Panel I of a Hearing of the House Financial Services Committee - Oversight of Implementation of the Emergency Economic Stabilization Act of 2008 and of Government Lending and Insurance Facilities; Impact on Economy and Credit Availability

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REP. BRAD SHERMAN (D-CA): Thank you, Mr. Chairman. I'd like to associate myself with your statements, particularly those dealing with the mortgage foreclosure prevention and the use of TARP funds to achieve that goal.

Earlier in our discussion there was discussion of the intent of the Secretary of the Treasury and the intent of members of Congress being balanced in interpreting this law. I want to point out that under the Constitution Congress writes the law and legislative intent is the only intent that should govern the construction of a statute.

I have a question for the record that I hope all three of you would respond to and that is whether you'll use your influence over banks to remind them of how important it is to lend to credit worthy projects being done by charitable organizations. The work of charities is very important during this recession, and all too often banks refuse to lend or refuse to provide letters of credit to charitable projects because they are concerned about the bad public relations that they would have if they ever had to foreclose. I think it's important that they get some bad public relations for refusing to lend and some pressure from you folks in achieving that objective.

Secretary Paulson, I want to commend you for buying preferred stock rather than toxic assets. First, your approach ensures that we're only bailing out U.S. institutions and not buying toxic assets that were in safes in Beijing on September 20th. Second, you're buying a much more valuable asset. Any ninth grader would tell you -- any 9-year-old would tell you that a toxic asset is less valuable than preferred stock. But I can't commend you on accepting half the rate of return and one-sixth the number of warrants than Warren Buffett was able to get on similar transactions. Our children will be -- have a larger national debt because we have been so generous in the terms on the preferred stock.

I would also point out that, Mr. Secretary, this would bother me a lot except I wasn't in favor of buying toxic assets. But you've basically testified here that October 3rd, you had already decided to change your mind and not buy toxic assets and instead buy preferred stock, and you didn't tell Congress immediately before our vote that you would be going in a different direction. Perhaps I've misinterpreted your comments -- and if I have I'm sure the record will reflect that and if you hadn't made that decision until after our vote on October 3rd. And I gather from your facial expression that's what you're meaning to say.

SEC. PAULSON: Absolutely. This was a --

REP. SHERMAN: Then -- thank you, let me move on.

SEC. PAULSON: This was a rapidly changing --

REP. SHERMAN: Sir, let me move on. I'll accept --

SEC. PAULSON: -- and very seriously difficult situation.

REP. FRANK: Mr. Paulson, the members control the time. It's just -- there's no debate.

REP. SHERMAN: Then I did misinterpret your comments, and if you made the decision after October 3rd I fully understand.

Now under Section 111 of the bill you're supposed to put forward regulations limiting executive compensation to that which is appropriate. You've been remarkably liberal in that you've only imposed by regulations the minimum standard set forth in the statute. And you therefore allow unlimited regular salaries, unlimited bonuses to be declared by boards of directors.

But while you've been so liberal in defining that part of the bill, another part of the bill requires you to define financial institutions eligible for participation under TARP. In fact, the statute explicitly says that insurance companies are eligible, and yet the CPP has issued regulations saying that only depository institutions are eligible. The insurance companies have to go out and buy depository institutions, as noted on the first page of today's Wall Street Journal.

But the issue that I'd like you to address orally is bailing out or providing some sustenance to the automobile companies. We know how important that is to the economy. If you got rid of your CPP regulations and looked at the statute, you would see that auto companies do qualify since they are incorporated under the United States and they are regulated by the United States and its state governments. But instead your definitions in the CPP regulations limit you to just depository institutions.

So the question I have for you, Mr. Secretary, is if the bill, as properly interpreted, allows you to buy preferred stock from the three major auto companies, would you at least buy enough preferred stock to tide them over until the new administration could make a policy decision? Or do you think it's acceptable --

REP. FRANK: If the gentleman wants an answer, we're going to have to wrap that up now.

REP. SHERMAN: -- to have the Obama administration just look at three companies in Chapter 7?

SEC. PAULSON: I've answered this a couple of times. I'll answer it again. And I think it is very, very important to stay with the purpose of the TARP, because this is all about protecting the financial system, avoiding collapse, and recovery. And there is a good deal more that needs to be done before this system is recovered -- the market is functioning as normal; credit is flowing. And that will make a big difference.

Now, with regard to the auto companies, what we've said -- and I think you've heard me say it -- the Congress has acted. You have a bill that was passed, $25 billion bill, Department of Energy. And again, I urge you to modify that, to have a path for making an investment in a viable company.

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