in my opening statement, i spend a lot of time focusing on the nonhit modifications, the mods performed by banks and services outside of the program. six months ago when you were here, we discuss the the same topic, and you agreed this was an important part, and i think because of the additional information that the treasury has shared since that time, we now know it's even more important. in fact, 70% of the modifications are now in nonhamp mods three to one. do you agree that -- what's your assessment? are these the way forward? are they sustainable, and what's your assessment on these proprior tear modifications? >> i spent time for this hearing on these questions. how much do we know about those mods and the quality is not so

great so far, but i think the general sense of my colleagues is that the majority of those modifications are lowering monthly payments quite substantially, and the -- one of the most valuable things we did in setting an industry standard for modifications is give a bar people couldn't sort of drive practice too, but i would like more data on that, and we'll look at ways to do that. >> you're right. eng the information coming out about reduction and modification payments is out there, but isn't the heart of the issue the stainability and the length of the modifications under hamp. those modify cases are five years, and then set to the low rates of today. we doamentd know the information -- we don't know the information. >> i agree. the three measures to look at are what is the magnitude of the

repayment reduction, how long is it in place, and what is left in terms of the remaining balance of obligations after the modification period expires, and, again, as i said, we'll look for ways to get better information out there to asees those -- assess those programs. >> the hamp monthly reports have been improving month after month and now have greater information distinguishing the performance by servicer. last week in the "new york times" a big story focused on large servicers, nonhamp modifications and highlighting the differences so in the cases of borrowers who were denied a hamp modification only 14%, for example, received a nonhamp mod, bfa, but over 40% received a nonhamp mod at wells fargo. how do we explain these

differences? >> i don't actually know. it's a very good question. i'm happy to pursue that with my colleagues to give you a better sense. >> yeah, to the extent that this type of data, and we had the same discussion with phyllis caldwell saying a lot of this information is held by supervisors, and to the same extent that this data has been voluntarily provided with respect to the hamp mods and i think the information with the to with respect to the nonhamp mods would be helpful to the program. >> as you noted one of the things we've done is put out very detailed metrics of individual servicers under hamp, but under a whole range of other measures and if there are other ways we can improve the quality of information out there, that would be good, and it's valuable

not because it gives a chance to look at it, but it changes behavior. >> yeah. >> it serves as a conscious. >> i think what i read in the times article may be misinterpreted. it doesn't mean wells is three times better, but the portfolio itself has characteristics that may drive those. we talked about in the past also a need for a performance mortgage system, similar to the origination side. do you have a, you know, a view as to the need at this point? do these types of data needs demonstrate the need for a national reporting requirements for reference data? >> well, i completely agree that we can do a much better job with much better data that's out there for the world at large, and again, i'm happy to look for ways we can do that. >> thank you. >> thank you. looking forward, and you know, trying to figure out what to do in the remaining days and in

your written testimony you talked about the second lien program and unemployment program. the second lien is a major promise. we have a servicer as a second lien, and a bank as a first lien, and the servicer won't want to make a modification. it's been around for awhile now, and based on the data we see, it's not what we all would like to see. i think i can say everybody. do you have any thoughts on getting this second leenl program up and running and moving? >> it took a very long time to get up and running and only been in place for a very short period of time, but i think it's very promising in the sense it achieves the simple em -- imperative. if the first is modified, the second has to be modified. we have the capacity to do that and now better incentives to do that so i think it's very promising, but it will take time to evaluate that.

>> do you have any idea on how much money is in that program? >> i thought you would ask me new estimates on what we spend. >> i look at this as a way, i think the panel does too, that this is a big problem. i also realize this is extremely complex problem and getting up to speed will take a long time. is there anything we can do or you or anybody to get this program to be all it can be? >> we're doing everything we can with a tremendous talented group of people who are on this all the time. we'd like the reenforcement, and the more we shine a light on pempers the better we can do. on the cost investment, i don't know how much we'll spend on this, and we're in the process of another reevaluation on how much we'll spend across the programs. we aren't in a position to reveal that until the budget, but you'll have a chance to look

at it then. >> good. right now, it's not budgeted for money because there's no incentives, yet clearly, we start on the hamp program, we were not beginning to have unemployed, but that shows the difficulty of the program. now, when you have someone to look at the debt on income ratio and people who needs modifications the reason is because they are unemployed. a second lien program is really key to making this whole thing work. what are your thoughts about the unemployment program? >> i agree. servicers are required 20 provide a three month fore barns. that comes later in the individual and comes months five to eight in their period of unemployment, so it has more value than people think. the other program we have, of course, is the programs with a variety of housing agencies providing resources to help them run programs to help the unemployed, and you made that point that the principle factor

which is driving foreclosures today is not what was at the heart of foreclosures of being in a crisis which is as you know a set of broader lending practices. now it's really about unemployment and that's why it's important to emphasize that the most important thing that will affect housing prices and the number of foreclosures and lay lowing people to -- allowing people to stay in their home is what the government can do to get the unemployment rate down quickly. >> t.a.r.p. is ramping down and hamp is ramping down. do you have any thoughts on the programs and this is an important issue and so much has been learned on this. is there some suggestions you could come forward, you don't have to right at the table, but i think this is a subject of legislation, you know, a new program funded, this is still a problem, and said it and i agree this is a program years out and it's key to the recovery, and, you know, we've learned a lot in

the t.a.r.p. program, but now we're not making modifications. if you have thoughts, i'd like those, but also a statement on paper. >> i'd be happy to think about that, come back to you a enmy colleagues can talk about that in detail. i think it's important to recognize. the -- there have been a lot of capable people spending a lot of time looking at broad different strategies to address the housing crisis, and there are people in this room and people around the country who have suggested much more dramatic departures of approach in the past. this would all require legislation and some require substantial additional resources, be -- but i think the fundamental question is really a different question which how many people do you think you can reach? the principle gap between the

roughly 5 million americans today that are late in their loans and the number of people likely to get a modification ultimately is really about the following, and just looking at those numbers in broad terms. of that 5 million, roughly 2 million are now potentially variable for hamp and the modification programs. the other 3 million americans late on loans fall into different categories, but many of them are individuals who took out loans for houses that are expensive, above $625,000 or whose mortgage burden today is below their income meaning they can stay in their house or were investors who had a second home. now, that's not all the 3 million. some of that 3 million is from

loans with services who don't participate in our program, some it is a people who there's no economic case for helping them stay in their home. it's better to help them through other ways, but thinking in a dramatic approach to reach millions of americans, you have to decide whether you want to extend the benefits of the programs using taxpayer's money to the class of the americans who fall into those categories, and that's something we looked at very carefully. we did not think this that was a reasonable policy choice and not a good use of money because a substantial fraction of those people were investors who were in a second home or an expensive home or who can't clearly afford to meet their payments. >> there's still, you talk about 3 million people out there who are not in that situation who need help who we've learned about how to deal and the services and second liens, we learned about the unemployed, we've learned about all these

things to get those 3 million, and they are extremely important to whether we're going to deal with what everybody on the panel here said how are we going to get out of this and if housing doesn't start being more productive, we're in deep trouble. there's a combination of people that kind moral obligation to help who are not subprime people, people who do it right, got unemployed through no fault of their own, about to go belly up, we have an obligation to help those people morally, but what makes it binding is to do it economically to get the economy moving and move on to the next step. no one, you know, my mother had a safe nothing worthwhile in life is easy. this is very, very, very difficult, but it's also very, very, very important. >> i agree with that. our work is not done. the government's work is not done. the damage is still profound and

it's going to take a long period of time, and again, the most important thing for governments to understand in financial crisis is you have to keep at it, keep working on it. you can't stop -- >> right. >> you can't stop too early, and as you know in looking at the foreclosures at risk still and unemployment at 10%, we have a lot of work to do as a country. >> one of the things to do is to put it together so next time this happens, god forbid, and some way to have an approach to deal with the whole thing, but in interim, we're still here as you said in a deep hole, and, you know, anything that we can use from what you've learned and what you people learned from hamp, we shouldn't just, you know, say, okay, it's now april 3rd, good-bye in terms of anything. >> we're going to be at this for a longer period of time than that. >> as you said, there's lots of

things hamp can't do. i'm sorry for taking so much time. >> thank you, senator. mr. secretary, in your opening statements you said that the financial institution were basically stronger today than they were a few years ago, that they have stockpiled around a trillion dollars and excess reserves earning 25 basis points so approaching the question of lending, it's not a question of insufficiency of supply. there's a trillion dollars they can loan tomorrow if they wanted to, so there has to be a problem with demand. why is there a problem with demand? i mean, from my perspective over the last two years there's been a great amount of uncertainty interjected into the economy to people who sit around their offices drinking bad coffee out of cups who really make decisions on hiring one person or two people at a time has simply said, you know, i think

we'll hold off on that decision. what's going to change in that perspective over the next six months to a year? >> i think the principle source of uncertainty remaining is uncertainty about what is going to be the pace of growth and demand for someone's products? as principally a question about how fast is our economy in the global economy going to grow, there is more uncertainty about that than is typical because of the scale of the damage caused by the crisis, and the basic shoal -- shock provided in the confidence in the depths of the panic. those scars last a long time. that's understandable. people are still economically secure today in terms than they were at any time really in generations in this country because the crisis was so severe. that's going to take time to heal, but it is healing. the best measure of getting better again is what's happening

to the underlying pace of the demand? what's happening to forecast of demand? those show gradual healing, and looking at how companies are behaving, is suggests optimism. i'll give you some measures of that. as i said, the private sector job growth is faster, stronger than have been in the last two recoveries, and business investment spending in equipment and in software ran at a rate of about 20% for six months of this year, about 12-15% in the third quarter, and still looks quite strong, so businesses are spending again because they want to make sure they have the ability to participate in the recovery that's coming, and that's encouraging, and again, that's going to take a little bit of time to heal still, but i'd say the best thing to say is gradual healing, gradual healing in confidence, but ultimately, what's going to generate more

confidence is just the reality of growth getting gradually stronger. >> okay. thank you. november 17th, the federal reserve announced another round of stress tests, but for reasons i'm not sure i fully understand that the stress tests are kept secret and will not be disclosed. i doubt that you made that decision, but can you comment on it? i guess i'm troubled that somehow transparency in this is not complete. >> well, i think as you know, i am a very strong advocate and principle architect of the decision in early 2009 to force our major institutions to go through the stress test and disclose the results in enough detail so investors could assess on their own whether they were realistic, and that was a remarkably affective approach because the firms raised capital earlier, and if you contrast that experience with what europe is still going through, you can

see the benefits of having a very detailed level of disclosure on conservative assumptions about potential losses. it's a very good strategy, and i'm very confident that a regular part of risk management in the future in the system will be regular public disclosure of stress tests by major institutions. i can't speak about what the fed announced recently, but i'm very confident looking forward we as a country will go through regular publicly disclosed stress tests of our major institutions. >> yes, i know though, but every day we read in the papers about rides, lawsuits, signing, and a lot of these stress tests, i think, were initiated based on that. i think it would be helpful to disclose. let me ask another quick question. do you believe that fannie mae and freddie mac should ride down

in the participation in the fda's short refinance program? >> there are, you know, we have a principle reduction program in our treasury housing programs, and we, and the fha's what's called in shorthand, short program, both those things we think have a lot of benefits and we can use a pretty good economic case for fannie and freddie to participate in those programs, and we're in the process of talking to the fha about those, about the merits of those programs, about their concerns, and i can't say at this point whether they're likely to adopt them or not. again, we want to understand their concerns, and they have a different set of objectives and in some ways different constraints, but i'm hopeful they find a way to participate in as many as these programs as possible. >> okay, i need to finish up. if you are successful in helping

them, and i think they are pressured, what is your objective cost of doing this, riding down those loans? >> there's two ways to think about the costs in this. remember, fannie and freddie an the government own all the risk today, so if you do things that improve the odds that house prices will be higher in the future, that defaults will be lower in the future, then you're going to improve the overall quality of the portfolio and entities of government. think about the financial imp cases of the program through the broader prism which we do and we want to encourage the individual agencies to do that as well. >> okay. my time is up. thank you. >> thank you. mr. silvers. >> i appreciate your answers to the questions. i found both the ma crow part and the financial answer to the gse issues, i think you're spot on.

i'd like to follow-up more on the question that my colleague raised about nonhamp modifications. first, let me ask you this. cbo as part of the $25 billion number is projecting on the a $12 billion expenditure out of a potential 7 a 5 -- 75. do you agree with that? >> i think it's bad news, but i think it's low. it's too low, too pessimistic. what we set aside was more like 45 or 50. they expect we spend 12. that's too low. but we're going through an assessment, and we'll share that with in the sometime in the first quarter. >> you're not satisfied with the type of overall impact that projection would appear to presume? >> look, my obligation is to make sure the programs reach as

measure people as possible, and the more people we retch, the more we will be spending. -- i think it's a good use of the limited resources we have in the country because of the returns in helping the country in the housing crisis are very high overall. >> i want to say one thing in response to the question about how you evaluate risk and return these things, and i think it's straightforward. you have to look at, you know, we got a 20% return on some programs relative to what risk, but, we're the government. we're not an investment, not a hedge fund, not a vulture fund, and the impact of the funds should be what did you do to overall growth access to credit as a whole. when you think about the return of the taxpayer, the most important return is not the financial return to the treasury and up vestments, but about the broad impact. >> no, in fact, mr. secretary, your remarks are helpful to me.

i wanted to ask you about that precise issue in relationship to the term you used several times around foreclosure -- mortgage modifications which is the question of what the homeowner can afford. can exactly do you mean by that term? do you mean what the homeowner can afford consistent with what? because if -- to be more precise about this we know what the -- it may be that there's a gap between what the homeowner can afford and what a financial institution views as the point at which they would start to lose money on the mod. why don't we think of the gap in light of what you just said about the larger negative foreclosures which is what i was trying to get at in my earlier questions. >> well, no perfect answer to this. ed standard we use in the -- the standard we use in the

programs is we want people's payments to be reduced to 31% of income. why? because on a bunch of evidence, that's something that suggests people can sustain over time. >> that's not what i'm asking. i know what the number is, but when that number supports a payment that's here, right, and the npv model, the model that supports the bank, shows a number here that the people can't afford. that's a gap in the bank's interest and homeowners' interest. in that gap means that you go to foreclosure, then all that negative stuff on our economy you described earlier happens. now, in order to close that gap, you've got to take a hit to principle, right, and the bank takes a hit if they don't like, is that -- it seems like we're basically saying when that gap opens up, we basically let the bank make the call. am i right about that?

why does that make sense? why shouldn't we be asking the banks to take something of a hit so we get more of across our whole real estate market better outcomes? >> it's a very good question, and you're right that part of the difference between the number of people we've reached through permanent modifications and those we haven't is because it's a relatively small amount of people where the npv return is negative. let's think about what you're suggesting. i think to decide that we're going to take the taxpayer's money so that people can afford to stay in a home that is really beyond their capacity to afford because we want to avoid the broader negative consequences,

clat raj damage -- collateral damage. >> yeah, but i wasn't asking about the taxpayer's money. i was asking about the bank's money. >> this is a broader question that your chairman raised earlier is we do not have the legal authority to compel certain types of performance by banks in this stuff. now, congress had decided to give it to us, i suspect they would not, they could, but that option is not an option available to us at this time. >> mr. secretary, i mean, i disagree with your characterization of the leverage around the question which i think is implied by your statement about not having legal authority. i think the web of rips that -- relationships that exist with the gse's fed, and the like give you a fair amount of ability to open that question up. i want to take you one last place with the chairman's

permission. given the fact this is a difficult problem and what is clearly a matter of numbers, the increasing reliance of nonhamp mods across the market to drive the mods, i'm puzzled by when i read, and maybe i read incorrectly, the treasury's opposition to having the state agencies among the uses of the money that they've gotten from hamp use that money to help homeowners get counsel so they can then have a better shot of negotiating mods. >> you're referring to legal aid? >> yeah. >> that's a good question. we spend a lot of time looking at this, and of course, we do provide resources to help homeowners decide eel jilt for the programs and participate in the programs. the question congress raised is can we use this authority to help provide more financial

assistance to legal aid itself, and the way the laws of the land are written, we cannot legally use t.a.r.p. or hamp resources for that purpose. there's some amendments pending before the congress and legislation pending that would change that. >> how did you come to that conclusion? >> very carefully. >> under whose advice? >> we consulted with a broad range of lawyers across the government, and i'm confident their judgment is right, and that's recognized -- >> the reports you -- >> that's not true. we would never do that. we have lawyers at the treasury and justice department. >> you did not ask -- it's a false report that you asked a particular law firm, give me a moment, find the name of it. it's a -- it's just false that you asked

-- i think i can help you. >> what's the name? >> i have no idea. i'm sure we asked people across like you'd expect us to do. but the judgment we rely on is the judgment of the response of the people in the executive branch, and i think that legal judgment is the correct judgment although i'm not a lawyer. >> the letter from your counsel says that legal aid services are not necessarily or essential to the implementation of a modification program. is that the core of your finding? >> no. i don't think you're reporting the letter in full. >> i'm not. that would take a long time. >> i'd have to read the letter again, but can i make a simpler legal argument? >> i want you to address -- >> congress by statute authorizes and provides funding for a particular function of government, then the general judgment of lawyers is we cannot use another source of funds to supplement or enhance that

separate -- this is understandable judgment by lawyers. >> wasn't that particular authorization passed after the decision not to fund? >> i don't believe that's the case, but i'd be happy to respond in writing to anymore question about the legal basis for it. i want to say that i think you were right that there's a very good public policy case for using resources to help people take advantage of government programs, manage through a very complicated difficult modification process. there's a good case for doing that, and i've been very, very supportive for more government resources for counseling for legal aid generally, and where we had the authority to do that, we have made funds available, but there's a legal constraint to use t.a.r.p. on legal aid directly that law would have to be changed to rely on. >> mr. secretary, it puzzles me

when hedge funds get money, i believe they pay for lawyers, and it puzzles me a vast amount of t.a.r.p. money has been expended on legal counsel for the benefit obviously of the government. it seems as though lawyers are understood to be a necessary and essential component of all the transactions that t.a.r.p. and hamp -- that t.a.r.p. undertakes except when homeowners need lawyers. >> that puzzled me too when i was first confronted with it, but i'm very confident the judgment our lawyers made is the right one. >> i appreciate your engagement with me on that. thank you. >> thank you. >> mr. secretary, switching gears here and talking about cars here for a little bit. so as you're aware in december of 2008, the decision was made to use t.a.r.p. funds to provide

financial support to the general motors and chrysler. would you have done that? would you have reached the same decision if you had been secretary at the time? >> it was not my decision to make as you implied, but i was aware of the merits of the choice at the time, and i thought what my predecessor did what was the right thing. >> i guess essentially this was to avoid going into bankruptcy which i think that was the alternative at the time. you've alluded to the estimate that a million jobs would have been lost through bankruptcy, so firms as large or larger than general motors have gone through bankruptcy as did lehman brothers, and our economy survived, so would the world really -- would the world today really have looked much different had

general motors and chrysler gone through bankruptcy in 2008? how different would the unemployment picture be, and tell me why whether you think that's true and what you base that decision on? what are your thoughts on why it would look different? what's different. >> look, market economies require failure. they don't work unless you allow firms to be failed when they cannot make things people want to buy. in normal recessions even, not just in normal expansions, bankruptcy is an essential part of the functioning of an economy, but everything is different when you are in a financial crisis like what we faced in the great depression or what we face in this basic crisis, and in those circumstances, bankruptcy itself cannot provide an affective way to protect the economy from the failure of major financial institutions or even in the auto case, the failure of a

concentrated number of major providers, and i think that -- see, you have to think about those two different worlds. in a crisis you have to do things you would never do in a normal recession or certainly wouldn't do in an expansion. bankruptcy never works without there being a source of lending better in position of financing because companies need to fund to go through that, and in a financial crisis, there will be no source of debtor position financing on a significant scale, and so in some cases, the government has to step in to provide that temporary financing, and what matters most in the auto case is if you do that, you have to do it on the condition that you bring about a restructuring to allow the fund to reemerge profitable and that's what the auto piece of the strategy was able to achieve. unemployment would have been much higher, millions more jobs lost if we had not gone through that, and i thought that was a

very well designed use of government resources in an acute crisis. >> let's talk about gamc a bit and the exit plan. the government's plan with general motors shows a lack and the management team discussed publicly the idea of a 2011ipo. given that the company is reported three consecutive quarters of profits, what is the timetable for an ipo? >> quickly as possible. if you look at what we've done across the board, and we're way ahead of anybody's expectations, we're going to move as quickly as we can to replace the government's investments with private capital, take the firms public, and exit as quickly as we can, and we're working hard with the board of gmac to achieve that outcome. i don't know how quickly, but it's going to be much sooner than we thought six months ago.

>> change subjects again and talk about executive compensation. when mr. feinberg testified before our panel, he stated that is the culture of pay on wall street has not changed in the wake of t.a.r.p., i think our work has not been successful, and it's not -- and if it's not being followed, it is a problem. do you agree with him? >> if that were the case, i would agree with that. >> do you think that's not the case? >> very good question and a good time to be asking that question, and i guess i would say the following. we did two things over the last six months or so, # one in the dodd-frank reform act and another enactment for enforcing to bring about very substantial changes in compensation practice looking forward. first was a requirement for disclosure and give shareholders the right to vote on

compensation packages, and the second is a set of standards on the design of compensation incentives at the federal reserve and bank supervisors are responsible for enforcing, and we'll know more about the results in the early part of next year. to date what you can say is there's been a substantial shift in compensation so there'sless in cash -- less in cash, more in equity, invests over time, more at risk of being clawed back if firms don't perform as well as people have hoped. that's very good, but i would say you cannot say today, and i would not claim we've seen enough change yet in the structure of compensation, and that's important to achieve because as you know, those incentives were so skewed to encouraging risk taking that they played a material role, i think, in what caused the crisis itself. >> thank you. >> thank you.

mr. secretary, i think you may have anticipated my questioning around servicer performance because you may have preempted me by characterizing this as dismal in the last exchange, but i do believe it deserves further discussion. in fact, speaking pelosi who appointed me to the panel made public a letter that she sent along with other members of the delegation, to the department of justice, to the fed, and to the occ, a letter that describes in 20 pages excruciating detail of examples of real stories from homeowners in deals with servicers. it demonstrates their frustrations and clearly despite a good faith effort on the part of the homeowners, failures by the servicers. you know, it highlights areas to

respond in a timely manner, the timeliness of proceeding with foreclosures while at the same time proceeding with modifications as well as a continual evidence of losing and misplacing documentations. do we need national standards for mortgage loan servicers? >> i think we do. there are a number of states including new york that have models out there. we over two years ago have put them in place, not only a registration of mortgage servicers, but one of the most comprehensive in the country that poses duty of care, specific rules of conduct with fair dealing with customers, with homeowners in requiring modification, requiring trained personnel, and requiring a data reporting requirements. is this something that could serve as a model at the federal level? >> i think it could.

i'm not familiar in detail with new york, but i know a number of people think very highly of it. we'll look at that model and others, but i think you're making the right point. >> in your efforts to stand up in the ktpb, do you see this as an early priority, one of the areas that's a mandated statutories for rule making? >> i'm not quite sure how early that will come realistically, and as you know, we're focused overwhelmingly on that we're fixing the problems in performance and making sure we reach as many people as we can in terms of modification programs, but it will be a very important priority. as you know, we have a whole set of complicated work on defines new underwriting standards, defining what the residential qualified mortgage, what should be the basic future of the housing finances, and more generally, looking at these things together, not that we want to take too much time, but

we have some time. we got this terribly wrong as a country. we want to make sure we get it right, and we'll do everything we can to get a durable set of fixes. >> how do we proceed to avoid a 50 state proceedings down the road requesting data from servicer in 50 different formats. does this not have to be priority? >> it will be, i just don't know yet. i can't be honest with you yet in if it's something we'll have a proposal in six or 12 months. i just can't tell you, but it's absolutely important, and we'll look at the model in new york and other states in the best way to proceed. >> with respect to the cfpb, do you sigh a new era of cooperation, my reference to a cooperative federalism between states and the agencies? >> i think we do. you know, we'll going to have a test of that in how we deal with these broad set of mortgage

documentation problems that have been the subject of many of your earlier comments where we have a broad task force of agencies looking at this and working closely can the states and a standing mechanism called the financial fraud task force working closely athe counsel established by law to give financial stability gets a seat at the table with insurance and banking regulators. we're a country and we have a national financial system, and so if we're going to do a better job in the future of preventing crisis, we have to make sure these entities are working together. >> thank you, my time expired. >> thank you. just a big question. what's the current systemic risk of assets in banks? how do you see it? >> i believe that the u.s. banking system has a very substantial amount of capital on their books today in the form of

common equity against the assets they hold and the risks their taking, and i am much more confident today that we made the right judgments in forcing that much capitalism earlier, and that will give a reasonable process of coming out of this stronger. i think what matters is the capital relative to the potential exposures still, but firms are working down those assets, and most measures you see of performance of those assets now are improving and have been improving for some time even in mortgages. >> the financial system may be stronger, but we still have more concentration in the banking system. what's your opinion on dodd-frank, and what's happening more and more people are saying discussions in the hearings here and everything else, assume we're in trouble if a bank

fails. what's your feeling on increasing concentration of the big banks? >> of course you're right that the system is more concentrated today than it was before the crisis, and that's an unavoidable consequence in a crisis. >> exactly. >> we still have roughly 8-9,000 banks. that's a great strength. we want to preserve that. >> we got a few banks that are extremely big. >> we do, but not to underestimate the consequence, but they are much smaller of our country that is true of any other country too. look at canada, u.k., western europe, japan, even our largest banks are smaller relative to the size of the economy that is true to that as a whole. if you look at the top 50 of the world, the u.s. banks are in the dwieshed on that list in terms of size. that's not to say that's not a

big -- >> aren't they so closely aligned with the government? >> we would not want to be like them. >> exactly. the resolution sport these are still banks -- >> you know, the most important things that dodd-frank did were to give us the authority -- >> right. >> to force the large institutions to held much more capital posing risk to the system as a whole. we have achieved that to give us the authority to apply those requirements for capital, restraints on leverage that our banks, like aig or investment banks or range of other institutions that we're not regulated as banks before, and add you said, resolutions authority which is like a bankruptcy authority for banks so that in the event in the future, a bank like that makes mistakes that cause it to fail, the government can step in and unwind them, butt them out of their --

put them out of their misery, break them up without risk in the economy as a whole. i think we're in a better position in the future to prevent crisis of these magnitude and manage them care fry. we'll have crisis in the future, but the reform bill to the credit of the architects in congress today will help us fix the fundamental failures that caused this crisis. >> but as you said earlier, when you're in a situation of financial crisis, bankruptcy is something you really want to avoid. >> you can't have liquid dation being a institution. >> it's better to do it when it's not? >> that's right. >> thank you. ..

the losses you may face on them, how they are performing so that individuals across the financial marketplace can judge for themselves whether the banks are sufficient against those losses. i would say the judgment i am

reflecting is these banks hold substantial amounts of capital against the risk they still old. >> if i might be allowed one final.do you disagree -- the thing that haunts me about those numbers in relation to the question of the strength of our banks is when you take at and connect it to mortgage modifications, and there seems to be a fundamental question there which is are we in a zero sum game between the strength of those banks rang out, our ability to modify mortgages and the well-being of the american public and the strength of our housing market and i can clearly tell that you don't believe we

are in a 0 sum game but the evidence before this panel suggests we are. can you explain why we you think we are not? >> it is a fundamental question. there is a broad perception -- you share of principle barrier where we should reach modifications is weakness in some way this among the nation's major banks. -- maybe we should pursue this in more detail subsequently but you have to look at the source of the difference between people who have mortgage modifications today and those who are not and as i said earlier, it is principally about how we define eligibility, not about the incentive problems banks face. >> thank you. mr. secretary i want to return to comment you made earlier and

push you on the comments he made earlier about executive compensation and risktaking and i would argue that a major part of risktaking was result of a perception to fail which after a certain point firms didn't worry about what the distribution looked like. do you think -- have report situations in place that are pushing firms undergoing to require firms to start thinking about the likelihood of an extremely bad loss? >> exactly right. two sources of financial crises are classically moral hazard, perception the government will isolate you from your mistakes and a fundamental uncertainty or excessive optimism about how dark the future might be how adverse the sale might be in the

extreme event. in this crisis both were at work. what wind wrong -- but the failures across the system in my view were not principally about moral hazard. they were a much more systematic failure of people to anticipate what might happen in the event we had a deep recession warehouse prices fell substantially because that was not in the memory of most people alive today. most people today, their personal finances are in expectation that house prices would not fall. in parts of the system more hazard made that worse. how do we fix that? we will never fix that complete the, but what the dodd frank bill does is allow us to

constrain risk tangling with restrained some leverage to offset moral hazard risks instead of a system where these institutions are at the risk of failure again, we cannot save them. all we can do is dismembered and safely. breaks up without collateral damage and that will reduce the expectation in the market that is pervasive in any financial system and in the future, when there's risk of failure the government will insulate the firm from the consequences. you can correct it completely but we're in a better position to reduce that risk going forward. >> one final question building on that. until that happens. until we see that situation and we see firms, businesses, how the governor will deal with that. will we see that before they start believing that that is the case or do you think they have started responding to it with the belief that now everything is changed? >> you can run the system that

market discipline works that way. you have to do two things. you have to constrain risktaking and force firms to hold more capital against the risk of a very deep shock. that is a function of government and government failed to do that. you have to do that as well as make sure you have the ability to let firms fail without causing collateral damage. the reform bill gives us those two authorities. we will have crises in the future and how they are managed depends on the overall cost but we're in a much better position to prevent them than we were before. >> thank you. you also have to anticipate particular firms. that is if third part. >> obviously you want people running institutions, running special banks and supervision with the capacity to anticipate but you have to recognize the reality that we don't know what

the future is. >> one of the key things. >> fundamentally you have to make sure your system is strong enough to compensate for the failures of individuals to anticipate because that will happen and that is why capital is so fundamental. >> if you don't anticipate because as you say, is a totally different deal and the crisis. >> thank you. >> two quick questions. we both mentioned in our opening statements the unfinished work in bank lending particularly by smaller banks or 50% of the loans to small business made by banks under $10 billion even though they only had 26% of the asset. give us an update on the status of the implementation of small-business lending. >> we're working very hard to put in terms the public very quickly to get capital to banks on a large scale as quickly as we can and we are close to being

able to do that. >> any more specifics? >> soon. in june when you were here talking about this year were relatively optimistic about bank participation. what is your assessment today on bank participation? will the structure of that program as you envision it overcome the t.a.r.p. stigma? >> i hope so but i can't tell for sure. there are two types of deterrent did -- discouragement for banks. it is a sign of weakness that is hard to correct because people are not getting capital from the government. the other source of deterrence was the fear of conditions, actual or perspective that would make this non economic or unattractive. that is the reason a relatively small amount of the capital purchase program went to small banks and hundreds switch applications. we fixed that problem. i can't be sure we fixed the

other problem. >> that is the concern we are hearing. those that are currently in 600 or some banks the already in the target. will they see this as the banks are not in the tarp problem. i appreciate your assessment. will loan demand be there for them to utilize that capital? >> the question what happened to loan demand is an excellent question. it is worth noting that if you look at the balance sheet of the american private-sector it is not just the big firms. people have a lot of cash. the averages mask a lot of differences and lots of small businesses are not fit sitting on that-but what happens will depend not just on how quickly the economy recovers but how quickly people work for those balances of cash they accumulated before the crisis that many of them built up in the