[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
TARP OVERSIGHT: IS TARP
WORKING FOR MAIN STREET?
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
AND CONSUMER CREDIT
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
MARCH 4, 2009
__________
Printed for the use of the Committee on Financial Services
Serial No. 111-9
U.S. GOVERNMENT PRINTING OFFICE
48-862 WASHINGTON : 2009
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina RON PAUL, Texas
GARY L. ACKERMAN, New York DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California WALTER B. JONES, Jr., North
GREGORY W. MEEKS, New York Carolina
DENNIS MOORE, Kansas JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts GARY G. MILLER, California
RUBEN HINOJOSA, Texas SHELLEY MOORE CAPITO, West
WM. LACY CLAY, Missouri Virginia
CAROLYN McCARTHY, New York JEB HENSARLING, Texas
JOE BACA, California SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia RANDY NEUGEBAUER, Texas
AL GREEN, Texas TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois JOHN CAMPBELL, California
GWEN MOORE, Wisconsin ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota THADDEUS G. McCOTTER, Michigan
RON KLEIN, Florida KEVIN McCARTHY, California
CHARLES A. WILSON, Ohio BILL POSEY, Florida
ED PERLMUTTER, Colorado LYNN JENKINS, Kansas
JOE DONNELLY, Indiana
BILL FOSTER, Illinois
ANDRE CARSON, Indiana
JACKIE SPEIER, California
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York
Jeanne M. Roslanowick, Staff Director and Chief Counsel
Subcommittee on Financial Institutions and Consumer Credit
LUIS V. GUTIERREZ, Illinois, Chairman
CAROLYN B. MALONEY, New York JEB HENSARLING, Texas
MELVIN L. WATT, North Carolina J. GRESHAM BARRETT, South Carolina
GARY L. ACKERMAN, New York MICHAEL N. CASTLE, Delaware
BRAD SHERMAN, California PETER T. KING, New York
DENNIS MOORE, Kansas EDWARD R. ROYCE, California
PAUL E. KANJORSKI, Pennsylvania WALTER B. JONES, Jr., North
MAXINE WATERS, California Carolina
RUBEN HINOJOSA, Texas SHELLEY MOORE CAPITO, West
CAROLYN McCARTHY, New York Virginia
JOE BACA, California SCOTT GARRETT, New Jersey
AL GREEN, Texas JIM GERLACH, Pennsylvania
WM. LACY CLAY, Missouri RANDY NEUGEBAUER, Texas
BRAD MILLER, North Carolina TOM PRICE, Georgia
DAVID SCOTT, Georgia PATRICK T. McHENRY, North Carolina
EMANUEL CLEAVER, Missouri JOHN CAMPBELL, California
MELISSA L. BEAN, Illinois KEVIN McCARTHY, California
PAUL W. HODES, New Hampshire KENNY MARCHANT, Texas
KEITH ELLISON, Minnesota CHRISTOPHER LEE, New York
RON KLEIN, Florida ERIK PAULSEN, Minnesota
CHARLES A. WILSON, Ohio LEONARD LANCE, New Jersey
GREGORY W. MEEKS, New York
BILL FOSTER, Illinois
ED PERLMUTTER, Colorado
JACKIE SPEIER, California
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
C O N T E N T S
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Page
Hearing held on:
March 4, 2009................................................ 1
Appendix:
March 4, 2009................................................ 39
WITNESSES
Wednesday, March 4, 2009
Baker, Dean, Ph.D., Co-Director, Center for Economic and Policy
Research....................................................... 9
Cloutier, C.R., President and CEO, MidSouth Bank Corporation, on
behalf of the Independent Community Bankers of America......... 12
Davenport, Robert W., President, The National Development Council 11
Ely, Bert, Principal, Ely & Company.............................. 14
Scharfstein, David S., Ph.D., Professor of Finance, Harvard
Business School................................................ 7
Zucchero, Joseph, Owner, Mr. Beef Deli........................... 16
APPENDIX
Prepared statements:
Klein, Hon. Ron.............................................. 40
Baker, Dean.................................................. 41
Cloutier, C.R................................................ 46
Davenport, Robert W.......................................... 54
Ely, Bert.................................................... 62
Scharfstein, David S......................................... 74
Zucchero, Joseph............................................. 90
Additional Material Submitted for the Record
Maloney, Hon. Carolyn:
Copy of a lawsuit filed by Bloomberg L.P. against the Board
of Governors of the Federal Reserve System................. 93
Letter from Professor Joseph E. Stiglitz of Columbia
University................................................. 102
TARP OVERSIGHT: IS TARP
WORKING FOR MAIN STREET?
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Wednesday, March 4, 2009
U.S. House of Representatives,
Subcommittee on Financial Institutions
and Consumer Credit,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 3:15 p.m., in
room 2128, Rayburn House Office Building, Hon. Luis V.
Gutierrez [chairman of the subcommittee] presiding.
Members present: Representatives Gutierrez, Maloney, Watt,
Sherman, Moore of Kansas, Hinojosa, McCarthy, Baca, Green,
Clay, Scott, Cleaver, Ellison, Klein, Wilson, Foster,
Perlmutter; Hensarling, Castle, Capito, Neugebauer, Price,
Marchant, Lee, Paulsen, and Lance.
Chairman Gutierrez. This hearing of the Subcommittee on
Financial Institutions and Consumer Credit will come to order.
Good afternoon and thanks to all of the witnesses for agreeing
to appear before the subcommittee today.
Today's hearing is entitled, ``TARP Oversight: Is TARP
Working For Main Street?'' We will examine whether the TARP has
been successful in freeing up credit for American businesses,
especially the small and medium-sized firms that are vital to
the U.S. economy. We will be limiting opening statements to 10
minutes per side. But without objection, the record will be
held open for all members' opening statements to be made a part
of the record. I yield myself 5 minutes.
Last week in his first speech before a joint session of
Congress, President Obama stated, ``The concern is that if we
do not restart lending in this country, our recovery will be
choked off before it ever begins.'' I imagine that few will
argue against the proposition that unfreezing the credit
markets and reinvigorating lending to American businesses is
how we find our way out of this recession.
Resuming the flow of credit to the businesses on Main
Street so that those firms can retain existing employees and
even create new jobs is exactly what this TARP oversight
hearing is about. Specifically, we will focus on whether the
TARP funds distributed through the Capital Purchase Program
(CPP) have been successful in freeing up credit for American
businesses, especially the small and medium-sized firms that
are vital to the U.S. economy.
The impact of CPP funds on small banks, small businesses,
and lending to Main Street deserves examination because small
firms are the backbone of the American economy. Small
businesses employ about half of the private sector employees in
the United States and pay nearly 45 percent of the total U.S.
private payroll.
In my home State of Illinois, more than 49 percent of the
workforce is employed by small businesses. Since the mid-
1990's, small businesses have created 60 to 80 percent of the
new jobs in the United States and have traditionally led the
Nation out of recession because small firms tend to recover
faster.
I supported TARP and the Emergency Economic Stabilization
Act that created it primarily because I felt it was necessary
to unfreeze the credit markets and get capital flowing again.
But under no circumstances do I want the money to be held in
the vaults of Wall Street firms to be used for executive
bonuses or to pay shareholder dividends or to be hoarded in
case these institutions are threatened with insolvency.
When announcing the creation of the Capital Purchase
Program, former Treasury Secretary Paulson stated, ``Our
purpose is to increase confidence in our banks and increase the
confidence of our banks so that they will deploy not hoard
their capital. And we expect them to do so, so increased
confidence will lead to increased lending. This increased
lending will benefit the U.S. economy and the American
people.''
Congress wasn't sure that TARP and CPP funds are being used
in ways that are consistent the intent of those programs. If
these programs, which could place a large financial burden on
American taxpayers, are not working in ways that benefit U.S.
businesses and consumers, then we should revisit the manner in
which they are being implemented before the Treasury Department
divides the second $350 billion in the same way they did the
first.
Some critics of Congress' involvement in this area argue
that we are setting out to force banks to lend or encouraging
banks to make bad loans. This is a straw person argument. I am
not interested in encouraging banks to made bad loans. I
understand the support of the current environment of stricter
lending standards because even under those strict standards
there are thousands of businesses across the country that can
qualify for loans.
Furthermore, I believe that those same strict standards
should be applied to financial institutions. In other words, if
banks will not lend to businesses that have made bad business
or investment decisions, then likewise, Congress should not
invest taxpayer dollars in financial institutions that have
made bad investments and business decisions and which are quite
frankly credit risks. Rather we should reward those
institutions that have made sound investment decisions and
stand ready to make loans in rural and urban areas all across
our country.
It is time to shift our primary focus away from saving the
Wall Street firms that got us into this mess and concentrate on
the Main Street and community-oriented firms that know how to
create jobs and grow the economy. Without a vibrant small
business community, this recession will linger longer.
Investing in small and medium-sized firms is one of the fastest
routes we can take to economic recovery. I look forward to
addressing these issues during this hearing.
I will yield the ranking member, Mr. Hensarling, 5 minutes
for his opening statement.
Mr. Hensarling. Thank you, Mr. Chairman. And thank you for
holding what I believe is truly a very, very important hearing.
People all across America have questions about the TARP
program. The hearing is entitled, ``Is TARP working for Main
Street?'' I think clearly most Members of Congress think that
it ought to be, but whether or not it is, is frankly an open
question.
Now, when we ask is TARP working for Main Street, we have
to really take a look at what TARP was designed to do. And
frankly, that is a difficult question to answer. Because if you
look at the congressional, the enabling statute, TARP was told
to, number one, protect taxpayers. It was told to provide
financial stability to our financial markets. We were supposed
to help struggling families in the law and help retirement
security, stabilize communities, and the list goes on and on.
Now one can argue there were a lot of different competing
goals in TARP and sometimes when you charge a statute with many
things you charge it with nothing. Now if the purpose of TARP
was to give large financial institutions a capital cushion at a
time they vitally needed it, I suppose some people could argue
maybe it worked. I don't know. Unlike the chairman, I did not
support this statute. Although I think it is important that
government act, I think there is a legitimate crisis, I think
there is much pain within our society. And I am heartened to
hear the comments of our chairman that a lot of the solution
lies within our small businesses.
I believe many Members of Congress believe that ultimately
the road to recovery does not lead through the halls of
Congress. The road to recovery does not lead through Wall
Street. The road to recovery leads through the small businesses
of Main Street. And so again, as we question, is the program
working for Main Street, I think we have to look how at, do we
judge this? It is frankly difficult, and as a member of the
Congressional Oversight Panel for TARP, there continues to be a
regrettable lack of transparency within the program--very few
metrics of success, very little accountability. And frankly, no
articulated plan that the vast majority of Americans, much less
the markets understand. Now I say that about both
Administrations, the current Administration and the previous
Administration.
So what we have in some respects is at least a second
tranche of TARP was $350 billion in search of a program. Now we
know that the President as of yesterday included $750 billion
for son of TARP, grandson of TARP, whatever we call it now.
Again we don't have an articulated program. Now I try not to
read too much into 1-day swings in the stock market, but
clearly, since this Administration has come to office, there
has been a loss of approximately 15 percent in the DOW. And I
think part of it is because the Administration has failed to
articulate a plan, which is frankly the same mistake that the
previous Administration made as well.
The best way again to get out of this economy is to help
empower small businesses. Small businesses employ the majority
of America. Three out of four new jobs are created by small
businesses. But they need certainty in the market. There is so
much capital sitting on the sidelines, but they are waiting to
find out, is somebody going to bail me out, or are they gong to
bail my competitor out, or bail my customer out? We need some
legislative and regulatory certainty. People need to know what
the rules are.
We can't have a program also that is picking winners and
losers, that is not going to help our small businesses. If TARP
gets into the business of saying we want to help the auto
industry, but we don't want to help the trucking industry, we
don't want to help the software industry, that is picking
winners and losers. Now people are concerned about throwing
good money after bad. You know AIG is now in for their fourth
involuntary contribution of taxpayer funds, Citi is in for
their third, and Bank of America is in for their fourth. GM has
now come back three different times. So we need a program that
will help our small businesses, our struggling families, and
where necessary, use Federal funds to close down failed
financial institutions and launch new ones, but we need to do
it in a way that doesn't send the bill to future generations
and decrease their job opportunities and their homeownership
opportunities.
Mr. Chairman, I appreciate again you calling this hearing.
I yield back.
Chairman Gutierrez. Thank you so much, Mr. Hensarling. I
look forward to working with you over the next 2 years.
Congresswoman Maloney for 3 minutes.
Mrs. Maloney. Thank you, first of all. And welcome to all
of the panelists. I congratulate Chairman Luis Gutierrez on his
new chairmanship and Ranking Member Jeb Hensarling on his. And
I look forward to working with both of you. We certainly have
our work cut out for us.
What I have been hearing from my constituents is that our
credit markets remain frozen, people are having trouble getting
loans, and unemployment is rising. That is not to say that TARP
has not had benefits. Its first step was to stabilize our
banking system and to stabilize our economy and it was
successful to a certain degree in that area.
I do want to note that a constituent of mine will be
testifying, Robert Davenport. He is the president of the
National Development Council, which is one of the oldest
national nonprofit community and economic development
organizations in the United States. Thank for your work and
thank you for being here.
One of the concerns that the public has in having trust in
the TARP system is transparency; they are saying they want to
know where their dollars went before more dollars are
allocated. I have asked Chairman Bernanke and he says this
information is out there. Yet I would like to place in the
record a letter from Professor Stiglitz, who points out that he
cannot find this information, and a lawsuit filed by Bloomberg
who say they likewise cannot find that information.
Chairman Gutierrez. Without objection, it is so ordered.
Mrs. Maloney. And currently, if I could say this, I think
it is important to note that the TARP data are presented in
filings in over 25 different Federal agencies now, including
filings with the Securities and Exchange Commission, Federal
Reserve Registration Data, the FDIC, Over the Counter Trade,
the Commodities Futures Trading Commission; the data sources
required to perform transparency for the TARP initiative is not
only housed in different agencies but incompatible systems and
formats. It is impossible to track this information. That is
why I have introduced the TARP Accountability and Disclosure
Act. This legislation would require the Secretary of the
Treasury to develop a centralized database that will be the
repository of how this money is spent after it has been
provided to a financial institution so that we can track this
information and know if it is being successful, not only in
stabilizing our financial institutions, but in getting lending
going, the wheel of our economy, of getting lending out into
our communities and helping our economy go forward. I urge my
colleagues to look at this legislation and hopefully join me in
cosponsoring it.
And again, congratulations, Mr. Chairman. I look forward to
working with you and the ranking member.
Chairman Gutierrez. The gentleman from Delaware is
recognized for 2 minutes.
Mr. Castle. Thank you, Mr. Chairman. Let me just say I
agree with all those who have spoken and I think that the words
are well taken. And I believe very strongly that there is just
not sufficient, and we keep using the word ``transparency,''
but understanding of exactly what has happened here. I think
most of us can track and follow those banking institutions, be
they holding companies or banks directly, which have received
money; we have charts to that effect. We can even look at some
of their lending patterns which stay roughly the same if you
look at the last 3 months of last year.
But it becomes very difficult to track exactly to whom
those loans have gone and exactly how that money is being spent
and accounted for, nor do I know if it is. I don't know if a
banking institution has loaned an extra $50 million or to whom
it has loaned it other than GM or somebody of that nature and
exactly how it has been spent. I just don't think we have that
information, which is one reason I look forward to this hearing
today. I think it is vitally important that not only Members of
Congress but the public understand this.
I watched the stock market just collapse here in the last
several months. I think a lot of it is a lack of understanding
of what is going on out there. And we need better information,
better presented in terms of what is happening. You may make
the argument that not only banking institutions but other
institutions are raising money are in some way or other raising
capital and for that reason are more stable than perhaps we
think they are. But at this point, there is just a lot of doubt
in the minds of a lot of people, even beyond the Congress of
the United States who just aren't sure what is happening. I
don't think anybody can make a conclusive argument that TARP is
working or not working. So what you are going to present today
and the answer to your questions is vitally important to all of
us and I think we have an obligation to make sure that there is
a public understanding of all of this. I am glad to see the
Federal Reserve has started to move in that direction.
I yield back, Mr. Chairman.
Chairman Gutierrez. The gentleman yields back. Congressman
Sherman from California for 2 minutes.
Mr. Sherman. Thank you. I usually focus on whether
taxpayers are getting a good deal in TARP transactions or
whether there has been undue generosity toward Wall Street. We
have all been outraged by the dividends, the compensation and
perks and the Congressional Oversight Panel demonstrating being
shortchanged by $78 billion in terms of receiving less
preferred stock than we should have.
I have also been concerned about taxpayer money going to
foreign entities as appears to be the case with the transfer of
tens of billions of dollars to AIG counterparties, including
what appears to be substantial transfers to foreign entities.
Today we focus on helping Main Street and there are two ways
that TARP can do that without going through Wall Street. One is
the use of the TALF to have the Fed make loans. Now true, some
of these may be generated originally by large banks, but they
could also be from small banks and increasingly we could see
Federal agencies making the loans themselves.
The second is to use community institutions. I look forward
to seeing how we could better use community banks. And I want
to comment about credit unions who want to make small business
loans. They need capital and they are turning away deposits.
They can't issue preferred or common stock because of their
nature. They could be allowed to issue subordinated debt which
is much like preferred stock. If they could, we in Congress
authorized them to do so, they can sell the subordinated debt
either to the TARP program or to the public, get the capital,
accept deposits that their members want to make, and make small
business loans.
The other thing we need to do is to explicitly authorize a
greater amount of small business lending by credit unions. So I
look forward to seeing community banks and credit unions get us
out of a recession that they clearly did not put us into. I
yield back.
Chairman Gutierrez. The gentleman yields back, Mr. Klein
for a minute-and-a-half.
Mr. Klein. Thank you very much, Mr. Chairman. And thank you
for holding this hearing. Last week, the Oversight and
Investigations Subcommittee held a hearing on TARP oversight
and this is an important follow-up to those proceedings.
Many of the witness here today will be discussing the need
to improve lending to small businesses. And it is clear from
today's testimony that we will hear that the TARP program, and
I think from the experience we have had in speaking to our
neighbors and friends back home is largely failing to unfreeze
the credit markets and allow creditworthy businesses to assess
credit on reasonable terms. And certainly nobody is asking
anybody to make loans that are not credit worthy. But it is
clear that the pendulum has swung wildly to the other side and
has hit the wall and it is unfortunately lending itself to
allowing these types of reasonable loans to take place.
I certainly agree with the recommendations to take concrete
action with certainty to ensure businesses can obtain the
credit that is essential in the successful operation of their
enterprise. Small businesses tend to lose jobs faster as the
country ends a recession, but they also tend to recover faster
with a little more flexibility and adaptability in emerging
from a recession. So it is even more essential that we find
substantial ways to help these small businesses access the
credit which is their life blood.
Elizabeth Warren, who is the chair of the Congressional
Oversight Panel, testified last week, ``If this TARP program is
about putting money into the hands of small businesses, then
you make that part of the terms of receiving the money. And if
someone doesn't want to do that with the money, then don't let
them have the money. It's that straightforward.''
It seems pretty simple to me, as well. I think her comments
are absolutely correct, and I look forward to the testimony so
we can work together to flesh out the ways of restoring the
flow of credit to our small business community. Thank you very
much, Mr. Chairman.
Chairman Gutierrez. Thank you Mr. Klein.
We are pleased to have before us today witnesses
representing a small business, a community bank, a community
development financial institution, two noted economists, and a
financial consultant.
Testifying first is David Scharfstein, Ph.D., the Edmund
Cogswell Converse Professor of Finance and Banking at the
Harvard Business School. Next is Dean Baker, Ph.D., the co-
director of the Center for Economic and Policy Research.
Testifying third will be Robert Davenport, president of the
National Development Council. Next is Rusty Cloutier, the
president and CEO of MidSouth Bank Corp. located in Lafayette,
Louisiana. Following him is Bert Ely, founder of Ely & Company,
based in Alexandria, Virginia. Finally, we have Mr. Joseph
Zucchero, who is the owner of Mr. Beef Deli in Chicago,
Illinois.
Mr. Scharfstein, you may proceed with your testimony.
STATEMENT OF DAVID S. SCHARFSTEIN, PH.D., PROFESSOR OF FINANCE,
HARVARD BUSINESS SCHOOL
Mr. Scharfstein. Good afternoon. Chairman Gutierrez,
Ranking Member Hensarling, and members of the subcommittee,
thank you for inviting me to speak today. My name is David
Scharfstein. I am a professor at Harvard Business School, and a
research associate of the National Bureau of Economic Research.
I am also a member of the Squam Lake Working Group on Financial
Regulation, which is a nonpartisan, non-affiliated group of 15
academics who have come together to offer guidance on the
reform of financial regulation, but I speak only for myself
today.
I would like to make three main points. First, there has
likely been a contraction in the supply of bank loans because
of the poor financial condition of many large banks. This poses
a challenge for most firms, but particularly for small firms
which rely on bank loans for almost all of their financing.
About half their loans come from large banks, and these banks
appear to be cutting their lending more than our small banks.
Thus it is important to find ways to ease the supply of credit
to small firms.
Second, the Capital Purchase Program of TARP should be
thought of as two distinct programs. One is a support program
for large troubled financial institutions, some of which are
systemically significant. The effect of this program on
financial stability and credit availability is hard to measure
since we cannot observe what would have happened in its
absence.
The other part of the CPP program is targeted at small
banks. This program is not a support program for troubled
financial institutions, but rather, a program that provides
capital to banks so they can increase their supply of credit.
The effect of this program will be somewhat easier to measure,
but such measurement will inevitably be imperfect.
Third, and at the heart of my testimony, the government
should consider expanding the Capital Purchase Program for
small banks, perhaps even creating a separate program for them.
The problems of the big banks have no easy solutions and it is
highly uncertain how and when their problems will be resolved.
In the meantime, small firms risk losing their primary source
of funding. Many small banks are well-positioned to step into
the breach, given their knowledge of local markets, and with an
infusion of capital, could do so.
However, as with any government program, one must ask, why
does the government need to be involved? In this case, one
should ask, why can't banks with good lending opportunities
raise capital on their own? The answer is that many can raise
capital, but are reluctant to do so in the current financial
environment. Given extreme investor uncertainty about the
health of the banking sector, a bank that issues stock is
likely to be perceived as one that is undercapitalized or has
unrecognized losses on its loan portfolio. So it is natural
that banks have been reluctant to issue stock on their own,
given that doing so would likely drive down their stock price.
In addition, most small banks are privately owned and cannot
easily raise capital in illiquid markets. The government's
commitment to purchase stock at a premium would entice small
banks to participate in the program and raise capital as many
have already done.
This program will attract more banks if it does not include
the same sort of restrictions that are now imposed on TARP
recipients, nor should it. This program would not be designed
to put taxpayer dollars at significant risk. The program would
be most effective if it targets small banks that are able to
leverage the equity investment by expanding their deposits or
borrowing. And it should target banks with expertise in
business lending. Research I have done suggests that the
existing TARP investments in small banks do appear to have gone
to banks that do more business lending.
It would be tempting to require participating banks to
reach a target level of new lending equal to some multiple of
the government's investment. This temptation should be
resisted. Mandates of this sort could result in a rash of bad
loans and we do not want to turn healthy banks into unhealthy
ones.
Moreover, we should probably not measure the success of the
program purely on the basis of whether there is an increase in
lending. It will be a success if the increased lending capacity
of small banks increases competition and puts downward pressure
on interest rate spreads which are now at high levels.
Of course, it is important to keep in mind the limitations
of such a program. Some of the hardest hit communities may also
have many troubled banks. Investment in these banks may help
stabilize them, but that is not the sort of investment I have
in mind. Moreover, while many small banks are relatively
healthy now, their condition could worsen appreciably. In that
case, the investments are unlikely to have the desired effects.
With these limitations in mind, I believe that the
government should enhance its program of investment in small
banks, targeting healthy banks that are well-positioned to
increase lending at a time when large banks appear to be
retrenching, this would better enable our financial system to
meet the pressing needs of small enterprise.
Thank you for the opportunity to address you today. I look
forward to answering any questions you may have.
[The prepared statement of Dr. Scharfstein can be found on
page 74 of the appendix.]
Chairman Gutierrez. Thank you for so rigidly following the
rule of the red light. Everybody has 5 minutes, so when you see
the little yellow light, that means you have about 30 seconds
to wrap it up.
Mr. Baker, please.
STATEMENT OF DEAN BAKER, PH.D., CO-DIRECTOR, CENTER FOR
ECONOMIC AND POLICY RESEARCH
Mr. Baker. Thank you, Chairman Gutierrez, and Ranking
Member Hensarling, for inviting me to speak here. I want to
make three main points in my comments here today. First off,
agreeing with the chairman's opening remarks, I think there
were two contradictory purposes or at least distinct purposes.
Chairman Gutierrez. Mr. Baker, could you pull the
microphone closer?
Mr. Baker. There were two distinct purposes or motivations
behind the creation of TARP: One, the stabilizing of troubled
banking institutions; and two, restoring the flow of credit.
Those are two very distinct purposes. The second point I want
to make, and perhaps I am out of line with some of the other
witnesses here in some of the other comments, but I think the
main cause of this downturn is we are misplacing it if we
seeing it as being in the financial system. I think the main
cause of the downturn is a loss of $8 trillion in housing
wealth. I will make a couple of comments on that, but I think
we would be misleading ourselves if we thought simply restoring
the flow of credit would be sufficient to get the economy going
again.
And then the third point, agreeing with many of the
comments just made, is that the Treasury and the Fed should try
to target TARP money to aid smaller financial institutions
because many of those are best positioned to resume the flow of
credit, which certainly will help with the recovery.
Now as far as the first point, just to recap the history
that you all recall very well back in September and October,
the pressing need, the urgency that the Treasury Secretary and
the Federal Reserve Board Chairman came to Congress and said we
needed TARP, the pressing need was that interbank lending had
come to a halt, the LIBOR rate the spread between the interbank
lending rate in London and the 90-day Treasury rate had
expanded almost 5 percentage points at its peak. During normal
times, it is typically between 15 and 30 basis points. So we
basically had a freeze of interbank lending between the major
banks simply because no one could trust that these banks would
be in business 90 days out, we are only talking about 90-day
loans. That, to my mind, was the urgency, the main purpose of
the TARP. And certainly I think Members of Congress have been
right in pressing for more transparency. The taxpayers
certainly have a right to know where their money is going.
On the other hand, getting the money to the banks to ensure
that they did not collapse does not restore the flow of credit.
And perhaps our best example here is simply the case of AIG,
which is, of course, not a bank, but an insurance company, but
the money that we funneled, the taxpayers have funneled into
AIG is not about restoring the flow of credit, it is simply
about keeping a systematically important institution from
collapsing. And I think we do ourselves a disservice if we try
to conflate the two. Getting money to AIG does not restore the
flow of credit.
My second point is that the downturn is first and foremost
due to the loss of wealth. We have lost on the order of $6
trillion of housing bubble wealth, and we are on our way to
losing on the order of another $2 trillion. This explains the
downturn almost in its entirety. The basic story, if you look
at the housing industry itself, we have seen a contraction on
the order of about $450 billion a year in annual demand due to
direct housing construction, building in the housing sector and
the residential sector. And then on top of that, the wealth
effect that we would expect to see based on $8 trillion of
housing wealth would imply an additional about $500 billion in
annual consumption. That is sufficient to explain the downturn
we are seeing.
The impact of the freezing-up of the credit system
obviously magnifies that, but the basic story is that we had a
very large bubble which led to a huge amount of, in effect,
fictitious wealth, which has disappeared over the last 2 years.
And that is the cause of the downturn.
Now, one item I like to cite as evidence that there isn't a
problem or the problem is exaggerated of creditworthy customers
being unable to get credit is the Mortgage Bankers Association
mortgage applications index--if it were the case that
creditworthy customers were having difficulty getting home
mortgages, we would expect to see that index soaring as people
had to apply for two, three or four mortgages just to get one.
And of course, many people apply for two or three mortgages and
are still not able to get one issued. In fact, this index has
trailed downwards. It has followed wholesales downwards,
indicating that creditworthy borrowers are not having much
trouble at all getting mortgages. So I do not mean to say that
businesses can never have trouble getting mortgages but the
main factor here is simply the loss of wealth.
On the last point we know that we had many large banks that
are severely troubled. One of the things that has been striking
is many small banks have held up very well through this crisis,
that is not true everywhere. Obviously, if you are in the
middle of a bubble market, you will get hit hard. But if you
look at the FDIC's data, you see that the category of banks
with assets of $100 million to $300 million actually managed to
increase their loans modestly in the fourth quarter, a period
in which the economy was declining at a 6 percent annual rate.
That suggests that those can be an engine that could move the
economy out of the downturn and Congress would be well-advised
to try to get them the capital they need to sustain lending.
Thank you.
[The prepared statement of Dr. Baker can be found on page
41 of the appendix.]
Chairman Gutierrez. Thank you very much.
Mr. Davenport.
STATEMENT OF ROBERT W. DAVENPORT, PRESIDENT, THE NATIONAL
DEVELOPMENT COUNCIL
Mr. Davenport. Mr. Chairman and members of the committee, I
want to thank you for the opportunity to testify today
regarding the effectiveness of TARP on Main Street. I am Bob
Davenport, the president of the National Development Council in
Washington, D.C., an organization that was created in 1968
after the tragic deaths of Dr. Martin Luther King and Robert F.
Kennedy. Our mission is very simple: It is to end
discrimination and create opportunity in low-income
communities.
Fundamentally, we provide training and we provide technical
assistance and we do financing in low-income communities. We
finance affordable housing, we do small business lending, and
we finance a whole variety of community facilities such as
medical centers, libraries, educational facilities, and youth
facilities.
We have lots of experience in business financing on Main
Street. We are a CDFI and CDE as certified by the U.S.
Treasury. We are also an SBLC with a license from the SBA. We
financed about a half-billion dollars worth of affordable
housing and we financed about a half-billion dollars of new
markets transactions.
In SBA, we have loaned just under $100 million in financing
to small businesses. Our average borrower is borrowing
$300,000. All of our borrowers are on Main Street. It is clear
the economic downturn is having a devastating impact on our
low-income communities, but also on organizations such as ours
which are involved in financing in low-income communities. And
we do need another source of capital until the banks return to
our market. We need TARP and TALF, we believe, not because we
are doing poorly, but because we are doing well. We need to
increase our liquidity and we need to replenish capital in
order to meet the increasing demand that we are finding in our
communities as the conventional banks pull back.
Here is how the pullback has affected us directly. First of
all, I mentioned we are an SBLC, which means we are a small
business lending company, we make SBA guaranteed loans, the SBA
guarantees 75 percent of it. If we make a $400,000 loan,
$300,000 of that loan is guaranteed by the SBA. We borrow that
$300,000 from a conventional lender, they have a very secure
loan, it is 100 percent guaranteed by the SBA.
One of our conventional lenders is a large money center
bank that received TARP funds last fall. We had a longstanding
relationship with that bank going back to the 1990's. This bank
had a $5 million credit facility to us. Starting last December,
however, they took a series of actions that forced us to pay
the loan back. First of all, they raised the rates, which we
felt was unwarranted because we had just completed a
superlative safety and soundness exam by the Farm Credit
Administration. And the SBA's overall risk rating for our SBLC
was 1, which places us at the highest grade, lowest risk rating
possible.
Second, they asked for a direct security interest in the
loans that we made. SBA has that security interest and we would
be in violation of our SBA license if we were to give it to
that bank. Finally, they said that they demanded that we agreed
to pay them on any defaulted loan before the SBA pays us.
They said they assumed all of our small businesses loans
would go bad in the communities in which we are working. They
wanted to be paid in a timely fashion and would not wait for
the SBA. Well, the only way we could meet that condition was by
us borrowing from them and not lending the money out to have
the money to pay it back if anything went bad.
Since we couldn't comply with the conditions, we had to
agree to repay them. From their perspective, they didn't turn
us down for credit, they believe they offered us credit. We
just couldn't meet the terms that they demanded. And as a
result, we are paying that loan back. And this all happened
after the bank received TARP funds.
We have made several recommendations in our written
testimony. I won't go into them, let me just say, if TARP and
TALF were available to the 4,000 or 5,000 institutions that are
out there, from the smaller community banks that you will hear
from to alternative financial institutions such as us, to
community development financial institutions, etc., if it was
offered to those financial institutions to replenish their
liquidity and to increase their capital because they have made
loans and they will continue to make loans, they don't need the
TARP funds because they might make loans, they are making
loans. These mission-driven institutions have no desire to
hoard their TARP funds. They will use the TARP funds to make
loans, and they will use it responsibly. Thank you.
[The prepared statement of Mr. Davenport can be found on
page 54 of the appendix.]
Chairman Gutierrez. Thank you.
Mr. Cloutier.
STATEMENT OF C.R. CLOUTIER, PRESIDENT AND CEO, MIDSOUTH BANK
CORPORATION, ON BEHALF OF THE INDEPENDENT COMMUNITY BANKERS OF
AMERICA
Mr. Cloutier. Chairman Gutierrez, Representative
Hensarling, and members of the committee, my name is Rusty
Cloutier. I am president and CEO of MidSouth Bank Corp., which
is a bank holding company located and headquartered in
Lafayette, Louisiana, with total assets of approximately $940
million. Through our wholly owned bank subsidiary, MidSouth
offers complete banking services to commercial and retail
customers in both south Louisiana and the entirety of southeast
Texas.
MidSouth Bank, like the vast majority of community banks,
did not engage in the subprime lending practices that are at
the heart of the current crisis. As a result, MidSouth bank is
healthy and well capitalized and is in a strong position to
help this economy recover. MidSouth Bank lived through the deep
recession, or as I call it, depression, that ravaged the
economies of Louisiana and Texas in the 1980's. We are terribly
experienced in helping to revitalize an economy when the large
financial institutions have failed. It is important to
distinguish the Capital Purchase Program available to community
banks from other TARP programs. The Capital Purchase Program
funds are only given to healthy community banks. On the other
hand, too big to fail institutions do not have to be healthy to
receive TARP money. In most instances, they receive it because
they are not healthy.
The CPP program is not a bailout for community banks.
MidSouth must pay an annual dividend of 5 percent on the $20
million in preferred shares we purchase from the Treasury along
with a grand of stock 1s. Community banks participating in the
program relend the money in order to cover the costs of this
capital. MidSouth heeded the call by Treasury and banking
regulators to participate in the TARP Capital Purchase Program
because we believed it was our patriotic duty to participate in
CPP to help stimulate the economy.
When MidSouth accepted the $20 million in CPP funds in
January, we viewed the government's investment as a public,
private partnership that President Obama has talked about to
promote lending. We began to actively promote the availability
of $250 million in loan opportunities to small businesses and
community leaders through town hall meetings in 18 communities
in south Louisiana and southeast Texas. We focused on small
businesses because they drive the economy and create new jobs
in our communities.
In addition to the general business community, we are also
reaching out to the minority business community through town
hall meetings with the Black chambers of commerce in Baton
Rouge in southwest Louisiana and the group of 100 Black Men. We
will also have a billboard campaign underway throughout our
markets aimed at small businesses and the general public
letting them know we have $250 million to lend.
While attendance at these meetings has been good, there
seems to be a reluctance to take on a significant amount of new
debt. This is true despite small business loan rates at least 2
percent lower than a year ago. The reluctance of the borrower
is probably due to an uneasiness about the general economy and
due to the drop of the price of oil, which is an important
driver of the economies of southwest Louisiana and southeast
Texas. Given the state of the economy and the tough regulatory
environment we live with, it is harder for community banks to
find borrowers who are currently creditworthy.
Despite the challenge, we believe our outreach efforts have
paid off. Our level of lending for consumers and businesses
remains about the same about this time last year. We believe
that is quite an accomplishment in the midst of a most serious
recession. Since receiving the CPC capital infusion in January,
we have made approximately $13 million in new consumer and
commercial loans and $7 million in mortgages. We are especially
proud of 2 new small business loans made by MidSouth since
receiving the CPP fund. These loans to 2 small oil field
service business will create over 50 new jobs in south
Louisiana and southeast Texas.
As MidSouth Bank has shown, community banks have the know-
how and the desire to use the CPP funds to support economic
recovery in the communities throughout the Nation. MidSouth
Bank does not engage in compensation practices found at some of
the larger TARP recipients, which have understandably created a
public furor. We are frustrated at being tarred with the same
brush as these large institutions. ICBA believes compensation
restrictions and new corporate governance regulations should be
focused on the larger TARP recipients that have undermined the
public competence in the Treasury's recovery efforts.
If the government changes its agreement with MidSouth by
adding new burdensome conditions, MidSouth will have to
reevaluate its continuing participation in the CPP program as
our hometown competitor, Iberia Bank, did when it paid back its
CPP funds this week. It would be a shame if new burdened
conditions forced MidSouth to withdraw from the program,
because MidSouth has proven itself to be a responsible partner
in the effort to revitalize the economy. I would be very happy
to take your questions.
[The prepared statement of Mr. Cloutier can be found on
page 46 of the appendix.]
Chairman Gutierrez. Thank you.
Mr. Ely, please.
STATEMENT OF BERT ELY, PRINCIPAL, ELY & COMPANY
Mr. Ely. Mr. Chairman, Ranking Member Hensarling, and
members of the committee, I very much appreciate the
opportunity to testify today about TARP and whether it is
working for Main Street. I have appended to my written
testimony the answers to 8 questions posed in the letter of
invitation to testify. As will be readily evident from the
answers, I am not a great fan of the TARP. Further, I greatly
fear that the TARP will become a vehicle by which Congress will
impose credit allocation policies on TARP investees. Such
policies will be very destructive to the American economy.
My early consulting experience is especially relevant to
the subject of this hearing as for over a decade, I consulted
with small and medium-sized businesses on a broad range of
financial matters including obtaining bank credit. I also
worked with business insolvencies. Those experiences brought
home to me the importance to small businesses of having
sufficient equity capital which is safely leveraged bank
credit.
Lending standards clearly are returning to earlier prudent
standards after the excessive laxness of recent years. That
return to prudent standards is crucial, both for the recovery
from the current recession, as well as for the longer term
health of the American economy. This is absolutely the wrong
time for Congress to force banks, whether through TARP rules or
otherwise, to launch a new round of imprudent lending whether
to small businesses or homeowners or whomever.
With regard to lending to small businesses, it is important
to realize the primary reason that a business cannot obtain
credit it believes it needs is that it lacks sufficient equity
capital and/or it cannot demonstrate to the lender that it can
properly employ the credit being sought.
It is vitally important to realize that credit is not a
substitute for equity capital, rather credit can only be
reasonably leveraged of a sufficiently strong equity capital
base. In this regard, non financial businesses are no different
than banks except that for good reason, non-financial
businesses cannot operate with as much leverage as banks and
other financial intermediaries.
Because lending centers are returning to normalcy,
businesses of all types cannot operate with as much leverage as
they could a few years ago, nor should they try. The underlying
cause of insufficient credit for businesses, including small
businesses, is inadequate equity capital as mentioned. Rather
than beating on banks to lend more, Congress should address the
tax incentive working against equity capital accumulation
within businesses. To put this another way, the Internal
Revenue Code is the principal underlying cause for the current
financial crisis.
I address the tax laws and 10 other public policy causes of
the crisis in an article which will appear shortly in the Cato
Journal. I would be glad to submit that article for the record
when it appears in print later this month.
While there are many aspects of the tax laws which fueled
the housing bubble and gross overleveraging of the American
economy, working together, they encourage businesses and
individuals to overleverage by incenting overspending and
undersaving, thereby discouraging an accumulation of capital
denominated as equity. This is rather than encouraging saving,
which builds equity on a balance sheet that tax laws actively
discourage savings and equity capital accumulation through the
relatively heavy taxation for profits, for profits represent
the generation of equity capital.
At the same time, the tax deductibility of interest expense
by businesses and homeowners encourages borrowing and therefore
overleveraging.
When the pretax cost equity capital is easily 15 percent or
more and the prime rate is 3\1/4\ percent as it is today, it is
an apparent no-brainer for a business to finance as much of its
balance sheet as it can with that capital and as little as
possible with equity capital. In addition to funding the
portion of a business' bank balance sheet, the equity capital
also serves as its loss cushion, the same role equity capital
plays in a bank balance sheet. That lost cushion becomes vital
to a businesses survival during a recession, for it is equity
capital, not debt capital, which must absorb business losses
and serve as a foundation on which where borrowing during tough
times must be based.
Far too often, I have seen business owners seduced during
good times by seemingly cheap debt only to suffer losses during
the tough times that exhausted too-thin equity capital
foundation. I will close this portion of my testimony by posing
this thought experiment: What would be the condition of the
American economy today and the availability of credit for
businesses of all sizes if interest was not a tax deductible
business expense and business profits were not taxed at a
business level? I strongly suspect that America would not be in
a recession and that it would enjoy a much more profitable or
much leveraged business sector than it has today.
I will close by discussing a potential threat, threatened
loss of bank capital and therefore reduction bank lending
capacity. The 20-basis point deposit insurance special
assessment that the FDIC has proposed a levy on the Nation's
banks and thrifts this coming September 30th. This assessment
represents a $15 billion tax on bank capital and what occurs
the government is trying to boost the banking industry's
capital and lending capacity. As FDIC Chairman Sheila Bair has
admitted, this assessment would be procyclical, yet she is
determined to levy it. I recommend that the Financial Services
Committee express its opposition in the strongest possible
terms to this most untimely attack on bank lending capacity.
With that, I thank you for your time.
[The prepared statement of Mr. Ely can be found on page 62
of the appendix.]
Chairman Gutierrez. I just want to say I have known Mr.
Zucchero for over 20 years. I have been at his business in the
summer, the winter, and the fall, and there is always a long
line, many, many people. I just can't understand how a thriving
business like that cannot really--there is so much demand at
his place, any season of the years, anybody from Chicago knows,
so all politics being local, I did invite a local business
person, but he is so representative of what is wrong with our
current banking system. Mr. Zucchero, please.
STATEMENT OF JOSEPH ZUCCHERO, OWNER, MR. BEEF DELI
Mr. Zucchero. Good afternoon, Chairman Gutierrez, Ranking
Member Hensarling, and members of the committee. On behalf of
myself, my business partner, Michael Genovise, and my attorney,
James DiChristofano, I thank the committee for inviting us to
participate in this crucial hearing. I sincerely believe it is
essential during this tumultuous time that the voices of small
business owners are heard and those struggles are reported.
I am the owner of Mr. Beef on Orleans. We have been there
in the City of Chicago for 30 years. We have built a reputable
reputation and thriving business. In addition, I am the owner,
along with Michael Genovise, of an apartment building and an
Italian fine dining restaurant named Natalino's, also located
in the City of Chicago. We opened that in March of 2008.
Combined, both restaurants employ 50 hardworking people. We
provide much of the needed sales tax receipts for the City of
Chicago, Cook County, and the State of Illinois. We source all
of our food and our products from small business purveyors. The
economic downturn has had its impacts on my business due to
loss of jobs and income from local residents who live and work
near downtown Chicago.
Many small businesses are being starved of needed lines of
credit or having their lines of credit not renewed upon
maturity. Not only have I seen and heard this from a variety of
small business owners, I personally lived out this nightmare. I
have two relatively small loans that matured in October and
November of last year. These loans have been paid every month
and I continue to submit payments. I do not have the funds to
give the entire loan amounts that are due. Midwest Bank, which
received $85 million in TARP funds, will not renew or extend
mature loans any further. This places my business and my
properties in jeopardy.
Another bank will not refinance the two mature loans
because the new bank would be placed in a third lien position,
thus the banks want us to try to obtain funding to refinance
all the loans at Natalino's and Mr. Beef. This has hampered our
nonstop efforts to find financing or a resolution to our
problem. Small businesses do not have the capital to take on
this loan. Again, big banks are not even the slightest bit
interested in our using the TARP money to insulate their own
revenues. We have actively been submitting loan packages to
various banks and loan brokers in order to extract us from the
situation.
Our current loans are approximately 55 to 60 percent loan-
to-value based on recent appraisals. Our loans carry interest
rates right now of 8\1/2\ to 9 percent. Current rates are
around 6\1/2\ to 7 percent. Lowering our rates would provide a
dramatic savings to our business, would prevent us from letting
go of more employees, and would give us breathing room to ride
out the economic turmoil. Midwest Bank frustrates me in that
they received TARP money and are not willing to either extend
our loans or lower our interest rate on the non-mature loans.
They have been patient with us while we seek alternative banks
to finance us, but in reality that means nothing. Many bankers
seem to be paying us lip service and are not actually
interested in providing financing but rather seek free
publicity.
We have been dealing with one small bank for about 6
months, we have been giving them documents, we have paid for
expensive appraisals and tried to accommodate every request
they made. To this day, we have been constantly given
optimistic outcomes that they have increased our hopes that an
end is near to our situation, yet they have not approved or
denied any loans.
My situation is just one example. I am fortunate to have a
successful business in downtown Chicago. There are other
business owners who are not that fortunate. At the end of the
day, we are at the mercy of the banks who have no willingness
or obligation to help us. I was approached by a local banker
whom I knew, and he found out that I was coming here to testify
in front of this committee. He strongly suggested that I should
not appear, I should ride out the economic problems and wait
until this all blows over. I politely asked him to give me the
$84,000 a year that lower rates would save and he promptly
walked out of my establishment.
I do fear backlash within the local banking industry for
coming here today. I implore this honorable committee to set my
mind at ease. I do not need a bailout from the taxpayers. I
only want the banks to be fair and refinance our loans.
Congress needs to take action, Congress needs to know that
small businesses drive the economy, that we are fighting every
day to keep our doors open and our people employed. It is time
that TARP funds come with requirements that the banks must
actively seek out and help lower small businesses interest
rates or extend the mature loans or the lines the credit that
are performing. On behalf of myself, my partner, Michael
Genovise, my attorney, Jim DiChristofano, and all of the small
businesses that run the economy, I thank Chairman Gutierrez and
the other members of the committee for the opportunity to come
here today to tell our story. I welcome all questions from the
committee.
[The prepared statement of Mr. Zucchero can be found on
page 90 of the appendix.]
Chairman Gutierrez. Thank you very much, Mr. Zucchero.
I will open up with 5 minutes. First of all, Mr. Zucchero,
I want to thank you for what I know is a difficult task, to
come before the committee and tell your story, and for the
courage that it takes. I know you are very fearful because of
what the financial institutions and the kind of repercussions
by complaining about them might cause you and your business.
Since you are here, I would like to make clear to everybody
just what is going on so that we can see. So Midwest Bank holds
how much in loans to your businesses? What is the total amount?
Mr. Zucchero. $335,000.
Chairman Gutierrez. So, $335,000. And those loans have
matured; is that correct?
Mr. Zucchero. They have matured, yes.
Chairman Gutierrez. And they won't refinance those loans?
Mr. Zucchero. We asked them to refinance, and they
wouldn't.
Chairman Gutierrez. And they received $85 million in TARP
money?
Mr. Zucchero. Yes. They sent us a letter saying that they
received $85 million in TARP money.
Chairman Gutierrez. Let me ask you something: Were you ever
late on the loan during the time you had the loan with them?
Mr. Zucchero. No. It just matured.
Chairman Gutierrez. Okay. And let me just ask you
something. Even though they have said they are unwilling to
renegotiate any new terms, have you continued to pay the loan?
Mr. Zucchero. We continue to pay the loans in full amount.
Chairman Gutierrez. So you took out the loans with Midwest
Bank. You paid it on time every month. The loan came to
maturity. They refused to renegotiate the terms of the loan.
You were never late, and you continue to this day to pay the
loan and the amount of money owed as you try to renegotiate.
Mr. Zucchero. Yes. We submit the payments on time.
Chairman Gutierrez. So let me ask you, what do you think
the place on Orleans in downtown Chicago is worth? I mean, Mr.
Beef is a nice--it is a nice, humble establishment, but it is
what it is. But I just wonder, what does that land in such a
critical part of the City--I mean, the real value there must be
not the building but the land. What do you say?
Mr. Zucchero. Our last appraisal, which was, I think, done
in November of 2008, was about $3 million.
Chairman Gutierrez. $3 million. So that is where Mr. Beef
sits, on a piece of land worth $3 million, and you owe them
$300,000 on that loan that they refuse. And what is the value
of the other property? Because there are two of them. There is
the other restaurant. What is the other value?
Mr. Zucchero. 1523 Chicago Avenue is, I want to say, about
$3.1 million.
Chairman Gutierrez. So you have appraisals for $6.1
million; is that correct, Mr. Zucchero?
Mr. Zucchero. I am sorry. It is about $5.3 million.
Chairman Gutierrez. $5.3 million.
Mr. Zucchero. Both properties are combined.
Chairman Gutierrez. What is the total amount of money that
you owe? This is everything, the $300,000 that won't be
renegotiated and the other permanent financing that you have.
What is the total amount that you have?
Mr. Zucchero. About $3.4-, $3.5 million.
Chairman Gutierrez. So we see that he isn't overleveraged.
He has appraisals for $5.3 million in an economy where real
estate is losing value every day. He owes $3.4 million or
thereabouts in total amount. And we gave somebody $85 million
in TARP dollars, and they won't renegotiate. And it isn't as
though--or what is the interest rate you are paying to Midwest?
Mr. Zucchero. 8\1/2\ to 9 percent. We also threw in private
homes on that.
Chairman Gutierrez. Of course, you also secured this with
your own private homes and the private homes of your own
business partners in addition to what the appraisals are. And 8
and 9 percent. I mean, just so that we understand, that is what
he is paying. He has paid it faithfully. I think that is what
we need to understand. It isn't giving small businesses loans
so that they won't be repaid to the financial institutions.
We hear this story day in and day out in my office, and I
know in offices across the United States of America, that
people who have thriving businesses, the choking of the lines
of credit is such that it is causing our economy harm. Even if
you have a business that makes money, they will not extend to
you the credit, unless, of course, you go outside the regular
banking system to even more onerous interest rates in order to
get this done. I don't think that is where we want to take
America in terms of where our small business is.
I just want to thank you again, Mr. Zucchero, for coming
and testifying before this committee and telling your story. I
have other questions for other members of the panel, but now I
will go to Mr. Hensarling for 5 minutes.
Mr. Hensarling. Thank you, Mr. Chairman.
And, Mr. Cloutier, maybe we have a new customer for you
here. I don't know. It is against House ethics rules for us to
take a commission. So it will just be a public service. Maybe
you two can all meet after this hearing.
I am not a banker. My background is not in banking. Not
unlike Mr. Zucchero, I was a small businessman for 10 years
before I ran for the House of Representatives. At the
recommendation of our chairman, Mr. Zucchero, I certainly look
forward, one day when I am in the Windy City, to going to your
restaurant. If that doesn't violate House rules, then I would
be happy to have you buy the Italian sausage.
Frankly, I have no idea, Mr. Zucchero, whether you are the
greatest credit risk in America or the worst credit risk in
America. I have no idea. It is not my area of expertise. The
gentleman sitting two seats to your right, it probably is his
area of expertise. But before I ask my questions, I think there
is a very important point to be made for myself and for a
number of Members of Congress, and that is, we want to empower
banks to lend credit to creditworthy individuals. We do not
wish to cajole, browbeat, or mandate. With all due respect to
all of my colleagues, with few exceptions, I don't think there
are many people here who probably know how to run a bank. Just
like when we were in our hearing with the CEOs of the three
auto manufacturers--I must admit I was a little amused at how
many of my colleagues wished to tell them how to make cars. We
don't know how to make cars. We don't know how to do this. We
need to empower you to do your job.
Now, Mr. Cloutier, the question for you--I believe in your
testimony you said essentially that if certain provisions of
TARP were changed in the funding agreement under the Capital
Purchase Program, that your bank would rethink its
participation.
Previously the House passed a bill--the Senate did not take
it up--that would have defined provisions with respect to the
second tranche of the $350 billion. Included in that House-
passed bill was a provision that allowed the Federal Government
to put an observer into your boardroom, and all those who
indirectly benefited from the TARP money, which ostensibly
would be your customers as well, if that passed the Senate and
became law, would that be a troublesome provision to you?
Mr. Cloutier. If that became law, I think you would have
basically all 400 community banks returning the money. Most
community banks most probably are thinking about it very
seriously. When the Treasury came with the program--you
remember the CPP program, which came by Mr. Paulson, after he
realized he didn't have enough money to buy toxic assets, he
came up with this idea of putting money into healthy banks to
try to help regenerate the economy. They were counting on 2,000
community banks taking the money. It is now down to 400, and
those banks are starting to return the money.
So, the answer to your question is yes, I would anticipate
that we would return the money, and most community banks would.
Mr. Hensarling. Mr. Ely, in your testimony you state that
you have a fear that TARP could become a vehicle by which
Congress could impose, ``credit allocation policies,'' which I
guess I read as lending mandates. Could you tell me in your
long-standing history within the industry, what are your fears;
what historic precedent are they based upon? And what would you
see as the consequences of such actions on the part of
Congress?
Mr. Ely. Well, first of all, there is, I think, a mistaken
idea that the banks are being given TARP money. They are not
being given TARP money. The government is making an investment
in the banks. It expects to be repaid on that with what
effectively is interest in the form of dividends, and hopefully
the taxpayer will not end up losing any money. So I think it is
very important to realize that there is not a present here.
Second of all, banks lend very little in the way of
capital. Their capital serves primarily as a loss cushion. Most
of the money that banks lend is actually the deposits that they
bring in, and they are borrowing from institutions like the
Federal Home Loan Banks. So I think it is a mistake to somehow
equate a TARP capital investment, which is there to strengthen
the bank's loss cushion, with its lending activities.
But there seems to be a lot of talk about that, and that we
might end up with some kind of lending mandates being imposed
on banks. There certainly has been that discussion, which I
find unfortunate because it leaves out the fact that banks have
been increasing their lending. The Federal Reserve data on this
are very clear that banks have been increasing their lending
even though we are now in a recession and many potential
borrowers are actually cutting back on their borrowing.
So, in my opinion, the banking industry has been performing
as a whole exceptionally well and increasing its lending at a
time of economic distress. And I would think that if lending
mandates are in place, to follow up on what Mr. Cloutier said,
that you will find a lot of banks are saying, you know, this
just isn't worth it. We are out of here. We are going to buy
back that preferred stock we sold to the Treasury Department.
Mr. Hensarling. Thank you.
Chairman Gutierrez. Thank you.
Mr. Moore for 5 minutes.
Mr. Moore. Thank you, Mr. Chairman.
The TARP program set up by the Treasury Department and the
Federal Reserve to provide liquidity and stability in the
financial marketplace, are there additional steps or changes in
any of the current programs that the Federal Government should
consider to ensure credit is flowing to our small businesses?
Mr. Ely, do you have any comments on that?
Mr. Ely. Well, I think that in the short term, there are a
lot of small businesses that are going to have to hunker down
in this time and live with the fact that credit standards have
tightened, that things did get too loose. And what the small
businesses have to focus on is trying to raise equity capital
so as to improve their creditworthiness. I realize that this is
a very difficult environment to do that.
But I also don't think it is wise in this economy to
encourage banks or to force banks to make risky loans, and that
is, of course, the real concern that flows from the notion of
lending mandates, that banks are going to be forced to make
loans that they otherwise would not, keeping in mind that banks
are in the business of lending, this is how they make money. We
shouldn't assume that banks are just sitting on the TARP money
and not looking for lending opportunities. They are, but in
this environment they want to understandably make good loans.
And I have one additional point. What I hear from bankers
across the country is that they are getting a lot of criticism
from their bank examiners, the folks out in the field, about
the riskiness of their loan books. So there is a lot of
pressure coming from that element of the bank supervision
establishment to actually cut back on the riskiness of their
lending. And that may be the situation at Midwest Bank. I don't
know.
Mr. Moore. Mr. Cloutier, do you have any different
thoughts?
Mr. Cloutier. I will tell you that I have a good friend in
Louisiana who says, ``The big banks get the gain, and we get
the pain.'' Let me be honest, the ``Miserable Eight''--as I
have nicknamed them--who appeared before you here, most of them
are insolvent now. We went through this in Texas and Louisiana
in the 1980's. You have to deal with the insolvent
institutions. The regulators in Congress have been very slow to
do that. The pain is going to take a much longer period of
time.
And I would tell you, there are two things you learn in the
banking business very early on. One is that concentration is a
bad thing. And what we have done is we have concentrated all
the assets in this country in deposits into eight hands to
about the tune of about 64 percent, and that goes back to the
late 1990's when I testified in this room in front of
Congressman Baker's subcommittee in this exact committee room,
and we brought that up when it was getting out of hand, and
they were well aware of it.
The second thing is in the banking business you learn very
early that your best loss is your first loss. To keep pumping
money into these big banks is causing a lot of problems. And I
will just tell you, the community banks out there, we are
second-class citizens. We know it. Mr. Tim Geithner said it the
other day when he testified before the Senate under questioning
from Senator Kay Bailey Hutchison. He said point blank, ``We
are going to take care of the Big Eight. The community bankers
have to take care of themselves.''
Mr. Moore. Sir, let me stop you for just a minute. I will
ask both of you if we have time. Are there additional steps or
changes in any of the current programs that Congress has set up
now that the Federal Government should consider to ensure
credit is flowing to our small businesses? What can we do to
make this credit flow so we can get this economy revived and
moving again?
Mr. Cloutier. Let me give you one example. Mr. Ely just
talked about it. I woke up last week and found out that my
second quarter profits are totally gone. They are going to the
FDIC. I am going to have to pay a premium of 20 cents, which is
about $1.6 million in my bank. My FDIC premium is up 480
percent since last year because I have to pay the losses that
the big banks have gotten.
I mean, you know, to feel like we feel, like a second-class
citizen, is an understatement. And, you know, I didn't fly up
here on a private jet, and I don't live that way. But I think
the first thing Congress could do is drag the regulators in
here, the Treasury and the Secretary of the Treasury, and say,
``What are you going to do for the community banks? We are
tired about hearing about saving the Big Eight. What are you
going to do for Main Street? What are you going to do for the
people who live in Mr. Gutierrez's district, Mr. Hensarling's
district, your district? What are we going to do to help those
on Main Street?'' That is the real problem. And until that
message gets to the regulators, we will continue to feel the
pain, and they will continue to get the gain.
Mr. Moore. Mr. Ely, did you have any different comments?
Mr. Ely. My comment would be that Congress should resist
the temptation to put more restrictions and obligations on the
banks that have accepted TARP funds so as not to drive those
banks out of the program that are in it now, keeping in mind
that there are many banks that have purposely chosen not to get
involved with TARP in the first place because they don't want
these lending restrictions and mandates.
Mr. Moore. Anybody else on the panel have any thoughts, or
are we out of time?
Chairman Gutierrez. We are out of time.
Mr. Moore. Thank you, Mr. Chairman.
Chairman Gutierrez. Mr. Lee of New York for 5 minutes.
Mr. Lee. Thank you.
I may want to take this in just a slightly different
direction, but what Mr. Hensarling started out with I thought
was right on the mark. And I think we keep on picking on Mr.
Ely here, but I liked one of the comments that I read in your
testimony, and that was the comment, ``Don't push banks to make
bad loans.'' It is a pretty simple premise, but I believe over
the years in Congress we have helped initiate some of the
problems that we now see today.
And one thing that I have just learned over the years in
business--and unfortunately, I think in Congress we keep trying
to think that there is a magic pill that is going to get us out
of these problems that we face. I am proud of the fact that I
have many community banks in my district who have had sound
lending practices. They haven't had their hands out. And they
are the ones who still are making loans in my district to, for
example, farmers who need cash to keep their operations
running. So I agree with you that the TARP funds unfortunately,
I think, in some cases have been misplaced.
In getting back to that point on regulation, I am deeply
concerned, because unless there is a known bottom to this
market, you have a lot of people sitting on the sidelines and
not knowing what the rules are. And that applies to banks as
well. I will start this out with Mr. Ely, and somebody else may
also chime in, but right now we are toying with legislation on
something called a cramdown. Are you familiar with that?
Mr. Ely. Yes, I am.
Mr. Lee. My personal concern is that the idea was to have
good intentions; in fact, it will have the exact opposite. I
believe that by allowing bankruptcy judges to have the power to
rewrite or modify your primary mortgage, it would be very
detrimental to the market and to banks. My concern is that I
think it would raise interest rates, and it will further
eliminate the flow of capital. I would like to hear your
thoughts on that.
Mr. Ely. Well, I have those same reservations about
cramdown. The essence of the cramdown provision would be to
empower the bankruptcy courts to modify mortgage terms on the
primary residence, and what that would do is increase the
uncertainty in lending on mortgages, and banks and other
lenders would have to take this into consideration in their
loan pricing going forward. The talk is that the cramdown would
only apply to loans that were made by a certain date. Once
Congress did that, then it would be reasonable for lenders to
assume that in the future you might have a similar provision.
And so it would be actually unwise of them not to assume that
as a new risk in lending. What this would do would be to hurt
those who are the most credit constrained in borrowing, and it
would have the effect of pushing up or pushing down minimum
loan-to-value ratios on loans, requiring higher credit scores,
and making it harder for the credit constrained to borrow.
I also have another concern that goes back to my years of
doing bankruptcy work, and that is we have several hundred
bankruptcy judges in the country spread across many district
courts, 12 or 13 appellate circuits. It would take a long time
for case law to develop through the courts as to what was an
appropriate mortgage modification, and what was not. What I
would be concerned about is during that time, which could be
for many years, that you would have great uncertainty across
the judicial circuits as to what was appropriate or not
appropriate in a cramdown, and that would add even more
uncertainty in the--
Mr. Lee. I think we have opened up Pandora's box in doing
so.
Mr. Ely. Absolutely.
Mr. Lee. One more question for Mr. Cloutier. I apologize,
gentlemen. We are not trying to pick on these two gentlemen.
But if we set TARP aside, is there anything else that we can be
doing here legislatively here that would help your bank?
Mr. Cloutier. I think the number one thing you can do to
help my bank and to help all the community banks in America is
to separate it into two categories, large financial
conglomerate institutions and banks. The people in New York are
not banks. You know, I mean, I know they give them titles,
Goldman Sachs and Morgan Stanley. They are in a different
league from me. As I like to tell people, they are playing in
the NFL, and in the communities I service, I am down at the
junior high school level, and that is the difference.
I think when you lump them all together, when Congress
says, well, the banks did this, the banks did that, it is just
not the people in your district, Mr. Lee. I know your district.
We have a future chairman coming out of New York, and, you
know, he runs a little $80 million bank up there. He is not the
same as the boys at Goldman Sachs and Morgan Stanley.
If we look at different regulations for the size of the
institution and the complexity and realize that when you talk,
it is Congress I am talking about, not you individually, I
think we would make a huge difference.
Chairman Gutierrez. The time of the gentleman has expired,
Thank you, Mr. Cloutier.
Mr. Cloutier. Thank you.
Chairman Gutierrez. Mr. Baker, I want to thank you, since I
know we promised you we would get you out of here by 4:30.
Unfortunately there were a few votes that delayed us. We thank
you. Whenever you have to leave, please feel free to leave. And
we thank you for your testimony. We look forward to speaking to
you again soon.
Mr. Baker. Okay. I appreciate that very, very much.
Chairman Gutierrez. You are very welcome.
And next, we have Mr. Sherman from California for 5
minutes.
Mr. Sherman. Thank you.
Let me just respond to Mr. Ely for a second. To think that
if we pass a bankruptcy law in 2009 applicable to mortgages
written in 2008 that somebody in 2015 is not going to make a
mortgage loan because they wonder what Congress will do if
there is a national financial panic in 2020 means that
apparently nobody in the lending business knows much about
politics or government.
How we respond to the economic panic of 2025 has almost
nothing to do with what Congress does in 2009. I don't know
what the politics will be. I don't know if the Democratic Party
or Republican Party will be in existence. So if somebody wants
to make loans in 2020, assuming that they know what the law is
going to be in 2025, I don't think reading the history books of
2009 is going to tell them much. I do realize it would be
unprecedented, but I, for one, can't tell you what the law is
going to be in 2025 with regard to cramdowns or how Congress is
going to react in--
Mr. Ely. May I respond? I think the concern is not what
happens in 2015 or 2020, but what happens in 2009, 2010, and
2011.
Mr. Sherman. Well, if somebody makes a loan in 2010, they
are not going to be doing the same subprime they used to. But
if we pass a law in 2009 designed to deal with the abusive
lending of 2008, and somebody makes a legitimate loan in 2010,
I will tell you I do know enough about politics. We are
probably not going to pass a cramdown law in 2011 applicable to
mortgages written in 2010. I am not going to ask for your
response because you are the expert, except when it comes to
predicting Congress. Then we don't really need to bring in
outside experts to give us advice.
Mr. Baker. Excuse me, Representative Sherman. If I could
just comment on that very briefly. I think actually the effect
that was referred to here by Mr. Ely is exactly what you would
want; that in the event we saw a sort of crazed period of
lending as we actually had in 2004, 2005, and 2006, we would
precisely want the banks to be worried that Congress might take
action to make it more difficult to collect those loans. That
was what we want. It would be great if they had that concern.
Mr. Sherman. I am not looking for that particular fear. And
I certainly don't want them to not make a good loan because
they are worried that 2 or 3 percent of the good loans they
make are going to go bad, and then there is going to be
cramdown for those. I would hope the cramdown would exist only
for laws prior to enactment, and that is what the statute
before the Congress would provide. Yes, it takes the
unprecedented and makes it precedented, but it certainly
provides only the slightest bit of guidance as to how Congress
is going to legislate with regard to mortgages issued in future
years.
The focus of a lot of attention is, why aren't the banks
lending? And there are a few benign reasons for that. First, I
remember the good times, 2 or 3 years ago, constituents would
always be coming to me, telling me their dreams are being
crushed because nobody will make them the loan they want. So we
start with a background base of people who would be
disappointed even in the best of times. We then have the fact
that up until very recently, lending standards were way too
loose, so a lot of people were getting loans they shouldn't
have. Then everyone is a worse credit risk now than they were a
year ago. And finally, the banks themselves, or the big banks
at least, are somewhere between insolvent and undercapitalized.
So the big banks are still lending more money than they are
getting from TARP. They are lending less money than they used
to. And I have no way of calculating whether they are lending
more money than they would have had there not been a TARP.
But the bigger issue is not are they lending more than they
would have if we hadn't have adopted the program, but, rather,
how do we configure a program that dollar for dollar imposed on
the taxpayer gets you the most in lending into the economy?
Mr. Baker, how would you compare taking the next $100-,
$200 billion of TARP money and giving it to the big banks in
one form or another versus going to Chairman Bernanke, who has
basically said he will do TALF-type programs? We put up $10
billion, he will go out there and lend $100 billion, which
provides the most--
Chairman Gutierrez. The gentleman's time has expired.
Mr. Sherman. I would ask that the witness be able to
respond.
Chairman Gutierrez. Sure.
Mr. Baker. I will just be very quick. I would follow-up
from Mr. Scharfstein's testimony that I think you wanted to
distinguish between money that is going to keep essentially
insolvent institutions alive for systematic purposes versus
lending. Your priority, I think very reasonably, is on lending.
And we obviously have to deal with systematically important
institutions, but that is a totally separate issue.
Chairman Gutierrez. Congressman Marchant for 5 minutes.
Mr. Marchant. Thank you, Mr. Chairman.
My question has to do with the distribution of the TARP
funds among the large banks and the small banks. And I had some
information that I had reviewed before I came to the committee
that gave a list of all the banks in America, all the financial
institutions that had received the money and the amounts. I am
reading with great interest this trend, Northern Trust and
bankers that are coming into my office, and in the testimony we
are hearing that the small banks and many of the banks are
going--the healthy banks are really going to give the TARP
money back at their earliest opportunity because they don't
like the restrictions that are involved with it.
I guess this may be more a philosophical question, if the
TARP money was distributed across America to financial
institutions basically not necessarily according to their need
and their risk factor, but so that it would be distributed
pretty well to affect lending across America, if you begin to
have the healthiest banks and the small banks and the
healthiest institutions give the TARP money back--and the way I
understand the legislation, if the money is repaid, I don't
think it goes into the Treasury and then pays the debt down. I
think the money comes back into the system, into the TARP
system, and then the TARP system then gives the money back out,
so that you could have a situation where the healthiest
institutions give the money back into TARP, and then it begins
to be distributed then to the least healthy institutions, and
in a matter of time there is no need for new injections of
TARP. But all of the money flows and gets concentrated in the
institutions that are the least able and the least likely to
then lend. I would like some reaction to that.
Mr. Ely. I will take a shot at it. First of all, the
Administration, at least initially, did set some minimums as to
who they would invest TARP funds in. Basically it was a
function--a belief, and I think an understandable one, that
TARP funds should not go into really weak institutions that
might be on the verge of failure; that instead those
institutions ought to be merged into stronger institutions.
Although there has been a lot of criticism, I think that is
essentially what drove the PNC acquisition of National City.
But as I understand how TARP would work, and given what the
limit is in the ESA legislation, if moneys are paid back into
the Treasury, from, let's say, the Northern Trusts of the
world, that is money that could be reinvested in other banks,
but with the proviso that it wouldn't go into really weak
banks. So possibly you might find that at the end of the day,
not all TARP funds would be invested, or they would be
available for investment outside of the banking industry.
Mr. Scharfstein. I think it is extremely unfortunate that
the TARP program, as Mr. Cloutier was saying, was set up as a--
there is a part of it that is a big bank bailout, if you will,
a subsidy of the banks that are systemically significant, and
we don't want those to go under. And then you have a set of
healthy banks that have also received capital. I think it is
important to separate these programs, and I think the problem
is that putting lots of restrictions on the smaller banks, I am
agreeing completely with Mr. Cloutier, I think that is a real
problem. And I don't think the subsidy to the small banks is a
big one. I think that they are basically sound institutions,
and the kind of transfer that is occurring from taxpayers to
large institutions is a much bigger transfer than anything that
is going to the small banks.
So I don't think it is appropriate to have the same level
of restrictions on the small banks. In fact, you know, there is
an FDIC program that guarantees the debt that is issued by
banks. The small banks haven't opted into that. And I think it
would be a good thing if they could opt into a program where
they could get the equity from the government in, I think, a
newly designed CPP program for small banks and then leverage
that equity by borrowing potentially with government-guaranteed
debt.
So I think it is important to be able to invest in healthy
banks that have the capability to leverage that capital and
then also to have experience and exposure with business
lending.
Mr. Marchant. Thank you, Mr. Chairman.
Chairman Gutierrez. Thank you. Your time has expired.
The gentlelady from New York, Mrs. McCarthy, please, for 5
minutes.
Mrs. McCarthy. Thank you, Mr. Chairman. Thank you for
having this hearing.
Let me first say that in the bankruptcy bill that is going
out, the cramdown, all of the language has been changed so that
basically it is going to be out at last resort, because many of
us were very nervous last week about how that language was, and
we changed the language. That is why the bill was actually
pulled last week.
And as far as the TARP money goes, if a bank refuses to
take the TARP money, it goes back into the Treasury. Now the
Treasury's business is to lend money to banks if they need it.
So it actually is coming back into the system and not going--
wasting taxpayers' money.
But, Mr. Davenport, it is basically you that I wanted to
ask. I understand from your testimony that nonprofit
organizations cannot presently participate in TARP through the
Capital Purchase Program because they are not structured to
issue warrants or accept equal investments, as required under
CPP. It seems to me, however, that the community financial
institutions, like yours, can make sound and efficient use of
TARP funds. How can we work with the Treasury Department and
the Federal Reserve to allow community financial institutions
to participate on terms and conditions that make sense within
the nonprofit structure?
Mr. Davenport. Well, it is actually very simple because we
are a nonprofit. We cannot issue shares of stock or warrants.
But, in fact, we issue debt every day of the week. The large
money center banks that do finance us--and we at any point in
time have approximately $15 million of lines outstanding to
them--it is all in the form of debt. We have debentures of
various terms and maturities, and I think that the type of
debenture that we are able to issue as a nonprofit entity is
completely consistent with CPP or TARP in terms of the terms
and conditions that would ensure that the debt was paid back,
that it had an interest rate attendant to it, that we were
willing to live with the conditions that were imposed upon it.
Mrs. McCarthy. You know, one of the things, I am listening
to everybody's testimony and certainly listening to Mr.
Zucchero. We go home and the stories that we, the Members of
Congress, are hearing, that people can't get loans, and that is
with our small community banks. That is why, you know, many of
us sit here very puzzled on hearing that the small community
banks are lending out there. But yet when Mr. Zucchero was
giving his testimony, I noticed that Mr. Baker, who left,
unfortunately, and Mr. Scharfstein were watching and listening
very carefully. And I was just wondering if you had any input
on the testimony that you heard from him on what is going on
out on Main Street.
Mr. Scharfstein. I think if you look at the data, the data
indicate that small-bank lending has maintained its level.
Large banks are a different story. The large banks saw a big
increase in their lending right after the Lehman Brothers
failure, but that was largely involuntary lending as a number
of very large companies drew down on their existing revolving
credit facilities. This was GM, Tribune Company which later
went bankrupt. So there was a big bump up in large-bank
lending, but then it has come down dramatically in the ensuing
4 months.
So, you know, I don't know the specifics of Mr. Zucchero,
what exactly is happening there, but if you look at the data,
it seems that small-bank lending has maintained its level, and
it is really the large banks, and there is a whole problem with
the large banks of syndicated lending for large companies. It
is sort of a separate issue.
Mrs. McCarthy. Last week, we had the large banks here, and
they were saying they were lending billions and billions of
dollars out. So if they are lending billions and billions of
dollars out, and our small community banks are lending money
out, then what is going on with our economy? Because it sounds
like, as far as the large banks and the small banks, they say
they are lending, they are putting billions of dollars out, and
yet we are hearing that we can't get any money into the system.
Mr. Ely. If I could address that, Madam. The Federal
Reserve data on commercial bank lending show that bank lending,
commercial bank lending, has been increasing over the last
year. And even though there has been some recent downtick in
it, it is nowhere near as great as the decline in economic
activity. Where the problem really lies as much as anything
else is out in the shadow banking world, and specifically with
asset securitization, and that is what the TALF is supposed to
get going. So that is where the greater weakness is is over at
shadow banking versus in depository institutions.
Mrs. McCarthy. Thank you. I yield back.
Chairman Gutierrez. I thank the gentlelady.
Mr. Paulsen for 5 minutes.
Mr. Paulsen. Thank you, Mr. Chairman. And I want to also
commend you for holding this hearing today, especially focusing
on the small business community in particular with the
mainstream banks.
Mr. Cloutier, it was mentioned--I certainly believe it is
the small business sector that is going to help lead our
economy out of this current economic turmoil that we are in. Do
you believe that the community banks have the liquid capital to
help meet the needs of most small businesses in their
community? And would receiving TARP funds significantly help
that problem for community banks?
Mr. Cloutier. I think 30 days ago, that would have been a
correct statement, but I think today, it is most probably not.
Two major things have happened. First of all, I think all
community banks have lost confidence in the Federal
Government's ability to negotiate with them. We have all been
told, those of us who took the TARP funds, that they are going
to do the same thing to us that they did in the 1980's to the
people who did business with the Federal Government, and then
the government reneged on their commitments and ended up being
sued. And that is why they put 5(c) in there to make sure they
could change the rules. Most people took the TARP money,
believing that the government wouldn't do that, that they had a
serious economic crisis. It seems like the government has just
ignored that.
The second thing is this FDIC premium is hitting all the
banks. I talked to many community banks today. As one of them
told me, I am going into a foxhole right now. I am never going
to be criticized by my examiners for not lending, for not
expanding my bank, and, you know, if the government--the FDIC
made a decision this week that the capital in all the banks,
the community banks in America, now are for the use of the FDIC
to take care of the losses that are going to be entitled that
are coming, and that scares the hell out of bankers. So there
is no more strategic planning. There is no more long-term focus
in banking because you can't. It is just impossible when things
change that fast.
Mr. Paulsen. Well, and it was touched on earlier about the
concern that the FDIC's proposed premium increase was going to
really hit community banks pretty hard, and that was going to
be a significant challenge. Is that a significant challenge for
our community banks right now, as a resistant fact in terms of
respect to lending?
Mr. Cloutier. Absolutely. What happened was they took all
the earnings out of banks, so you did away with the safety net.
If you have any loan losses, now it is coming out of your
capital. It makes it a very difficult situation. When community
banks hear, you know, we are going to bail out the big banks,
but we are not putting any money in to bail out the FDIC fund,
I will tell you, the money is going to return to the TARP
program, I think, in great numbers, and I guess the money will
be available to go to the Big Eight because you are not going
to get any community banks showing up to borrow, and I think
they are going to be very worried about adopting any of these
other programs.
You know, I will just tell you, I think the community
bankers and I think small businesses in America feel like they
are left out of the conversations, be it at the White House, be
it at the Treasury, or be it at the Congress. I will tell you
right now, in my 18 meetings I have had around Louisiana and
Texas, I can tell you they feel left out because every time
they look at a picture, it is all the Wall Street people and it
is all the New York people showing up at all the meetings,
making all the conversations. And when they look at the
President's economic panel, it is made up of G.E. and everybody
else, and no people from Iowa, Nebraska, Texas, or anywhere
else. I think they feel left out. I think they are hunkering
down. And I am very concerned, I am going to be honest with
you.
Mr. Paulsen. Well, I certainly heard from many banks in my
community, Mr. Chairman, that are concerned about paying the
millions and millions of dollars of unexpected costs from these
premium increases. And that is not going to restore the
confidence of Main Street, Minnesota, or across the United
States for that matter. And that is where we really do need to
focus, I think, to make sure we come out of this economic
crisis.
I will just ask one final question. It is not just capital
that is going to be potentially lent out from banks in terms of
liquidity. But how are our deposits right now? Have deposits
increased? Have consumers hunkered down? Are they increasing
their deposits at your banks?
Mr. Cloutier. I will tell you what worries me a lot. I
spent an hour on the phone yesterday with a customer who wanted
to take out some serious money, and I thought he was taking it
to another bank. His concern was, how good is the health of the
FDIC? What is inflation going to look like?
There are a lot of concerns out there. I go from one crisis
to the other pretty much on an ongoing basis. I know many of
your bankers in your State of Minnesota--I have spent a lot of
time up there. It is a great State. And I will tell you, they
are very concerned up there also.
Mr. Paulsen. Thank you, Mr. Chairman. I yield back.
Chairman Gutierrez. Thank you.
Mr. Cloutier, that is why we are here.
Mr. Cloutier. I understand, and I greatly appreciate the
invitation.
Chairman Gutierrez. We appreciate small banks. We think you
are important.
I just want to go quickly out of order for 30 seconds. Mr.
Scharfstein, Mr. Ely says they are lending, the big banks are
lending. And your point is--
Mr. Scharfstein. Well, if you look at the data, I mean, it
really does look like the large banks had an initial bump-up in
kind of involuntary lending, but it is coming down. The data is
very hard to track in some ways because a lot of the lending
that--most lending that banks make is actually in the form of
extending lines of credit, which are not well-reported in the
Fed data. And I think a reporting change would actually allow
us to better measure the actual extension of credit so we could
see it. And if you look at the data, it looks like it is
actually coming down.
Chairman Gutierrez. Thank you.
Mr. Scott for 5 minutes.
Mr. Scott. Thank you, Mr. Chairman. This is a very good
hearing. And it really gets right to the meat of the issue as
far as I am concerned, because I have always felt that we
rushed to try to get the right answer without having the right
problem presented before us in the very beginning. And
sometimes you can figure out--you need to try to figure out how
you got into a problem in order to get out of it. And I think
we got into this--if you look at--we went in with a TARP
program, a Troubled Assets Recovery Program, that was designed
to free-up the credit. And somewhere along the line 2 weeks
later, after we left Washington, we had come up with another
program that we had nothing to do with here in Washington, we
voted on, called the CPP program. I didn't know what that was.
All of a sudden, TARP morphed into a Capital Purchase Program.
And the next thing you know, nearly $300 billion of that has
already gone as direct infusions into banks, and what little
guidelines we were able to put on the TARP were applicable to
TARP, not to a Capital Purchase Program. Those big banks did
what they saw fit with it. So is it any wonder you come back
with them having thrown up $18 billion to themselves in
bonuses?
About that time the auto companies come to us, we never
thought of that in the TARP program. Now we are bailing out the
auto companies. The reason we are bailing out the auto
companies is they came before us and said they can't get loans
from the banks after we have given them $290 billion. And as a
result of all of this, the question comes down to now, how do
we make sure the $700 billion or what is left of it--and that
is one thing I would like to ask you all from your own
understanding of this, how much is left of this? How much are
we talking about that is available now? Seventy-five billion
dollars is certainly being set aside for housing. You have the
$290 billion gone. So much has gone to the autos, another $50
billion went to Citicorp, and another $45 billion went to AIG.
So when you look at all of this, I think it would do us well to
try to get an accounting of what we do have left here to work
with.
And if we are going to bring in the real people on Main
Street, that little bank sitting there on Main Street in my
district, that is where the auto dealer goes to to get his
loan. That is where the person who is going to open up a beauty
parlor or any other small business, which makes up about 70
percent of our labor force, that is where they go.
I want to ask you, Mr. Cloutier, what is it--and can you
identify in order of priority the challenges that community
banks are faced with right now with respect to lending? And
then secondly, is there anything that we here in Washington can
do, the Treasury Department, whatever moves we can make to see
to it that whatever we have left of this TARP money, whenever
somebody can get their hands around what we do have left, to
see how we can channel and more directly get this down to the
small community independent banks that, in my estimation, will
be the saving grace of our economy and our financial system.
Mr. Cloutier. Well, I agree with you, Mr. Scott. Of course,
I am a little prejudiced since I run a community bank. But I
will just tell you that, you know, I think you talk to the
regulators, tell them that the community banks are the backbone
of America. And I want to make it clear again--and I want to
thank this committee so much for letting us, the small banks,
have a voice today--it is not my opinion that we are not being
heard. It is the opinion of the American people that when they
turn on the television, that is all they see is the automobile
execs and the big bankers and whatever. But I think it is to
continue to have a vocal dialogue with the community bankers of
America, to continue to be engaged with them, to continue to be
engaged with small business people like Mr. Zucchero, to listen
to what is going on out there and certainly work. And I gave
Mr. Zucchero my card before I sat down, and I told him I would
try to help him and go to Chicago. I love the Cubs.
Chairman Gutierrez. That is very good. Thank you very much.
The time of the gentleman has expired.
We are going to go to Mr. Ellison, who has patiently been
waiting, and then we will finish up with my friend, Mr. Green.
Mr. Ellison for 5 minutes.
Mr. Ellison. I will yield to the gentleman from Georgia 30
seconds.
Mr. Scott. I did want to try to get an assessment as to how
much money do you think is left, just from your cursory
following of the news and the allocation? Where would you say
we are in terms of $700 billion?
Mr. Cloutier. Mr. Scott, I wish I could answer that, but
they throw around billions so fast, that even Everett Dirksen
couldn't keep track of it anymore.
Mr. Scott. Just to answer the other part of my question,
what I am after here is, I am after, what can we do in terms of
the restrictions that we could lift or add? If I may, just one.
Mr. Ellison. It is coming out of my--I gave you 30 seconds,
man.
Mr. Scott. You did good. Thank you. I appreciate it.
Chairman Gutierrez. The gentleman wants his time back, Mr.
Scott.
Mr. Ellison, please.
Mr. Ellison. Man.
Mr. Scott. Thank you, Mr. Ellison.
Mr. Ellison. Give him a rope, he wants to be a cowboy.
Anyway, I want to thank everyone for coming today. I want
to also thank the chairman. This is a phenomenal hearing, and
it is a long time coming.
Mr. Scharfstein, I have a question for you. You have
recommended that we infuse, invest more in our community banks.
I think that is a good idea, for a lot of reasons. But I wonder
if you could flesh your thinking out a little bit more. What do
you think is an appropriate level of capital investment in
community banks for the government to make? And do you think it
should be under the TARP program, or do you have another kind
of program in mind?
Mr. Scharfstein. Well, in terms of how the government
allocates the budget, I don't know. I do think it should be a
conceptually separate program. The idea that I am sort of
pushing is this notion that if the large banks are under
financial stress, in difficulty, potentially insolvent, you
know, it stands to reason they are going to be cutting back on
their lending.
About half of small business lending comes from large
banks. And so my thought is that if we can encourage small
banks to take the space that is left open by the large banks,
by the retrenchment of the large banks, that would actually
help our economy, help small firms.
About 23 percent, 25 percent of the assets in small banks,
let's say banks under $5 billion, have received TARP money,
okay. I think that there is potential to expand that. But I
think the way to expand it is that we have to recognize that it
is not a major subsidy, that it is not the same kind of thing
that is going on with the investments in the Wall Street firms,
with the big banks, and therefore it should not be associated
with sort of onerous measures. And I think that is the way to
get more banks involved.
Mr. Ellison. Well, one difference is that the program you
are proposing is really to help small business lending and help
consumer purchases and help small community banks do that,
whereas the other bank program was a salvage program.
Mr. Scharfstein. The other program was--you know, had two
goals allegedly. One was to sort of help out the systemically
significant banks. It was to sort of keep them stable. The
other goal was to promote lending. But if that had been the
goal, we wouldn't have put the money in the bank holding
companies, but rather in the actual subsidiary banks to promote
lending.
Mr. Ellison. Mr. Cloutier, could you kind of react to what
you think about Mr. Scharfstein's proposal?
Mr. Cloutier. Well, you know, I think there are a lot of
good things he is absolutely correct about. I agree with his
testimony completely.
I will tell you one great thing that the Congress did do
was expand the SBA program. I can tell you that has helped a
lot of my customers. It has helped some people get into
business. That is a very good program that is working right
now, helping to increase lending.
So the problem is going to be to get the community banks
again to have faith in Congress that you offer them some money
and they take it. I can tell you right now, most of them are
just very nervous about getting into any capital arrangements
with the government at this moment.
Mr. Ellison. I see.
I will yield back. If I have some more time, the gentleman
from Georgia can have it.
Mr. Scott. Well, I am ready. I certainly will ask this. It
is my final question I want to ask you. I want to ask you this
because I think it is very important, Mr. Cloutier.
Can you tell me what impact the FDIC's recent proposed
premium increase and surcharge will have on community banks and
lending by community banks?
Mr. Cloutier. Most of them will give up a great deal of
income this year. In my bank, it is about 50 percent. And I can
tell you, it is going to make the community banks across
America retrench, you know, because you have given up the
safety net of earnings. And I know Ms. Bass says that earnings
are not going to be part of the CAMEL ratings, but I don't
think anybody really believes that in the bottom of their
heart. So it is going to cause banks to really retrench.
Mr. Scott. I agree with you.
Chairman Gutierrez. The time of the gentleman has expired.
Mr. Green, for our final 5 minutes.
Mr. Green. Thank you, Mr. Chairman. I thank you and the
ranking member, both of whom are my friends. And I think that
this is a timely hearing.
Mr. Chairman, I do believe that if you know the truth, it
will set you free, and I also believe that the truth can free
capital. So for just a moment, I would like to take the axe of
truth and slam it into the tree of circumstance and let the
chips fall where they may.
Let's talk for just a moment about the CPP program, which
was a $250 billion purchase program of nonvoting senior
preferred shares. I assume that everybody agrees with this. And
senior preferred shares were issued such that they qualify as
tier one capital. Everybody agrees with this, I am sure, tier
one capital.
Now, it is important to know what tier one capital is. Tier
one capital, generally speaking, is used to protect against
unexpected losses; tier one capital, unexpected losses. Tier
one capital, generally speaking, is not money that a bank
lends. Banks make loans from deposits and from money that they
can borrow. Some would say they borrow cheap. They borrow from
the government and then they lend that money. So if you have
tier one capital that generally speaking you cannot lend,
larger institutions were in a position wherein they had a
problem with reference to unexpected losses that had become
expected because we know that there were runs on banks, and
given that there were runs on banks when they received this
tier one capital, it was used to help cause them to become well
capitalized. To be well capitalized, a bank has to have a
certain amount of what I am going to call tier one moneys in
reserve so that they can make loans. The truth is that many of
these banks can't make loans because they need to be well
capitalized, and they are using TARP moneys, which were given
to them as tier one moneys to be well capitalized.
Now, I just want to deal in truth, because if we are going
to fix it, we have to know what we are going to fix. So the
notion that we should have lent the TARP money is a notion that
in some ways is flawed, because the way it was received put
banks in a position where they couldn't lend the TARP moneys.
Now, Mr. ``Banker,'' you help us with this truth, this
search for truth, if you would.
Mr. Cloutier. Certainly. And, Congressman, it is so good to
see you again. I always remember when I testified after the
Katrina hearings, and you and I had a good exchange about what
was happening during Katrina, and I have always appreciated
that.
Let me tell you, and in my testimony, if you had noticed, I
said we started a campaign the minute after we got the $20
million in TARP money to loan $250 million. Our goal was to
bring in deposits and to make loans. But what has happened
pretty much in the regulatory environment is that now they have
increased the capital requirements on banks. They are now out
there, rather than saying 8 percent is well capitalized in
community banks, they are now talking about 10, 12 percent.
That is what the FDIC did. There is a premium--
Mr. Green. For people who don't know, Mr. ``Banker,'' that
is 8 percent of--
Mr. Cloutier. Of the assets of the bank.
Mr. Green. --of the assets of the bank. That is important
for people to understand.
Mr. Cloutier. Right. Assets of the bank.
So what they have said now is now rather than 8 percent, it
has to be 10 percent, so nobody can make loans because they
have to keep it all for capital. You are absolutely right,
Congressman Green. They have changed the rules of the game. The
regulators have said, we want more capital, bigger safety net.
And now the FDIC--
Mr. Green. Let me do this quickly because I have to move
on. I wanted to bring this out not to defend any position, not
to really stake out a position, but so that we can understand
what is happening such that we can lend money at some point.
But you have to understand what the problem is before you can
solve a problem, generally speaking.
Now I have to move to something else quickly. I would like
to say more about this, and I have a lot more that I could say.
But I do want to talk about now something that is near and dear
to me called the LaTourette-Green amendment. That is ``Green,''
as in Al Green. And I am concerned about it because this is an
amendment that allows us to have that transparency with
reference to how the moneys are being utilized. Is there anyone
who would oppose banks giving us intelligence about new lending
based on TARP moneys received, anyone see a problem with that?
Chairman Gutierrez. One person can answer that question.
Mr. Green. Thank you, Mr. Chairman.
Chairman Gutierrez. Does anybody care to answer? Mr.
Scharfstein?
Mr. Ely. I would like to because I addressed it in my
written testimony.
You cannot track the flow. The capital comes in on the
right side of the balance sheet. It comes in as cash. Cash is
fungible on the bank balance sheet. You are not going to be
able to track TARP funds into specific loans.
Chairman Gutierrez. Thank you.
Mr. Green. Mr. Chairman, could I ask unanimous consent for
10 seconds?
Chairman Gutierrez. Sure. For 10 seconds, I won't object.
Mr. Green. What about tracking simply the amount of
increase in new lending? Can that be done?
Mr. Ely. What you can track through the call reports and
through the data filed with the Fed are changes in the total
amount that a bank has lent at any particular time.
Chairman Gutierrez. The time of the gentleman has expired.
Mr. Cleaver.
Mr. Cleaver. Thank you, Mr. Chairman. I always feel the
need to let the panelists know that when people are going in
and out, it is not because they are bored. Most of us are on
two committees. And Mr. Green and I are just running back from
Homeland Security, a very important meeting on immigration. So
I apologize. And because of that, I will be brief.
First of all, I think we have damaged the credibility of
the Congress because most people think we voted for Secretary
Paulson to give the money to the banks, and as you know, there
was never a congressional vote for that. They did that, Mr.
Paulson and the Administration. So we are trying to at least
create some truth to what happened.
I am interested, particularly Mr. Cloutier, community banks
seem to be doing so much better than the banks that we have
labeled too big to fail. So do you think that maybe what we
ought to do is to encourage more community banks to participate
in TARP so that they will make loans to the small businesses
that I think both sides are interested in? Because it seems
that when we are putting money in the giants, we lose. The
taxpayers lose and certainly the small businesses lose. I mean,
this is a kind of a self-rewarding question, but I need to get
a response on it anyway.
Mr. Cloutier. You know, I was thinking about Congressman
Scott's question, too, and yours is almost identical. I would
tell you that regulatory reform is going to be something coming
up in Congress. I think one thing that I learned in Texas and
in Louisiana and Oklahoma in the 1980's is that Congress has to
come up with the plan of how to rebuild the banking system. The
big bank model didn't work. They sold it to Congress. It was
well sold. It was told that if you all go along with this, life
is going to be great. Life hasn't been great. It is obvious
now. And I think, you know, you have to go back to the model
and look at breaking them up. I mean, as an example, Citicorp
today, they wanted to sell their branches. I know Don Adams
would buy them all and put the money up in the morning. So you
have to relook at the models.
So when they come with regulatory relief or regulatory
rewrites, I would encourage Congress to very much look at going
back to the models of increasing community banks around
America, increasing the banks in the States. And I would ask
you please to come study what has happened in Louisiana, Texas,
and Oklahoma. We lived through this in the 1980's. Congressman
Hensarling will tell you that the banks in Texas were destroyed
in the 1980's, and we rebuilt a very solid banking system
through community banks in that State.
Mr. Cleaver. One final question. Do you think--or maybe
this is for any of you: Has there been any kind of detectable
change since the FDIC insurance was increased from $100,000 to
$250,000?
Mr. Cloutier. Absolutely. I will tell you that, you know,
absolutely. It was amazing how many people fought that change
for years, and then we did it in a matter of a week. But it has
made a big change. It has given people a lot of confidence. It
has helped keep deposits in the banking system. And people are
looking for a home today that they feel is safe, and we are
just trying to get them to keep it in the banks right now and
not put it in their back yard because they are very nervous.
All of a sudden, as I tell my people at the bank, we have this
new product called a CD that pays 2 percent, but at least you
get your money back. People are pretty happy with that today.
Mr. Cleaver. Two percent is big now.
Mr. Cloutier. Yes. I wish I had some of my money back that
I lost, I will be honest.
Mr. Cleaver. Thank you very kindly.
Chairman Gutierrez. Thank you so much. I want to thank the
witnesses and the members for their participation in this
hearing. The Chair notes that some members may have additional
questions for the witnesses which they may wish to submit in
writing. Therefore, without objection, the hearing record will
remain open for 30 days for the members to submit written
questions to the witnesses and to place their responses in the
record.
I think there is a new bipartisan truth. Small business is
important and vital to our economic prosperity and survival,
and that we need to work to encourage those kinds of dollars.
We need to reexamine TARP. We need to look at the new FDIC
insurance requirements and the impact that they are going to
have. And we need to ensure that we are getting correct data
and information in terms of just who is lending and how much
they are lending.
Mr. Zucchero, I hope you can say stay. I and my staff want
to sit down and talk to you a minute, too. Mr. Cloutier has
been very kind to extend a warm hand of help to you. We want to
do the same right after this hearing.
Thank you all so much. Without objection, this hearing is
adjourned.
[Whereupon, at 5:15 p.m., the hearing was adjourned.]
A P P E N D I X
March 4, 2009
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