Financial Regulatory Reform

Letters regarding AIG and the Federal Reserve
In March of 2009, I was joined by 26 of my colleagues in sending a letter to TARP Inspector General Neil Barofsky requesting an investigation into AIG’s counterparty payments. Specifically, the Members of Congress wanted to know what kind of assessments (if any) were made of the health and total exposure risks of the counterparties, as well as whether or not AIG made any attempts to renegotiate the contracts.

The report issued by Mr. Barofsky concerned these payments made by AIG after that organization was rescued via payments from Treasury and the Federal Reserve. AIG made payments to “counterparties” who were owed funds by the company, following various transactions. These claims were paid to improve liquidity at AIG, taking them away from the brink of failure. Claims were paid at near 100 percent of face value, including swap-related claims.

 The SIGTARP report reveals that counterparty payments were made after efforts were made by the Federal Reserve Bank of New York, on behalf of AIG, to negotiate “haircuts”; payments made at a lower level than promised.

One company, UBS, agreed to these “haircuts,” with the understanding that other counterparties would do the same. Those companies refused, thus all companies were paid full value on their transactions. Iwas pleased with the work done by the SIGTARP staff, but frustrated with results they revealed.

Before this audit, the Federal Reserve said taxpayers should not be able to follow their money, because it would harm the market. With this report, Mr. Barofsky proved that to be categorically untrue. Congress received answers to some basic questions, and in Mr. Barofsky’s words, “the sky did not fall.” This is another case of the Fed operating beyond acceptable oversight and further proof that oversight, transparency and accountability must, again in the words of Mr. Barofsky, become our default, not something for which we must beg and plead.”

The overarching statement made by results of the audit do not find fault in any particular entity, but do show a disappointing reluctance on the part of Federal Reserve officials to negotiate haircuts for the taxpayers, and a massive lack of transparency and accountability from all parties involved in the transaction.

Following this report, revelations in media reported potential pressure applied by the Federal Reserve Bank of New York (FRBNY) on AIG. Reports indicated that the massive insurance company was pressured to avoid or delay disclosing to the Securities and Exchange Commission credit default swap contract settlement payments.

I sent two letters of request, the first requesting House Oversight and Government Reform Committee Chairman Edolphus Towns open a full investigation, including committee hearings, into this issue and the revelations.

It was critical that we understand if the FRBNY did request the withholding of information and what the extent and nature of the pressure exerted by the FRBNY on AIG may have been. If evidence indicated that the FRBNY did indeed ask that AIG withhold information from its SEC filings, the Committee needed to examine the specific nature of the information that the FRBNY allegedly asked AIG to withhold as well as the relevant statutory and regulatory disclosure requirements that applied to AIG at that time.

The letter to Chairman Towns also requested that Treasury Secretary Tim Geithner and Barofsky be called to testify at the hearing.

Barofsky was the recipient of the second letter, containing several questions:
1.    In conducting his audit, was Mr. Barofsky aware of, and did he have access to, the email exchange between AIG officials and attorneys representing the FRBNY?
2.    If he had access to the exchanges, why were they not mentioned in the report auditing AIG counterparty payments; or if he did not have access to the email exchange, how would this information have affected the conclusions reached and lessons learned in the audit?
3.    Finally, in light of this information, does Mr. Barofsky believe it necessary or appropriate to re-open his audit?

In all cases, the money provided by the FRBNY to AIG came from U.S. taxpayers and taxpayers had the right to know at the time the money was being provided how it was to be used – particularly if such information was required to be disclosed by AIG under SEC authority. 

While full disclosure may not have occurred at the time the FRBNY provided federal aid to AIG, we can continue to work to ensure that the circumstances under which that aid was provided and the uses to which it was applied are now fully transparent.

Following the hearing on this situation, along with other House Members, I sent a letter to House Financial Services Committee Chair Barney Frank and Senate Banking Committee Chair Chris Dodd. The letter requested, “a comprehensive Congressional review of the Federal Reserve System and an exploration of possible changes in its governance model.  More immediately, a complete and public audit of the system should be made part of the regulatory reform bills currently moving through your committees.”

The letter was signed by myself, Rep. John Tierney, Rep. Lloyd Doggett, Rep. Maurice Hinchey, Rep. Alan Grayson, Rep. Peter Welch and Rep. Tim Walz. 

Wells Fargo Lending and Baltimore

The Mayor and City Council of Baltimore brought suit against Wells Fargo Bank in January 2008 under the Fair Housing Act, alleging that Wells Fargo targeted African American neighborhoods in Baltimore for predatory mortgage loans. The city contended that Wells Fargo utilized “reverse redlining” practices, driving potential homebuyers in minority communities into high-cost mortgage products. The allegations referenced affidavits of former Wells Fargo employees, describing incentive programs that offered rewards based on the interest rate for each loan originated.
While Judge J. Frederick Motz recently dismissed the case, the Associated Press has reported that Baltimore City intends to file an amended complaint.

I wrote a letter to Assistant Attorney General Thomas E. Perez, regarding lending practices undertaken by Wells Fargo, and other institutions, in the Baltimore area. My letter requested an investigation by the new Fair Lending unit, created within the Civil Rights Division Housing Section of the Justice Department.

I was pleased to hear about the formation of the Fair Lending unit. The foreclosure crisis has been one of the most challenging problems that I have faced in my decades of public service. Communities in Maryland’s Seventh District and across the nation have been decimated by the seemingly unending stream of defaults and foreclosures. We must find a way to get this problem under control. The best way to do that is to find out what went wrong, and what we can fix. I hope my letter will help that process.

In my letter, I asked that Perez task the unit with answering several questions regarding Wells Fargo and other lenders:
1. Was there a systematic effort by any mortgage lender to drive minority borrowers into high-cost mortgage loans?
2. To what extent were any borrowers who were eligible for lower-cost products targeted for high-cost products?
3. To what extent do the practices observed in Baltimore mirror or deviate from practices observed in other urban areas?
The Fair Lending unit will be tasked with pursuing lenders and brokers that have unfairly denied minorities access to home loans. It will also identify companies that targeted minorities for mortgages with loose underwriting standards or high interest rates that forced borrowers into foreclosure.

Hearings
Following a letter to Chairman Towns, regarding AIG, he convened a hearing of the Oversight and Government Reform Committee, to examine the AIG counterparties situation. My concern had always been to ensure that the taxpayers’ money has been spent for their benefit, and that the Committee, and this Congress acted with the utmost integrity. I believe the hearing was an example of that integrity. The events that unfolded starting with the initial $85 billion Federal Reserve loan to AIG in September 2008 have been truly unprecedented, both in terms of scope and magnitude.

As distasteful as the AIG bailout was, the systemic risk posed by AIG to the domestic and international economies was real, and cannot be overstated. A disorderly AIG collapse would have been devastating far beyond Wall Street, well onto Main Street.

 During the hearing, Secretary Geithner confirmed that he was recused from FRBNY dealings by the time the decision was made to manage the disclosures. Geithner also answered questions I posed, regarding his own feelings on the importance of transparency.

“There are very few cases where there should be a lag in disclosure, or some gap,” Geithner told me. “In national security, in law enforcement, and in protection of confidential supervisory information; we would not want to disclose information that would hurt the taxpayer. We don’t want to make it harder for the taxpayer to recoup our investments. Transparency is important; the taxpayers deserve and we have brought an unprecedented level of transparency and disclosure.”
 
Also participating in the hearing were Thomas C. Baxter, Executive Vice President and General Counsel of the Federal Reserve Bank of New York; Elias Habayeb, Former Senior Vice President and Chief Financial Officer – Financial Services Division of American International Group, Inc.; former Treasury Secretary Henry Paulson; and Stephen Friedman, Former Chairman of the Federal Reserve Bank of New York.

Legislation that has been passed
In 2009, I introduced HR 846, the Accountability from Corporations for Outlays Under TARP (ACCOUNT) Act, which would require institutions receiving assistance under the Troubled Asset Relief Program (TARP) to report expenditures on corporate junkets, executive compensation and bonuses, and other employee perks.

When these companies come to us on their knees begging for money and then turn around and continue the partying on Wall Street with the corporate junkets and million-dollar bonuses, it is nothing less than a slap in the face of the American taxpayers. The American people are now shareholders in these companies, and it is only right that we know how our money is being managed and spent.
 
I am a fierce critic of profligate spending by companies that received TARP funding, particularly expenditures on executive compensation and bonuses, corporate junkets, and sports sponsorships. I am very concerned about the lack of transparency with regard to how these institutions are spending taxpayer dollars.

Under the ACCOUNT Act, any company receiving TARP funds would be required to prominently disclose on its website its expenditures on corporate events and junkets, bonuses and compensation, corporate jet use and executive travel, club memberships, and lobbying. The information would be updated monthly.
 
While my neighbors in Baltimore continue to lose their jobs and their homes, it becomes increasingly difficult for them to understand why AIG is taking their hard-earned money and then giving away more than a billion dollars in bonuses or why Citigroup is taking this money and then spending $400 million to put its name on a baseball stadium in New York. This bill is an important first step in bringing transparency and accountability to the distribution of TARP funds.

I took another step in July 2009 by introducing H.R. 3436, the TARP Executive Disclosure Act. This legislation would require the CEO and Board Chairman of any company that receives more than $30 billion in cumulative government assistance to file the same financial disclosure report that a Cabinet secretary would be required to file upon receiving a Presidential appointment.
 
As we try to rebuild our nation’s economy and move forward, it is critical that we not only address the issues that led us to this place, but also ensure that Wall Street is operating with transparency and accountability. The men and women running our country whose salaries are being paid by taxpayers are required to disclose basic information about their finances, and the CEO’s who are running companies being funded by taxpayers should have to meet this same standard.

I also stood with my colleagues as we passed H.R. 3269, the Corporate and Financial Institution Compensation Fairness Act. This legislation addressed the perverse incentives in compensation plans that encourage executives in large financial firms to take excessive risk at the expense of their companies, shareholders, employees, and ultimately American taxpayers.
 
The legislation is part of a comprehensive plan for financial regulatory reform to address the events that led to the nation’s current financial crisis. It would provide shareholders of public companies with an annual, non-binding vote on the executive compensation plans of companies’ top five executives. It would also authorize federal regulators to proscribe inappropriate or risky compensation practices of financial firms with at least $1 billion in assets.