your testimony which i think flow very nicely into the real issues facing the country right now, which do include the question of the unemployment rate. a couple of weeks ago in two parallel stories in "the washington post," the following statement was made on the front page. the wounded u.s. economy, and i quote, has shown signs of improvement in recent weeks, but many economists are accentuating the negative, bracing for head winds, you mentioned head winds, that could cause the economy -- cause the recovery to be weak. huge swaths of the financial system have been damaged which could lock consumers and businesses out of loans for years to come. next to that story was another story about asia. you're smiling. you probably read the same papers i do. and that story says asian recovery was -- i won't quote it, but to the effect of the asian recovery has been far more robust than ours and a key factor in that has been the relative strength of asian banks.

now, do you agree with this characterization that appeared in "the post" of the circumstances we find ourselves in? >> important to start with, in the best of times we grow roughly at an average of 2.5% a year. for an emerging market economy in china, india, brazil -- >> mr. secretary, japan was the comparative here. >> i doubt that you're going to see a robust recovery there than here. again, you need to think about that relative comparison. but i think that we are in a position where it is much less likely today that weakness in the banking system or in the rest of the financial sector proves to be a financial constraint on the pace of recovery. the dominant constraint on the pace of recovery here is the basic reality as a country we borrowed too much, saved too little, lived within our means, and the process of correcting that pattern of behavior is going to necessarily produce a

slower recovery for the united states. >> mr. secretary, why is it in your view that the weakness of the banking system, and particularly three out of the four largest banks whom i believe you correctly are not allowing to repay t.a.r.p. money, in light of your comments that the mortgage market is a creature right now of your efforts and, secondly, as you noted in your written testimony, that business lend,iing by bank is going the wrong direction, why is that not a problem? >> i think it is a problem. we're in a much better position than we have been and i think than we could have expected to be. it's much less likely today it would be a constraint, but just a few observations. bank lending is declining but it's declined much less than it has in the past recessions. in part because we've been relatively effective in restoring some confidence of

stability. the decline in bank lending has been more than offset by the increase in borrowing in the securities markets. so overall in a situation now where mostly we're seeing a reduction this demand for credit. again as people improve their balance sheets, save more, spend less, and less evidence of a substantial con stractitraction supply of credit. still early. largely because of the forceful actions we took and the support we're continuing to provide and so it would not be appropriate or prudent for us to infer from that sign of progress that we're at the point where we can start to walk this stuff back, wind it back completely. >> just to come back to that one sentence which i found most interesting, is it really a good thing that essentially credit provision has moved away from the banking system to the extent that it's going on, particularly with with respect to the fact

that most employers, most creators of jobs can't access the bond market? >> it's an interesting question, but remember our banking system took on too much leverage. >> unquestionably. >> so inevitably the banking system leverage was going to have to come down. that was the necessary thing. the consequence is you will see less growth in lending by banks. it's important that there are alternatives to banks in the capital markets that actually work. if there's weakness in banks, there's an offsetting source of strengths and vice versa. part of the reform process is not just to make sure there's stronger capital in banks, much stronger shock absorbers in banks, better capacity to absorb future risk, but that the securities market have a more robust framework. >> my time has expired. i'll come back next round. >> thank you. commissioner. >> madam chairman, i wanted to

start out by looking ahead i guess if we could. because i said as i said before the authority expires at the end of this year and you have the authority to certify that it should be extended with the justifications under the statute and no one would be happier than i to see it meet its end. but according to the statute your certification should include a justification why the extension is necessary and stabilize market and the expected cost to the taxpayers. i guess my first question is have you made a decision yet? >> no, i have not yet decided. we're going to think through that carefully. >> that's why i wanted to explore because this is rather -- for a statute, no offense to a congressman here who didn't vote for it anyway, but it's very squishy and it's really questionable to me like what, for example, to stabilize financial markets. you just said that where you've

been relatively effective in restoring stability. so when you determine that the markets have been stabilized, are you comparing it to a year ago, three years ago, in which case they might not be more stable. what kind of markets would you look at? u.s. stock market, commodities, the dollar? i think all of these things need to be carefully looked at. i don't know if you've started this process. >> i completely agree with you. you want to look at what is the capacity of the financial system to live on its own now without these exceptional support. how likely is it that you're going to see enough repair and strength in the securities markets, not just the banking system, for us to withdraw that support? i think some of these programs realistically are going to take a longer time for them to work. for example, the expected path of foreclosures is going to last for a long time. so it's very, very unlikely that we're going to be at the point in the next few months to have

said that the housing market is at a point where we can be confident that we can withdraw these exceptional actions. there are parts of the credit markets in asset-backed securities where there's been substantial improvement, but a lot of that has come on the strength of the basic backstop we provided. so we want to looked at a broad stet of measures of basic health in the system and we want to make sure that people are confident that we're going it get this thing on a strong foundation. as i said, i think the classic mistake people make is they declare victory too soon and withdraw these things and the system has to go back and build more insurance against the risk of a bad outcome. that could intensify the recession -- >> contrarywise, too, you can also make a mistake of leaving the crutch on too long and the patient then gets too dependent on that. >> you're exactly right. >> we're talking about moral hazard, which i hope as you all do your cost analysis, you have to take that into account

because i think that's a huge undermining factor. >> i completely agree with you. i think you said it exactly right. one thing that's helpful on that front, largely these programs are designed so that they will be expensive when things normalize, and that's why you have seen use of these programs dramatically decline as conditions have improved. that helps mitigate the risk that people rely on these things too long, depend on them too much. >> i think you could argue that, for example, the warrants are relatively underpriced. sure, the taxpayer is nmaking a nominal profit. but in relationship to the humongous risk the taxpayer took, is that recoupment con men sure rat with the risk that was tak taken? >> when you look at who types of things in measuring the effect of these programs, one is what was the directly measured benefit to the taxpayer in terms

of the return on the risk we took, but that's not sufficient. the best way to measure the effect is to take a broader view of what did you do to help get this economy out of crisis and into recovery? and that's a harder thing to measure. >> right. >> but still if you look at almost any measure of cost of credit, confidence in the financial system, availability of credit, concern about risk, all those measures are dramatically lower, and that is the fair way to capture the return on these investments is to look at those too. not just the 18% return we've gotten on our investments. i think the art of this, and there's no -- there's no science in it. there's no perfect thing. the art is if you commit to do enough and you make that credible to people, you're not going to be behind always chasing an escalating crisis,

then you're more likely to solve it at lower cost. if you prematurely pull it back, you live with too much risk, it's going to be more expensive in the future. that's the basic central design of financial strategy. >> thank you, mr. secretary. superintendent neiman. >> thank you. mr. secretary, the new treasury servicer report on mortgage modifications represents i think an important step in data access and accountability, but it also confirms in the report just issued this week that there are wide disparities among the rates of modifications. some firms, as you well know, have not started any trial modifications, while many more firms have really started rates in the low single digits. you held an important meeting with servicers on july 28th to discuss these very issues. i was also encouraged yesterday to hear assistant secretary bars' house testimony with respect to new commitments that have been made in key areas such as the speed of implementation,

data collection, and borrower outreach. the report that was just issued shows there are trial modifications started in the numbers around 360,000. these would indicate only 12% of estimated eligible borrowers. secretary bar indicated that servicers have committed to increase that number to a total around a half a million trial modifications by november 1. based on that, your benchmark of reaching 3 to 4 million homeowners at risk, are you satisfied we're on that track? have we set realistic expectations and even more importantly, is the real risk and challenge in converting those trial mods to permanent, sustainable modification? >> you just described it absolutely right. it's not enough to have sent out $1.8 million of solicitations, which are the numbers we've approached, or almost that lufl. it's not enough that you have something like in the close to

half a million offers extended. it's not enough that you have more than 350 households now benefiting from substantial reductions in mortgage interest rates. you need to make sure those are converted into things that are going to work over time. and we are very focused on making sure this program reaches as many eligible homeowners as possible. two important things to point out. it is very helpful to do what we just did, which is to put in the public domain every month detailed numbers that allow the american people to see how many people these banks are reaching. and i am quite confident that will produce much, much faster modifications much more quickly because institutions do not want to live with the consequences of being so far behind the curve of what is possible in helping families get through this exceptional set of problems. the other important thing we're doing is to make sure that we are going in after the fact and

looking at whether people are denying eligible homeowners access to modifications. we have a program of auditing to make sure they are not denying eligible homeowners the chance to participate. i think this is going to reach a substantial share of people that are eligible, but it's important to recognize that this was just one part of a set of actions we took to help stabilize the housing market. those actions looked into total that's helped bring down mortgage interest rates to very low levels and it's helped bring a measure of stability to housing markets, housing prices, housing activity faster than many economists had forecast, and fundamentally it is that broader measure that should be the ultimate test of this program. >> i think i'd be interested in your comments about the continued obstacles to effective

and increasing the effectivance of servicer participation. what we're hearing in talking to servicers is there's still concern about outreach, getting documentation back from servicers. some creative approaches that i have heard from servicers are because people are not responding to going out physically and visiting. i'd like your thoughts on other creative approaches. i've suggested to the past possibly even letters from yourself or even ideally the president of the united states to assure that people are opening their mail realizing that this is not just another creditor notification, but a real response and involvement from the government. >> we welcome those suggestions. of course, we are very pragmatic. we want this to work. we'll act on any reasonable suggestion. i think you're right to point out for this to work people need to take some initiative to find out how to make sure they can get help.

but as you're seeing, 350,000 families today have seen a dramatic reduction in the cost of carrying their mortgage in ways that puts more money in their hands at a time they're going through enormous challenge. and the pace of that curve is very rapid. >> that's our time. >> i just -- we will be holing a hearing on september 24th in philadelphia on this very issue and we would look for support from your office to assure that we have representatives from the treasury and fannie mae and freddie to go over those programs you reference, particularly the second look. >> a good use of your extra 20 seconds there. >> thank you. >> thank you, superintendent neiman. i'd like to return, secretary geithner, to a point you raised, and that is that the stress test are effectively the tool by which we have measured the strength of the 20 largest institutions and that's what gives you confidence both that

we understand the risk of exposure on the toxic assets and the overall projections on how stable these institutions are. but the worst case scenario under the stress test for 2009 projected average unemployment for the year at 8.9%. current unemployment rate a 9.7%. average for the year has reached 9.7%. the panel has recommended under those circumstances the stress test be repeated for these financial institutions. does treasury plan to do that? >> i think there's an important thing to start with in looking at whether this was a conservative enough stress test and the measure of that is not actually meaningfully in the forecast for growth and employment that was framed as part of that scenario.

the most important thing to look at was the loss rates that were assumed in the worst case scenario. if you look carefully, as you have done, at what the fed designed and produced, the loss rates that were assumed in the stress scenario were worse than peak losses experienced by this country in the great depression. so they assumed roughly ross ralts -- loss rates could rise to 9%. we're in the 2% to 3% range. losses are running well below that level, and earnings are running substantially above the assumptions. >> let me stop there because you're the one who put out what the appropriate details were in the stress test -- >> actually the fed designed it, as you'd expect. >> that's right, the fed designed, but you advanced it and said we could rely on it. and one of the featured elements was unemployment, and we all

know that unemployment relates very closely to the level of foreclosures which in turn relates very closely to the value of the toxic assets. >> but the framing constraint in the stress test was the loss estimates that were applied and the earning estimates that were constrained, and those did not relate to the unemployment forecast. so, again, what matters -- >> is not what you advertised mattered? >> again, the great virtue in this assessment was that we put in the public domain for everyone to see and assess for themselves what the loss rates were, so people can judge on their own. >> that raises the question, actually we would like to be able to rerun the stress test, and i had understood from conversations with you that we would have enough information about how the stress test is composed that reasonable people could sit down, build in other assumptio

assumptions, and see how the stress test would come out with these major banks. and, in fact, we don't have the risk model, and we don't have the data inputs -- >> i'd be happy -- >> that would be necessary to repeat them. >> i'd be happy to remedy that and spend as much time as you'd like going through this. >> i'll take yes for an answer. >> i need to change the way you framed it. these were an important improvement in the market's capacity to assess risk. on the strength of that improved capacity, you have seen a substantial amount of private capital come into the u.s. financial system. now, we nefver said it was sufficient. there's no certainty in life. things could change going forward, but i think we have a basis, be happy to work with you on it, for people to independently assess whether these assumptions were rigorous enough or whether they need to be revisited. >> let me ask the other half of that. we asked the question about expanding the stress tests to mid-sized banks and perhaps smaller banks in a somewhat modified form. is treasury willing to do that

>> we said we were not going to conduct a similar exercise bank by bank across the 9,000 other banks in the country, but what -- >> how about the next 100? >> well, again, i think what the supervisors have done, because this is their job, what they have done is apply pretty careful exacting framework through the supervisory process to those rest of those institutions so we can have a better sense for making judgments about the strength of the remaining system. but it's not realistic or feasible for us to conduct -- for the fed and supervisors to conduct the level of detailed assessment required for this to be credible for a banking system that has 9,000 additional banks. >> thank you. mr. secretary. i'm sorry, congressman hensarling. i'm scott cohn, we'll take a brief break in the hearings just to give you some information from fairfield greenwich group.

they are the group that was on the other end of that madoff phone call that we've been playing all day and last night. they say they want to clear up some misinterpretations of the madoff phone call, particularly the first words out of bernie madoff's mouth. listen. >> obviously, first of all, this conversation never took place, okay? >> fairfield greenwich says rather than take madoff's suggestion, fairfield greenwich executives did the opposite, they told s.e.c. executives about the call and answered all questions accurately. they say they had permission from the s.e.c. to talk to bernie madoff when the s.e.c. was going to come in and interview fairfield greenwich about the madoff relationship. it's one of many investigations that the s.e.c. botched in the madoff probe. now back to the hearings. >> by the administration so can you enlighten -- >> i would be happy to walk you through again like i do in the

substantial reports the fed and the financial stability oversight board has provided. i would be happy to do it, but i don't think what you're saying is fair. the virtue of these programs are you can see directly, not just how much money we're spending, where we're spending it, but what is actually happening to borrowing conditions. i'll give you an example. one of the most important things we did with the fed was this program called the term asset back lending facility. i'm be very brief. designed to provide a backstop of support to the lending markets critical for small businesses, for auto loan finance, credit card receivables, et cetera, and you can see in detailed evidence how much issuance has come with this program, what's happened to the cost of issuance, how much has been directly funded by these programs. >> mr. secretary, what you're asking us to do though is draw in essence the cause and effect. happy to look at the statistics in the economy, but, again, coming from an oversight panel

here, it's hard not to conclude that essentially you have the subjective power to invest $700 billion on a revolving basis on any institution you deem as a financial institution and that any program will be judged as a success if you deem it a success after the fact. >> i don't agree with that. and i would never claim that. i will jus remind you of two things. the congress of the united states designed the authority treasury was provided. >> mr. secretary, you have the ability under the programs that you designed to say here are the metrics -- >> and i'm giving you them, but this is the great virtue of this program. you can see not just the return we're getting when people repay, price we're getting relative to the market, but you can see directly program by program what's happening to credit conditions which is the ultimate test of what we're trying to do. that's the great virtue. can do better than that -- >> if what's happening in the credit markets is the ultimate test and again we can question

cause and effect, you know, clearly the libor ois spreads one month were incredible back in the crisis in september of '08. by the time your administration took office, they went down from 300 basis points to 20 basis points. now, since your administration has come into power, apparently they're down to ten basis points. certainly that's an improvement. but it sounds like a lot of this happened on the previous watch. again, i don't know what the cause and effect relationship is. >> cause and effect is difficult in economics and finance, but it is much easier and more clear in these programs, these markets, than in most other things where we try to measure the effects of economic policy. you were right to point out that the actions taken by my predecessor, which of course i was part of, did have an important effect in breaking the panic in the fall of 2009. but it's also true almost any measure of financial health for this country in january of this

year was still in signs of emergency. >> mr. secretary, again the question is what is the taxpayer getting for their money today. >> i'll tell what you the taxpayer is getting. you have an economy -- you have a financial system that is more stable. credit is more available. people can borrow at much lower cost, and the taxpayers of the united states can see in the investments we've made in the banking system returns in terms of actual billions of dollars. >> well -- >> there is no better measure of the return of these programs than i think anybody could see. i would be happy to -- >> how about an additional 2.5 million jobs lost, the highest unemployment rate that we have seen in 25 years, mortgage delinquencies and foreclosures up. mr. secretary, it's a mixed report card at best. >> but congressman, no one -- i was very clear in my statement, it is only now we're seeing positive growth for the first time. unemployment is still very high

and could stay high for some period of time. we are not close to being through this, but on the clearest, direct measures of the program we were tasked with executing, we have made more progress than i think people reasonably expected. not enough yet though, not enough, and we're going to keep at it. >> thank you, mr. secretary. mr. silvers. >> mr. secretary, i want to take this up from a different angle. i think one of your achievements, clearly yours, not the prior administration's in the stress test was to put an end to the fiction that all banks were equally healthy. i understand why that fiction was indulged originally. i don't think it was done out of bad faith or for anything other than the best of reasons, but it was important to put an end to it. however, i think many of the characterizations of success that you have just indulged in with my colleague are due to unwinding funds that were given to strong banks, and when they

paid them back, they paid them back at a profit and that was never where the risk was embedded anyway. there was always some risk, but the big risks were not there. so i want to turn to weak banks. i hope you will indulge me in some peculiar questioning. can you explain to me and to the listening public what is a zombie bank and why is it so dangerous? >> i don't ever use that term myself because i don't think it helps anything. i think the risk in any financial crisis is if you have a banking system that doesn't have enough capital, they will have to reduce lending, and viable businesses or families will not have access to credit and, therefore, they will be forced to shrink or go out of business or delay a college education for their children. that's why the health of the banking system matters and that's why it is a good use of policy and financial resources

to try to make sure you bring capital in so you're not living with a set of institutions that are too weak to lend. >> too weak to lend. is it fair to say those people who like the term zombie bank mean by it the walking dead, meaning an institution that is not in receivership or insolvent but is too weak to lend? is that a fair characterization of that term? >> i think i just said it -- i'm being less graphic than you, but i think you have the right concept. >> okay. >> where are you going with this? >> i thought i got that question. where i'm going with this is whether or not you like graphic terms, graphic terms sometimes have the ability to clarify things that sometimes seem very mysterious. whether or not you like graphic terms and whether you use the terms i just use or the terms you used, in your view is citigroup such an institution today? >> no. >> why? >> this won't satisfy you, mr.

silvers, but i'm not going to -- i can't talk in this context, and i will never talk in this context about the detailed outlook for individual institutions in this country no matter which they are. i want to return to where i began which is that the best test of whether that's things are working is whether you're seeing private capital, private investors in this country and around the world willing to come in and provide capital to those institutions, to provide funding for them, and one of the great virtues of the stress test was it gave them a chance to make that choice and they basically in a sense voted with -- >> mr. secretary, how can you be sure, and i recognize the cause and effect issues that you mentioned earlier are real in these areas, but how can you be certain that what you didn't really do in the stress test was signal that you, the treasury department and the 23fed, were t going to further hammer the capital structures of these banks and they could be invested

in because there was an implicit guarantee even though they remain at their core not really functioning institutions? >> again, you're right to point out that we did a range of other things besides just making it possible for private capitol to come into these banks. part of that were the set of guarantees, those were important things. they have been helpful in restoring confidence. again, i think by any measure you have a -- the system that we have today is in a smaller but stronger capacity to support the economy going forward, and that's the ultimate test of what we're trying to do. >> mr. secretary, i'm going it refrain because i think folks at citigroup may feel i'm picking on them. i was going to ask you about b of a and wells in order. i won't spend the time in doing that because you're not going to answer and i appreciate why you feel it would be inappropriate

to be specific. those three institutions are a macroeconomic problem, and they go directly to jobs. as this panel has gone through the country talking to people who are trying to create jobs, we hear over and over again that in various ways, it depends what it is, whether it's ag or commercial real estate or large firms or small firms, we hear over and over again that the system is weak and the large institutions are not stepping up. >> mr. silvers, that's our time. >> i'm done. >> commissioner atkins. >> thank you, madam chairman. i wanted to go back to the statute a bit because one of the other provisions of the statute regarding t.a.r.p. is that the government accountability office is to do an audit, and i think significantly it's not under government accounting rules but under gap and gas which i think will be interesting. so they're going to have to get to some of these issues if they're going to do a balance sheet and p and l statement and all that sort of thing.

they'll have to look at cost and whatnot. is this being scoped out yet as far as the audit goes? where does that stand? >> i don't think i can do adequate justice to that today but i'd be happy to get back to you in writing. i know we have coming up something we have to put out in terms of a broad financial statement of the government which will include some estimates of those measures, but in terms of the gao process itself i don't know the details right now. >> as far as when it might be public -- >> just can't tell you but be happy to have them get back to you or do it ourselves directly. >> okay. another issue, and you brought this up in your opening statement, is regulatory changes that you all have proposed to congress, and i guess having come from an independent agency sundays i value that sort of tradition of independence from the administration, and earlier this year there were reports in the press about i guess i'd term it as maybe excessive pressure

frommed ed ethe administration, especially the treasury secretary with respect to your colleagues on the president's working group and elsewhere. so i wonder where that stands as far as you're concerned as far as dealing with others as independent agencies. they're not part of the administration, of course, and how you view your interaction. >> i actually believe that despite what you read that there is a lot of agreement across the agencies on the core things we're trying to achieve. i think on the broad structure, and you can say this in the framework for protection and derivatives we put out on resolution authority for dealing with failed instuthss itutions future. you can see it on the core provisions on capital. there's a broad base of agreement across those agencies on the core parts of reforms. there are some areas though

where they would prefer thwe lee the existing authority with them. the focus of some of their concerns is where we propose to take authority from them and put it in a different place. most conspicuously in the area of consumer credit protection where i think by any measure you look at our system and it failed, and our belief is to put in place a stronger system you had to put in a single entity both the authority to write rules and enforce them. but that's i think the best example really of where there's still disagreement across these institutions. nothing surprising in that. >> most people have vested interest and everything else. but i guess we'll have another chance to talk about these particulars later on. with respect to the programs under t.a.r.p., do you have any expectation of expanding the list you have now or -- >> again, what we tried to do

earlier in the year was to lay out a broad frimwoamework to recapitalize the system and provide broad credit reports necessary for recovery. as many of you say, we put out a pretty broad framework of programs in that area. that was our best judgment at the time about what it was going to take. we want to have some capacity to modify and adapt them over time to wind them down, redeploy capital as necessary. at this stage we don't have any specific plans to substantially expand either the scope of entities of areas we would target, but it's possible that looking at the damage in the system remaining, we might make that judgment. but we'd wand to set a high bar for doing so because we want to be able to demonstrate to you that that's an appropriate use of taxpayers' money in terms of returns we will get. >> speaking of which, one of the issues i think that is still in

question is whether or not t.a.r.p. is a revolving type of arrangement, whether the monies that are paid back are then available for future. do you have any legal analysis of this? >> in previous testimony we provided pretty extensive responses to the congress on how we interpret, how we think that authority was drafted. i think there's broad acceptance of the view in the congress by the architects of that legislation that the way it works is this -- if a dollar comes back and, of course, as i said, substantial billions of dollars have come back to the treasury, that goes directly to the general fund to reduce debt outstanding. but -- >> mr. secretary -- >> it still gives us the authority to use that if we think we need to do it to help protect the system. >> i guess i would like to see -- >> happy to do that. >> thank you. superintendent neiman. >> thank you. >> a major aspect of regulatory reform is streamlining and

modernizing our regulatory structure. your proposal includes merger of the otc and ots and i support that change. some, including our nation's largest banks, however, propose going further to create a single monolithic federal bank regulators which in my opinion cra raises serious concerns. it relies on the faulty assumption that regulatory consolidation leads to a stronger and safer banking system in itself. in my opinion the opposite is true. such a proposal would increase the fragility of the system by increasing industry consolidation, by eliminating needed checks and balances and subordinating the interests of the consumers to the business goals of a handful of mega

banks. mu what are your concerns about the proposals to create a single monolithic regulator and how important was it for you in drafting your proposals that the fdic and the federal reserve retain examination authority to better inform their respective missions of deposit insurance and lender of last resort? >> thank you for raising that question. you framed the choices thoughtfully. one of the most important things we decided we had to do was to eliminate the weakest parts of supervision in the system and eliminate the opportunity for people to take advantage of weaker supervision and flip their charter or shift risk to those parts of the system. one of the principal examples of that, unfortunately, was in the difference between the standards applied to thrifts and banks. we thought eliminating that was a necessary, absolutely essential condition for reform. if you look beyond that, it there's less evidence that having the federal banking

system we have with two entities responsible for different types of state charter banks alongside a single federal supervisor would create really meaningful risk of arbitrage in the future. if you look at the standards applied by bank supervisors, in general they were more evenly applied and more effectively enforced. so we don't think it was necessary or desiraable to try o force all of that into one new entity partly because of the concerns about concentrated power and partly because, frankly, we're asking the congress to do a lot in a short period of time and a guiding principle that affected our choices were to say we want to make sure they're focusing on the things that are essential to do and not on those that might be desirable to some people but would not offer a benefit that was proportionate to the political difficulty or the practical difficulty of doing it. further dramatic consolidation of bank supervisors we didn't think met that test. but we're open to suggestions. if there's will in the congress and interest in going further in

consolidation, we would be happy to be supportive of that. but i think you have to balance the factors that you laid out in your comments. >> and you would share my concerns over the role of the checks and balances that i often use as an example the role of the independent fdic in raising issues, the importance of the leverage ratio was an important checks and balance. >> i think you're right there are virtue in multiple sets of eyes looking at these institutions. but competition creates risks, too. we didn't get that balance right. we thought we proposed how to fix the weakest parts of the problem. but, of course, we'll be open to suggestions about how it get that balance better. >> i yield my time. i will pick it up in the next round. >> thank you. >> assuming we're going to have a next round. >> i hope so. thank you. aig has received about $70 billion in t.a.r.p. money, about $100 billion in loans from the

fed. do you know where the money went? >> absolutely. and the money that -- and, of course, happy to provide any detail you'd like to see on this. the money in that context went to help prevent default, helped stabilize the very damaged institutions that would have posed, we think, very substantial risk of systemic -- >> maybe i should ask it with more specificity. was treasury aware of who the counter parties were that were going to receive payment in full on the credit default swaps when $170 billion went to aig? >> they have hundreds of thousands -- sorry, hundreds and thousands, maybe thousands of counter parties, but i'm sure that the supervisors involved and the people at the fed who were at the front lines of this stuff would have access to detailed information. >> so they knew who was going to get the money, the counter parties? >> well, i think they could have known. >> they could have. >> whether they knew at the

time, i'm not sure they knew. >> do you know if they spoke with any of the counter parties? >> in what sense? >> in any sense. >> about what? >> about the fact that -- >> many of the counter parties are institutions that are supervised all the time. >> they were holding pieces of paper from an entity that was clearly insolvent and the question of the government infusion of dollars there was going to make the difference between whether they got paid off in full or they ended up with nothing. >> right, but where are you going? what would you like -- >> i just want to know was treasury -- did treasury have conversations with any of the counter parties who ultimately profited -- >> i was not secretary of the treasury at the time, but i was president of the new york fed. i'm sure that was the right judgment at the time. you're right to point out that

that action did help make the system more stable, it did have broad benefits to the stability of the system, including the direct counter parties. i want to say one important thing. i think it's the premise of your question. the reason why aig posed systemic risk was not princip principally or significantly because of the direct exposure of those institutions, those counter parties. the biggest risk of failure to the system was in the damage it would have done to both retail people who brought insurance protection and saving protections from ai g as well as the type of risk you saw lehman present. >> so let me follow up. i understand your point and the distinction you're drawing. we just finished our auto report, and chrysler and gm, insolvent company, aig insolv t insolvent. chrysler and gm have bondholders, unsecured creditors, secured creditors, employees.

they will all took big haircuts. aig had people holding credit default swaps and they took no haircut. they ended up with money from the federal government 100 cents on the dollar. >> you understand that better than many people. it's sort of the tragic failure about the regime we came in with because we did not have the legal capacity to manage the orderly unwinding of a large, complex financial institution. capacity we have for small banks and tliferhrifts but not for ai. that forced us to do things -- >> are you saying you couldn't find a way to pay less than 100 cents on the dollar there but since you could find a way -- >> of course not. we would have done that in a second if we could have done that. but in deciding that default by aig would have presented the risk of further systemic damage to a very fragile system, we made the judgment to prevent default. by preventing defaults, we helped aig meet its financial

obligations, not just people who brought insurance protection, but it's broad counter parties. if you think through -- >> but not the same for the auto industry. >> completely different situation, you're right, but if you think through what happens when you let default happen, you can look at the wake of the trauma caused by lehman's default to get some sense of the damage that it can cause. that's why we've moved so quickly to propose broad resolution authority. >> and i appreciate that. let me ask one quick question if i can slip it in before we run out of time, and that is a year ago we were worried about banks that were too big to fail. but in the last year big banks have gotten bigger while 84 small banks have been allowed to fail and some experts are estimating that 1,000 smaller and midsized banks could disappear before this crisis is over. i just want to know, are we more at risk on the question of concentration than we were a year ago?

>> you know, i don't think so, but it depends largely on what congress ultimately decides to do in terms of financial reform. the only way to deal effectively with the moral hazard risk created by the consequences of this crisis and by the too big to fail problem is to make sure there are a set of reforms in place that make us better able to withstand the failure of large institutions, so we don't have to intervene to provide for a more orderly resolution. and that requires resolution authority, stronger capital, better derivatives protection, a whole set of cushions and safeguards. that's why, again, reform is so important. that's the only way i think -- >> thank you, mr. secretary. >> -- we can make the system safer for future failure. >> thank you. congressman hensarling. >> thank you, madam chair. mr. secretary, i continue to be concerned over the precedent being set for the taxpayer and our financial markets with the chrysler and gm intervention.

you are well acquainted with the facts since it was your team that helped put together the reorganizations, but in gm bondholders were asked to swap $27 billion in get for initially 10% common equity. the uaw agreed to swap $20 billion for 17.5% of common he can quit. $9 billion in preferred stock. and the uaw ends up with 55% of chrysler. they end up with 17.5% of gm. when you talk about the success of your administration in stabilizing the fanl markinanci markets, i'm just very concerned when senior secured bondholders are treated less equally than those who are unsecured and equally unsecured creditors still we see the uaw receives

preferential treatment. warren buffett, perhaps the most famous investor in america, said, quote, if priorities don't mean anything, that's going to disrupt lending practices. abandoning that principle would have a whole lot of consequences. "the wall street journal," some would say, i guess, the investor journal, wrote an op-ed back in may, quote, by stepping over the bright line by the rule of law and the arbitrary behavior of men, president obama may have create 1,000 new failing businesses. that is businesses that might have received financing before but now will not since lenders face the potential of future government confiscation. "investors base daily" this undermines the reason for accepting a bond at all. accepting lower returns for legal guarantees. that reduces the willingness to buy bonds. it's extra an nsomewhat anecdot

when i talk to investors i believe there are hundreds of billions of dollars sitting on the slooidelines concerned. i have small businesses that tell me they can't get lines of credit, so i know there was a huge stabilization by the time your administration took office. i'm not sure i have seen a lot of improvement then, and i simply question what precedent have you set and what is the impact for financial stability in treating the uaw so differently than senior creditors or those who are equal? >> you guys had a lot of time to look at this carefully. your report provides a thoughtful discussion. i know you have had testimony on this before, and i understand the concerns you're raising. many people have raised those concerns for some time, but this was a process overseen by a bankruptcy judge. that bankruptcy judge looked at

the terms of the agreement and reached a judgment about whether that was acceptable. that's the great strength of our system. >> it was a plan though -- a plan financed with taxpayer money under t.a.r.p. >> it was, and i think you know, you don't agree with, it you opposed this action which i understand, for thoughtful principled reasons, but we took this action because we thought it was important and effective to do in the face of this crisis and recession, and i think this will be judged as an exceptionally well-designed, dramatic restructuring. an important thing to point out is the scale of the restructuring designed and approved through this process went well beyond what is contemplated by many people in this congress -- >> in the time i have remaining, mr. secretary -- i'm sorry, i'm sorry, we have limited time. another aspect i simply don't understand is how fiat is brought into the deal 20%, i believe, of chrysler, up to 35%

if they will produce cars that receive 40 miles to the gallon. i know the president and the administration is passionate about their global warming agenda. we can have that debate, but i'm having troublefiat, who wasn't owed a dime, i don't believe put a dime into the deal, what having them use tarp money, u.s. taxpayer money to produce these cars, sometimes in the future, had anything to do with taxpayer protection, or financial stability. i just don't get it. >> again, i don't think i'm going to talk you out of your concern. i respect why you've opposed what we did of the. and what my predecessor did. we made a judgment we thought was in the best interests of the country. i think we're much better off today because those companies were not forced to go into liquidation. i think that was a prudent, sensible use of the authority kojs gave us. >> thank you, mr. secretary. mr. silvers?

>> mr. secretary, my colleague seems to be under the misapprehension that you are a bankruptcy judge. >> the last time you asked me if i was an investment banker, i said no then. i've also never been a bankruptcy judge, you're right. >> i did recall about your resume that the term banker does seem to apply to the federal reserve bank of new york. >> that would be stretching the definition. >> it's not a bank? anyway, you're not a bankruptcy judge, are you? >> no. >> the role of the t.a.r.p. in respect to any bankrupt entity is as a provider of debtor in possession financing, is it not? >> in that context, yes. >> a provider of such financing makes strategic decisions about how they want their money to be used. mr. buffett, if he was a debtor in possession, i assume the treasury would as well. >> and we did what we thought were the best financial terms for the taxpayer and for the country in that sense.

again, those judgments were overseen by a bankruptcy judge. >> let me move on. t the -- we -- you've made some references in your testimony to regulatory reform. one criticism of a program which i personally believe is a pretty serious and positive program that the administration has put out is the krit sim that it doesn't really deal with what structurally went wrong in our banking system and financial markets in that it doesn't deal with the combination and risks associated with investment banking in particular proprietary trading combined with commercial banking and insured deposits. i'm particularly concerned about this problem. to go back to my prior question, because of the zombie bank problem. if you have very weak financial institutions, particularly ones that think they have an explicit or implicit guarantee, they've not been resolved. they're really very weak.

the temptation to gamble is almost irresistible. can you comment on your views as to how this problem should be addressed and will be addressed under the administration's program? >> again, the -- in some ways the most important thing we have to do is make sure that institutions hold more capital and a higher quality form of capital against the risk they might face in the future. capital is sort of like a rainy day fund. it's resources they can draw on if things don't turn out so well. it's probably the most important protection we have against the risk of future crisis. future leverage in risk taking, it will make the system better able to withstand the stress that might come if one institution faces the risk of failure. that is the centerpiece of reform that we set out last week for reforming capital standards. if you ensure that these hold more capital against the risk they take, in whatever form uks and there's more capital against

the more risky activities, you can -- it's probably the most important thing we can do against the risk you're framing now. if we adopted a strategy of guaranteeing the reliability of the financial system, not forcing recapitalization, not conditioning our assistance on the kind of pretty dramatic restructuring, then i would be more worried about the risks that you refer to. that's not the strategy. >> is it your view that an aggressive proprietary trading desk is consistent, allowing an aggressive proprietary trading desk is a wise form of public policy? >> i think it is very important to make sure that you hold -- institutionals hold a lot of capital against all the risks they take. if you look at this crisis, of course, we'll be looking at this for a long time, most of the losses that were material for the weak institutions and the strong relative to capital did

not come from those activities. they came overwhelmingly from what i think you can fairly describe as classic extensions of credit, particularly where they're backed by real estate, and those basic choices which are a classic type of decisions. this is sort of the tragedy of this crisis. >> i'm not so sure about that. i think if you look at where the big holes came in the major commercial banks, they were substantially -- i give one example. i had this very interesting conversation with one large bank where they said, we didn't make any subprime loans. and i said, how did you get in so much trouble? they said, we had what's called a capital markets desk and they were in the business of repackaging other people's subprime loans. do you disagree with that as a characterization of how we got here? >> maybe we're agreeing rather than disagreeing. what you would call trading i would call the extension of credit. these were extensions of credit. in any case, the basic point -- >> all right. >> you want to make sure that,

if firms aren't forced to hold capital against the risky things they do, we'll be vulnerable again. and we're not going to let it happen. >> thank you, mr. secretary. mr. atkins? >> mr. secretary, i'm glad that you have a lot of confidence in capital. but i think even the capitals levels that you're talking about would not have prevented what went on last year. and so, i mean, you know, it's -- i think you have to -- some of it is, you know, a bit of flying by the seat of the pants, i think, ultimately. >> it's necessary, but not sufficient. but it is central. >> one of the central things is really predictability. as you were talking with the chair about aig, i think if you go back last year, and this is a debate for another time, but when you track fannie mae and freddie mac and what happened there, and then allowing lehman to go, but then turning around with aig, i think that did more to freeze up the marketplace because people were uncertain than anything else. but i wanted to get to the

public private investment program to find out where that stands. the two basic programs at the legacy streets program, of course, then the loan program. the legacy securities program is the only one that's really up and going. and i was wondering where that stands, how many purchases have been made. do you view these as viable in this grand -- great scheme of instruments that are out there? >> we are about to, i think at the end of this month, you'll see the asset managers we got to close on these programs. by all indications they're raising a lot of capital, a lot of interest. then they'll be out in the market buying securities. but you saw when the program was announced and when the details were put out, pretty significant effect on prices in those securities, because the prospect of financing capital coming in did help restore liquidity in

those markets. as i said many times before in public, we expect less demand for these facilities than was initially expected in part because liquidity has improved and partly because more capital came into the financial system. but i still think they're valuable enough worth going ahead with. if we think -- again, there's a high return to the taxpayer and to the overall economy from expanding them, we'll be open to expanding them further. >> okay. well, i think we can probably save that for another day. your time is short. i wanted to give mr. neiman an opportunity as well. >> madam chairperson, could i just -- very briefly? >> of course. >> i think you're right to say if you look back over the arc of this crisis, one thing damaging to the confidence was about the lack of clarity, whether the government would step in and stabilize the system. but to be fair with my predecessors -- but to be fair to me, too -- that was largely the