Sunday

Treasury Secretary Timothy Geithner is set to appear on George Stephanopoulos’ morning talk show. He will be followed by former Federal Reserve Chairman Alan Greenspan.

Monday

Sen. Dick Durbin, D-Ill. is giving the keynote speech an event at the Center for American Progress Action Fund on how to stop foreclosures. The subtext of Durbin’s appearance is the reincarnation of loan modification cramdowns in bankruptcy, a reform measure Durbin and other Democrats could not get passed in the Senate earlier this year. The event runs from 12pm to 2pm.

Tuesday

Senate Banking Committee is holding a hearing at which regulators will offer their opinions on the Obama administration’s regulatory restructuring proposals. The first panel will include Federal Deposit Insurance Corp. Chairman Sheila Bair; Fed Governor Daniel Tarullo; Comptroller of the Currency John Dugan and Office of Thrift Supervision Director John Bowman. The second panel will include former FDIC Chairman Gene Ludwig; the Brookings scholar Martin Baily; and Rick Carnell, a professor at the Fordham University School of Law.

Elsewhere, Treasury will be releasing a company-by-company breakdown of data on loan modifications in an attempt to pressure banks into performing more of them under the Obama administration’s loan mod and refinance plans.

Andrea Beltratti and René Stulz, of Bocconi University and The Ohio State University, respectively, compared banks in 20 different countries for their stock price performance both before and during the financial crisis. Using a variety of measurements, they concluded that banks that faced tougher capital standards during the housing boom saw their share prices rise far more modestly than less tightly governed banks. Once the crisis hit, however, banks with higher capital requirements did not see their stock values plunge like other less restrained banks. In short: banks with higher capital requirements and more independent boards were able to ride out the crisis better, the economists concluded.

But stricter regulation—which is not the same thing as higher capital requirements and was used as a separate variable by the authors —did not always lead to better stock performance. Beltratti and Stulz posited that stronger regulators may have intervened more during the crisis “at the expense of shareholders.”

Pandering to shareholders, however, turned out not to be such a great idea. “Banks with more shareholder friendly boards, which are banks that conventional wisdom would have considered to be better governed, fared worse during the crisis,” the authors wrote.

There was a point in the course of the financial crisis at which regulators, investors and even the public realized that a bank’s share price was more important to its survival than ever before. Suddenly, “tangible common equity” replaced “Tier 1 capital” as the latest catch phrase. By the time the Treasury Department and the Federal Reserve performed stress tests on the 19 largest U.S. banks, TCE had completely overshadowed Tier 1 as the preferred measure of health. That dynamic adds value to Beltratti and Stulz’ findings. Before the crisis hit, it may have been less conceivable that stock price could be as important as a performance indicator.

But paradoxically the capital requirements that saved banks relied on Tier 1 standards, not on TCE. Going forward, then, it’s unclear whether this study would support a return to Tier 1 as a standard or a further embrace of TCE.

In some senses, it doesn’t matter: Capital is capital, and the study’s bottom line is actually about losses, not gains: Banks that catered to their shareholders lost big. If anything, the study supports arguments for an overhaul of corporate governance and perhaps even executive compensation.

The image has endured, however; nearly a month after it first appeared, the Goldman-as-cold-blooded-marine-monster concept is still bobbing merrily on the surface of public debate about executive pay, bailouts and bank earnings. And more than any other vehicle for populist outrage so far, including the phantom executive pay limits Congress tried to impose on banks (the House Financial Services Committee reported out another, significantly weaker attempt today), it seems to be taking a material toll.

Exhibit A: Goldman’s decision to pay the Treasury Department’s full asking price of $1.1 billion for its Tarp warrants last week, believed to be largely motivated by image concerns. This news produced a phenomenon so rare and surprising that it deserves attention even a week after it happened: During a House Financial Services Committee hearing on the Tarp warrants issue, the committee’s ranking Republican Spencer Bachus warmly agreed with Elizabeth Warren, the Harvard professor whose consumer products regulation proposal is the scourge of Washington conservatives.

Warren, who was testifying before the Committee that day in her capacity as the chairman of the Tarp Congressional Oversight Panel, said Goldman’s agreement to pay full price for its warrants “proves that oversight works,” giving credit to her committee for having called out the first few banks’ warrant purchase prices as too low. “I agree with you,” Bachus said later, praising Warren’s panel. “Oversight worked.”

But the image of a giant bloodsucking squid may have had more impact than any oversight – and may continue to do so. As long as the image stays intact in the media (it was repeated again today in a column by Michael Lewis satirizing Goldman critics) as a creature the bank itself fears, the squid may be the most powerful motivator there is toward palliative moves like the warrant repurchases.

Animal metaphors as a policy lever are nothing new in the banking world. The National Association of Realtors helped fuel its campaign several years ago against bankers’ efforts to win real estate brokerage powers by showing an image of an Octopus reaching out to grab peoples’ homes. The group even handed out buttons and magnets with the Octopus, labeled “The Big Grab.” It’s worth noting that NAR ultimately won the fight.

Perhaps policymakers should take a hint. Could the White House get away, for instance, with calling any mortgage servicer who refuses to modify enough loans a raging wildebeest of doom, trampling the most delicate and slow-growing of grasses—the U.S. housing market? Animal nightmares may be all the leverage they have left.

Sunday

At 7pm, Federal Reserve Chairman Ben Bernanke will appear in a town-hall forum with PBS’ Jim Lehrer for an hour-long session, “Bernanke on the Record.” The forum will take place in front of an audience at the Federal Reserve Bank of Kansas City. Excerpts from the program will be broadcast on Lehrer’s show News Hour over the coming week.

Monday

House Financial Services Committee Chairman Barney Frank, D-Mass., will address the National Press Club at 12:30pm. His speech will discuss the future of financial regulation.

Tuesday

House Financial Services will mark up a bill to regulate executive compensation. The markup will begin at 9:30am.

Meanwhile, the Senate Banking Committee will hold a 9:30am hearing on restructuring insurance regulation. Witnesses have yet to be announced.

Treasury officials will be meeting with the heads of the 25 largest mortgage servicers to discuss the progress ( " target="blank">or lack thereof) they’ve made in modifying loan terms for delinquent borrowers.

Wednesday

The House Financial Services Subcommittee on Housing and Opportunity will hold a 10am hearing on “academic perspectives on the future of public housing.” Witnesses have yet to be announced.

Thursday

The Federal Deposit Insurance Corp.'s advisory committee on economic inclusion will meet to discuss prize-linked savings programs bringing underbanked consumers into the mainstream.

1:01pm: Federal Reserve Chairman Ben Bernanke is giving his opening statement. He's saying systemically important institutions should be subject to special regulation. There should be "a more macro-prudential" perspective for that area of regulation, too.

Bernanke is running through ways to deal with systemically important firms, with a resolution authority that lets the government impose haircuts on creditors and counterparties.

1:03pm: Bernanke spent most of his time on the systemically important regulation issues and skipped right over consumer protection. He says there's definitely a need for better consumer protection and supervision of international firms, but he isn't offering details. He ends by saying decisions by committee aren't efficient.

1:06pm: Federal Deposit Insurance Corp. Chairman Sheila Bair has begun her remarks. Will she also demur, as Bernanke did, from criticizing the consumer protection proposal?

"To end too big to fail, we need" a resolution mechanism, Bair is saying. It should by funded by assessments.

We also need "a better structure for supervising systemically important instutions." She backs the oversight council--a difference from Bernanke's assertion that the council wouldn't work.

Bair: "The FDIC strongly supports the creation of a new consumer protection agency," she says, "the administration's proposal would be even more effective if it included tougher oversight" for non-bank financial institutions. But Bair says she doesn't support taking away consumer protection oversight from bank regulators. It would be too disorganized, she says.

1:09pm: Comptroller of the Currency John Dugan is up now. "The OCC supports many elements of the proposal," he says, including a systemic risk monitoring council. And a resolution authority. And the Fed's role as a consolidated supervisor.

1:11pm: Dugan says giving the Fed the power to override bank supervisors' authority goes "much too far."

Dugan: "We support the proposal to effectively merge the Office of Thrift Supervision with the OCC," Dugan says. He adds that the OCC supports an agency like the consumer protection agency but he does not like the idea that consumer protection oversight would be taken away from the banking agencies. "I believe it makes sense to consolidate all consumer protection rulewriting," he says. But "bank supervisors must have meaningful input into the process."

He doesn't like the idea of repealing federal preemption. "This repeal of the uniform federal standards option is a radical change," he says. "These costs will ultimately be borne by the consumer."

1:14pm: The consumer protection rules don't give bank supervisors enough authority. The bank regulators should have more board seats on the new agency, Dugan is saying.

1:16pm: OTS Director John Bowman has begun his remarks. "The OTS supports the fundamental objectives at the heart of this proposal," he says. But does each proposed change address a real problem in the financial system? "One federal agency whose central mission is the regulation of consumer financial products should" have rule writing authority for all consumer products, Bowman is saying. The new agency should have enforcement authority over non-banks.

Bowman: We also have to close regulatory gaps. And address "too big to fail." The government should not have to prop up too big to fail companies.

1:19pm: Wow. Bowman did NOT voice an explicit objection to getting rid of the OTS.

1:21pm: North Carolina Banking Commissioner Joseph Smith, Jr., is has begun his remarks. He says the too big to fail proposals don't go far enough. And that the consumer protection agency wouldn't give states enough authority to make their own consumer protection rules.

1:24pm: Rep. Brad Sherman, D-Calif., is saying he doesn't want the new consumer products regulator interfere with the relationships between attorneys, accountants and their clients.

Sherman thinks the new consumer products regulator should enforce the law; not write it.

Sherman: On credit rating agencies, it's not so important who paid the credit rating agencies for a particular rating, but who selected them.

1:27pm: Sherman says the President should appoint regional Fed presidents. He also says all naked swaps should be banned.

1:29pm: Sherman wants Bernanke to say whether there could be a limit on future bailouts of systemically important companies.

Bernanke has begun to respond to him. "I do not support presidential appointments of regional Fed presidents," he says. On limits of bailouts, "I would certainly be open to subordinate the 13.3 authority to the requests of the resolver."

1:30pm: Rep. Michele Bachmann, R-Minn. is up now. She wants to know whether the General Accountability Office to audit the Fed.

Bernanke replies that the GAO has authority over almost all of the Fed's lending authorities and financial management programs anyway. "The concern that I have with the bill" to oversee the Fed, he says, is that it doesn't exempt monetary policy decisions from audits.

Bachmann: So, no?

Bernanke: The GAO can have broad authority, just not over monetary policy?

Bachmann: I'm worried about how the reg restructuring proposal fails to address the government sponsored enterprises.

Bair: None of us has much to do with the GSEs.

1:35pm: Bachmann, on resolution authority: Geithner said that the post-resolution assessment will improve moral hazard. But if other people have to pay for it, how is that true? What about the creditors?

Bernanke: We support a haircut for the creditors.

1:37pm: Rep. Gregory Meeks, D-N.Y. has asked about the effects of the financial crisis on emerging market economy. Wow. This committee is not usually so outwardly focused.

Bernanke is giving him a quick report on emerging market economies. He says their troubles won't affect the U.S. much.

Meeks: How would we be able to handle another Lehman Brothers?

Bair: With the resolution authority.

1:43pm: Rep. John Campbell, R-Calif., is asking Bernanke about how many firms would receive systemic oversight supervision. And if a firm didn't want to be scrutinized as systemically important, it could just spin off parts of itself and downsize, right?

Bernanke: Right.

Campbell: Hey regulators, do you all agree that the consumer products regulator's enforcement authority is wrong, that the authority should be somewhere else?

Everyone nods. Rep Barney Frank, D-Mass., reminds them that the Congressional recorder cannot hear nods.

1:47pm: The hearing is adjorning in a rather disorderly fashion. Bachus jumps in as Frank is closing and says he wants Bernanke back before them in September. Frank agrees before pounding the gavel.

10:36am: Rep. Paul Kanjorski, D-Pa., has begun his opening statement. As he called the hearing into session, House Financial Services Committee Chairman Barney Frank, D-Mass., said hearings on consumer protection would take place in September.

Kanjorski, with first colorful image of the day: "By sprinkling their magic dust on toxic assets, ratings agencies turned horse manure into fools' gold."

10:39am: Rep. Jeb Hensarling, R-Tx., has come out swinging in his opening statement, saying that the right regulatory restructuring plan can't come out of the wrong explanation for the cause of the financial crisis. It wasn't deregulation, he says, but "dumb regulation." He's also accusing the Obama adminsitration of "sweeping Fannie [Mae] and Freddie [Mac] under the rug." As for consumer protection, he calls the proposed new regulator one of the greatest assaults on consumer rights I have witnessed."

Hensarling: I prefer Rep. Spencer Bachus's plan, which adds to the bankruptcy code to allow for the resolution of large, systemically important institutions.

10:42am: Frank calls the charge "that Fannie Mae and Freddie Mac are being ignored" a "startling misconception." They were being ignored before the crisis, he says, and dives into his well-worn recitation of the history of failed government sponsored enterprise reform.

10:44am: Republicans are on a new, strong message this morning, pushing their alternative to the administration's reg restructuring proposals. They've got their own proposals for consumer protection: a department that focuses on disclosures and fraud penalties.

10:46am: Rep. Melvin Watt, D-N.C.: A compromise is when nobody is happy. "I haven't heard anybody who is completely satisfied with what has been proposed. That probably suggests that we have hit the right balance if we do what the administration has proposed."

Watt says the industry "grossly overstated" the potential problems with a consumer protection agency, and he urges everyone to "come to the table" and try to work out the problems they have with the proposal.

10:49am: Rep. Edward Royce, R-Calif., has gone back to disputing the history of the housing bubble. Frank cuts him off quickly.

10:51am: Rep. Gary Miller, R-Calif., is calling for a change in the way accounting standards are set.

10:52am: Rep. Scott Garrett, R-N.J., points out that the industry isn't the only contingent objecting the the consumer protection regulator.

10:53am: Geithner has begun his opening statement. Apparently the Committee plans to recess for a vote after Geithner finishes.

Geithner: "The President decided we needed to move quickly" on regulatory restructuring before the memory of the financial crisis begins to fade.

He has zeroed in on the conusmer protection regulator issue. The old system failed, he says, because "all of the federal financial services regulators have higher priorities than consumer protection."

10:56am: Geithner is saying the "only viable solution" for consumer protection is to house oversight and regulation in "a single entity."

If consumer protection responsibilities are divided, regulatory arbitrage could continue, Geithner says.

10:59am: Geithner: "Resolution authority is essential."

11:01am: Geithner is on to the Federal Reserve now; he's insisting that the proposal both giveth and taketh away Fed power.

11:03am: Committee hastily recesses. Stay tuned.

11:41am: Hearing has reconvened. Frank has declared that he will continue to review the history of failed GSE reform before beginning to question Geithner.

11:44am: "I was struck to note that there's been a lot of debate about whether to have a consumer protection agency and who should be the systemic risk regulator," Frank says, addressing Geithner. "Your critics seem to be aligned with the socialist governemnt in London while the conservatives over there are on the opposite side...When you cross the Atlantic I guess things get reversed."

Frank continues by dismissing the Republican claim that a consumer protection regulator is a bad idea because all of the banking regulators are against it. He calls the bank regulators' consumer protection powers "pristine" because "they have never been used."

11:47am: Rep. Spencer Bachus, R-Ala., has begun his questioning by saying he hopes Geithner can come back another time and talk about reg restructuring. But right now he's asking about Fannie Mae.

He's talking about Fannie's losses. "The biggest loss of all, $85 billion that we extended to Freddie and Fannie. I see no prospect on getting that back," Bachus says.

He has continued by listing big bailouts: the auto industry, Bear Stearns, AIG. He wants Geithner to go through the bailout numbers and describe the real losses.

Geithner: Some areas of the system are very damaged and others aren't. But we can't, this month or even this year, give you a detailed estimate for the losses we'll really see on these. "Some of these programs are making money."

11:52am: Kanjorski's got the floor now. "We're sort of wearing that seat out with your presence, Mr. Secretary," he tells Geithner. Finally, someone is talking about the reg restructuring proposal. Kanjorski isn't happy with the proposal to regulate ratings agencies. He thinks the user pay model should be scrapped; Geithner responds, "I don't see a viable alternative."

Kanjorski: How soon should we enact these reforms?

Geithner: They need to be done as a package together. "I think it's very important we move this year." There is a lot of resistance and opposition and if we wait it will get harder and hard to find consensus.

11:54am: Kanjorski says House FS Committee is working on an insurance bill and wants to know whether the same crisis could occur again without a federal insurance regulator.

Geithner: We can't afford to allow AIG-like behavior to take place again, that's true. Federal oversight is important.

11:56am: Hensarling is up now. He's joking that if he had more than five minutes he and Geithner could actually talk about things they agree on. Geithner quips: "I could use my time to do that."

But Hensarling has moved on. He's back on the GSEs, talking about their contribution to the housing crisis. Now, the GSEs' share of the origination market has increased. This is a central issue of this crisis, and you're not focusing on it, he tells Geithner. There's nothing about the GSEs in this regulatory restructuring proposal.

Geithner: "Congress, in its wisdom, passed legislation that for the first time provided modern authority" over the GSEs back in 2008. And it's true, we still have to think about their future.

"We're rarely accused of insufficient ambition," Geithner presses. He's saying GSE reform isn't the most important thing now.

"Let's speak about another ambition, then, of the administration," Hensarling fires back. Now he's on to the consumer protection regulator. He wants to know what other products, besides subprime mortgages, contributed to the financial crisis.

Geithner: There were a lot of products in mortgages and credit cards that were bad.

12:00pm: Geithner makes an important counterpoint to the claim that the consumer protection agency would impose new restrictions on consumer freedom. The regulatory powers it would hold already exist; they're jstu going to be consolidated.

12:04pm: Rep. Carolyn Maloney, D-N.Y. started out by asking about commercial real estate loan problems. Now she's back on the consumer protection agency. She says she supports both the new consumer protection agency and the regulators' claims that consumer protection duties should remain with them. That system would be a "check and balance," she says.

Geithner: We can't have a new consumer protection agency with no enforcement authority. And if you leave that enforcement authority with the existing regulators, it will not fix the problem that led to the financial crisis: nobody was paying attention.

Maloney: "I would move the enforcement to the protection agency" but leave rule-writing with the bank regulators "as a back-up."

12:08pm: Rep. Randy Neugebauer, R-Tx., is asking Geithner why Bernanke disagrees with his claim that consumer protection should be taken away from the Fed and given to a new regulator.

Geithner replies that the regulators are just doing their job by protesting the loss of their consumer protection authorities.

12:09pm: Neugebauer: But if you're going to have a separate agency, won't that just be more expensive and cumbersome?

Geithner: There are experts scattered across the bank regulatory landscape right now; we want to consolidate them because "overall, supervision was inadequate." I can't say how much that would cost, but the resources are already there.

Neugebauer: But isn't this government trying to limit the choices of the people?

Geithner: Look, I hate limiting choice too. But that's not what proposing. We just think "there should be a set of standardized, simple-to-understand disclosured products available to consumers." They can choose to use them or not.

12:12pm: Rep. Maxine Waters, D-Calif., is praising the consumer protection agency proposal.

She's got "speaking engagements in New Jersey, Tennessee, and other places" to promote the consumer protection agency.

But now let's focus, she says, on job creation. Unemployment among minorities is high. "I'm very interested in doing everything I can do to help create jobs." I want minorities to participate in programs the Treasury has developed, such as the Public-Private Investnemtn Partnership.

Look at Magic Johnson, for example, and what he's been able to do, showing people that you can go into minority communities, you can help generate business, and you can create jobs.

12:17pm: Waters: Are you going to have a new PPIP announcement soon?

Geithner: We're not fully operational yet. Our firms are still trying to raise capital for the program.

12:18pm: Rep. Shelley Moore Capito, R-W.V., says community bankers are worried they won't have the flexibility to offer customized consumer products if a consumer regulator starts to control the products available.

Geithner: "I don't think there's any credible risk" of that happening.

12:22pm: Geithner is telling Capito that community banks will actually benefit from a consumer products regulator because it will offer a "level playing field" with non-bank lenders. There won't be the same pressure to compete with people who are evading regulations altogether.

12:23pm: Watt reiterates his support for the consumer protection agency. "I'm not closing my mind to concerns that are raised," he adds. "Three things I want to ask you about which I think have some merit...The examination authority...Will you work with me and us...to make sure that the consumer protection examinations are coordinated with the prudential examinations so that we don't end up with duplicative examinations in there?"

Geithner: "We're proposing to put the prudential supervisor on the board of--"

Watt: "That's the second point here, the resolution of potential conflicts, which I have asked many people to tell me what those conflicts are" and I haven't gotten any good answers, "Will you work with me to make sure that when there is some kind of conflict there is an appeal or review mechanism, I thought it was going to be in the Financial Services Oversight Council" but "I don't see it particularly addressed there."

Geithner: We will work with you on that. We've proposed to deal with that on two levels: The FS Oversight Council and the consumer products regulator's board.

Watt: "Will you work with me to make sure that there's no presumption of liability for products that are issued that are not the so-called 'plain vanilla' products?" People shouldn't think they are going to get sued for offering non plain-vanilla products simply because they are not considered plain vanilla.

Geithner: Yes.

12:28pm: Royce has begun his questioning by taking up the GSE history again. It's as if half of the Committee members are in a different hearing and Geithner isn't sitting there.

12:31pm: Royce has moved on, finally. "There are several problems with the current, Balkanized state regulatory system," he's saying. "It appears we may be taking a step back in the banking sector" as we approach regulatory restructuring because it provides the ability for state regulations to go beyond the federally established ones. Won't this make banking go the way of insurance?

Geithner: "We thought about it alot; what we laid out was our best judgment." We didn't want to deprive states of the ability to go beyond that.

Actually, did Geithner just give in a little on the preemption issue? His response to Royce's concern was kind of lame. He emphasized that the administration had spent a lot of time on the consumer protection proposal and that he would be happy to keep working on the issue to "find the right balance."

12:34pm: Now Frank has interjected: They're going to end Geithner's panel soon and bring in the other regulators. They'll have Geithner back in September.

12:35pm: Rep. Al Green, D-Tx., says community bankers are worrying about paying "for the sins of others." They don't want to have to pay more in insurance premiums. Can you offer them some comfort? He asks Geithner.

"I think they have a point," Geithner replies. "The basic costs" must be shared more equitably, he says.

12:39pm: Garrett tried to make a joke but nobody got it. Now he's asking Geithner to explain his comments about bank regulators' defense of their consumer protection powers. "It really puts us in a hard situation when agencies come forward...doing it not for the good of the country or the economy but because it's their perogative..." Geithner says it's a judgment call. "Consider the source?" Garrett offers. "Exactly," says Geithner.

12:42pm: Garrett is worried about consumers not being able to access more customized products. Geithner is insisting that institutions won't be restricted from offering a range of products.

Now he's asking about systemic resolution authority. "Under the proposal...it seems as though you're beginning to identify them with a set of parameters." Also, if you just assess systemically important companies to pay for the resolution power, won't that be dangerous?

Geithner: The largest institutions need to have more conservative restraints on capital requirements and leverage. To do that, you have to be able to apply differentially higher charges...but also we "deeply understand the moral hazard risk."

12:45pm: Frank cuts Geithner off mid-sentence. Now Rep. David Scott, D-Ga., is asking about the fate of small, minority owned and women-owned businesses in regulatory restructuring. "If we don't make a special effort to make sure they have the opportunity to compete, and if it doesn't come from the top, it just doesn't get done."

Scott has moved on: "Some in the banking industry, it seems to me, are reverting back to some of the very practices that got us into this mess." The executive compensation packages and bonuses are way up again.

Geithner: "We do not believe we can go back" to the way executive compensation used to be. That's why we have a new exec comp reform proposal. But it also has to be in the context of broader regulatory reform.

12:48pm: Scott now says banks aren't lending and wants to know how Geithner can make them do that.

Geithner: Banks need access to capital themselves. We also have to make sure the broader credit markets are working. "I do think its important, given what the cumulative judgments of our banks across the country did to our economy" that banks try to win back popular confidence.

12:50pm: Rep. Michasel Castle, R-Del., is asking about regulatory arbitrage.

Geithner explains that Countrywide and Washington Mutual changed their charters from bank charters to thrift charters to seek lower standards of enforcement. "That's one example," but there were others.

Castle: "Should we be looking at legislation to change that?"

Geithner: Um, yes. That's what our regulatory restructuring proposal is. Ending the thrift charter is a good idea.

Castle: "Is it your view that every new product that a bank would issue would have to go through an approval process?"

Geithner: "Absolutely not...the core of our proposal" is that broad standards and practices should be adopted.

12:55pm: Castle: Existing regulators aren't happy with the change. And they're starting to do a better job than they were in the past.

12:56pm: Frank dismisses Geithner and calls the other witnesses--Bernanke, Bair, Dugan, Bowman and Smith--to the table. We're going to jump to a new window for the second half of the hearing. Follow along from the BankThink home page!

Small banks are having a harder time than their giant counterparts in dealing with CRE loan losses because they can’t absorb the chargeoffs as easily, according to a post on Bank Lawyer’s Blog this week.

“Aggressive write-downs usually mean aggressive hits to capital, and in many cases community banks are disproportionately affected by write-offs that a large bank could take in stride,” wrote blogger Kevin Funnell. “Moreover, as we've seen thus far from the federal bank regulators, especially the FDIC, massive CRE write-offs are a prelude to a death spiral for banks that are ‘too small to save.’”

Paradoxically, community banks, Funnell wrote, are drawn to CRE lending “as one of the few avenues” in retail banking “left open to them where they can not only make decent money but provide better (i.e., more personal) service to the borrower than many of the big banks.”

If the country’s largest banks have gotten big enough to drown out small banks in the retail banking sphere, and if the smallest banks really have been driven into a riskier, narrower area of lending by this phenomenon, then it’s worth wondering whether there’s an anti-competitive element built into the largest of the large. If there aren’t legal grounds now for challenging this status quo, then there may be after the Obama plan bestows more “Tier 1” privileges upon a select few.

Some are beginning to wonder if the administration should use the regulatory restructuring effort to construct more solid controls on “too-big-to-fail,” so as to keep the majority of the country’s banks from becoming definitively too small to compete.

But last time we checked, a Freddie exec is the last person who can expect to have much say over his company’s future. The Obama administration was quick to utilize the GSEs, which have been in public conservatorship since last fall, in its attempts to stem the foreclosure crisis. But the administration appears to be in no hurry to grant entities more independence.

Haldeman acknowledged some element of this constraint right away: “I totally get the function of the regulator and the need to have the approval and the involvement of the regulator in much of what Freddie does,” he told the Banker.

That arrangement may last longer than Haldeman has let himself imagine, however. A recent strategic report from the GSEs’ direct regulator, the Federal Housing Finance Agency, offered not even hint of detail on the structure of the two companies in the future. It did list as a goal, however, the " target="blank">continued use of the GSEs to further housing policy goals.

And although Haldeman clearly expects a seat at the table, the fate of Fannie and Freddie will remain in the hands of strategists in the White House for the foreseeable future. Haldeman will be lucky if he gets any say at all.

For more from the new Freddie head, look for a profile in tomorrow’s Banker.

Describing CIT’s $3 billion lifeline from private bondholders yesterday, American Public Media’s Marketplace argued that the Obama administration’s nudging the private sector into action was designed to provide grounds on which to refuse future bailouts—perhaps of companies larger than CIT—and force the market to step up to the plate.

The radio program quoted International Risk Analytics CEO Dennis Santiago, who said, “We could get back to the normal state of affairs where companies come and go and do their thing in the normal free market process.”

In other words, the same maneuvers that before seemed foolhardy, such as letting Lehman Brothers fail, could work better now. That would be a political dream for the Obama folks.

But Chris Low, the chief economist at First Horizon National Corp.'s FTN Financial, saw the CIT incident as a risky game of chicken between bondholders and the government.

“The bondholders were clearly waiting to see what the government would do and it wasn’t until the White House made it clear that they were going to do nothing that the bondholders got together to figure out what they could do,” Low said in an interview.

He disagreed with claim that the strategy could work for a larger company. In the case of CIT, he said, the administration perhaps felt it could stomach a failure because officials didn’t view it as systemic.

The choice would not be as easy for a behemoth, however.

“If ‘too-big-to-fail’ were a factor here, then we’d be in the same position that we found ourselves when Merrill was going down, where regulators found themselves in a position where there really wasn’t anything they could do,” Low said.

He argued a new systemic resolution authority would have eased the process for both CIT and larger firms, and would still encourage private-sector bailouts. Now, in the absence of such an agency, policymakers face two drastically different scenarios: An appealing private rescue or a costly, harried government bailout.

“If they had the authority to put them into receivership,” Low said, “they would have started moving towards putting them into receivership and the bondholders would have realized they stood to lose more than they had gained, and they would have put up the $3 billion.”

Peter Eavis touches on this interplay today in the Wall Street Journal’s “Heard on the Street” column. But while agreeing with Low that a systemic resolution framework is needed, he warned that the process for taking over institutions should not be overly standardized, and should allow for cases like CIT’s where creditors lend a hand.

“Why don't the Treasury's overhauls provide a framework encouraging creditors to banks to take orderly haircuts in such situations?” he wrote.

So even though the government may have effectively kept the market guessing with CIT, the need for Congress to create a resolution authority is still there. Without it, Low is right: the game of chicken the public and private sectors play is just as dangerous as ever.

Tuesday

The House Financial Services Committee will hear testimony from Bernanke starting at 10am as mandated by the Humphrey-Hawkins Act, which requires the Fed chairman to report to Congress twice-yearly. Some predict the testimony will focus on how—and possibly when—the Fed plans to extract itself from its quantitative easing policies. Later, the committee will hold a “too-big-to-fail” hearing starting at 2pm. Witnesses have yet to be announced.

The House Oversight Committee will hear from the inspector general for the Troubled Asset Relief Program, Neil Barofsky for a 10am hearing called “Following the Money.”

Wednesday

Bernanke will appear before the Senate Banking Committee at 10am. Meanwhile, House Financial Services will hear from regulators in the morning in a hearing focusing on regulators’ perspectives on the Obama administration’s regulatory restructuring proposals. There are two similar hearings scheduled with regulators this week, and the committee has not released witness lists for either one yet. At 2pm, the Financial Services Subcommittee on Oversight will hold a hearing on Tarp oversight.

And House Oversight’s Domestic Policy subcommittee is looking at “the misuse of mandatory arbitration to collect consumer debts” in a hearing starting at 2pm.

Thursday

At 10:30am the Fed will hold an open meeting to discuss proposed changes to Regulation Z under the Truth in Lending Act. The changes deal with mortgage loans and home equity lines of credit.

Senate Banking will tackle systemic risk regulation at a 9:30am hearing whose witnesses include Federal Deposit Insurance Corp. Chairman Sheila Bair; Fed Governor Daniel Tarullo and Securities and Exchange Commission Chairman Mary Schapiro. Witnesses for a second panel will be announced soon.

Friday

House Financial Services will hold another hearing on regulators’ views of the new regulatory restructuring proposals. The difference, so BankThink is told, is that the regulators testifying today will not be the same people who testified Wednesday.

Both arguments have merit. There’s little indication that the firm’s demise would cause a Lehman Brothers-style panic in the markets, but a New York Post story this morning gives evidence that CIT’s exit from mid-market commercial lending would indeed hit certain industries hard (the story also says JPMorgan Chase is considering purchasing part of CIT’s lending business).

There’s a narrower area in which CIT’s importance is also up for debate: Small Business Administration lending. CIT used to rank among the top-10 SBA lenders in the country. In the 2008 fiscal year, which ended last October, CIT was the top SBA lender, making a total of 865 loans worth $525 million. But when the secondary market for SBA loans ground to a halt late last fall, CIT’s lending volume crashed. Its business model included heavy reliance on the secondary market for fresh capital to lend, and when the option to sell the guaranteed portions of SBA loans disappeared, so did CIT’s SBA lending program. Since Oct. 1, CIT has made just 92 loans worth $67 million. Its now ranks 16th on SBA’s list, but even as the top SBA lender CIT only captured 5.5% of the market share.

With more small businesses in trouble and unemployment on the rise, it wouldn’t be hard to claim that every SBA lender counts. The Obama administration has already demonstrated its interest in the SBA as a tool for affecting economic recovery; allowing CIT to go bankrupt may greatly impact that effort. So while CIT may not be too big to fail, officials could be making a mistake in their claims that it is not too interconnected.

Some studies, like this recently released white paper by researchers at the Boston Fed, are providing backing for the claim that loan mods aren’t working. Many borrowers are redefaulting; foreclosures continue to rise and servicers don’t see an economic benefit in lowering borrowers’ payments and principle. Housing Wire reported last week that temporary moratoria on foreclosures imposed by Fannie Mae and Freddie Mac and some private servicers didn’t do much good, either. Regulators like the Office of the Comptroller of the Currency and the Federal Housing Finance Administration have also condemned loan mod programs as ineffective.

But hey, anyone remember IndyMac? Last we checked the redefault rate on that loan mod program was clocking in at just 12%. Would that make it the exception that proves the rule or the only well-executed loan-mod program?

The question is, should policymakers and the administration be focused on helping borrowers make payments now or forcing meaningful loan mods?

Monday

The House Financial Services Committee will hold a 2pm full committee hearing on “preventing unfair trading by government officials. No witness list has been released.

Tuseday

The Senate Banking Committee will hold a 9am hearing looking at the proposed new consumer protection regulator. Witnesses include Honorable Assistant Treasury Secretary for Financial Institutions Michael Barr; Connecticut Attorney General Richard Blumenthal; American Bankers Association President and Chief Executive Edward Yingling; Travis B. Plunkett, the legislative director for the Consumer Federation of America; and Sendhil Mullainathan, a Harvard economist.

Meanwhile, at 10am, the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises will look at oversight of the Securities and Exchange Commission, a hearing for which witnesses have yet to be announced.

Wednesday

Financial Services will hold a 10am hearing offering banking industry representatives a chance to voice their views on the Obama administration’s regulatory restructuring proposal. No witnesses have been announced yet. At 2pm, the Subcommittee on Housing and Opportunity will convene a hearing on ways to preserve government assistance for affordable housing.

At 2:30pm, the Senate Banking Subcommittee on Securities, Insurance and Investment will hold a hearing on regulating hedge funds. SEC Director Andrew Donohue will testify first. The second panel will include industry representatives: James Chanos, the chairman of the Coalition of Private Investment Companies; Trevor Loy, a general partner at Flywheel Ventures; and Joseph Dear, the chief investment officer of the California Public Employees’ Retirement System.

Thursday

At 10am the House Committee on Oversight and Government reform will pick up its inquiry into the machinations of the merger between Bank of America and Merrill Lynch late last year. Last month, the committee heard testimony from Federal Reserve Chairman Ben Bernanke, in a deeply unsatisfying hearing that focused narrowly on whether Bernanke threatened to fire BofA CEO Ken Lewis if Lewis tried to back out of the Merrill deal. This time, former Treasury Secretary Henry Paulson will be the sole witness, and he is guaranteed to be questioned about whether he lied to officials in a deposition, in which he allegedly said Bernanke had told him about the intent to fire Lewis under certain circumstances.

Senate Banking will convene a 9:30am hearing on preventing foreclosures. The first panel of witnesses will be made up of regulators: Assistant Treasury Secretary for Financial Stability Herb Allison and senior Housing and Urban Development official Bill Apgar. The second panel will consist of bankers and credit counselors: President and CEO of the Bridgeport, Conn. Housing Development Fund Joan Carty; Mary Coffin, the head of Wells Fargo’s mortgage servicing division; Allen Jones, a manager at Bank of America Home Loans; and Diane E. Thompson, of counsel at the National Consumer Law Center. The committee’s Web site says there may be other witnesses announced later.

House Financial Services will hold a 10am hearing giving consumer advocates a chance to discuss the Obama administration’s proposals. Witnesses have yet to be announced.

The man behind the “Bankslaughter” plan, Guardian columnist Paul Collier, proposed the British government lay out a set of criminal laws governing bank management. “Fear of jail would discourage excessive risk,” he reasoned. A trial of managers of a failed bank would unfold similarly to that of a person accused of manslaughter. Intent to harm wouldn’t be a factor in the case; rather the question would be whether the executives managed the bank irresponsibly.

Since his column ran, other commentators have joined the discussion. Reuters’ Felix Salmon gave the idea a thumbs up on his blog this week, while blogger John Carney called it “a terrible idea that needs to be nipped in the bud before some populist lawmaker tries to make a garden party out of it.” Then the braniacs over at The Baseline Scenario (well, one of them—James Kwak) walked readers through the possibilities for translating the “bankslaughter” to fit into the American legal system.

While BankThink is withholding judgment about whether “bankslaughter” is a cool or revolting idea, we have to admit that Kwak makes a convincing argument for its compatibility with well-established legal practices here in the U.S., namely torts.

Readers, it’s up to you: Could holding bankers criminally liable for negligence in court work? Would the threat of a criminal conviction be effectively scarier than the constant threat of civil lawsuits with monetary penalties? And how has criminal prosecution changed Wall Street? Despite the fact that one can be sent to jail for insider trading, for instance, the practice endures. Just sayin’…..

“The more important point is the risk that this agency creates could end up harming consumers. That’s the message we’re trying to get out. It could end up stifling creativity, innovation and access to credit and capital,” Scott Talbott, the senior vice president of government affairs at the Financial Services Roundtable told BankThink (he’s also quoted in the WP story today). Of the Harry and Louise idea, he added: “It’s simply an option that we’re thinking about—nothing has been planned.”

Nevertheless, Talbott said, lobbying to head off the creation of the consumer products regulator is beginning “now.”

Two things: One, some lobbyists are already disowning the campaign as the WP presents it—they say it isn’t as cohesive a front, and that not every group thinks a TV ad campaign is necessary.

Two: Given what else is on TV right now, does anyone really think a Harry and Louise-style campaign would work? The media environment has changed considerably since the 1990s. Fox News has likely already turned a great deal of its viewers against the idea of a consumer products regulator, which represents more government, but even Fox has to compete with a prevailing view that financial firms can’t be trusted.

Other TV ads are actually articulating that notion. The Financial Industry Regulatory Authority, a self-regulatory body, just launched a series of radio and TV ads that warns consumers that not every broker is telling the truth. Meanwhile, Charles Schwab has been airing cartoon-styled “Talk to Chuck” commercials in which financial consumers talk about the epiphanies they’ve had about previous financial advisors giving them a raw deal. And Ally Bank, the new brand that has emerged from the tattered GMAC Financial Services, is (ironically enough) promoting itself through a series of spots depicting children indignantly rejecting unfair “special offers” based on their obvious logical inconsistencies.

And what of Harry and Louise the actual characters? They’ve already been expropriated to the other side: They appeared in a 2008 commercial put out by healthcare advocacy groups asking the presidential candidates to focus first on healthcare reform.

There’s a lot of material out there telling consumers that they should be wary of the things banks try to sell them. Lobbyists on the other side of that sentiment could be facing a Sisyphean challenge.

Think about it: Struggling borrowers who ruin their credit in exchange for a loan mod are taking themselves out of a pool of future potential loan customers. They won’t be able to easily take out other kinds of consumer loans in the future—at least until they’ve repaired their scores—and banks will have a solid argument for curtailing their access to credit. What will this mean for the overall economy and for banks’ business? Probably nothing good. Bankers are already complaining of mixed messages from regulators about whether they should lend more or lend more prudently. With a growing number of mortgage holders whose credit behavior looks terrible on paper those two forces will be in even stronger opposition.

Wouldn’t doing more loan mods earlier be a positive move for banks, then? The market may have the answer eventually. But by then it could be too late.

Monday

The FDIC will hold a roundtable to discuss its proposal for new rules to govern private equity investments in failed banks. The agency declined to release a list of participants.

Wednesday

The Senate Banking Committee will hold a hearing at 2pm on ”the effects of the economic crisis on community banks and credit unions in rural communities.” Witnesses include Independent Community Bankers of America representative Jack Hopkins, the CEO of CorTrust Bank, N.A. in Sioux Falls, S.D.; Credit Union National Association representative Frank Michael, the CEO of Allied Credit Union in Stockton, Calif.; American Bankers Association representative Arthur Johnson, the CEO of United Bank of Michigan in Grand Rapids; and Peter Skillern, the executive director of the Community Reinvestment Association of North Carolina.

Thursday

The House Financial Services Committee will hold a hearing on new legislation, the Tarp for Main Street Act of 2009. No witnesses have been announced. Later, the committee will convene a 2pm hearing on balancing the Federal Reserve’s monetary policy duties with a potential systemic risk regulatory role. The committee has not yet released a witness list.

Friday

At 10am, Treasury Secretary Timothy Geithner will testify before a joint hearing held by Financial Services and the House Agriculture Committee on regulating derivatives. The hearing will take place in the Cannon building, room 345.

The blog Housing Wire last week reported that Citigroup had put its correspondent lending division's activities on hold while it investigated breaches in "quality control." Translation: Citi was funding loans made by independent mortgage brokers who, as late as last week, were still not bothering to verify appraisal or income information they were getting from applicants.

Citi's recent censure in Japan is perhaps even more telling. Japanese regulators announced Friday that they would ban Citi from advertising its retail financial products for a month because the bank had not been properly monitoring or eliminating "suspicious activity," including money laundering. Japan's Financial Services Authority said that Citi's Japanese unit had not "accurately identified a series of problems that were recently found" and that "the effectiveness of the internal audit has not been ensured." Remember that this is the same body that shuttered Citi's private bank in Japan for a very similar set of violations. That episode that culminated a bow of apology delivered personally and publicly by Prince in 2004.

The U.S. regulator for money laundering, the Treasury Department's Financial Crimes Enforcement Network, has engaged in enforcement actions against several banks in recent years over failures to adequately handle suspicious activity reports or otherwise maintain a good internal auditing system to catch financial crimes. But it's been nearly two years since FinCEN has cited a U.S.-based bank. A spokesman for the agency would not say whether Japan's FSA's move would prompt any additional monitoring of Citi in the U.S.

Current CEO Vikram Pandit has tried to maintain Citi's image as a functioning global bank, and as an institution that is on track to regain its independence from the government and re-cast itself as a top competitor in markets around the world. So the timing of these missteps is especially problematic. Because the last thing Citi needs now is evidence that its operational house is not in order.

Meanwhile, the Treasury Department is expected to release legislative language for the creation of a new consumer protection regulator, giving lawmakers something to read over their July 4 holidays. And the Supreme Court will rule Monday on the preemption case it heard in April, Cuomo v. Clearing House Association LLC, which looked at whether states can enforce applicable state laws against nationally chartered banks.

The hearings in the House Financial Services Committee, or at Senate Banking, or House Oversight, at which regulators, bankers and other industry officials must justify their roles in the messy response to the meltdown, ought to be terrifying. Certainly, there has been some anticipation of terror, the same shudder a child feels when his mother threatens to Tell His Father. But the frightening scenario never plays out. Instead of causing kids from the banking world to truly quake, our big old Congressional dad seems to have gone soft. When he yells, his heart’s just not in it. Plus he doesn’t really seem to have been listening when Mom explained the crime in the first place. He struggles to keep the story straight.

Onlookers want blood, or at least some catharsis. Something they, as taxpayers maybe, can hang onto for sweet revenge. Boy, our Congressmen really told it to ‘em!

Instead we get hearings like today’s interrogation of Federal Reserve Board Chairman Ben Bernanke.

Armed with a memo full of excerpted emails between Fed officials, the Oversight Committee seemed geared up to deliver some truly grueling questions about whether Bernanke coerced Bank of America CEO Ken Lewis into buying Merrill Lynch with threats of kicking him out of his job. There were also new materials raising questions about when Bernanke knew certain things about Merrill’s losses and how that knowledge affected his decisions.

As they addressed Bernanke, the committee members seemed angry. But they asked the same questions many times over, as if they had not heard his responses to their colleagues’ identical interrogations. It meant that Bernanke repeated the same few assertions throughout the hearing. That he hadn’t told Lewis he’d fire him if Lewis refused to do the Merrill deal. That he hadn’t known about Merrill’s fourth-quarter losses until after the Fed had approved the merger.

It was all so repetitive that by the time Marcy Kaptur, D-Mars, got the chance to ask her questions about Fed contracts with investment management firm BlackRock, the conspiracy theories about mortgage-backed securities revealed to be fraudulent inventions sounded like refreshing comedy. A reprieve not from true pressure but from profound ennui.

Few committee members chose to look forward, to ask about the BofA-Merrill deal’s implications for the Fed’s potential role as systemic risk regulator. They didn’t try to tease out Bernanke’s claim that the Fed needed more authority or a different definition of its duties in order to monitor systemic risk. If that were true, then what has it been doing for the past few months?

And there seems to be no greater understanding now about who was lying—Bernanke, Lewis or former Treasury Secretary Henry Paulson—in his testimony on the later, controversial stages of the BofA-Merrill deal. Weren’t we looking for some answers?

It’s hard to say why Congress can’t quite capture that je ne sais quois that makes for a substantial, enlightening hearing. Perhaps committee members should try harder to coordinate their lines of questioning with each other, to cover more ground and avoid wasting time. Perhaps they should take better notes and concentrate harder on their follow-ups. The country’s waiting. In the words of White House Chief of Staff Rahm Emanuel, a crisis is a terrible thing to waste.

Will Bernanke be able to defend his contentions that the Fed acted prudently and out of necessity? How will today’s hearing affect President Obama’s regulatory restructuring plan, which would hand the central bank significantly more power? More personally, will this endanger Bernanke’s chances for reappointment? Stay tuned to find out.

10:02am: Hearing is late by a few minutes, but here are some excerpts from Bernanke's prepared testimony:

"I believe that the Federal Reserve acted with the highest integrity throughout its discussions with Bank of America regarding that company’s acquisition of Merrill Lynch," the testimony reads.

"On December 17, 2008, senior management of Bank of America informed the Federal Reserve for the first time that, because of significant losses at Merrill Lynch for the fourth quarter of 2008, Bank of America was considering not closing the Merrill Lynch acquisition. This information led to a series of meetings and discussions among Bank of America, the regulatory agencies, and Treasury. During these discussions, Bank of America’s CEO, Ken Lewis, told us that the company was considering invoking the Material Adverse Event clause in the acquisition contract, known as the MAC, in an attempt to rescind its agreement to acquire Merrill Lynch.

"I expressed concern that invoking the MAC would entail significant risks, not only for the financial system as a whole but also for Bank of America itself."

10:05am: The hearing has begun. Committee Chairman Edolphus Towns is giving his opening statement. He is walking through the story of the struggle Lewis claims to have had with the Fed and the Treasury department. Lewis claims that Bernanke, along with Treasury Secretary Henry Paulson, threatened to fire him if he didn't go through with the deal.

"Was this just an old-fashioned shakedown?" Towns asks. Given the proposal to give the Fed new powers, he continues Congress needs to know. "New emails we have obtained from the Fed may indicate that the Fed may have attempted to keep other agencies in the dark."

10:09am: Towns emphasizes that the committee's investigation is far from complete. "We need to get all of the facts out on the table before we are in a position to say what happened and when it happened," he says. The committee plans to interrogate Paulson next.

10:10am: Darrell Issa, R-Calif., the committee's ranking member, has begun his opening remarks. He opens by patting himself and the other committee members on the back, praising the bipartisan nature of their inquiry. "We came to a consensus that for all the good work in the financial crisis, oversight still needed to discover what was and wasn't done," he says.

10:13am: Issa has thanked Bernanke for his "quick written responses" to the committee's queries. He says he wants to give Bernanke "a full and complete opportunity" to explain his actions. Were the so-called threats to fire Ken Lewis "blown out of proportion?"

"Going forward, if the systemic risk proposal by the Obama administration" gives the Fed the power to oversee all institutions that pose systemic risk, "what will the oversight be?"

10:16am: Dennis Kucinich, D-Ohio, is speaking now. He's says "what the government did not do" is more amazing than what it did to urge the BofA-Merrill deal. BofA knew about the losses at Merrill before shareholders ratified the merger, Kucinich says. The Fed believed that Lewis' threat to back out of the deal was "a bargaining chip," he explains. BofA itself failed to do due dilligence. Why, then, did the Fed agree to bail out BofA with few conditions in return? "If bad decisions by corporate management can have systemic consequences then the Fed's remedy in the BofA case amplifies it," because it demonstrates that bad decisionmaking "will be subsidized, not punished."

10:20am: Kucinich: "We can't afford to make the Fed a super-regulator...without increasing its transparency in a number of ways."

10:20am: Rep. Jim Jordan, R-Ohio, has also given a brief statement in which he expresses concern about the implications of the emails the committee obtained from the Fed.

Now Towns is swearing Bernanke in and explaining the five-minute time limit to him.

10:24am: The committee staff is fumbling with Bernanke's microphone now. All he has managed to say so far is the part about how the Fed acted with full integrity.

10:25am: He repeats the integrity statement and goes on to emphasize that the Fed did not participate in the initial deal, struck in September, to merge BofA and Merrill.

Bernanke reminds the committee that the Fed had to act at many points throughout the fall "to prevent a global banking meltdown."

10:27am: Bernanke is sticking to his written testimony. Now he's going over the "three reasons" why he thought invoking the MAC was a bad idea. It would have destabilized the system, he explains, and it would have thrown BofA's ability to do due dilligence on large deals entirely into question. Also, Bernanke says, invoking the MAC may not have even legally worked, and then BofA would have had to pay heavy penalties for attempting to do so, while suffering losses in the market as investors backed away.

10:30am: Bernanke denies any coercive actions toward BofA and Lewis. He says he never warned of Fed action in the event that the deal fell through. He also believes the Fed acted appropriately in its decisions about when to disclose information about the deal.

He points out that the final decision about what to disclose was ultimately up to BofA itself.

10:32am: Should regulators have revealed their plans to grant aid to BofA earlier? "In retrospect...." No. They followed a prudent course of consultation and planning, Bernanke says.

10:33am: Towns has begun his questioning. Did Bernanke tell Paulson to tell Lewis that he and his board would be fired if they backed out of the Merrill deal?

"I did not," Bernanke says.

Well New York Attorney General Andrew Cuomo said that Paulson told him you did, I just want you to know that, Towns replies.

Did Bernanke threaten Lewis himself?

"I did not."

Towns then asks whether Bernanke promised to prop up BofA if the bank went through with the deal.

"I did not promise a specific sum" of money Bernanke replies.

10:36am: Towns asks Bernanke why the Fed kept information away from the Securities and Exchange Commission about BofA and Merrill losses. "I can't speak for Bank of America," Bernanke says as he begins his replies. The Fed's goal was first and foremost to develop an aid package for BofA.

"So you were forthcoming?" Towns asks. "I was," Bernanke replies.

10:38am: Now Bernanke is explaining why the Federal Deposit Insurance Corp. was uncomfortable with the government assistance proposed for the BofA-Merrill deal. It's because Merrill wasn't a bank! That's the reason. FDIC Chairman Sheila Bair was worried about the FDIC's financial exposure, and she didn't want to assist a non-bank.

10:39am: Now Issa has taken over questioning. He's asking why a Fed official warned not to discuss the hullaballoo with Ken Lewis during a phone call in which an OCC official was participating. Bernanke replies he doesn't know.

10:40am: Issa reads an email from a Fed official who writes of a conversation with Bernanke in which Bernanke told him he planned to threaten Lewis if he invoked the MAC clause. "I don't recall the details of that conversation," Bernanke replies.

He adds that the email doesn't just say that invoking the MAC clause would get Lewis fired--he explains that if Lewis had invoked the MAC clause and had then required a government bailout, "there should be consequences."

10:43am: Issa: "You said that you had three good reasons that BofA should not pull out and one of them was that" BofA would be seen as "inept." But "day after day after day regulators were discovering, 'oh blank,'" another company is failing. Why couldn't BofA's mistake in that case just be par for the course?

Bernanke: "If they tried to invoke the MAC, the market would understand that the chances of success of the MAC would be very low" and therefore both companies' reputations would be compromised.

10:45am: Kucinich is at the mic now. He says he will submit evidence that the Fed knew that BofA failed to do due dilligence. "Your colleague, Kevin Warsh, doubted the competence of BofA's senior management" to handle the Merrill merger.

Kucinich is cleaving to a different smoking gun: It's interesting. He wants to go after the Fed not for bullying BofA but for failing to be tough enough on the company and on Lewis.

10:48am: Kucinich: "In view of the considerable evidence amassed by your staff" that BofA's top management was incompetent, did you require any management changes at the bank? Kucinich asks. "Yes," Bernanke says, subsequent to giving the bank more government aid.

Now Kucinich is asking about other ways in which the Fed could have held BofA accountable: forcing a foreclosure prevention plan along with other changes at the bank.

Bernanke says he can't remember whether they made BofA adhere to a loan modification plan.

10:50am: Kucinich is accusing Bernanke of giving aid to BofA without imposing any changes.

"The supervisory process is not a one-time event," Bernanke replies, implying that the Fed could still impose new changes.

10:51am: Rep. Dan Burton, R-Ind., asks, "Is Mr. Lewis lying?" Bernanke responds: "All I know is that I did not" threaten to fire him. "Is Mr. Paulson lying" about what he told Cuomo? "I believe he's modified that statement," Bernanke replies.

Burton cites a letter to the committee from Cuomo in which Cuomo says Paulson claimed that he conveyed the threat to fire Lewis at the behest of the Fed.

Then he moves on to the email from the Fed official, Jeffrey Lacker, who claimed that Bernanke told him that if Lewis invoked the MAC he'd be "out."

"Was Lacker lying?"

"I don't recall that conversation."

Burton adds pressure. He suggests that to avoid perjuring themselves officials often say they can't remember anything.

10:55am: Now Burton is asking why the SEC was kept out of the loop. Bernanke insists he communicated with the appropriate agencies.

10:56am: Rep. Bill Foster, D-Ill., has begun his questioning. Like the others, he opens by asking whether Bernanke threatened to fire Lewis. "I did not," Bernanke replies.

"Do you believe there is any additional clarity that needs to be added" to the duties of a CEO to shareholders, regulators and the public?

It might be something for Congress to examine, says Bernanke.

Foster: "If you accept that the federal recapitalization of both BofA and Merrill was inevitable," then what was the point of forcing the merger?

Bernanke replies that the merger strengthened the stability of both companies. "We learned that there were problems with the investment banking model," he explained.

10:59am: Now it's Jordan's turn. He brings up the meeting Paulson and Bernanke had with the nine big bank CEOs during which the two officials described the need to infuse government money into the banks. Is it true that the meeting took less than an hour? And is it true that nobody knew it was about "being forced to accept Tarp money" before the meeting began? "I don't know," Bernanke says.

"I was not in contact with the nine CEOs," Bernanke says, passing off responsibility to Paulson on that one.

11:02am: Jordan is moving on to the question of whether Bernanke threatened to fire Lewis. He rehashes the Cuomo and Lacker letters, but doesn't give Bernanke a chance to respond. He moves on to the issue over whether the Fed tried to delay a filing with the SEC that would reveal Merrill's losses.

"Do you see how a reasonable person could reach the conclusion that there in fact was this pattern of pressure from the government?"

"No," Bernanke says.

11:04am: Rep. Jackie Speier, D-Calif., has taken over. She asks why the Fed let Lehman Brothers fail.

We tried to prevent it, Bernanke responds. But we didn't have the authority.

"But you saved AIG that same weekend," Speier replies.

It was a different situation, says Bernanke.

11:06am: Speier is now asking where the Fed came up with the number for the amount of money BofA got in federal assistance. It adds up to the cost of purchasing Merrill, she points out. "Did the American people subsidize the purchase of Merrill Lynch?" She asks. "No," Bernanke says, "the American people made an investment."

Why wasn't the SEC included in the discussions on bailing out on BofA?

They weren't within the sphere of responsibility that was relevant, Bernanke says.

But, Speier says, "some of these emails suggest that there was an active interest in not telling the SEC certain things...I'm just trying to understand why."

Bernanke insists that the Fed told the SEC everything it was supposed to.

"Is there anything you would have done differently," looking back? Speier asks.

No.

11:10am: Rep. Jason Chaffetz, R-Utah, points out that Bernanke did have the authority to fire BofA's management. So how did he NOT seem to be threatening Lewis when he questioned BofA's judgment on the MAC threat?

"We advised him that we did not think that that was a good idea," but we didn't threaten him, Bernanke replies.

"With all due respect, I'm just not buying that," says Chaffetz.

11:13am: Chaffetz asks how Bernanke can say he never directed BofA to withold any information from the public. If that's true then how can he explain the email in which a Fed official is vowing to get Merrill to delay its fourth-quarter filing?

Bernanke points out that despite the email, no actual attempts were made to get Merrill to delay its filing.

11:15am: Rep. Gerry Connolly, D-Va.: "I want to be clear on who was threatening whom," when did you first learn BofA did bad due dilligence? "Did you take it as a threat or did other senior federal officials discuss it as a threat...that Mr. Lewis" was talking about backing out of the deal?

"I was concerned about that when I first heard about it," Bernanke replies. "After some meetings with Mr. Lewis...that impression faded." He seemed "genuinely undecided" about what to do.

11:18am: Connolly: Did you ever warn Lewis not to disclose to the public or the SEC info about Merrill's losses? Bernanke: No.

Connolly: Did you commit to bailing out BofA before the Merrill deal closed?

Bernanke: We informed the other banking regulators that we would do what we needed to bail out BofA if something were to go wrong, but there was not yet a specific plan.

11:20am: Connolly: Did you accelerate aid to BofA in response to Lewis' threat to invoke the MAC?

Bernanke: I did't feel threatened.

"I believe the narrative lends itself to a very different interpretation: Of a wily CEO...gaming the system" and reaping the benefits, Connolly concludes.

11:21am: Rep. John J. Duncan, Jr., R-Tenn., is asking about "too-big-to-fail." Bernanke says there needs to be a resolution regime, better oversight and more controls on big firms.

Duncan: How much money have you spent on bailouts?

Bernanke: "Our balance sheet is $2.2 trillion" but not all of that can be considered bailout money. In fact, only the infusions to Bear Stearns and AIG can be seen as lost money.

11:24am: Duncan brings up the evidence that the Fed withheld information from other regulators and asks, generally, whether Bernanke thinks the Fed is transparent enough?

Yes, Bernanke says. And the Government Accountability Office's suggestions for increasing transparency would actually hinder the Fed's ability to carry out monetary policy with effeciency and safety.

11:26am: Rep. Marcy Kaptur, D-Ohio is presenting the Left Field question of the day. She's asking about BofA and Merrill's connections with BlackRock, the private equity fund. At the time of the BofA-Merrill deal, didn't BofA buy BlackRock, which now owns a majority stake in BofA? And now isn't BlackRock involved in analyzing some of the mortgage-backed securities held by Fannie Mae and Freddie Mac on behalf of the government?

What year did BlackRock's CEO Larry Fink sell the first tranche of MBS to Fannie and Freddie?

Bernanke: I don't know.

"Do you believe you should know that?"

"No."

Now Kaptur is talking about the danger of MBS. Is the Fed in collusion with Mr. Fink "in covering up" fraud by shifting portfolios of MBS around "in ways favorable to those clients he served?"

Bernanke describes the strict firewalls between different parts of BlackRock and vows to provide the Fed's contracts with BlackRock. We have them, Kaptur replies, but they're incomplete. The investment strategy, fee schedule and lists of key officials are blacked out.

"If we're going to fix what's going wrong in this society it seems to me that those who hold extraordinary power to create money...something went seriously wrong and I hear what you said this morning but I am deeply concerned that the Fed itself is involved in the manipulation of the mortgage markets, particularly the toxic assets...I hope you can provide information to the record to convince me that my suspicions are unwarranted."

11:32am: Rep. Mark Souder, R-Ind., begins by observing that the Fed has been "an activist Fed." Will it continue to step in during crises?

"The past two years has been the worst financial crisis since the 1930s," Bernanke responds. "Extraordinary actions had to be taken." But hopefully no one will have to do this again.

Souder asks how the Fed will avoid becoming "politicalized" and how it will extract itself from "Tarp and tarf and all of these other equities injections..."

It will be a challenge, Bernanke admits.

Souder: How will the Fed deal with non-bank lenders in the future?

Bernanke: There are a lot of different suggestions in the administration's reg restructuring plan.

Souder: How will you cooperate with the other regulators and government officials without becoming politicized?

Bernanke: In a time of crisis the American people expect government agencies to work together.

11:36am: Souder: "Agreeing that we were in deep trouble last fall, how would you...have a guideline that says 'oh we're going to have these extraordinary interventions,' how did you determine that this was the greatest crisis since the 1930s when it wasn't there yet?"

Bernanke says once AIG and Lehman failed, it was pretty clear.

Souder: Well, what about the people who say failures would have been good to "cleanse" the market?

Bernanke: "If we have a resolution regime...we can avoid this problem in the future."

11:38am: Rep. Diane Watson, D-Calif., wants to know when the Fed first realized that BofA would need government aid to complete the Merrill deal and that BofA hadn't done due dilligence.

Bernanke: When Merrill and BofA announced their agreement to merge the bailout bill hadn't been passed yet. Both banks got Tarp money in October, and BofA got funds on Jan. 16--that was after an analysis that determined that BofA needed it for stability. (How was that answering her question?)

11:40am: Watson: Many of my constituents complain that they can't get loan mods. Where did all of that bailout money go? Also, in testimony here, Lewis claimed that a Dec. 14 revelation of a big loss at Merrill prompted him to consider invoking the MAC clause. But a New York Fed official has said that Lewis' claim that he didn't know about the Merrill losses earlier seems suspect. What do you think he knew?

"I have no way of knowing. I did have concerns about the quality of due dilligence."

11:43am: Watson: "In an email on Dec. 20, the president of the Federal Reserve Bank of Richmond, Jeffrey Lacker, described a telephone conversation with you" in which he said that you said if BofA invoked the MAC clause Lewis would be out. Do you remember the conversation and do you think Lewis' claim that he was threatened is credible?

"I was concerned initially about whether this was a serious proposal to invoke the MAC...I never made any threat to Mr. Lewis regarding the board and the management." But the Fed has removed management teams--at AIG, for example.

11:45am: Now Rep. Patrick McHenry, R-N.C. is questioning Bernanke. He's talking about Bernanke's close work with Paulson in the early days of the bailout. And with Treasury Secretary Timothy Geithner. "In the context of this controversy that we're analyzing today, did you have conversations with those two about BofA?"

Bernanke replies that Geithner had been designated already as the Treasury Secretary designate and so recused himself from involvment with the creation of BofA's aid package.

McHenry brings up a Dec. 20 email to Bernanke from Geithner asking whether Bernanke was "getting what you need from the troops." "It seems to me that he was all over this," McHenry concludes. Don't you think?

Bernanke: "The troops" probably refers to his staff at the New York Fed. He was probably just asking if they were cooperating.

"My only association with Mr. Geithner during this period was general phone calls to update him."

11:50am: McHenry is now asking about Paulson's threats to fire Lewis. Did Bernanke talk to Paulson about that at all?

Bernanke: Paulson just told me that Lewis decided not to invoke the MAC.

11:51am: Rep. Elijah Cummings, D-Md. "Listening to your testimony, I think I get it. You became so intertwined" with Paulson that it's hard to tell who did what.

"Basically, you did not believe in the competence of Mr. Lewis, is that right? Yes or no."

Bernanke: "I don't think that's a yes or no question."

Cummings: But did you think your judgment trumped his, despite his experience as a bank CEO?

Bernanke: It was his decision. He was uncertain what to do.

Cummings: "There is not a person in this room who did not understand that he" (Lewis) "was threatened. You even used the word yourself! You used it! I didn't, you did."

Bernanke: "To say that I did not threaten anyone."

11:57am: Rep. Brian Bilbray, R-Calif., reminds the room that "this is not an inquisition." Then he asks whether Bernanke thought Merrill was too big to fail.

"I did," Bernanke replies, adding that it Merrill was bigger than Lehman.

Bilbray: You said earlier that you didn't threatened to fire Lewis if he invoked the MAC but that if BofA invoked the MAC and then needed more assistance there would be problems, right?

Bernanke: That's what was in my conversation with Lacker but I didn't say that to Lewis. Although I do think it's unreasonable for a CEO to be kept on after he damages his company enough to need a government bailout.

Bilbray: "When you get into this, you said 'we did not guarantee BofA anything,'" but couldn't you have maybe indicated in some other way that you were dedicated to supporting BofA if something went wrong with the deal?

Bernanke: We committeed to making sure BofA "would not collapse because of this issue."

12:04pm: Rep. Wm. Lacy Clay, D-Mo., asks whether Bernanke thought he should have disclosed any more info than he did. Bernanke says no.

Clay: "At one point does the welfare of the investor become" more important thant he welfare of the system?

Bernanke: Investors' reaction to the collapse of that deal would have hurt the whole system.

Clay: When did you disclose information to the public?

Bernanke, repeating what he has said to many of the committee members, replies that Tarp rules require the government to disclose all new injections within a week--and emphasized that he followed the rules.

12:06pm: Now Bernanke is telling Clay why the Fed couldn't save Lehman. "With respect to the other cases, we did everything we could to avoid a systemic failure." It was easier to save AIG because the company could put up collateral needed to lend to the Financial Products division.

Clay: "Was it really necessary to salvage AIG?"

Bernanke: "If they failed, the consequences would have been a worldwide banking run" and other unknown effects.

12:07pm: Rep. Jeff Fortenberry, R-Neb., says Bernanke's explanations of the bailout make sense.

But, he asks, did Merrill really need to be propped up?

Bernanke: Yes.

Fortenberry: What did you discuss with Bair?

Bernanke: She was concerned about the exposure to the DIF in the BofA bailout.

Fortenberry: What do you think about the fact that 10 banks control the majority of assets in this country?

Bernanke: We need a resolution regime for big companies.

Fortenberry: "But are these banks too big?"

Bernanke: There shouldn't be an incentive for banks to grow just to reach too-big-to-fail status, but we probably do need big banks.

12:12pm: Burton has jumped in again. You said Paulson changed his claim that you told him to threaten Lewis, but he is still claiming that his threat was "based on knowledge" that the Fed didn't like the MAC clause.

Bernanke: "We were strongly opposed to that action for the reasons I've described."

12:13pm: Rep. Peter Welch, D-Vt., thanks Bernanke for his service. Then he recalls Lewis' testimony to the oversight committee: First he said the BofA-Merrill deal was great. Then he said the Merrill losses were so great that they soured the deal. Then he said he was threatened away from invoking the MAC clause. Finally, he assured the committee that the Fed and Treasury had promised to help BofA. Is that true?

Bernanke: Yes we told him that we would help BofA. There were no specifics.

Welch: You said we need a new systemic risk regulatory regime. Now Congress has to decide how to do it. Is a "super-sized" entity to oversee the whole market better, or should an institution be simply prevented from getting too big to fail? That way we wouldn't have to depend "on the vigilance of regulators."

Bernanke: Well you could discuss both options but "very large banks do have an economic function, a global reach, diversity of activities."

12:18pm: Rep. Paul Kanjorski, D-Pa., says "I can't see how people are jumping to the conclusion that by yourself or the Secretary of the Treasury informing memebrs of a board that they have the power to take action," that it's a threat. It's not necessarily a threat. "It's telling the truth."

Bernanke: Yes.

Kanjorski: I don't care what happened in December as much as I do about what happened in September--can you tell the committee how bad things were at the beginning of the crisis?

Bernanke: It was "an incredibly intense period...the world economy went into a nosedive." Regulators "worked overtime to try to prevent additional failures." Tarp helped alot. We coordinated with other countries to prevent "a global financial meltdown."

Kanjorski: "The thing we have to decide is what we're going to do in the future and how we're going to handle it." Why don't regulators act, even when they do have the authority? That seems to be what happened with the Fed. It had opportunities to prevent the economic crisis. Why didn't it write the Hoepa mortgage rules for 14 years? If they had been enacted earlier the mortgage crisis might have been avoided. Also, "there are issues with the Federal Reserve that they are now acquiring additional powers?"

Bernanke: Yes the Fed was late but "we have been very aggressive over the past couple of years." We need to be even stronger in the future "if the Fed retains those powers" (have to assume he's specifically talking about consumer protection). As for making the Fed the systemic risk regulator, it won't be a massive increase in power, but rather a change in strategy.

12:25pm: Rep. Michael Turner, R-Ohio, has taken over. "I have voted against every bailout that has come before this Congress," he declares. The bailout plans were ill-defined in many ways. "There's a lot of unintended consequences."

These BofA-Merrill problems get right to the hart of them. "The federal government has a very mixed record" on issues related to interference. "We're not a very good customer" for contracts. Is there abuse of process? "So when you then put another layer on of us not just being a customer but an investor...I have greater concern."

Now Turner is talking about new legislation he introduced for a constitutional amendment to limit the ability of the government to take stakes in private companies.

12:27pm: Turner: I have 102 original co-sponsors on this baby.

12:28pm: Turner: But enough about me. What do YOU think about my amendment?

Bernanke: I agree that limited government intervention in the private sector is frequently good policy. But we need to have rule and regulations that allow firms to fail. You have to have failure in a way that's not going to bring down the entire system.

Turner: Are you saying that the only way you could have intervened was to take a stake in these companies?

Bernanke: Look at other banking crises: there are instances elsewhere of governments taking temporary stakes in banks. "I'm not sure what the alternative would be. I'll have to think about it."

12:31pm: Rep. Stephen Lynch, D-Mass. reminds Bernanke that he voted against the Tarp bill. He also complains about Congress' having had to pass the "Tarp corrections bill" a few weeks later. "I do want to say the reason why we're going over this chronology is because we've granted an enormous amount of power to the Fed."

12:33pm: Lynch is going over the timeline of the BofA-Merill deal and Lewis' consideration of the MAC. Whatever the timeline, Lewis ultimately went ahead with the deal. What does that mean for the taxpayers? Do you think Lewis was afraid of losing his job if taxpayers had gotten voting rights as BofA shareholders?

Bernanke: I don't know.

Lynch: Are taxpayers really getting what they deserve out of the government support of BofA?

Bernanke: The Fed and the OCC are overseeing BofA and trying to improve the comapny and its functions.

Lynch: But couldn't we have protected taxpayers more? Or gotten more power over BofA? It doesn't seem "commensurate with the amount of support" the taxpayers provided.

12:37pm: Rep. John Tierney, D-Mass.: When you bailed out AIG, you kept the credit default swap counterparties 100% whole. Why?

Bernanke: "I don't see on what basis less than 100% could have been paid. These were contractual obligations. Failure to pay them would have prompted the creditors to pursue bankruptcy, which is exactly what we were trying to avoid."

Tierney: But the AIG employees themselves say they might not have had to pay 100%. It looks bad. "Will you produce to this committee copies of all of the CDS contracts the AIG FP division had with those counterparties?"

Bernanke: I think we pretty much released a lot of the documents already, but please send us a letter with specific requests, "we'll see what's available."

Tierney: "We want everything to be available."

12:42pm: Rep. Danny Davis, D-Ill.: "How involved is the Fed in day-to-day management of BofA" and have there been any attempts to change the management?

Bernanke: The board of directors of BofA manages day to day operations. We told them to add more independent directors.

Davis: Why did you replace AIG's management and not BofA's?

Bernanke: "The merger was undertaken in good faith; at the time it looked like a reasonable combination." Lots of financnial institutions suffered huge losses. We judged Lewis to be able to continue to lead the company.

Davis: Fed Governor Kevin Warsh wrote to you about the Richmond Fed possibly having threatened Lewis or coerced him into getting rid of BofA's dividend. Do you think that the Richmond Fed team threatened or coerced Lewis at all?

Bernanke: "At various points there were some confusions I think about what the position of the Fed was because there were some miscommunications between the Richmod Fed and the board of governors in Washington." But we cleared it up.

Davis: Can the American people really get a grasp of what really happened? "Was Mr. Lewis bullied into going forward with this bad deal?" Or did he "recklessly" agree to go through with it?

Bernanke: "Today, I think, has been very productive in terms of transparency...clearly it was a very difficult period...I believed that we solved this problem without taking any steps that were beyond the law or unethical."

12:47pm: Rep. Eleanor Holmes Norton, D-D.C.: "We did have a series of rather unusual, late-developing factors come to light in the process of negotiations for this agreement...Could not BofA have negotiated a reduction in price with Merrill had it invoked the MAC clause? Wouldn't you think that would be the logical thing?"

Bernanke: The advice I got was that "short-term loses, no matter how large, are not basis for a MAC." Merrill has been a profitable acquisition. And negotiating a better price didn't come up, but it would have created additional danger as investors lost confidence in the deal and in Merrill.

12:51pm: Holmes Norton: Didn't shareholders really take a hit with the Merrill losses?

Bernanke: "Not in our view." Shareholders would have been worse off if BofA had failed or needed a big bailout later.

12:53pm: Issa has the mic again. He's asking whether Bernanke things "the ends justify the means."

Bernanke says no.

Issa: So federal officials should always adhere to the rule of law, right?

Yes.

Issa: Can you answer additional questions in writing?

Yes.

Issa: Do you think Lewis and Paulson lied?

"I have no opinion on that."

Issa: Should regulators pick winners and losers?

Bernanke: "I think all of these interventions are very unfortunate" and they were made only under duress.

Issa: Can't you remember the conversation with Lacker?

No.

12:56pm: Burton has taken over. He's complaining about the general tendancy of the government to "tell the private sector what to do."

Now Burton is re-reading Lacker's email describing Bernanke's intent to threaten Lewis.

Burton: It's not fair that the government bullied a private company into doing a deal it didn't want to do after discovering the losses were higher. "I just think that's wrong. You can make a response if you like."

Bernanke: "I never said that."

Burton: "What about your attorney who said that you were going to put pressure on them?"

Bernanke: "I didn't tie it directly to replacing him or the board."

12:58pm: Kucinich: Your staff believed Lewis knew about the higher Merrill losses a month before he came to the Fed. Did the Fed actually know about the losses before approving the merger?

"No I don't think we did."

Kucinich: But the Fed was receiving detailed information about Merrill's losses, as this email from September demonstrates.

Bernanke: "We are certainly involved in a light way in the oversight of Merrill Lynch since we began to lend to them. But we are not their supervisor."

Kucinich continues to insist that the Fed knew about Merrill's financial peril before it approved the merger.

Bernanke: "All I can says is I was not aware, and I don't think anybody else at the Fed was aware of the $14 billion loss."

Kucinich: But this email is a request for daily reports on profits and losses!

1:03pm: Kucinich has moved on to ask Bernanke whether he really though Lewis was using the MAC threat as a bargaining chip. Bernanke replies that he did at first, but then he says it became clear that Lewis was genuinely confused "we provided advice," Bernanke adds.

Kucinich: The record clearly shows you thought that a collapse of the BofA-Merrill deal would have posed systemic risk. Did Lewis' MAC threat prompt you to promise government assistance when you didn't otherwise intend to provide it?

Bernanke: We probably would have provided it anyway.

Kucinich: If you knew about those losses why did you approve the merger?

Bernanke: We didn't know about that in November.

1:06pm: Issa is asking whether, "on a day-to-day basis," Bernanke knew what some of the toxic assets on banks' books were worth. No, Bernanke says.

Issa: I don't think actually that the foundation for a MAC claim is so shaky.

Bernanke: Our lawyers said it wasn't likely to succeed.

1:08pm: Jordan has the mic. He's asking when the Tarp plan as a scheme to buy toxic assets became unfeasible.

"Did you know before Congress voted on it" (Tarp) "Or did you know after?"

Bernanke: "After."

Jordan: But you had a whole month to convince Congress you were going to do this, why the about-face afterwards? And why did the bankers get called to Washington without any indication of what the meeting they were attending would be about?

Bernanke: The situation went south so fast. We realized we needed capital injections.

Jordan: Now I have questions about the money supply. How are we going to deal with inflation?

Bernanke: The money's not in the system in any real way. It's not being circulated. Now we just have to figure out how to unwind these loans and the stimulus in time.

1:11pm: Kucinich wants to add documents to the record.

1:12pm: Kaptur wants to add documents about the connection between the connection between BlackRock, BofA and the Fed.

Kaptur has launched into another discourse on the unchecked fraud allegedly perpetuated by BlackRock, now a government contractor.

Kaptur wants to know how the Fed will avoid conflicts of interest in dealing with BlackRock.

She also wants an FBI investigation into BlackRock's execution of government contracts.

Bernanke replies that if there's a reason for the FBI to investigate, they certainly will.

Kaptur: Fink should be investigated. Not only at BlackRock but at First Boston, his previous job.

1:15pm: "I will make three observations before we close," Towns says. There are major inconsistencies between today's testimony, that of Paulson and Lewis, and the Fed emails. We have learned that the SEC and the FDIC played a role in the BofA-Merrill deal. We're going to talk to the SEC and the FDIC. Paulson too. He's appearing before the committee in July. But we also need to hear from the FDIC and the SEC.

1:17pm: Hearing adjourned.

Getting closer…

The biggest American banks these days may be enshrined in the comfortable status of “too big to fail,” but they’re missing out on an important, cost-free publicity jaunt. Smaller banks, many of which can claim to have maintained stability throughout the financial crisis, are reaping the benefits of a recession-fueled nostalgia for simple gifts. Like credit cards with no fees and no interest rate hikes.

John King, the president and chief executive of the $110 million asset Three Rivers Bank in Kalispell, Mont., said he hasn’t had to pay for much advertising, but his bank has grown 10% this year. He believes the growth has come from customers’ search for transparency.

“I see more and more businesspeople and depositors coming in and asking how the bank is doing and we don’t give them a bunch of numbers. We just tell them how we’re doing,” King said.

He added that while he hadn’t launched any new ad campaigns, he had written a letter to the bank’s customers inviting them to stop by and ask questions. “One out of 10 will show up and ask questions,” he said.

King has also distributed all 1,000 copies of Three Rivers’ printed statement of condition. Typically, a run of thousand copies lasts a whole year, he explained. This year, realized he needed an extra thousand.

Community bankers and regulators may have legitimate complaints about the Obama administration’s failure to solve the “too-big-to-fail” problem: The new regulatory restructuring proposal could actually draw big banks deeper into their own category, with material consequences, including cheaper funding costs and separate leverage restrictions. Small-time bankers have been complaining since the start of the financial crisis that big banks have gotten more help from the government for less effort. But those smaller bankers are benefiting from the negative media coverage of the public’s abrupt abandonment of Wall Street worship, as well as the rosy stories of community banking, such as this New York Times piece on community banks in Indiana, and an op-ed today in the Times touting credit unions’ uncomplicated credit card offerings.

King said his bank, too, offers cards without fees or harsh penalties. Three Rivers charges a 14.88% interest rate on all cards and does not raise rates after late payments. The bank started offering credit cards 23 years ago.

“It’s been profitable since day one,” King said.

King said he didn’t believe his bank turned down an inordinate number of credit card applicants, either. “We definitely use the five “C”s of credit in looking at a credit card decision because it’s unsecured,” he explained. “You take somebody who’s banked here a long time, never been in the overdrafts and they’ve never had a credit card and they apply for one for say $1,000, if the have the cash flow to handle that $1,000 limit I’m all over that person because they’ve demonstrated over the years that they can be responsible.”

Descriptions of prudence; old-fashioned common sense: They’ve been transformed into low-cost, cutting-edge marketing tools.

Monday

Senate Banking will hold a 3pm hearing on the regulation of over-the-counter derivatives. The first panel will consist of regulators: Securities and Exchange Commission Chairman Mary Schapiro; Commodity Futures Trading Commission Chairman Gary Gensler; and A. Patricia White, associate director of the Fed’s division of Research and Statistics. The second panel will consist of derivatives experts, including University of Texas Law Professor Henry Hu; Citadel Investment Group CEO Kenneth Griffin, and Institutional Risk Analytics Managing Director Chris Whalen.

Tuesday

The Fed will begin its two-day FOMC meeting.

Wednesday

Frank will convene a 10am Financial Services Committee hearing on a consumer protection regulator. A witness list hasn’t yet been announced, but a spokesman for Elizabeth Warren, the Harvard Law professor who came up with the idea of a separate regulator for financial products, said Warren is scheduled to appear.

The Fed will conclude its two-day meeting.

Thursday

Bernanke will testify to the House Committee on Oversight and Government Reform at 10am on BofA’s takeover of Merrill during the height of the credit crisis.

The full Financial Services Committee will hold a 10am hearing on preserving affordable housing assistance at the state and federal levels; later, the Subcommittee on Financial Institutions and Consumer Credit will address financial literacy in the new regulatory regime at 2pm.

Within days of its release, the pundits have decided they aren’t happy with the Obama administration’s new plan for regulatory restructuring. They say it fails to address the problem of too many regulators while instead adding more bureaucracy with a new systemic risk council and a new consumer protection regulator.

Krugman thinks new standards for retaining risk in loan origination aren’t tough enough, and points out that there’s little in the way of reform offered to curb the power of the rating agencies, a sentiment Pearlstein echoes. And on consolidation, Pearlstein reasons, “If you have to set up a council of regulators just to harmonize the rules used by different bank regulators, why not bite the bullet and consolidate them into a single agency?”

But there’s one important thing the commentators don’t seem to mind: the proposal to expand the Federal Reserve’s powers to allow the agency to oversee systemic risk. Krugman calls it “good stuff,” and Pearlstein declines to condemn it. The Economist, while acknowledging the potential pitfalls, concludes that “if macroprudential regulation is to be done, the central bank is the logical body to do it.”

Eliot Spitzer, the fallen New York governor and former scourge of Wall Street, thinks the plan fails to hold regulators accountable for their failures. “Each of the major regulatory steps that the Treasury secretary and the director of the National Economic Council have set forth makes eminent sense,” Spitzer wrote in his Slate.com column yesterday. “Yet each was already squarely within the purview of an existing federal agency.”

Ideology aside, Spitzer is the one voice of the four closest to regulation and Wall Street in practice and his point is worth noting. As for the others, while they may be right, their muddled mixes of praise and criticism smack of the old adage about compromise: When it is reached, no one is happy.

This post on Dealbreaker echoes what we at BankThink thought we heard: Sen. Bob Corker, R-Tenn., opened his remarks by greeting “Mr. Chairman,” and Geithner understood the address to be directed at him. He replied, “I’m not Mr. Chairman yet.”

Then he had to backtrack: He mumbled an acknowledgement that Corker had meant to address the Senate Banking Committee’s chairman.

We in the media understood Mr. Geithner to be referring to the chairman of the Federal Reserve as if he were expecting to someday assume that role. And perhaps we weren’t alone: Corker went on to ask Geithner whether it would be appropriate to have the next chairman of the Fed come from the White House, to which Geithner replied “No, I don’t think that would be appropriate.”

Hence Dealbreaker’s post and BankThink’s acknowledgement of the incident. Apparently, however, we were wrong. As described in this later post on Dealbreaker, a spokesperson from the Treasury requested that the site’s blogger “clarify” her earlier post: Geithner was talking about the chairmanship of the yet nonexistent systemic risk council.

Well, readers? With all the talk of the connection between Lawrence Summers (Geithner’s mentor), who has expressed interest in the Fed chairmanship himself, and the push to grant the Fed more power in this latest regulatory restructuring push, do you buy the explanation that Geithner was talking about the council?

9:35am: Sen. Chris Dodd, D-Conn., is giving his opening remarks. He says consumer protection must be "an urgent priority" and adds that the new independent consumer protection agency makes sense.

9:42am: Sen. Richard Shelby, R-Ala., the committee's ranking member, has begun his opening remarks. Dodd ended his with a call for cooperation. But Shelby has begun with a warning on the possiblity of failure to act "on this unique opportunity" if things move too fast. Shelby is asking Geithner to share "any and all documents" used to analyze the financial crisis and come up with a plan for reg restructuring.

9:45am: Shelby: "We have spent very little time discussing the concept of systemic risk...and whether it can be regulated at all."

9:46am: Shelby's moved on to concerns about the Fed. Could it be insulated from political influence if it were the systemic risk regulator? Could it handle the multiplicity of tasks? Could it oversee non-banks?

9:48am: Shelby: "I hope that we will not allow the administration's recommendations to limit the discussion we are about to have..."

9:50am: Geithner has begun his opening testimony. He seems distracted as he reads his speech--he has lost his place a few times already. Is this all hum-drum for him already?

9:51am: Geithner: "Our economy was brought too close to the brink to let this moment pass." He says of the plan: "We made the judgement that now was the time to pursue the core reforms" of the financial system.

9:52am: Geithner is saying that the solution to the former patchiness of the regulatory system is the creation of a systemic risk regulatory system, consisting of a council and enhanced powers for the Fed. He touts the committee's importance as a monitor and information gatherer, but adds, "you can't convene a committee to put out a fire." He argues that the Fed needs some authority so it can act quickly when problems arise. He is definitely taking the committee's wariness into account: He notes that while the proposal would give the Fed new powers, it would also take some away.

9:55am: Geithner says stronger protections against risk will foster innovation, not stifle it.

9:58am: Firms will have higher capital requirements, Geithner says. This should also help reduce moral hazard.

9:59am: Geithner has finished with his opening statement and Dodd has begun questioning him. Dodd starts off with a question about consumer protection in the mortgage industry: Would the administration be willing to work with the committee on more reforms of the mortgage industry?

Geithner: Yes.

10:01am: That last question was just a warm-up pitch. Now Dodd is quoting an academic who likened giving the Fed more power to parents giving their son a bigger, faster car right after he has crashed his old one. "Could it not conflict with their fundamental responsibility of conducting monetary policy?" Dodd asks.

Geithner: Other central banks throughout the world have more than one role. "If you look at the experience of countries in the financial crisis who have taken away responsibilities from their central banks," Geithner adds, they seem worse off. He seems to be comparing giving the Fed power with only one alternative: a committee.

10:04am: Geithner: Also, our proposal is modest--we are only giving the Fed slightly more power. Gramm-Leach-Bliley gave the Fed almost enough power, but still required that the agency consult with other regulators before taking certain actions. The Fed needs more freedom to decide and act quickly.

10:06am: "I don't think there is any regulatory or any supervisor in our country" that doesn't share some blame for the financial crisis. But the Fed's hands were tied. It couldn't act at the appropriate times to contain the crisis.

10:08am: Shelby has taken over questioning. He's explaining to Geithner how the Federal Reserve System works, with a board of governors and 12 presidents of the individual Fed banks. Who will be accountable? Shelby asks.

Geithner: "The chairman of the board of the Federal Reseve would be accountable--as he is now."

10:10am: Shelby: The Fed gets systemic risk regulatory powers because you say it has the most expertise. But I don't agree. "As a systemic risk regulator the Fed would likely have to regulate insurance companies, hedge funds, asset companies, mutual funds and a variety of other firms it has never regulated before." Why couldn't there just be a newly created entity?

Geithner: No, it wouldn't be that sweeping. The Fed would exercise systemic risk authority over the major banks and investment banks in the country. "We do not envision quite as sweeping and broad a net as you suggested in your initial remarks."

10:13am: Sen. Charles Schumer, D-N.Y. has begun his questioning. He's expressing love for the proposal and says Geithner deserves "a pat on the back" for coming up with the consumer protection agency and also the concept that lenders and securitizers must hold on to part of the risk for the products they create.

10:14am: Schumer: We have to establish a regulator with a bird's eye view of the system if we don't want this crisis to happen again. "We cannot let the perfect be the enemy of the good here."

Schumer: "I tend to agree that the Fed is the best" candidate for systemic risk. "A council, everyone would pass the buck and it would stop nowhere." A new regulator wouldn't have the institutional knowledge to assume responsibility for systemic risk. "Until shown a better example, I think the Fed, at least tentatively, is the best one."

10:16am: Schumer points out that with the new consumer protection agency there will still be four different regulators overseeing banks. "Why didn't you consolidate the banking regulators more?" Why should the Fed regulate state-chartered banks?

Geithner: We thought a lot about that. "We wanted to make sure we were focusing on those problems that were central causes of this crisis."

10:18am: "The basic problem that we faced was in the thrift charter," Geithner is saying. Bells are tolling for the Office of Thrift Supervision.

10:20am: Sen. Bob Bennett, R-Utah, is protesting the cancellation of the industrial loan corporation charter. ILCs "have been stronger than the banks," Bennett says. How is this addressing the core problems that caused the financial crisis?

Geithner: "This is a very complicated issue and it is hard to be sure what the right path is here...Institutions that do things like take deposits and make loans...need to come within a common framework of standards and oversight."

10:23am: "The theory is fine," Bennett replies, "but in practice this is an area that works." Why would the President want to take away this source of credit?

Bennett: "You're engaged in overkill here in my opinion."

10:24am: Bennett has cast the issue as a power struggle between the Fed and the Federal Deposit Insurance Corp. over authority over the ILCs.

10:25am: Sen. Daniel Akaka, D-Hawaii has asked Geithner to explain how the consumer protection agency will work. Geithner responds: It will get rule-writing and enforcement authority. Consumer advocates' advice would guide the creation of new rules. One option being considered it the creation of a new, standardized mortgage product.

10:30am: Geithner says financial education is important and should begin early and should be taught in schools.

10:33am: Geithner is defending the decision to put off dealing with Fannie Mae and Freddie Mac in this round of regulatory restructuring. He says the government-sponsored enterprises did contribute to the financial crisis but they aren't germane to establishing a new system to protect the financial markets against systemic risk.

10:38am: Now, Geithner's emphasizing the importance of preserving independence for the Fed. He says that does not preclude giving the Fed two different sets of responsibilities. "To change the way 13(3) now acts, to require the approval of the Secretary of the Treasury, is an important change" because it will help mitigate some of the Fed's power without significantly impacting the Fed's independence. Limiting 13(3) (the Fed's power to lend in emergencies) will also help prevent moral hazard.

10:41am: Sen. Mark Warner, D-Va., is asking Geithner what will happen with the Tarp warrants. As for reg restructuring, "I think we realize," he adds, "that if we mess this up the unintended consequences to not only our own economic recovery but the financial stability of the whole world is at stake."

Warner: "Systemic risk ought to be put in a council that would include the Fed...with an independent chair and a staff that would be solely focused on systemic risk."

Warner: The council, as it is structured in the current proposal, "is emasculated."

10:44am: Warner is asking how the governemnt would fund a resolution authority for a company as large as Citigroup. He also wants to know whether banks would end up having to pay for the resolution of non-banks.

Geithner: We want to adapt the existing resolution model of resolving banks to the resolution of bank holding companies. For funding, we want to have an assessment after the fact, "over time," applied to bank holding companies only in the event of a loss.

10:47am: Warner: So the public would have to act as "a short-term bridge" to fund the resolution of a large bank holding company? Why couldn't the cost be a contingent liability on the books of bank holding companies?

Geithner: We definitely thought about that idea but it didn't seem practical, in the end.

10:48am: Sen. Jim Bunning, R-Ky., has begun his questioning. Geithner is again explaining why the Fed is the best candidate for systemic risk regulator.

Bunning: But the Fed took 14 years to write one particular consumer protection regulation after Congress authorized it to do so, so what makes you think the Fed would act fast now?

Geithner: We're taking away consumer protection authority from the Fed. Its powers to recognize systemic risk, however, remain unmatched. They are, of course imperfect. But we have to have "much stronger cushions in the system, shock absorbers" like capital and liquidity requirements. "That is the only real effective defense." The critical failure of policy was not to establish more conservative constraints on leverage in good times.

10:52am: If you want the reforms to be bi-partisan, why did Democrats get briefed on the plan first, before Republicans?

Geithner: I invited members of both sides of the aisle to a briefing.

10:53am: Bunning: "You think Treasury should have a slush fund of $700 billion under their control, which is what Tarp is." Why can't Tarp be declared to be over?

Geithner: We still aren't out of the woods.

10:54am: Sen. John Tester, D-Mont., is asking why now is a bad time to start over from scratch with financial regulation.

Geithner responds that "much more substantial changes" are not necessary and wouldn't address the system's core vulnerabilities.

Tester: But there will still be gaps and overlaps in this proposal, won't there? What about combining the SEC and the CFTC?

Geithner: "The Congress has considered many times in the past merging those two entities." But we're more focused on bringing the underlying statutes governing derivatives markets "more into conformity."

10:57am: Tester: How will this plan bolster consumer confidence?

Geithner: Through clearer accountability and stronger authority in terms of market integrity, investor protection, consumer protection, bank supervision and systemic risk monitoring. "Those are the core responsibilities of policy in any financial system."

10:59am: Geithner admits, "we are not proposing an elegant, neat structure." Look at other countries who have done that--there's no evidence that neatness and consolidation has worked better.

BankThink's observation: Geithner has referred several times this morning to comparisons between the US regulatory structure and that of other countries. It's interesting for the level of curiosity it displays about the workings of bureaucracies outside of the States. We're used to navel-gazing, and this is refreshing.

11:03am: Mike Johanns, R-Neb., opens his questions with a warning that the economic and market revivial that seems to be manifesting itself this quarter could be a mere "dead cat bounce." He moves on to question, again, the idea of making the Fed systemic risk regulator. How could systemic risk even be observed and monitored?

Geithner: First of all, you're right to be concerned about the economy. On the Fed, preserving independence is key and we wouldn't recommend anything that would put that independence at risk or damage the Fed's credibility.

11:08am: Sen. Bob Menendez, D-N.J.: "If we have institutions that are too big to fail, have we not failed already?"

Menendez: Do increased capital requirements really do the trick of avoiding creating a too-big-to-fail institution?

Geithner: We need to make sure the system can withstand the failure of a large institution. That will involve setting tougher limits on risk-taking and higher capital standards and other cushions. We also need a better resolution system in the event of the failure of a big institution. Those powers combined will help us maintain stability in the financial system.

11:11am Menendez: And how would the systemic risk council you proposed actually exercise any power? What if it disagrees with the Fed? How will it initiate corrective action?

Geithner: "We're giving the council the power to collect information" and recommend changes but not to implement them. "That would create the risk of more confusion and less accountability." A committee can't take on the responisibility to force big firms to change. That would allow for too much diffusion of responsibility.

Menendez: But the Fed dropped the ball on regulating mortgage lending. How are we to trust its judgment?

Geithner: It will have to be more accountable to Congress. And I can't tell you that it will be able to prevent every single problem in the future. But it will be better than today.

11:14am: Sen. Mel Martinze, R-Fla., has returned the discussion to the GSEs. They contributed to the mortgage crisis. Why are we creating more entities that are too big to fail by extending an implicit government guarantee to big banks?

Geithner: First of all, Congress tried to fix the GSEs last year--that's a beginning. And we're proposing stronger, more conservative capital requirements for the banks so they won't end up like the GSEs.

11:18am: Martinez: And when will the consultation on reforming the GSEs conclude and who will end up recommending a solution to the government's temporary conservatorship of the GSEs?

Geithner: We haven't designed a plan for that yet, but the Federal Housing Finance Agency and the Department of Housing and Urban Development will definitely be involved.

11:20am: Sen. Michael Bennet, D-Colo.: It's obvious that people can't yet agree on how to change financial regulation for the better. But one thing is clear: Our deficit has soard and our savings rate has plummeted. "If we could rewind the movie that we just had play out..." if we had had this proposed regime in place earlier?

Geithner: The government would have been able to act sooner and we also would not have faced such tremendously levered institutions.

Geithner: The Treasury Secretary will also now be required give regular reports to Congress on the monitoring of systemic risk and the overall effectiveness of the regulatory system.

11:25am: An interesting Freudian slip: Sen. Bob Corker, R-Tenn., opened his questions by addressing "Mr. Chairman" and the committee members and thanking everyone for "being here." He was referring to Dodd, but Geithner misunderstood.

Geithner interjected: "I'm not Mr. Chairman yet."

11:26am: Corker goes on with the question of whether it would be expected that someone from the White House would be appointed Fed chairman. "I would like to make sure that the people who were involved in giving all of these new powers to the Fed" aren't taking advantage of it, Corker added.

"No I don't think that would be appropriate," Geithner replied rather sheepishly.

11:28am: Corker: Why are you reserving the power to do what's allowed in Tarp?

Geithner: Tarp is temporary. We are not trying to preserve that power. It doesn't have to do with giving the FDIC resolution authority.

11:32am: Geithner is talking about the necessity of tightening the Fed's authority and responsibility for setting capital requirements and regulating bank holding companies.

11:33am: Sen. Jack Reed, D-R.I.: The Fed is supposed to report, by October, on the changes the Fed will have to make to accomodate its new responsibilities. What are we supposed to do in the meantime?

Geithner: You don't have to wait for the Fed in terms of the legislative process. We just want the Fed to do that report to explore how to impose good safeguards on the separation of powers within the Fed.

Reed: I think there definitely needs to be some reorganization at the Fed, and also a change in the culture there. Can safety and soundness still trump everything else? Also, we need more transparency at the Fed. Before the financial crisis began, there were debates inside the Fed about whether there was a housing bubble. But we didn't know about it. How will there be more communication in the future? And who will provide oversight of the Fed's duties? The Fed's foot-dragging on the housing-related regulations it had to write wasn't mitigated by the letters I wrote.

11:39am: Sen. Kay Bailey Hutchison, R-Texas, says she's warming to the idea of giving the Fed more power, but she's still a little unsure. "I think that your proposal is attempting to do something that is good...Trying to level the playing field between banks and savings and loans is good." But do thrifts really have to disappear entireley?

Also, "I agree with Sen. Schumer" that mortgage originators need to hang on to some of the risk of the loans the originate.

11:41am: Hutchison: But on Tarp, we feel we were misled on the Tarp program's original intentions. You've continued to use Tarp in different ways from the one we anticipated. And now you want to extend the program. "Do you believe that these eleven funds that have been a part of Tarp that were not all a part of the original purpose of Tarp should have more Congressional oversight?"

Geithner: "We said that there were five areas where we thought it was going to be appropriate to use Tarp:" They were housing, securitization, small business lending, secondary markets, and bank recapitalization. We started programs in all of those areas. "These programs are subjected to an enormous amount of oversight...We have been fully transparent about the specific terms underpinning each of these programs."

Hutchison: Is that a no?

Geithner: The current oversight mechanisms have done a good job.

11:45am: Sen. Jeff Merkley, D-Ore., is asking about the consumer protection agency: "Would they have the power, without additional authority from another sector, to do things such as shut down new tricks and traps introduced into credit card practices" or mortgage lending practices?

Geithner: Yes.

11:47am: Merkley: I'm reluctant to have the Fed set capital adequacy rules. They were the ones who fought against leverage ratios.

Geithner: But if you give it to too many people you don't have accountability.

Merkley, undaunted: In the past, we gave the Fed powers it didn't exercise. Is there a way for the Fed to see these new powers as a major mission in addition to monetary policy "so they won't fall asleep at the switch?"

Geithner: But look at mortgages and other areas in which there was a lot of risk--the dangerous behavior increased along with the distance from a Fed-regulated instutition. The Fed didn't supervise firms where the problems were most acute.

11:50am: Sen. Mike Crapo, R-Idaho, is protesting "the bifurcation of consumer protection and safety and soundness regulation." Shouldn't those things still be connected?

11:53am: Geithner says the model of using safety and soundness to control abuse of consumers hasn't worked well enough. "We've had a good experiment in whether that model works and it didn't work well enough," he says. "The rules themselves were I think almost certainly not sufficiently strong," nor was the enforcement of them.

11:54am: Crapo: Also, how is this proposal serving to streamline our financial regulation? Won't adding more regulators it make us less internationally competitive?

Geithner: We're not adding a regulator. The creation of the consumer protection agency is balanced by the elimination of the OTS. Also we will lead the world in basic protections for stability.

11:56am: Sen. Evan Bayh, D-Ind., begins by commending Geithner on his dedication to bipartisanship. Then he asks whether the regulatory restructuring plan will adequately prevent future crises since it doesn't really address the imbalance of savings and consumption "in the world." The size of the deficit is going to be larger than GDP growth. Will macro factors overwhelm this reg restructuring effort?

Geithner: We have to make sure that our macro conditions don't overwhelm our efforts. But savings is increasing, and you're right that we do have to bring the deficit down. Still, "there is a recognition, not just in China but in countries around the world, that the US consumer is not going to lead the world out of this recession."

12:00pm: Bayh: Also, how are we going to avoid global regulatory arbitrage?

Geithner: We need a level playing field and higher standards globally. We are trying to work "in parallel from the beginning" with other countries. "There is a very elaborate system of cooperation in place" under the Financial Stability Board to drive these reforms.

12:04pm: Geithner, in response to a question from Sen. Herb Kohl, D-Wisc., about the FDIC's effectiveness as a resolution authority, referred to Chairman Sheila Bair as "Commissioner Bair." He must be overwhelmed.

12:05pm: Sen. Tim Johnson, D-S.D., asks why there isn't a better proposal for insurance regulation.

Geithner replies that the regulatory restructuring process will move in stages.

Johnson: Should reinsurance have a federal charter?

Geithner: We don't have a view on that yet.

12:07pm: Hearing adjourned. Stay tuned for this afternoon's House Financial Services hearing, at which Geithner will also testify.

Update: Due to floor votes, the House hearing has been postponed to a later, unspecified date.

There’s no question that banks’ interests have diverged significantly from the governments’ over the past few months (after being temporarily aligned, one could argue, during the early days of the credit crisis last fall). And now that the financial markets are no longer in acute crisis, bank lobbyists have room to oppose what they once accepted without argument, so perilous were their institutions’ conditions. But does a stronger bank lobby necessarily equal sounder financial institutions? And will bank lobbying wins actually translate into economic recovery and growth?

Logically, banks would try to do what was in their best interests, lobbyists would help clear a path to that action, and that action, since it was what the banks wanted, would lead to steady economic growth.

But in the wake of the crisis, those of us in the media should be taking a careful look at the things banks say are in their best interests. That logical allocution did not hold up so well during the subprime crisis, and to allow our scrutiny to snap back to the way it was before things started going south would mean we’re an incredibly near-sighted bunch.

The question of who knows best remains to be answered, but for now it would be prudent to think critically, rather than trust whichever voices can shout the loudest.

Monday

Capital raising plans for the ten banks that were told to raise more funds after the stress tests are due, and the Federal Reserve is handling the related announcements.

On Monday morning the Small Business Administration will unveil guidance for its new loan program, America's Recovery Capital. The program, created by the stimulus package, will provide small, short-term loans to struggling but viable small businesses. The SBA targets having the program running by June 15.

At 12:30pm, Federal Reserve Governor Daniel Tarullo will address a luncheon at the Peterson Institute for International Economics. He will talk about regulatory restructuring.

Tuesday

The House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises will hold a hearing on the regulation of over-the-counter derivatives starting at 10:30am. No witnesses have been announced yet.

Wednesday

At 1pm the House Committee on Small Business will hold a hearing on how to expand small businesses’ access to capital. The hearing will focus on issues related to the SBA. Though an official witness list has not yet been announced, American Banker reported that the American Bankers Association and the National Association of Development Companies will be there.

Elsewhere, Fed Governor Betsy Duke will speak on “the systemic importance of consumer protection” at 12:15pm at the Community Development Policy Summit in the Crowne Plaza Hotel in Cleveland.

Thursday

The Financial Services Committee will hold a hearing on the linkages between executive pay and systemic risk starting at 10am. Witnesses have not yet been announced.

Next week, one of the more far-flung effects of the financial crisis will gain a brief presence in Washington. Experts from Europe will gather to testify before the U.S. Helsinki Commission on Capitol Hill on the increase in violence against Gypsies. The Gypsy population, known as the Roma, faces segregation and high unemployment in several Eastern European countries; and since the banking crisis began, the number of violent attacks against Roma people and homes has increased. In Hungary, seven people from the Roma community have been murdered in drive-by shootings and firebombings of family homes.

Hungary’s banking system began to falter late last fall. Its currency, the forint, grew weak and ratings agencies downgraded its sovereign debt. According to Moody’s, much of the country’s lending growth had been fueled be wholesale funding, which dried up during the crisis. Furthermore, many borrowers had taken out foreign currency loans they could not repay with a weaker currency. Hungary secured a 20 billion euro loan from the Bretton Woods institutions and the European Union.

The witnesses say backlash from the financial crisis, including populist rhetoric from politicians, has inflamed the violence against Gypsies. “There is a serious concern that lately the governments are going toward a radical right, and populist statements from political parties are really feeding these radical parties and legitimizing instances of violence by private parties against the Roma,” said Isabela Mihalache, who is traveling from the Open Society Institute’s Budapest office to testify at the hearing.

A commission staffer said the point of the hearing is to raise awareness. “First and foremost, we want to send the message that, when there is an escalation of racially motivated murders, and when a five-year-old child and his father are riddled with bullets to keep them from escaping their fire bombed home, that won’t go unnoticed.” the staffer said.

“The mortgage industry’s track record so far shows that loan modifications are not likely to succeed with superficial fixes that fail to lower a homeowner’s monthly payments,” said a press release the CRL distributed.

Bankers are claiming that not even a reduction of monthly payments can stop many foreclosures from happening; some borrowers are simply in over their heads.

It’s hard to tell who’s right. BankThink has tackled this topic in previous posts. Analysts, too, claim that lower monthly payments are the key to sustainable loan mods, but regulators and many banks keeping track of loan mod efforts fail to include this detail in their metrics.

Halfway through 2009, bankers and regulators still have a great deal left to solve in the foreclosure crisis. As this grim statistic shows, time is running out.

The slideshow highlighted one card, the Austin Powers TM Titanium Visa from First USA, which carried a rate that was an entire percentage point higher than the normal Titanium Visa. Customers who signed up for the card received a free video gift of the Austin Powers: International Man of Mystery movie.

American Banker reported last week that despite the drastic changes card issuers will have to make to their business models, they won’t give up their search for new ways to make money from fees. The Austin Powers Titanium card is an example of an instance in which card holders may have known and accepted the fact that they were being charged a higher rate in exchange for the branded card (see the slideshow: It cites a newspaper report about the rate difference).

With the proper disclosures, this trend could not only continue but accelerate. It’s no secret that visual and aural evocations of brand names can be lucrative, and it’s easy to imagine new ad partnerships forming from this. Marc by Marc Jacobs Visa Platinum, anyone?

Update: Check out the Roberto Cavalli credit card, launched this spring during Milan's Fashion Week, here.

Monday

A Tarp report on deleveraging is due out by the inspector general, as mandated by legislation. It’s unclear, though, whether the Treasury, which has missed so many deadlines, will stick to this one.

Tuesday

At 2pm, the Office of Thrift Supervision is holding its quarterly earnings briefing.

Wednesday

Bernanke will testify before the House Committee on the Budget at 10am. He’ll discuss the state of the economy and the budget.

The House Financial Services Subcommittee on Financial Institutions and Consumer Credit will hold a hearing at 10am on issues of regulation and disclosure related to remittances. Witnesses have yet to be announced. At 2pm, the Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises will hold a hearing—also with heretofore undisclosed witnesses—on the future of the GSEs.

Thursday

Bernanke will open the Journal of Money, Credit, and Banking Conference on Financial Markets and Monetary Policy with a speech at 8:45am at the Fed.

The Senate Banking Committee will hold a 9:30am nomination hearing for Herb Allison, who has been picked to be the assistant Treasury Secretary for financial stability.

The Financial Services Subcommittee on Housing and Community Opportunity will hold a 10am hearing on legislation to reform the Section 8 voucher system.

Friday

Fed Vice Chair Don Kohn will appear on a panel at the Fed’s financial markets conference at 2:15pm. The panel will discuss “financial markets and monetary policy.”

As the day of the Target annual shareholders meeting dawned, activist shareholder William Ackman, who is fighting to install a set of directors onto the company’s board, hashed out his position on CNBC’s morning show, Squawk Box. The thrust of Ackman’s argument was that directors of companies like Target need more specific expertise, and in making it Ackman dissed two current board members, Wells Fargo Chairman Richard Kovacevich and former Fannie Mae CEO Jim Johnson.

Both Fannie and Wells “rely on taxpayer funding in order to survive, as a result of real estate investments that they in some cases didn’t intend to make,” Ackman pointed out by way of criticizing the two executives’ tangential knowledge of the real estate sector.

Ackman said he was confident that whether his proposed executives won or not, “The new directors that join this board are going to people with more relevant expertise.”

That expertise could play into the fate of the company’s card business. Target is struggling to keep its card operation profitable in the face of drastically changed market conditions and a new set of regulations. Ackman’s directors would push for the sale of the business to a major financial institution. One of his nominees, Richard Vague, said earlier this month that the time could be right to make some move on Target’s credit cards.

Ackman’s confidence this morning seemed to convey the message that whether or not he wins the proxy battle, a decision will eventually present itself on how to properly adjust Target’s business to the recession. But finding the right things to change will come only after an initial shift that’s looking trendier every day in the corporate world: The re-education of the boardroom.

“Here we have a trillion-dollar bailout program (on top of the many other trillion-dollar bailout programs) to get banks out of the deep holes they’ve dug themselves. Not only do they want their, um, dirt shoveled, they want to get paid for shoveling it,” read a post on Columbia Journalism Review’s The Audit.

There was just one problem: It wasn’t true.

FDIC Chairman Sheila Bair was blunt at a press conference in dismissing the idea.

“Banks will not be able to bid on their own assets,” she said, though she acknowledged, “There has been some confusion about that.”

A close read of the Wall Street Journal story that started the dust-up makes it clear that the newspaper was talking about banks being able to bid on other banks’ assets – an idea that has been out there for almost two months, and was reported by American Banker on April 7.

That idea is still a possibility, but Bair warned today that there may be less interest in the program due to recent capital raising by banks.

“The good news is, banks have been able to raise a lot of new capital, even before taking more aggressive steps to cleanse their balance sheets, so the incentives to sell may be less, but that’s for good reasons,” she said.

In an attempt to determine how banks could better capture new business, Aite Group analysts divided the so-called underbanked into categories: “Surprising Check Cashers,” “Convenience Chasers,” “Active Splitters” and “Bystanders.” The first two groups, they concluded, are comprised of people more likely to be won over to check cashing services provided by banks.

“Surprising Check Cashers” are people with “relatively high incomes” (that means a household income of $45,000 or more) whose past experiences with punitive fees have led them to prefer check cashing stores. Though they’re well-informed about financial planning and technological developments, earlier credit problems have left an impression on them. They have both checking accounts and prepaid debit cards.

“Convenience Chasers,” meanwhile, make more use of prepaid debit cards, but find services at banks to be slow and the maintenance of minimum balances irksome. They prefer the speed check cashing stores provide, and they like to pay bills immediately after cashing a check.

The other two groups are less likely to be won over by banks. They may have multiple jobs, and some do not engage in traditional banking practices at all. That means they’re further from banks’ reach.

“Aite Group estimates that banks could increase their share of checks cashed by users of check cashing stores from 28% to 47% if they were to more effectively target Surprising Check Cashers and Convenience Chasers,” the report concludes.

The report concludes with suggestions for how to target the two groups. Banks should offer prepaid debit cards and services to repair credit. They should also make bank transactions easier for customers, by extending branch hours and making it possible for customers to complete multiple transactions at once.

These changes could capture new customers or simply increase the amount of business from some existing depositors. Just taking a closer look at who these types of potential customers are would no doubt shed light on even more changes banks could make locally to make their services more attractive.