.
Mr. Souder. It doesn't take too much time, we have had
multiple hearings here, reading about Countrywide and so on,
that basically, if you were paying 6 percent, there was less
risk than if you were paying 14. When you start to see the high
rates of return beyond the normal rates of return, I think it
is Eric Paulson who made the $3.7 billion.
Mr. Kashkari. John Paulson.
Mr. Souder. When he was here and I asked him a similar
question, he said, ``how do you think I made my money?'' He
could see this, anybody who was studying it could figure out
which ones were inflated and which ones weren't. It wasn't like
that confused. It was sloppiness, people wanted the high
returns. You had to either be in pharmaceutical speculation,
energy speculation or housing speculation if you are getting
higher than 6 or 8 percent. And the pension funds may have done
that.
I am not very tolerant of the people who say, ``oh, we
couldn't figure out was going on, we need more transparency.''
But they weren't paying close enough attention.
In this non-bank financial sector, in trying to monitor how
they are doing, I have Lincoln Financial in my district, the
center of annuities in the country. They bought a bank because
they are now applying for TARP funds. And we saw a number of
others convert to banks. But you suggested that the Federal
Reserve is setting up a separate fund that won't require them
to be like a bank.
Mr. Kashkari. Correct, so that the new program that the Fed
has set up, that Treasury is supporting to get lending going,
many, many financial participants can use it.
Mr. Souder. And who is going to regulate them, and what
guidelines are they going to have, and are there going to be
similar regulations? Because while we are all in Congress
obsessed about the banking sector, you are telling us that
there is a 40 percent and the Fed is floating out $2 trillion,
while we are dealing with $700 billion in your funding.
Mr. Kashkari. The Fed and Treasury designed very important
procedures and restrictions to make sure we know the quality of
the collateral that we are going to be getting. Because when
the Fed loans in this new program, they are going to get the
securities as collateral. So it is only going to be new loans,
new securitizations in this current program. And very strict
guidelines in terms of what is eligible to make sure that we
protect the taxpayers. There is not with it, per se, going to
be new regulations that go for the people who are lending money
into that system, but we are making sure the taxpayers are
protected.
Mr. Souder. Thank you.
Mr. Kucinich. Mr. Kennedy.
Mr. Kennedy. Thank you, Mr. Chairman.
You have painted for us a very stark picture in terms of
what we have in front of us, and that is, we have the
uncertainty of the markets, and yet we have the necessity to
act quickly. We are going to be confronted with the choice as
to how to put an end to this uncertainty by putting up however
many more billions of dollars to stave off continued decline in
the markets and continued recession that is going to lead to
further dislocation of our workers in this country. And the
President spoke very clearly of the need to act now or act
later.
The question I have for you is, given the fungibility that
you say these financial institutions are involved with respect
to the world markets, how can we be certain that the dollars
that are going to be going into this public-private fund are
dollars that are going to absolutely mean the end of the
uncertainty with respect to those toxic assets, when we are
part of an international world economy now? And we want to make
sure that whatever final package is the final package and that
there isn't going to be another shoe to drop, so to speak.
That is what my constituents want to know. We want closure
just as much as the President does. We want to be able to move
on. We don't want this recession to drag on any further. And we
also don't want to overpay for these toxic assets any more than
they have to be. But we understand that if we let this
recession drag on, it is going to cost us a great deal. I would
ask you to comment on this, because I think this is a
fundamental point that most economists have been talking about,
what is it that we have to put the staunch to, wrap the
tourniquet around? How do we wrap a tourniquet around something
that is involved in a global economy in terms of assets?
Mr. Kashkari. Thank you, Congressman. I will answer your
question in two parts. The first part, the global nature. We
cannot act alone. So we have our programs. We are consulting
closely with our counter-parties in other countries who are
taking similar measures that are tailor-made for their system.
The world leading economies all need to act. I think that they
are acting with different speeds, but they are acting, and we
are going to continue to have an active dialog to encourage all
of us to move in a coordinated fashion, No. 1.
No. 2, Secretary Geithner's financial stability plan has
laid out a broad framework to do this. There is not one piece
of it that by itself will solve everything. We have the capital
program that he has laid out to make sure our banks have enough
capital, even in a worse economic environment, that they can
continue to lend. That is very important. That is underway, the
details are out there.
No. 2 is the lending program that we talked about, scaling
up from $200 billion to $1 trillion, to make sure our consumers
and our small businesses can get the credit that they need
right now. That is underway. It is going to start funding in a
couple of weeks. And then third is the public-private
partnership that we just talked about to go after the bad
assets. Not one of these tools by itself will be the final
solution. We believe these three tools, combined with the other
tools that the Fed and other regulators have done, will get at
this.
Fundamentally, we have a credit crisis that has hurt our
economy. And now the economy is looping back. It is a vicious
cycle, and it is hurting the financial system again. So we have
to go at it from the financial perspective, and then the
stimulus bill that the Congress passed and the President signed
is also going to be very important to getting the economy
going. We need to go at it from both directions.
Mr. Kennedy. I would say that obviously, as we have heard
this morning, transparency. We need to be able to show the
American public just how this links to them. And I understand
the college loans, I understand the making payroll in
businesses, I understand people's vested pensions and
annuities. But we need to make that even clearer to people,
because right now, that case has not been fully made. And until
it is fully made, we are not going to be able to come back to
the American people and say to them, ``this is in your
interest.'' Because right now, they don't see it as in their
interest.
And there is only one person who can really make that
argument, that is the President of the United States. You can't
have 535 Members of Congress out there trying to explain to the
American people how getting this financial system back on track
by infusing it with more dollars is going to do this for them,
when all they're seeing is that, you know, kind of trickle
down. They have to understand that this is part of the
lifeblood of the economy, and the lifeblood of our financial
system is one and the same.
Right now, that is not becoming very transparent, as you
have seen from this hearing. Until that becomes transparent, it
is going to be very hard for the people's representatives, us,
to be able to give the President what he needs in order to
infuse any more assets into this kind of recovery. So we
certainly want to get out of this situation, but we need really
clear leadership and explanation from the top, in the only way
the President can deliver it.
Mr. Kashkari. Thank you.
Mr. Kucinich. The gentleman's time is expired.
Mr. Issa.
Mr. Issa. Thank you, Mr. Chairman.
Mr. Kashkari, you have been as good as your word, it has
been quite an afternoon, and I appreciate your time. One
question I have for you. Earlier I asked about, if you will,
pushback or influence or advocacy by Members of Congress. But
now let's switch to the other side. Tell me about the pushback
you inherently get or you are getting or resistance you are
getting from the mortgage industry, from the banking industry,
on giving you the facts and figures you might need in order to
better analyze the underlying assets that we so often call
toxic.
Mr. Kashkari. So far, Congressman, every time we have asked
for data from any recipient banks, they have all complied with
us, because they know they need to. It is in the country's
interest and their interest to comply. And that is really
focused on lending levels, which many people ask us about. As I
said, we are going out to all the institutions to collect the
data, not just the top 20. We have not gone out and done a
survey of so-called toxic assets per se. I think if we asked
them for the data, they would provide it to us.
Again, we work closely with the regulators who have a lot
of this data already. I know that the OCC, the OTS and the
FDIC, for example, collect loan level data from all of their
banks and roll that out to look at what is happening in
mortgages around the country. So we get the data from different
places, partly from the banks, partly from the regulators. As
yet, we haven't had any pushback to the data that we have asked
for.
Mr. Issa. Earlier today, there was some talk about loans
going to Dubai and China and other places. Isn't it true that
the United States is a net debtor around the world?
Mr. Kashkari. Yes.
Mr. Issa. So if we wanted back all the money that, if you
will, we have loaned and invested in other places, and the rest
of the world did the same in return, wouldn't we suddenly have
trillions of dollars of shortfall far beyond what we are
putting in with TARP?
Mr. Kashkari. I believe so, yes.
Mr. Issa. I had that impression, from a little CNBC and Fox
Business News, it seemed it was that way.
Congressman Kennedy has left, but he talked about
certainty, one-time, etc. From your standpoint, having lived
with multiple tranches of different solutions, TARP being one
of them, do you think we are well-served by having one more,
this is it, it encompasses everything, we will never come back,
or should we look at smaller steps with more congressional
oversight? In other words, do what you think is right, come
back to us and tell us what you have done, rather than the $700
billion which, by your own admission, really never got used in
the original way and will be probably gone before we begin
buying those assets in any great numbers.
So I don't want to say that he was wrong, but wouldn't you
say that the opposite is true, that we should ask for careful
and deliberate actions, even if they are not complete, agree to
those, authorize you and then have you come back when you learn
more?
Mr. Kashkari. I think that there is merit in that. But I am
cautions, because sometimes we have to take action that is so
unpleasant, but it is so urgent, we just have to move.
Mr. Issa. Sure. And I am not suggesting little teeny sizes.
But the $700 billion which was $350, $350, represented by your
own statement, at least 489 different transactions. So going
forward, you don't need a trillion all at once next time, that
in fact, although we may authorize and anticipate a trillion,
the periodic reporting that we could expect in a TARP II, the
updates and the increments could in fact be more manageable,
because we are not dealing with an overnight crisis in which
you don't know how much you need to put out, but you might need
to put it all out in 1 day, so to speak?
Mr. Kashkari. I think it could be, and I think that this is
consistent with the way Secretary Geithner is thinking about
it. Because of his new programs, we can get going with the
available capital we have. We can assess that they are having
the desired effect and then come back and ask, if and when he
decides to ask for more, do so then.
Mr. Issa. Now, I have kind of a long-arm question for you,
and it is a big one. It is a little outside yours, so if you
feel uncomfortable completely answering it today, I hope you
would come back with your thoughts. Up until now, Members of
Congress have been saying, we have to put, and the
administration, too, saying we have to put money in in order to
free up mortgages. And I am not dissuading anyone today from
that view.
But another scenario, if we hadn't put a penny into the
back end, the banks, and instead, we put a hypothetically
sufficient amount, whatever it was, into the refinancing of new
mortgages, so that if a bank said, ``look, I am calling the
loan, here is the foreclosure,'' because you know, they are not
doing foreclosures right now in many cases, people are staying
in their homes months and months and months, waiting to see
what happens.
If they had done all the foreclosures and people who could
make a monthly payment on a future mortgage had available
mortgages, if we facilitated the front end of the new mortgage
with trillions of dollars of capability, wouldn't we in some
ways have mark to market, refinanced, found the good people,
renegotiated in much less time than now we are putting money
in, the chairman and others have made the point that it doesn't
necessarily seem to be trickling down. We are pushing it on
this end, asking it to end up here, rather than saying, do what
you think is right and we will take care of people who are
creditworthy, whether they are existing homeowners or future
for homeowners on those foreclosed properties.
Mr. Kucinich. The gentleman's time is expired, but I would
ask if you would answer his question.
Mr. Kashkari. Thank you.
Congressman, I think we are doing both. So I think the
actions taken to stabilize Fannie and Freddie, to make sure
that mortgages were still available in FHA is very important. I
don't think we could just say, forget the banks, we are just
going to startup all new lending programs, because we would
have no way of administering that. The banks, for all our
frustrations, they have thousands of branch offices in all of
our communities. And they are the tentacles out into getting
credit out there.
So I think we need to do both, providing the Government
support for the lending like the new program that I talked
about, as well as helping the banks get through this time.
Mr. Issa. Thank you, Mr. Chairman.
Mr. Kucinich. I thank the gentleman.
We are going to go to a fourth round with Mr. Kashkari. One
of the things that I am concerned about, the Washington Post
reports on a public-private partnership, they say last week,
the Government is seeking to resuscitate the Nation's crippled
financial system by forging an alliance with the very outfits
that most benefited from the bonanza preceding the collapse of
the credit markets, hedge funds and private equity firms. The
article goes on to say that they would be invited to buy up
recently issued highly rated securities. These securities
finance consumer lending, such as credit cards and student and
auto loans. The program would involve the Government lending
nearly $1 trillion.
Is this the public-private partnership you are talking
about?
Mr. Kashkari. Yes.
Mr. Kucinich. OK. So in this graph that the, some art work
that the Post puts out, they say that with Government
assistance to stimulate purchases of the securities investors
borrow from the Fed, for $10 million worth an investor might
put up $1 million and borrow $9 million. Then it says, the
second part, the public part, the Government offers to cover
losses if consumers default and the asset-backed security
declines in value. Then it goes on to say that if the asset-
backed security's value falls, an investor may lose only his
original $1 million and the Treasury and the Fed would absorb
additional losses, which means that the exposure under this,
according to this report, the exposure of the Treasury and the
Fed could be as much as 90 percent.
Now, here is my question. The Obama budget says that he has
put a marker, placeholder of $250 billion anticipating that
would be the losses if the Government goes forward with this
$750 billion TARP II. We see that there is a discussion among
more money going to the FDIC. We know that the amount of
losses, according to the President's new budget, is 33 percent,
estimate. We know that the amount of loss that you had before
is around 30 percent, that is the number that is being thrown
about.
Is it possible that if we go forward with a total of what
could be about $3 trillion in TARP funds, rough figure, if the
estimated loss would be 30 to 33 percent, we are looking at
taxpayers being stuck with $900 billion to $1 trillion. Now,
think about this. Every, you know, if you use $3 trillion and
somebody else can do the math here, but you have 300 million
Americans, is that like $10,000 per capita? Is that like
$30,000 or more a family that we are into this already?
And then you get to this, check this out. Today's headline,
Washington Post, Rays of Hope for Big Banks Spur Rally on Wall
Street. Citigroup apparently is doing some recovery. And the
article says, and this goes to what Mr. Kennedy raised and what
I want to laser focus on right now. Investors were being dealt
more signs yesterday that corporations were shedding more jobs.
Seen by many as a way for companies to steady themselves during
a deepening recession, United Technologies, a large industrial
company, said it expects to lay off 11,600 employees. AOL said
it is executing a second major round of layoffs, shedding 10
percent of its work force.
I am from Cleveland. Our economy has been falling apart. We
have foreclosures everywhere. The sub-prime loan bandits have
capitalized in my city and crushed neighborhoods in my city.
Our steel mills are in trouble, we have auto plants that are in
trouble. And the banks are doing, are starting to come back,
according to this. But we don't see any evidence that we are
going to come back.
What can you tell the people in neighborhoods across this
country, that they should go ahead and put trillions of dollars
of their money at risk when we are reading these reports that
they could, it looks like huge losses are in the offing under
the best of circumstances? Why aren't we taking a controlling
interest in mortgage-backed securities and the Government
directing loan modifications to lower principal, lower interest
instead of leaving it up to people who are still freezing
credit here in the States, while they are shipping jobs and
money overseas?
This to me is a textbook definition of political insanity.
And I would just like, do you ever think about these things,
about the inherent contradictions that are in this, about how
Wall Street might have one view of the world, but the rest of
America is just beset with all these problems as a result of
Wall Street?
Mr. Kashkari. Thank you, Mr. Chairman. I think about these
things all the time. And you asked a very important but complex
question, so please, permit me to give a thorough answer to
your question.
First, let's talk about the foreclosure piece. The
administration has now come out with what I think is a very
good loan modification program, a $75 billion program to
encourage servicers and lenders to make long-term sustainable
loan modifications. That program is getting up and running
right now. We have teams of people, reporting to me, that are
working on implementing that right now. We feel very good about
that. I think that is going to make an important difference in
our communities, No. 1.
No. 2, in terms of the loss estimates, I would like to
offer my perspective on that. I think we have to segment our
different programs, because different programs have different
classes of risk for the taxpayers. So for example, the lending
initiative that I have spent a lot of time talking about today,
which Secretary Geithner wants to take to $1 trillion, is
secured by very high quality collateral. We expect, where
investors are in the first loss, actually there are multiple
losses for investors, before Treasury is exposed, the taxpayer
is exposed.
My expectation is the losses on that program or the risks
on that program are much, much lower than the risks on some of
the other things that we have had to do. So I am just telling
you candidly, I don't think we can take the loss estimate for
one program and scale it up and apply it. I don't think it is
going to be that aggressive.
Nonetheless, there are real risks. We are all taxpayers.
And none of us like putting our dollars at risk to have to do
what we are having to do. But the economic consequences for all
of us are much, much greater if we don't do these distasteful
things that we are having to do, putting taxpayer dollars at
risk, intervening in these markets. It is in our own interests.
We need to get through this crisis as quickly as possible so
the economy can grow again, so we can create jobs. And then we
need to reform our regulatory system so we don't get back here
again.
Mr. Kucinich. My time is expired. I would like to go to Mr.
Souder.
Mr. Souder. I thank you for your time today, and I wanted
to leave you with a couple of thoughts. One encouraging thing
is, all these hearings, which I know have to be frustrating to
you, it is amazing how much about finance Americans are going
to be learning in this process. It is like we forgot what risk
was.
My house, I bought it from a local small town bank, Grable
Bank. The next thing I knew, I was sending it to Brussels, to
Amro, Ambro or whatever that company is. Now it goes to a
company owned by the Chinese. If we are not careful here, we
will slam down our own mortgages on ourselves. This money is
all over the place and split and securitized and much more
complicated than most of us even think about when we get our
home mortgage, which may not even have the name of the company
we are paying it to.
The transparency question, one is, I know that some banks
are nervous about getting in because they are worried that if
they get this fund, they are going to get a call from you or
somebody that says, ``we noticed you put satellite radio in
your car, why did you do that?'' They are very concerned about
the big hand of Government here, because they are watching the
micromanaging, what is a fair salary how do you do this?
On the other hand, from the taxpayer perspective, you can
hear today a lot of the frustration with transparency. I think
while you need to have your private ability, and I am very
worried we are about in the process of potentially destroying
private sector capital because of the amount of money that the
Government is going to be taking, how we are going to
micromanage this, the different loan categories. It is a
frightening thing. There might be public-private partnerships,
but it is a scary time if you are more of a private sector
person. Partly brought on by the private sector.
But in the transparency question, I understand the point
here. But even in mark to market, there is a deep suspicion
that, because the change only occurred in 2007, that the reason
we can't come back is that hedge fund, people who are buying
short and long and all this kind of stuff, have a chokehold on
the system. And it is not transparent. And what would seem
logical to a traditional banking system, we can't see what is
happening. That leads to a mistrust, because it seems to a
hardworking person who gets up in the morning and goes to work
and starts a small business and tries to get an expansion loan
and the bank calls down and says, ``we are not going to keep
your revolving loan credit there, we are having struggles,''
partly, is somebody speculating against me and I can't see it?
So one of the advantages of the education process that we
are going through is that it has also generated a fear that
some people are manipulating us. I think that the demand of
transparency is going to overwhelm the desire to have
flexibility in your decisions. When you touch the Government,
you get the full scale of the Government. This is very
worrisome to many of us. At the same time, I don't know how to
do it, because even I don't have a lot of trust right now.
Mr. Kashkari. Thank you.
Mr. Kucinich. I thank the gentleman.
Mr. Cummings.
Mr. Cummings. I was just sitting here thinking about what
somebody watching this, whether the American people would, how
would they feel about all of this, this hearing. The newspapers
are running a story, by the way, just in case your staff hasn't
told you, Kashkari says that we should stay out of the banks'
business of lending. That is the story that has come out of
this. That is what is all over the place.
And then you have Reuters, just came out with a story an
hour ago, I just want to quote from the story, it says, ``Six
months after the United States Government stepped in and saved
an insurance giant overwhelmed by derivative losses, AIG
continues to bleed red ink. Its stocks and bondholders have
been crushed, but one group has suffered almost no damage:
banks that bought credit protection from AIG financial
products. Regulatory filings show that since the Federal
Reserve announced its rescue of AIG on September 15th, about
$50 billion of Government money has passed through the company
to the banks. `Treasury is providing a massive wealth transfer
from taxpayers to Goldman Sachs and other parties, and it is
something that absolutely should be investigated,' said Eric
Hovde, chief executive of Hovde Capital Advisors, where he
manages financial services focused on hedge funds.''
The reason why I mention that, it seems like the banks are
coming out of this pretty good. They are getting money, whether
they want it or not, they get it. If they don't like the rules,
you know what they say? ``Screw you, we will give it back.''
Then we have you saying we shouldn't meddle in their business,
taxpayers are saying, ``we just want a loan.''
Then you tell us, and I am sure this is a good thing, this
entity that you are creating to help people get loans, auto
loans and all of that. But the problem is this. It seems that
we are helping the banks tremendously, but they basically, and
they could be more of a part of a solution to the problem. But
I kind of think maybe, whether it is intentional or
unintentional, that we just said to them, you know, guys, we
are going to keep on giving you the money and you do whatever
you want.'' Because top guy says, Congress, we shouldn't be
trying to determine who they lend to. They are the
decisionmakers, as President Bush said, the deciders.
And the deciders have gotten us into the jam that we are in
today. I guess what I am trying to say is that I want to go
back to that analogy that I gave. I believe that you all are
doing everything in your power. I believe you lose sleep, I
think you are giving it everything. And I think you are very,
very competent. I think the whole team is. But I feel like you
are going up a hill.
But it is not becoming any easier, when the banks could
help us up this hill by having some gravel down there so we
could get a grip on something, we get ice. Sometimes I think
that the folks on Wall Street operate in a whole different
world. I don't know if they even have a clue, a clue about the
people who are looking at this right now. I really don't. When
they say, $1 million, it is like $25 to the folks who are
losing their homes.
So you have to say something to me, you have to do
something for me to tell these banks to help out. I don't want
us to leave this hearing with them saying, ``thanks, now we
really have our way.'' And it is very, very painful.
Mr. Kucinich. You may respond to Mr. Cummings, and then we
will conclude this round.
Mr. Kashkari. Thank you, Congressman.
I share your frustration. Every time I open the paper and I
read another story of some shindig somewhere, I just wonder,
what are these guys thinking. They are not helping themselves,
they are not helping me. They are not helping Washington or our
leaders who are trying to get us through this. They are not
helping the American people have confidence.
So I think there have been many cases of enormous lapses of
judgment in some of the actions that the banks have taken. And
I also, sir, I don't want to leave you with the wrong
impression. My comments about, we don't want to micromanage
these institutions, I am talking about the hundreds, maybe
thousands of institutions we are investing in, community banks
all around our country, who did not create this problem. But we
want to encourage them to participate, because they are in the
best position to step up and increase credit. So that is where
my comments were directed there.
For the institutions, the one-offs that made terrible
decisions and they need extraordinary assistance from the
Federal Government to prevent them from being destabilized,
then we absolutely have obligations and responsibilities to
make sure that they run their businesses in a prudent and sound
manner, and that they can pay back the taxpayers. Again, my two
highest priorities are financial stability and paying back the
taxpayers.
Mr. Cummings. Thank you.
Mr. Kucinich. I thank the gentleman.
Mr. Kashkari, you have been here for four rounds of
questioning. We are going to conclude the question of you and
thank you for giving this committee your time here, and giving
this country your service. We know this hasn't been easy for
you as a witness. But I think that you have been a good witness
in representing the point of view that Treasury has been
conducting as policy. The difference that we have, this whole
hearing has been about challenging the policies, about what we
believe is Treasury's failure to monitor the ways in which
financial institutions are using taxpayers' funds.
And I think that as I conclude, and send you with the
appreciation of this committee, one of the things I have seen
here, and Mr. Souder brings it up, there is a fundamental flaw
in Government intervention in the markets. This is why we are
here. The Government is intervening in markets and it is
picking winners and losers.
So when the issue came up about micromanaging, you have to
remember that Congress has a constitutional obligation for
oversight. We are a co-equal branch of Government. We cannot
defer to Treasury when there are trillions of tax dollars at
stake. I know you understand that, which is the whole point of
this hearing.
The reason why we are here in the first place is that the
banks did not perform their fiduciary responsibilities. So when
we want to defer to the banks again, you could understand why
we would have some problems with just letting that go
unchallenged, and in not insisting that Treasury, as we move
forward, has to look at their responsibilities for monitoring
the ways in which financial institutions are using these
taxpayer funds under the Troubled Asset Relief Program.
So with that, I just want to say that you have appeared
before this subcommittee on two occasions. You have conducted
yourself in a way that I think reflects honor and service to
the country, and I want to thank you for your presence here.
And all the members of the committee who I have talked to about
your presence here today, while we may take issue with your
presentation, we think that you have certainly been an
excellent witness for the Department of Treasury.
So thank you, Mr. Kashkari.
We are going to proceed, the first panel with Mr. Kashkari
is now discharged. We are going to take a 5-minute recess, and
it is only 5 minutes, as we get the second panel together. We
are going to combine the second panel and the third panel
together, without objection. But we are going to take a 5-
minute recess. We will be back in 5 minutes.
[Recess.]
Mr. Kucinich. The committee will come to order.
We are fortunate to have an outstanding group of witnesses
on our second panel. If you just joined us, we are combining
the second and the third panels. This is the Domestic Policy
Subcommittee of Oversight and Government Reform. The topic for
today is ``Peeling Back the TARP: Exposing Treasury's Failure
to Monitor the Ways Financial Institutions are Using Taxpayer
Funds Provided Under the Troubled Assets Relief Program.''
Our first panel has been with Mr. Neel Kashkari. And we are
going to go to the second panel. And moving right into this, I
want to introduce the members of the panel.
They include Professor Anthony B. Sanders, professor of
finance and real estate at the W.P. Carey School of Business of
Arizona State University, where he holds the Bob Herberger
Arizona Heritage Chair. He has previously taught at the
University of Chicago, the Graduate School of Business,
University of Texas at Austin Macomb School of Business, and
the Ohio State University Fisher College of Business. In
addition, he served as director and head of asset-backed and
mortgage-backed securities research at Deutschebank in New York
City.
Mr. Stephen Horne is vice president of Master Data
Management and Integration Services for Dow Jones Business and
Relationship Intelligence. Mr. Horne has over 30 years
experience in master data management, consumer relationship
management, Web data applications and very large data base
development. Mr. Horne specializes in large scale data
integration and data utilization from the Dow Jones master data
base and performs business development and strategy for these
areas. Previously, Mr. Horne was a consultant for Generate, a
startup relationship mapping and Web-based data collection form
that was acquired by Dow Jones to become the Dow Jones BRI
division.
Mr. Mark Bolgiano is president and CEO of XBRL US, Inc.,
the leading advocate for the use of extensive business
reporting language, which promises to increase the transparency
of reporting and disclosure of corporate financial information.
Mr. Bolgiano joined XBRL US as its first president and CEO in
December 2006. Previously, he led the technology and online
communications operation of the Council on Foundations as vice
president and Chief Financial Officer.
We are also joined by Mr. Neil Barofsky. Mr. Barofsky was
confirmed by the Senate as a special inspector general for the
TARP on December 8, 2008, and was sworn into office on December
15, 2008. Prior to assuming the position of special inspector
general, Mr. Barofsky was a Federal prosecutor in the U.S.
Attorney's Office for the Southern District of New York for
more than 8 years. In that office, Mr. Barofsky was a senior
trial counsel who headed the mortgage fraud group which
investigated and prosecuted all aspects of mortgage fraud, from
retail mortgage fraud cases to investigations involving
potential securities fraud with respect to collateralized debt
obligations. Mr. Barofsky received the Attorney General's John
Marshall Award for his work on the case that led to the
conviction of the former president of Refco, Inc., and that is
Tony Grant, and the guilty plea of Philip Bennett, Refco's
former chief executive officer.
Mr. Richard Hillman has served 31 years with the U.S.
Government Accountability Office, and is currently the Managing
Director of the GAO's Financial Markets and Community
Investment Team. This team helps the Congress improve the
efficiency of regulatory oversight in financial and housing
markets, and the management of community development programs.
Over the past decade, Mr. Hillman has produced scores of
reports and led a wide variety of efforts assessing the
economy, efficiency and effectiveness of Federal and State
regulation of the financial services sector.
It is the policy of the Committee on Oversight and
Government Reform to swear in all witnesses before they
testify. I want to thank all of you for being here, and I ask
that now you would rise and raise your right hands.
[Witnesses sworn.]
Mr. Kucinich. Thank you, you may be seated.
Let the record reflect that each of the witnesses has
answered in the affirmative.
As with panel one, I ask that each witness give an oral
summary of his or her testimony. I would especially ask that
you keep this summary under 5 minutes in duration.
I would like you to bear in mind that your complete written
statement will be included in the hearing record. And we are
going to go from my left to right, we are going to start with
professor Sanders. You have 5 minutes, and I think we will
cover some of the territory in the Q&A. So you may proceed.
STATEMENTS OF ANTHONY B. SANDERS, PROFESSOR, W.P. CAREY SCHOOL
OF BUSINESS, ARIZONA STATE UNIVERSITY; STEPHEN HORNE, VICE
PRESIDENT, MASTER DATA MANAGEMENT AND INTEGRATION SERVICES, DOW
JONES AND CO.; MARK BOLGIANO, PRESIDENT AND CEO, XBRL US INC.;
NEIL BAROFSKY, SPECIAL INSPECTOR GENERAL, TROUBLED ASSET RELIEF
PROGRAM; AND RICHARD J. HILLMAN, MANAGING DIRECTOR, FINANCIAL
MARKETS AND COMMUNITY INVESTMENT, U.S. GOVERNMENT
ACCOUNTABILITY OFFICE
STATEMENT OF ANTHONY B. SANDERS
Mr. Sanders. Thank you, Mr. Chairman.
Mr. Chairman and members of the committee, thank you for
the invitation to testify before you today. I testified before
you on November 14, 2008, on the subject of the Troubled Assets
Relief Program [TARP]. At that time, we understood that the
Treasury had not purchased any loans from the financial
institutions using TARP funds. Instead, the TARP funds were
deployed to numerous financial institutions.
My testimony today focuses on the lack of transparency
surrounding the use of the TARP funds as well as some related
Treasury and Federal Reserve programs.
Transparency is of critical importance to the stability of
financial markets, as well as the reputation of the United
States in the international economy. For example, research has
found that the frequency of stock market crashes is higher in
companies that are more opaque, or less transparent, to outside
investors. A recent paper on asset mortgage securitization side
has concluded that in order to attract investors, transparency
is essential. The less transparent a market is, the more poorly
understood it will be by investors, and the higher will be the
yield those investors demand to compensate for the uncertainty.
Thus, whether we are talking about loans that are
originated and securitized by banks or how TARP funds are
deployed to the banks, transparency is critical to returning
trust to our financial system and comforting investors both
United States and globally. When we consider that our own
Federal Government borrows funds from overseas investors,
transparency will be a vital tool in restoring confidence in
the tarnished financial system of the United States.
Greater transparency of the TARP can alleviate concern
among U.S. taxpayers and the investment community that the
funds are being used appropriately and not wasted. Without
transparency, we are no longer the shining city on the hill.
Rather, we are New York City during the blackout of 1977. For
example, there should be more transparent asset valuation so
that we understand how Treasury and the Federal Reserve are
valuing the banks relative to the private market valuations,
that is the stock market. If the Treasury systematically is
over-valuing the banks, it is an indication that we are still
in danger from toxic assets, particularly mortgages that have
not been dealt with. Until asset valuation is more transparent
and the market is confident that the banks have written down
toxic assets, such as bad mortgage loans and accurately priced
these assets, any effort to restore stability and confidence in
our financial system will ultimately fail.
One can argue that all assets, including TARP funds, are
fungible, meaning that it is very difficult, if not impossible,
to trace how TARP funds are spent. For example, if Bank A
receives $15 billion in TARP funding, but is so large and
complex that a paper trail cannot be followed, that presents
serious problems. Despite our accounting and regulatory
reporting on these institutions, the TARP funds seemingly sink
into an abyss or black hole. Clearly, greater transparency is
required so that the TARP funds are spent in a non-wasteful
manner.
Currently, financial institutions report that information
that can be found in SEC filings, the 10Qs and 10Ks, and Call
Reports that are produced quarterly. However, this information
is not real time and is highly aggregated. As a consequence, it
is difficult to follow the money from these filings. Although
banks can report on the use of TARP funds in a timelier fashion
with Treasury, even daily, the quality of these reports may be
of dubious substance given the size and complexity of the
financial institutions that have received TARP funds.
For example, our largest financial institutions have
hundreds of divisions and subsidiaries and perform operations
in numerous countries. For example, Citigroup has operations in
over 100 countries and includes such banks as Banamex. For a
regulatory body, Congress, the executive branch or the
financial institutions themselves to understand where the TARP
funds have gone, there is a need for more aggressive forms of
auditing that permit better disclosure.
Traditional auditing of the financial institutions is a
time consuming and labor-intensive process. The Office of the
special inspector general for the Troubled Asset Relief Program
produced an initial report to the U.S. Congress on February 6,
2009 detailing the allocation of TARP funds, which is an
admirable first step in providing transparency for the TARP
program. But it does not address how the recipients of the TARP
funds have actually spent the money.
An approach that can offer real time measures of the
expenditure of the TARP funds or any other recipient of
Government funds is volumetrics. It is possible to obtain vast
amounts of reported information on loans, corporate benefits,
golf tournaments, concerts, retreats and aggregate them into a
usable form for regulators and other market participants.
Should the taxpayers be concerned about a particular bank
using TARP funds for the naming of a sports stadium? Well, it
can be argued that the naming of a sports stadium or
professional golf tournament is part of a marketing strategy,
but it can also be argued that the price that the bank pays for
these naming rights is far in excess of their advertising
value. While it may be a reasonable argument to name sports
stadiums, these institutions must be aware of the backlash by
taxpayers and regulators against perceived squandering of
scarce taxpayer dollars in an economic crisis. The same
argument applies to rock concerts, corporate events, executive
compensation and perquisites.
Mr. Kucinich. I would like to ask the gentleman if he could
try to wrap up his testimony, and I know we will get back in
Q&A.
Mr. Sanders. Transparency for the use of funds by TARP
recipients represents a step forward in understanding how
taxpayer dollars are deployed, particularly in this economic
climate. In summary, the TARP should be wrapped in Saran Wrap
rather than a lead veil that Superman can't even penetrate.
Taxpayers have the right to know what is being done with their
wealth and transparency helps achieve more economically sound
use of TARP funds and eliminate waste.
Thank you for letting me share my thoughts with you.
[The prepared statement of Mr. Sanders follows:]
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[GRAPHIC] [TIFF OMITTED] T2883.133
Mr. Kucinich. Saran Wrap. [Laughter.]
Mr. Bolgiano.
STATEMENT OF MARK BOLGIANO
Mr. Bolgiano. Good afternoon, Mr. Chairman and members of
the subcommittee. It is my privilege to testify today about
XBRL, or Extensible Business Reporting Language.
I am here as the president of a non-profit organization,
XBRL US, that advances XBRL as an open, free, open-source
standard. We all benefit from Internet standards, and I am not
going to take any time to try to explain the concept. But just
in the way that the Web standard brought us browsers and global
access and search to a huge amount of information, or .pdf gave
us high fidelity to the print document, or even emails made it
possible for any of us to exchange messages, regardless of what
software, what device or even where we are, XBRL simply makes a
common dictionary available and a consistent structure, so that
all financial reports can use a common format, so that it can
be shared and exchanged at much lower cost with much lower time
to do the processing.
As we have heard for last few hours, it is very labor and
time-intensive to analyze and parse financial reports.
XBRL documents are more consistent, and they are searchable
and they are machine readable. It can transform a 1,500-page
10K annual report that is nothing but a long stream of text
into a structured, indexed document that can be readily
processed.
But it is not the technology plumbing and wiring that is
really the issue here. What is important about this standard
and any standard is that the world chooses to agree on it. And
the world has agreed on XBRL as the standard across the world
for business reporting.
I would like to take the next few minutes to elaborate on
this and refer to my testimony in more detail to make the
points that XBRL is real, it is ready and it is relevant to the
discussion of the subcommittee today. First of all, it is real.
Every quarter, 8,000 banks report to the FDIC using this
format, and they have since 2005. I will again refer to the
testimony on the efficiencies of oversight and regulation
gained by the FDIC by using XBRL.
A hundred companies today voluntarily file to the FCC their
financial reports using XBRL. And over the next 2 years, SEC
rules will phase in all publicly traded companies will submit
their financial reports, including the industrial disclosures
and footnotes that have numbers embedded in narrative text,
like the pension footnote, in XBRL. All mutual funds, all
credit rating agencies will be filing to the SEC phased in,
these rules have just been promulgated, and they will be phased
in over the next 2 years.
So XBRL is real, it is in production. The dictionary that
the SEC uses, developed by our non-profit, by bringing together
lots of industries and professions for the common good,
contains every concept in U.S. GAAP, Generally Accepted
Accounting Practices. We are building on that, to include, as
detailed in the testimony, mortgage-backed securities. This is
ready for us and it is being applied right now in our market.
It is also ready in terms of having a strong organizational
underpinnings. Our non-profit brings together the accounting
industries, the CFOs that issue, all the way to the investors
and everyone in between, including technology companies, for
the common good, to make sure that we get a high quality
agreement between industry and Government to publish out these
dictionaries.
And finally, I am going to say it is relevant in that,
again and again, we heard today about, we are not sure, we
can't see, we don't know. The fact is, you can't provide
oversight to something you can't see. And this common standard
does offer a powerful tool for the Government and for markets
to get true visibility and transparency into the facts, into
the books.
With that, I will conclude my remarks. Again, I thank you.
I will just end with the one point that transparency is no
longer a matter of technical capability. It is a decision that
is waiting to be made.
Thank you, Mr. Chairman, thank you subcommittee.
[The prepared statement of Mr. Bolgiano follows:]
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Mr. Kucinich. Thank you very much, Mr. Bolgiano.
Mr. Horne, you may proceed.
STATEMENT OF STEPHEN HORNE
Mr. Horne. Good afternoon, Mr. Chairman, Ranking Member
Jordan, members of the committee.
My name is Steve Horne, and I want to thank you for
inviting us here to speak to you today.
I am going to show you an example of what Professor Sanders
and Mr. Bolgiano were just speaking of. The question is getting
to TARP transparency. I have some slides up on the board, you
may not be able to see them too well. Those who have the
handouts have the slides included.
The question you have raised is, ``where did the money
go?'' I think that is the question everybody has been asking
since this morning started. I am going to show you how to take
what is complex financial information and make it simple and
then transparent.
I am showing on the slide here eight of the CPP
institutions. I intentionally left off AIG, because being in
SSFI, they have different things that we have to look at, and
we can talk about those at another time, if you wish.
But these companies collectively received just about $200
billion of the total TARP outlay from tranche one. They
collectively represent over $10 trillion in assets, they have
greater than 14,000 subsidiaries, any of which could receive
funds that had been fused into the institutions themselves.
They have greater than 6,000 executives making decisions as to
how to use these corporate assets. And in the first 100 days
since TARP funds were approved, there have been greater than
40,000 what we call public events, which consist of regulatory
filings, press releases, and other kinds of public disclosure
about these firms regarding TARP, specifically TARP.
Now, let's look at an institution to illustrate the
complexity. I don't expect anybody to read this eye chart.
Rather, I am making a point of the structural complexity, in
this case of just Bank of America. I chose Bank of America
because they were alphabetical. So any other institution is
going to kind of look this way.
This is a portion, and only a portion, of BofA's 2,435
subsidiaries and divisions. The reporting banks on the slide
are shown in red, the investment firms are shown in blue. Any
of these subsidiaries or divisions may be a beneficiary of the
funds or part of the total $45 billion in total capital
infusions that have come into this institution through TARP to
Bank of America.
A hundred and four of these subsidiaries and divisions file
with up to 20 or more Government agencies. And there is no
single holistic view of the institution that comes in through
those agencies. Furthermore, the information sometimes comes in
disparate and incompatible formats. My friend here, Mr.
Bolgiano, has commented on the fact that we are very big
subscribers to the concept of XBRL, because that is a
computable and consistent format.
In other cases, it is aggregated at a holding company
level, but you lose all the detail of the transactions that are
underneath it. Now, a lens can be put on individual
transactions that roll the data into a single view of the
institution. Now, in the time line that is shown on my chart
here, instead of looking at greater than 10,000 of the Bank of
America events, a regulator could highlight what they might
call the seminal events, chosen by them, which show the key
transactions of the funds that move through the institution. In
addition, the aggregation of the non-public regulatory data, as
proposed under Congresswoman Maloney's bill, TARP
Accountability and Disclosure Act, would be available to the
regulator as well.
At the request of the committee, we have a sample of
transactions that are in excess of $1 billion, as well as
charitable contributions and marketing events during this first
100 day period. The first capital infusion at the beginning of
the chart took place in October 28th of last year, and $15
billion were taken onto the Bank of America books as a partial
receivable. The remaining $10 billion was paid out when the
Merrill Lynch transaction was completed.
Other events, including the issuance of new debt, to
layoffs, to charitable contributions, continue to impact the
balance sheet that is highlighted in this time line. So let's
drill into one of these events. Just last week, the Bank of
America filed their 10K SEC annual report for 2008. Now, here
on the right side of the chart, what you are going to see is a
statement about their new Q4 lending activity. Other
institutions have made similar types of statements.
To use an analogy, think of your own checking account. You
know your balance, you just can't look at the deposits, you
have to look at the withdrawals, too. So to add transparency,
one must look at the offsetting activities shown in the
summary, including write-downs, foreclosures, toxic asset
reductions, etc., to get to the balance as you would in your
own checking account. You might question the lending activities
occurring between the banking institutions and federally
sanctioned lending institutions, such as Freddie Mac, Fannie
Mae, FHA, etc. None of this is contained within the filings
themselves.
Now, compare the single institution to looking at three
separate, an aggregated view of three separate institutions, in
this case Bank of America, Citigroup and J.P. Morgan Chase.
These banks were recipients of more than $75 billion during the
Q4 period of 2008 of TARP funds that reported increased lending
activity. Similar offsets took place with these institutions as
well.
What we see here is $75 billion in capital infusions and
less than $100 million in increased net credit facilities to
the American people. That is what is on the balance sheet. What
is off the balance sheet is another thing entirely, but that
means it is not transparent. How do we reconcile the overall
lending activity from the institutions that are reporting to
the Federal Government? Public data, plus the addition of the
data included in Congresswoman Maloney's bill, will enable the
ultimate provider of information to go from a complex
collection of separate transactions across thousands of
organizations to greater transparencies of funds distributed
through the Government to private institutions.
I want to thank you, Mr. Chairman, Ranking Member Jordan,
members of the committee, for your time and attention.
[The prepared statement of Mr. Horne follows:]
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Mr. Kucinich. You have given us a lot to think about here.
I am sure there will be a lot of questions.
Mr. Barofsky, special inspector general.
STATEMENT OF NEIL BAROFSKY
Mr. Barofsky. Thank you, Mr. Chairman.
Chairman Kucinich, Ranking Member Jordan, members of the
subcommittee, I am honored to appear before you today as the
special inspector general for the Troubled Assets Relief
Program [SIGTARP].
$300 billion has already gone out the door, and including
the recently announced programs, Treasury intends to combine
TARP funds with the Federal Reserve and others to more than
quadruple the original $700 billion allotment to fund at least
eight separate programs involving approximately $2.9 trillion.
These huge investments of taxpayer money will invariably
create opportunities for waste, fraud and abuse, and will
require strict oversight. To meet this oversight challenge, I
focused SIGTARP on three areas since our inception:
enforcement, transparency and oversight.
First, enforcement. Of the four primary bodies set forth in
the Stabilization Act, we alone are responsible for
investigating those who seek to criminally profit from the
TARP. To meet this challenge, we have developed key
relationships with other law enforcement and prosecutorial
agencies from coast to coast, and have already shut down one
securities fraud in Tennessee and have several other criminal
investigations pending.
Today I am also pleased to announce our newly formed TALF
task force. The TALF has been announced as a trillion dollar
Federal Reserve Bank of New York program that will be seeded
with up to $100 billion in TARP money. It is intended to secure
liquidity to the securitization market by lending Government
money to investors, including hedge funds, to buy newly issued
asset-backed securities.
We have been vocal in our warnings about the susceptibility
of this program to fraud. And today we convert those warnings
into action by putting together a team of Federal law
enforcement and regulatory investigators to address potential
fraud in the TALF. Members of this task force will include the
SEC, the FBI, the Postal Inspection Services [ICE], Treasury's
Financial Crimes Enforcement Network, the Federal Reserve's
Inspector General and the IRS. We will operate out of New York
and Washington and provide training to both Federal and local
law enforcement and prosecutorial agencies and provide a
conduit, so we can ensure quick response to any tip or lead,
whether generated from our hot line, 877-SIG-2009, the Federal
Reserve or elsewhere.
Together, the members of our task force will combine our
shared experience in securities fraud investigations and
combine our resources to identify and cutoff potential fraud
schemes before they can fully develop, deter would-be criminals
and bring to justice those who seek to commit fraud through the
TALF. For any would-be fraudster, our message is clear: If you
try and steal from this program, we will find you, we will
investigate you, and we will put you in jail.
My office has also focused on transparency since my first
day in the office. And our audits are going to bring
transparency both to those running the TARP program and the
TARP recipients. We are conducting a survey on TARP recipients'
use of funds, and on both the recipients' plans for complying
with executive compensation conditions, as well as Treasury's
plans on overseeing compliance.
We are also conducting audits on the impact of outside
influences, such as lobbyists, on the TARP application process,
and a case study on the circumstances under which Bank of
America received approval for $45 billion in cash, $100 billion
in asset guarantee in four different transactions through three
separate TARP programs.
As for oversight, we have and will continue to coordinate
our oversight activities with my co-panelist, Rick Hillman, and
his colleagues at GAO, as well as the other inspectors general
whose responsibilities touched on the TARP. We have also tried
to have a positive impact on the TARP programs before the money
goes out the door. Treasury has adopted several of our
recommendations and we will continue to make recommendations to
Treasury to address potential fraud as the new programs are
rolled out.
The TARP program has changed significantly since the
Stabilization Act was passed last October. Originally intended
to purchase and manage $700 billion of toxic assets, that
effort now stands as just a portion of only one of the eight
intended TARP programs, and less than 25 percent of the total
$2.9 trillion involved. We must change with it, and I ask that
you support S. 383, the Special Inspector General Act of 2009,
which unanimously passed the Senate early last month, and would
give my office important hiring flexibility to react as the
TARP programs grow and evolve. Quick passage of this important
and essential legislation will help me continue to build the
necessary core of my office to meet this challenge.
Chairman Kucinich, Ranking Member Jordan, members of the
subcommittee, I commend you for your efforts to ensure proper
oversight of the trillions of dollars of American taxpayer
funds, and I would be happy to answer any questions that you
may have.
[The prepared statement of Mr. Barofsky follows:]
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Mr. Kucinich. Thank you, Mr. Barofsky.
Mr. Hillman is the person who is the Managing Director of
Financial Markets and Community Investment for the U.S.
Government Accountability Office.
Thank you for being here, you may proceed.
STATEMENT OF RICHARD HILLMAN
Mr. Hillman. Thank you, Mr. Chairman. I am pleased to be
here today to discuss our work on the Troubled Assets Relief
Program. My statement today is primarily based on our second
60-day report required under EESA that was issued on January
30, 2009. Specifically, my statement focuses on the nature and
purpose of activities that have been initiated under TARP, and
Treasury's efforts to establish a management structure for
TARP.
Regarding our first objective, Treasury has announced a
number of new programs to try to stabilize financial markets.
But most of its activities during our reporting period have
continued to fall under its capital purchase program. As of
March 5, 2009, Treasury had disbursed approximately $300
billion in TARP funds, about $200 billion of which was for the
capital purchase program.
Our previous report emphasized the lack of monitoring and
reporting for program investments and recommended stronger
measures to ensure that participating institutions used the
fund to meet the program's purpose and comply with program
requirements on, for example, executive compensation and
dividend payments. In response to our recommendation, Treasury
developed plans to survey the largest 20 institutions monthly
to monitor lending and other activity, and analyze quarterly
call report data for all institutions.
While the monthly survey is a step toward greater
transparency and accountability for the largest institutions,
we continue to believe that additional action is needed to
better ensure that all participating institutions are
accountable for their use of program funds. Our latest report
recommended that Treasury expand the scope of its monthly
surveys to include collecting at least some information from
all institutions participating in the program.
Further, our most recent report found that Treasury has
made limited progress in articulating and communicating an
overall strategy for TARP. This lack of a clearly articulated
vision has complicated Treasury's ability to effectively
communicate with Congress, the financial markets and the public
on the benefits of TARP, and has limited its ability to
identify personnel needs. While Treasury has continued to
publicly report on individual issues, testify and make speeches
about the program, it continues to struggle to convey clearly
articulated and overarching methods about its efforts
potentially hampering TARP's effectiveness and underscoring
ongoing questions about its communication strategy.
Without a clearly articulated strategic vision, Treasury's
effectiveness in helping to stabilize markets may be hampered.
Our most recent report recommended that Treasury clearly
articulate its vision for TARP and to document needed skills
and competencies to achieve that vision.
Regarding our second objective on TARP's efforts to
establish a management structure for TARP, our first report
included several recommendations for Treasury to improve
hiring, contract oversight and its system of internal controls.
Treasury has taken important steps to address our
recommendations, but in its latest report, we found that it
still faces several challenges.
First, it took proactive steps to ensure a smooth
transition to the new administration by keeping positions
filled and using an expedited hiring process, including direct
hire authority. Moreover, after losing some potential
candidates because of conflicts of interest, Treasury is now
asking candidates to address potential conflicts earlier in the
recruitment process to avoid unnecessary delays and finalizing
employment offers. However, it continues to face difficulty
providing competitive salaries to attract skilled employees.
Second, consistent with our earlier report about
contracting oversight, Treasury has enhanced such oversight by
tracking costs, schedule and performance, and addressing its
training requirements of personnel who oversee the contracts.
However, as we previously recommended, Treasury needs to
continue to identify and mitigate conflicts of interest in
contracting.
Similarly, in an earlier recommendation, our latest report
found that a framework for adopting and organizing the
development and implementation of a system for internal
controls for TARP activities is progressing. The program plans
to use this framework to develop specific standards, policies,
drive communications on expectations and measure effectiveness
of internal controls and the related policies and procedures.
However, to date, much work continues to be needed to be
accomplished in this area, including implementing a disciplined
risk assessment process. Our latest report called for the
development of a comprehensive system of internal controls over
TARP activities, including detailed policies and procedures and
guidance that are robust enough to ensure that the program's
objectives and requirements are being met.
In summary, Treasury is taking important steps to implement
our previous recommendations, but we continue to identify a
number of areas that warrant ongoing action by Treasury to
improve the accountability and integrity of the program.
Mr. Chairman and members of the subcommittee, I appreciate
the opportunity to discuss these critically important issues
and I would be happy to address any questions you may have.
[The prepared statement of Mr. Hillman follows:]
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Mr. Kucinich. Thank you very much, Mr. Hillman. I would
like to go to questions now and begin with Mr. Horne.
In your testimony, you made the pretty shocking statement
that the new lending several of the largest TARP recipients
have claimed they are doing has been grossly overstated. I am
going to ask staff to help us with some of these Bank of
America slides. How could their representations be so far at
odds with your own?
Mr. Horne. Mr. Chairman, I don't believe that the
representations per se are at odds. What they are is one side
of the story.
Mr. Kucinich. Well, you are just looking at new credit, but
not offset by credit contracted.
Mr. Horne. If you are going to publish a story that says
that you are giving $115 billion or whatever, $150 billion in
the case of another institution, etc., it talks about new
lending activities. A balance sheet would actually say to you
that you should also show the opposite side of those
transactions. That has not been what we have observed. And
again----
Mr. Kucinich. So we don't really have a clear view as to
the net effect.
Mr. Horne. Transparency would dictate that you would want
both sides of it.
Mr. Kucinich. So you could have a condition where a lot of
money is going out the door, but the credit contracts and you
have a new loss?
Mr. Horne. Well, again, as I said, we are trying to
represent information from a transparency standpoint.
Mr. Kucinich. I know. Right. I get it.
Mr. Horne. So our issue is, from a transparency
perspective, if you want to be transparent, and we have been
doing so for 100 years for the commercial marketplace, you have
to show both sides of the picture. And it is impossible for you
to say that you are giving out lending without having an
offsetting amount that shows that you are retracting.
Mr. Kucinich. Thank you, Mr. Horne.
I want to ask Mr. Sanders, from the standpoint of impact on
the economy, which is a more accurate description of bank
lending activities, the method of representation employed by
several TARP recipients, or the method that Mr. Horne has
presented?
Mr. Sanders. Well, I think that method Mr. Horne is
presenting gives us a much better picture of how it is really
impacting our economy and how it is impacting borrowers.
Because again, the way the bank balance sheets are structured
and the call reports, we just can't get a good picture.
What Mr. Horne is talking about is much more in real time
and is much more translucent, we can actually see what is going
on.
Mr. Kucinich. So let's go back to Mr. Horne. If the banks
you have identified are creating so little new credit now that
they have billions in TARP funds, what are they using TARP
funds for?
Mr. Horne. Well, again, most of the activities that we are
seeing from a transparency perspective are reflected in the
balance sheet. So if you looked along the time line of some of
the examples of events, you can see some of the examples of
events. The first transaction that took place in the Bank of
America event was a $16.8 billion debt buy-down on Countrywide
being infused into Bank of America. Now, at that point in time
they had only received $15 billion, so they used some of their
internal funds.
They also, many of the institutions need money to make
money. In other words, you can't go out and lend secured notes
or create senior debt without having balances or relatively
large sums in reserves. So they want to keep this money on
their books, in some cases, in order to be able to try to get
other institutions to invest in them.
Mr. Kucinich. Well, can I get a true picture at Treasury of
bank lending by relying on the monthly intermediation snapshot?
Mr. Horne. No, you cannot. You need to have every
individual event that occurs transactionally over time brought
together into a single format and structure to answer that
question.
Mr. Kucinich. So all the necessary information is available
to regulators to create transparency of how TARP funds are
being used?
Mr. Horne. All the necessary information is available in 25
or some odd places.
Mr. Kucinich. Mr. Bolgiano, Treasury can track how banks
are using these funds?
Mr. Bolgiano. Yes.
Mr. Kucinich. And the technical capability is there, is
that right?
Mr. Bolgiano. Yes, that is correct.
Mr. Kucinich. So it comes at a question of whether there is
a will to do it?
Mr. Bolgiano. That is right.
Mr. Kucinich. Some have argued that since TARP funds are
fungible, is it not possible to track the use of TARP funds?
Mr. Horne?
Mr. Horne. It is absolutely possible. Professor Sanders
mentioned volumetrics. Volumetrics is, if you think of two
glasses of water, and if you were pour the water, they were
both half full and you pour the water out of one glass, and as
long as you don't spill any into another glass, you should have
the same volume of water. If you look at individual events, and
remember, there is a Pareto principle, I don't know how many of
you are familiar with the 80-20 Pareto law, well, in these
cases of institutions that we are talking about here, it is
more like 95-5, where 5 percent of the transactions make up 95
percent of the actual movement of funds.
So there is not, as a proportion of number of transactions,
a large number volumetrically of funds that have to be looked
at, nor to understand the ebbs and flows of the funds moving
throughout the business. It is complex in terms of the
interconnections. That is why it is so important to have a
format such as XBRL, which would leave the ability to take two
different systems together that are speaking totally different
languages and bring them together as one.
Mr. Kucinich. Thank you, Mr. Horne. My time is concluded
this round. Mr. Jordan, you may proceed for 5 minutes.
Mr. Jordan. Thank you, Mr. Chairman.
Is it fair to say then, I am trying to gather this
together, that it is almost too much information in too many
different forms is actually leading to a lack of transparency?
Is that the problem? And we will go with Mr. Horne again.
Mr. Horne. Yes, Ranking Member Jordan. In some cases that
is true. But I feel that it is mostly the lack of the ability
for individual members of various committees of the regulatory
agencies, etc., to read paper documents. We live in Washington,
in a document-based world. We don't live in a data world.
Mr. Jordan. Has there been a reluctance on the part of
various financial institutions and/or the Treasury to embrace
Mr. Bolgiano's XBRL that he talked about, or the process that
is going to allow us to sort of synthesize this and get it in a
readable format? Has there been a reluctance out there to go
that direction?
Mr. Horne. I would defer that to Mr. Bolgiano.
Mr. Jordan. All right.
Mr. Bolgiano. In our markets today----
Mr. Jordan. And if there has been a reluctance, why is that
the case?
Mr. Bolgiano. I think there is certainly a reluctance,
first of all, to change in general. But also, information is a
very valuable commodity. And the absence of a standard and the
absence of transparency makes the publishing of that
information a very profitable enterprise. This is a commodity
that flows through our economy just like any other.
So the absence of transparency does protect certain
businesses.
Mr. Jordan. I want to go to the inspector general. Mr.
Barofsky, your thoughts on the same question.
Mr. Barofsky. We have taken a different approach to this.
We made a recommendation to Treasury that they require banks to
establish internal controls to account for the use of funds and
report on the use of funds. We recommended that they do that on
a forward-going basis.
They haven't, so we have initiated our own use of funds
survey. And we have pulled all of the banks and----
Mr. Jordan. Wait. Go back. You made a recommendation to
Treasury to increase transparency and they didn't?
Mr. Barofsky. Yes. It is included in our February 6th
report. We made a recommendation that for every agreement going
forward, it is taking a step back, we initially made the
recommendation back in late December. And they did adopt it
with respect to Bank of America and Citigroup, in those
extraordinary transactions, they did require those banks to
establish internal controls at our recommendation and report
quarterly on how they are using the funds.
They have not adopted that recommendation with respect to
any other financial institutions.
Mr. Jordan. And give me your guess as to why.
Mr. Barofsky. I don't want to hazard a guess. I think that
Mr. Kashkari has articulated some things this morning that are
probably consistent with that explanation. I don't want to
speak for him, but concern about putting certain conditions on
a----
Mr. Jordan. Well, obviously that is an important question,
particularly when in your written testimony you talk about the
potential exposure of hundreds of billions of dollars of
taxpayer money potentially being lost to fraud and that is in
your written testimony, so that is an important question.
Mr. Barofsky. It is absolutely an important question.
Mr. Jordan. Talk about your thoughts on the XBRL, that
concept as well.
Mr. Barofsky. From our perspective, we are taking a look
and we are doing a survey of all the financial institutions'
use of funds. We are going to get their narratives, they are
coming in, I think we have about 90 percent responded. I think
XBRL would help us turn around and then test some of these
responses. But we are taking a different approach really on
starting with the financial institutions' own reporting on how
they are using the funds.
Now, our reports also require a certification, subject to
criminal penalty, that if they lie to us, they would be
committing a crime and we would investigate that. So we are
hoping that provides a sufficient hammer to make sure we get
accurate responses.
Mr. Jordan. That is usually a pretty good incentive.
Last question. XBRL, can this help us, and my guess is it
can, get to the questions I posed earlier to Mr. Kashkari that,
we still haven't got at the focus of this entire TARP program
initially, the mortgage-backed securities? Can it help us in
that regard as well?
Mr. Bolgiano. Yes. Mr. Jordan, we have been working on the
mortgage-backed securities dictionary for the last 6 months
with this question in mind. It is not a substitute for policy,
obviously, and it is not a substitute for access to the
information or the Government authority to request that
information. But it does give a consistent vehicle for that
information to be delivered and for the Government to use it
effectively.
Mr. Jordan. I thank the chairman.
Mr. Kucinich. I thank the gentleman.
Mr. Cummings, 5 minutes.
Mr. Cummings. Mr. Barofsky, you mentioned, I think you were
talking about the task force. And then you just talked a moment
ago about if folks lie to you. How do you deal with that, and
what is the offense?
Mr. Barofsky. Any official, senior executive officer, any
person who lies to us, we are a Government entity, or a part of
the executive branch, that is a crime under 18 U.S.C. 1001. It
is the statute that Martha Stewart, for example, was prosecuted
under, just to give an easy example. And we require each and
every one of the recipients of our survey to sign a
certification with a senior executive officer stating that the
information that is contained in this report is true. And if
they lie, that is a Federal crime.
Mr. Cummings. When we try to get information from some of
these folks, they seem to duck and dodge. We don't always get
the whole truth and nothing but the truth. I am just wondering,
do you feel that you are getting the kind of information that
you need?
Mr. Barofsky. My audit chief, who has begun the review of
these surveys, we are holding off doing our full review until
they are all in, which should be this week, has told me that
his initial review, that they have been very good responses. We
have gotten a lot of detailed responses about use of funds,
according to him. He is encouraged that we are going to be able
to do a very complete audit report. We will have to take a look
at that.
Then obviously there is going to be followup. We are not
just going to take the banks at their word. We are going to be
doing followup as part of the audit process.
Mr. Cummings. Now, are you staffed up sufficiently?
Mr. Barofsky. No. We are growing. We have been in existence
a little bit under 3 months now. We have about 25 people on
staff. We are aggressively hiring.
It has been very difficult. S. 383, which is now in the
House, will help us grow. It gives us some hiring flexibility
that we desperately need. We are striving to build to about 100
to 125 initially. So hiring is a challenge.
But I also don't want to leave the impression that it is
only me and my staff of 25 standing between the taxpayers' $2.9
trillion and those who would try to take advantage of it. We
are working with all of Federal law enforcement, as well as
some State law enforcement, to make sure that we have the right
protections in place.
Mr. Cummings. I see we have a vote coming, but I have one
question I have to get out. In your written testimony you
indicate that you have ``begun an audit into the process under
which the Bank of America received $45 billion in capital
investment and it is to receive a guarantee relating to
approximately $100 billion of toxic assets in four separate
TARP transactions under three different TARP programs.'' You
further state, and this is what I am getting to, as to
coordinated oversight, it has been and will continue.
Now, considering what you wrote in your testimony, I am
interested to know whether Treasury knew about the $3.6 billion
in bonuses awarded by Merrill Lynch in December, just before it
was taken over by Bank of America. Did you know about that?
Mr. Barofsky. Congressman, I really can't talk about any
matters that are pending under review in our investigations.
Mr. Cummings. I understand.
Mr. Barofsky. It has been stated that we do have a pending
investigation into the Merrill Lynch BofA bonus situation.
Mr. Cummings. I understand. Let me ask you another way. And
this may fall in the same category. Is this the kind of
information, though, that would normally come through your
office?
Mr. Barofsky. Yes, Congressman, we would ask those types of
questions and we would expect to receive those types of
answers.
Mr. Cummings. And you would expect to get truthful answers,
is that right?
Mr. Barofsky. It would also be a crime to lie to our
office, if we asked that question, if somebody gave an
untruthful answer, that would also be a crime. So yes, we would
expect truthful answers.
Mr. Cummings. Very well. I know we have a vote coming up,
so thank you, Mr. Chairman. I yield back.
Mr. Kucinich. We will go to Mr. Issa.
Mr. Issa. Thank you, Mr. Chairman.
I am going to try and focus a little bit of attention again
on XBRL. I apologize, I have been going through here and the
Circuit City bankruptcy hearing next door. And actually, they
have a lot in common, since it cost Circuit City $30 million to
get a $50 million financing package. Needless to say, their
Chapter 11 was short.
But without getting into whether TARP funds should be used
for DIP financing or to encourage the Debtor In Possession
financing to stop corporations from going bankrupt completely,
Mr. Horne, Mr. Bolgiano, let me go toward you again. I think I
heard Mr. Jordan kind of get on this, but I want to be
absolutely sure.
If XBRL were to be implemented going forward, well, let's
go the other way. If in fact we were to use XBRL to try to
drill down into where the TARP money has gone today, would you
be able to do that?
Mr. Bolgiano. Yes, sir, with the proper authority from the
Government, we would be able to provide the tool to be wielded
by the Government for oversight.
Mr. Issa. So you could provide the tool. They would need to
make sure they had access to the data bases?
Mr. Bolgiano. We would be able to provide the standard to
be wielded as a tool, a dictionary. But it is not a system. It
is not software. It's a standard.
Mr. Issa. Should we realize that you allow other people to
develop independently software that use your technology?
Mr. Bolgiano. It is similar, if you had asked me in 1993,
would it make it easier to get information from people if we
had the Web, I would have immediately answered you yes. It
would be a quantum leap in the efficiency, time and expense to
gather information.
Mr. Issa. So I guess, Mr. Horne, would you have the
equivalent of Google, now that we have established that it is
like getting the Web, would you have the ability to drill down?
Mr. Horne. I would love to be using that analogy. I think
the key is that we would actually create something that would
be, to a greater extent, even more actionable relative to this
subject matter. Because we would be dealing with the numbers of
events that are specifically related to the financial instances
that would be involved.
So the answer to that, Mr. Congressman, is yes, we would be
in that type of position.
Mr. Issa. And then I think I will shift, obviously if we
implemented this technology going forward, it wouldn't just be
the two of you we would be asking, but in fact, all our
regulators would then have the tools to do this themselves?
Mr. Horne. That is correct. And it would also be on the
basis of the fact that we are asking through Congresswoman
Maloney and Congressman King and also in the Senate to pass a
bill that would allow access to the regulated data, so it
wouldn't just be the data that is publicly available but also
the data that would be available only to those people who would
have access for regulatory purposes.
Mr. Issa. Mr. Barofsky, when we had Secretary Kashkari here
a few minutes ago, he answered in very, very many ways that of
course, he would love to have the ability to have more
transparency, to know the value of these assets in order to
value them and so on. But today, are we in fact, I am going to
lead a little bit here, are we in fact asking for repeatedly,
and are you asking for, repeatedly, production of documents
almost in the way that attorneys do in a court case, where you
have to know what you want, you ask for it, they turn it over
to you, often you have to sift through it and say, but it is
not in a format I can use, can you re-manipulate it and send it
back to us? Is pretty much what is going on in the delivery of
answers to your questions by the various TARP recipients?
Mr. Horne. No, Congressman. From what my audit chief tells
me, we have gotten good narrative answers that we think are
going to be very useful.
Mr. Issa. I was talking about production of data, not
narrative answers. In fairness, Bank of America said they were
solvent, so solvent that they could turn around and buy Merrill
Lynch. Today we know that is not true, that in fact we would
have been much better off having Merrill Lynch live or die on
its own, BofA live or die on its own, and not have two
organizations perhaps too big to fail be now two organizations
made into one too, too, too big to fail.
So back to the question. You are receiving answers to your
requests, narrative answers. Mr. Kashkari, of course, if he
asks for it, is receiving them. But the real question, the
question that Mr. Horne was asked and answered was, do you or
does anyone in the Federal Government have the ability to
basically ask the question, if they have the access, and get
the answers from raw data, diverse raw data, or do we in fact
depend on often self-serving individuals at various large banks
who do not want to fail to give us answers that cause us to
give them money, only to later get answers that they need more
money?
Mr. Kucinich. The gentleman's time is expired, but please
answer the question.
Mr. Barofsky. We have not asked for that type of raw data,
in part because it would be simply way too expensive for us to
analyze it.
Mr. Issa. So if I can conclude, so you don't ask for the
information because you couldn't analyze it, people are here
today talking about the tools to analyze it both prospectively
and retrospectively. And we are being told, no, we are going to
rely on companies to deliver us information that have proven to
be unreliable.
Mr. Kucinich. The gentleman makes a point, if I may, and
that is, Mr. Barofsky, how do you know if people are telling
the truth if you don't have a comprehensive data base against
which to analyze the bank's reports?
Mr. Barofsky. What we are doing in our survey and how we
are going to test these answers is, there are several things
that we have built into the survey. And it is a survey, to be
very clear. We are initially, as the initial part of this
audit, and as a part one, relying on the banks' responses. But
not in a vacuum. For example, we have asked them to make
reference to their budgets and plans. Our experience is that
when a bank gets a huge influx of cash, they don't just say,
``have a party.'' They budget, they plan for it.
These TARP programs are expensive for some of these banks.
Mr. Issa. Well, actually AIG did have a party, if I
remember right.
Mr. Kucinich. They did.
Mr. Barofsky. They may have, but many of these financial
institutions, they have plans, they have budgets, we make
reference to internal emails, internal planning, and we are
going to test it against that. And again, if they do lie, if
they do tell us a story and it doesn't match up with their
internal documents, with their public statements, with data
that we can later obtain, they will have committed a crime and
we are going to investigate that thoroughly.
Mr. Kucinich. And if I may say, that this investigative
party will continue.
We have dozens, literally dozens of questions to ask the
witnesses. But we are out of time. We are going to submit
written questions as a followup, to the witnesses, I will ask
Mr. Issa and Mr. Jordan to join me in this, that will help to
fulfill the purpose of this particular meeting.
We have had a very patient panel here in front of us,
because this hearing has gone on over 5 hours. The title of the
hearing, ``Peeling Back the TARP: Exposing Treasury's Failure
to Monitor the Ways Financial Institutions Are Using Taxpayer
Funds Provided Under the Troubled Assets Relief Program.'' We
know that we could be looking at as much as $3 trillion in
funds that are coming from our Government, from the taxpayers,
to these various Wall Street interests. It is a mind-boggling
amount of money. And we also know that if Treasury does not
have the capability to keep track of those funds, we are
looking at nightmare.
And we are looking at a severe challenge to trust in the
political system. We can worry about banks collapsing, but we
also better worry about the trust that the American people
should have in their Government collapsing. Because that is the
basis for our entire Nation. It is all held together by trust.
So I want to thank each of the witnesses for what they have
done to try to take a path toward trust and toward
accountability and toward reliability of the information which
Congress is given.
I want to thank you on behalf of this committee and on
behalf of the American people. This committee meeting stands
adjourned, but we will be back at this subject. I want everyone
here who is paying attention to this to know this subcommittee
will not relent in our efforts to make sure that the people of
the United States know how their tax dollars are being spent.
[Whereupon, at 3:08 p.m., the subcommittee was adjourned.]
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