CAPITAL MARKETS HEARING NOTES: HFSC Hearing on Oversight of TARP

    10 December 2008

    On December 10, 2008, the House Financial Services Committee (HFSC) held a hearing entitled “Department Conduct of the Troubled Assets Relief Program.” The hearing focused on oversight concerns regarding the Treasury’s implementation of the Troubled Asset Relief Program (TARP). The stated concerns included inadequacy of oversight of executive compensation and conflicts of interest, insufficient foreclosure prevention measures, failure to require Capital Purchase Program (CPP) funds to be used to re-inject capital, increasing access to credit for consumer goods, among other issues discussed below. The following are notes on: (1) the witness list (2) the key issues raised in opening statements and (3) the key issues raised in question and answer period.

    I. Witness List

    The witnesses included:

    • The Honorable Gene Dodaro, Acting Comptroller General of the United States, U.S. Government Accountability Office
    • The Honorable Neel Kashkari, Interim Assistant Secretary for Financial Stability and Assistant Secretary for International Affairs, U.S. Department of the Treasury
    • The Honorable Jeb Hensarling (TX-05), Congressional Oversight Panel under the Emergency Economic Stabilization Act
    • Professor Elizabeth Warren, Leo Gottlieb Professor of Law, Harvard University, and Chair, Congressional Oversight Panel under the Emergency Economic Stabilization Act.

    II. Issues Raised in Opening Statements

    The following summarizes issues raised during opening statements, including: (1) creation of a blue ribbon panel for financial oversight; (2) auto relief; (3) foreclosure reduction; (4) Fannie/Freddie; (5) Treasury’s failure to require CPP funds to be used to re-inject capital; (6) CPP program conditions; (7) inadequacy of oversight on issues of executive compensation, conflict of interest, re-injection of capital from CPP Funds; (8) concern over Federal Reserve expenditures; (9) loan modification by servicers / class action law suits; (10) insurance guaranty program; and (11) capital injection authority.

    To recap:

    (1) Creation of a Blue Ribbon Panel Financial Oversight Commission. Rep. Issa (R-CA) said that oversight of the bailout is severely lacking and that future tax dollars of Americans are at stake. He said that Congress must pass legislation to create a bipartisan blue ribbon panel that can give Americans an assessment of causes of economic crisis. He noted previous legislation he has introduced (H.R. 7275) to create a financial oversight commission. Rep. Issa said that Congress must understand the substantial causes and root problems of the economic crisis. He said that neither Congress nor officials in the Administration have sufficient expertise to gain an understanding of how to get in and out of the problem.

    (2) Auto Relief. Rep. Pascrell (D-NJ) said that Congress needs to use TARP funds to open up ability of consumers to purchase automobiles again. He said the reason he voted for bailout was so Treasury could open up the credit market to keep people in homes and enable consumers to make large purchases such as automobiles. He noted that the health of US economy depends on robust auto industry; he said TARP funds have been greatly mismanaged to date and that TARP funds should go directly into getting access to consumer loans for mortgages, auto loans, and credit cards in order to stimulate the economy. The Treasury should use TARP funds to open a credit market for auto loans. He said we also urgently need to consider auto insurance tax assistance. (Chairman Frank noted that this last tax issue is outside jurisdiction of the HFSC). Rep. Maloney (D-NY) also noted that consumers do not have access to credit to purchase automobiles.

    (3) Foreclosure Reduction. Chairman Frank (D-MA) said he continued to think he was right in voting for the bailout, and that it was better than the counterfactual, e.g. if Congress had done nothing at all. However, Chairman Frank said that Treasury should have done better on issue of foreclosure reduction.

    (4) Fannie/Freddie. Ranking Member Bachus (R-AL) said he hoped Congress would take a look at mandates from Congress and Administration directives on Fannie and Freddie to loan money to people who would not be able to pay them back. He noted no document loans and stated income loans as examples.

    (5) Failure to Require CPP Funds to be Used to Re-Inject Capital. Ranking Member Bachus (R-AL) expressed criticism of Treasury’s ever-shifting strategy and explanations for its actions in implementing TARP resulting in market uncertainty for participants and confusion for consumers. He noted the GAO report’s failure to clearly communicate expectations for institutions which receive funding to lend rather than hoard cash. Rep. Bachus said the expectation of relending should have been made before the money was given out, rather than after received. Rep. Bachus noted the use of funds for payments of dividends and mergers with other companies.

    (6) CPP Program Conditions. Ranking Member Bachus (R-AL) expressed concern about the two page application for CPP program without more strings attached to how money would be used. He said Treasury should be held to standard of care of a reasonably prudent investment banker who would do more due diligence in a deal than a two page form. By contrast, Ranking Member Bachus (R-AL) complemented the level of detail and information submitted by auto manufactures for their bailout request.

    (7) Inadequate Oversight: Executive Compensation, Conflict of Interest, CPP Funds. Rep. Kanjorski (D-PA) expressed concern over inadequacy of oversight of TARP. As examples of lack of oversight, he noted that the oversight panel was formed just two weeks ago and confirmation of inspector general just two days ago. Rep. Kanjorski (D-PA) expressed alarm that there no compliance mechanism were in place for executive compensation, conflicts of interest, and usage of CPP funds to inject capital. Similarly, Rep. Biggert (R-IL) said there needs to be far more accountability and transparency weaved into program.

    (8) Concern over Federal Reserve Expenditures. Rep. Castle (R-DE) said that oversight of Federal Reserve actions are not as stringent as oversight of Treasury actions. He said he would welcome hearing in committee of government expenditures made by the Federal Reserve.

    (9) Loan Modification By Servicers / Class Action Lawsuits. Rep. Royce (R-CA) raised the issue that recent class action law suits against servicers have prevented loan servicers from modifying mortgage agreements. He noted a recent class action law suit to block 400,000 loan workouts. He said Congress needs legislation in order to stop class action lawsuits which are stopping loan workouts from happening. Chairman Frank (D-MA) agreed this was an important problem and that something should be done on all levels. Chairman Frank noted that his committee is determined next year to change legislation defining legal rights so that there will not be a continuing ambiguity about services. Chairman Frank noted that Congress included in the legislation that servicers who do what is economically in the best interests of the loan holders should not be sued. However, Chairman Frank said that the government would probably not go so far as to indemnify insurers.

    (10) Insurance Guaranty Program. Rep. Biggert (R-IL) noted that Treasury has yet to set up an insurance guaranty program and called for a concrete timeline from Treasury on when this issue would be addressed.

    (11) Capital Injection Authority. Rep. Garrett (R-NJ) noted that provisions to authorize CPP program were buried in various parts of the text of the bill. He criticized the bailout plan as lacking transparency and oversight, noting he had voted against the bill in the first place. He said that if the usual procedure had been used – e.g. hearings, markups, amendments – would have yielded improved oversight than what we have now.

    II. Issues Raised in Question and Answer Period

    The following summarizes issues raised during the question and answer period, including:

    (1) ensuring re-lending of CPP funds; (2) plans for remaining use of TARP funds; (3) master industrial policy; (4) subchapter S banks; (5) reason for move from illiquid asset purchase program to CPP; (6) foreclosure relief; (7) eligibility of banks based on viability; (8) GAO report/Transparency on how CPP recipients use money; (9) consumer access to credit for cars and houses; (10) upcoming hearing on executive compensation; (11) certainty of the marketplace; (12) bank holding company use of TARP money for commercial purposes; (13) TALF program/underlying assets; (14) mark to market; (15) airports and funding for local infrastructure; (16) lack of consultation with Congress about Treasury initiatives; (17) Chrysler and GMAC application for conversion to bank holding companies; (18) municipal bond market; and (19) role of the TARP oversight committee.

    To recap:

    (1) Ensuring Re-lending of CPP Funds. Chairman Frank (D-MA) said he was disturbed by GAO report on lack of Treasury monitoring on whether banks receiving money are lending money, noting that total loan amounts is accountable even though money is fungible. Mr. Kashkari said Treasury is working with four banking agencies to look at the four quarterly reports they collect, and whether they need more information from banks. Chairman Frank said that the ability to measure relending will be a prerequisite to further funding of $350 billion next drawdown. On broader note, Ranking Member Bachus (R-AL) asked whether Treasury has adopted detailed mechanism to make sure the CPP meets its goals. Mr. Dodaro, GAO, said his recommendations have focused on once applications are approved and money is transmitted to institutions, this is where greater monitoring needs to take place to make sure money is being used as Congress intended.

    (2) Remaining Use of TARP funds. Rep. Kanjorski (D-PA) inquired about remaining use of TARP funds. Kashkari said that the remaining funds would be used for existing programs. In terms of future programs, Treasury has a lot of policy development work going on but there has been no determination made on whether or when to request further $350 billion funds from Congress.

    (3) Master Industrial Policy. Rep. Kanjorski (D-PA) asked whether Treasury would create a master industrial policy. Mr. Kashkari responded that this was not something he had focused on. He said once we get through the crisis, we need to take a step back and look at larger regulatory system to make sure this does not happen again.

    (4) Subchapter S Banks. Ranking Member Bachus (R-AL) asked about Treasury’s work to include subchapter S banks in the CPP. Mr. Kashkari responded that the CPP is broadly a program for healthy banks and that staff are working on how to include subchapter S banks in program.

    (5) Move From Illiquid Asset Purchase Program to CPP. Ranking Member Bachus (R-AL) asked why the Treasury moved away from illiquid asset purchase program. Mr. Kashkari gave an overview of the decision to move toward the CPP instead, noting the scale needed for programs to be successful in the changing economic circumstances.

    (6) Foreclosure Relief. Rep. Waters (D-CA) raised the issue of why Treasury had not done more to prevent foreclosures. She asked why Treasury has not adopted FDIC Chairman Bair’s mortgage modification proposal for homeowners, but only extended a similar plan to Citigroup. Similarly, Rep. Meeks (D-NY) expressed concern about helping homeowners from losing homes to stabilize the market. Mr. Kashkari responded that Treasury is working on more foreclosure mitigation policies. Mr. Kashkari noted work with Fannie and Freddie on loan modification outside of the TARP to use the right tool for the right job.

    (7) Eligibility of Banks Based on Viability. Rep. Neugebauer (R-TX) asked about criteria used by Treasury for purchase of warrants and preferred stock for companies. Mr. Kashkari responded that the guidelines were for healthy banks only, priced with 1% to 3% of value to give same terms to all. Similarly, Rep. Hensarling (R-TX) asked whether the only criteria being used by Treasury for eligibility was viability. Mr. Kashkari responded that Treasury relied on viability assessments of the four regulators to ensure that money only goes to healthy banks.

    (8) GAO Report/Transparency of How CPP Recipients Use Money. Rep. Maloney (D-NY) asked the GAO witness whether the Treasury had the ability to obtain real-time data to ensure money is being used for purposes Congress authorized. Mr. Dodaro, GAO, said the first recommendation in the GAO report was for Treasury to work with the regulators in timely manner. He said that right now, regulators get quarterly information but that could be modified to obtain more frequently. He said Treasury should consider collecting this information to collect information on a company-level basis. Rep. Maloney said she agreed and intends to legislate on this issue. Similarly, Rep. Castle (R-DE) expressed concern that Treasury is reviewing how recipients of CPP funds are using money. Mr. Kashkari said he had a call with the four regulators on how they are monitoring aggregate data and institutional measures of financial institutions of how they use the funds.

    (9) Consumer Access to Credit for Autos and Houses. Rep. Maloney (D-NY) asked what Treasury was doing to help consumers get a loan from a bank for a car or house. Mr. Kashkari highlighted work with Federal Reserve on consumer credit facility to bring cost of credit down for car buyers and student loans. He noted work on giving homebuyers access to mortgages for new houses at 4.5% rate. Later in the hearing, Rep. Cleaver (D-MO) noted to Professor Warren his concern about access of consumers to credit for auto loans. Rep. Cleaver (D-NO) said that that GMAC had admitted to him the high level of credit scores and interest rates needed to finance auto purchases.

    (10) Executive Compensation. Chairman Frank (D-MA) noted he received a letter yesterday from minority requesting a hearing some time next week on executive compensation of CEOs of participants in the program. Chairman Frank said that he thinks it will be hard logistically to accommodate that next week but agrees with the substance of the hearing. He said his committee will have such a hearing at some point with representative samples of CEOs. He said that if next request for $350 billion does not come until January, the hearing may wait until January. Rep. Cleaver (D-MO) voiced outrage over excessive compensation of AIG executives and frustration over Mr. Kashkari’s reluctance to clarify what level of compensation was excessive. Similarly, Rep. Manzullo (R-IL) sharply criticized AIG’s payment of $3 million dollar bonuses to executives, after AIG received taxpayer bailout money. Mr. Kashkari said that he did not know enough about the details of AIG bonuses to determine whether the compensation were excessive.

    (11) Certainty to the Marketplace. Rep. Hensarling (R-TX) emphasized the importance of clarity and certainty for market confidence. He said that by careening from one strategy to another, Treasury has done more to incite the markets and that certainty is needed. Mr. Kashkari said Treasury needs to be on front foot to stabilize the system, but agreed that more clarity to market participants and consumers will help boost confidence.

    (12) Bank Holding Company Use of TARP Money for Commercial Purposes. Rep. Meeks (D-NY) asked what safeguards the Treasury is establishing to ensure that Goldman Sachs and Morgan Stanley and other holding companies which receive TARP funds are not being used to support the non-commercial activities of these bank holding companies. Mr. Kashkari said that by becoming bank holding companies, these companies will come under increased regulatory oversight. Rep. Meeks followed up by inquiring, for example, what would prevent TARP money going to travel agencies or other commercial entities of bank holding companies to qualify for TARP funds. Mr. Kashkari said it is difficult for Treasury to fence money within an organization. Rep. Kanjorksi (D-PA) interjected that perhaps it is a good idea to separate the organizations if the TARP money cannot be fenced in.

    (13) TALF Program / Underlying Assets. Rep. Garrett (R-NJ) asked about the backing on underlying assets of TALF program if there is a default on the asset. Mr. Kashkari gave an overview of the types of assets eligible under the TALF such as securitized student loans, credit card loans, and car loans, and noted the distortion of the pricing of these assets now due to market conditions.

    (14) Mark to Market. Rep. Roskam (R-IL) raised the issue of revisiting mark to market, and need to ensure that regulations are not in place that are draining access to credit. Mr. Kashkari said that mark-to-market is pro-cyclical and exacerbates swings in the market. However, he said that Treasury does not see a better alternative and is an issue SEC is handling.

    (15) Airports and Funding for Local Infrastructure. Rep. Scott (D-GA) highlighted the example of the Maynard Jackson International Airport in Georgia and asked whether TARP resources going to banks can also be used to unfreeze the market for state and local debt so that projects like Atlanta Hartsfield airport can go on. He noted that almost 3000 jobs are at stake. Mr. Kashkari said he is designing programs to get credit flowing to state and local governments, and that they are getting feedback from industry participants. He said banks have an important role to play, but the non-bank sector is also important. Later in question and answer period, Rep. Price (R-GA) further reiterated Rep. Scott’s point about the need to help Atlanta Hartsfield International Airport.

    (16) Lack of Consultation With Congress About CPP. Rep. Cleaver (D-MO) asked why there was no emergency meeting with Treasury and Congress to divert money away from troubled asset purchase to helping banks (e.g., to CPP program). Mr. Kashkari said the legislation was flexible, and that legislation provided flexibility needed to be nimble and adjust to changing circumstances. Rep. Cleaver (D-MO) said that Treasury Secretary Paulson did call Chairman Frank the evening of the notification that the illiquid asset program would be abandoned, but that he told him and did not ask him. Rep. Cleaver (D-MO) said he would have liked for Congress to be consulted first. Mr. Kashkari emphasized that the crisis was intensifying at too fast of a fast rate for delay.

    (17) Chrysler and GMAC Funding and Application for Conversion to Bank Holding Companies. A question was raised inquiring about recent applications by Chrysler and GMAC for conversion to bank holding companies to be eligible for funding under the TARP. Mr. Kashkari responded he could not comment on individual applications.

    (18) Municipal Bond Market. A question was raised concerning how the Treasury may help unlock the municipal bond market. Kashkari indicated that Treasury is looking at working with companies that reinsure the municipal bond market. He said there are various proposals being examined, but did not give specifics.

    (19) Role of the TARP Oversight Committee. Rep. Watt (D-NC) asked Professor Warren whether the members of the oversight committee are planning to do this full-time, or is this a part-time job. Professor Warren responded that this was a part-time job. Rep. Watt followed up asking whether the work of the oversight committee can be taken seriously as a part-time job. He noted that Congress viewed the committee as a substantive role more than a public opinion outreach process.