reported trends in executive compensation that exposed a disproportionate nature of corporate pay packages. according to the research paid to ceos is at an all-time high at over 400 times the average workers' pay. how has executive pay grown to these extreme amounts and what factors contributed to these trends? >> i'm not a historian in terms of the causes of the growth.@@@' between executive compensation and line workers. and i've tried to take that into account in limiting executive comp under my review.

>> i have long been concerned about gaunted bonuses. as we have seen with a.i.g., guaranteed bonuses and incentives do not seem to encourage product tivity. aren't guaranteed bonuses of any kind inconsistent with effective risk management? >> well, i think they are. executive officials to performance, not guarantees and have worked as best we can to eliminate guaranteed payments as

part of any compensation package. >> in order to hold t.a.r.p. recipients fully responsible, is there any possibility of nullifying prior payment obligations to executives? >> yes. we've been very successful in doing that. as i mentioned to the chairman and the ranking minority member, in almost every case where we confronted a prior guaranteed contract, we were able to negotiate voluntarily with the companies and get them to yield on that guaranteed contract and instead roll that amount into stock, going forward over four years tied to performance. >> have any employees or recipients taken legal action because of your -- because of those corporations' actions? >> no. >> no. okay. >> we're very persuasivepersuas.

>> have the huge bonuses led to a culture of entitlement. in other words, do executives now expect packages like this regardless of performance? >> i think huge guaranteed bonuses undercut performance. if you're guaranteed a huge cash salary or you're guaranteed a bonus regardless of performance or you're guaranteed commission payments regardless of sales. i think that what we learned is that undercuts the statutory directive that we tie compensation more to the overall financial health of these seven companies and that's what we tried to do in the report. >> thank you for your response, mr. feinberg. >> thank you. >> mr. chairman, i yield back. >> thank you very much. i yield to the gentleman from indiana, mr. burton? >> thank you, mr. chairman.

here's a quote by an executive from one of the companies, there's no question that people left because of our uncertainty for the ability to pi. it's a highly competitive market out there. one of the things that concerns me is that you have top talent and you said you have some people that were making, what? $13 million and you cut them down to 350,000 or something like that? why would anybody in their right mind, if they're an executive for a company like that who has the talent to manage and run a company, why would they take a pay cut from 13 million to 350,000 and does that damage the company? >> absolutely it would damage the company and that isn't what we did. we took 13 -- congressman burton, we took $13 million in guaranteed cash, reduced it to $350,000 in guaranteed cash and told that executive, we'll give you $13

million or $9 million or $8 million, i don't know the exact amount, in stock. now, you have a vested interest in that stock. if that stock, over the next four years, goes up, you may get more than this. >> let me interrupt. >> so we tried to tie it. >> yeah. well, if a person has a contract and you said -- i think i used the term "alleged contracts," if they have a contract that guarantees a certain amount of money and you say you want them to renegotiate that and pay them $350,000, what would be the rationale for them to take the $350,000 and not go ahead with the contract and take their money? >> the rationale would be, "a," that they want to stay at the company and redeem that stock in value that may be even more than $13 million. >> well, i can understand that you believe these people have the best interests of the company at heart and probably

they do. but when you're talking about that kind of a cut and whether or not somebody could get that money immediately within the contract, it seems to me that most women would take the money and run. and as i said before this quote says question clearly that they said it's a highly competitive market out there. and they're jumping ship. now, if they jump ship and you don't have top talent running these companies, the american taxpayer who's a majority stockholder has inferior people running the company. doesn't that concern you? >> it sure does. >> what can you do about that? >> i think that if you look at the levels of total compensation that we established in our determination, we think it -- i made this recommendation on my conclusion -- they won't jump ship. they won't. >> they already have. >> some have, before my recommendations. >> first of all, i mean, i understand you're doing what you've been instructed to do. but it doesn't make any sense to

me if somebody has a contractual guarantee of a certain amount of money that they're going to take $350,000 and then say okay, i'll take it in stock when you have an economy like we have right now and they could take the money and go. and if they go to another company, they could make the same amount of money or maybe even more than they were making where they are. so the top talent, it seems to me, would be encouraged to leave. now, the other thing i wanted to ask you is this. who do you answer to when you make these decisions some? >> under the law i make -- i have final authority, nonappealable. these decisions are mine and mine alone. i serve at the discretion of the secretary of the treasury. >> but he doesn't -- i mean, once you make a decision, you don't say to him, this is what my recommendation is. you just -- the decision is final. >> under the law as written, the regulations, afford me final binding authority to issue those determinations. >> that's a treasury regulation.

it's not a law, is it not? >> that's the treasury regulations that evolve out of the statute, yes. >> but the point is, as far as accountability is concerned, and i'm not inferring that you're not doing a good job, i'm just saying that you really don't answer to anybody. >> well, i answer to this committee and other committees with oversight functions. >> well, let's be straight about this. you're the czar. you make the decision. that's it. right? >> under the law, i make the decision. >> okay. so if these people leave these companies because they are not being compensated as was in the contract, and i'm not saying they didn't make too much money and they were accountable and didn't do their job properly, i'm just saying when you need top talent to run general motors or chrysler or aig, you want people that can really do the job. they may not have done their job right in the past, but they have the knowledge and the talent to do the job. and you're saying to them, here, we're going to renegotiate your contract, and you take $350,000,

and we'll extend it and give you stock for the $13 million that you were going to get. and they say, hey. the heck with that. i want my money and i'm going to leave. and so you have people that don't have the knowledge and the competence to run that company. and so the stockholders, the american people, are in danger of seeing their money, the t.a.r.p. money going down the tubes because a company doesn't respond. >> my response to you, congressman, is this. i have tried my best in this report to implement that statutory directive that they stay on the job and that the taxpayer get his money back. i'll defend these recommendations. now, you may say, if i were doing your job, i would have a different level of compensation or do it differently. fine. i did the best i could to try and maximize the very objective you're stating, which is keep these people on the job. and i think we've done that. >> mr. chairman, may i have one final question, please?

>> i'd be delighted to yield the gentleman an additional minute. >> the federal reserve's issued guidelines under which the fed would review, if necessary, or amend or reject the compensation policies of all banks regulated by the fed. are you familiar with that? >> that's just come out last week, yes. >> yeah. that really concerns me because what we're talking about is you or somebody going beyond where you are right now and regulating people that did not get t.a.r.p. money simply because they're regulated by the fed. what do you think about that? >> congressman, my limit, what i'm doing of these seven -- and only these seven companies -- what the federal reserve is proposing or whatever is not on my watch. you'll have to ask the federal reserve about the scope of those regulations. >> thank you, mr. chairman. >> thank you. >> thank you very much. and i now yield five minutes to the gentlewoman from ohio, miss marcy capture. >> thank you, mr. chairman, very

much. mr. feinberg, thank you for coming today. from whom did you receive the first call suggesting you be appointed to your present position? >> i received the first call from the deputy secretary of the treasury, neil wollen. >> who else did you hear to prior to the appointment? >> the only other person is the secretary to the treasury. >> and approximately when did those calls happen? earlier this year? >> i'm sorry? >> when did those calls happen? earlier this year? >> yes, i think about five or six months ago. >> all right. is your federal position classified as schedule "c," or are you classified as civil service or some other category? >> special government employee. >> special government employee? >> yes. >> does that mean you have a special contract with the treasury? >> i believe that is the case. >> all right. and that's a matter of public record? >> yes, it is. >> thank you. for whom did you work prior to your current position? >> i was in a private law firm in private practice. >> okay. and could you state the name of that firm for the record?

>> question, the name of the firm is feinberg, rosen, llp. >> all right. and where are they located? >> washington, d.c., and new york city. >> new york city. where's the principal headquarters? >> washington, d.c. >> do you have any relationship with that firm now? >> yes. >> all right. could you state the relationship with that firm? >> i am the founding partner of the firm. >> you're a founding partner. >> yes. >> is it true that three of the institutions whose compensation you are supervising are or have been clients of that firm including citigroup, citibank, aig with the acquisition of merrill lynch? >> no, that is not true. >> that is not true. >> no. >> it has been reported in the press that that is actually the case. >> it may be reported in the press. it's not true. >> it's not true. are any of the institutions under your purview -- have they been clients of that company? >> no. >> they have not. all right. let me ask you, you stated that it's a good idea to tie the

stock opportunities for employees of these companies to a four-year term. all right. and you said it pays out one-third in what year? >> one-third after two years, one-third after three years and one-third after four years. >> you know, that doesn't sound very long term to me. how did you arrive at four years? >> well, it's a very difficult question. we concluded that asking individuals to delay the payment of their salary beyond a fourth year would simply work too much of a hardship, that it is a problem of keeping them on the job and trying to get the taxpayers' money back. we concluded that a four-year payout of salary was a fair limitation. now, what we also did, congresswoman, which is implicit in your question, we also required that any additional stock that might be issued to

these officials, it would not vest for at least three years and would not be redeemable at all until top loan money was repaid to the taxpayer. so that was the balance we struck. >> i find it surprising if you look at these horizons, by the way i look at the world that isn't a very long time at all. >> it may not be a long time. i guess it's relative. but our concern was that if we are reducing compensation to these officials across the board by about 50 percent, and we're obligated to keep these companies in business to repay loaned taxpayer money, that asking these officials to wait more than four years to redeem their salariesed stock was

simply too onerous. maybe it should have been five years or six years. we thought four years was a pretty good compromise. >> on the outer edge but on the inner edge it's two years. you were quote in the the "new york times" october 23rd stating anybody making $100 million a year is engaged in excessive risk. you approved compensation packages million or more for six -- worth 9 million or more. that $9 million is 23 times as much as the pay for the president of the united states, 46 times the pay for the fed chair and treasury secretary, and more than 50 times as much as a military general. how did you determine that amount was not contrary to the public interests? >> well, we did it a number of ways. first, we gathered all the data we could gather and examined the data as to what constitute competitive market place

compensation. then what we did is we made sure that that 9 million or 8 million was not guaranteed compensation. the cash component of that 9 million is likely to be $500,000 or less. the rest of it, as congressman burton pointed out, the rest of it is tied to stock which cannot be redeemed at once, has to be held two, three, four years, and a big chunk of that compensation cannot be redeemed by the official until and unless top money is repaid to the taxpayer. so it may be 9 million in theory, but in practice we believe it will be a lot less than that. gentlewoman your time has expired. >> i would like to place in the record information we have about the clients of the gentleman's law firm and would appreciate response. >> without objection. >> thank you very much.

law firm and would appreciate response. thank you very much. >> thank you. without objection. the gentleman from indiana, mr. sauter. >> thank you, mr. chairman. i'm sure it doesn't shock mr. feinberg that some of us on the republican side have -- as outraged as we are about the salaries, as outraged as we are about the corruption and the crisis that was triggered by greed, that we have deep uncomfortablity about the government in effect taking over majority of these companies or have somebody setting their salaries. i will say the word "czar" does fit you, and you seem to fit comfortably in the word "czar," as we've debated because if you don't have anybody directly that you're reporting to and you're explaining how you make these decisions, but it's still a little scary as an elected official or as people watching in the country to see one person with this much power over major institutions in our society and

the challenges to how are you making decisions, who are you talking to, why aren't you reporting to any elected official directly in the treasury department or the president is not a good press dented for a democracy. now, let me ask you a fundamental question. aig, we talk about like it's one company. in reality, it's, what, 80 financial and 120 insurance or the other way around. did you separate out, in this top 25, those -- and not all divisions were bad -- did you separate out which divisions actually caused the problem? same at bank of america. bank of america, citibank, had traditional banking things that were regulated, and their compensation might have been fair inside that industry. but they had these nonbank, rogue divisions that went crazy. are you doing all 25 evaluations as if it's one institution rather than, in fact, separate institutions some of which

clearly caused a problem and some of which didn't? because of incompetent management? >> under the law i'm looking at the top 25 compensated individuals at aig as the parent. in other words, i'm not looking at seven people of this unit and five people at that unit in determining the top 25. that was really submitted to us by the company itself under the law. and worked from that. >> in other words, my question is, then, congress didn't separate. we blended them all together. let me go back because what the american people are frustrated with was that we had -- and i voted for t.a.r.p. every time it's come up, okay? because i believe our country is going to collapse because some of these people didn't look at basic, you know, economies growing at 16% over four years, housing's going up at 200%. what kind of incompetent person can't figure out that people may, for example, be self-reporting income? how in the world nobody looked at the risk of securitization? why didn't they ask in the bonding companies that we've had

in here, the rating companies, why didn't anybody at these different companies say, hey. isn't it strange that these companies are getting aaa for selling us bad credit? why were they only checking 10% to 20% and then paying bonuses if you cleared these? the question i have is, are we aimed at the wrong thing? why are we looking at compensation here rather than do you think we could have looked at -- because one of the questions, oh, we have to pay these people this or they'll go to another company. what about stigma that you were incompetent? wouldn't we have been better off analyzing what actually went wrong in these companies, finding out which managers were clearing it, holding them accountable by whether they performed their basic duty or they looked the other way to get profit in their company and in effect through investigations, whether it was violation of the law or incompetence, putting a stigma on them and all of a sudden pay would have been different. the problem in this situation is we don't have pure capitalism

working. the bonding companies didn't work like capitalism was supposed to work. the stockholders and boards weren't paying enough attention. in an investigation here isn't the real problem not the compensation but that people who did crummy jobs aren't being single out? the next tier of management, wink, wink, the next term management, wink, wink. and you're treating in bank of america and citibank and aig those who participated in this huge cover-up in incompetence the same as those who were running the traditional banking part, and they're all part of the parent. >> congressman, i can only say, in response to your -- >> i ask your opinion now, just not what you're required to by law. >> well, but, i mean, i think that is a fair answer. i'm confronted with a statute and some regulations, and i'm asked to very expressly and specifically deal with what congress has asked me to deal with. you're raising some very good questions. >> i'm asking you, you're inside now. you're looking at these. you've got to be measuring these different execs.

and one of them maximized his return and, in fact, could go over to chase or somebody. if you're trying to keep him there, don't you look at whether they were competent in their area? in other words, if you adjusted some of their pay by whether or not they were over an area, that unbelievably rewarded people who were behind in their mortgages as more value and securitization than people who were paying? now, that is some kind of stupidity. no risk management. yet you're analyzing, and people -- isn't that one of the variables even under statute that would measure whether or not they're employable? >> i think to the extent that you're asking do we also look at the importance, the role of the individual, how long they've been at the company, what capacity they served, yes, we do look at that. >> did they handle these toxic things and overlook? >> i also think, if i may, congressman, you're raising -- implicitly you're raising an important question raised earlier which is the extent to which quite apart from my

compensation decisions, what about corporate governance reform designed to rein in the discretion of some of these officials, and that is a subject which is, of course, worthy and is now being considered by congress. >> the gentleman from texas. >> thank you, mr. chairman. thank you, mr. feinberg, for being here with us. and i understand you have a very difficult job, and i appreciate it. i guess if i can look at the scenario, this is what the scenario is. you have companies that have received t.a.r.p. dollars, companies that have not received t.a.r.p. dollars, and, of course, you have the regulators also, the federal regulators. and i guess the basic premise is if you received federal dollars we can dwell into your compensation regardless of your performance or not. and if you have not received federal t.a.r.p. dollars, we're not going to get into the free market forces. is that pretty much what we have? >> correct. >> now, we talked about

compensation and i think in the past when aig took off -- remember those conferences that they went off and there was an outrage from the public saying why are they going to those conferences and meeting those luxurious resorts. people were saying you've got to watch how you spend those dollars. you remember that? >> yes, i remember that. >> all right. so i guess one of the things that we have to look at as legislators is sometimes the public looks at perception, saying if y'all are the regulators, then you have to watch what you do also. and i'm just reading something that just came out of "the washington post." i believe that -- i think it was october 19th, the fed chairman, ben bernanke and i think about several of these employees went to an october 19 -- it was on october 19, san francisco conference on global and financial aid situation. they went and they traveled to the baccarat resort near santa

barbara, california. i guess some of those suites go up to $2,000 a night. and you can go on and on and on and on. i think out of the 100 participants there, i believe one-third of the participants there were federal employees. whether they got good discounts on the hotel rooms and it was not during the season, you know, i guess -- and i know that's not under your watch. and i don't mean to put you on this. but i guess that's one of the things we've got to be very, very careful because if you have t.a.r.p., non-t.a.r.p. entities and then the federal regulators saying you've got to watch what you do and spend the money, we just have to be very careful how we regulate. any comments without you going -- >> i completely agree with your comment about being careful. i assure you that the office of the special master is very, very cognizant of your concern about image and how it looks with the regulators. and i can't speak for the

federal reserve. but i can tell you that our office is very cognizant of that concern about perks and excessive compensation, travel allowances, et cetera. >> thank you very much. >> thank you. >> and i yield five minutes to the gentleman from north carolina, mr. mchenry. >> thank you, mr. chairman. thank you, mr. chairman. thank you, mr. feinberg, for your testimony. i appreciate how candid you are. and i was saying to a colleague that your extreme confidence is necessary with the extreme job that you have. but i also appreciate you just being frank with us. and that's what we need. now, in terms of -- i just want to touch on a couple things quickly. i've got some other questions. your report to the secretary of the treasury, he's your boss. is that correct? >> correct. >> how locoften do you meet wit secretary geithner? >> i've met with the secretary probably three or four times in the last five months. >> in the last how many months? >> five months. >> five, okay. so every other month, roughly.

okay. and in terms of this discussion about cash, okay? in your testimony you discussed cash, okay? and when people hear that, and when i read "the wall street journal" story, i think that the language differential here is important, the distinction. you're talking about cash as your daily -- your monthly salary or weekly salary, however they pay. and then if you get a cash bonus at the end of the year, that's your cash package. correct? >> correct. >> now, the "wall street journal" story you reference in your opening statement says that you raised the base pay for 89 individuals. you cut it for a couple others. you left it the same for others. that is their base salary that they receive monthly. is that correct? >> that's what "the wall street journal" says. my definition of base salary's quite different. my definition of base salary is not only what you get twice a

month but also drawers that may be provided you over the course of the year, guaranteed commissions, guaranteed bonuses. the example, congressman, that the news article referred to said that in one case with citibank, i had raised the base salary by 111% to $4 >> i pointed out earlier to the committee that total cash that person received last year was $13 million and i reduced it by 98%. >> that $13 million figure is not any stock awards. >> that was cash. >> that was cash. >> ok. all right. i just want to understand this distinction because i read here in the wall street journal one story and then i hear your testimony which is different. i just want to understand. you're talking about that twice a month. their comparison here is the twice a month pay or monthly pay to what you're now setting at

their monthly pay. >> i guess that's right. it's unclear to me in that story what they mean. >> so what you're looking at is you would up that base guarantee in that factor, but the rest you're having with stock. >> i'm also eliminating all cash guarantees like bonuses guaranteed, regardless of performance, like commissions guaranteed regardless of sales, like any other type of cash guarantee those are completely eliminated under my program. >> ok. i want to discuss a larger issue here. do you use compensation consultants within your office? >> in the office of the special master? yes. >> ok. are these compensation consultants that have other clients? >> no. they may have clients that i'm not aware of. they're both academics. >> both academics. all right. in terms of compensation

consultants there's been a lot of discussion on this. but i think there's another piece here, which is the tax ramifications for salary and bonuses. have you encountered this as a challenge in dealing with these institutions? >> we certainly have. >> can you discuss -- because we're in congress here. we set the tax rules. what can we do to make the tax codes more effective so that executives' actions are tied to shareholders' interests? >> that's a complicated about the tax code. i'd have to get back to you on that. i can tell you that you're absolutely right, congressman, that we run into these problems every day in establishes deferred compensation. you know, it may vest today under the law but it's not redeemable for two years, three years, four years. what are the tax consequences of this? and we have run into that problem. and i'll be glad to get back to

you and lay out some of the tax issues that have arisen in the course of my five months on the job. >> i'd certainly appreciate that. >> i will. >> finally, the number of 25, ok? i find it arbitrary. do you find it arbitrary? >> yes. of course it's arbitrary. >> have you encountered this as a problem where you have two executives, one makes marginally more than the other, the number 26th executive, the other is the number 25th. and then perhaps you have a class of people that are very similar to what the 20th or 25th executive that fall under your purview. have you seen anything currently that you have the 26th executive making more than the people that you have just given new rules to? >> no. we haven't seen that yet. of course, we haven't got to the new top 25 in 2010, which may vary.

we haven't seen the problem yet of the difference between number 25 and 26. what we are seeing is the arbitrariness of 26 to 100 when the 100th person is cut off at 100 and there may be hundreds or thousands of employees at 101 and 102 and 1,000 and 5,000 and 1,000 that are subject to the same compensation structure. 1,000 and 5,000 and 10,000 that are subject to the same compensation structure. so we're running into that problem a little bit. but hopefully we'll be able to come up with a program that will take that into account. >> your time's expired. >> mr. chairman, if i may submit for the record, a question i have about contracting out services that are not under your purview as well. >> without objection. so ordered. i now recognize the gentleman from vermont, mr. welch. >> thank you very much.

mr. feinberg, i thank you and i thank your staff for the tremendous work that you've been doing. i think we all really appreciate it. i have questions in two areas. first, a brief statement. trying to figure out what's the quote right level of compensation obviously ultimately is an arbitrary decision. but there's been a premise in corporate america that the more you're paid, the more you're worth, disgraced and incompetent executives who walked away with hundreds of millions of dollars, stanley neil, richard fuld, the list goes on, have proven that to be wrong. and i think the two concerns we have here in congress are, one, what compensation practices are going to drive a constructive business model so that bankers make money by lending rather than ripping folks off on kite schemes like subprime mortgages? and then number two, with respect to the taxpayer bailout

which was presented to us as something that had to be done even if we didn't want to do it, how can we get some of that money back for the american taxpayer? and this isn't in your purview, but it's a question i want to ask because you probably have more practical experience on this than anyone in america and certainly more than any of us on the committee. among the t.a.r.p. recipients was goldman sachs. they've since paid that money back with interest. and goldman sachs is good at what it does. and it's now on track to have another year of record profits and likely to award bonuses in the range of $21 billion to $23 billion to its employees. part of their bottom-line profit came from a taxpayer payment to aig over $100 billion. aig took the taxpayer money and wrote a $12.9 billion check to goldman to cover collateral debt

obligations in some of these exotic instruments that were in jeopardy because of the collapse of aig. do you have an opinion as to whether or not goldman sachs should repay taxpayers that $12.9 billion before it awards $21 billion in bonuses to its employees? >> congressman, i don't have an opinion. i've read that, that story just as others have. i have enough difficulty focusing on the seven companies that are on my watch. and whether or not goldman should either voluntarily or by force of congress, congressional directive, repay -- >> let me ask you this. i understand you have a limited purvi purview. i can't tell you that nobody's listening and it's just between us. but i know that one of your concerns is taxpayer fairness. and, again, that's in the eye of the beholder. but it's a fairness standard. and one of the things that we've

learned in this entire catastrophe of the financial meltdown is that most of the things that were done that are truly outrageous and harmful to taxpayers in our economy were all legal, legal, but not fair and not right. and if we're going to restore some sense of fairness that the american taxpayer needs, do you think that we've got to address such transfers where the goal of the taxpayer bailout was to revive the financial system but not to reward any individual firm? >> yes. i'm hopeful that the model that we have developed for the seven companies that's in this report -- and executive compensation is not the answer to all of these problems. but to the extent that executive compensation has a role to play going forward in improving the economy and in promoting

fairness, i'd like to think that the recommendations we have made in this report might be adopted. voluntarily by other companies on wall street. and might be seen as one step among many that can be taken to deal with the overall problem. >> thank you. i yield back. thank you, mr. feinberg opinion. >> thank you very much. i now yield to the gentleman from california, congressman bilbray. >> thank you, mr. chairman. mr. feinberg, i guess with my wife on the other side of the continent, i spent some quality time with hamilton and the federalist papers last night, and i'm just thinking of what our founding fathers must be thinking watching entire process that we're talking about today. the concept of the federal government is actually looking at these kind of private sector jurisdictions that have changed. and i think rightfully so, we should be looking at it. i think one of the greatest

things when you read the federalist papers is concepts of rights and responsibilities go together. when the taxpayer was required to take on responsibilities, those rights obviously start following. and i appreciate you working on this part of it. breaking very new ground. let's hope it's not ground that we have to cover ever again in the future, and let's work on that. i think that your comment about the regulation that we're considering, one of the concerns i see is basically continuing the process of a federal government deciding salary rather than powering stockholders who are actually the ones who bear the financial responsibility and should have it. wouldn't you agree that is the vehicle that we probably should be looking at as those who pay play and determine who get paid? >> i think that's right. as i said earlier, the asterisk to that general view which i share is that at least as to these seven companies, congress spoke and said that since the taxpayer is the primary creditor

of these seven companies who received the most t.a.r.p. assistance, as to these seven and only these seven, there should be mormon toring and determination of pay. >> because rights and responsibilities -- the fiscal responsibility leads the right to be able to intervene. i worry some of us is that we're starting to see this as being an excuse to intervene in other companies where the responsibility has not been taken over, but the right is being proposed to be preempted. >> i can't speak for the federal reserve or others. i know that i have publicly again today expressed the view that my jurisdiction should not be extended beyond these seven companies and only as long as they still owe the taxpayers money. >> and i appreciate that. how many members of your team were drawn from the private law firm from your private law firm? >> i think myself and two others. >> would you mind naming them? >> ms. camille byros who is

sitting right here and ms. jacqueline zins also sitting next to ms. byros. the rest are all treasury officials. >> all the rest are treasury officials. >> i believe so. >> do you have their names? >> they're all here. i can get you those names, yes. >> i appreciate that. now, there's a lot of reports that have been going around. the latest is that according to those reports, your team includes academic consultants. >> two. professor lucian from harvard and another from usc. >> i appreciate that. and that's the kind of clarity i think that president obama really wanted to set as a new example. rightfully so pointing out the previous administrations have not been as transparent as we hoped. and that creates concerns that really so many times just don't need to be there. the -- at this time will you provide to the members of this

committee the names and the subjects and the venues of all the individuals that you rely on to work out this issue? >> i'll be fwlglad to do that. i can tell you summarily, there's the two academics at harvard and southern cal and the people here at treasury with two others from my law firm, and that's it. about 15 people. but i'll get you the information, and in transparency, lay it out to you and let you have all that information. >> thank you very much. and that's how we avoid all of the he says/she says or we hear reports and we don't have it. thank you very much. >> would the gentleman yield? >> i yield to the gentleman from california. >> being an old employer, i couldn't resist asking one question. you've had more than half of the key 25 of aig and b of a depart. how many outside individuals under similar pay to the people that you're losing did you hire? in other words, not from within, not people that are already number 26 or number 28, but how

many new outside people have entered the ranks of the top 25 of those two companies under the conditions you're willing to pay? >> i don't -- i don't know the answer to that, congressman. it's a fair question, and i'll try and get you that answer. >> if you'd get back to us on that. additionally, madam chair, i'd like to enter bloomberg.com's article into the record at this time because it's been brought up. and then just ask one closing question, which is if the credit default swaps had not been paid at full value but at 60 cents on the dollar which was a negotiated amount, wouldn't that amount that wouldn't have gone to goldman sachs and other companies, wouldn't that have been greater than all of the executive compensation that you're going to handle over your tenure? >> i'm not sure, but -- >> by a magnitude of many? >> i'm not sure, but i will assume, based on the ranking minority member's question, that the answer is a definitive yes. >> thank you. i yield back.

here you go. >> mr. foster is recognized for five minutes. >> thank you. thank you for appearing today. i really appreciate it. the first question i have is sort of technical. when you attempt to align compensation incentives with long-term company performance using stock that has to be held over time or vests over time, do you encounter problems in preventing employees from simply hedging against a possible decline in the stock value? >> prohibited by our rules and regulations. very good question. >> who enforces this? especially for former employees that are holding the stock that's going to vest over time? >> i would guess with any of our final compensation determinations, if there's a violation, i would assume that that would be referred to the department of justice. >> okay. but do they have to report? if you leave the firm and then, you know, for the next several years,.

>> i think we would monitor that and then be required to do that, yes. >> so there are financial statements that have to be filed? >> i think so. >> years after you're terminated. okay. your staff is at least not shaking their head. okay. so n >> i may get corrected in the next hour, and if so, i'll let you know. >> down the hall in the financial services committee that i also serve on, we have a broader concerns about >> so based on your experience with dealing with the corporate culture and so on, i was wondering if i could have your reaction or writing if you're not comfortable to doing it now, to two possible structural changes in compensation that might help in going forward and systemically important firms. the first one is the requirement of periodic stress tests for systemically important firms with negative implications for compensation if the stress test didn't come out well. so if you seem to be operating

in a company that will not withstand a 20% decline in asset values or whatever the stress test would be based on that actually that would have a negative implication for the bonuses this year. so that's suggestion one. suggestion two is that as you probably are aware, the administration or the treasury and the financial services committee staff gently proposed industry-wide assessment into a fdic-like insurance fund. and it would be post-funded so this would be after -- you foe, if a too big to fail firm failed, the two industry or at least firms above i believe 10 billion in assets effectively have to pay into this fund to cover the losses. and i was wondering if you have a reaction or could provide one against making that assessment not only against the films themselves but against the highly-compensated individuals and perhaps even using a call-back provision. >> again. those are questions. i will get back to you. those corporate governance questions are very important. they're all part of the total

determination of what constitutes credible compensation. to the extent that over the next few months we're dealing with -- in designing compensation structures for employees 26 to 100 which is on my watch, this is suggestions such as yours, congressman, that you know, we should take a look at. i don't know if it should be part of my report or be part of the broader corporate governance reform effort that's underway. but clearly those are suggestions that ought to be considered, yes. but clearly those are suggestions that ought to be considered, yes. >> yeah. what i'm looking for is a response of you personally not as special master. because you have been on the front lines of this. you've dealt with the corporate culture. you've seen what makes people jump and what makes them shrug, and that's what we have to understand. >> i will honor your request and

get back to you, then, as a layman. as a private citizen. >> thanks very much. >> thank you. >> i yield back. >> thank you. mr. jordan from ohio. >> i thank the chair. and i apologize. i was over on the floor handling a few suspensions with this committee. so if i ask things that have already been asked, bear with me. mr. feinberg, we appreciate you being here and your staff as well. was there any coordination? in some of your responses to congressman bilbray, you talk about the independence of your place. was there any coordination last week when your findings came out along with what the fed is planning to do, and as i read what the fed's planning to do, i think about security national bank in ohio, looks like the president there could be, in fact, potentially having the government look at his or her compensation. was there any coordination or is it just the luck of the way the world works that they happened to come out the same day? >> we have been -- it was for luck that it came out the same day.

the federal reserves in terms of what the federal reserve released last week in terms -- >> as a matter of fact, we did not. i had no contact with the federal reserve concerning the time of their release. >> is it coincidence that they came out the same day? >> all i can tell you, congressman, is that there was no coordination and no communication on that regard. >> do you -- again, sort of picking up where congressman bilbray was in the big-picture sense, are you troubled, you know, you think about car czar, pay czar, t.a.r.p. program, energy czar, stimulus package, bailouts for the auto industry, are you -- as you look back, and you can probably guess where i come from, do you think we might have been a little better off if we would have never started down this road in the first place?

>> i'm not going to second-guess congress. i've learned over the years that's a mistake. >> the american people sure do. >> i can only say, congressman, as i've said it publicly, that my role is relatively very, very limited. it is the seven companies that are owned by the american people that i'm focused on. and that is all i'm focused on. >> let me ask you this, then. the slippery slope argument. are you nervous -- and in light of comments like people by senator schumer, a publicly traded company, i guess i just look at this, and i'm thinking, who would have thought in the united states of america, we would have the federal government, the special master of executive compensation telling a private american citizen what they can make? sometimes if you step back and ask the fundamental question, i think you stop and think, wow. this is amazing where we are at today in the united states of america.

and that's a concern, and it's also a concern that when you think about it, you know, we're a country of over 300 million people. and we have this huge market. we're the largest economy in the world. and now one person, one single person, is deciding what people make. i mean, to me, that is -- that's a dangerous, dangerous place we're going. and then when you couple it with, again, what senator schumer has said, where this potentially can take us as a nation, it's no wonder americans are frightened and frankly some members of congress are pretty scared, too, where we're headed. >> i have two answers to your concern. one, my job and my office and what i'm doing was established by congress in the federal statute, accompanied by official treasury regulations. i'm not -- i'm serving under the law, and i'm obligated to serve under the law. >> mr. feinberg, i understand that. and, you know, i get it. and i get the fact that these companies, these firms held out

their money and took the taxpayer dollars. i get that. my question is, does it trouble you as the person who has that responsibility where it could potentially lead and the implications of taking this step, when you already have members of congress frankly important members, influential members like senator schumer talking about where it goes next. >> i am troubled, and i say so in my public statement. i am troubled at the notion that my role currently with these seven companies, i am troubled at the notion that it -- that it could be expanded. >> well, it's important -- >> that's a mistake. >> it's important that you emphasize what you said earlier. it stops here. i mean, that's what scares people. and i think that god bless you for saying it, but it's important that you stick to it. now, let me ask you one quick question. i have a couple seconds left. it seems to me that the administration is going to great lengths to keep you -- you know, you met with the treasury secretary a couple times, you don't meet with the obama administration.

so tell me about that. tell me the relationship you have with treasury secretary geithner. >> i have an excellent relationship not only with the secretary of the treasury i'd like to think but other officials at treasury and at the federal reserve in terms of consulting with them concerning these decisions that i'm making, suggestions that i'm making. they have been extremely cooperative in offering their advice to me at my request. ultimately the decision's mine. but i have sought out a wide range of views, the academics that i mentioned earlier that are our consultants, individuals at treasury, individuals at the federal reserve in an effort to come up with a report that i think is balanced, that is fair and most importantly complies with the statute and the regulations. >> thank you. >> thank you. the gentleman's time has expired. dr. chu. >> thank you, madam chair. and thank you, mr. feinberg for testifying before us today.

i know you have the limited purview of these seven companies, but goldman sachs, jpmorgan chase and morgan stanley, of course, had substantial loans. they paid it off since. and they are no longer under executive pay restrictions. however, with their profits recovering from the government bailouts, all three firms are expected to make huge payments to their executives this year and, in fact, according to attorney general cuomo, goldman earned $3.2 billion in 2008 yet paid out more than twice that amount $4.8 billion in bonuses. what authority would it take to stop such negligent and reckless behavior? what can we do to stop this? this is very upsetting to the american people, as you know. >> that -- that is a huge legitimate question, what authori authority. historically the authority has been the self-regulating

marketplace. now, to the extent that that supplemented by the federal reserve, by the regulators like the s.e.c., the fdic, that is a subject that congress may want to revisit. i want to emphasize my reluctance to attempt in any way to broaden my jurisdiction beyond these seven companies where i'm trying to collect money representing the taxpayers as a creditor. i'm not saying it's not a legitimate concern. i'm just saying that it's a subject that goes well beyond my jurisdiction, it seems to me. >> well, there is one company, gmac, which is under your jurisdicti jurisdiction, and it has already received $12.5 billion of t.a.r.p. money. however, they are asking for a third bailout. and how do you plan to ensure that the additional $5.6 billion that they're requesting doesn't go towards these unscrupulous compensation practices?

>> we're very vigilant in making sure that the compensation practices that we have articulated in this report are fair, are reasonable and will be paid by gmac to its employees as part of this program. i'm not sure we are that extra requested funding will go, but we want to make sure under the law that there's sufficient funds at gmac to pay these officials, and we'll make sure of that. >> and for them to control their compensation practices? >> they control their compensation practices subject to our rules and regulations in which we have mandatory jurisdiction, congresswoman, to make sure that we're monitoring those compensation practices. >> well, let's talk about aig. i know that you made some major

exceptions to pay cuts for three senior aig executives who had signed contracts for multimillion-dollar bonuses prior to your appointment. you stated that you're reluctant to invalidate contracts prior to the enactment of this current law. but do you have the authority to override these contractual rights? what can be done about this situation? you have aig employees who -- well, let's see. four employees made over $4 million. one employee made $10.5 million. >> we have authority under the law to attempt to work with the company in renegotiating those contracts. we have been successful in almost every case, although that's the exception that you have referenced. three individuals at aig. what we did with those three individuals at aig, they had a contract. they insisted on honoring that

contract. they had every right to insist on honoring that contract. and therefore under the law, i took those contracts into account in reducing their 2009 compensation. beyond that, i have no authority to act. and i think that that's what i did under those circumstances. >> while there are alarming findings that executive compensation is actually increasing even though there is this outrage by americans, now that you've had the experience with these seven companies, what would be your recommendation on a going-forward basis? >> i think going forward we'll continue. first to implement the recommendations in our report that call for a reduction in cash compensation of around 90%, a reduction in overall compensation of around 50%, cash plus stock. in addition, i am hoping -- and

we've also reined in perks. we've also tied compensation to long-term performance. and i'm hoping that our recommendations will be followed not only by these seven companies which are required to follow them, but i'm hoping that some of our recommendations will voluntarily be adopted by other companies seeking to improve their compensation practices. we shall see. >> thank you. i yield back. >> his time has expired. mr. cummings is recognized for five minutes to be followed by mr. connelley. >> mr. feinberg, i wanted to thank you for your testimony. and i've listened to you very, very carefully. and i do believe that you have done what you've been instructed to do. and i think you've done an outstanding job. >> thank you. >> let me just try to get down to where the rubber meets the road. you know, i think part of the

reason why this is going on, why you're doing what you're doing, why the congress has asked you to do what you're doing, is so that -- and you've implied this in your testimony. part of the reason is to try to get other companies to do >> i have had an opportunity -- i know you guys have had maximum cooperation as you said. i've had the opportunity to meet with the former c.e.o., mr. liddy, and listen quite to bit to what he had to say. and i read the papers like you do. i have absolutely no confidence, none, that the things that you're able to do -- and it has nothing to do with you -- there is a culture on wall street that will cause them to reduce salaries. i mean, consistent with what you just said a minute ago. and i mean, in your -- and

you're very bright and straightforward person. i mean, what do you see -- i mean, what would cause them to even do it? because my dealings with them is like we're on two different planets. they have -- i think that when they talk about multimillion dollar bonuses, it's like shoe shine money to them. and i'm serious. and so -- and when you talk to -- i've talked to mr. liddy about my constituents who be being thrown out of their houses because of foreclosure, losing their savings, everything, and they still wanted to give money to their financial products division and to not -- to seem to not even have a clue or not give a hoot about these folks, and at the same time handing out millions. i mean, i just can't see how with all your fine work that is

going to be turned around. i just don't. i mean, i've been around a long time. and number two, i was wondering what advice do you have conversations with the president? and because let me tell you, i believe that the american people -- in order for all of the things that president is trying to do to right this economic ship, if the american people aren't there, and if they feel like they're getting screwed every which way, and certainly it goes beyond these seven companies. and you know, so the question becomes, are we -- i mean, what do we see? what do you see? and i mean, i know what you're hoping. but mr. mirovski said something

the other day that really empressed me when he was giving us a little talk about his report. he said that secretary geithner and others, whenever he comes before us, they listen. so here you are before us. you're the man working with the seven companies. i'm trying to figure out, what will it take if anything? this may be a culture that's impossible to turn around. to make these folks move in another direction? .. congressman, you're asking a political science question about the difference -- the gap -- the gap between wall street and main street thinking on this subject. "a," i can play whatever role i can play hopefully in impressing

upon wall street generally the value of what's in this report. whether or not wall street will pick up on any of this, i do not know. >> and give me your best argument. that's what i want to hear. you're talking to wall street. you say wall street, we've got a great report here. this is why you should do this. your best argument. >> my best argument would be to wall street that this is why you should do this because if you don't do this, there may be a time when congress or others will rein in -- will rein in pay and will limit your discretion and will limit your unilateral ability to determine what to pay people. i mean, to the extent that these modest proposals, modest in the sense that they only apply to seven companies, to the extent that they are ignored in the private marketplace, ignored, well, i mean, the question is, will congress, in its wisdom, sit by and allow compensation to go forward under the old regime and the old way of doing things?

i don't know. i've got enough problems, as you've witnessed this morning, dealing with these seven companies and suggesting that my role should definitely not go beyond these seven companies to express their view on what global decision should be made by congress to try and rein in wall street. that is a subject of beyond my jurisdiction and one that i wisely don't want to get near because i don't want to undercut my credibility and my effectiveness in terms of dealing with these seven companies. >> thank you very much, senator. >> we might need another companies. >> congressman connelly. >> thank you, mr. chairman and mr. feinberg, thank you for your willingness to serve. in listing some of the rhetoric about the subject, on the other side of the aisle, one would think, if one knew nothing that congress and the federal

government just has this irrational compulsion to interfere in the private sector and arbitrarily set compensation limits. what's your understanding of why your job was created, mr. feinberg? >> it's clear. my job was created by congress and the treasury to establish compensation determinations designed with one primary objective in mind -- to get the taxpayers' money back. and that is the primary objective. now, how we do that -- >> mr. feinberg, i understand that, and thank you. but why? did something go wrong? why did we decide on these seven companies? >> these are the seven companies that were -- that were allowed, i guess, to survive on the back of the taxpayers' willingness to contribute these funds. >> ah, so the private sector, the free market, in fact, had failed. is that correct? >> correct. >> let's take one of the seven

companies you oversee. aig. the largest corporate quarterly loss in the american history was in the last quarter of last calendar year, and it was none other than aig. is that correct? >> correct. >> and aig has been the biggest recipient of bailout funds, is that correct? >> i think that -- yes, that's correct. >> so it had the largest loss and the largest single taxpayer bailout in american history is that correct? >> correct. >> does the public have any interest at all? in wanting to see some kind of rational compensation limits in a company that's bailed out, the biggest in its history? >> insofar as the public's view is reflected in the statute that i'm working under, yes. >> does that seem a rational concern? >> no. >> it's not rational? >> it's a rational response to

the crisis yes. >> in the public's interest? >> yes. >> thank you. let me ask you, the statute that created a special master was to review prior payments. when your office reviewed prior paymen payments two senior executives in aig, what did you find? because presumably you found something wrong in the fact that you've chosen to roll back some of that compensation. >> with most of the companies we found that prior to the enactment of the law there had been prior payments actually made. there was nothing fe fairous or illegal about it. those were contracts prior to creating my office. what we did find going forward under my tenure, we did find that there were pending payment s that were obligated to be made

under prior contracts. and we were able through negotiations with the companies, in almost every respect except for two or three cited earlier to get those contracts voluntarily in validatevalidate instead we rolled those into respective performance-based stock. >> performance based. in your report you're submitting today going forward, i assume that there's some rational basis for your coming up with the recommendations. there's some rhetoric that would seem to suggest the sky is the limit. we have no business even talking about limiting executive compensation, even in companies we bailed out. and you agree that within some reason, any limit is arbitrary? >> i think that's right. >> but would you not agree,

however, if i said the ceo's compensation of company x ought to be 200% of company x's entire profit for the year, that would be an irrational compensation, would it snot. >> i think it probably would. >> so it's not entirely arbitrary. >> oh, no. our decisions weren't arbitrary. our decisions absolutely were based, i think, were based on reasonable evaluation of the data and the an neck total information we received from the seven companies. i would defend my report as being not at all arbitrary, but very, very principled, very rational and very reasonable. now, people may disagree, but i think it is clearly a reasonable and defensible report that was submitted to the secretary. >> and you use the words performance-based. could you just elaborate on that?

that's where we get into the rational or arbitrary here. it's tied to some kind of rational expectation of financial performance on the part of the company. is that correct? >> that is absolutely correct. we rejected out of hand the notion that regardless of company performance there should be guaranteed salaries, guaranteed bonuses. guaranteed commissions. guaranteed perks, guaranteed, guaranteed, guaranteed. and what we said in our report, and what i recommended is that the era of the compensation guarantee is over. and instead, other than small cash-based salaries, the remainder of the compensation package should be tied to performance. and not only tied to company performance, but tied to company performance over a peer yo of

time so that you can not simply short the stock, sell it after a year, roll it over. you've got to hold it for up to four years. and then we're hoping the long-term benefit of holding that stock will tie the officials' compensation to the overall value of the company as reflected in the stock. in addition, one other point, we also offered up the notion of longer term incentive-based stock, in addition to salary. but that stock cannot be redeemed. it d not be sold, until and unless the taxpayers get their money back. that's the formula we tried to use to correct what we thought in our report were the problems with executive compensation practices in these seven companies. >> i thank you.

and my time sup, mr. chairman. thank you. >> i just want to make one point from my friend and colleague from virginia. they taurked about the private sector failing. i think it's important to understand. the private sector didn't fail. we had some institutions that had major problems. but to argue the private sector failed is just in my judgment fundamentally wrong. institutions fail in the private sector every single day in this country and across the planet. that's part of capitalism. that's part of -- what the problem is, once we start down the reed, that's when we get into all these questions and all these problems. >> yeah. thank you very much. let me say this before i yield to the gentleman from new york, that, you know, there's a lot of concern about these folks who have failed going to another company. you know, i'm not sure that anybody would be too excited about hiring people that fail. i mean, i don't think you have to worry about that too much.

they run one company into the ground and you expect to get big money to go to another one and do the same thing? i don't know that that's a real conce concern. >> well, we hear the argument all the time. you expressed one view, and ranking minority members express another view. there are a lot of vacancies. whoever was going to leave would have left, i don't know. we're trying to implement the statute of keeping in mind both of those positions. it's a balancing act. >> i think about moefbs congress. when we leigh, someone takes our seat. they do real well. i yield five minutes to the gentlewoman from new york. >> thank you. first i would like to welcome mr. feinberg and mention his truly outstanding work as a special master for 9/11 during a very difficult period in our country. it's a very difficult topic. you did a fine job.

i would like to ask how we are faring internationally in terms of our compensation compared to foreign countries. we are in a global market now. we are kpaet competing with firms across the world. and how does u.s. executive pay >> i can get you that data. what i do know is that there has been a great deal of recent g- 20 and other cooperation between the treasury and the secretary in other countries, trying to come up with a common set of international standards governing compensation. how much american composition varies from that of japan and italy, i do not know, but i can get you that data. >> of like to know and have also read that the united kingdom adopted rules, shareholder vote on executive pay. are you aware of that?

has it made any difference in pay scale? >> again, i think that is of recent vintage. i will try to secure some information concerning the impact of that in the united kingdom. cooks the united kingdom, the five largest banks, have reportedly agreed to the g-20 executive compensation rules. and have u.s. banks like was agreed to except these conditions? these would include an independent compensation committee, clawbacks for poor performance? >> not on my watch. i do not know. i am limited to the seven companies. at the risk of disappointing you, i will give you the answers to these questions, congresswoman. >> are you aware of any other legislative fixes or actions we should be taking in terms of

tying executive pay more to performance? >> that raises the whole question about corporate governance. and what congress is considering in both the house and senate concerning both corporate governance, reforms in federal legislation, and corporate regulatory reform. both bills subjects are part of the overall concern about total compensation even though those two severe and not directly part of my jurisdiction. though those two subjects aren't directly part of my jurisdiction. >> okay, the law gives firms the right to appeal within 0 days of the compensation determination. and do you anticipate appeals? and if so, how will they be conducted? >> i haven't received any appeals as yet. i'm hopeful there won't be any

appeals. if there are under the law, we will certainly give due consideration to those appeals, but as of yet, as of today. >> are companies offering grarnt guarantees to employees and does that violate treasury regulations? >> it all depends whether those employees getting those grants allegedly in the new york times fall within my jurisdiction one 1 to 25 or 26 to 100. citigroup and other companies under my jurisdiction, at least legally have the authority to act independently if they're not part of my mandatory jurisdiction. i could issue some advisory opinion, if i knew more about such bonuses. and we will look into that.

>> do you have the authority to override contractual rights? >> no. if the contractual rights are found by my office to be valid, legal and binding, then we give due deference to the constituti constitution. the fact that the sanctity of contracts should be upheld. but as i said earlier, we do have under the law two ways to deal with these old contracts that might be found to be valid. one, we can seek to renegotiate those contracts with the company. we've been very successful in doing that. we'll yield those contracts and turn it over to performance-based stocks. second, if a company refuses to voluntarily modify the contract, we can take those contracts into

account in establishing perspective compensation. so we do have some weapons at our disposal. >> thank you. my time has expired. we've been calmed to a vote and thank you for your service to our nation. >> and congressman, thank you for all your help on 9/11. you were a stalwart in convincing your constituents to come into the fund, and i will always be in your debt for that. >> thank you. >> thank you very much. and let me thank you your testimony. you were an outstanding witness, no question about it. we want to let you know we appreciate that, appreciate the work you've done and we really, really want to continue to stay in touch with you as we move forward, because as i indicated earlier on in my opening statement, the american people are angry, and of course, you're helping to sort of calm them down. thank you so much. >> mr. chairman, you and the ranking##x

>> this week senator dick luger is guses challenges facing the country in response to the president's agenda so far. >> are in a war in which americans are losing their lives in which tens of billions of dollars are being every appropriated at a time in which we are running a deficit -- been re-appropriate. there's $1.40 trillion spent last year and even more this year, and all kinds of ominous signs. this is why i have criticized

the president for instituting a large health-care reform, for going into the climate change business, and a whole lot of other things important in this world and to americans, but virtually impossible to do on top of the budgetary stresses and the economic crisis we have. >> was the full interview with the indiana senator today at 6:00 p.m. eastern. -- watch the full interview. >> tonight, prime minister gordon brown discusses climate change policy, the afghanistan presidential runoff election, and the 1988 bombing of flight 103 pan am.

now a house hearing on financial regulations with tim geithner. this is one of a series of hearings hosted by the financial services committee. the chair is barney frank of massachusetts. it will last about one hour, 50 minutes. the hearing will convene. i apologize, because i was delay ad few minutes and i regret that. we will have ten minutes on each side for opening statements, and the gentleman from illinois is recognized for three minutes. >> thank you, mr. chairman. first of all, i'd like to thank the secretary for coming here today, and while i support most of the legislation, do i have apprehensions about the way we

propose to create a fund to pay for the costs associated with the resolution of a failed systematically significant financialin tu institution. it seems to me that behavior that was reckless in the past has generated huge profits and gains and allowed the wall street executives to line their pockets with hundreds of millions of dollars if not become billionaires in the process. that that greed should it ever, that avarice ever gain its ugly head once again, there should be an insurance fund paid for them, and these are good times. we read all about how good the wall street giants are doing once again, and how their profitability is there. well, they should set aside some of that money. most of us don't die and then buy a life insurance policy. most of us say, in case

something happens to luis, let me make sure if i owe people money and if i have responsibilities that i leave my family and all of those that i have a responsibility, that i set aside some money and buy some insurance. be wonderful that one day, i just wake up cold and that all of my debtors and everybody say, oh, let's go take a life insurance out on luis. that is not the way it works and wall street has to learn -- because i read in the paper this morning, mr. secretary, there are a few of them complain, and record profits on wall street, and they are complaining that the congress of the united states might require them to set aside some of those billions of dollars in earnings so that in the eventual waieventualitie th risky and fail, that they have to set aside money. no more american taxpayer money

should be set aside in case we see the tragedy and the failure we have seen in the last couple of years. so my basic premise today is, look, they were greedy. they should pay for future insurance policy payouts, and the funds should be set up just in case their behavior and reckless and dangerous and risky behavior raises the ugly head again and i look forward to not only today, but to the process of designing legislation that makes sure that those systematically risky institutions are paying into a fund now today, not after the fact. thank you very much, mr. chairman. >> the gentleman from alabama is recognized for five minutes. >> mr. chairman, as you know from the letter you received from the house financial services republicans yesterday, the process for considering the most far-reaching significant reforms of our financial system since the great depression

should be deliberative and not hurried. the draft legislation that is supposed to be the subject of this hearing was not received until tuesday afternoon. do it if any of today's witnesses with the possible exception of secretary geithner have had the opportunity to look at the legislation in its entirety or be informed dunl ter merits. dunl ter rules of the committee, the witness's written testimony was due two days before the hearing and which is to say that it was due before the draft bill was released and the written testimony therefore cannot and does not a address in any meengful way the legislation we are now marking up this morning. or marking up early next week. although we have, we have had the draft bill for less than 48 hours, even a cursory reading shows that the administration has chosen to continue its

failed policies of forced bailouts and orchestrated behind closed doors by officials at the treasury and the reserve. the democrats' talking points that the new proposal ends the era of i quote too big to fail is just that, talk. the taxpayers are first if line to bear the losses when the government invokes its resolution authority, and for those who believe that those taxpayer losses will be subsequently recouped from the surviving firms i direct their attention to the recent examples of gm, chrysler, fannie mae and freddie mac and aig and even more recent example of gmac where the prospects of full taxpayer reimbursement are fanciful. this committee's haste -- sorry. in fact, in testimony before this committee last month former federal reserve chairman paul volcker warned that a resolution

authority with the power to lend or to provide money would encourage the too big to fail syndrome, although he advised the obama administration that his caution has been rejected in the draft. in in a attempt to avoid naming the institutions that deems too big to fail, the administration's legislative proposal foregoes the transparency and full disclosure that are the hallmark of america's capital markets. in the place of an open process, it substitutes a regulatory regime built around a secret list of too big to fail institutions. it is foolish to assume that such a list will be kept secret. are we so gullible as to believe that the regulatory authorities for eight government agencies will be able to impose increased capital requirements and a host of other regulatory constraints on the so-called identified firms without market

participants quickly figuring out which firms are on the list? are companies expected to treat this information as immaterial for purposes of filing reports with the s.e.c.? until these questions are answered, it is simply irresponsible for this committee to accept such a foundational premise and move forward with this legislation. the administration's desire to get something, anything done to satisfy some arbitrarily, arbitrary deadline impose odd n en -- imposed on the chairman will result in this committee passing a product that has not received the careful deliberation necessary to ensure sound legislation. mr. chairman, is it too much to ask the members of this committee and the people they represent that they have enough time to read and understand the far-reaching implications of this legislation? in conclusion, this committee's haste also stands in marked contrast to the views expressed

by federal reserve vice chairman donald cohen who said, i hope we build a regulatory structure that is good for a couple of decades and it is worth taking our time to get it right. the economy is fragile and we learned this morning that it continues to lose jobs. we need to promote job creation and growth and not more uncertainty. i share chairman cohen's hope that we fulfill our obligation to do this in a deliberative manner and not the haste that we are witnessing this morning. i yield back the balance of my time. >> the gentleman from pennsylvania is recognized for two minutes. >> thank you, mr. chairman. mr. chairman, i understand that we are under pressure to get some things done, and unfortunately, we haven't had a great deal of time to spend in analyzing this proposition. iag@ @ s)@ @ @ @ @ rs

to prevent future disasters of the kind we have experienced in the past year, but i also feel with the american people speaking to this congress and broadly to the world, that they cannot understand how we just support the safety mechanisms for the bailout and cannot put caps or limitations on these huge conglomerations of money that we are causing by our own very bailout. it seems that of treasury was able to come up with such proposals they should also have the burden, and at this time use this offer as a balancing act to come up with a mechanism in place that we can act to start limiting the unlimited power of the goldman sachs of the world, and other huge conglomerations. power of the goldman sachs of the world and other huge conglomerations of money.

that may sound strange and may sound revolutionary, but we are almost in revolutionary times. clearly, if treasury and the executive have come to the conclusion that the danger to our system was so great that we have to use the interstate commerce clause to create tremendous executive authority without much restraint -- i just read mr. chairman's letter and he makes good points. if we are having that transfer of authority, it seems to me the obligation of treasury to come forward to prevent this so it does not happen again in the future by curtailing and tailoring down the size of the institutions and particularly the financial institutions of this country so that we cannot have systemic problems.

>> the gentleman's time has expired. i want to do to a couple on the republican side. the gentleman from texas, mr. neugebauer. >> i thank you for the work on the new draft. while you have address some of the concern in prior proposals the overall concept not changed much. this draft will allow regulators to identify firms who are too big the fail, and although those firms will now be kept secret. this version still keeps the government in the bailout business while a line of credit for the taxpayers will be used that may or may not be paid back. these are non-starters. rather than a government arbitrary resolution, we need a strong banking regulation to hold them to the law. rather than picking winners doo council should require regulators to look at risks and review capital requirements to ensure all firms are holding the

needy capital for the roles they are taking. we need a reform plan that puts the taxpayers and economies first rather than making bailouts permanent. like the ranking member, i think this process needs to be slowed down some because these are probably some of the more important things that we'll do on this committee in the next few months, and we need to get it right. i yield back. >> the gentleman from california, mr. royce. >> thank you, mr. chairman. apparently the too big to fail mod cell too hard to kill. i thought we would have learned our lesson from fannie and freddie. prior to their failure it was widely perceived the government would thereby to bail them out when they ran into trouble. that implicit guarantee translated into real advantages for the gses in terms of lower cost of capital which facilitated their dominance in the marketplace. the assistant backstop already provided to the largest of our financial institutions is having an eerily similar effect.

a recent study by the study of economic and policy research found that the too big to fail doctrine translated into a tangible subsidy for the 18 largest bank holding companies worth $34 billion per year with a 78 basis points lower of capital when compared to smaller competitors. instead of granting permanent bailout authority and institutionalizing the too big to fail doctrine, which this legislation does, we should set up a structure that will allow for an orderly liquidation of an institution through an enhanced bankruptcy without the use of government funds. >> and the jept gentleman from illinois. >> thank you. my initial review of the chairman and secretary's financial stability plan is that it would do the complete opposite. create further financial instability and facilitate risky behavior in financial firms. while the headlines have said a

deal has been reached, i would argue this is no deal for the american people and especially the taxpayers. while i support a strong council of regulators, including federal and state regulators at the table and stronger, smarter regulation, i don't think the resolution authority under this proposal is the right answer. it's my hope instead of supporting more proposals to increase the power of the federal government the administration will strongly consider a new chapter to the bankruptcy code. it's my hope we can also consider proposals addressing two of the biggest financial failures of our time. fannie mae and freddie mac. never again can we allow regulators to fall asleep at the wheel or another bailout or the government picking winners and losers of private businesses. i yield back. >> i will yield myself five minutes. we are in a difficult situation. history is apparently been somewhat rewritten. all the bailouts that the gentleman from alabama referred

to, where we are not going to get money back, were the result of an absence of policies to deal with this set of situations. and every one of those bailouts was requested by the bush administration by secretary paulson and chairman bernanke. now as of april 2008, secretary paulson said we need to do some things to keep this from happening. it happened very quickly, and we were unable to avoid those. the question of simply allowing bankruptcy to be the way to deal with it, there's nothing theoretical about that. that's the lehman brothers situation. lehman brothers went bankrupt and the bush administration officials had two responses. first, to use federal reserve authority without any congressional approval, and even prior notification to begin the process of providing funds to pay off the creditors of aig. that was done by the federal reserve last september under the

bush administration with no congressional involvement other than to be told after the fact. secondly, they came and asked us for authority to spend some money to provide some forms of cash so other institutions didn't go under. congress agreed with some conditions. i think it avoided worse dangers that could have been administered better. our whole purpose is to change that situation and to prevent it. yes it is true we had these previous problems. that's because we didn't have any set of rules. what we do today is to begin deliberation on a proposal that does a couple -- now there are two problems that were raised with regard to the bailouts. one, the use of taxpayer money. and this is a set of proposals that will prevent taxpayer money from being used. members say, oh, this requirement that it come from the financial industry, that won't work. congress will do it instead.

they have a very different congress in mind than the one i have served in. i do not believe there's any remote chance that congress would come to the rescue of the financial industry as this bill will have required and set aside substitute taxpayer money. if that's their intention, they can try but i feel they'll be outvoted. there's the moral hazard. the argument that once people know certain institutions are of a certain size they'll be protected. that's why many of us rejected the notion there be a list published beforehand. what we have here is this. a group of regulators that will be monitoring institutional behavior, both cumulative institutional behavior like subprime loans and the behavior of a large irresponsible institution like aig. there will be no notification to the public or privately that a particular institution is in that category without simultaneous restrictions on the institution. there will be no prior

notification so the institution will then be free to attract investment because it will be shown to be so big. it will become manifested. this institution is covered. the day that the regulator says you must significantly increase your capital, you must reduce your activity, we will be adding to this. it's in here. and the ability to take the kind of restrictions that exist that under glass/steagall nationwide and impose them institution by institution. so there is a threshold quest n question. is it possible to go forward in this situation without any funds ever being used to prevent the kind of cataclysm of failure leading to failure leading to failure that the bush administration felt very much we had to avoid. we, i think, minimize this in a couple of ways. first of all, the penalty for being such an institution will be very severe. there will be death panels

enacted by congress this year, i hope, but they will be for those large institutions who are to be put out of business, whose shareholders will be wiped out and executives fired, whose boards of directors will be replaced. there will also be no guarantee in any case that the creditors are going to receive 100 cents on the dollar. classes of creditors will be allowed to be exempted entirely from any repayment. other creditors will have it reduced. you can't do that under bankruptcy. general bankruptcy makes it harder to have that kind of thoughtful selection. we're using the constitutional power of bankruptcy but a way that's more thoughtful. final lirks would say this. this is not the only place. i hope we will be imposing some restrictions on your ability to secure ties 100% of the loan. we are doing other things. we are requiring other people to register. there will be other restrictions that will keep us from getting to that situation. now i recognize the gentleman from texas, mr. hensley for one minute. >> thank you mr. chairman.

i find it somewhat curious that we're having a hearing on systemic regulation and nowhere do i see the director of fhfa, the regulator of fannie and freddie. the same fannie and freddie that were compelled to buy the lion's share of poorly underwritten loans in this nation, the same fannie and freddie that have now cost the taxpayer over $1 trillion. the administration has now submitted to us legislation to regulate pawn shops and grocery stores, but no legislation deal with the greatest systemic risk within the system fannie and freddie. the bill we're considering today will simply institutionalize too big to fail, paving the way for more fannies and freddies and perpetual taxpayer bailouts. according to "the wall street journal," the administration is not done with taxpayer funded bailouts as apparently gmac is now in for their third multibillion-dollar bailout. to borrow from a title of a song by the commodores, once, twice, three times a bailout, enough is

enough. i yield back. >> mr. garrett for one minute. >> mr. chairman iseek unanimous consent to enter into the record the statement by congressman brad sherman regarding let's not adapt t.a.r.p. on steroids and an appropriate analysis of exactly what this legislation stands for. >> without objection means you can do it. >> secondly iwish to enter into the record the congress -- into this record the congressional record from the day in which the t.a.r.p. legislation was passed this house of congress and indicate in that day of the congressional record that the chairman was the manager of that legislation as it passed through a democrat congress. without objection? >> without objection. >> there you go. thank you. mr. chairman, do i begin my time now? >> start the minute now. >> thank you. mr. chairman, i find this legislation draft proposal which is a continuation of bailout

legislation absolutely incredible. the last several months it was my impression that there was a developing consensus the federal reserve should be given less power, not more. in reading over this discussion draft in the very limited time we've had to review this most important legislation this committee will probably ever consider in our lifetimes, i'm struck by how much power the fed has given. although it's not singled out as a sis stemmic uber rater in name. this fed is given primary supervision or systemic firms and can override lesser regulators that don't comply with its wishes. the fed is given almost unlimited thort systemically dismantle a private company. this is a lot more than impotion capital standards. i for one given the extraordinary government intervention into private firms we've already seen with the trampling of the rule of law in order to benefit some political favorites in the auto industry, for instance, i'm very uncomfortable with this sweeping unchecked power. >> the gentleman's time has expired. >> they failed to effectively

mitigate many of the large bank holding companies already under its purview. thank you. >> the secretary of the treasury is now >> today we learn that our economy is growing again. in the third quarter of this year it grew at 3.5%, the first time we have seen positive growth in the year, the strongest in two years. business and consumer confidence has improved substantially. house prices are rising. the value of american savings have increased substantially. americans are now saving more and barring less from the rest of the war. consumers are just beginning to spend again. businesses are starting to see orders increase. exports are expanding. these improvements are the direct result of the tax cuts and investments as part of the recovery act and actions we have taken to stabilize the system and un freeze credit markets. this is only the beginning.

unemployment remains unacceptably high. for every person out of work in every family facing foreclosure, every small business facing a credit crunch, the recession is alive and keeping go growth will bring jobs, but we need to work together to strengthen the recovery and create conditions where businesses will invest again. and all americans will have confidence and feel secure in retirement. we have a responsibility to create a system more fair and stable, to provide protections, and gives business access to capital that they need to grow. that brings me to the topic at hand. need to grow. that brings me to the topic at hand. now this committee has made enormous progress. you've acted swiftly to better

protect investors and consumers from unfair fraudulent investment practices to regulate the derivatives market, improve investor prosecute techs, improve credit rating agencies, to bring basic oversight to hedge funds and other unregulated activities. today you carry this momentum forward. one of the most searing lessons of last fall is no financial system can work if institutions and investors assume that the government will protect them from the consequences of failure. never again should taxpayers be put in the position of having to pay for the losses of private institutions. we need to build a system in which individual firms no matter how large or important, can fail without risking catastrophic damage to the economy. now last june we outlined a comprehensive set prove posals to achieve this goal. there's been a lot of work by this committee and many others since then. chairman's introduced new legislation to accomplish that. we believe any effective set of reforms has to have five key elements.

i'm going to outline those very, very quickly, but the legislation in our judgment meets that test. first test is the government has to have the ability to resolve failing major financial institutions in an orderly manner with losses absorbed not by taxpayers, but by equity holders and by unsecured creditors. in all but the rarest case, bankruptcy will remain the dominant tool for handling financial failure. but as the collapse of lehman brothers demonstrates, the bankruptcy code is not an efective tool for resolving the failure of complicated global financial institutions in times of severe stress. now under the proposals we've provided, which are very similar to what already exist for banks and thrifts, a failing firm will be placed into an fdic manager receivership so they can be unwound, dismansled, sold or liquidated in an orderly way. managers responsible for failure would be replaced.

a second key element of reform. any individual firm that puts itself in the position where it cannot survive without special assistance from the government must face the consequence of that failure. that's why this proposed resolution authority would be limited to facilitating the orderly denies of the failing firm, not ensuring its survival. it's not about redemption for the firm that makes mistakes. it's about unwinding them in a way that doesn't cause catastrophic damage. taxpayers must not be on the hook for losses resulting from failure and subsequent resolution of a large financial firm. the government should have the authority as it now does when we resolve small banks and thrifts. the government should have the authority to recoup any losses by assessing a fee on other financial institutions. these assessments should be stretched out over time as necessary to avoid amplifying, adding to the pressures you face in crisis. fourth key point. the -- i want to empsigh this. the emergency authorities now

grant to the federal reserve and the fdic should be limited. so they are subject to appropriate checks and balances and can be only used to protect the system as a whole. final element. the government has to have stronger supervisory and regulatory authority over these major firms. they need to be empowered with explicit authority to force major institutions to reduce their size or restrict the scope of their activities. where that is necessary to reduce risk to the system and this is a critically important tool. we do not now have at present. regulators must be able to impose tougher requirements, most critically, stronger capital rules, more stringent liquidity requirements that reduce the probability that major financial institutions in the future would take on a scale of size and leverage that can threaten the stability of the financial system. this would provide strong incentives for firms to shrink to simplify to reduce leverage. we have to close loop holes, reduce possibilities for gaming

the system for avoiding these strong standards. monitoring threats to stability will fall to the responsibility of this new financial services oversight council, the council would have the obligation and the authority to identify any firm whose size and leverage and complexity creates the risk to the system as a whole and needs to be subject to heightened stronger standards -- stronger constraints on leverage. and the federal reserve -- and under this model would oversee individual financial firms so it's a clear, inescapable single point of accountability. the fed already provides this rule for major banks, bank holding companies, but it needs to provide the role for any firm that creates that potential risk to the system as a whole. the rules in place today are inadequate and they are outdated. we have all seen what happens when an n a crisis the government is left with inadequate tools to respond. that's the searing lesson of last fall. in today's markets, capital moves at speeds unimaginable. when the system was created more than 90 years ago, and today's

economy given these risks requires we bring that framework into the 21st century. the bill before the committee does that. it's a comprehensive coordinated answer to the moral hazard problem. we're also concerned about. what it does not do is provide a government guarantee for troubled financial firms. it does not create a fixed list of systemically important firms. does not create permanent t.a.r.p. authority. and it does not give the government broad discretion to step in and rescue insolvent firms. now we're looking forward. we're looking to make sure we provide future administrations and future congresss with better options than existed last year. this is still an extremely sensitive moment for the financial system. investors around the -- across the country and around the world are watching carefully your deliberations, oury did bait, our discussions. i want to make sure they understand that these reforms were proposing the crises about the future. while we work to repair the damage still caused by the

current crisis. now the american people are counting on us to get this right and to get this done. i want to compliment you again for the enormous progress you made lrksd and i look forward to working with you, continuing to work with you to produce this strong package of reforms. thank you, mr. chairman. >> i'm going to begin and use my five minutes essentially to make some points. i know there will be no dirth of questions, mr. secretary. i will not be asking you any questions. i do not feel you'll be ignored by the end of this morning. first, let me address the timing issue. the ideas that we are talking about here really were first formulated for major public debate by former treasury secretary paulson in april of 2008. and they have been under serious discussion since then. various versions have gone forward. this particular draft reflecting a lot of conversations, a lot of people have had, was recently released.

we won't get to marking it up until next week. and that's probably not until wednesday now because we have a couple of things to finish up from tuesday. the argument that we should wait, i think, i think we are more open to the criticism that we haven't moved quickly enough, rather than we are moving too quickly. there was a paralysis in the financial system, but that is happily ending, and we don't want to get behind that curve. second, i want to address the question of fannie mae and freddie mac. i am astounded by the notion we have to regulate them. we did. in 2007, as chairman of this committee, i made as our first major order of business adopting the regulation of fannie mae and freddie mac that the bush administration wanted. we did that in the house. we did not get prompt action in the senate. surprisingly. and when the first stimulus bill came up in january of 2008, i argued they take our fannie and freddie reform and make it part

of the bill. they weren't able to get agreement to do it. the senate did act on our reform in 2008, too late to stall off the crisis. but the sfact the fannie and freddie that exist today are already the ones that were strictly regulated. now they have collapsed. they are not acting as they did before. it is important for us going forward to totally revise the functions of the secondary market and whether or not subsidy should be a part of that and that certainly will be on our agenda next year. fannie and freddie are not out there. "a," they are subject to regulation. "b" there's a case of collapse. part of this debate suffers from partisan lag. i want to talk about the comparison between this year and last year. in the events leading up to the collapse of last year, there was no regulation of subprime lending. a major contributing factor. we adopted legislation to control subprime lending in the

house. it didn't get enacted in the senate. we have that as part of this bill. we will not have the unrestricted, unregulated responsible subprime lending that led in part to the collapse because so many of the securities that fell apart were of that sort. we had no regulation of derivatives. aig was engaged in wild speculation and these things all interact. you had bad subprime mortgages that shouldn't have been issued. aig without any restriction ensuring against the default of these bad subprime mortgages. that again will be corrected by the time we go forward. we will have what the s.e.c. now hedge fund registration. private equity registration. much more data collection than we have had before. as i said, we have fannie and freddie playing a very different role. you had an unregulated fannie and freddie before this house began. you had unregulated subprime

mortgages. all of those are now incorp praptd we want to avoid the too big to fail. part of it is we have restrictions that will keep these institutions from getting too big and from being likely to fail and, c, having fewer consequences when they do. so the comparison of today to before as i said is serious cultural lag. we will have severely restricted the kind of irresponsible activity in derivatives in subprime lending and another piece that i mentioned, in stewartization. i thi securitization. 30 years ago, people that lent money to other people were the people expecting to be paid back. once they were able to get rid of all that loan, the discipline of the lender/borrow relationship diminished. we're going to reform securitization with risk retention. we're restricting irresponsible subprime loans. we are regulating derivatives. there will be no unreported -- no unregistered large financial

enterprises going forward. we will have the ability to significantly increase capital requirements, more than proportionately. all of those things are there. in the absence of all of those, we had greater problems. we are talking about a regime that puts all of those in a place and then in the end says, and for all of that somebody fails, we step in and we hammer them pretty hard and we protect the taxpayers. the gentleman from alabama. >> i thank the chairman. secretary geithner, this list of companies is to be kept secret. is that correct? >> congressman, the central imperative is to make sure that institutions that could threaten the stability of the system are held to tougher constraints on leverage and risk taking. >> and capital and -- >> capital and liquidity and risk taking generally. that's the central lesson of this crisis. central imperative reform. to do that, they have to know who they are.

this should not be a fixed list. it may change over time because the system changes over time. but the central imperative is, if you take on or could risk the stability of the system as a whole. >> but you have to -- you have to designate. it has to come on a list or it has to be designated if you are going to increase capital on them or prudential regulations or -- >> exactly. and -- >> so you will have a list. i mean, there will be these companies that you know of. >> i would say it this way. this is the system that exists today although it didn't work as well as it needs to. >> i'm not talking about that -- >> no, right now if you are a globally active bank, the capital requirements you are held to are different from and tougher than if you are a regional or community bank. so that's a system we have today. those banks know who they are. they exist. they're designated as globally active banks. >> these companies have to file with the s.e.c. they would have to make a material disclosure as to they

>> so, it will not be secret? >> no, it cannot be because the purpose is to allow them to tougher standards. >> then it is a given that people can figure out quite quickly when you raise capital restrains, require more, that it will be disclosed? >> if there were held to higher capital requirements, but nobody knew it, it would not do any good. >> you say in this legislation that you can increase it? >> that is right. >> investors will know that the companies would have to disclose that it? >> absolutely. they have to exist to be tougher and the market will have to know that they're held two separate standards. >> so the public would almost

immediately realize who these companies are? >> yes, but i think we're missing the key point. what you do not want to do is create an expectation that the government will protect them if they screw up. it is a difficult balance, the balance you have to strike. . . strike. >> i know you won't release -- it says there will not be a release of the companies on the list, okay? but by putting new requirements on them, i mean, people will realize quite quickly. in fact, those companies will have to disclose to investors have to disclose to investors and to the market and s.e.c. and other regulators that they are under those constraints. >> i don't think we're disagreeing. i think as i -- if i understand you correctly, you are in favor of make suring these firms can be held to higher standards. this is a way of doing that. and --

>> and let me say this. i'm not in favor of -- i'm not in favor of them being held to higher standards, but if we tor hold them to higher standards, i think the market is going to have to know. >> you would not impose tougher standards on the largest, most risky institutions than apply to a community bank or a regional bank? >> let me ask you this. well, i'm not because what you then do, you say that you are going to -- that you can loan these companies money. >> no. i mean, i think that's the mischaracterization of this. what this does is makes sure if, in the future, they get themselves in the position where they can't survive on their own -- >> right. >> -- then the authority we would have is to manage their failure without causing the economy to go through this -- what this economy went through. that's the basic -- >> but under 1109, even a solvent company, you can have capital injections. you can invest in those institutions. you can buy their assets.

>> again, congressman, the important thing to recognize is, and it's just worth going back to what it was like last fall. without the ability for the government to step in and manage the failure of a large firm and contain the risk of the fire spreading, we will be consigned to repeat the experience of last fall. it's a really stark, simple thing. and there is no -- i know of no person who has stood in my seat. this is true for chairman paulson in any central bank in any major country that would say the country should be run with no authority to step in and act in that case. i don't think there's any credible -- >> let me ask you this. this will be my last question. you impose a tax on large and medium size financial institutions -- >> only if -- only if as part of protecting the system from their failure the government is exposed to losses. in that case and only to that

extent, would there be a fee assessed on institutions to cover it. that's to protect -- >> that's a tax on their competitors, isn't it? >> can i borrow my time? >> you may finish but no further questions. >> this is a very important key thing. the system congress designed for small banks and thrifts today works in a similar way. it's different because it's part of an explicit insurance regime. but in that case, if the government has to step in and the fdic does this every week, step in. and manage the failure of a bank. if in that case the government assumes any risk of loss, it has to put a fee on institutions who recoup that loss over time so the taxpayer is protected. what we are doing is a very simple thing. we're taking that basic framework and adapting it to the system we have today. we should have done that ten years ago, but we didn't do that. but it's a very simple thing. if the government is exposed to loss when it acts to protect the

system, any risk of loss it should assess a fee on banks over time to recoup that loss. that's to make sure the taxpayer is not in the position of absorbing those losses. that's the basic premise. >> i think we all know what they now -- >> the gentleman's time is expired. >> that's a fee on the insured deposit. >> the gentleman's time. >> it goes beyond that. >> look. time is expired. the chair is going to ask for cooperation here. >> okay. thank you. >> and now the chair is going to take its time, ten minutes, right? no, i'm serious. i'm going to follow on the questions that the ranking member has asked. if i listen to what he was saying, and i think your answers are off the point, mr. secretary. he's asking you on what authority is this extraordinary centralization of executive authority contained? do you have some particular provision in the constitution that says this congress has a right to transfer this amount authority to the executive branch of government?

and that should be a pertinent question we all address. there are a lot of things in this country we'd like to do, should do or could do to protect the people but there's a little document that they executed some 233 years ago or 22 years ago. that don't allow us to do that. what is the basis for your authority? >> well, it's -- you look at our system today. i think there's -- i'm not a lawyer. of course, our lawyers will have a chance to study this very carefully, but congressman, right now the congress grants to a series of agencies created by the congress the authority to set capital requirements on banks. >> yes. >> right now the congress has given the executive branch the authority for banks and thrifts. >> mr. secretary, i agree with that. but that's because those institutions exercise the right of being insured under statutes that this congress has passed. >> no, it's not solely because

of that because the protections that exist today, the congress has given the executive branch go beyond simply the simple deposits of insurance. >> i'm not a man that fears this administration or you, but i do fear the accumulation of power executed by someone in the future that can be extraordinary. now you and i know that in this last disaster, treasury was able to determine the general motors and the auto industry were banks, financial institutions so they could have access to t.a.r.p. i'm not sure i agree with that. but at the sim it was certainly essential if we were going to save those institutions. but what we're doing is allowing a board or council or organization to make determinations in a time of extremity. no question about that, that some of us may not agree that that authority rests in those entities or was constituted or

we even had the authority in this congress to give that type of authority. >> well, you get to choose now what mix of authorities and limits and executive power are going to be appropriate for the future. that's the choice you'll be debating and making. what we proposed, though, has a carefully designed set of checks and balances and it does limit substantially the authority of the executive branch. but again, that's the choice you'll have to make in that case. we're using a model that exists today building on that model. >> i'm going to make the assumption you've got the authority. your lawyers have said you've got the authority. you have good, constitutional basis. if you do, what's our excuse for not exercising that same type of authority to stop these two large to fail organizations from occurring and existing. why can't you in this legislation say, nope, this bank is just too large. it's got to cut up, split up. why should the american people have to sit out there and see us creating mammoth organizations

that nobody says we have the authority to control or limit but we have the authority to help them when they get into trouble. >> i agree with you. that's why this bill would provide authority to not just impose high capital requirements on them. it would have the authority to limit the scope of their activities, to compel them to shrink and separate. it's a very important thing. i agree with you about that. >> you believe we have the authority or you will have the authority to preemptively seize these corporations and take them under the control of federal authority with no judgment, no due process, no thought on their -- >> i think you can separate two different things. one is about prevention. one is about what you do in the event of a severe crisis. in the prevention front, what this does do is makes clear regulators have the responsibility and the authority to limit risk-taking, limit the scale and scope of activities, size if necessary, if that's

necessary to protect the system. that's a very important thing. we did not have that in this crisis for a large part of the financial system. >> you are interpreting this statute to give treasury the authority to look at an organization that is not in difficulty or extreme but it's huge. and potentially it's not determined to be monopolistic at this point but it's huge and could have systemic risk characteristics to it that you have the right to summarily seize that organization -- >> no, no. >> disband the assets of that organization. >> no, that's -- slightly conflicting two different things. it gives the responsible regulatory authority the power -- >> some organizations have no regulators. general motors didn't have a regulator until you came in and interpreted it that it was a bank. >> that wasn't my judgment. that was my predecessor. >> do you sustain what judgment was made there that in fact, that was a bank and secretary to governmental regulation? >> i don't think that's quite

the right where a to think about that. that was a judgment made by my predecessor under authority given to him under the emergency economic stabilization act. i think he made the right judgment there but that was his judgment in that context. i don't think that's what this bill is about. >> i wish we had more time, mr. secretary. >> we will. >> we certainly should engage in the future. if i could make a recommendation that we perhaps break down the sections with this committee on both sides so some of these questions -- fundamental questions should be answered. >> thank you, mr. chairman. i want to go back to a little bit of what the ranking member was talking about. mr. secretary, because i'm a little confused now. page 11, confidentiality. the committee of the congress receiving council's report shall maintain the confidentiality of the identity of the companies described in accordance with paragraph a3, information relating to dispute resolutions described in accordance with paragraph.

then i'll go over to page, i believe it is, 17. and it says the council and the board, which is the fed, may not publicly release a list of companies identified under this section. and what they are talking about is the identification of financial companies for heightened provincial standards for financial stability purposes. so what are those companies? the determination for those companies would be their capital structure, number one. and those would be categorized into well capitalized, which we hope all companies are well capitalized. then we have significantly undercapitalized companies. and the council is going to make, and i guess along with their regulator make that decision what categories they fall into. and you are telling me that you are going to disclose that information. the bill says you can't disclose that information, and i'm a

little concerned about what is the answer to the question. >> let me start with the simple thing. it does not make sense to the system in which community banks and regional banks are held to the same standards that are necessary to protect the system from the risk posed by large, complica complicated financial institutions. you need to have a tougher regime apply to them. >> mr. secretary, i -- >> i just want to know, are we going to disclose the companies or not or are we going to disclose -- >> you have to start with this thing. they need to be subject to a different set of constraights. i've heard nobody suggest what's appropriate for a community bank is appropriate for a major global firm. >> if that's true -- >> let's just talk about the large banks. >> if that's true they have to be subject to higher standards, and i am sure for the reasons many of you said, they'll be disclosing the regime they are

operating under. analysts will know and it will be clear how much capital they are holding. and i think that's the best way to get the balance right. what you want to avoid, i think, as many of you said in the past, is you want to have the sense there's a fixed list of companies out there that are going to benefit from special support. we want to avoid that risk. that's why the chairman tried to strike the balance in the draft. >> i'm going to reclaim my time because there will have to be a list. this bill calls for a list to be determined because that's the council's responsibility. >> would you prefer it be a public list? >> i don't know how you can keep it secret because these companies if i'm a creditorary shareholder of a company and it's not disclosed to me that my invest -- i am investing in a company that's critically under if you are withholding information? >> i do not think that we are disagreeing. the company will be held to tougher standards, disclosing the capital that holds. its equity holders understand

that. that is probably where we get the balance. >> where i am headed is that the resolution authority proposed under this bill basically doesn't end necessarily and we have it in some of the resolutions as falling the rule of law -- as following the rule of law. for example, general motors was intimidated into taking the position that they did not want. general motors was managed under the established procedures all bilal the land. >> congress recognized many years ago that those procedures do not work for banks. they borrow short and cannot function effectively under that kind of regime. so, clear priorities are established for creditors. >> why not use the bankruptcy

code? that is the republican alternative. >> i do not think that this is complicated. look at what happened in the wake of lehman brothers. it caused catastrophic damage. in the wake of the s&l crisis in well before that, congress recognized the banks that operate like that have special hat operate like banks they need a special set of protections to allow for the equivalent of bankruptcy. bungets had we had a different provision in the bankruptcy code for a lehman-like or financial institution, we could have done that and make sure that -- >> that's effectively what this does. that's effectively what this is designed to do. >> the gentleman's time is expired. now the gentle lady from california. >> thank you, mr. chairman. let me ask mr. geithner, do you have a list of systemically

significant organizations that are basically in the definition of too big to fail? do you have a defined list? >> i do not have a defined list today. but i want to come back to one thing. >> please. i just want to know that. secondly in this legislation, where you have broad -- you are asking for broad authority, do you have authority to bail out. >> in this proposal? >> yes. >> what this proposal does -- >> do you have the authority to spend money to bail out any of these systemically significant organizations after they get in trouble? not just resolution authority to break them up and to assign the management of their failed assets, et cetera, et cetera. do you have the authority to spend the taxpayers' money to bail them out if you deem that to be a good way of handling

that situation? >> no. >> describe what authority you have to resolve them if you don't have bailout authority. >> what you have is the authority to wind them down, to separate the bad from the good. to sell the good businesses. to put them out of existinence a way that doesn't cause catastrophic damage to the economy. if in that process the taxpayers exposed to any losses, then we propose to recoup those losses as we do for banks and thrifts by imposing a fee. >> okay. i think i have the answer. you aren't asking for any monetary bail out authority as you do the resolving of any of these systemically significant institutions. that's what you're saying? >> we want the ability to let them fail. >> you do not have the -- you aren't asking for the authority to bail them out. okay. i got that. have you suggested to any of these systemically significant

organizations that they should be winding down the size of their organizations? we know that aig, for example, started to sell off, started to wind down. you have got some significantly systemically significant organizations that are in trouble now. citi is in trouble. what are you suggesting they do? >> i would be happy to go in detail, as i think the chairman of the fed, and go through exactly the conditions that have been put on the range of institutions not relying on the taxpayers. since i've come into office we've had $70 billion of capital taken out of the financial system, replaced with private capital. the financial system has changed very dramatically. those major institutions are smaller. they have less leverage today. they're being forced to run more safely. the riskier part of their business had been wound down and

it's an important thing -- >> i want to take back my time. but the question really is this. if you know who they are, and there is a possibility they could cause the same kind of meltdown that we have experienced in this economy, have you suggested before they get into trouble again that they should be downsizing, selling off, they should be reducing their size? >> of course. absolutely. >> i do want to say precisely the purpose of this bill is to give them powers to do more of that than they now have. they do not now have the powers in a binding way to do what the gentlewoman is suggesting. and this bill would give them more powers to make those, not just as suggestions, but as binding orders. >> before they need money from the government. >> let me just finish. as we take a look at what has happened in the past, with the bailout that we have supported, and we have found that the

institutions that we bailed out froze the credit, didn't make credit available, they increased interest rates, they did all of that. perhaps we had the power to put some mandates on them, some dictates on them about what they should do in exchange for getting the bailout. for example, our small, regional community banks don't have capital now. and you say to them you got to go out and get capital or we're going to close them down or fdic or somebody says that. and we have bailed out some of these big banks who are now richer. goldman sachs is a lot richer because we bailed them out. banks lend money to each other, but they're not lending money to the small community banks and minority banks. what can you do or what have you done to make that nexus? >> congresswoman, this is a very

important issue. small businesses are much more reliant on credit from banks, including small banks. to get that credit, banks need the capital they need to lend. the president proposed two important initiatives to make sure small banks can get that capital. as well as community development, financial institutions as well. and i think congress needs to work with us to help make those banks more comfortable coming to get capital from the government. if they do that, then they'll have a better capacity to provide credit to small businesses. and we think that's very important to do. the congress also passed in the recovery act some important changes to help encourage small business lending by the sba. lending by the sba since those actions were taken has increased dramatically. but i think you are absolutely right for many small businesses across the country, they still aren't getting the credit they need to grow and expand. we need to try and work with you to fix that problem. >> this is obviously a very important question. let me reinforce what the gentle woman said. absent the addressing of this, i

think we have a great deal of problems going forward in any broadway. the gentleman from california, i think, is next. >> thank you, mr. chairman. mr. geithner, i asked you about a provision in your white paper earlier this year. i'd come back to that. and that's this idea of providing direct funding to an operating institution to keep it from failing. such authority, of course, would be markedly different from a resolution authority that would entail an orderly, unwinding of a failed firm. some have compared this idea that's in the white paper to the open bank assistance authority at the fdic. it appears as though you've maintained this idea in the discussion draft that was issued earlier this week. and i'd ask, is it your belief, should this legislation become law, that the government should have the authority to prop up an

operating institution with federal dollars without ever unwinding it. >> my answer to that is no. but it's a little more complicated than that. you need two authorities we don't have today. one is for a large institution that is courting failure and whose failure could cause catastrophic damage you need to be able to act and unwind them with less damage to the economy. without the taxpairs being exposed to loss. we don't have that authority today. thus, the traumatic damaging experience of last fall. you also need to make sure that you can protect solvent, liquid institutions in the rest of the system from losing their capacity to operate and fund. in clax financial panics, what happens is the weakness of one spreads to the strong. you need to arrest that to contain panic, to fix panics, and that's why in this bill, there is still some authority reserved for the fed and the fdic to contain the risk of panic spreading to healthy

institutions. now we propose to limit that authority, but you need to have both those provisions for it to work. >> but under that interpretation, the government would have the authority to prop up that operating institution with federal dollars, without unwinding it because of your presumption at some point that you are eventually going to be able to restabilize it. i think -- >> no, that's not quite right. think of a world in which you have one bank that is large and complicated and can no longer survive without government assistance. and you have a rest of the system that is still relatively strong and healthy. what you want to do is take that one institution that managed itself to the edge of the abyss and put it out of existence safely. you can't flip a switch and do that. continental illinois it took ten years. you have to have the capacity to

do that as quickly as you can and safely. but you need to make sure the rest of the system does not suffer a calamitous loss of funding. and you need that basic -- it's like a fire break. >> i understand your argument on that. part of the problem here are the unintended consequences. and unless we set very clear parameters on this authority, we run the risk of the market really interpreting the worst here. let me give you an example. and this has to do with moral hazard. it was often stated by several individuals, including members of this committee, that the government would not bail out fannie mae and freddie mac when they ran into trouble. but because there was a level of ambiguity, the market perceived these institutions as government backed. times we asserted they were not, but the market perceived that they were. which, by the way, turned out to be the case. economists pointed this out at

the time. with respect to the chairman's comments, it's true that several members often raised the example of fannie and freddie. we do this not simply because the gses were at the center of the mortgage market meltdown. i feel they were. when you put a mandate from congress that one-half of your portfolio has to be either alt a or subprime. when you manage to bully the system into a way where you've got zero down payment loans and so forth, and when it ends up being 85% of the losses of these institutions, you know, i think you can see how some of us would believe that that played a large role in the market turning into a bubble. and i think that many in the fed believe it did, too. and i think going back to what happened over on the senate side, the fact that senate

democrats blocked the real reforms that passed the senate banking committee on a party line vote. and i think the fact that fannie and freddie's political pull prevented real reforms during the years because i certainly saw them up here lobbying against the reforms that would be necessary to deleverage these institutions until it was too late. i think we can see out of that how we end up with moral hazard in the system. and creating more gses would compound that problem. >> a brief response if you wish. >> i believe i agree with you. you cannot allow a system to be created again where institutions exist and operate with the expectation there will be government support if they mismanage themselves to the extent they can't survive without that. that's the central lesson of this crisis and the central responsibility we have to make sure that doesn't happen. that requires -- make sure you have strong constraints on risk

taking and leverage and you limit dramatically any expectation of government support. >> the gentleman from illinois. >> thank you, mr. chairman. first of all, secretary geithner and chairman frank, i think the proposal is really a step in the right direction in terms of imposing the tougher standards, in terms of the constraints, in terms of allowing us to create a system that will prevent to the extent humanly possible the kind of calamity that we have suffered already. and to that extent, let's move forward. let's get that job done. that's the last piece that we need to get done. we've done a lot of work here. we really need to get this last piece done. that's really not my issue here this morning or with the proposal. my issue with the proposal is that we have this reckless and dangerous and risky behavior which we have no evidence is going to cease to exist. so