Hearing Of The Senate Banking, Housing And Urban Affairs Committee - To Consider The Nomination Of Herbert Allison To Be Assistant Secretary of Treasury For Financial Stability

Statement

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SEN. DODD: Good morning. The committee will come to order.

Let me welcome all of you here this morning. And let me say that my friend and colleague, Senator Shelby, the former chairman of the committee, will be with us shortly this morning. We've been joined -- I see Senator Schumer, Senator Tester are here, and others.

Let me welcome our nominee this morning, Mr. Herb Allison, who is our nominee to be assistant secretary-designate for Financial Stability at the Department of the Treasury. And we welcome you as well, Mr. Allison. And let me begin by thanking you for your willingness to serve during these times.

I'm going to take a couple of minutes in some opening comments, and I'll ask my colleagues whether or not they'd like to share any opening thoughts on this matter, and then we'll turn to you for some opening statements. As soon as Senator Shelby comes in, I'll also interrupt wherever we are to give him a chance to make any opening comments, and then we'll get to some questions for you if we can.

So let me begin by welcoming everyone here. It's no overstatement to suggest that this position for which you have been nominated, that of assistant secretary for the Office of Financial Stability within the Treasury Department, is among the most important this committee will consider in this term of Congress. You have inherited a giant task, none bigger than overseeing the Troubled Assets Relief Program.

The Office of Financial Stability was created as part of the Emergency Economic Stabilization Act. Congress believed that the size of the program, $700 billion at the time last fall, required the full- time attention of skilled professionals to oversee and manage purchases made under the program.

At first, some resisted the call to establish such an office, arguing that it would create a layer of bureaucracy within the Treasury. But I and many of our colleagues, including Senator Schumer, Senator Tester, who were deeply involved in the formation of the Emergency Economic Stabilization Program last fall, believed it was a very important mechanism to provide accountability and transparency so that the public could understand the government's decisions.

Now, with 12 TARP initiatives announced by Treasury, the need for a dedicated office to ensure the proper management of their money, the public money, taxpayer money, was obviously clear. And proper, competent management is what the TARP program desperately needs. We need strong, steady management to ensure that the core purposes that Congress outlined with the Emergency Economic Stabilization Act -- protecting home ownership, college funds, retirement accounts, life savings and jobs -- are fulfilled by the TARP.

TARP funds must be used to get credit flowing again to families to pay for homes, a car or college tuition, and to small businesses to stock inventory and to meet payrolls, because with 10,000 foreclosures every day being filed and 20,000 layoffs occurring every day, families and small businesses still need our help desperately in this country.

Thankfully, we've begun to see a sharp change in direction for the TARP program, from the Home Ownership Preservation Program, which draws upon the $75 billion in TARP funds, to more accountability from firms which receive taxpayer assistance. But as the news this week that General Motors was filing for bankruptcy reminds us, we are hardly out of the woods. And I would add that this committee intends to hold another hearing next Wednesday to examine the administration's plans to restructure GM and Chrysler.

There are also real questions about the future of the public- private partnership program -- investment program, excuse me -- to purchase so-called legacy assets from banks and other institutions, which have put an enormous strain on our financial system.

When the Treasury secretary was here a few weeks ago, I asked him if this program would work and if he believed banks would still be willing to sell these so-called toxic assets at discounted prices, given the better-than-expected stress results that were completed about two weeks ago. He said that he expected those programs to begin operating over the next six weeks. But now some are arguing that the program may no longer be necessary because of the unanticipated strength of these financial institutions.

And so, Mr. Allison, the responsibility falls to you to provide the kind of steady leadership our country needs to navigate through the complexities of this economic crisis. With America's financial system continuing to hang in the balance, this office which you'll be heading needs a strong and vigilant manager, someone who can follow through on commitments made and maximize the return to taxpayers, as well as keeping them well-informed in understandable language as to what is occurring, why it's occurring, what our plans are, and where we're headed, where the shortfalls are, the pitfalls, what's not working, as well as what is working, in clear, clear language.

There's a tremendous difficulty for the public, as well as many members up here, to understand on a daily basis how this all is unfolding, how it is working. We need someone who will listen, who is responsive to legitimate concerns raised by the TARP oversight bodies, makes course corrections when necessary, keeps a watchful eye to prevent any conflicts of interest that might arise, and keeps this committee very well-informed.

We'll have to determine some way to do this, but almost on a regular basis, so that we're knowledgeable about any things you see that we ought to be aware of, rather than just waiting for a hearing process to occur before we discover it or read about it in the newspapers. And we'll need someone who is judicious when it comes to committing the remaining TARP funds as well, estimated at some $109 billion, so (one can ?) ascertain which areas of our financial system require assistance and which do not.

Above all, we need someone who can inspire confidence, who can articulate a clear vision to the public and policymakers regarding the role the TARP program can and must play in helping our economy recover.

Mr. Allison, you know as well as I that you face a difficult road ahead, as I'm sure you discovered during the last several months overseeing Fannie Mae. There'll be no parades on the National Mall should you succeed, in my view. But I hope you will use your diverse professional background in the fields of finance, retirement services and education to fulfill the core purposes that Congress outlined with the Emergency Economic Stabilization Act.

You have an incredible background. It really is remarkable. When I looked over the experiences you've had in these areas of finance, of retirement issues, of education, you're tremendously well- suited to do this, in my view.

You've had a distinguished academic career. You served our country with great distinction -- in the Navy, during the Vietnam conflict, a graduate of Stanford as well as Yale undergraduate degree. So you really have the tools and the experience and the background, I think, to make a significant difference.

And I personally want to say I'm excited about your nomination. I think this is going to be a great opportunity for us to get this right and to give the country that renewed sense of confidence about how this program is working and why it's in their interest that we succeed with it.

You and your family have epitomized the importance of public service. You now have a unique opportunity to affect the role that our financial markets and institutions play in the lives of literally virtually every American citizen. In many ways you will hold the keys to the future of housing, financial and economic crises that we're currently encountering. And you have a remarkable opportunity to make a difference for millions of Americans, as I know you are aware.

I know you have some family members here as well this morning. Why don't you take a minute and let's introduce them as well. Can we do that before you start?

MR. ALLISON: (Off mike.)

SEN. DODD: Welcome.

MR. ALLISON: (Off mike.)

SEN. DODD: What is it?

CAPT. : Captain in the U.S. Navy, sir.

SEN. DODD: Well, welcome.

CAPT. : Thank you.

SEN. DODD: Surface ships or submarines?

CAPT. : Surface.

SEN. DODD: Oh, well. I thought you might have had some experience in Groton, Connecticut.

Well, let me turn to Senator Tester.

SEN. JON TESTER (D-MT): Thank you, Mr. Chairman. And those introductions cleared up a lot, because when I came in, I met Mr. Allison in the back room and I walked out here and I saw his brother George and I thought, "Wow, how'd he get out here so quick?" (Laughter.)

SEN. DODD: He's going to be good.

SEN. TESTER: (Inaudible) -- very, very good.

Thank you, Chairman. And I want to thank you for calling this hearing.

And, of course, welcome, Mr. Allison. I want to echo the chairman's comments on thanking you for your willingness to serve and your willingness to appear before the committee today.

It was Milton Friedman that said that nothing is so permanent as a temporary government program. We need to make sure that TARP does what it needs to do and then wind it down and get the taxpayers (paid ?) back as soon as possible. I know you feel that way.

I want to commend you, Mr. Allison, for your willingness to serve and for your efforts at Fannie Mae. I also want to urge you to be mindful of what I think we're going to need to do to get out of this economic recovery. We need to be mindful the successes of this economic turnaround will be driven by small business and middle-class families.

It's important, as I said earlier, to repay the taxpayer as quickly as possible, and not to just reinvest the funds because we have them. I think this money was specifically put out for a specific reason. We need to keep that in mind as we move forward. And we also need to understand the community banks play a critical role in the life bloods of our small rural communities across this country, and they really weren't the cause of the economic problem, at least from my perspective. And maybe most difficult is we need to deal with the too-big-to-fail problem that comes out. And if you can help us in that, I think that the sooner we can deal with that, the better off this country is going to be in general.

With that, Mr. Chairman, I look forward to the testimony of Herb Allison and I look forward to a quick confirmation.

SEN. DODD: Thank you.

I just noticed the arrival of our colleague from Colorado, Senator Bennet. I'm saying it with some deliberation and will give you a chance to get seated over there. Would you care to make any comments at all on the case of our nominee?

SEN. MICHAEL BENNET (D-CO): Thank you, Mr. Chairman.

I'd just like to thank you, Mr. Allison, for being here. Thank you for your willingness to serve. I, unfortunately, have an Agriculture Committee hearing that I have to go to. But I just want to stress, as those coming in -- I heard Senator Tester say this, how important small business and community banks are to this recovery effort. We've had a number of conversations here with the Treasury secretary on that subject.

We have a case of our own in Colorado relating to a bank failure, one of our agricultural banks that's under review by the Treasury Department. And my perspective is the same as Senator Tester's, which is that until we begin to see this involvement beginning to take place at the local level, our public is still going to wonder how we're spending our taxpayers' money.

So I wanted to just underscore that for you. I'm sure you know that and look forward to hearing your thoughts about that and to working with you as a member of this committee. Thank you for being here.

Thank you, Mr. Chairman.

SEN. DODD: Thank you, Senator, very much.

And Mr. Allison, welcome, again, to the committee. We're happy to hear your opening comments.

MR. ALLISON: Thank you very much, Chairman Dodd and other members of the committee. I'm honored to be before you today.

First I want to thank President Obama and Secretary Geithner for the trust they've shown in asking me to serve. I also want to thank you and your staff for the time you've spent acquainting me with your perspectives on the financial crisis and the measures to address it.

Before I review my background and my plans for the Office of Financial Stability, if confirmed, I want to thank my wife again of 35 years, Simin, and my sons, John and Andrew, for their steadfast support over those years.

I began my career, as the chairman said, as an officer in the U.S. Navy, spending four years on active duty, including a year in Vietnam. After attending business school, I joined Merrill Lynch and spent 28 years there, leaving as president in 1999.

At Merrill I held many positions in finance, human resources, investment banking, capital markets and general management.

In 1998, I played a central role in unwinding long-term capital management, the hedge fund that a decade ago presented a systemic risk to our banking system.

I learned from my experiences at Merrill that the long-term success of financial institutions depends on sound corporate governance, including independent checks and balances, tight control over risk, and executive compensation geared to long-term performance on behalf of clients as well as shareholders. At Merrill Lynch, I contributed to strengthening those governance practices in the 1990s. Since leaving Merrill Lynch a decade ago, I've led two other major financial institutions through transitions necessary for their long- term success.

In 2002, I became chairman and C.E.O. of TIAA-CREF, a leading provider of retirement and asset management services. We adapted the company to changing markets, created independent risk management and doubled the company's capital so we could withstand a harsh investment climate. As a result, TIAA-CREF is now one of very few financial companies that carry triple-A ratings. And during my tenure, TIAA- CREF became the first company in the Fortune 100 to allow its stakeholders an advisory role on executive compensation.

In September of 2008, I was named C.E.O. of the Federal National Mortgage Association as that company was placed into government conservatorship. The crisis that devastated Fannie Mae's liquidity and capital base also threatened millions of American homeowners with foreclosure. New management had to shift the company's focus from maximizing profit and market share to helping hard-pressed American families stay in their homes. As a result, Fannie Mae is the agent for the President's Home Affordable Refinance and Modification programs which offer financial relief to millions of Americans.

Members of the committee, the Financial Stability program is essential to President Obama's and Secretary Geithner's plans for recovery. Our economy declined sharply last year, in part, because credit stopped flowing. Without access to credit, small businesses cannot buy their new equipment, raw materials and inventory that they need to expand, and larger businesses need well-functioning credit markets as they adjust to the changing nature of the global marketplace.

If confirmed, I will keep in mind that the financial crisis isn't mainly about banks. It's about alleviating the real hardships Americans are facing every day. I will strive to be a prudent investor on behalf of the American people; to protect the taxpayer who've entrusted us with so much of their money.

So, let me tell you what my top priorities will be if you decide to confirm me. First, I will carefully review the controls over managing the taxpayers' money, giving special attention to the compliance with laws and directives, managing risks and internal audits. I will work closely with the special inspector general, the Government Accountability Office, the Financial Stability Oversight Board, the Congressional Oversight Panel, and the committees of Congress to assure the accountability and oversight that the American people demand.

Second, under the direction of Secretary Geithner, I will continually strive to maximize the effectiveness of financial stability programs, restoring soundness to financial institutions and liquidity to our markets.

And finally, as Secretary Geithner has directed, I will emphasize transparency and interaction with Congress so that you and the American people will know what we're doing with their money, why we're doing it, and how it's making a difference to our economy.

Members of the committee, let me close by thanking you for considering my nomination as assistant secretary of the Treasury for financial stability. I was raised by a family that has always valued public service. My father spent much of his career as a special agent in the FBI. My dad's father worked in the U.S. Department of Agriculture here in Washington, D.C.

My mother's father was sheriff of Sioux Falls, South Dakota. And my brother, George Allison -- with me today, retired with the rank of captain after 28 years in the U.S. Navy. Having started my own career in the Navy, I'm honored and inspired by the opportunity to return to public service. Thank you very much.

SEN. DODD: Thank you very, very much.

In our conversation, I didn't know that your dad had been in the FBI. My father was an FBI agent -- (inaudible) --

MR. ALLISON: Really?

SEN. DODD: In fact, his first post was in Sioux Falls, South Dakota. (Laughter.) And long before I was born, by the way.

MR. ALLISON: (Laughs.)

SEN. DODD: I might have been raised there. -- (inaudible) -- (laughter) -- over the years. Well, thank you.

And we're joined by Mark Warner -- Senator Warner of Virginia.

Mark, do you have any opening comments you'd like to make before we?

SEN. MARK WARNER (D-VA): No. Senator Tester told me, since I was late, I had to reserve my comments to additional time.

SEN. DODD: (Laughs.) Well, Jon runs the show around here, so we appreciate it.

Well, let me start with some questions. And I'm going to -- I'm going to leave the clock off here. And, in fact, I'm going to invite my colleagues, since there are just three or four of us here, to have more of an informal conversation with you here. So, feel free, as colleagues, if I start a line of questioning, and you got a thought along the same line, jump right in here, so we make this, in a way, more cohesive in that sense.

I guess, one of the places to start -- let me start with this, SIGTARP noted that since TARP's inception the program's scope, size and complexity have dramatically increased. I made note of this in my opening comments when I mentioned the 12 separate initiatives under TARP that -- around today. Some of these interact with the Federal Reserve, some with the FDIC, some with, obviously, private investors that we've discussed as well.

I wonder if you could begin -- and I think some of this you mentioned in your steps, the initial steps you intend to take, but I'd like you to expand on this in how you would assure this committee, and the public at large, the effective management of such a complex program, that involves already interaction with almost every other federal agency that's directly or indirectly involved with economic recovery in the country.

And -- (inaudible) -- that I've been joined now by our colleague from Alabama, and so let me interrupt myself and ask my friend and colleague if he'd like to make some opening comments.

SEN. SHELBY: Mr. Chairman, I've -- I was late. I've been in the Appropriations committee meeting with Senator Mikulski. We have the FBI director there. But, I told them we also have a very important hearing on this nomination here in the committee. I would ask that my opening statement be made part of the record. I might have a question in a few minutes.

SEN. DODD: Great. Terrific.

SEN. SHELBY: Thank you.

SEN. DODD: We just heard, by the way, that Herb Allison's father was an FBI agent for many years, so it's a timely connection --

SEN. SHELBY: It is. Very good. He's got a presumption in his favor (right now ?) --

(Laughter.)

MR. ALLISON: Thank you.

SEN. DODD: Well, why don't you begin with that.

This is -- (inaudible) -- . You've been involved in complex entities in the past -- obviously, at Merrill, and Fannie and TIAAF- CREF (sic), and so forth, so you have a background in this. But, give us some sense, because it seems to us every time we turn around here there's some new activity involved with the TARP program, and wondering how we get our arms around this. And it's getting more and more complex in understanding how these resources are being used. But, give us some sense of how you'd approach this.

MR. ALLISON: Yes, sir. Thank you very much for the question.

Actually, one of my first steps, as I joined the Treasury, was to contact the special inspector general, Neil Barofsky, and ask to meet with him. We've been meeting every week since. I think he plays a very important role in protecting American taxpayers, and I want to do all I can to work with him, going forward.

As you well said, this is an extremely complex and very large program. It requires vigilant control. One of my first acts will be to meet with our people in Compliance, as well as our own internal audit people, people in the legal area, to reexamine all of our controls over the financial stability programs.

Secondly, we are building our information systems even further so we can monitor the performance of each of these programs, monitor these controls. I'm having -- will have, when I'm confirmed, weekly meetings with the management team to go over all those metrics. We're going to be inviting in members, and meeting with the Congressional Oversight Panel and the other oversight groups, including the GAO, and seeking their guidance as well to make sure that this program is well controlled and highly transparent to all who have to oversee it.

SEN. DODD: Well, let me -- let me jump to the issue of foreclosures. There was an article in one of the leading newspapers in the country yesterday about concerns over whether or not the foreclosure mitigation program -- which we've been so actively involved in on this committee for the last several years, is working very well. The administration has dedicated $50 billion of TARP funds for foreclosure prevention mitigation through a loan modification program. I, and most members of this committee, strongly support that effort.

We've tried various ideas as to how this would work. And, obviously, when there's 23 of us up here trying to craft something, you get a lot of different ideas that can make up that decision. And all of us, I think, understand as well -- and while we may debate about how many causes conflicted -- or contributed, rather, to this crisis, I think all agree that a major cause was, of course, the residential mortgage market, the subprime lending, the predatory lending that went on.

And so any effort to address all of this absolutely demands, insists that we do everything we can to try and keep as many people in their homes -- the 10,000 people a day with their foreclosure filings, every single day in this country, and the numbers may increase in the coming weeks and months. So, the concern is about whether or not this program is going to work very well.

It raises two issues, in my mind, given the apparent resistance on the part of servicers to participate in this program. First, we need good data on how many loans are being modified or refinanced under the -- in the HOPE for Homeowners Program; how many are being rejected for assistance, in order to hold the receiver -- servicers accountable for their promises; and we need that data made public on a servicer-by-servicer basis. I wonder if you might commit to doing that very quickly.

And secondly, there needs to be some process by which homeowners or consumers can raise concerns about the way the process is working. I have two thoughts on this. Either creating an ombudsman -- in a sense, that gives people an opportunity to understand all of this, dedicated to loan modification. Or perhaps we ought to ask the special inspector general to oversee compliance with foreclosure prevention programs. I wonder if you might share some thoughts.

This goes to the heart of this in so many ways. If this fails, and we're not making the kind of effort -- (inaudible) -- "making the effort," but if the effort is not succeeding in this area, and we end up with a new wave of foreclosures coming in, as we could, swamping the kind of efforts that are being made -- this thing is beginning to gain traction, things are beginning to improve, confidence and optimism clearly seem to be getting better. And what none of us want to see is this, all of a sudden, stalling out and falling back. If it does, to regain that momentum again, I think, will be a lot harder than it was in the initial effort.

So, this is a critical moment, it seems to me, not to lose that momentum, however slight it may be, but certainly momentum heading in the right direction for the first time in months, in my view.

But failure in this area I think would throw us back in ways that would make it very difficult to recover.

And so I'd be very interested in the ideas and how you can -- I don't think we all want to wait weeks or months to find out whether or not this is working or not. This concerns it not working as well as all of us up here would like it to work and we need to know whether or not we need to do something. What can you do? What can the administration do to get this back on track again.

MR. ALLISON: Yes. Yeah. Thank you for your question and your thoughts, Mr. Chairman. I fully share your concerns about this crisis of foreclosures and defaults and mortgages across the country. Millions of Americans have been affected by this. There are many desperate households today, anxious to hold on to their homes and that's why the president and the Treasury secretary have made this one of their top priorities.

And the Home Affordable Program, I think, is an extremely effective tool. It's going to take time to really ramp up and reach full scale. And as you well said it's important that the Congress and the public is informed about the performance of these programs. And I would pledge to you that if I am confirmed one of my first acts will be to reexamine our information systems and our reporting. And I know that the Treasury is pulling together more information as we speak about this program.

I think we have to be agile as we look at this program as well. Let's see how it's working. Not working as effectively as it needs to. We'll make every effort to make it more efficient and more effective and to reach more people.

What's extremely important in dealing with the mortgage crisis is to reach out to as many people as possible. People are fearful about losing their homes. They're fearful about contacting their bank or their servicer to describe their problem for fear that that could cause itself a foreclosure on their house.

We have to reach out and tell people programs are available, banks are willing to work with you, Fannie Mae and Freddie Mac are willing to work with you. You can go to the Financial Stability dot gov website if you are a homeowner who's concerned and get more information and contacts, people who can counsel homeowners how best to hold on to their homes.

SEN. DODD: But the servicers need to do this as well. You know, we carved out that safe harbor provision, which was controversial, to insulate them against lawsuits from investors. And we -- frankly, the investor community spoke up and said, you know, you're breaking contracts here and they were right. But we understood if we didn't do that the argument would be, look, we'd like to help out these homeowners but we can't face the possibility of an overwhelming number of lawsuits by investors who will sue us for engaging in modifications.

So we insulated them from that problem. What are the servicers doing? Servicer by servicer I want to know what they're doing out there. I mean, the homeowner is reluctant, you're right. The servicer shouldn't be reluctant in light of what we've done here for them to create that safe harbor and other provisions.

So I'd like to know what they're doing and whether or not we're probing those servicers to find out why they're not stepping up if in fact they're not doing that.

MR. ALLISON: Mr. Chairman, thank you for your question. And at least 14 of the top servicers in the country have already signed up and are already active in this program and they account, including Fannie Mae and Freddie Mac, for over three-fourths of the mortgages in America.

So this is moving ahead. I will say that this is an extremely complex, large scale program. It takes time to fully get to speed. It's moving ahead rapidly. I think we're going to see over the next few months reaching out to even more people. It's encouraging that already over 100,000 offers for mortgage modifications have been sent out to people. We've received millions of contacts on the website, people wanting more information.

So, again, this is a matter of outreach. It's a matter of taking some time so that these banks can reconfigure some of their systems and their capability to be able to handle the large volumes that we expect.

But it is moving forward and I'd be happy to report to you often on the progress of that program.

SEN. DODD: I appreciate that.

Senator Warner wanted to make a comment on that.

SEN. WARNER: Thank you, Mr. Chairman. And thank you for opening up this line of questioning.

Mr. Allison, good to see you this morning. And I'm glad you raised that issue of the 100,000. That's what I've heard as well. I have to tell you, folks in my state -- I remember when Secretary Donovan was here and I understand this is a Treasury program and also has, obviously, a great deal of collaboration with HUD that, you know, we told folks call after March 4 and, at least the folks in my state would call and they would then get a basic response that said well thanks but we don't have any of the details ready. And I understand the complexity. I think the chairman's raised a good point about perhaps an ombudsman so some kind of a appeals or process so that if you can't get answers a website alone may not be enough.

I guess one of the things that would be helpful from an information standpoint, and this just may be one off examples, but what I'm hearing in my state is that there are a number of banks that basically have stopped processing foreclosures waiting for this loan modification program to be fully in place and that while the wave of foreclosures has slowed its not slowed because necessarily economic conditions have dramatically improved but everybody's just kind of taken a time out until the loan modification program's fully put in place. And while it's great that 100,000 offers have been made, one, I'd love to know how many of those offers have been accepted and two, if all of these servicers don't get fully engaged do we have this enormous potentially multi million backlog of foreclosures waiting to flood the system if our -- if these initiatives are not successful? And do you have any sense on whether there's this backlog that's been created? Is this just kind of a one off example or -- my sense is this is probably going on around the country.

MR. ALLISON: Yes, sir. Thank you, Senator, for your question and for your concerns about this.

It certainly is true that the program had to be organized and during the organization period anxious homeowners were calling in trying to find out when they could get assistance. I think you see a much fuller response today than just a couple of months ago.

As to the foreclosure crisis, there were moratoriums. Many of those have been lifted now. But recently the government has instituted a couple of new programs that can ease the situation for homeowners and one is called Deed in Lieu. And also there are efforts to get out to as many people right now as possible to engage in mortgage modifications. And I think it's extremely important, and I'll say this again, that we all reach out to as many people as possible to alert them to these programs, that help is available to them. And I think as we do that we can help prevent many, many foreclosures.

One of the prime objectives of this administration is to do all possible to keep people in their homes. And we need feedback. We need information systems. And if I'm confirmed I will come back to you and other members of the committee with --(inaudible)—- reporting about the progress of carrying out mortgage modifications, the pace at which we're doing it, whether we're on track and what more we can do going forward.

SEN. WARNER: Thank you and that'll obviously include what percentage of the take up of that 100,000 offers made, what kind of backlog we're looking at because I'm just afraid that we may have, in a sense, a false sense of progress because there're people -- (inaudible)--, people about to be foreclosed upon. The actions haven't been taken but, my gosh, if these -- if the bullets we've fired haven't worked we've got to be prepared for what's next.

MR. ALLISON: I fully share your concern about that, Senator, and we will provide you with that information. Thank you.

SEN. DODD: Senator Schumer wanted to make a comment on this as well.

SEN. CHARLES SCHUMER (D-NY): Yeah, I just had a quick question and apologize for having to go.

I just am curious how much of the capital program funds do you anticipate will be repaid next week, next six months, next year? How much are we going to get back, which gives you money to play with, I guess. Not play with but have in the need of emergency.

MR. ALLISON: Senator, I will have to wait the final results on that. That'll be communicated as soon as possible, as the Treasury has been communicating repayments over time.

SEN. SCHUMER: But don't we expect a bump next week?

MR. ALLISON: I think that's quite likely that there will be a bump next week.

SEN. SCHUMER: Yeah, maybe like a ballpark estimate.

MR. ALLISON: I wouldn't want to make an estimate, Senator, as to what it'll be. I would wait for the Federal Reserve and the Treasury to complete that process.

SEN. SCHUMER: Okay, and just one more quickie.

Several firms feel they're going to be at disadvantage if they're competitors are approved for repayment before they are. You know there's always competition, of course. Have you heard that concern? How are you going to address it?

MR. ALLISON: Senator, I have heard that concern and I'm sure that the administration is well aware of that and it'll be taken into account as the announcements are made.

SEN. DODD: Senator Shelby.

SEN. SHELBY: Thank you, Mr. Chairman.

Mr. Allison, thank you for taking on this responsibility. I wish you well.

What assurances have you been given from Secretary Geithner and the White House that you will have sufficient autonomy in your decision making, in other words, the management of this program?

MR. ALLISON: Senator, first of all, I understand my responsibilities if I'm confirmed for this position. And my role is to carry out the Treasury secretary's directive as well on this program. He and I will be consulting frequently. I know how concerned he is about making sure that these programs are successful. I see him daily about these issues and those contacts will probably grow even closer if I am confirmed.

SEN. SHELBY: What's your view, if you have one at the moment, of how the Treasury, which you'll be right in the central role there, should manage its investments in GM and Chrysler? And how long do you believe Treasury will be a shareholder of GM and Chrysler, if you want to?

MR. ALLISON: Thank you for your question, Senator. I must say to you that I have not been involved directly in the auto initiative and at this point that would've been presumptuous of me to get involved before I am confirmed. So I can't give you details on the auto program.

SEN. SHELBY: But you plan to get involved, don't you?

MR. ALLISON: Yes, sir, very much involved.

SEN. SHELBY: With all -- with both elbows, huh.

MR. ALLISON: Yes, sir, absolutely. I can assure you that I will get involved in all of the initiatives under the financial stability program.

SEN. SHELBY: Well your number one goal right now is to get confirmed, we all here understand that.

AIG, the management of AIG, what steps do you believe need to be taken -- have you thought about this -- for the federal government's oversight of AIG?; in other words, you've got a big bear and you can't turn it loose. I hope we won't have to put more money into it, I don't know. But it seems, I don't know how you discard it.

MR. ALLISON: Well, Senator, certainly I understand the importance of the AIG situation. Again, I have to tell you that I've not been involved in AIG because again that would've been presumptuous if I started getting into it. But I will certainly, if I am confirmed, immediately turn my attention to that issue as well and I'll be happy to come back and discuss it with you.

SEN. SHELBY: Just a generic thing, how do you believe -- what do you believe is the best way for the federal government to manage its equity investments in the TARP recipients to, one, ensure that the management of these firms have the proper incentives in running their companies and hopefully paying back the money?

MR. ALLISON: Senator --

SEN. SHELBY: Now you would have an interest in that, would you not?

MR. ALLISON: Yes, sir. I think that's a very important question that you're asking. And very shortly the administration will be announcing its policies as a shareholder in the companies and we have all heard the president as well as Secretary Geithner say the government has no desire to be a day-to-day manager of those companies. It will be a shareholder and its policies on governance as a shareholder will be made public soon.

SEN. SHELBY: Mr. Allison, you well know this, we all do, government programs are quite often difficult to create and sometimes just about impossible to terminate. The TARP Program has a statutory termination date that can be slightly extended --

MR. ALLISON: Yes, sir.

SEN. SHELBY: -- at the request of the Treasury Secretary, you know this. Do you believe that the TARP program should ultimately be terminated and would you have any concerns if the program were converted into some kind of permanent revolving fund?

MR. ALLISON: Senator, I think that's an important question many Americans as well as people in Congress are asking. And as you said the program is scheduled to terminate at the end of the year, although it could be extended by an act of the secretary until, I believe, as late as October of 2010. But I think it's important to point out that the programs within the financial stability area have themselves termination provisions, many of them made their terms to the financing end dates. There are also disincentives built into those programs that cause -- which should cause banks to want to repay that money as fast as possible. We've already seen and we will see additional repayments.

So this program is designed to deal with an extremely serious financial crisis. And it was not set up to be a long term permanent program.

SEN. SHELBY: Mr. Allison, while the TARP Program has provided hundreds of billions of dollars to the banking sector, there have been a lot of complaints -- and we all hear it here in the Senate -- that the banks receiving TARP funds are not making loans, at least not enough. What is being done or what do you intend to do about ensuring that the TARP recipients are making loans particularly to small businesses? We're not talking about making bad loans, I know you can't micromanage the daily activities of them. But as far as policies it seems that the small business community is really being squeezed in the financial sector in this country.

MR. ALLISON: Yes, sir. Well we're acutely aware that in many small communities around the country small businesses are still having difficulty getting access to credit. I think there are a number of reasons for that but it's important to point out that the secretary recently directed that we would reopen the capital purchase program for small banks which provide an outsized portion of lending to small businesses around the country --

SEN. SHELBY: You believe that'll help a lot don't you?

MR. ALLISON: I do. I think it's important. We're not forcing money on banks. We're making money available. And we want to be helpful in every possible way to small business where also the secretary has initiated a number of actions and to small banks. It's, I think what's the first priority is to make sure these banks are well capitalized. And over time, that capital will turn into more and more lending. I think we have to go through a period where there are concerns about borrowers as well. Small companies in some cases are fearful about borrowing because they're not sure about the economic environment.

As the chairman said, we're not yet out of the woods with this economic crisis. We all have to be aware of that. We have to be vigilant, we can't be complacent, we have to be willing to modify these programs if necessary moving forward. We have to have a constant dialogue with the Senate, with the House, with the American people and with the financial community to make sure that these programs are as effective as they possibly can be and I know that the secretary is completely dedicated to making sure that happens.

SEN. SHELBY: Thank you. Thank you Mr. Chairman.

SEN. DODD: Thank you very much Senator Shelby. Senator Tester.

SEN. JON TESTER (D-MT): Yeah, thank you Mr. Chairman. Kind of going back to the -- when this program would end, assuming it would be extended, does that mean that the money would be paid back by October 2010 for the program to end or does that mean that no more money would be lent out by October of 20109?

MR. ALLISON: Senator, it would mean that no more money is going to be invested from this program from that point onward.

SEN. TESTER: Okay.

MR. ALLISON: There still may be monies outstanding. That's what it's also important that we have a strong and effective asset management capability within the Office of Financial Stability.

SEN. TESTER: Yes.

MR. ALLISON: And that would be one of my responsibilities if I'm confirmed as well, to make sure that happens.

SEN. TESTER: So -- and you may or may not have looked at this; I mean, you're talking about AIG, Bank of America, GM, Chrysler, those paybacks are probably going to take some time or what's your perspective on that?

MR. ALLISON: Senator, I don't think any of us can forecast exactly how long that will take. I think it will take some time. The purpose of putting capital in there is to enable for instance the auto companies to make that transition over some period.

SEN. TESTER: Okay. Jump back to the auto program. You had said that you're going to be jumping in, waist deep at least if not further, into this program. Can you tell me from your perspective right now, who is making the daily decisions on that program? Or will it be you?

MR. ALLISON: Well, eventually, if I'm confirmed, I will be involved in making those decisions --

SEN. TESTER: The primary decision making?

MR. ALLISON: -- the secretary is involved as well. And I will report to the secretary of the Treasury as well. And I'm sure we'll have a continual dialogue about that, along with others within the Treasury Department and throughout the government.

SEN. TESTER: One other -- one of the concerns that Ranking Member Shelby brought up I believe -- or maybe it was Chairman Dodd brought up the fact that we're not -- the TARP recipients aren't loaning money or at least in some cases that's the case. Yesterday it was brought up to me by a person who uses, an industry actually, that uses a lot of fuel that this TARP money is being used to speculate in the oil market. Would you have any control in your position to look at that and quite honestly I've got some real problems with folks tinkering around in the oil industry that aren't taking delivery on the product and maybe I'm alone in that, maybe I'm not. But it creates artificial balloons and when they pop, we have problems.

Would you have any ability in your position to take a look at if in fact they're doing something like messing around in oil speculation, driving the prices up artificially?

MR. ALLISON: Senator, I should point out that already the Treasury Department is producing monthly reporting on the lending activities of the banks that are receiving financial stability funds. And that reporting was recently expanded to include all the banks that have received that funding. And we will work to make that reporting as fulsome as we possibly can.

Let me also point out that throughout this recession, and I think thanks to these programs that have been put in place, we've seen lending remain fairly steady throughout this period and I think it's been important by injecting capital into these banks as they wish to have it that we've been able to sustain lending during this very difficult period.

All of us want to see lending increase. And may I also say Senator that we will, I will be glad to get back to you on your question about whether these monies are being used for oil speculation. We want to develop more reporting, both at the oversight committees as well as for the Congress.

SEN. TESTER: If they are, is it within your capacity to say no?

MR. ALLISON: Senator, we are not going to be in the business of micromanaging these banks. We're there to help them be financially --

SEN. TESTER: I appreciate that. But the reports are, we can give direction of the reports.

MR. ALLISON: Yes, sir.

SEN. TESTER: Thank you.

A couple questions if I might Mr. Chairman. Your predecessor recently commented that firms deemed too big to fail have an unfair advantage over smaller competition because they can raise money more cheaply in the debt markets. What are your thoughts on that?

MR. ALLISON: Senator, the administration's working right now on a proposal on financial reregulation that is very much needed and I'm sure that it will be addressing broadly the type of issue that you're raising.

SEN. TESTER: So you do think that it is a concern?

MR. ALLISON: I think that there's a concern on behalf of the American public and certainly myself that we have a strong, stable financial system. And a system that's responsive to the long term needs of the share holders and the long term needs of this country.

SEN. TESTER: Okay. I'll let you off on that one.

Do you think, just give me your opinion on the too-big-to-fail thing as an overall perspective. And you know what mine is. I mean I think that if failure is not a possibility, that means the taxpayers are on the hook, and that also means that there's not a lot of risk there if you know that you cannot fail, and you're one of those banks that are too big. What's your perspective on that? Do you think it's healthy? Do you think we need to do something about it? What would you do if you were in my boots?

MR. ALLISON: Senator, I think one of the reasons for this initiative on financial industry reform and re-regulation is deal with the fact of what we were confronted with as a country last year when these huge institutions began to fail, and there was no real mechanism for an orderly resolution for those problems. I think what we need is to have a mechanism in place to, if that type of event should ever recur again—and we're going to try to work very hard to make sure it wouldn't—that there's a mechanism for dealing with it.

The other is to make sure that these organizations have a framework of regulation that will allow for transparency and active interaction between regulators and the financial institutions to try to prevent some situation like this from happening again.

SEN. TESTER: Okay, very good. Thank you. Thank you, Mr. Allison. Thank you, Mr. Chairman.

SEN. DODD: Thank you very much.

Senator Warner.

SEN. WARNER: Thank you, Mr. Chairman. I want to go back to comments both Senator Schumer and Senator Shelby made. Senator Shelby weighs the point of, I liked your analogy, we got this bear AIG and we don't know what to deal with it. Senator Corker and I, when Secretary Geithner was in recently --

SEN. DODD: Senator Warner, let me apologize. I did not see Bob Corker walk into the room. I apologize to my friend from Tennessee, but normally we go back and forth from one side to the other, so forgive me. Senator Corker, I apologize.

SEN. BOB CORKER (R-TN): I'll let him ask his first question. Go ahead.

SEN. WARNER: We were very concerned. I think a lot of folks are obviously very concerned about the whole AIG situation. We were concerned with the fact that 100 percent payoff on the counterparties with AIG, no haircut taken. Senator Geithner said, well, he didn't have any authority, and now there's a precedent set, and consequently even if we tried to give him authority perhaps it couldn't be fully utilized.

That brings me to what Senator Schumer raised earlier which is, as we think about a repayment pattern from the financial institutions that have received TARP funds, we know they want to pay back these dollars, we know many of them want to pay them back as soon as possible. Secretary Geithner said that as these banks start paying back, at least initially it was his intent to take back not only, let them repay but also kind of wash out the warrants or sub back the warrants as well.

And my concern is, before we start setting precedents on this repayment program that we through an overall strategy and policy goal for our repayments. And what I'm particularly concerned about is the warrants. You know the American taxpayers, we as shareholders and investors took an awful lot of downside risk exposure. And I'd like to see some of the upside here.

Now I know that none of us want us to be long-term holders of investors in financial institutions, but my hope would be that, one, you'd have an overarching policy in terms of repayments; that, secondly, that one thing you will consider and we raise with Secretary Geithner that while we the federal government may not want to hold those warrants too long because we don't want to have that potential even hint of political interference, I would hope we would at least consider some other options rather than selling them before we got full value, which might include setting up a trust or selling them to a third party where we could share some of the upsides so that there is an independent financial entity that's making sure that we get some value on those warrants since we the taxpayers have taken that risk.

So if you could comment a little bit about your thoughts about a repayment policy, and particularly as it applies to the warrants?

MR. ALLISON: Senator, first of all, I appreciate your concern about the taxpayers and the importance that the taxpayers receive an appropriate return on the investment that they've been making in these institutions. Given the recent enactment of the Reid Amendment which gives the Treasury more flexibility as to the timing of disposition of the warrants, the Treasury is now looking at that issue actively. And I'm sure it will be announcing before too long what his policy will be on warrants, given this change in the rules governing the management of the warrants.

SEN. WARNER: That doesn't give me any hint of what your thoughts are.

MR. ALLISON: This is actively being discussed right now, and I'm sure that there will be a policy that is made public before long.

SEN. WARNER: Thank you, Mr. Chairman.

SEN. DODD: Yeah. And of course under the Reid Amendment there's a lot of flexibility. That was the idea. I think what Senator Warner is suggesting, now that we have the flexibility, looking at a range of ideas that would give us additional options within that range of flexibility other than making the choice of either selling those warrants or holding those warrants seems to me between those two bookends there's some opportunities here that we ought to examine.

Senator Corker. My apologies again.

SEN. CORKER: Thank you, Mr. Chairman. No, no, no. I understand.

Mr. Allison, first of all, thank you for being here, being willing to do this. I think we are fortunate in the public arena to have people like you with the background you have that are willing to offer yourself. And I want to thank you for that, Senator. I have a lot of similar kinds of concerns. When we began this program with TARP it was sold, and we all focused on it in this way, I think as something where we were going to bypass that's a value. And we all talked about the fact—I know we were highly involved in meetings about the fact that the $700 billion in all likelihood would yield a return that would get back more than $700 billion. And by the way I think that very well could have been the case. It's evident with some of the things like AIG and I don't want to create a debate here on the panel but starting to use money for things like mortgage modifications and all that that's likely not going to be the case today.

But as we look at TARP or as you look at it, I would like to get an understanding. I know that these things evolve, and there's fine print in bills and people are able to be very entrepreneurial about taking advantage of a few words in a bill and starting to do a lot of other things with it, which I think we've all learned a lesson from in many, many ways. But is it your perspective that with these TARP funds your primary goal is in stabilizing a financial system, investing in things that will have value, and that will return taxpayers their money?

MR. ALLISON: Sir, as the law states, the financial stability program is intended to improve the stability of the financial system while protecting the interests of taxpayers. I think it's very important that I, if I'm confirmed for this responsibility, are mindful of both of those conditions. And I think it's early to say what the eventual returns will be to the American public. I can assure you that if I'm confirmed I'm going to work very hard to make sure that these monies are well invested and well managed and tightly controlled going forward, keeping the interests of the taxpayer, the American people, very much in mind.

SEN. CARPER: As we look at where we are in the TARP program today, somebody like you I don't think would take on a position like this unless you had responsibilities and you felt like you were making a difference. I mean you have stature and you have substance. And yet as I look at the program and where we are, it seems to me that those decisions that are going to be left as it relates to TARP, other than making decisions about timing and when we take advantage of our warrants and those kinds of things, much of the heavy lifting may have already been done. It seems like that decisions about who we're going to invest in majorly will be made by the Treasury secretary and that the TARP leader may be more of an implementer.

And I'm just wondering what kind of conversations you all had in that regard because, again, looking at your resume and background I'm just wondering what it is that is luring you to this position..

MR. ALLISON: (Laughs.) Well, I'm lured to the position, I've taken on this responsibility if you confirm me because I believe that this is still a very serious economic time for this country, that much still has to be done to restore stability. There are many positive signs thanks to the initiatives by the administration and these programs. We're seeing the spreads coming down, credit spreads in the banking area. We've seen home sales more steady the past few months, and there are other signs: for instance the banks being able to issue equity on their own, to issue unsecured debt.

These are all very positive signs. But we also see housing prices are still falling, the commercial real estate market is still under pressure. Small businesses are still having some difficulty. We have still credit spreads. This measure of risk in the system is still higher than they historically have been and should be. There's still a great deal of work to be done here, and I don't think at this point we ought to become complacent and think that because the banks are starting to repay some of this money that the crisis is over and we can just go ahead.

There still could be, as the president and the secretary have said, some bumps along the road here. I think we have to see this program through and make sure that it's well-administered all along the way. As the chairman said, this is going to require close management and experienced management skills, and I think that's what I can help to bring to this and also provide assistance to the secretary of the Treasury who has the overall responsibility for these programs.

SEN. CORKER: Very good answer. And this is my last question, Mr. Chairman. Secretary Paulson last summer, when he was given the authority, if you will, to act as a conservative for Fannie and Freddie, mentioned that before he left he was going to give a statement about what the ultimate outcome of those two organizations ought to be. The events of the day and the crises that continued sort of prevented that from happening, or if it happened it was overwhelmed by other news that were happening at the time. You've been at Fannie, and you're a smart guy. And I'm wondering if while we're all here, since it's a major responsibility of all of us on this committee, if you could just tell us what you think as we move through this crisis what the ultimate outcome should be with Fannie and Freddie. A lot of people have talked about privatization, a lot of people have talked about, yeah, we ought to only use them as insurers. There's all kinds of things that have been stated. You've lived it and breathed it, and I wonder if you might share with us what you think the ultimate outcome of those organizations ought to be.

MR. ALLISON: Senator, thank you for the question. And let me just tell you what I used to tell the people at Fannie Mae who were asking this question themselves. You could see they were quite concerned about the future of an institution where they had worked for many years. And by the way they are outstanding employees, and they're working extremely hard today on behalf of the American public. What I told them was, let's not try to anticipate what form this company may take or whether it may even exist in the years ahead. Let's look at what's in the best interests of the American public. Let's do our jobs on behalf of people right now who are desperate to stay in their homes. And that's the line of business of Fannie Mae today, to keep people in their homes.

I think that this will be an issue debated within Congress. The administration will take its viewpoint on this down the road. I think what's most important is that we have the vibrant housing system in the United States with liquid markets so that people can access credit in responsible ways to own their home. After all, that's part of the American dream.

So at this point I wouldn't offer any specific prescription. I think this depends on major government policy going forward. This is a pivotal moment, and I think that it calls for a debate, a reasoned debate about the future of the housing market and of housing policy in the United States.

SEN: Thank you very much. That was pretty much a non answer, and I guess during confirmation hearings when you don't know if you're going to be confirmed or not it's maybe unfair to ask that. I sure hope that as time moves on and you are confirmed that you will be more clairvoyant and helpful to us as to what you think ought to occur. But I will, certainly like Senator Tester, will give you a pass and tell you would be well-qualified to run for public office based on that answer. But thank you. (audience laughter)

MR. ALLISON: Thank you, sir.

SEN. DODD: Let me just say I was going to suggest, by the way, let me just mention to my colleague before Senator Corker leaves, just so my colleague is aware, your reputation at Fannie among the employees was just remarkable. At a time when they were being absolutely deluged and overwhelmed you restored a sense of confidence to a workforce that was feeling rather battered in many ways. And I want my colleagues to know about that. That's strong leadership at a time like that, and obviously we like your ideas. I want to pick up on Senator Corker's point. This is a very important issue as to where we go with this policy. And the fact that you were there and understand that institution as well as you do and enjoyed a reputation with the workforce as strongly as you do, this is not the moment for it but there will be a moment we'd like to invite your thoughts and ideas on how that construct ought to occur. So I second it.

SEN. CORKER: Thank you. Thank you, Mr. Chairman.

SEN. DODD: And I appreciate that. Let me go back to Senator Warner. Do you want to finish up and then --

SEN. WARNER: Yes. I just had one more point. Thank you, Mr. Chairman.

Mr. Allison, one of the comments you made in terms of our priorities was transparency. And I just want to get a little further confirmation on that as well. One of my frustrations and actually led me to put forward legislation with Senator Martinez and Senator Brown, Senator Tester said he wants to join me in this, to try to mandate since we've not heard so far from the administration, on a publicly accessible single website basis the status of all of the investments we've made with the TARP program. And then the chairman made clear I think there are 12-odd separate programs and initiatives, and the administration has gotten better on this. You still need not only a technology degree but also a finance degree to try to find all this information on various websites around and the fact that it could and should be consolidated into a user-friendly single site where the American people can check what we've done with the $700 billion and what the status of these loans or investments are.

It is terribly important because I can tell you, at least again in my state, an awful lot of folks think that we've taken these funds and basically either thrown them into the wind or flushed them down the toilet and that we're never getting them back, when in reality I'm optimistic that we, I'd like to hope we get it all back, but that we will actually get a fairly good rate of return and that we will have shorn up the financial system.

So this is as much a comment as a question, but my hope is that when you get confirmed as I know you will that perhaps you could mitigate or even get rid of the recent (unclear) legislation by trying to put in place this kind of user friendly single website to highlight and real-time indicate the status of all these TARP programs and let the American public know where these funds have gone and what the status of either repayment or potential repayment would be.

MR. ALLISON: Senator, thank you very much for your suggestion. I fully share your thoughts about that as I know the secretary does as well. And the Treasury is in the process of further enhancing the information on its website about these programs, and I have met with the people in the Home Ownership Initiative area about that very subject. So I'm confident that we'll be able to prepare more information, and we'd like to have a two-way dialog about this and make sure that we're satisfying your needs for information and those who you represent.

SEN. WARNER: Well, Mr. Allison, I hope that would be the case. My only hesitancy, and that's one of the reasons why we actually put forward legislation, which I again would love to not have the need for, we have heard that response from every individual who's testified, from the secretary on down, that, yeah, that's a good idea, we want to get this information out, yet it's still pretty hard to find in a single source and a user friendly way. So we look forward to that kind of conversation and that kind of result.

MR. ALLISON: Thank you.

SEN. WARNER: Thank you, Mr. Chairman.

SEN. DODD: Thank you. Senator Merkley.

SEN. JEFF MERKLEY (D-OR): Thank you. Thank you, Mr. Chair. And I thank you for your testimony, Mr. Allison. I wanted to, you know you have both the Wall Street experience and the experience in the housing world. I wonder if you could give us some insights on the role that prepayment penalties and yield spread premiums played in creating financial risk or contributing to the housing bubble, and how we ought to address those in the future.

MR. ALLISON: Well, I think that there's a need to reexamine the financing of home ownership in the country. It's obvious that some of these loan structures were totally inappropriate for the people to whom they were sold. And I think that needs to be looked at very carefully. I think there should be a simpler process for borrowing. The terms of the borrowing should be highly transparent. And I think that attention is going to be given to that as well as the government looks at re-regulation of the financial industry.

You know, a home is the biggest investment most people ever make, and that should be taken into account. If we want to promote home ownership and promote wealth creation in the United States among the public, I think there have to be much more attention given to the structures of those loans.

SEN. MERKLEY: How did those practices contribute to systemic risk?

MR. ALLISON: I think we've seen inappropriate lending practices, not full transparency in some cases. I think there's plenty of evidence that many homeowners were convinced to take risks that they shouldn't have been taking. And that happened on a pretty large scale.

And I think that led to a significant part of the housing crisis.

SEN. MERKLEY: Thank you. I would just suggest that one has to track how the securitization and the subsequent splitting of the tranches and the creation of CDOs and CDO squared contributed to creating really the toxic assets that contaminated the international banking world. And one needs to make those connections, I feel, in order to get one's hands around the systemic risk part of this.

Am I way off track here, or do you share that --

MR. ALLISON: Well, I think that we've seen that Secretary Geithner is concerned about making sure that there is adequate disclosure, that there are mechanisms in the marketplace that will lead to better risk management. And this is a complex issue. There are many elements to having an appropriate risk management approach within the financial industry. I'm sure that's getting a lot of attention among those who are working on these proposals for re- regulation.

SEN. MERKLEY: To change topics here, my support for the second half of the TARP was contingent upon a big chunk of it going to mortgage modification, assisting homeowners or perhaps in refinancing. The reports we got from the field in Oregon remain very minimal. That is, people are as frustrated today in trying to reach someone they can talk to. Those who service the loans are as unknowledgeable, if you will, as unhelpful as they were months ago.

We have one particular institution that folks repeatedly get told, well, our institution is not participating, when their institution is participating. This institution was featured in an article yesterday in a different state with experiences that very much reflect what's happening in Oregon, in which a person who had lost their job and was doing everything they could to make their payments but clearly was going under was simply told they'd have to wait until they were behind three months, and then the effort was made to sell them a new loan at a higher interest rate, with high servicing charges, that would have put them further in the hold, kind of a repeat of the types of flipping practices that have been destructive.

Somehow we have to get over the hill here. We have to get into the world where our institutions are really taking seriously the modification programs. The institutions that have received enormous tax support from citizens who are earning 30,000 bucks a year and seeing their tax money go to help these institutions but then, in return, are being stonewalled on the mortgage front. What can we do to accelerate this effort to assist our citizens?

MR. ALLISON: Senator, I share your concerns that we be as effective as possible in rolling these programs out to every community in America where people are feeling under great pressure right now. And this is a mammoth program right now. And it has taken some time to get rolling. I think all of us are impatient. We want this to be working as quickly as possible because people are suffering every day.

So I know that people are working day and night. I'm encouraged, as I mentioned before, that more banks are becoming involved. The banks who account for, and the other institutions, at least 75 percent of mortgage loans are involved in this program right now. It's taken them time to build their staffing, to change some of their systems, to be able to implement this program as it's designed.

And it's frustrating when we all want to see this operating overnight, because we know people out there need this immediately. So I can assure that if I'm confirmed I'll be working with others within the government. I know that Secretary Donovan is very concerned about this, Secretary Geithner, not to mention President Obama. There's a great deal of pressure on everyone to get this program out as fast as possible, working closely with the banks. And they're making, I think, great efforts, too.

Now, we have to do more. We have to reach more institutions. We have to reach more people. It's important that they know these programs are available. And in the case you mentioned, I think, you know, it's important that we try to get as many banks as possible involved in this program. And I'd be happy, if I'm confirmed, to talk with you or your staff about this and learn more about those situations. But I think everybody has got to be working at maximum effort to try to make this program effective.

SEN. MERKLEY: I appreciate your statement and I think I can characterize a commitment, it's a high priority for you, maximum commitment or effort to make this program succeed.

MR. ALLISON: Yes, sir.

SEN. MERKLEY: Thank you.

MR. ALLISON: Thank you.

SEN. DODD: Thank you very much, Senator. Senator Reed has joined us, and I'm going to have to slip out in a minute, and Senator Tester, I think, is going to take the gavel to finish the hearing, I've been told you are anyway.

And let me, if I can, the issue was raised by Senator Shelby earlier about AIG. And on May 20th at a hearing -- in fact, the secretary was here -- the issue came up dealing with creditors and counterparties. And obviously, a lot of attention was focused on bonuses and so forth and the AIG matter -- (inaudible).

And about the same time, there was announcements about the counterparties and creditors that didn't get anywhere near the same attention. But one of the things that's been disturbing is the fact that while the value of an AIG stock has declined obviously, creditors and counterparties were getting paid 100 percent of value.

And the issue it obviously raises, and many of us raised here, is, who's doing the negotiating? We're an 80 percent owner of this company. And here, counterparties are getting 100 percent on the dollar. It doesn't exactly sound like a great negotiating position, it seems to me, given the exposure of the dollar amounts.

What I'd like to know -- and again, I realize you're not in your job yet. But what tools do you feel the government needs to negotiate the best terms for taxpayers? Do we need to give you any additional tools? If there's something we need to be doing, I'd like to know about it. If you have the tools necessary to negotiate better, then we'd like to know what they are and how they intend to be used.

I don't want you especially to necessarily tell me what the answer ought to be. The answer that we can't do anything, we just have to accept this, is unacceptable, I think to most of us anyway. Just unacceptable given the exposure we're talking about.

MR. ALLISON: Mr. Chairman, I think everybody is frustrated about the AIG situation. I think that's a major reason why the secretary and others are working hard on financial re-regulation proposals. There was no mechanism for the orderly resolution of the AIG problem. And there needs to be if, God forbid, there ever is another situation like that.

I think one of the practical implications -- and again, I'm not involved in the AIG matter directly -- but there were cost-default clauses that would trigger defaults across AIG's exposures to counterparties and debt holders that would have caused a massive problem within the financial system given the size of that entity. And that could have had ripple effects throughout the banking system.

So I think that the government has been doing what it can in that very difficult, very complex situation to protect the interests of taxpayers. That's frustrating, and I think that it's a very strong reason why there's a need to put new measures in place that can deal with a situation like that if it ever does happen again.

SEN. DODD: Well, the resolution mechanism is clearly something that we've got to deal with. But again, the negotiating process that goes on, I believe the tools are there. It's a question of whether or not you buy into the notion that any negotiation that could, in any way, diminish something less than 100-cents-on-the-dollar value would somehow create the kind of economic problems you just mentioned or not.

And I know there's a pretty significant debate. I'm not satisfied that's the case. But I'm going to continue raising this issue, as I'm sure others will. Because again, the exposure dwarfs. There were a lot of headlines about the bonuses. The bonuses, by comparison to the exposure here, is no comparison, it's such a vast difference we're talking about.

Let me turn to Senator Reed. And thank you very much. And I look forward to moving your nomination as soon as we possibly can.

MR. ALLISON: Thank you.

SEN. DODD: Thank you, again, for your willingness to -- (inaudible).

MR. ALLISON: Thank you very much.

SEN. DODD: And welcome to your family as well. Delighted to have them here.

MR. ALLISON: Appreciate that very much. Thank you.

SEN. REED: Thank you, also, Mr. Allison.

Thank you, Chairman Dodd.

Senator Warner, I believe, raised the issue of warrants which is close to my concern also. Just once again emphasize, with the recent legislation, you have complete flexibility of the use of warrants. And I urge you to use that flexibility wisely.

There's an issue that frankly this is a question that's just come to mind. The TARP fund will receive two forms of payment -- the principal that was advanced and also interest on the preferred. Does that interest revert back into the TARP program?

And another question related is the value of the warrants, the profits for the warrants. Does that go back into the TARP program?

MR. ALLISON: Senator, as I understand it, the monies that are received go into the general funds of the U.S. Treasury. The amount advanced initially is then deducted from the amount outstanding under the $700 billion limit. I will double check that for you, but that's my understanding.

SEN. REED: So essentially, the repayment would restore the ability to extend the principal amount that's repaid, but the additional, the profits, the interest and the value of the warrants, they go back to the general Treasury.

MR. ALLISON: Again, that's my understanding. I will go back and double check it for you.

SEN. REED: Thank you very much, Mr. Allison. And I would assume that you've looked at the April 21st report of the special IG for TARP.

MR. ALLISON: Yes, sir.

SEN. REED: And I think he did a very good job in laying out some of the problems with transparency, oversight. Do you have any thoughts about these recommendations and how to implement them? And you've covered them before, I apologize.

MR. ALLISON: I have begun in my first week in the Treasury to meet with the special inspector general. I meet with him every week, if not more often. Our staff at the Treasury meets with him also and his staff. We are, I think, all intent on making sure these programs are very well-controlled and that there's as much transparency as practical, given the need to have these programs also be quite broad.

I know that the special inspector general shares those objectives. So we are respectful of his findings, and we take them very seriously. And we're working with him to find practical ways of dealing with those concerns.

SEN. REED: And there's another issue potentially, which I know the regulators are doing a great deal with regard to the issue, that is the reapplication to TARP for an institution that might have (paid ?) out but then need additional assistance. Are you establishing any procedures for that? Or is that something that's still off on the horizon?

MR. ALLISON: Senator, if I'm confirmed, I will certainly look at that, and I would be happy to meet with you or your staff on that question. Thank you for the question.

SEN. REED: Again, thank you, Mr. Allison, for your willingness to serve. I think it began as a lieutenant or an ensign really in the United States Navy. So thank you very much.

MR. ALLISON: Thank you very much.

SEN. TESTER: Thank you, Senator Reed.

Senator Merkley, do you have any further questions?

SEN. MERKLEY: Yeah, I'd like to ask one more question that's appropriate.

One of the concerns I have is related to (PPIP ?) program and the possibility of manipulation between buyers and sellers. And there is -- I believe that TARP-recipient banks are not going to be participating in the legacy loans program, but that no such restrictions have been put in place in the legacy securities program which we managed by the Treasury and the Fed under TALF. Any thoughts or insights on you have basically parties with an interest on both sides of the transaction?

MR. ALLISON: Well, there are going to be very clear conflict of interest rules in the public-private investment partnership. And those rules are also being discussed with the special inspector general as well, as with people within Treasury.

I think it's very important to the credibility of the program and to protect the taxpayers that the program be administered in a way that prevents such conflicts of interest.

SEN. MERKLEY: Absolutely. Thank you.

MR. ALLISON: Thank you.

SEN. TESTER: Mr. Allison, there's been a few figures floating around about how much is left out there to be invested or loaned, however you want to put it. Have you been able to take a peak and see what's left out there, how many billion (dollars) are left?

MR. ALLISON: It's roughly $100 billion, Senator, that is available today.

SEN. TESTER: And as things unfold here, your crystal ball being as clear as anybody's, what kind of criteria do you see utilizing for potentially investing those dollars, personally?

MR. ALLISON: I think first of all, it's important that we leave some headroom in this program, because we're not yet out of this crisis. And I think the Treasury, the government needs some flexibility so that if there's a need in the future, we can intervene in a timely manner on behalf of the American public.

SEN. TESTER: So is 100 billion (dollars) what you think is adequate for headroom?

MR. ALLISON: Senator, I wouldn't want to place a number on that. I think we all have to be vigilant, and there needs to be flexibility in this program so we can act on behalf of the American people if necessary.

SEN. TESTER: Okay, thank you. Thank you very much. I appreciate you putting yourself forward for public service and going through all the questions.

MR. ALLISON: Thank you.

SEN. TESTER: I also appreciate your family for being here. I think behind every good guy there's a good family, so we appreciate that.

Thank you very much. This hearing is adjourned.

MR. ALLISON: Thank you, sir. Thank you, Senator.

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