[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
EXAMINING HOW THE DODD-FRANK
ACT COULD RESULT IN MORE
TAXPAYER-FUNDED BAILOUTS
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
JUNE 26, 2013
__________
Printed for the use of the Committee on Financial Services
Serial No. 113-34
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
GARY G. MILLER, California, Vice MAXINE WATERS, California, Ranking
Chairman Member
SPENCER BACHUS, Alabama, Chairman CAROLYN B. MALONEY, New York
Emeritus NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
JOHN CAMPBELL, California STEPHEN F. LYNCH, Massachusetts
MICHELE BACHMANN, Minnesota DAVID SCOTT, Georgia
KEVIN McCARTHY, California AL GREEN, Texas
STEVAN PEARCE, New Mexico EMANUEL CLEAVER, Missouri
BILL POSEY, Florida GWEN MOORE, Wisconsin
MICHAEL G. FITZPATRICK, KEITH ELLISON, Minnesota
Pennsylvania ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia JAMES A. HIMES, Connecticut
BLAINE LUETKEMEYER, Missouri GARY C. PETERS, Michigan
BILL HUIZENGA, Michigan JOHN C. CARNEY, Jr., Delaware
SEAN P. DUFFY, Wisconsin TERRI A. SEWELL, Alabama
ROBERT HURT, Virginia BILL FOSTER, Illinois
MICHAEL G. GRIMM, New York DANIEL T. KILDEE, Michigan
STEVE STIVERS, Ohio PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois DENNY HECK, Washington
DENNIS A. ROSS, Florida
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
KEITH J. ROTHFUS, Pennsylvania
Shannon McGahn, Staff Director
James H. Clinger, Chief Counsel
C O N T E N T S
----------
Page
Hearing held on:
June 26, 2013................................................ 1
Appendix:
June 26, 2013................................................ 59
WITNESSES
Wednesday, June 26, 2013
Bair, Hon. Sheila C., Chair, Systemic Risk Council, and former
Chair, Federal Deposit Insurance Corporation (FDIC)............ 14
Fisher, Richard W., President and Chief Executive Officer,
Federal Reserve Bank of Dallas................................. 11
Hoenig, Hon. Thomas M., Vice Chairman, Federal Deposit Insurance
Corporation (FDIC)............................................. 9
Lacker, Jeffrey M., President, Federal Reserve Bank of Richmond.. 13
APPENDIX
Prepared statements:
Bair, Hon. Sheila C.......................................... 60
Fisher, Richard W............................................ 72
Hoenig, Hon. Thomas M........................................ 94
Lacker, Jeffrey M............................................ 150
Additional Material Submitted for the Record
Bachus, Hon. Spencer:
Written responses to questions submitted to Richard W. Fisher 203
Written responses to questions submitted to Hon. Thomas M.
Hoenig..................................................... 207
Written responses to questions submitted to Jeffrey M. Lacker 209
EXAMINING HOW THE DODD-FRANK
ACT COULD RESULT IN MORE
TAXPAYER-FUNDED BAILOUTS
----------
Wednesday, June 26, 2013
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:04 a.m., in
room 2128, Rayburn House Office Building, Hon. Jeb Hensarling
[chairman of the committee] presiding.
Members present: Representatives Hensarling, Bachus, Royce,
Capito, Garrett, McHenry, Campbell, Bachmann, Pearce, Posey,
Westmoreland, Luetkemeyer, Huizenga, Duffy, Hurt, Grimm,
Stivers, Stutzman, Mulvaney, Hultgren, Ross, Pittenger, Wagner,
Barr, Cotton, Rothfus; Waters, Maloney, Meeks, Capuano,
Hinojosa, Clay, Lynch, Scott, Green, Cleaver, Moore,
Perlmutter, Himes, Carney, Sewell, Foster, Kildee, Sinema,
Beatty, and Heck.
Chairman Hensarling. The committee will come to order.
Without objection, the Chair is authorized to declare a recess
of the committee at any time. The Chair now recognizes himself
for 5 minutes for an opening statement.
Not long after the financial crisis arose in 2008, we heard
the cry, ``Occupy Wall Street.'' Most Americans have never
wanted to occupy Wall Street; they just want to quit bailing it
out. Today, though, there is a growing bipartisan consensus
that the Dodd-Frank Act, regrettably, did not end the too-big-
to-fail phenomena or its consequent bailouts. Thus, we have
much work ahead of us. I want to thank Chairman McHenry and the
members of the Oversight and Investigations Subcommittee for
their work so far on this subject.
Ending taxpayer-funded bailouts is one of the reasons why
this committee has invested so much time on sustainable housing
reform. The GSEs, Fannie Mae and Freddie Mac, are the original
too-big-to-fail poster children, yet were untouched and
unreformed in Dodd-Frank. They have received the largest
taxpayer bailout ever, nearly $200 billion, and along with the
FHA, the government now controls more than 90 percent of our
Nation's mortgage finance market with no end in sight.
One of the most important steps we can take in ending too-
big-to-fail institutions is to remove the permanent taxpayer-
backed government guarantee of Fannie and Freddie. For far too
long, Fannie and Freddie have been where Wall Street and
foreign banks go to offload their financial risk on Main Street
taxpayers. This must stop, and soon it will as part of our
committee's sustainable housing legislation: sustainable for
homeowners so they can have the opportunity to buy homes they
can actually afford to keep; sustainable for taxpayers so they
are never again forced to fund another Washington bailout; and
sustainable for our Nation's economy so we avoid the boom-bust
housing cycles that have hurt so many in the past.
Regrettably, Dodd-Frank not only fails to end too-big-to-
fail and its attendant taxpayer bailouts; it actually codifies
them into law. Title I, Section 113 allows the Federal
Government to actually designate too-big-to-fail firms, also
known as Systemically Important Financial Institutions (SIFIs).
In turn, Title II, Section 210, notwithstanding its ex post
funding language, clearly creates a taxpayer-funded bailout
system that the CBO estimates will cost taxpayers over $20
billion.
Designating any firm as too-big-to-fail is bad policy and
worse economics. It causes the erosion of market discipline and
risks further bailouts paid in full by hard-working Americans.
It also becomes a self-fulfilling prophecy, helping make firms
bigger and riskier than they would be otherwise. Since the
passage of Dodd-Frank, the big financial institutions have
gotten bigger, the small financial institutions have become
fewer, the taxpayer has become poorer, and credit allocation
has become more political.
Even if some conclude that certain financial firms are
indeed too-big-to-fail, and I am not in that camp, it begs the
question of whether Washington is even competent to manage
their risk or whether the American people, in light of the
recent revelations about the IRS and the DOJ, can trust
Washington to do so.
A review of the Federal Government's risk-management record
does not inspire confidence. The Federal Housing
Administration's poor risk management has left it severely
undercapitalized. The Pension Benefit Guaranty Corp has an
unfunded obligation of $34 billion. Even the National Flood
Insurance Program is $24 billion underwater--yes, pun intended.
And, of course, regulators encourage banks to load up on
sovereign debt and agency MBS by requiring little or no capital
to be reserved against them. Think Greek debt and Fannie and
Freddie.
We should recall it was the government's misguided and
risky affordable housing mandate that principally loosened
prudent underwriting standards in the first place. Government
not only did not mitigate the risk; it created the risk.
We have to keep our focus on the right questions if we are
to achieve the right solutions. As a society, what are we
willing to pay for stability? Are we trading long-term
instability for moral hazard and short-term stability? Why
should the government have to protect Wall Street firms from
taking losses? Do we really want a Solyndra-like economy in
which risk management is guided more by government politics
than market economics and taxpayers are left to hold the bag?
And perhaps more fundamentally, don't we want financial firms
to take risk? In the not-too-distant past, one of the large
investment banks took a risk on Apple when it was floundering.
Now Apple is one of the most valuable companies in the world
and its products have revolutionized our lives and our economy.
Without financial risk, we lose out on innovation. Under
too-big-to-fail, we also risk encouraging irresponsibility and
moral hazard. Bailouts beget bailouts. And the most fundamental
issue is this: If we lose our ability to fail in America, then
one day we may just lose our ability to succeed. That is what
this debate should really be about.
I now recognize the ranking member for 5 minutes for an
opening statement.
Ms. Waters. Thank you, Mr. Chairman. I welcome today's
hearing as an opportunity to examine Titles I and II of Dodd-
Frank and assess whether these provisions will achieve their
intended goals of protecting taxpayers and preserving financial
stability. I want to thank our esteemed panel of witnesses for
joining us today, and I look forward to their insight and
testimony on these critical issues.
While there has been significant public debate regarding
Wall Street reform, I have found that not enough attention has
been paid to the actual legislative text. I believe the law may
provide answers to many of our questions today, which is why I
would encourage my colleagues to read the law.
Title I of Dodd-Frank established the Financial Stability
Oversight Council (FSOC), and the Office of Financial Research
(OFR), to monitor systemic risk and potential threats to
financial stability. Title I also gives Federal regulators
enhanced prudential authorities over systemically significant
financial institutions and requires these firms to submit
credible resolution plans, known as living wills.
The living wills are intended to reveal weaknesses and
complexities, as well as provide a roadmap for how these
institutions may be orderly liquidated. The law requires firms
to pursue bankruptcy as a first resort. However, if bankruptcy
compromises financial stability, the statute authorizes
regulators to use an alternative tool for resolving
systemically complex firms.
Title II of Dodd-Frank created the Orderly Liquidation
Authority (OLA). According to Section 204 of Title II, the
purpose of the Orderly Liquidation Authority is to provide
banking regulators with the necessary authority to liquidate
failing financial companies which pose a significant risk to
the financial stability of the United States in a manner that
mitigates such risks and minimizes moral hazard.
Moreover, Title II, Section 214, of Dodd-Frank provides
that all financial companies placed into receivership under
this Title shall be liquidated. No taxpayer funds shall be used
to prevent the liquidation of any financial company. The law
also requires that any funds expended in the liquidation of a
financial firm must be recovered through assessments on the
financial sector.
Title XI, Section 1101, repeals the financing mechanisms
the Federal Reserve used to bail out financial institutions in
2008. The law mandates that any new Federal Reserve policies
governing emergency lending serve the purpose of providing
liquidity to the financial system, not one failing firm in
particular, and that such policies must protect taxpayers from
losses.
Repealing Title II of the Dodd-Frank Act will make the
financial system less stable and invite the chaos of the 2008
crisis on our current recovery and would be a huge step in the
wrong direction if it will not make megabanks any less large or
any less complex. In fact, repealing Title II would take us
back to the status quo use of the Bankruptcy Code, which would
put taxpayers and the financial system at risk.
My colleagues and I are going to use today's hearing as an
opportunity to incorporate the relevant provisions of Titles I
and II outlining regulators' new systemic risk and resolution
authorities. Each of us will focus on a particular section of
the law, explain what the provisions of the law authorize, and
at times we will ask witnesses to expound on any ambiguity
concerning how regulators may interpret their enumerated
authorities. It is my hope that this will facilitate a rational
discussion of important issues based on actual provisions
within the law.
Mr. Chairman, I yield back the balance of my time.
Chairman Hensarling. The gentlelady yields back.
The Chair now recognizes the gentleman from North Carolina,
Mr. McHenry, the chairman of the Oversight and Investigations
Subcommittee, for 3 minutes.
Mr. McHenry. Thank you, Mr. Chairman. And I want to thank
our panel for being here today.
Two-and-a-half years ago, President Obama, when he signed
the Dodd-Frank Act, said that this would end too-big-to-fail.
Across the ideological spectrum we hear debate, but greater
consensus on the side that Dodd-Frank did not end too-big-to-
fail. I appreciate the ranking member's opening statement, and
in fact in the Oversight Subcommittee, which I chair, we have
gone section by section in the text of Dodd-Frank and we have
heard from a variety of witnesses over the previous few months
that Dodd-Frank does not end too-big-to-fail, and systemically
we went through those section by sections of Dodd-Frank. This
is very important.
From these hearings we identified, among other things, the
shocking inability of the Financial Stability Oversight Council
to perform one of its core functions: identifying new risks to
the economy. We have learned that nearly 3 years after
enactment of Dodd-Frank, the Federal Reserve has not considered
nor made public how it will apply its broad new authorities to
prevent future financial crises.
We have heard from legal scholars and economic experts on
Dodd-Frank's new resolution authority, the Orderly Liquidation
Authority, and what it will mean in future bailouts as the
bailout mechanism when the taxpayer will provide liquidity to
these failed firms. The subcommittee learned that far from
creating greater clarity and certainty in the marketplace, the
Dodd-Frank law simply granted an incredible amount of power and
discretion to Federal regulators to enshrine future taxpayer
bailouts for specially designated large institutions. Now, that
designation we have had a lot of discussion about, as well.
Finally we heard testimony, shockingly, from the Justice
Department regarding their obvious reluctance to prosecute
large financial institutions, which may be the best evidence
yet that this Administration doesn't even believe that the
Dodd-Frank Act ends too-big-to-fail.
The fact is that Dodd-Frank did not end too-big-to-fail; it
guaranteed it. Instead of making it implicit, it now has made
it explicit. That is a problem and we need to address it. And
the message that it has sent to the marketplace has created a
perverse incentive to the creditors of the largest financial
firms. Now, this undermines the taxpayer, it undermines small
financial institutions, and it undermines a truly competitive
and fair marketplace. Too-big-to-fail must end, and that is
what we must begin to discuss in this hearing.
Thanks so much, Mr. Chairman.
Chairman Hensarling. The Chair now recognizes the
gentlelady from New York, Mrs. Maloney, for 2 minutes.
Mrs. Maloney. Thank you, and welcome to the panelists.
In 2008, when a large financial institution was on the
verge of failing, regulators had two options. They could allow
it to fail and go into bankruptcy, as Lehman did, or they could
bail it out, as we did with AIG. Neither was a good option.
Dodd-Frank gave regulators a third option by creating an
orderly liquidation process for large financial companies. This
gives regulators the tools to successfully wind down large
financial companies similar to the FDIC's longstanding practice
of winding down failed commercial banks that worked so well
during the crisis.
Now, some of my colleagues say that we should just have
bankruptcy, just let them fail. But we tried that. That is what
we did with Lehman, and look at the results. We got a massive
crisis and failure in the financial system, a massive financial
crisis. This is not an acceptable solution.
Economist Alan Blinder in his book says that too-big-to-
fail should be called too-big-to-fail messily, that we have to
have a process to orderly, in an organized way, wind down large
institutions, to put foam on the runway, and to orderly wind
them down. It could not be clearer. In Section 214, it says
that there is a prohibition of any taxpayer funds: ``No
taxpayer funds shall be used to prevent the liquidation of any
financial company under this title.'' It could not be clearer.
It is against the law to use any taxpayer money to fund any
bailout.
But Dodd-Frank gave us a third option. Under Title II,
which was largely written by Sheila Bair, and she can talk
about it, we can now wind them down. And under Title II there
was enhanced supervision calling for greater capital
requirements, stress tests, living wills, and other tools to
manage the wind-down of failed institutions.
I yield back.
Chairman Hensarling. The Chair now recognizes the gentleman
from New Jersey, Mr. Garrett, for 1 minute.
Mr. Garrett. Thank you.
There is an old saying that you can't have your cake and
eat it too, but, unfortunately, that is exactly what the other
side of the aisle is trying to do. You can't, on the one hand,
say that banks are no longer too-big-to-fail, and then, on the
other hand, bemoan the fact that they still are whenever one of
them has a significant trading loss.
You can't, on the one hand, say that there is an
appropriate resolution process that allows these banks to be
wound down without taxpayer support, but then, on the other
hand, tell those same banks exactly how they are to run their
business because you are worried about their systemic risk and
the costs to U.S. taxpayers.
You can't, on the one hand, also say that you have
eliminated too-big-to-fail, and then, on the other hand,
specifically designate companies as too-big-to-fail and give
them new access to the Fed's discount window.
Unfortunately, Dodd-Frank continued the long-term goal of
many to essentially turn the banks into utilities backed by the
government that regulators can control and use to fund the
government and allocate resources to their favorite
constituencies.
We must finally reform the system to restore market
discipline to our financial system, and this means ensuring
that we have a credible resolution process, free of picking
winners and losers.
Chairman Hensarling. Apparently, the gentleman is done.
The Chair now recognizes the gentleman from New York, Mr.
Meeks, for 2 minutes.
Mr. Meeks. Thank you, Mr. Chairman. I appreciate that
today's hearing has provided an opportunity to discuss the
contours of Title II of Dodd-Frank, which deals with the
Orderly Liquidation Authority, and I especially thank the
ranking member for finally focusing our attention on the actual
law itself.
One of the objectives of the Dodd-Frank Act was to address
our financial services' exposure to systemic risk arising from
complex, interconnected, qualified financial contracts which
represent a significant activity of too-big-to-fail
institutions. These contracts include security contracts,
commodity contracts, repurchase agreements, and derivative
contracts.
It is precisely the exponential growth, the financial and
legal complexity, and the interconnectedness of these contracts
that have magnified the severity of the 2008 financial crisis
and nearly brought our economy to its knees. The Dodd-Frank Act
addressed this risk by providing the FDIC the powers to
mitigate this contagious effect. Section 210, Subsection 16 of
the Act reads, ``The corporation as receiver for a covered
financial company or as receiver for a subsidiary of a covered
financial company shall have the power to enforce contracts of
subsidiaries or affiliates of the covered financial company,
the obligations under which are guaranteed or otherwise
supported or linked to the covered financial company.''
In effect, these provisions give the FDIC, acting as
receiver for a financial company whose failure would pose a
significant risk to the financial stability of the United
States, the power to maintain continuity and financial
contracts and limit the disruption and failure of
interconnected institutions.
As we observed during the failure of Lehman Brothers in
2008, our ability to isolate contagion embedded in these
contracts and counterpart financial obligations could mean the
difference between experiencing a contained failure of a single
financial institution versus experiencing another mammoth
financial crisis. Unfortunately, the regulators did not have
this tool then, but I am convinced that our economy is better
protected from the concept of too-big-to-fail because of the
Dodd-Frank legislation.
I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentlelady from Minnesota, Ms.
Bachmann, for 1 minute.
Mrs. Bachmann. Thank you, Mr. Chairman.
Just this month we received a progress report regarding the
Dodd-Frank rulemaking; 279 rules had a deadline and they were
passed, 63 percent of those deadlines were missed.
Specifically, 64 which came from the bank regulators were
missed, the CFTC missed 17, the SEC missed 49, and 35 deadlines
were missed by other regulators.
Now, interestingly, supporters of Dodd-Frank claim that
these regulations prevent taxpayer bailouts, but these
regulations aren't even implemented. So the point is, if the
regulatory agencies are finding that the rulemaking is too
onerous for they, themselves, to manage, imagine the burden of
compliance on the financial services industry and on its
customers.
This is a bill that is so big it is already failing itself
and failing the American financial services industry. That is
why I introduced H.R. 46, which would fully repeal Dodd-Frank,
and my hope is that we do exactly that.
I yield back.
Chairman Hensarling. The time of the gentlelady has
expired.
The Chair now recognizes the gentleman from Texas, Mr.
Green, for 1 minute.
Mr. Green. Thank you, Mr. Chairman.
I am so pleased that medicine is very unlike politics. In
medicine, if a drug proves to be efficacious, we market it, we
extol its virtues. In politics, if a law proves to be
efficacious, we repeal it. One example might be what happened
yesterday with the civil rights law.
However, I would like to focus for just a moment on Glass-
Steagall. It served us efficaciously for decades, and was a
great piece of law. It was repealed because it succeeded. Now,
of course, we have the Volcker Rule, which is similar but not
the same.
This is what is happening to Dodd-Frank. It is going to be
emasculated by some who would do so. At some point, if it
succeeds, it will be said that we no longer need it. If it is
emasculated and it fails, it will be said that it was never a
success, and should not have been implemented in the first
place.
I stand with the ranking member. Only yesterday, I was here
with Mr. Frank himself when his portrait was revealed, so it is
ironic that we would have this hearing today.
I yield back.
Chairman Hensarling. The gentleman yields back.
We now welcome our distinguished witnesses for today's
hearing. From my left to my right, first, Thomas Hoenig
currently serves as the Vice Chairman of the FDIC. Prior to
joining the FDIC in 2012, Mr. Hoenig was the President of the
Federal Reserve Bank of Kansas City, a Member of the FOMC from
1991 to 2011, and served the Fed for almost 40 years. He earned
his Ph.D. in economics from Iowa State University, and an
undergraduate degree from St. Benedict's College in Kansas.
Next, I am happy to welcome my friend and fellow ``Dallas-
ite,'' Richard Fisher, who is the President and CEO of the
Federal Reserve Bank of Dallas. You know what, I am going to
end this introduction halfway through because I made a mistake.
The gentleman from Missouri needed to be recognized also to
welcome Mr. Hoenig. My apologies to the gentleman from
Missouri.
Mr. Cleaver, you are recognized.
Mr. Cleaver. This will be short, Mr. Chairman, since
somebody has already done it. But I do want to take the
opportunity to introduce Thomas Hoenig, who became the Chair of
the Kansas City Fed the same year that I became Mayor of Kansas
City. He is a man of great integrity and we respect him a great
deal in Kansas City. He was with the Federal Reserve for 38
years and then last year came to the FDIC Board.
I have had the pleasure of working with him over the years.
I even know his newspaper deliveryman who comes by his house
every morning and places the newspaper on his front porch.
So we welcome you, Mr. Hoenig, to the Financial Services
Committee.
Thank you, Mr. Chairman.
Chairman Hensarling. Meanwhile, back to Mr. Fisher, sorry
about that. Prior to his appointment, President Fisher worked
in the private sector. Before that, he served as the Deputy
U.S. Trade Representative from 1997 to 2001. He earned his MBA
from Stanford, and his undergraduate degree in economics from
Harvard.
On a personal note, he just flew in from the U.K., and as
soon as he finishes with his testimony, he is headed back to
Lone Star soil where he will meet his brand new grandson,
William Weir Smith IV. Congratulations.
And now, hopefully not making the same mistake twice, the
gentleman from Texas, Mr. Green, is allocated 30 seconds for an
introduction.
Mr. Green. Thank you, Mr. Chairman. It is nice to have a
great Texan introduced twice. And I want you to know, Mr.
Chairman, that while he is from a small town just outside of
Houston known as Dallas, we don't hold it against him. He
attended the Naval Academy, graduated with honors from Harvard,
has an MBA from Stanford, and is a great and noble American.
We welcome you to the committee.
And, Mr. Chairman, I yield back.
Chairman Hensarling. Be careful. I made an inquiry to the
parliamentarian as to whether I could have your words taken
down for besmirching Dallas, but fortunately for you, I could
not.
Our next witness, Jeffrey Lacker, is the President and CEO
of the Federal Reserve Bank of Richmond, a position he assumed
in 2004. President Lacker has held various positions within the
bank since he joined as an economist in 1989. Before that, he
taught economics at the Krannert School of Management at Purdue
University. He holds a Ph.D. in economics from the University
of Wisconsin, Madison, and a bachelor's degree from Franklin
and Marshall College.
Last but not least, and certainly no stranger to this
committee, we are happy to welcome back Sheila Bair, who most
recently served as the Chairman of the FDIC, a position that
she was appointed to in 2006, and she held that position during
the worst years of the financial crisis. Before that, she held
a number of various public and private sector positions in the
financial industry. She earned her law degree and undergraduate
degree from the University of Kansas.
I believe each and every one of you is a veteran of
testifying before the committee. You will each be given 5
minutes for an oral presentation of your written testimony. And
without objection, each of your written statements will be made
a part of the record. Hopefully, you are familiar with our
lighting system. When you have finished, members of the
committee will have an opportunity to ask you questions.
Vice Chairman Hoenig, you are now recognized for 5 minutes.
STATEMENT OF THE HONORABLE THOMAS M. HOENIG, VICE CHAIRMAN,
FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC)
Mr. Hoenig. Thank you. Chairman Hensarling, Ranking Member
Waters, and members of the committee, I appreciate the
opportunity to testify on issues relating to improving the
safety and soundness of our Nation's banking system.
How policymakers and regulators choose to structure the
financial system to allocate the use of government facilities
and subsidy will define the long-run stability and success of
the economy. My testimony today is based on a paper entitled,
``Restructuring the Banking System to Improve Safety and
Soundness,'' that I prepared with my colleague Chuck Morris in
May of 2011. I welcome this opportunity to explain what I think
are pro-growth and pro-competition recommendations for the
financial system in that paper, which I have attached to my
written statement. Although I am a Board Member of the FDIC, I
speak only for myself at this hearing.
Today, the largest U.S. financial holding company has
nearly $2.5 trillion of assets using U.S. accounting, which is
the equivalent of 16 percent of our nominal gross domestic
product. The largest eight U.S. global systemically important
financial institutions hold in tandem $10 trillion of assets
under U.S. accounting, or the equivalent of two-thirds of our
national income, and $16 trillion of assets if we were to
include the fair value of derivatives, which then would place
them at 100 percent of our gross domestic product.
Whether resolved under bankruptcy or otherwise, problem
institutions of this size relative to our national income will
have systemic consequences. But I must add that my concern with
the largest firms is not just their size, but their complexity.
Over time, the government's safety net of deposit insurance,
Federal Reserve lending, and direct investment has been
expanded to an ever-broader array of activities outside the
historic role of commercial banks.
In the United States, the Gramm-Leach-Bliley Act allowed
commercial banks to engage in a host of broker-dealer
activities, including propriety trading derivatives and swaps
activities, all within the Federal safety net. Because these
kinds of activities were allowed to remain within the banking
organization, the perception persists that despite Dodd-Frank
the government will likely support these dominant and highly
complex firms because of their outsized impact on the broader
economy. This support translates into a subsidy worth billions
of dollars, and I have provided a list, a summary of
independent studies, documenting this subsidy.
My proposal then is simple: To improve the chances of
achieving long-run financial stability and make the largest
financial firms more market-driven, we must change the
structure and the incentives driving behavior. The safety net
should be narrowly confined to commercial banking activities,
as intended when it was implemented with the Federal Reserve
Act and deposit insurance was introduced.
Commercial banking organizations that are afforded access
to the safety net should be limited to conducting the following
activities: commercial banking, underwriting some securities
and advisory service, and asset and wealth management. Also,
for such reforms to be effective, the shadow banking system, I
realize, must be reformed and its activities subjected to more
market discipline.
First, money market funds and other investments that are
allowed to maintain a fixed net asset value of $1 should be
required to have floating net asset values. Shadow banks'
reliance on this source of short-term funding would be greatly
reduced by requiring share values to float with their market
value and be reported accurately.
Second, we should change the bankruptcy laws to eliminate
the automatic stay exemption for mortgage-related repurchase
agreement collateral. This exemption resulted in a
proliferation in the use of repo based on mortgage-related
collateral. One of the sources of instability during the recent
financial crisis was repo runs, particularly on repo borrowers
using subprime mortgage-related assets as collateral.
Reforms specified in the proposal I am describing today
would not, and are not intended to, eliminate natural market-
driven risk in the financial system. They do address the
misaligned incentives causing much of the extreme risk stemming
from the safety net's coverage of nonbank activities.
In addition, this proposal would facilitate the
implementation of Titles I and II of the Dodd-Frank Act to
resolve failed systemically important firms by rationalizing
the structure of the financial system, making it more
manageable through crisis.
Market participants argue that this proposal would stifle
their ability to complete globally. These largest firms
understandably are driven by profit motives and the subsidy
enhances their profits. I suggest that the proposal I offer
would shrink the subsidy and enhance competition, which is what
policymakers owe the American public. This structure will also
provide much stronger protection from the possibility of future
government intervention.
I conclude my oral remarks by emphasizing again that the
choices we make today are critical to the future success of our
economy. Rationalizing the structure of the financial
conglomerates, making them more market-driven, will create a
more stable, more innovative, more competitive system that will
serve to support the largest, most successful economy in the
world.
Thank you very much for this opportunity, and I look
forward to your questions.
[The prepared statement of Vice Chairman Hoenig can be
found on page 94 of the appendix.]
Chairman Hensarling. Mr. Fisher, you are now recognized for
5 minutes.
STATEMENT OF RICHARD W. FISHER, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, FEDERAL RESERVE BANK OF DALLAS
Mr. Fisher. Thank you, Chairman Hensarling, Ranking Member
Waters, and members of the committee.
We all share the goal of ending taxpayer bailouts of large
financial institutions considered too-big-to-fail. However, as
the iconic Patrick Henry, not Patrick McHenry, said in one of
his greatest speeches, ``Different men often see the same
subject in different lights.'' So I recognize and respect the
difference of opinion on this critical issue of how to
eliminate taxpayer bailout funds, including the different
perspectives of the members of this committee, other observers,
and the members of this panel.
It is our view at the Dallas Fed, however, that Dodd-Frank,
despite its very best intentions, does not do the job it set
out to do. It does not end too-big-to-fail and it does not
prevent more taxpayer-funded payouts.
First, some quick facts. There are less than a dozen
megabanks, a mere 0.2 percent of all banking organizations. The
concentration of assets in their hands was greatly intensified
during the 2008-2009 financial crisis when several failing
giants were absorbed, with taxpayer support, by larger,
presumably healthier ones.
Today, we have about 5,500 banking organization; that is
5,500 banks in the United States. Most of these are bank
holding companies and they represent no threat to the survival
of our economic system. But less than a dozen of the largest
and most complex banks are each capable, through a series of
missteps by their management, of seriously damaging the
vitality and the resilience and the prosperity of the U.S.
economy. Any of these megabanks, given their systemic footprint
and their interconnectedness with other large financial
institutions, could threaten to bring the economy down.
These 0.2 percent of banks, the too-big-to-fail megabanks,
are treated differently from the other 99.8 percent and
differently from other businesses, and under Dodd-Frank,
unfortunately, we believe this imbalance of treatment has been
unwittingly perpetuated.
I have submitted a lengthy, detailed statement as to the
drawbacks of the Act, developed with my colleague sitting
behind me, Harvey Rosenblum, a great economist at the Federal
Reserve Bank of Dallas, and with our staff. Today, at Ms.
Waters' suggestion, I am going to specifically address Title I
and Title II, and then if I have time, I will summarize the
Dallas Fed's proposal to remedy the pathology of too-big-to-
fail.
With regard to Title I, based on my experience working the
financial markets since 1975, as soon as a financial
institution is designated systemically important, as required
under Title I of the Dodd-Frank Act, and becomes known by the
acronym SIFI, it is viewed by the market as being the first to
be saved by the first responders in a financial crisis. In
other words, the SIFIs occupy a privileged position in the
financial system. One wag refers to the acronym SIFI as meaning
``save if failure impending.''
A banking customer has a disincentive to do business with
smaller competitors because a non-SIFI does not have an implied
government funding lifeline. Even if a SIFI ends up finding
itself with more equity capital than a smaller competitor, the
choice remains of where you would like to hold important
financial relationships: with an institution with a government
backstop; or with an institution without it? Thus, the
advantages of size and perceived subsidies accrue to the
behemoth banks. Dodd-Frank does not eliminate this perception,
and, again, it wasn't intended to, but in many ways it
perpetuates its reality.
Some have held out hope that a key business provision of
Title I requiring banking organizations to submit detailed
plans or so-called living wills for their orderly resolution in
bankruptcy, without government assistance, will provide for a
roadmap to avoid bailouts. However, these living wills are
likely to prove futile in helping navigate a real-time systemic
failure, in my experience.
Given the complexity and opacity of the too-big-to-fail
institutions, and their ability to move assets and liabilities
across subsidiaries and affiliates, as well as off balance
sheet, a living will would likely be ineffective when it really
mattered. I don't have much faith in the living will process to
make a material difference in too-big-to-fail risks and
behaviors. The bank would run out of liquidity, not necessarily
capital, due to reputational risk quicker than management would
work with regulators to execute a living will blueprint.
With regard to Title II, Dodd-Frank describes and
designates the Orderly Liquidation Authority as the resolution
mechanism to handle the disposal of a giant systemically
disruptive financial enterprise. These three letters themselves
evoke the deceptive doublespeak of what I consider to be an
Orwellian nightmare. The ``L,'' which stands for liquidation,
will in practice become a simulated restructuring, as would
occur in a Chapter 11 bankruptcy. But under the OLA of Dodd-
Frank, the U.S. Treasury will likely provide, through the FDIC,
what is essentially debtor-in-possession financing from the
yet-to-be-funded Orderly Liquidation Fund, the OLF, located in
the United States Treasury, to the failed companies'
artificially kept alive operating subsidiaries for up to 5
years, perhaps longer.
Under the single point of entry method, the operating
subsidiaries remain protected as the holding company is
restructured. So if a company does business with operating
subsidiaries, then this company is even more confident their
counterparty is too-big-to-fail. Some officials refer to this
procedure as a liquidity provision rather than a bailout.
Whatever you call it, this is taxpayer funding at below market
rates. At the Dallas Fed, we would call this form of
liquidation a nationalization of a financial institution.
During the 5-year resolution period, incidentally, this
nationalized institution does not have to pay taxes of any kind
to any government entity, and to us this looks, sounds, and
tastes like a taxpayer bailout just hidden behind the opaque
and very difficult language, Mr. Chairman, of Section 210 of
Title II.
I will stop there, Mr. Chairman. I would say after a
careful reading of Title II, to us, with all due respect to
those who would argue otherwise, this is basically a ``rob
Peter to pay Paul'' chain of events with the taxpayer paying
the role of Peter. And we have made a proposal that would amend
and summarize and simplify Dodd-Frank.
I will just say one thing in conclusion. Despite its 849-
page proscription, it has thus far spawned more than 9,000
pages of regulation that this very committee estimates will
take 24,180,856 hours each year to comply with. Market
discipline is still lacking for the large financial
institution, as it was during the last financial crisis, and we
need to improve upon Dodd-Frank.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Fisher can be found on page
72 of the appendix.]
Chairman Hensarling. The Chair now recognizes Mr. Lacker.
STATEMENT OF JEFFREY M. LACKER, PRESIDENT, FEDERAL RESERVE BANK
OF RICHMOND
Mr. Lacker. Thank you, Chairman Hensarling, Ranking Member
Waters, and members of the committee. It is an honor to speak
before the committee on the Dodd-Frank Act and the persistence
of ``too-big-to-fail.'' At the outset, I should say that my
comments today are my own views and do not necessarily reflect
those of my colleagues in the Federal Reserve System.
The problem known as too-big-to-fail consists of two
mutually reinforcing expectations. First, some financial
institution creditors feel protected by an implicit government
commitment of support should the institution face financial
distress. This belief dampens creditors' attention to risk and
makes debt financing artificially cheap for borrowing firms,
leading to excessive leverage and the overuse of forms of debt,
such as short-term wholesale funding, that are most likely to
enjoy such protection.
Second, policymakers at times believe that the failure of a
large financial firm with a high reliance on short-term funding
would result in undesirable disruptions of financial markets
and economic activity. This expectation induces policymakers to
intervene in ways that let short-term creditors escape losses,
thus reinforcing creditors' expectations of support and firms'
incentives to rely on short-term funding. The result is more
financial fragility and more rescues.
The Orderly Liquidation Authority of Title II of the Dodd-
Frank Act gives the FDIC the ability, with the agreement of
other financial regulators, to take a firm into receivership if
it believes the firm's failure poses a threat to financial
stability. Title II gives the FDIC the ability to borrow funds
from the Treasury to make payments to creditors of the failed
firm. This encourages short-term creditors to believe that they
would benefit from such treatment. They would therefore
continue to pay insufficient attention to risk and to invest in
fragile funding relationships.
Given widespread expectations of support for financially
distressed institutions in orderly Title II liquidations,
regulators will likely feel forced to provide support simply to
avoid the turbulence of disappointing expectations. We appear
to have replicated the two mutually reinforcing expectations
that define too-big-to-fail.
Expectations of creditor rescues have arisen over the last
4 decades through the gradual accretion of precedents. Research
at the Richmond Fed has estimated that one-third of the
financial sector's liabilities are perceived to benefit from
implicit protection, and that is based on actual government
actions and actual policy statements.
Adding implicit protection to the explicit protection of
programs such as deposit insurance, we found that 57 percent of
the financial sector's liabilities were expected to benefit
from government guarantees as of the end of 2011. Reducing the
probability that a large financial firm becomes financially
distressed, through enhanced standards for capital and
liquidity, for example, are useful but will never be enough.
The path towards a stable financial system requires that the
unassisted failure of financial firms does not put the
financial system at risk. The resolution planning process
prescribed by Section 165(d) of Title I of Dodd-Frank provides
a roadmap for this journey.
A resolution plan or living will is a description of the
firm's strategy for rapid and orderly resolution under the U.S.
Bankruptcy Code without government assistance in the event of
material financial distress or failure. It spells out the
firm's organizational structure, key management information
systems, critical operations, and a mapping of the relationship
between core business lines and legal entities.
The Federal Reserve and the FDIC can jointly determine that
a plan is not credible or would not facilitate an orderly
resolution under the Bankruptcy Code, in which case the firm
would be required to submit a revised plan to address
identified deficiencies.
In essence, regulators can order changes in the structure
and operations of a firm to make it resolvable in bankruptcy
without government assistance. It is important to remember that
all features of a large financial firm that render it hard to
contemplate putting it through unassisted bankruptcy are under
our control now before the next crisis.
Resolution planning will require a great deal of hard work,
but I see no other way to ensure that policymakers have
confidence in unassisted bankruptcy and that investors are
convinced that unassisted bankruptcy is the norm. Resolution
planning provides the framework for identifying the actions we
need to take now to ensure that the next financial crisis is
handled appropriately, in a way that is fair to taxpayers, and
in a way that establishes the right incentives.
Thank you.
[The prepared statement of Mr. Lacker can be found on page
150 of the appendix.]
Chairman Hensarling. The Chair now recognizes Chairman Bair
for 5 minutes.
STATEMENT OF THE HONORABLE SHEILA BAIR, CHAIR, SYSTEMIC RISK
COUNCIL, AND FORMER CHAIR, FEDERAL DEPOSIT INSURANCE
CORPORATION (FDIC)
Ms. Bair. Thank you, Mr. Chairman. Thank you for the
opportunity to appear here today to discuss the Dodd-Frank Act,
too-big-to-fail, and the resolution of Large Complex Financial
Institutions, or LCFIs.
No single issue is more important to the stability of our
financial system than the regulatory regime applicable to these
institutions. The role certain large mismanaged financial
institutions played in the leadup to the financial crisis is
clear, as is the need to take tough policy steps to ensure that
taxpayers are never again forced to choose between bailing them
out or financial collapse.
As our economy continues to slowly recover from the
financial crisis, we cannot forget the lessons learned, nor can
we afford a repeat of the regulatory and market failures which
allowed that debacle to occur.
The Dodd-Frank Act requirements for the regulation and, if
necessary, resolution of LCFIs are essential to address the
problems of too-big-to-fail. I strongly disagree with the
notion that the Orderly Liquidation Authority enshrines the
bailout policies that prevailed in 2008 and 2009. Implicit and
explicit too-big-to-fail policies were in effect under the
legal structure that existed before Dodd-Frank. Dodd-Frank has
abolished them. To be sure, more work needs to be done to
reduce the risk of future LCFI failures and ensure that if an
LCFI does fail, the process is smooth, well understood by the
market, and minimizes unnecessary losses for creditors.
However, to the extent the perception of too-big-to-fail
remains, it is because markets continue to question whether
regulators or Congress can and will follow through on the law's
clear prohibition on bailouts. I believe we are on the right
track for addressing these realities, but more can and should
be done.
First, regulators must ensure that LCFIs have sufficient
long-term debt at the holding company level. The success of the
FDIC's Orderly Liquidation Authority using the single point of
entry strategy depends on the top-level holding company's
ability to absorb losses and fund recapitalization of the
surviving operating entities. Currently, we have no regulation
that addresses this need and we must address this gap.
To avoid gaming, the senior unsecured long-term debt must
be issued at the top level holding company and it should also
be based on nonrisk-weighted assets. To limit the contagion or
domino effect of an LCFI failure, the debt should not be held
by other LCFIs or banks, nor should other LCFIs be permitted to
write credit protection for or have other real or synthetic
exposure to that debt. A well-designed, long-term debt cushion
would support the FDIC's single point of entry resolution
strategy and help assure the markets that the LCFI is indeed
resolvable and not too-big-to-fail.
Second, the Financial Stability Oversight Council must
continue to designate potentially systemic nonbank financial
firms for heightened oversight. Title I of the Dodd-Frank Act
requires that the FSOC designate firms for heightened
supervision by the Federal Reserve. This enhanced supervision
is designed to: first, improve regulation over large
potentially systemic firms; second, provide regulators with
important information to assess and plan for a potential
failure; and third, reduce the likelihood that potential
systemic risk will simply grow unnoticed outside of the
traditional regulatory sphere.
While some have argued that the designation might be viewed
as a positive and fuel market perception so the company is
somehow backstopped by the government, I do disagree. This
designation is not a badge of honor but a scarlet letter. It
includes no benefits from the government. It only heightens the
firm's required capital and supervision. It does not mean the
firm will be resolved under OLA rather than bankruptcy. In
fact, Section 165 requirements for resolutions are aimed at
ensuring an orderly resolution under the Bankruptcy Code, not
ordered to liquidation. This helps explain why most LCFIs have
pushed back so strongly to avoid this designation.
Third, regulators should strengthen capital requirements so
these firms have a meaningful buffer against losses. Our
existing capital regime is incredibly complex, riddled with
uncertainty, and results in a host of perverse incentives that
encourage bad risk management and synthetic risk-taking at the
expense of traditional lending. Not only would a stronger and
simpler capital regime provide a meaningful buffer that reduces
the likelihood of an LCFI failure, it would reduce the
artificial funding advantages available to large firms and give
regulators and counterparties a much better sense of a firm's
financial health.
While current capital regimes continue to over-rely on risk
weighting and internal modeling, a better approach is to
simplify our capital rules, strengthen the leverage ratio, and
eliminate regulatory reliance on a firm's internal models.
Fourth, regulators should improve public disclosure about
large complex financial institutions' activities and risks so
that investors can make better decisions about these companies
and so that markets and policymakers can feel comfortable that
a firm can fail in bankruptcy without destabilizing the
financial system.
Improved disclosure about the level of the large financial
institutions' unencumbered assets could increase the chances
that debtor-in-possession financing could be seamlessly
arranged in a bankruptcy process without disrupting payments
processing and credit floats. In addition, greater disclosure
about a firm's corporate structure and profitability by
business line could facilitate the market's ability to
determine the optimal size and structure for financial
institutions. It would also allow investors to see if firms are
too big or too complex to manage and would provide better
shareholder value if broken up into smaller, simpler pieces.
So, thank you again for the opportunity to be here today.
This remains an enormously important issue and the committee is
right to keep a very close eye on it. Financial reform and
system stability are not partisan issues. Both parties want to
end too-big-to-fail, and though there may be different
perspectives on how to achieve that goal, through open
dialogue, discussion, and collaboration, we can achieve it. We
must.
Thank you very much.
[The prepared statement of Chairman Bair can be found on
page 60 of the appendix.]
Chairman Hensarling. I thank each and every one of our
witnesses. The Chair now recognizes himself for 5 minutes for
questions.
Mr. Fisher, I will start with you. In your statement, you
gave a group of statistics about the financial concentration in
our largest money center banks. I assume implicit in that
statistical rendition was that it is not natural market forces
at work which has led to the concentration of these assets. Is
that correct?
Mr. Fisher. Well, it is--
Chairman Hensarling. Is your microphone on?
Mr. Fisher. Pardon me, Mr. Chairman. It has been occurring
over time, but this process accelerated during the crisis, and
indeed we have greater concentration today. Over two-thirds of
the banking assets are concentrated in the hands of less than a
dozen institutions. And in my formal presentation, I provide a
little graph which explains that.
Chairman Hensarling. Now, is it my understanding that you
believe the Orderly Liquidation Authority will further hasten
that process, leading to greater concentration within the
financial services industry?
Mr. Fisher. It is my feeling that the Orderly Liquidation
Authority does not end the concept of taxpayer-funded bailouts.
Even if you go through Section 210, the wording is so opaque,
so difficult. I will give you an example, Mr. Chairman. It
says, ``The assets from a failed firm must be sufficient to
repay the Orderly Liquidation Fund. However, if a shortfall
remains--''
How can it can be sufficient if a shortfall remains? There
is a lot of contradictory verbiage in there. But essentially
what happens is that you have a process that, even by the
wording of Section 210, takes up to 5 years or more to occur,
and if you do process that according to Section 210, what is
interesting is that you end up, those institutions that might
provide additional funding with assessments, that is a tax-
deferred or business expense that is written off. So one way or
another the Treasury ends up paying for it, the people of the
country end up paying for it, and it is not not taxpayer
funded. But I do believe that it does not solve the issue of
leveling the playing field for the other 5,500 banks in the
country. I hope that answers your question.
Chairman Hensarling. Mr. Lacker, you have questioned the
Orderly Liquidation Authority as well, and I believe you have
stated previously that you see it as a codification of the
government's longstanding policy of constructive ambiguity.
Based upon our most recent financial crisis, how constructive
do you find constructive ambiguity and does it remain in the
Orderly Liquidation Authority?
Mr. Lacker. I think it is clear that in the Orderly
Liquidation Authority and the use of the Orderly Liquidation
Fund, the FDIC has a tremendous amount of discretion in the
extent to which they provide creditors with returns that are
greater than they would receive in bankruptcy. I think that
discretion traps policymakers in a crisis. Expectations build
up that they may use that discretion to rescue creditors and
let them escape losses, and given that expectation,
policymakers feel compelled to fulfill the expectation in order
to avoid the disruption of markets pulling away from who they
have lent to on the basis of that expected support.
So to me it does seem as if the discretion that is inherent
in the Orderly Liquidation Authority and that is inherent in
the way the FDIC has laid out their strategy, sort of the lack
of specificity we have about the extent to which short-term
creditors could or would get more than they would get in
bankruptcy, I think that potential for trapping policymakers
into rescuing more often than they want is quite there.
Chairman Hensarling. Ostensibly, Dodd-Frank constrained the
Fed's ability to exercise its 13(3) authority. Just how much
constraint do you actually see there? Was it effective and, if
not, has Dodd-Frank dealt with too-big-to-fail, if it has not
constrained 13(3)?
Mr. Lacker. I commend the effort to rein in the 13(3)
authority. I think it is unnecessary and its existence poses
the same dynamic for the Fed that I described just now. It is
not clear, I think it is an open question as to how
constraining it is. It says it has to be a program of market-
based access, but it doesn't say that more than one firm has to
show up to use it. And it certainly seems conceivable to me
that a program could be designed that essentially is only
availed of by one firm.
Chairman Hensarling. In the time the chairman doesn't have
remaining, I just wanted to say to Chairman Bair that having
read your testimony, I agreed with far more of it than I
thought I would, and I hope in other questions you will discuss
the need for a stronger yet simpler capital regime, since I
believe an ounce of prevention is worth a pound of cure.
The Chair now recognizes the ranking member for 5 minutes.
Ms. Waters. Thank you very much, Mr. Chairman. Mr. Hoenig,
you mentioned the importance of activity limits for
institutions that have access to the Federal safety net, and
the first part of your proposal is to restrict bank activities
to the core activities of making loans and taking deposits.
As you know, Section 165 of Dodd-Frank requires
systemically important financial institutions to submit orderly
resolution plans to regulators showing how they would be wound
down under the bankruptcy process. If regulators judge that a
plan is not credible, the law says they may impose more
stringent capital, leverage or liquidity requirements or
restriction on growth activities or operations of the company
until the firm submits a credible plan. The law also states
that if the firm doesn't fix the plan within 2 years,
regulators can order divestiture of assets and operations
again. This process is designed to ensure any of these large
institutions could be resolved by normal bankruptcy
proceedings. The Fed and the FDIC have extended the deadline
for submission of these plans to October.
In your judgment, do the FDIC and the Fed have the
authorities they need to limit activities if they find that the
resolution plans wouldn't allow the banks to be wound down
under an ordinary bankruptcy proceeding?
Mr. Hoenig. First of all, let me answer your question by
first answering the chairman's question, and that is I think
that the subsidy that is within the industry has allowed firms
to be larger than they otherwise would have been and removed
them from the market's discipline. I think it forced broker-
dealers that were independent to come into the--
Ms. Waters. Reclaiming my time.
Mr. Hoenig. Yes, I will be right with you.
Ms. Waters. Reclaiming my time.
Chairman Hensarling. It is the gentlelady's time.
Ms. Waters. Reclaiming my time.
Mr. Hoenig. Now, to answer your question--
Ms. Waters. Reclaiming my time.
Mr. Hoenig. Okay, sorry.
Ms. Waters. I am going to address this question to Ms.
Sheila Bair.
I don't know if you heard the question. I will go back over
it again. As you know, Section 165 of Dodd-Frank requires
systemically important financial institutions to submit orderly
resolution plans to regulators showing how they would be wound
down under the bankruptcy process. If regulators judge that a
plan is not credible, the law says they may impose more
stringent capital leverage or liquidity requirements. Going
through that, the Fed and the FDIC have extended the deadline
for submission of these plans to October. In your judgment, do
the FDIC and the Fed have the authorities they need to limit
activities if they find that the resolution plans wouldn't
allow the banks to be wound down under an ordinary bankruptcy
proceeding?
Ms. Bair. Yes, I think there is very broad authority as
part of the living will process, and I agree with Jeff Lacker
that this is a very important--
Chairman Hensarling. I'm sorry, Chairman Bair, can you pull
the microphone a little closer to you there, please?
Ms. Bair. So, yes. Section 165 gives the Fed and the FDIC a
lot of authority as part of the living will process to require
these banks to simplify their legal structure, to divide their
activities, move the activities, high-risk activities outside
of insured banks. The standard is resolvability in bankruptcy,
and that is a very tough standard, particularly under the
current bankruptcy rules. So I think there is tremendous
authority there, which I hope both the Fed and the FDIC will
aggressively use to get these banks to simplify their legal
structures, divide them along business lines. I think Tom
Hoenig's suggestions are great along those lines.
Ms. Waters. Will the Fed and the FDIC take other actions if
study of the resolution plans submitted in October shows they
aren't credible? Back to Ms. Bair.
Ms. Bair. I don't know. That might be better addressed
directly to the FDIC. My personal view is that they should be
as transparent as possible about the status and acceptability
of these plans. And if their--I know that there is confidential
information that they need to protect, but I would like to see
more disclosure about what is in the living wills as well as
the process for approving them.
Ms. Waters. Mr. Lacker, would you like to comment? We have
a few seconds left.
Mr. Lacker. I agree with Sheila Bair.
Ms. Waters. That is a very safe thing to do.
I will yield back. Thank you.
Chairman Hensarling. The gentlelady yields back.
The Chair now yields 5 minutes to the gentleman from North
Carolina, Mr. McHenry, the chairman of the Oversight and
Investigations Subcommittee.
Mr. McHenry. Thank you, Mr. Chairman.
Mr. Fisher, does Dodd-Frank end too-big-to-fail?
Mr. Fisher. No.
Mr. McHenry. Mr. Lacker?
Mr. Lacker. No.
Mr. McHenry. Ms. Bair?
Ms. Bair. It provides the tools to end too-big-to-fail.
Mr. McHenry. Mr. Hoenig?
Mr. Hoenig. It does provide the tools.
Mr. McHenry. All right. So there is some disagreement here.
Mr. Lacker, please explain the Orderly Liquidation Authority.
You reference this in your writings, previous speeches, and
your testimony today, but does the Orderly Liquidation
Authority provide creditors with a different assumption about
how they will be treated?
Mr. Lacker. There are three ways in which the returns to a
creditor in the Orderly Liquidation Authority resolution would
potentially differ from the returns to, going through a
bankruptcy, unassisted bankruptcy. One is that the FDIC has the
authority to provide creditors with more than they would get in
liquidation. There are some conditions on that. It has to be if
it is deemed to be minimizing the cost to the FDIC, but I think
a fair reading of the history is that standard still provides a
fair amount of latitude to the FDIC.
Mr. McHenry. And does that discretion provide greater
certainty in the market or lead to more uncertainty?
Mr. Lacker. It is more uncertainty. In addition to that,
they would potentially receive their money far earlier than
they would in a resolution under the Bankruptcy Code in which
there can be delays for good procedural reasons in the
resolution of claims of creditors; and then, third, the
discretion provides greater uncertainty or latitude relative to
the relative adherence to absolute priority rules in unassisted
bankruptcy.
Mr. McHenry. So, Mr. Fisher, the FDIC's authority,
discretionary authority that Mr. Lacker speaks of within the
Orderly Liquidation Authority, does it provide them wider
latitude for bailouts?
Mr. Fisher. According to the way the law is written, there
is substantial latitude certainly in terms of time. I mentioned
this in my spoken statement in terms of the liquidation process
and the time that it takes. I think it is important to realize
that is one issue. We can have--given the way it is structured
and the way the wording is stated, this can take up to 5 years
or longer. This promotes and sustains an unusual longevity for
a zombie financial institution. I believe it imposes a
competitive disadvantage on small and medium-sized
institutions, but one aspect I don't think anybody has
discussed in any of the hearings that I have studied before
this committee is that if the reorganized company under the
process cannot repay the Treasury for its debtor-in-possession
financing, which is essentially what it is, then Title II
suggests the repayment should be clawed back via a special
assessment on other SIFIs, other large bank competitors.
Mr. McHenry. So, in essence--
Mr. Fisher. That assessment--excuse me, Mr. McHenry.
Mr. McHenry. Go right ahead.
Mr. Fisher. --is then written off as a tax deductible
business expense, thereby reducing revenue to the Treasury and
to the people of the United States. So to say that there is no
taxpayer funding I believe does not completely state it
correctly. It may be reduced, but it is still carried by the
taxpayers.
Mr. McHenry. So we are justified in saying that is, in
fact, a bailout by the taxpayer?
Mr. Fisher. That is one way to describe taxpayer support.
Mr. McHenry. We are sensible people, we are Members of
Congress, right? So, to this point, there is a lot of debate
about this, do the large financial institutions have a funding
advantage as a result of this?
Mr. Fisher. I believe what Mr. Hoenig was about to say
earlier--at least I will give you my interpretation--is they
presently have a huge funding advantage. There are studies by
the BIS, the Bank for International Settlements, by the IMF,
there is even one which is highly disputed by Bloomberg that
shows they have an $83 billion per year advantage. The Bank of
England under Andy Haldane states a much bigger number, in the
$300 billion for the internationally systemically important
financial institutions. But here is what I think is the fact.
If you take, say, the work of Simon Johnson, a noted MIT
economist, who was the chief economist at the IMF--that may
discredit him in the eyes of some in this room, I don't know.
But as he points out, all you have to do is ask a market
operator, does a large institution have a funding advantage
over a smaller one. The answer is yes.
Now, we at the Dallas Fed don't know what the number is,
and I noticed under Brown-Vitter, there is an effort or under
those two Senators to actually get the GAO to study the number,
but I am here to tell you as a former practitioner with over 25
years experience in the business, having been a banker, having
run financial funds, having been an investor, that there is a
substantial advantage to these institutions, and just the name
``systemically important financial institution,'' that is like
saying, I bought it at Neiman Marcus. It attracts and brands
and provides a special dispensation. And I believe that despite
the industry's efforts, there is a funding advantage. And I
believe it is measurable, and if it is not measurable,
certainly you can feel it as a financial operator, and it buys,
again, the smaller--
Chairman Hensarling. The time of the gentleman has expired.
Mr. McHenry. Thank you.
Chairman Hensarling. The Chair now recognizes the gentleman
from Texas, Mr. Green, the ranking member of the Oversight and
Investigations Subcommittee, for 5 minutes.
Mr. Green. Thank you, Mr. Chairman.
Let me start by calling Lehman to our attention. As you
know, this was the largest bankruptcy in American history, and
its failure created a chain reaction that had a tremendous
impact on the economic order. In 2011, the FDIC examined how
Lehman could have been wound down under Dodd-Frank, and I
believe the report concluded that it could have been done in
such a way as to allow taxpayers to be off the hook and cause
creditors as well as investors, shareholders to share the
burden of the cost.
My question, Ms. Bair, to you is, could you please
elaborate on how this could have been accomplished such that we
would have preserved economic stability and avoided having
taxpayers bear the burden of the cost?
Ms. Bair. So, yes, that report concluded that under Title
II, systemic disruptions could have been avoided, and also that
the losses for the creditors, for the bondholders would be
substantially less. Lehman's bondholders still haven't been
paid yet, and the losses are going to be substantial once that
happens, and the strategy that was articulated in that paper is
the one the FDIC says it won't use, which is single point of
entry, taking control of the holding company, continuing to
fund the healthy portions of the operation to avoid systemic
reduction, to maintain the credit flows, require derivatives
counterparties to continue to perform on their contracts,
whereas in bankruptcy, they have this privileged status where
they can repudiate their contracts, grab their collateral and
go, which creates a lot more losses for bondholders, and that
is one of the reasons why the bondholders are going to be
suffering such severe losses in Lehman.
So I think it is a viable strategy. Is it perfect? No. Is
there a lot more work to be done to make it work as well as it
should? Yes. But I do think we would have had a much different
result, and ironically, bankruptcy proponents, those who want
to change bankruptcy to make it work for financial
institutions, which I am all for, be careful with that because
one of the things some of them want to do is provide government
funding into a bankruptcy process. So if you don't like the
fact that the government can provide some liquidity support in
a Title II process, which will be repaid off the top, be
careful because the bankruptcy folks want that same kind of
mechanism in a bankruptcy process, and the reason they want to
do that is because a financial institution, whether it is large
or small, its franchise will be destroyed if it can't fund its
assets anymore.
It is not like a brick and mortar company. It has to have
liquidity support to maintain the healthy parts of its
franchise. If you are going to provide that type of mechanism,
make sure it is under the control of the government which has a
public interest mandate.
So I think that does need to be an important part of the
debate about bankruptcy versus Title II. But I do think it is a
viable strategy, and I think it would have worked a lot better,
served the country better and ironically Lehman creditors as
well if it had been used in that case, but we didn't have it
then.
Mr. Green. Thank you.
Now a question for everyone. I would like to ask a really
difficult question, but you are all brilliant people, and this
should be easy for you, given what you have accomplished in
life and what you have studied. If you genuinely thought in
your heart of hearts that the failure of a given entity would
bring down the American economy as well as the world economy,
if you genuinely thought that it would and the only way to
prevent it would be the utilization of tax dollars to be
repaid, you genuinely believe that we may bring down the
American economy if you do not respond, and tax dollars to be
repaid is the only methodology by which you can prevent this,
would you take the measure of using the method available to
you, Mr. Fisher? I am going to ask for a yes or no, given that
time is of the essence.
Mr. Fisher. My quick answer, Congressman, and again, you
are a personal friend of mine, but my quick answer is this: It
is better to create--
Mr. Green. I reject your quick answer, and I ask you this.
Mr. Fisher. It is better to create greater and noble--
Mr. Green. Here is what I am going to ask. If you would
not, if you would not do this, if you would not utilize the
only method available, which is tax dollars, and the American
economy and the world economy is about to go under, raise your
hand, anyone.
Let the record show that there were no hands raised,
including my very good friend, Mr. Fisher.
And I would also say this to you, friends, this is what
Dodd-Frank attempts to do. It only has the ability or accords
the ability if we are about to have a tragedy of economic
import comparable to what happened with Lehman, and as a
result, it would not allow us to bring down the economy.
Thank you, Mr. Chairman.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the chairman emeritus of our
committee, the gentleman from Alabama, Mr. Bachus, for 5
minutes.
Mr. Bachus. Thank you. Back in May and June of 2010, we
were debating this very subject, how do we address the failure
of a large financial institution? We basically had two choices,
and one was what I call rule of law, and that is enhanced
bankruptcy. And the other was what Chairman Bair referred to a
minute ago as tools. But that would be tools you give to the
government, and those are discretion. So, really, the choice is
between rule of law and discretion, government discretion in my
mind, and I would just ask each of you to comment on that.
Mr. Hoenig. If I may, Congressman, number one, Title I is
bankruptcy, and that is the preferred method. Number two, our
odds of being able to implement Title I in bankruptcy increase
if we take the subsidy and pull it back and if we split out
investment banking activities from commercial banking so that
firms can fail and not bring down the economy, as Drexel did. I
think that is a much preferable way, and it does require the
rule of law in your Title I.
Mr. Bachus. And as I understand it, you want to really
limit it to commercial banking?
Mr. Hoenig. I want commercial banking to be the only sector
which has this very explicit subsidy.
Mr. Bachus. So that is one path, and I acknowledge that.
Mr. Fisher. Congressman, I agree with Mr. Hoenig.
Our proposal that I have outlined in my submission just
restricts the Federal safety net, that is deposit insurance and
access to the Federal Reserve's discount window, to where it
was always intended to be, as Mr. Hoenig said, and that is in
traditional commercial banking deposit and lending
intermediation and payment systems functions. If that were the
law, that is the law.
And then, secondly, all other activities with other parts
of a complex bank holding company, I don't want to get rid of
the complex bank holding companies, you can't stuff the old
rules back into the bottle, Glass-Steagall, but it would be
very clear that every transaction, every counterparty, every
customer, anybody who does business with them has a clear
contract that says there will never, ever be a government
bailout. That is much simpler than what is in this legislation
here, which is so opaque and so complicated. So when you have
discretion, you have room for powerful lobbies to influence
decision making. When you have a strict rule of law, as long as
it is a good rule of law--I believe it is a simple proposal we
have made from the Dallas Fed--then you remove that possibility
for folks to work on the regulators, massage the regulators,
lobby the regulators and so on, and you have a greater chance
of discipline. So this is all about the rule of law, and I
agree with you on that front.
Mr. Bachus. All right. Dr. Lacker?
Mr. Lacker. I think you are right to put your finger on
that. I think discretion is at the core of too-big-to-fail. It
is why we got here. It began over 40 years ago with the rescue
of a $1 billion institution in Michigan where the FDIC went
beyond insured depositors. The precedents that kept being set
on through Continental Illinois gave rise to the expectation
that policymakers might use their discretion with uninsured
claimants, but regulators tried to have it both ways. We tried
to, with constructive ambiguity, preserve the fiction that we
wouldn't intervene, tried to get people to behave as if we
wouldn't intervene because that aligns incentives correctly and
limits risk-taking, and yet we wanted to preserve the
discretion to intervene, and markets saw through that. And as a
result, when the time came, when push came to shove in the
spring of 2008, markets had built up a tremendous array of
arrangements that were predicated on our support, and we were
boxed in. Pulling the rug out from under that would have been
tremendously disruptive. But the problem isn't that we need to
provide the support. The problem is to defeat that expectation
at the core.
Mr. Bachus. Sure. And even on Lehman, when we started
talking about whether the government would exercise discretion
or not, it unsettled and made the process unpredictable, and I
would say this: Discretion is almost antithesis to
predictability and certainty. When you have discretion, you
take away certainty, and then it is hard to have something
orderly.
Mr. Hoenig. And remember, Lehman had been allowed to
leverage up, to issue basically a deposit that had the
impression of government backing.
Mr. Bachus. Right.
Mr. Hoenig. And therefore facilitated its size, its
vulnerability and then the crisis.
Mr. Bachus. I am going to write you all a letter about
Governor Tarullo wanting to go beyond Basel 3 in some of his
increased capital requirements and other things such as that,
and I have a real concern that the rest of the world won't
follow us in that regard, and--but I will have to write a
letter because of the time.
Mr. Fisher. Chairman, can I just point out as a point of
fact that Ms. Bair was not at the FDIC when Continental
Illinois failed.
Mr. Lacker. Much less Bank of the Commonwealth.
Chairman Hensarling. For the record, the Chair now
recognizes the gentleman from Massachusetts, Mr. Capuano for 5
minutes. Apparently, I don't.
I recognize the gentleman from New York, Mr. Meeks, for 5
minutes.
Mr. Meeks. Thank you, Mr. Chairman.
My first question goes to Chairwoman Bair. Dodd-Frank
created OLA to apply only in the rare situation where it is
necessary to avoid the adverse effects of liquidating a
systemically important financial company under the Bankruptcy
Code. Can you discuss other adverse effects that may result in
liquidating a large and complex financial institution under
traditional bankruptcy and how OLA helps mitigate some of these
dangers?
Ms. Bair. Right. So I think the two problems, the main
problems you have in bankruptcy, which are where you have an
advantage with the Dodd-Frank Act, the Title II approach is,
one, regulators can do advance planning, and these institutions
don't go down overnight, even with Lehman Brothers. This was a
slow burn over months of time. So regulators can be inside the
institution planning, trying to figure out how it will be
resolved if it fails. Regulators can also provide, the FDIC can
provide temporary funding support to keep the franchise
operational. Take a bank, for instance. So a bank goes down. If
there is no process to continue some liquidity support, a small
business can't access their credit line anymore to make
payroll, you are going to your settlement for your house, there
is no funding for your mortgage anymore. These are financial
assets.
To maintain any value in the franchise, you need to
continue funding the operations, and again that is true with
large and small banks. The government can do that under the
stewardship of the FDIC. I think you need a government agency
if you are going to be temporarily putting government money
into that. You just can't do that with bankruptcy. Again, I
caution you that some of these bankruptcy advocates, that is
what they want. They want the Fed to be lending into a
bankruptcy process.
The third thing that we can do under Dodd-Frank and we
could always do under banks is require derivatives
counterparties to continue to perform on their contracts, so
they can't walk away and repudiate their obligations. That
created tremendous disruptions for Lehman. So those are the
things that are addressed which are advantages of Title II. I
think there are Bankruptcy Code changes that could be made
which would facilitate very quick debtor-in-possession
financing to provide that liquidity that you need, stop giving
derivatives to counterparties this privileged status. The
planning thing is still going to be a problem, but maybe
working with the regulators, that can work better.
But you don't have that now, and so you need something like
Title II, and there is serious work going on at the FDIC to
make this a viable, operational strategy where the shareholders
and creditors will take the losses. There is no doubt in my
mind about that. And there are substantial limitations on the
discretion of regulators. They can't differentiate among
creditors except under two conditions: one, you are going to
maximize recoveries; or two, you are going to maintain
essential operations. You have to pay your employees. You have
to pay your IT people, the people who are mowing your lawn, and
that is true in bankruptcy. Those people are paid in full in
bankruptcy. Those creditors are differentiated. So, I think
there are a lot of constraints.
Prior to Dodd-Frank, we didn't--Congressman, you are
absolutely right, it was all over the place: WaMu goes into
receivership; Lehman goes into bankruptcy; Bear Stearns gets
bailed out. It was bad. But I think Dodd-Frank was trying to
say, this is the process going forward, here, the government is
going to do this, these are the limits on their discretion. I
think there are very meaningful limits there, and I'm sorry if
we disagree, but I think it is in the statute.
Mr. Meeks. Thank you. Let me ask Mr. Lacker a question
about living wills, which are important tools and should
credibly show how a bank could be resolved under the Bankruptcy
Code, but it is not clear to me why the effective use of living
wills makes elimination of the FDIC's authority under Title II
necessary or even advisable. Can you discuss your views on the
Orderly Liquidation Authority in light of the failure of the
Bankruptcy Code to mitigate the systemic impact, for example,
that Lehman's bankruptcy had on the economy and the financial
stability? And can you also discuss how taxpayers and the
economy would be more secure if a large systemic firm was
liquidated under bankruptcy? Moreover, where would large firms
find adequate debtor-in-possession financing in the private
sector?
Mr. Lacker. Good question. I think the orderly liquidation
process provides that discretion. I think it provides enough
discretion that regulators are likely to feel boxed in and
forced to use it. I think that Lehman told the world a lot of
things, and as Sheila Bair pointed out, I think that meant
essentially five different firms had been handled four
different ways, and then, after AIG, it was six different firms
five different ways. I think the tremendous turmoil in
financial markets was due to just confusion about what the
government's strategy was about doing that.
Now, as for the bankruptcy of a large financial
institution, so, we have come to become accustomed with the
bankruptcy of a large airline, for example, and plenty of
people are creditors of airlines, they go fly airlines that are
bankrupt, and things, life goes on. I am not saying that we
could ever get to the point where a large financial firm could
fail and go into bankruptcy and it would be as far back in the
newspaper as an airline bankruptcy, but we need to get to that
point, and the key thing to remember is that everything that
makes bankruptcy scary for a large financial firm is under our
control now. They don't have to be so dependent on the--
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentlelady from West Virginia,
the Chair of the Financial Institutions Subcommittee, Mrs.
Capito, for 5 minutes.
Mrs. Capito. Thank you, Mr. Chairman.
We obviously have a disagreement on the panel, and I think
if the basic disagreement is whether too-big-to-fail exists or
not and half the people think it exists, then, in my opinion,
it exists because, real or imagined, it is very much a part of
the Dodd-Frank bill and also the Orderly Liquidation Authority.
So let's dig down with President Lacker, talking about the
living wills and how they may be used to then tweak, as
Chairman Bair was saying, or reshape the Bankruptcy Code to be
able to address the issues that you all have talked about
today. Could you please talk about how a living will could be
beneficial in this process?
Mr. Lacker. It is a matter of planning ahead of time so
that you have confidence that you can take them to bankruptcy
unassisted, and it would not be disruptive. Sheila Bair points
out the ongoing franchise value of a company sometimes involves
liquidity needs. Those liquidity needs are foreseeable. We can
plan for those, we can provide for those.
Congressman Meeks mentioned debtor-in-possession financing
that a bankrupt firm gets in bankruptcy. That is something we
can entirely foresee and for which we can entirely plan. We can
estimate how much liquidity they could need at the outside,
what is likely needed, what is the worst-case scenario, and we
can make them organize their affairs so that they don't need
any more liquidity than they would have on hand themselves in a
bankruptcy. So they wouldn't need the Fed or the FDIC or the
Orderly Liquidation Authority.
Mrs. Capito. Let me ask a further question on this because
one of the push-backs on an enhanced bankruptcy initially when
we argued this was that it wasn't--the courts weren't agile
enough or quick enough to be able to react to this. Does
anybody have a comment on that?
President Lacker, go ahead.
Mr. Lacker. I will just say I am familiar with proposals
for a new chapter in the Bankruptcy Code, Chapter 14. There are
some, I think, meritorious features of those recommendations
that are definitely worthy of consideration that would improve,
that could improve on the bankruptcy process for large
financial firms. I think dedicated judges assigned specifically
to this class of bankruptcies could help in that regard.
Mrs. Capito. Okay. Another thing I have been concerned
about, as the Chair of the Financial Institutions Subcommittee,
is the consolidation and mergers that we are seeing, not so
much on the largest institutions, but we know they are getting
bigger, but some of the other smaller institutions, if they
can't meet the cost of compliance, so they are either being
acquired or merged or whatever. I don't know if this
liquidation or this resolution process will mean more
concentration in the financial services industry. Has anybody
thought of it like that because it does provide that?
Yes, Mr. Fisher?
Mr. Fisher. What is interesting about this conversation is
that we are still talking about institutions that are too-big-
to-fail. These different sections are to handle these mega-
institutions that present a systemic risk. As long as they
exist, as long as they have a comparative funding advantage,
they place the smaller institutions at a competitive
disadvantage, and if that is your question, what I worry about
here is this entire conversation is based on maintaining too-
big-to-fail and on institutions that are so-called systemically
important, and putting them through a process that, again, is
understandable, is earnest, but develops a massive bureaucracy
and procedure in order to deal with them should they get into
trouble.
Far better I think and we propose to structure the system,
incent the system to have institutions that don't put us in
this position in the first place. That is the basis of our
proposal. But as it is now, we are continuing to allow them to
concentrate, and then we have these fire drills we put up in
case they get into trouble.
Mrs. Capito. Right.
Ms. Bair. Could I just add, I think--
Mr. Hoenig. Let me just say--
Ms. Bair. Go ahead.
Mr. Hoenig. Let me just say I agree with what Mr. Fisher is
saying, but I think, in bankruptcy, there are still two issues.
One is debtor-in-possession financing and the other is cross
border, and that is what the living wills are partially
designed to address, and what a new Chapter 14 would address as
well. But if you rationalize the structure of the firms--if you
get them into manageable sizes and you scale back the subsidy--
you address the drive toward further consolidation. Although
that is always an issue, if you take away the competitive
advantage that these largest institutions have over regional
and community banks, I think you have a much more rational
system in which failure can be addressed through bankruptcy,
and Title II becomes less significant under those
circumstances.
Ms. Bair. I would just like to add that Title II really
subjects these large financial entities to the same process
that community banks have always had, and almost all community
banks I know support Title II of Dodd-Frank because they know
that process. They know it is a harsh process. It is a harsher
process than bankruptcy, frankly, because the management is
gone; the boards are gone. They have to--they are required to
be fired. They can continue in a bankruptcy process. So I don't
think--there is a problem, there is absolutely a problem,
Congresswoman, with too many of these other regulations
applying to small banks and compliance costs, and that is going
to speed further consolidation, but on Title II, I think, if
anything, most community banks I know support it because it
imposes the same discipline.
Chairman Hensarling. The time of the gentlelady has
expired.
The Chair now recognizes the gentlelady from New York, Mrs.
Maloney.
Mrs. Maloney. Thank you very much, Mr. Chairman.
I would like to ask Sheila Bair, I am sure you remember the
bailout of AIG in 2008, and we did this by taking an 80 percent
stake, equity stake in the company. Essentially, the government
or the American taxpayers became the majority owners of the
company. We did not put it through bankruptcy, and we did not
liquidate the firm. We kept the old firm alive with government
money.
Now, I would like to draw your attention to Section 206 of
Title II, which says that the FDIC, ``shall not take an equity
interest in or become a shareholder of any covered financial
company or any covered subsidiary.'' I understand you wrote a
large part of Title II. And in light of this prohibition that
is in Section 206, do you think that Title II of Dodd-Frank
permits more AIG-type bailouts by the FDIC? Does it permit it?
Ms. Bair. No, just the opposite. It bans, as you say,
capital investments. You just can't do that anymore. Title II
is really an FDIC-controlled bankruptcy process. The claims
priority is the same. It is more harsh, as I said, because of
the punitive way that the boards and managers are treated. So,
no, there could be no more AIGs, and that was a very specific
purpose of mine in working with this committee and folks in the
Senate in drafting Title II.
Mrs. Maloney. Also, how would a liquidation under Title II
be different from the AIG bailout? How would it be handled? How
would it be different?
Ms. Bair. So, there would be a restructuring. My guess is
they would use a good bank-bad bank structure. The bad assets
would be left in the receivership, the shareholders and
creditors would take the losses, the healthy part of the
organization would be spun out probably into--I am sure into
smaller, more manageable pieces. It would be recapitalized by
converting some portion of the long-term debt at the holding
company level into equity positions. These would be by private
stakeholders, and the equity positions and the healthy parts of
the entity that would be spun out back into the private sector,
and I think it would take less than 5 years, 5 years is the
outer limit, but it is 5 years since Lehman went through
bankruptcy, and the bondholders still haven't been paid, so, in
the world of restructurings and traditional bankruptcy
processes, 5 years is not a hugely long time.
Mrs. Maloney. And can you please describe why the
bankruptcy option and that process did not work for Lehman?
Ms. Bair. I think, again, there was a full stop with the
financing. The franchise lost value very quickly because there
was no liquidity left, and I think the ability of the
derivatives counterparties to repudiate their contracts and
pull out their collateral also had a disruptive effect, and
then, of course, you triggered insolvency proceedings in
overseas operations, as Tom Hoenig has mentioned, because the
whole thing was going into a receivership process as opposed to
the single point of entry strategy, which is also the one that
the bankruptcy reform advocates want to use. It is the holding
company that goes into the receivership, but the healthy
operating subsidiaries underneath, including those in foreign
jurisdictions, remain open.
Mrs. Maloney. And very importantly, why did Lehman's
bankruptcy really spur a global economic crisis? Can you
explain how that happened?
Ms. Bair. I think it was a combination of things. It
surprised the market, as we said. There were so many
different--I think there was a bailout expectation, and when
the market didn't get a bailout, the market doesn't like
surprises. I think the derivatives, the full stop on the
funding was a real problem, I think the derivatives
counterparties pulling out and then going back to the market to
rehedge, I think that created some significant disruptions as
well, and then just general uncertainty. Another important
recommendation that I make in my testimony which will help
facilitate bankruptcy or Title II is better disclosure, what is
inside these firms, their financial statements. The market just
doesn't have any confidence in them. When Lehman went down--so
who else is out there with bad assets that we don't know about
because the financial statements aren't doing a very good job
reflecting that.
Mrs. Maloney. And speaking about disclosure, there has been
some testimony about reports which have shown that the markets
are more dark or less disclosed since Dodd-Frank, that they are
really not going on the exchanges. So this is not--probably the
best clearest way is an exchange where you know what is
happening. Why is it becoming darker? Why is that trend
happening?
Ms. Bair. I was referencing more the financial statements
that publicly traded companies and financial institutions in
particular have to make publicly available. I think on market
trading, yes, that is another problem, and that accelerates
volatility because who is trading what and what the deficit
market is becoming quite opaque, and the amount of money
sloshing around out there, it is quite volatile. So I do think
that does exacerbate the problem as well. It is more of a
market structure issue.
Mrs. Maloney. My time has expired.
Chairman Hensarling. The time of the gentlelady has
expired.
The Chair now recognizes the Chair of the Capital Markets
Subcommittee, the gentleman from New Jersey, Mr. Garrett.
Mr. Garrett. Thank you. And Ms. Bair, just to follow up on
those lines, who exactly with regard to being the bailed out in
those situations under that title--who exactly is it that is
being bailed out? Is it the credit--I will answer the question.
Is it creditors actually that are being bailed out or--
Ms. Bair. Nobody is bailed out in a Title II, and nobody--
creditors are--if you say because creditors are paid something,
that is because the remaining value of the franchise is enough
to give them some of their money back. That is true in
bankruptcy, that is true in the FDIC. That is not a bailout.
That is just the way the process works.
Mr. Garrett. But is it the creditors who are receiving the
fruits of the payments in that situation? I don't want to get
into the weeds with the definition of a bailout or not.
Ms. Bair. No, I think it is more the customers of the
institution. It is the customers of the institution who, if
they are relying on the credit functions of the institution,
are the ones who are receiving the benefit. The unsecured
creditors and shareholders are held in receivership and will
take whatever attendant offices there are. If the franchise is
so worthless that there is very little recovery left, they
won't get anything back.
Mr. Garrett. Yes. So let me go into an area in which I
thought I agreed with you. And generally, I agree with you more
now than in your previous capacity, by the way. So you made an
interesting point in your written statement that I don't
believe got a lot of attention so far here, and that is with
regard to FMUs, financial and market utilities, is that right?
Specifically to their access to the Fed's discount window, and
in that area, I do completely agree with that where you say
that new GSEs--this is creating a new GSE and a potential new
source of system instability if left in place. Now, you may
know that last Congress, I introduced, along with Senator
Vitter, legislation that would have eliminated Title VIII,
among other things, and I would hope that this will be
included, by the way, with any new package that goes forward.
But a couple of points with you on this, right? If the
Chairman of the CFTC continues to move forward with regulations
that force swaps transactions which take place outside of this
country, overseas, between non-U.S. firms, and to comply with
the clearing requirements under Dodd-Frank, then those
clearinghouses will have to do, what, to clear the trades and
then also have access to our discount window, right? So isn't
that in short what Mr. Gensler is doing is trying to, not maybe
trying to, but actually importing potential systemic risk over
in Europe and then looking to the taxpayer here in the United
States to bail them out? Isn't that the actual outcome?
Ms. Bair. Congressman, I have not looked as closely as
perhaps I should at the CFTC's proposed regulation. Could I
give you a written response to that? I'm sorry; I just don't
feel like I have enough information to answer that right now.
Mr. Garrett. But it is true regardless of where they are,
your point is that by having access to the FMUs, to the
discount window, you basically have a backstop for the
taxpayers?
Ms. Bair. You absolutely do. That is 1,000 percent. I just
have not thought about the interrelationship between that
designation and what the CFTC is proposing, but yes, that is a
bailout. I don't think Title I is, but Title VIII absolutely
is. The too-big-to-fail designation comes with liquidity
access, no additional regulation. Yes, if you could get rid of
that, that would be great.
Mr. Garrett. Right, so that is all good, and I agree with
you, great, on that. The flip side of that is you have also
talked, however, in some of your public comments and saying
that you have been critical of the claim that the top tier
allows for taxpayer bailouts in this section, right? But then
you advocated for a prefunded pot of money, bailout money I
will call it, paid for how? By additional levies on the
financial institutions themselves, and I would--are you with
me?
Ms. Bair. Yes.
Mr. Garrett. You say, and I can pull out your statements on
it, that this is not a tax on the consumer; this is a tax on
the financial institutions. Is that correct, in your
assessment?
Ms. Bair. I don't anticipate--first of all, I think you
need to differentiate between propping up an institution,
leaving it open, leaving the management in place, and giving
them liquidity support, which is what you can do with
clearinghouses under Title VIII, and once an institution has
been forced into receivership, the managers are gone, the
boards are fired, the shareholders and creditors will take
whatever losses there are. This is true in bankruptcy or Title
II. That is the process you provide the liquidity support. So
you get the market discipline--
Mr. Garrett. But ultimately, indirectly, it first goes onto
the financial institutions, and the first one, if it can bear
it, with its equity and what have you, but if not then to the
other financial institutions in the industry, and ultimately
doesn't that get passed through to the consumer?
Ms. Bair. I would be very surprised if that happens, but I
think that is a good reason why other large financial
institutions which work closely with the Fed and the FDIC to
make sure both Title I and Title II work.
Mr. Garrett. Right. But wouldn't the simple solution just
be to--I am with you 100 percent on the first--eliminate that
backstop? Wouldn't the simple solution be just treating both of
them in the same way to prevent any possibility because nobody
knew about the possibility going into 2008 that this was all
going to be feed back on the consumer. So wouldn't that be the
most direct way, just to eliminate them both entirely?
Ms. Bair. I would like to get to a world where for
operations outside of insured banks, outside of the safety net,
I would love Tom Hoenig's activity differentiation, the rest of
that can go into a bankruptcy process without hurting the rest
of us. I would love to see that world.
Mr. Garrett. Thanks.
Ms. Bair. We are just not there yet.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Massachusetts,
Mr. Capuano, for 5 minutes.
Mr. Capuano. Thank you, Mr. Chairman. I am still trying to
process Ms. Bair and Mr. Garrett agreeing on something. I am
going to have to rewind this tape at a later time and try to
figure this out.
Mr. Hoenig, in your testimony, your verbal testimony, you
used the word ``perception.'' Mr. Fisher used the same word.
Mr. Lacker, you used the words, ``implicit, artificial, the
people believe certain things and expectations.'' I agree with
everything that the three of you said on those issues. I may or
may not agree on whether there is a real ability to use too-
big-to-fail anymore, but I agree that the perception is out
there. Whether I like it or not, whether I agree with it or
not, it is there.
I agree with it, and by the way, Chairman Bernanke agrees
with it as well. To quote his testimony from an earlier date in
this committee, he said that market expectations that the
government would bail out these firms if they failed, period,
those expectations are incorrect. He went on to further state,
obviously, the perception is there, but he thought the reality
is not, and at a later time, he also stated that the tools that
the Federal Reserve used to implement too-big-to-fail in 2008
were no longer available to the Fed. So I guess a lot of this
to me is a lot of wasted time. We can agree or disagree whether
the law does it or not, but I don't think there is any
argument, regardless of what we think the law does, that the
perception is there, so perception in this case may well be
reality.
Mr. Fisher, I particularly like, and I will be filing a
bill to implement your second proposal, the item that just sign
something saying we are not doing it. I like that. I don't
think you have to repeal anything to do that. I like belts and
suspenders. I am going to be filing a bill, and I hope my
colleagues will cosponsor it with me. I think that is a pretty
good general proposal.
I also particularly liked your comment earlier that it is
the first time I think I have heard it said that a SIFI
designation provides a competitive benefit to somebody. I
actually believe that, but I congratulate you for saying it.
I want to get back to the too-big-to-fail. Really, in my
opinion, it deals with the subsidy, the alleged subsidy which I
happen to agree is there but some people disagree that the
bigger banks or the bigger entities get. I was very interested
to note that in all of your testimonies, you didn't really talk
about size too much; you talked mostly about complexity and
concentration. Now, size obviously factors into that. You can't
be complex if you are not big enough. But I wonder, Mr. Hoenig,
how would you feel if you could, if I gave you a magic wand,
would you re-implement something along the lines or something
equivalent to Glass-Steagall if you had that power?
Mr. Hoenig. Yes, I would.
Mr. Capuano. Mr. Fisher?
Mr. Hoenig. Something like it. That is what I propose
because you want to change the perception.
Mr. Capuano. I know that is what you proposed, that is why
I asked you the question.
Mr. Fisher, I don't know what you proposed. Would you
implement, not necessarily the same law, but something
equivalent to Glass-Steagall if you could?
Mr. Fisher. I think what we proposed is similar. I don't
think you can stuff Glass-Steagall back in a bottle.
Mr. Capuano. I agree with that.
Mr. Fisher. Thank you for offering to put a bill in. I am
now proud to have been educated in Massachusetts. Thank you,
Congressman.
Mr. Capuano. Thank you. Mr. Lacker, would you again impose
something equivalent to Glass-Steagall if you could?
Mr. Lacker. I think the living will process will get us
there if we need to go there. I think it will identify what
activities we need to push out, separate from banking
activities, if that is what is needed to make unassisted
bankruptcy palatable.
Mr. Capuano. Ms. Bair, would you reimpose something
equivalent if you could?
Ms. Bair. Yes, I agree with it, and I think the regulators
have the tools under Title I to get there.
Mr. Capuano. Thank you.
Are any of you familiar with an article that was written by
Professor Hurley and Mr. Wallison of AEI several months ago? It
appeared in Forbes magazine. It proposed something that would
impose a market discipline on the larger institutions to
actually make themselves smaller. It basically would require a
higher capital formation if these institutions were too big,
which would put pressure on stockholders to then voluntarily
shrink the entity. I am just wondering if any of you are
familiar with this? If you could read--maybe I will send you a
copy of H.R. 2266, because that is my attempt to put it into
legislation. I like the idea of the market rather than the
government saying, you are too big, I like the idea of the
market doing the same thing, which is a little different than
everything else. It kind of lets the entities themselves,
actually the stockholders make that decision, and I am just
wondering, are any of you familiar with the concept of the
proposal?
Mr. Hoenig. I am generally familiar with the concept, and
my concern is that given that you have them internally, doing
this against a market bench, it probably will be gamed, and it
will be very hard to get the capital ratios that you would
need.
Mr. Capuano. I am convinced that anything that we ever do
will be gamed, which is why Congress exists, to play whack-a-
mole with everybody else.
Mr. Fisher, are you familiar with the concept?
Chairman Hensarling. Speaking of whacked, the Chair is
going to whack the gavel. The time of the gentleman has
expired. The Chair now recognizes the gentleman from
California, the Chair of our Monetary Policy and Trade
Subcommittee, Mr. Campbell of California.
Mr. Campbell. Thank you, Mr. Chairman.
One thing we haven't talked about yet is capital, and the
Brown-Vitter proposal over in the Senate is very much capital-
based. I have a proposal on this side that is entirely capital-
based. The theory from those of us who believe that SIFI
institutions should have more capital is that it is an elegant
solution, in that by requiring them to have more capital, it
makes the circumstances under which OLA or whatever any sort of
government bailout, bankruptcy, whatever, would be reduced, and
that it simultaneously reduces those competitive advantages
that SIFI institutions have because this capital will be
expensive, and it will thereby reduce their returns, which
might even encourage some of them to break themselves up,
either by region or by business line. But we haven't really
talked about any of that today, so I am curious from each of
you on the capital thing, and I know you have talked about it,
Ms. Bair, at long-term subordinated debt. Good idea, bad idea,
should it be a part of a proposal, or not part of a proposal?
Is it a complete solution, or not a complete solution? I am
just interested in all of your views on that.
Mr. Hoenig. First of all, more capital would be a real plus
for the industry. Right now, the largest institutions actually
have less capital than the regional and the community banks by
a substantial margin, so the largest should increase their
capital. Whether they should have more capital, I think if you
could get them up to the same level as regional and community
banks, you would have accomplished something, but I do think
for an equal playing field, they should have the same basic
tangible capital levels, and then we need to revise the Basel 3
to simplify it and make it more useful as a risk measure
against the tangible capital. I do think some of the largest
institutions are woefully undercapitalized overall, and that
needs to be addressed.
Mr. Campbell. Mr. Fisher?
Mr. Fisher. I agree with Mr. Hoenig, too-big-to-fail with
higher capital requirements but without complementary
structural changes, I think falls short of the necessary
action. Again, living wills, which we talked about before, have
higher capital requirements, are potentially helpful tools, but
they are not sufficient to ensure the survival of the company,
and they will not eliminate massive losses that can choke off
liquidity and disrupt financial markets in the economy, so I
would say they are necessary. They are important. By the way,
the big banks are going to fight you on that big time.
Mr. Campbell. I have experienced that.
Mr. Fisher. You know that? Put on your body armor? But I
would say exactly what Mr. Hoenig said, just reminding you that
structural changes are also an important part of this aspect.
Thank you.
Mr. Campbell. Thank you.
Mr. Lacker?
Mr. Lacker. I think robust capital requirements are very
important, very valuable. We have seen increases in capital.
They are very substantial since the crisis, and I hope that
process continues. I agree with President Fisher; they are
insufficient. I think if you get to the point where you have
run out of liquidity, where you have run through capital, the
fact that you used to have a lot of capital is cold comfort,
and I think that the misalignment of incentives, which is at
the core of the too-big-to-fail problem, really has to do with
what happens in the end game. When you get to the point where
you have run through capital and run through liquidity, and I
think we have to pay attention to that, too.
Mr. Campbell. Thank you. Ms. Bair?
Ms. Bair. You know where I am. Yes, your first strategy is
always to try to prevent a failure or reduce the probability of
it, and that can only be done with high quality capital. We
also need to dramatically simplify the risk weightings. They
are just broken, and they are providing incentives for frankly
harmful behavior. They really need to be changed.
Mr. Campbell. Do you have a view--Ms. Bair, let me just
start here in the last minute here, how much capital, debtor
equity or what are your--
Ms. Bair. I have suggested a minimum 8 percent, as has the
Systemic Risk Council, which I chair, an 8 percent leverage
ratio, nonrisk-weighted assets, with a denominator that
includes a lot of off-balance-sheet risks, so it is what is
called the so-called Basel 3 leverage ratio, which is one of
the good parts of Basel. Not everything in Basel was good, but
I think that part was good. They only wanted 3 percent, I think
it should be a minimum of 8 percent.
Mr. Campbell. Mr. Lacker?
Mr. Lacker. I don't have specific numbers for you. We are
moving in the right direction, though.
Mr. Campbell. Okay. Mr. Fisher?
Mr. Fisher. I don't have a specific number, although I do
note that the community bankers aren't uncomfortable with 8
percent capital ratios, and as Mr. Hoenig said, the big ones
are woefully undercapitalized relatively speaking although
improving, and there should, of course, as Chairman Bair said
earlier, I think we have to be careful that we do have a Basel
3 outcome that doesn't penalize the smaller and regional banks.
Mr. Campbell. Last words, Mr. Hoenig?
Mr. Hoenig. I have suggested a leverage ratio as high as 10
percent because before we had the safety net, that is what the
market demanded of the industry. So we ought to at least be at
that level, and then simplify the industry so we can in fact
apply that systematically.
Mr. Campbell. Thank you.
I yield back, Mr. Chairman.
Chairman Hensarling. Before proceeding to the next Member,
Chairman Bair, I was just informed that you are requesting to
be excused at noon. Is that correct?
Ms. Bair. Yes.
Chairman Hensarling. We won't keep you here against your
will. It was simply the first I had heard of it.
Ms. Bair. Oh, I'm sorry.
Chairman Hensarling. So, again, for Members, they should
take note that Chairman Bair has to leave soon.
The Chair now recognizes the gentleman from Missouri, Mr.
Clay, for 5 minutes.
Mr. Clay. Thank you, Mr. Chairman.
I want to thank the panel of witnesses for their
participation today.
This is a panel-wide question, and it goes back to 2008 and
prior to that. What was your position regarding the state of
the U.S. economy? Did anyone on the panel see a potential
collapse of our economy, and if so, did you warn anyone or say
anything about it? I will start with Mr. Hoenig, and we will
just go down the line.
Mr. Hoenig, did you see trouble coming?
Mr. Hoenig. I did speak about issues in terms of the
imbalances that were developing in the economy in 2003 and
2004. I did not identify exactly where this would all play out,
but I certainly had my concerns given the interest rates that
were in place.
Chairman Hensarling. Mr. Hoenig, could you pull the
microphone a little closer, please?
Mr. Hoenig. I'm sorry. The answer is yes, I did speak about
the imbalances that were caused by some of the interest rate
policies that were in place at that time.
Mr. Clay. Thank you. Mr. Fisher, did you see any trouble
coming?
Mr. Fisher. Yes, sir. In fact, I listened to Mr. Hoenig at
the table and Mr. Lacker, all three of us did speak of this,
and particularly was concerned about the housing market, what
was happening in the housing market, the excesses in mortgage-
backed securities, and without getting technical here, watching
the credit default swap spreads that were occurring
particularly among certain firms, Merrill and others, Bear
Stearns, one could see a storm coming.
As to how pervasive and how dangerous it would be, one
could not foresee that, but one knew that there was a big storm
on the horizon, and we spoke about it a great deal at the
Federal Reserve.
Mr. Clay. Go ahead, sir?
Mr. Lacker. In June of 2008, I gave a speech warning that
the actions we had taken with Bear Stearns would set precedents
that would alter incentives going forward and had the potential
to contribute to financial instability.
In all fairness, I was looking forward to the next business
cycle, not the one we were in then. I had no idea that it would
come so soon and so swiftly and with such ferocity.
Mr. Clay. Thank you.
And Ms. Bair?
Ms. Bair. Yes, when I was at Treasury in 2001 and 2002, I
spoke about and tried to do something about deteriorating
mortgage lending standards. I went into academia. I came back
to the FDIC in 2006. The FDIC staff were already on top of
this. We started speaking very early about deterioration in
lending standards, the underpricing of risks, the need for
banks to have more capital, not less, so I think we do have a
good track record on that.
Mr. Clay. When you were at Treasury, did you bring it to
the attention of then-Treasury Secretary O'Neill?
Ms. Bair. We did. We initiated something, Ned Gramlich, the
late Ned Gramlich worked with me. We tried to get--the Hill was
not going to have mortgage lending standards. I think there
were some on this committee who were trying to do it on a
bipartisan basis. The Fed had decided they didn't want to write
lending standards. They had the legal authority. So we put
together a group of industry and consumer groups to develop
best practices to try to put some curbs on this, but it was
voluntary so it helped little on the margin, but yes, that was
all very public.
Mr. Clay. Thank you for that response.
One more panel-wide question: Do you think that U.S.
taxpayers are better off today with the Dodd-Frank law, or are
they not better off today in fear of another bailout of large
banks by taxpayers?
I will start with Mr. Hoenig.
Mr. Hoenig. Today, we have institutions that are every bit
as vulnerable as we had before, and that is a concern.
Hopefully, we have the tools in bankruptcy to make sure that we
don't repeat the mistakes of the past. But I do worry that if
they do get into trouble, we still have a very vulnerable
financial system.
Mr. Fisher. I would agree with Mr. Hoenig, Congressman, I
don't think we have prevented taxpayer bailouts by Dodd-Frank,
and I think the taxpayer is still susceptible, and I would like
to have, again, restructuring occur so that this would not be
the case.
Mr. Clay. You don't think Dodd-Frank and certain sections
provide enough protection to taxpayers?
Mr. Fisher. No, sir, because I think it still perpetuates
too-big-to-fail.
Mr. Clay. Okay. All right.
Mr. Lacker. I agree that the Dodd-Frank Act did some good
things, and also did some things that I don't think are the
best approach to these issues. Back in the 1930s, there were
several pieces of substantial banking legislation. It wouldn't
be uncalled for, for Congress to revisit this issue again.
Mr. Clay. Thank you.
And Ms. Bair?
Ms. Bair. I do think Dodd-Frank provides very strong
protections against taxpayer bailouts. The shareholders and
creditors will be taking the losses. If there should be any
shortfalls, there is going to be an industry assessment, the
taxpayers aren't going to pay for it, and I am happy to support
an amendment to the Tax Code to eliminate the deductibility of
those payments if an assessment ever occurs.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Georgia, Mr.
Westmoreland.
Mr. Westmoreland. Thank you, Mr. Chairman. And I want to
thank the witnesses for being here today.
This question is for President Fisher and President Lacker.
Can Dodd-Frank's Orderly Liquidation Authority provide the
opportunity for more AIG-like bailouts where a hard-working,
taxpaying factory worker in my district would end up bailing
out the creditors of European banks 100 cents on the dollar?
Mr. Fisher. Mr. Lacker, would you like to go first?
Mr. Lacker. Sure. It has been commented before that there
were certain features of the way we structured the intervention
into AIG that wouldn't be legal now, purchasing equity, for
example. But having said that, the way that the Orderly
Liquidation Authority is envisioned to work, with a single
point of entry, a parent company, it envisions providing funds
from the FDIC that would let creditors of operating
subsidiaries escape losses. So I would have to say that your
characterization is accurate, that it could happen again.
Mr. Fisher. With regard to your hard-working factory,
Congressman--
Mr. Westmoreland. Taxpaying. Hard-working, taxpaying.
Mr. Fisher. Hard-working, factory-working taxpayer, I don't
believe that it provides adequate protection for that type of
individual. I think it, again, enmeshes us in hyperbureaucracy,
and it certainly doesn't do anything for, and in fact doesn't
improve the situation, the comparative advantage too-big-to-
fail institutions have over whom that individual is likely to
go to, to secure a loan or finance their car or do the kind of
things that they like to do and they need to do at their level,
the small community and regional banks.
And as long as that advantage is maintained or, as the
gentleman pointed out earlier, perceived to have been
maintained, then they are at a funding disadvantage to the
operation of these large systemically important financial
institutions.
So from the standpoint of that particular constituent it
may mitigate the risk for these gigantic institutions, but it
doesn't prevent these gigantic institutions in the first place
nor the advantage they have in operating compared to the bank
with which that institution is likely to work.
Mr. Westmoreland. Thank you.
Let me ask, I know that there has been some agreement
between most of you on the panel. I know one area that you do
agree on, I think all of you support the Brown-Vitter bill that
is in the Senate, that we have heard a lot about over here. Do
you think that when we are looking at too-big-to-fail, we need
to look at some of these things that are in Brown-Vitter? And
the thing that I would like for you to comment on is the 15
percent capital requirement for the 8 largest banks. I got in
here a little late and heard Mr. Campbell asking some questions
about the cash requirements. Do you feel that the 15 percent
for these larger banks is an unrealistic number or do you think
that is the right number?
Mr. Hoenig. I think that the Brown-Vitter approach does
bring the discussion forward in the right way. Whether 15
percent is the right number, I think that may be high given the
history in terms of capital. My number is 10 percent with a
real leverage number. But that would do much to improve these
institutions which are right now sorely undercapitalized.
And to again make the point, this would be even more
effective if we had the system rationalized where we were
looking at commercial banks as commercial banks and broker-
dealers as broker-dealers and where the capital requirements
are different for each. They are different types of animals,
they have different risk profiles, and the markets should in
fact demand the capital that it needs, and it is going to do
that if we scale back the subsidy that is right now distorting
what the right capital ratio should be.
Mr. Fisher. I would agree with that, Congressman. And I
would also add that one of the benefits of Brown-Vitter--and I
am not willing to endorse the bill entirely; there are some
aspects in terms of the Federal Reserve that are undefined in
it--is it does show that there can be a bipartisan approach to
dealing with what is a problem and it encourages me enormously.
As to the capital ratios themselves, again, if you were to
follow our plan at the Dallas Fed where we would only provide
the Federal guarantees to the commercial banking operation of a
complex bank holding company, I am not sure we have to be as
high as 15 percent, and I am more in the range of Mr. Hoenig.
And I think that will be a negotiated rate, again depending on
how big the lobbies are and how powerful they are at
influencing the Senators who have to vote on that bill.
Mr. Westmoreland. One quick comment to that, and then I
know my time is up. But there were different levels: the 15;
the 10; and the 5. Do you think all those levels need to be
adjusted from your standpoint or just the top level?
Mr. Hoenig. I think we need to have an across-the-board
number that is applicable to all so that you have a level
playing field, but I think that is dependent upon correctly
separating out the broker-dealer activities which would then
define their own capital needs.
Chairman Hensarling. The time of the gentleman has expired.
And again, for Members, although I just recently learned about
this, we will excuse our witness, Chairman Bair, at this time.
I assume, Madam Chair, that if Members have further
questions, you would be happy to answer them in writing.
At this time, the Chair will recognize the gentleman from
Texas, Mr. Hinojosa, for 5 minutes.
Mr. Hinojosa. Thank you, Mr. Chairman. I had a question for
the Honorable Sheila Bair, but I think I will pass that
question on.
Chairman Hensarling. The gentleman is officially out of
luck.
Mr. Hinojosa. Yes, I am out of luck. I apologize that I had
to run to speak to a very large group of students on the
Education Committee and I was one of their speakers. So I ran
down there and spoke and ran back to take this opportunity to
ask a couple of questions.
So I will start with the first one for President Richard
Fisher. I want you all to know that he is my fellow Texan,
someone that I know very well, and I would like to ask him a
question or two, because I read an article in Bloomberg, and I
quote, ``Fed's Fisher urges bank breakup amid too-big-to-fail
injustice.'' And one sentence that I will read, it says,
``Fisher reiterated his view that the government should break
up the biggest institutions to safeguard the financial system.
He is one of the central bank's most vocal critics of the too-
big-to-fail advantage he says large firms have over smaller
rivals.''
So my question then, President Fisher, is you have made
those statements, and I have to say that I respectfully
disagree with you about the tools within Dodd-Frank to end too-
big-to-fail, but I am interested to hear your thoughts about
the danger of ever-growing megabanks. What danger do they pose
and how would you go about splitting them up?
Mr. Fisher. Thank you, Congressman Hinojosa, and I have
explained that in my more fulsome statement that I submitted.
First, I want to make it clear that I would prefer to have a
market-driven solution here, and our first aspect of our
proposal, which we have discussed while you were in and out of
the room, is that the government guarantees that its deposit
insurance access to the Federal Reserve discount window would
be applied only to the commercial banking operation of a
complex bank holding company. They would be allowed to continue
to have those other aspects, but everybody who is a
counterparty with those other parts of that big bank holding
company, or little bank holding company, whatever it may be,
would simply sign an agreement saying that the government will
never, ever come to their rescue should that transaction go
sour.
I think if you did that, then market forces would begin to
focus on who is strong in these areas and who is not and you
would have a better rational allocation if it was understood
that the entire bank holding company wasn't protected as too-
big-to-fail. So I want to make sure that you understand that I
prefer a market-driven solution rather than a government-
imposed solution, although there may have to be a bridge in a
period where the government might, by making clear how we would
approach this ultimately, implementing the plan that we have
suggested, rather than the hypercomplexity that is embedded in
the 9,000 pages of rules that have come out of Dodd-Frank. I
don't mean that disrespectfully. I am just stating an
observation here that simplicity sometimes trumps complexity.
Mr. Hinojosa. I am glad you gave us the count, because it
is a huge piece of legislation. I want to say to our witnesses
that I agree that it is important for us in Congress, both
Republicans and Democrats, to read the law and examine the
relevant provisions within the Dodd-Frank Act. And I want to
ask a question on a portion of the Dodd-Frank Act, specifically
Title XI, Section 1101(A)(B)(i), which reads, ``As soon as
practicable after the date of enactment of this subparagraph
the Board shall establish by regulation, in consultation with
the Secretary of the Treasury, the policies and procedures
governing emergency lending under this paragraph.''
So my question I guess will go to our first panelist, the
Honorable Thomas Hoenig, if you would like to answer this
question. Can you discuss the emergency lending authorities
that were used in 2008, as well as how they were used, and
whether that type of lending is possible under Title XI of the
Dodd-Frank Act?
Mr. Hoenig. In 2008, the primary section that was used was
what is called Section 13(3), which allowed for lending under
exigent circumstances to institutions, including nonbank
institutions. So that would allow for the lending to the money
markets and so forth. That provision was used extensively in
that crisis.
The law that you are citing is designed to limit the
lending ability, as it has to be systemic, it has to be
industry-wide, not given on a case-by-case basis to individual
institutions. We don't know until you actually have a crisis
whether we will be able to implement that authority or whether
the Federal Reserve will be able to implement that
successfully.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from California, Mr.
Royce, for 5 minutes.
Mr. Royce. Yes. I think as we go to the written testimony
of Mr. Fisher, President Fisher and President Lacker, we have
this concept of what we do when we place a name, SIFI, on these
institutions. What are the unforeseen consequences of doing
that? Are we sending the message to say that they occupy a
privileged space in the financial system? What does that mean
in terms of their cost of borrowing compared to the costs faced
by their smaller competitors? As Mr. Fisher pointed out, it is
like saying you bought it at Neiman Marcus when you have this
stamp.
And my question is, did the Dodd-Frank legislation further
expand, compound the conundrum here by using an arbitrary, or
as the General Counsel of the Fed calls it, a somewhat
arbitrary threshold number of $50 billion in assets to
determine SIFIs, and do we really make the system safer by
putting everyone in the pool together in this way, or is there
a better way to do this? And if there is a better way to do it,
what is that better way? That is my question to the panel.
Mr. Lacker. If I could, Congressman Royce, when I think of
the provision of the Dodd-Frank Act about designating SIFIs, it
is a natural outgrowth of one of the animating philosophies of
Dodd-Frank, which is that rescues are inevitable and we need to
do what we can to stiffen and strengthen the constraints on
risk taking at these institutions. I think strengthening
constraints on risk taking is a valuable thing, but the other
animating philosophy which at times competes in Dodd-Frank is
that we want to strengthen market incentives and the discipline
that a competitive marketplace imposes on institutions and the
power of that discipline to limit risk taking. And from that
point of view the designation of SIFI cuts in the other
direction because of the implication coming out of the first
philosophy, the implication that it is there because they are
viewed as likely to be rescued.
So there are cross-purposes there in that designation. How
we grow out of that, how we transition away from that, I am not
sure I have a solution for you, but it is a dilemma in the end.
Mr. Royce. Thank you, Mr. Lacker.
Any other observations on that?
Mr. Fisher. Again, I think by designating an institution as
systemically important, you give it a special moniker. And by
having a procedure which is under the FSOC to deal with these
institutions that are considered systemically important or that
might present risk by being systemically important, you give a
special imprimatur. I just think that places the community and
the regional banks at a disadvantage.
And again, Congressman, I would respectfully ask you to
take the time to read the proposal that we have made in the
Dallas Fed. Under our plan, supervisory agencies would oversee
several thousand community banks, as they do now--
Mr. Royce. I understand.
Mr. Fisher. --a few hundred moderate size banks, and no
megabanks.
Mr. Royce. But remember that part of my question was the
$50 billion threshold.
Let me ask Mr. Hoenig.
Mr. Hoenig. Let me just say, first of all, that being a
SIFI has advantages and disadvantages. The disadvantage from
their perspective is they have to do these living wills. I
found in the last crisis that no one wanted to be a holding
company until they wanted to be a holding company, that is,
only when it is to their advantage. So I think there are
institutions that will affect the economy which do not want to
be designated SIFIs, because of this work, until they need to
be, and I think that is a risk.
On the $50 billion, it is not indexed, and there are a lot
of institutions that would be pulled into that. If that is the
issue, raise the limit, because I don't want it to be
discretionary any more than absolutely necessary because then
you get different outcomes depending on what the political pull
and so forth is of the individual institutions.
Mr. Fisher. And I would agree with that, Congressman Royce.
Mr. Royce. And the last question I would ask you is just
the factors that should be taken into account if we are going
to set a regulatory standard in terms of moving over from the
risk-based approach towards an equity capital standard or
equity leverage ratios. If we move in that direction, what then
are the factors that should be taken into account in setting a
regulatory standard?
Mr. Hoenig?
Mr. Hoenig. I think, first of all, we need to make sure the
leverage ratio does include off-balance-sheet items, either
using international accounting standards or a--
Mr. Royce. That is the major issue to you?
Mr. Hoenig. A major issue. Because you have value, you have
$1.5 trillion on the largest company off balance sheet in
derivatives. That is just the derivatives. That is not the
lines of credit. So that needs to be brought into the equation.
And then we should ask, what should be the right number?
And I think the Basel discussion should be about what the right
number should be based on research that is out there, and what
the timeframe should be to get to that number. Then, you have a
systematic approach for leverage. Then, simplify the risk base
to make sure that they don't get out of bounds just using a
pure leverage ratio.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Massachusetts,
Mr. Lynch.
Mr. Lynch. Thank you, Mr. Chairman. I also want to thank
the witnesses for coming before this committee and helping us
with our work.
Let's pick up right on that point of derivatives. Each of
you has expressed concerns about inappropriate use of the
government's safety net. Section 716 of Dodd-Frank, commonly
referred to as the swaps push-out provision, would force banks
to move at least the riskiest swaps out of the insured
depository institution.
Do you believe the pricing of swaps in depository
institutions receive a benefit from access to the Federal
safety net and do you support our efforts in Dodd-Frank to move
them out of the depository institution?
Mr. Hoenig. Yes and yes. I do think that they should be
outside, and I think being inside does give them a subsidy and
does facilitate their ability to use those instruments beyond
what they would be able to do without a subsidy.
Mr. Fisher. Yes and yes squared.
Mr. Lacker. Derivatives provide the opportunity to do good
things and to take excessive risks, and I am not sure the law
as crafted doesn't go too far and limit the ability of banks to
use derivatives in legitimate ways.
Mr. Lynch. One of the problems that remains here is by
allowing internal models of these banks to really calculate
their risk is in many cases I think discounting the risk that
really does lie within these megabanks' derivative exposure,
and also the accounting rules here in the United States, I
think, allow some of that discounting to occur.
Mr. Hoenig and Mr. Fisher, I believe from your earlier
testimony, would you agree that just going to just a capital
standard such as in the Brown-Vitter rule, just a 15 percent,
instead of getting into whether or not the activity being
undertaken is creating the risk, just putting a flat 15
percent--I know 15 percent doesn't have to be the number, but
certainly using a total asset-based standard versus an activity
standard, is that more appropriate?
Mr. Hoenig. I think you need both. I think you need to have
them pushed out to where they are away from the safety net,
where they are constantly encouraging increased leverage. But
for those institutions you need a strong capital standard in
terms of the unexpected. Capital is for good management who
make mistakes. It doesn't save everyone from foolish mistakes,
but it does help moderate the extremes. But you also have to
change the incentive. If the incentive is to lever up because
you have a subsidy, you are going to do it. Eventually you are
going to push hard, as we have seen over the last 10 to 15
years.
Mr. Fisher. I don't disagree, Congressman. I would like to
make a side comment, if I may. The transition in banking that
has occurred has been from going from a balance sheet mentality
to an income statement mentality. That is, the old banking
system used to be where you focus on just preserving the
institution, protecting your depositors, and doing what bankers
do, intermediating between short-term deposit and long-term
risk in terms of commercial loans, et cetera.
The transition that took place post-Travelers and
Citigroup, which was quite brilliant, is the transition of
mentality to an income statement, how much can we make every
single year. And I think what we really need to guard against
in the end is the utilization of these derivative transactions
to continue to maintain the income statement mentality that
seems to be pervasive in these large industrial concentrations,
the big megabanks.
So my belief on capital, for what it is worth, and I stress
for what it is worth, I believe we should have equity capital
as the primary Tier 1 protective capital of the institution,
again, especially securing the commercial banking operations of
the institution, which is where we provide the government
guarantees that we provide or propose be restricted, that they
be applied.
Mr. Lynch. Thank you.
Mr. Lacker?
Mr. Lacker. I think capital quality is very important. I
also think we should be humble about the ability of any one
group of regulators or supervisors to settle on the single
optimal formula for capital. So I think the robust approach
would be to use multiple measures.
Mr. Lynch. I thank the gentlemen.
My time has expired. I yield back.
Chairman Hensarling. The Chair recognizes the gentleman
from Missouri, Mr. Luetkemeyer, for 5 minutes.
Mr. Luetkemeyer. Thank you, Mr. Chairman.
And thank you, gentlemen, for being here today.
I was wanting to talk to Ms. Bair with regards to an
article that she wrote April 1, 2013, appeared in the Wall
Street Journal, with regards to allowing the banks to basically
develop their own internal models with regards to risk basing
or to risk weight their capital. And she starts out with the
headline of the article, ``Regulators Let Big Banks Look Safer
Than They Are,'' with the subtitle, ``Capital ratio rules are
upside down. Fully collateralized loans are considered riskier
than derivative provisions.''
As you go through the article, she talks about the
difficulties in actually comparing the big banks with the
little banks because of the way they model their capital asset
ratio and the riskiness of the assets that they are looking at.
And she made the comment here that, ``And now the London whale
episode has shown how capital regulations can create incentives
for even legitimate models to be manipulated.'' And then talks
about the latest Fed stress test on Morgan Stanley reported
that the risk-based capital ratio was nearly 14 percent. Taking
the risk weighting out drops the ratio down to 7. U.S. Bancorp
has a risk-based ratio of 9 and virtually the same ratio on a
nonrisk-weighted basis.
So we are playing games with the ratios. And I think we
have mentioned it a few times and I would just like to get down
to the nitty-gritty here, because each one of you have alluded
to these same things a couple of times here, in the last two or
three folks who have asked questions with regards to how you
can play around with the ratios and get right down to the exact
real Tier 1 capital.
Can you give me some hard and fast information or an
opinion on that, Mr. Hoenig, because you are the one who said a
minute ago that we need to simplify the capital--
Mr. Hoenig. Right. I am familiar with her article. I happen
to agree with it completely. I think their reporting of 14
percent risk weighted is counting only 50 percent of their
total assets as risk. And then when you take out the good will,
the intangibles, and you go to equity tangible capital, and you
bring on the off balance sheet items, the derivatives and so
forth, the risk part is about 3.5 percent to 4 percent. So you
have really given the wrong impression, I think, to the market
and to the public.
And so what I have suggested is that you have a leverage
ratio that is equity capital with the good will and the
intangibles out and that you bring onto the balance sheet those
off-balance-sheet items that have risk. There are ways to do
that systematically, and then report that.
The advanced approach where they are doing internal models
is an opportunity to game the system by underreporting risk
assets based on advantages that the regulators give by the risk
weights themselves. That leads to bad outcomes.
Mr. Luetkemeyer. Okay. Now you, as a regulator, all three
of you gentlemen as regulators, how are you going to get
through this little manipulation game that is being done here?
Whenever you look at these banks, are you going to say, hey,
wait, wait, this is not where you need to be. We are going to
take a look at this a little bit differently and force them to
raise capital or do something different with their risky assets
here?
Mr. Hoenig. Hopefully, through the process of the
regulators coming together, we will turn to a leverage ratio
that is meaningful. And that is still in process as we look at
this Basel agreement. We need to have a full capital program
that includes proper risk, simplified where people can at least
operate it or understand it from the outside, with a leverage
ratio that gives us a standard across all institutions,
nationally and internationally, so that you can compare apples
to apples and then you can judge risk based upon a useful risk-
weighted system. We should do that as one proposal.
Mr. Luetkemeyer. The reason I bring the question up, and I
appreciate your comments, is because a lot of Members and a lot
of the public believe that Dodd-Frank solved all these
problems. There are still inherent problems with the way they
are regulated, with the way some of this information is
interpreted. And while Dodd-Frank may have an ability to wind
down a particular institution, if you have a meltdown like we
had in 2008, it is, ``Katy, bar the door.'' We will throw out
the rules and regulations and we will do, as Paul Volcker said,
``whatever it takes to get this situation solved.''
And with that, Mr. Lacker, I have just 37 seconds left, you
mentioned a while ago that you have some 1930s laws and
regulations we may need to go back and look at. Would you like
to elaborate just a little bit?
Mr. Lacker. I was just pointing out that in the 1930s,
there was the Banking Act of 1933. It was a response to just
the tremendous turmoil of the banks, the waves of bank failures
in 1931, 1932, and 1933. And then Congress revisited banking
legislation 2 years later in 1935. They didn't feel as though
the Banking Act of 1933 was sufficient. I was just pointing out
you might want to take a second bite of the apple.
Mr. Luetkemeyer. We can use all the good advice that we can
get. Thank you very much, and I appreciate all three gentleman
being here today.
Mr. Chairman, I yield back.
Chairman Hensarling. The Chair now recognizes the gentleman
from Colorado, Mr. Perlmutter, for 5 minutes.
Mr. Perlmutter. Thanks, Mr. Chairman.
Gentleman, I appreciate your testimony today. I have a
couple of questions, and I will start with you, Mr. Hoenig. We
talked a little bit about Glass-Steagall, and you and I have
had conversations about Glass-Steagall. And really, as I
remember it, there were three parts to Glass-Steagall: the
creation of your organization, the FDIC; the separation of
investment banks and commercial banking and insurance companies
and that kind of stuff; and the creation of unitary banking. So
each bank, big or small, stood on its own capital.
I have had the opportunity as a State senator to vote
against branch banking. I lost, because I believed in unitary
banking. I had the opportunity here when we were going through
Dodd-Frank to, with Mr. Kanjorski, offer an amendment that
separated investment banking from commercial banking, and I
lost. So I appreciate the things that you are saying, but we
are in a political world in this place and you have to have
more votes. So we came up with a third approach, Mr. Hoenig,
and let's go through it.
So as I understand this, first we try to deal with things
in advance. Is that right? The living will--
Mr. Hoenig. Right.
Mr. Perlmutter. I know a couple of the very big
institutions have 2,000 or 3,000 subsidiaries. Is that right?
Mr. Hoenig. Yes.
Mr. Perlmutter. And as regulators, we have put a lot of
pressure and a lot of responsibility on your shoulders to look
at those living wills, to say, hey, this gives us a good
roadmap as to what to do if everything falls apart. Correct?
Mr. Hoenig. Yes.
Mr. Perlmutter. So I am going to lead you a little bit
here. That is kind of what I do. Then if you see some things
that are potentially a problem, you can demand more capital as
a regulator. Isn't that right?
Mr. Hoenig. Yes.
Mr. Perlmutter. And if that is not sufficient, you can ask
for divestiture?
Mr. Hoenig. Yes.
Mr. Perlmutter. This is all in advance of getting into
bankruptcy, because, Mr. Fisher, Mr. Lacker, I will get to you,
too, in a second. You can order a divestiture of some part of
the organization, it could be the investment banking, it could
be the insurance, it could be the making of engines. We have a
big SIFI potentially that is in the manufacturing business.
Correct?
Mr. Hoenig. Correct.
Mr. Perlmutter. None of that works. Then, I start into the
statute. Section 202 allows the Secretary of the Treasury to go
to the United States District Court and petition the court to
place the whole kit and caboodle into receivership. Isn't that
right?
Mr. Hoenig. Yes.
Mr. Perlmutter. And this can be done over a weekend in a
confidential setting with that United States District Judge.
Mr. Hoenig. Yes.
Mr. Perlmutter. And it is very similar to what occurs
today, is it not, when the FDIC--they don't go to a judge, but
they can place somebody into a liquidation over the course of a
weekend.
Mr. Hoenig. That is correct.
Mr. Perlmutter. And SIPC does that, but they do go to a
judge to place a broker-dealer into liquidation. They do have
to get an order of the court.
Mr. Hoenig. Right.
Mr. Perlmutter. So now we are in the courtroom, we are in a
bankruptcy setting, but it is with the United States District
Court, not bankruptcy court, right?
Mr. Hoenig. That is correct.
Mr. Perlmutter. All right. So now, we are in court. What is
it that you think now allows for the Secretary and the FDIC as
its agent, the receiver, to allow too-big-to-fail to continue?
We are now in the court. You have the bank potentially being
liquidated by the FDIC and you have the rest of the company in
court in a bankruptcy. And ``bankruptcy'' has been used very
loosely. There are two kinds of bankruptcy: liquidating; and
reorganizing.
So what is it that really bothers you about now we are in
court, you have the bank in liquidation and the FDIC in charge,
and now you have the rest of the company going under the
authority of the United States District Judge and the receiver.
And I am already out of time by my leading questions.
Mr. Hoenig. It assumes all your leading questions are
correct assumptions.
Mr. Perlmutter. That is why I said, do you agree.
Mr. Hoenig. Well, no, I said you can do it. Whether you
will do is the question that is unanswered.
Mr. Perlmutter. All right. Now, that is really the
question. Do the regulators have the guts to do what we have
asked of you? That is the real question.
Mr. Hoenig. But, Congressman, the Bank Holding Company Act
has had a provision for the last 30 years that if a nonbank
affiliate jeopardizes the bank you can force divestiture, and I
don't think it has ever been used.
Chairman Hensarling. The time--
Mr. Perlmutter. I am giving you the tools. You have to use
them.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from North Carolina,
Mr. Pittenger, for 5 minutes.
Mr. Pittenger. Thank you, Mr. Chairman.
Mr. Fisher, I will direct this to you first, but I welcome
comments from any of you. Why is more complex regulation,
particularly complex capital regulation, an ineffective way of
reining in market expectation of government bailouts?
Mr. Fisher. I'm sorry, Congressman, I didn't hear your
question. Excuse me.
Mr. Pittenger. Why is more complex regulation, particularly
more complex capital regulation, an ineffective way of reining
in market expectation of government bailouts?
Mr. Fisher. Again, I think if you are simple and
straightforward, it is a better solution than complexity. One
of the disadvantages of complexity is it places the smaller and
regional institutions at a disadvantage. If you talk to
community bankers now, they will tell you what they are hiring
are lawyers and consultants rather than people who can make
loans and affect the business and do the business that they are
paid to do.
So it gives an advantage again to those that are big and
rich. And the more complex it is, the more you are just giving
a comparative advantage to those that have the means to deal
with these complexities. And that means the very large
institutions. That is the simplest way I can possibly explain
it.
Mr. Pittenger. It makes sense.
Would you all like to respond?
Mr. Hoenig?
Mr. Hoenig. I am not sure that I understood your question
completely, but I think the fact is that more capital is
helpful. But if you have a subsidy that is driving you towards
leveraging and it gives you a cost of capital advantage, as Mr.
Fisher is saying, over regional and community banks, it leads
to, I think, unintended bad outcomes where you then further
consolidate the industry and give the largest firms a
competitive advantage that they don't otherwise deserve or
would earn in the market.
I hope I understood your question and answered it.
Mr. Lacker. So banking is a complex activity these days,
and I think you need to grapple with that complexity. It
doesn't mean you fine tune the complexity of your supervisory
approach or regulations to it, but you have to be robust
against the ways in which firms and markets can adapt to what
regime you put in place. So that robustness is what you have to
look for, and that is why I think on the capital front, there
is a logic to risk-weighted assets, but there is also a sense
in which humility ought to lead you to not place all your eggs
in the basket of one capital regime. And the value of
simplicity, I think, comes forward then.
Mr. Pittenger. Let me ask you, Mr. Fisher or Mr. Lacker,
how can we level the playing field between the smaller and the
regional financial institutions compared to too-big-to-fail?
Mr. Lacker. I think leveling the playing field is going to
require eliminating the expectation of support for the
creditors, the wholesale funding lenders from which they
benefit. That wholesale funding source is what I see as the
most consequential aspect of the advantage too-big-to-fail
gives to larger institutions.
Sure, being too-big-to-fail comes with an outsized burden
of compliance, but compliance has hit a lot of small and
regional institutions as well. A lot of the compliance burden
is a reaction to the risks that have been taken and the
riskiness that we see in the banking industry and the exposure
of U.S. taxpayers and the government to these institutions,
large and small. If we were able to rely more on market
incentives, on market discipline, there would be less of a need
to continually grow the compliance burden on these institutions
and that would help level the playing field as well.
Mr. Fisher. My definition of leveling the playing field,
Congressman, is if you are a small or regional bank, or if you
are in the 99.8 percent of the 5,500 bank holding companies we
have, the FDIC has a saying: ``In by Friday, out by Monday.''
If you screw up, your management is removed, and new ownership
is put in place. The playing field will be level when that
applies to all financial institutions, including large ones.
Mr. Hoenig. If I can add, number one, you do need to get
the capital ratios to be more equal. Right now, the largest
institutions have a capital advantage.
Number two, you do need to rationalize and separate out so
that commercial banks are commercial banks and the subsidy is
confined to that. Then, whether you are a community bank or
regional bank or large bank, you are playing on a much more
level playing field and I think competition will be well-
served.
Mr. Fisher. And leveling the playing field is the purpose
of the Dallas Fed's proposal, Congressman.
Mr. Pittenger. Thank you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair recognizes the gentleman from Delaware, Mr.
Carney, for 5 minutes.
Mr. Carney. Thank you, Mr. Chairman, and thank you to the
panelists. This has been a very interesting and fascinating
discussion today. I don't know that we have shed any light on
answering the question of whether too-big-to-fail exists or
not, but we have had some really great discussion, I think,
about that.
I would like to say with respect to SIFIs being a
privileged designation, it is funny, I have not had anybody
come to me requesting to be put in the category of being a
SIFI. In fact, just the opposite. People have come to us
saying, we shouldn't be included in this designation, just as
an observation.
But I would like to pick up where Mr. Perlmutter left off
in the District Court, and I guess start with you, Mr. Fisher,
and ask the question I think he was about to ask, which is what
problem do you have with the legislation as it relates to the
firm that is brought into the District Court by the U.S.
Treasury because it is in big trouble?
Mr. Fisher. I am going to ask Mr. Hoenig to address this
question, if I may.
Can you do that, Tom?
Mr. Hoenig. Yes, first of all, if you have these largest
institutions in the country at risk of failure, you have to go
to the Federal Reserve and the FDIC and get the two-thirds vote
to put them in the Orderly Liquidation Process.
Mr. Carney. With the potential, as Mr. Fisher said in his
testimony, of these eight institutions to take down the rest of
the financial system.
Mr. Hoenig. Right. So you are up against this major
consequence to the economy. Then, you go to the Secretary of
the Treasury, who has a choice: Do I put it in receivership and
put that chaos in play or do I do something else? There are
options perhaps I can find that would not force it into
bankruptcy such as going to the District Court, or going to the
President.
So that is a very, very difficult process, which it should
be. But I think when you then have the economy going down, you
tend to want to step in and intervene in a way that doesn't
cause failure.
Mr. Carney. Rightly, yes?
Mr. Hoenig. Yes. You are going to be very slow to act.
Mr. Carney. So then the District Court Judge determines
whether to require orderly liquidation under the Act, correct?
Mr. Hoenig. If the Treasury Secretary does bring it to him,
yes.
Mr. Carney. If the Treasury Secretary brings it.
Are you familiar with the enhanced bankruptcy proposals
that the people out at Stanford have developed?
Mr. Hoenig. Yes.
Mr. Carney. What if the District Judge had the option of
triggering either the Orderly Liquidation Authority or some
sort of structured bankruptcy? The difference, I think, being--
I am no expert, as Mr. Perlmutter is, in bankruptcy--that there
is no access to the wholesale funding source.
Mr. Lacker. If I could comment on that, it is worth
pointing out that in the scenario Congressman Perlmutter laid
out, actually they don't spend much time in court. And the
sense in which that is true is that there are only limited
aspects of the Secretary of the Treasury's decision that are
subject to review by the court, and it is just these two fact-
finding things out of five determinations that the Secretary
makes.
Mr. Carney. Okay, don't get too far down in the weeds, we
don't have much time. I am interested in whether you think it
would be a better process if the judge had that discretion and
why?
Mr. Lacker. I think it would be useful if the regulators
themselves could initiate bankruptcy. As things stand now, they
don't have the option to do anything but orderly liquidation by
themselves. They can ask the firm to put itself in Chapter 11,
but they can't force that. The Hoover Group proposal would give
regulators the ability to do that, and I think that would be
valuable, and I think that would be a better way to get to the
right outcome.
Mr. Hoenig. May I add that if the Stanford Group is
successful with regard to the Chapter 14, which they are
working on now--to address the issues of debtor-in-possession
financing to provide liquidity and cross-border issues--then
bankruptcy will be a natural first choice in every instance.
And those are the two things that the Orderly Liquidation
Authority addresses. That is why it is there. So, you have to
get a solution to debtor-in-possession and cross-border issues
to make sure we can put the largest firms into bankruptcy. That
is what Stanford is working on.
Mr. Carney. Thank you very much. My time has expired.
Mr. McHenry [presiding]. We will now recognize Mr. Hurt of
Virginia for 5 minutes.
Mr. Hurt. Thank you, Mr. Chairman.
And I want to thank each of you for your testimony here
today, and I'm sorry that Ms. Bair is gone because I thought
her testimony was very interesting as well.
It occurred to me as I listened to the testimony of each of
you that there really can be or should be some opportunity here
to amend the Dodd-Frank law in a way that really can get us
where I think that we all want to be, and that is something
which has eluded us over the 2 years that I have been in this
Congress. And so this gives me some hope that maybe there is
some possibility that we can do these important, important,
important things that we must take the opportunity to do while
we can, as Mr. Lacker said, all the things that we can do to
keep this from happening again. We control those levers, if we
will. And so, I am just very interested in your testimony, and
I thank you for it.
I guess my first question--which would have been to Ms.
Bair had she been here, she makes it pretty clear; she uses the
word ``abolish.'' She says that bailouts are abolished under
Dodd-Frank. But I hear something different from this side of
the table, that it is really not that clear. And when you look
at the numbers--and I was particularly interested in the
numbers from the Richmond Fed--that financial sector
liabilities today, 27 percent of the financial sector's
liabilities today enjoy an implicit government guarantee.
That being the case, and I know that you can't speak for
Ms. Bair, but can you help those of us up here who are
listening to very intelligent people, can you help us figure
out where is the difference between what Ms. Bair is saying and
what I think the facts are, and that is, there are tremendous
implicit guarantees and there is risk associated with that.
Mr. Lacker?
Mr. Lacker. Sure. In Ms. Bair's defense, the legal
authority under which we provided assistance to the merger of
Bear Stearns and JPMorgan Chase and assisted AIG was Section
13(3), and the ability to craft a firm-specific 13(3) program
has been eliminated. We can craft a program, but it has to be
of wide market availability. So in that sort of narrow sense,
that is true.
But too-big-to-fail has been around since--it started in
the early 1970s, as I said. That was carried out via the FDIC's
authority. They had the ability to add extra money and pay off
uninsured creditors, uninsured depositors in bank failures. And
the Federal Reserve has a role, too, because when we lend to a
failing bank before it is closed we can let uninsured creditors
get their money out before the closure takes place and the
remaining uninsured creditors are forced to take losses.
So, we still have those modalities. We still have those
capabilities of keeping short-term creditors--letting them
escape without bearing losses. That is why she says, yes, that
authority we used, the way we chose to do it has been
abolished, but we were doing it other ways before that.
Mr. Hurt. Got it.
Anything you want to add to any of that?
Mr. Fisher. I think President Lacker has given a good
explanation of what we think she meant by that.
Mr. Hurt. One of the things that has been touched on by
both sides of the aisle is this idea that the subsidy, the
government subsidy that is real, that gives competitive
disadvantage to the largest banks, and I think that you see
that trend seems to me to be continuing, that trend in favor of
those banks, despite the fact that we are told that the
bailouts have been abolished, we continue to see that. And so
it concerns me from an issue of competitiveness domestically.
But are there other concerns that any of you have as it
relates to global competitiveness? Obviously, it goes to the
heart of what individual customers and banks, the
competitiveness that exists in this country. But does any of
this rise to the level of concern as it relates to global
competitiveness?
Mr. Hoenig. Congressman, I have been asked that question a
lot, and I am convinced that a banking system that competes
from a position of strength will be the system that wins. What
we have now is a structure that is not a free market structure.
It is heavily subsidized. Because of that, we have capital
levels that are lower than they otherwise would be.
We are asking, if you will, directly or indirectly, for
either other members of the banking industry or the public to
underwrite our ability to supposedly compete with the rest of
the world. When we rationalized this structure before, when we
had broker-dealers separate from commercial banks, we were the
most competitive capital market in the world.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from New Mexico, Mr.
Pearce, for 5 minutes.
Mr. Pearce. Thank you, Mr. Chairman.
And I thank each one of you for being here today.
So we started this discussion today on whether or not Dodd-
Frank ended too-big-to-fail, and there are a lot of different
opinions. I think the first thing that I was curious about,
now, under Title II you have the insurance, and are too-big-to-
fail firms predominantly banking firms or are those just
different financial firms? Because where I am going is, under
Title II they are now covered by deposit insurance, which gives
them access to funds from firms too small to succeed. And so I
wonder what kind of advantage that we are giving too-big-to-
fail firms?
So forget whether or not Dodd-Frank did anything. We have
different opinions. But what about, Mr. Fisher, do you have an
opinion about that ability for too-big-to-fail firms to get
into the deposit insurance funds now?
Mr. Fisher. Yes, sir, and I believe I addressed that very
specifically in my written submission. But just to summarize,
again, the purpose of deposit insurance was the old-fashioned
purpose of assisting commercial bankers to take in deposits,
assure their depositors, and then intermediate to make the kind
of loans on which your constituents depend. I believe that
should be the sole purpose of that deposit insurance. In other
words, I don't believe that a complex bank holding company
should be able to exploit that for other services they may
provide.
By the way, I don't want to take away their capacity to
provide those other services, but it should be restricted to
the original purpose for which it was intended.
Mr. Pearce. Forget the discussion of whether Dodd-Frank
technically ended it. We have given them a conduit to funds
that they did not have access to before, which seems to hint
that maybe it doesn't have as much effect at killing too-big-
to-fail. That is what some of our friends on the other side of
the aisle say.
Mr. Hoenig, now, first of all, regulators have discretion,
is that correct? I heard that comment.
Mr. Hoenig. Discretion for?
Mr. Pearce. For making decisions on what to do under
circumstances of too-big-to-fail during bankruptcy. You have
discretion, is that correct?
Mr. Hoenig. Under bankruptcy, they would go to a bankruptcy
court and it would be handled there.
Mr. Pearce. But as it approaches that, the regulator has
the ability to maneuver certain tools, I think is what Ms. Bair
said.
Mr. Hoenig. Of course. The regulators will examine the
institution or deal with the institution, insist on more
capital to keep it from failing, and so forth.
Mr. Pearce. Does Dodd-Frank have any consequences for
regulators if they choose incorrectly or purposely make a
mistake?
Mr. Hoenig. Purposely make a mistake?
Mr. Pearce. Just if they make a mistake. We will just leave
it at that.
Mr. Hoenig. Well, look, if it is a mistake, it is a mistake
like any other. That is what you have capital for, mistakes by
management or otherwise.
Mr. Pearce. I find the whole discussion that we are having
today, we are going to create a regulatory agency that comes in
and looks and determines if firms are solvent, if they are
qualified, but we are going to turn that over to regulators.
Now, keep in mind the regulators had been hearing for 10 years
on Bernie Madoff that he was doing stuff, but they turned a
blind eye, and the courts found that the regulators could not
be held accountable for that. They were shielded by the
discretionary function exception. And the court did express
regrettable disdain for the actions, but nothing happened.
So we are trying to decide on fairly small nuances here,
but there is no nuance in taking segregated customer accounts,
and yet Jon Corzine still hasn't had anything done to him. He
took $1.5 billion. The regulators were sitting in the room
watching him, multiple regulators, and not one thing going.
We are having this protracted discussion here today on
should the regulations be tweaked here or tweaked there. If we
can't hold the regulators accountable, I will guarantee you it
does not matter if too-big-to-fail is in place or it is not in
place, because the regulators will have in their discretion, in
your terms, their discretion to determine whether or not things
should be done, whether or not they should get bailed out, and
there is nothing that we as the American people, the taxpayer,
can do.
These are the things that are making people furious out
there in the streets. They get stuck for people who have wrung
every single bit of profit they can out on risky adventures,
and then the taxpayer gets stung with it. And I will guarantee
you this whole system has many, many problems ahead of us if we
don't get this right, if we continue to create a system of too-
big-to-fail through law.
Chairman Hensarling. The time of the gentleman has expired.
The gentleman from Kentucky, Mr. Barr, is recognized for 5
minutes.
Mr. Barr. Thank you, Mr. Chairman.
I think of all of the data available to Members of Congress
and observers of this interesting question about too-big-to-
fail, there is one piece of data that is most telling about
whether or not Dodd-Frank has solved the too-big-to-fail
question. It is the statistic that Mr. Fisher points to, that
0.2 percent of institutions control nearly 70 percent of all
industry assets. So for those folks out there who say that
Dodd-Frank has solved too-big-to-fail, I think that is a
statistic that we ought to always keep in mind.
To that point, have we seen a greater concentration of
industry assets in these megabanks in the 3 years since Dodd-
Frank has been the law of the land?
Mr. Fisher. Congressman, we have seen a greater
concentration as we go through time. And certainly from before
the financial crisis to now, yes, because of the acquisitions
that were made, we have seen a concentration in fewer hands.
Mr. Barr. You have kind of two parts to this. You have the
implicit government taxpayer subsidy, the $83 billion subsidy,
the cost of funding advantage for the SIFIs, but you also have
the regulatory pressures placed on the 99.8 percent, the other
banks, the regional banks, the community banks, the
consolidation that we have seen in the smaller banks.
I would like for the panelists to comment on not only the
taxpayers' subsidy and the funding advantage of the SIFIs, but
also the effect of Dodd-Frank and the CFPB and the regulatory
pressures and the consolidation and the lack of new charters in
the smaller banking sector and whether or not that has
exacerbated the problem of too-big-to-fail.
Mr. Fisher. I am going to just quickly comment because my
other colleagues will no doubt want to comment in the 2\1/2\
minutes left. I travel throughout my district, which is a large
district, the Federal Reserve District of Dallas, the 11th
District. I meet constantly with bankers. To a person--these
are community bankers, these are regional bankers--they are
deeply concerned that they are being overwhelmed by regulation
and they are having to spend their moneys, as I said earlier,
hiring people, lawyers, et cetera, with all due respect to
lawyers, to help them comprehend and deal with this, rather
than being able to afford, with their limited budgets and with
their interest margins being so tight, hiring bankers to make
loans to go out and do what bankers are paid to do.
So we are being constantly criticized and concerns are
being raised that they are way swamped in terms of all the
different things that you mentioned. And it is not just Dodd-
Frank, you mentioned other authorities that have been granted
under different legislation that was enacted, and they just
feel deluged. And that puts them at a disadvantage, because if
you are not able to spend your time worrying about how to make
a loan, someone else is going to make it for you.
Mr. Barr. And I think it is a good point. I think it just
goes to show that we ought not just look at Title II and OLA
and the implicit taxpayer subsidy here, but also the
consolidation that is happening and the lack of sufficient
competition to the SIFIs because of the consolidation--
Mr. Fisher. These are unintended consequences, Congressman,
of this process.
Mr. Barr. Right. One final question as my time is expiring,
and the question is to all of you. It relates to the regulatory
discretion that is conferred under OLA and whether or not we
are moving away from a bankruptcy rule of law-based system to a
system in which there is excessive discretion and we are moving
away from the rule of law.
Many people believe that General Motors, the automobile
bailout of recent years was highly politicized, because the
Federal Government conditioned its bailout on GM giving
preferred treatment to the union claims. President Fisher and
President Lacker, under Dodd-Frank's OLA, could the FDIC use
its discretion to pick winners and losers, much like we saw in
the auto bailout, and picking winners and losers among
creditors of a failed firm in a politicized manner, much like
we saw in the auto bailout?
Mr. Hoenig. Let me say first that, just to clarify, in
terms of the discretion under Title II to the FDIC, it is
limited. And besides that, the FDIC's own rule requires that
you treat, in terms of order of preference, in the same manner
as bankruptcy. And I would point out that even in bankruptcy, a
bankruptcy judge can make exceptions in terms of assuring that
payments are made and that essential operations continue.
So it is not a broad-based discretion that they can pick
whomever they want. It is very clearly identified in terms of
the order of preferences that they have to stick with, and the
exceptions have to be explained as carefully as in a
bankruptcy.
Chairman Hensarling. Really quick answers from the other
gentlemen.
Mr. Lacker. He is right, discretion is constrained at the
FDIC. But broadly speaking they have, as I read the statute,
more discretion, more authority, more leeway than a judge does
in bankruptcy to violate absolute priority.
Chairman Hensarling. Mr. Fisher nodded in consent. The time
of the gentleman has definitely expired.
The Chair now recognizes the gentleman from South Carolina,
Mr. Mulvaney, for 5 minutes.
Mr. Mulvaney. Thank you, Mr. Chairman.
And thank you, gentlemen, for making yourselves available
and for sticking around.
I want to go all the way back to one of the opening
statements. It was made by Mrs. Maloney and it caught my
attention; it is the actual language of Section 214. And she
read it accurately, the second sentence says that no taxpayer
funds shall be used to prevent the liquidation of any financial
company under this title. And I think for some people, both in
this room and outside of this room, that sort of ends the
discussion. But I think it is clear that it doesn't end the
discussion. In fact, you heard Mr. Green give a certain set of
circumstances under which he would certainly support additional
taxpayer funds being spent. So I think it is very much an open
question as to whether or not taxpayer funds can still be used.
Walk me through the process under which that might possibly
happen. I turn to Section 214(b), and it says that, ``all funds
expended in a liquidation of a financial company under this
title shall be recovered from the disposition of assets of such
financial company,'' but then it obviously immediately
contemplates that might not be enough to pay because the next
half of the sentence says, ``or shall be the responsibility of
the financial sector through assessments.''
Now, let's skip for a second the impossibility of defining
perhaps what the financial sector is, but that is the word that
is used. These assessments, number one, how easy would it be to
do that, Mr. Lacker? If we are talking about a situation, the
economic situation where a major bank is failing, how easy is
it going to be to assess the other banks in the financial
sector?
Mr. Lacker. It is going to be really hard to do it in a
timely way. And my sense is that what is envisioned, both in
the FDIC's plans for implementing the Act and the Act itself,
is that is recovered after the fact. After assets are sold off
in an orderly way over the course of several years, then you do
the calculation that says, oh, we have to go back, we have a
hole we have to fill, we go back.
The point I would make about the taxpayer part is the key
thing about too-big-to-fail is the incentives, short-circuiting
the incentives of creditors, and from that point of view it
doesn't matter where you get the money, whether you get it from
taxpayers, which is viewed by I think many as terribly unfair,
or you get it from the man in the moon. Ultimately, you are
short-circuiting incentives, and that is what gives rise to
excessive risk-taking, and excessive short-term wholesale
funding.
Mr. Mulvaney. I recognize that.
Mr. Fisher, yes, go ahead.
Mr. Fisher. I was just looking, sir, at the remarks made by
Martin Gruenberg when he was Acting Chairman of the FDIC at a
Federal Reserve Bank of Chicago conference. Just to make your
point here, he talks about the Orderly Liquidation Fund located
in the Treasury Department. Those are taxpayer moneys. The
Orderly Liquidation Fund must either be repaid from recoveries
of the assets of the failed firm or from assessments against
the larger, more complex financial companies. Taxpayers, as you
said, cannot bear any loss from the resolution of a financial
company under the Dodd-Frank Act.
As I pointed out in my spoken comments, first of all, these
are taxpayer moneys, there is an opportunity cost of setting
them aside. I know we don't often talk about that, but that is
something to consider.
Secondly, let's say that it is insufficient in liquidation
and you need to go back to the industry, as you mentioned, and
you assess them. They are given a tax deduction as a business
expense for the expenditure of those funds. That is taking
money from the taxpayer, as far as I am concerned.
Mr. Mulvaney. And, by the way, if we do get the assessments
set up, who ultimately pays for those?
Mr. Lacker. The customer is going to pay for it.
Mr. Hoenig. The customer.
Mr. Lacker. And I would venture to say many of them are
going to--
Mr. Hoenig. Let me add one thing, though. Title I, and I
think Title II, are designed for an idiosyncratic event, a
large institution that gets into trouble. If you have a
systemic meltdown as we had last time, I feel pretty confident
that the Congress will be asked for another TARP. The market
perceives if you have a systemic meltdown, that may be the
case. So, you have many issues.
Mr. Mulvaney. I think that is an excellent point. This
might work if you have an aberration, if you have one large
financial institution going out, but it raises very serious
issues about what is going to happen if you end up in a similar
situation to where we were in 2008 and 2009.
Mr. Fisher, you wanted to say something?
Mr. Fisher. I completely agree with that, because remember
how interconnected all these firms are. I doubt you would just
have one alone.
Mr. Hoenig. Bankruptcy will be--
Mr. Fisher. And then you go back to Mr. Fisher's--
Mr. Mulvaney. That goes to Mr. Lacker's point that if you
have perverted the market and you have given this sense of
safety where there is none, you are going to encourage
creditors to lend to these facilities when they shouldn't be
doing so.
Mr. Hoenig. Which is why we should, if you will,
rationalize or simplify the system so that we don't end up in
the same position we did in 2008. We need to pull back the
safety net to commercial banking so that we can--
Mr. Mulvaney. I hate to cut you gentlemen off, but I have
20 seconds left. The last section says, ``Taxpayers shall bear
no losses from the exercise of any authority under this
title.'' I would suggest to you and to the chairman that is
simply unenforceable. That is language that made people feel
good about voting for the bill, but I think you have already
seen, and Mr. Hoenig you just mentioned it, that there are
folks in here today who, under the right set of circumstances,
would use taxpayer money again, even with Dodd-Frank in place,
and I think that tells us a lot about where we are.
Thank you, gentlemen.
Chairman Hensarling. The time of the gentleman has expired.
No other Members are in the queue.
I wish to thank all of our witnesses for their testimony
today.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
This hearing stands adjourned.
[Whereupon, at 1:04 p.m., the hearing was adjourned.]
A P P E N D I X
June 26, 2013
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