to you agree that we need to strengthen incentives to modify mortgages to turn this economy around? would it help spur participant haïtian of the -- would it not help spur more for submission to give homeowners more leverage? >> housing is at the center of this crisis. you are right. many americans are losing their homes. that includes some who were responsible and are suffering because of the actions of those borrowers who lived beyond their means and the banks to make a bunch of loans they should not have made. . government should have moved earlier to address this crisis. we were late as a country and behind the curve. i do believe that the president's program is a -- it does provide a very powerful set of incentives to induce a

substantial increase in modifications. we're at the very early stage of implementing that program. it's true we've been in office now six months and this program was laid out in terms of the detail only a few months ago, but there is a substantial increase in efforts to put out notifications to potentially eligible borrowers and i expect to see a substantial acceleration of the pace of modifications. this program does create significant incentives for services to participate and it also does reach homeowners significantly under water. it won't reach all homeowners. there are some homeowners who simply borrowed and got themselves into a point where they have a completely unsustainable mortgage and are unable to retain their house, but the program is designed to reach homeowners that are living today with significant amounts of negative ltvs, negative equity. the program has been successful

in helping bring down interest rates working alongside the fed. it has been successful in substantially increasing refinancing so that more americans can take advantage of the lower rates and as i said, we're just beginning to see the effects of these very substantial incentives we put in place to encourage modifications. realistically, i don't think we're going to know until probably early fall whether we've got the incentives right and whether they'll prove powerful enough, but our judgment is that this is the best package of incentives which offers the best return for the taxpayers's resources to help address the housing crisis. >> i asked this question of this predecessor and perhaps in a little different form, and still remain skeptical, but the voluntary approach to mortgage renegotiation is going to save us from this crisis that we're facing. i think until we get an honest approach that really results in

substantial renegotiation of mortgages that the real estate industry and the housing industry will continue to be weak. i don't know how we can build a strong american economy if our homes are losing value and we face our neighbors facing forbe closure as we go across this country. >> senator, i understand your concern and commend your focus and leadership on this perspective, but this program is a dramatically different program from what was tried under the previous administration. the financial incentives that we put in place here are very substantial and it came alongside a substantial change in policies by fannie and freddie to help finance even for homeowners that were slightly under water. so i think we all want to see results and you should judge us by our results and it will take longer to judge whether this is as powerful as we expect it to be. now, i think if you step back and look at what's happened in the housing market over the last six months or so, partly because

of the effect of the recovery program and confidence, partly because of the impact of the fed's programs and the treasury's programs, the pace of decline in home prices has started to slow and that is early signs of us being able to look to the other side of this, but realistically, i think you can associate a challenging period ahead for many homeowners and many homeowners at risk of losing their homes and that's why we want the programs to work. >> senator collins, i might say each member will have five minutes and more than one round. >> thank you mr. chairman, mr. secretary i want to follow up on the discussion we had about the use of t.a.r.p. funds. it troubles me that banks have received billions of dollars without having to demonstrate that they've increased lending as a result, and without having to be fully accountable and

transparent in the expenditure of funds they have received. i mentioned to you that i've seen in my state a large recipient of t.a.r.p. funding constrain credit to actually cut off lines of credit to cease lending to a non-profit hospital in my state, a major retail er. so i don't see on the grassroots level the benefits of putting billions of dollars into financial institutions that the intent of which was to prevent this constrained credit. in addition, the special inspector general for t.a.r.p. in his report in april criticized the treasury for not adopting recommendations to require that all t.a.r.p. recipients account for the use of the funds.

so i'd like to ask you to comment on why haven't -- why hasn't the treasury made as a condition of receipt of t.a.r.p. funds a condition requiring an increase in lending and full transparency? >> senator, excellent question. i can just start by saying this? this is a crisis produced in significant part by two things. one is families across the country substantially increased the amount they borrowed. so household debt rose dramatically as a share of our overall economy and we had pockets of excess leverage, too much lending build up across the financial system. now we're going through a very deep recession. in any recession, the demand for credit falls because economic activity falls and the recession that follows a long credit boom like this, you would normally have expected credit to fall quite sharply.

that's important because it's hard to know how best to measure the full impact of these programs because again, it would have been under any circumstance we would have had a period where borrowing would fall as homeowners, as families decide to go back to living within their means and decide to save more, reduce their debt outstanding and lending would fall as the weaker part of the financial system declined to a more sustainable level. now, it is very important to us that we have better ways of measuring the impact of these programs. so when we came into office and we nut place a much more comprehensive set of reporting so that all banks that received t.a.r.p. assistance would report on what's happening to lending behavior. we started with the major banks and we extended that out to all t.a.r.p. recipients and you'll be able to see monthly now on the treasury website what banks are doing in terms of lending and that is the ultimate measure of these the capital assistance programs. we are very committed to improving the overall quality of

transparency and accountability across these programs and each of the programs we designed provides for an exceptionally careful level of oversight and a level of transparency so people can measure the actual impact in effects. there if there are other things you can do it strengthen that, we can do it because nothing is more important than a better sense among the american people that they have a better sense to judge with the american impact. just to finish quickly where you began. the program that congress authorized last fall and the actions that my predecessor took initially to put capital into the u.s. banking system were absolutely essential to prevent a catastrophic financial collapse. if you look back to the period of time lending absolutely stopped and because lending stopped and because confidence was so badly damaged, basic business stopped, and it happened around the world. when that capital was put into those banks initially, that was the first step in beginning to lay a foundation for recovery

and repair. we cannot know with certainty what would have happened in the absence of that action, but my judgement is that without those actions you would have faced the prospect of a catastrophic failure in the u.s. financial system and much, much more damage to economic activity than we already saw. now, today we're seeing over the last several week, we've seen some very impressive and encouraging signs of improvement in the overall credit conditions. so if you look at concern about risk and exposure to banks. if you look atablity of banks to raise equity and replace the government's investment. if you look at what's happening to borrowing costs for businesses across the country. look what's topped mortgage rates and interest rates, there have been substantial improvements in the basic measure of the banks. mience sense is in the early days, and this is just the beginning, but where the government has acted you can see very tangible benefits in improvement. we have a ways to go. the condition of this crisis took a long time to work

through, but i think these programs are having -- are achieving traction and they're the right mix of programs and we will do everything we need to do to make sure that we are adopting sensible recommendations by not just the t.a.r.p., but by the congressional oversight panel and gao who are looking very, very carefully at all these programs. >> thank you. >> senator lautenberg? >> thanks, mr. chairman. mr. geithner, the financial crisis we're seeing was, in my vi view, due in significant part to poor management of these companies and particularly contained by the outcome of the management years in the automobile industry who refused to see what the public appetite was and refused to be

competitive and thus, jobs have been lost and an industry practically destroyed, that we loved and admired for so many years. well, when we look at risks taken by corporate executives and decisions made, many of these executive pay packages insulate ceos from the risk and again, i may -- i don't want to take you out of your bail, but to avoid this excessive mismanagement, should executive compensation be tied to the long-term health of a company? where do we have a right to interject our views? >> senator, this is a very important issue, and i agree with you that i think although many things caused this crisis, what happened to compensation and the incentives that created for risk taking did contribute

in some institutions to the kind of vulnerableity that we saw in this crisis. we need to increase reforms particularly in the financial industry because of the dependence of the economy and a well functioning, more stable set of judgments by financial institutions. i think the board of directors does not do a good job. i think shareholders do not do a good job in terms of compensating practices and a centerpiece of sensible reforms would be to tie compensation to better measures of long-term investment and return and to adjust them to reflect risk. that's part of the reforms and we are, as part of our broader regulatory reform proposals, our proposals to reform the whole framework of the regulations of the united states will include suggestions for trying to encourage >> where does the start begin? is it in treasury or i.r.s. or

the s.e.c. and how do we get things introduced intod governance of these things? -- into the governance of these things? >> as you'll hear from us in the next few days the s.e.c. has some important responsibilities and obligations to this area and some tools and authorities they may seek in this area. the bank supervisors under the leadership of chairman bernanke and others have initiated a process to define standards and principles that supervisors could use to bring about reform of practices in the financial industry. those are two ways we can have influence over the shape of practice in these areas. there are other ways, too. but my own sense is that the core will be those two authorities. >> if senator nelson mentions something about government owning shares, and -- in these

companies, and it's -- i think it has to happen. who, for instance, would vote the shares? would the government be -- american government likely to appoint the board -- a board of directors and have them make decisions? >> this is an enormously important set of questions. as we said before, the president said, we are extremely reluctant investor. we're -- we don't want to be in the business of managing these companies on a day-to-day basis. we would like to make sure we have the ability to get out as quickly as we can and have these companies emerge as their own as viable entities without government assistance and have the commaft to raise capital in the markets to repay the government's investments. to underscore that, we are -- we've designed a set of policies and mechanisms that will ensure that people

understand we only tend to use our voting rights for a very limited number of core judgments about financial structure of the firm, make sure that there's a strong board and management in place at the time we take our equity investments so the taxpayers are protected. so we have confidence in their ability to oversee a sufficiently robust restructuring plan. we do not want to leave the impression or the reality in place that the government of the united states will -- will be able to and will have the capacity to exercise judgments over the day-to-day operations of these business. -- of these businesses. we think it will be damaging to the cheese value and damage to the taxpayers and make sure we can get out as quickly as possible. taxpayers and trying to make sure we can get out as quickly as possible and our hope is we designed a set of institutional protections to avoid that risk. >> thank you. thanks, mr. chairman. >> senator bond?

>> thank you very much, mr. chairman and mr. secretary, a lot of us in the heartland are wondering why you're treating failed financial institutions differently than gm and chrysler. they forced them into bankruptcy and it seems that failed financial institutions like citi into restructuring. we've seen in the past that large organizations, want as large as citi, but indymac has gone through an fdic cleansing program and this one is outside of politics and when you do it through the fdic you don't get the political questions that are asked. you don't get the political involvement in it and as "the wall street journal" asked today, citi is not forced into an fdic-like restructuring. how can you assure the tax payers that we won't continue to return for billions and billions

of bailouts which i think all of us have heard great concern from our constituents? >> senator, i share those concerns, and i think it's important to acknowledge that the actions that the government's had to take over the last 12 months in particular to help protect the economy from this crisis have created -- well, they've been exceptional and extraordinary and they've created the risk that unless we reform the system, we'll face a greater risk of financial crises in the future because we would have created moral hazard that would make the system more vulnerable in the future. i am deeply worried about that and i share that concern and that is why it is so important that we put in place against constraints in the future. what the president will recommend in terms of financial reform will be a set of much more conservative set of constraints and risk taking across the financial system with a more effective oversight and as part of that, we need to have a better capacity to deal with

the potential failures of large institutions. the system that you referred to and the system that congress helped put in place built around the fdic, strengthened the weak of the crisis is a very effective crisis, but it was designed to deal with relatively small banks and thrifts, and it was not designed for a crisis of this severity. that is why we did not have -- and that system was not designed to deal with a more complex type of failure, for example, like aig. that's why a centerpiece of what the president will recommend will be stronger capacity to resolve, address, better manage the risks to the system imposed by those types of institutions. i just want to underscore a couple of things about contexts. when i came into office the government of the united states had already invested roughly $200 million in our nation's banks. as i said to senator collins, it was an essential thing to do. >> mr. secretary, i'm running out of time, but i think everybody would agree that the

federal reserve came in and flooded the system with money. we put -- the t.a.r.p. money went in, but now we're past that and unless we take some steps to deal with too big to fail, and we've got that moral hazard, and i'm also worried about the ppip. a lot of people are saying the banks aren't participating because it looks like it will be political, and if they get in, who would want to get in partnership with the federal government when they see what some of our fellow members of congress are doing? are you going to be able to get any of these toxic assets out with ppip? where are the -- where are the participants? >> listen, i want to underscore that you're right. that's yet president wants to move so quickly on legislation. on the issue of the legacy assets that are still in the books of the nation's banks you're right that there is some concern in the market still about participation and whether

that brings some risk of political conditions imposed in the future and that could limit participation in the beginning and that would be an unfortunate thing and i think we have the responsibility to reduce the sense of risk and uncertainty about the rules of the game. it's also true that -- that banks have found it more easy to raise equity than they thought and that combined with the slight improvement and confidence in the system may also reduce participation. in my judgment, though, these funds are still an important part of the necessary framework of tools to help get our country through this crisis, and i believe that iis important that we go ahead and put them in place even if we see participation somewhat more limited than people would have expected because of the political concerns and because the basic -- >> i would hope that we would use the fdic model, chairman durbin and i and others and senator dodd would have proposed

beefing up the fdic. we need to use them and i'll have further questions for the record and mr. chairman asked that my full statement and all my good advice would be included in the record in the hopes that somebody might read it some day. >> we look forward to reading that and we'll gladly be inserted. senator bond and senator nelson? >> thank you, mr. chairman. secretary geithner, you mentioned that we're reluctantly in a position of holding shares of general motors and perhaps in a position of controlling other institutions, but we're doing so reluctantly. i'm so reluctant to be one of those holders of that stock, that i'm introducing a resolution as a sense of the senate resolution that we begin the process to divest ourselves of the stock ownership over a reasonable period of time, making clear that we're only a

temporary shareholder and that we should take all steps to protect the american taxpayer dollars and begin to invest the ownership as expeditiously as possible and call for a gao study to help determine the period of time that it may take to return gm and chrysler's solvency and complete its divestiture. i think that says what i'd like to say. in addition, i've heard it said that for those who worry that somehow we're drifting into socialism, that socialism is where the government wants to take over profitable ventures as opposed to being where we are right now. apart from the levity, i think it is probably accurate, so i hope that the administration will be supportive of every effort to make the public statements that this is a temporary situation, not one that is optimum -- or optimal in

terms of what we would prefer to do, but where we are at the moment, but to make certain also that we're not going to stay there one day longer than we should in that position of ownership. and i'm encouraged when you say that we won't exercise day-to-day judgment over many of the decisions and opportunities that the industry will have. i've got some other questions about that, and that relates to the -- to the dealerships. i know they're very concerned about summarily being dismissed after decades of relationships with the auto industry. is there any effort to try to establish some sort of a recognition of the rights, and not just contractual rights, but somewhere the rights of dealerships in this dismissal where any compensation is being

directed toward those dealerships to soften the blows? it's not taking their position that's so important, it's recognizing that in small communities all across america, particularly in nebraska where dealerships are going to be lost, people are going to lose their jobs as well in small communities where the job replacement can be even more difficult than in the urban centers. i wish you might comment on that. >> senator, can i just begin where you began to say and i think you said it right in terms of the government stake where we take the stake, temporary, clear path to exit, no day-to-day management. this brought up the impact of communities and the substantial reduction in dealerships that the automobile companies decided was necessary to get back on a path to viability, i want to underscore that these were their judgments based on the careful analysis of what was necessary again to get them down to a cost basis that was more a tenable over time, but i understand the

concern about the impact and would be happy to explore with you and talk to my colleagues about -- to make sure that you have responses to your thoughtful questions about what the companies themselves might be able to do to help soften the blow. >> i appreciate that. >> but it has to be their judgments. >> of course. of course. the -- in terms of financial regulations, can you give us a preview of what you have planned for financial regulation? for example, are there any plans to change the state-based regulation of insurance? will you propose an office of insurance information or similar position or will you seek authority to regulate insurance at the federal level? >> senator, i don't want to get ahead of the president of the united states on this. he's going to lay out a com pro hencive set of proposals next week. in that context, we'll lay out our judgment about what we think is the most practical way to help begin the process of

ensuring more effective supervision of at least parts of our insurance industry, but i don't want to get out in front of him, but we've been taking a careful look at what is the most practical way to help begin progress against that objective. >> as you take a look at the case of aig, although it's an insurance holding operation, keep in mind that the insurance subsidiaries were profitable, that they didn't have bad assets, that this is not something that has rippled through the insurance industry, but focus on what happened with the glass steagall modifications that permitted aig to do what it did and so let's don't cure problems that don't exist as we try to take a quote, unquote, comprehensive approach. let's just make sure it is not so comprehensive that we sweep in regulatory schemes and mechanisms that are currently working. >> senator, i completely agree and we're bringing a broader, prague matec spirit and exercise

and trying to focus things central to the crisis, not things that were not. on things that were necessary to do, not just those -- not those that would be desirable to achieve over time. we may not all agree on the adjustments we're making, but that's the framework. >> you're making the commitment not to have collateral damage, right? >> that is an obligation that we all share and we're careful to try to avoid that, but senator, we did have really systematic failures across the regulatory framework of the united states and we are going to have to change a lot of things to address those failures. >> thank you. thank you, mr. chairman. >> thanks, senator nelson and senator tester. >> so many questions, so little time. secretary geithner, in your budget there's a financial stabilization reform of $250 million. in front of banking last week herb allison will oversee the t.a.r.p., hopefully, he talked about -- he called it head room.

i interpret it as being reserve of $100 billion. can you tell me why we need 250 million in the budget? >> senator, can i just begin by saying i announced this morning that banks have -- we've indicated the banks that the fed has indicated banks repurchase $68 billion of those initial investments and those will be coming back into the general fund. the eesa legislation that is designed that does create additional flexibility to allow us to use those funds if we believe there's a strong and compelling case and since we're -- all those thing are getting better in the financial system, i think to be realistec, there's a lot of risk ahead for us and we need to be careful to remind people that the flexible sit important. in the reserve fund the president put in the budget this additional reserve fund and in the abundance of caution against the possible they we could face a deepening crisis. we do not expect at this time

i began by pointing out the $68 billion retainment thing because it does provide some modest encouragement i think that we're going to be able to get through this without having to put you in the position of coming back for substantial additional funds. >> we appreciate that. i guess the question is $700 billion, $250 million, even though it's a ton of money is like spitting in the ocean. >> well, you're right. we're a $14 trillion economy. this is a very severe financial crisis, the worst in generations and financial crises are expensive to solve, particularly if you wait to solve them. >> i interpret -- i interpret by your answer to the last question that you anticipate the money paid back will go into the general fund and not reinvested into other troubled banks? >> by law it goes into the general fund but the law as written does give us flexibility to use that if we think there's a compelling case. >> in the end, well, you have an opportunity to extend it, in