Hearing of the Senate Banking, Housing and Urban Affairs Committee - The State of the United States Economy and Financial Markets
Statement
SEN. JACK REED (D-RI): Thanks very much, Mr. Chairman. Thank you, gentlemen, for your testimony today. And --
We are all engaged in dealing with a host of very complicated, interrelated issues. But when you step back one of the most sobering factors, that's been alluded to by the chairman, is that if we just let things sort of work out over the next several months, there could be as much as a 20 (percent) to 30 percent devaluation in the value of homes in the United States, which some people have estimated to be on the order of 4 (trillion dollars) to $6 trillion dollars in household wealth.
That is going to be a huge shock to the quality of life of most Americans. It's going to translate into whether children go to college or which college they go to. It's going to translate into whether they're prepared for retirement. It's going to translate into whether or not they can cope with a serious health crisis without insurance.
And frankly, that is what's on the -- concern in the minds of my constituents right now, and the clock is ticking much faster than I get the sense that the markets are moving to these corrections. Which puts, I think, huge pressure on not simply letting the market work out, but to take much more deliberate, much more focused, much more concentrated action. Because at some point, the American people will demand an even more affirmatively than they are today.
That said, I think there's two major challenges. One, timely, effective action to ease this liquidity crisis. But second, a very sober, careful review of how we got here by the regulatory agencies, so that we don't repeat these mistakes. And we've seen this happen before.
Enron collapsed; we had FASB produce rules about special corporate entities. FASB got beaten back to move from a more specific rule to more principles-based. And now, as Chairman Cox indicated, they're re-thinking that. We've been there before.
And I -- I'll ask just a question to Chairman Bernanke first. You're not only the monetary policy leader in the country, but you also are the major regulator of financial institutions. You have, on a daily basis, I would presume, hundreds of Federal Reserve examiners, agents, in these institutions looking at everything they're doing. Have you looked back now and begun a searching review, an after-act report of the lapses that allowed these situations to develop?
MR. BERNANKE: Senator, certainly we are looking at all those issues. I think I should say that this is very much an international issue, that other countries as well are very much involved in this. And there is, in fact, an elaborate process underway which is involving, first of all, each individual agency doing extensive analysis.
We at the Federal Reserve have looked at our practices, have looked at a variety of other issues. Those are being combined together in a joint analysis with the president's working group, of which we all three are members. And that in turn is feeding into international bodies, such as the Financial Stability Forum and the Basel Committee, which are trying to develop lessons learned -- not just for the Federal Reserve or for the United States, but for the entire world in terms of our regulatory processes and approaches.
So we have thought about it very extensively, both in terms of our own agency, but there is, in fact, a very substantial international effort underway and, in fact, the financial stability forum at the G-7 meetings last weekend just released a preliminary report. We expect to see an extensive report at the next meetings in Washington -- I think it's in April.
SEN. REED: And these reports will be publicly distributed with very specific analysis of the steps that might have been taken previously by the Fed, SEC, and the Treasury Department?
MR. BERNANKE: They will be very principles-based. They will be talking about the kinds of approaches we need to take in order to make sure the problems don't happen again. But yes.
SEN. REED: Well, I appreciate that, Mr. Chairman, but I think at some point you've got to drill down to the specifics of adequacy of your procedures, adequacy of the staffing, cooperation from financial institutions. Why are -- you know, we were aware of these SIVs and these SPEs for years and years and years. Suddenly they're roaring and unstable and destabilizing balance sheets.
Let me switch to a slightly related question. You know, you both -- you and the Treasury secretary have said that the banks have to reveal very quickly their losses. Have they revealed their losses to you? You say in your statement there's still some uncertainty about what they have on their balance sheets. I would think that would be the first point of clarification. Are you -- do you feel that you're getting the kind of --
MR. BERNANKE: We're getting very good information. The difficulty is that for many of these assets, a clear, succinct, sharp measure of the loss is not always easy, because many of them are not traded, frequently, in markets. They're very idiosyncratic. And their valuations can change from day to day, depending on, for example, how the market is valuing sub-prime mortgages.
So it's not an easy problem. The FASB has set up a set of standards which divides measurements in to three levels: those assets which have a market value; those which can only be addressed through modeling, which means using some market information but also some assumptions and models internally; and third, those categories which are mostly judgment. And so inherently it's very difficult to get sharp answers.
But Chairman Cox can add to this, but we certainly are getting good cooperation and we are urging our institutions to disclose as promptly and as effectively as possible.
SEN. REED: My time's expired, Mr. Chairman.
SEN. DODD: Thank you very much.
Senator Allard.
SEN. REED: Thank you
BREAK IN TRANSCRIPT
SEN. JACK REED (D-RI): Thanks very much, Mr. Chairman. Thank you, gentlemen, for your testimony today. And --
We are all engaged in dealing with a host of very complicated, interrelated issues. But when you step back one of the most sobering factors, that's been alluded to by the chairman, is that if we just let things sort of work out over the next several months, there could be as much as a 20 (percent) to 30 percent devaluation in the value of homes in the United States, which some people have estimated to be on the order of 4 (trillion dollars) to $6 trillion dollars in household wealth.
That is going to be a huge shock to the quality of life of most Americans. It's going to translate into whether children go to college or which college they go to. It's going to translate into whether they're prepared for retirement. It's going to translate into whether or not they can cope with a serious health crisis without insurance.
And frankly, that is what's on the -- concern in the minds of my constituents right now, and the clock is ticking much faster than I get the sense that the markets are moving to these corrections. Which puts, I think, huge pressure on not simply letting the market work out, but to take much more deliberate, much more focused, much more concentrated action. Because at some point, the American people will demand an even more affirmatively than they are today.
That said, I think there's two major challenges. One, timely, effective action to ease this liquidity crisis. But second, a very sober, careful review of how we got here by the regulatory agencies, so that we don't repeat these mistakes. And we've seen this happen before.
Enron collapsed; we had FASB produce rules about special corporate entities. FASB got beaten back to move from a more specific rule to more principles-based. And now, as Chairman Cox indicated, they're re-thinking that. We've been there before.
And I -- I'll ask just a question to Chairman Bernanke first. You're not only the monetary policy leader in the country, but you also are the major regulator of financial institutions. You have, on a daily basis, I would presume, hundreds of Federal Reserve examiners, agents, in these institutions looking at everything they're doing. Have you looked back now and begun a searching review, an after-act report of the lapses that allowed these situations to develop?
MR. BERNANKE: Senator, certainly we are looking at all those issues. I think I should say that this is very much an international issue, that other countries as well are very much involved in this. And there is, in fact, an elaborate process underway which is involving, first of all, each individual agency doing extensive analysis.
We at the Federal Reserve have looked at our practices, have looked at a variety of other issues. Those are being combined together in a joint analysis with the president's working group, of which we all three are members. And that in turn is feeding into international bodies, such as the Financial Stability Forum and the Basel Committee, which are trying to develop lessons learned -- not just for the Federal Reserve or for the United States, but for the entire world in terms of our regulatory processes and approaches.
So we have thought about it very extensively, both in terms of our own agency, but there is, in fact, a very substantial international effort underway and, in fact, the financial stability forum at the G-7 meetings last weekend just released a preliminary report. We expect to see an extensive report at the next meetings in Washington -- I think it's in April.
SEN. REED: And these reports will be publicly distributed with very specific analysis of the steps that might have been taken previously by the Fed, SEC, and the Treasury Department?
MR. BERNANKE: They will be very principles-based. They will be talking about the kinds of approaches we need to take in order to make sure the problems don't happen again. But yes.
SEN. REED: Well, I appreciate that, Mr. Chairman, but I think at some point you've got to drill down to the specifics of adequacy of your procedures, adequacy of the staffing, cooperation from financial institutions. Why are -- you know, we were aware of these SIVs and these SPEs for years and years and years. Suddenly they're roaring and unstable and destabilizing balance sheets.
Let me switch to a slightly related question. You know, you both -- you and the Treasury secretary have said that the banks have to reveal very quickly their losses. Have they revealed their losses to you? You say in your statement there's still some uncertainty about what they have on their balance sheets. I would think that would be the first point of clarification. Are you -- do you feel that you're getting the kind of --
MR. BERNANKE: We're getting very good information. The difficulty is that for many of these assets, a clear, succinct, sharp measure of the loss is not always easy, because many of them are not traded, frequently, in markets. They're very idiosyncratic. And their valuations can change from day to day, depending on, for example, how the market is valuing sub-prime mortgages.
So it's not an easy problem. The FASB has set up a set of standards which divides measurements in to three levels: those assets which have a market value; those which can only be addressed through modeling, which means using some market information but also some assumptions and models internally; and third, those categories which are mostly judgment. And so inherently it's very difficult to get sharp answers.
But Chairman Cox can add to this, but we certainly are getting good cooperation and we are urging our institutions to disclose as promptly and as effectively as possible.
SEN. REED: My time's expired, Mr. Chairman.
SEN. DODD: Thank you very much.
Senator Allard.
SEN. REED: Thank you
BREAK IN TRANSCRIPT
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