| Interim Assistant Secretary for Financial Stability Neel Kashkari Testimony before the U.S. House of Representatives Financial Services Committee Washington, D.C. December 10, 2008 |
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Interim Assistant Secretary for Financial Stability Neel Kashkari
Testimony before the U.S. House of Representatives Financial
Services Committee
Washington - Good morning. Mr. Chairman, Ranking Member
Bachus, and Members of the Committee, thank you for asking me to
testify before you today regarding oversight of the Troubled Asset
Relief Program.
We are in an unprecedented period and market events are moving
rapidly and unpredictably. We at Treasury have responded quickly to
adapt to events on the ground. Throughout the crisis, we have
always acted with the following critical objectives in mind: one, to
stabilize financial markets and reduce systemic risk; two, to support
the housing market by avoiding preventable foreclosures and
supporting mortgage finance; and three, to protect taxpayers. The
authorities and flexibility granted to us by Congress have been
essential to developing the programs necessary to meet these
objectives.
Today, I will focus my remarks on compliance and oversight of the
TARP and on measuring the results of this program, which are two
very critical issues to the Treasury Department (Treasury). The
American people provided Treasury with broad authorities to stabilize
the financial system and it is essential we communicate our actions in
an open and transparent manner to maintain their trust. I will
describe the many steps we are taking to ensure compliance with
both the letter and spirit of the law and what measurements we look
at to gauge the success of our programs. A program as large and
complex as the TARP would normally take many months or years to
establish. But, we don't have the luxury of first building the
operation, then designing our programs and then executing them.
Given the severity of the financial crisis, we must build the Office of
Financial Stability, design our programs, and execute them - all at
the same time. We have made remarkable progress since the
President signed the law only 68 days ago.
Oversight
The first topic I will address is oversight of the TARP. In addition to
the normal oversight provided by Congressional committees of
jurisdiction, the Congress established four important avenues of
oversight: one, the Financial Stability Oversight Board; two, the
Special Inspector General; three, the Government Accountability
Office; and four, the Congressional Oversight Panel. I will review
Treasury's interaction with each body in detail.
First, we moved immediately to establish the Financial Stability
Oversight Board, which, by law, includes: the Secretary of the
Treasury, the Chairman of the Federal Reserve Board, the Chairman
of the Securities and Exchange Commission, the Secretary of
Housing and Urban Development, and the Director of the Federal
Housing Finance Agency.
The law required the first board meeting to take place within fourteen
days. We moved very quickly, and the Oversight Board met within
four days. At that initial meeting, the members of the Board selected
Chairman Bernanke to be Chairman of the Oversight Board. The law
requires the Board to meet once a month, but it has already met five
times in the just two months since the law was signed, with
numerous staff calls between meetings, and expects to meet again
this week. We have also posted the bylaws and minutes of the Board
meetings on Treasury's website. In addition, the Oversight Board
has interacted with other oversight bodies, such as the GAO and the
Congressional Oversight Panel.
Second, the law also requires appointment of a Senate-confirmed
Special Inspector General to oversee the program. We welcome the
Senate's confirmation on Monday December 8 of Neil M. Barofsky as
the Special Inspector General. I spoke with him on Tuesday
December 9 and we look forward to working closely with his office. In
the interim, we have been coordinating closely with Treasury's
Inspector General. We held our first meeting with Treasury's IG on
Monday, October 6, and have had numerous meetings since then to
keep Treasury's Inspector General apprised of all TARP activity. We
look forward to continuing our active dialogue with both the Treasury
IG and with the Special IG as he builds up his office.
Third, the law calls for the Government Accountability Office to
establish a physical presence at Treasury to monitor the program.
Treasury provided workspace for our auditors within days of the
President signing the law and Secretary Paulson had his first call with
the Acting Comptroller General, Gene Dodaro, on Tuesday, October
7. The Acting Comptroller General and his team met with our team
for the first time on Thursday, October 9. Since then, I have
participated in multiple briefings with the GAO and our respective
staffs are meeting almost daily for program updates and also to
review contracts.
The GAO published its first report on TARP to Congress on
December 2, which the law required within 60 days of enactment.
The GAO met with our team on Saturday, November 22, before their
report was finalized. They provided a thorough review of the TARP
programs and progress – essentially a snapshot at the 60 day mark
of a large, complex project that continues to be a successful work in
progress. As I noted above, given the intensity of the financial crisis,
we must build our operation, design our programs and execute them
all at the same time. The GAO report identified nine "areas that
warrant Treasury's ongoing attention." We are pleased with our
auditors' recommendations because the GAO had identified topics
that we already had focused on. The report was quite helpful
because it provided us with thoughtful, independent verification that
Treasury is, indeed, focused on the right topics and Treasury agrees
with the GAO on the importance of these issues.
Given the importance of the GAO's feedback, I want to spend a few
minutes going through the nine areas that GAO identified and
describe what we are doing in each case:
1. Monitoring and reporting of financial institutions activities
As the report indicated, given the number and variety of financial
stability actions being put in place by multiple entities, it will be
challenging to view the impact of the Capital Purchase Program in
isolation and at the institutional level. Moreover, each individual
financial institution's circumstances are different, making
comparisons challenging at best, and it is difficult to track where
individual dollars flow through an organization. Nonetheless, we are
working with the banking regulators to develop appropriate
measurements and we are focused on determining the extent to
which the CPP is having its desired effect.
2. Compliance of CPP participants with program requirements
The key first step to effective compliance was developing effective
program agreements and we have already accomplished that for
publicly traded institutions and most private institutions. The CPP
agreements are designed to require that the participants comply fully
with the executive compensation restrictions set out by Congress in
the legislation. We are now developing procedures to ensure that
compliance with these restrictions is maintained.
3. Formalize existing communication strategies to keep people
informed about our strategy
Treasury recognizes the importance of a more comprehensive
communication strategy and we are looking at ways to enhance our
communications, while recognizing that the TARP program is just one
piece of a comprehensive response to the financial market crisis. Very
detailed updates, such as this testimony, are part of that strategy.
4. Develop a definitive transition plan
Our team has been meeting regularly with the transition team and
discussing our ongoing activities to ensure a smooth transition. We
intend to have a fully functioning TARP organization in place as the
new Administration takes office.
5. Expedite hiring efforts to ensure the Office of Financial Stability
has the needed personnel
From day one, hiring has been a key focus area for the entire TARP
team and we are making concrete progress every day as we staff up
our team. Our Chief Operating Officer is coordinating an intense
effort with our human resources office to identify and fill critical staff
needs both for the immediate and long terms.
6. Ensure sufficient personnel are assigned to oversee performance
of contractors
Working with the Treasury procurement staff, we are implementing a
comprehensive process for monitoring contractors. We view staffing
in this area as a high priority and are bringing staff on board now to
make sure it is done right.
7. Continue to develop a comprehensive system of internal controls
Here, we appreciate the acknowledgement by GAO of the work we
are doing in this area. Internal controls were one of the first areas
that we addressed. For example, we contracted Price Waterhouse
Coopers to help us develop a system of internal controls, and we
contracted Ernst and Young to advise us on accounting procedures.
While we have more to do, we are making excellent progress.
8. Issue final regulations on conflicts of interest
Treasury has drafted conflict of interest regulations and expects to
publish them soon. We will then work diligently with our existing
service providers to make any necessary adjustments to bring their
mitigation plans into conformance with these regulations. In the
meantime, Treasury is confident that our conflict of interest
requirements are some of the toughest out there.
9. Institute a system to manage and monitor the mitigation of
conflicts of interest
Treasury is requiring firms to provide detailed information about their
compliance programs, potential conflicts, and their mitigation plans
before any contracts are signed, and we are using this information to
select the best vendors. In addition, we will soon have regulations in
place with rigorous monitoring and certification requirements and we
are considering third party reviews and audits as well.
The GAO report is just one example of our compliance with the
tough oversight Congress has appropriately established over the
TARP. Treasury will continue to have an open dialogue with the GAO
through regular briefings to keep them informed of our progress and
welcome their additional feedback as we move forward.
Finally, the law called for the establishment of a Congressional
Oversight Panel to review the TARP. That Oversight Panel was
recently formed and we had our first meeting with its initial members
on Friday, November 21. We look forward to future discussions with
the Panel.
Reporting and Transparency
Next, I would like to discuss reporting requirements and
transparency. Reporting results to the Congress and the American
people is a critical responsibility of the TARP. People need to see what
we are doing, understand why we are doing it, and know the effects
of our actions. The law defined numerous reporting requirements for
the TARP, which I will review here in detail. Treasury has met all of
our reporting requirements on time, and we will continue to do so. All
of our reports are posted on the Treasury website.
First, the law requires Treasury to publish a Transaction Report
within two business days of completing each transaction. Many of
our transactions are executed on the same day and so we have
published four transaction reports on October 29, November 17, 25
and 26 for the 54 transactions we have completed so far. We will
issue another transaction report tomorrow for the investments
completed last Friday.
Second, the law requires Treasury to publish a Tranche Report to
Congress within 7 days of each $50 billion commitment that is made.
The comprehensive report must provide details on the following
topics: the transactions made to date, the impact on the financial
system, the challenges that remain, and additional actions that may
be necessary to address those challenges. To date, Treasury has
published three Tranche Reports on November 3 and 21 and
December 2.
Finally, the law requires Treasury to provide a detailed report on the
overall program within 60 days of the first exercise of the TARP
purchase authority. We sent that report to Congress last Friday,
December 5, and it is available on our website.
Measuring Results
People often ask: how do we know our program is working? First, we
did not allow the financial system to collapse. That is the most direct,
important information. Second, the system is fundamentally more
stable than it was when Congress passed the legislation. While it is
difficult to isolate one program's effects given policymakers'
numerous actions, one indicator that points to reduced risk of
default among financial institutions is the average credit default swap
spread for the eight largest U.S. banks, which has declined more
than 200 basis points since before Congress passed the EESA.
Another key indicator of perceived risk is the spread between LIBOR
and OIS: 1 month and 3-month LIBOR-OIS spreads have each
declined about 100 basis points since the law was signed and about
180 basis points from their peak levels before the CPP was
announced.
People also ask: when we will see banks making new loans? First, we
must remember that just over half the money allocated to the Capital
Purchase Program has been received by the banks. Although we are
executing at record speed, it will take a few months to process all the
remaining applications. The money needs to get into the system
before it can have the desired effect. Second, we are still at a point
of low confidence – both due to the financial crisis and the economic
downturn. As long as confidence remains low, banks will remain
cautious about extending credit, and consumers and businesses will
remain cautious about taking on new loans. As confidence returns,
we expect to see more credit extended.
The increased lending that is vital to our economy will not materialize
as fast as any of us would like, but it will happen much faster as a
result of having used the TARP to stabilize the system and increase
capital in our banks.
We firmly believe that healthy banks of all sizes should use this
program to continue making credit available in their communities.
Treasury expects banks to continue their lending in a safe and sound
manner as a result of these investments and we firmly support the
statement issued by bank regulators on November 12 to that effect.
The statement emphasized that the extraordinary government
actions taken to strengthen the banking system are not one-sided;
all banks – not just those participating in the CPP – have benefited
from the government's actions. Banks, in turn, have obligations to
their communities to continue making credit available to creditworthy
borrowers and to work with struggling borrowers to avoid
preventable foreclosures. At the same time, Treasury believes
institutions must not repeat the poor lending practices that were a
root cause of today's problems.
In addition, we are actively engaged with regulators to determine the
best way to monitor CPP investments and bank lending. We may
utilize a variety of supervisory information for insured depositories,
including existing Home Mortgage Disclosure Act (HMDA) data,
Community Reinvestment Act (CRA) data, call report data,
examination information contained in the CRA Public Evaluations, as
well as broader financial conditions.
Conclusion
Treasury is committed to an open and transparent program with
appropriate oversight. We look forward to continuing to work with
the Financial Stability Oversight Board, the Special Inspector General,
the Comptroller General, and the Congressional Oversight Panel as
we execute this important program. Transparency will not only give
the American people comfort in our stewardship of these funds, it will
give the markets confidence that we are stabilizing and strengthening
the financial system.
While we have made significant progress, we recognize challenges lie
ahead. As Secretary Paulson has said, there is no single action the
federal government can take to end the financial market turmoil and
the economic downturn, but the new authorities that you and your
colleagues provided in October dramatically expanded the tools
available to address the needs of our system. We are confident that
we are pursuing the right strategy to stabilize the financial system
and support the flow of credit to our economy. Thank you and I
would be happy to take your questions.
Testimony before the U.S. House of Representatives Financial
Services Committee
Washington - Good morning. Mr. Chairman, Ranking Member
Bachus, and Members of the Committee, thank you for asking me to
testify before you today regarding oversight of the Troubled Asset
Relief Program.
We are in an unprecedented period and market events are moving
rapidly and unpredictably. We at Treasury have responded quickly to
adapt to events on the ground. Throughout the crisis, we have
always acted with the following critical objectives in mind: one, to
stabilize financial markets and reduce systemic risk; two, to support
the housing market by avoiding preventable foreclosures and
supporting mortgage finance; and three, to protect taxpayers. The
authorities and flexibility granted to us by Congress have been
essential to developing the programs necessary to meet these
objectives.
Today, I will focus my remarks on compliance and oversight of the
TARP and on measuring the results of this program, which are two
very critical issues to the Treasury Department (Treasury). The
American people provided Treasury with broad authorities to stabilize
the financial system and it is essential we communicate our actions in
an open and transparent manner to maintain their trust. I will
describe the many steps we are taking to ensure compliance with
both the letter and spirit of the law and what measurements we look
at to gauge the success of our programs. A program as large and
complex as the TARP would normally take many months or years to
establish. But, we don't have the luxury of first building the
operation, then designing our programs and then executing them.
Given the severity of the financial crisis, we must build the Office of
Financial Stability, design our programs, and execute them - all at
the same time. We have made remarkable progress since the
President signed the law only 68 days ago.
Oversight
The first topic I will address is oversight of the TARP. In addition to
the normal oversight provided by Congressional committees of
jurisdiction, the Congress established four important avenues of
oversight: one, the Financial Stability Oversight Board; two, the
Special Inspector General; three, the Government Accountability
Office; and four, the Congressional Oversight Panel. I will review
Treasury's interaction with each body in detail.
First, we moved immediately to establish the Financial Stability
Oversight Board, which, by law, includes: the Secretary of the
Treasury, the Chairman of the Federal Reserve Board, the Chairman
of the Securities and Exchange Commission, the Secretary of
Housing and Urban Development, and the Director of the Federal
Housing Finance Agency.
The law required the first board meeting to take place within fourteen
days. We moved very quickly, and the Oversight Board met within
four days. At that initial meeting, the members of the Board selected
Chairman Bernanke to be Chairman of the Oversight Board. The law
requires the Board to meet once a month, but it has already met five
times in the just two months since the law was signed, with
numerous staff calls between meetings, and expects to meet again
this week. We have also posted the bylaws and minutes of the Board
meetings on Treasury's website. In addition, the Oversight Board
has interacted with other oversight bodies, such as the GAO and the
Congressional Oversight Panel.
Second, the law also requires appointment of a Senate-confirmed
Special Inspector General to oversee the program. We welcome the
Senate's confirmation on Monday December 8 of Neil M. Barofsky as
the Special Inspector General. I spoke with him on Tuesday
December 9 and we look forward to working closely with his office. In
the interim, we have been coordinating closely with Treasury's
Inspector General. We held our first meeting with Treasury's IG on
Monday, October 6, and have had numerous meetings since then to
keep Treasury's Inspector General apprised of all TARP activity. We
look forward to continuing our active dialogue with both the Treasury
IG and with the Special IG as he builds up his office.
Third, the law calls for the Government Accountability Office to
establish a physical presence at Treasury to monitor the program.
Treasury provided workspace for our auditors within days of the
President signing the law and Secretary Paulson had his first call with
the Acting Comptroller General, Gene Dodaro, on Tuesday, October
7. The Acting Comptroller General and his team met with our team
for the first time on Thursday, October 9. Since then, I have
participated in multiple briefings with the GAO and our respective
staffs are meeting almost daily for program updates and also to
review contracts.
The GAO published its first report on TARP to Congress on
December 2, which the law required within 60 days of enactment.
The GAO met with our team on Saturday, November 22, before their
report was finalized. They provided a thorough review of the TARP
programs and progress – essentially a snapshot at the 60 day mark
of a large, complex project that continues to be a successful work in
progress. As I noted above, given the intensity of the financial crisis,
we must build our operation, design our programs and execute them
all at the same time. The GAO report identified nine "areas that
warrant Treasury's ongoing attention." We are pleased with our
auditors' recommendations because the GAO had identified topics
that we already had focused on. The report was quite helpful
because it provided us with thoughtful, independent verification that
Treasury is, indeed, focused on the right topics and Treasury agrees
with the GAO on the importance of these issues.
Given the importance of the GAO's feedback, I want to spend a few
minutes going through the nine areas that GAO identified and
describe what we are doing in each case:
1. Monitoring and reporting of financial institutions activities
As the report indicated, given the number and variety of financial
stability actions being put in place by multiple entities, it will be
challenging to view the impact of the Capital Purchase Program in
isolation and at the institutional level. Moreover, each individual
financial institution's circumstances are different, making
comparisons challenging at best, and it is difficult to track where
individual dollars flow through an organization. Nonetheless, we are
working with the banking regulators to develop appropriate
measurements and we are focused on determining the extent to
which the CPP is having its desired effect.
2. Compliance of CPP participants with program requirements
The key first step to effective compliance was developing effective
program agreements and we have already accomplished that for
publicly traded institutions and most private institutions. The CPP
agreements are designed to require that the participants comply fully
with the executive compensation restrictions set out by Congress in
the legislation. We are now developing procedures to ensure that
compliance with these restrictions is maintained.
3. Formalize existing communication strategies to keep people
informed about our strategy
Treasury recognizes the importance of a more comprehensive
communication strategy and we are looking at ways to enhance our
communications, while recognizing that the TARP program is just one
piece of a comprehensive response to the financial market crisis. Very
detailed updates, such as this testimony, are part of that strategy.
4. Develop a definitive transition plan
Our team has been meeting regularly with the transition team and
discussing our ongoing activities to ensure a smooth transition. We
intend to have a fully functioning TARP organization in place as the
new Administration takes office.
5. Expedite hiring efforts to ensure the Office of Financial Stability
has the needed personnel
From day one, hiring has been a key focus area for the entire TARP
team and we are making concrete progress every day as we staff up
our team. Our Chief Operating Officer is coordinating an intense
effort with our human resources office to identify and fill critical staff
needs both for the immediate and long terms.
6. Ensure sufficient personnel are assigned to oversee performance
of contractors
Working with the Treasury procurement staff, we are implementing a
comprehensive process for monitoring contractors. We view staffing
in this area as a high priority and are bringing staff on board now to
make sure it is done right.
7. Continue to develop a comprehensive system of internal controls
Here, we appreciate the acknowledgement by GAO of the work we
are doing in this area. Internal controls were one of the first areas
that we addressed. For example, we contracted Price Waterhouse
Coopers to help us develop a system of internal controls, and we
contracted Ernst and Young to advise us on accounting procedures.
While we have more to do, we are making excellent progress.
8. Issue final regulations on conflicts of interest
Treasury has drafted conflict of interest regulations and expects to
publish them soon. We will then work diligently with our existing
service providers to make any necessary adjustments to bring their
mitigation plans into conformance with these regulations. In the
meantime, Treasury is confident that our conflict of interest
requirements are some of the toughest out there.
9. Institute a system to manage and monitor the mitigation of
conflicts of interest
Treasury is requiring firms to provide detailed information about their
compliance programs, potential conflicts, and their mitigation plans
before any contracts are signed, and we are using this information to
select the best vendors. In addition, we will soon have regulations in
place with rigorous monitoring and certification requirements and we
are considering third party reviews and audits as well.
The GAO report is just one example of our compliance with the
tough oversight Congress has appropriately established over the
TARP. Treasury will continue to have an open dialogue with the GAO
through regular briefings to keep them informed of our progress and
welcome their additional feedback as we move forward.
Finally, the law called for the establishment of a Congressional
Oversight Panel to review the TARP. That Oversight Panel was
recently formed and we had our first meeting with its initial members
on Friday, November 21. We look forward to future discussions with
the Panel.
Reporting and Transparency
Next, I would like to discuss reporting requirements and
transparency. Reporting results to the Congress and the American
people is a critical responsibility of the TARP. People need to see what
we are doing, understand why we are doing it, and know the effects
of our actions. The law defined numerous reporting requirements for
the TARP, which I will review here in detail. Treasury has met all of
our reporting requirements on time, and we will continue to do so. All
of our reports are posted on the Treasury website.
First, the law requires Treasury to publish a Transaction Report
within two business days of completing each transaction. Many of
our transactions are executed on the same day and so we have
published four transaction reports on October 29, November 17, 25
and 26 for the 54 transactions we have completed so far. We will
issue another transaction report tomorrow for the investments
completed last Friday.
Second, the law requires Treasury to publish a Tranche Report to
Congress within 7 days of each $50 billion commitment that is made.
The comprehensive report must provide details on the following
topics: the transactions made to date, the impact on the financial
system, the challenges that remain, and additional actions that may
be necessary to address those challenges. To date, Treasury has
published three Tranche Reports on November 3 and 21 and
December 2.
Finally, the law requires Treasury to provide a detailed report on the
overall program within 60 days of the first exercise of the TARP
purchase authority. We sent that report to Congress last Friday,
December 5, and it is available on our website.
Measuring Results
People often ask: how do we know our program is working? First, we
did not allow the financial system to collapse. That is the most direct,
important information. Second, the system is fundamentally more
stable than it was when Congress passed the legislation. While it is
difficult to isolate one program's effects given policymakers'
numerous actions, one indicator that points to reduced risk of
default among financial institutions is the average credit default swap
spread for the eight largest U.S. banks, which has declined more
than 200 basis points since before Congress passed the EESA.
Another key indicator of perceived risk is the spread between LIBOR
and OIS: 1 month and 3-month LIBOR-OIS spreads have each
declined about 100 basis points since the law was signed and about
180 basis points from their peak levels before the CPP was
announced.
People also ask: when we will see banks making new loans? First, we
must remember that just over half the money allocated to the Capital
Purchase Program has been received by the banks. Although we are
executing at record speed, it will take a few months to process all the
remaining applications. The money needs to get into the system
before it can have the desired effect. Second, we are still at a point
of low confidence – both due to the financial crisis and the economic
downturn. As long as confidence remains low, banks will remain
cautious about extending credit, and consumers and businesses will
remain cautious about taking on new loans. As confidence returns,
we expect to see more credit extended.
The increased lending that is vital to our economy will not materialize
as fast as any of us would like, but it will happen much faster as a
result of having used the TARP to stabilize the system and increase
capital in our banks.
We firmly believe that healthy banks of all sizes should use this
program to continue making credit available in their communities.
Treasury expects banks to continue their lending in a safe and sound
manner as a result of these investments and we firmly support the
statement issued by bank regulators on November 12 to that effect.
The statement emphasized that the extraordinary government
actions taken to strengthen the banking system are not one-sided;
all banks – not just those participating in the CPP – have benefited
from the government's actions. Banks, in turn, have obligations to
their communities to continue making credit available to creditworthy
borrowers and to work with struggling borrowers to avoid
preventable foreclosures. At the same time, Treasury believes
institutions must not repeat the poor lending practices that were a
root cause of today's problems.
In addition, we are actively engaged with regulators to determine the
best way to monitor CPP investments and bank lending. We may
utilize a variety of supervisory information for insured depositories,
including existing Home Mortgage Disclosure Act (HMDA) data,
Community Reinvestment Act (CRA) data, call report data,
examination information contained in the CRA Public Evaluations, as
well as broader financial conditions.
Conclusion
Treasury is committed to an open and transparent program with
appropriate oversight. We look forward to continuing to work with
the Financial Stability Oversight Board, the Special Inspector General,
the Comptroller General, and the Congressional Oversight Panel as
we execute this important program. Transparency will not only give
the American people comfort in our stewardship of these funds, it will
give the markets confidence that we are stabilizing and strengthening
the financial system.
While we have made significant progress, we recognize challenges lie
ahead. As Secretary Paulson has said, there is no single action the
federal government can take to end the financial market turmoil and
the economic downturn, but the new authorities that you and your
colleagues provided in October dramatically expanded the tools
available to address the needs of our system. We are confident that
we are pursuing the right strategy to stabilize the financial system
and support the flow of credit to our economy. Thank you and I
would be happy to take your questions.
