[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
IS TREASURY USING BAILOUT FUNDS TO INCREASE FORECLOSURE PREVENTION, AS
CONGRESS INTENDED?
=======================================================================
HEARING
before the
SUBCOMMITTEE ON DOMESTIC POLICY
of the
COMMITTEE ON OVERSIGHT
AND GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
NOVEMBER 14, 2008
__________
Serial No. 110-170
__________
Printed for the use of the Committee on Oversight and Government Reform
Available via the World Wide Web: http://www.gpoaccess.gov/congress/
index.html
http://www.oversight.house.gov
U.S. GOVERNMENT PRINTING OFFICE
50-097 PDF WASHINGTON : 2009
----------------------------------------------------------------------
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800
Fax: (202) 512�092104 Mail: Stop IDCC, Washington, DC 20402�090001
COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM
HENRY A. WAXMAN, California, Chairman
EDOLPHUS TOWNS, New York TOM DAVIS, Virginia
PAUL E. KANJORSKI, Pennsylvania DAN BURTON, Indiana
CAROLYN B. MALONEY, New York CHRISTOPHER SHAYS, Connecticut
ELIJAH E. CUMMINGS, Maryland JOHN M. McHUGH, New York
DENNIS J. KUCINICH, Ohio JOHN L. MICA, Florida
DANNY K. DAVIS, Illinois MARK E. SOUDER, Indiana
JOHN F. TIERNEY, Massachusetts TODD RUSSELL PLATTS, Pennsylvania
WM. LACY CLAY, Missouri CHRIS CANNON, Utah
DIANE E. WATSON, California JOHN J. DUNCAN, Jr., Tennessee
STEPHEN F. LYNCH, Massachusetts MICHAEL R. TURNER, Ohio
BRIAN HIGGINS, New York DARRELL E. ISSA, California
JOHN A. YARMUTH, Kentucky KENNY MARCHANT, Texas
BRUCE L. BRALEY, Iowa LYNN A. WESTMORELAND, Georgia
ELEANOR HOLMES NORTON, District of PATRICK T. McHENRY, North Carolina
Columbia VIRGINIA FOXX, North Carolina
BETTY McCOLLUM, Minnesota BRIAN P. BILBRAY, California
JIM COOPER, Tennessee BILL SALI, Idaho
CHRIS VAN HOLLEN, Maryland JIM JORDAN, Ohio
PAUL W. HODES, New Hampshire
CHRISTOPHER S. MURPHY, Connecticut
JOHN P. SARBANES, Maryland
PETER WELCH, Vermont
JACKIE SPEIER, California
Phil Barnett, Staff Director
Earley Green, Chief Clerk
Lawrence Halloran, Minority Staff Director
Subcommittee on Domestic Policy
DENNIS J. KUCINICH, Ohio, Chairman
ELIJAH E. CUMMINGS, Maryland DARRELL E. ISSA, California
DIANE E. WATSON, California DAN BURTON, Indiana
CHRISTOPHER S. MURPHY, Connecticut CHRISTOPHER SHAYS, Connecticut
DANNY K. DAVIS, Illinois JOHN L. MICA, Florida
JOHN F. TIERNEY, Massachusetts MARK E. SOUDER, Indiana
BRIAN HIGGINS, New York CHRIS CANNON, Utah
BRUCE L. BRALEY, Iowa BRIAN P. BILBRAY, California
JACKIE SPEIER, California
Jaron R. Bourke, Staff Director
C O N T E N T S
----------
Page
Hearing held on November 14, 2008................................ 1
Statement of:
Barr, Professor Michael, former Deputy Assistant Secretary
for Community Development, Department of Treasury,
University of Michigan Law School & Center for American
Progress; Professor Anthony B. Sanders, W.P. Carey School
of Business, Arizona State University; Alys Cohen, staff
attorney, National Consumer Law Center; Larry Litton, Jr.,
president and CEO, Litton Loan Servicing LP; Stephen S.
Kudenholdt, chairman, Thacher Proffitt & Wood; and Thomas
Deutsch, deputy assistant director, American Securitization
Forum...................................................... 52
Barr, Professor Michael.................................. 52
Cohen, Alys.............................................. 77
Deutsch, Thomas.......................................... 124
Kudenholdt, Stephen S.................................... 107
Litton, Larry............................................ 99
Sanders, Professor Anthony B............................. 70
Kashkari, Neel, Interim Assistant Secretary of the Treasury
for Financial Stability and Assistant Secretary of the
Treasury for International Economics and Development....... 13
Letters, statements, etc., submitted for the record by:
Barr, Professor Michael, former Deputy Assistant Secretary
for Community Development, Department of Treasury,
University of Michigan Law School & Center for American
Progress, prepared statement of............................ 55
Cohen, Alys, staff attorney, National Consumer Law Center,
prepared statement of...................................... 79
Deutsch, Thomas, deputy assistant director, American
Securitization Forum, prepared statement of................ 126
Kashkari, Neel, Interim Assistant Secretary of the Treasury
for Financial Stability and Assistant Secretary of the
Treasury for International Economics and Development,
prepared statement of...................................... 15
Kucinich, Hon. Dennis J., a Representative in Congress from
the State of Ohio, prepared statement of................... 4
Kudenholdt, Stephen S., chairman, Thacher Proffitt & Wood,
prepared statement of...................................... 109
Litton, Larry, Jr., president and CEO, Litton Loan Servicing
LP, prepared statement of.................................. 101
Sanders, Professor Anthony B., W.P. Carey School of Business,
Arizona State University, prepared statement of............ 72
IS TREASURY USING BAILOUT FUNDS TO INCREASE FORECLOSURE PREVENTION, AS
CONGRESS INTENDED?
----------
FRIDAY, NOVEMBER 14, 2008
House of Representatives,
Subcommittee on Domestic Policy,
Committee on Oversight and Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 10:05 a.m., in
room 2154, Rayburn House Office Building, Hon. Dennis J.
Kucinich (chairman of the subcommittee) presiding.
Present: Representatives Kucinich, Cummings, Issa, and
Bilbray.
Staff present: Jaron R. Bourke, staff director; Charles
Honig and Noura Erakat, counsels; Jean Gosa, clerk; Charisma
Williams, staff assistant; Leneal Scott, information systems
manager; Charles Phillips, minority senior counsel; Jason
Scism, minority counsel; Molly Boyl, minority professional
staff member; and Larry Brady and John Cuaderes, minority
senior investigators and policy advisors.
Mr. Kucinich. The subcommittee will come to order.
The Subcommittee on Domestic Policy of the Committee on
Oversight and Government Reform is now in order. Today's
hearing will examine the foreclosure crisis and its solutions.
Without objection, the Chair and the ranking minority
member will have 5 minutes to make opening statements, followed
by opening statements not to exceed 3 minutes by any other
Member who seeks recognition. Without objection, Members and
witnesses may have 5 legislative days to submit a written
statement or extraneous materials for the record.
The title of this hearing is ``Is Treasury Using Bailout
Funds to Increase Foreclosure Prevention, as Congress
Intended?'' Two days ago, Secretary Paulson gave his answer:
``No.''
Secretary Paulson's policy reversal breaks with
congressional intent, contradicts public assurances previously
made by Treasury, and leaves the Federal Government without an
adequate mechanism to stem a tide of home foreclosures.
Congress' intent in enacting the Emergency Economic
Stabilization Act of 2008, the statute that created the
Troubled Asset Relief Program, was in part to buy troubled
mortgage assets and implement a plan to minimize risk for
foreclosures.
Only 3 weeks ago, Mr. Kashkari testified before the Senate
that he was preparing to purchase troubled mortgage assets. Two
weeks ago, Mr. Kashkari's top staff, including an individual
with the position entitled ``Interim Chief for Home
Preservation'' and another in charge of whole mortgage loan
acquisition, spoke with my staff about the Troubled Asset
Relief Program's plans to purchase troubled mortgage assets.
Last week the Treasury filed an interim tranche report required
by the Emergency Economic Stabilization Act stating that
Treasury's policy teams were still committed to preserving
homeownership.
Rather than prevent foreclosures by acquiring troubled
mortgage assets as the Emergency Economic Stabilization Act
authorized, Secretary Paulson announced on Wednesday that the
Troubled Asset Relief Program would not buy mortgage assets.
Instead, Treasury would exclusively continue along the path of
providing preferred equity injections to handpicked companies.
Thus, the only significant use by Treasury of the funds
Congress authorized to address the mortgage crisis underlying
the financial crisis includes, among other things, propping up
a Beverly Hills banker; subsidizing the evisceration of
National City Bank and the laying off of thousands of
Clevelanders who worked there; and indirectly funding the
payment of bonuses, compensation, and dividends by financial
firms that could not have afforded to make them without the
TARP capital infusion. I think it is fairly obvious that
Congress would have never passed the Emergency Economic
Stabilization Act had it known how Treasury would marshal the
resources it was given.
There is a consensus among the business community,
academics and policymakers that the financial crisis will not
be resolved until the mortgage crisis is resolved. There is a
further consensus from experts, some of whom you will hear from
today, that resolution of the mortgage crisis demands stronger
action by the Federal Government than private industry so far
has been willing to undertake.
The Emergency Economic Stabilization Act enables Treasury
to purchase and thereby control the mortgage servicing of
potentially millions of mortgages that will soon go into
default. That control, if exercised, would make a qualitative
difference in the kind of loan modifications that would be
performed because the Federal Government would not and should
not have followed the same restricted loan modification
policies so far pursued by private investors.
To accomplish the social policy of protecting neighborhoods
and preserving the financial system as a whole, once TARP owned
whole mortgage loans, acquired from the bank portfolios and
securitized mortgage pools, TARP could direct mortgage
servicers to make loan modifications in the principal balance
of troubled mortgages. We are going to hear today from industry
and academic experts alike about how critical this step is to
fix our current mortgage crisis.
While there is some disagreement among experts whether
Treasury currently possesses sufficient authority to purchase
mortgages and effect loan modifications over the full range of
mortgage and mortgage-related assets, and there remains an
issue whether Treasury should pursue a mortgage guarantee
program to replace or complement an asset-purchase and
modification program, these technical questions, while
important, should not obscure a fundamental fact: Treasury was
uniquely empowered by Congress and positioned to embark on a
range of foreclosure-prevention efforts that could not be
undertaken by the private sector. Treasury had the money, and
the technical challenges had solutions.
Rather than undertake this difficult but crucial work, the
Treasury Department has abdicated its responsibility to stem
the tide of mortgage foreclosures. They have passed the
responsibility back to the private sector and additional
inadequate government efforts. While there are many hard-
working and well-intentioned people in the industry striving to
do loan modifications, the hard truth is they are not keeping
up with the number of borrowers needing modifications to
prevent foreclosures and default.
As a predictable result, foreclosures have continued to
mount, and millions more are forecast. Furthermore, experience
is showing that there is a significant problem of redefault
where borrowers who are among the lucky few to receive a loan
modification at all are not receiving loan modifications that
cure the dual problems of affordability and negative equity.
Foreclosure is delayed, but not prevented. Treasury's action to
abandon acquiring troubled mortgage assets unfortunately, maybe
tragically, leaves the problem of negative equity unresolved.
I hope that today's hearing will permit us to have a
thorough examination of the basis for the Treasury Department's
decision to ignore the foreclosure prevention objective of the
Troubled Asset Relief Program. As Congress may soon receive a
request for a second installment of $350 billion toward the
Troubled Asset Relief Program, and as we are on the eve of a
new administration which will have the opportunity to
reconsider Secretary Paulson's decision, it would be helpful to
Members of Congress and to the next administration to
understand the viewpoints and assess the judgment of the
current Troubled Asset Relief Program leadership before
deciding to entrust to them the remainder of the bailout funds
and continue their policies.
[The prepared statement of Hon. Dennis J. Kucinich
follows:]
[GRAPHIC] [TIFF OMITTED] T0097.001
[GRAPHIC] [TIFF OMITTED] T0097.002
[GRAPHIC] [TIFF OMITTED] T0097.003
[GRAPHIC] [TIFF OMITTED] T0097.004
[GRAPHIC] [TIFF OMITTED] T0097.005
Mr. Kucinich. At this time I am pleased to recognize the
distinguished Congressmember from the State of California, Mr.
Darrell Issa, who has been not just a ranking member of this
subcommittee, but a partner in expressing concern over so many
of these issues that are reflected not only in this $700
billion bailout, but in Treasury's management of it.
Mr. Issa, I just want to thank you personally for the
efforts that you have made. They have been outstanding. I am
pleased to be with you today, having you join Mr. Cummings and
I.
Thank you.
Mr. Issa. Thank you, Mr. Chairman. In that this may be the
last hearing that you and I do together in our present
capacities, I want to thank you for 2 solid years of
bipartisan, cooperative work, which from a field hearing
standpoint began with going to Cleveland and looking at this
problem approximately 18 months before the Treasury came and
said they had a crisis that needed to immediately be handled.
Mr. Chairman, today I appreciate your holding this hearing,
and I appreciate the joint effort that brought our witness to
us today. The focus of today's hearing is stated to be to
determine whether or not the administration is following the
intent of Congress embodied in the $700 billion financial
bailout package related to mortgage foreclosure prevention.
My interpretation of Mr. Kashkari's testimony and the
remarks by Secretary Paulson on Wednesday demonstrate to me
that the administration is ignoring congressional intent and
reversing course of their original request. I don't know
whether to call this fire-ready-aim, or something more
pejorative.
I approach this issue with somewhat of an interesting
perspective because I, like the chairman, voted against the
bailout not once, but twice. Chairman Kucinich and I sometimes
disagree on the proper role of the Federal Government. In fact,
when it comes to some of the solutions that could be used under
the TARP, we may, in fact, reach opposite conclusions. But I
think we stand here today or sit here today united in two parts
of the problem: One, it was disingenuous in the way that the
administration came to us with a crisis which ultimately could
not have been a crisis as described because the money has not
in any way, shape or form been used as it was asked for; and,
two, that, in fact, Treasury's request for authority appears to
be a request for a blank check of $700 billion, rather than any
definable use of the money other than vaguely saying the money
would be used.
Today I find myself in an odd situation. I am asking
whether I agree with the chairman or not as to exactly what we
are supposed to do with the money. I am asking should we, in
fact, instead of authorizing the second $350 billion pursuant
to the TARP, look at reallocating those funds to HUD, or
actually to the VA and the FHA, because, in fact, if we need to
have people be able to remain in their homes, it is very clear
that Treasury cannot and will not make the effort to keep
people in their homes.
As I said more than 18 months ago, the chairman and I went
to Cleveland. Mr. Chairman, I will be going to Cleveland after
this hearing today because it happens to be both of our homes
and the chairman's district, or historic home in my case. We
saw that people in Cleveland were unable to keep their homes
because the unwinding of the subprime began in those
neighborhoods and those communities first. But it spread
throughout the country. It wasn't until it spread to Wall
Street that the administration came to us with the need for
emergency funds.
I think Congress should have known, and the chairman and I,
I think, did know, that there was something fairly disingenuous
when it was a crisis related to home mortgage, but, in fact,
was a crisis in Wall Street that prompted the action by
Treasury.
I appreciate the witness being here today. I look forward
to your testimony, although, quite frankly, knowing what your
testimony is going to be, I look forward more to the questions
we are going to ask and, in fact, shedding some light on the
real question of should Congress trust this administration to
spend one more penny, and, if we do, what will we get for that
$350 billion that could well be spent, and the remaining few
dollars that is destined to go to AIG and other programs and
individuals and companies not envisioned in the original
legislation.
Last, but not least, I will be asking two tough questions:
Who have you sought to understand the complexity of the market
that you clearly don't understand; and what are you going to do
when you leave this hearing room today to live up to the
expectation of Congress?
With that, Mr. Chairman, I thank you again for holding this
hearing, and I yield back.
Mr. Kucinich. I thank the gentleman.
The Chair recognizes the distinguished gentleman from
Maryland, who has been very active on this subcommittee in
pursuing the answers to the questions that Members of Congress
perhaps should have been asking in the places like the
Democratic Caucus. Mr. Cummings.
Mr. Cummings. I want to thank you very much, Mr. Chairman,
for holding this hearing this morning. I want to take just a
moment, Mr. Chairman, to thank you for your leadership. I join
with others in saying that you have done a phenomenal job
taking on some issues that have not been the most popular, but
I thank you. I know, as Mr. Issa has said, that you have
consistently stood up for the American people, and I want to
thank you.
I also, Mr. Chairman, I only have 3 minutes, but I----
Mr. Kucinich. You have 5 minutes.
Mr. Cummings. Thank you.
Mr. Chairman, I also want to just say, I cannot help, when
I read this morning this statement, this article in the
Washington Post, which says, ``AIG to pay millions to top
workers,'' I have to tell you, it made my heart ache.
Mr. Chairman, I just have to comment on this, and I hope
you will hear me, Mr. Kashkari. I don't think AIG gets it. I
really don't think they get it. They don't get that Americans
are suffering. They don't get that Citicorp laid off 10,000
people; U.S. Steel, 675; Morgan Stanley, 10 percent of its
workers, approximately 44,000 people are employed. That is
quite a number. GM, 3,500; DHL, 12,000; Circuit City, 6,800;
National City, 4,000. I could go on and on and on. These are
announcements that have been made in the last month or so.
My point is simply this, that I think AIG has gotten to the
point, and I have to believe that they just don't get what is
happening in the rest of the country. AIG has come to this
Congress--and I did vote for the bailout, by the way, and I
voted for it because my people were suffering in my district. I
voted against it when it was in the House. I voted for it when
it came from the Senate. But the fact is that the people in my
district are losing their houses, too. The people in my
district are also losing their jobs. And we have an AIG that
will go on these lavish junkets, and, as you probably know,
because of this Congress, they canceled 160 junkets, and they
averaged $200,000 to $250,000 apiece. That is a lot of money
for a corporation that is supposed to be dying and would not be
in existence. Then we open the paper today to hear they are
going to pay millions, as if everything is just the same as it
was, to their employees in bonuses.
Well, the problem is that a lot of the people that we
represent won't even have a job at Christmastime and damn sure
won't have a bonus. So, in some kind of way, I hope that we can
get through to AIG and other companies, because it is bigger
than AIG. I don't want these companies coming to the Congress
with their hand out thinking that they can take the money, do
whatever they want to do, and then have their little parties
and have a good time, get their manicures, pedicures, massages,
pay $1,600 a room, and then come dancing back to us and say,
``give me more,'' when the American people's tax dollars are
being wasted. It is very upsetting.
So, Mr. Chairman, this is an important addition to the full
committee's investigation into what went wrong with the
financial markets. We knew years ago that our economy was
headed for trouble when the housing bubble began to burst. The
first victims were everyday Americans who had been sold loans
they could not afford from dishonest brokers.
We did all in our power to keep people in their homes and
to keep the economy afloat, but we were fought at every turn by
this administration. We asked the administration what authority
they needed to keep the market from going bust, and their
response was a nonresponse. They said, ``We should let the
markets be free. Let the invisible hand work it out.''
Well, we know now that the invisible hand has failed. Wall
Street has come to us, cashmere hat in hand, to ask us for a
$700 billion bailout to recover funds lost from risky deals it
made. When times are good, those risks resulted in windfall
profits, and people got rich; but now that the tables have
turned, the U.S. banking system is turning to the American
taxpayer to bail them out, and the administration is fully
behind them.
This administration wants to privatize Wall Street's gains
and socialize Wall Street's losses. Sadly, the situation is at
such a fever pitch that we simply cannot afford to ignore it.
The risky bets made on Wall Street were so complex that every
single segment of our economy could fail if we do not bail them
out. Further, we are seeing, with the news of the rippling
effect in the European and Asian markets, the global economy is
also on the brink of failure.
It is for these reasons that I held my breath and voted for
this bailout measure.
I am almost finished, Mr. Chairman.
I initially voted against it, because I thought the bill
did not include sufficient oversight and did too little for
Main Street and a lot of the people we are going to talk about
today.
But as with Katrina, the war in Iraq and any number of
smaller issues this administration has been charged with
addressing, Congress has come along to clean up the mess.
Unfortunately, we were not given sufficient time to fully
examine what went wrong on Wall Street before we had to pass
legislation.
But I appreciate the opportunity, Mr. Chairman, to take a
look at these extremely complex issues. I know that with these
hearings, we and the American people will gain a greater
understanding of what went wrong, and as a result we will arm
ourselves with the information necessary to fully address the
economic crisis.
I anticipate that the $700 billion Band-Aid that we placed
on this crisis will stunt the blow of Wall Street failures, but
it will not be enough to insulate us from the failing markets.
With that, Mr. Chairman, I yield back. I want to thank you
for your courtesy.
Mr. Kucinich. The Chair would like to remind people in the
audience that you are here as guests, and this committee is
going to enforce proper decorum, and if we don't have it, you
will be removed.
The committee and myself would like to greet you, Mr.
Kashkari. Thank you for being here today. We are grateful for
your presence.
I want to introduce Mr. Kashkari to the members of the
committee and to the public. Mr. Neel Kashkari was designated
as the Interim Assistant Secretary of the Treasury for
Financial Stability on October 6, 2008.
The Chair is going to pause for a second. Mr. Bilbray, did
you have an opening statement?
Mr. Bilbray. No, I did not, Mr. Chairman.
Mr. Kucinich. OK. Fine. I just wanted to show our colleague
the courtesy.
So in this capacity, Mr. Kashkari, as the Secretary of the
Treasury for Financial Stability, oversees the Office of
Financial Stability, including the Troubled Asset Relief
Program. Mr. Kashkari is also the Assistant Secretary of the
Treasury for International Economics and Development.
He joined the Treasury Department in July 2006 as senior
adviser to U.S. Treasury Secretary Henry Paulson. In that role
Mr. Kashkari was responsible for developing and executing the
Department's response to the housing crisis, including the
formation of the Hope Now Alliance, the development of the
Subprime Fast Track Loan Modification Plan, and Treasury's
initiative to kick-start a covered bond market in the United
States.
Prior to joining the Treasury Department, Mr. Kashkari was
a vice president at Goldman Sachs & Co. in San Francisco.
Mr. Kashkari, thank you very much for appearing before this
subcommittee today. It is the policy of the Committee on
Oversight and Government Reform to swear in all witnesses
before they testify. I would ask that you please rise and raise
your right hand.
[Witness sworn.]
Mr. Kucinich. Thank you, sir. Let the record reflect that
the witness answered in the affirmative.
Mr. Kashkari, I ask, if you can, if you can keep your
opening remarks to 5 minutes in length. Your entire written
statement will be included in the record of this proceeding. We
are very grateful for your presence. Please begin.
STATEMENT OF NEEL KASHKARI, INTERIM ASSISTANT SECRETARY OF THE
TREASURY FOR FINANCIAL STABILITY AND ASSISTANT SECRETARY OF THE
TREASURY FOR INTERNATIONAL ECONOMICS AND DEVELOPMENT
Mr. Kashkari. Thank you, Chairman Kucinich.
Mr. Kucinich. Please pull that mic a little bit closer.
Mr. Kashkari. Thank you, Chairman Kucinich, Ranking Member
Issa, and members of the committee. Good morning, and thank you
for the opportunity to appear before you today.
I would like to provide you with an update on the Treasury
Department's actions to stabilize our financial markets and
restore the flow of credit to our economy.
We have taken actions with the following three critical
objectives: No. 1, stabilizing the financial markets; No. 2,
supporting the housing market by avoiding preventable
foreclosures and increasing mortgage finance; and, No. 3, to
protect the taxpayers.
We have acted quickly and in coordination with the Federal
Reserve, the FDIC and our colleagues around the world to help
stabilize the global financial system, and it is clear that our
coordinated actions are having an impact.
Before we acted, we were at a tipping point. Credit markets
were largely frozen, denying businesses and consumers access to
vital funding and credit. Financial institutions were under
extreme pressure, and investor confidence in our system was
dangerously low.
We recognize that a program as large and as important as
this demands appropriate oversight. We are committed to
transparency and oversight in all aspects of this program and
continue to take strong action to make sure that we comply with
both the letter and the spirit of the requirements established
by the Congress, including regular briefings with the
Government Accountability Office, the Financial Stability
Oversight Board and the inspector general, and we are committed
to continuing to meet all of the reporting requirements
established by the Congress.
As the markets rapidly deteriorated in October, it was
clear to Secretary Paulson that the most timely, effective step
to improve credit market conditions was to strengthen banks'
balance sheets quickly through direct purchases of equity.
Working with our banking regulators, we have now approved
literally dozens of applications from banks across the country,
and we will very soon post the term sheet so private banks can
participate. We feel very strongly that healthy banks of all
sizes, both public and private, should use this program to
increase lending in their communities. With a stronger capital
base, our banks will be more confident and be better positioned
to play their necessary role to support economic activity.
Further in support of this goal, just 2 days ago our
banking regulators issued a statement underscoring the
responsibility that banks across our country have in the areas
of lending, dividend and compensation policies, and foreclosure
mitigation. Treasury commends this action taken by the banking
regulators and believes it is critical to focus on the
importance of prudent bank lending to restore our economic
growth so that we do not repeat the mistakes, the poor lending
practices that are a major cause of our current economic
problems.
On housing we have worked aggressively to avoid preventable
foreclosures, to keep mortgage financing available, and to
develop new tools to help homeowners. Here I will briefly
highlight three key accomplishments.
No. 1, in October 2007, Treasury helped establish the Hope
Now Alliance, a coalition of mortgage servicers, investors and
counselors, to help struggling homeowners avoid preventable
foreclosures. Through coordinated industrywide action, Hope Now
has significantly increased the outreach and assistance
provided to homeowners. Hope Now estimates that nearly 2.5
million, 2.5 million homeowners have been helped since July
2007, and industry is now helping about 200,000 per month avoid
foreclosure.
No. 2, we acted earlier this year to prevent the failure of
Fannie Mae and Freddie Mac, the housing GSEs that touch over 70
percent of mortgage originations. These institutions are
systemically critical to financial and housing markets, and
their failure would have materially exacerbated the recent
market turmoil and profoundly impacted household wealth. We
have stabilized the GSEs and limited systemic risk.
And No. 3, just 3 days ago, Hope Now, FHFA and the GSEs
achieved a major industry breakthrough with the announcement of
a streamlined loan modification program that builds on the
mortgage modification protocol developed by the FDIC and
IndyMac. The adoption of this streamlined modification
framework is an additional tool that servicers will now have to
help avoid preventable foreclosures, and potentially hundreds
of thousands of struggling borrowers will be helped to stay in
their homes.
On Wednesday, Secretary Paulson outlined three critical
priorities and related strategies for the most effective
deployment of remaining TARP funds: No. 1, further
strengthening the capital base of our financial system; No. 2,
supporting the asset-backed securitization market that is
critical to consumer finance; and, No. 3, increasing
foreclosure mitigation efforts.
These priorities are necessary to reinforce the stability
of the financial system so that banks and other institutions
critical to the provision of credit are able to support the
economic recovery and growth and to help homeowners avoid
foreclosure.
In conclusion, our system is stronger and more stable than
it was just a few weeks ago. Although a lot has been
accomplished, we have many challenges ahead of us. We will
focus on the goals outlined by Secretary Paulson and develop
the right strategies to meet those objectives. Foremost among
these will be to ensure that the financial system has
sufficient capital to get credit flowing to businesses and
consumers.
Thank you for this opportunity. I would be happy to answer
your questions.
Mr. Kucinich. I thank the gentleman for his testimony.
[The prepared statement of Mr. Kashkari follows:]
[GRAPHIC] [TIFF OMITTED] T0097.006
[GRAPHIC] [TIFF OMITTED] T0097.007
[GRAPHIC] [TIFF OMITTED] T0097.008
Mr. Kucinich. Without objection, members of the committee
will be given 10 minutes each to ask questions in the first
round, and 5 minutes each to ask questions in the second round
of questioning. Without objection.
I also want to state for the purposes of your staff, Mr.
Kashkari, that they might be prepared in the second round of
questions to be ready to answer questions about the decision of
Treasury with respect to National City Bank and PNC. So if you
could be ready for that, that specific matter. We are going to
have some broad questions now that relate to the overall
economy, but in round two please be ready, because I am going
to have some questions about that.
Mr. Kashkari. I am ready.
Mr. Kucinich. Thank you. I am glad you are.
Now, I heard your testimony, and I have to say that I am a
little bit surprised, because it appears that testimony was
prepared before Mr. Paulson's statement about the purposes of
the Troubled Asset Relief Program and the Secretary's decision
not to purchase mortgage assets through his decision.
Hasn't Treasury rendered obsolete entire sections of the
Emergency Economic Stabilization Act, because there was no
question about congressional intention, that Treasury use an
asset purchase program to mitigate foreclosures. Do you have a
response to that?
Mr. Kashkari. Congressman, thank you for asking that. It is
a very important topic.
We worked very hard with both Houses of Congress to design
the legislation to provide a lot of flexibility, and we and the
other regulators are using every tool at our disposal to get at
this problem, stabilizing the financial system as well as
helping homeowners. And Secretary Paulson and Chairman Bernanke
and Treasury, we have been looking at how do we deploy these
resources to first stabilize the system so we can get credit
flowing to the entire economy, to our communities.
So Secretary Paulson made the determination that the best
way to get at this problem, given how rapidly markets were
deteriorating, was to lead with capital. But that doesn't mean
that we don't care about other aspects that are very, very
important. We are trying to use the right tool to solve the
right problem.
Mr. Kucinich. Well, it would appear, Mr. Kashkari, that
Secretary Paulson has gutted section 109 of the act, which
requires Treasury to undertake specified steps to mitigate
foreclosures with respect to the mortgages it acquires,
including working with other Federal regulators to identify
troubled assets required for the loan modification efforts.
How do you reconcile this policy reversal with Congress'
expectations laid out in the statute?
Mr. Kashkari. Congressman, is a very good question, and I
appreciate you raising it. There are the other sections of the
act, as an example, that direct other government agencies,
whether it is FHFA in its conservatorship of the GSEs, FHA, the
Federal Reserve, to the extent that they own or control
mortgages, to take action. So let me give you an example,
Congressman, because this point is very important.
If we had spent all $700 billion buying loans, that would
be around 3 million loans or so, depending on the value of the
loan, but around 3 million, 3\1/2\ million. Instead, if you
look at the actions that we took on Tuesday, by using the GSEs
to now set a new industry standard for loan servicing, when the
GSEs set a standard, other servicers around the country use
that standard, whether it is for GSE loans or for other loans.
Those actions and that protocol has the ability to influence
servicing for almost every loan in America. There are 55
million residential mortgages in America, so we can touch 3
million, or 55 million.
Mr. Kucinich. Sir, it has the ability. But the problem is
that Treasury, by taking this action that deemphasizes loan
modification, has essentially sent a signal to all the banks
that this isn't particularly what you are concerned about. Even
though you may maintain, oh, this is in there, look, I have the
act. Here is the purposes. I want to spell them out. The
purposes of the act are, ``And No. 2, to ensure that such
authority and facilities are used in a manner that protects
home values.'' Then it goes on to section B, preserves
homeownership.
Now, the Treasury just basically cut that out of the bill.
What we have here is a situation where banks are hoarding the
money that they are getting from the TARP. They are using the
money to purchase other banks. We still have a credit freeze. I
am looking at your testimony. You are saying credit markets
were largely frozen, denying financial institutions,
businesses, consumers access to vital funding and credit.
Financial institutions were under extreme pressure. Investor
confidence in our system was dangerously low.
Hello. Are we in a different universe here? The same
situation prevails today, and yet your testimony acts as
though, well, you know, we are just merrily skipping along our
way here. We have millions of people threatened with losing
their homes, and the underlying problem is that banks are now
increasing their interest rates in order to get more customers.
Think about this now. It is counterintuitive to your
Troubled Asset Relief Program. You are now saying we are going
to put the money into the banks, into these financial
institutions, shore up finance capital. Well, finance capital
now is seeing that the only way they can survive is to start to
raise their interest rates and give away some of the money that
the government is giving to them. At the same time, you are
picking winners and losers.
How do you reconcile these policy reversals? And why won't
Treasury act swiftly and forcefully to maximize assistance to
homeowners under TARP and play a significant role in
modification of home loans at risk of imminent default? Why
not?
Mr. Kashkari. Congressman, I am glad you are raising this,
because I personally have spent most of the past year and a
half focused on ways to try to reach and help homeowners. That
has been my primary focus within Treasury.
Mr. Kucinich. Well, hasn't the Secretary listened to you?
Do you feel frustrated that your position isn't being
vindicated?
Mr. Kashkari. Congressman, the Secretary is passionate
about this as well.
Mr. Kucinich. Passionate about what?
Mr. Kashkari. Helping homeowners, Congressman.
Mr. Kucinich. He is? Where? What country?
Mr. Kashkari. Congressman, we are using all the tools
available to the Federal Government to get at the credit crisis
and try to help homeowners. Let me give you an example, please.
We have different tools----
Mr. Kucinich. Mr. Kashkari, I really respect your being
here, but I am looking at a bill, section 109, that spells all
this out. The Secretary just essentially took some scissors and
cut it out and threw it away. Now, maybe this is just some kind
of a game to some people in the administration. They are on
their way out of office, and they just feel they can do
whatever they want, pick winners and losers in the market. We
have millions of people losing their homes.
Mr. Issa came to my district and saw some of our old
neighborhoods, how they are just falling apart. And we have
people that are holding on, hoping against hope that somebody
is going to help them. We have millions of people in
foreclosure, and if I read it right, Mr. Issa, in California
there are millions more at risk of foreclosure with these jumbo
mortgages and the Alt-A mortgages in 2009 and 2010, and all of
a sudden the Treasury sent a signal to the banks, forget about
it. We are going to give you the money that you want, and you
do what you want with it.
Unless you direct it specifically, it is not going to
happen. So tell me again, why isn't it happening? Not how
passionate the Treasury Secretary is.
Mr. Kashkari. Congressman, I believe it is happening. If
you will permit me, I will walk you through it.
Mr. Kucinich. Please, go ahead.
Mr. Kashkari. The four banking regulators--the Treasury is
not a regulatory agent--the banking regulators supervise the
banks that are getting this capital. The four banking
regulators put out a joint statement that is going to govern
how they supervise these banks. One of the things that they are
going to be looking very closely at and watching, not just
executive compensation, not just dividend policies, is making
sure lending is getting out there in our communities and
foreclosure mitigation efforts.
The banking regulators are the supervisors of these
institutions, and they have now put out a joint statement
saying exactly what they are going to be looking at in their
supervisory capacity. There is no one better positioned in the
country than the banking regulators to do that. Treasury is not
in a position to do that, but the banking regulators absolutely
are. No. 1.
No. 2, Congressman, again, if you look at all the tools
available to us, Housing and Urban Development has a very
important role to play. This Congress. The President signed the
Hope for Homeowners legislation, a $300 billion program to help
housing, just in July, and, Congressman, that program is just
getting up and running now. Treasury is involved in overseeing
that program. That is making progress. The actions we are
taking to get the industry to move, more loan modifications, a
systematic approach, that just got announced on Tuesday. We
have had numerous initiatives to try to get to the root of this
problem.
But the most important benefit, Congressman, for homeowners
is that we didn't allow the financial system to collapse.
Imagine how many foreclosures we would have if the banking
system had collapsed and mortgage finance was not available to
our homeowners. That is the biggest benefit we have been able
to achieve.
And, Chairman, we are not out of the woods yet, and I
didn't mean to suggest that in my testimony, but I can walk
through numerous statistics looking at the beginning of a
healing credit market, which is the first step to getting
through this problem.
Mr. Kucinich. Again, there might be some philosophical
divide here, because on one hand the Bush administration and
Treasury seems to indicate that the trickle-down effect--give
the money to the banks, and they are going to loosen up money
and credit, and it is going to start to flow, and people are
going to be protected. On the other hand, there is another
model which says create a system where you get pools of
mortgage-backed securities the government takes control over,
and you direct loan modification, you know, lowering interest,
lowering principal, extending the terms of payments to keep
people in their homes. One model may keep several big banks
afloat, but risks millions of people losing their home anyway,
and the other model keeps people in their home.
See, you are talking about an if-come model that is based
on the charitable sentiments, seemingly, of major Wall Street
banks. But the truth of the matter is if you don't get the
money into the grassroots and help on loan modification, the
banks aren't going to get their money at the end anyhow,
because one model percolates up; money goes to the banks and
helps move money on Wall Street. The other one, you have this
idea of trickle down, and the trickle never gets down.
Everybody understands that. And yet Treasury seems to cling to
this notion that only the regulators now are going to do their
job.
Are you kidding me? Regulators? Look, Treasury has been
given almost omnipotent power here, and you have,
unfortunately, not exercised in the interest of homeowners.
Do you believe that Congress would have passed the EESA if
it understood that none of the TARP funds would have been
earmarked for asset purchase and subsequent mortgage loan
modifications? This looks like classic bait-and-switch.
Do you want to respond to that?
Mr. Kashkari. Congressman, I really appreciate and respect
your perspective. We worked very hard, in the middle of a
crisis, with the Congress to design the legislation to have
broad flexibility so that we could adapt our strategies and our
approaches based on what is happening in the markets and what
we are seeing. And as we went to the Congress to ask for this
authority and we negotiated the legislation, and I was very
involved in all-night sessions with both Houses to do that, our
credit markets were deteriorating much more quickly than we had
expected. So Secretary Paulson had to take very aggressive
action to stabilize the system.
Again, with deep respect, sir, if we had spent all $700
billion on loans, that would be around 3 million loans. There
are 55 million mortgages in America; 25 million other Americans
own their homes outright, so there are 80 million homeowners in
America. We can benefit 3 million directly by buying all their
loans, or we could benefit every American by not allowing the
financial system to collapse. That was our highest priority,
Congressman.
Mr. Kucinich. Well, just a brief response, and then we go
to Mr. Issa, and that is that we have foreclosures in the city
of Cleveland. Are you aware that when you have a lot of
foreclosures in a neighborhood, the value of everybody's
property drops?
Mr. Kashkari. Yes, sir.
Mr. Kucinich. OK. Thank you.
Mr. Issa.
Mr. Issa. Thank you, Mr. Chairman.
Mr. Kashkari, I appreciate that you were in on those
negotiations with leadership. The majority of Republicans voted
against it, once and twice. Mr. Kucinich wasn't in the meeting
where Secretary Paulson came in with the Vice President and Fed
Chairman Bernanke and made all these assurances that there was
absolutely a critical immediate need to get rid of the
corrosive derivative products, all the different names for this
ubiquitous Sub-S retraded credit default swap, blah, blah,
blah, blah. OK. But they talked about them as though they knew
what the hell they were. You got the money, and you immediately
said, what items, what auction?
Would you please respond, under oath, when did you go from
what you told Members of Congress in open and closed sessions
was the absolute reason to have this money immediately, to buy
a specific group of assets, about $350 billion in the United
States, about $350 billion held by other countries and other
funds outside the United States, those assets were what you
said was locking up and destroying the market--when did you
first hear that money was not going to be spent that way?
Mr. Kashkari. Congressman, the day--on October 3rd, the day
that the Congress passed and the President signed the
legislation, we immediately created several policy teams
developing asset-purchase programs, all of the details, both
mortgage-backed securities----
Mr. Issa. That wasn't the question. I want to know the time
and date, because I want to know whether Congress was lied to,
or whether there was a team all along that had an alternate--
one or more people that had an alternate idea of how this money
would be spent?
Mr. Kashkari. Congressman, forgive me. On October 3rd we
created a team----
Mr. Issa. No, that is not answering the question. And here
is the reason I am asking a very directed question. You can
create the team. You can put together all that.
Look, Circuit City, and I sold them for 20-plus years, so I
am very sensitive to the trouble they are in, Circuit City
announced that they were closing 155 stores and began that
process. They never announced they were filing Chapter 11. But
all of us looked and said, look, they are not going to
renegotiate walking away from 155 leases without a bankruptcy.
So in our minds we knew it is a question of time. Well, they
don't tell you one thing, they do tell you another.
You never in any good faith explained why you formed these
organizations, and now you say it is hopeless and impossible to
buy these products that were the entire reason. You can't have
the success for doing something different than you said without
explaining why you didn't buy one of those assets. And when did
somebody figure out--by date, when did you first learn that we
were not going to buy these assets because we couldn't value
them properly?
Mr. Kashkari. First of all, Congressman, it is not a
question of our ability to value them. The decision was made by
Secretary Paulson very recently, earlier this week, late last
week, when we had finished a lot of our work. It is not just a
question of valuing the assets.
For asset purchases to work, it has to be done in scale,
and when credit markets deteriorated that quickly, much faster
than we thought in late September and early October, he made
the decision with Chairman Bernanke to lead with equity. So now
the $700 billion is no longer $700 billion of asset purchases.
We have allocated $250 billion, so that is $450 billion, and we
made the decision, as we have watched how this has worked and
how the markets have responded, the markets may need more
capital, and now you are left with an asset-purchase program
that much smaller than the original $700 billion.
So we can do it. We have done all the work. We know how to
do the asset-purchase program. But we want to use the capital
to its maximum benefit for the financial system.
Mr. Issa. Let me followup on what you now want to do,
because I want to be respectful of the time of every Member up
here.
First of all, let me ask you a question which is a fact-
finding question. Organizations like the Professional Services
Council, the Information Technology Association of America and
others would like to help and have been reaching out to
Treasury on helping you understand and model what you want to
do with this. They believe they can, in fact, help you.
Have you met with any of these organizations?
Mr. Kashkari. I don't know the organizations you named
personally. We have teams of people who have met with dozens or
hundreds of organizations, soliciting the best ideas and
looking at the services they can provide, and we welcome ideas,
and we get a lot of ideas every day and look at them very
seriously.
Mr. Issa. Would you commit to meet with these organizations
to at least see what help they could give you to model the
problem and perhaps find better solutions than you presently
have?
Mr. Kashkari. Absolutely. The only hesitation I offer is we
have a very formal procurement process, and I don't want to do
anything that would advantage or disadvantage anybody.
Mr. Issa. The Information Association of America is a
501(c). They are not selling a product.
Mr. Kashkari. Wonderful. Then I would be happy to.
Mr. Issa. OK. Second, it has been said that your purchases
of $250 billion-plus of preferred stock is at a price that
would not be market competitive, meaning you paid too much.
Tell me why I am to believe for a minute that those preferred
stocks that you bought you could resell today for anything
close? Remember, the market has improved. You have said that.
Tell me what the profit would be on those preferred stocks if
you began to even put $1 of them into the market today?
Mr. Kashkari. Congressman, I don't know what the price
would be.
Mr. Issa. OK. You are from Goldman Sachs.
Mr. Kashkari. I used to work there.
Mr. Issa. Well, I am from Directed Electronics. You are
from your last job. If you tell me that you have improved the
market, then by definition those assets, if bought at par, have
appreciated. Isn't that true?
Mr. Kashkari. Well, again, with deep respect, Congressman,
there are many different markets. There is the equity market,
there is the credit market. I think there are strong signs, I
can walk you through data showing the credit markets are
improving. The equity markets, we purchased equity.
Mr. Issa. You purchased a debt instrument.
Mr. Kashkari. Well, it is tier one capital, Congressman.
Mr. Issa. You know, we can go ring-around-the-rosy here,
but you are here today because Congress is feeling that you
played a bait-and-switch game, and you are not convincing
anyone that you haven't. But let us just try to go to the
fundamentals. You bought preferred stock.
Mr. Kashkari. Yes, sir.
Mr. Issa. Preferred stock is a debt instrument. You are
capitalizing the company, but you are capitalizing with a debt
instrument. Those instruments trade. I have BB&T, I have--well,
I have a number of debt instruments of that sort. They have, in
fact, appreciated from the time you bought until today in
various portfolios. So I am looking at those, and I am
following a lot more of those kinds of instruments. They have
appreciated.
So my question to you today, under oath, as someone who
should know about this, is are your purchases above par today,
in your opinion?
Mr. Kashkari. Congressman, I don't know. We have
independent valuation firms that are going to provide regular
reporting on the current valuation.
Mr. Issa. Regular reporting starting when? You are here
today. Do you have any regular reporting from the day you
bought them until today?
Mr. Kashkari. We have published the reports to the Treasury
Web site within 48 hours of completing the transactions on the
terms. Right now we are in the process. Just yesterday the
equity asset managers' solicitations concluded, and we
received, I think, hundreds of proposals. We will be engaging
the equity asset managers, who will be providing us the
valuation services and the reporting to the Congress on a go-
forward basis.
Mr. Issa. Wouldn't it be reasonable for us to believe here
today that if, in fact, you have improved the market, that
those assets that you purchased--we will call them equity since
they are a hybrid--have appreciated?
Mr. Kashkari. I think it would be reasonable relative to
the day we bought them.
Mr. Issa. OK. So if we find out on the next report, which I
hope is forthcoming and we will be looking for it, that they
are below par, then, in fact, you paid too much, right?
Mr. Kashkari. Well, again, it depends, Congressman, what
our objective was. Our objective was to create a program that
would encourage thousands of banks across our country to
voluntarily apply and to use the capital. So we intentionally
made it attractive for them to want to apply.
Mr. Issa. So you believe here today that you had authority
to subsidize banks, including providing them this capital at a
below par, a below fair market, of a market that should have
existed but didn't exist?
Mr. Kashkari. Well, Congressman, as you know, the market,
when we did this, there was no market. Most banks couldn't
raise private capital.
Mr. Issa. But, no, we are in a better market today.
Understand, one of the reasons for the question is you have
thrown $350 billion, including AIG and so on, out there. You
are coming back for another $350 billion. If, in fact, what we
discover, and I believe here today, is that your $350 billion--
and let us just look at $250 billion, we will leave AIG, which
is a whole other can of worms, aside. If that money, in fact,
is a subsidy arriving at a price below the fair market price,
thus causing banks to choose you--including banks in my
district--choose you instead of other capital, all you have
really done is give them discount capital.
Now, the reason I ask that is how large is the capital base
necessary for the banking industry in America? Do you have any
idea? Isn't it about $55 trillion, plus or minus?
Mr. Kashkari. In terms of assets or capital?
Mr. Issa. The size of the market, if you will.
Mr. Kashkari. That sounds about right. I don't have those
numbers at my fingertips.
Mr. Issa. So you would have to put several trillion dollars
in to be the owner of that base, even with the multiple.
So the reason I am asking all of this--and I know I have
extended my time, but just to followup one last time--if all
you are doing is moving your money in at a discount to banks
and entities like American Express and GMAC and everybody else
who is rushing to become a bank holding company today as a
result of this deal, then at the end of the day we would have
bought stock at too high a price or debt at too low an interest
rate, however you want to look at these preferred instruments,
and we will have moved people to other capital where they can
to get the returns they want because you are competing at a
price that the market wouldn't accept the loans. You are giving
them a deal that distorts the market.
Isn't that true, based on your background at Goldman?
Mr. Kashkari. When you have a market that is dysfunctional,
any deal that we would put in, because we would be then the
only provider of capital, would--by definition, would be better
than the nonavailable capital in the middle of a crisis.
So, yes, we did offer attractive terms to stabilize the
market.
Mr. Issa. Mr. Chairman, I would note that Warren Buffet
weighed into this with billions of dollars. Wells did a deal.
There have been dollars done. But those dollars, I believe, are
not coming in until the United States quits subsidizing, in
competition to private-sector dollars, that would ask for a
better return and undoubtedly would say that dividends and
excess compensation would have to be curtailed until they were
getting their returns.
I yield back the balance of my time.
Mr. Kucinich. I thank the gentleman. There was a reason why
I voted with the gentleman twice on this same question, the
bailout.
We now recognize, for a period of 10 minutes, Mr. Cummings
of Maryland. You may proceed with your questions.
Mr. Cummings. Thank you very much, Mr. Chairman.
Mr. Kashkari, I must say as I have sat here listening to
your answers, I have been disappointed. I think that you have
kind of skipped around the issues here. I say that because when
I saw pictures of you, I said this looks like a guy who will be
a straight shooter.
So I am going to ask you some questions, sir. I don't say
that trying to embarrass you; I say it because life is short,
and I don't have time to hear ring-around-the-rosy answers.
Let me go back to something that the chairman said. He
asked about whether you understood that when foreclosures take
place, did you realize that it also affects the housing in the
communities? In other words, you sell a foreclosed house at a
lower price, the price-values go down.
Let me ask you a followup question to that. You also
understand that when price-value goes down, local government is
affected because it is based upon--the tax dollars are based
upon that. So--this goes on and on and on, so it is a very
serious problem that we are dealing with here.
Every time I sit in these hearings I always try to put
myself in the position of my constituents who are watching
this, because when I come home--hopefully, I will get home
about 3 today. I live in the inner city of Baltimore, and
believe me, when I go to the supermarket tonight, when I take
my daughter to the movies this evening, I promise you people
are going to ask me about you. And what they are going to say
is, ``Cummings, we watched the hearing. We heard that guy
Kashkari, but I'm losing my house today.''
And they are going to ask the question. They are going to
say, ``We heard about the Citigroup thing where I have to be 3
months behind before I can get help. And we heard that guy
Kashkari; we know that he is in charge of the $700 billion.
What can he tell me today? I don't want a handout; I just want
a hand. I want to pay my mortgage. I just need a little help
because this Bush administration and its policies have put me
in a position where I don't have a job or I'm now working a
part-time job. Help me. Did I miss something, Cummings? What
can Mr. Kashkari--did he say something to help me know how I
can help my family?''
That's what they are asking. They are in pain.
You are on TV. You are the man. I don't know how much we
are paying you, but you're our employee; and I'm asking you to
look in the camera somewhere back here and tell those people
what you are doing.
They hear about the bailouts of Wall Street. They hear that
their tax dollars are being paid to AIG, and these people are
going on junkets. They hear all of that. They feel like it is
ring-around-the-rosy. They hear a lot of nice talk, but they
are still being put out of their houses.
They hear Paulson talk about wonderful stuff, but they are
worried whether they are going to come home and their stuff is
going to be on the street. Those are the people that I
represent. So I am begging you to please tell me exactly what
is being done.
And then I want you to please do something else. With
Fannie Mae announcing Monday that it lost $29 billion--and you
talked about all of the wonderful things that Fannie Mae is
going to do, I know that we have $100 billion that can go into
their coffers--how does that affect them, helping that guy that
I just talked about?
I hear you guys talk about the urgency of the market and
all of that. But something tells me that you need--and I think
this is where the chairman is coming from--you know, we can fix
Wall Street. But it seems like there is a bucket down there at
the bottom, these people who have been and are being thrown out
of their houses, it is like a bucket with a hole in it.
So whatever you do for Wall Street, if you are not saving
these mortgages and helping people stay afloat and saving some
pain, it makes no sense.
Help me with that, because my people don't believe that you
all care about them. I hate to tell you that, but they don't.
And they are angry.
Mr. Kashkari. Thank you, Congressman. I appreciate and
share your perspective.
Let me say two things, please.
One, the legislation that we asked for, we asked for it to
try to stabilize and prevent a complete financial collapse of
our financial system. That was not to help Wall Street; that
was to help every American.
Please, sir.
Mr. Cummings. Let me tell you something. I understand that.
That's why I voted for it. But let me tell you, when we gave
the banks money, they still weren't loaning any money.
Mr. Kashkari. Let's talk about that because we are
passionate about getting the banks to loan money in our
communities to help our small businesses and to help our
homeowners.
First of all, we allocated $250 billion for banks of all
sizes across the country, and just about half the money is out
the door today. I think we are going to approve another 20
banks today, large and small, across the country.
Potentially thousands of banks are applying and it is going
to take a few months to process the thousands of transactions
to get the money out the door. So we are working as fast as we
can. We are working around the clock to process and get the
money in our community banks, first of all.
No. 2, our banks are still--we are still at a period of
very low confidence in the system. It has gotten better in the
last few weeks, but we have a long way to go. And as we see
confidence begin to be restored in our system, we are going to
see our banks feeling more confident in themselves and more
willing to extend credit, and our businesses and consumers more
willing to take on their own loans. Unfortunately, it is not
going to happen overnight; but we are working very hard to get
credit in our communities.
One other comment, respectfully: This legislation was
focused on stabilizing the system for every American, but it is
different than a plan. It is not a stimulus. It is not an
economic growth plan. It is an economic stabilization plan to
stabilize the financial system. I want to respectfully set
expectations that we are trying to use these resources to
stabilize the system for every American. But we also have real
economic challenges that we all need to work through. And this,
by itself, is not going to solve all of our economic
challenges.
Mr. Cummings. I got that. Let me ask you this.
I had a conversation yesterday with a fellow named Joe
Haskins, who is head of the Harbor Bank, which is a small bank
in Baltimore, an African American-owned bank in Baltimore. He
was telling me yesterday that one of the problems is that you
all are financing these big banks. And the little banks, the
little community banks that did it right--in other words, they
kept the loans, they didn't sell them, so you know how that
works, they make sure that they make good loans. This stuff
with all of these foreclosures, it doesn't affect them so much
except for people who may have lost their jobs. But as far as
not properly vetting people for these loans, they didn't have a
problem with that.
But one of his problems is that while he did it right, you
all are financing all of these other banks, these big banks,
and he is worried that they then are going to try to acquire,
using our taxpayer dollars, the guys who did it right. They
will try to acquire the little banks. The guys who did it wrong
will try to acquire the little guys who did it right.
Mr. Kashkari. Let's talk about that because that is a very
important point.
We have created a program for all banks of all sizes, big
and small, the same terms. So the first nine banks that we
funded have the same terms as No. 10, No. 100, No. 1,000. So
the gentleman in your community, Harbor Bank in Baltimore, can
apply, can download the application off the Treasury Web site
or their regulated Web site, submit it to their primary
regulator, and it will come into our process.
And we welcome it. We want banks of all sizes to use this
program. They are the ones lending in our communities. We need
them. We need the good banks to take the capital because they
are in the best position to make new loans. That is exactly who
we want in the program.
Mr. Cummings. Yesterday we had Mr. Paulson right where you
are sitting, the guy who made $3 billion last year on hedge
funds.
Mr. Kashkari. Mr. John Paulson?
Mr. Cummings. Yes.
And we had George Soros and James Simmons and Philip
Falcone and a fellow named Kenneth Griffin. You probably know
those guys. One of things that they said yesterday when they
were talking about what you all are doing, they said they need
to be doing more and doing more and urgently getting--helping
those folks who are losing their houses. They said, it just
makes sense.
I am sitting here and saying, these are the billionaires,
and they have figured it out. They showed tremendous
sensitivity with regard to the folks at the bottom, the people
who are losing their houses.
And then Mr. Issa asked you a great question; he apparently
mentioned several organizations.
I am just wondering, who are you all seeking advice from?
In other words, we want--as I close, Mr. Chairman, we want the
rubber to meet the road, but I am wondering if the rubber ever
really meets it.
In other words, going back to my initial statement, if
people see their tax dollars being spent on everything else--
and I get it, that's why I voted for it, the bailout. But they
are not so much worried about themselves, because 95 percent of
the people are fine with regard to their mortgages. They are
worried about their neighbors. They are worried about the tax
base.
I plead with you, we have to find a way to more rapidly
help the little guy and lady who are trying so desperately to
deal with their mortgages.
Mr. Kashkari. Congressman, again, I share your perspective.
I have spent the last year and a half working with
nonprofit counselors. When we first started working on this
problem, we found that counselors had a lot of great ideas. The
banks had their own ideas, and the two weren't talking to each
other. One of the first things that I personally did, I said,
look, we are all in this together. Let's get the best ideas on
the table and let's not point fingers at who is at fault. Let's
get the best ideas to try to reach and help homeowners. I
personally feel passionately about that.
If you look at some of the statistics on the rate of loan
modifications over the past year, we have more than tripled the
rate from where it was when we started this a year ago. We have
made a lot of progress, and people now are embracing loan
modifications. We shouldn't underestimate how powerful the
action on Tuesday is. We have now established an industry
standard using Fannie and Freddie to push it out to the whole
industry on a fast-track loan modification process to get
homeowners into long-term, affordable mortgages.
It is not going to be perfect, but we are taking very
aggressive action and trying to use the right tool for the
right job.
Mr. Kucinich. The gentleman's time has expired.
Mr. Bilbray.
Mr. Bilbray. Thank you.
Mr. Kashkari, I guess you sort of get a taste of how Mel
Gibson felt in the last scenes of Braveheart, huh?
Look, you're probably the best spokesman the administration
has, and I want to compliment you on that. You come across with
more credibility than anybody else that I have heard across
this dais.
But let me tell you something, when you sit there and make
a statement like the administration trying to communicate with
the banking institutions, let me tell you, my constituents in
northern San Diego County remember great communication between
the administration and the bankers in 2005 and 2006 when they
were given the OK to give loans to people who didn't have legal
documentation or viable IDs, in violation of the RICO
provisions. It was just, don't worry about it, you can open the
bank account, give the loan, you don't have to check viable
identification if they fall into a certain category.
I don't know when the law ever created a gap in the RICO
provision for the administration to tell banks that they give
out loans to people who did not have viable identification. Do
you know of any time that there was?
Mr. Kashkari. I do not, sir.
Mr. Bilbray. OK, but you do know that was going on?
Mr. Kashkari. I am as outraged as you are about the
practices that were allowed to go on earlier in this decade.
That's why we are here.
Mr. Bilbray. Let me tell you, it was a hot issue in my
district. And the administration itself said, no, this is OK
for these guys to do it. They actually locked on and approved
of a program that was identified as a violation of a RICO
provision, breaking Federal law. And they basically said, this
really isn't a breaking, we don't require viable identification
for this segment of the population. And I didn't know there was
any exemption there.
Mr. Kashkari. Forgive me, but I'm not familiar with it. But
I take your word, sir.
Mr. Bilbray. The FDIC just announced that they want to come
in with some kind of program to focus on homeowners on this.
The feedback I have gotten is that the Treasury Department has
some real problems with that.
What's your problem with that strategy?
Mr. Kashkari. Sure. I will make a couple of points. We have
worked closely and have a lot of respect for Chairman Bair and
her ideas. Candidly, it was really her ideas that led to the
development of the program that was rolled out on Tuesday.
Set that aside. The FDIC proposal, at the end of the day,
is a spending proposal. When Secretary Paulson came to the
Congress to ask for the authority for $700 billion, that was
$700 billion to make investments. Whether it be buying assets
or buying equity, it was buying a financial instrument that
would offer a return that we could offer to sell over time, to
hopefully make back the taxpayers' money.
That is fundamentally different than just having a
government spending program; however well intentioned and
designed it is, it is just very different. And this is
something that Secretary Paulson thinks is a very interesting
idea and that Congress should consider it.
But to take the $700 billion, when we told the taxpayers
that we would be buying assets that we could then sell, it is
just different than saying we are going to take $20 or $50 or
$100 billion and spend it with no chance of ever getting that
into the program.
So it is just very different than what the program was
structured to be--investing versus spending--No. 1.
No. 2, Congressman, in all of these programs we have to
look very carefully at who is helped by them. There are
programs out there, when you actually scratch beneath the
surface, that help homeowners. But maybe it ends up helping the
banks a lot more than actually helping homeowners.
Sometimes Wall Street firms will bring us proposals. They
couch them as homeowner preservation. They are helping the
banks and helping mortgage-backed securities investors.
So we have to look at all of these very carefully to be
sure who they are helping. But the biggest challenge is, it is
fundamentally spending. You are not going to get the money
back, versus investing. That is the difference----
Mr. Bilbray. The TARP is not in isolation. We set the
precedence with Freddie and Fannie. Now we are not bailing out
Freddie and Fannie. Or are we doing an umbrella package there?
Mr. Kashkari. On the institutions or the mortgages?
Mr. Bilbray. The institutions.
Mr. Kashkari. The institutions. Again, we are buying
preferred stock in the institutions to stabilize the
institutions. And the taxpayers have warrants on 79.9 percent.
Mr. Bilbray. Is there a reason why we should be surprised
that when we got to the TARP, you didn't take the same
strategy?
Mr. Kashkari. Our strategy evolved as conditions changed.
And so when Fannie and Freddie deteriorated very quickly
through July and August, and the Secretary came to the Congress
to ask for that authority, the Congress provided it, and he
took very bold action with Chairman Bernanke and Mr. Lockhart
to stabilize them.
Similarly, we led with an asset purchase program because,
in our judgment at that time, that was the best way to help the
financial system. But market conditions deteriorated so
quickly, we had to move with equity first.
Mr. Bilbray. When we talk financial system, are we talking
now that we are not going to pick and choose, we are going to
get into Bank of America and credit card companies?
Mr. Kashkari. Forgive me. With respect to what Secretary
Paulson talked about on Wednesday in terms of consumer credit
and making it available?
Mr. Bilbray. Correct.
Mr. Kashkari. That is a program that we are developing to
get credit flowing directly to consumers, whether it is credit
cards or auto loans or student loans--potentially, mortgages as
well.
Mr. Bilbray. So we are talking about moving into that
field.
Mr. Kashkari. We are looking at it. Right now the markets
have frozen. Credit card rates are going through the roof, auto
loan rates are going through the roof. And it is impacting
families directly, and that is impacting our economy as a
whole. So we are looking at a program that could unfreeze that
market to get credit flowing again.
Mr. Bilbray. So are we talking about the possibility of a 2
percent Federal loan to American Express?
Mr. Kashkari. No. That program would be structured where,
much like the Federal Reserve has set up a facility to get the
commercial paper market going again, it is not directly going
to the banks or the lenders of the commercial paper, the
issuers. It is getting the market working again. We do
something similar here to get the liquidity going in the asset-
backed market.
So the credit card market, the auto loan market, this would
help all of our auto dealers and it would help the auto
companies and help all of the retail industry that relies on
the credit card business to work. Right now--as the chairman
said, credit card rates are being increased right now in large
part because these markets are broken.
Mr. Bilbray. Twenty-two percent.
Mr. Kashkari. It is a big number.
We have the banking financial sector and the nonbanking
sector. The banking sector provides about 60 percent of credit
in our economy, the nonbanking, about 40 percent. Our initial
actions have now stabilized the banking sector. We feel good
about that.
There is more work to be done. But the nonbanking sector is
now frozen, so we are looking at what actions we can take to
get that working again.
Mr. Bilbray. We are always going after the taxpayers' money
as the only way we can interject and save the economy and
whatever. There was a whole discussion about half a trillion
dollars of American assets overseas that could come back if we
held it harmless, the repatriation issue.
Have you been following what the IRS did with the grace
period for repatriated funds?
Mr. Kashkari. Forgive me. Not closely.
Mr. Bilbray. They increased it from 6 months to 10 months.
Do you have any idea why they would do that?
Mr. Kashkari. I have not focused on those issues. I am
spending 100 percent of my time executing the TARP.
Mr. Bilbray. Mr. Chairman, we need to take a look at--and I
think the IRS was on to something. It is always quick to use
taxpayers' money to be able to go in there. And we are actually
taking money coming out of our general fund to go after this.
But we wouldn't hold harmless private money coming in from out
of the country and investing back here, because we want our
pound of flesh. And now the IRS has recognized that by at least
extending the grace period, because there is a huge amount of
assets.
To be blunt with you, as somebody who has worked with the
Federal Government since 1976--the chairman and I were elected
on the council and the mayors together back in 1978--the
Federal Government does not manage assets very efficiently at
all. That is one of our biggest frustrations that those of us
in local government have: the fact that this is going to come
back to bite us when we could allow private-sector funds to get
in there and try to get involved if we just didn't want to take
our pound of flesh and drag it into Washington, DC.
Mr. Kashkari. I completely agree with you. Some of our
plans are designed specifically to attract private capital to
come in, because we don't think that the taxpayers should do
all of this themselves. The private sector should be encouraged
to do that.
One of the things that the Secretary talked about on
Wednesday was a potential capital program that involved a
matching component: if a firm went and raised a dollar of
equity, that the government would provide some kind of matching
as a carrot to go back and get the private capital coming back
in our system.
So we agree 100 percent with the spirit of that.
Mr. Bilbray. Let me tell you, as one Member, I saw the
bailout of Freddie and Fannie come up, and said, oh, this will
take care of it; then we take care of that. And all I have
seen, Washington, including the administration talk about, is
how we are going to spend taxpayer money, not how we are
reforming the process.
We did the guarantees on the deposit insurance--that was a
step. But that is a very small step compared to a whole lot of
stuff that we have not touched base on. We haven't redefined
mark to market yet. We are not even talking about that anymore.
That is sort of left behind and don't worry about it.
There are some major issues that we need to talk about, and
the administration is only talking about how we are going to
spend the taxpayers' money, not about how we are going to avoid
it. And that is one of those things that, as a father, if one
of my children came in and said, Dad, I am deep in debt, I need
you to bail me out, the first thing I'd do would not be to
write a check, it would be to ask for the credit cards. And we
are not asking for the credit cards, we are not asking for the
reforms; we are basically just writing a lot of checks.
Mr. Kashkari. Congressman, I share your frustration. Our
energy is focused on stabilizing the financial system.
But there are profound regulatory and structural questions
that we as a country have to ask and answer in the near future:
what to do with Fannie and Freddie; what role the government
should play in mortgage finance going forward.
What we have done in the case of Fannie and Freddie, which
were on the verge of collapse, is to stabilize them, to buy us
all time, so we as a country and the Congress and the next
administration can have that debate and make a thoughtful
decision.
But we need to stabilize the system. That is what our
actions have been focused on.
We are all frustrated by the kinds of actions we need to
take. We don't want to do these kinds of actions, but we have
needed to stabilize the system. But we need to have that
thoughtful discussion so we are not here again in the future.
Mr. Bilbray. Thank you, Mr. Chairman.
Mr. Chairman, somewhere down the line we are going to have
to talk about who has actually been subsidized on this. You
have foreign nationals. You have people who are not legally
present in the United States. I have a constituent who cries
about a home being lost when it is their seventh home, that has
two or three homes. You have people who have leveraged this.
And then you have the innocent people who are basically just
trying to play by the rules.
Somewhere down the line, I think the American people are
going to ask us to separate these groups and make sure that our
resources are going to those who deserve to be helped on this.
Mr. Kucinich. I thank the gentleman.
We will move on to our second round of questioning. This
will be a 5-minute round.
I indicated I will have some questions about the National
City transaction. PNC took over National City with the help of
the Treasury Department. When you look at the money that you
are giving to banks and you are picking winners and losers, you
picked a winner, PNC, and you picked a loser, National City
Bank.
Now, were you aware at the time that National City Bank had
a relative history prior to the transaction involving PNC of
being under attack by short sellers? Did you know that?
Mr. Kashkari. Congressman, with deep respect, it is not
appropriate for me to speak about any individual institution,
but I can talk generally.
Mr. Kucinich. With deep respect, you put 4,000 people out
of work in the city of Cleveland. Are you taking the fifth
amendment here?
Mr. Kashkari. No, sir. First of all, Congressman, I was
born and raised in northeastern Ohio.
Mr. Kucinich. I am the representative of northeastern Ohio,
and I'm asking you a question. Can you answer the question: Did
you know that National City was a target of short sellers?
Mr. Kashkari. I think many financial institutions,
including National City, were the target of short sellers.
Mr. Kucinich. Did you know that National City stock had
been undervalued, according to Oppenheimer?
Mr. Kashkari. I did not know that.
Mr. Kucinich. Did you know that National City's debt had
been overstated, according to many analysts?
Mr. Kashkari. I did not know that.
Mr. Kucinich. Did you know that credit-rating agencies were
given credit, literally, with pushing National city off a
cliff? Did you know that?
Mr. Kashkari. No, sir.
Mr. Kucinich. Do you look at the role of credit-rating
agencies in terms of determining who gets troubled asset relief
and who does not?
Mr. Kashkari. If you permit me to walk you through that
process----
Mr. Kucinich. I want to be careful about where you are
walking me.
Can you answer the question about credit-rating agencies?
Mr. Kashkari. We do not look at credit-rating agencies when
deciding who to make an investment into.
May I, please, sir, walk you through the process?
Mr. Kucinich. I am going to keep asking you questions.
On October 24th, National City Bank was bought out by PNC
for $5.2 billion; and they used $7.7 billion of TARP funds.
Did Treasury give PNC $7.7 billion of TARP funds.
Mr. Kashkari. PNC has not yet received any money from the
Treasury Department.
Mr. Kucinich. Did they agree to give them $7.7 billion?
Mr. Kashkari. We have not--PNC has publicly stated that
they received preliminary approval.
Congressman, the reason I am speaking this way----
Mr. Kucinich. Isn't there a yes or no answer?
Mr. Kashkari. We have a very strict process about the way
we disclose information about individual institutions, and I
want to respect those institutions.
Mr. Kucinich. You are testifying before a congressional
committee here. If you can't answer the question, you have a
constitutional right not to answer. I can inform you of that.
Mr. Kashkari. I do not want to put an institution at risk
by revealing supervisory confidential information.
Mr. Kucinich. Are you invoking your constitutional
privilege?
Mr. Kashkari. No, sir.
Mr. Kucinich. Since you're not, you are saying you cannot
tell this committee what actually went on?
Mr. Kashkari. First of all, when a bank submits an
application to apply for TARP funds in the Capital Purchase
Program, that application is reviewed by its primary Federal
regulator and then that regulator makes recommendation to
Treasury.
I can tell you that we have never received an application
from National City Bank to the Treasury to apply for TARP
funds, and when we do receive recommendations from the
regulators, we look very closely at those recommendations.
Mr. Kucinich. You were saying National City never asked the
Treasury for help?
Mr. Kashkari. I have never seen an application from
National City.
Mr. Kucinich. You have no knowledge that regulators denied
a request, saying the firm was too weak to save?
Mr. Kashkari. Again, the regulators do go to some banks
that they think are not solvent institutions and discourage
them from applying to the program.
Mr. Kucinich. Did you put any conditions on PNC with
respect to the $7.7 billion?
Mr. Kashkari. If a bank comes to us and wants to apply for
funds as part of an acquisition, they will only get--if it is
recommended by the regulator, they will only get the target
share upon closing of the transaction. There are conditions.
Mr. Kucinich. Can you tell this committee why you thought
National City was too weak to save? Do you consider the
negative effects on local employment and ripple effects of more
layoffs in an economically depressed region?
You know, you think about it: Congress in its wisdom--and
Mr. Issa and I talked about this; we fought for some provisions
that would help inner cities that were suffering from the most
foreclosures. Cleveland certainly qualified for that.
Don't you look at the impact of your decisions on regional
economies? Do you give it any consideration at all?
Mr. Kashkari. We review applications that the regulators
submit to us with their recommendations. If a regulator does
not submit an application to Treasury because a regulator deems
a financial institution is going to fail, we can't review it.
And I don't think it is a good use of taxpayer money to put
taxpayer capital into a financial institution that is going to
fail.
Mr. Kucinich. Well, you know what, that statement that you
just made, you will hear about for the rest of your career.
My time has expired. I am going to come back to this
question. We are going to go to Mr. Issa.
Mr. Issa. We won't just come back to it, I think we will
stay with it for a moment. PNC has announced a price, and they
are going to buy National City Bank. If they don't have your
implicit money, then they must be doing it with their own
money.
Now, if they do have your implicit support, then that means
that, in fact, a little bit like a Goldman Sachs deal, they
have the assurances that they have the money to go do a deal;
they go do a deal, and then they get the money at closing.
Now you are sitting here today saying you can't reveal, but
in fact, if there is an announced deal, either you are going to
provide the money or you're not. It's that simple.
Now, I appreciate all of the confidentiality and all of
those other statements, but we have a right to know whether or
not there is an acquisition that is going to be done with other
funds or the U.S. Government's funds. So I am going to ask you
once again, in light of that, is that acquisition going to be
done with the pledge that at closing they will be provided the
funds they need? Or are they going somewhere else for the
funds, as far as you know?
Mr. Kashkari. Congressman, generically--please permit me to
speak generically. I can be more candid if you'll allow me to
speak generically.
Mr. Issa. I don't want to speak generically because we have
certain acquisitions--Wachovia, obviously, and National City
Bank. These are banks where both of us are shaking our heads.
And by the way, I have nothing against the acquiring banks
at all, but we are looking at the banks being bought and
saying, if they got--in the case of National City Bank, if we
bought $5.5 billion worth of preferred stock in that company,
would they be viable? Do you have any knowledge to answer that
question?
Mr. Kashkari. The regulators, Congressman, are making
judgments on which banks they deem to be healthy banks, viable
banks, and making recommendations to us.
If a regulator determines that one of its regulated banks
is not viable, and they do not submit their application to us,
we can't invest in them. It wouldn't be prudent.
Mr. Issa. You are basically following the FDIC's lead; is
that right?
Mr. Kashkari. All four banking regulators--the Fed, the
FDIC, the OCC and the OTS--are the ones who review the initial
applications and make the recommendation to Treasury. We then
look at those recommendations and either go back for more
information or make our own decision.
Mr. Issa. You said ``or make your own decision.'' So you
could make an independent decision?
Mr. Kashkari. Absolutely. Ultimately, it is Treasury's
decision who to invest in and under what terms.
Mr. Issa. So at the end of the day, Hank Paulson gets to
decide who lives and who dies? Who buys whom?
He could potentially have looked and allowed the opposite,
the regulators to go in and say to PNC, we don't think that you
are going to make it, and therefore National City Bank is going
to buy you out; and $7 billion could have gone the other way?
That could have happened?
Mr. Kashkari. In theory, yes. Ultimately, the regulators
are the ones who have been supervising the institutions. They
have people onsite, and they are in a much better place to make
recommendations to Treasury about who is a healthy bank and who
is not.
Mr. Issa. Let's ask the question I have been wanting to
ask.
During the bailout debate, we had Bill Isaac, a former FDIC
chairman, who described to all of us--both sides of the aisle,
a very bipartisan series of meetings; as a matter of fact, Mr.
Kucinich and I--I had never been to a Progressive Caucus
meeting, but I got to go to one because immediately following
we had a series of questions and answers with Chairman Bill
Isaac.
In his time in the Reagan administration, he was granted
and used a system of buying subordinated debentures essentially
in an exchange program that put zero dollars--zero dollars of
the Federal Government's Treasury money in play because it was
a credit default swap, if you will, in its own way, and that
authority still exists today. It requires that the Secretary of
Treasury make a finding, which we have effectively made, we
have said there is an emergency, and then that tool is directly
the responsibility of the agency, in this case the FDIC.
You said you are using all of the tools. Why are you not
using that tool? Because that tool uniquely says you have to
pay back all of the money. To get this increase in your capital
base, you are putting your money at risk; essentially, you are
putting your existing stockholders behind these because this is
a better stock, if you will, a better debt stock.
Why are we not using that tool, and isn't that the tool
that should be used in this case?
Mr. Kashkari. Well, Congressman, let me say a few things.
It is an important point.
First, the preferred stock that we are buying is senior to
the common stock. So we get paid back before the equity owners
of these institutions. So we are in a better position than
their shareholders; and that is very important, No. 1.
No. 2, and I don't have all of the details on the
gentleman's proposal, but I know that some of those proposals
which didn't require any cash going into these institutions
were basically a form of forbearance, pretending that the banks
had more capital than they had. We need our banks raising real
capital from the private sector, and also from the public
sector; and recognizing their losses, not pretending that they
have more capital than they do. We have to be very careful.
There were a lot of ideas tried in the 1980's that
pretended we had more capital than we did, and it didn't work
out very well.
Mr. Issa. First of all, we are pretending that we have more
capital than we have because simply moving negative net worth
from a bank to the American people is, in fact, causing the
American people to lose real capital. The wealth of our country
is, in fact, in this case, being moved onto the taxpayers'
rolls and off the banks' rolls. So let's not kid ourselves.
So if you overpay, you invest in somebody who otherwise
would not be solvent, particularly if they are going to buy
other banks that you've determined are not solvent, you have
determined that you are going to spend the American people's
money, indebt the American people in return for that.
So when you chose one instrument over another, as far as I
can see here today, what you have done is, you've made a
determination that you are going to put real money of the
American taxpayers' dollars into these banks forever, because
if you buy too cheap, you are giving them real money forever,
instead of the alternative authority that already existed that
we argued should have been used first, where you at least made
sure that 100 cents on the dollar, real 100 cents on the
dollar, would be fully repaid without any risk to the American
people except an ultimate liquidation of that entity at a loss.
So I appreciate the fact that during the Reagan
administration we may have invested in banks that, at the time,
were--although viable going forward--in our opinion, were not
viable at that moment. The difference was that those banks
either became viable and paid back 100 cents on the dollar, or
everyone lost everything, except we got paid first whatever was
left. I appreciate that.
But when I asked you the questions earlier about par and
where we were and whether we overpaid when we invested, you
couldn't answer those questions because, in fact, your system
puts us at a greater risk, as the American taxpayers, than the
system that we suggested you could do without any authority
under the TARP.
Mr. Kashkari. There are very important taxpayer
protections, not just the dividend rate that we are going to be
earning on the preferred stock. The warrants, we are getting 15
percent of the value of the investment in the form of warrants
in these institutions. So there are important taxpayer
protections that we have designed in, so that this ends up
being hopefully a good investment for the taxpayers.
This is not something that we wanted to do. Our first
choice is not investing in banks. We felt like we had to
stabilize the financial system, and so we have taken bold
action to do that.
Mr. Kucinich. Thank you.
Mr. Cummings, you may proceed.
Mr. Cummings. Mr. Kashkari, I am still listening carefully.
One of the reasons I voted for the bailout very
reluctantly--I held my nose, closed my eyes and prayed--is
because President-Elect Obama at that time had assured me that
if he were elected President he would work on making sure that
the people that might be losing their houses through
foreclosure would be helped.
If President Obama came to you--and I don't know how long
you will be around, and I assume somebody is going to ask
Secretary Paulson this question, but if President-Elect Obama
came to you and said, give me your best advice as to how I can
help people who are facing foreclosure, what would you tell
him?
Mr. Kashkari. Congressman, that is a very important
question that I have spent a lot of time thinking about. The
best thing I think we can do as a country to help the housing
market and avoid foreclosures is to bring mortgage rates down
for borrowers so they can refinance into long-term, sustainable
mortgages that they can afford.
The way to do that partly was stabilizing Fannie and
Freddie, was to stabilize mortgage finance; and some of the
actions we are looking at, trying to get credit flowing again,
is to bring rates down for our consumers. If we can bring
mortgage rates down--and as you know, the Federal Reserve has
been cutting interest rates, but that hasn't led to lower
borrowing rates for consumers and borrowers because the markets
are stuck.
So by trying to fix the markets, we are trying to get that
directly to the consumers so they can get into mortgages that
they can afford, and that will also support home values, to
stop this falling knife that we have right now.
My judgment--I'm being very candid with you--is that
bringing mortgage rates down for borrowers is the best thing we
can do to try to help homeowners avoid foreclosures and
stabilizing our housing sector.
Mr. Cummings. Now, if President-Elect Obama asked you to
stay on, would you stay on?
Mr. Kashkari. Congressman, I would be honored if the
President-Elect wanted me to be part of his team. I would have
to talk to my wife, ultimately; this has been a hard 2\1/2\
years for her.
Mr. Cummings. Let me go back to Fannie Mae and Freddie.
I asked you earlier about how this loss, this announcement
on Monday, the $29 billion loss, affects, if at all, what you
are trying to do to help the homeowner through Fannie Mae? Does
it affect it?
Mr. Kashkari. Not directly. When we took our actions in
July and August to stabilize Fannie and Freddie, we expected
big losses to come, and so we sized these $100 billion
contracts to be big enough to deal with these losses. We were
not surprised by it. We knew they were coming, and we don't
think that directly affects what we can do with Fannie and
Freddie.
Mr. Cummings. Now, I was intrigued by Mr. Issa's questions,
and I want to give you a broader question sort of hooked up
with his.
You all had to made some tough decisions as to where this
$700 billion is going; and the American people--and this is
what I hear at the supermarket and at the gas station when I
run into my neighbors--they think that there are a whole lot of
people lined up with their hands out. They are looking at GM
and they are looking at all of these other folks who are
saying, government, bail us out.
I want to know two things. One, what goes into the
decisionmaking with regard to, you know, the bailing out? I
know you have certain structures you have to go by, but how do
you all try to make sure that whatever the objective is, it
happens? In other words, do you need more authority from us?
I have to tell you, one of the most disappointing things
for me was when you all gave the banks money and then I read
the next day that a lot of the banks were not going to be
loaning money and that they were going to use the money to
acquire other banks and they were going to use the money to not
make the cuts that they needed to make and that kind of stuff.
So now we face a situation with GM, and a lot of us are
saying, you know what, one out of every 10 jobs is connected
with the automobile industry. We want to make sure that we
don't lose a GM or lose any of our automobile companies because
they are so important to our economy. But at the same time the
American people are saying, and we want to make sure that if
they got the money, that they move toward energy-efficient cars
and they are competitive and all of that.
So how do you all say, we are going to give--like Mr. Issa,
you are going to give to this company, this bank? What is the
objective? How do you make sure that the objective is achieved;
in other words, you can't guarantee, but create the best
possible circumstance to have it achieved? And do you need more
authority from us to achieve that?
I am going to tell you, the American people are running out
of patience. And Mr. Issa and Mr. Kucinich voted against the
legislation. I have to tell you, I venture to guess most of us
wanted to vote against it, even those who voted for it.
So I am trying to figure out, tell me how do you do that.
At some point the Congress is going to say, sorry, no more,
because you know what, the American people are saying it
already.
Mr. Kashkari. Congressman, these are very good questions. I
appreciate you asking these questions.
First of all, if you look at the capital program, we want
to make sure that our banks are lending in our communities, so
we designed in very specific contractual requirements to make
sure that happens. Let me walk you through them.
One, no dividend increases. No. 2, restricting share
repurchases. It doesn't make sense for us to put capital in and
then have them pay it out to their shareholders.
Now, the capital is in the bank; if they don't put that
money to work, their own returns are going to come down. And so
there are very strong economic incentives to want to make them
want to lend.
Having said that, it is not going to happen overnight
because there is still a lack of confidence in our economy and
in our system.
So we believe that the economic incentives are there and
are very strong to get them lending in our communities. And the
actions that the banking regulators are now taking, as their
supervisors, are completely consistent with that objective and
are going to be pushing the banks to lend, No. 1.
No. 2, I'll be candid with you, my phone is ringing off the
hook. Many people around the country--individuals, businesses,
local and State leaders--are calling and saying, we need help,
our community is in trouble, our business is in trouble, can
you help us.
I would first say, that is exactly why we are taking the
actions we are taking. If we went out to each of the businesses
and communities and helped them directly, the $700 billion
wouldn't go far enough. So we are trying to take the $700
billion to stabilize the system as a whole, so credit can then
flow out to everybody around the country who needs it.
We are trying to think every day if we have finite
resources, how do we use those resources to the best possible
benefit to the system as a whole, because that will help every
American. And it is not perfect and it is not going to happen
overnight, but that is our objective.
Mr. Cummings. I thank you. My time is up.
Mr. Kucinich. We are going to go to Mr. Bilbray, and then
we will have a third round of questioning for Mr. Kashkari.
Mr. Bilbray. Mr. Kashkari, as late at September 5th, the
Secretary said that Freddie and Fannie were basically sound and
encouraged Americans to purchase shares and invest in those two
entities. These investments were wiped out when the Secretary
took over the GSEs.
It appears to any reasonable person that the Secretary
misled the public on September 5th. Is there any justification
for how the Secretary could have made such a terrible mistake
that impacted a whole lot of people that trust the word of
their government when it came down to putting their hard-earned
resources into these two entities and then watch it evaporate
when the same Secretary took over control?
Mr. Kashkari. Well, Congressman, first of all, Treasury is
not the regulator, as you know, sir, of Fannie or Freddie.
OFHEO and now FHFA is, and they have been releasing reviews of
their capital levels and their position. And so any of the
Secretary's comments, I think, were based on the regulatory
supervision and the analysis that has been done by the
regulators, No. 1.
No. 2, I don't think that the Secretary ever encouraged
people to buy preferred stock in Fannie or Freddie or buy
Fannie or Freddie shares.
Mr. Bilbray. But he did make the statement that both of
them were sound.
Mr. Kashkari. Again, sir, I believe it was based on the
analysis done in terms of the regulatory capital levels
established by the Congress and looking at that analysis.
I don't think anybody was more disappointed than he was, or
we at the Treasury were, that we had to intervene to stabilize
these institutions or risk systemic risk across the world.
There are $5 trillion worth of debt, as you know, sir, and
mortgage-backed securities around the world. If they had been
allowed to collapse, it would have been disastrous for our
economy and our financial system. We had to take action to step
in.
Once the decision was made to step in, our highest priority
was stabilizing the situation and a close second was protecting
the taxpayers as much as possible.
And so when we went in, when the regulator went in and put
them into conservatorship, with the support of the Secretary
and the Chairman of the Federal Reserve, the taxpayers received
some protections, warrants for 79.9 percent of the company,
dividends on the preferred stock, etc. So this is not action
that any of us wanted to have to take.
Government action can have unintended consequences, as you
know. Fannie Mae was created 80 years ago in the Great
Depression. I don't think anyone would predict that it would
grow to become a systemic risk for the entire country. But it
did, and we had to take action.
Mr. Bilbray. Within 2004 and 2005 that issue was raised. I
remember Ed Royce was raising the issue that they had gone from
30 to 70 percent. Wasn't that kind of an indication that things
were growing a little larger than anybody had predicted?
Mr. Kashkari. I think you're right, Congressman; there were
Members of Congress. And members of the administration, before
my time, had been very focused on the systemic risk posed by
Fannie and Freddie, and it was unfortunate that it came to what
it came to, that we had to take this action.
And now Congress and the next administration and the
American people will have a very important debate about what
form they should take in the long term.
Mr. Bilbray. So you are saying that basically the Secretary
had no clue that both of these institutions were on the verge
of falling off a cliff?
Mr. Kashkari. I don't have my dates exactly, but I believe
in July he came to the Congress to ask for specific authority
to try to support Fannie and Freddie in the event that they ran
into trouble. Again, markets--and I have said this a few times,
not in this hearing--the one constant throughout the credit
crisis has been its unpredictability. Fannie and Freddie's
deterioration surprised even us, just as the credit market's
deterioration surprised us in September and October.
Mr. Bilbray. Shifting over, is the administration ready to
go back and tighten up the enforcement of the RICO provision on
who and where people get loans in this country? Are we willing
to say now that we want to make sure that the people getting
the loans are actually legal under the system and have a viable
ID before they get that loan?
Mr. Kashkari. Congressman, with deep respect, I am not deep
in the policy process on that specific issue that you are
referring to. I know it is an important issue. And we are
passionate about making sure that we issue mortgages that
people can actually afford, so we don't get back here again.
But I am not deep in that policy piece.
Mr. Bilbray. Mr. Chairman, we need to understand that this
administration, more than any other administration, has
specifically told lending institutions that they do not have to
follow a guideline that every previous administration has
followed to stop the racketeering; and especially in California
and along the border region, where we have huge amounts of
assets being laundered by drug cartels.
To sit there and say that we are not going to enforce RICO
for certain institutions, I think that has opened up a lot of
problems, not just RICO, but I think a lot with this.
Now is the time that the American people want to see us go
back and reform and change our operational pattern to avoid
future problems. I just hope the administration is brave enough
to be able to say, we made a mistake here, we are going to send
the signal that what we said in 2005 and 2006 is not going to
be the rule from now on.
I think this administration ought to do the change before
the new administration, because it is this administration that
set the pattern that has created this problem; and I hope you
understand that--mistakes are made; correct it before the new
administration comes along.
Thank you, Mr. Chairman.
Mr. Kucinich. We are going to go to a third round of
questioning of Mr. Kashkari.
National City Bank, are you concerned when you pick winners
and losers that you are increasing market concentration that
may work against the interest of consumers in other industries?
Are you concerned about that?
Mr. Kashkari. We are not actively trying to consolidate the
industry.
Mr. Kucinich. When you talk to regulators, do regulators
say it is OK to concentrate the markets?
Mr. Kashkari. The regulators, I think, will say that if you
have a failing institution that gets taken over by a healthy
institution, that community is better off.
Mr. Kucinich. I--not. OK, I want to go on to another
question.
By my calculation, out of the first TARP tranche of $350
billion, $250 billion has already been spent or pledged, and
you have another $40 billion for further aid to AIG, remaining
$60 billion for new capital, a purchase plan for nonbank
financial institutions.
Is it fair to say that you have already committed the
entirety of the first tranche of $350 billion?
Mr. Kashkari. The last $60 billion has not been committed.
Mr. Kucinich. And none of the commitment was for the
purchase of mortgage-related assets or conditioned on the
recipients of the TARP funds undertaking any mortgage
modifications; is that correct?
Mr. Kashkari. Not contractually.
Mr. Kucinich. Do you anticipate Congress is going to
receive requests in the 65 remaining days of this President's
administration for Treasury to get access to the second
tranche?
Mr. Kashkari. The Secretary has not made any determination
on when he would make such a request.
Mr. Kucinich. One of the things what strikes me in your
testimony is your view that private views, up to and including
the HOPE NOW streamline modification, are sufficient to stem
the foreclosure crisis. It is interesting because we started
there.
We started with the private sector and we ended up with
subprime loans. We started with the private sector and we ended
up with $684 trillion in derivatives. We have people losing
their homes. And then we came up with the TARP, which is going
to interfere in the marketplace, but promising us it is going
to help homeowners.
And now we have reversed the course, and we are saying
again it is going to be private efforts, loan modification with
regulations. It is kind of like we are back to the future.
Now, you are still saying this, it is private efforts.
Mortgage money is going to go to borrowers, you are going to
stabilize mortgage rates, and people are going to be able to
protect their homes.
But at the Financial Services Committee hearing on Tuesday,
it became clear that the efforts by the private sector to
remedy the problems, even efforts coordinated by Federal
agencies, were insufficient. As our hearing witness Thomas
Deutsch stated at the Committee on Financial Services,
``Macroeconomic forces bearing down on our already-troubled
housing market are simply too strong for the private-sector
loan modification initiatives alone to counteract the
nationwide increase in mortgage defaults and foreclosures.''
Now, Mr. Kashkari, why do you have more confidence in the
ability of the servicing industry to avoid a tsunami of
foreclosures than these observers and, in fact, than the
servicing industry has in itself?
Mr. Kashkari. If you look at the data on what has been
achieved: increasing modifications from 23,000 a month to
100,000 a month over the course of the past year; over 200,000
Americans are getting a form of loan workout every month. It is
not enough, but a lot of progress has been made.
I would also very respectfully ask you to consider the
incentives of some folks who are making these plans. There are
some folks who would like nothing more than the government to
provide guarantees for mortgage-backed securities. The
investors would love that. Investors around the world would
love it if the U.S. Government guaranteed all their mortgage-
backed securities under the rubric of helping homeowners.
Mr. Kucinich. If it gave loan modifications and directed
lowering principal and interest rates and extending the terms
of payments, maybe millions of homeowners would love it. I
don't know if you have thought of that, though.
Can you point to anything in your HOPE NOW or any other
private initiative that cures the problems of large proportions
of negative equity that many borrowers face now that the
housing bubble is deflating?
Mr. Kashkari. Negative equity is a very tough problem. The
Hope for Homeowners bill that was passed by this Congress and
signed by the President is directed specifically at that
problem, to encourage servicers to take write-downs to get them
into mortgages that homeowners can afford with positive equity.
Mr. Kucinich. I have been informed by staff there have only
been 42 workouts. Just thought I would talk about a box score
here.
I have a minute left, and in that final minute, I would
like to apprise the members of the subcommittee. I just talked
to Mr. Issa about this matter. We have many industries that are
being looked at here. I am concerned that with all of this
attention to finance capital, which has been unregulated, we
are seeing our industrial capital crushed here; and we are
seeing our industrial base threatened by credit freezes.
In Cleveland, for example, we have a steel mill that is on
idle because orders have dropped, because there is a credit
freeze. We have a credit freeze going on where consumers can't
get auto loans, so you have people getting laid off in the auto
industry. America's national security is at risk.
So this subcommittee is going to hold a hearing next
Thursday on this specific issue, and we are going to ask
people--I understand your time availability, but we are going
to ask somebody from Treasury to be present to also discuss
about what Treasury's plans are, if any, to deal with the fact
that we have an industrial base that is in imminent peril.
When Mr. Cummings said earlier in questioning, and his
comments are well taken because when we go back home, people
are asking, what are you doing to keep us in our homes and what
are you doing to help protect jobs. We have a whole way of life
threatened in America; and one thing that this subcommittee can
do is require people to come forward and answer questions, and
try to use that information that we gain to suggest new
initiatives. I want to thank Mr. Issa for his willingness to
pursue that.
And so next Thursday, we will give you the exact time, but
we will have a hearing on that because we are concerned about
using the assets that the Federal Government has to protect an
entire way of life. I just wanted to make that comment as the
chairman.
We are now going to go to Mr. Issa for a continuation of
the final round with Mr. Kashkari.
Mr. Issa. Thank you, Mr. Chairman, and I will be brief. I
don't think I will use the whole 5 minutes.
I don't know if you are aware, but later today I will be
forming the Bank of the 49th Congressional District of
California. I will be looking for $10 billion or $15 billion,
and I hope I will be favorably received. I have no deficits, I
don't have a negative net worth, and the viability of the real
estate in California, if anything, has never been better,
because it has never been lower than it is today. So hopefully
someone from your staff will help my staff run through the
application for a Federal charter so we can end this question
of how we get money to creditworthy banks.
Certainly if National City Bank wasn't creditworthy and
needed to go away, I am shocked that PNC would pay $5.5 billion
for a company that was insolvent. That becomes one of the
conundrums I find, is if somebody isn't worth investing in by
the American people, but they are worth, when you invest in
somebody else buying out for $5.5 billion, then my years in
business were misspent, I guess.
Let me go into two questions.
One, earlier in your testimony, and I know you are the
messenger and you are bullet-ridden at the end of this hearing,
so I will try to make these last two a little more at the
economics level and a little less at the level of why didn't
you do what we asked you to do kind of level. You said earlier
that if you just bought mortgages, you would have run out of
money, and essentially what you are saying is you need to
leverage it more. I don't have a problem with that concept. But
let me go through a hypothetical for you real quickly, because
I would like to make sure it goes back to Treasury with you.
If you had taken $50 billion and you put it into a fund and
you said this fund exists for banks of exclusive refinance,
meaning we will go to anybody where there is a deep discount
for the existing homeowner to refinance his home, the bank that
is walking away has to agree to be wiped out. But in return,
they will get 100 percent of the current market for that
product. The homeowner puts in whatever skin they can and
refinances. You then take that refinanced package,
understanding that the bank has lost nothing because they were
going to foreclose and they were only going to get market
anyway, you have a willing buyer in a sense of a refinance.
If those packages were packaged up, do you believe, or let
me rephrase that, do you believe for a minute that you wouldn't
be able to resell those packages and thus have that $50 billion
be leveraged 10 or 15 or 20 times? Because every time you get
$50 billion worth of these new packages and sell them on the
market, you have your $50 billion again, the way originally
subprime was done. And let's assume for a moment there is a
small equity factor in there; in other words, a certain amount
so you don't get it all back.
Do you believe for a minute you wouldn't be able to
repackage those and leverage that $50 billion or $350 billion
or $700 billion in order to get people to stay in their homes
if they were able to make a mortgage at current value?
Mr. Kashkari. Congressman, to make sure that I followed it
and I got it right and I am reacting to what I think I am, let
me just repeat it back to you. So if we bought mortgages and
repackaged them and sold them, that would be a way of
leveraging the TARP funds. Just to keep it really simple----
Mr. Issa. Essentially, yes. Because when it was presented
to us, it was we were going to do it one time originally.
Mr. Kashkari. Right.
Mr. Issa. My only question to you is, was that considered?
Mr. Kashkari. It was, and I will talk you through it.
Mr. Issa. Why isn't it being done?
Mr. Kashkari. It is a lot of the work we are doing to reach
where we are, in looking at that, the idea of buying loans,
modifying them, repackaging them, to free up more space under
the TARP. The challenges that we found is it is a very slow
process, a few months it turns out to acquire, let's say, $50
billion worth of mortgages.
Mr. Issa. OK, I will stop you because I want to be
respectful of the time. I am not talking about the loans. I am
talking about the houses. They are new loans. Whoever is
foreclosing on Mr. Kucinich or my constituents, whoever is
foreclosing is offered by the owner based on having gone to the
Bank of the 49th Congressional District or the Ohio Bank of
Reconsolidation, they say, look, I have a short sale
effectively financed with this. This group is a willing buyer-
willing seller situation. The homeowner is willing to put their
name on the line, presumably a recourse loan, presumably fresh,
but it is at a lower rate. It is a short sale, but it is a
short sale to the person that is in the house at current market
price.
Why wouldn't that system leverage the American taxpayers'
dollars almost infinitely, because we are forcing the banks to
recognize the real mark to market, but we are creating a market
for the resale of that asset immediately so it provides real
liquidity.
If your program to prop up the banks afterwards is still
needed, that is fine. But why is it we aren't doing something
like that with this huge amount of money that we gave you
almost unlimited ability to use in different ways?
Mr. Kashkari. Again, just to be clear, I want to make sure
I am answering the right question. So the TARP would be
providing the loan to the buyer at the current market price in
a short sale?
Mr. Issa. It would undoubtedly use a bank or some other
entity.
Mr. Kashkari. But it would be TARP funds going to the
homeowner.
Mr. Issa. It would be TARP funds.
Mr. Kashkari. OK. And then we would package those up and
sell them.
Mr. Issa. And they would immediately be sold. Because they
are not corrosive loans. They are not any of this other stuff.
They are at the real market today, perhaps even with a Federal
guarantee in case things go lower.
Why is it we are not doing that so we can get the leverage
that the gentlemen to my left so desperately want?
Mr. Kashkari. Right. Well, Congressman, at least as we have
talked about it, that sounds an awful lot like the Hope for
Homeowners program, where what ends up happening is the
borrower gets put into a new loan that he can afford at today's
market price for the house, and then those loans are
securitized and sold off through Ginnie Mae. And the challenge
is there are very complex incentives on the existing lender's
willingness to mark down that loan into that loan that
homeowner can now afford based on today's market price.
Mr. Issa. I am going to cut you off because my time has
been cutoff, appropriately. I think your problem is as long as
you give the money to the banks without their fully availing
themselves, what happens is you are discouraging that secondary
behavior, because you are putting the money into their back
pocket and causing them not to be desperate enough to use that
other program.
I am going to close with one question I want back for the
record real quickly. Currently, today, Treasury bills at 2
years are 1.22 percent; GSE's are 2.64 percent. Five years, 2.3
percent versus 2.65. Ten years, 3.72 versus 5.08.
Why has Treasury with their full faith guarantee of GSE not
insisted in fact that they beat T bills? Why is it today that
the American taxpayer is funding Fannie and Freddie at a rate,
a cost of money rate, that is substantially higher to the
American taxpayer because of what we did in taking it over,
without getting T bill rates? Had you converted GSEs to T
bills, you would have been able to get these rates. I would
like an answer for the record.
Mr. Kashkari. Of course, sir. First of all, we do not--
Fannie and Freddie are not full faith and credit. We have
provided very strong implicit support through these contracts
that provides the Treasury's backing. But they are not the same
thing as saying it is full faith and credit. It is darn close,
but it is not quite full faith and credit, No. 1.
Mr. Issa. It is not very close on the interest rate, I am
afraid.
Mr. Kashkari. No. 2, the Treasury lending authority, if we
wanted to provide all the lending to them instead of them going
to the market themselves, the Congress provided us authority
through the end of 2009. So we need Fannie and Freddie to be
able to access the markets directly for their long-term
applications to continue to fund themselves. So we could step
in on a short-term basis and provide liquidity, but it is not
unlimited authority.
Mr. Issa. Thank you.
Thank you, Mr. Chairman.
Mr. Kucinich. I thank Mr. Issa for the final round of
questioning of Mr. Kashkari.
The Chair recognizes Mr. Cummings. You may proceed.
Mr. Cummings. Mr. Kashkari, in the neighborhood I grew up
in the inner city of Baltimore, one of the things that you
tried to do was make sure that you were not considered a chump.
And what ``chump'' meant was that you didn't want people to see
you as just somebody they could get over on. And I am just
wondering how you feel about an AIG giving $503 million worth
of bonuses out of one hand and accepting $154 billion from
hard-working taxpayers?
I am trying to make sure you get it, you know? I mean, you
know what really bothers me is all these other people who are
lined up. They say, well, is Kashkari a chump? We can just go
in there--and I am not saying they are. I don't know. We can go
in there, we will get some money. And you know what AIG did?
They will even tell you they are coming back for some more. And
they have the nerve, the nerve, to grant some $503 million
worth of bonuses.
I am just wondering, do you all say to yourself, boy, this
doesn't look too good. And I am wondering about them, if it was
simply from a PR standpoint, and I know nothing about PR, but
one thing I do know, I wouldn't want to be asking my friend for
some money to help me stay afloat and if I didn't get the money
I would be out of business, and then for my friend, I say OK, I
am really struggling. Then my friend, who can barely afford to
go to McDonald's, then walks around and sees me in a restaurant
costing $150 a meal. There is absolutely something wrong with
that picture.
So I wonder, does that go through your head, or is it just
me? Am I missing something?
Mr. Kashkari. No, Congressman. I saw the same images that
you saw of the parties and I share your frustration with that.
Mr. Cummings. What about the $503 million worth of bonuses?
Mr. Kashkari. Let's talk about that, because I heard about
that this morning I think as you did in the paper, and I asked
my colleagues to check on it. I said, what is this, because I
was outraged when I saw the headlines.
What was explained to me is that this was money apparently,
and I am not defending it, but this was money that had already
been paid to employees that was set aside in a separate fund
that they would get if they left AIG, and we need AIG to keep
running as a company so it can sell off its assets and pay back
the taxpayers.
So from what has been explained to me is this money that
has already been paid but set aside to the employees was now
released so that the employees did not have an incentive to
quit, because we need them to keep working so that they can
sell off the assets and pay back the taxpayers.
Mr. Cummings. We need them to keep working, but guess what?
There are a whole lot of people that can replace them because
there are so many people losing their jobs. This is an
employer's market today.
Mr. Kashkari. That is true, sir.
Mr. Cummings. Come on now. I guarantee you there are people
lined up saying, please quit so I can get a job. And that is
what the American people are looking at, and they are
frustrated.
Now, let me go to another question. You said something very
interesting. And, by the way, I thank you. You have a tough
job. The $350 billion that is left, you said that Mr. Paulson
has not made a decision on that. I mean, I don't want to be
considered a chump either. You cannot convince me that Paulson
is not coming back for the $350, I know you say he has not made
a decision, that he is not coming back for the $350 billion,
because you have said here several times that the $700 billion
if you don't do it this way or don't do it that way, you can't
achieve but so much. So obviously you need that.
I mean, what would be the logical argument to get the $350
billion, if you were advising Mr. Paulson to go after the $350
billion?
Mr. Kashkari. It would be the priorities that he has
outlined. So, No. 1, additional capital for all sorts of
financial institutions, not just banks, because many of them
provide credit to our communities. No. 2, getting consumer
credit flowing again.
I talked about auto loans, credit cards, student loans,
etc. Those markets are frozen today. So to get at those
problems, that is part of what we would want to use the second
$350 billion for, if he makes that determination. So that is
what I would be talking to him about, sir.
Mr. Cummings. So last but not least, a lot of times when we
have these hearings, and I will close with this, and I walk
away from the hearing, I often ask myself, does the witness
then go to his friends and his employees and say, we got
through that one, and then go back to business as usual?
I am praying, and I am talking about constituents, man. I
mean, I am talking about people who are hurting. I am praying
that you will never be the same after this hearing. I am
serious. And I know you have been reaching out.
In other words, I want you to go back with a little bit
more fire. I am not saying you haven't had the fire, but I want
it to be hotter, to try to help these people who are losing
out. These are the people that I face.
I go home every night. I live in Baltimore, so I see my
constituents every day. So they need help, and they are begging
for help. And I just hope that when you go back you don't say,
got past Kucinich, got past Issa and Cummings. It was a little
rough, but, OK, boys, let's go back to business as usual.
We can't afford it, nor can we afford to be chumps. We
can't afford it. It is too much. People are hurting and they
are in pain.
So I hope that while we are looking at Wall Street and we
are looking at all the folks that have their hands out and we
are looking at all the AIG officials as they go on their little
junkets or whatever, that you keep in mind, as I know you have
been doing, but I want you to do it more, that every decision
you make, you think about those folks who are losing their jobs
and who are in pain and who are not going to have a decent
Christmas. They are going to probably be sitting around the
Christmas tree with no presents. You know why? Because they
won't have a job.
All of these people, as I hope as they are coming to you
begging for the taxpayers' money, that you will remind them of
all the people who are suffering and that are in pain, and tell
them that it cannot be business as usual.
Thank you very much, Mr. Chairman.
Mr. Kucinich. Thank you, Mr. Cummings.
Mr. Kashkari, do you have any response?
Mr. Kashkari. Thank you for the opportunity to be here
today. Just to Mr. Cummings, I don't know how to work any
harder than we are already working, and I take your feedback
very seriously. That is why we are working as hard as we are,
and we are going to keep doing it and trying to accomplish it
and meet your expectations.
Mr. Cummings. Thank you very much.
Mr. Kucinich. If I may take the prerogative as Chair to say
I don't think anyone questions, Mr. Kashkari, that you are
working hard. Our question is who are you working for.
That will conclude this first panel. I want to thank you
for your presence, sir. As Mr. Cummings said, I know that it
cannot have been easy. You have been answering questions for
over 2 hours and the committee will take note that you have
engaged in a thoughtful Q and A here. So we appreciate it. I
just want you to know it is much appreciated and we understand
the burdens of your office.
So we are going to thank Mr. Kashkari for his presence here
and we are going to move on to the second panel. I would ask
the witnesses from the second panel to come to the committee
table.
Thank you again, Mr. Kashkari, for your presence here.
The committee will take a 5 minute recess while the table
is set up for the second panel.
[Recess.]
Mr. Kucinich. The committee will come to order.
We are fortunate to have an outstanding group of witnesses
on our second panel. Professor Michael Barr teaches financial
institutions, international finance, transnational law and
jurisdiction and choice of law and co-founded the International
Transactions Clinic at the University of Michigan Law School.
He is also a senior fellow at the Center for American Progress.
Professor Barr conducts large scale empirical research
regarding financial services in low and moderate income
households and researches and writes about a wide range of
issues and financial regulation.
Professor Barr previously served as Secretary Treasury
Robert Rubin's special assistant and Deputy Assistant Secretary
of the Treasury.
Professor Anthony Sanders. Professor Sanders is a professor
of finance and real estate at the W.P. Carey College of
Business of Arizona State University where he holds the Bob
Herberger Arizona Heritage Chair. He has previously taught at
the University of Chicago Graduate School of Business,
University of Texas at Austin McCombs School of Business, Ohio
State University Fisher College of Business. In addition, he
has served as director and head of asset backed and mortgage
backed security research at Deutsche Bank in New York City. He
has served as a consultant to various firms such as Merrill
Lynch, UBS, Bank of Scotland, Nationwide Insurance and Deutsche
Bank on the subject of mortgage design, mortgage-backed
securities and commercial mortgage-backed securities, loan
servicing and risk management.
Ms. Alys Cohen is a staff attorney at the National Consumer
Law Center, where she focuses on homeownership and other low
income consumer credit issues. She is contributing author of
the ``Cost of Credit and Truth in Lending'' manuals, provides
training and consumer law to attorneys and other advocates, and
participates in NCLC's advocacy records.
Prior to joining the NCLC staff, Alys worked as an attorney
in the Federal Trade Commission's Bureau of Consumer Protection
Division of Financial Practices where she specialized in credit
discrimination and high class lending issues.
Mr. Larry Litton is the president and chief executive
officer of Litton Loan Servicing, overseeing the day-to-day
operation of Litton's $75 billion mortgage servicing portfolio.
As a founding member of the company, Mr. Litton has been
involved in every aspect of the business since its inception in
1988 with more than 20 years of experience in mortgage
servicing. He is considered an expert in the field of credit
sensitive mortgage loans, was appointed and served on the
Mortgage Bankers Association Residential Board of Governors,
Board of Directors of the Texas Mortgage Bankers and served on
the State of Ohio Foreclosure Prevention Task Force.
Mr. Stephen Kudenholdt serves as chairman of the Structured
Finance Practice Group of the law firm of Thacher Proffitt &
Wood based in New York, a leader in residential mortgage loan
securitization. His areas of practice include residential and
commercial mortgage-backed securities and other asset-backed
securities, primarily focusing on residential mortgage loan
securitization as well as resecuritization transactions
involving various classes of mortgage-backed securities.
Mr. Kudenholdt has helped develop many transaction
structures and formats that have become industry standards,
including shifting interest subordination techniques.
Mr. Thomas Deutsch. Mr. Deutsch is deputy director of the
American Securitization Forum, a leading trade organization of
all parties to mortgage-backed securities. Prior to joining the
American Securitization Forum, Mr. Deutsch held the position of
associate in the Capital Markets Department of Cadwalader,
Wickersham & Taft LLP, where he represented issuers and
underwriters in various structured finance offerings, including
residential mortgage-backed securitizations and credit card
securitizations.
Prior to Cadwalader, Wickersham & Taft LLP, Mr. Deutsch was
an associate at McKee, Nelson LLP, where he focused on
residential mortgage-backed securitizations.
So this is a panel of experts and we appreciate their
presence here.
I would inform the witnesses, as I did the last witness,
that it is the policy of the Committee on Oversight and
Government Reform to swear in all the witnesses before you
testify. I would ask that each of you rise.
[Witnesses sworn.]
Mr. Kucinich. Let the record reflect that each and every
witness has answered in the affirmative.
Now, as with panel I, I am going to ask that each witness
give an oral summary of your testimony. I would ask you to keep
this summary to about 5 minutes in duration. Your complete
statement will be in the written record. We do this in order to
have a little bit more time for Q and A and interact.
Professor Barr, let's proceed with you. I want to thank you
for your presence here and I want to thank you for your
patience, too. The questioning of the first witness, as you
might expect, went an extended period of time, but we know that
your time is valuable as well. Thank you for your patience.
Please, Professor Barr, you may proceed.
STATEMENTS OF PROFESSOR MICHAEL BARR, FORMER DEPUTY ASSISTANT
SECRETARY FOR COMMUNITY DEVELOPMENT, DEPARTMENT OF TREASURY,
UNIVERSITY OF MICHIGAN LAW SCHOOL & CENTER FOR AMERICAN
PROGRESS; PROFESSOR ANTHONY B. SANDERS, W.P. CAREY SCHOOL OF
BUSINESS, ARIZONA STATE UNIVERSITY; ALYS COHEN, STAFF ATTORNEY,
NATIONAL CONSUMER LAW CENTER; LARRY LITTON, JR., PRESIDENT AND
CEO, LITTON LOAN SERVICING LP; STEPHEN S. KUDENHOLDT, CHAIRMAN,
THACHER PROFFITT & WOOD; AND THOMAS DEUTSCH, DEPUTY ASSISTANT
DIRECTOR, AMERICAN SECURITIZATION FORUM
STATEMENT OF PROFESSOR MICHAEL BARR
Mr. Barr. Thank you very much, Mr. Chairman, Ranking Member
Issa and distinguished members of the committee. It is my honor
to be here today to testify about Treasury's progress in
preventing foreclosures.
There is bipartisan agreement today that stemming the tide
of foreclosures and restructuring troubled mortgages would slow
the downward spiral harming financial institutions and the real
American economy. The Federal Government has a range of
authority to take action, but what has been missing is a way to
get servicers who control most of these loans on behalf of
mortgage-backed securities investors to restructure the loans
themselves or sell the loans to the Treasury at a discount so
they can be modified.
To date, Treasury's efforts have largely failed. Owing a
duty to countless investors with conflicting interests,
servicers have largely been paralyzed by a fear of liability,
of restrictive tax and accounting rules, and the wrong
financial incentives. Instead of restructuring loans, most
servicers are foreclosing at alarming rates, as you have seen
yourselves in your own communities.
As I will explain further in a moment, what we need now is
new legislation to unlock the securitization trusts so that
servicers can modify loans or sell them to Treasury at a steep
discount. Treasury can then restructure those loans, including
a shared equity feature to protect taxpayers, issue new
guarantees on the restructured loans along the lines that the
ranking member has suggested, and selling them back into the
market. This would help homeowners and restore liquidity and
stability to our markets.
In the meanwhile, the administration can act now. They
should use a full court press to help troubled homeowners. They
should stabilize their financial markets and jump-start our
economy. In particular, Treasury can guarantee home mortgages
held in trust and in portfolios in exchange for real
restructuring. They can pay servicers to restructure loans as
well. Treasury can contract with the FDIC to implement a
restructuring program, enlist Fannie and Freddie and bolster
FHA. Let me talk about this in a little bit more detail.
After nearly a year of hoping that the private sector would
stem foreclosures, and in a hurried series of weeks, lurching
from bailout to bankruptcy and back to bailout again, Treasury
finally declared that the time had come for congressional
authorization of a program, the Troubled Asset Relief Program,
with the dominant rationale that Treasury would buy tranches of
securities and collateral debt obligations in order to jump-
start credit markets. But the administration's proposal left
intact the conflicts of interest and legal barriers blocking
real home mortgage structuring.
Moreover, the administration's rationale for the program
shifted significantly between proposal and enactment, and after
enactment the administration put on the back burner its plans
to buy mortgage-backed securities, instead focusing on capital
injections, hoping that banks would increase their lending.
Instead, capital has been deployed largely to shore up the
capital base against further decline in asset values as well
as, the committee noted, to engage in merger and acquisition
activity, and new capital has gone to AIG as well.
Just this week Treasury announced formally what we already
knew, it had abandoned the idea of buying troubled assets under
the Troubled Asset Relief Program. Despite the limitations of
the approach taken by the administration thus far, the
Emergency Economic Stabilization Act's potential is
significant. Under section 109 of the act, the Treasury
Secretary is authorized to use loan guarantees. Under section
101 of the act, the Secretary is authorized to make and fund
commitments to purchase troubled assets, including home
mortgage loans. These authorities can be deployed now to help
homeowners. Here is how.
First, guarantee home mortgages in exchange for real
restructuring. Treasury can offer to guarantee troubled loans
held by servicers if they modify troubled loans to bring debt-
to-income ratios in line with prudent underwriting and
sustained affordability.
Second, pay servicers. Right now, trusts pay servicers for
the extra work of foreclosing on homes but largely not for
modifications. Treasury could pay servicers to make loan
modifications that meet Treasury guidelines.
Third, let the FDIC act now. The FDIC has led the way in
seeking to end this crisis, as you know, and has put forward a
plan for guaranteeing troubled loans. Treasury could just say
yes.
Bolster the FHA, in need of real resources. Enlist Fannie
Mae and Freddie Mac beyond the announcement Tuesday that
largely reflected existing practice.
Private label securitization, not the GSEs, however, hold
most of the troubled subprime and Alt-A mortgages. We need to
find a way to unlock those pools. Here is how. There is a
three-part plan.
First, preserve REMIC tax benefits. Servicers managing
pools of loans are generally barred from selling the underlying
mortgage loans, but the trust agreements provide that servicers
must amend the new agreements if doing so would be helpful or
necessary to maintain Real Estate Mortgage Investment Conduit
status. These rules provide important benefits for the trusts.
Through a legislative fix, we can effectively require the
trusts to change their practices.
Second, indemnification of servicers.
Excuse me, Mr. Chairman. I notice my time is up. May I
finish?
Mr. Kucinich. Sure.
Mr. Barr. Thank you.
Second, we should indemnify servicers. Legislation could
provide a narrowly tailored indemnification of servicers who
reasonably pursue loan modifications or sales under Treasury
programs.
And, third, we need to provide legal certainty under
accounting standards. Because selling home mortgage loans to
Treasury would advance important public interests and not
conflict with the underlying purposes of Statement 140, the
Financial Accounting Standards Board should modify the
statement to provide servicers with legal comfort in broadly
modifying and selling mortgage loans under Treasury's programs.
Until we provide real home mortgage relief, our economy is
going to continue its vicious downward spiral of foreclosures,
home price implosions, credit illiquidity and decline. We need
to end the crisis now.
[The prepared statement of Mr. Barr follows:]
[GRAPHIC] [TIFF OMITTED] T0097.009
[GRAPHIC] [TIFF OMITTED] T0097.010
[GRAPHIC] [TIFF OMITTED] T0097.011
[GRAPHIC] [TIFF OMITTED] T0097.012
[GRAPHIC] [TIFF OMITTED] T0097.013
[GRAPHIC] [TIFF OMITTED] T0097.014
[GRAPHIC] [TIFF OMITTED] T0097.015
[GRAPHIC] [TIFF OMITTED] T0097.016
[GRAPHIC] [TIFF OMITTED] T0097.017
[GRAPHIC] [TIFF OMITTED] T0097.018
[GRAPHIC] [TIFF OMITTED] T0097.019
[GRAPHIC] [TIFF OMITTED] T0097.020
[GRAPHIC] [TIFF OMITTED] T0097.021
[GRAPHIC] [TIFF OMITTED] T0097.022
[GRAPHIC] [TIFF OMITTED] T0097.023
Mr. Kucinich. I thank the gentleman.
Professor Sanders, you may proceed. Thank you.
STATEMENT OF PROFESSOR ANTHONY B. SANDERS
Mr. Sanders. Thank you, Mr. Chairman.
Mr. Chairman and members of the committee, thank you for
the invitation to testify before you today.
Housing prices in many areas of the United States have
slowed or declined dramatically over the past 2 years. This
decline is partly responsible for the large increase in
subprime mortgage delinquencies over the same period. According
to Hope Now Alliance Survey data, 14.4 percent of subprime
mortgages are 60 days or more delinquent over the third quarter
of 2008, and while 2.3 percent of prime mortgages are 60 days
or over delinquent in the same period, that rate is almost
double from the third quarter of 2007 at 1.26 percent. From the
third quarter of 2007 to the third quarter of 2008, there were
many, many, many foreclosure sales, of which over half were
subprime borrowers.
But as Adam Smith's invisible hand, we used to term it as,
that has been replaced by the invisible foot, where homeowners
are being booted out of their houses at record rates.
We are in the midst of a subprime meltdown and the second
wave of Alt-A, the low documentation mortgage ARMs and related
mortgages, and those are beginning to reset. Therefore, it is
of critical importance to find ways to slow down the
delinquency in foreclosure waves if economically viable.
This urgency is reflected in the announcement by the
Federal Housing Finance Agency on Wednesday that Fannie and
Freddie announced accelerating their loan modification
activities. While Secretary Paulson has announced that TARP
will not be used to purchase troubled loans from banks, it is
still of tantamount importance to stabilize the housing and
mortgage markets, and loan modifications are one of the best
tools available to Treasury, even if they decide in the short
run not to deploy them.
Hopefully, the acceleration of loan modifications by Fannie
and Freddie will help stabilize the market, but it is dangerous
strategy to rely on the banking system when called to unjam
pipes, particularly with an overwhelmed servicing industry.
Once again, it is important to note that Fannie and
Freddie, while Congressman Cummings pointed out maybe 70
percent of the loans are being touched by Fannie and Freddie,
that is the low hanging fruit. We are not talking about the
whole loans, subprime and Alt-A that are really the source of
the problem in the housing market in the United States.
There are several loan modifications that are currently
being deployed by loan servicers. These include loan rate
reductions, loan rate freezes, amortization period extensions,
principal reductions. While the first two are the most common,
principal reductions have been much less so. In fact, only
Ocwen currently has been a major force, with approximately 70
percent of the total principal modifications done to date.
According to Credit Suisse, the average balance decline for
first lien principal modifications is approximately 20 percent,
and 55 percent for second lien principal modifications.
As housing prices begin to fall and the number of borrowers
experiencing negative equity continues rising, the demand for
such modifications is growing. Principal modifications serve to
reduce the monthly payments and reduce negative equity. Thus,
principal modifications should increase the willingness of
borrowers to stay in the home.
Loan modifications may help keep borrowers in their home
and increase the probability that they will be able to cure
their delinquency. Foreclosure involves multiple transaction
costs, including legal filings and selling expenses that can
reach almost 50 percent loss severity on each loan. So during
the current housing and mortgage crisis, the capacity of loan
servicers to process additional foreclosures has been limited,
resulting in an increase in the effective cost to cure
delinquencies and a reduction in the number of households that
have been able to obtain a modification.
In summary, preventative principal reductions can actually
serve to stave off defaults and help stabilize the housing and
mortgage market. Waiting until the borrower goes 60 to 90 days
delinquent is dangerous, since the longer a servicer waits to
modify a loan, the more likely the loan is to go into default,
generating enormous costs for the lenders and servicers. Thus,
loan modifications are not a bailout of borrowers per se;
rather it is an attempt to reduce costs to lenders and
investors while at the same time preserving homeownership and
reducing systemic risk in the economy.
Thank you for your willingness to let me share my thoughts
with you.
[The prepared statement of Mr. Sanders follows:]
[GRAPHIC] [TIFF OMITTED] T0097.024
[GRAPHIC] [TIFF OMITTED] T0097.025
[GRAPHIC] [TIFF OMITTED] T0097.026
[GRAPHIC] [TIFF OMITTED] T0097.027
[GRAPHIC] [TIFF OMITTED] T0097.028
Mr. Kucinich. Ms. Cohen, you may proceed.
STATEMENT OF ALYS COHEN
Ms. Cohen. Chairman Kucinich, Ranking Member Issa, thank
you for inviting me to testify at today's hearing on the
Treasury Department's TARP program.
On a daily basis, the National Consumer Law Center's
attorneys provide legal and technical assistance on consumer
law issues to legal services, government and private attorneys
representing low income consumers across the country. From this
vantage point, we are seeing the devastating effects of
escalating foreclosures on families and communities. There is
no doubt bold and immediate action is needed to save homes and
neighborhoods.
Treasury's recent announcement makes clear, however, that
stopping foreclosures and saving homes and neighborhoods is not
a priority of the current TARP program. We appreciate the
FDIC's announcement today on the use of the TARP guarantee
program. Such a plan with would be a substantial step in the
right direction.
Congress must insist that Treasury use the broad powers
provided by TARP to mandate affordable modifications through
every means available. Only such a plan will get at the root
cause of this entire crisis, defaults and foreclosures
engineered by overreaching mortgage loan originators and
investors, and thus stabilize the housing market.
To the extent Treasury provides funds to firms providing
non-mortgage credit, there should be a quid pro quo for
reforming mass abuses in those industries, including auto,
finance, private student loans and credit cards.
On mortgages, Treasury should develop a loan modification
program that can be routinized and applied on a large scale
basis. It should condition any purchase of an equity interest
in a financial institution on a rigorous loan modification
plan. It should provide guarantees only for affordable loan
modifications, and it should purchase a sufficient stake in
assets to enable the implementation of an aggressive
modification program through the purchase of whole loans,
second mortgages, securities or servicing rights. An effective
TARP program for homeowners lies in the mechanics of its loan
modification program. The following principles should apply to
such a program.
One, a mechanized program of affordable and sustainable
modifications is essential to process the many homeowners
facing foreclosure.
Two, the affordability analysis in any loan modification
program must be both objective and have a safety valve for
homeowners in special situations.
Three, loan modifications should include principal
reductions to 95 percent LTV so borrowers are invested in long-
term homeownership and so they can refinance to make needed
repairs, obtain a reverse mortgage or relocate.
Four, second liens should be bought out at a nominal
pricing. Without addressing second liens, a program can go
nowhere.
Five, loan modifications should be available to homeowners
in default as well as for those for whom default is reasonably
foreseeable.
Six, late fees and all default servicing fees should always
be waived in loan modifications. As servicers profit enormously
from such fees, they are often out of proportion to the loan
balance.
Seven, any shared loss guarantee should favor the most
needed loan modifications.
Eight, loan modifications should not cost servicers more to
do than foreclosures.
In addition, Congress should pass legislation to allow loan
modifications through bankruptcy, reform the servicing industry
by requiring loss mitigation prior to any foreclosure, and
remove tax consequences for loan modifications.
Why do we need these measures? While the servicing industry
stands at the center of the foreclosure crisis and thus is in
the best position to turn the situation around, the basic
structure of the servicing business requires us to recognize we
cannot leave it to this industry to lead the way out of the
foreclosure nightmare. Even the streamlined modification
program is limited in terms and has been announced by private
sector servicing firms that have a dismal record of providing
efficient and fair service.
In the interest of maximizing profits, servicers have
engaged in a laundry list of bad behavior which has
considerably exacerbated foreclosure rates, including cascading
fees imposed upon homeowners in default. Servicers profit from
levying fees and keeping borrowers in the sweat box of default
contrary to the interests of homeowners and investors. While
clarifying a servicer's duty to the entire investor pool and
allowing for clear decisionmaking capacity by servicers will
help, more substantial intervention will be needed to rescue
homeowners from a broken system that works against their
interests.
Thank you for the opportunity to testify before the
committee today. A strong loan modification program under TARP
is essential, as is passage of legislation to allow for loan
modifications in bankruptcy, to reform the servicing industry
and to address the tax consequences of loan modifications.
Thank you. I look forward to your questions.
[The prepared statement of Ms. Cohen follows:]
[GRAPHIC] [TIFF OMITTED] T0097.029
[GRAPHIC] [TIFF OMITTED] T0097.030
[GRAPHIC] [TIFF OMITTED] T0097.031
[GRAPHIC] [TIFF OMITTED] T0097.032
[GRAPHIC] [TIFF OMITTED] T0097.033
[GRAPHIC] [TIFF OMITTED] T0097.034
[GRAPHIC] [TIFF OMITTED] T0097.035
[GRAPHIC] [TIFF OMITTED] T0097.036
[GRAPHIC] [TIFF OMITTED] T0097.037
[GRAPHIC] [TIFF OMITTED] T0097.038
[GRAPHIC] [TIFF OMITTED] T0097.039
[GRAPHIC] [TIFF OMITTED] T0097.040
[GRAPHIC] [TIFF OMITTED] T0097.041
[GRAPHIC] [TIFF OMITTED] T0097.042
[GRAPHIC] [TIFF OMITTED] T0097.043
[GRAPHIC] [TIFF OMITTED] T0097.044
[GRAPHIC] [TIFF OMITTED] T0097.045
[GRAPHIC] [TIFF OMITTED] T0097.046
[GRAPHIC] [TIFF OMITTED] T0097.047
[GRAPHIC] [TIFF OMITTED] T0097.048
Mr. Kucinich. Thank you very much for your testimony.
Mr. Litton.
STATEMENT OF LARRY LITTON, JR.
Mr. Litton. Yes, sir. Mr. Chairman, I just want to thank
you very much for the opportunity to be here today.
I am responsible for running a mortgage servicing company
that is right on the front lines of this crisis. We service
450,000 loans----
Mr. Kucinich. Hold on, is your mic on now? OK. We want to
make sure----
Mr. Litton. I talk so loud I wasn't able to hear myself
anyway through the microphone.
Mr. Kucinich. When I was on the City Council in Cleveland
years ago, my mic used to be cutoff, so I learned to talk loud
as well. But here they need to pick up the sound of your voice.
Mr. Litton. There you go.
Mr. Kucinich. Are we all set now on the technical side?
Good.
Mr. Litton. To top it off, I even have a cold.
Mr. Kucinich. Thank you for being here. Go ahead.
Mr. Litton. I would like to thank you again for the
opportunity to address the committee.
I run a mortgage loan servicing company that services
450,000 loans totaling about $75 billion of product. I was
asked here today to provide some insight into the performance
of loan modifications and to explore additional ways that
servicers can help homeowners stay in their homes during these
very difficult times.
As a servicer, we are the intermediary between investors in
mortgage loans and mortgage-backed securities as well as
homeowners. Servicers perform a host of duties. We are
responsible for collecting monthly payments from the customer.
We are responsible for forwarding those payments on to the
investor. We handle taxes, insurance, as well as other things.
We are also responsible for working with delinquent customers,
and we are also responsible for creating workout opportunities
and modifying those loans when we can do so.
Litton has been a strong proponent of responsible loan
modifications since my father founded the company in 1988, and
I am very proud to say, by the way, that I am still working
with my dad 20 years later. As a servicer, we not only have a
contractual obligation to our investors, but we also have a
responsibility to provide options that give homeowners a second
chance.
In the past year, we have observed several notable trends
that are presenting increased challenges to servicers as well
as homeowners.
First of all, default rates have increased and have
continued to do so at an accelerated rate.
Second, redefault rates on loans that have been previously
modified have gone up and are going up at an accelerating rate.
Third, fewer customers are accepting the loan modifications
that were being offered, including preapproved streamlined loan
modifications.
Fourth, foreclosures on vacant properties have doubled from
this time last year.
And, finally, our customers are facing tremendous economic
head winds driven by higher incidences of job loss, wage
compression and a host of other economic issues.
It is clear to me that we as a servicing industry need to
continue to be even more aggressive than we have been with
modifying loan terms and finding new ways to get homeowners'
payments down even further than we have done already. We
believe that this is good both for homeowners and communities,
and it is also good for investors whose loans we are servicing.
Over the past 12 months, I am proud to say that we have
modified more than 41,000 loans. That represents 12 percent of
our portfolio and it represents 38 percent of loans that were
60 days or more past due. Whenever we modify a loan, we
consider all of the following approaches. We will write down
principal, we will waive part or all of the arrearage that has
accrued on the loan. We will look at decreasing the interest
rate, and we will also look at extending the term. However,
despite that work, despite all the loan modifications we have
done, we have not seen an appreciable decline or any decline
whatsoever in new foreclosure starts over this same period.
In response to this, it is clear to me as an asset manager
responsible for 450,000 mortgage loans, that we have to do
more, and the more that we are doing is we have implemented at
Litton a new debt-to-income standard of 31 percent on our loan
modifications. Our belief is that using this standard will
allow us to do more loan modifications and provide greater
payment relief to borrowers and provide a more long-term
sustainable solution. We believe that our investors will
benefit tremendously from this and we are confident that we
will be able to demonstrate that by decreasing future default
rates.
Thank you, Mr. Chairman, for the opportunity to address the
committee, and I look forward to answering additional questions
that you may have.
[The prepared statement of Mr. Litton follows:]
[GRAPHIC] [TIFF OMITTED] T0097.049
[GRAPHIC] [TIFF OMITTED] T0097.050
[GRAPHIC] [TIFF OMITTED] T0097.051
[GRAPHIC] [TIFF OMITTED] T0097.052
[GRAPHIC] [TIFF OMITTED] T0097.053
[GRAPHIC] [TIFF OMITTED] T0097.054
Mr. Kucinich. I thank the gentleman.
Mr. Kudenholdt.
STATEMENT OF STEPHEN S. KUDENHOLDT
Mr. Kudenholdt. Chairman Kucinich, thank you for the
opportunity to speak with you today. My name is Steve
Kudenholdt. I am the head of the Structured Finance Practice
Group at the law firm of Thacher Proffitt based in New York.
Mr. Kucinich. Could you please pull that mic a little bit
closer?
Mr. Kudenholdt. Certainly, sir.
Since the credit crisis began last year, our firm has
worked closely with the American Securitization Forum and other
industry participants to improve awareness about the
flexibility in existing securitization structures to perform
loan modifications. In today's environment, residential
mortgage loan servicers need to be able to use all possible
tools to minimize losses and foreclosures.
My comments will focus on how TARP or other programs could
be used to increase loan modifications and reduce foreclosures
in the context of residential loans included in private label
securitizations, non-GSE securitizations.
Most private label securitization governing documents give
broad authority to the servicer to service loans in accordance
with customary standards and in a manner that is in the best
interests of investors. Many securitization governing documents
specifically authorize loan modifications where the loan is in
default or where default is reasonably foreseeable.
EESA Section 109(a) provides that the Secretary may use
loan guarantees and credit enhancements to facilitate loan
modifications to prevent avoidable foreclosures. If a guarantee
program were created that covered specific loans that had been
modified, this could result in more modifications.
Under a typical loan modification program, the servicer
takes the following steps: First, a specific proposed loan
modification is designed based on the borrower's current
ability to pay. Second, the anticipated payment stream from
that loan as modified is compared with the anticipated recovery
from foreclosure on a net present value basis. Third, the
servicer chooses the alternative with the greater NPV.
Now, in comparing a loan modification with a foreclosure,
the servicer applies an assumed redefault rate, and this factor
reduces the NPV of the modification alternative. But if credit
support were added that eliminated that redefault risk, then
the servicer would be more likely to be able to choose the
modification over foreclosure, as long as the cost of the
guarantee was less than the reduction in NPV that would have
resulted from the redefault risk.
In order to encourage modifications and protect the
taxpayers' interests, such a guarantee program should be
limited to servicers who have demonstrated that they have a
robust and systematic modification program with sufficient
staffing and resources to handle a high volume of modification.
The program should include procedures to verify current income
and should include a reliable model for calculating NPV. We
think a program of this type could actually change servicer
behavior without creating a mandate or changing the operative
documents.
Another possibility would be to develop a program under
TARP whereby defaulted mortgage loans could be purchased
directly from securitization trusts at a discounted price. Such
a program would be very helpful because there are borrowers who
will default who would like to stay in the home but would not
be able to qualify for a loan modification because they could
not document current sufficient income and they may not be
eligible for the Help for Homeowners program either. Defaulted
loans purchased under this program would be subject to a wider
range of workout options, such as potentially renting the
property back to the borrower.
Although typical servicing authority provisions have been
broadly interpreted to allow loan modifications, these
provisions to date have not been interpreted to allow such
sales for a number of reasons, primarily because FAS 140 does
not permit sales of loans out of securitization trusts.
However, most securitization documents are actually silent on
whether defaulted loans can be sold for a discounted price.
Where they are silent, we think there is a strong argument that
such sales could be made if the loan was in default and if the
cash price resulting from the sale was greater than the NPV of
a recovery under foreclosure, and the servicer safe harbor
provisions that were added under section 119 of these would
support this interpretation.
However, an essential element of this type of program would
be an authoritative change or clarification of FAS 140 to
permit sales without adverse accounting consequences. These two
programs would potentially offer additional tools to a servicer
to mitigate losses and prevent foreclosures that they do not
have today.
[The prepared statement of Mr. Kudenholdt follows:]
[GRAPHIC] [TIFF OMITTED] T0097.055
[GRAPHIC] [TIFF OMITTED] T0097.056
[GRAPHIC] [TIFF OMITTED] T0097.057
[GRAPHIC] [TIFF OMITTED] T0097.058
[GRAPHIC] [TIFF OMITTED] T0097.059
[GRAPHIC] [TIFF OMITTED] T0097.060
[GRAPHIC] [TIFF OMITTED] T0097.061
[GRAPHIC] [TIFF OMITTED] T0097.062
[GRAPHIC] [TIFF OMITTED] T0097.063
[GRAPHIC] [TIFF OMITTED] T0097.064
[GRAPHIC] [TIFF OMITTED] T0097.065
[GRAPHIC] [TIFF OMITTED] T0097.066
[GRAPHIC] [TIFF OMITTED] T0097.067
[GRAPHIC] [TIFF OMITTED] T0097.068
[GRAPHIC] [TIFF OMITTED] T0097.069
Mr. Kucinich. I thank the gentleman.
Mr. Deutsch, you may proceed.
STATEMENT OF THOMAS DEUTSCH
Mr. Deutsch. Chairman Kucinich, my name is Tom Deutsch, and
I am the deputy executive director of the American
Securitization Forum. I very much appreciate the opportunity to
testify before this committee on behalf of the more than 330
member institutions of the American Securitization Forum,
including mortgage lenders, servicers and institutional
investors, regarding how the securitization industry and the
Federal Government can work together to prevent avoidable
foreclosures under the new Emergency Economic Stabilization
Act.
I testify here today with one simple overarching message:
Industry participants have been and will continue to deploy
aggressive and streamlined efforts to prevent as many avoidable
foreclosures as possible. But let me also repeat the statement
that you quoted earlier today, that macroeconomic forces
bearing down on an already troubled housing market are simply
too strong for private sector loan modification initiatives
alone to counteract the systematic risks imposed by a
nationwide increase in mortgage defaults and foreclosures.
In my testimony here today, I look to outline a number of
ways that the industry and the government can work together
under TARP to target relief to troubled homeowners while
simultaneously helping to restore credit to mortgage borrowers.
The economic and housing market conditions have clearly
deteriorated over the last 18 months, and that deterioration
has intensified recently. Job losses, declining home values and
borrowers' extraordinary non-mortgage consumer debt have
combined to put severe strain on homeowners and drive rising
delinquencies, defaults and foreclosures. Given these
unprecedented challenges, servicers have responded with
unprecedented efforts, as no securitization market
constituency, lenders, servicers or investors, benefits from
loan defaults or foreclosures.
As a result, the number of loan modifications, for example,
has increased by over six times the rate at which they were
being provided to borrowers at this time last year. One driving
force behind this exponential increase was the streamlined
framework the American Securitization Forum developed last year
that all major servicers have implemented to provide efficient
loan modification decisions to subprime-ARM borrowers facing
interest rate resets.
In an effort to expand this framework, we are actively
reviewing criteria from other streamlined loan modification
approaches that have recently been announced, such as the plan
implemented by the FDIC at IndyMac and the Federal Housing
Finance Agency protocol announced on Wednesday.
Ultimately though, we must all recognize the seismic
economic challenges in the United States, the epicenter of
which is in the housing market, are too great for purely
private sector loan modification solutions. As such, evolving
private sector loan modification activities, though playing an
important part of the solution, have limits in their
effectiveness in addressing the extraordinary challenges in the
housing market and should not be seen as a panacea for all
housing market ills. As such, we believe expanded voluntary
government programs under TARP would be very effective in
bridging the gap to address the potential foreclosures that
commercial and contractual obligations cannot prevent.
The newly enacted TARP contains significant opportunity for
the Federal Government to use guarantees to incentivise
additional loan modifications for distressed borrowers. In
particular, the act specifically authorizes that the Secretary
may use loan guarantees and credit enhancements to facilitate
loan modifications to prevent avoidable foreclosures.
We believe there have been some positive general approaches
put forth; for example, by the chairman of the FDIC, that would
have the Federal Government through TARP provide credit
guarantees for redefaults on modified loans that would
substantially increase the number of loan modifications granted
and ultimately foreclosures avoided. But the details of the
program, such as that which was announced this morning, are
very important. Issues like DTI and LTV requirements are
thoroughly under review by our members as we speak to evaluate
the program and to see about the next steps the ASF may be able
to take.
Since the TARP program announced, there continues to be a
great deal of discussion, much of which has occurred today,
regarding what assets the program would purchase and how that
ownership would give the Federal Government control over the
servicing of those assets. If whole loans were purchased by
TARP directly from the banks, for example, the government would
have complete discretion to apply its own loss mitigation and
loan modification protocols to those loans. But if the TARP
program were to buy mortgage-backed securities in whole, their
ability to exercise control over servicing policy to effectuate
their own loan modifications would be limited unless the
program purchased a supermajority of each outstanding class of
each note in the trust.
Given that there is currently $7.5 trillion of securitized
mortgage debt outstanding in the United States, which is
slightly more than half of the $14.8 trillion of mortgage debt
outstanding, a third opportunity for TARP should be explored.
That is, in this time of extraordinary housing market
dislocation, it may be appropriate for the industry, accounting
standard setters and tax officials to reevaluate the ability of
servicers to be able to sell individual distressed loans out of
mortgage-backed securities pools to TARP, which could give the
Treasury Department unlimited discretion to modify those loans
under whatever protocol they think appropriate. Currently,
mortgage loan servicers generally do not have the legal ability
to sell distressed loans out of mortgage securities.
I would note that it is critical that these programs remain
voluntary. As we have noted and as we have heard today, one of
the primary objectives of TARP is to restore credit
availability to mortgage and consumer assets throughout the
country. Anything other than voluntary could greatly put that
at risk and further entrench the credit crisis.
I thank you very much for the opportunity to testify here
today, and look forward to answering any questions that you may
have.
[The prepared statement of Mr. Deutsch follows:]
[GRAPHIC] [TIFF OMITTED] T0097.070
[GRAPHIC] [TIFF OMITTED] T0097.071
[GRAPHIC] [TIFF OMITTED] T0097.072
[GRAPHIC] [TIFF OMITTED] T0097.073
[GRAPHIC] [TIFF OMITTED] T0097.074
[GRAPHIC] [TIFF OMITTED] T0097.075
[GRAPHIC] [TIFF OMITTED] T0097.076
[GRAPHIC] [TIFF OMITTED] T0097.077
[GRAPHIC] [TIFF OMITTED] T0097.078
[GRAPHIC] [TIFF OMITTED] T0097.079
[GRAPHIC] [TIFF OMITTED] T0097.080
[GRAPHIC] [TIFF OMITTED] T0097.081
[GRAPHIC] [TIFF OMITTED] T0097.082
Mr. Kucinich. Thank you very much, Mr. Deutsch.
I just want to say to each and every member of the panel,
thank you for your very thoughtful, analytical presentations. I
have had the chance to read your testimony, and based on the
urgency of this moment, I am going to ask staff to work
together to provide Members of Congress with the testimony that
was given today. We really need to do that. When Members come
back next week, we need to get to them this testimony from
these individuals, because what we are looking at here is a way
forward.
Mr. Issa, I just mentioned that it is so important for
Members of Congress to look at this perspective that has been
offered, which is really a way out of where we are right now,
and I have asked staff to work together to communicate this to
the Members of Congress.
We are going to have the first round of questions, 10
minutes, and I am going to begin. I would like to just go down
the line of witnesses with the same question.
Each of you had the opportunity to sit through the lengthy
questioning of Mr. Kashkari, and I am sure that you also are
very familiar with Mr. Paulson's announcement 2 days ago that
the TARP would not buy troubled mortgage assets.
What was your reaction to Mr. Paulson's statement about how
he views the use of the Troubled Asset Relief Program at this
point?
Mr. Barr. Well, Mr. Chairman, I think it is quite troubling
that the administration has decided not to use the authority
that the Congress gave to the Treasury for the purpose of
helping homeowners. I think it is a significant policy error
and it has enormous negative consequences for our country. So I
was quite disturbed by it. I am hopeful that Congress can work
with the administration in its remaining weeks to reverse that
decision, and I am hopeful that the new administration would
take a different approach.
I think we need to have a systematic effort to restructure
troubled mortgages. It sounds like many of the panelists agree
that a program of guarantees, a program of purchase, changes in
tax and accounting rules, are in order to unlock the trusts and
help our country move forward.
Mr. Kucinich. Professor Sanders.
Mr. Sanders. Thank you, Congressman Kucinich.
I just wanted to go on record and say I was kind of
startled by the decision to cancel the loan repurchase part of
TARP for the simple reason as this, is that what is causing the
problem with banks are failed loans, and the failed loans are
costing the banks enormous amounts of money, which means they
can no longer meet their capital. So what do we do? We give
them checks for more capital in the form of preferred stock,
however you want to do it. In other words, so we didn't get to
the root cause of the problem; we simply treated what the
outcome was, like a rash. I mean, it is very severe, and I
don't mean to downplay that. Having banks fail was a horrible
thing, but if they are not making loans to anybody, kind of,
why are we doing this, is No. 1?
But, No. 2, in terms of the repurchases, I am trying to, we
really have to do something, and I agree with everyone on this
panel more or less who said we have to become much more
aggressive or assertive in how we are going to modify some of
these loans because we have another wave coming, and we are
going to get swamped by business as usual. So I am just
pleading with Congress and the incoming administration to take
some bold steps, because we are going to be under water
severely.
Mr. Kucinich. That is a point that member of the committee
have made, and we appreciate you making it.
Ms. Cohen, your assessment of the Treasury Secretary's
announcement?
Ms. Cohen. Well, your question reminds me of that weekend
back in September when we saw the first draft of the TARP
legislation coming out of Treasury. The purposes of the act
then were only to help banks and not to help homeowners, and
folks had to fight very hard to get the rights of homeowners
in.
And so in some ways it is not surprising that the vision of
the Treasury Department and the administration is not different
now from what it was then. In their view, it is all about
liquidity; and on Main Street, it is really about homes and
neighborhoods. So it is a huge disappointment, and I agree with
the other panelists that it needs to be turned around.
Mr. Kucinich. As we go to Mr. Litton, I just want to say
that I appreciate the relationship that you have with the East
Side Organizing Project in Cleveland, OH, where you have worked
to complete modifications. And you know, from our
understanding, it has been a model of success in these troubled
times, you know, more success than we've seen in other areas. I
just wanted to point that out and thank you and ask you for
your assessment of Mr. Paulson's pronouncement relative to the
work that you are doing right now and trying to do.
Mr. Litton. So, as it relates to that announcement, as a
servicer in the trenches every day, servicing loans that are in
mortgage-backed securities, it doesn't impact me as directly on
a day-to-day basis because we can't sell the assets anyway on a
one-off basis, as these gentlemen had previously indicated.
What does become more clear to me--and Mr. Chairman, I
think that you hit on a great point a moment ago with your
acknowledgement of the work that we do with ESOP--is that the
borrowers that I deal with every day cannot afford the
mortgages that they are in, and we are re-underwriting them on
loan modifications to standards that do not produce long-term
affordable mortgages. To me that is the simple, fundamental
realization as a guy that is trying to work with these
consumers on a day-to-day basis, that we have to be more
effective at coming out with a lower debt-to-income standard,
and we have to be more reasonable as it relates to writing
principal off and right-sizing these balances if we are going
to put a stop to the downward spiral on what is going on with
home prices.
So anything that we can do that helps me get that objective
accomplished I think is a good thing. Anything that gets in the
way of getting that objective accomplished is, I think,
ultimately a bad thing.
Mr. Kucinich. Thank you.
Mr. Kudenholdt.
Mr. Kudenholdt. Thank you, Mr. Chairman.
I think I could understand why large-scale purchases of
residential mortgage-backed securities in and of themselves
would not necessarily reduce foreclosures, would not
necessarily enable the government to cause those pools to
service the loans differently because it is very difficult to
get control over a pool by purchasing classes. And as Mr.
Deutsch mentioned, it is extremely difficult, considered
impossible really, to amend a governing document to change the
rules.
But as I talked about in my testimony, the existing rules
of these securitization documents do permit a wide array of
options for the servicer in mitigating losses. And the existing
provisions do support the types of modification programs that
the panel has talked about today.
Now, the two programs that I talked about which could be
done through TARP or through the FDIC or another government
program, namely a guarantee program and a purchasing individual
defaulted loans out of pools program, these could actually
change servicer behavior. They could change outcomes. They
would result in a fewer number of loans going into foreclosure.
I think incrementally they could certainly make improvements.
Mr. Kucinich. Thank you.
And, finally, Mr. Deutsch, your comments on Mr. Paulson's
announcement relative to the Troubled Asset Relief Program.
Mr. Deutsch. I think one of the primary objectives of TARP
at the beginning, and continues to be an objective, is to get
credit available to consumers, whether that is mortgages, auto
loans, credit cards, etc. It is one of the primary focuses,
because as we all know, the securitization markets, the
secondary and capital markets, are essentially a frozen tundra
right now where capital is not available to the banks in that
secondary market, which if banks don't have that credit
available, they cannot lend it to consumers.
So I do think there was a very fine focus by Secretary
Paulson to get the securitization markets resumed, to get them
going again so banks will have capital to lend to consumers, so
that they will have an ability to refinance, so that they will
have an ability to buy a car, so that they'll have an ability
to use their credit card at reasonable rates. By invigorating
that market, by invigorating the securitization market, it will
allow the economy to get back on its feet and resume as normal.
Mr. Kucinich. Professor Barr, I want to ask you, do you
think Treasury is justified in diverting its attention away
from mortgages and toward other urgent needs, such as credit
card defaults?
Mr. Barr. I think there are growing problems throughout the
credit markets, including in the markets that Secretary Paulson
identified. But I don't think that it is either appropriate or
justified to move attention away from the origins of this
crisis, as Professor Sanders suggested, in the mortgage
markets. We do need to deal with troubled home mortgages. We
need an aggressive, robust plan. They can do actions now under
their existing authorities. They can take further steps by
clarifying tax and accounting rules. I think that is absolutely
essential if we are going to get out of the current crisis.
Mr. Kucinich. Well, let's look at where we are right now,
and I would like your response as to what Congress should do.
And if anyone else wants to jump in here as I ask my final
question of this round, you can feel free to.
After today, this administration has only 65 days
remaining. If the President asked for the next installment of
$350 billion for the Troubled Asset Relief Program, that's the
TARP, should Congress give it to him or wait until a new
administration has had the opportunity to reconsider Secretary
Paulson's decision not to buy mortgage assets with the Troubled
Asset Relief?
Mr. Barr. Mr. Chairman, I think if the Treasury insists on
its current path and refuses to implement a program of the kind
that has been described by this panel with respect to buying,
not the mortgage-backed securities, but mortgages themselves
that can be remodified; if Treasury continues to block the
FDIC's plan for a guarantee program, my own judgment is it
would be inappropriate to proceed with the additional funding.
Mr. Kucinich. Anyone else want to jump in on that question
before I go to Mr. Issa? Anyone else want to respond?
Mr. Deutsch. I would say that it is urgent that TARP use
the funds that were authorized to get the market resuscitated
as soon as possible. And I think it is imperative for
government, both the administration and Congress, to find a way
for that to be spent to reinvigorate the market.
Mr. Kucinich. Anyone else?
Mr. Sanders.
Mr. Sanders. Yeah, I just want to, again, go back to the
root cause issue, that we have to get to the root cause issue
as fast and as expediently as possible. Delays are going to
kill us. Housing prices are not slowing down. I know people
like to think that they are. They are not. They keep falling.
Defaults are falling--are increasing dramatically.
What we can do at least in the short run during the current
administration is go into a dramatic loan modification--we can
even modify ZIP codes and States. We can prioritize them. We
can go hit some of the cities in the northeast. We can go out
to some of the places in California.
I have maps of all of the hot spots, where the foreclosures
are the largest. And you ought to see it. It is very
compelling.
Mr. Kucinich. I have seen it. We know all about it. We also
know what is going on with the ALT-A in California. We are
concerned coast to coast here.
Mr. Kudenholdt, did you have something you wanted to add?
And thank you, professor.
Mr. Kudenholdt. Thank you, Mr. Chairman.
I was just going to agree with the panel that, provided
that any systemic risks are addressed, that the most important
priority in the recovery is to find a floor and stabilize home
price values.
Mr. Kucinich. Thank you.
We are now going to go for a 10-minute round of questions
to Mr. Issa.
Mr. Issa. Thank you, Mr. Chairman. And I am going to
continue, as we have all day, along pretty much your line of
questioning but maybe expand it a little bit.
A long time ago, somebody said a billion here, a billion
there; pretty soon it is real money. I guess we are talking a
trillion here and a trillion there; and pretty soon it will be
real money.
Mr. Deutsch, I am a little concerned, $350 billion, in the
old days used to be real money after you put that many billions
together. If we allow this administration in the last 65 days
to continue down the same course they are going, in other
words, $350 billion more to buy investments in American
Express, GMAC, other things that become banks, because they are
all becoming banks, because that is the in thing, it is in
fashion, do you believe that urgency of 65 days preempts the
consideration by the new administration of alternative ways to
spend that relatively small amount of money, $350 billion?
Mr. Deutsch. I think there is an urgent need to get TARP
money into the market. I think there are different variations
on how that can get into the market, and I don't think we are
here today to provide an opinion on exactly how that should be
put into the market. But we have identified, there are a number
of ways that it can get into the market to not only restore
pricing within securitization, and particularly mortgage
backed, but also a way to meet the objectives of the
foreclosure standards as well of the bill.
Mr. Issa. And before I get into sort of the housing portion
of this, I just want to ask one question, realizing you are all
very well educated, but you are not Goldman Sachs folks like
the last gentleman we had here, but I still want to ask this:
If you are going to price preferred stock, a debt/equity
instrument, and you buy it behind closed doors at a relatively
low return rate, and it is not floated in the market, how would
any of you know that you are paying a fair value? I mean, I
would settle for no one would possibly know, but I will take an
attempt at an answer.
Mr. Sanders. Well, since everyone is pointing to me on
this, I will be glad to try to answer that. And the answer is,
I agree with you 100 percent. The markets are so ill-liquid
right now; we have no clue what these things are worth. The CBO
market, as you're aware, has completely failed. We don't know
how to price those. So I think, we will call it a heroic effort
if they think that they can go through and price these things
appropriately.
The only thing I will say is, if they go in and try to buy
the loans off the books or give preferred stock or debt, it
will be mispriced. But knowing the way this whole thing works,
they will overpay rather than underpay.
Mr. Issa. When I couldn't get an answer as to whether--
since the credit markets had improved--whether we'd gotten back
to par, I think that said a lot today.
Let me go through a line of questioning because I think it
may lead this committee and hopefully the rest of the Congress
as they review this to some thoughts for, not just the $350
billion, but the clearly large amount of money that directly or
indirectly is going to be invested in the next Congress in
stabilizing home prices. I keep hearing that you can't actually
get to these instruments and buy them out. I heard it here just
a minute ago.
Mr. Litton, you're probably the best one to handle this. If
the house burns down, don't you have to find out who you are
going to give the money to?
Mr. Litton. Yeah, so, let me give you a brief description
of how we go about working out these loans----
Mr. Issa. No, no, I don't want that. I really want, a house
that is within your servicing burns down, and let's assume for
a moment it was leased land. So you have 100 percent loss, and
the insurance company says, we know there is a mortgage on it
for $300,000, but there is $80,000 that we are going to pay on
this liquidated asset because that is what it is insured for.
You have an $80,000 check. You've got a $300,000 loan. Do you
know where to send that? That check doesn't just sit in a
deposit account? Doesn't it go----
Mr. Litton. No, we actually file a claim with the insurance
company. The check comes in, and then we would remit that check
as a remittance through to the investor or mortgage-backed
security that is the owner of that asset.
Mr. Issa. So taking a piece of that asset and liquidating
it, you don't have to go find the guy in Abu Dhabi or the
sovereign wealth fund of China, you in fact can start at the
home that is underwater, and you can liquidate it because it
can happen if there is a fire, right?
Mr. Litton. Right.
Mr. Issa. Mr. Kucinich and I discovered 18 months go that
there was a mass fire in Cleveland because we are watching
boards go on top of homes. And they are going no where. The
people are thrown out. The homes are boarded up, and they are
sitting there, and of course the neighbor's house goes upside
down in value.
Ms. Cohen, you have worked in the community for a long
time. Let me ask you, again, a question that is a little off
the main, but I think it is germane. A road is going through a
house, and they tell people, I'm sorry but you have to go, and
here is what your house is worth. The city tells you that. Your
house and your neighbor's house is worth this amount. They take
the house by eminent domain and give you X amount of dollars,
right? And I assume, like a fire, Mr. Litton would know where
to send the check to, even if the check was less than the loan?
Ms. Cohen. Is your question, who gets the check?
Mr. Issa. No, Mr. Litton already took care of who gets the
check. But the city comes in and just takes your house, and it
turns out their value is less than you owe on it, so it all
goes to Mr. Litton, and he sends it off to Abu Dhabi. That part
we understand. We know where the check goes.
But cities do that regularly in blighted communities. They
do it in a number of different regions for redevelopment,
right?
Ms. Cohen. Well, it is required under the Constitution's
Takings Clause.
Mr. Issa. Right. So for us here on the dais, if we began
anew looking at how to deal with blighted homes, upside-down
situations, people who could pay the current fair market price
of a home, either theirs or the one two doors down that is
boarded up in the case of many of the homes in Cleveland, the
fact is we could empower the cities with money to do this, to
take those homes on an individual basis, to allow them to
figure out where they are going to stabilize their prices the
most. We could do that through existing sub-government bodies,
and we could do it with funds that ultimately we'd get
substantial amounts back, couldn't we? And isn't that somewhat
what we have done from the Federal Government when we are
trying to help communities stabilize prices?
Ms. Cohen. I think that is part of the goal of the
Neighborhood Stabilization Program and other programs where
essentially they are trying to make affordable housing out of
foreclosed properties. But to the extent there are homeowners
who are in homes that are their primary residences and they can
make reasonable payments on the homes, we should give them a
shot at that first before we move on to the other plan.
Mr. Issa. Of course.
So when we look at this $350 billion, and I am somebody who
lobbied my colleagues and was happy when I could get my
colleagues, a majority of them, to vote against the TARP
because I thought it was ill-conceived. Now Secretary Paulson
agrees with us. He has decided that his ill-conceived, his
fire-ready-aim plan, he is not doing that firing. But he is now
doing other things.
I guess the question is, do any of you see that going to
the end result, the community, as Professor Sanders says, the
communities most blighted, Stockton, CA; Las Vegas, NV;
Cleveland, OH; Detroit, MI--we can go city by city--that going
to those cities and the individuals who could pay, will pay,
and dealing with them first, does anyone see that wouldn't be
an every bit as good a use of the $350 billion remaining,
because that is what Mr. Kucinich and I are here to talk about
today?
Mr. Litton. Well, just to give you some feedback on that,
the chairman referenced our relationship with the East Side
Organizing Project, which is a classic example of a
relationship that works, and it works very well. The members of
that community feel comfortable working with that group. They
act as the intermediary in many instances between the consumer
and ourselves, and we do a lot of workouts through them.
So dollars that are spent to help expand the reach of those
local groups where there is alignment between the community--
and these are people who live in the community, they care about
what happens in those communities--those have been very
effective relationships that we have been able to lever into
getting more deals done. So I can tell you that there are
perfect models where that works, and it works very, very well.
Mr. Issa. My final question, and it is an important one.
During the bubble, we ran up the prices of homes beyond what
would have been their normal credit value. Given a normalized
credit, the bubble would not have given us home prices as high
as it has. I understand the first panel, you know, told us that
we need to shore up these markets, shore up these markets. Can
any of you or have you begun to model what the fair value in a
normalized credit market is of home values, and whether or not
the Congress needs to look at that, because--and my question is
simply, in some cases, do we have to go further down against
normal credit and ultimately need to let that happen? And in
other cases, we are already below the fair value, and many
areas of Cleveland fit that examination--or is that they have
gotten too low, is that a factor that we can analyze, and if
so, who should help us do it?
Mr. Kudenholdt. I'd like to--I think what I would suggest
on that is, you know, a normalized value for the housing market
I think would be values that would prevail in an environment
where we had normalized mortgage lending and where we had
mortgage lending being made under conservative standards with
full documentation of income, with loan products that do not
include rate-shock features.
So, you know, if the mortgage markets were restored and
were lending anew under conservative parameters, having learned
the lessons of the last several years, and maintain those
standards, I think that would over time bring the market values
back to a normalized level.
Mr. Barr. I would just add that one of the key problems now
is that foreclosures and defaults and the frozen credit markets
are so dramatically pushing down home values nationally and
then even further in some areas, that it is not a question of
reaching bottom. In other words, we will keep going down. It is
a self-reinforcing cycle of credit decline, credit freezing,
foreclosures and defaults. You don't break that cycle unless
you have a major initiative to stabilize the credit markets.
And so I don't think that we are going to reach bottom in a
natural state unless we take some rather bold action.
Ms. Cohen. Can I----
Mr. Issa. Ladies first.
Ms. Cohen. I just want to highlight how your question fits
in with a couple of other pieces. One is, a lot of borrowers
got loans with inflated appraisals. So notwithstanding the
decrease in housing values, and by the way, in east St. Louis
and in other places, there was not a hugely inflated home
market to begin with. We are talking about homes that are worth
$10,000 or $20,000 or $50,000 or $60,000. But many of those
folks all over the country, even in California where things
were already expensive, got inflated appraisals. So that is
another piece of figuring out how the loan piece fits with the
value piece.
And then the other point I just want to make is that to the
extent that loan modifications are premised on an analysis of
net present value, your question about where we are in the
market and how do we measure what the value of a home is, is a
prescient question in that context. And we really have to
figure out, what do we mean by net present value, and how do we
figure that out? Is it based on a foreclosure sale? It used to
be based on a percentage of the value of the home, but if we
don't know how to value the home, we might need to look at
another way to do that. And Treasury and everyone else engaged
in net present value analyses need to be more transparent about
how they are doing it.
Mr. Issa. I am shocked that you would suggest that we
should get transparency out of the Treasury. But I appreciate
your asking for it, as this committee has been asking for it.
Thank you, Mr. Chairman.
Mr. Kucinich. And I want to----
Mr. Sanders. Can I add one clarifying comment?
Mr. Issa. I'm sorry. Gentlemen second.
Mr. Sanders. Mr. Issa, in terms of housing value, until we
actually get lending back in the markets, I don't know where we
are going to see the bottom of this, but, again, until Mr.
Paulson and Mr. Kashkari can give us some degree of confidence
when liquidity is returning, that would be great.
Also, and the other reason it is difficult to price this,
as you pointed out yourself, we don't even know what the
preferred stock values are. So it is kind of hard to find the
bottom of the housing market because nothing is being priced
correctly.
But one thing I do want to say about TARP, in a perfect, do
you know who I would like to stick the cost of this to? The
banks and the ABS holders. They went through and bought
subprime mortgages. They went through and bought these knowing
there was a probability this whole thing was going to melt
down. And suddenly we find out, what we knew all along, from
Mr. Kudenholdt, there were problems with getting ABS holders to
accept modifications, even if it is in their best interests.
And then we are also saying, maybe we should make the banks
do this. Well, it turns out we are giving the banks preferred
stock; at the same time, we are not making them modify the
loans that perhaps they should have done, knowing what the
risks were when they went into this market in the first place.
So it is this kind of--unwinding this is very difficult because
there are so many competing problems and competing objectives
and competing solutions. So, I think, unfortunately, we are to
the point where we probably will have to use some taxpayer
dollars, but I wish we could unbundle the ABS and get them to
start--really telling them hey, look, you bought this. You
should modify this. You help us save the economy. And the same
to the banks. And that wouldn't cost taxpayers a cent. That is
really what I would like to say. I don't know if we can achieve
that any more.
Mr. Issa. Thanks again, Mr. Chairman.
Mr. Kucinich. Which raises some of the questions that you,
Mr. Issa, have been looking at, and that is, as the professor
points out, there is a point at which the government does have
to intervene. There are those of us who, when we began this
discussion about the Troubled Asset Relief Program, we thought,
well, you know what, the government is interfering in the
market here, picking winners and losers, and we are looking at
a sea change that we are still finding out what it means. We
just don't know yet what it means.
We do know, for example, in Cleveland, yes, National City
Bank, they were in trouble because the CEO made a decision to
go into subprime loans. National City was a blue chip bank at
one point. It is a 160-year-old-plus bank, and yet it made some
bad decisions. OK. Even with that, it could have been saved.
Even with that. So a decision was made, and the point you made,
imagine if they would have given that money, instead of giving
it to PNC, given it to National City Bank. They could have
saved the bank. I pointed out that they apparently weren't
mindful of the fact that, you know, let's face it, on Wall
Street, there is a battle going on for dominance in banking.
Banks are eating banks. And now they are using the TARP to take
over banks. There is consolidation going on. I mean, that
seldom gets discussed about the competition that is still going
on.
National City, short-selling attack, undervaluation of
assets, of their stock, over assessment of their debt, credit
agencies, which we saw how political they are weighing in, just
as credit agencies are weighing in right now, knocking down the
auto suppliers, weakening the auto industry a little bit. You
know, there is another level of predatory conduct going on here
which goes back to your point about, if the Treasury is picking
these winners and losers, we are in trouble if you can't really
establish a ground of meaning of what anything is worth, and I
think that this question of value that was pointed out, that
you have been hammering at, Mr. Issa, and that has been talked
about by the panel here, I want to go back to Cleveland, OH.
Our homes weren't overvalued there to begin with. We didn't
really see in the city any kind of a boom, a housing bubble,
let's say. We didn't see that at all. But the bursting of the
bubble has affected us, and the subprime wave has affected us.
So you have homes in the city and in some of the suburbs where
the property values have dropped 25 to 30 percent. This is a
real loss, I mean, people, for most Americans, their only
investment. So the market manipulation with the subprime, with
the $600 trillion plus and these derivatives, it is coming home
to roost in middle America, and we are seeing a massive
transfer of wealth, just massive transfer of wealth. And the
government now apparently is presiding over it and helping the
banks do it. This is my concern.
Now, you know, Mr. Litton, Secretary Paulson apparently
left foreclosure mitigation to private industry. Recently the
industry put out a protocol that looks something like what you
have been doing for years. Do you think, based on your
experience, that such initiatives will be enough to stem the
foreclosure crisis?
Mr. Litton. So here is one of the challenges with our
industry. With the company that I run, the vast majority of the
pooling and servicing agreements gives me wide latitude on
being able to operate within doing these loan modifications.
There are other servicers who don't have quite that same
latitude. So that is a problem.
I can tell you, as an asset manager, that if I didn't have
that latitude, then the losses that I would be presiding over
as it relates to trying to administer defaults on these loans
would be a lot higher than they are today. So I think that is a
significant obstacle and a significant problem that needs to be
dealt with.
Mr. Kucinich. What is the obstacle?
Mr. Litton. The obstacle is that there are some pooling and
servicing agreements that don't provide the wide latitude that
servicers like a Litton or in others may have; because of the
inconsistency of those pooling and servicing agreements, it
creates obstacles from servicers being able to execute that. I
think that is a problem.
Mr. Kucinich. Would you comment on a target of the 38
percent debt-to-income that is the cornerstone of the
streamlined modification program issued by HOPE NOW?
Mr. Litton. Absolutely. From my perspective, when I look at
our recent performance, I look at all of the loan modifications
we did in the last year, 41,000. I look at the redefault rates,
which are now north of 40 percent and going up, going up
dramatically. When I look at that 38 percent debt-to-income
standard which has been our average income-to-debt-rate
standard, what that clearly tells me is, even though we are
doing more loan modifications, the loan modifications are not
as effective as they need to be. It also tells me that we need
to lower the debt-to-income standard so we can provide a
longer-term sustainable mortgage. I think doing that is
consistent with my obligation under the terms of the pooling
and servicing agreements in which I will create lower losses
for investors at the end of the day. But a 38 percent standard,
in my judgment, based off of performance that I have looked at
in my book, will not be as effective as a 31 percent standard
that produces a lower monthly payment for these borrowers.
Mr. Kucinich. So what is the role of principal reduction
and sustainability of a loan?
Mr. Litton. From a principal reduction perspective, as we
have analyzed this issue, we believe that more principal
reductions need to occur. Here is the reason why: Servicers,
when we service loans on a day-to-day basis, we make decisions
every single day to write off principal. When we sell a piece
of real estate that has been foreclosed on, that is a
determination that I as a servicer have to make, taking into
account property value and other things, to sell that piece of
property and take a principal reduction.
When I do a short sale, it is the same type of an analysis.
Our pooling and servicing agreements gives us wide latitude to
waive principal when we need to, so we'll waive principal which
resets the loan balance at a more reasonable level. We believe
using a market-based note rate, waiving principal creates a
longer term affordable mortgage because right now, leaving that
balance out there and rolling it forward is going to make it
much more difficult for that borrower to pay that loan off in
the future.
If this was going to be a V-shaped recovery and property
values were going to recover next year, we would want to
forebear principal, but nothing in the cards seems to indicate
that is the case. So waiving more principal more aggressively
is, I think, the appropriate response given the conditions we
are facing today.
Mr. Kucinich. There is a question of whether the recovery
is V or Z.
Mr. Litton. Good point, sir.
Mr. Kucinich. Mr. Litton, what assumptions do you have
about the future of the housing market that--strike that. I'm
going to go to Mr. Deutsch.
Mr. Litton. Yes, sir.
Mr. Kucinich. Mr. Deutsch, you have heard other witnesses
say that loan modifications, emphasizing principal
modifications, are needed to restore financial certainty and to
keep borrowers in their homes. What I would like you to comment
on is this: Do you think, left on its own, private industry
will perform that kind of modification program? And if not,
what might that say about the role the Federal Government
should perform?
Mr. Deutsch. Well, let me start with the programs that are
out there. Nearly every loan modification program, including
IndyMac through the FDIC's program, the Countrywide program,
the Chase program, the Citibank program, all, each and every
one of those programs focuses on interest rate modifications
and principal forbearance as the initial steps, as the first
things to look at to be able to get to an ability to pay for
each of those borrowers. That is, and is included in my
testimony as Annex A, is that interest rate modifications can
get most borrowers to a point where they have the ability to
pay their mortgage. Some, whether it is a Jose Canseco in
California or others, who choose to walk away from their homes,
who choose to walk away from their obligations, some of those
simply cannot be prevented. None of us want or require Jose
Canseco to stay in those homes that are underwater.
Now it is very clear that in certain circumstances and
appropriate circumstances that principal modifications can,
will be, and as Mr. Litton said, have been made. But I think
those will continue to be used in limited circumstances.
It does say, to the second part of your question, what is
the role, if any, of the government? I think we have outlined
two ways that can encourage principal reductions, first through
purchasing loans out at sub par prices. That is servicers
acting on behalf of investors could sell loans out of the pool
potentially after a number of hurdles could be cleared to the
TARP program. Those would not be sold at 100 percent of the
value. They would be sold at something below 100 percent of the
value, depending on the delinquency default probabilities.
So I think, ultimately, and as well as the program
announced this morning by the FDIC chairman, it is looking to
take advantage of providing incentives, to be able to have
servicers modify these loans into programs, to refinance them
into the programs like the Hope For Homeowners, but I do think
those take modifications and a lot of analysis on to the
detail.
Mr. Kucinich. I want to thank you very much for that
response. We are at the conclusion of the hearing. I would just
say that your response and the other witnesses indicates that
Secretary Paulson should be rethinking his decision about the
use of TARP funds with respect to loan modification. Would you
agree with that?
Mr. Deutsch. I think there is a lot of opportunity to help
reduce foreclosures through the use of TARP funds.
Mr. Kucinich. Mr. Kudenholdt.
Mr. Kudenholdt. I agree. I think that program should be
initiated as we discussed to help reduce foreclosures.
Mr. Kucinich. Mr. Litton.
Mr. Litton. It is clear that we need to do more sustainable
loan modifications. I think that is absolutely certain.
Mr. Kucinich. Ms. Cohen.
Ms. Cohen. The government can do a lot for loan
modifications, and they can also allow the private sector and
courts to do more with bankruptcy reform.
Mr. Kucinich. Thank you.
Professor Sanders.
Mr. Sanders. And I agree with everything, but I also want
to point out that we do mark-to-market for mortgaged-backed
securities, AVFs, CDOs, but the one person or set of groups we
don't do mark-to-market for is homeowners. If we marked their
loans to market, we wouldn't be having a default wave.
Mr. Kucinich. Thank you, professor.
Professor Barr.
Mr. Barr. Yes, I think we need to start quickly with the
change to the tax and accounting rules to unlock the
securitization trusts, and then we can proceed with a
systematic modification program using the guarantee authority,
and the Treasury purchase program as has been described, I
think it would make an enormous difference.
Mr. Kucinich. I want to thank each and every one of the
witnesses. Our staff will continue to be in touch with you as
this matter continues to be not just in discussion but vexing
the Congress as far as what to do. Your testimony today shows a
path, and it is very thoughtful testimony. Each and every one
of you are very much appreciated for your presentation here
today. We ask you to feel free to communicate with our
subcommittee with respect to any other observations you have as
we proceed.
We certainly have to find a way to keep people in their
homes. As you pointed out, you are looking at loan
modifications which include principal, interest, arrearages,
and a rescheduling of the debt. So, thank you, because you give
hope to millions of Americans who are looking for a new
direction.
This is the Domestic Policy Subcommittee. I am Congressman
Dennis Kucinich from Cleveland, the chairman of the
subcommittee. Today's discussion has been on this question: Is
Treasury using bailout funds to increase foreclosure prevention
as Congress intended?
We have witnesses who included Mr. Neel Kashkari, the
interim assistant secretary of the Treasury for financial
stability and assistant secretary of the Treasury for
international economics and development, and we very much
appreciate his participation today; as well as the second
panel, Professor Michael Barr, Professor Anthony Sanders, Ms.
Alys Cohen, Mr. Stephen Kudenholdt, Mr. Larry Litton, and Mr.
Thomas Deutsch.
Thank you for being here, and I thank the staff for the
excellent work they have done in preparing Members for this,
and I thank my partner, Mr. Issa, for his tremendous
participation.
This committee stands adjourned.
[Whereupon, at 1:43 p.m., the subcommittee was adjourned.]