January 21,2009

Grassley: Stakes Are High for Next Treasury Secretary

Prepared Statement of Senator Chuck Grassley
Finance Committee Hearing on Timothy Geithner for Treasury Secretary
Wednesday, Jan. 21, 2009

Today, we perform one of the most important functions of this committee -- we examine
the qualifications of the man nominated to be the next Treasury Secretary, Mr. Timothy
Geithner. Yesterday I was heartened to hear President Obama say, “What is required of
us now is a new era of responsibility…” For President Obama, that era of responsibility
will begin in his cabinet, and I look forward to helping facilitate that.

I come into this hearing with a profound sense of concern and worry for the future of our
financial system. Of course most people are worried about a financial crisis these days,
but my worry has been deepened by my dissatisfaction with the decisions made to
alleviate that crisis, and by what I have learned about certain people entrusted to make
those decisions.

On October first of last year, I voted for the Emergency Economic Stabilization Act of
2008, which created the Troubled Asset Relief Program, or TARP. It was not an easy
decision to support that legislation, but I believed that something needed to be done, and
legislation important to many taxpayers, and to Iowans specifically, was added to the
TARP bill.

However, last Thursday I voted against allowing the Secretary of the Treasury to access
the second half of the $700 billion in bailout funding. Instead of using the first payment
of $350 billion to purchase troubled assets, as the name Troubled Asset Relief Program
suggests, the money has been erratically and arbitrarily distributed in a monstrous act of
government intervention and ownership over our financial markets.

In addition to the TARP program, taxpayer dollars are on the line in the bailouts of Bear
Stearns and AIG. The Federal Reserve has loaned money to three Special Purpose
Vehicles (“SPVs”), which are all limited liability companies that used the Fed funds to
purchase troubled assets. Maiden Lane I accepted residential and commercial loans as
well as derivatives, including credit default swaps from Bear Stearns in connection with
its purchase by JP Morgan.

In similar deals related to the AIG rescue, Maiden Lane II holds residential mortgagebacked
securities while Maiden Lane III holds the collateral debt obligations purchased
from the credit default swap counterparties. It would seem that the Fed’s investment in
these SPVs is based on a valuation of assets that was conducted, in all three cases, by
Blackrock Financial, which also, I understand, now manages these assets.

I championed the need for a Special Inspector General for the TARP and supported the
various congressional oversight duties, including the mandate for GAO reports on the
program, which at least sheds some light on the activities and transactions under the
TARP. Similar transparency and oversight of the bailouts conducted outside of the TARP
is also needed.

In addition to these concerns about how the TARP and other bailouts have been managed
to date, we have to consider what we have learned about the nominee’s tax history. The
nominee’s troubled tax history was made public last week in a bipartisan Finance
Committee document.

I ask unanimous consent that the committee staff memorandum, released to members on
Tuesday, January 13, 2009, along with supporting documentation, be printed in the
hearing record.

Since the report was issued, additional questions have arisen specifically about the
nominee’s failure to pay self-employment taxes on his International Monetary Fund
income reported on his tax returns for the years 2001 through 2004. The press has
documented many of these questions.

Mr. Chairman, I ask unanimous consent to enter five articles and editorials into the
hearing record. Over the past few years, this committee has spent a lot of time examining
the tax gap. It is the difference between what taxpayers legally owe and what they
actually pay. The nominee has been found to be a tax gap participant. In addition to
failing to pay self-employment taxes while working for the International Monetary Fund,
the nominee’s returns contained other irregularities that added up to his owing a total of
$48,268 in taxes and interest to the IRS.

When asked by staff and members of this committee to explain these irregularities, the
nominee has offered many excuses that range from statements that he should have known
to exclamations that if only his accountants had warned him, he would have done the
right thing.

A troubling fact has emerged. An IRS audit in 2006 yielded a demand by the IRS that
the nominee pay self-employment taxes for tax years 2003 and 2004. The nominee paid
the taxes due for those years. During the audit, it became clear that the same liability
existed for the nominee’s 2001 and 2002 returns. The IRS, however, was barred by the
statute of limitations from collecting the taxes due for those years.

Shortly after then-President-elect Obama expressed an intent to nominate him, on the
advice of the transition team, the nominee amended his 2001 and 2002 returns, and paid
the amounts owed. Furthermore, the nominee received a tax allowance from the IMF to
pay the difference between the “self-employed” and “employed” obligations of his Social
Security tax.

In considering this nomination, this committee has a difficult road to travel. There are
some who believe that the nominee’s actions can be explained as simple and common
mistakes. To some he is possibly the only man for the job of healing our fractured

His involvement in building and implementing the TARP gives him unique insight into
how we have gotten to where we are today. To some he isn’t merely the best choice, but
the only choice.

On the other hand, we need to consider how much the nominee’s tax history could reflect
on the secretary of the Treasury. As secretary, the nominee would be in charge of the
IRS. If confirmed, would the nominee be able to effectively lead his department? How
much does his troubled tax history reflect on his judgment as a decision-maker? These
are some of the issues this committee must consider.

So, I ask the nominee, are you the general, drawing on your financial sector expertise,
who will marshal the financial troops and assets of the Treasury Department to lead our
nation to prosperity? Or are you the general, with this troubling tax episode in your past,
who will lead the nation’s tax policy and administration system? These are the two key
questions we face today. Mr. Geithner, I look forward to your testimony and hope you
can resolve these questions.