that is important. there has been a lot of discussion about what happened. the federal reserve, 14 years later, used that authority. that is important to note. the authority that mr. bernanke used to regulate subprime mortgages was the authority that mr. greenspan had. . .

but don it was to use specific authority that was given by congress in 1994 to mr. greenspan. there were efforts to get it used. my column identified -- my colleagues identified this earlier. we tried to get mr. greenspan to use that authority first. there was nothing to specifically mandate what did not happen. we were frustrated. it became an ideological dispute. we were in the minority. in 2007 when congress changed hands again, we passed such a bill in the fall of 2007 to

mandate what the fed had been permitted to do but it did not do. the bill did not pass the senate. there was a phrase on the word processor that said the bill did not pass the senate. you had to hit only one key to get that printed. it saves a lot of time. [unintelligible] people have pointed to actions taken by the federal reserve. in every case, the action came after this committee had made certain inactions. one question to mr. lee. when you raise these issues, but

was the general response you got? >> annoyance from within lehman brothers. and they knew the points. >> were they supported it? did they defend it? >> they certainly did not support it. on one issue, they knew about it. but they did not appear to know the number was so large. it had risen to over 30 at the end of both orders. >> do you think the subsequent revisions improved the situation? >> i cannot really comment on that.

>> i guess there is a certain historical sense of justice in that lehman brothers went to the united kingdom to get their opinion. they sent me back to get even. duke made it a little bit more whole. thank you. -- use sort of made it a little bit more whole. thank you. >> the gentleman from texas. >> i assume you were here for the testimony of mr. lucas earlier? >> i did hear a good piece of it. >> on page three of his testimony, he represents that lehman brothers had in writing its risk appetite and had a binding constraint that cannot

be exceeded under any circumstances but management did not observe the limits. do you agree or disagree with that assertion? >> we set up risk appetite with a lower level hurdle of 8-10%. that was the level below which we were not allowed to go as an internal standard. >> what did you represent to the sec? >> what we represented it to them was that given our -- the same thing, given our level of revenues. let me explain risk appetites in what it was to put it in context. i do not want to be too technical, but it is important that you understand it.

risk appetite was the amount the firm could lose in a year and a still pay all of its expenses in create an after-tax of eight to 10%. >> here is the bottom line. my time is limited. mr. lucas said lehman brothers made representations to the sec that the limits were breached. do you agree or disagree? >> the binding limits was at 8%- 10%. our risk appetite was set at $4 billion. had we lost 3 billion, that would have triggered a 12.5%

r.o.e. >> do you agree or disagree with the assertion? >> we were not supposed to go below 8%-10%. >> on the fourth page of the testimony of mr. lucas, he said day design programs to determine if there were historical areas. lehman brothers did not include many of its riskiest assets in its stress testing such as commercial real estate. do you agree or disagree with that assertion. >> that was the case until towards the end of 2007. the day today marking of commercial real estate was a practical exercise.

the risk committee and executive committee said regardless of that, we will include commercial real estate because it is becoming more of an important part. >> something included. at some point, some commercial real estate was added to the stress test? >> yes. >>v: let's talk about the repo 105 transactions . the former president's of lehman is one person who would've answered to you? >> aes. >> are you familiar with the emailed -- yes. >> are you familiar with the e- mail exchange?

i am not sure if you are familiar with repo 105. are you familiar with this e- mail exchange regarding this topic? >> yes. >> do you have an opinion on what your former president and ceo meant by "it is a another drug we are on" ? >> no, i do not. that email was not addressed to me. i was not part of the exchange. >> how about michael mccarthgar?

are you familiar with this gentleman? you are unfamiliar with this gentleman? he said that this is window dressing. it is based on legal technicalities. i was informed that he was a senior member of your finance group. you are unaware of his existence? you're not familiar with the gentleman? >> no. >> my time has expired. thank you. >> on your written testimony, you said, i have no recollection whatsoever about anything

regarding repo 105 in sections while i was ceo of lehman brothers. is that correct? >> yes. >> with your employees hiding this from you? >> no, they were not. >> why would you not know about this? did they know about it? >> there was nothing about hiding. these transactions were sales transactions of government securities that haven't done a government trading desk. let me try to put this in some context of i can't. -- that have done government -- that happened on a government trading desk.

let me try to put this in some context if i can. on any given day, lehman brothers traded between $50,000,000,000.1214226313 dollars of revenues. we were probably one of the largest government dealers in the world -- $58 billion-$100 billion a day. there is no reason why i would have known about a sale. there is no reason why i would have known about these repo transactions. there is inherently nothing wrong with them. as ceo, had a mentality more of what do i really need to be focused on? i was looking at assets, real

estate, residential, leveraged loans. i was not focused on the most highly liquid securities. i was not focused on government securities day today that could vary between $50,000,000,000.1214226313 dollars a day. my focus was more on what could impact -- $50 billion and $100 billion a day. my focus was more on what would impact our capital. lehman brothers rode down close to $25 billion that were in essentially tied to our less liquid position in a couple of years. that was my focus. >> you say your focus is on what would impact your capital.

was the fact that your firm was offloading $50 billion worth of assets each quarter to cover up how over leveraged balance sheets had become. is that not important at all? collects these government securities were sold. they were gone. on any given day another 50 could be sold. >> i know $50 billion may not seem a lot to wall street, but certain ceo's be that where of transactions -- be aware of a transactions of that amount. >> that is always a lot of money. i do not want to leave the impression that that amount is an insignificant number. i must say to you that with the

focus on less liquid assets, whether our balance sheet, which is an indication up or down 50 billion or 100 billion of governments, that was not my focus. >> in view of what has happened, should it have been your focus? " i was not involved in those transactions. >> you are the ceo. >> yes. >> shouldn't you have been focused on that then based on what you know now? >> from what i know now, we had a thorough process around it. it was approved. legal counsel signed off on the disclosure. as i had come to understand it, there was nothing wrong with rego 105 transactions -- reppo

105 transactions. now another question goes back to what it did we do wrong. what we did wrong is i believe we did not understand the contagion of one security, one asset class to the next. i believe that we did not come and i take responsibility for this, i did not see the depth and violence of this crisis. i believe early on, we had too much commercial real estate. i believe we corrected that. we went from 50 billion-32

billion. we corrected our residential positions. we went down to 17. we corrected our leveraged loan positions. from 45 down to less than 10. we waste capital. -- we raised capital. >> mistakes were made. >> bad judgments were made regarding the market. yes. >> i hope that other ceo's of other companies can learn from the mistakes that lehman brothers and you made. would that be a worthwhile goal? >> yes, it would. >> thanks. >> i want to return to an argument earlier by the chairman of the committee that the policies of the fed on

inflation could have been offset by the regulatory oversight -- proper regulatory oversight. perhaps that is true. it was the chairman who argued for setting a fed funds rate in 2000 t2 below inflation. the argument that congress is making at the time to but everybody in a home, regardless of whether they had means for a down payment, there was the types of over leveraging that introduced that on top of the bubble. for the record, i would make the observation that many negative interest rates four years does

not help unemployment. in fact, it guarantees that when the bubble bursts, there will be much higher unemployment, because you have made money so cheap. you have misallocated capital. he sent the wrong signals to the market in misallocated capital. at some -- you sent the wrong signals to the market and missed allocated capital -- miss allocated capital. -- misallocated capital. given this ongoing presence of the fed and the sec mention in your testimony, and the fact that you're much smaller competitor bear stearns, which was interconnected, receive government assistance, just

months prior to your situation, were you working under the assumption that lehman brothers would be bailed out? >> no, i was not. >> or a similar arrangement perhaps as to what happened with bear stearns, the diamond deal. you were not working under the assumption that that would happen in your situation as well? >> no, i was not. >> said these bills do not create a moral hazard in your view -- so in these bailouts do not create a moral hazard in your view? with respect to the firm's you did business with, your creditors, do you believe there was a presumption that lehman

brothers should be treated as a another counterpart, or do you think they assumed that like their stance -- bear stearns, the government would be right behind them? >> you have touched on a very interesting piece, which i would like to talk to. there were a couple of claims at the end of september 15 after lehman brothers. one was that there was a huge capital wholhole. some said 30 billion. others said other numbers. some said there were some pluses and minuses. at the end of the day, it was somewhere between 500 million and about 2 billion, which would

have lowered our equity to 26 positive. the world believe that we had a capital whole -- believed that we had a capital hole. >> from my stand point, once we have done bailout, we will do future bailouts. i voted against them. i thought it was a very bad precedent. one person won the nobel prize in 1974 by explaining exactly how government intervention in these cases helps causes this boom and bust cycle in the economy. i cannot see why people cannot understand why running interest rates that are negative for several years in a row and failing to control the over ledger -- leveraging and then to allow further leveraging it

would not have this impact. i do not want to see those that are ceo's have the ability in the future to get a bailout at the expense of the taxpayers and the legislature -- this underlying legislation is the wrong approach. thank you. >> i want to pursue the line that was raised about fannie mae and freddie mac. i understand you were direct competitors with them. you did the same thing they did. you bought mortgages. unlike them, he did not have a dual mission. your only mission was to make money. is that right? there was no affordable housing goal for lehman brothers? is that right? you were just under a

requirement of your shareholders to make a profit? >> i believe all of us had a clear minded view that the administration wanted everybody in the industry to extend themselves to fill the american dream. >> you were also making a tiny profit from these mortgages? how much did you go with your participation in the real-estate market? >> the latter years, we did not grow. >> did fannie mae and freddie mac have anything to do with the failure of lehman brothers or buying and selling sub-prime mortgages or selling securities based on them? it did not have anything to do with them did it? if not the way you are asking the question. the events of the weekend

before, it did impact us. >> your business over the course of the last decade, your purchase the patient -- your participation did not have anything to do with fannie and freddie. you were competitors, were you not? >> sometimes we were competitors and sometimes we sold into their conduit. we were both a client in a competitor. >> you said in response to his question that you never expected the bailout. that is different from other accounts. all of the accounts say that you assume that you would be rescued -- one person said

earlier about things that could be done that would have made the collapse less catastrophic for the entire economy were passed on. there was an opportunity to sell lehman brothers to a korean firm, to sell half of it to a chinese bank. there were discussions about selling your asset management unit that never happened. what do we have to do to impress upon ceo's and corporate directors that they will be allowed to fail and not be rescued. >> we got to that fateful weekend looking at the s and

valuations, we have strong capital. we lost 30 billion in liquidity in a couple of days. there was another claim that we had no collateral. we had plenty of collateral evidenced by the fact that on monday brigade $50 billion of collateral to get a loan from the federal reserve bank. that was paid back 100%. we had collateral. we had capital. we did not need a capital bail out. we needed a liquidity bridge so that we could consummate the sale to a potential buyer. that is what we needed. or, we needed the window to be extended to us as it was extended to the other investment banks that sunday night. to be even more clear, when we

heard the bank -- the federal reserve window would be opened that sunday night, we said, we are fine. we will get this done. then we heard it was not being opened to us specifically. >> that did not respond to my question. >> i apologize for that. >> flaws can redo to let them know that they will be allowed to fail. there is no safety net. -- what can we do to let them know that they will not be allowed to fail. there is no safety net. what can we do to convince you that that is what the future hold? >> i was convinced that the time that there would not be a bailout. do not misinterpret my statement.

what i was saying is that we could have avoided a lot of destruction by putting into place what they say they do not have. i wonder if some of the actions they have with others would have gotten us to a much softer landing. i am not talking about a bailout. i am talking about right up to the end, the flak that was received by the treasury on bear stearns that it would be unlikely that they would want to do that again. >> good afternoon.

do you believe there were corporate government failures at lehman? >> i think our government procedures were very good. i have stated that in miny meant that i believe the major problems with lehman brothers -- if you remember in to a dozen 6, we had years of a very profitable -- 2006, we had years of very profitable real-estate ventures. the market was going up. we did not have record earnings. a business decision was made to expand our proprietary

investments. part of that was in real estate. it ended up dead real estate was one of our major problems. the other was an investment bank cannot continue to exist once confidence is lost. you can never have enough capital for that. that explains a lot of reasons why this happened. >> what about getting better about earlier in the year regarding another entity? >> i would not have liked that. >> in your opinion, did lehman brothers executives hide the true nature of the firm's global balance sheet from the sec or the federal reserve or both?

>> on the basis of disclosure, the answer is yes. >> can you elaborate? >> i am not an accounting financial disclosure expert, but on the knowledge i had gained over the years, i think the public were misled about the true leverage of lehman brothers the least during that fiscal year. >> did they excuse the fed bank to acquire the material on the statements on the grounds that they were not regulators for lehman. the you find that explanation convincing or appropriate for government regulators to ignore

wrong during on the grounds that it is not acting in a regulatory capacity that >> it is never correct. you have a responsibility. if the fed does not have rules mandating that its employees make the justice department, they should change that today. i would believe that you will find they have guidelines in place but require the kind of referrals. if hit with complete indifference, this is the quotation from the report from the federal reserve bank new york official. tallyman it reports its liquidity is between lehman, the world. we do not have any responsibility. >> thanks. now you indicated that your testimony that the sec and the fed conducted regular in daily

oversight of lehman. u.f. answered questions about other members in the committee about this. -- you have answered questions about other members in the committee about this. what do you say to this? >> i do not believe that to be the case. >> thanks. >> i believe fraud is important. the american public would like to know if fraud was committed. mr. black, you have indicated that fraud was committed. is this with reference to the repo 105. that fraud was committed with that?

>> the examination report shows and several other things were quoted in this hearing that the purpose of the transaction was to produce an artificially deflated idea of the leverage of the corporation. that is important. it is and pour into security investors. if you deliberately create a deceptive representation that is material to investors that its securities fraud, that is a felony. >> do you think this was committed at lehman brothers? >> repeatedly. >> i would like to go to mr. lee. you indicated that you delivered a message, hand carried a message. he did not say what it was. for you indicating to us that

you were trying to tell the auditors that something was taking place? >> i delivered my may 16 letter by hand. let's -- >> were you trying to indicate that this act could be harmful to investors? >> that was underlying it, yes. >> did you have an opportunity to communicate this? >the fact that there was something impropriety is taking place that may be harmful to investors regarding repo 105.

>> the other factors in my knowledge were well-known in the firm. >> how were they well-known it? did you tell some specific person that this repo 105 may harm investors. >> for months and years -- >> did you convey this? >> aes. >> did you convey this to the audit committee? for an auditor? >> i did. 2 of them. >> did you receive a response? >> no, i did not. >> nothing was said to you after you pass this on? >> there was an acknowledgement that they knew about the issue.

i do not think they knew the amount. >> mr. black has used the term fraud. the you think there was brought? -- there was fraud? >> [unintelligible] >> in your opinion, it seems that you think there was not only fraud in a civil sense but also in a penal sense? is this correct? >> yes. the elements of the same, there is simply a higher burden of proof of establishing the elements. >> have you conveyed what you are sharing and perhaps other information to some authority that could investigate fraud? >> i do this on a weekly basis

in my writings. it is in my prepared testimony. yes. >> have you received a response to what you called to the attention of these authorities? >> the sec has never contacted me about any of the things i have attempted to alert them about. >> named the authority that you took evidence of fraud to? >> i took it to the public. i did not take it in a secret letter to them. i write saying the following things are frauds and need to be prosecuted. >> you write and publish it in the newspaper. how are you to assume that the proper authorities will know? someone may miss your ridings who is in a position to do something. >> i can guarantee you that the

sec is aware of the fact that i had been writing these things. this is something i have been doing for several decades.  re now.  re thanks. >> ltd. delivered and decisive move to embark on a growth strategy -- you made a deliberate and decisive move to embark on a growth strategy. instead of pulling back, and he decided to double down. is that correct? >> no, it is not. >> were there models of risk that you had that you were to go by and you were above them on numerous occasions most of the time? is that true?

>> the model of risk for us was a model of growth -- it was more about a wider share of clients. it was a client-focused business. it was not about taking on more risk. the second piece of your question is there were risk levels. we ignored them. did i make that up? >> might understanding is that you have had models of risk that you were to go by. you were consistently above those levels. >> those were internal levels that we set. i had this conversation with the examiner. i thought i explained it. what i said was we would look at these levels and understand why

we tripped above a certain trigger. some might have been volatility. some might have been because the hitch did not work. some may be because of change of diversification. one of the biggest moves in our risk appetite was our changing our own diversification benefits. we took exactly the same portfolio, gave a lower rating to the diversification benefits, which moved our risk appetites -- i forget the specific numbers. let us say from 3 billion to 4 billion. that was all our doing. it was not that we had bought something. given the market, the way it was, you can have the same position from one day to the next and because of volatility

and traders and interactions with hedges, that -- and triggers and interactions with hedges, that can change your appetite. in response to that, really acted in an aggressive way and brought to dump those securities -- we we acted in an aggressive way and brought down those securities. -- we reacted in an aggressive way and brought down those securities. >> do you gamble? >> not the way you are asking now. >> some would say the behavior at lehman brothers was more of a gambler then an executive on wall street. >> those that do not have the information and the accurate information may say that. >> do you feel that with the information that you have provided it would not look as

much of a gamble? is that correct? >> the information i provided today is a tiny microcosm of who we were. please understand, i hesitate to say this. we were risk averse. commercial real estate, i know. i walked right into that one. commercial real-estate was an area where over the last seven or eight years, a terrific team, very talented, smart decisions. i will tell you that the decisions that were made on the properties that we bought that were commercial real estate, strong management teams, strong properties, strong locations. i will look at you tell and tell you terrible timing. bad timing. terrible timing. >> i have a couple of other

questions i would like to get in. before lehman bankruptcy, the treasury secretary paulson and ben bernanke said that the financial system could handle the collapse of lehman. it is clear that that was not true. from this report, it appears to me that the company knew that. why? the you agree with that? the company meeting lehman brothers. >> we told secretary paulson on that fateful weekend that -- we had been mandated, we did not choose. we had been mandated by the fed to declare bankruptcy. we tell the secretary paulson if

you do that, there can be nor orderly wind down. there'll be a massive repercussions in the swaps and derivatives markets that you will not be able to control. this will be a disaster. >> do you believe there were people inside the lehman organization fighting for government help besides your conversation that you had with often->> not that i am aware of. >> at the end of every quarter, the transactions were temporarily removed from the balance sheet. where were they put back on? >> at the end of a reporting time frame. if you read the examiner's

report, there was always a level base. [unintelligible] >> when you were talking about any given day, there were a number of sales transactions. is it fair to say that at the end of a quarter that it was completely different than the rest of the quarter? >> the examiner's report had an interesting chart that showed a spike on the quarters. >> do you know why it spite of the quarters? structural creation of these. i will say that these transactions were not created by

lehman brothers. there were created and modeled after after an item. i do not believe that that item created this rule to give affirms the ability to create a gimmick and mislead. >> when you use those transactions, did it fairly reflect the condition of lehman brothers? >> i do. this was a piece that was said before that i did not have a chance to respond to. given what i said of our ability to sell not monthly or weekly but the daily 50 billion.

>> i am trying to save as much time as possible. >> i am pretty quick. we could have sold 50 billion a day. and we did. the reason we took these back, there had to be a business purpose. the examiner talks about a business purpose, because even in the sales transaction, there was an implied spread. there would have been no other reason to buy the securities back. >> the chief financial officer or the chief risk officer where the head of product control and capital markets, did any of them tell you about the existence of repo 105? >> not to my regulation -- not to my recollection. >> when did you find out about /wpthis?

investigation. >> in talking about risk averse, at the 30 to one, was that a leveraged figure that was risk averse? was there a figure that concern you? >> i think 30 to one is a misconception. matchbook was a series of short- termhve financing where we would sell securities to clients buy them back and finance them. they were a series of three, five, seven-day transactions. it had very little if any risk. i look at our balance sheet. >> he think those references are not fair in your mind? >> correct. >> do you think the packaging

of the document loans, is that a solid product? did it make sense to be involved in them? at the time when we made those loans -- but we bought as a conduit that our investors -- we never created the package thinking that our investors would lose money. that is not what our firm was about. >> the document loans, interest on loans and the look and wonder, how can they ever paid? was anyone in the firm aware of the fact that each step of this made it much more likely that these loans could never pay off?

>> when we operated our own origination platforms, and we stepped in and change management where we thought it was appropriate. we changed underwriting standards where we thought they wrote lax. we changed certain products where we thought there was vulnerability. i believe that we;÷0ok a very solid and prudent approach. our goal was not to sell securities that are going to hurt clients were hurt those people that were taking mortgages. we did not want to be in the repossession business. >> in going back to your initial remarks about not a capital hold, but lehman still went away, was there a loss of

confidence? the capital was there, the 26 billion was there, why did we wake up and see lehman gone? >> why did we wake up? >> aes. you have your -- yes. >> if you have your board of directors. you had 26 billion. was it a loss of confidence tha? >> i think it was a loss of confidence. many said they did not want to do it again. we cannot convince the world about the condition that we were in. we had collateral and capital and a solid plan. we did have a solid plan. we cannot convince the world -- the s&p came out with a report

10 days after that said why was it lehman singled out? they talked about our franchise and how we raise capital and our ability to earn money and have liquidity. they talked about those things. we've lost $25 billion of liquidity in a couple of days. >> thanks. >> tens of thousands of people in my district are out of work, have lost the opportunity because they invested in lehman brothers stocks and bonds. they have lost it all. i have no consolation in the

fact that you may have to live with that every day. that is not enough. why is it that you sold your home in florida to your wife for $100 tha? >> that was misrepresented. before lehman brothers had any problems -- it is personal. >> it is public information. >> she decided to sell some of her art. so that we had equal assets, it was her art in her name. i put the house in her name to rebalance that. very simple. that was decided long before lehman went down.

you are blowing this out of proportion. >> it took place after lehman had fallen. m&g>> i made the decision backn may and june. >these things do not get it done overnight. >> you have said in your testimony that you feel vindicated by the results in the report by one man. but he clearly states over and over there are claims that can be made against lehman for misrepresenting the 10k and s.k. documents. he says billions of lehman shares traded on misinformation. there is nothing in this report

that indicates you. there is plenty of information to suggest that the sec did not do its job and the fed may not have done its job. but in new misrepresented the status of lehman brothers. you said that he did not know not know repo 105 but to get this person looked at all of these emails and said there is every reason to know that you did. having said that, and you have to be concerned as the ceo of a company with the rating agencies ratings of lehman brothers? correct? >> yes. >> that should be number one on your priority list. to make sure they continue to wait your company and your products as investment-grade. correct? >> was it on your liit was on o. my first concern was protection

of capital and shareholder equity. >> that has everything to do with whether or not the rating agencies are gritting your products as an investment -- grading your products as investment-grade. >> the rating agencies reacted more to our stock price than they did to our timeliness. the time the ability to pay back debt. they reacted more to our stock price. they heard the rumors about the hole in the balance sheet and thought we could not raise equity. one of the real shortfalls was our ability was when i said, we cannot convince the world, there

were so many rumors about our condition that people thought that given that whole, we would not be able to raise equity. -- hole, we would not be able to raise equity. >> have you ever shorted securities that you were selling to the public? >> i, myself? >> your company. >> not that i am aware of. >> thanks. >> several things to have answered today or to the examiner, not that you recall or

are aware of, did you review any documents in preparation for today's hearing? >> yes. >> what were those? >> i do not even know how to begin to answer that. >> did you practice your answers for today's hearing? did you rehearse it? did you go over practice questions? >> i wrote questions for myself. i thought about them. .

i read his book. >> do you recall the concerns urging a move to more conservative place with the balance sheet? >> we had a number of conversations regarding

liquidity, a potential capital raised. i do not recall a warning from him. >> they you recall a warning from the supervisors -- do you recall a warning from the supervisors that you were overexpose? >> i do not. >> 3 you recall the concerns of madeleine or michael gilbert with respect to risk-management or risk levels for off-balance- sheet accounting? >> i saw mathew today

i was not familiar with him. michael -- a long terime memberf the firm -- i will only tell you a day after he left the firm, the senior officer that took his place came to see me, told me we were overexposed in leveraged loans. i said, how bad is it? he took me through it. i said, what is your recommendation? he said, i would like to bring it down. i said, referring it to executive committee. third to bring it down today -- bring it to the executive committee. start to bring it down today. we took it from 45 billion to 7 billion. >> in these discussions of lowering your exposure or leverage, did they include

lowering leverage specifically for a quarter of the report to investors? -- a quarterly report for the investors, or specific targets? >> are you asking me did i ever set a specific target? no. >> yet you continue to say you do not recall engaging in any decision making or even hearing about the use with respect to the quarterly report, or moving on or off balance sheet to improve how about looks? >> i recall no conversation or seeing no document. >> do you recall an individual by the name of deventer? -- david? >> i know his name. >> were you concerned about what

short sellers were saying about your company? >> yes, i was. >> was he one of those short selling? >> i believe he was. >> were you were aware of a speech he gave to a high-level group of investors in which he criticized your first quarter reports and question the numbers of your first quarter reports verses your 10q filing? >> i do not have all the pieces, but i was where he was cleaning been misrepresented items -- i was aware he was claiming we misrepresented items, claiming they were all mortgages. they were not. they were corporate loans. we tried to tell him that. he ignored that. he continued to talk about lehman. i will be kind and say, in an unflattering way. >> did any of that include taking a look at what the

reasons were? >> not at all. >> am i out of time? >> not as much as some other members. the chair does thank all members for their testimony. some may have additional questions they may wish to submit in writing. the hearing record will remain open for 30 days. they must place their responses in the record. this hearing is adjourn. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2010]

>> earlier tim geithner and then burning he testified about the 2008 failure of lehman -- been

burning chief testified about the 2008 failure of lehman brothers -- ben bernanke testified about the 2008 failure of lehman brothers. >> it helped push our financial system to the brink of collapse. lehman's failures represents many of the fundamental flaws in our financial system. these problems are exposed with great care in the report. it shows the story in which -- of the ways in which are institutions take on institutions without effective constraints. it allowed the emergence of a parallel financial system, but many have called the shadow banking system. this grew to be almost as big as the regulated banking system, but it lacks basic constraints necessary to protect the economy from classic failures. imagine building a national highway system with two sets of drivers.

the first had to wear seat belts and buy cars with antilock brakes. the second group can drive as fast as they choose without safety features and without fear of getting pulled over by the police. imagine both groups are driving on the same road. that system would inevitably cause serious collisions, and drivers following the rules of the game would inevitably get hit by drivers who were not. a system like that makes no sense. as you would expect, there is going to be a lot of activity and risk moving to where constraints are weak. in the lead up to the crisis, we saw a breakdown in the most important checks and balances in the system. credit ratings agencies failed to do an adequate job of assessing the risk and

disclosing their ratings methodologies. board of directors failed to exercise critical judgment. accounting and disclosure did not adequately inform investors of material risks in a timely fashion. executive compensation practices awarded short-term gains with little attention to long term loss. the derivatives market, operating largely in the dark without oversight, grew to enormous scale. firms were able to write hundreds of millions of dollars in commitments without capital to meet those commitments. tragically, when we saw firms manage themselves to failure, the government had exceptional authority to step in and protect the economy from those failures. we did not have any ability, as we have with banks for more than three decades, to step in in an orderly and safe way, and winds down major investment banks are major insurance companies like aig. failure is inevitable and

financial systems. the challenge is to provide assistance -- a system in which failure cannot cause catastrophic damage to the economy. in our system, the federal reserve was a fire station with important but limited tools to provide liquidity to market. however, the federal reserve under the law of this land, was not given any legal authority to set or force limits on risk- taking by large financial institutions, insurance companies like aig, fannie and freddie, or the hundreds of financial firms that operate outside the constraints of the banking system. the sweeping financial reforms this committee has passed, that the house has passed, and that the full senate is about to consider, are designed to deal with the flaws in this system exposed by the crisis and illustrated by the lehman example. first, with financial reform,

investment banks like lehman will not be able to escape consolidated supervision because of their corporate form. large firms like lehman would be subject to tougher requirements such as higher capital, higher liquidity requirements, and more exacting oversights and other firms because of the greater risk they pose to the system. we will bring derivative markets out of the dark. we will establish transparency to regulators can more effectively monitor the rest of driven -- the risks of derivatives players and financial institutions, and we will bring the product into a clearing houses and treating facilities, reducing the risk these markets can pose to the system. with financial reform, a firm like lehman is able to manage itself to the end of failure, then the government would have the ability to wind it down with no exposure to the tax payer. this is the end of the four banks. it is essential to deal with moral hazards. they will take risks in the future the governor -- with the

expectation the government will step in to bail them out. we will establish stronger protection for investors and consumers with clear rules and in force across the financial marketplace. we need a system in which regulators can act preemptively to protect, not be left to simply come in and clean up the mess. the failures in our system were devastating. when a conservative republican president, a president with an abiding faith in markets, is forced by financial crisis to put fannie mae and freddie mac into conservatorship, to ask congress for $700 billion and authority to stabilize the financial system, and to invest taxpayers' dollars, to lend billions of dollars to our largest automaker, when a conservative president is forced to do all that, and he was right to do it -- it is undeniable the system is broken. the question we face is not whether to fix it but how best

to fix it. any strategy that relies on market discipline to compensate and leave it to the government to clean of the mess is a strategy for disaster. the best strategy is to force the financial system to operate with more transparency, clear rules that set unambiguous limits on leverage and risk so that taxpayers never have to come in and protect the economy by sitting firms from their mistakes. this is the strategy behind reforms put forward last year by the president, the reforms passed by the house, and the reforms currently under debate in the senate. thank you very much. >> chairman bernanke. >> thank you. >> i appreciate the opportunity to testify about the failure of lehman brothers and the lessons of that failure. in these opening remarks, i will address several key issues relating to that of sir. the federal reserve was not lehman's -- to that episode. the federal reserve was not lehman's supervisor. the federal bank did not own the

commercial bank. the core subsidiaries under the supervisory jurisdiction, which also supervised the parent company under the consolidated supervise entity. importantly, the program was voluntary, established an agreement with supervise firms, without the benefit of statutory operation. although the federal reserve had no supervisor responsibilities or authorities with respect to the men, it began monitoring the financial conditions -- respect to lehman, it began monitoring the financial conditions. in march 2008, responding to escalating pressures of primary dealers, the federal reserve use its territory emergency lending powers to establish a primary credit facility and a landing facilities as sources of liquidity for those firms.

to monitor the ability of firms to repay, the federal reserve required all funds dispensed -- all those provide information about other companies on an ongoing basis. two federal employees were put on site to monitor the financial condition. beyond gathering information, these employees had no authority to change in business activities. federal employees were in contact with their counterparts of the sec, and chairman cox negotiated information sharing between our agencies. cooperation between the federal reserve and s.e.c. was generally quite good, especially considering the stress and turmoil. in particular, the federal reserve developed and conducted several stress tests of the liquidity position of lehman and

others during the spring and summer of 2008. the results were presented jointly by the federal reserve and the sec to the managements of lehman and other firms. the results show significant deficiencies in liquidity, which management was urged to correct. the federal reserve was not aware lehman was using transactions to manage its balance sheets. according to the bankruptcy examiner, lehman's death did not report these transactions even to the -- of lehman's staff did not report these transactions, even to the board. it would not have altered the review on the condition of the firm. the information we did obtain suggests of liquidity was sufficient, of you we conveyed to the company and a belief was shared by -- of you we convey to the company and i believe was shared by the treasury department. lehman took steps to improve the

liquidity position in july and was attempting to raise additional capital in the weeks leading up to its failure. its efforts proved inadequate. during august and early september, increasingly panicked conditions in markets put lehman and other financial firms under pressure. in an attempt to provide the private-sector solution to the plight, the federal reserve and treasury, and a cd, -- s.e.c., brought together leaders during the weekend of september 13 through september 15. despite the best efforts, a solution could not be crafted nor could an acquisition be arranged. with no other option available, lehman declared bankruptcy. the federal reserve fully understood the failure at lehman would shake the financial system and the economy. however, only to available to address the situation was the ability to revive short-term liquidity, and lehman already had access to our emergency

facilities. it was clearly mended books do region needed both substantial capital and an open-ended guarantee -- it was clearly men needed both substantial capital and an open-ended guarantee. -- it was clear lehman needed both substantial capital and an open-ended guarantee. the failure provide a please two important lessons. first, we must eliminate the gap in our framework that allows large complex firms like lehman to operate without robust, consolidated supervision. in september, 2008, the government agency had sufficient authority to compel the men to operate in a manner that did not pose a danger -- to compel lehman to operate in a manner that did not pose a danger to the system. second, we need a new resolution regime analogous to that already established for failing banks. such a regime would protect our

economy and improve market discipline by ensuring shareholders and creditors take losses and management is replaced. thank you, and i would be glad to respond to your questions. >> chairman? >> i appreciate the opportunity to testify. the sec supervised lehman with the consolidated program designed to fill a gap in the regulatory structure left when an act failed to require investment bank companies to be regulated at the holding company level. this program, while staff of ne'er-do-well a staff of hard working professionals, was -- while a staff of hard working

professionals, was flawed and not prepared. it reflected a profoundly different approach to oversight and supervision. a move away from our traditional oversight to a provincial model of supervision involving a standard array of entities and financial products. participation in the program was voluntary. the program was seriously understaffed and under-managed and in some ways had a clear vision regarding its staff and mandate. the program was discontinued in 2008 by christopher cox. the examiner report raised serious questions about the oversight of lehman's liquidity pool, as a valuation, and internal control. although firms are fully responsible to providing active

regulation, it appears there was a sufficient follow-up on issues that should have raised concern. in addition, the report identifies the use of transactions as a means to reduce the leverage. the report concludes the regulators, credit ratings agency, and the lehman brothers board were unaware of the reaction. it gives critical pressure about the use to manage the balance sheet and also raises questions as to how widespread this practice may be. we have requested additional information. while the program no longer exists, the sec is taking steps to significantly bolster our oversight through improvements to a reporting and monitoring,

establishment across teams with dedicated responsibility for oversight of key financial firms, enhancement to our broker regulation program, changes to capital rules, and consideration of increased capital requirements. the failure of lehman also demonstrates the need for important legislative changes and supervisor structures. the bill passed in the house and being considered in the senate, although different in many details, are designed to address key issues to address the crisis. the move toward transparency of derivatives can have a substantial impact on the soundness of our financial system. the creator as a -- of a systemic risk council can be a force to improve standards across the industry, and an establishment of a resolution

regime is vital to ending the problem of too big to fail. in light of the failure, the sec is determined to become a more affective regulator, focused on capital adequacy and liquidity, committed to core strength in enforcement, and embracing meaningful functional regulation and transparent markets. it is not clear any action by the sec could have saved lehman brothers, but we are determined to use the lessons of that experience to be more effective. more vigorous oversight and a new approach are essential, and i look forward to continuing to work with you as you consider ways to strengthen our financial system. thank you for the opportunity to testify today, and i look forward to your questions. >> thank you very much. i am going to take five minutes while the chairman is out of the room. i want to publicly announce that george orwell's lives. i listened to my colleagues on

the republican side, and i cannot believe it. there are two conclusions i can come to. either you failed to read the bill we passed in this committee or in the house, or you are purposely attempting to mislead the american people as to the real content of that bill. when you say we do not have protections in there that never existed before, you are dead wrong, and i call your attention to the amendment i offered. it passed the committee and is part of the house bill that will give these regulators and others the ability to stock institutions from growing so large there will systemically challenge -- to stock institutions from growing so large there will systemically challenge the system. -- to stop institutions from growing so large it will systemically challenge the system. we have got to get everybody together to except the fact that

we have to face -- to accept the fact that we have to face the facts or we are in trouble. we need a system. we really need a system, and i listen to your testimony very closely. i listened to mr. bernanke very closely and mr. schapiro very closely, and i did not hear you mention the too big to fail a man and, where we have authorized the regulators to move in and take over large institutions that challenged the risk to our system and either forced them to break up, add capital, or take other actions that would reduce their risk. is there a reason i am hearing you not mention that at this testimony? >> you are right. critical to any reform and at the center of the bill are a set of authority to limit risk taking across the financial system, and as part of that, the

committee embraced a provision to give explicit authority to the federal reserve to limit risk ahead of the crisis, but i completely agree. the best way to deal with too big to fail, the necessary way to deal with that, is to make sure you have people equipped with the authority to put effective constraints ahead of the crisis. >> the question is, have we been two knives in saying the regulators have had authority, -- 2 licensing regulators have had authority, or should we mandate that -- to say the regulators have had authority, or should we mandate that? >> it does impose actual limits and does require the federal reserve to design regulation that would apply those limits, so it includes your broad authority that companies with an explicit requirement would be put in place.

>> i appreciate that. i did not hear your testimony, but the too big to fail amendment as proposed by this committee and now part of the senate bill and modification. is there a reason why important elements of this administration and regulatory leadership are not taking a public position on this issue? >> i am very much in favor of addressing too big to fail. i think it is a big concern, and the two lessons i drew are two big parts of the strategy. >> they are. i did not hear your comment on the amendment i offered as part of the house bill and now part of the senate bill, giving the authority to the regulators to intercede, require plans, require an additional capital, break down organization that are too big to fail. is there reason you failed to address that? >> we were discussing lehman.

prior to the crisis, you want to take actions to limit risk, and i am very sympathetic to the view that through capitals, through restrictions and activities, through liquidity requirements, three effective compensation, through a whole variety of mechanisms, it is important we eliminate excessive risk-taking, particularly when the losses are borne by the taxpayer. >> you dance well. are you going to answer the question? are you or are you not in favor of the law passed by the house and inc. in the senate bill authorizing regulators with greater authority to break a organizations if necessary, if deemed too large to fail? >> i think it would be something that would be constructive, and i am certainly willing to work within its dictates. >> madam chairman bentsen -- madam chairman? >> thank you.

i would agree having that authority for regulators is critical, and i would point to an example of a program to illustrate that, because that was a program on a statutory basis, and despite its many other flaws, there was no authority on the part of the regulators said -- regulators to take dramatic or substantive action with respect to imposing requirements upon the investment holding companies, and i think that was a huge flaw of the program. >> thank you. let me state before i to read -- before i turn to the questions, that where we disagree is injecting capital into those companies. the house passed $150 billion -- what i continue to call a bailout fund. it is $50 billion in the house.

secretary gartner is calling for that to be removed, -- secretary geithner is calling for them to be removed, but we disagree that it is appropriate to put capital by our government entities. that is where there is serious disagreement -- not that you do not need more resolution authorities or as they go into bankruptcy procedures -- there is no disagreement there, so i think we're getting closer together. let me ask you this, secretary ,geithner. the examiner's report is replete with examples of the new york federal reserve and the sec missing red flags that would have prevented lehman cause it's -- impose an from being as devastating -- lehman's inclusion from being as devastating. had the government acted on what it knew or should have known, there would have mean -- would

have been more opportunities for a soft landing. as harsh as the criticism is, for me it raises another question, and that is, why didn't the government act? why didn't the regulators require lehman to correct its statement and do something to prevent billions of dollars of additional investments into lehman by investors, based on this information? the answer might be handed in your explanation to the examiner said you fear the markets will figure out lehman has "error." in other words, lehman was carrying assets with inflated values. i would ask you to respond to that. >> could i begin with your first point, and i will answer your question directly. the bill this house passed would

not give the executive branch of the united states the ability to put capital into institutions. this is an important point. you may be right. we may agree on the core provisions, but it does not do that. it does say if a firm gets to the edge of the abyss, cannot survive without the government coming in, the only thing the government can do is step in and put it into receivership so it can be broken up, sold off without causing catastrophic risk to the economy as a whole and without the taxpayer being exposed to any loss. >> he mentioned putting capital into the firm, and you said you did not have the right to add capital for lehman. you wish you had that right, and i think that is where we disagree. >> will the gentleman yield seven? >> i never mentioned putting capital in. >> we will review the record.

i thought you said you did not have the right to put additional capital into lehman. >> we just had no tools. that would have been one possibility, but i am not advocating that. >> you did say you did not have the tools to put capital in, which to me would be an indication you would at least like to put capital in, and maybe i misread that. >> no, sir. i do not. >> you would agree that putting capital in is not appropriate? >> i want to be able to break it up and sell off pieces like we do with banks today. >> absolutely, and we have proposed and enhance bankruptcy, and i think give you additional powers is appropriate in that -- giving you an additional powers is appropriate in that regard alone. would you respond to the charge that you could have avoided some

of the harshness and we could have had a softer landing had you acted sooner? >you were at the new york said. that is why i am asking. >> i was president of the new york said. at that point beginning in march, -- i was president of the new york fed. at that point beginning in march, two things were clear. we were at the verge of a financial crisis of enormous force, something we had not seen in decades, and there were a series of institutions that have got themselves to the point where they were uniquely exposed to the thrift. they were going the terror -- exposed to those risks. they were going to be terribly vulnerable. after bear stearns gone if -- got itself into that mess, we moved very quickly to put in place a set of arrangements. it was a patchwork of arrangements to try to encourage those large independent investment banks that remain to

take actions to make themselves stronger, and we worked very closely together. >> the gentlemen's time has expired. >> let me ask a yes or no. >> you can make a concluding statement, but we have a lot of members. >> i am going to report to the it -- to point to the examiner's report. the federal reserve bank of new york was aware that lehman was overstating its liquidity. is that a true statement? >> i do not know that as a fair statement. when i will say is there is nothing in that experience that did anything but confirm our judgment that lehman was vulnerable to this gathering storm, in terms of how much leverage it had and how it was fun during -- it was funding itself. we were deeply concerned about that. >> you were aware lehman was

overstating its liquidity. >> you have plenty of time. you raised some other issues. it is my responsibility to give every member a chance. i asked one of my colleagues on the democratic side to stop an important statement. we cannot run the committee without reaching with people talking whenever they want without regards -- we cannot run the committee without talking whenever we want without regard to time. i am disappointed. let's be very clear. the primary responsibility here within the region within the security commission -- the primary responsibility within the security commission -- sec was lehman's primary regulator. mr. cox was a republican member of the committee appointed by president bush to head the sec only because he thought his predecessor was to enter vented richard winter vented -- -- too

interventing. we are here to make sure this does not happen again. that is our major role. the other thing i have to respond to a business characterization that we are trying to put capital into this company. he began by saying he disagrees with democrats because we want to put capital in the company. he incorrectly concluded that statement. he then said, the chairman said that was a tool they might have had back then. the chairman is a nice fellow, does not speak to the democrats. the bill we have is very explicit. no money can be spent in these cases until the institution is out of business. the notion that we inject capital into institutions is flatly wrong, contradicted by the text of the bill. the point is we put money in at the suggestion of the fdic'.

she says her experience is when you are putting an institution of of business as she does with dave, you need some money to do that -- as she does with banks, you need some money to minimize the cost to the government. that is what the money is there for. what is important is none of that money should be spent to help the institution. none of its gross -- the statement that there is an effort to inject capital into the institution is simply wrong. the other point i want to make is we were told they have all the authority, but i believe there were a couple of decisions made s.e.c. under chairman cox. chairman cox and senator paul -- chairman, sen paulson both contradict, that they did not

have the authority they should have had, and they want more authority, but let me ask share schapiro -- chair schapiro -- the sec made a lot of decisions one -- decisions. wouldn't be fair to say that contributed to the context in which this happened and we have taken action to undo that? >> the consolidation program had to be voluntary because there was no authority for the sec to bring investment bank holding companies under the regulatory umbrella, so when the director required supervision of these institutions, the sec thought it was september to the plate to provide a supervisor so it would reduce stepping up to the plate to provide as a razor so it would be right -- was

stepping up to the plate to provide a supervisor so it would be regulated. the system would be to give the regulator the tools to see all the entities and affiliated entities across the institution, which i think it's very important. in return to submitting to a holding company regulation by the sec common and it committed the broker-dealers -- by the sec, it permitted the broker- dealers to use capital in a different way, which took away the prescribed cuts and allowed the firms to use and at risk model. >> with the new authority you would get, would that still be allowed? >> the rules would still be allowed, although there are no surviving entity is any longer. presumably, they would be subject to these risks. the alternative net capital rules do still exist.

they have been cut back dramatically, and it is a question we are debating now within the agency to eliminate them in their entirety. the effect they had in 2004 was to allow firms to support larger institutions against the same capital base. to counterbalance that, they were required to hold $5 billion in capital and to have a liquidity pool, which raises its own issues, sufficient to cover the cost for a year if unsecured lending were unavailable, so there were trade-offs. agency felt it was spreading the holding companies into the regulatory seizure, but at the same time, it loses some of the top -- regulatory sphere, but at the same time, it loses some of the ties on firms. -- new since -- loosens some of

the ties on firms. >> i am going to raise a couple of issues. because congress is on the brink of passing legislation that will fundamentally change our financial sector, and it is not just members on this side of the aisle saying this. over the weekend, i listen to one of our democratic colleagues say that the dog bill -- dodd bill would lead to permanent bailout authority, so there is the concern, and the underlying premise of the bill is the belief that despite the regulators performance in recent years, regulators are going to always known what to do to mitigate the next systemic shock. they are going to know that. in the case of lehman brothers, i think it proves this is a shaky precedent upon which we are facing the future health of our capital markets, because there is another way to look at

this, and i remember an argument mr. geithner made i thought was profound. you said the top three things to get done our capital, capital, capital. it is the fact that we allow these institutions to over leverage. i agree. i remember greenspan said the reason the capital issue is so often raise is that in a sense it solved every problem, and i remember volcker saying the same thing once, so that is where the reform efforts should be centered. a wider presence of the dodd bill, which a lot of economists are raising the issue with this concept of bailout authority, but let's go over the regulatory experience. there is an expectation of regulatory confidence in the market. creditors, investors. they expect the regulator to have a firm understanding of the

solvency of an institution and whether or not that institution is basically accurately portraying their liquidity position. are those leverage ratios really what they are supposed to be? we are looking at the examiner's report here, and if says the sec deferred federal reserve based in new york region we mentioned these stress tests. you did 3 -- we mentioned three stress test. you did three stress test. you were chairmen at the time, mr. bernanke, and lehman failed all three, and in the words of the bankruptcy examiner, it does not appear any agency required in the action of lehman in response to the results of the -- required any action of lehman in response to the results of the stress test. it required women to take --

lehman to take action. the bottom line seems to be that the fed could have tightened terms. failure to use that leverage likely will be management into believing the government would reject likely lull -- likely lulled the management into believing the government would take care of them. affirm the fed probably knew to be failing should be treated like any other party. can i have your observations on that? let's get back to the capital statement you made earlier. >> i really agree. we cannot design a system that relies on the wisdom of regulators to act preemptively with perfect force and preemptively diffuse pockets of risk and leverage within the system. that may be possible. we will do our best, but we

cannot build a system that requires that kind of preemptive exercised as the foresight. that is not possible. the only way i am aware of to design a more stable system is to use capital requirements to in force constraints and leverage on institutions that could pose -- to enforce constraints and leverage on institution that could pose a danger. to be able to do that on a consolidated basis for institutions that posed systemic risk is the essential necessary reform we all have to support. it is not sufficient, but it is necessary. you also make credible the possibility of allowing futures in the -- allowing this in the future without collateral damage to the innocent, and that is what this bill does. >> under the bill, the creditors of any company that is resolved under the company will have a chance to be bailed out.

the creditors are not to take most of the losses. a fund is not necessary. >> the gentleman's time is expired. the gentleman from california. >> thank you, mr. chairman. i was listening very closely, and i join in talking about the importance of his amendment. i think we should go further and not just allow, but require regulators to break up firms that have reached a certain size. he put forward the idea that either our republican friends have failed to read the house bill or were deliberately mischaracterizing it in an effort to -- mischaracterizing it. in an effort of bipartisanship, i will suggest they have read the senate bill, which is much closer to their characterization's than the house bill. as for reading bills, i know the secretary of the treasury has

stated under the senate, the taxpayer will not be exposed to any risk. id for the secretary -- are referred to sections to enter 10 of the bill come out in which the taxpayer does it -- 210 of the bill, in which the taxpayer does take risks. that is similar to the ones they would take in section 1200 for -- when thousand two entered for of -- 1,204 of the bill last year. taxpayers do not take the risk, but character thing tens of billions of dollars of risk -- taxpayers take tens of billions of dollars of risk to take care of the general creditors of these failed firms.

mr. baucus shares my passion for avoiding a bailout, but he said the way to do that is to strip from the sun until the $50 billion fund their for the $150 billion fund this house makes available to provide for the creditors of resolve institution. i would point out the amount available under the senate or the house bill for taking care of creditors and counterparties is not just the $50 billion or $150 billion. it is the borrowing from the treasury, so if you eliminate the $50 billion or $150 billion fund but allow the borrowing, the borrowing starts with no one, and i think the ultimate total victory for wall street would be to tell them they do not have to pay into the $50 billion at the present time but that they are available for the

fdic to borrow money and bail out their creditors. >> if the gentleman would respond briefly, what i said is that taxpayers would not be exposed at all, so i insane one thing is -- >> i am reclaiming my time. i am more concerned with his remarks were he seems to take aim at the 50 or the 150 and leave the borrowing capacity. >> we are here to discuss lehman brothers. we are doing an autopsy to learn how to treat future patients, and one possible treatment is the house for seminole -- or senate bill, so let me take you back to 2008. it is too late to save lehman brothers, but it is not too late for an orderly resolution. the purpose of this bill is to give you and other regulators the force for resolution.

how much money would you need from outside lehman brothers to take care in an orderly way of the counter parties -- say, the county of san mateo which put money in, seems relatively blameless? would you use the tools of these bills to go into the $50 billion, the $150 billion fund in an orderly way to provide more to the general creditors in san mateo county than the carcass of lehman brothers would provide? >> you are a very thoughtful critic, and i respect your views on this, so let me describe the basic idea underpinning the bill that passed the house and is still in the senate. the idea is to take a model that has existed for more than three

decades for small banks. we have a lot of experience with that model over many recessions and many financial crises. >> could you just answer my question of what you would do with lehman brothers? >> and going to get to your question. your question is an excellent question. with the authority, the government would have been able to come in, put lehman in receivership to wipe out of policyholders, to replace management in support, and manage the institution in a way that maximizes returns to the tax payer and minimizes the losses to the system. >> mr. secretary, how much money would you need? >> it is an unanswerable question. you cannot know in advance. >> tens of billions. >> the gentleman's time has expired. >> thank you, mr. chairman, and thank you for holding this hearing, and thank you all for

being here. i wish we had held this a long time ago, and i wish we had the report. i think it really is a document that is very important to our work in the committee, and it is getting kind of -- i do not want to say political, but there are a lot of arguments that i think if we had this before, if we had maybe a better discussion, and i know the questions i have always had our about the regulators and did they do the right thing, and now we are talking about, did you have the authority, and one of the reasons -- i have asked secretary geithner many times about having a council rather than through the federal reserve, and the reason for that is it seems apparent to

me here -- the fact that the regulators in the report said you did not really discussed this. may be at an early time when more action could have been taken. the regulators did not meet and talk about it, and i would imagine there was such a crisis coming up that it would have come to that committee. they would come and say, we have a problem, and we do not think we have the authority. what can we do? how can this be solved? that did not happen, so we are looking back from a serious issue, and now we are talking about -- you have got to take care of the risk, take care of a bank that is maybe going to fail before the crisis, so we have got to have the working together of everyone to solve these

problems, and i see that -- i do not want to see this get into back-and-forth and being negative about all this, but if we have the council -- i was thinking, we wanted to bring all the agencies together when there was a problem, and we did that with katrina and found out there was a lot of duplication within the agencies, but what we need is the authority for the regulators, but if we have a council and that was to discuss, and somebody comes up with an issue, and somebody else in another area has the same thing, that we would know ahead of time without so much government intrusion into these areas, and to say, we have the big banks. we are going to tell them we're going to fail. will the next step be

companies, if they fail, lun -- what will their crowns -- what will their compensation be? what is the difference between bankruptcy for lehman brothers and having other ones that we are going to tell them they are going to fail but they do not go through bankruptcy? what about a small company? we have seen the small businesses going out of business every single day because they cannot operate within the barriers of the state -- the state or the government has put up. i think we have a huge problem, but i really say -- releasing the examiner has done a good job to highlight this, -- i really think the examiner has done a good job to highlight this. i know you have worked a lot of this and came in at a time when it was difficult, and all of you have lived through this.

we really have to come up with the right answers, so i am not going to come up -- to ask any questions. >> we continue our look at the number of financial stories we are following on capitol hill tonight on c-span. up next, the head of the treasury department's car program testifies about a proposed tax atarp -- tarp program talks about a proposed tax. after that a talk about financial regulations legislation, and later, a look efforts to police the u.s.- mexico border. .

>> the financial crisis of 20008

spread throughout our country destroying 8 million jobs and lead to 3 million bankruptcies. the spark for that fire was lit in the financial industry. to generate huge profits and big bonuses, big banks were writing bad mortgages and they should have known folks would not be able to pay. they would have known it, if they had done their homework on the loan applications. they bundled good and bad mortgages together and sold them to investors called ceo's -- cdo's. they called the insurance policies credit default swaps

allowing banks to protect their risk and make big profits even if the mortgages they were writing went bad. they hedge their bets and made a lot of money. unfortunately the financial system did not have enough money to cover all its bets. and now there are charges that big banks may have been both assembling packages of mortgages on one side and betting against them at the same time. then the spark kindled the flame and suddenly our nation's economy was engulfed in the fire. the dow plunged, dropping to just above 6500 in march 2009. unemployment rose above 10%. then-treasury secretary paulson knew that he had to act. he came to congress with a proposal to save the economy. the proposal turned into the emergency law that authorized the treasury to distribute almost $700 billion through the troubled asset recovery program,

otherwise known as tarp. i know when we were working on this legislation that we needed to hold the treasury and tarp recipients accountable for how the money was spent. tarp was spending hard-earned taxpayer dollars to save the big banks. and those big banks had been paying out bonuses worth billions of dollars. those big banks had sometimes been rewarding excessive risk- taking. so i propose that we build right into the law a special, unbiased investigator. this investigator would ensure the transparency and accountability of tarp funds. that proposal resulted in the special inspector general for the troubled asset relief program. and that person is sitting before us today, mr. neil barofsky. welcome, mr. barofsky. mr. barofsky is responsible for overseeing the tarp program. he keeps track of where the money goes, how it is spent, and whether it is paid back. and that leads us to the purpose of today's hearing.

the tarp legislation anticipated that there might be losses. congress anticipated that the bank might pay back something less than all the tarp money. the most recent estimate anticipated that the treasury will end up losing about $89 billion. we need to think about how we're going to get that money back on behalf of american taxpayers. in january president obama proposed a bank fee to recover tarp losses. his fee is estimated to raise $90 billion over 10 years. it would apply to the 50 largest institutions in the country. this committee is going to take some time over the course of several hearings to consider the president's proposal and other options to recover tarp losses. we want to understand the best approach to designing a fee, to whom it should apply, and how it might affect the economy in the markets. we need to learn whether banks will pass it on to consumers and how it might affect lending to small businesses. we need to take into account what european countries might do

as they consider similar levies. we begin today with mr. barofsky. we will ask who has benefited from the tarp program, how much they have been repaid, and why some tarp beneficiaries might never be able to pay back the american taxpayers. the financial crisis of 2008 kindled a great fire that spread throughout our entire economy. let us examine how widely that fire spread. let us see who benefited from our efforts to put out the fire. let us try to learn what we can to prevent such further economic fires in times to come. >> i welcome you here, mr. barofsky. we both believe in transparency and oversight and accountability and thank you for leading that effort. it is an important area of government when $700 billion was put out by congress. today we are discussing what the

president calls a financial crisis responsibility feet. however, the assistant secretary for tax policy told the dozens of people in attendance at a briefing for senate staff on the present fiscal year 2011 budget earlier this year that the president's proposed fee is actually an excise tax. this is similar to the name game that the administration played with the excise taxes in the health-care bill. although they referred to the excise taxes as fees, the legislative text clearly states that they are actually excise taxes. i will refer to it as the tarp tax, and not the bank tax as some call it, because the proposal -- the proposal applies not only to banks but to insurance companies, security brokers, and thrifts among others. the statute that created tarp required the president to submit a plan by 2013 to recover any

losses under tarp so that the taxpayers are actually repaid for any tarp losses. however three years before it was required, the president proposed this excise tax -- the tarp tax. one problem that surfaced recently is that congressional democrats are already reportedly planning ways to spend the money raised by the proposed tarp tax. one proposal gaining steam among many on the other side lately is to add the tarp tax to the financial regulatory reform bill. the congressional majority is so strapped for money to pay for out of control spending that they are looking to the banks and other financial institutions for money. this reminds me of the story about a reporter asking willie sutton, a notorious bank robber, why he robbed banks. sutton allegedly said, "because that is where the money is." i cannot emphasize this next

point enough -- if congress decides to pass a tarp tax, that money should only go toward paying down the deficit. otherwise, the tarp tax would not even pay for the losses from tarp. it would just enable more taxing and spending by those who want to spend more. all economists state that corporate entities don't actually bear the burden of taxes -- people do. i wanted to know which people would bear the burden of the proposed tarp tax. so i wrote a letter asking the nonpartisan experts at the congressional budget office and joint committee on taxation a series of questions along that line. the cbo responded to my letter by saying that customers would probably pay higher borrowing rates and other charges, employees might bear some of the calls, and investors could bear some of the cost. the cbo also said that the tarp tax "would also probably

slightly decrease the availability of credit for small businesses." in addition, the cbo said, "for the most part, the firms paying the fee would not be those that are directly responsible for the loss realized by the tarp." one other item from the cbo letter worth noting is that the tarp tax would not apply to firms in the automotive industry. that is really odd, since cbo's march 2010 tarp report states that the automotive industry accounts for 34% -- no, $34 billion of the programs estimated total cost of $109 billion. chairman baucus and i invited gm to testify before our committee at one of the later hearings, but gm representatives said they did not want to

testify. i think it is obvious that the gm silence is deafening. on another tarp-related matter, i want to thank you, mr. barofsky, for investigating the multi million dollar severance payments that treasury is allowing tarp recipients like aig to pay their departing executives. as you know, i have communicated on several occasions with treasury and the tarp special master for executive compensation about this troubling issue, and i have basically run into a stone wall. i am also pleased that you, mr. barofsky, are going to investigate the possible conflicts of interest on the part of key people at treasury who worked on the tarp executive compensation regulations. since those regulations helped executives walk away with huge severance payments, we need to find out if they were drafted by people who used to represent the

very executives affected by the regulation. that all the proper recusals were made, but it has provided none of the documentation necessary to verify that claim. so i trust that you will be able to get to the bottom of these important questions and report back to the committee in the near future. thank you, mr. chairman. >> thank you, senator. thank you, mr. barofsky, for your efforts for the country. i'm a very gratified that we named this position -- putting this position of legislation. remember how important it was defined auditors to find out how the moneys being spent. we also found a way to the power that you needed to see into the

back rooms and the department of treasury. we're happy with your performance. we selected a very good person to do this job. thank you very much for your service to this country. i think you help restore some confidence of the american people that this program was conducted properly. as much confidence as any one person could three we thank you very much for your service to the country. >> mr. chairman, i want to thank you for saying what you just said. is so important in the checks and balances of government and the oversize that committees have to do -- and the risk committee does a good job of oversight -- they know that you are behind what is being done here and what he is doing is so important and i thank you so much for saying that. >> mr. barofsky. >> chairman baucus, ranking

members, and member of the committee, i thank you for your kind words today in your ongoing support of our office in conducting our oversight. it is a privilege and honor for me to appear here today to release to this committee are most recently quarterly report to congress spirit we have some good news to report. aspects of the financial system -- there are clear signs they are on their way to recovery and many of the larger tarp banks have been able to repay their tarp funds far in advance than anyone would ever anticipated, and as a result, the expectations of losses for tarp, while still substantial, have been trending downward. there was estimates of $127 billion, the cbo estimated $109 billion -- both of them estimating that the concentrations of losses, support to aig and the automotive industry and to struggling homeowners. on the other hand, while tarp

does not -- does appear to be succeeding in getting wall street on its feet, it is not succeeding in getting main street back on its feet for long-term unemployment is the highest in recent memory. small community banks are failing at a mall -- at an alarming rate, 50 already this year. 2.8 million foreclosures last year with estimates for this year that will even eclipse that. hamp appears to add never meet its goal. fewer than 230,000 permanent modifications more than a year in the program aired last month we issued an audit where we detailed some of the failings of the program and made some recommendations to address the

areas of transparency,, problems with execution of the program, and concerns about the very design which leaves it vulnerable to the ultimate failure. circumstances where borrowers received modification and are unable or unwilling to make the payments because of the high rate of the payment or being hopelessly under water. treasury announced major modifications to the atm deprogram -- the hamp program. significant indicators of default and while the actions to address some of the recommendations and issues raised by sigtarp, they have their own set of concerns. our quarterly report we've identified several of those issues and make further recommendations like continuing problems with transparency,

problems with the potential vulnerability of fraud, and problems with the design of some of these revisions. it may lead to them being ineffective or to arbitrary results. it risks that the hamp program will be remembered not for being the catalyst for recovery in the housing market but for its bold announcements, modest goals, and meager results. we also review what we're doing in our investigative division. and with your insistence on the creation of sigtarp or the invest -- over the objections of many, in recognition that in part with the program of this size, it would drop those who seek to profit criminally off a national crisis. it is because we have been

building a sophisticated white- collar enforcement agency. we've had some success. one person was indicted in the seventh district of new york with his fraud as the ceo and president of park avenue -- park avenue bank for trying to sale -- trying to steal $11 million from tarp. we supported the sec in its case that resulted in $150 million settlement with bank of america and resulted in important governance changes at the bank. alan california, we assisted the us -- attorney general's office in obtaining criminal charges against two man for their role in a fraud that would of take criminal and an inch of

struggling homeowners by falsely promising the mortgage modifications that never materialized. mr. chairman and mr. ranking member, it is a privilege to be here and i look forward to answering any questions you may have. >> thank you, mr. barofsky. i like to start off by asking you, what you think all losses are and how long will it take to realize definitely what those losses might be? one can argue over the next few years that the losses will be less. it would be helpful to the know what the losses are today and what -- how much they will be reduced over the next several years. >> it is very hard to determine through our role is to report what others have done as far as analysis, what omb and cbo of done. they have concentrated in three areas. aig -- "the estimate being between $36 billion to $50

billion. the automotive industry, and the one program that could be an entire loss. there is no mechanism for recovery there. whether those losses will be realized in the longer term will depend on large amount of what happens with the economy, particularly the automotive industry for doubt will depend on the economy recovering, are people buying more cars, is gm and chrysler and gmac going to be able to return to profitability? it is an equity investment. the ability for a good -- for them to repay will depend on how successful they are in rebuilding those companies. it is difficult to determine and it will take several years to get a sense -- a real sense of what those losses may be. if the economy improves, we hope to see that these losses will continue to decrease.

>> what -- your sense of this proposed bank fee tax, and do it is levied on -- and who it is levied on, what amount of the tarp expenditures could be repaid? to what degree and how efficiently will let return dollars back to the taxpayers? >> section 1 is a statutory mechanism that provides recruitment. there is certainly a lot of flexibility and there and how to recoupment is directed. it is very broad and his language for the brought -- for the financial industry. the way that tarp was rock -- i

originally intended -- it was originally envisioned that the government was going to buy up to $700 billion of the securities and then in five years make a deterrent termination on how the investors are doing. if there are short, it would make sense to make the financial industry come back and levy a fee or tax in order to recoup those investment. it becomes more difficult because of the weight tarp has morphed into 13 different programs, many and capital investments. those that have most people repaid and there would be a loss associated propose doing poorly, and would not be able to necessarily repay, a tax. aig and the automotive industry, it would be more difficult to put a tax on them. i think that flexibility will be important. >> some people suggest -- first

of all, the tarp money went to banks and that helped the banks but it also help the economy generally. the argument is that if the is on the banks it's on the issue words itself. is that appropriate? because the benefits of tarp in the first place were not only specifically directed but also widespread? if i understand the argument, why is it not more widely spread even those the institutions get the benefit of tarp? >> certainly there are multiple sides to this argument and discussion. it really boils down to the policy determination for the congress and the administration to decide who is appropriate to

fulfill the requirement for recoupment. the financial industry and the larger banks certainly benefit beyond just the dollars interested in them, and not just from tarp but from as a whole of the response of the government to the financial crisis. the implicit guarantee that they have of government support has been widely reported that they are able to more easily raise money than their smaller counterparts, giving them competitive advantage and opportunities for high profit is a very complicated question for sure, mr. chairman. >> let me hear your thoughts on how the fee structure. your thoughts on the structure as opposed to a profit tax. >> to be honest, until we see something hard and in writing as

far as a legislative proposal, we do not get them fault with an oversight perspective. once it is more fully formed and we're going to be responsible for overseeing it, that is when we roll up our sleeves. we have not had the opportunity to fully analyze the proposal. >> my time is expired. >> thank you, mr. chairman. a year ago, cbo and omb projected the loss from tarp to be $250 billion. owen b. now estimates tarp will lose $127 billion. cbo estimated that at $109 billion. it has been reported recently in the "new york times" that some treasury officials on named, as i recall, expect the bailout program to "eventually turn from red to black."

if treasury says that eventually there may not be losses, it does this excise tax makes sense -- and before you answer that, wouldn't the amount of losses if any be more certain in 2013, the year that the tarp law says the president is supposed to -- supposed to propose a land to recoup taxpayer losses from tarp? >> in 2013, the will certainly be more certainty. >> 01 be says that the auto industry is responsible -- omb says that the auto industry is responsible. does it make any sense to recover tarp losses and then carved out the auto industry responsible for 30% of the losses? >> based on the structure of the way it was envisioned, it is a

difficult policy question. >> in march 2009, and that was just 13 months ago, the president announced an initiative to use $15 billion in tarp funds to fund what is called sba loans. however small business does not actually receive that money and lending has not increased because the initiative was reduced to $21 million as a pilot program. that is the difference between $15 billion intended and $21 million as a pilot program. in january, the administration proposed taking $30 billion out of the tarp program and setting up a separate non-tarp program

to support small business lending. we do not have actual legislative language yet, but i'm concerned about what that would mean for the ability of your office to conduct oversight. could you explain why the previous small business lending program never materialized and why you think you should retain jurisdiction to oversee the newly proposed $30 billion program, and also come out what are the risk to accountability and transparency if you're oversight -- if oversight from your oversight would be dropped by a change in the legislative language? >> let me answer your second question first. we think that this would be tremendously dangerous and wasteful to the taxpayer if this $30 billion program was taken out of the tarp without our oversight continuing. there is virtually no difference between the newly proposed program and existing capital purchase programs. it involves the same five regulators making decisions on who gets money and who does not.

it is the same capital structure. the same eligibility criteria. the same type of investment. it is actually same -- the same money. we estimate the cost of 95% of tarp resistance, because of the way it is designed to set up, they can transfer their tarp investments into this. 95% will not change anything other than moving out of tarp and into this new program. meanwhile, we've grown organically with the capital first program. we were there when it was created. but on the audit side, the reporting side, and the investigation side, this is been built around learning this program which this set up as the mirror image of that. we've done audits into the decision making process, how it works, the impact of outside influences -- we have made a series of recommendations about transparency in program design. and most important, and the

investigation said -- we have dozens of criminal investigations into those process who criminally profit off the capital purchase program. we have sophisticated forensic teams, and these types of crimes, it is virtually identical to our program. the issues that we have already seen that we spent a significant amounts of time learning and training, getting up to speed -- to take this and throwaway the 14 months of expertise and training that we have from an audit and criminal investigative perspective, taking that out and leaving this program a draft, essentially, with a new oversight body that may or may not have the resources to get up to speed, it certainly will be akira process that could take at least a year to get it close to where we are, even if they have the necessary resources and expertise. i think it would be a tremendous disservice to the american

taxpayer. it would essentially leave a program which has a greater vulnerability of being taken advantage of -- essentially without effective oversight. it would be a tremendous waste of taxpayer dollars and i would strongly encourage this congress to include sigtarp oversight. is not a expansion of our jurisdiction but a continuation of our jurisdiction over the same money, and i am disappointed that the administration changed course after saying that we would be included in the proposed solution. >> would it not be more accurate to say that if we do not do anything, you will be included? work if they set this up, we have to transfer what you do now over to that? i thought you automatically had jurisdiction unless balal was changed to take it away from you. >> if they'd ripped this out of the tarp, we may have jurisdiction to a certain extent

on some of the money, but we would necessarily have complete jurisdiction of the program. >> been you have answered my question. you will have jurisdiction unless congress changes the existing law. >> yes, that is correct. >> i hope the members of this committee will be aware that so that we don't let something like that slip through. i'll wait for second round. >> thank you for your service. a big part of the ultimate losses of tarp is coming from aig. and a big part of the losses in aig that will not be the payback is as a result of the credit default swaps being paid off, the insurance policies, at one hundred cents on the dollar. now do you think that these

derivative counterparties, such as goldman sachs, the received the preferred treatment, puts them at the front of the line when the circumstances occurred as they did with aig -- do you think that they should be put at the front lawn? >> i think that when making this policy considerations, everything should be on the table. the fact is that goldman sachs and seven of the aid of the large as counterparties receive negotiated concessions which led them to receiving one hundred cents on the dollar. we issued an audit on this where we explore the reasons and the justification for this, but it is irrelevant -- it is our relevant policy consideration has contemplated by the statute.

>> what in the world made the federal was serve sit there and take that by these counterparties saying, we're not going to negotiate with you on this? it seems like the federal reserve should have been in the driver's seat. >> center, we agree. when we released our audit report, we went through the reasons that the federal reserve gave and what we described as an ineffective negotiating strategy that was ultimately doomed to fail. it was also a lack of effort, even within certain limitations that they put on themselves. things like requiring that they would not do any deal must all the counterparty degree, or refusing to put a little pressure on them because of their status as a regulator, and it did encourage the negotiations to move for and they said, don't worry, it is a volunteer in negotiation. but the fact that they did not know what they had done just a few weeks earlier with the recipients of the capital

purchase program. the then-president of the federal reserve, now secretary guy, he did not get on the phone and call them together and make a strong effort on negotiation like they did with cpp, telling them that this was important for the country, pointing out the incredible support that the federal reserve and the taxpayer had given to aig, and what all likely suffer terrific losses without that support, and using the bully pulpit to voluntarily get negotiated fees. even after one of the banks actually agreed to a concession, we've been critical of that because at the very least they should have tried harder. >> of the $89 billion that you think we're not going to get back, the taxpayers are not going to get back from the bailout, is most of that

attributable to aig? >> to be clear, we have not done our own analysis third we are reporting west's cbo and omb have done. but it does look bad anywhere from $50 billion will be attributable to aig. the lawyers and all the credit default swaps that were paid off, with all of those firms, $13 billion for goldman sachs and going down the line, that would total up to about $50 billion, would it not? >> in one facility along, the portion of the federal reserve purchased from the counterparty at face value, at market value, the other half of that, the collateral posted, most of that money came from the taxpayer. that alone was tens of billions

of dollars. >> this is an outrage. let me ask you about hamp. would you talk more about your recommendations regarding hamp's effectiveness and your recommendation on fraud and the voluntary nature of hamp's principal reduction program? >> with respect to fraud, the newly designed program increases incentives, or their circumstances were treasury is going to provide incentive to homeowners as well as to the servicers to encourage them to basically turning the keys to their house and that it be sold to someone for less than what the mortgage is actually worth three so of the house is worth $100,000, the mortgage as $150,000, it would sell at $100,000, and the servicer would release the borrower. it is basically a short sale.

certainly encouraging those -- we have no problem with that program. it would be less in this -- expensive to investors and not as painful as foreclosure. the problem is that these types of sales have historically been honorable to a special type of short sale fraud, called flopping. it's the opposite of flipping. that is the artificial deflation of the home. the home is really worth $125,000 in my example, but there is of benefit for the fraudsters, if they can get the investor believing it is only worth $100,000, they provide false information. if they do that, then they get the home below market value and could flip of home almost instantly and make a nice, tidy profit. the valuation standards that treasury anticipated using on this is basically not very

robust. even that is not standardized. it is based on the review of the servicer of -- i am running out of time. our recommendation, to what the fha does, required a certified appraiser to make sure there is a good third party look to prevent this type of fraud. >> you all the tech a look in florida were some of this flopping is going on. >> there is a hotbed of that activity and florida. >> thank you for your stewardship in the good work being done on this front. i want to go back a bit. i want to make sure that it is clear. when the last administration came to congress and ask for us to fund the tarp program, my recollection was they ask for $700 billion. >> that is correct. >> the proposed use for the money at that time was to allow the purchase of illiquid assets

being held by a variety of entities. >> that is correct. >> we ended up taking a different approach and injected a fair amount of that money into large financial institutions and we bought their preferred stock, as i recall. >> that is absolutely correct. >> $50 billion or above? >> the initial rollout -- the first $125 billion went to the largest 8 financial institution third overtime, as the capital purchase program expanded, it funded more than 700 institutions and we of breakdowns and are quarterly report of the various sizes. they range in investment even today with repayment, as low as $300,000, up to city sama, holding $25 billion. >> they have an obligation to us

to pay on our preferred stock dividends, is that correct or smart >> yes, 5%. the oilers and the opportunities for them to lower that 5% by lulling money -- by lending money that was injected into their balance sheets which are >> that had not been part of the tarp program. it is part of the proposed rollout. >> what about the dividend income on to the treasury? >> on the gross level, is going pretty well. there been 104 tarp recipients submitting payments. some have caught up, and that leaves a balance that not made payments. a few tarp recipients have failed and obviously will never made making payments. >> can you quantify the dividend obligations there that had not been fulfilled to the treasury, roughly?

>> we have it in our quarterly report. i believe is $100 million. >> that is close enough. with infused all of this capital money, we bought the preferred stock, and for the most part received the dividend payments that we're supposed to. a good deal of the capital has been infused into the balance sheets of these institutions. a lot of that is being repaired. >> absolutely. >> repaid essentially with interest, with the exception that you have mentioned. explain to us how we're doing -- we have been able to exercise [unintelligible] profits in the billions of dollars. >> for the warrant sales, it is

pure profit for the american taxpayer. when congress design is, they put in a requirement for warrants so that we could share in the outside. it has been successful, billions of dollars returned from the sale of these warrants. we have an audit report coming out on may 11 which will detail our analysis of how treasury has been doing in administering the warrant process. but it started off with estimates, including the congressional oversight panel, all little bit rocky. but since the report has come out, we've seen that they are doing better in getting market price for these three recently we had all actions which again appeared to bump the price is up. it seems to be a pretty successful program. i will provide more detail on may 11 when we do that our report. >> their other institutions that not been able to repay the

money and their obligations, but that number is decreasing over time. aig's still opposes fair amount of money. >> its about $46 billion. >> i've been following in the press that they have at least reach some agreements to sell some of their assets. there was one big insurance company, $15 billion. i've seen another for $35 billion. that money, has an already been credited to their obligation to the treasury and not for the mark dullard that money will not go to treasury for the federal reserve gets paid back every penny before treasury gets paid back. if those transactions go off as planned, that will help very much in reducing a i.t.'s obligation to the federal reserve. but it is not anticipated that there will be nearly enough to increase any credit to the

taxpayer. >> the money owed by gm and chrysler, that is come back to the treasury $3 that is correct. >> gm recently paid $1 billion to the treasury $3 they've announced that they are going to be paying back the debt portion, about $6 billion, in its entirety, very shortly. we need to be cautious about that because the way that that payment is going to be made is drawing down and equity to elicit -- equity facility of other tarp money. it is good that they are reducing their debt, but they are taking other available tarp money to repay the tarp. it's good news because that money is going to be available for future problems with gm if there is a determination that they do not needed. but we should cautioned that it is not generated out of earnings. >> when will you have really good news from gm? >> i do not have a crystal ball. >> what is the store with

chrysler's obligation? >> we have an equity interest in chrysler. our future ability to recoup taxpayer investment is one to be wholly dependent on how successful chrysler is and how successful the american automotive industry is $3 i have some more questions. maybe we'll let us second round. >> thank you. senator schumer. >> being in this room, i am overcome with health care. we spend so much time here doing that. >> we're not talking about financial health. >> right, and i want thank you and mr. barofsky for your testimony in your service in overseeing the implementation of the tarp program. as unpopular as tarp has become, i think most to would look get it would say it was absolutely necessary to save the economy from complete collapse. i was in the room when chairman bernanke and hank paulson, president bush's secretary, told members of congress just how

serious the situation rise. they told us that if we fail to enact the tarp, we risk another great depression. we were staring into the abyss. when we heard it, i think there was a collective goal in the room. ben bernanke talked about it and is very professorial, and you knew how serious it was. so congress came together and did the right thing. republicans and democrats, and the bush administration which had proposed it signed it into law. so it is important to emphasize that the current financial reform proposal also includes multiple safeguards to make sure taxpayers are never again on the outlook for rescuing the financial system. i think that is very important. any cost incurred in winding down financial institutions would be covered by the industry. sort of the way it is in the banking industry with the fdic. we certainly can and should work to prevent any more taxpayer

bailouts. but we also need to close the book on the last one and make sure that taxpayers get back every dime they pay to rescue the economy. the piece of that legislation was the provision requiring the president to assess the cost of programs and "cement a legislative proposal that recoups from the financial industry and amount equal to the shortfall in order to ensure that the program does not add to the deficit or national debt." it was a tough vote, even then, and i think we have to live up to those words. they should not be ignored. in keeping with the requirement under tarp to make sure taxpayers are recovered, it proposed a financial crisis responsibility fee to be assessed on financial institutions with over $50 billion in assets and as proposed by the administration, it would amount to 1.5% of the liabilities of these countries -- companies other than deposit.

there are legitimate questions about the details of the plan and i salute chairman baucus for holding this hearing to try and answer them. but overall i think the administration's proposal is a common-sense way to make sure that taxpayer money is repaid and i believe it should be included in the financial reform legislation soon to be debated on the senate floor. i agree with the administration in this regard. as the president said when introducing it, it is our responsibility to ensure that the taxpayer dollars the supported these actions are reimbursed by the financial sector so that the deficit does not increase. mr. chairman, i want to work with you and all of our colleagues on this committee to get recovery legislation ready in time to be included in the financial reform legislation that will soon be considered on the floor. now my question to you, mr. barofsky, is this -- you are

talking a little bit before about minimizing losses. the government still holds billions and billions of dollars of these assets. what do you think the administration can do it, congress can do it, to minimize the potential losses? you indicated earlier it would take years to know exactly what our losses will be, but now we are moving on here and we ought to start looking at how to minimize those losses. could you comment? >> 1 and the areas that is near and dear to our role is if you're looking at inefficiencies in the program as they are run and defraud vulnerabilities. those areas are preventable losses through some of the losses with respect to aig and the automotive industry will depend on macroeconomics conditions. whether the economy improves and people buy more parts. there is very little in the tarp program to address that, but we try to make recommendations so that if the program runs

efficiently, it maximizes each dollar spent, and it makes sure that the right protections are there against fraud. so that money is not lost by providing institutions and small business programs that are defrauding his department, getting money that results in failure of the system. those are areas that we have been working hard to make sure that when the tarp money goes out the door, it goes out efficiently and it is not the result of fraud. >> my time is expired. thank you, mr. chairman. >> thank you very much. a lot of questions here. small business -- small business has been unable to take advantage like the big banks, whether tarp funds for federal reserve's systems or what not. their son that suggests that banks make some money by

borrowing at low interest rates from the fed and then lent out to other banks instead of small business. your thoughts on how and what can be done with the tarp program to help small business -- just your thoughts. it has been a real program -- it has been a real problem. >> i think that there is merit in the administration proposal from small business bond to emphasize small business lending. unlike the original outlays of the capital purchase program, money sent out without any conditions or incentives or carrots or stick about what to do with that money, the rally had free rein to do with it whatever they pleased. and back then, and up until now, without any accountability, because the administration's

refusal to require tarp recipients to report on the uses of funds. by lowering the dividend rate to encourage them to increase small business lending, that can help. i think the administration finally adopting our long-term recommendation of requiring tarp recipients to report on their use of funds, so that there is some accountability for the use of tarp funds, will also assist in helping to meet that goal to further incentivize small- business lending. >> are they reporting? >> treasury has sent out a survey and i think the responses were due this past friday. they're going to be publishing the results. it will be quantitative data as well as qualitative data. for the first time, treasuries point to sponsor that. we did that ourselves in an audit report back last summer, but for the -- it was a voluntary audit report, but treasury is now going to require and report on how tarp recipients are saying they are using the funds. >> have you seen the proposed

regulations? >> is actually just a survey. we commented on the design of the certified. >> are you satisfied with the design? >> we made some suggestions. some were adopted. but we work overall ok with what the treasury plan was and the question is on execution. we think that getting -- the quantitative data and making it -- matching it with a qualitative dead at -- data, putting that together and putting the other -- together a comprehensive report will be helpful. one of the recommendations we made that they adopt it is making sure that there was a high-level official certifying it under criminal penalty. we want to make sure that the people signing on that would be incentivize to be accurate and truthful.

>> i appreciate that. any other thoughts on small business? so much of us here from community banks and small businesses. small businesses say that they cannot borrow because banks are not lending. >> is a very difficult problem and a lot has to do with outside the tarp. we all heard anecdotal information about the push and pull between the regulators to may be tightening certain lending restrictions. there's a possibility that has been discussed that the banks are getting the money very cheaply but reportedly a lot of turning around and lending it back to the federal government by buying treasury bills instead of lending in out to small businesses. all we tried to do in this report is just an overview of small business lending. with a tutorial on some of the issues come up with the fha role is, and one thing we do come down at the mud there is no way that we could have lasting

economic recovery without a return from small businesses. they are too important as far as net jobs, net job growth. >> i agree with that very much. all of this discussion of tarp a sense that everything is on the up and up. is there any way, fraud, abuse by certain actors in the tarp program generally, so far as you can tell? >> the tarp is a giant several hundred billion, multi billion dollars pot of money. is going to draw some flies. our job is being very vigilant over this. we absolutely are seeing those trying to take criminal advantage. we have started several trauma -- criminal charges we are getting some investigative division, we have 84 an

investigated as -- investigation. and they apply across the tarp. many tried to steal from the tarp by fraudulent applications. we're also looking at housing programs, public/private investment programs, it is really across the board. yes, mr. chairman, there are those who take criminal advantage. what we've tried to do is on two fronts. referring to the department of justice for prosecution and we have a committed amount for deterrence. i think we've had ascended to impact with that. also just helping to design these programs. if i may, a great example is in that health program, the federal reserve program for lending asset-backed securities. when that program was first designed to was in early january of last year, it had virtually no protection whatsoever. it was going to rely only on the

rating agencies and inspector do diligence for those of the things that got us into this mess in the first place. i cannot get the federal reserve more credit in being willing to work with us. we issue our first report, of an entire team came down from york, and this program ultimately designed is a very safe program. that followed our recommendations, and did not but residential mortgage-backed securities into it even though they were going to prove that was one area where we had some degree of success. >> senator grassley. >> one of the tarp programs now ramping up that treasury is the public/private investment program. this is a $40 billion program and it is the only tarp program designed to buy toxic assets. i understand your office is investigating a potential conflict of interest involving this program and that the

investigation might include a wall street investment firm, black rock. as i understand it, they have a deal to work one maiden lane for the federal reserve bank of new york as the toxic assets analyst, wallace separate black rot company has a deal with treasury to participate in the public/private investment program to buy toxic assets. is there a conflict, and what can you tell this committee about the results of your investigation? i don't expect you to tell us anything that would violate any investigation you are doing or stolid. anything you can tell us i would appreciate it. >> there some particular gray areas here. on our audit side, we have a number of audits on the black rock role and it is an extensive role throughout this financial crisis prepare three different audits that touch on their role.

we're doing an audit with the petition -- the potential conflict of interest in one program. we're doing an audit on the citibank's asset guarantee program on which they also served in an fisa role. we are looking at the top, an audit on collateral monitors, they served in that role. and they have our role beyond just those programs with the federal reserve $1.25 trillion repurchase program, with respect to may ii and a i and laneii -- to maiden lane ii and maiden lane iii, and we expect to examine their role throughout the financial crisis. on the investigation side, we have a pending investigation