[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]







                   THE ANNUAL REPORT OF THE FINANCIAL
                      STABILITY OVERSIGHT COUNCIL

=======================================================================

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 17, 2015

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 114-34



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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking 
    Vice Chairman                        Member
PETER T. KING, New York              CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
SCOTT GARRETT, New Jersey            GREGORY W. MEEKS, New York
RANDY NEUGEBAUER, Texas              MICHAEL E. CAPUANO, Massachusetts
STEVAN PEARCE, New Mexico            RUBEN HINOJOSA, Texas
BILL POSEY, Florida                  WM. LACY CLAY, Missouri
MICHAEL G. FITZPATRICK,              STEPHEN F. LYNCH, Massachusetts
    Pennsylvania                     DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia        AL GREEN, Texas
BLAINE LUETKEMEYER, Missouri         EMANUEL CLEAVER, Missouri
BILL HUIZENGA, Michigan              GWEN MOORE, Wisconsin
SEAN P. DUFFY, Wisconsin             KEITH ELLISON, Minnesota
ROBERT HURT, Virginia                ED PERLMUTTER, Colorado
STEVE STIVERS, Ohio                  JAMES A. HIMES, Connecticut
STEPHEN LEE FINCHER, Tennessee       JOHN C. CARNEY, Jr., Delaware
MARLIN A. STUTZMAN, Indiana          TERRI A. SEWELL, Alabama
MICK MULVANEY, South Carolina        BILL FOSTER, Illinois
RANDY HULTGREN, Illinois             DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida              PATRICK MURPHY, Florida
ROBERT PITTENGER, North Carolina     JOHN K. DELANEY, Maryland
ANN WAGNER, Missouri                 KYRSTEN SINEMA, Arizona
ANDY BARR, Kentucky                  JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania       DENNY HECK, Washington
LUKE MESSER, Indiana                 JUAN VARGAS, California
DAVID SCHWEIKERT, Arizona
FRANK GUINTA, New Hampshire
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
BRUCE POLIQUIN, Maine
MIA LOVE, Utah
FRENCH HILL, Arkansas
TOM EMMER, Minnesota

                     Shannon McGahn, Staff Director
                    James H. Clinger, Chief Counsel























                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    June 17, 2015................................................     1
Appendix:
    June 17, 2015................................................    65

                               WITNESSES
                        Wednesday, June 17, 2015

Lew, Hon. Jacob J., Secretary, U.S. Department of the Treasury...     4

                                APPENDIX

Prepared statements:
    Lew, Hon. Jacob J............................................    66

              Additional Material Submitted for the Record

Hensarling, Hon. Jeb:
    Written statement of the American Council of Life Insurers...    73
Lew, Hon. Jacob J.:
    Written responses to questions for the record submitted by 
      Representatives Duffy, Garrett, Guinta, Hill, Hinojosa, 
      Hurt, Lynch, Neugebauer, Ross, Rothfus, Stivers, Wagner, 
      and Williams...............................................    82
 
                   THE ANNUAL REPORT OF THE FINANCIAL
                      STABILITY OVERSIGHT COUNCIL

                              ----------                              


                        Wednesday, June 17, 2015

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:07 a.m., in 
room 2128, Rayburn House Office Building, Hon. Jeb Hensarling 
[chairman of the committee] presiding.
    Members present: Representatives Hensarling, Royce, Lucas, 
Garrett, Neugebauer, Pearce, Posey, Fitzpatrick, Westmoreland, 
Luetkemeyer, Huizenga, Duffy, Hurt, Stivers, Fincher, Stutzman, 
Mulvaney, Hultgren, Ross, Pittenger, Wagner, Barr, Rothfus, 
Messer, Schweikert, Guinta, Tipton, Williams, Poliquin, Love, 
Hill, Emmer; Waters, Maloney, Velazquez, Meeks, Capuano, Lynch, 
Scott, Green, Cleaver, Moore, Ellison, Perlmutter, Himes, 
Carney, Sewell, Foster, Kildee, Murphy, Delaney, Beatty, Heck, 
and Vargas.
    Chairman Hensarling. The Financial Services Committee will 
come to order.
    Without objection, the Chair is authorized to declare a 
recess of the committee at any time.
    This hearing is for the purpose of receiving the annual 
testimony of the Chair of the Financial Stability Oversight 
Council (FSOC).
    I now recognize myself for 5 minutes to give an opening 
statement.
    When Democrats first passed the Dodd-Frank Act, they 
claimed that the Financial Stability Oversight Council (FSOC) 
was one of its crown jewels. FSOC, whose agency heads largely 
failed in the last crisis, would now be able to clearly 
identify risks to financial stability and take action before 
these emerging threats metastasized into another crisis.
    But a fatal flaw in this pipe dream was always the failure, 
perhaps the deliberate refusal, of Dodd-Frank's supporters to 
recognize that among the greatest threats to financial 
stability are Washington policies themselves, including 
policies of the very agency heads who sit on the Council. FSOC 
simply refuses to look in the mirror.
    In its report, it conspicuously omits any references to 
specific government policies or agencies that are helping to 
cause the systemic risk it identifies: ``Greater risk-taking 
across the financial system is encouraged by the historically 
low-yield environment,'' the Council reports. Yet, the Council 
refuses to identify the obvious source of this apparent risk, 
one of its own members, the Federal Reserve, and the Fed's 
unprecedented loose monetary policy.
    The Council warns of reduced liquidity in the capital bond 
markets, yet never acknowledges that Dodd-Frank's Volcker Rule 
and other regulations have drastically reduced liquidity.
    The Council lists ``risk-taking of large, complex, 
interconnected financial institutions'' as a threat. Yet, 
again, it fails to mention that Dodd-Frank amplifies the threat 
by empowering the Council to designate certain firms as too-
big-to-fail, thus enshrining the concept into law.
    These designations will only make worse the profound threat 
ignored by the Council but recently identified by the Federal 
Reserve Bank of Richmond in their ``Bailout Barometer,'' that 
threat being that hardworking taxpayers, implicitly or 
explicitly, are now on the hook for a staggering 60 percent of 
the liabilities of the entire U.S. financial system.
    The Council turns a blind eye to other serious threats. 
Fannie Mae and Freddie Mac, at the epicenter of the last 
crisis, barely receive a mention.
    And it gets worse. Our unsustainable national debt, $18 
trillion and counting, as all can see, perhaps one of the 
greatest existential threats that we face, with more debt 
incurred under this Administration than in our Nation's first 
200 years, is totally ignored. This is beyond negligent. It is 
beyond egregious. It is dangerous and, frankly, it is 
offensive.
    Another glaring omission from the report is any meaningful 
reference to economic growth or, rather, the lack of it. Along 
with Obamacare, Dodd-Frank is at the center of the 
Administration's economic policies. As we approach Dodd-Frank's 
fifth anniversary, we see the slowest, weakest recovery in the 
post-war era.
    We see an economic recovery that has created 12.1 million 
fewer jobs and has provided $6,175 less income for every 
citizen compared to the average post-war recovery. Again, 
compared to the average, we see an economic recovery that has 
left 1.6 million of our fellow citizens mired in poverty, and 
working middle-income families losing over $11,000 in annual 
income that rightfully should have been theirs.
    I find it stunning that in its report FSOC can find a link 
between weak economic growth in Greece and stability in the 
eurozone but apparently can find no link between economic 
growth and stability on this side of the Atlantic.
    Also nowhere to be found in the Council's report is the 
threat posed to our stability, growth, and personal freedoms by 
the erosion of the rule of law under this Administration. We 
know that our President seemingly never tires of admonishing us 
that he has a pen and a phone ready to enact whatever policy he 
sees fit. Regrettably, he never seems to have handy a copy of 
the Constitution.
    As Americans become less governed by the rule of law and 
more governed by the whims of Washington, fear, doubt, 
uncertainty, and pessimism are sown. It is not lost on the 
American people that increasingly, Washington decides what 
credit cards can go in their wallets, what kind of home 
mortgages they can receive, and whether, if they like their 
bank account, they can keep it.
    Truly, never before in my lifetime has more unchecked, 
unbridled discretionary power been given to the unaccountable 
and unelected. This includes the Financial Stability Oversight 
Council, which operates largely out of public view, yet its 
decisions have the potential to profoundly alter the lives and 
livelihoods of every American. FSOC typifies not only the 
shadow regulatory system but also the unfair Washington system 
that Americans have come to loathe--powerful government 
administrators, secretive government meeting, arbitrary rules, 
and unchecked power to punish or reward.
    Mr. Secretary, your Council and the rest of Washington need 
to awaken to the obvious truth, and that is, when it comes to 
systemic risk, Washington is a large part of the problem.
    I now recognize the ranking member for 5 minutes.
    Ms. Waters. Thank you, Mr. Chairman.
    And welcome back, Secretary Lew.
    Today, we receive the annual report of the Financial 
Stability Oversight Council, as required by law.
    As we all know, this year marks the fifth anniversary of 
the enactment of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act. It is hard to believe it was just 5 years ago 
that we were coming to grips with the magnitude of the 
financial crisis, which caused the greatest loss of wealth in a 
generation. All told, the financial crisis cost our Nation more 
than $13 trillion in economic growth and $16 trillion in 
household wealth, not to mention the devastation of an 
unemployment rate topping 10 percent in many States.
    In the lead-up to the crisis, nobody in the private sector 
or in government was looking at the stability of our financial 
system as a whole. Nobody was looking at the big picture. And 
nobody had the responsibility to deal with emerging threats 
before they caused damage to our economy.
    That is why we created the Financial Stability Oversight 
Council as part of Dodd-Frank. FSOC filled that void, looking 
at every aspect of our financial system for possible 
weaknesses. And it serves as an advance warning system to 
identify and address systemic risk posed by large, complex 
companies, products, and activities before they threaten the 
economy.
    The Council has ensured for the first time that our 
financial regulators are working collaboratively to identify 
and respond to emerging threats to financial stability. And 
with their February announcement outlining enhanced engagement 
and opportunities for public input, they have doubled their 
efforts to engage with the industry and Congress in a 
transparent manner.
    In its 2015 annual report, the FSOC noted substantial 
progress to protect Americans from another crisis. And, indeed, 
we have taken important steps to prevent another economic 
disaster from happening, including making our large banks more 
resilient through stronger capital, leverage, and liquidity 
standards; covering oversight gaps in our financial system by 
designating complex, interconnected nonbanks for consolidated 
supervision; and reforming key markets like asset-backed 
securities and money market mutual funds.
    However, 5 years after Dodd-Frank became law, my Republican 
colleagues remain fighting the battles of the past. They 
continue to believe that if only we rolled back all of the 
rules of the road, the financial system would magically unlock 
growth and the market would suddenly police itself.
    And they continue to ignore the lessons of the last crisis 
by doing all they can to undermine FSOC under the guise of 
oversight. By focusing merely on dismantling Dodd-Frank, my 
colleagues on the other side of the aisle impede Congress' 
ability to focus on the new emerging threats to financial 
stability identified in FSOC's 2015 annual report.
    Like the Consumer Financial Protection Bureau (CFPB), 
destroying FSOC has become a leading component of the 
Republican deregulatory agenda. And while they waste countless 
hours working to undermine it, engines of job growth and 
American competitiveness like the Export-Import Bank face a 
possible shutdown in just 5 legislative days. Rather than renew 
a proven job creator like the Ex-Im Bank, Republicans are 
spending their time bogging the FSOC down in countless document 
requests and inquiries--an obvious effort to undercut its 
ability to protect homeowners, consumers, and the American 
economy.
    So welcome, Secretary Lew, and thank you for your 
resilience in the face of efforts to stop the Council from its 
important work. I look forward to your insight on areas of 
systemic risk the Council has identified and hope to learn more 
about what FSOC is currently doing to monitor for such risk and 
promote financial stability.
    As we hear additional details from you, I will be 
interested to hear whether Republicans believe FSOC should take 
any action to address systemic risk or simply wait for another 
crisis.
    So I thank you, and I yield back the balance of my time.
    Chairman Hensarling. The gentlelady yields back.
    Today, we welcome the testimony of the Honorable Jacob J. 
Lew, Secretary of the Treasury. Secretary Lew has testified 
before our committee on previous occasions, so I feel he needs 
no further introduction.
    Welcome, Mr. Secretary. We are happy to have you back.
    Without objection, your written statement will be made a 
part of the record.
    Mr. Secretary, you are now recognized for 5 minutes to give 
an oral presentation of your testimony.

   STATEMENT OF THE HONORABLE JACOB J. LEW, SECRETARY, U.S. 
                   DEPARTMENT OF THE TREASURY

    Secretary Lew. Chairman Hensarling, Ranking Member Waters, 
and members of the committee, thank you for having me today and 
for this opportunity to testify on the Financial Stability 
Oversight Council's 2015 annual report.
    I would like to begin by recognizing that we are a few 
short weeks away from the 5-year anniversary of the enactment 
of Wall Street reform and the creation of the Council. As we 
approach this milestone, it is clear that these reforms have 
made the financial system safer and more resilient while 
supporting long-term economic growth.
    Wall Street reform has put important consumer, investor, 
and taxpayer protections in place, supporting companies that 
play by the rules and serve their customers, small businesses 
that need access to credit to grow and create jobs, and working 
men and women trying to save for their children's education, a 
downpayment on a home, or their own retirement. Wall Street 
reform has worked.
    Five years ago, the Council was created to be a forum for 
the entire financial regulatory community to come together to 
look across the U.S. financial system to identify and respond 
to potential threats to financial stability. Today, the Council 
is doing exactly what Congress designed it to do, from asking 
the tough questions that will make our financial system safer 
to shining a light on emerging threats before they can evolve 
into the next financial crisis.
    Moreover, the Council's member agencies work 
collaboratively to leverage the expertise that each regulatory 
agency brings to the table. And the Council has also 
established a track record of conducting its work in an open-
minded and deliberative manner, incorporating constructive 
suggestions from stakeholders, including members of this 
committee, who have made the Council more effective. The 
Council asks hard questions and only makes judgments based on 
facts and detailed analysis.
    Before discussing this year's report, I want to emphasize 
why each annual report is important. The annual report provides 
transparency about the Council's work. Each report covers a 
range of issues based on extensive data-driven analysis, and it 
contains in one place the collective views of the financial 
regulatory community about current risks and emerging threats 
to financial stability, along with recommendations for specific 
actions to mitigate those risks.
    The findings and recommendations set down a marker for 
action, providing clarity regarding the Council's priorities 
and a roadmap to the year ahead. This provides Congress and the 
public with a way to hold the Council accountable for making 
progress.
    The report highlights the Council's recent work and 
demonstrates its continued commitment to openness and good 
governance. For example, this year's report highlights a series 
of important Council initiatives over the past year, including 
enhancements to the Council's transparency policy, stronger 
internal governance, supplemental guidance to our nonbank 
designations process, and ongoing engagement with the public 
regarding potential risks from asset management products and 
activities.
    Last month, at our 51st meeting, the Council released its 
fifth annual report. This year's report focuses on 11 key 
areas, many of which have been discussed by the Council in 
prior annual reports as well as at its meetings over the past 
year. These include the potential incentives for greater risk-
taking in a low-yield environment, the need for continued 
progress to reform benchmark rates such as LIBOR, and the 
continued reliance on short-term wholesale funding. For each of 
these areas, the report highlights where progress has been made 
and where more still needs to be done.
    Cybersecurity remains a key area of focus for the Council. 
The financial sector has been a leader of other industries 
adopting cybersecurity measures, but still we have seen cyber 
incidents affect the largest financial institutions and the 
community banks that form the bedrock of the financial system.
    That is why this Administration and the Council are 
focusing on how to continue working with the private sector to 
strengthen best practices, information-sharing, and incident 
response. I commend the committee for focusing on the topic in 
recent hearings, and we look forward to working with Congress 
on this critical issue.
    This year's report also identifies several new potential 
risks coming into focus which the Council and its member 
agencies will monitor over the coming year. For example, the 
Council will pay heightened attention to ongoing regulatory 
efforts to bolster the resiliency of central counterparties, or 
CCPs. The Council also highlighted the ongoing evolution of 
market structure across various asset classes and the need for 
constant monitoring to ensure that markets function 
efficiently.
    The Council recommends continued vigilance to the 
confluence of factors driving changes in market structure and 
the extent of their impact on market functioning and the 
provision of liquidity.
    Promoting financial stability and protecting the American 
public from the next financial crisis should be a common 
objective that we all support. Yet, opponents of reform 
continue to advocate rolling back these protections, including 
the ability of the Council and its member agencies to respond 
to future threats to financial stability. As the Council's 
annual report demonstrates, threats to financial stability are 
real and will evolve with the marketplace. We simply cannot let 
our guard down.
    I want to thank the other members of the Council and all of 
the staff involved with the 2015 annual report for their hard 
work and commitment.
    As we approach the 5-year anniversary of Wall Street 
reform, we will continue to work with this committee to 
continue addressing these threats and promoting the strength 
and stability of the U.S. financial system.
    Thank you very much, and I look forward to answering any 
questions that you have.
    [The prepared statement of Secretary Lew can be found on 
page 66 of the appendix.]
    Chairman Hensarling. Thank you, Mr. Secretary.
    The Chair now yields himself 5 minutes for questions.
    Mr. Secretary, I alluded to it in my opening statement, but 
by chance are you familiar with the ``Bailout Barometer'' 
report of the Richmond Fed? Are you familiar with this report?
    Secretary Lew. I have seen it in the past. I am not sure 
which one you are holding.
    Chairman Hensarling. I'm sorry?
    Secretary Lew. I have seen it in the past, but I am not 
familiar with what you are holding.
    Chairman Hensarling. Okay. So you have reviewed the 
document. You are familiar with--
    Secretary Lew. I am familiar with the--
    Chairman Hensarling. Okay. So you are familiar with the 
fact that it indicates that there has been a 61-percent 
increase in the explicit Federal guarantees in our financial 
system since the crisis. Is that correct?
    Secretary Lew. I understand that is the analysis which is 
in that piece of paper. I haven't read the piece of paper.
    Chairman Hensarling. Okay. Do you have any reason to 
challenge that analysis? Has FSOC come up with a contrary 
analysis?
    Secretary Lew. Look, I think if you look at the experience 
we have had since the financial crisis, since financial reform, 
we have seen--
    Chairman Hensarling. No, I am just asking, Mr. Secretary, 
has the Council--
    Secretary Lew. I haven't looked at that piece of analysis, 
so--
    Chairman Hensarling. Okay. That is--
    Secretary Lew. --I can give you my response to the idea, 
but that is what I was--
    Chairman Hensarling. Okay. Well, let me quote from the 
report. There is $26 trillion, according to the Richmond Fed, 
in explicit and implicit Federal backstop today. One of the 
final conclusions of the report is that, ``It is essential to 
restoring market discipline and achieving financial stability 
to shrink this Federal safety net.''
    Do you agree or disagree with their conclusion?
    Secretary Lew. I don't want to comment on a report I 
haven't read. I am happy to address the issue, Mr. Chairman--
    Chairman Hensarling. How about their conclusion? Do you 
believe, independent of their report, that it is important to 
achieving financial stability to shrink the size of the 
government Federal safety net?
    Secretary Lew. Congressman, I--
    Chairman Hensarling. In our financial markets, is it 
important or not important?
    Secretary Lew. I think if you look at the financial 
stability situation today versus before the Dodd-Frank Act and 
Wall Street reform, we have a much--
    Chairman Hensarling. Mr. Secretary, I would be happy to let 
you have some context, but I would like for the question to be 
answered. It is a fairly simple--
    Secretary Lew. Congressman, I am happy to--
    Chairman Hensarling. --question. Do you believe that for 
the sake of financial stability, the extent of the Federal 
safety net in our financial markets should be shrunk?
    Secretary Lew. I think if you look at an issue that we have 
talked about before, I very much believe that it would be a 
good thing to enact reform in the area of GSEs. There was 
progress on that on a bipartisan basis in the Senate last year. 
It is something that didn't proceed to the Floor--
    Chairman Hensarling. So can I take your answer as ``yes?''
    Secretary Lew. Mr. Chairman, I am happy to look at that 
report. I am happy to offer my views on this issue, but--
    Chairman Hensarling. You don't have it to look at the 
report, Mr. Secretary. I am just asking you about a conclusion.
    Secretary Lew. Yes. I--
    Chairman Hensarling. I don't sense I am going to get an 
answer. Let me move on, Mr. Secretary.
    Secretary Lew. I would be delighted to answer the question 
if you give me the time.
    Chairman Hensarling. I think you have had plenty of time to 
answer the question, Mr. Secretary--
    Secretary Lew. Yes, I don't think I have gotten--
    Chairman Hensarling. --and you haven't.
    Under Dodd-Frank, FSOC is comprised of agency heads as 
opposed to the agencies themselves, correct? We can both agree 
on that?
    Secretary Lew. Yes.
    Chairman Hensarling. Okay. And we can also agree that of 
the 10 voting members of FSOC, each was appointed by President 
Obama, correct?
    Secretary Lew. Yes, I believe that is correct.
    Chairman Hensarling. Okay. I alluded to it again in my 
opening statement. I have read excerpts of this report. I have 
not read the entirety of the 150-page report. Have you read the 
entire report?
    Secretary Lew. I have.
    Chairman Hensarling. Good. My staff read the entirety of 
the report; I have read many excerpts. So, in identifying 
emerging threats to financial stability, can you point to any 
page in the report where FSOC identifies a current Federal 
policy or rule as a contributing factor to an emerging threat? 
Because we can't find it.
    Secretary Lew. Mr. Chairman, we identified the threats that 
we see as real. Many of those have a connection to Federal 
policy. And I am happy to answer specific--
    Chairman Hensarling. Okay. But under Dodd-Frank, you also 
have the mandate to actually make recommendations. So how do 
you make a recommendation if you can't cite a source?
    Secretary Lew. It is not my view that Federal regulation is 
a significant risk to financial stability. So I don't agree 
with--
    Chairman Hensarling. The last time you were here, Mr. 
Secretary, there was increasing evidence that we are suffering 
great illiquidity in our corporate bond market. You admitted 
that. This report cites it. We know that when mid-market 
companies hoard cash, they can't promote jobs and economic 
growth. Many economists believe this will be the source of the 
next financial crisis.
    Somehow, the FINRA head can connect this bond illiquidity 
to the Volcker Rule. SEC Commissioner Dan Gallagher has said 
that the Volcker Rule has set the stage for a potentially dire 
liquidity crisis. There has been similar testimony from CFTC 
Commissioner Giancarlo. Even former Secretary of the Treasury 
Larry Summers has said, ``There is a danger in their enthusiasm 
for keeping each individual institution safe that regulatory 
authorities will lose sight of keeping markets open and liquid, 
and I think that is a legitimate concern.''
    So, in your last testimony, you found no evidence that the 
Volcker Rule contributed to the bond illiquidity. We have 
incredible evidence that it has contributed. Do you still stand 
by your previous testimony that there is no connection to bond 
illiquidity in the Volcker Rule?
    Secretary Lew. Mr. Chairman, I think that the question of 
market liquidity is a very complicated one, and trying to 
reduce it to one factor is never going to--
    Chairman Hensarling. I said a contributing factor, Mr. 
Secretary. Is it a contributing factor?
    Secretary Lew. If you would allow me to answer your 
question, this is a complicated issue. It is a very important 
issue. It is an issue that I spend a lot of time thinking 
about. It is not a 10-second answer. I will give you a--
    Chairman Hensarling. Starting out with, is it a 
contributing factor? Or is it not a contributing factor?
    Secretary Lew. Yes. I think that it is not possible to say 
what is the single cause. I do not believe that Federal 
regulation is a significant factor--
    Chairman Hensarling. I understand that, Mr. Secretary.
    My time has expired. I now--
    Secretary Lew. May I just ask to address this issue? 
Because I think it is actually a very important issue.
    Ms. Waters. Mr. Chairman? I will yield time to the 
gentleman.
    Chairman Hensarling. I would be happy to have the Secretary 
answer the question.
    Please. The Secretary is recognized.
    Secretary Lew. Mr. Chairman, I think if you look at the 
question of liquidity, there are a lot of people trying to 
reach a simple explanation to a complicated question.
    We are at a point in the business cycle where we are seeing 
naturally a lot of volatility as we move out of the deepest 
recession since the Great Depression. We are seeing an 
expectation of some movement in interest rates. That is a 
significant factor.
    We are seeing market structure changing rapidly. We are 
seeing the introduction of a high level of electronic trading, 
including high-frequency trading, that is changing the 
structure of markets.
    We have also seen a tremendous increase in the volume of 
issuance of bonds. That is having a big effect on market 
structure--
    Chairman Hensarling. I understand all that, Mr. Secretary.
    Secretary Lew. I think anyone who tries to point to a 
single thing, like a rule, is not going to--
    Chairman Hensarling. Mr. Secretary, I did not say it was a 
single thing. I asked you the question, was the Volcker Rule a 
contributing factor, and several minutes later you have still 
refused to answer the question.
    Secretary Lew. Well--
    Chairman Hensarling. My only takeaway is that you don't see 
it as a contributing factor, and so many other market--
    Secretary Lew. I think that part of the issue--there was a 
desire in financial reform for certain things that are high-
risk, highly leveraged investments to be less liquid. I don't 
that is necessarily a bad thing.
    That doesn't mean it is a good thing for there to be a loss 
of market liquidity. I do not see a major impact--
    Chairman Hensarling. Thank you.
    Secretary Lew. --in terms of broad liquidity, but we are 
constantly looking at this question of liquidity. And we are 
open to asking the question as to what the impact of Federal 
policy is. I just think it is a mistake to start there.
    Chairman Hensarling. You could have fooled me, Mr. 
Secretary.
    I now recognize the ranking member for 5 minutes.
    Ms. Waters. Thank you very much, Mr. Chairman.
    Mr. Secretary, I would like to offer you the courtesy of 
continuing your explanation, if you would like to have it.
    Secretary Lew. Thank you very much, Congresswoman Waters.
    I guess the thing I would add is that there has been a lot 
of focus on this issue since October 15th, and there has been a 
lot of telling of the story of what happened on October 15th 
that is just not based on the analysis or the facts.
    There was no breakdown in Treasury markets on October 15th. 
That is not something that is supported. There was no liquidity 
crisis. There was a moment, there was a blip, there were a lot 
of things going on, but we don't see any evidence that 
regulation contributed to that event.
    There was a moment in time when there was a lot of off-risk 
sentiment because of events going on in the world. There was a 
huge amount of electronic trading going on. And there was a 
blip in the market that, obviously, is very much worthy of our 
attention. But people took from that, I think incorrectly, the 
notion that somehow that was an event that was caused by a 
rule. It wasn't.
    And we are doing a lot of work on it and look forward to 
issuing an analysis very shortly.
    Ms. Waters. Thank you, Mr. Secretary.
    One of the largest and most frequent criticisms my 
Republican colleagues have lodged against the Financial 
Stability Oversight Council is what they deem to be a lack of 
transparency with respect to nonbank systemically important 
financial institution, or SIFI, designations.
    And while I think many of their criticisms are merely 
attempts to hamstring the Council under the guise of oversight, 
I do appreciate that you and your staff have redoubled your 
efforts to engage with Congress and with nonbank institutions 
and to open up your deliberations for additional public 
scrutiny.
    Mr. Secretary, would you describe precisely what changes to 
both the annual and to the 5-year designation processes FSOC 
made in its February 2015 supplemental procedures announcement? 
And please also describe how FSOC balances the need for 
transparency against the need to protect sensitive market and 
supervisory information.
    Secretary Lew. Congresswoman, thank you.
    We made a number of changes that were designed to respond 
to concerns raised both by this committee, members of the 
committee, and by stakeholders, which give a great deal earlier 
notice and transparency to the process to parties that are 
under review.
    I want to just underscore that there was a lot of back and 
forth even before. So this is not as radical a change as it may 
sound like, but it is more formal. And I think it is something 
that has led to a good deal of, kind of, recognition that the 
system is more transparent, which is our goal.
    The review process, by necessity, involves reviewing highly 
confidential business documents that are commercially sensitive 
under law where we have to protect the documents and the 
information. We try our best, in the context of that 
constraint, which is a reasonable constraint, and it is a 
constraint shared by supervisors of these institutions as well, 
to be transparent with the public and the committee at the same 
time.
    I think that the changes that we have made have helped, but 
FSOC is a young organization, and we always remain open to 
suggestions on how to improve the process.
    Ms. Waters. Last month, the chairman of the full committee 
and five chairmen of each subcommittee sent a lengthy and 
onerous request for documents regarding the FSOC designation 
process, which contained at least 13 different subparts. It is 
my understanding that more than a week ago you responded to 
that document request with an offer for an in-camera review of 
1,400 pages of confidential business and bank supervisory 
information.
    Since you responded, my staff has begun a review of those 
materials. To your knowledge, has the Majority availed 
themselves of that opportunity?
    And would you consider the production of such sensitive and 
voluminous documents to be consistent with the Council's desire 
to be transparent with the Congress?
    Secretary Lew. Congresswoman, we did make that offer. We 
appreciate that your staff has begun reviewing it. Unless it 
has happened in the last day, I am not aware that the Majority 
has reviewed it, but it could have happened in the last 24 
hours.
    That is the right way for us to make clear the commitment 
to transparency while protecting very sensitive confidential 
information.
    Ms. Waters. Thank you very much.
    And, Members on this side of the aisle, would you please 
allow the Secretary to answer questions and give him the 
courtesy of not badgering him. This is complicated subject 
matter that we are dealing with, and he deserves the right to 
be able to respond in the time that it takes.
    I yield back the balance of my time.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentleman from New Jersey, Mr. 
Garrett.
    Mr. Garrett. I thank the Chair.
    So, Mr. Chairman, you said at the outset, ``I would be 
delighted to answer your questions if you would just give me 
the time.''
    Mr. Secretary, we gave you the time to answer some 
questions that were submitted to you after the last hearing, 
which was back in March, and, lo and behold, it took your 
appearance here today before we got the answers to them. In 
other words, at 11:18 last night, we got the answers.
    That is March, April, May, and now halfway through June. So 
we do give you a lot of time. But it is just a pattern, I 
guess, of this Administration of ducking the questions and 
evading the answers. And it is certainly a pattern of yours of 
obfuscation in all these things and not giving a clear answer. 
You have such disdain for the American public that we have to 
bring you before this committee before you would simply answer 
the American public's question?
    Mr. Chairman, you asked a question, is it a factor, the 
Volcker Rule, and the Secretary couldn't answer it.
    And yet, Mr. Secretary, you were able to come up with a 
litany of other factors. You said it was a factor with regard 
to, the time that it was happening, high-frequency trading was 
a factor, volume was a factor. So you ran off all those--
correct?--that those were all factors.
    But then did you say that regulation and Volcker is not a 
factor? Is that the final answer?
    Secretary Lew. Congressman, what I said is complicated, and 
we are open--
    Mr. Garrett. It is complicated. I understand. And you 
listed the other four factors.
    All we want is a simple question. You did say that in the 
blip, there was no evidence of regulation being a factor in 
that blip. Correct?
    Secretary Lew. That is certainly my understanding.
    Mr. Garrett. Okay. So is it your understanding, further, 
going forward, that Volcker, therefore, is not a factor in any 
of this?
    Secretary Lew. Congressman, I think the Volcker Rule is a 
very important protection against--
    Mr. Garrett. Is it a factor?
    Secretary Lew. --risk-taking. I can't give you--
    Mr. Garrett. You listed four other factors. Is this one of 
the factors?
    Secretary Lew. Congressman, I listed the factors that I 
know are very much real--
    Mr. Garrett. Do you know whether this one is a factor?
    Secretary Lew. I am not able to say that I know the Volcker 
Rule--
    Mr. Garrett. So you knew the other factors, and you don't 
know this factor. That is--
    Secretary Lew. I--
    Mr. Garrett. --the end of those questions.
    Secretary Lew. I am trying to demonstrate an open-
mindedness that you are not giving me a chance to express.
    Mr. Garrett. No. You are just--
    Secretary Lew. I haven't ruled out--
    Mr. Garrett. You were given the chance to answer the 
question, Mr. Secretary.
    Reclaiming my time, with regard to the FSOC and the FSB, I 
appreciate that the FSOC has announced that it has a process 
with regard to the listing of the potential risk associated in 
going forward in the designations.
    Is there such a process with FSB, as far as a due process 
system in place there, that we are trying to get to with FSOC?
    Secretary Lew. Congressman, the FSB is a very different 
process than--
    Mr. Garrett. I understand that.
    Secretary Lew. --FSOC. There is no consequence to the 
designation in terms of--
    Mr. Garrett. I understand that.
    Secretary Lew. So it doesn't have the powers that FSOC--
    Mr. Garrett. I understand that.
    Secretary Lew. Only FSOC has the power to impose--
    Mr. Garrett. I understand that.
    Secretary Lew. --a regulatory burden on--
    Mr. Garrett. So is there a process, nonetheless, of due 
process for the companies--
    Secretary Lew. There is an open process where stakeholders 
share their views and, certainly, governmental entities share 
their views with the FSB, but it is a different kind of a 
process. So I don't think the same kinds of due process issues 
apply when you are not designating a firm with the 
consequence--
    Mr. Garrett. So it is not a due process, it is a different 
process, is what you are saying?
    Secretary Lew. I am saying you are comparing apples and 
oranges. FSB and FSOC are very different. So there is an 
appropriate set of due process concerns--
    Mr. Garrett. Within that process right now, the FSOC is 
asserting its authority with regard to new roles with their 
disclosures to asset managers and the like, and I am sure you 
are familiar with that.
    Secretary Lew. Yes.
    Mr. Garrett. And I know the FSOC had previously been 
looking at that issue.
    Until the SEC finalizes that, will you go to the FSB and 
suggest that they make no final determination with the asset 
managers?
    Secretary Lew. Congressman, I think there is a more basic 
issue, which is that we are--
    Mr. Garrett. I am not asking about the basic issue. I am 
asking one question.
    Secretary Lew. I don't think the FSB's process and our 
process are at all identical.
    Mr. Garrett. I understand that.
    Secretary Lew. We have our own responsibility--
    Mr. Garrett. You just said that. So what I am asking you 
is, as a member of FSB, where you have told us repeatedly it is 
done on a consensus basis, I am asking, when you go back and 
try to get a consensus, will you say as your position is until 
your regulator, the SEC, which is working on this, you would 
ask FSB to stand down for now until this decision is made over 
here.
    Secretary Lew. What we are doing at the FSB is trying to 
make sure that it is a thorough, complete review. They--
    Mr. Garrett. I gotcha.
    Secretary Lew. --are proceeding in a similar manner--
    Mr. Garrett. I gotcha. I understand all that. You are being 
thorough, diplomatic, and all the rest.
    Simple question: Until the SEC finishes their process, will 
you use your capacity to say the FSB should stand down in this 
area? That is a simple yes-or-no question too.
    Secretary Lew. I don't know the precise schedule at the 
FSB, so I--
    Mr. Garrett. I didn't think that you did. I am just asking 
you, would you--
    Secretary Lew. I don't think that the FSB can time all of 
its actions around--
    Mr. Garrett. I doubt that they can. But can you assert your 
authority in that regard to try to do so?
    Secretary Lew. Look, this consensus process, let's 
understand what it is about. It is about trying to drive the 
world--
    Mr. Garrett. No, I am not asking about a consensus process. 
I am trying to ask you whether you will use your authority as 
the American Secretary--
    Secretary Lew. I don't know. I would have to--
    Mr. Garrett. --of the Treasury to represent the American 
companies on their behalf?
    Secretary Lew. I would have to look at where we were and 
where they were and make a judgment at the time.
    Mr. Garrett. Yes. Well--
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlelady from New York, Ms. 
Velazquez.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Mr. Secretary, we have held a number of cybersecurity 
hearings this year both in this committee and in the Small 
Business Committee to examine the toll of cyber attacks on 
consumers and businesses. Many of the witnesses stated that a 
clear, uniform set of rules was needed to address this problem.
    Can you elaborate on FSOC's proposal for a national plan to 
respond to cyber threats that you mentioned in your testimony?
    Secretary Lew. Thank you, Congresswoman. This is a hugely 
important issue in every sector of our economy and our country 
because, truly, there are exposures to cyber risk everywhere.
    The financial sector, I think, has been a leader in taking 
it seriously. And the largest firms are putting enormous 
resources into trying to put systems in place that are 
effective.
    One of the things that we have done as a government that I 
think is very important is our National Institute of Standards 
(NIST) has put out best practices. We have encouraged the 
private sector to use best practices. I have certainly 
encouraged other financial regulators to have the same view.
    I think that we are at kind of a moment where it is not 
just a question of what does a firm do itself, but you have to 
ask what are the policies a firm has with regards to who it 
will do business with. A lot of the exposures come not directly 
at the firm but when a third party connects to the firm.
    Ms. Velazquez. Right.
    Secretary Lew. So those firms do not just have to worry 
about what are they doing, but do they have good standards as 
to who they will do business with. And our goal ought to be to 
bring all of those parties to the highest standard.
    I think it is premature to talk about having a single 
national standard that is mandatory. We have put it out as a 
voluntary standard. I think many are going and using that 
standard. And I think it is something we have to continue to 
look at.
    Ms. Velazquez. The cost is an issue, especially for small 
businesses. Do you have any type of interagency working 
relationship on this matter like the Small Business 
Administration (SBA)?
    Secretary Lew. We do work across agencies in many areas. In 
particular, there are connections between, say, the utility 
sector and the financial sector, because if your power goes 
out, you are obviously going to face a risk.
    I am not familiar with what the SBA's program on this is. 
In the financial area, one of the things that we have focused 
on is the need for smaller financial institutions to be able to 
work together or through organizations so that they can pursue 
best practices together, because the burden for any individual 
firm would be too high. That is one of the reasons it is so 
important to have legislation in this area, to make the 
collaboration between firms easier and less risky for them.
    We have been very much supporting the enactment of cyber 
legislation, but even pending the enactment, we have put out 
Executive Orders to try and pave a way for firms to work 
together.
    Ms. Velazquez. Thank you.
    As you mentioned, lending standards have decreased as 
financial institutions try to find profitability in the current 
low-interest-rate environment. While the loosening of credit 
markets since the recession is beneficial for small businesses, 
too much risk-taking could again lead to problems.
    If interest rates were to rise, what impact will this have 
on the markets overall and specifically on access to capital 
for small businesses?
    Secretary Lew. Congresswoman, I think that there is at some 
point a tradeoff between access to credit and risk-taking. We 
have raised concerns over the last couple of years that in some 
cases there may by an overadjustment, where--if you look at the 
FICO scores for home mortgages, the averages have gotten very 
high. There are a lot of not very risky potential borrowers who 
are having access-to-credit issues.
    Some of that requires a clarification of some of the 
policies put in place. It is why some of the agencies have been 
addressing the issues like put-back risk.
    Now, why am I answering a question about small-business 
lending with housing issues? I think we all know, for a lot of 
small businesses, the pathway to credit, in part, is through 
their personal home equity, their home mortgages.
    Ms. Velazquez. Sure.
    Secretary Lew. So the two are related.
    We have done a lot through our programs to reach out, both 
through the SBA and through programs we at Treasury run, to 
make credit available to small businesses. We work with the 
community banks and local lenders to encourage that lending. I 
think it is an important question.
    I do think, as we come out of the--through the financial 
crisis into a period of calmer macroeconomic circumstances, 
that is an important time for more lending activity to be 
appropriate.
    The question isn't, do financial institutions have no risk, 
but do they take reasonable risks, and are they not overly 
leveraged?
    Ms. Velazquez. Thank you.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentleman from Missouri, Mr. 
Luetkemeyer, for 5 minutes.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    And good morning, Mr. Lew.
    Secretary Lew. Good morning.
    Mr. Luetkemeyer. I was kind of taken aback by your report. 
This morning in the Washington Times, there is a report that 
CBO put out, I think yesterday. I don't know if you have seen 
the article yet with regards to--
    Secretary Lew. I haven't seen the article. I know the 
report.
    Mr. Luetkemeyer. Okay. Thank you.
    And they make the comment here that--the headline is, ``CBO 
Warns of Financial Death Spiral from Debt.'' The first line 
says, ``Rising Federal debt threatens to choke off economic 
growth in a decade, beginning a death spiral that will sap 
revenue from government programs even as demand grows, forcing 
the government to borrow even more.''
    And one of the things--in your testimony here, your second 
paragraph, the first line says, ``The Council was created to 
identify and respond to vulnerabilities in the U.S. financial 
system and provide a mechanism for agencies to talk to each 
other and take collective responsibility for addressing 
potential threats to financial stability.''
    And yet, in your report, I don't see anything about debt. 
Am I missing something?
    Secretary Lew. Congressman, I think if you look at the 
risks to our economy from Federal spending and debt, we are in 
a much better position now than we were 6\1/2\ years ago. We 
have reduced the deficit as a percentage of GDP and in dollars 
at a historically quick rate. And that very report makes clear 
that over the next 10 years, we are in a pretty stable place.
    I think the thing in that report that people are concerned 
about is the long term. And, obviously, there are still--
    Mr. Luetkemeyer. That is not what it says, Mr. Secretary. 
That is not what it says here. It says the long-term outlook 
for the Federal budget has worsened dramatically--
    Secretary Lew. No, I said over the next 10 years. That 
report goes out far longer than 10 years. And I think that the 
issue of--
    Mr. Luetkemeyer. So we have just a little blip in the 
screen here--
    Secretary Lew. No.
    Mr. Luetkemeyer. --and then we go back a little lower part 
of the curve, and then we go back up again?
    Secretary Lew. I think if you look at where we were in 
2008-2009, we were careening towards a very treacherous place. 
We have stabilized it, and it is improving. We still have long-
term challenges, and--
    Mr. Luetkemeyer. Mr. Secretary, if you just quote the 
President and use his analogy of a car in a ditch, we are not 
out of the ditch yet, we are still trying to struggle to get 
out of there. We are bumping along here with an annual growth 
rate of what? Less than 2 percent, 1 percent, something like 
that, of our GDP?
    And here CBO says--and the point I am trying to make is, 
CBO points out the debt is a problem for our economy, and yet 
your report does nothing, says nothing about it. And you are 
supposed to be an agency that points out these problems.
    My question is, why did you not point out that debt is a 
problem for our economy?
    Secretary Lew. Our report appropriately looks at the 
threats to financial stability, and--
    Mr. Luetkemeyer. So you don't consider it a threat?
    Secretary Lew. I think that if you look at where we are 
today versus 6 years ago, the Federal deficit has been brought 
under control for the next decade.
    Mr. Luetkemeyer. Yes, but part of--
    Secretary Lew. We are in a period where we need to get the 
economy growing; I totally agree with you. Our conversation 
should be about what can we do to grow the economy.
    And we know there are things we could do. We could have an 
infrastructure program in place. We could have immigration 
reform. There are lots of things we could do to grow our 
economy.
    I don't think, right now, the debt 20, 30 years from now is 
the thing that is holding our economy back.
    Mr. Luetkemeyer. I think you have missed the boat, quite 
frankly. CBO points it out. There is nothing in here. I think 
we are missing the boat. We have dropped the ball on this.
    Next question. One of the concerns I have, as the chairman 
of the Housing and Insurance Subcommittee is that we have a 
situation where we have designated some insurance companies as 
SIFIs. And one of the things is, that is fine if you feel there 
is that much risk there. We have asked before, quite frankly, 
to give us the criteria on which you based your analysis, and 
we have never gotten it. We had an Under Secretary who was here 
not too long ago who actually did a very good job of getting me 
the analysis on this.
    But I think part of your job, also, is to figure out how to 
de-risk things. You pointed out there is a problem. Okay, how 
do we get the problem solved? And I think that is also what is 
in your report. In your first line here, it talks about 
addressing potential risks to find ways to get back to 
financial stability.
    So how do we de-risk your--do we have criteria in place yet 
to de-risk a SIFI, an insurance SIFI?
    Secretary Lew. The analysis that led to firms being 
designated is laid out clearly in the record that is quite 
public. And I think each of the firms understands why they were 
designated.
    The question of how they--you are really asking how could 
they exit, because de-risking would mean they would no longer 
be.
    Mr. Luetkemeyer. Right.
    Secretary Lew. We have made clear that we are going to 
review regularly, annually, the status of the firms. We have 
done that with the firms that have been designated. And--
    Mr. Luetkemeyer. Okay.
    Secretary Lew. --if a firm changes its business model and 
has less risk, it would no longer be designated.
    Mr. Luetkemeyer. I see my time is up. I will yield back. 
Thank you, Mr. Chairman.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from New York, Mr. 
Meeks.
    Mr. Meeks. Thank you, Mr. Chairman.
    Mr. Secretary, I want to go somewhere else, but I just have 
to say, I think, from what you were talking about, how we are 
better off than we were 6 years ago--and I wish my colleagues 
had talked about the person, and when they had the opportunity 
to stop the person who drove the car into the ditch in the 
first place, that caused us to have this debt and all this 
problem. So then when someone else comes along and says, okay, 
I am going to help you get out of this ditch that I didn't 
drive you in--but I am going to get you out of the ditch now. 
And you start pushing them to get them out of the ditch. Now, 
you might not be going 100 miles an hour yet. You are going 
maybe 50 miles an hour. But now you are no longer in that 
ditch. You are out the ditch, and you are moving in the right 
direction.
    But yet you want to blame the person who is getting you out 
of the ditch instead of the one who put you in the ditch in the 
first place. And that is where we are today. We were in a ditch 
in 2008, and now we are driving ourselves out of the ditch. 
That is where we are today.
    Let me go to where I really want to go to, Mr. Secretary, 
dealing with asset management. That is what I have been looking 
at, dealing with FSOC and the work-around, the asset management 
and that industry. And I know they don't assume all of the risk 
as banks, that we look at them differently.
    But I did see in one of the reports, however--and I am 
concerned about herding. I think that was in an FSOC report, or 
OFR, et cetera. And we have a lot of investments there. Should 
we be concerned about this process of herding?
    Secretary Lew. Congressman, I think that, obviously, asset 
management has grown as a sector, and there are a lot of 
individual and institutional assets there. We have been looking 
carefully at this question for some time. The risks are not 
necessarily just firm-specific. That is one of the reasons that 
we are looking across the industry at activities to ask, are 
there activities that are particularly risky?
    We have not reached a conclusion. I am reluctant to give a 
view until we have reached a conclusion. Because, frankly, we 
have entered the process, as have regulators around the world, 
trying to understand and learn about a growing and somewhat new 
industry. We have identified that as a question. I can't 
prejudge what the answer is.
    What I can tell you is that it is important that we 
complete the process and that it be driven by facts and by 
analysis. And if there is action that needs to be taken, the 
appropriate regulatory body should do so.
    I think the notion that you cut these questions off because 
you think you might not like the answer or because you think 
you know the answer is exactly what got us into trouble in 2007 
and 2008. We have to be willing to ask the questions and, even 
if the answers end up being hard, follow them to a logical 
analytic conclusion. I think that is what FSOC is doing, and I 
look forward to that process being completed.
    Mr. Meeks. So let me ask--and I know on some municipal 
levels and State levels where we have multibillion-dollar 
pension plans that have tried to benefit from a greater 
diversification of asset management by using more emerging and 
diverse asset managers, which are generally smaller asset 
managers. And some are minorities and women who have selective 
investment strategies. However, I am finding that these small 
managers face real barriers that prevent them from gaining more 
market shares.
    Has the Treasury or FSOC looked into how we can get more 
diversification of managers in this industry?
    Secretary Lew. I don't know that FSOC has looked at it. As 
Treasury Secretary, I have looked at it. And I think that if 
you look at the performance of the smaller and minority-owned 
managers, there is not a huge difference. Some are successful, 
some are not. The same is true with the large managers. Some 
are successful, some are not. Some have good years, some have 
bad years.
    I think one of the problems is that there is a tendency to 
bulk things up because it easier to deal with a few rather than 
a lot of managers, and we need to push back on that. We need to 
make it clear that the door has to be open to new participants 
in this space.
    And we have tried through a number of things we have done 
to have that be the approach, both in terms of how we have 
managed some things within Treasury and through other 
intergovernmental efforts we have had. I think we are making 
progress, but there is more progress that needs to be made.
    Mr. Meeks. Okay. Because as these asset managers get bigger 
and bigger, they play more and more of an important role in the 
sourcing of capital to businesses that create jobs in various 
communities. And so, that is one of the reasons why with banks 
we had to go to the Community Reinvestment Act in the 1970s.
    So don't you think we should be looking into some policy 
that can ensure that we have more inclusion in the asset 
management industry so that we can also make sure that they are 
investing or reinvesting in some of our other communities?
    Secretary Lew. I think it is important for there to be 
broad participation and for the process to be open. I don't 
know that I would think you should have, kind of, mandatory 
targets. But I would be happy to follow up with you. And it is 
a matter I have a great deal of interest in and would like--
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Michigan, Mr. 
Huizenga, chairman of our Monetary Policy and Trade 
Subcommittee.
    Mr. Huizenga. Right over here, Secretary Lew.
    Secretary Lew. Everybody has moved around. I don't know 
where to look.
    Mr. Huizenga. Sorry about that.
    So, unfortunately, I have 5 minutes, not 15 minutes, so I 
am going to try and quickly and respectfully move through a 
number of things.
    I, too, received the email at 11:18 last night and the 
answer to my questions on a few things from 3 months ago.
    Congratulations. You were actually very clear on one of my 
questions regarding financial services trade negotiations. I 
asked for you to explain why Treasury continues to oppose 
including financial regulatory matters in TTIP. This is the 
most clear answer that I think I am aware of and I think the 
committee has seen. You say TTIP is not, however, an 
appropriate or necessary vehicle for addressing financial 
regulatory cooperation. You claim that it is already happening 
at the Financial Stability Board, international standards-
setting bodies, and a number of others.
    I disagree with the answer. I think it should be included. 
But I appreciate your clarity. However, it does lead me to 
another question, which has to do with local storage data 
requirements that many in Europe are starting to push.
    And it is my understanding that the Administration has 
highlighted the free flow of information across the digital 
world as sort of a centerpiece of the negotiations for both TPP 
and TTIP, which is, again, a provision I fully support. I am 
confused as to what that difference without a distinction might 
be, as to why you are going to be doing that, since it is--it 
makes a tremendous amount of sense to have us negotiate with 
our partners in this if it is bad for American business. But, 
again, you exclude financial services.
    And I am curious, is it the Administration's position that 
we are seeking to prohibit local storage requirements for 
everything except for financial services?
    Secretary Lew. No. We have been very firm on the issue of 
putting nontariff barriers in place where you have a local 
storage requirement for electronic data.
    I think the distinction is easy to make, and I have tried 
to be clear in this committee before. We view prudential 
regulation as something that ought not to be brought under 
trade negotiation or a trade process. And that is the 
difference. It is not prudential regulation to say that there 
shouldn't be a nontariff barrier--
    Mr. Huizenga. So you are willing to have the financial 
services sector treated differently than any other sector of 
the U.S economy in the trade negotiation?
    Secretary Lew. In general, trade agreements do not bring 
prudential matters or--
    Mr. Huizenga. We have the Europeans--
    Secretary Lew. We said ``no'' to the Europeans on this.
    Mr. Huizenga. Yes, the Europeans would like to do it. And 
it seems very odd and, I think, a huge mistake.
    Secondly, I do want to quickly move on to the IMF and 
Greece. Would you agree or acknowledge that the decision to 
bend the rules, shall we say, if not ignore the rules regarding 
Greece on the exceptional access framework, which was done with 
Treasury's concurrence, was a mistake?
    Secretary Lew. I think that the actions taken in 2010, 2012 
to avoid an economic crisis in Greece were the right thing for 
the IMF and the right thing--
    Mr. Huizenga. So it was not a mistake?
    Secretary Lew. --for the United States.
    Mr. Huizenga. Okay. But just so I am clear, it wasn't a 
mistake?
    Secretary Lew. At the time, Greece said--
    Mr. Huizenga. Okay. So now, looking back, do you think it 
was a mistake?
    Secretary Lew. No. And if I could just take--
    Mr. Huizenga. I will take ``no'' as your answer. That is 
fine. Because there is a discussion of putting those rules back 
in place at the IMF. That is something that the IMF board is 
interested in. And I am curious why the Administration, from my 
understanding, is opposed to that. Why?
    Secretary Lew. So, look, I think that there are occasions 
when it would be important for the IMF to have flexibility--
    Mr. Huizenga. So the rest of the IMF board, excluding us, 
wants to put those rules back in place because they believe 
that what happened with Greece was a mistake . But you--
    Secretary Lew. I think that is not exactly where the 
conversation in the IMF is. There is a serious conversation--
    Mr. Huizenga. I have had a number of conversations with 
folks from the IMF and involved with the IMF, and I am not sure 
that is an accurate portrayal--
    Secretary Lew. Congressman, there is a range of issues, and 
I think it is important to distinguish them. There is the 
exceptional access issue itself, and there is a question of how 
to proceed into a new world of debt reprofiling. We have tried 
to--
    Mr. Huizenga. We also have the temporary new arrangements 
to borrow. And I know that the Administration has been trying 
to use that as a reason to not necessarily go into IMF quota 
reform. But it seems to me, if we are not going to address this 
exceptional access framework--
    Secretary Lew. Congressman, if I could just take--I know 
you are running out of time, but if I could take half a minute 
to respond--
    Mr. Huizenga. I am happy to take a private meeting later 
about this, but--
    Secretary Lew. I would be delighted to--
    Mr. Huizenga. --we can only get you up here twice a year, 
so--
    Secretary Lew. This is a hugely important issue. Obviously, 
quota reform is critical to the U.S. place in the world, and we 
are working very hard to get quota reform enacted.
    I think exceptional access has serious questions. I have 
never pushed back on the kinds of questions you are asking, and 
I am open to a serious conversation about it. I think, looking 
forward, finding a way for the IMF to avoid having to use tools 
like that is in all of our interests, and I would be happy to 
have a conversation.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Massachusetts, 
Mr. Capuano.
    Mr. Capuano. Thank you, Mr. Chairman.
    Hello, Mr. Secretary. How are you doing?
    Secretary Lew. I am fine.
    Mr. Capuano. Are you familiar with Major League Baseball?
    Secretary Lew. I have heard of it.
    Mr. Capuano. Are you familiar with the team called the 
Boston Red Sox?
    Secretary Lew. I have.
    Mr. Capuano. So you purport to be an expert in baseball. 
Mr. Secretary, can you tell me what is wrong with the Red Sox 
right now?
    Secretary Lew. That is a long--
    Mr. Capuano. No. Then you refuse to answer that question. I 
need to know, is it the pitching? Is it the fielding? Is it the 
hitting? Come on, Mr. Secretary, answer the question.
    Secretary Lew. I am--
    Mr. Capuano. I can't believe you refuse.
    If you won't answer that question, can you answer me why 
the Republican baseball team can't seem to beat the Democrats? 
Come on, Mr. Secretary, answer the question. You have plenty of 
time.
    Oh, well, okay, if you refuse to answer the question, I 
guess I will have to move on to some other areas. Because I 
just wanted to show that I guess badgering is not the exclusive 
realm of some of my colleagues. We can badger, too. But it 
doesn't produce much. So--
    Secretary Lew. As a Mets fan, I am showing great self-
control, though.
    Mr. Capuano. Mr. Secretary, for everybody's sake, in your 
next FSOC report, can you put a chapter in there on debt? You 
have a great story to tell. I think my colleagues actually 
raise a good point. Debt, in theory, could be a risk to the 
economy, and you have a good story to tell. It would satisfy 
everyone, including me.
    Secretary Lew. I understand. And, look, we could discuss it 
and say why we don't think it is a risk. The report focuses on 
the things that we think are risks.
    Mr. Capuano. But I--
    Secretary Lew. It is a fair point.
    Mr. Capuano. Yes. Just, if you do it the next time, at 
least you take one of their arguing points away and you make 
some good points.
    Secretary Lew. Yes.
    Mr. Capuano. And I think it is a fair thing to discuss.
    With that, I am going to move on to a couple of things that 
are not directly related to FSOC but indirectly related to it.
    First of all, I would like to talk about Fannie and 
Freddie. Have Fannie and Freddie paid back every penny of the 
money that they borrowed from the American taxpayers?
    Secretary Lew. They have, I believe, just--
    Mr. Capuano. The answer is ``yes.''
    Secretary Lew. I believe the answer is ``yes,'' but--
    Mr. Capuano. I know it is. I am asking a question I know 
the answer to.
    And, by the way, haven't they also paid back billions upon 
billions of dollars above what they borrowed?
    Secretary Lew. Yes. I think I understand where you are 
going, Congressman.
    Mr. Capuano. I hope so.
    Secretary Lew. And I think what they have not done is they 
have not removed from the Federal Government, the Federal 
taxpayer, the risk that goes with those institutions having the 
backing of a Federal backstop.
    Mr. Capuano. I understand that. But the money that they are 
paying now above and beyond the money they borrowed, where does 
that money go?
    Secretary Lew. It goes to the Treasury.
    Chairman Hensarling. It goes to the general Treasury. So, 
basically, homeowners who have a mortgage--
    Secretary Lew. And so does the risk--the support that goes 
behind the risk--
    Mr. Capuano. I supported all that. I am not--I totally 
agree with everything that was done up until they paid back 
their loans.
    Secretary Lew. Yes.
    Mr. Capuano. My problem is they paid it back, they are 
stable, they are heading in the right direction, and it is time 
to get back to more business as usual. Because, like everybody 
else, I want to keep homeowners keeping their own money, to the 
best of our ability. Yes, there are interest rates, and, yes, 
there is some risk. But their dollar-for-dollar risk--right now 
they are simply contributing to the Federal Reserve--to the 
general Treasury account, and that doesn't seem fair to me.
    It strikes me that if we are going to have a general 
Treasury account, either we should tell people we are charging 
you extra because you have a service or we are increasing your 
taxes--neither one of which, it seems to me, is fair. But, in 
this case, you are charging them through their mortgage for 
something that is unnecessary at this point in time.
    Secretary Lew. Yes. That is not the way I look at it. I 
see--the GSEs are still in conservatorship, which means the 
Federal taxpayer is directly standing behind them if they fail 
in the future.
    Mr. Capuano. They have done that from day one, and you 
weren't--
    Secretary Lew. Well, no. From day one, there was an actual 
denial that there was a backstop. It is now clear there is a 
backstop.
    Mr. Capuano. Who denied that?
    Secretary Lew. It was in law.
    Mr. Capuano. I would respectfully and strongly disagree, 
and I think facts pointed out that I was right.
    Secretary Lew. No. I think that we have seen over the last 
several years the estimates of the potential risk of a problem 
in the GSEs is still quite large. So--
    Mr. Capuano. I understand. But if the money were going to a 
separate account to sit there and build up some kind of capital 
reserve, I think you would have a fair argument.
    Secretary Lew. But the liability is borne generally.
    Mr. Capuano. But the money going into the general Treasury 
doesn't bear up, in my estimation.
    Secretary Lew. The liability is borne generally, yes.
    Mr. Capuano. Number one, they deserve their money back now 
that they are stable. Number two, homeowners deserve lower 
interest rates unless they are being told what the money is 
used for. And right now some of their money is being used to 
support something other than Fannie and Freddie. So I guess we 
will have to disagree on that.
    And I guess with the last few seconds, I wanted to follow 
up with something that I brought up with Mr. McRaith, who I 
think is also doing a great job. However, it strikes me that 
FIO and possibly FSOC is pursuing a backdoor way to take over 
regulation of U.S. insurance companies via international 
agreement.
    Now, that may be a little overstatement, and I am not a 
``black helicopter'' guy, I kind of overstated it to make the 
point. But it certainly strikes me that some of the agreements 
we are about to make with some our international friends may be 
pushing a little too far.
    With that, I will have to yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Wisconsin, Mr. 
Duffy, chairman of our Oversight and Investigations 
Subcommittee.
    Mr. Duffy. Thank you, Mr. Chairman.
    Welcome, Mr. Lew. Obviously, you are the Treasury 
Secretary, not the coach of the Red Sox, and therefore we are 
not going to ask you questions about their failings. We would 
note that they are doing better than the Brewers, which says a 
lot about the Brewers.
    But if you were the coach, we would expect you to answer 
the questions that we have about baseball. And when we asked 
questions, we would hope that you wouldn't give us answers 
about the history of baseball and how it came to be and you 
could talk about the history of Fenway. But you would actually 
answer the question of what is wrong with the Red Sox.
    You had a lot of questions today about the liquidity in the 
bond market. And I think the chairman brought out, is this 
related to Volcker or other rules and regulations that have 
caused banks and traditional market makers to leave the space.
    And I want to give you a chance to answer that question. Is 
this something that you are looking at? Do you think the rules 
and regulations that have come since the crisis have had any 
part in the lack of liquidity in the bond market?
    Secretary Lew. Congressman, I think that to answer the 
question fully would take quite a long time, because it is a 
very complicated issue.
    Mr. Duffy. The Red Sox are complicated too.
    Secretary Lew. And I had tried to indicate that we are open 
to looking at any of the possible costs.
    Mr. Duffy. This is not a ``gotcha'' game at all. You 
identify risk in the markets, right? That is your job. And you 
do come in, and you talked about cyber, and you talked about 
other things that are very complicated, that we can't wrap our 
heads around, but you tell us where you see those risks.
    And so it is a very simple question, because a lot of the 
commentators will say: Listen, it is complicated. There are a 
lot of reasons why there is a lack of liquidity in the bond 
market. But they will unanimously point out that one of the 
causes could be the new regulatory regime and its impact.
    The commentators can talk about this, but you are not 
willing to answer that question today?
    Secretary Lew. In fairness, Congressman, I am offering a 
much more detailed answer than the commentators. Most of the 
commentators that I have heard, with some self-interest, have 
jumped to one explanation.
    Mr. Duffy. You do this really well. So I ask you about 
liquidity in the bond market, and I mention commentators, then 
you will start to talk to me about commentators and the history 
of commentating and the articles that are written.
    Listen, are you unwilling to answer this question because 
the do-gooders who are looking for risk are actually the ones 
who are potentially creating the risk in the market? And so, if 
you tell us, yes, this could be a cause of the lack of 
liquidity in the bond market, you have to look at yourself. You 
have to look at the regulatory regime that has taken place 
since the financial crisis, and you don't want to admit that 
today.
    That is not badgering. I think that is a fair question. And 
to say that it is too complicated to answer, I don't understand 
that, Mr. Lew. Give us a straight-up shot. What is it? Yes or 
no?
    Secretary Lew. I think that if you look at the many factors 
that are at work right now that are having an impact on 
liquidity, it is not my view that financial regulation is the 
principal thing that requires our attention. I have not said we 
shouldn't look at it, and I think these other factors are very 
clear.
    Mr. Duffy. I don't know whether you were a tap dancer when 
you were young. I didn't ask if it was the principal. This goes 
back to what the chairman was saying. You are playing with 
words. Is it a contributing factor, which goes back to the 
point the chairman made, is it a contributing factor, the rules 
and regulations? Are you looking at that? Is it a contributing 
factor? Not the main factor, not the only factor, but a 
contributing factor? Yes or no?
    Secretary Lew. If you look at liquidity, you have to look 
at different parts of the market.
    Mr. Duffy. I know. I know.
    Secretary Lew. And if you are looking at Treasuries, it is 
different than if you are looking at high-risk bonds.
    Mr. Duffy. I am going to ask you a yes-or-no question. Are 
you looking at FSOC, yes or no, at whether the rules and 
regulations are having some impact on the lack of liquidity in 
the bond market?
    Secretary Lew. We are looking at all of the factors that 
could contribute.
    Mr. Duffy. So you are looking at that?
    Secretary Lew. We are looking at all of the factors that 
could contribute.
    Mr. Duffy. So this is one?
    Secretary Lew. I am saying that as Secretary of the 
Treasury, it is something that many of the members of FSOC in 
their own agencies are looking at as well.
    Mr. Duffy. Mr. Lew, this isn't complicated stuff. We ask 
you simple questions and I think we are entitled to get 
straight answers from you. And I think if you think, listen, 
the rules and regulations that come have no impact, the 
commentators are wrong, banks and market makers have left the 
space, but that has no direct correlation with the lack of 
liquidity, tell us that.
    Secretary Lew. Congressman, I think that the financial 
reform has made our system safer and sounder than it was. We 
have a stronger economy because of it. Liquidity is still deep.
    Mr. Duffy. Is it creating a risk too?
    Secretary Lew. And I think that when we look at the issues 
related to liquidity, we should look at all potential factors. 
I identified the things that I am aware of.
    Mr. Duffy. One quick question: Do you support TPA like the 
President?
    Secretary Lew. I do, very strongly.
    Mr. Duffy. Duly noted.
    I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlelady from New York, Mrs. 
Maloney.
    Mrs. Maloney. Thank you so much, Mr. Chairman.
    And I am very pleased to welcome one of the favorite sons 
of the great City of New York. It is very good to see you.
    Secretary Lew. Thank you.
    Mrs. Maloney. And I regret I had to chair another meeting 
and I just got here. But I want to follow up with something 
that was raised by Ranking Member Waters earlier. And while my 
good friends on the other side of the aisle have criticized 
FSOC for not being responsive to their document request, I 
would like to point out that FSOC did make 1,400 pages of 
confidential documents available to this committee. And my 
staff and I believe the staffs of many other Members on this 
side of the aisle have been over there to Treasury and reviewed 
these documents.
    And these were confidential documents laying out the 
detailed reasoning behind the FSOC's decision to designate 
individual companies as systemically important, which was 
exactly what the Majority asked for. So I think supplying 1,400 
documents for review is being responsive, and I just want to 
make that very clear.
    Now, I would like to ask you, Mr. Secretary, you said 
earlier that the issue of bond market liquidity is a legitimate 
one, but we should be very careful about assessing the causes 
of the lack of liquidity. And I agree with you. I don't think 
we have any definitive answers yet, but I think it is an 
incredibly important issue.
    I think it is also important to focus on potential problems 
in the Treasury market rather than other markets, because the 
Treasury market is a $12 trillion market that determines the 
borrowing costs in so many other key markets as well.
    You mentioned the huge swing in the Treasury market on 
October 15th of last year and said there was no evidence of a 
breakdown in the market that day. And I agree with you. On 
October 15th, trading was continuous and trading volume was 
heavy. So was it really a lack of liquidity driving the wild 
price swings or was it something else?
    Can you give us some more context for what the FSOC has 
found so far as it has looked into this issue?
    Secretary Lew. Thank you, Congresswoman.
    We have worked at Treasury, together with other agencies 
that look at the market carefully, and tried to follow the 
transactions that day to understand what actually happened. And 
there was a huge amount of volume, and there was this 15-minute 
period when there was a price spike. But there was not a 
breakdown in the market. It is something we have to ask what 
happened then and what do we learn from it going forward.
    There was a huge amount of electronic trading going on. 
Market structure has evolved, and one of the things with 
technology is you never go back. So we have to deal with the 
reality. And there are many positive things about electronic 
trading, so I don't say that critical of the development of 
electronic trading. But that changes the structure of a market.
    We are looking at that. I can't sit here today and say I 
have a clear answer. We are hoping over the course of the next 
few weeks to complete our analysis so that we can offer a more 
definitive view.
    But what I was trying to say before is that there was a 
desire to jump to a conclusion that somehow financial reform 
caused October 15th. We see no link between financial reform 
and what happened on October 15th. Maybe others will find it. 
But it is why we have to be so careful when we ask these 
questions about liquidity to treat a very complicated issue the 
way it should be treated.
    I have not ruled out looking at any of the contributory 
possibilities from any policy area or market condition. But we 
also ought not to jump to a conclusion, which many did very 
quickly in a way that I can understand why they did, but it 
doesn't mean it is right.
    And the Treasury market remains the deepest and most liquid 
in the world. There are other areas of the market where there 
are some questions about liquidity that are quite legitimate, 
where they are not electronically traded, so that is different, 
where the huge volume of corporate bond issuances raises some 
questions about would there be a good liquid market if there 
were a very stressed day. We are looking at all those 
questions. We take them very seriously.
    One of the things, you have to separate the different kinds 
of liquidity, because if it is a question of institutions 
keeping high-risk proprietary investments on their balance 
sheet or not, that is not something we should go back to. We 
have a system that is safer and sounder because we have moved 
away from that.
    Mrs. Maloney. Thank you. I look forward to your report, and 
I hope you will personally brief Members of Congress.
    Secretary Lew. I would look forward to it.
    Mrs. Maloney. I think it is critically important.
    And my time has expired. Thank you very much.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentleman from Pennsylvania, 
Mr. Fitzpatrick, chairman of our Task Force to Investigate 
Terrorism Financing.
    Mr. Fitzpatrick. Thank you, Mr. Chairman.
    And thank you, Mr. Secretary, for your time here.
    We have had a couple of hearings of the Task Force to 
Investigate Terrorism Financing. And I have a series of 
questions here, which I would like to sort of make part of the 
record rather than go through them today and ask that the 
Secretary give us a timely response.
    Secretary Lew. Sure. I would be happy to respond.
    Mr. Fitzpatrick. I will submit them to the Chair.
    I actually wanted to follow up on some questions and your 
quick responses from my friend, Mr. Capuano of Massachusetts, 
with respect to the national debt.
    It was being referred to as the national debt, which is not 
in the FSOC report, it is not even identified, that, number 
one, the national debt is a good story, it is a good story to 
tell about the national debt, and, number two, it is not a 
threat to our economy. And I think that you answered both in 
the affirmative. Do you agree with that?
    Secretary Lew. Again, it is a complicated question. I was 
OMB Director 3 years with a surplus. I believe in having a 
fiscal policy that lasts for the long, long term. I think if 
you look at what we inherited, the stability that we now have 
is a world of improvement, and there is still work to do 30, 40 
years from now.
    Mr. Fitzpatrick. But, Mr. Secretary, the question is the 
debt itself, which in 2008 President Obama referred to as a $10 
trillion national debt is unpatriotic and immoral. Today, there 
is a debt clock, it is right above us at the hearing, $18 
trillion, $159 billion--it is going up a million dollars a 
minute.
    Secretary Lew. It has come down.
    Mr. Fitzpatrick. Is it a good story?
    Secretary Lew. It is a good story. The deficit has come 
down as a percentage of GDP faster than at any other point.
    Mr. Fitzpatrick. That deficit started coming down, there 
was a new Administration, a new Speaker who took office in 
January of 2011, and because of fiscal restraint, restraint of 
Federal spending and growth of the economy, the annual 
operating deficit is coming down. But it is not zero yet and 
the national debt continues to rise. Is that a good story?
    Secretary Lew. I don't think it would be good for our 
economy if we were to have a balanced budget today. Right now, 
we have an economy which many of you have said isn't growing 
fast enough. We need to continue to look at keeping the economy 
growing and keeping an eye on the long term. Having a stable 
fiscal posture for 10 years is huge progress.
    Mr. Fitzpatrick. Mr. Secretary, a couple of years ago the 
then-Chairman of the Joint Chiefs of Staff described the 
national debt as the greatest threat to our national security. 
Is an $18 trillion debt a threat to our national economy?
    Secretary Lew. At the time, our deficit was in double 
digits. It is now coming below 3 percent of GDP.
    Mr. Fitzpatrick. I am not asking about the annual operating 
deficit. I am asking about the national debt.
    Secretary Lew. The debt as a percentage of GDP has 
stabilized for this period of time. We have made enormous 
progress. It was climbing and it is has stabilized.
    Mr. Fitzpatrick. Mr. Secretary, last month you referred to 
a proposed amendment to combat currency manipulation in the 
Trans-Pacific Partnership as a poison pill. But also last 
month, the President said he was opening new efforts to combat 
currency manipulation abroad.
    Can you describe what efforts or what ideas the 
Administration might have, what the role of the Treasury would 
be, and whether you think they could be effective?
    Secretary Lew. Sure. The President and I personally take 
this extremely seriously. We put in enormous effort through our 
multilateral and bilateral engagements to use the tools we 
have. And we have had considerable success. We have helped push 
China into a different policy and Japan into a different 
policy. So I think we are using the tools, and we are using the 
tools well.
    In the trade legislation that is moving through Congress, 
there are additional tools. One is that there is a negotiating 
instruction that says in TPP currency issues are a high 
priority. And we are working with our TPP negotiating partners 
to arrive at agreements that will give us more visibility and 
more ability to use the consultative process and the public 
disclosure to get them to do the right thing.
    Mr. Fitzpatrick. But can you identify the ideas the 
Administration was referring to last month?
    Secretary Lew. And then I was going to say there is an 
amendment that we support that Senator Hatch and Senator Bennet 
put in, in the Senate, which puts new tools in place, which 
requires that we do an evaluation based on objective criteria 
as to whether or not countries are violating what we would 
consider fair currency practices. If they are in violation, it 
puts us in a position where there are several new tools, 
including not being able to be in trade negotiations with 
countries that are violating. So I think we have important new 
tools in the trade law.
    Mr. Fitzpatrick. I want to get a question on Treasury's 
budget. The President identifies the budget as a compilation of 
our Nation's priorities. FinCEN and the Office of Terrorism and 
Financial Intelligence (OTFI) have been relatively flat-funded. 
Congress has met, probably even exceeded the President's 
request, specifically on FinCEN. I want to say that the 
organizations within the Department of the Treasury do an 
outstanding job with the resources that they have.
    Secretary Lew. Thank you.
    Mr. Fitzpatrick. But we see terror growing, the challenges 
globally every single day, new organizations coming to light 
every single month. What can you tell us about--
    Secretary Lew. Congressman, I couldn't be prouder of our 
offices that work on threats.
    Mr. Fitzpatrick. Do they have sufficient resources?
    Secretary Lew. They do have sufficient resources, and they 
punch way above their weight. But if we thought we needed more 
resources to do the job, we would ask for them.
    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.
    First of all, I think you are doing a great job, Mr. 
Secretary. And I know we had a disagreement last week on TPA, 
but never in my time knowing you have I ever heard you address 
Congress or the American people with disdain. That is something 
not in your makeup or character.
    Secretary Lew. Reverence would be more like it.
    Mr. Lynch. That is right. And a desire to serve. So I 
appreciate that. You are a good man. We don't always agree, but 
I honestly believe you have the best interests of the American 
people at heart, and the Administration is lucky to have you.
    I want to focus on a situation here. When a bank is 
convicted of a felony or a bank pleads guilty to a felony, we 
have laws in place. Congress has put forth some laws that say, 
when they are guilty of these crimes, we remove some privileges 
that they have.
    One of those privileges that they have is that of a well-
known seasoned issuer (WKSI). And so we had a recent bout of 
guilty pleas by big banks, both in connection with LIBOR and 
also with the FX manipulation of dollar-euro exchange rates.
    Normally those banks should be penalized by removing that 
WKSI designation, which allows them off-the-shelf registration 
and other privileges. But what has happened is that--I believe 
Labor Secretary Perez is the one who grants these waivers--I 
will give you a for-instance. In the latest round of SEC 
waivers, Barclays just received their third WKSI waiver since 
2007. Citigroup has triggered a disqualification 5 times in the 
last 9 years, and every single time we give them a waiver. We 
don't penalize them. So there is no difference in how they 
operate, because we give them a waiver after they plead guilty.
    UBS just received a seventh WKSI waiver since 2008. So they 
broke the law, criminal conviction, all pled guilty. JPMorgan 
Chase received its sixth WKSI waiver since 2008. And the Royal 
Bank of Scotland received its third WKSI waiver since 2013.
    And UBS, going back to UBS, their last WKSI waiver occurred 
while they were still under a nonprosecution agreement from 
LIBOR. So they immediately failed.
    So the penalties that Congress has put in place don't 
happen because the SEC has given them waivers. And I am just 
wondering if giving these waivers continually and not punishing 
these banks is a moral hazard, is causing them to behave just 
as they always have been, because it seems that way to me.
    Secretary Lew. Congressman, let me start by saying I think 
we have made clear as an Administration that no individual and 
no firm is above the law, and we will prosecute and we will 
enforce regardless of who has broken the law.
    Secondly, the violations of law that are behind these 
actions are very serious. They get to the heart of the 
integrity of our system, things like tax fraud, things like 
terrorist financing facilitation.
    I think that if you look at the prosecutions, if you look 
at the settlements, the numbers have been very large, and there 
is no question but that firms are being held accountable.
    Mr. Lynch. But the penalty falls on the shareholders. The 
penalty doesn't go to any of the individuals who were involved 
here, and these banks continue to operate. Yes, you are right, 
there was $2.5 billion in fines, but they just keep on doing 
what they have been doing. And I have people in my district who 
are convicted of far smaller crimes, and they do serious time.
    Is there another set of penalties that we could put in 
there that you would actually agree to enforce?
    Secretary Lew. If I could answer your first question, then 
I will come back and answer that last question.
    I think if you look at the approach the prosecutors have 
taken, they have wanted to make sure they could hold 
accountable financial institutions and the individuals in them 
and not have unintended consequences that they can't control.
    Mr. Lynch. But these are intended consequences. That is my 
point. We intended them to be penalized, and they are not.
    Secretary Lew. And I would leave it to the regulators to 
decide the right way to respond. But prosecutors need to know 
that they are not going to create an unintended consequence.
    Mr. Lynch. No, that is not the point here.
    Secretary Lew. I think on your last question, there are a 
lot of things we could look at in terms of what the practices 
within the industry are and how you hold individuals 
accountable that are worthy of consideration.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Texas, Mr. 
Neugebauer, chairman of our Financial Institutions 
Subcommittee.
    Mr. Neugebauer. Thank you, Mr. Chairman.
    Secretary Lew, it is good to have you back. I want to 
refresh your memory a little bit. Back in March, you and I had 
a conversation a little bit about U.S. regional banks and 
whether or not they were a systemic risk. And you and I also 
discussed a little bit, the OFR report in February where they 
used, I think, five of the Basel standards to analyze a number 
of banks.
    And if you recall, that analysis showed that $50 billion 
banks were not a systemic risk. In fact, it went pretty far up 
the asset chain before it reached a point where they felt like 
those financial institutions were a systemic risk. Yet, Dodd-
Frank says that the trigger is $50 billion.
    And so I guess my question to you is, as the Chairman of 
FSOC, is the framework of Basel in conflict with Dodd-Frank?
    Secretary Lew. I don't think it is a question of in 
conflict. The question is, do banks of all size pose the same 
risk and require the same exact treatment? The answer is no. 
And we have been very careful in designing rules to try and 
distinguish different levels of treatment for different firms 
of different size.
    That doesn't mean we have it perfect. There certainly is an 
openness to looking at issues there. But I have to say that the 
debate recently has taken on a kind of odd character. There has 
been discussion of exempting banks of $500 billion or less.
    Do you know how many banks there are that are between $500 
billion and the biggest banks? There are six banks, the largest 
financial institutions in the country and the world. So we have 
to be careful not to ask questions as if a $2 billion bank is 
it like a $50 billion bank, or a $50 billion is it like a $500 
billion bank.
    I would be happy to have this conversation. We are open to 
ideas of how to tier the treatment appropriately.
    Mr. Neugebauer. And I guess that kind of leads me into the 
other discussion that you and I had, and that was about Section 
115. I think one of the things is that when Dodd-Frank was 
passed, it was passed in a pretty hurried manner and not in a 
very transparent manner, but somebody just picked $50 billion. 
But then in Section 115 they said, you know what, you all can 
establish--it gives you the latitude to establish a different 
trigger or trigger mechanism if you choose to.
    And I think, if I go back and look at our conversation, you 
said that you all had not formally looked into it. You 
mentioned that you had informally looked into it. But there is, 
in fact, a process where there can be a formal process where 
Treasury could go through that process and recommend to FSOC to 
change that. And I am a little confused.
    Secretary Lew. There could be a formal process. But I think 
if you look, there are a number of regulators taking a look at 
this issue to see what they can do with their regulatory 
flexibility. And I think it is a question of when you raise it 
to the level of a formal review.
    I will give you an example of the kind of issue that we 
have looked at, the frequency of the examination cycle. There 
is a reasonable case that the frequency should be different for 
a small institution and a very large institution. So there are 
ideas here that could be pursued.
    The fact that it is not a formal Section 115 review doesn't 
mean that people aren't asking these questions. If you look 
within the regulatory bodies, they are looking at them, and we 
are obviously looking across the landscape.
    Mr. Neugebauer. Mr. Secretary, I think it is important to 
get their input, but the truth of the matter is that under 
Section 115, those other regulators do not have that authority. 
Section 115 authority resides in the Secretary of the Treasury, 
and last I checked, that is you.
    I think it is kind of a little confusing here, that we have 
one entity, OFR, using these Basel standards, saying this is 
what the world looks like from a systemic risk standpoint, and 
then we have Dodd-Frank. I think from a banking perspective, it 
is a little confusing as to what standards should be in place. 
And I think it is really kind of time for you to take on that 
leadership role and exercise Section 115 and bring some 
certainty to the marketplace.
    Secretary Lew. I would be happy to continue this 
conversation with you, Congressman. To be clear, OFR expresses 
independent views. It doesn't express the views of the Treasury 
or of FSOC. I am expressing my own views. And they won't always 
be identical. You wouldn't want them to be identical with OFR, 
because OFR was put in place to be an independent institution 
expressing its own analytic view.
    Mr. Neugebauer. I see my time has expired, Mr. Chairman.
    Chairman Hensarling. The gentleman yields back.
    The Chair now recognizes the gentleman from Georgia, Mr. 
Scott.
    Mr. Scott. Thank you, Mr. Chairman.
    Secretary Lew, it is good to have you here. You are doing a 
great job.
    Secretary Lew. Thank you.
    Mr. Scott. I want to keep the conversation for a moment on 
liquidity. It is a very serious issue. I am very concerned 
about it. A number of experts are registering great warnings 
about it. Liquidity, to me, is the key to protecting our 
financial system. It is also the key to being able to ascertain 
potential risks to our system. It sort of like provides us with 
a way to be able to not just look down the road for problems, 
but see them before they turn that corner.
    So I also realize, and I think you would agree, you too are 
concerned about liquidity, correct?
    Secretary Lew. I have said so, yes.
    Mr. Scott. Yes. And so the issue becomes, will this 
liquidity worsen as the economy worsens? And specifically, tell 
me what if there were another crisis? We don't want another 
crisis. After they finished the Depression, they said they 
didn't want another crisis. But as surely as we have a free 
enterprise system, it is free to go up, sideways, down, 
whatever.
    So if we had another crisis, would the financial system, in 
your opinion, have the liquidity to be able to come to the 
assistance of our financial system the way it did in 2008 when 
healthier institutions, it helped us a lot, they had the 
liquidity, they were able to buy up institutions at IndyMac, 
Washington Mutual, Countrywide, and Lehman Brothers, rather 
than the government having to wind them down?
    Secretary Lew. Congressman, I think when we talk about 
liquidity in the markets we are not talking about institutions 
that merge or don't by other institutions or not. I think what 
we are talking about is, is there a market for buying and 
selling bonds in a quick way with stable prices?
    So obviously the capital and the depth of the balance sheet 
of institutions will affect, potentially, both questions. But I 
think they are severable.
    Let me make a couple of comments. One, I think that as we 
came out of the financial crisis, there is undoubtedly going to 
be some more volatility. When I started testifying as Treasury 
Secretary everyone was concerned there was no volatility in the 
market. Now there is a concern that there is volatility in the 
market. It shouldn't be a surprise that as we see a return to a 
more normal economy, there is more volatility.
    I think that the institutions themselves are stronger than 
they were going into the crisis. They have more of a capacity 
to come through a period of economic stress in a healthy way, 
and that is a good thing.
    And I think in our FSOC report, we look at the risks that 
we see to the broad financial system, and we do include 
liquidity on the list, but it is not the single factor that we 
are looking at. And I think it is also going to separate the 
different parts of the market, because Treasuries are very 
different from high-risk bonds.
    Mr. Scott. Let me ask you this other question. I don't have 
much time. But do you believe that there is any link between 
our anemic United States growth rate and the fact that our 
financial institutions have to hold so much capital in reserve 
rather than putting that capital back into the economic system 
to good use?
    Secretary Lew. Congressman, I think that there is a lot of 
money that is on the balance sheet of businesses they don't 
even need to borrow to get access to. And yet, there is a more 
fundamental question, why are they not investing more? I think 
it has to do with a sense of confidence that they are looking 
for that the continued economic growth will be strong.
    Mr. Scott. But do you see a link? Is there a causal--
    Secretary Lew. Yes. I don't think there is a lack of access 
right now to capital that is the problem. I focused earlier on 
things like housing and small business, because I think that is 
where the questions are real as to whether individuals or small 
businesses are having trouble accessing capital. Large firms 
right now are not having trouble accessing capital.
    Mr. Scott. Do you feel that these companies should have to 
hold as much capital in reserve as they are, and is that 
helping or damaging?
    Secretary Lew. I think that the fact that our banks now 
have the ability to see themselves through a difficult period 
makes our system safer and sounder. They did not have the 
capital, they had too much leverage, and we saw in the 
financial crisis what the result was. We can't go back there.
    Mr. Scott. All right. Thank you, sir.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlelady from Missouri, Mrs. 
Wagner.
    Mrs. Wagner. Thank you, Mr. Chairman.
    There seems to be so much interest in this issue of 
liquidity, so I just can't help myself. And perhaps I will ask 
a question that will help put this to rest for all of us.
    In going back to your March 2015 testimony, Secretary Lew, 
on the issue of liquidity you said, and I quote: ``So I think 
that this is something that requires a lot of analysis. We are 
doing it. And I would be happy to share with you a more 
complete analysis when we complete it.''
    Now, this was March of 2015. I didn't get anything at 11:18 
last night. What is the plan here?
    Secretary Lew. As I have indicated earlier, our hope is 
that in the next few weeks, that analysis of October 15th will 
be completed, and we look forward to sharing it with the 
committee. It has been a complicated analysis. It has required 
a number of agencies working with very different bodies of 
data, and I am very anxious to get it completed.
    Mrs. Wagner. So within the next 3 weeks, we will receive--
    Secretary Lew. I can't say 3 weeks; over the summer is the 
schedule we are working on. I have been pressing people very 
hard to finish it as soon as possible, and as soon as it is 
finished, we will share it.
    Mrs. Wagner. And you believe that will come this summer 
then?
    Secretary Lew. That is the schedule we are working on, yes.
    Mrs. Wagner. And that should answer all our questions about 
the importance of liquidity or lack thereof?
    Secretary Lew. No, I wouldn't say that any single analysis 
will answer all the questions. It will help us understand 
October 15th much better. And in the FSOC report, we noted that 
there is a broad range of factors.
    I must say that I have taken a lot of questions today which 
want me to comment on regulation. In the FSOC report we added 
regulation to the list of things that we need to look at. So we 
are open to looking at all the causes. I identified the things 
that I am confident are things that we need to be looking at.
    Mrs. Wagner. I have several more questions here. We look 
forward to your report this summer.
    To date, FSOC has designated four nonbank financial 
companies as systemically important financial institutions, or 
SIFI, essentially signaling to market participants that the 
government considers them too-big-to-fail. As a result, 
Richmond Fed President Jeffrey Lacker stated that shareholders 
and creditors of those firms can't expect the government to 
shield them from losses during periods of distress, ultimately 
putting the taxpayer on the hook for a future potential 
bailout.
    For that reason, I am interested--and I think others on 
this committee also have mentioned this today--in how these 
companies can ultimately de-risk and shed their designation 
status from FSOC and remove the implicit government support 
that such a designation carries with it, knowing that the 
primary goal for FSOC is to reduce risk in the financial 
system. I think that you also would share that sentiment.
    I know that Senator Mark Warner has told you before that 
there was never any intention of creating a ``Hotel 
California,'' I believe were his words, with the designation 
process where you were able to check out any time you like but 
never leave.
    Secretary Lew, in the absence of any practical guidance 
from FSOC on how to exit SIFI designation, is it really 
possible for designated firms to know what they are supposed to 
do to reduce systemic risk?
    Secretary Lew. Yes, Congresswoman. I think that the process 
is clear, that we review the designations annually. If the 
business of the designated company has changed and it no longer 
presents risk, they know what the risks are, we have identified 
the risks very clearly. And right now, it has been in the news 
that GE Capital has changed its business plans for reasons that 
have nothing, I believe, to do with the SIFI designation, but 
that will cause there to be a review, and we will have to see 
whether that changes their character.
    So we are open to, if firms change their structure, if they 
change their business--
    Mrs. Wagner. They specifically, though, know how they can 
reduce risk, have you have given them guidance on this, how to 
change their business model, their structure?
    Secretary Lew. They know what it is about their business 
that created the designation in the first place. They know what 
the transmission mechanisms are.
    Mrs. Wagner. Do they know from you specifically?
    Secretary Lew. There is a very long analysis that goes to 
the companies when they are designated that identifies for them 
the basis of determining the risk. If the basis, then, 
changes--
    Mrs. Wagner. So you have a list--because I have limited 
time here--of specific information on what firms can do to 
remove this designation?
    Secretary Lew. It is not a question of take steps A, B, and 
C. It is a question of what are the risk factors, and if they 
no longer present those risk factors.
    Mrs. Wagner. So you don't have a list of how these--
    Secretary Lew. The risk factors are quite clear.
    Mrs. Wagner. The risk factors are quite clear to whom?
    Secretary Lew. To the firms that are designated. They 
understand what it is.
    Mrs. Wagner. Have you provided them with those risk 
factors?
    Secretary Lew. Yes. It is in the analysis that is available 
to the public.
    Mrs. Wagner. I have run out of time, Mr. Chairman.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentleman from California, Mr. 
Sherman.
    Mr. Sherman. Mr. Chairman, thank you for holding these 
hearings. I hope that we get the other members of FSOC to also 
testify. ``Chairman'' is a lofty position, but if you were to 
interview the chairman of this committee, I am not sure you 
would get the views that would reflect every member. And I am 
glad that Secretary Lew is here, but I look forward to hearing 
from the others.
    You have litigation on whether, I guess, it is MetLife, 
perhaps Prudential, is a SIFI. You have filed your reasons to 
dismiss their lawsuit under seal. You are the client. This is a 
document filed on your behalf. Could you just put it on your 
website, because it is of public policy interest, of course 
redacting any proprietary information about the individual 
company? Why would the reasons for arguing the dismissal of the 
lawsuit be under seal?
    Secretary Lew. Congressman, obviously it is a matter under 
litigation. I am not going to comment on the substance or the 
process of pending litigation. We have tried in all of the 
designations to be as transparent as we can be while protecting 
legitimate commercial information that we need to protect.
    Mr. Sherman. I would hope that you would make that document 
available for members of this committee since it is a public 
policy document as much as anything.
    Lehman Brothers didn't go under because it had too many 
assets. It went under because it had too many liabilities, 
particularly contingent liabilities. And I am confused as to 
how there is discussion of mutual funds being listed as SIFIs.
    Now, obviously if the markets dropped by thousands of 
points, that is terrible for the economy. It is terrible for 
me, because I have my individual accounts. It would be just as 
terrible if that same money was in a mutual fund.
    Why would an unleveraged mutual fund be classified with a 
SIFI knowing that it has no liabilities?
    Secretary Lew. Congressman, in a review of asset managers 
we have made the judgment that the area that we need to spend 
considerable time on is looking at activities that asset 
managers engage in and whether or not there is risk associated 
with those activities. We haven't completed the review yet, so 
I am not in a position to--
    Mr. Sherman. Are you looking at whether the asset 
management company would go bankrupt, whether the mutual fund 
would go bankrupt, or whether the economy would suffer not 
because the SIFI wasn't able to pay its liabilities, but rather 
because a big company was doing this or that in the stock 
market?
    Secretary Lew. Ultimately, the questions of looking at 
financial stability involve looking at what the losses would be 
to creditors and associated businesses, not so much of an issue 
here, what the run risk would mean in terms of the potential 
spread to the economy and markets, whether or not it locks up 
access to one or another kind of essential services.
    We are looking not just at firms. We are looking at 
activities to see whether--
    Mr. Sherman. So an entity could be designated as SIFI not 
because their inability to pay their liabilities would cause a 
problem, but just because their activities cause a problem?
    Secretary Lew. No. The question is, are there activities 
within asset managers that if there were, under a stressed 
situation, a series of bad events. These things don't happen in 
good situations. They usually happen when there are a lot of 
bad things going on.
    Mr. Sherman. Okay. I want to go on.
    Secretary Lew. And we have to understand, are there 
activities in those asset management firms that present the 
kinds of risks we need to be concerned about. I don't know the 
answer to it. We have asked this question--
    Mr. Sherman. I need to move on to another issue.
    Secretary Lew. We have asked the question knowing that the 
answer could be yes or no. So I don't sit here today with a 
firm view.
    Mr. Sherman. We are of course faced with this trade deal. 
We are told that there are enforceable standards, but they are 
usually enforceable only if the Executive Branch of our 
government is willing to take action. With regard to China 
currency manipulation, we passed a law requiring the Executive 
Branch to do things. You explained to this committee last time 
I asked you about it that, well, the law is really bad policy 
and so will not be followed.
    If the Executive Branch won't enforce U.S. laws because our 
trading partners would find that offensive, it is difficult to 
see how any provision of any trade agreement would be 
enforceable if that enforcement required the Executive--
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Oklahoma, Mr. 
Lucas.
    Mr. Lucas. Thank you, Mr. Chairman.
    Mr. Secretary, it is good to see you again. In the working 
order with which we work through members on this side, we have 
worked through the subcommittee chairmen, we have worked 
through the underclassmen who didn't have a chance to ask you 
questions the last time, that is appropriate, and now you are 
back to the old guys on the back row.
    I share some of the concerns of my colleagues on both sides 
of the aisle that there is a real problem with this liquidity 
issue on the Financial Services Committee. And I find it seems 
very hard to argue that this reduction of liquidity has nothing 
to do with the cumulative impact of new rules and regulations 
and the capital requirements.
    And while we of course continue to work to improve the 
safety and soundness in the system, it is just as important 
that we don't lose sight of that big picture of course, that 
aggregate impact of all these factors, and be ever mindful of 
unintendedly creating risk and harming the ability of end users 
to drive this economy and create growth.
    I have a particular issue that I would like to focus on for 
this moment, though, and that is on the leverage ratio rule as 
it applies to the treatment of segregated margin. This is an 
issue that increases costs for end users and impacts their 
ability to hedge risks. And as you know, Congress required that 
margin received from customers for clear derivatives belongs to 
the customers and should remain segregated from the banks' 
affiliated members' accounts.
    However, under the leverage ratio rule, this client margin 
is treated as something the bank can leverage and treated 
punitively by requiring higher capital requirements for 
clearing. If end users don't have the ability to hedge their 
risk, more risk is introduced into the system, customers pay 
more, and economic growth is harmed. And I think this is an 
example of the leverage ratio rule and higher capital 
requirements when applied, I believe, inappropriately, in my 
opinion, where it actually harms liquidity and increases risk.
    As a prudential regulator, can you tell me, why does the 
rule treat customer margin as something the bank can hedge?
    Secretary Lew. Congressman, the leverage rules apply to all 
assets. It even applies to Treasuries and cash. So it is a very 
inclusive rule. And I think it is reasonable to ask questions 
as to whether or not there are unintended consequences. And 
certainly you distinguish it, say, from the Volcker Rule. The 
Volcker Rule exempted Treasuries. A lot of the questions I got 
earlier were trying to tie liquidity to the Volcker Rule. The 
Volcker Rule obviously doesn't affect Treasury holdings.
    I would have to look at the specific issues related to the 
margins.
    Mr. Lucas. But I hope you agree it would seem to have the 
effect, by requiring extra capital to cover these margin 
accounts that are segregated, it would have the net effect of 
increasing the costs to the end users. I hope you see where I 
am coming from on that.
    Secretary Lew. Yes. Look, as I say, I haven't focused on 
the margin issue. I have focused on the Treasury and the cash 
issue. And I think if you go back to the purpose of the 
leverage rule, it is a very solid objective, which is to make 
sure institutions don't get overextended. And I think that what 
the percentage is makes a big difference in terms of whether or 
not it is the binding constraint or not.
    Mr. Lucas. Segregating the money makes very good sense, and 
I think we did the right thing there, but the net effect.
    Let me ask you this then. Regulators have been focused on 
removing risk from the banking system through the capital 
requirements and the additional regulations such as the Volcker 
Rule. Risk is going to exist somewhere within the system. If we 
remove it from the banking system, Mr. Secretary, where does it 
pop up next? If the banks can't play this role of playing a 
market, somebody will. Will it be more of a danger to the 
overall economy than, for instance, the banks?
    Secretary Lew. I think it is an overstatement to say the 
banks aren't playing that role. Banks are still doing their 
core business. And even under the Volcker Rule, they are not 
prohibited from market making and holding inventory for market 
making.
    You are asking a question that I am asking as well, with 
the evolution of the markets, are there questions of financial 
stability that we need to ask that are different? So you look 
at some of the newer players in the market, where the volume of 
trading is, I think it does raise questions, both about the 
kind of plumbing of the system, but also about implications on 
liquidity.
    Mr. Lucas. Historically, the banks in making these markets, 
it would seem to me, historically have had a perspective of 
evening things out, consistency, stability being boring. But 
the entities who are winding up taking their place have 
historically made their money off of volatility. If we take it 
away from the people who like to take the wave out, yet give it 
to people who have made and make more the more intense the 
waves, it just doesn't seem logical.
    Secretary Lew. I think one can overstate the tradition of 
banks doing things that weren't in their economic interest to 
maintain markets. But clearly having inventory has been real.
    I also think that if you look at what the definition of 
liquidity is, it may not be reasonable to think that there 
should be no price fluctuation even if there are dramatic 
things going on.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Missouri, Mr. 
Cleaver, ranking member of our Housing and Insurance 
Subcommittee.
    Mr. Cleaver. Thank you, Mr. Chairman.
    Mr. Secretary, thank you for being here.
    We are moving toward the fifth anniversary of the passage 
of Dodd-Frank. Many of us were here during those turbulent and 
troublesome days, and we know that great care was taken in 
dealing with the creation of this Act. And we think that we 
made significant progress. And I think you, apparently, agree 
with us as well, that we have made tremendous progress. And 
regulators have moved toward implementation. Some of the 
rulemaking I agree with, some of it I, along with my 
colleagues, have challenged. But overall, we have made great 
progress.
    But when you think about Dodd-Frank as a whole, what do you 
think is the most significant thing left undone? What would you 
want to see right now completed so that we would have the full 
strength of Dodd-Frank at work preventing another collapse?
    Secretary Lew. That is a very good question. Obviously 
there are pieces that need to be completed, and that is not 
really what you are asking. You are asking, what is the kind of 
area that we haven't addressed?
    Mr. Cleaver. Yes.
    Secretary Lew. I would have to say GSE reform is the area 
we haven't addressed. And it would be a good thing if we would. 
I am not sitting here today optimistic that is going to happen 
legislatively. But it is why we engaged so much in the Senate 
in the bipartisan discussion to try and work through an 
approach to GSE reform.
    Mr. Cleaver. Mel Watt, who was a member of this committee--
you mentioned the GSE reform and Mel Watt, of course, is now 
over at FHFA and doing a great job. Some of the work he is 
doing is going to help in some of the housing needs we have 
with money put into the Housing Trust Fund. But one of the 
things that you might be able to help me with is what do we do 
to enable private money to move back into the market?
    Secretary Lew. To back mortgages, you mean?
    Mr. Cleaver. Yes.
    Secretary Lew. I think there have been some small steps 
taken, but there needs to be an active effort to look at what 
can we do to have a more active private securitization 
industry. The notion that most mortgages are backed by either 
FHA or a GSE that is backed by the Federal Government is not a 
great place for the industry and that part of the market to be, 
which is why I said GSE reform, which is a path towards an 
active private marketplace.
    The experiments that I think have been useful have been 
things like putting first-loss protection in place apart from 
the GSE. It has been small. But we have seen that there are 
ideas there that you can insulate the public from the first 
risk and start to bring private money back into place. That can 
be through mortgage insurance. It can be through capital market 
products. I think more thought has to be put into that area to 
develop it further.
    Mr. Cleaver. But you do believe that there is a need for a 
secondary market?
    Secretary Lew. I'm sorry?
    Mr. Cleaver. You do believe that we do need a secondary--
    Secretary Lew. Yes. I think it would be good if there were 
more private, nongovernmentally backed.
    Mr. Cleaver. So the GSEs would be a hybrid?
    Secretary Lew. Yes. Or they would have competitors.
    Mr. Cleaver. I think in this committee there is some 
suggestion from time to time that the GSEs are not even needed.
    And one of the things that I am wondering about, when some 
prefer that it be completely private, is whether you believe 
the private market has an appetite to fully either take over 
or, what I would prefer, reenter the market.
    Secretary Lew. Look, I think right now the structure of our 
mortgage industry makes the continued operation of Fannie and 
Freddie necessary. The idea behind GSE reform was to be able to 
chart a path where there would be a different kind of 
marketplace in the future. So we live in the present, we live 
in a world with FHA and Fannie and Freddie, and we have to try 
to make that world better absent legislation.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from California, Mr. 
Royce, chairman of the House Foreign Affairs Committee.
    Mr. Royce. Thank you very much, Mr. Chairman.
    And for the record, Mr. Secretary, one of my colleagues 
earlier asked if the GSEs have repaid the money that they have 
borrowed from the American taxpayer. The simple answer that my 
colleague tried to elicit, I think, was that the payments they 
have made to the government now exceed the rescue funds they 
received.
    Mr. Secretary, I think you agree here this is not the real 
answer nor the real question. The real question is, have they 
repaid their debt to the American taxpayers?
    And for that answer, I think we can go to the Federal 
Reserve Bank of New York that was asked that question. And they 
put it this way. They said, ``Should these figures be 
interpreted to mean that the Treasury, and therefore the 
taxpayers, have been `repaid' by Fannie Mae and Freddie Mac, 
and that the two firms should now pay dividends to their 
regular shareholders again? The answer to that is no.''
    The New York Fed said that taxpayers are entitled to a 
substantial risk premium, government support has lowered 
funding costs and boosted profits, and the government has never 
collected the commitment fee that the government is owed from 
Fannie and Freddie.
    So the false scenario that is perpetuated is that taxpayers 
have been repaid, it is time to end conservatorship and return 
the GSEs to control of the shareholders. From your comment 
earlier, I assume you disagree with this narrative and agree 
with the conclusion of the New York Fed that failing to work to 
wind down the GSEs and give space for private capital to come 
in would be a colossal missed opportunity to put the U.S. 
residential mortgage finance market on a more stable long-term 
footing?
    Secretary Lew. Congressman, I totally agree, and I was 
trying to indicate in my response earlier that the risk is 
being borne by taxpayers on an ongoing basis and the 
conservatorship is not over.
    I would only add one additional thing to what I said 
earlier, which is that the damage done to our economy by the 
housing crisis was far more than the simple amount of money 
that was put into the GSEs. And I think Americans are still 
healing from the pain of that financial crisis.
    So I think that the right thing is to do GSE reform and to 
get on to a new restructured system, but it is not the right 
time to be talking about ending the conservatorship or paying 
dividends.
    Mr. Royce. And I think we can move forward together on that 
GSE reform concept. I have publicly endorsed reforms that would 
increase private sector participation in the secondary housing 
market, that would decrease taxpayer exposure to future losses, 
and that would limit disruption to the housing market.
    But I think, if you look at the particulars, more risk 
sharing is something that can be done to create a lot of space 
here. A common securitization platform is something that works 
for the GSEs and then brings in private capital to use that 
platform. A common residential mortgage-backed security would 
be a good start for Congress, I think, to pass this year. If I 
could have your thoughts on that?
    Secretary Lew. Look, I think the items that you just 
mentioned are the kinds of things we have been talking about 
and thinking about. Obviously, there is a common security 
platform being built. It is something that could be expanded 
beyond the GSEs and be available more broadly. I think the more 
we are able to lay a foundation that a private securitization 
market can be built on, the better off we would be.
    Mr. Royce. If I have a minute here, I am going to quickly 
push--Last week, the Treasury Department announced its 
deliverables for the upcoming Strategic and Economic Dialogue 
with China. One of the issues a few years back was that 
ownership caps were raised there from 33 to 49 percent. But 
this is largely symbolic because it doesn't really provide 
further benefit to firms operating in China. When Chinese 
institutions invest in the United States, they face no 
ownership cap or activity restrictions. And this is just one of 
many impediments that our financial services firms face when 
operating there.
    I did want to raise that issue with you. And also, I raised 
with you earlier that on this technology restriction, we have 
China agreeing to delay implementing a certain restriction on 
its draft antiterror laws that would require foreign companies 
to hand over their encryption keys. Clearly, our banks and our 
financial services firms, technology firms, cannot operate 
under those conditions in China.
    Recently, we were in Shanghai, and they were pushing that. 
It is still on the third reading. The peoples' Congress has 
adjourned until next year, but that still hangs out there. And 
so, we need to have greater pushback.
    Secretary Lew. Congressman, I agree with you totally. I 
have pushed back with China's most senior leaders on this issue 
and have made it clear to them that it is a very significant 
issue here and it is something that in the context of both the 
S&ED and the leaders meeting we need to see movement on.
    Mr. Royce. Thank you, Mr. Chairman.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlelady from Wisconsin, Ms. 
Moore, ranking member of our Monetary Policy and Trade 
Subcommittee.
    Ms. Moore. Thank you so much for joining us today, 
Secretary Lew.
    I can't resist asking some questions about liquidity as 
well, since that has come up several times, but I want to take 
a different approach, as opposed to the required capital 
standards. In your testimony you mentioned that it has been a 
year now since we have floated the NAV for institutional 
investors, and at least your executive summary was not very 
descriptive of how that has been working.
    I am wondering if we have seen less use or about the same 
of assets which are typically a little bit more liquid than 
other investments in the money market mutual fund space?
    Secretary Lew. Congresswoman, first, I don't believe the 
rules are effective yet. They were put in financial form with a 
future effective date.
    I think we have seen a continued reduction in the reliance 
on short-term wholesale funding, which is a good thing, but we 
still have very large amounts of investment in money market 
funds. And we saw in the financial crisis that there was run 
risk there, and the reason that the rules were put in place by 
the SEC was to create a safer path forward.
    I certainly will keep an eye on that as it is implemented 
to make sure it works as designed. But we have made clear that 
we have to keep attentive to whether or not they are sufficient 
or whether there is a need for additional policy.
    Ms. Moore. But it would not be a good thing if we were to 
close down or essentially shut down the money market mutual 
fund--
    Secretary Lew. No.
    Ms. Moore. --or stagnate it in some way, prevent those 
institutional investors from having that liquidity. That would 
be something you would be watching out for?
    Secretary Lew. Right. The problem is the connection between 
the money market funds and the rest of the financial system. 
What we saw during the financial crisis was that the risk of 
money market investors, institutional investors, leaving, 
selling their position, was creating the risk that the 
overnight funding that the largest financial institutions 
relied on would evaporate. And that could have caused the 
entire implosion of major financial institutions.
    We are in a much better place because there is less 
reliance on wholesale funding, and we now have rules in place 
to try and make it safer.
    Ms. Moore. Thank you, Mr. Secretary.
    You mentioned also that the threat of migration of 
servicing from banks from nonbanks, such as the recently 
announced algorithmic lending that Goldman Sachs, for example, 
wants to do, really demonstrates there is a change in market 
structure, that there is more risk-taking incentive.
    I am wondering, in that context, how nonbank SIFIs--do you 
think it is more important to focus on a few industries, fewer 
institutions? Or what do you see? Do you see an expanded role 
for the FSOC given the change in the market structure?
    Secretary Lew. Look, I think that we have tried to be very 
careful and analytic in the approach and not to overreach and 
go into spaces that we don't need to be in or belong in. The 
institutions that have been identified are market utilities 
that have crosscutting exposures, and the largest kinds of 
firms that are nonbank firms, where the determination was made 
that the risk is there.
    So it is not that we are looking to regulate more firms for 
the sake of regulating more firms. We are going to continue to 
go through the criteria, and we are obviously getting to 
smaller firms as we get down the list.
    Ms. Moore. Thank you, Secretary Lew.
    I was stunned at some of your comments to Mr. Cleaver about 
GSE reform, and also your declaration in your testimony that 
negative equity has declined. That hasn't been my experience at 
all. And I think homeowners are in a lurch after this 
recession, a lot of housing in my district is deteriorating 
because you can't lend for needed improvements in the home, I 
mean, basic things like roofs, plumbing, and so on. I think we 
need some sort of product.
    I only have 10 seconds. I guess I just want to get your 
insight about help for the homeowner in this environment.
    Secretary Lew. I would be happy to follow up. I don't have 
the time now. But I have tried in a few instances to express 
the concern that creditworthy borrowers should have access to 
the market, and there are a number of things that we are 
looking at in that regard.
    Chairman Hensarling.The time of the gentlelady has expired.
    The Chair now recognizes the gentleman from Florida, Mr. 
Posey.
    Mr. Posey. Thank you, Mr. Chairman.
    Mr. Secretary, in October of 2013, the online publication 
RepealFATCA.com submitted a Freedom of Information Act (FOIA) 
request for documents concerning the intergovernmental 
agreements with the United Kingdom, Switzerland, and Canada. 
The Department promptly acknowledged the request, and on 
October 24, 2013, stated that, ``Expedited treatment has been 
approved.'' It is a letter from your agency. However, since 
then there has been no response from the Department despite 
repeated follow-up inquiries from the requester.
    On January 27th of this year, 15 months after the initial 
request, I sent you a letter asking for prompt action on the 
request and to keep me informed on the response that would be 
forthcoming. Despite additional inquiries, the only answer I 
have received so far is, ``We are working on it.''
    It has now been 20 months, almost 2 years since their 
simple initial request under the Freedom of Information Act, 
and 5 months since my letter inquiring about the status of that 
request. Is this the Treasury standard for expedited treatment?
    Secretary Lew. Congressman, in general our performance on 
FOIA is better than that. I am not familiar with this specific 
matter. I am happy to look into it.
    Mr. Posey. It is just hard to believe that there is some 
reason that the Department is stonewalling that one.
    Secretary Lew. I will have to look into the matter and get 
back to you.
    Mr. Posey. On another matter, I would like to bring to your 
attention that the Fiscal Year 2012 Financial Services 
appropriations bill included report language directing the 
Secretary of the Treasury to submit a report to Congress 
regarding the potential risks to the U.S. financial markets and 
economy posed by financial terrorism and economic warfare.
    I subsequently met with Treasury Assistant Secretary 
Fitzpayne in August of 2012 and was told that the Treasury 
would work on that. The report language also included in Fiscal 
Year 2013 and 2014 appropriations bills.
    In July of 2013, my staff sent nearly a half-dozen emails 
to the appropriate Treasury staffer for a status update, but 
those emails went unanswered. Finally, in the Fiscal Year 2015 
CR/Omnibus bill that became public law, the actual bill 
language was included to the same effect.
    ``The Secretary of the Treasury, in consultation with the 
appropriate agencies, departments, bureaus, and commissions 
that have expertise in terrorism and complex financial 
institutions, shall provide a report to the Committees on 
Appropriations of the House of Representatives and the Senate, 
the Committee on Financial Services of the House of 
Representatives, and the Committee on Banking, Housing, and 
Urban Affairs of the Senate not later than 90 days after the 
date of enactment of this act on economic warfare and financial 
terrorism.''
    Obviously, Congress felt the issue was important enough 
that it has included language in an appropriations bill dating 
back as far as Fiscal Year 2012. However, it is apparent the 
Department isn't giving this matter the same attention. I was 
hoping you could provide us with some information about your 
progress on the report.
    As the Secretary provided his report to the relevant 
committees in Congress, given the Department has had knowledge 
of this issue for over 3 years, I would have thought the 
Department would have prepared to meet that 90-day threshold 
set by Congress. And so ultimately the question is, when can we 
expect the report?
    Secretary Lew. Congressman, I will have to check on the 
report.
    But in the area of economic warfare and terrorism, there is 
no agency in any government in the world that does a more 
effective job than Treasury, and I am happy to defend the 
record that we have here. We really are the global leaders in 
making progress in this area. And I think it is an area of 
great bipartisan consensus and we looking forward to working 
together.
    Mr. Posey. Just doing the report as the law requires would 
be a great way to kind of boast or toast what you are doing.
    Secretary Lew. I will check on the report. I am quite 
familiar with what we are doing. It takes a great deal of my 
attention and the world's attention. The report I will have to 
check on.
    Mr. Posey. So, will you have someone get moving in the next 
week on these two issues about the FOIA request so we don't 
have to wait another 2 years for that one?
    Secretary Lew. We will get back to you.
    Mr. Posey. And let me know the status of this report within 
the next week, would that be asking too much?
    Secretary Lew. We will get back to you.
    Mr. Posey. I heard you say ``yes'' a little while ago to 
somebody on the other side. I was just hoping we could maybe 
get the word ``yes'' twice in one meeting in the 3 hours. But 
can we expect that maybe in a week?
    Secretary Lew. I don't know what the status of the issues 
are. We will get back to you promptly.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Texas, Mr. 
Green, ranking member of our Oversight and Investigations 
Subcommittee.
    Mr. Green. Thank you, Mr. Chairman. And I thank the ranking 
member. Of course, I also thank the witness for appearing 
today.
    Mr. Secretary, in your annual report you cite some concerns 
about cybersecurity. Ironically, yesterday the Subcommittee on 
Oversight and Investigations held a hearing on cybersecurity 
styled, ``A Global Perspective on Cyber Threats.'' One of the 
things that I took away from this hearing is that there appears 
to be clear and convincing evidence that cyber threats and 
attacks pose a clear and present danger to our financial 
system.
    And I am pleased to see that you have addressed this, and 
you need additional assistance pursuant to what I am reading. 
You indicate that you would like for Congress to provide the 
financial regulators with the authority to oversee third-party 
vendors. And I believe I have some sense of why, but I think 
that the record should reflect your thoughts on why this is so 
important.
    Secretary Lew. Congressman, this issue of cybersecurity is 
obviously a relatively new issue, but it has gone right to the 
top of the worry list and priority list that we have, and as I 
talk to CEOs, it is the top issue that many of them have. The 
challenges are many. It is hard to protect a system, it is hard 
to have individuals in the system operate in a way that makes 
it as safe as possible.
    I think the financial sector is actually at the lead and we 
have a lot of work to do in the financial sector. There are 
many other areas where the exposure is even greater and some of 
them overlap. I mentioned earlier the connection between 
utilities and financial up here. Power and phones are not 
there, it is very hard to run a modern financial institution.
    I think that it is very much in the mind of both the 
regulators and the industry, and the more tools we have to work 
together, the more tools there are for them to work 
collaboratively and to share information and best practices, 
the more likely we are to be successful. A threat that shows up 
in one place, if you know about it, you can then look for it as 
opposed to being blindsided by it.
    And we are making progress. There is much better sharing of 
information than there was. But I wouldn't suggest that we are 
ultimately where we need to go. And I think the passage of 
legislation to enable the greater sharing of information would 
be very helpful.
    Mr. Green. I want to concur with you. The witnesses who 
appeared yesterday all indicated, I believe, that you are at 
the top of the game as it were, that you are doing better than 
most.
    Secretary Lew. I don't take much comfort in that, though.
    Mr. Green. They didn't say that we have absolute security 
and I understand this. My concerns have to do with the need for 
authority. What would you have us do immediately to give you 
this authority? I know that it is in broad terms here. Are 
there some specifics that you can call to our attention?
    Secretary Lew. The cybersecurity legislation that is 
pending would take down some of the barriers for sharing of 
information and collaboration in the private sector. I think 
getting that in place would be quite helpful.
    We are doing things now on a voluntary basis where there 
are risks that firms have to balance which would be very much 
eased if the legislation were to pass. We have Executive Orders 
that go as far as Executive Orders can.
    I would be happy to follow up with you on more specific 
issues in the financial space that could be helpful.
    Mr. Green. Thank you.
    And finally this: You have indicated that you believe that 
you should be allowed to coordinate a national plan, as it 
were, to deal with these responses to cyber threats, and you 
would like to coordinate this with law enforcement, Homeland 
Security, as well as regulators. How far along are we with this 
concept of your having this opportunity to coordinate a 
national plan?
    Secretary Lew. Obviously, within the Federal Government, we 
collaborate quite a lot, and DHS plays the lead on 
cybersecurity. But I will tell you, in the financial space we 
have a regular meeting amongst the agencies that work most 
closely together and we are looking at what we can do to be 
more prepared. And obviously, that gives us the ability to 
reach out more effectively and develop a plan.
    Mr. Green. Thank you for your service.
    And I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from South Carolina, 
Mr. Mulvaney.
    Mr. Mulvaney. I thank the chairman.
    Mr. Lew, in October 2013, you went to the Senate Finance 
Committee and had a hearing concerning prioritization of 
payments. And you told them at the time that, and I am quoting: 
``The systems are automated to pay because for 224 years the 
policy of Congress and every President has been to pay our 
bills.'' You went on to say it wouldn't be easy to pay some 
things and not others, they weren't designed that way, et 
cetera.
    And then in May of 2014, you gave this chairman a letter 
saying something slightly different. You said, ``If the debt 
limit were not raised and assuming Treasury had sufficient cash 
on hand, the New York Fed systems would be technologically 
capable of continuing to make principal and interest payments 
while the Treasury was not making other kinds of payments.''
    I will ask you, Mr. Lew, when did you come to learn the New 
York Fed was technologically capable of making the payments you 
set forth in your letter to the chairman of May 2014?
    Secretary Lew. Congressman, I don't remember the exact 
date, but I can tell you the statement I made at the Senate in 
October 2013 and the statement to this committee are entirely 
consistent. What I said in October 2013 is that we make tens of 
millions of payments and we don't have the capacity to pick and 
choose amongst all of them.
    I didn't address specifically the question of, is there the 
technical capacity to pay principal and interest. I did 
indicate to this committee that we do have the technical 
capacity, but it would be a terrible thing to do because if you 
chose to pay principal and interest, you would be defaulting on 
something else. You would be defaulting on a Medicare payment 
or on a veteran's payment or on something else.
    The only solution is to raise the debt limit and to not put 
any President in the position where they have to make the 
decision, do they pay one thing but not another?
    Mr. Mulvaney. Mr. Lew, that was a really good answer the 
first three times I have asked it. I asked you that same 
question, sir, in May of 2014, and you told me you would have 
to check. When you came back before us in March of 2015, you 
told me you had checked but you had forgotten it and you didn't 
remember it on that day, but you would look into it again. I 
sent you a set of written questions and asked you the exact 
same question. I got two pages with no answer in them.
    So I am not going to ask you any more questions, Mr. Lew. I 
feel like I have given you enough chances to answer that 
question. My question was very straightforward, when did you 
know? It is an answer you should know. And if you don't know 
it, you are right, you should go back and be able to look it 
up. In fact, you told me one time you did go back and look it 
up and you knew it at one point but you had forgotten it before 
you got here.
    Mr. Lynch asked you a question, sir, earlier today about 
whether or not you felt like your answers to this committee 
were disdainful, and you said that, no, you thought that they 
were reverent. And I kept waiting for the laughter after that, 
Mr. Lew.
    I have asked you some really serious questions. We have 
asked you some really serious questions. By the way, the other 
questions I asked you, not the first time, go deeper. This not 
an empty question, Mr. Lew, this is not a question that was 
designed to just ``gotcha,'' to try and make you look bad so we 
would get on television. That is not the point. We are 
interested in answering the questions because of the market 
turmoil that always raises its head as we come up against the 
debt ceiling.
    So in addition to the question I asked you about when you 
knew, I also asked you, ``In the event we reach the debt limit 
and exhaust extraordinary measures and Congress does not raise 
the debt limit, can the Treasury Department continue to make 
principal and interest payments on the debt, yes or no?'' You 
didn't answer that. You have had, by the way, 6 months to 
answer these questions.
    I also went on and asked you, ``Will you commit that in the 
event we reach the debt limit and exhaust extraordinary 
measures and Congress does not raise the debt limit, the 
Treasury will continue to make principal and interest payments 
on the debt?'' You didn't answer that either.
    What are we to infer from your refusal to answer now for a 
year-and-a-half these types of questions, that the answers--no, 
you had your chance. I did what very few people here did today; 
I let you go until you stopped. In fact, I was going to even go 
until I had a minute-and-a-half left. You had your chance. It 
is my turn.
    We are interested in asking these questions because we are 
concerned about what happens in the markets. We would hope that 
the Secretary of the Treasury of the United States would be 
just as concerned. Your name is on the money, Mr. Lew. We have 
given you the chance to calm the markets. You have refused to 
do so. We have given you the chance to give this committee 
information. You have refused to do so.
    One implication is that you don't want us to know the 
information we ask for because it is harmful to you or the 
Administration. And the other implication that we are 
completely within our rights to make is that the answers 
regarding payments are not being given to us because you want 
the chaos, because you think it is preferable to you and your 
Administration, this Administration, to have the chaos, that it 
will help you achieve politically what you want to achieve.
    So I am done asking, Mr. Lew. All I will say is that when 
the chaos comes, it will not be on the shoulders of the people 
on this committee on either side of the aisle, it will be on 
you, because you have had the chance to calm the markets and 
refused to do so.
    Secretary Lew. Mr. Chairman--
    Mr. Mulvaney. No, sir. Not on my time.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Minnesota, Mr. 
Ellison.
    Mr. Ellison. I would like to thank the Chair and the 
ranking member for the time.
    And I would actually like to thank you, Mr. Secretary, for 
answering some of the written questions that I gave you. I know 
it is not easy to do that, you are busy doing a lot of things, 
but you did give us some answers, and they were answers that we 
can use. So I extend my thanks and appreciation for that.
    As you know, Mr. Secretary, you are probably going to get a 
question from me about Somalia. I know you are shocked. And 
what I would like to just ask you is if you have any 
information on the bill that we passed last year into law.
    There was a bill that we passed last year that was called 
the Money Remittances Improvement Act and the goal of the bill 
was to improve oversight of State-licensed nondepository 
financial institutions. Now that the law is in place, all well-
supervised entities like the money services business should 
have their license status recognized and respected.
    And I just want to know what you know. And if you don't 
know anything, I understand, because I didn't tell you I was 
going to ask you that. But if you do know, I would be happy to 
get a report.
    Secretary Lew. Congressman, thank you. As we have discussed 
many times, this issue of remittances is a very important one, 
and we are very concerned about the problems that families are 
having in making payments.
    We are working on the implementation of the legislation. 
And I am happy to get back to you with a more detailed response 
on the status of the implementation.
    But we are more broadly working on this issue of how to 
deal with remittances in Somalia.
    Mr. Ellison. Right.
    Secretary Lew. As I think you know, we are very involved 
with the World Bank to develop solutions to the problem, and 
that really means building up some capacity in the Somali 
financial system.
    Mr. Ellison. I agree.
    Secretary Lew. Because right now there is not a real 
financial system to engage with. We have had meetings at a very 
senior level in Somalia, at the political level, at the central 
bank level. And I know that our Under Secretary will be 
traveling to your district to have some meetings on this issue.
    Mr. Ellison. I appreciate that. And I just want to say 
again that I am foursquare with the Administration's effort to 
stop terrorist financing. I am on a task force to help achieve 
that.
    But on the other hand, we can get so successful at that 
effort that we close off all the money, and that, I think, 
would be unfortunate because it would actually serve the 
interests of Al Shabaab and terrorists over there to see the 
collapsing of the Somali economy which depends upon remittances 
to the degree about 40 percent.
    So I would like to talk with you more about the 
implementation of that program. I know that you all are doing 
some technical assistance to Somalia. I talk with political 
leaders there and try to give them my best perspective on how 
they can improve their system.
    Could you talk a little bit about the work that you all are 
doing in the technical assistance area and what sort of message 
that you would like them to receive in order to develop that 
solid banking system that I think they are going to need?
    Secretary Lew. Right. There is not an easy answer to that 
question. It is hard to exaggerate how little they are starting 
with in terms of building a functioning financial system. And 
the tragedy is that there are legitimate transactions, like 
family remittances, that should be able to go forward, but it 
is very hard to know that the money isn't going to go into 
hands that will do real harm.
    And trying to figure out how to build that system is why we 
are working with the World Bank. We can't go into Somalia the 
way we go into some countries, because of the security 
conditions. So we have people come out of Somalia into other 
countries for training. It is not the most efficient way to do 
it. Our OTA people are great when they can go in and work with 
people side by side. We just can't do that in Somalia. But we 
are trying to do it offsite to help them build the skills.
    It is a process. It is not something you can just kind of 
hand over and have a functioning system. They are trying, we 
are going to work with them, and we have to be creative in 
finding the ways to start that building process.
    Mr. Ellison. I just want to urge you on behalf of the 
people who live in the Fifth Congressional District of 
Minnesota and many other parts of this country.
    We actually, me and Mr. Emmer, are going to start a Somali 
caucus because we have constituents who live in both districts 
and definitely want to see that country get stable and strong 
and not be a haven or an attractive nuisance for bad people. So 
we try do our good part, and we hope you will continue to push 
with that technical assistance.
    Secretary Lew. We will do so and we will continue to work 
with you and try to find a solution to this.
    Mr. Ellison. Thank you.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlemen from Tennessee, Mr. 
Fincher.
    Mr. Fincher. Thank you, Mr. Chairman.
    And thank you, Mr. Secretary, for being here today.
    I am going to go back to an issue you and I talked about a 
few months ago, liquidity. I know it has been a pretty hot 
subject today. In recent comments from Larry Summers, former 
Treasury Secretary under President Clinton, who later served as 
adviser in the White House during the creation of Dodd-Frank, 
he warned, ``Regulatory authorities have made a mistake when 
they looked at each institution and they said, `You will be 
safer if you withdraw from the markets a bit,' and then forgot 
that if all institutions withdraw from the markets a bit, the 
markets will be less liquid, the markets themselves will be 
less safe, and that will in the end hurt all of the 
institutions. I think there is a real issue there. Frankly, a 
lot of the effort that is going into macro prudential should be 
into making sure we have liquidity.''
    What is your reaction to his comments about the role of the 
regulations, not just Dodd-Frank, but layered capital and 
liquidity mandates are having on fixed-income markets?
    Secretary Lew. Congressman, as I have said in response to 
several questions today, I think this liquidity issue requires 
our very serious attention. I think there are a number of 
factors that have been at work. It ranges from the point we are 
at in the economic cycle and the volatility that is natural at 
that point, to the emergence of new market mechanisms that are 
different and present different risks, to the volume of 
corporate bond issuance.
    I have also said that we have our eye on whether or not 
there are regulatory issues, it is in the FSOC report, that it 
is one of the things we need to look at. So I am not 
approaching this from the point of view that we know exactly 
what it is. Frankly, I don't think anyone knows exactly what 
the answer is.
    Mr. Fincher. But you think it could be a possibility that 
it could be overregulation?
    Secretary Lew. But I think the factors that I described I 
know are at work. I think that the question of regulation is 
much more speculative. And I think people have jumped 
prematurely to a conclusion about regulation which I think 
would take our eye off of where the real risks lie.
    Mr. Fincher. Would you say that we need more regulation?
    Secretary Lew. Look, I think that we have come a long way 
since the financial crisis. Our system is safer and sounder. We 
have the ability for our institutions to withstand a bump in 
the road that they didn't have before. That doesn't mean that 
we should ever stop. We have to keep looking forward.
    Mr. Fincher. So you think more is needed?
    Secretary Lew. I didn't say more or less. You can't take 50 
years between looking at these questions, that didn't turn out 
so well. We need to keep our eye on the future, and we have to 
be open to the possibility that there are multiple different 
factors that are at the core of an issue.
    And on something like liquidity, it is of fundamental 
importance that we have a deep and liquid market here. You 
still have to separate out Treasury markets from corporate 
markets to high-risk markets. They are not all the same. 
Liquidity issues aren't all the same.
    Mr. Fincher. Let me follow up. Secretary Summers' comments 
have been echoed by everyone from the Bank for International 
Settlements, Mr. Ketchum at FINRA, SEC Chair White, CFTC 
Commissioners Bowen and Giancarlo, and many overseas 
regulators, such as Mark Carney at the Bank of England. We 
talked about you issuing a data-driven analysis, and I think 
you have said there is going to be a White Paper coming out.
    Secretary Lew. Hopefully. Our goal is to get it this summer 
and we will share it as soon as it is completed.
    Mr. Fincher. Okay. It seems like every time we have a 
hearing, we talk about the problems that we face and more 
regulation. I know I am just going to differ with you, and I 
know you haven't said.
    Secretary Lew. I didn't say anything--
    Mr. Fincher. I know. But it sounds like that you are 
inclined to be for more regulation.
    Secretary Lew. We have to be open to less also. I didn't 
say more.
    Mr. Fincher. There are you go, and that is good.
    Secretary Lew. We have to be open to more or less.
    Mr. Fincher. What seems to be happening is the more liquid 
that is tied up in the markets, it is not the bigger 
institutions that pay the price here, it is the small guys. It 
is the guys back in States like Tennessee and Arkansas, Mr. 
Hill, that end up paying, the folks at the bottom. And we need 
to make sure that when something does happen, there is enough 
liquidity available to take care of these issues.
    So thank you, Mr. Lew.
    And with that, I yield back, Mr. Chairman, which is rare, 
the balance of my time.
    Chairman Hensarling. The gentleman yields back.
    The Chair recognizes the gentleman from Colorado, Mr. 
Perlmutter.
    Mr. Perlmutter. Thanks, Mr. Chairman.
    And thank you, Mr. Secretary, for staying cool under the 
withering cross-examination of my Republican colleagues.
    So I just really have a different view than the chairman 
and than Mr. Duffy, as to what is going on in the economy. We 
might as well start with all the records being set by Dow 
Jones, it is up from 6,500 at the end of George Bush to 18,000. 
The S&P from about 700 to 2,100. The NASDAQ is 3 times what it 
was. Foreclosures are down very low. There has been a 
tremendous improvement across pretty much all sectors, from 
manufacturing, to hotels, to whatever.
    So when they are talking about calming the markets and you 
are causing them to roil, I want to thank you for rebuilding 
the markets from the recession that we were in at the end of 
George Bush. I don't know if you have your report in front of 
you, but there are some very important graphs that I would like 
you to take a look at, if you have your report in front of you.
    So let's take a look, just at easy ones, starting with 
4.1.4. Under the Obama Administration, we see oil imports drop 
and oil production increased like we haven't seen in decades. 
Do you see that one?
    Secretary Lew. I do.
    Mr. Perlmutter. How about 4.1.6, civilian unemployment rate 
dropping like a rock--this is on page 20 of the report--after 
the 2007-2008 recession. Do you see that? All right.
    But now let's talk about FSOC. So if you would turn forward 
in your report to pages 62 and 63. I want to look at graphs 
5.3.16 and 5.3.19. Do you see those?
    Secretary Lew. Yes.
    Mr. Perlmutter. So can you tell us what graph 5.3.16 is?
    Secretary Lew. I have read the words. I am looking at some 
of these graphs for the first time.
    Mr. Perlmutter. All right. So let me tell you what it is 
and then you can expand on it if you like.
    As the recession took place starting in 2008, 2007-2008, we 
saw loan loss reserves fall so that banks couldn't withstand 
one more loss. But since FSOC was created in 2010, what do you 
see in terms of the loan loss reserves? They have almost 
tripled.
    Secretary Lew. Yes. And we are seeing performing loans 
doing better and we are seeing the foreclosure issue settle 
down.
    Mr. Perlmutter. Okay. Now let's look at the one that is 
really quite telling, and that is 5.3.19, FDIC-insured failed 
institutions. Do you see that?
    Secretary Lew. Yes.
    Mr. Perlmutter. And my friend the chairman was talking 
about this recovery and why isn't it bigger, other than the 
fact we have 13 million new jobs. We see pensions at an all-
time high. But under Republican Administrations, and I think 
between 1980 and 1990 we had the Reagan Administration and the 
first George Bush Administration, look at the number of failed 
institutions. Do you see that?
    Secretary Lew. I do.
    Mr. Perlmutter. Okay. Then it falls off to virtually zero 
under the Clinton Administration. There were almost no bank 
failures. Do you see that?
    Secretary Lew. Yes, sir.
    Mr. Perlmutter. Then under the second George Bush we see a 
tremendous spike in failed institutions. Do you see that? So 
now, it has fallen off precipitously.
    We are here to talk about the FSOC and about Dodd-Frank and 
putting some structure back into the market so that we don't 
have a failed banking system. Would you like to comment on 
that?
    Secretary Lew. Congressman, I think that you have talked 
about the improvement in the economy in a very compelling way. 
Obviously, the graphs illustrate it, but so does the number of 
people working every day.
    I think that there is no doubt but that the steps we have 
taken through Wall Street reform and FSOC have made our system 
safer. We also have an economic recovery underway, which is why 
everything is also getting better.
    What I don't think we can do is kind of rest comfortably 
that there is no problem out there to worry about, because what 
will happen is we will get to the down point of a business 
cycle, there will be stress on the system, and we owe it to the 
American people to make sure we are in a position when times 
get tough that we don't go back to the 2007-2008 kind of 
situation. That is exactly what we are doing in FSOC.
    Mr. Perlmutter. I completely agree with you, and that is 
why you need the loan loss reserves, so that you can withstand 
a downturn. That is why we take into consideration these 
precautions.
    Secretary Lew. It is why you need capital.
    Mr. Perlmutter. If I were my Republican friends, I would be 
grasping at this liquidity straw too, given the overall 
recovery of the economy. But I want to thank you and I want to 
thank the President for putting this economy back on track.
    And I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Florida, Mr. 
Ross.
    Mr. Ross. Thank you, Mr. Chairman.
    Mr. Secretary, it is a pleasure to have you here again.
    I want to talk about the ultimate goal of FSOC. FSOC's goal 
is to reduce risk in the market, is it not?
    Secretary Lew. Yes, it is to reduce. It is to make sure 
that we have financial stability always on our minds and we 
reduce the risk of a financial crisis.
    Mr. Ross. And financial stability could be accomplished 
with the elimination of risk too, which I don't think that is 
the ultimate goal, because without risk you have no return of 
course.
    Secretary Lew. No, no. It is why I focused on stability.
    Mr. Ross. Thank you. And let's talk about stability, 
because in gaining stability we need to make sure that our 
institutions have a proper road map. And right now we have a 
designation of a SIFI that leads to an institution now trying 
to find out how they get out. And I give you credit for what 
happened in February with some of the transparency rules that 
you promulgated and an opportunity every 5 years to try to get 
a decertification, if you will, of being a SIFI.
    My concern is, why don't we have in place a road map, a 
precautionary measure to prevent them from ever being 
designated as a SIFI?
    Secretary Lew. The process is not one where we assume that 
everyone could be a SIFI. It is to go through the firms that 
present themselves because of their size, complexity, and 
structure.
    Mr. Ross. True. True. But are we not focusing on more of a 
treatment for the cure instead of giving the prevention of the 
problem.
    Secretary Lew. I think the reality is that no two firms 
present themselves in an identical place. And the way we go 
through the analysis looks at each firm and the risk that it 
presents through a--
    Mr. Ross. And it should be done--
    Secretary Lew. --consistent set of questions.
    Mr. Ross. It should be done that way. But, again, in a 
proactive way, if these firms being looked at were given some 
guidance to prevent them from ever going over the cliff, we 
wouldn't have to have--
    Secretary Lew. Right.
    Mr. Ross. --the designation.
    Let me move into something really quickly here on asset 
managers, because I think asset managers are pretty important, 
and I have some concerns about them being declared SIFIs.
    For example, in Dodd-Frank, it says that some of the 
criteria to include are leverage, the extent and nature of the 
off-balance-sheet exposure of the companies, the amount and 
types of liabilities of the company, including the degree of 
reliance on short-term funding.
    Let's talk about leverage. What is a leverage ratio that 
you would consider to be worrisome? 30 to 1?
    Secretary Lew. Yes, I don't want to give you a single 
number. Obviously, the larger it is, the--
    Mr. Ross. So smaller would be better.
    Secretary Lew. Yes.
    Mr. Ross. And knowing that, 5 to 1 may even be a little bit 
of a concern.
    Secretary Lew. And it depends on what the investments are 
in.
    Mr. Ross. Correct.
    Secretary Lew. It is a combination of leverage and risk.
    Mr. Ross. When asset managers will not--they won't have a 
greater than 1\1/2\-to-1 risk--in fact, I think Vanguard has 
1.04-to-1 risk, which is about almost minuscule--it would seem 
to me that should be a consideration that would prevent them 
from even being considered a SIFI. Would you agree?
    Secretary Lew. It is certainly a factor that you would have 
to consider. And we have made our focus for this last period of 
time looking at the activities that contain the most risk, 
because we don't--
    Mr. Ross. But they don't really contain risk. Asset 
managers don't contain risk. They are basically--they don't 
even have any collateral as such to have risk.
    Secretary Lew. First, asset managers have different 
business models. Some of them are leveraged; some of them are 
not leveraged.
    Mr. Ross. But the leverage is very minuscule.
    Let me just go into this, if I can. Once you are a SIFI, 
then you become jointly and severally liable for all SIFIs, do 
you not? If one fails, then everybody that is a SIFI bears the 
brunt of that?
    Secretary Lew. I am not sure what you mean by joint and 
several. It--
    Mr. Ross. The SIFIs themselves will bail out the SIFIs.
    Secretary Lew. I am just--I am not sure what you are 
referring to.
    Mr. Ross. Okay.
    Let me move on, then, to what the impact is if an asset 
manager were to be deemed a SIFI. You, of course, realize the 
cost of compliance, but, most importantly, asset managers deal 
in mutual funds, they deal in 401(k)s, they deal in investments 
that deal with people's retirements and pensions.
    And there is a study out there by the American Action Forum 
that indicated that the capital requirements necessary if an 
asset manager was deemed a SIFI could raise the cost as much as 
25 percent, that over the life of that program for the retiree 
could be over $100,000.
    Will that not be taken into consideration when trying to 
determine whether or not they are a SIFI?
    Secretary Lew. Obviously, those same retirees have an 
interest in making sure that they have access to their savings 
when they need them and that they--
    Mr. Ross. But it is having a significant impact--
    Secretary Lew. Yes. So--
    Mr. Ross. --on the mom-and-pop--
    Secretary Lew. --I don't start out with the presumption 
that firms should be or shouldn't be designated. I think we 
have to complete the analysis and come to a conclusion of what 
risk factors we are looking at and if those risk factors 
warrant any kind of action. So--
    Mr. Ross. I agree with you. I just think it would be a good 
preventive measure to do it in conjunction with the institution 
so that they can prevent that risk from ever being taken--
    Secretary Lew. Yes.
    Mr. Ross. --and ultimately continue in a very stable 
financial environment.
    Secretary Lew. My sense is that the asset management 
industry is very much offering its views as we go through this 
process.
    Mr. Ross. Very strongly. Yes, sir.
    I see my time is up. I will yield back.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Maryland, Mr. Delaney.
    Mr. Delaney. Thank you, Mr. Chairman.
    And thank you, Mr. Secretary, for being here.
    I want to associate myself with the comments that 
Congressman Ross just made, because I have a similar view on 
asset managers, but I don't want to take up my time to talk 
about that.
    When I walked in, I thought I heard my colleague asking you 
about the prioritization of our debts, but I might not have 
heard that. And I know you weren't able to answer it, so I do 
want to make a comment on that.
    It seems to me that is a really misguided idea, because the 
best credits in the world, which, obviously, we should view the 
United States as certainly one of them, never prioritize their 
debts. Right? Berkshire Hathaway, ExxonMobil, all these 
terrific credits, all their debts are treated the same, and 
they have great flexibility as a result, whereas weak credits 
are forced by the market to prioritize their debt so that 
people know exactly what they have and when they get it paid.
    So it strikes me it would be a really misguided idea to 
force the United States Government into a position where it was 
somehow signaling to the world that we are weak credit. I don't 
know if you agree with that. Very quickly, if you don't mind.
    Secretary Lew. I couldn't agree more.
    I think that the reality is the technical question of could 
you pay principle and interest misses the point, which is that, 
if you pick and choose what you pay, you are going to default 
on something.
    Mr. Delaney. Right. And you are going to present very 
differently than the way we want the United States--
    Secretary Lew. Even if you reach the conclusion that you 
had to do that because it would be disastrous not to, it is a 
terrible place to be because you are still in default.
    Mr. Delaney. Right.
    Secretary Lew. So the only thing that solves the issue is 
to raise the debt limit.
    Mr. Delaney. So the second question is about the liquidity 
crisis, and I know you have talked about this a lot.
    And it is interesting, when you think about the role of 
banks, which have been very important to our economy for a long 
period of time, which is why the government has supported them, 
which is why we also try to regulate them in ways that make 
sense, right now banks are not all that important when markets 
are good. There are a lot of other alternatives for liquidity. 
But they are really, really important when markets are bad 
because there is no incentive for market-based participants to 
really participate in markets when they are bad, other then if 
they are kind of vulture investors and trying to get really 
good deals.
    And I do worry that what has happened with liquidity has 
put these banks in a position that, if there were some kind of 
a crisis, they wouldn't be able to respond as well. And I know 
there are a lot of reasons why this liquidity data is emerging, 
but it seems to me--and this is coming from someone who is 
supportive of the regulatory response that we have had, 
supportive of Dodd-Frank. I think all the things we did we 
obviously had to do.
    But it seems to me the notion of having very high minimum 
liquidity standards for banks, coupled with not looking at 
risk-weighted assets from a capital test and having this kind 
of overlay where you still risk-weight assets but you need a 
minimum amount of capital, which inevitably puts a lot of 
capital against really low-risk-weight assets like Treasuries, 
it seems to me those create very big incentives for banks not 
to be liquidity providers in a crisis.
    Do you agree with that assessment?
    Secretary Lew. I think that the liquidity rules, the theory 
behind them was you look at the overall exposure of the firm, 
and they didn't make distinctions between different kinds of 
assets.
    I obviously think that Treasuries and cash have a degree of 
safety that is different--
    Mr. Delaney. Right.
    Secretary Lew. --than almost any other asset in the world. 
But that is a different approach than saying everything is 
treated the same.
    Mr. Delaney. Right.
    Would you support changes to the regulatory framework that 
actually eliminated disincentives for institutions to hold 
Treasuries and cash so that they are actually in a position to 
do their job in a crisis?
    Secretary Lew. I don't think we have any evidence that they 
are not in a position to do their job. The Treasury markets 
remain deep and liquid. And as I have said a couple of times 
today, I don't think that what people looked at on October 
15th, in terms of the movement on Treasuries, had to do with a 
lack of--it wasn't the effect of any kind of regulatory 
environment.
    Mr. Delaney. But the people running these institutions seem 
to think they have a disincentive to hold liquidity in cash.
    Secretary Lew. Yes.
    Mr. Delaney. So sometimes perception becomes reality.
    Secretary Lew. I will give you an example. I have heard a 
lot of them say as if it affects the Treasury market, that 
Volcker is the reason, but Volcker--
    Mr. Delaney. That has nothing to do with it.
    Secretary Lew. --Volcker doesn't cover Treasuries.
    Mr. Delaney. I agree. I am talking about Treasuries.
    Secretary Lew. Yes. So, in Treasuries, I think you asked 
the right question, is it something in the leverage rules, 
because the other rules didn't--
    Mr. Delaney. Because it used to be, no matter how many 
Treasuries you had, you didn't have to have, really, capital 
against them.
    Secretary Lew. Right.
    Mr. Delaney. Now you kind of do. So, in my mind, if I was 
running an institution, that would make me have less of them.
    Secretary Lew. Right. I think that it is very important for 
us to maintain the deep and liquid Treasury markets. It is 
something that is part of what makes our dollar the world's 
reserve currency. It is part of our economic backbone. I don't 
see a weakness in the Treasury market right now, but I can 
assure you that--
    Mr. Delaney. You are looking at it.
    Secretary Lew. --a day doesn't go by when I don't ask 
questions about it.
    Mr. Delaney. Right. Sure.
    Last question, Ex-Im Bank. I have talked about ideas where 
institutions like Ex-Im are required to sell off some of their 
portfolio on a regular basis so there is better transparency as 
to how their assets are priced. Do you support approaches like 
that?
    Secretary Lew. I am not familiar with that proposal. I 
would be happy to look it.
    I think the Ex-Im Bank does enormously important work in 
leveling the playing field for U.S. exporters. It throws off 
a--
    Mr. Delaney. Right. And I agree with that position. I just 
think additional transparency around how they price their 
assets is useful--
    Secretary Lew. I just haven't looked at that. I would be 
happy to look at it.
    Mr. Delaney. Yes.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair wishes to alert Members that in order to 
accommodate the Secretary's schedule, we anticipate clearing 
three more Members in the queue. Presently, that would be Mr. 
Stivers, Mr. Pittenger, and Mr. Barr, depending on whether or 
not somebody else walks in on the Democratic side.
    The gentleman from Ohio, Mr. Stivers, is now recognized.
    Mr. Stivers. Thank you, Mr. Chairman.
    Right here, Mr. Secretary. How are you?
    Secretary Lew. I am well. How are you?
    Mr. Stivers. Good.
    So you have already answered questions from Mr. Duffy and 
Mr. Ross and Mr. Fincher about liquidity. I want to ask a 
couple of things about that.
    You have said you don't think there is a problem, and, to 
you, the world is rainbows and unicorns and everything is good 
with liquidity.
    Secretary Lew. I don't think that is what I said.
    Mr. Stivers. You said there wasn't a problem with 
liquidity, didn't you?
    Secretary Lew. No. I said I think the Treasury market--we 
haven't seen problems in the Treasury market. I think there are 
issues about liquidity that require a lot of attention, and I 
went through at some length the kinds of issues that I think we 
need to pay attention to.
    Mr. Stivers. Great. Okay. Well, then, let's talk a little 
bit about that.
    So you do believe that we need to give it a little 
attention. In your role of Chair of the FSOC, have you directed 
the Office of Financial Research (OFR) to study this problem 
and how the policies that are completed and proposed might come 
together to cause a problem? Or have you asked them anything at 
all?
    Because some of us would love to see them do a study. I 
wrote them a letter asking them to do a study. And I am just 
curious if you have asked them to do a study on it, on 
liquidity and--
    Secretary Lew. They are doing work in this area. And they 
have obviously issued some analysis, and I know they have other 
work that is ongoing.
    And I think it is not just an OFR question. It is a 
question that we have to ask in domestic finance in Treasury, 
securities and banking regulators have to ask. So I think that 
there is a serious conversation in this area.
    What I have tried to make clear is that it would be a 
mistake to jump to conclusions about what the relationship 
between the safer, sounder world after financial reform and 
liquidity is. We have to be open to it but not assume that is 
the whole explanation.
    Mr. Stivers. I don't disagree with you, which is why I ask 
you if you would ask the OFR to do a study.
    And so you just indicated there is some work going on. When 
can we expect to see a study from OFR around--
    Secretary Lew. I would have to get back to you on the 
workstream.
    Mr. Stivers. Please do. Because that is their job. Their 
job is--it is called the Office of Financial Research. So it 
seems to me that they are the most logical place to look at it.
    Secretary Lew. They have been doing a lot of analysis on 
October 15th, for example, to understand what happened on that 
day. And they are very much in the space of helping to make it 
possible to look between the data that different regulators 
have and do the analysis.
    Mr. Stivers. Which is their job. And I am just asking you--
    Secretary Lew. Yes.
    Mr. Stivers. --to have them do their job and make that 
available to us. Because, as policymakers, we would love to see 
that, and it may impact some of the policies we decide to make. 
And as somebody who enforces those policies that are made by 
Congress, obviously you have some ability to change the way you 
do your job too.
    But we would love to see that information. And the sooner 
we can see it, the sooner we can make an informed decision, as 
opposed to either one of us, maybe me assuming that it is a 
problem and you assuming it is not. Let's look at--
    Secretary Lew. I couldn't agree more that we have to 
understand things before we act.
    Mr. Stivers. So please ask them do a study that is detailed 
with regard to this. Because I think, when you see what is 
going on between the Volcker Rule and what is going on with the 
Department of Labor and what is going on in the private sector 
separately from regulation, where a lot of people are 
simplifying their business model, getting out of some risky 
businesses, those three come together in a way that could 
really cause a liquidity crisis in the future. And I just want 
to make sure we look toward it and try to anticipate it and 
head it off. So, please, I would urge you to do that.
    The other question I have, really quickly, is with regard 
to designating systemically important institutions. Has anybody 
talked to you about that? Because I didn't hear whether anybody 
had talked much to you about that.
    Secretary Lew. There were quite a number of questions 
earlier.
    Mr. Stivers. So--
    Secretary Lew. I am not sure what question--
    Mr. Stivers. Okay. Well, do you think the $50 billion--
let's talk about banks for a second. The $50 billion level--
many folks, including folks at the Federal Reserve, have said 
that is an inadequate and artificial number. How do you feel 
with that number in the law?
    Secretary Lew. I think that it is important that we use the 
flexibility we have to treat institutions of different size 
differently. And we have tried to do that, and we need to 
continue to ask, is it being done as well as we can do it.
    I think it is a mistake, though, to think that a $2 billion 
institution is the same as a $50 billion institution or a $100 
billion or a $500 billion institution. So I think some of the 
suggestions that I have heard about drawing the line, say, at 
$500 billion are very bad policy. That would take the next six 
largest institutions out of the heightened supervision.
    Mr. Stivers. Let me suggest an alternative approach. Have 
you looked at nonbank assets, the assets that are not under the 
covered institution--I would ask you to look at that, because 
that is where the systemic risk is created.
    I know my time is gone, but please look at that. I will 
follow up in writing.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from North Carolina, 
Mr. Pittenger.
    Mr. Pittenger. Secretary Lew, there has been some 
discussion today, a considerable amount, regarding the debt. 
From what I understood, you seemed to be somewhat dismissive of 
this concern and of the threat. Do you see it as a threat?
    Secretary Lew. I--
    Mr. Pittenger. Do you see it as an economic--
    Secretary Lew. I have spent most of my professional life 
trying to control our spending and have revenue to cover our 
expenses, so I don't dismiss it at all.
    Mr. Pittenger. Okay. But do you see it--
    Secretary Lew. I think we have made enormous progress--
    Mr. Pittenger. Do you see it as a level of concern as much 
as Iran--
    Secretary Lew. I don't think--
    Mr. Pittenger. --in terms of national security and economic 
security?
    Secretary Lew. I think--
    Mr. Pittenger. How would you place it?
    Secretary Lew. --if we had stayed on the course we were on 
in 2008--
    Mr. Pittenger. No.
    Secretary Lew. --I would say that--
    Mr. Pittenger. Sir--
    Secretary Lew. --we have made progress since then. I 
don't--
    Mr. Pittenger. --with all due respect, let me ask you--this 
is the question I am asking. How do you view the threat? Do you 
view it as important as the concern we have with Iran and the 
security threat there?
    Secretary Lew. I--
    Mr. Pittenger. The economic threat that we have with the 
debt--
    Secretary Lew. Look, I--
    Mr. Pittenger. --do you sense that? Is that as compelling 
to you?
    Secretary Lew. I think they are, obviously, very different 
kinds of--
    Mr. Pittenger. They are.
    Secretary Lew. --threats. We have made a lot more progress 
on our fiscal position than we have in terms of moving Iran.
    Mr. Pittenger. I understand that.
    You heard the statement from Admiral Mullen earlier, and 
you hear it from Peter Orszag still today, the former budget 
writer for Mr. Obama, still talking about the trajectory of 
spending and the concerns over the debt.
    I was with Erskine Bowles over the weekend. I have known 
Erskine for 25 years. He made a statement publicly this last 
fall regarding the spending levels and the debt and where that 
is headed.
    There are a lot of people who give a clear focus on the 
debt and see it as a major priority and a concern. And what I 
am asking you, do you see the same level of concern--when you 
put your head on a pillow at night, does that keep you awake as 
much as Al Qaeda?
    Secretary Lew. Congressman, we have made enormous 
progress--
    Mr. Pittenger. No, no, no. That is not the question, with 
all due respect.
    Secretary Lew. But it is the reason why my answer is what 
my answer is. If you had asked me this question in 2009, I 
would have given you a different answer than I am giving you 
now because--
    Mr. Pittenger. I am asking you today.
    Secretary Lew. --we are not in the same place.
    Mr. Pittenger. Is it a vital concern to you today?
    Secretary Lew. I don't think it is the most pressing 
concern today, because we have controlled the rate of growth--
    Mr. Pittenger. So $18 trillion, that is not a concern to 
you?
    Secretary Lew. As a percentage of GDP, we have stabilized 
the deficit and the growth of the debt.
    Mr. Pittenger. And the trajectory of spending is going up--
    Secretary Lew. I think--
    Mr. Pittenger. --not leveling off.
    Secretary Lew. --for the next 10 years, we have a stable 
debt and deficit situation.
    Mr. Pittenger. Here is Erskine Bowles--
    Secretary Lew. It does not mean--
    Mr. Pittenger. Excuse me. Here is Erskine Bowles, October 
2014: ``The deficit is projected to return to an upward path 
over the rest of the decade and beyond.''
    Sir, a lot of smart people disagree with you. A lot of 
smart people are concerned about the trajectory of spending and 
the imploding debt and the fiscal crisis that is going to put 
us in. And what I am asking you is, do you not share that 
concern?
    Secretary Lew. Congressman, I am telling you I do have a 
concern about our fiscal policy. We have to maintain a 
responsible fiscal policy. We also have to maintain growth, and 
we have to--
    Mr. Pittenger. Do you think it is enough to talk about, to 
bring it to the American people?
    Secretary Lew. We have done more than talk, Congressman. We 
have reduced the debt--
    Mr. Pittenger. Sir, in all due respect, the man that you 
work for, that you report to, has he ever brought it up in an 
inauguration? Has he ever brought it up at the State of the 
Union address? He came here to the Capitol this week to talk 
about TPA. Has he ever come to talk to the Members of Congress 
about the debt and the--
    Secretary Lew. Congressman, when he took office--
    Mr. Pittenger. The man that you advise, do you advise him 
to address this debt concern?
    Secretary Lew. Congressman, we have reduced the deficit as 
a percentage of GDP from 10 percent--
    Mr. Pittenger. That is--
    Secretary Lew. --to under 3 percent.
    Mr. Pittenger. I am talking about the future.
    Secretary Lew. That speaks to what we are doing and what we 
have done.
    Mr. Pittenger. There are a lot of smart people who 
proceeded you in your job who have serious concerns about it.
    Let me go on to another issue, and that deals with FATF. 
There are 34 countries, as you know, committed to the 40 
recommendations of FATF in going after terrorism, terrorism 
financing. What capabilities do we have of going after those 
countries that are not in compliance?
    We have Turkey, we have Qatar. Clearly, they are complicit 
with terrorism financing. What role can you play as enforcer, 
in that FATF is not an enforcer? They merely have the 
standards. And yet, clearly, we see the infractions by those 
who, in some measure, like Turkey, is a member of NATO.
    Secretary Lew. FATF has been a very important process to 
bring the world community together behind high standards to 
control bad practices and bad activity.
    We are very much engaged on a bilateral basis with any 
country that we see doing things or not doing things that they 
need to do to control--
    Mr. Pittenger. Have you called out Turkey on the matter?
    Secretary Lew. I have talked with our counterparts in 
Turkey about what they need do in their banking system, and--
    Mr. Pittenger. Have you called out Qatar?
    Secretary Lew. I have talked to people in most of the world 
about this issue. And when we talk, they actually respond and 
they move.
    So it is not an easy process where you can just kind of 
turn a switch and have everybody doing everything they need to 
do, but we are engaged very deeply at a very high level around 
the world.
    Mr. Pittenger. Thank you for your service.
    I yield back.
    Chairman Hensarling. The gentleman yields back.
    Our last questioner will be the gentleman from Kentucky, 
Mr. Barr. He is now recognized.
    Mr. Barr. Thank you, Mr. Chairman.
    Mr. Secretary, thank you for your patience and for staying 
with us here.
    Since we have talked a lot today about market liquidity, 
let me bookend our discussion here today with that subject.
    The Center for Financial Stability has found that market 
liquidity has declined 46 percent since its peak in March of 
2008. And a recent article in the Wall Street Journal provides 
this analysis: ``Talk to almost any banker, investor, or hedge 
fund manager today, and one topic is likely to dominate the 
conversation. It is the lack of liquidity in the markets and 
what this might mean for the world economy and their 
businesses. Market veterans say that they have never 
experienced conditions like it. Banks have become so reluctant 
to make markets that it has become hard to execute large 
trades, even in the vast foreign exchange and government bond 
markets, without moving prices.''
    So I want to address my question to your skepticism that 
regulation has played a part in this liquidity issue.
    Have you heard from bankers, many of your former colleagues 
on Wall Street, and bankers that I have heard from as well, 
that they are less likely today to engage in market-making 
activities as a result of Volcker and other regulatory 
pressures?
    Secretary Lew. Look, I have heard people say things, some 
of which are supported by facts and some of which are not. So--
    Mr. Barr. But, clearly, as Secretary of the Treasury, you 
have--
    Secretary Lew. I talk to people all the time.
    Mr. Barr. Yes, and they have given you that feedback. But 
what is it that leads you to doubt their sincerity, or do you 
not--
    Secretary Lew. I am not doubting anyone's sincerity. I 
think people see the world the way they see it. Sometimes it is 
right, and sometimes it is wrong.
    I think that--you just cited at the end of the piece that 
you read that people are saying they are having trouble moving 
blocks of bonds in any size they want without any movement in 
price. I think that has something to do with market structure. 
You have different players in the market now. It may mean that 
to maintain liquidity you have to do multiple transactions.
    Mr. Barr. I understand, but--
    Secretary Lew. That is different from not being able to 
transact.
    Mr. Barr. Yes. I understand. But would you acknowledge that 
when banks become reluctant to engage in market-making that 
impacts liquidity?
    Secretary Lew. I think there are different kinds of market-
making going on. There is a lot of market-making going on, and 
you can't roll back the clock. The fact that you have the 
emergence of, say, electronic trading and high-frequency 
trading, there is a lot of activity taking place in that space 
that isn't the traditional broker-dealer model.
    Mr. Barr. Let me take one example, and that is the 
collateralized loan obligation marketplace: $350 billion of 
senior secured commercial and industrial loans that provide 
financing for very dynamic job-producing companies, many of 
which are actually in my own district.
    Would you acknowledge that the Volcker Rule has forced 
banks to take pretty significant losses in AAA and AA CLO 
paper?
    Secretary Lew. Obviously, the Volcker Rule is still taking 
effect. It hasn't--
    Mr. Barr. There are already banks being forced to divest 
AAA and AA CLO paper.
    Secretary Lew. Banks are going to have to not have 
proprietary investments that they had in the past.
    Mr. Barr. Right, but let me ask you--
    Secretary Lew. That means that they are going to have to 
sell some assets.
    Mr. Barr. Sir, do you know how many AAA or AA tranches of 
CLO notes defaulted over the last 20 years? The answer is zero. 
The Volcker Rule is forcing banks to divest in very safe 
investments. And you have to acknowledge that has a 
destabilizing impact on the financial stability of these 
institutions.
    Secretary Lew. But I think you also have to acknowledge 
that the exposure to risk on proprietary investments was a 
significant--
    Mr. Barr. What risk is there with AAA or AA CLO notes that 
have never defaulted over 20 years and performed well during 
the financial crisis?
    Secretary Lew. The objective of the Volcker Rule was to 
reduce the level of risk exposure of firms by getting them out 
of proprietary investments. I think that we will be better off 
when that is implemented. And I think the markets will adapt--
    Mr. Barr. You don't dispute the fact that Volcker forces 
banks, which haven't defaulted in 20 years, to divest of AAA 
paper?
    Secretary Lew. With the exception of Treasuries, it is a 
pretty tight rule in terms of--
    Mr. Barr. Let me conclude just really quickly with one 
other point, and that is community banks.
    Community banks in my district, the bankers tell me that 
Dodd-Frank and the avalanche of compliance costs and red tape 
has really impacted their bottom line. And the numbers bear 
this out. The number of community banks $10 billion or below 
has shrunk from 7,700 in the second quarter of 2010 to only 
6,300.
    Meanwhile, there is consolidation in the industry. So the 
big banks, the SIFI banks, are larger. And too-big-to-fail is a 
bigger problem now because we don't have diversity and we don't 
have as much competition in the system.
    Can you respond to that financial stability issue?
    Secretary Lew. Look, I think the consolidation was going on 
before Wall Street reform was enacted, and I am not sure that 
consolidation is leading to the SIFIs taking over. It is mostly 
smaller banks combining. And it is an issue that--we have a 
real shared interest in making sure communities have access to 
community banks--
    Mr. Barr. And I would encourage FSOC to look at 
consolidation, industry consolidation, as a problem, because it 
is exacerbating too-big-to-fail.
    Thank you. I yield back.
    Chairman Hensarling. Although there are other Members in 
the queue, they will not be recognized today.
    I would like to thank Secretary Lew for his testimony.
    The Chair notes that some Members may have additional 
questions for this witness, 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 this witness and to place his 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.
    Mr. Secretary, we would ask that your office respond as 
promptly as you are able. And I mean this most respectfully and 
sincerely: We would ask that Treasury cease the response dump 
at midnight before your appearances. That is a sincere request 
to you, sir.
    With that, this hearing stands adjourned.
    [Whereupon, at 1:13 p.m., the hearing was adjourned.]
    
    

                            A P P E N D I X



                             June 17, 2015
                             
                             
                             
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