all institutions. the same capital was made available to any other institutions that made similar standards for eligibility. my predecessors determined that the viability to try to screen institutions. the process remains in place today. we are changing strategy and some important ways. we did not believe it is necessary to keep capital purchase programs open for large institutions. the main will be for institutions below a certain threshold. we are trying to design them in a way that will give them a chance to spur lending and make it unlikely as a sign of strength and not -- and make them coming as a sign of strength and not a sign of weakness. >> how do you determine that? >> the supervisors have a

process. . . ect process but it is better than the alternatives. >> i am sorry to go back to gmac again. i understand at least on the call on us demond, that there is a negotiation going on, and i guess i want to try to understand who is actually the decision-maker? is it the assistant secretary allison or is it you as far as determining under what terms further extension of credit is given, doing the particular facts? >> the financial terms will be as defined in the programs. they are not differentiated terms. the question the head is really what plan for restructuring the new management of this firm embark on. we want to be confident that is one to be supervised and some basic pat dubai. again the incremental capital needs relative to what is

identified under the stress test. those of the issues ahead. >> two of those board members are treasury picks or whatever. how much interaction do you have with people on the board? >> we have what you would expect in not more than you fear in the sense that again-- >> my fears are rampant. >> i'm not sure what your fears are. our obligation is to make sure again that there is in place a plan for getting back the viability that has a reasonable prospect of working. we want the new management and board taking a fresh look that amount that to be as strong and robust as possible. at the same time of course we need to reassess what the increments of capital needs would be and that is the process we are undertaking now. >> okay, my time is up. thanks. >> mr. sellars. >> mr. secretary i would like to shift in terms of a fine down

with the large banks. my "new york times" this morning tells me that something we all kind of already knew, which is that city would very much like to return its t.a.r.p. money. citigroup argues they have lost cash and this is an argument they have made to this panel, and having lots of cash means they should be able return the tort money. i don't have your experience with banks but it doesn't strike me as exactly the right argument. >> i think you are right. >> can you explain to me with the criteria is for being able to return the money and what relevance if any having lots of cash has? >> a few critical point. is a good thing for the country that banks are eager to get out of the investments. it is healthy, necessary and desirable. it is a very good thing for the country that private investors

are willing to come in and in effect take the government out of those positions. we are not prepared to have this money come back in the way that could lead the system or the institutions with inadequate capital. if we did that that might seem good in the near term but it would be bad for the country as a whole because believe the system with too little capital so what we have done is to say we want you to go out and raise capital. this is for the system in general, raise capital from the markets, so you can repay the taxpayer with interest and that is what is happening. >> mr. secretary, do i have a right that the requirement is that he should be able to praise the entirety of the t.a.r.p. money, not allowing payments in stages. is that correct? >> i don't think that would say it quite that way. this is a difficult thing for me to do because under the laws of the land the supervisor is responsible for setting the terms of access, but--

>> you do know a few things about how they are doing. >> i do know a few things but the basic objective is to make sure that as we exit, which we are going to do as quickly as we can were leaving the capital position of the institution strong rinna weaker. >> in this regard mr. secretary obviously bank of america is now in the process. it could be little hard to follow the steps in which they are doing it. can you explain, are they repaying all of the t.a.r.p. money and have they raised the equity capital to do that repayment in an amount that is equivalent to both the tip and the cbp? >> the good thing is i got a check for $45 million last month. >> i'm interested in what the source of the funds for the check is. >> it was put in my comment that i would be happy to let the fed responded the tell. i think it is out there clearly in the market.

i think the details are all out there. >> but, the policy appears to be, according to what one reads out in the public, the policy appears to be raised inequity. all of the money necessary to repay, not a portion. is that your understanding? >> i think that is generally a desirable approach, because clean-air exit is better than a staged exit. i'm not sure that is going to be possible in every circumstance but i think again it is a good thing when these institutions are eager to go out and have private investors come out. >> mr. secretary andrew, a reporter for "the new york times" to judging by his book seems too often no more than we do, has written about the bank of america's repayment, that ,"

it will take too long-- he expresses himself. he said basically two things. the fdic didn't think they should be allowed to repay and two the reason why they were so eager to repay was so they could increase their executive compensation that could be offered to the successor and it would not inappropriate for me to do that. on the second question, i think you are absolutely right to compensation restrictions would be put in place for firms. they are very tough restrictions and they were properly tough restrictions, and for that reason, but for many other reasons, and again because you can do it in stronger in the eyes of the market. deese thanks rigor to, rhee pay and i think we should welcome that and encourage it and i expect to see it substantial bit more that ahead.

>> i'm not going to press you to reveal perhaps what you feel is compliments but it strikes me as a matter deep concern at the fdic does not agree with along the repayment because the bank is too weak. my time is about to expire so i'm going to express further thought then pressing e1 this. effectively, the strength of treasury and the regulators sense that the premature repayment on these banks are weak is that for the country. that is an extremely important thing. >> we would not allow that our support. >> i want to encourage and bolster your viewpoint there and i would be deeply concerned if those kinds of considerations were overridden the matter how well meaning, any desire to increase people's executive pay. >> again we would not support that and i think the agreement

esau in that context strengthens the institution very substantially. the best test of that of course is what happens going forward but to a private investors come in and be willing to put substantial amounts of capital as a sign of confidence and strength. >> superintendents neiman. >> we olick knowledge the crisis that was aborted by the impressive efforts, the multiprong efforts by the administration and other agencies and be here words, some of which you use this morning, lastly chairman bernanke characterized what we avoided as a global financial meltdown, magnitude unseen for generations, a second great depression cataclysm. as i stated in my opening, i think really it is imperative that the american public understand the linkage to the real economy as well as what really was avoided.

could you share with us your descriptions of the sequencing of what could have played out with the failures of large interconnected firm and a direct linkage to the real economy because they think that really is at the heart of assessing the effectiveness of the program. >> in september of last year for the first time i think it, seven years americans across the country were starting to take their money out of banks, banks that were strong, no connection to the weaknesses in the sub-prime crisis because they were scared about the security of their savings. we saw the economic activity around the world come to a stop. markets rose around the world. the value of american savings fell by more than 40%. people were faced with the process of having to work ten years longer. esol millions and millions of americans lose their jobs, thousands of businesses failed

that did not need to fail, deeply unfair and the damage to the basic confidence of americans in the fairness and justice of our system. deep loss of confidence around the world and our basic financial stewardship of this country. it is not something that is about a set of individual institutions. it is about the basic fabric of confidence in america, the basic security americans have in their future. when you allow that to suffer so much damage as you are saying, it takes a huge amount of time to repair that basic damage so financial crises are unjust and dramatic because they cause deep damage to people who were careful and prudent and had nothing to do with the crisis and the scars that creates are long-lasting and we are going to live with, for a long time, the challenges in trying to repair that damage. >> thank you for that. one issue that is also addressed

in our report issued yesterday are issues around moral hazard and we have debate among the panel itself as to the extent that t.a.r.p. increased the risk of moral hazard. i think moral hazard was almost built into the fact of the emergency efforts, the fact is will the government always be there. i think you just explain the criticality of why the government had to step then and why i think your position, which i also agree with, is that to address the moral hazard we have to address to big to fail and that is an imperative for our congress, which they are debating currently. is strongly agree that the need for systemic regulator and the resolution authority but i would like your views on whether we should be in effect allowing institutions to grow to such large nets and complexity to be

characterized as too big to fail, and is in that time to engage in a debate in this country now that we all recognize that the safety net that there is for institutions, the benefits that the financial institutions come in particularly depository institutions have from fdic programs, from the fed as a lender of last resort. is the time to debate what we want our institutions to be? are the social utilities that should be able to engage in speculative then high-risk activities? >> i agree with everything you said. a tragic choice in the financial crisis is to solve the problem come up put up the fire and protect the innocent and limit damage. you have to act. you can sit there and hope it is going to burn itself out and if you worry about moral hazard to much, as you saw, this is the story of the first 18 months of this crisis, deacons c enormous pain and damage, and what it

takes to clean that up will cause much more moral hazard sophie care about moral hazard you have to care about having basic protections to prevent penikas from spreading. it is a paradox. people tend to think if you care about moral hazard you should diggins the fire station but if you don't have the ability to act, as you saw the damage is so sweeping and dramatic government will have to do so much more in such a broader scale with much greater cost to incentive so is a great case for emergency authority. we are having a debate about too big to fail and we have proposed a sweeping set of new authorities in constraints that reduce the risk that thinks in the future take on so much risk that they could imperil the system and we are proposing an ability to allow them to fail with less damage to the system and less risk to the tax there as a whole. we have a debate in the congress, which is very welcome.

>> thank you. mr. atkins. >> that is great. kayaked the one to pick up the threads of this is@@@@@@@@@ i do not work for the united auto workers. >> or the socializing -- socialization of small-business lending you were talking about. one thing i want to talk about is as far as treasury's use of funds going forward and how it is going to be allocated, i think that has implications. you mentioned the proposals for new statutory authority for resolution and for systemic risk regime, and the way i view the

resolution of authority it is rare richard reall -- is really tarp for years to come and how did bills. in. we will review how the treasury has interpreted t.a.r.p. over the last year and now by the sounds of it if we are talking about job creation or whatever else is coming out from the administration. exactly what sort of uses are you going to put these funds to because you have said sort of both sides, now you want to keep some in reserve, you put some in community banks and i guess i don't really understand. >> let me start with the job creation question and let me say it as well as i can. because of what we have been able to achieve in terms of stability in the system, there are at least $200 billion in lower costs ahead.

that-- >> because of? >> because we have achieved so much improvement in stability and not now believe that is going to be necessary to suspend a substantial amount of resources because a substantial is gone up substantially. the savings reduce the budget deficit. they go to the budget deficit because you cannot use t.a.r.p. to fund an infrastructure program. you cannot use t.a.r.p. to provide a tax cut to small businesses. you can use t.a.r.p. to incent green energy efficiency products. this are choices congress is going to have to make. what we have done the because of the careful stewardship of this program is dramatically reduce the expected costs much lower than anybody anticipated, not just the beginning of last year but in august. that gives the congress and presidents and choices to make about how to use those resources and i believe it will be a strong case for doing that for using some of those resources to

support targeted measures that can help get the job creation back more quickly but there's going to be substantial resources to reduce our long-term future deficits. i want to come back for you began just very quickly. the resolution authority we proposed is nothing like permanent t.a.r.p. and i want to make this very clear and i would not support that for reasons i think he would agree with. what resolution authority does is allow the government to, in effect, taking institution that is mismanaged itself to the edge of the cliff and in effect put it in receivership and wind it down. not save it, not give it a chance for redemption but to sell and wind it down safely at less cost to the taxpayer, less damage to the public. it is not a chance for redemption. >> the problem is there's so much flexibility. >> i don't think so and again this is very important. the challenge in these things is

getting the government some authority to contain financial panics but that has to be very-- [inaudible] >> coming into this crisis united states of america, president of the united states, the only emergency authority he has to contain the panic himself in this case, the executive branch before t.a.r.p. was passed in the fannie and freddie legislation was passed was in effect declare a bank holiday and closed markets. that was that. actually very limited, but the panic continuing authority was here for mergence east think we need to limit discretion in the case. >> okay, i think, going back to basically this goes back to the issue of t.a.r.p. as a revolving-- >> let's talk about that. >> i would like to have an opinion from the general counsel of the treasury addressing that issue which i asked for back in september and haven't gotten

yet, because i think that is germane to what we are talking about as far as how much money has been saved and is going to be reallocated. >> we provided to many city members of congress webb's nordby happy to copy this things that congress designed this with that basic feature. it was wise to do it. >> that is different because i disagree with that. i think it calls into question-- >> there has been no challenge from congress. >> alright gentleman. mr. silver's. >> i would like to just make an observation because my colleague miss characterize whom i work for. i work for the afl-cio. united autoworkers-- i do not work for the united autoworkers. i don't have that honor, and but

i feel very, very strongly about the dignity of people who work hard physically for living, and i think that is often not properly honored in washington. mr. secretary, i would like to touch on, come back to the big bank issues. i am just confused about something and perhaps it is just that i'm not reading closely enough but we pass notes back and forthwith this stuff and they are confused as well. behnke of america has $45 billion in t.a.r.p., in preferred stock. held. bank of america had a public offering of $19 billion but what is the source of funds for the remaining $45 billion the federal government receive from bank of america? the remainder of the 45 billion?

>> i think probably i should give you in writing which i would be happy to do. >> there isn't any other equity offering is there? >> it is a little more complicated than that and this is important, leads the capital position of the institutions stronger than it was before this, not just in the eyes of the supervisors which is very important and this is what they all agreed on but also in the eyes of the marketers and the creditors. >> are you saying the comment about fdic is incorrect because he said they all agreed on it. >> i was trying to stick with my line which is i'm not going to comment on this issue. , who i believe that it is very important. in of the supervisors believe it is important to make sure that as we exit, i think they share that view and i am glad they do. >> okay, perhaps mr. sorghum is wrong.

stronger not weaker, i don't have all the numbers in front of me or can run them in my head but to what extent if any are the funds for the repurchase of the bank of america preferred coming from internal earnings? >> i don't think they are, but again i need to go back and reviewed the numbers in detail. again, let's focus on the stuff critical to the financial position of the firm, so the best way is to look at their common equity ratio to assets before the repurchase and after. that measure, which is probably the most valuable measure of financial strength is stronger with repayment, not weaker. >> what i am concerned about-- >> the quality, another way of thinking about it, the quality of capital that has the strongest source of confidence--

>> of course it would be stronger because they have raised, and in payoff for fur. >> that is it, it is the basic strategy and is a good strategy. >> but that of course would happen even if the bulk of funds raised by it something other than the public offering. it concerns me that the basic standard appears to be a good one which is if you want out of t.a.r.p. you've got to be able to raise the equivalent amount of t.a.r.p. funds in new equity of the t.a.r.p. fund you are paying back. >> that is not quite the standard. >> explain the standard then. >> again, this is a discussion we should have with the supervisors because under the laws of the land-- >> i know but you know with fairmount about it and you were the only one here today. [laughter] >> i don't think it is as complicated as you are making it. it is a simple thing. common equity before repayment,

after repayment, a higher after repayment. it is good for the system. >> it is not clear to me if the common, if you have raised little bit of common equity that mausolea loud prefer to be paid back with cash that comes out of earnings-- >> i don't think that is right but i would be happy to ask the supervisors and i'm sure they would be responsive to lay down in detail but we are happy to provide an authoritative report. >> i hope to keep insisting in the future, i can't change with you done with bank of america but i hope he keeps insisting in the future that you have to be able to have the strength to raise the equivalent amount in the public markets and the equity, common or preferred that you are paying back for t.a.r.p. money. >> superintendents eamon. >> i would like to go back to the original dialogue regarding supporting small business

lending through expanding capital investments in community banks and i am on record as strongly supporting those initiatives, and i also agree with your assessment of the reluctance of community banks and in particular to participate and i think you identified the primary reason for that reluctance, being a stigma. one way to address that reluctance and stigma is to issue those details regarding the program. focusing on eligibility requirements, criteria for approvals, details about the approval process. i think greater transparency in the program in the program was announced i believe october 19th so we are approaching almost two months before the details are

issued. i think greater transparency, a full disclosure of the eligibility requirements-- is there a black box that is going to determine eligibility, would go a long way in addressing those concerns and reluctance on the part of the bank so any further insight on how you intend to address those concerns of the banking community as well as any projections as to when we may see more details about the application in the approval process. >> again, happy to try and do that. you are a supervisors do you know some of this is tough to beat-maggie can't reduce it to a clear simple set of criteria. is not just about stigma though. is partly the concern about and that is a big part of the deterrence. >> let's talk about lessons

learned in developing the details for the program. what are the lessons learned from a large bank capital investments that can now be employed to the smaller bank program? i was glad to see that the l1 of the program would include a detailed lending programs to be submitted as part of that the application as well as ongoing reporting requirements. >> we think that would help. i can't tell you though whether that is going to be sufficient. i think you understand, you can't, we don't want to have the government forcing banks to lend and have quantitative-- fallen so much in the aftermath of a recession, but we think it is a promising approach. i think as you know we are also improving substantially this survey we put in place that would allow banks to report on how they use the funds and what

actually happens in different categories of lending and i think that should help too and we are open to other suggestions. >> that raises another important point. can you share with us your assessment and evaluation of the bank lending in terms of both originations as well as bank balances? >> you have to look at overall credit to have a good sense of the risk in the credit crunch now. the price credit has come down a lot. bank lending is still falling for reasons you will understand. borrowing from the securities markets for those who have access has increased very dramatically. on net credit is still falling. nor surprise in that of course because in a recession as the economy because the economy has slowed so much contracted somewhat, demand would fall quite a lot of the pace of decline is slowing a bit and if you look at surveys of what businesses say they are saying

they do not cite a credit as the principle problem they face. mostly with the faces lower demand for products going forward. >> so when we hear about banks maintaining large balances that the federal reserve earning his bread, is that something the public should be concerned about or are we looking-- >> i don't think so. that is just a necessary consequence of the actions taken to help frankly bring unemploymentna7@ @ rgg)r there are a lot of charts that provide helpful indications. i would say dramatically better than it was, quicker than we would have hoped, but pockets of the country are still vulnerable to a damaging retraction of credit.

>> mr. secretary, we're talking a great deal of systemic risk, and that is what we were talking about a year ago when we got into the business of bailing out large financial institutions, and particularly with agee. -- aig. aig. i read the november 17 report of the inspector general for the troubled asset relief programs report. as you know he was quite critical of the actions that you took, in negotiating with the ultimately with counterparties for the aig financial instruments. now, i was struck by two quotes in here. he says that the federal reserve and treasury officials defended the rescue of aig on the grounds of the company's failure "to pose considerable risk to the

entire financial system and would significantly intensify an already severe crisis in contributed to a further worsening of local economic conditions which has been the standard story for well over here but the report also states that you told sigtarp that "the financial condition of the counterparties was not a relevant factor in the decision to see to it that goldman sachs and other counterparties were paid 100 cents on the dollar. i have to say these two statements appear to be at odds with each other. >> let me try to explain. systemic risk is a complicated, difficult thing to assess and measure. the risk to the system from aig's collapsed is not particularly reflected in the direct effects on its major counterparties. the things that bob protection from aig. the direct effects and this is true for lehman and all the

other financial systems that direct effects of that failure were not particularly significant. what was significant for the system as a whole with the broader collateral damage that would it have happened in the event of a failure so what you saw after lehman for example is a general pullback or classic run on the entire system. asg presented exactly that type of risk but on some with a much greater skill because aig unlike lehman, unlike bear stearns had written a bunch of different types of savings vehicles to the retail community across the country and around the world and if those, if those policyholders have lost confidence in the system as a whole than the damage could been much greater so it sounds like of course the entire system was at risk and if the system has collapsed no institution in the united states or around the world would have been intolerable to the collapse.

>> mr. secretary if goldman sachs could have withstood these losses-- >> only the direct effects. is not the right way-- >> they still could it paid off all the parties in turn that they owed money to. this will not cause goldman sachs to collapse. >> chairman, you understand this. when you decide it is necessary to prevent default, you prevent the fault. if aig had not met its contractual obligations to its counterparties it would have defaulted. it would have been downgraded and the company would have collapsed and would have been to what they did in the worst financial storm in generations. there was no feasible way to selectively default on its counterparties without bringing the whole thing down. >> mr. secretary, we did not step then and back up all of the counterparties, all of the

trades. we pick aig and aig alone. and backed up 100% on the dollar in repayment. .. >> these financial institutes are going to be treated effectively like deposits in checking accounts. >> absolutely not. >> they ended up he effectively with 100% on the dollar guarantee, which they will never pay. >> the fcc does two things. there is no other way within that storm.

looking forward, we do not want to have a situation -- we do not want investors in the future to live with the expectation the government will aid them. that is where reform is so necessary. expectation. that is the challenge by financial reform is so necessary. now, chairman, nothing would have made me happier in that context to have a different set of choices, but until all of the land the authority we have for the tragedy of the country we had no other choice. it's been a kid did have a choice before you moved in and that is it could pay 90 cents on the dollar, 85 cents on the dollar -- >> i don't know why this is so complicated -- >> it is complicated. >> but it's come down to the nature of choices. you either prevent default because the fault would be cataclysmic or you don't. when you provide -- when you prevent default, you are doing so so they can meet their obligations to everyone the of contractual obligations to.

if you select redefault on any it will come crashing down. that is the consequence of the system we had going into this crisis. that's why we want to change. that's why we want to change the system. some of mr. secretary, i come from abroad of chapter 11. people negotiate all the time and they do not bring down their entire system. >> and you're a national expert on this based on the issue but that's why things are different. aig is effectively -- >> aig was not a bank. i'm out of time and i've done it to myself again. i apologize. >> this is very important to have come important debate to have. >> go at this, mr. secretary. >> [inaudible] [laughter] >> go ahead, mr. secretary. >> and you know this, i know you understand this. financial the institutions the concourse has recognized for a long time needed a different type of bankruptcy regime than we have four other companies. now, aig is not a bank. but in affected operate as a bank. it borrowed money, it operated

on a leveraged and without capital to support that. for the same reason we have a different type of bankruptcy for banks for many, many decades. we need one for complex financial stopper lee just like banks. now, in bankruptcy you have lots of choices. you can negotiate all sorts of different treatments in this context and we still would be helpful for the country. we want is a bank type of resolution regime that gives the choices that we've had for banks and four in a sense colossi bankruptcy's the we did not have that for complex large financial institutions and that is what limited choices. >> we may disagree about whether or not we had it but we would certainly agree we do need a system in order to be about to liquidate large financial institutions. where we may draw a very sharp difference is whether or not we should ever be in the business of doing that after the fact, and going back and effectively guaranteeing transactions with mullen bank institutions --

>> we feel the same way -- suggests winder stand do you feel the same way about the fdic guarantees pimply september? because, because the guarantees -- again, you would never, ever want a country in a position you have to guarantees, temporary, whenever the price because, because of the moral hazard risk. but in a financial panic there is often no other way to stem the risk of much greater damage to the innocent. >> mr. geithner, there are consequences to doing that because now markets understand that you may at any point decide that anyone is large enough and that their debt should therefore be backed up by the u.s. taxpayer. >> well said, and no one feels more strongly about that, and that is why even in the midst of the steep crisis we propose sweeping reform that would give a better choice is in the future. i could not feel more strongly about that. >> thank you. i apologize to my fellow panelists.

mr. atkins. >> no, it was a very fruitful discussion i thought. and i note next month we will be drawn into aig as a topic, and so i look forward to that as well. but i just wanted to turn back to i think part of the problem especially last year was predictability, transparency of the government's actions were. and also with respect to what balance sheets and other things work consisting of and that sort of made the marketplace itself on easy and i think that is part of the same thing i wanted to discuss now is the predictability of who gets what and who does what to whom and that is what i was trying to refer to as far as audit programs. i wasn't disparaging working man that there is a huge perception out there that other unions got a great deal out of that rescue package that was negotiated earlier this year. but that dovetails into the

situation of small businesses that we've been talking about. a lot of the problem in today's business environment is an uncertainty as to what the future holds. the administration is talking about, and the congress is talking about huge tax increases, huge, new expensive health care plans, new owners environmental regulations being talked about. and then looming deficits of course, you know, far into the future, not even counting the off-balance sheet obligations in the united states government, which some people put at 100 to $0 billion or more. so nobody basically can plan for anything, and that affects borrowing, and that obviously can affect lending. so, at the same time now we are talking about the -- you were talking about the stigma of participating t.a.r.p. among some small banks, and people because of things like people are -- have been leery to purchase it in the private public partnership because they don't want to get close to any

sort of government control of their business or influence. so i guess my main question is how are you going to inject more predictability into the system? you're talking about this vague notion of limiting aig to $550 billion or so and then focusing on small businesses and housing and other -- let can't remember the last part, anyway i will leave that to you. how exactly are you going to put these funds to work? what is the general plan? >> there is a cable attached to my testimony that gives a very detailed estimates on what we think a reasonable estimate as a future program is very clear and the programs have very clear and transparent positions and one of the things we did from the beginning is put the specific terms of any contract in the public domain for everyone to see. so i think that will be very

effective and very clear and making sure what the limits are going to be on these programs and what the precise term is one to be. you are right that business across america still faced a lot of uncertainty, a lot of uncertainty how strong the recovery is going to be and they face some uncertainty with the name of the game is when to be going forward and that is one good reason why you the congress's plan to bring to closure the health care reform for the system and the broad changes ahead on energy policy and things like that. it will help reduce uncertainty and help improve confidence. businesses want to know what the rules of the game are, so i think i agree with you on that. you want to bring clarity as quickly as we can. >> i guess again going back to the resolution of 40 you're asking for i think that will just perpetuate the lack of clarity -- >> relative to what? again, let's think about the choice ahead. do you want to go back to a situation on which the united states of america comes into the worst crisis in the generations

with no authority, no ammunition, no ability contain the damage? it cannot be good for us to a court that disaster again. >> but it can describe these particular on defining powers -- >> they are very well defined and they are carefully limited. they are more limited in some ways those exist today and the ones created that are new or modeled on a resolution of the regime established and tested for banks over the decades. >> i agree with the chairwoman that bankruptcy is probably the best >> bankruptcy a salles for squall site bankruptcy? >> i am talking about even beyond the banking system of firms that are not necessarily banks, but are deemed to be for some reason to big to fail or of a systemic risk and i think that is the thing we are concerned about. >> again, these are all about choices because i think many of

us would share the basic objectives. it was not good for the country to allow a very large very risky complex institutions to operate and effectively as banks outside all the protections we put in place for banks in the wake of the great depression and crisis that preceded it. that was a terrible mistake. so institutions that effectively our thanks to chris, could imperil the system need to have constraints in the routt line >> i am going to interrupt. why don't you finish the cut? >> people do not know what the scope of this is, but what caused this crisis, what made it so severe is we allowed an entire system of the fact of the bank's operating without constraints -- you could say

fannie and freddie, too, and without the protection we put in place. that was the classic mistake of the government. you use better tools to manage failure with was the vague. >> in your view that the bill the ministration supports, that the bill provides this fdic model quasi bankruptcy process. is that a fair statement? >> that is a fair statement. >> let me say that this issue that has -- we have been going through is of great concern to me. i looked closely at that bill. i thought earlier drafts were inadequate and did run the risk of another tarp.

i think the bill is the right one, and your leadership has been very helpful. let me return to the broader discussion about panics and bounds and so forth in the context of aig. i want to understand the argument you're making. are you saying the reason the creditors had to be made whole was not because of the threat of were they not made holder would fail, but because the threat that if anybody was not made whole in a crowded derivative transaction there would be a broader mediation of derivatives market? would be a broad disintermediation in derivatives markets? is that -- is that your concern? >> i think that you are mostly right but what we see it slightly differently. if any -- aig defaulted on any single counterparts in derivatives or any other contractual obligation that would force the generalized be

felt, downgrade, the system would collapse. not because that collapse would have been cataclysmic for the system as a whole. >> default is an interesting term here. the fault is a form of legal term where the person who has the obligation asserts the party hasn't paid and in that circumstance -- in that circumstance perhaps can try to insist on payment and enforce bankruptcy. is it your view that in a negotiated hair cut would have had the same impact? because that would not have been the default. people negotiator cuts all the time between commercial parties. >> they do but that's the point. remember, this is not like there were three people. that had the total exposure of counterparties and derivatives to aig. there were tens and tens of counterparties on the derivatives, it may be hundreds. there were thousands of other

counterparties at stake in this context. no one but have been willing to individually volunteer a concession without it being extended to all of the counterparties in similar positions. it is a simple thing. it's like flipping a switch. either the firm is able to pay and avoid default, or eight courts default and downgrading collapse. >> is your view -- is your view that aig is from? that they appear to be quite -- the seem quite convinced that there was an opportunity to negotiate not redefault, but a concession on the part of the major parties the chair mentioned? >> the real world does not work this way. you can't run a strategy on the hope that people will be nice and decided they are going to voluntarily give up a set of contractual obligations and if they are unwilling to do it then you're only choice is that you not pay and take --

>> so your concern was the default of aig, not the broad run and the derivative market but or was it both? >> i think just think about what happened after lehman brothers. it is the simplest way to think about it. what happened to lehman brothers, they failed. they defaulted. >> then you're seeing the issue was the defense of aig. i want to understand whether you believe that the derivatives markets in a crisis our markets where everyone has to get 100 cents on the door of the time. >> in a financial panic, in a generalized financial ron, if you see cascading defaults like this on any type of contractual financial contract, that will accelerate cannot mitigate the panic. again, nothing would have been better if there was a solution in place in this case where you could have negotiated instead about comes that left the taxpayer with less exposure of losses that has no realistic prospect of success in a financial panic of this

magnitude. resolution of 40 but mix of the trees is a little bit easier. but there are no good choices in a panic like that. >> i would conclude after derivatives -- if derivatives are the kind of instrument that are having the kind of importance in the markets in which 100 cents on the dollar is necessary in a crisis we need to regulate them as such. >> and impose sweeping changes to how derivatives are treated and regulated under markets because of that risk. >> thank you. superintendent neiman? >> i would like to me in on the aig issue just to confirm that there is not necessarily a consensus on this viewpoint on the panel but also more importantly to delve into it a bit deeper. and also to encourage everyone to read the t.a.r.p. report not because necessarily the lessons learned but because it does outline the sequencing of defense that led up to and describe the transaction. mauney reading of the report says that once the government

decided that aig was too big to fail they had no longer have leverage over negotiating on those haircuts. that is a different situation and was faced the municipal issuers months earlier. i think also indicated very clearly that the issues around violating contractual obligations once the government decided to prevent a default also treating u.s. counter priest offered him for an counterparties would have raised significant issues utilizing the supervisory powers of the federal reserve to use that leverage to force negotiation i think what also have raised significant concerns. and last the issue you raised of decreasing the downgrades, the impact that would have on the american tax payer and the global system. so you know, i would encourage

everybody to read that report because of the descriptions and the kill switch to my knowledge were not clearly outlined up to the issuance of the report but take this agreement with lessons learned and in my opinion it is we did not have the right tools for resolution of an institution of that nature and that is why it is so critical that we have resolution authority to deal with systemically institutions. >> well said and i think you said they're right. i think it is important to recognize it is a good thing for the country and this is going to happen for years to come. people are going to pour over every decision we made. they are going to look very carefully tall of those judgments. it is of course harder to judge the benefit of hindsight whether it is possible and a lot of it is going to be hard for anyone to appreciate who has not lived through minute by minute what was happening in that acute series of financial panics with of good choices for us. our job was to make a set of

choices among unpalatable deeply offensive basic choices and to do what was best for what we thought was best at that stage. but i respect the efforts to come back and look over this again. a lot will happen in the future. we are born to cooperate because the american people deserve to try to understand that, but again, understand no one can really appreciate the range of choices available at the time and that is one reason why we have to work so hard to make sure we have bitter twist in the future. resolution of 40 to allow the firms to fail without taxpayers being exposed to the risk of loss, and that we do countries undertaking the future that can help mitigate the moral hazard riss pc. >> before moving on to another subject i would like to use my remaining time. can you give us an update on aig particularly what we are reading in the press about issues of risk of losing individuals resulting from a compensation directives?

>> there is risk of that as you expect and you've seen. i would see in general the management, the new board management institution are working very hard and effectively to strengthen the underlining insurance business is there for improving the prospect of the taxpayer being repaid and bringing down the risk in the financial product division that took the institution the edge of collapse. that has come down very dramatically overall scale of exposure and derivatives are about half of the peak level but that is the basic strategy. >> is it something that we should be concerned about at this time? the impact to the american tax payer if there is walls of critical employees? >> absolutely. i mean, we need people who are capable of running these businesses.

the taxpayer making sure we maximize return on those actions we took require that there be capable people running these firms, these businesses. >> thank you. >> thank you, mr. treasury. our time is short so we will enter the lightning round and try to get in at least one more question. i know you need to leave -- >> i need to be somewhere else out 12:00. >> we understand you are here until 12. >> like five minutes before 12 because i need to be at my next thing at 12. >> i thought we were told we were ending at 12 that we have to for two hours. so, let me to ask the questions -- >> let me -- >> as the bank's -- we are talking about how to wind down t.a.r.p., here's my question to read the top of the guarantees for the money market expired september 18. that is one of the winding down of t.a.r.p.. but we jumped in, we the federal government, we, the treasury department, jumped in when the money markets were about to break the buck.

now the money markets don't have any official guarantees. they don't pay anything for any guarantees that most of the market believes if the money market started to break the buck again there would be substantial government assistance. you describe the banks as leading t.a.r.p.. they are stronger, sure they are stronger. they paid back their debt, no restrictions under t.a.r.p., but they also bask in the glow of an implicit guarantees. after all we've held up the big sign that says those folks are worth saving no matter what. so my question is how do we wind out of implicit guarantees of the fact that the market assesses these institutions as stronger and capital as cheaper for these institutions for the specific reason that there is this implicit government guarantee? >> i.t. the only way to do it is to put in place financial reforms to the chief to outcomes. one is authority for the government to come string

risk-taking more broadly and effectively in the future. that is necessary. it's not sufficient. and you need quasi bankruptcy authority that allows a credible risk that these firms can be failed, and wild more safely. i don't know a better way to do it. i worry about the risks you leave out. it's inherent in any successful effort to prevent financial fire. there's no way to put out financial fire without taking some risk you are going to hurt financial incentives in the way that you described. the only solution to that is to change the rules of the game. >> thank you, mr. secretary. mr. atkins? >> can i see something briefly prexy said at the beginning although in this agreement but i want to underscore -- t.a.r.p. was only one part of what helped bring growth back to the economy, stability back. t.a.r.p. would not have any effective without the guarantee but in fact without the fdic and broad measures of the financial

squeeze by the fed and without the recovery act itself things did not turn. things did not improve, did not bottom until you have that full arsenal of policy responses in parallel. it wouldn't have worked without t.a.r.p.. t.a.r.p. was necessary and it was a part of the basic strategy. t.a.r.p. cannot claim the credit for all of the things improve in this case but it wouldn't have been possible without it. >> welcome you know, the recovery act as a whole nother issue and i don't have time to go into that one so i will leave that. there's two things i want to bring out. one is you are discussing nonbanks come on banking firms, would ever before. i do have to know many of them feared better than that huge banking institutions that had regulators and examiners living in their offices day after day. >> for symbol? >> hedge funds and others have less leverage, 221, three to one, than other sorts -- >> i need that point a lot that is in part because we were

actually quite effective in making sure the institutions that provide leverage give them financing were much more constrained than they were and 98 for example. as the knicks will have to pick that one up. i just want to say that transparency i do believe is the answer ultimately. but one last thing i'd want to point out with respect to the housing issues, we had a hearing not long ago six folks one of whom brought up an issue as to eesa and the authority of the treasury to the programs you're doing now because the statute talks about how treasury will acquire assets, meaning, you know, loans or the underlying mortgages or the securitized assets. and so the programs are not geared toward that, and so wanted to -- >> the opinion on that? >> i would be happy to provide that. >> thank you. >> and mr. silvers is went to the last question.

>> [inaudible] -- i would wave my last. >> mr. silvers. >> i've looked at the composition of the revenue. it's hard to look at the profits of the four largest banks over the last six quarters, and it appears that there is a trend toward interest income from loans declining slowly and income from securities revenue. again, revenue from security training. are you at all concerned about this, essentially the quality of earnings within the largest banks? >> i'm not at this stage. i think they are getting better, not worse. i think the most important thing to point out is what has happened to earnings across the financial system is a direct function of the fact not just the government did extraordinary things to save them from collapse, but that the markets are now opening up. firms are able to raise capital

again, and the healthy process of repair, companies are able to go out and raise equity is a substantial source of revenue. that is what banks exist so it is a healthy thing obviously we look at this carefully because what we don't want to do is have a situation where the same type of risk that brought this to the edge of collapse start to reemerge again. >> thank you very much, mr. secretary. i want to say our characterization of the past may not always be in agreement but i think we are very much in agreement, at least i hope we are, that we cannot go this way again. there must never be t.a.r.p. 2.0. >> this isn't over yet. we still ought to fix what was broken, not just put reforms in place to prevent crisis in the future. thank you triet. >> thank you to read this hearing is adjourned. the record will be held open for questions for the secretary. hearing adjourned. [inaudible convers

. . .

jo i understand ta. we should never forget that there's a critical need for the government from national leaders to local to step up to meet these mission requirements as well. this is significant civilian part of this we are putting in place. the state department has worked inyesterdayiblely hard. not just numbers but individuals with the right skills. we can leverage that. we know that there is a bill

out there, if you will. this is an international effort. 43 countries have come bat forces here. there's a lot of work to be done. he was clearly articulating a requirement. the exact mechanisms that will be put into place to sustain them are yet to be determined. >> last question.

it's clear that the leadership feels this is important. that's up to them and they'll carry that out accordingly1ya o. thank you.

>> it on this morning's washington journal, we'll discuss healthcare and talk about the future of iraq. live each morning starting at company eastern on c-span. >> this weekend on book tv, a look at climate change. afterwards, usa today's joan

and looking at more. >> the government had to be aware of declaring victory too soon and obama's decision to extend tarp until 2010. the congressional oversight panel that created the same law he is stab lirved by cock res in 2008 also questions during this two hour hearing. jo welcome mr. secretary to your third appearance. we pressure coming every quarter. yesterday, this panel released its monthly oversight report for december. oration of the pla

where t.a.r.p. has fallen short. you made it a busy news day by announcing at the same time that res ri will extend -- treasury will extend t.a.r.p. until october of next year. thus it seems between the two of us we have intensified a vigorous debate in congress about what direction the program should take going forward. as the starting place for our conversation, i want to note the conclusion of our report. t.a.r.p. was an important part of the government's rescue strategy. and it helped rescue the financial system from imminent collapse. the apocalyptic fears that we were all suffering 14 months ago have not come to pass. and for that we owe a great debt of gratitude to the public servants who tiled through the darkest -- toiled through the darkest days of this crisis but as the report also highlights t.a.r.p. has been far from

an unmitigated success credit for consumers and small businesses remains scarce. the foreclosure crisis continues unabated and treasury's mitigation programs have not achieved the scope the scale or the permanence necessary to stabilize 2 housing market. large banks survive the crisis with the help of government support but smaller banks don't fail at nearly unprecedented rates and the fdic is in the red for the first time in 17 years. perhaps most disturbing of all t.a.r.p. create an implicit government guarantee for major financial institutions. a guarantee that has not shared by their smaller counterparts. the unprecedented government actions taken to stabilize the system have created a huge more hall -- moral hazard that makes our system riskier and that affects the pricing of assets. we welcome you here today mr. secretary to engage in

the constructive process of evaluateing the t.a.r.p. and assessing whether it is serving taxpayers in the manner that was intended. i look forward to your testimony and a productive discussion. and with that i call on mr. atkins for two minutes of remarks. >> all right. okay. thanks. thank you madam chairman. welcome secretary geithner. milton friedman once said that nothing is so permanent as the temporary government program. yesterday we learned what most of us had already suspected that t.a.r.p. will not die at the end of this year. the program is no longer, no longer can be considered a hastefully arranged effort to arrest the financial freefall. i can understand why a treasury secretary, any treasury secretary really would want to extend t.a.r.p.. why not. it's a free option at taxpayer expense and essentially a blank check to finance any macroeconomic

stimulus initiative that the executive branch can imagine to the tune of hundreds of billions of dollars. by -- but now that last year's emergency has abated the rationale behind t.a.r.p. as a safl for financial markets in distress no longer supports treasury choice i believe to extend it. the previous congress reluctantly authorized t.a.r.p. in response to extraordinary financial panic. would kong today approve snarp i cannot imagine it. that was why it was extended i believe. but toex tend t.a.r.p. borders i think on recklessness and irresponsibility in treasury's role as a stewart of the nation's financial system. t.a.r.p. continues to inflict great economic costs both directly to the taxpayer in the form of actual and potential tens of billions of dollars of losses and indirectly as chairwoman said of moral hazard distorted insentives created by implicit government guarantees and inefficient government

interference in the operation of private firms. moreover the administration's legislative proposals will not solve these problems i believe but only institutional them. now that unbridleed financial panic that was krilted as the original -- crime cited as the original justification for t.a.r.p. disappeared why deepen and prond these cost. i'm not convinced we kev p yet credit the program itself for staffing a panic in the markets the united states government basically cru $8 -- through 8 trillion in the form of guarantees sqloens direct out lays at the financial markets something had to happen out of all of that liquidity and in fact i think this chart here shows how t.a.r.p. rates as but a small portion of the total government out lays. this little red triangle here compared to everything else guarantees, out lays and loans that the federal government did last year. so the lack of political accountability i believe may

be t.a.r.p. greatest liability of all and i think the treasury department has done very little to assuage many obvious oversight concerns that this panel has expressed. first treasury takes the position that t.a.r.p. essentially is a revolving line of credit with a $700 billion limit on outstanding balances at any time. at your previous appearance before the panel i asked far legal opinion justifying the view that t.a.r.p. is a review fl -- revolving fund we have yet to receive such an opinion from treasury. i believe this omission needs to be addressed as soon as possible. thank you. >> thank you. >> mr. silvers? >> good morning and thank you chairwoman warren. i wish to begin by saying mr. secretary that i believe the administration's decision to extend t.a.r.p. e only responsible course of action. the financial system today is not fundamentally stable in my opinion. the mortgage foreclosure

crisis accelerating and overall economic situation particularly when looked at globally is not good. the risk of a systemic problem in the coming months is significant. while i believe a tough resolution authority such as proposed by the obama administration and being acted on hopefully in the house in the coming hours would be far superior to t.a.r.p. as a means of dealing with a possible future financial crisis. at the moment congress has not passed any such authority. in this context the administration's decision was the only responsible one and as i think you just got a little taste of, it was an act of political courage for which i think you deserve a substantial amount of credit. now, we found in our december report released earlier this week that t.a.r.p. played a positive role in halting a runaway financial crisis in the fall of last year. i recognize this is hard to prove in the way a mathematician would prove something but i'm completely

con individualsed this is true and the -- convinced this is true and the reason i think this is true and the reason my colleague mr. atkins has it wrong because there's a difference between liquidity and equity. now, nonetheless t.a.r.p. is wildly unpopular among the american public and this is not because the public does not understand what happened. it's because the public understands all too well what happened. this panel found in report after report t.a.r.p. transactions have been undertaken less than fair terms to the public issues in transparentty in key t.a.r.p. actions including the stress test the underlying weaknesses in the financial system have been inadequately addressed and finally and perhaps most importantly the key credit markets that matter to the american public remain weak with real consequences for jobs. it did not have to be this way and it does not have to be this way in the future. this administration has taken significant steps to make t.a.r.p. a program that works in the interests of the american people and not simply in the interest of

the financial firms we bailed out. including allocating significant moneys to foreclosure reliefs and managing to avoid putting more money into the large banks. but more must be done. t.a.r.p. in its second year must one, work for main street not just wall street. no, -- two, always transabout with private parties on terms that are fair to the american public and three, address the underlying weaknesses in large financial institutions by cleaning urp up firms that are broken rather than continuing to hope time will heal all wounds. this week president obama spoke powerfully about the need to help solve the main street credit crisis so businesses can kre jobs and he spoke about the role t.a.r.p. might play in that mission. i look forward today to hearing in more detail about those plans and like the chair and mike, i'm very pleased to see you here today and thank you for your attention to the panel. >> thank you mr. silvers superintendent neiman? >> good morning mr. secretary. yesterday morning our panel issued a report analyzeing theñi overall effectiveness of

t.a.r.p. in a comprehensive year end review. and while the report criticized several of t.a.r.p.'s shortcomings to date, it also gave a large share of credit to the treasury department and to congress and in my opinion to the fed and the fdic for the achievement of the primary objectives. t.a.r.p.'s primary objectives were to restore financial liquidity and this has largely been achieved as the report stated and i elaborated in my additional views. this this reflection is critically important so the american public can fully appreciate the depth of the crisis and how the treasury's multiprong response stabilize not only a financial sector but also avoided a dramatic worsening if not collapse in the real economy. but congress also charged treasury with use t.a.r.p. funds in manner to preserve homeowner ship in addition to promoting jobs and economic growth and we are now entering perhaps most

critical stage of treasury's foreclosure prevention foreclosure prevention program. thank you for your time with us this morning. thank you mr. neiman. i want to note that we are missing our fifth and newest panelist mark mcwaters that

joined the panel by apointment last night. he can't be with us today because he has the flu. so we are sorry and we wish him well soon. as you can see mr. secretary we have kept our remarks brief so that we will be able to have the maximum amount of time for questions and answers. so i would ask that you keep your remarks to five minutes. mr. secretary? >> thank you. thank you chairman warren members of the committee of the atunyoteer sight committee -- oversight committee and thanks for the opportunity to testify about this important set of policy issues faceing the country. more than a year ago as you noted we faced one of the most severe financial crises in the century a deep economic recession and we've begun to turn this around. confidence in the stability of the financial system in the security of american savings has improved dramatically. credit is flowing again. the economy is now growing.

broerg costs have fallen. businesses have raised substantial capital from private markets housing prices have stopped falling in many parts of the country and job losses have slowed at a pace more consistent with stronger recove rer -- recoveries than weaker recoveries. however this is a very tough economy and households and businesses still face very significant challenges unemployment of course is veryer, very high commercial losses weigh heavily on small banks impairing their ability to extend new loans. credit is tight for many small businesses. foreclosure is driven now principally by unemployment are very high. today i want to outline our strategy to address these challenges going forward and how we're going to wind down and ultimately exit the t.a.r.p.. there are four elements to this strategy. first we will terminate and wind down the emergency programs put in place at the peak of the crisis necessary to break back of this financial panic in september we shut down the money market guarantee program which earned taxpayers 1.2 billion we've etec fek tfly

shut down now the capital purchase program under which the majority of t.a.r.p. investments in banks were made. second, we will limit new commitments under this program in 2010 to three areas. housing small banks and credit markets for consumers and small businesses. for housing we're going to continue to work to mitigate fore- -- foreclosures for responsible home owners as we take the steps necessary to continues to stabilize the housing market. for small businesses we recently launched initiatives to provide capital to small and community bans to increase lending to small businesses and reserving additional funds to facilitate small business lendsing and finally going to continues to support the securities markets necessary for credit flows to consumers and small businesses. third beyond these limited new commitments e we will not use remaining e, s.a. these are starp funds unless necessary to re -- t.a.r.p. funds unless necessary to respond to immediate

financial threat to our economy from financial stability. a determinationly only make after consult wgs the president and chairman of the federal reserve board and submitting written notification to congress. fourth we will continue to reduce our financial stake in banks and manage our down other investments we will keep the government out of the business decisions of these companies and we will exit from our investments as soon as is practical and return ownership to private hands. this strategy requires a limited temporary extension of the authority provided by the congress under the emergency economic stabilization act. it would be irresponsible to do otherwise. the expected cost of the t.a.r.p. have fallen dramatically. while we're extending the program we do not expect at this point to deploy more than 550 billion in total. we also expect up to $175 billion in repayments from banks by the end of next year. substantial additional payments thereafter and as a result we know expect the ultimate cost of t.a.r.p. will be at least $200

billion less than was projected as recently as the august mid session review of the president's budget. we now expect to make not lose but to make money on the $245 billion of investments in bank. we estimate the t.a.r.p. programs for banks will yield a positive return of over $19 billion. indeed banks have already repaid more than $116 billion in investments the stress tests of the financial institutions helped accelerate repayments by providing markets with the transparency and confidence necessary for banks to be able to raise capital from private sources. these programs as you know have generated significant income roughly 15 billion which has been used already to help pay down our nation's fiscal obligations. of course we do not expect all t.a.r.p. investments to generate positive returns unlikely we will be repaid for all over investments in aig. gm and chrysler even there the outlook too is improved and you'll see newes it mass in the report we're issuing today.

we'll continue to manage t.a.r.p. in transparent and accountable manner. erier this morning treasury published or maybe sometime today not sure it is out yet. published first annual financial statements for this program. these statements discuss in great detail the operations and impact and expected cost of the program. gao provided unqualified opinion of those statements included no material weaknesses in internal controls and this is a notable achievement for the men and women who have helped put in place this very important program in a short period of time. let me just end by emphasizing as you did the importance we continue to work to reinforce the process of repair in our financial system. it is absolutely essential to make sure we establish a strong recovery that have put americans back to work and it is very important because of the consequences kre -- kre yad by the actions necessary to put out this financial fire that congress move to adapt a strong and comprehensive package of financial reforms and i've -- and i'm encouraged by the progress we've seen to. a lot of channels ahead to

getting a strong package in place. i know you played a helpful role to bring strong insight to those choices and i'm sure you'll continue to work with us to make sure we have a strong package in place as quickly as possible. thank you. >> thank you mr. secretary. let's start with your statement. you say as part of the extension that you want to focus any new spending on housing small banks and supporting credit to consumers. small businesses. let me focus on the small business initiative i understand the importance of the initiative this is the one part of t.a.r.p. that may have a direct effect on unemployment or maybe the most easily traced effect on unemployment and that is if small businesses can borrow money then they'll be able to stay in business. they'll be able to keep their employees or hire more employees. so i understand the importance of this and applaud that approach.

but my concern is that last spring treasury launched the program to stimulate small business lending. i think it was not a success. later treasury announced a program to purchase up to 15 billion dollars in securities backed by sba loans and i believe it's the case that so far treasury has not spent a single dollar under that program and two months ago treasury announced a third program to support small business lending by providing low cost capital to community banks and as i understand it so far nothing has happened. so it's not news to anyone that small business lending is important. small businesses are closing every day. but treasury has now announced three plans and surely has not gotten the job done. what's going to be different now mr. secretary? >> let me start by saying the economy would not be growing today without t.a.r.p.. unemployment would be dramatically higher today without the action we took

to help save lives of financial system and open up the markets so broken. let me walk through the specific programs you pointed out. to get small business lending going again. small business you know they depend on banks overwhelmingly for credit and small banks provide about half the credit small businesses get from the banking system as a whole. small banks are among the most affected still by the challenges facing the economy as a whole. many of them are going to need more capital. those that need more capital are cutting back on lending and commitments and as you said that's affecting small businesses in. our judgment to address this requires a set of different approaches. we've actually been quite successful in bringingly quitty back to the securities markets important for small business lendsing the program has been very helpful. that's one reason why sba loans have increase sod much. the sba program providing higher guarantees lower fees is also helping although those programs are small in total mag my tuesday but for this to work we have to make it possible for banks to come get capital from the

government so they can support more lending. banks have been very reluctant to come and the reason the program youer fromed to has not yet been launched is because they had been very reluctant to come and do business with the government. ..

you started by saying you were going to terminate the capital purchase program and then i thought i just heard you say you are talking about putting more capital into small banks? i am just little confused on this. >> again, the emergency programs or necessary to-- in the capitol programs for large banks were now confident we can wind down and put out our misery, but as he said the president announced a program for capital and small community banks a few months ago. that is important we are going to preserve that and we are exploring ways to build on that but for it to work, chairman, we need to make sure we need to make it more comfortable for banks to be willing to come. >> let me if i can pinpoint, how can it be that we can manage to put hundreds of billions of dollars into the hands of very

large financial institutions and what was effectively a matter of days, at 14 months in t.a.r.p. we are still talking about trying to figure out how to put much, much smaller amounts of money into very small financial institutions. >> it is not complicated but let's go back a little bit. we actually did not give the large banks a choice because it was necessary for the country that they have capital put in right away. justice second, let me say, but small banks, and we meet the capital quite attractively priced as many of you have pointed out, but they are reluctant to come. they don't want to come because they think it is a sign of weakness and not drink. even though capital is the best way they are reluctant. >> let me just-- >> as you said we have tried quite creatively many different ways to design these things to make them more attractive but we can't force them to come.

>> so your statement here today is the reason why we have a problem with small business lending is you are making the money available to small banks and they just won't come? >> that is one of the problems and it is absolutely a central problem in this area. the basic credit crunch uc across many small businesses across the country today is partly as a result of banks pulling back a don't have capital to solve that. it is not the only thing you can do but to solve that-- >> thank you mr. secretary. mr. atkins. >> thank you madam chairwoman. i salute you very much for producing an audit of the t.a.r.p. program. i think that is great and that is something we have been obviously expecting and that is super so i look forward to seeing that later today. again. i disagree with you as far as how important t.a.r.p. was for the situation today, basically this sine qua non of where we are with their meager

recovery and anyway, and approbation of the program. but i want to focus on what all this talk from the white house and elsewhere, about job creation coming out of t.a.r.p. and things like this. what troubles me is what sort of parameters are you going to put a brown this. when you are talking about injecting money into small banks that are not really trouble but you are doing it for some of the reason i think you are very much drifting away from the intent of congress in passing fsob-- eesa i wonder how you will analyze this. >> t.a.r.p. was essentially about credit, recognizing that there is no roof without credit. the banking system is critical to the provision of credit. what we have designed for small banks, for community banks, for small business lending in securitization markets opening

up, housing more stable are central to the basic objections o& á@ @ t @ @ @ k

you are talking about the bank. >> again banks are critical. they are not the only thing but they are critical to that. if you are a small business and you are unlucky in your choice of banking eurobank got exposed to a bunch of commercial real estate exposure that bank is fun to cut back in your credit and you'll have to cut back on payroll employment and it takes time to find another bank particularly in a system so traumatized by the crisis. >> part of that too is examiners and other people who through their scrutiny and this is a natural human reaction to over react to a crisis and questions may be need to be asked but through that sort of process it then causes banks to recoil of bed and not be so ready to land. >> you are right about that. as commissioner neiman no's this is an important balance to get right. what happens in recessions after

financial bums is banks may pull back more than is rational and supervisors may tend overreact so we have, these are independent of the treasury, but we have been encouraging supervisors to try to provide some more balance and the guidance to give to examiners across the country so they don't overdo it. they issued guidance to blanding ululation standards a few weeks ago. i think that is very helpful. they are looking at additional steps but you are right to emphasize the importance of trying to lean against overreaction by supervisors. >> so i want to go back-- gibbon netley you have all decided that it deserves some more funds. >> g is part of the institution but to the stress test early in the spring. s4 manning we identify significant capital needs and for all those institutions we said if you do not raise capital from the private markets, if you are unable to be put to you

because it is important to the stability of the system so the only thing committed to do back then and i think actually the ultimate will be lower than we anticipated back in june. >> apparently you have decided to inject more capital. >> no, somewhat less than the estimated in june. >> but the more recent round, where they have come back. >> no, in june when we released the estimates and the stress test, the estimated capital needs for the institutions we gave them a curative time to go out and raise capital from the private markets. overwhelmingly banks were able to do that. you see private investors willing to come in and increase their stakes in banks across the country now allowing the taxpayer to get out of those. it was never going to be possible for g. all we are doing is committing to put the capital and recommitted at probably a

slightly lower level than back in june. >> thank you. >> thank you. mr. silver's. >> mr. secretary, when t.a.r.p., wendy eesa was an active and t.a.r.p. began, my read of the statute was the purpose of t.a.r.p. was not to rescue a particular institution, even particular firms. it was to preserve the system. and, for the purpose in the statute was i think pretty clear about this. not because the system was a thing of beauty or because a particular concern for again those businesses but because the role of the financial system played in providing the resources necessary for the real economy to function. in that regard, and stop me if i have got it wrong, in that regard it seems to me that you appear to be identifying, you

when the president appeared to be identifying that aspects of the system continue not to be working adequately in continue to be needing more support. am i reading your words that you correctly? >> exactly. there has been a dramatic improvement in the overall stability in functioning of the u.s. financial system but parts of the system are still very damaged and broken. i will mention just three. housing markets are still overwhelmingly dependent on the temporary programs put in place by the government. commercial real estate finance is still very difficult as you would expect with an economy coming through such a large basic adjustment, and there's a significant risk of credit crunch across small business in part because of the small things. they are still somewhat impose to the risk is that. i don't know anybody who could

look assistant to the and say that they are not significantly impaired and did not a surprise given the scope of the damage caused by the crisis. this year there is on the economic case to use the authority provided and perfectly consistent with the objectives of the authority to continue work, but that is not the only reason we are extending dr. silvers. we still need to keep in reserve some the availability to respond if we are to face again a serious escalation of systemic concern. ag would be deeply irresponsible and prudent at this stage, only a year and to this recovery process, only three months after we first appeared, to stand back and walk away from the challenges ahead. that would leave the taxpayer at much greater risk of future losses. ultimate casa the program would go up, not down. it would be prudent to put in place of limited qualified extension. >> now i may pick up on your

expansion with the chair, there are under the t.a.r.p. 2 types of programs. you have programs where capital has been provided to firms who were then t.a.r.p. recipients and you have programs where t.a.r.p. fund said and injected into markets, in ways such as the talf in ways the various private parties that may touch those funds are not actually tower percipience. is that there characterization of one way of understanding the to come into range of programs you have? >> programs for individual institutions, t.a.r.p. percipience although they are because of the importance for the system. programs about market wide support to the capital markets securities markets are designed differently. >> in light of the concern that you stated that small banks have been receiving t.a.r.p. money which i find between the issue

of reputational risk which i find that understandable concern, i'm not sure how congressional action could change that. in light of that, and in light of your description of the small business problem as a market problem, not a firm, not a particular firm that is weak here that is the issue. in light of that, are you considering taking the market support approach? maina take the market support approach rather than the firm support approach? >> you have to work on both channels of credit. you have the bang channel and you have the capital markets and you need both. and fatigue make the capital market channel work better to increase for banks to make pull the banks out of their uncertainty, but these are small business credit. they are very small loans. the capital markets were never going to provide, in the past

would not be significant providers that you have to work on both. >> my time is running out so i want to be clear what i'm saying to you. i'm not saying to you yuca nevitt public markets solution here. i am suggesting that if you want to move this money to small business quickly, that both from the perspective of getting the banks involved without making them into t.a.r.p. recipients and from the perspective of tapping small business-- banking expertise that you should be looking at structures that move money, and thirdly to avoid the problem that has been present and t.a.r.p. from day one of handing money to banks and not knowing what use is made of it, that the right way to do this is to do this with a conduit that most t.a.r.p. money more less directly to small firms with banks as a manager of the process rather than as intermediary. >> i generally agree with you and i think the most promising idea fly in that realm.

banks still need to have risk on the table because we don't think, and we couldn't do it through t.a.r.p. being in the business of providing direct loans to businesses. >> superintendents neiman. >> i would like to come back to the foreclosure mitigation program. over the past two weeks there has been a lot of media focus on the 25% of those individuals who are in-- who are not current on those remarks. and that some may not have even made their first payment. i would like to focus though on the 75% of those borrowers who are making payments in a timely fashion and for those, january 1 of this new coming year will not only bring in a new year but will also be a fateful day for almost 400,000 homeowners this trial modification period expires. most of these homeowners have made at least three months of timely payments and in some

cases four, five or even greater as required under the program however less than half of these homeowners have submitted all the required documentation and by some estimates and i've talked to some of the largest servicers directly, half of this group, the group that has submitted all their documents, have yet to have their documentation decisions or validated by the service are. now given these numbers that i have stated it looks as if possibly over 75% of the homeowners who have demonstrated a willingness and ability to make timely payments on their trial mods may be eliminated from the program and once again facing foreclosure. now you have recognized the urgency of the situation by implementing swat teams at the largest institutions among other efforts to engage homeowners and servicers to facilitate both the submission of documents by borrowers and the validation of that documentation by the

servicers. so, fundamentally my question is, does this expected loan conversion rate implied that the original documentation standards are not set correctly and are too onerous or do you think that the standards are correct and liberalization what impact the integrity of the program? >> said we are working on this and on many fronts a we have taken a careful look at whether we can streamline the document requirements. we try to mobilize resources to make sure services are processing these and converting to permanent as quickly as possible. they can help to a better job of helping people benefit from current modification and i think we are going to make substantial progress in the area although there are lots of challenges. i just want to emphasize the what we have achieved so far. almost three-quarters of a million americans now are benefiting from modification programs that reduce their monthly payments dramatically.

on average $550 a month, $6,000 a year. that is a meaningful amount of support for income for some of the people hurt most by this crisis. we want those mons to be permanent and banks will not get a dollar from the treasury unless they convert to permanent months and we are using a tremendous amount of persuasion to try to make sure we get those conversion rates up to a reasonable level. >> but, and i agree with you those reductions are significant but if at the end of the year, this first group cannot convert to permanent modifications they will lose those monthly payments and now be faced with the same situation of being offered a maud buy the servers are which will likely increase those payments for foreclosure action to proceeding so are you considering extending again, the opportunity for the trial modifications so that our worst

who have not had documentation validated-- >> we are going to work hard to avoid the outcome you love this guy. we will make sure it reaches this many homeowners as possible and benefitting in real economic terms from this program and we are not there yet. but i think we are going to make substantial progress. >> okay. we look forward to some of your performance numbers being issued today. >> one of the virtues of the numbers we lay out is you can see performance servicer by servicer and everybody can look and see how many eligible homeowners are they reteaching and a number of these need to get their numbers up. they need to do a better job and they have the ability to do that. >> there certainly to the other big issues around both negative equity and unemployment. you mention unemployment in your opening remarks. i appreciate the response from

mr. ellison and as a follow-up to our last testimony to reduce some of th@@@@@@@ @ @ s >> reaching many, many people. we were always looking at ways to troy to help make sure this would reach people would could hopefully reach.

>> if i could, i'll pick up on the point. that is the deliberate decisions. it has created an irony against the back drop. backdrop of the sub-prime mortgage crisis that started with zero down loans and 100% financing. we now are creating modified loans supported by the united states government that have 110% loan-to-value ratios, 20% loan-to-value ratios, 125% loan-to-value ratios. we have no experience with long-term payment of deeply under water mortgages, but the little bit of data that we do have available, about even modestly under water mortgages, suggests that over the long term, second only to the question of affordability of the

payment, long term, being under water on mortgage means that people are unlikely to continue to make their mortgage payments, so i want to push back on this little bit. are we creating a program in which we are talking about potentially spending $75 billion to try to modify people into mortgages that will reduce the number of foreclosures in the short term but just kick the can on down the road so that we will be looking at an economy with elevated mortgage foreclosures not just for a year or two but for many years? how do you deal with that problem mr. secretary? >> it reduces the basic overall obligation of mortgages. it does not increase and we a people in these programs with very high ltv's able to qualify and it does bring down the overall burden. >> i'm sorry, are you saying you

are doing principle reductions? >> no but the change in payment structure does reduce the basic value of the obligation in the mortgage but i think it is more helpful for me to say it this way. i think your right to point out the huge problem, the amount of negative equity presents for us, the question is what to do about it because that is a hard thing. what is driving this now principally, the whole foreclosure rate across the country is driven by what has happened with unemployment and what is happening to income of americans, and i think our judgment is the best things we can do now to help mitigate that risk is to help get the economy growing again, bring unemployment down has the can, put people back to work and make sure we are providing overall stability to the housing market and we have seen actually better results on prices and expectations about future prices than many of us expected.

we brought it down to levels are houses are much more affordable now and housing demand is actually picking up a bit. the question is not what he described as a problem. you have been eloquent and persuasive but the question is in addition to those actions we should embark now on the program where we are what would be dramatic additional cost to the taxpayer, helping relieve people of that obligation, and the problem in doing it apart from its expense is the basic sense of fairness and what did this to incentives in the future. now, but you are asking the right question. the question is do we have a solution that is there? >> i really would like to push back. you talk about relieving the homeowner. let's keep in mind this is about whether not the investor in these mortgages, some of them making substantial profits during the glory days, should be required to take the losses when the mortgages that the investor

then turned out not to be worth nearly so much as they had promised. >> through what means? >> one means would be to bankruptcy which doesn't cause the american taxpayer any money. >> that would be one means. >> another i am deeply concerned about is the extent to which the current programs the treasury advances sends a signal to investors and mortgages in the signal is, sit on the sidelines. you know, there's no reason to come to the table and negotiate these mortgages. you can wait for the u.s. treasury to offer a bribe to get you to the table to do what should it been in your interest to begin with. we all understand that foreclosures don't just destroy the value for homeowners. they destroy the value for investors themselves yet investors are hanging back. they are not engaging in rational write-downs that would keep a good stream of payments coming from these businesses. instead, holding out for larger streams of payments and holding out for help from your treasury

department. >> i don't think i quite agree with that. you are right it is one option in you and eloquent advocate of those reforms and as you know the president did for posen was supportive of, but congress was unwilling to act, in part because of concerns it would make it harder for capital to come back into the banking system and help support improvement in housing markets with broader returns. that is a judgment congress considered and shows a different strategy. i don't agree that the programs in place are working against this process to repair that will support. i think they are actually helping in actually we are seeing quite a lot of new interest and willingness and investors to renegotiate a write-down. we are seeing much more that than we saw before and that is encouraging. >> you know, i have to say mr. secretary i lived through a big housing boom and bust down in southwest during the late

1980's. in fact i lost money on the house we had to sell during the bus. but the government didn't step in and help in the same way. the lenders had to eat the losses for bad investments that they got involved in and so did the homeowners. this was not a question of the taxpayer support there. >> this crisis as you know and i think you understand is nothing like that crisis. is much more dramatic in scale and impact, much broader effects on people across the country and i don't think there's anything from that basic in the past it would been helpful. you could take the view that it was a mistake to try to give the americans the ability to see a substantial reduction in their monthly payments and therefore improve the odds to get to keep their house. i don't agree with that and i don't think you do either. this is actually program that is doing quite well in delivering a meaningful improvement in the basic financial economic

position. as i said almost three-quarters of a million americans now and it has been part of what has been a quite successful effort to bring some modicum of stability to the housing crisis much earlier than many people with thought. >> thank you mr. secretary. i apologize to my co-panelists for running over by two minutes and i'm going to skip my next round of questions. mr. atkins. >> thank you very much, and i actually think that is a good rationale there and with respect to negative at whti i think it would be a mistake to start dumping money into that. i don't think there's enough money around, once you start getting into the issues of fairness and everything. i agree with that. wanted to turn, as far as t.a.r.p. goes to the access that we were talking about earlier that you alluded to. the reason capital option, i guess he can call that the

success of some sort, i was wondering how you foresee this going forward in the future. are you still planning on engaging negotiating price by backs before establishing an option? what is the current view of treasury as to how you are going to unwind this? >> i think it is possible that we are going to still see a mix going forward in part because many small banks will not be realistic approach but in the auction is a good approach and that gives a way to let the market determine the best price. we think that will help maximize return to the taxpayer. it was subscribed by a factor of 12 and close to the ultimate test of what these are worth as to be established by what people are willing to pay for them so i think it is an approach that is going to deliver better returns than the alternative in this case but it won't be probable

for all of these institutions. >> so then as we go forward and you talk about putting money into all sorts of community banks and others, what is the approach? what is actually the decision-making process of how the money goes in and what is received by treasury in return for a myriad now, we are to have 600 some banks that are participants. >> the program added to the beginning and that was not the secretary the treasury but they agree very much the basic design was it was designed to make capital on the same terms to all institutions on the same capital from the larger institutions was made available to any other institution makes similar standards, and my predecessor in supervisor put in place and then blabbers process for determining liability to try to screen institutions. that process remains in place today and we are going to use

that process going for. we are ranging in some important ways. we do not believe it is necessary to keep it open for large institutions of their meaning program will provide capital will be for institutions between a certain threshold. we are trying to design and in a way to give a chance to spur lending by and make it more likely they come as a sign of strength and not a sign of weakness as we just discussed with the chairman but we are going to leave in place the basic bigel the stana to make sure we are not supporting a viable institutions. the supervisor in the process in which the superb-- all sorts of measures of rating and financial strength and there's nothing, as you know this is not a highly perfect process but it is better than the alternatives. >> i am sorry to go back to gmac again. i understand at least on the call on us demond, that there is a negotiation going on, and i guess i want to try to

understand who is actually the decision-maker? is it the assistant secretary allison or is it you as far as determining under what terms further extension of credit is given, doing the particular facts? >> the financial terms will be as defined in the programs. they are not differentiated terms. the question the head is really what plan for restructuring the new management of this firm embark on. we want to be confident that is one to be supervised and some basic pat dubai. again the incremental capital needs relative to what is identified under the stress test. those of the issues ahead. >> two of those board members are treasury picks or whatever. how much interaction do you have with people on the board? >> we have what you would expect in not more than you fear in the

sense that again-- >> my fears are rampant. >> i'm not sure what your fears are. our obligation is to make sure again that there is in place a plan for getting back the viability that has a reasonable prospect of working. we want the new management and board taking a fresh look that amount that to be as strong and robust as possible. at the same time of course we need to reassess what the increments of capital needs would be and that is the process we are undertaking now. >> okay, my time is up. thanks. >> mr. sellars. >> mr. secretary i would like to shift in terms of a fine down with the large banks. my "new york times" this morning tells me that something we all kind of already knew, which is that city would very much like to return its t.a.r.p. money. citigroup argues they have lost

cash and this is an argument they have made to this panel, and having lots of cash means they should be able return the tort money. i don't have your experience with banks but it doesn't strike me as exactly the right argument. >> i think you are right. >> can you explain to me with the criteria is for being able to return the money and what relevance if any having lots of cash has? >> a few critical point. is a good thing for the country that banks are eager to get out of the investments. it is healthy, necessary and desirable. it is a very good thing for the country that private investors are willing to come in and in effect take the government out of those positions. we are not prepared to have this money come back in the way that could lead the system or the institutions with inadequate capital. if we did that that might seem good in the near term but it would be bad for the country as a