Hearing of the House Budget Committee - Near-Term Economic Outlook
Statement
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REP. KAPTUR: Thank you.
Welcome, Mr. Chairman. I can't see you, but I know you're there.
I thought I might begin with a brief perspective, having been here over two decades now, and then ask a series of four questions that can be answered very briefly or for the record.
In the last two decades, what I have witnessed here in the housing finance sector as the result of legislation passed by this Congress, is a great power shift in housing finance and a great responsibility shift. And that power shift has been from local communities and local community banks to financial centers very far from where my constituents live. We have seen local banking institutions eliminated. Our thrift, which used to promote savings and provide housing finance, no longer exists. Wall Street was empowered and we have gone as an economy from a pro-savings to a pro- debt, consumer credit, credit card -- I think delinquencies are at all-time highs. We've changed the whole way we though about savings and investments, including in the most important sector that any family holds savings, and that is in their homes.
The theory back when all of this happened -- which I fought against and didn't win -- was that we would never have to worry again about housing crunches leading this nation into recession because securitization was going to save us. And it was offered as a cure-all to prevent recession. The old mantra of, well, the local community banker who looked at character, collateral and collectability, as well as community responsibility, was gone, and we moved into an era now of very cursory credit evaluations, very risky sub-prime and accounting practices and securitization. So the whole system was turned inside out.
Local portfolio lending was replaced by international securitization. Many communities, like those I represent, became derivative. They basically had no local institutions left but for some credit unions and some small rural banks, and all that power shifted to the megabanks and investment houses.
Here are my questions: Number one, what firms on Wall Street and which financial regulatory agencies here in the nation's capital are most responsible for the securitization of sub-primes into the international market? Number one -- which firms and which regulatory agencies are most responsible for the creation of those practices.
Number two, in order to pay for this fiscal stimulus that we are talking about here, should the bankers, financiers and board members of those institutions who brought us to this sub-prime debacle and were hugely rewarded, while obviously failing to do even the most minimal due diligence, be required to pay back their salaries and bonuses to the people of the United States?
Number three, seeing as how you were the former CEO of Goldman Sachs, what percentage level of investment -- were you not --
MR. BERNANKE: No, no, no. (Laughs.) You're confusing me with the Treasury Secretary.
REP. KAPTUR: I got the wrong firm?
MR. BERNANKE: Yeah.
REP. : (Off mike.)
REP. KAPTUR: Paulson. Oh, okay. Where were you, sir?
MR. BERNANKE: I was the CEO of the Princeton Economics Department. (Laughter.)
REP. KAPTUR: Oh, Princeton. Oh, all right. Sorry. Sorry, I got you confused with the other one. I'm sorry. Well, I'm glad you clarified that for the record.
What percentage level of investment in a bank or investment house do you consider to constitute effective control -- 10, 20, 30, 50 percent?
And finally, as we consider this fiscal stimulus package, how can we design it, structure it, to create the greatest wealth creation in our country and prevent the draining off of those precious dollars toward hollow expenditures by consumers or by the government of the United States. How can we create wealth creation with whatever small portion we're able to direct toward investment in this country?
Thank you.
MR. BERNANKE: Congresswoman, those are quite a list of questions.
You're quite right -- quite correct that there's been a major shift in mortgage lending from what's called portfolio lending -- banks who lend for their own portfolio, including community banks -- to a securitization model. And that, by the way, I think the important institution that was involved in that was Fannie Mae, which essentially created the securitization market for mortgages. That was viewed as very positive. I still think it's basically positive because it makes the mortgage market less dependent on flows of deposits into particular banks or thrifts. There were periods in the past when for whatever reason deposits flowed out of local banks and thrifts, and that made mortgage credit more difficult to obtain. And so the idea that there would be essentially direct access to capital markets was viewed as an important step in terms of freeing up the housing market and housing market finance.
Now, as we've learned and you correctly point out, the securitization model is not without its problems, and we've seen some of them: the so-called originate-to-distribute model, which is what we've been seeing. In particular, the question arises when you have one firm making the loan and another investor holding the loan, does the firm that makes the loan have appropriate incentives to make sure it's a good loan -- a well-underwritten loan? If you're making the loan for your own portfolio, you have a strong incentive to do so. If you're making it just to sell it off, you may have much less incentive, and that clearly has been part of the problem that we saw in the sub-prime situation going back.
REP. KAPTUR: Sir, could I ask you: Does Freddie Mac have as much responsibility as Fannie Mae in the change in that securitization process?
MR. BERNANKE: Freddie came later but has played also an important role. That's essentially what those two firms do is they buy mortgages from banks and other lenders and they sell them on the secondary market. They securitize, essentially.
So as we go forward, I think we're going to have to look very carefully at that originate-to-distribute model, make sure that incentives are properly aligned and make sure that transparency is adequate so that people know -- investors know what they're buying.
I do want to indicate and take note of the fact that the Federal Reserve has recently put out for comment an extensive set of rules and regulations that would apply to all lenders in the United States that would try to prohibit some of the practices and underwriting practices that contributed to some of these problems. But I do think that there's a major set of issues here we have to look at going forward.
I'm not going to comment on the CEO question. I don't think that's really my department.
REP. KAPTUR: But do you think that they might have responsibility? Do they have some responsibility to the people who --
MR. BERNANKE: Well, some of them have been fired. Some of them have lost money. Certainly their firms have taken significant write- downs. And so again, as I said before, it's hardly the case that these firms are protected from the consequences of what they'd done, and it's not our intention -- either as a central bank or as a regulator -- to protect those who made mistakes from the consequences of those mistakes.
REP. KAPTUR: (Inaudible.)
REP. SPRATT: Mr. Chairman, Ms. Kaptur, we've got to move on because -- he has to leave here at 12:30, so we've got to move ahead with the --
REP. KAPTUR: Could I just ask the chairman, what percentage level of investment in a bank or investment house would the chairman consider effective control -- 10, 20, 30, 50 percent?
MR. BERNANKE: It depends. It depends very much on the governance structure -- you know, how many directors and what role the investor plays in the management of the firm. If you're thinking of the recent capital investments by a number of foreign wealth funds, for example, those have been relatively small, and they have in general not involved any control rights in the firm.
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