if they're evaluating someone for hamp, they cannot foreclose on that person. if they decide t person isn't eligible for hamp, they have to consider other alternatives, short sales. it's only after they've certified they've done all those things, you can proceed to the foreclosure. we've required the servicers to have a process for appealing the decision. we've also set up our own centers so people can come to us if they feel they've been wrongly denied. we will run a calculation to give them a view on that. we have an escalation center that deals with complaints. >> let me ask you this. would you agree wel never get to the bottom of this problem or figure out how to proactively deal with the foreclosure crisis if we don't examine the actions of mortgage servicers? >> i would agree, congressman, that we need to look at how this entire industry is functioning

or rather not functioning. i think there is a lot of work going on in that regard. obviously through hamp, which is a voluntary program, we cannot force a change on the entire industry, but we have learned a lot about what is -- >> mr. barofsky can examine it. >> yes, congressman. by the way, we do have an ongoing audit of the mortgage servicers. i will make sure my staff meets with your staff to make sure we have any concerns to incorporate. >> you have to communicate with the chair on that. is my time expiring or do i have 20 seconds more? >> the gentleman has 20 additional seconds. >> thank you. this is so important to my constituency, because cleveland, ohio has been an epicenter of the sub prime meltdown. people have lost everything they worked a lifetime for. when you get into a situation when they depend on hamp to try

to save their homes and the mortgage servicers have a subterfuge to defeat that, it's important we call them to an accounting. >> the chair recognizes the gentleman from florida. >> thank you, mr. chairman. i want to thank both of the witnesses for being here today. recognizing that we're in difficult times. there are lots of -- i'm sure -- let me say i'm sure it's not easy to sit there and take the questions, but there is a lot of frustration. i wanted to start off by saying this, that my observations so far is that what we're talking about is failed government regulations and programs, an today, what we're talking about, or some people are talking about is what other government programs can we add on top of that to try to makehe failed ones work as if though more

government regulation, more government programs is going to be the answer? i'll tell you, i've heard a couple people from ohio talk about ohio being the epicenter of foreclosures, i would welcome them to come down to fort myers, florida, to lehigh, to cape coral. i'll tell you what my stilts are telling me, they're telling me stop. we don't want more of this government kind of control. we don't want the idea that government is going to solve all of the problems. when a lot of people feel like government is part of the problem. so if you think about what's happened, government started to push people and mortgage companies into making loans and putting people into homes that maybe weren't fiscally able to do that, either the company or the individual. then when we have a crisis, we then turn to more government in

regulating. what you get is, instead of banks being able to lend, if you ta to community banks, they're afraid to lend, because exactly what mr. massad just -- you got to think about what you said earlier. you said that we need to incorporate some national standards. when these lenders hear that, what they hear is more punishment. what they hear is more changes are coming. we don't know what the ground rules are. we're afraid to lend. when you bail out the big banks, it disadvantages the small banks. when you talk about the costs of t.a.r.p. or these other bailout programs, what you're missing is

the cost of potential from other sectors. so you've got the big banks that you want to claim have, you know, done so well, i don't know that i see it that way, but it's been at the cost of the small banks. now what we're seeing is lenders do not want to lend because they're afraid of statements like, now we need national standards. so again, what i'm saying is stop. what i want to hear is not what's the next regulation, what's the next program, what's the next acronym that we're going to start talking about that is a failure because government can't do it, i want to hear from both of you, if you would, very specifically, what should we peal? what kind of repeals can we do that will help ignite borrowing and lending that is going to

help small businesses or that are gng to help families who are trying to put their lisgeth we're going to pass, i would like if both of you, mr. massad, start with you, if you could tell me, what do you think we ought to repeal? >> thank you, congressman, i'm happy to do that. first of all, my responsibility is the t.a.r.p. program. not a regulator, but what i would say is thi i'm trying to get the government out of e business of owning stakes in private companies, and telling private companies what to do. >> excuse me real quick, when you say we need national standards, think about what you said and think about what people back home, think about the small banks, think about the people who are trying to make it every day, what they've heard is the rules of the game are going to change again. now you are saying we need national standards. >> i was referri to national servicing standards for the

servicing of mortgages, which we already have some. you know, this business is mostly dominated by the big banks. the small banks really ar't in it. >> yeah, because they can't compete because government has sided one over the other. >> i think the -- >> if you come down to southwest florida, the community banks are so important to housing, but they've been pushed out because government has come in and bailed out the big banks. they can't compete. >> congressman, i agree small banks are very important. that's why we funded so many of them under t.a.r.p. again, that was something we had to do. i don't think it was a good thing for the government to have to do that but we had to do it. that's why we're trying to get out of itsoquickly. in terms of your comment on failed government programs, i think all we're trying to do is say we still are in the midst of a very terrible housing crisis that is a drag on our economic recovery. >> if i could, i'm sorry.

>> the gentleman's time has exred. >> if i could ask -- >> i would ask unanimous consents for o additional minute. >> i would say this to the chrman, if you would submit to this committee for us, please, in writing, specific things that we can repeal that's going to help, instead of submitting to this committee what other regulations and programs that we ought to be performing, i would like to hear what you think we ought to repeal. thank you, mr. chairman. >> if the gentleman would yield his remaining time. >> yes. >> as long as we're doing ask mr. massad, wou you commit before the next quarterly special ig comes out, produce an estimate of how many loan modifications you expect hamp to produce, as well as a source of material to the special ig or in the alternative, make available to mr.barofsky the source material so he can bring us an

assessment? >> yes, sir. i would be happy to do that. we've been working on that. i think a lot of that data is out there. >> we sure appreciate that. the chair recognizes the gentleman from massachuses, mr. lynch, for five minutes. >> thank chair now recognizes lynch for five minutes. >> thank you, mr. chairman. mr. barofsky, mr. massad, thank you both for your great work and thank you for your service to our country. mr. barofsky, i'm more filiar with your work, especially, so, sir, the work that you've been doing. i want to take half a minute to really correct some of the revisionist history here on t.a.r.p. i voted against t.a.r.p. and when it came before the financial services committee and before this congress, the stated legislative goal of t.a.r.p. was to help main street, to help main street, the troubled asset relief program. and when we asked secretary

paulson at the time, just before the vote, we said -- actually, i think it was the ranking member of financial services said, why don't you just take money and stuff it into the banks? the $700 billion that you wanted? and mr. paulisson siaid, no, we not going to do that. and then ten days after t.a.r.p. passed, they did exactly that. they injected all that money into the banks. this was the bank shareholder relief program. and for people now to say, eah, this is exactly what we voted for, this is not what we voted for. we voted to increase lending. that was the goal of the congress when t.a.r.p. was put on the floor. and many of us saw the failings of that. and to now say, oh, yeah, we suppted t.a.r.p. for all the right reasons, i think you have to accept the fact that t.a.r.p. stuffed basically $700 billion

worth of taxpayer money into big banks, helping out these shareholders. we paid 100 cents on the dollar to goldman sachs because we pumped $14 billion into aig. it was a pass-through. it went right to goldman sachs. 100 cents on the dollar on credit default swaps that shouldn't have been worth half that. we also passed through hundreds of millions of dollars to aig fp employees who mispriced this risk as part of t.a.r.p. they got paid off. they got bonuses from taxpayer money. how you can take credit for that and say that that was a good thing. and it was never a question of, i know people said, well, if we did nothing -- well, we wouldn't have done nothing. we would have done something different. and i think there are a lot of weaknesses in this t.a.r.p. program. i think mr. barofsky, you've drilled down and got to many of them. but i want to take my last

couple of minutes to talk about the service industry, because so much of the servicing industry is mentioned in this report. and i think it's spot-on. i want to just talk about -- i'll just list all the investigations that are going on right now with the services. and we're not going after them in a meaningful way. i don't think treasury is. on october 13th, 2010, the attorn general of all 50 states announced the joint investigation to whether some of the nation's largest financial institutions are using flawed and forged documents to execute wrongful foreclosures. the federal reserve and the fdic and the office of the comptroller of the currency are now investigating whether systemic weaknesses in the industry are leading to improper foreclosures. on january 7th, 2011, the supreme judicial court in my own state of massachusetts voted home citizens, because the folks who were foreclosing couldn't actually prove they owned the mortgages. the united states trustee

program has a similar program. the attorneys generals of arizona and nevada doing the same thing. the justice department. what are we doing about the services, how are we going to clean up this city and correct these problems if we're not going right after the services? that seems to be where the problem lies. >> i'm happy to respond to that, congressman. >> please. >> thank you for the question. you've referred to the activity that is going on by a variety of federal agencies and it's under the auspices of an interagency task force that treasury cochairs. so that is very important work and i think we will see some results of those investigations and i think it will help us figure out what types of reforms are needed, and potentially some of those tngs will be coming before the congress. let me just also, though, respond -- i appreciate the fact that because this program was first announced as a means to purchase troubled assets, and

then it became a program where at least, initially, what secretary paulson did under the bush administration was to invest money in banks, people, were critical of that. and all i would say to that is a couple of things. one, under the circumstances, we had to make that change. there wasn't time to do the troubled asset purchase as it was originally contemplated. number two, we didn't do $700 billion, we actually spent for a less than that. >> $534 billion. >> we -- >> $534 billion. if you want an exact number that went directly to the banks. >> congressman, if i may -- >> if you would summarize your answer, please. >> sure. about $250 billion went to banks and most of that has been recovered and we will make a profit on those investments. >> thank you, gentleman. the chair now recognizes the gentleman from pennsylvania, mr. kelly for fi mutes.

>> thank you, mr. chairman. mr. massad, in your opening comments, you made a reference to the automobile industry, of which i am a part of. i'm a car dealer in a small business. so while people talk about small business and their view of it from 40,000 feet, i'm actually on the ground. i can tell you this. the small business loan is not working. the most banks cannot operate out of fear. the regulations that have been posed on these people makes it impossible to get access to these funds. now, why do i say that? because i go through it every day. not only myself, but also the people i'm in business with. and while i'm an elected official today, in my real life, i'm a small business owner. i can tell you, with someone who has all the skin in the game, every day, i would suggest to you that while we go on with these programs and we live in this wondeul world of acronyms that really make sense inside this beltway, in real america, it makes absolutely no sense to everybody. and these loans simply are not available.

so while we talk about that money that's available to help us survive, the reality of it is that it not available to us. now, what's changed? it's the rules. to me, too big to fail means that i'm too small to survive. most of the banks that i do business with are small banks. they are absolutely frozen with fear. the eregulations and the rules have put them in a situation whereas they cannot operate on a day-to-day basis. quarterly, the covenants change for me. and as we talk abt small business leading the way out of this economic mess we're in, i will tell you, it is the uncertainty that all of us face. and i'm not talking about big corporations, i am talking about main street america. i am talking about the average person. the guy that gets up every day and worries about it, not just during business hours, but seven days a week, 24 hours a day. my only question to you, sir, and i don't know what you can do about it, b there has to be some way that we can free up these funds to make it possible

for these people to survive. the people have lost faith in this system. >> congressman, that's a very good question and you raise a lot of important points. let me say a couple of things. one is that what we tried to do under t.a.r.p. w in part restart the credit markets that helped small businesses, the securitization markets on which a lot of them actually depend for loans. and i think we have succeeded there. there's still a lot of work to do to help small business. i agree with you 100%. small business has been hurt in this crisis. small banks have been hurt in this crisis, and they haven't fully recovered. the small business legislation that was passed last year, which set up not only the small business lending fund, but also another program where the states are trying to help small businesses directly, i think, goes -- you know, provides some help. it may not be enough. so i'm happy to explore with you further things that should be done in that regard, because i agree, it's a problem that needs attention, and i think the

treasury and the obama administration have tried to pay attention to that. >> and i appreciate your comments, but time is of the essence. and we really do not have -- we are that close to the ground right now. there's not a lot of free fall left. i appreciate you so much for being here and i yield back my time, mr. chairman. >> and the chair appreciates that. the chair now recognizes the gent gentlelady from washington, d.c., ms. norton, for five minutes. >> thank you, mr. chairman. as predicate to my question, i want to note an article from the abilene reporter news, describing what appears to be the republican approach to the meltdown of hmes. and i ask that this be placed into the record. >> without objection. >> mr. numberburger is the chairman of the association,

he's a former banker hills and he's ptty frank. he essentially says that the initiatives aimed at cushioning the blow have all failed. and so he says let the market take over. to quote him, markets aren't kind, but they're very efficient. should we go cold turkey and leave millions of homeowners out there to suffer the consequences? and i would like a short answer, becaus i have further questions. mr. massad, and mr. barofsky, who seems to just throw up his hands often. yes, mr. massad? >> thank you, congresswoman. no, i don't think we should just go cold tuey. that's why i would disagree with some of the comments that have been made, that because hamp has not achieved 3 million to 4 million modifications, that therefore we should end it. i don't think that makes sense. i think this program can still help a lot of people. i think it's constructed so that

we only use taxpayer funds prudently and wisely to the extent that we do help people. i think it's helping the right people. people who need -- let me go to mr. barofsky, then. >> i think it's an incredibly important -- you know, paerp was designed in part, just as much to help the wall street banks as to help struggling homeowners. that was part of the intent of the legislation. and i think treasury bears an important responsibility to fulfill that goal that congress set forth. >> so you don't think we should go cold turkey and just leave millions of borrowers out there? >> i would like to see -- >> to let the market do what the market always does? it does resolve all such as crises, one way or the other. >> i would like to see an incredible revamp of hamp, so it can achieve the goals that -- >> let's talk about that. because i'm essentially remedy oriented, and as i've seen in my own district how hamp has failed so many homeowners, people who

work hard for their homes, got caught up in a crisis not of their making, it does seem that the only way out of this is to take measures that protect both homeowners and investors. a recent "washington post" article, january 18th, as a matter of fact, suggested that the incentive structure for services is greatly misaligned. let me just quote that. udies have shown that foreclosure is often more profitable for a company known as a mortgage servicer that collects the monthly payments on mortgages and passes them on to investors who own the mortgages. how it is often not the best path for borrowers who lose their home or investors or investors who lose money. mr. massad, is it true that mortgage servicers often have a

financial incentive to foreclose on distressed borrowers, and at times of that program, your program actually gives them a financial disincentive to work with borrowers, and what are you doing about it? >> well, what we're trying to do is give them an incentive to keep people in their homes. and i think that the structure of the program has worked in that regard. and that's why, also, it has been emulated by the industry. you know, before this program was started, we had two years of this crisis. nothing was done. >> why is fhfa considering an entirely new compensation structure if this one is so fine and dandy? >> no, no, let me make sure i'm clear. i agree with what the fhfa is doing. and treasury has supported that. they are looking at the basic siness model of the servicers. because it doesn't work. it is broken. it doesn't create the right

incentives. hamp because also trying to change those incentives with respect to the loans we could fect. and that is, i've said, a limited pool. it's not the entire industry. but one thing that has -- >> do you think the fhfa measures would have a meaningful impact? >> well, i certainly hope so, congresswoman. what they're doing is saying, look, we need to re-examine how servicers are compensated. because what's happened is, they're overcompensated for loans that are performing, but when it comes to the underperforming loans, they're not set up to deal with people, to resolve -- >> mr. massad, if this is not a win-win, it's not going to work. if it's a win-lose, and it appears often to be just that, then we're going to be stuck and that's where the borrowers and the homeowners are stuck. >> well, that's right, congresswoman, and that's why i've said wing there needs to be a lot of attention paid as to how this industry has failed us in a lot of ways. we've seen a lot of problems coming out of this crisis.

>> and how your incentive structure has failed. >> the gentlewoman's time has expired. the and chair would note we're expecting two votes at approximately 11:10. we'll work for about one more question after the vote is called. we'll leave, we will return, and as soon as there are two people on the dias, we will begin questioning again, as to be respectful of your time. the gentleman may continue. >> thank you, mr. chairman, and mr. barofsky and mr. massad to be here and appear in front of us. i had the dubious distinction to vote on t.a.r.p., to vote against it, i think for all the right reasons. i had the dubious distinction to be foreclose upon in my election. and for the last two years, to hear the response of people that finally awakened to the fact that yes, there was a problem,

yes, there was a significant concern, yes, there was a meltdown that was taking place. but frankly, their opinion was that it wa th wrong approach to take, and it seems to have borne out. mr. massad, i would ask you, and i hope this hasn't been asked while i was away, but what are the plans for the obligated t.a.r.p. funds that have not yet been spent? >> the only funds that have not yet been spend are those for the housing programs and let me just note, it's not $70 billion for hamp, our portion of hamp, there is a gse porti, our portion of hamp is 29. we've done a number of other housing rograms. so there's $45 billion allocated for a variety of housing programs. there's still a very small amount that's committed for the public/private investment partnership. basically, we're no longer making new commitments. we're no longer doing new programs. our focus now is getting the money back, and we've gotten, as i say, a lot of it back, and i expect we will get a lot more of

it back, and essentially all the program programs leaving aside the housing programs, all the programs considered as a whole, will result in a very little cost or essentially even a profit, because we will get all the funds back. >> can you make a blanket committee here today that those unobligated funds will not be spent? >> congressman, i can make a blanket commitment to you that we will make no further commitment of funds. we do not have that authority. but let me make clear, there are funds that are obligated that may be spent. there are no funds that are unobligated. we will not make any further obligation of funds. >> but you will not spend them? unobligated? >> unobligated funds we will not spend. but i want to make sure we're communicating. we no longer have authority to make obligations. i can't make new commitments of funds. i will not, therefore, make new commitments of funds. we do have some funds that have been committed but not spent.

and those, you know, we expect at least some of those will be ent. not necessarily all of them. >> thank you. mr. barofsky, on page six of the sigtarp report, in referencing, in comparing recipients of the federal assistance to fannie and freddie, you make this statement -- in many ways t.a.r.p. has helped to mix the same toxic cocktail of implicit guarantees and distorted incentives that led to disastrous consequences for the government-sponsored entities. based upon that statement, how are big banks who receive t.a.r.p. money similar to those tities? >> well, two of the bi characteristics of what happened with the lead up of the conservatorship of fannie and freddie was,one, the ilicit guarantee they received that they had a government backstop.

and one of the legacy results of t.a.r.p. is that the market still believes that the united states government is backstopping the largest too big to fail institutions. and that causes ahole range of problems. it hurts market discipline, counterparties, creditors, investors, they don't do the due diligence that's necessary when evaluating whether to do business with one of these banks or investing in one of these bank because they believe that any type of risk they'll take will be backstopped by uncle sam and the taxpayer. that gives them an advantage. it gives them the opportunity to borrow money more cheaply. s&p recently announced their attempting to change the ratin system to make it a permanent aspect that the too big to fail banks will have higher ratings based on implicit government guarantee. and they say the notwithstanding dodd/frank and other countries' response to the financial crisis. this is a market distortion. and as a result, the executives of those banks get back into the

position where it's, heads i win, tails, the taxpayer bails me out. >> what recommendations might you suggest to go away from that moral hazard? >> i think we are wher we are. and what we have is dodd/frank and the fstock and the committee that's providing oversight. and it does have a lot of tools. they need to have bo the regulatory will and the political will to rein in the size of these banks. they have to do tw things, which are going to be remarkably difficult. and secretary geithner, to his credit, was remarkably candid with us about the limitions about what they're going to be able to do. but first of all, they have to have a system where they can credibly resolve large fincial institutions without bailing out the shareholders, the creditors, the executives. second, which is probably just as important, they have to convince the markets that that's actually going to happen. was if they don't convince the markets, if they don't have the credibility that they will not be bailing out institutions going into the future, it almost won't matter otherwise, because, again, those incentives will

still be warped. that disciplinwill still be gone, and those risks where with the idea that the taxpayer will bail out the executives, the shareholders, the counterparties will continue a perversion of the system. >> thank you. in the parent world, we call that tough love. thank you. >> i thank the gentleman. the chair asks unanimous consent that a statement for the record submitted by the american bankers association be inserted at this time without objection. the chair now recognizes the gentleman from missouri, mr. clay, for five minutes. >> thank you, mr. chairman, and thank you for holding this meeting. mr. barofsky, i understand that you have the oversight authority to investigate mortgage service provided. i wanted to discuss on one specific example of a horrendous abuse against our active duty service member. according to an nbc news report of january 17th, jpmorgan chase and compa admitted at they

overcharged thousands of active duty military families millions of dollars on their mortgages. they also improperly foreclosed on some of these families. they weren't supposed to do that, because we passed a service member civil relief act, specifically to protect military families from higher interest rates and foreclosure action. we recognize the importance of those families' service to our country. mr. massad, have you seen this report? >> i have, sir. >> what can these families do other than seek redress from the company? >> congressman, i'll be happy to look into that. that's really outside of my jurisdiction. but it was a very troubling report, i agree. and i'd be happy to get back to you or get the appropriate officials to get back to you. >> well, and i'mlad to learn that jpmorgan has acknowledged their errors and is working with the families to try to make

things right, starting by paying them back $2 million in overcharges, interest. but this story makes me worry for a different reason. the victims in this case complain that the industry servicer in this case harassed them endlessly, refused to acknowledge legitimate documentation when they prented it, and essentially made their lives miseble. all without any basis to do so. and now i assume that banks don't have one collection agency, just for military serve members, and another one for everyone else. mr. barofsky, have you seen similar abuses of this kind, where the banks and their collection agencies harass people without any justification? >> we have. you know, we operate the sigtarp hotline, where we've collected more than 24,000 contacts since our inception. and a lot of them are complaints

from homeowners dealing with mortgage servicers, absolutely. and when we see those, we try to direct them to the right place. if there's an allegation of criminal activity and it relates to the hamp program, we'll take it. if it's criminal activity that's outside of our law enforcement jurisdiction, we'll refer it out. we'll refer it to treasury, if it's appropriate. if there's some degreef -- thing that they can do. and we also collect them for our review and for our audit function. >> how about the rule abusive servi servicers? can they be removed from the program? >> i'm sorry? can they be removed from our program? from the hamp program? >> yeah. >> they could be. again, you know, because there are some servicers that cover a lot of the market, and if we were simply to kick them out of the program, then we wouldn't be able to reach the people we'd like to reach. so that's why our focus has been to try to, you know, improve the practices as much as we can. let me just say, you know, we

will continue to be aggressive in this. we're in the large servicer shops, you know, all the time, and we'll continue to work with sigtarp on practical cotructions -- practical suggestions on how to get the servicers t do a better job, because we agree that they need to do a better job. >> but if they are totally ignoring the homeowner and ignoring the documentation, then -- >> sure. i wouldn't say they're -- if i may, congressman, i wouldn't say they're totally ignoring the homeowner, at least with respect to our program. i think with respect to our program, we've gotten them to pay attention. they've come a long way. when we started this, they said, we can't do this, they said, we're not ready, and we said, you've got to get ready. while we haven't achieved as many modifications as we'd like, i admit tha i've always admitted that, but nevertheless, we're making some progress. we're still getting about 30,000 new families helped a month. that's important.

it's not enough, but it's important. >> could either one of the witnesses supply us with the breakdown of state by state modifications? >> yes, we can certainly do that. we can do that for our program, congressman. we do produce a lot of statistics and metrics on our program, but that only covers our program. there, frankly, aren't a lot of statistics on the rest of the industry in that regard. >> okay. and of special interest to me would, of course, be on missouri. >> certainly. >> okay. i thank you, i thank the witnesses, and i yield back. >> i thank the gentleman. our last for this round before we go to votes will be the gentleman from arizona, mr. gosar. >> thank you. being from arizona and hearing of the discussion in regards to florida and ohio, i have to say that rizona, which we thought was a leveling of our problems with the housing, is now all of a sudden showing some signs of double dipping. so this is very troubling.

and being from a very poor community from the district, we see homeowners on the very urge -- or the very brink of catastrophe. my question to you, first, mr. massad is, doesn't the lower cost of borrowing that results from the implicit government guarantee parally explain the banks' ability to pay back t.a.r.p.? >> yes. it's probably a factor, but i think a more important factor was the process that we implemented of the stress test. because what we did was we put the largest banks through a very intensive stress test, because the market didn't have confidence as to which institutions might fail and how much capital they needed. so in the spring of 2009, we implemented the stress test process. and we made the results and the whole process very transparent. and as a result of that, they were able to raise private capital and we were able to get the government out. >> so in a follow-up question,

so the success depends on that implicit guarantee? >> no, i don't think i said that. what i'm saying is that we got out of the banks' investments, we got the money back through this stress test and recapital station process. i think if i may, i think the thrust of your question, it really relates to some of the concerns mr. barofsky has raised on too big to fail and moral hazard. and those are very legitimate concerns, and this congress obviously debated them at length when it passed the dodd/frank legislation. we're still implementing that. i think mr. barofsky is raising his views on that, that, in effect, it sounds like what he's saying is that dodd/frank may not have been strongnough or may not be strong enough. maybe we should break up some of these banks. maybe we should take more aggressive action. that's certainly an opinion. you know, and others have voiced that opinion. my own view is, let's give dodd/frank some time to work, because now we do have a lot of tools that we didn't have, so i think it's premature to say, to

pass judgment on dodd/frank. it was really the first overhaul of our financial system in many years, and it was, you know, it was necessary, or, rather, t.a.r.p. was necessary, because we didn't have the tools that dodd/frank provided. >> mr. barofsky, how would you feel or would you differ in that opinion? >> yeah, i don't think that mr. massad has correctly characterized my position, to put it mildly. the answer to your question, though, is, yes. the implicit guarantee absolutely enabled those banks to get out of t.a.r.p. on the terms that they did. because though banks enjoy enhanced credit ratings from the ratings agency, part of the conditions that the federal reserve put was to get out of narcotics and raise capital. and the larger banks can raise capital more efficiently and cheaply because of this implicit guarantee, because of the benefits they have. so, in short, the answer to your question is yes. >> thank you.

i yield back the balance of my time. >> thank you, mr. gosar. and i am instructed that we are about to be called to some votes. so i'm very, very grateful, both mr. massad and mr. barofsky for your attendance to this point. i know there are, if you can give us the indulgence, as soon as we conclude the votes, i know there are some members who would like to continue with some questioning. so the committee stands in recess. thank you.

[no audio] >> the meeting comes to order. >> thank you >> thanks to the witnesses for continuing to be with us here today. mr. massad, i looked at something that had been different than had been talked about today. a review of the most recent report, the issue of the extent to where we caliber as asian -- three caliber as asian -- recalibarization, and coming to you for recapitalization. some of them are looking at a difficult issues and coming to you for recapitalization.

they are making application. what is your policy with respect to when you get that notification, sharing it with others? >> congressman, thank you for the question. you raise an important issue. first of all, we do not ever provide additional funds. i want to make that very clear. secondly, our job with respect to those investments is to get as much money back as we can. we still have investments in about 560 banks. there are a few of those situations where banks have had trouble and had come to us because they are trying to attract private capital, and they asked us to modify our investment, and we have been agreed in a small handful of situations. in citigroup, we agree to convert from preferred stock to common stock. that one turned out very well where we will realize a $12

billion profit on our overall investment. others will be very small, but we do try to work with the banks. we have a whole process of monitoring our investments and these banks. occasionally, because the bank is troubled, the choice for us is not doing anything and losing our entire investment. the question is always, can we agree to some terms that help them attract new capital and therefore realize as much as we can? >> there is one of the issues that struck my interest. part of your participation with them is creating an awareness among others, and to some extent, a sign of good approval, taking other private investors to help with that bank. one of the things that concerned me in the report was the suggestion that

simultaneously, some of these banks may be having trouble for a variety of reasons, including they may be looked at for fraudulent activities. what timing has been your policy to report that to the ig, who may as you saw 24,000 reports from people? as a prosecutor i saw the whistleblowers being to keep things to us. they have the information. what are you doing to ensure that they are not activities that simultaneously they are under activity -- investigation for fraud and activity? >> we cooperate fully with sigtarp when they tell us there are investigating someone and we give them all that information. i know that in their core report, mr. barofsky has raised

the question of whether treasury should notify sigtarp when at some point in the process, and that is our recommendation we are looking at. we have from time to time do that -- done that. >> are you asking that sigtarp say to you when they have someone under investigation? >> no, we're not asking that. >> i am trying to understand. i am just trying to understand the timing here. that is the concern i have. they may be sitting on information, investigative information, and that could be contrary to your interest. i know my time is going to run out so i'm going ask you, mr. barofsky, if you could jump in at the conclusion of this, after ms. massad tells me, what do you need with respect to the ability to have timely notification that you may have a matter under investigation while simultaneously treasury is encouraging people to invest in that bank?

>> it is a very sensitive question. a lot of complexities to it, actually. you have touched on many of them. and we thought about this about the sec investigating the bank, or the justice department? should that knowledge be knowledge that we have, what do we do? their complexities that we're looking at in talking with mr. barofsky's staff as well as the other staffs and i would be happy to get back with you. >> i don't think there is a great deal of complexity with respect to sigtarp. they used to give us a heads up before that would do capitalizations, before they were publicly announced, which would give us an opportunity to communicate with the there is an

issue. we've now made a formal recommendation that that process be implemented and also that with respect of giving money in the other programs in which part banks have the opportunity to be capitalized in the small business lending program, the last thing we want to do is pour more money into an ongoing fraud. one was colonial bank which they had additional approval for tarp money and treasury did a remarkably great job working with us to make sure that money did not go out the door and we want the opportunity to repeat that success. >> mr. chairman, one more question? if there was a policy where in the past they were and they are not now, what is different? why did that change midstream? >> congressman, there was an informal policy. we had very few of these before. we did notify sigtarp and we are looking at what should the formal policy be. we have to be sensitive to the fact that if a law enforcement

officials shares information with us, we have to protect the confidentiality of that information, what position that puts a sen. -- put us in. as i say, there are some complexities to this. i would be happy to meet with you and your staff to discuss it further. we are getting a very serious thought. >> i think the gentleman. we now recognize the gentleman from virginia, mr. connolly, 45 minutes. >> good timing. >> the best. >> thank you for appearing before the committee today. mr. massad, did the bush administration make a mistake in creating the tarp program? >> no, i do not think so, congressman. i think it was unfortunate that we had to create tarp. we did not have the tools to otherwise deal with this crisis. but they were right to take the action that they took. i am proud of those members of

congress on both sides of the aisle who stood up and supported it. i think we needed it. again, it is unfortunate that we had to do it but i do not think we have much choice. >> at the time, mr. massad, bush secretary of the treasury, mr. paulson, were there not calls and then subsequently for the nationalization of the banking system in the united states? >> yes, there were. >> did tarp offer a market- driven private-sector alternatives to those calls? >> yes, i believe it did. >> despite the rhetoric about big government takeover, actually, would it be fair to say, mr. massad, that tarp represented precisely the opposite? >> i agree, congressman. >> and there were many concerns, and mr. barofsky, you

can comment, that tarp would be this endless sucking sound that would suck up tax dollars and inflate the federal deficit enormously. is that what happened in the tarp program? >> no, it is one of the areas where tarp has exceeded is in the declining aspects of the financial cost of the program. >> what is the cause currently of the 700 billion originally allocated to tarp? >> it at -- it depends on the u.s.. -- it depends on who you ask. treasuries most recent estimate is in $50 billion. omb has a higher estimate, but it is stated in may of 2010. i anticipate that number will come down as well.

>> but the nonpartisan congressional budget office, of which this institution has historically relied, except recently when we apparently do not like their numbers, says $25 billion? >> and the reason for the big difference between there and dressers number is that cbo does not believe that treasury will pay them a fraction of the amount that it is allocated. >> are there still warrants and stocks yet to be sold that could improve that net estimate of $25 billion? >> i am assuming that when cbo does its estimate, it considers those factors. >> but everything is on timing. >> of course, the markets could improve, at the markets could go down market worse. >> ok. you mentioned the hamp program. i seem to recall this committee having a hearing last year, and at that time, my friends and the other side of the doubt criticize the program which

they opposed. but they nonetheless says -- nonetheless criticized because it only helps 167,000 americans. do i understand that number is now 500,000? >> yes, that is correct, congressman. that is the direct permanent modifications. >> set this failing program has managed to help americans. >> it is the little train that could. >> at that hearing, we had testimony from banks, and maybe mr. massad, you are aware of this testimony, those bankers said that even the number at that time was reported to be understated, they agreed to the program positively because a lot of the banks had a standard that they could follow. >> that is absolutely right, congressman.

before we started, the servicers were not doing modifications. to the extent modifications were done, they often raise people's pavements. when hamp came in, it provided some standards for the services to emulate in their proprietary programs. fannie mae and freddie mac also adopted some of our standards in their mortgages. so the indirect effect has been quite great. at the same time people talk about the numbers of foreclosures and so forth, if you look at the total number of modifications it into since april 2009, either under hamp or under other programs, it does outpace foreclosure sales -- completions if you will -- two to one. it is not enough. i'm always the first to say that we do not do enough. but we are making this crisis better. >> i think the gentlemen and my time is up.

>> the chair now recognizes the gentleman from oklahoma, mr. langford, 45 minutes. -- for five minutes. >> i have a few questions. thank you for allowing us to step out to vote and then step back again. mr. massad, i am aware of some of the limitations dodd-frank placed on tarp. is treasury willing to assure us today that there is no plan and no intention that any tarp funds will be used for state pension bailouts for for state government bailouts based on the limitations of what can be used in tarp? >> yes, sir. to get terrific. on page one of your report, paragraph four, it detail some of the numbers. $410 billion disbursed to date, we are perceived by to under $70 billion. approximately -- $270 billion. if i am reading those numbers, we're missing $9 billion. could you submit to was a

written update on that, how that fits in there? >> i would be happy to do that. i do not believe it is by billion dollars but i would be happy to do that. >> those numbers when you add them together, and the third thing is on the auto industry financing program, what is the plan at this point? you break a separate statement on that. we've gone from 61% ownership in stockton up 33% ownership. that is great progress. what is the plan to take this down to 0%? >> we are actively working on that. i want to be careful because of the securities laws, i cannot be definitive about a timetable. but now that we have completed the initial public offering of gm, we do have a pathway to sell the rest of our shares. i would expect we would sell all of those -- hopefully within the next two years, market conditions permitting. with respect to our other

investments in chrysler and others, we're working toward initial public offerings for other institutions. >> by this date certain, we're going to be out? is there some plan to stick by this date certain ". >> we have not done that because we have to be sensitive to a couple of things. one is market conditions and also in the case of the company's not yet public, they have to be ready to go public. we cannot force them to do that. we're trying to get out of these investments as quickly as possible. i firmly believe that our purpose, to promote financial stability, is best served today by getting government out of the business of the punning interest in private companies. >> i would definitely concur on that. his treasury still day-to-day in the operations? is it helping advise? >> we monitor those investments

but we have never participated in the day-to-day management. we made it clear that we will not do so and that is an appropriate role for the u.s. government. >> i will agree on that as well. mr. barofsky's report details $59.7 billion available, sitting out there. i am sure that number may move around some based on the day- to-day operations. many funds have been returned. what is the plan for that? >> on the investment side, we're trying to get out as quickly as possible. i cannot give you a timetable, but with respect to the remaining investment, roughly $170 billion, we will get most of that back in the next two years, although there will be some portion we cannot get back

within that timeframe. we are winding down the operation. we are trying to get out as fast as we can. >> would it help to have a legislative solution on this to set a timetable to save the american people need reassurances that 20 years from now -- >> i do not think a legislative solution would be helpful. that could depress the value that we could get for the investments that we have. believe me, i don't intend to be here 20 years from now. in one last quick question. the report details the five largest banks now control about 60% of gross national product. obviously we have the heavy interest in the largest bank. you're talking about how the small and medium banks are assisted. but the bigger banks have grown bigger and they seem to be more systemic risks. >> there have been increased concentrates in our financial

system as a result of this prices. -- concentration in the financial system as a result of this crisis. but the question is whether to concentrated? it is one that congress can take up. mr. barofsky has noted that this is an issue that the congress may wish to consider. what we have right now under dodd-frank r. tools to regulate that. some people have suggested nationalizing bank, breaking them up, and that is obviously a policy option that the congress can consider. today it seems that we ever preference for the largest banks in this structure. i understand my time has expired. >> i thank the gentleman. we recognize mr. walsh for five minutes. >> thank you for coming in. it has been a long morning. let me be very brief and asked two broad, macro-level questions from each of you. like a lot of my colleagues, i hear from community banks

everyday who are struggling. like a lot of my colleagues, i hear from community banks every day who resent the fact that it seems like tarp, that government sided with the big banks. broad question. why are these community banks struggling? what is your biggest concern that you have got right now for our committee bags? >> that is a very good question. a lot of the smaller banks to have loan portfolios that are more heavily weighted in the real estate sector and therefore they have been hurt by that. they did not have access to capital as easily as big banks. those are very real concerns. we tried with the park program to address some of that. essentially when you look at the money invested in banks, about $250 billion overall tarp has invested, most of that -- to win the $34 billion or that

amount, was done among -- done under the bush administration. i agree with the actions that they took, but they did that, sending it to the largest institutions and the pitcher. when obama came in, we have only invested another $11 billion in banks. a lot of that went to the smaller institutions and we set up as much a program to help them. many of them are still struggling. we're trying our best to get the economy back and getting an economic recovery, it get the housing market stabilized. those of the best things we can do for this by. >> why this persistent struggle with the community banks? >> part of it as mr. massad pointed out, the structure. a large part of that is also this continuing existence of too big to fail. it gives an inherent advantage to the larger banks. their reason why the smaller banks do not have access to capital is the largest banks. they do not have the access to

the freed money from the federal reserve that the larger banks have. what has been the result of tarp and related programs is giving the opportunities to the largest banks to earn their way out of trouble. those opportunities are not available for small and community banks. >> that leads me to my second question. offer one broad " level country -- broad level critique of tarp. if you are to each offer one broad critique of tarp, what would it be? >> if we had to do this all over again, and i am assuming we will not have to, there are a lot of things we could change or would change, congressman. it is hard to be specific. there are certain things in the housing program that we did later that we might of done earlier. i agree with a comment made earlier that it was proposed as a troubled asset and then the bush administration wisely

changed course because i think they had to. but that obviously contributed some of the criticism. it seems that there are many others that we would do over. but hopefully now under dodd- frank, we have the tools that will make this sort of thing and necessary in the future. >> 1 overall critique, mr. barofsky. >> what could have been done better was better transparency for the treasury department. from day one, this has been a recurring theme of our criticism, and we have been very bipartisan and our criticism for both the paulson treasury department as well as the secretary geithner's treasury department. explain this better to the american people, being more upfront and honest about the problem, saying that the first nine institutions were by a bill -- by evelyn help they when we knew well that they were not.

-- were a viable and help the when we knew well that they were not. it is not to live in now with courage treasury to renew its efforts toward transparency. -- it is not too late and we encourage treasury to renew its efforts for transparency. you can be a more informed conversation, be a more informed debate. right now treasury posture running of this program is like picking winners and losers, back room deals. those criticisms, we would come out of these transparency to failures. >> if i could respond to that, i am fully committed to transparency and the particular suggestions that sigtarp has made in this regard. we have implemented them. i like to note, because often people are not aware of it, we

published annual financial statements which are audited and we received clean opinions on its financial statements on -- for two years without material weaknesses. that is a very rare thing for a startup. and that, it is a relatively rare thing in government. we publish a monthly report to congress that lays out exactly where the money is, how much as come back, the status of the program. if we publish the transaction report within two business days of completing it. we show how much dividend and interest payments we have gotten. we put all our contracts and agreements on our website. that means not only in the contract entered into with a financial institution, but also the procurement contracts, all the documents related to hamp, and any program we have as well as program guidelines and others materials. we have testified before congress numerous times. we meet, we have three oversight agencies, and we fully cooperate with them and give them all the affirmation that they need. they produce a total of 75 reports.

we can always strive to do more, but i think actually there is a lot of affirmation about these programs available. >> thank you both. thank you, mr. chairman. >> you are very welcome. if anyone -- having not had a first round, we will take them after we finish. we could have a brief second round for a couple people. i would go to the ranking -- the chairman of the subcommittee jurisdictions, mr. mcinerney, for his questions. >> thank you, mr. chairman. this is not been discussed greatly, but the moral hazard. -- created by tarp, mentioned in your report, mr. barofsky. it is certainly a big concern. mr. massad, s&p considers the

likelihood of government support explicitly in their credit rating. are you aware of that? is that a direct result of tarp? >> i would say it this way, congressman. i think because we did not have the tools to deal with this rescue, we had to do tarp. that does raise the moral hazard, too big to fail concerns that barofsky has mentioned. now congress has addressed as through dodd-frank we have not implemented dodd-frank yet, but it is not appropriate to blame it on tarp. rather, blame it on the fact that we did not have an adequate regulatory system and that is what we're trying to improve. >> i would like to call up the geithner slide, if i could. in a report on citi, it outlines very quickly, in the future we may have to do exceptional things again if we face a shot at large.

we do not know what is systemic and what is not until you know the nature of the shock. mr. barofsky come up was this post signing of the dodd-frank law? it seems that your testimony is counter to your boss's testimony. >> i do not think that it is. i think that what secretary geithner was referring to, and neither i nor mr. barofsky were in the room, but -- >> we have his words. >> and i have spoken to him about this. he was talking about the ability to use the tools are under dodd-frank to address this in the fact we do not know what the issue will be. the tools under dodd-frank are flexible. we will not have a set of immutable quantitative criteria that say, eat your above this amount of assets, it your too big to fail. >> my next slide is president obama said last night in the

state of the union, because of this law, there will be new rules to make clear that no firm is somehow protected -- the dodd-frank signing last year, i'm sorry. these new rules will make clear that no firm is somehow protected because it is too big to fail so that we do not have another aig. mr. barofsky, it seems as secretary geithner's words run counter to that. it is hard after the fat for his staff to say he did not really mean it. can you give us context for this course are jiddah a couple of things i want to make very clear. i was not in the room. i had six members of sigtarp including my deputy in the room. after receipt this quote, we documented it. we provided a draft report to treasury. we had a number of conversations and they made suggestions and we incorporated the suggestions. at the end of that process,

treasury assured us that they did not contest the lenders that was used and did not think that we presented any type of misleading or long contract. the quote is the quote, and we stand by it. i think that secretary geithner and the impression of the six people of the room was being transparent and candid. i commend them for that. by recognizing the reality that the market is today, the banks are to -- still too big to fail. if dodd-frank, and it is given the regulators many potential tools, and if they are implemented correctly, and that is a very big if, it would require actions by the rate the letters that frankly they did not seem capable of doing in the run-up to this questions -- this crisis. let's assume that they can. hopefully we can get to the point were the market will

believe that the government will not bail out these companies but we are not there. >> we know that s&p has made the idea of the bailout, a tar- like program, or dodd-frank, it is hard to judge based on s&p making permanent their analysis, for the fed to backstop the biggest firms. there is explicit guarantees signed four contracts in 2008 and 2009 for these financial institutions, where the fed, the fdic, or tarp, a backstop to get government guarantees of assets. we know that explicit number. right? so the question to both of you is, can you tell this committee what you believe the net present an iq of implicit

government guarantees are, going forward, to these financial institutions? >> we include one as a footnote reference in our report. we do not do that type of economic analysis. i think us all in the suggested, and please do not quote me on this, up $34 billion a year advantage at the larger institutions have because they have the better ability to raise debt more quickly than their rivals. that was one academic studies. there may be others. >> certainly, congressman, i do not have the ability to quantify that. but let me respond to your question. in terms of explicit guarantees, i think you're referring to the citigroup asset guarantee program which has now been terminated. >> that is not what i am referring to. at the time of the economic crisis, as has been well

documented, fdic, the fed, tarp, treasury has explicit guarantees through contracts that are publicly available -- i am asking about the implicit. those are well known and three documented. i am asking about the implicit guarantees. mr. barofsky, as he mentioned in his report -- >> the gentleman could conclude. >> the thrust of your concern is, happily address the too big to fail issues efficiently? my response to that is, congress passed the dodd-frank law to address that. arizona -- there is a view that that is not sufficient, that is a judgment for congress to make. but where we are now, where treasury is, is that we are actively trying to implement that law so that we can use the tools in gave us to make sure

that no institution is too big to fail. i think it is premature that it has not worked and we need some tougher legislation to address that. and i thank the gentleman. the chair now recognizes the ranking member. >> dodd-frank includes a number of provisions intended to eliminate the concept too big to fail. legislation is clear that taxpayers will not cover the cost of saving failing institutions and will not cover the cost of liquidating such an institution. further, the legislation also gives the federal reserve emergency landing authority. finally there is an oversight council to monitor systemic risk and to require non-bank financial companies that pose a risk to financial stability of the united states to submit to supervision by the federal reserve. can you describe briefly how

implementation of these measures will address the too big to fail problem, and what is the timeline for implementing the measures? >> congressman, i can describe that very generally. it is not my responsibility to implement but i am happy to get the appropriate officials of treasury to brief you. in july, but there is a number of rulemaking procedures and studies that are being conducted. fsoc holds regular meetings, and there is a part of that which is public, and they are busy working on this. they are also breeding the office of margin conditions in the financial industry and determine what risks need to be addressed. i would be happy to get to a more detailed briefing. >> and we will follow up with detailed questions. and if you can, how will criteria be established to allow us to identify firms that pose

systemic risk? i take it that you will do that in writing. >> i can do that. i consider very generally that had been announced, qualitative as well as quantitative judgment, and it is not just size. there is riskiness of activities, interconnectedness, extended leverage, supervision, so these matters are given a lot of thought. they are obviously very complex issues but i would be happy to get you a more detailed summary. >> thank you. let me say this. i think that both of you, we are all very concerned about hamp. mr. massad, we also are concerned about servicer behavior. i understand that you and sigtarp disagree on your authority a. -- authorities. would it take more aggressive steps to require servicer performance?

>> i don't think that we disagreed, but maybe there is a difference on how we can best improve the program. we talk regularly. but let me just say, and i want to make very clear, while we think the benefits of these housing programs are very real and very important, we're still trying to improve them, still trying to reach as many people as possible. and it is not just have. the statements about hamp, a lot of the money goes to the other programs as well. i think the key thing is that the statement was made that, well, because this has not gone as well as you had hoped, or because there are these problems, we should simply turn it all back over to the servicers and let them deal with them.

i think that what absolutely be the wrong thing to do. that is what got us here. it is clear not just from our hamp experience but from the foreclosure of irregularities issue and the number of other standpoints that turning it back over to servicers would not be constructed at this time to things. you talked about retooling. there things that you're doing to make it more efficient. i want you to give us a list of those things. when you expect them to be complete? i am running at a time, unfortunately. >> it is an ongoing process. when we see problems, we respond to them. some of the things we have recently done is address the fact that servicers might been considering someone for hamp at the same time they were for closing. we have addressed the fact that initially we started this program by trying to get a lot of people into trials, and we did not make the servitors

verify the income. that led to the fact that people did not get in the permanent trust. we have worked through the backlog and i would like to give you a list. >> i want to thank the chairman for this. he talked about making our agencies more accountable. if you are doing things that will improve this program, mr. chairman, i would ask that we would bring mr. massad someone from his agency back or someone with that level of authority at a certain date to give us a report as to where they stand. i think you have said it and we all agreed that we do want accountability. i do not want to see the program ended. but if you tell us you're doing things to improve the program, i want to know. i want to tell -- i want you to tell us when you can come back and give us more permission so we can have confidence. both sides of the aisle are quite frustrated, to be quite frank with the. -- you. >> happy to do that. >> if you will commit to give us monthly updates, next month, we

will commit to having back in your next quarterly report at the worst for both of you. -- of that works for both of you. >> that is fine. >> mr. chairman, i really appreciate that. i yield back. >> i think the gentleman. in closing, i have a couple of questions that can be answered for the record. they tend to be a little complex. today we have talked specifically about tarp. that was the subject. we got into hamp, and my understanding that hamp is shared with another piece of legislation. it has joint funds and we did not get into that $30 billion obligated, all of that. if you would, and mr. barofsky has a very thorough quarterly report, but if you would try to create before this next 30-day update a good analysis so that the members can have your interpretation of the outstanding funds, meaning -- and this is a question for

treasury in consultation with the fed -- obligated funds remaining at the fed, because we're not the financial services committee said you have to give us a primer -- looking at funds committed in other programs, because i think that will help us understand where the money is still out that is either obligated or literally out. and that will help us 30, 60, and 90 days from now. it is very clear that we do still have major credible agencies that believe too big to fail is leading them to having more success in loaning money at lower amounts. that is a challenge for small banks and we certainly would like to work as a committee to ensure that as dodd-frank put in no action, that leads to a fading away of that as the president has promised that the time of its signing.

we also did not talk about and i like this included in your report or briefing sheet, the possible $145 billion that i believe is gone forever to the gses, the actual failure rate, which is often as we talk about the success of tarp, but forget about ready and fanny's actual back -- losses that we have backstop as a nation. one thing you need to treasury, most of us here in washington who had been in business have tried to convert understanding the federal government's pay- as-you-go accounting. in treasury, you're different. you are a hybrid. as i looked through reports which i believe people have furnished you with, a report we and that -- we had developed internally, i saw the accrual system of reserves come into play in a way that as a public company officer, i always question.

ok, you had reserves. you had a stated value, of mark to market value. you went back and stated them, restated them in this year for the previous year, and they got worse. however in this year, they got some much better, there's this $154 billion swing. and we will give you our source material because it berry -- it may well be that you can clarify it to be more simple. it is important because as i understand it, those numbers reflect on the anticipated deficit and other figures that we look at, and i think all of us want to know the true deficit in 2009 and 2010, and so on. but we would like it not to exist. but we will like to have the accurate numbers for them. lastly, the request. today we have been talking in net dollars.

before talk again, i would like the committee to have source material that you agree on preferably in the way that a normal business would do it, meaning, you represent a profit from investments he made, loans you make, and warrants, etc., that have been realized. they did not go as an offset against other bad deals. we're not looking for your net profit. what we would like to see is where you put the money in and what you lost. where you put the money in and what you gain. effectively, what we're saying is scraped up the profits and put them in the pile for the good deals, but any time of particular passage -- a particular basket, a company or an entity, had a loss, we like to see those losses. when we evaluate this program that never did what we anticipated but that something very different, it is important for all of us to see, ok, loans to solvent entities in certain forms work.

other things, not so much. some of these you cannot answer because general motors and chrysler is our projected but not yet final. we will take to projections. lastly i like to take the liberty and closing of reading what is a draft but we believe will be the final mission statement, because as a private-sector guy, i figured at some point when you takeover, if you have to make sure you have a mission statement matching what you like to see. and because this is our first hearing, i like to read it. americans deserve to note that money washington takes from them is well spent. americans deserve an efficient, effective government that works for them. our job on the oversight and government reform committee is to help americans secure these rights. our task is to hold government accountable to taxpayers, because taxpayers have a right to know what they get from government.

we will work tirelessly in partnership with citizens, watchdogs, to deliver facts to the american people that bring reform to federal raucously. this is our mission statement. hopefully we began today by asking you as you have done to help us in that effort. i think you and we stand adjourned. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2011] in a few moments, the congressional budget office releases its outlook for the year, followed by reaction from democratic leaders of the set

and house budget committee. erick kanter outlines the economic principles he is sitting out for republican members. after that, president obama is in wisconsin to talk about the economy. tomorrow morning, we will discuss the president's call for more spending on infrastructure with matt kibbee. sewell chan will focus on the financiafindings of the financil condition. we will be joined by charles vest to discuss science and math education. "washington journal" is live every day at 7:00 a.m. eastern. >> this weekend, we will tour the home of social reformer and exclave frederick douglass.

texas a&m univ. jerry jones tells of the naval the policy of woodrow wilson. and a focus on daniel patrick moynihan whose career as a center spend four presidents. see the complete schedule online at c-span.org/history. you can have our schedules in mailed to you. >> the congressional budget office says the deficit this year will be $1.50 trillion with the national debt rising to $18 trillion in 10 years. president obama is expected to release his budget proposal next month. this briefing is one hour. >> the congressional budget office released the budget and economic outlook for fiscal years 2011 through 2021. you can find copies of the

document on our website at cbo.gov. our briefer is our director. he will give a brief comment and take your questions. if you would be kind enough to remember to identify yourselves buyer name and your news organization, we would appreciate that. thank you. >> the morning. -- good morning. as we say in our report, the u.s. faces daunting challenges. the economy has struggled to recover from the recent recession. the pace of growth and output has been anemic compared with that in past recoveries. the unemployment rate has remained high. federal budget deficits and debts have surged in the past few years. going to accommodation of a severe drop in economic activity, policies enacted in response to the financial crisis and recession, and an imbalance between revenues and spending

that predated the recession. unfortunately, it is likely that a return to normal economic conditions will take years. even after the economy is fully recovered, the return to sustainable budget conditions will require significant changes in tax and spending policies. let me discuss the economic outlook first and turned to the budget outlook. the economy will be below its potential for some time. we project that tbt will increase, reflecting continued strong growth and business investment. improvements in residential and investment and exports and increases in consumer spending. we have a long way to go on the of -- the employment front.

this slide is taken from the report itself. it can focus on the line in the center. payroll employment which declined by 7.3 million during the recent recession rose by 70,000 on net. between june 2009 and december 2010. the recovery and employment has been slowed but also by structural changes in the labour market.

the economy while at roughly 2.5 million jobs per year over the next six years similar to the average pace during the 1990's. even so, we expect the unemployment rate, shall in the next picture, will fall to only 9.3% in the fourth quarter of this year and 8.2% in the fourth quarter of 2012. only by 2016 in our forecast will the unemployment rate reached 5.3%. the cbo projects inflation will remain very low this year and next, reflecting a large amount of unused resources in the economy. it will average only 2.0% in 2012 and 2013. economic developments and the government response has have -- have had a big impact on the budget. we expect current laws to remain unchanged and the budget deficit will be $1.50 trillion or 9.8% of gdp. that would fall of deficits of 10% of gdp and 8.9% of gdp in the past two years, the two largest deficits since 1985. if current laws remain unchanged, as we assume for cb

0's baseline projections, we will drop markedly over the next few years. deficits would average three by 6% of gdp from 2012 to 2021, totaling nearly $7 trillion over that decade. that is the bottom line on that picture. debt held by the public will keep rising, reaching 77% of gdp in 2021. however, that projection is based on the assumption that tax and spending policies unfold as specified in current law. it understates the budget deficits that would occur if many policies currently in place where continued rather than allowed to expire when scheduled under current law. for example, suppose three major aspects of current policy work continued over the coming

decade. first, that the higher 2011 exemption amount for the alternative minimum tax. second, that the other major tax provisions in the recently enacted legislation were extended. rather than allowed to expire in 2013. third, that medicare's payment rates for physicians were held constant rather than dropping sharply as scheduled under current law. all the policies have been extended for one or two years. if they were extended permanently, deficits from 2012 to 2021 which average about 6% of gdp rather than the 3.6% in the baseline. the cumulative would total nearly $12 trillion. debt held by the public in 2021

would rise to almost 100%. -- debt held by the public in 2021 would rise to almost one under% of gdp, the highest level since 1946. -- 100% of gdp, the highest level since 1946. spending on social security and the government's mandatory health programs, medicare, medicaid, and insurance subsidies provided to exchanges, will increase to roughly 10% of gdp to about 16% over the next 25 years. to prevent that from becoming unsupportable, congress will have to restrain the growth

spending, raise revenues significantly above the historical share of gdp, where produce some combination of those approaches. the longer be necessary adjustments are delayed, the greater the negative consequences of the mounting debt, the more uncertain individuals and businesses will be about future policy, and the more drastic and the ultimate adjustments will need to be. however, changes of the magnitude that will ultimately be required would be disrupted. congress may wish to implement them gradually so as to avoid a negative impact of the economy, particularly as it recovers from the recession. to get families, businesses, and other levels of government to give -- to have time to adjust. allowing for gradual implementation would mean that remedying the fiscal imbalance would take longer and major policy changes will have to be enacted center. thank you. we are happy to take your questions.

>> i am from the associated press. in 2009, the recession, lower tax revenue helped fuel these large deficits. what is filling it now? -- what is fuelling it now? >> there are several factors that have kept the budget deficit from starting to improve in the way that economic news may suggest. the most important one is that the economy is recovering slowly. although output has been growing, it has not been growing at the rate one might have expected based on past experience in our company with these recessions. slow recovery is consistent with international recessions caused by financial crises. it has been a slow recovery by

our standards. the labor market in particular has been coming back slowly. incomes have been coming back slowly. it will take some time. it will take further recovery before we see the rebound in tax revenues. that comes with an expanded economy. one important difference in our current projection for 2011 relative to last august is the legislation enacted in december that pushed off for another two years many of the scheduled increases in tax rates. also, in particular, and limited a payroll tax cut that was not in place last year. that also is providing some boost to the economy, but means less revenue is being collected that would have been collected

otherwise. a third thing to emphasize is that there is an underlying dynamic affecting the government budget. spending on the large entitlement programs -- social kicks -- social security and medicare -- is moving up over time. on top of that, we have had a number of entitlement programs that focused on people in economic trouble -- unemployment insurance payments, food stamps, supplemental nutrition assistance programs -- they are laying out a lot of money right now because despite the improvement in the economy, many families remain short on income. it does the combination of the slow recovery and legislation keeping tax revenue from growing very rapidly with spending growth that is unusually slow because the economic conditions.

>> i am with the wall street journal. can you tell us about the interest payments? what is the impact of this on the index? >> we say in our report that interest payments in nominal dollar terms will more than triple over the coming decade. even relative to gross domestic product, will double. that is a consequence of both an increase in debt and increase in interest rates that we project. interest rates are very low right now by historical standards. we do not expect that to persist throughout the decade. in fact, our forecast calls for looking for them to begin to rise at the very end of this year into the following year. if one applies these higher

interest rates to the debt, the cost of servicing that debt becomes very large. our projection for interest payments over the next decade is more than $5 trillion. that is one of the consequences, of course, of accumulating debt. we have written a number of pieces over the past years. a few last year that talk about some of the consequences of rising debt. one, of course, is the traditional argument, at least to economists, that by directing savings into government borrowing rather than into productive capital, one is slowing down the growth of production capital and holding down future incomes relative to whatever might occur. we also talked about the more one has borrowed, the more one pace in interest.

that requires higher tax rates for any given path of debt the government suggest is unsustainable or inappropriate. the third problem we talked about is that as debt prices, it reduces the flexibility that the government has to respond to unexpected problems either -- unexpected problems. the more that one has, be less room the government has to respond to that. the fourth consequence we talked about of rising debt relates back to your question about interest payments. it is the rest of the fiscal crisis, by which investors lose confidence in the government's ability to balance its budget and the government loses its ability to borrow at a good interest rate.

as we said before it repeated in this report, there is no analytic basis for judging the tipping point or where it might be, but the risk does rise as debt rises. we think it will also rise to some extent as investor confidence in the global economy and global financial system rebounds. there will be more willingness on the part of investors to invest and not just in u.s. treasury securities. the more we have to borrow, the more important it is to borrow at reasonable interest rates. >> , the president last night proposed a five-year spending freeze. the republicans' proposed scaling back spending to 2008 levels. in the greater scheme of things, even if these proposals were enacted, what impact would

they have on this larger debt problem that you were describing? >> i am not sure what the proposals or that are on the table. non-defense spending is a well- defined budget category. you'll find it in our report. haleh security spending is not well defined. the money goes to a number of pre-existing budget functions or budget categories. specified find that in our table. many people can mean different things by it. if you look at -- we did an exercise of freezing and non- defense discretionary spending. apart from that, it goes to the homeland security appropriations committee.

if one friezes that for five years and then for us to grow again at the race we use in the baseline, but at the lower level -- this saves us about $400 billion over the decade. that is a large amount of money, the doubt, but it is also clearly less than 10% of baseline budget deficits that we project for the coming decade. only a few percent of the budget deficits that we project assuming the continued extension of those policies i extended -- i mentioned. i want to say, i do not think there is a single policy change that will eliminate the fiscal imbalance. i would not want my comments to be interpreted as "you cannot do it all, so it is not worth doing anything." as one can see in the work of

the fiscal commission appointed by the president and in the work of other groups that have offered their own proposals, addressing a problem of this magnitude requires a number of different pieces of policy working together. >> if yes? -- you look at what the impact on the deficit would be. what about the impact of the economic recovery at those cuts were made now? >> we have not studied that specific -- the economic effects specifically of any of these changes in appropriation. i could offer a few observations. the analysis we presented last january, we look at some changes in tax policy and some changes in spending policy. we looked at the effects of

increasing spending on infrastructure, increasing spending to state and local governments. when cannot roughly, not precisely, but roughly reversed the findings of those effects if thinking about the consequences of reducing spending of those sorts. i state roughly because those estimates are sensitive to economic conditions. it is not an all-time estimate. you can see some of the effect there. beyond that, we have a very large economy. gdp is about $15 trillion. that makes it hard to move for good and for real. that is one of the reasons that despite the large increases in spending a reduction in taxes over the past few years, the

economy has not let up words even though we think it has been supported by these actions. -- the economy has not leapt upwards even though we think it has been supported by these actions. the savings are fairly small and grow over time if we are talking about the defense budget. we are coming up the baseline at a slower rate and been turning up. with respect to the budget in 2012, it is single digit billions of dollars. in 2013, it is about $15 billion. the $400 billion, much of that number comes in the last half of the decade. i think what is important and was highlighted in my opening remarks, it is important in

judging the mass economic effect of the policies being considered -- partly the magnitude, partly the timing, and partly the specifics of the policy being undertaken. not every dollar of higher spending will lower taxes. it depends a lot on the nature of the policy. >> i am from the washington post. your new deficit projection for 2011 is about half a trillion dollars a bigger than he suggested in august. is it fair to say given that you are putting the tax bill at about $400 billion that the tax bill is largely responsible for changing your trajectory? >> yes, that is right. one caveat i would note is that the numbers we provide in here hold macroeconomic conditions. in fact, in our baseline

projections week look at the economic effect of our projections. the change is to provide -- is to support more economic growth this year than we otherwise would have had. there is a little feedback on revenue, but not enough in that sense. it is a very large share of the increase in the deficit. >> is $400 billion a number we can tend to the tax cut? >> [unintelligible] over fiscal year 2011, we estimate the deficit to be $414 billion. -- 48 -- $414 billion worse.

>> [unintelligible] >> there is a -$390 billion. that is on page 9. that is the 2011 legislation. that is part of the legislation. >> are you saying you have not done any analysis of the republican proposal to bring this year's level down to 2008 levels? i guess you could do homeland security and subcommittees? >> there is this question about

exactly what the policy is that is being proposed. i do not know what proposal chairman ryan will introduce or that the house will adopt. we did look up a couple of numbers we thought might interest you. this is for the 2008 regular probations act. this excludes defense, homeland security, and military construction. these are categories that are often discussed in this context. the total 2008 appropriations were $378 billion. in the ninth emergency appropriations, the continued evolution on 2011 on the annualized basis for the same category will be foreign to $61

billion. that is a difference of $82 billion. if one proposed to go back to 2008 levels as defined in my table, that would be and $82 billion reduction. >> congress may want to do some of these policies gradually. are you saying that cuts such as this could enter the economic recovery? >> i think policy -- could injure the economic recovery? >> the longer they wait to address the economic imbalance, the worse the consequences the rising debt is. on the other hand, moving tax and spending policies very quickly can be destructive to the overall economy and to the households, businesses, state, and local governments whose

individual experiences will be affected by that legislation. balancing those considerations is for policy makers, not for analysts. we have found, as you know, up from reading our work in the past few years, our analysis is that reductions in taxes are increases in government spending -- or increases in government spending provide short form solutions to the economy. -- short-term solutions to the economy. it can see that in the testimony to the budget committee -- budget committee in september. it can see that in the analysis and we do of many other contexts. the amount of effect on any given change in policy depends on the magnitude of the changes envisioned, the timing, and the

nature of the change. we tried not to make any generalizations about the effects of different policies. >> is there much change in the outlook for social security from the last report? >> there is some change. i do not think it is particularly large. the payroll tax cut by itself reduces the flow of money into the trust fund. that is all set in the legislation by money from non- dedicated revenue sources. the revisions that we make do effect the flow of money into the social security trust fund. i believe the change this time was a little adverse to the trust fund. the most important thing is

that we expect the disability insurance trust fund will run out of money in 2017, i believe. under the rules that we follow for constructing a baseline, we assume those payments continue to be made, but in fact, there is no legal authority for that to happen. the last time the trust fund was running out of money, money was moved over from the old-age survivors trust fund. >> that requires congress to act, right? >> yes. >> i have one technical question. the score of the tax-cut bill was at 374 last year. i was wondering what that was about. also, we have had at least two

stimulus packages and arguably a third wind with the tax-cut program. what, if anything, have you learned about what works or does not work in terms of stimulus? >> trawler the technical question, i believe the changes in the holdings happen a little more quickly than the tax committee has assumed in forming their estimates. more of the revenue is lost in 2011. that is a timing shift, not a more fundamental reassessment. it is a very good question what we have learned over the past few years. i think the right answer is that we have not learned much yet. i mean that in the following way -- when you look at the path of the economy, it is very

dangerous to attribute any particular movement to some single factor affecting the economy. there are a lot of factors affecting the economy at the same time. i think the best evidence about the effects of fiscal policy have come not from individual episodes looking at the aggregate data, it comes either from looking at the data from individual households in particular episodes -- for example, careful analysis of households that receive tax changes at different times in the previous recessions has not formed the estimates we made. that was a very regular looked and it takes some time to get to. there has been some work on the recent fiscal policy. the other sort of research that is important is research that

looks at controlling for the factors that affect the economy. for that sort of work, every expert perception is one more important set of data. they can't overturn the reports. we are watching very closely at what happened. there are people that look at the timing of the economic recovery and the composition of that and concluded that it supports the view that recovery legislation was important. other people have looked at the over all very slow recovery of the economy and the slower recovery of unemployment and that shows the recovery act did not work. our consistent view has been that we do not want to draw too much conclusion from that sort of look. we really rely on the economic

research that unfortunately take some time and altered the course slowly. if you look at the back of the report be released on the affects of the recovery act, you can see a tiny bit of discussion that was longer than it was two years ago. it was work that had been done and we were following it closely. it did not change our view fundamentally. next question. yes? >> on the economic growth projection for this year, how does that compare to private sector economists? how you justify the differences?

>> it is well within the range of private sector economists. it is a little less optimistic in the near term. it is a good lesson on the difficulties of economic forecasting. if we could today, we would change our economic growth in 2010. the fourth quarter turned out better than we and most analysts expected we closed this forecast. part of what happened is that we had a little better economic news in the past month and a half. that has led other forecasters to market their forecast a bit. if we were doing it today, which was slightly increase the near-term growth we project. when i sat here in august and said that we had closed out the forecast in june and the news was work that we were expecting, it is a reminder that this is a complicated business, especially in the economy that we think is in a slow recovery. there will be times when it

will look stronger for a few months and things have leveled out and will be trying to extract a signal from that and not just get caught up in the regular volatility of high- frequency economic data. in broad terms, though, our view that the recovery will take some time is widely shared. we are about 10 million jobs short of full employment. the pace of increase in employment that we have is about 200,000 jobs a month. that is better than we have been seeing so far. we are looking for a pickup in employment growth. it will take some time. moreover, the population is

growing in the labour force is growing. jobs will have to be created for those people as well. that is why it may take a to until 2016 to lead the labor market back in normal condition. i think inflation -- are forecast is a little below the consensus of private forecasters. we have been below the consensus for the past couple of years. that has turned out so far to be correct. i think those were the crucial aspects. again, we certainly pay attention to what other forecasters are thinking. we watched carefully what x -- outside experts are doing.

i think we have seen qualitative futures of different numbers in some of the details. >> had been factored in anything in terms of the state budget deficits and the problems that could come from them in the recovery? >> yes. our economic forecast includes the effects of state behavior. as you know, declined in incomes and sharp drops in house prices together with the extra demand for services provided by governments have put those governments in a tremendous financial squeeze. they are required, as you know, to take action to be back towards a balanced budget. to do that, their actions or simply by doing the automatic stabilizing effects that would have occurred on the federal

level. we incorporate our anticipation of that behavior in the forecast. i will also direct your attention to a brief we issued in december about the fiscal problems of local governments. i think it is an interesting brief about a large and very serious problem. >> there is a mismatch of skills in jobs available and that is part of the problem. there is some dispute among other economists to disagree with that. i wonder how much of the economic difficulties you describe are due to the mismatch? >> most of the elevation in the employment rate is due to a sh the economy. in addition to t cyclical factor, we think there is some role being played by structural factors.

we talk in the report about some structural mismatch -- in other words, certain sorts of jobs -- construction would be a good example -- are not there in the numbers they were and workers who have experience and skills for those jobs will not necessarily move quickly to other jobs as they open up. we also talked about the possible hindrance to the labor market that comes from the difficulty in moving -- people who are under water in their mortgages. there are some disagreements in the professional literature about whether being under water affects one's propensity. we talk about that in the report. we talk about the role of

unemployment and the extension of unemployment benefits and so on. these are important, but we emphasize -- this is consistent with most analysts -- that most of the shortfall in jobs comes from the shortfalls in demand for goods and services. that affects the firm's demand for workers. we have a slow recovery in employment but it -- because we have a slow recovery in output. >> [unintelligible] >> i am not sure we quantified that in the report. >> can you discuss the possible shots from abroad -- dramatic changes -- the usual culprits. what is the order of magnitude?

>> i do not think i can quantify it. we bring a probableistic projection. we do not know what will happen. we try to take account of the possibility of low probability, but is is a very consequential event, but i do not think we do it in a way that we can readily plot to fight for you. if you think about the problems in europe, the financial system problems, the problem of sovereign debt -- there are a number of channels that we get thought about and discussed with our advisers in which

further unraveling might affect the u.s. economy. one would think that the trade balance it would be a small one in terms of exports. possibly a more important wine would be the financial systems. as best we can tell from the conversations we have had with exports -- experts, most financial institutions do not have a lot of direct liability to some of the country debt and some of the bank debt that are the court -- that are the source of greater concern in europe. there are connections in the financial system that are hard to keep track of. institutions may have some liabilities to firms related to those problems.

we think it is a risk, but i would not say it is a very large risk at this point in time. >> are you -- u.s. investors rates slide to about 5.5%. is that where they normally would be? >> that is a good question. our interest rate forecast comes from a combination of our reading of financial market prices and our own modeling of what interest rates we think would equilibrate the supply of funds. in fact, our old bottling suggest interest rates should be somewhat higher -- our old modeling suggest interest rates should be somewhat higher. you can look at the term structure for interest rates and back out under some

assumption of what financial markets expect to prevail. those rates currently are somewhat below the rights of our old modeling -- that our own modeling suggest would be the most likely outcome. our own modeling takes account of the federal fiscal policy. we have picked a forecast that puts some weight on the current financial markets "and some light on our old modeling -- financial market quoters, and some weight on our old modeling. most people expect inflation to be a lot lower. if we look at inflation

adjustment rates, what we are looking for is not dramatically different from the past, but our own modeling, those have higher rates from the federal debt there are other factors. one of the changes we made in the forecast is to put a little more weight on what we expect to be former's willingness to buy u.s. assets and to hold u.s. treasury securities. that is a very difficult piece of behavior for us to get a clear fix on. there is a lot of treasury debt held and received. there is a lot of wealth owned by people overseas. the treasury debt would be part of that. i think we have a reasonable

forecast, but there is a piece of uncertainty. it is subject to destruction in financial crises. investor's willingness to hold debt of certain countries can shift very quickly. >> do you have an estimate in terms of with the statutory debt ceiling will be reached? >> what we have said in the report -- i want to make sure you read all the pages -- it is page 124. we talked about that subject to limits. we note that we think -- maybe it is not here where we know it. we do not try to pin it down -- here it is. in the middle of the right hand column on page 124.

as we say here, we mean "reached" under the treasury's normal behavior. there are things that previous secretaries have done. secretary geithner elected in his letter to congress that he could pull some bonds out the various government accounts that would put off the day of reckoning a little. it is worth recognizing that the government is running a deficit of about $1.50 treen. on average, that is more than $100 billion a month. at the rate of $100 billion a month, even if there are a set of actions the treasury could

take that opens up a few hundred billion dollars under the debt ceiling, that is just buying a short amount of extra time. >> is there any plan darted patient -- is there any prioritization of held debt is paid out? with congress set to authorize payment of the debt? >> i think there is not existing prioritization. the policy of the treasury is to honor all of the government's legal obligations. that includes payments to holders of debt, payments to people who have deliver goods and services under contract, and so on. the bills get paid when they come up. i think it is possible for the treasury secretary to decide

which obligations will not be honored if there were not enough money available to honor all of them. that is default. it may not be defaulted to get polders, it may be default to the suppliers of goods and services to the government. we have to look at the mechanics of how that works and how reliably it could be done and the consequences in terms of the operation of the government. it would be a default if the government could not meet all of its legal obligations that it faces. >> if this is another technical question. what are the most important assumptions that lead you to believe the government will shrink dramatically after 2012. >> there are a number of factors. part is the improvement in the economy, but a very important part also, is the exploration of certain provisions -- the expiration of certain provisions under current law.

if one turns to chapter 4 where we talk about revenues -- turn to page 85 -- all the top right column, we see multiple provisions of tax law scheduled to expire of the next two years. in addition, new tax revisions that are scheduled to take affect. -- to take effect. 2% in 2013 -- 3% in 2014 and 2015. there is nearly four percentage points increase in revenue in terms of gdp from those provisions alone. if you go back and look at the

difference in the deficit in 2011 and 2014, that is about 6.5% of gdp. nearly 4% of that 6.5% is due to changes in provisions schedule in current tax law. there are some similar things on the spending side. for example, medicare payments to physicians would fall back and so on. in addition to that is the improvement in the economy that will increase the tax base. the economy will start to pull in some of the spending programs. >> the middle class tax cuts do not get extended in an election year? >> our baseline follow some assumptions that are based on a law that has expired. those rules follow current law. it is not appropriate for us as

an agency of the congress to predict what the congress will do. what we tried to do is illustrate the consequences of alternative policies. that is why in this report we talk about what would happen if certain policies were extended. i mentioned a few. there is a table on page 22 which as the budgetary effects of certain policies. it is not on our baseline. we run through here alternative assumptions about defense spending, non-defense appropriations, medicare payments, a number of alternative tax policies. none of those are intended as a prediction of what the congress will do, they are just their to

illustrate the effects of changing policy. the baseline, current law, is the natural benchmark for considering action that congress might take. >> on page 15, the mandatory spending law, sort of it ends up in the same place at the end of the jin years. it will be about 14% of gdp. it is a forked fall off. does that have to do with physician payments? >> physician payments are part of that, but i think there are forces pushing in different directions. medicare and medicaid are growing over time compared to gdp. other programs, especially those that are larger because of

the weak economy, will shrink relative to gdp over time. if you read through chapter 3 where we talk about the different components of spending at some length, you can see some of those effects. there is a table if you get to page 58. there is a table that shows our assumptions of mandatory outlays. actually, a better table would be page 66. these are annual rates of growth. if you look over the 2013 and 2021 period, you can see the social security and medicaid move faster than the nominal levels of gdp. the other mandatory spending is

changing very little of that coming decade. that reflects the improving economic conditions. i think the fact that overall mandatory spending has changed in relation to gdp is just a net effect two different factors that are pushing in different directions. once the economy is back to full employment and the effects of these other programs have stabilized, then it really is patterns of social security and the health program that drive the longer-term outlook. it is that growth rate that has been the most important factor in our projections in the past and will be again this year. >> under the discretionary spending line where it is basically cut by a third between now and 2021 to 9.3% of

gdp, is your assumption the continuing resolution? basically a freeze in spending? >> no, i do not think so. our baseline assumptions for discretionary spending take the latest levels appropriated by the congress and inflate those with growth in the employment cost index for the part of the budget that concerns payment of benefits with the gdp index of outside goods and services. we always grow the latest levels of appropriations with those inflation rates. but those inflation rates are below the growth rate of gdp because they are mostly just price changes, not real output. it is always the case if you look at cbo projections of this sort that discretionary spending tends to decline.

the starting point to that is the funding of the continuing resolutions. we do not freeze it at that nominal level, that is just the starting point for the birth rate. if that makes sense. >> if this current law in other words? >> that is the current law from which we are starting. as we know it, and i did not talk about this in my opening remarks, we note in the report that the history of discretionary spending over the decade or more leading up to the recession is that discretionary spending has competed with gdp on average, not just with inflation. the pattern in the baseline projection is shrinkage of discretionary spending relative to gdp would be rather different from the few decades

leading up to the recession. >> when he made the projections a decade ago did you project that? >> we followed the same rules following the baseline projection that we all now. it is not our place to guess what congress will do i get appropriations. starting with the 1985 law, we projected discretionary spending to keep pace with inflation. if one wants to look at the alternatives, this table i referred you to show you what will happen if discretionary spending was frozen in nominal terms. thank you. >> is there an updated final expenditure in number given from the paybacks and so on?

>> we have not updated our estimate since november which we thought the overall cost of tarp would be $25 billion. we have done that analysis since then. we are required by law to report on the chart. i am us and we would do that again later this spring. -- i assume we would do that again later this spring. >> [unintelligible] >> the biggest change before was the economic picture. unemployment benefits turned out to be more expensive than we thought. that changed last this time. any other questions? ok. thank you very much. if you have further questions,

you should just give us a ring. >> that was a grueling briefing. [captions copyright national cable satellite corp. 2011] [captioning performed by national captioning institute] >> more on the congressional budget office projections from the budget committee. this is a half an hour. >> i am the one that has something. congressman dan hollen is going to be here in a short period, he is detained by house business for the moment. we agreed that i will began and he will address you when he arrives.

i am here to discuss cbo's a new economic outlook was which was -- which was released this morning. the report should be another wake-up call to all of us on the need to get deficits and debt under control. this first graph depicts cbo's new 10-year assumptions. it shows that you to passage of the tax extension package and the slow pace of the economic recovery, cbo is now expecting to see deficits of more than one $trillion a year until 2012. it shows that deficits will then briefly all before rise again when the baby boom generation retires. under the same scenario, a gross federal debt is expected to reach 100% of gdp this year, and continue rising. i should emphasize publicly held debt will reach 69% of gdp.

economists regard anything above 90% threshold on the gross debt as entering a danger zone, affecting future economic growth. as disturbing as those near term deficits and debt are, the long-term outlook is even more serious. it is the deteriorating long- term outlook that is the biggest threat to the country's economic security. the warning signs are clear. earlier this month two of the leading credit rating agencies, moody's and s&p, warned again that rising u.s. debt could loot -- lead to america losing its aaa credit rating. if such a thing were to happen, it would be extremely serious for the united states and could set off more global financial tensions. in his recent testimony before the budget committee, chairman bernanke call for red demonstration of political will

to address the long-term fiscal imbalance. he stated, nobody doubts the united states has the economic capacity to pay its bills. it is really a question of having the political will to do that. demonstration of political will -- is the congress and the public and the administration able to demonstrate that they are serious and have enough willingness to work together to make progress? at the point where confidence is lost, that is where you can see a relatively quick deterioration in financial conditions. i very much hope that the people of our country and the people of the congress and the administration are listening to chairman bernanke. i believe he has got it just right. we cannot afford to wait until the markets lose confidence in us. we need to act and we need to

act this year. let me be very clear. that does not mean we need to impose deep and draconian cuts this year. every bipartisan commission that has worked on this problem, including the president's fiscal commission, another commission, and the commission put together by the magazine "esquire," all of them conclude that what is imperative is that we adopt a plan now that is credible and will lead us to a stronger financial footing for the future. i believe the deficit and debt reduction plan was assembled by the presence -- the president's

fiscal commission provides one way forward. i was a member of that commission, as many of you know. i was one of the 11 that voted for that, other than that of 18 who supported it. -- 11 out of 18 that supported it. i recognize that it could be improved on. it does not have to be precisely that. but the element of that plan -- the elements of that plan was really good. tax reform, to provide a way to bring down rates and the american much more competitive, going along with what the president said last night. entitlement reform -- recognizing that we will have to adjust medicare and social security and medicaid in light of our current the natural realities. and also domestic discretionary spending -- i must say that when i see some of our colleagues in the house talk about $2.50 trillion in cuts on discretionary spending, i don't see anything about reforming

entitlements or the revenue side of the equation. i do not think that will solve this problem. frankly, the domestic discretionary spending has not been a part of the federal budget that has been growing in relationship to the size of our economy over the last decade. the part of spending that has been growing dramatically as a share of our economy are the entitlement discounts. we will have to deal with that as the commission indicated. important, the commission plan has bipartisan support. five republicans, five democrats, and one independent voted for the plant. i think we proved that democrats, republicans, an independents can come together to solve this problem. under the plan as you can see, instead of seeing the debt rises a share of the economy, the first day belies the debt

and then brought it down to a publicly held debt of 40% of gdp in 2014. looking at the cbo alternative fiscal scenario, we're headed for a debt of 233% of this size of our debt -- of our economy in 2040. that is a stunning, stunning projection. we cannot permit that to happen. those who listened as the money to float this boat will not allow it to happen. so the consequences to our economy would be enormous. if we say on that course. it simply cannot be permitted to happen. let me just close by saying we cannot continue to put this off. i believe strongly that we mean -- we need to adopt a plan this year that is a long-term plan, not just a budget resolution or five-year plan.

virtually all the budget resolutions have been five years and we understand the necessity for that. but we need a plan that goes way beyond five years. we're talking about picking relatively modest changes now that will pay big dividends as time passes. in that way, time is our friend. but for time to be our friend, we have to use it. we have to make decisions. i am very hopeful that we would choose to do that this year. i will stop there and be happy that answer any questions that people have. what we start right here and go right around? >> boehner and paul's plan -- rand paul's plan? >> i have not seen his plan. it would not be fair for me to comment on it. >> are you disappointed the

president did not discuss reform in more detail? >> i think the president did a very good job of saying to the american people these of the things we have to do as a nation to be competitive and grow the economy. we have to do the best job of educating our kids, we have to continue to the american trade and innovation, we have to do everything we can to improve our infrastructure is if we're going to be competitive in this world economy, and at the same time, we have to deal with our deficits in a responsible way. that requires women fundamentally reform our government performs. -- that requires we fundamentally reform our government performs. i would like very much if the president would have spent a bit more time helping the american people understand how a really big this problem is.

we are borrowing 40 cents of every dollar that we spend. you cannot continue that much longer. on top of that, if you look at the revenue and the expenditures, in 2009 the revenue was the lowest it has been in 60 years as a share of the economy. spending in that same year was the highest it has meant in 60 years as a share of the economy. that tells me that we have got to work both sides of the question. you have got to to hard work on the revenue side, and that is what the commission called for -- tax reform to broaden the base, lower rates, make us more competitive, and to reduce the deficit. and we have to work on the spending side of the equation. he cannot just be limited to non-defense domestic discretionary spending. that is a tiny fraction of the federal budget. that cannot be the piggyback to

get out deficits and debt under control. it is too small. yes, sir. >> you mentioned the tiny fraction. what that actually accomplish anything? >> yes, it would help a considerable amount. the five-year freeze would pay big dividends down the road. but again, he was careful to point out and i would be careful to point out, that is just one part of a plan. we need much more. we have to deal with the entitlements and revenue side of the equation. >> number of republicans introduced a balanced budget amendment. is this something you are ready to support? >> i do not support a constitutional balanced funds -- budget amendment that claims

balance by raiding the social security trust fund. >> talking about the need to reform entitlements. the president did not weigh in on what he would like to do things like social security and medicare. would you like more leadership out of the white house on this kind of things? >> i think he made it clear last night that has to be part of the consideration. he mentioned entitlement programs and especially the health care accounts. that is where the spending is growing most rapidly, that an interest on the debt. it will there be a bipartisan effort in the senate to put that in the legislation? on the corporate tax, can be tackled outside of the tax code overhaul? >> i personally believe it all has to be done together.

senator gregg and i fastened on this idea of a commission and we did this after hours and hours of discussion. one of the conclusion we reached is that it has got to be a grand compromise. you that they have all of the elements of a package together. that is the only way it will be big enough to address the problems that we confront. second, we believe everything has to be on the table. third, we believe everyone had to be at the table, including the administration. in our design of the commission, the secretary of the treasury and the head of omb were two of the 18 commissioners. we did not get a super majority and we were left with the only option being a presidential commission. we convinced the administration to form it. when it was formed, the secretary of treasury and the

head of the omb were not included. to reach a conclusion here, it is imperative that we have the leadership of the house and the senate and representatives of the white house at the table negotiating. >> to talk about the bipartisan effort? >> the work is very much under way. it is a fairly large group of senators, republicans and democrats. [inaudible] >> are you going to try for the first time in a long time to bring republicans and democrats

together in a resolution? [inaudible] >> it may be. i personally believe what i said publicly and privately, there needs to be a summit. involving the white house, the house, and the senate, to agree on a long-term plan that goes way beyond at five-year budget outline. i personally never thought the budget resolution was the place to do the long term plan required. almost always congress does a five-year budget. what is required here is much longer term than five years. >> you clearly stated the need for this. how likely is there going to be any action? >> is extraordinarily difficult. let's be very, very clear. when the american people are

asked what they want done and to prioritize what they want done, they want the deficits and debt dealt with. but when they are asked very specifically will they support changes in social security? the polls say no. changes to medicare? the polls as they now. changes in defense spending? the poll say no. there has got to be leadership to help persuade the american people this problem is so big that you have to deal with all of those things. nothing can be sacrosanct. nothing can be excluded. we will take a break and have congressman dan hollen -- van hollen speak.

>> i want to thank the senator for all of his leadership on these very important budget matters and issues of importance to our economic future and being fiscally responsible. a long history and night before to working with that. a lot make some comments and i look forward to answering questions with the senator. look, what the cbo report said and this came from the first hearing in the house budget committee, is a mix of good news and bad news. the good news is that it indicates that the economy seemed to be on a sustainable growth path. the double dip recession that many of us. it is not likely to happen. it is clear that is the result of many measures taken by the

congress and president over the last two years that helped provide stimulus and support to small businesses and other businesses around the country, to help get the economy moving again. obviously two years ago, when the president was sworn in and that first stated the union, the good news is that the economy seems to be rebounding. the most important thing we can do in terms of resolving -- getting ourselves back into better territory when it comes to deficits is to get economic growth going. now the bad news. obviously what it shows is that we continue to face a very difficult fiscal situation and longer-term problems are very real and cannot be measured by

as it -- economic growth alone. i'm sure the senators discuss some of the challenges that we face. he served on the commission. let me and with this. our number one priority has got to be pursuing tw attracts. one is to make sure that we do not do anything to damage the economic recovery which has been very fragile. it would be a big mistake, as mark zandi and other economists have said, to take deep, immediate, draconian cuts. to put the brakes on a fragile coverage, it risked putting people out of work. do we need responsible reductions, yes, the president talked about that. and senator conrad has been a leader on this, we have passed now -- we need act on a bipartisan basis to put together plan that was this country on a sustainable fiscal course. i think the president last night indicated that he wanted to work with republicans in serious fashion, and i've told a new chairman of the house

budget committee that democrats look forward to working with him and the white house to try to do that as soon as possible. >> excellent statement. yes, sir. >> [inaudible] what he think of that idea and contingency plans to be made? >> what they are saying is that we're one to forget about the american public and the things that they need. somehow they are secondary, and pain that chinese and japanese is the first priority of this country. i do not even know how to

describe that i did except it is a very bad one. >> just a second that, but they are saying essentially is that the full faith and credit of the american government does not extend to the american people itself. >> we have other questions. we would be happy to end there. >> is said the short-term deficit would be necessary. at what one man does it become a problem? -- at what point does it become a problem was a margin if you listen to chairman bernanke he has been clear on this. we need another 18 months to two years before we in -- start imposing they're really tough

medicine that will have to be imposed if we are going to deal with the long-term debt threat. it is interesting -- if you look at all the bipartisan commission, that is what they have concluded. one that had the most distinguished people in the country serving on a came to that conclusion. do not in danger this growing it cut -- endanger this growing economy. but adopt a plan now that is credible and gets back on track. that is what the president's fiscal commission concluded. that is what the esquire commission concluded. all of them are bipartisan and said, do not impose draconian cuts now. the economy is still too weak. with one in every six americans either unemployed or

underemployed. but not now a credible plan which you enact that in 18 years pivots and be -- in 18 months to two years begins to pivot and begins to bring the debt down. we have a level of debt now at the end of this year, it will be about 69% of gdp. we can manage it. what we cannot manage is where we're headed. and by 24 to come up the debt will be over 230% of the gross domestic -- gross domestic product of the country. we have to make decisions now that the fact that long-term outlook, but does not endanger this recovery. >> republicans rolled out a budget amendment earlier today. what is your take on that announcement was a margin obviously within our caucus we have a mixture of use. the consensus position is that if you can balance your budget,

let's do it right here, right now. one of the things as the result of the last election is our republican colleagues share responsibility for government. but show by their actions in budget and appropriations had you put together a long-term plan to do it. we all know in the past and we've had different views, but they have been filled with loopholes and gimmicks. the most serious approach to deal with this problem is to get together on a bipartisan basis and put together a long- term plan rather than pretending that these other things that are filled with all kinds of loopholes will do the job. >> go back to " point i made earlier when congressman van hollen was not here. the balanced budget amendments to find a balance budget as one that raided the social security

cookie jar in order to balance it. they were claiming balance based on the use of social security trust fund money. if that is what we adopt around here as the definition of balanced budget, god help us all. >> what is the democratic game plan on this after march 4? are you waiting for republican budget cuts or are you when to be proactive in come up with a run? >> we are back together now. we do not think there is a finnish plan on how to deal with the continuing resolution. -- it finished plan on how to deal with the continued resolution. >> as you probably know yesterday, we did a budget resolution in the house with no numbers senate.

not $100 billion, not $60 billion, we do not know. we were told we had waited until cbo came out what the numbers. today cbo has come out with numbers. maybe later today we will have some idea of what they are. the speaker of the house was asked on television a few weeks ago to identify any specific cuts he would make. he did not come up with one. senator conrad has pointed out for fiscal year 2011, the commission that was tasked with reducing the deficit and the debt assumed in their projections a number that was slightly above where we are with we arecr. -- with the current cr. but sit with the republicans come up with a house. it is important to stress that they are playing with fire in the immediate term, talking about draconian cuts.

that is what the commission indicated. >> on the cr, would you agree to cuts to the current spending levels? >> i supported the commission plan. it was $30 billion below. >> republicans are demanding major reforms on the budgeting process. you think that is an appropriate debate? is there a potential or you do not hold -- raise the debt limit and you have a catastrophic situation? >> first of all, we have no choice but to extend the debt limit.

to do otherwise would put in jeopardy the full faith and credit of the united states. and virtually every economist said that would be catastrophic to our financial standing in the world. these are debts we have already run up. they have to be paid. that is like getting your credit card bill in saying, gee, i regret what we did before but now i am not one to pay now. that does not work. i personally believe we should ask for and insist upon a long- term plan to be agreed to before we have any long-term extension of the debt, so that we keep the pressure on to write a long term plan that everyone agrees is important to the country. just a final point on this. mr. bernanke, the head of the federal reserve, has made very clear he does not believe we ought to impose draconian cuts now. he believes we ought to adopt a

plan now that gets america back on track over time. i think he is exactly right. that is what is required of us. but that means we need a plan. and it is not a five-year plan. we need a plan that goes well beyond five years to get us back on track. >> just to be clear, are both of you saying that neither of you would like to see any reduction in spending, they should not go at all the the remainder of this fiscal year? >> what i said was in relationship to the president's budget request, at the commission had 8 $30 billion reduction. remember -- >> do you see it going down at all?

>> what is appropriate is what i said. $30 billion below the president, level with where the cr is that. very substantial reductions of already been made. i would support the reduction is that the commission called for from the president's budget. >> i have to run. i have two minutes left on a vote. >> thank you.

>> and at the moments, house majority leader eric cantor outline principles he is setting out for republican members. in 20 minutes, and oversight hearing on the effectiveness of the troubled asset relief program known as part in helping homeowners facing foreclosure. after that, how federal spending is being affected by the new health care law. later, an oversight hearing on the effectiveness of tarp for homeowners facing foreclosure. at a couple of live events tomorrow on c-span. the senate budget committee hears from the head of the congressional budget office about the economic outlook and the deficit. that is at 10:00 a.m. eastern. at 2:00 p.m. eastern, homeland security secretary janet napolitano speaks at george washington university on the state of america's homeland security. >> no question 9/11 redefined

the presidency because it made it abundantly clear my most important job was to protect the country, and made a lot of controversy of decisions, many of which i described it in the book. if i had to do them over again, i would predict that of former president george w. bush talks about his best selling memoir with students from southern methodist university, sunday at 8:00. >> house majority leader harry kantor laid out the fiscal and economic principle -- eric cantor laid out the fiscal and economic principles that he expects house republicans to follow. he spoke about 20 minutes.

>> it is a pleasure to welcome leader kantor. his representative virginia's seventh district which he has served since 2001. it is a graduate of george washington university and received his law degree from william and mary. he espouses the principles of the founding fathers. he is a strict constitutionalist, which leaves meant free to seek improvement. that is the sum of good government. he has come here to speak about this. aziz said on sunday, or at the government's spending -- as he said on sunday, rapid government spending has been chronicled b