company regulation. type of investment. that type of conservative capital and accounting requirements prevent the crisis in the insurance industry that we've seen in the banking and other sectors. >> if i can get in one more question in my time.

>> sure. >> if we were to the federal market stability, where comprised all of federal regulators and maybe outside experts and others to look at what could be done with regard to the derivative regulations, should an insurance representative or representative be at the table and who should be at the table should it be a rotating state regulator or should it -- we set up the office of insurance information if we set that up, it would be the head of that entity to be involved in that. >> unequivocally congress wom, a state regulator should be in the conversation with the council. >> should it be rotating, or could we use the office of insurance information? >> that's right, i expect it would be rotating. i think there's value in having

that diversity of opinion, although a consistent standard message, but diversity of perspective, absolutely. >> thank you very much. i yield back. >> thank you very much, mrs. biggert. >> let me ask, we're here debating this largely because of actions that stemmed from the problems at aig with expensive trading and credit default swaps out of their financial products unit in london that was not regulated by state commissioners but by the federal government, the office of thrift supervision. however, some are using the

collapse of aig to argue for the creation of an optional federal charter for the insurance industry. as i said in my opening statement, this is somewhat problematic because here we've got an entity that had the federal oversight so the question has to be asked, would an optional federal charter had it been in place, would it have prevented the collapse of aig which, again, is already federally regulated? may i get your point? >> i think it's a good question. and again, we look at it from our narrow perspective in the

industry. the first word that you used, optional is where the trouble is, i think. in that an optional charter would leave itself open to arbitrage, meaning that our companies would have the ability to gravitate towards wherever they think the most level pursuits would be. a mandatory federal would encompass all companies, whether it's just the -- or a broader clash of companies would address that. a second issue is that if there was federal regulation, whether it was -- and it was focused on products, one of ways to look at perhaps aig issue is participation in credit default swaps, but inside the credit default swapz swaps, the requirements for them to post collateral which was the reason why they ended up collapsing,

it's the product itself and the nature of the terms that are inside that product. so i would say that, you know, federal mandatory sort of applies to everybody and possibility for arbitrage was important. but second, had it been in place and had they focused on what were the terms and the product that would be the case and that's why we think in a financially driven companies such as ourselves, that that really looks more like something like the fed would do for banks in terms of per missable kinds of business. >> thank you very much. >> the part of my question is that -- let's move to the state regulation because in the final analysis and this whole reform issue, i want to do what's best for the nation. but certainly i want to do what's best for georgia. we're comprised of 50 different

states and i believe that state regulation over the insurance industry is a legitimate regulatory entity. because states are able to make their own rules to comply with what that state deems important for their own population. we are one nation, but we're 50 different states with 50 different kinds of constituencies, industries, geography, climate, all of things that make the great diversity of the nation. and so i believe we've got to have room for states to deem what is most important for their own populations. that they would have the independence to grow in their own way and their own time and

most importantly ensure consumer protections for that kind of constituen constituency insure competition within the industry. am i not right about this? should not this be the case? >> i would agree with that. i believe that what we found is that the state insurance structure has been a real asset, we believe to our industry. if you can imagine, we're obviously participating in a mortgage market where we're subject not only to some of the issues of loans that were originated but also to a lot of macro economic issues that we can't control, like unemployment, et cetera. yet, we're in a position to be able to continue paying our claims because of the structure of the reserve system that we have with the states and what we

found is that that has been a structure that has helped us really survive through this challenging time. at the same time, it's been very clear that the regulateser etor themselves have been coordinating and as well as sharing information with the fha. we believe that that structure is working and will continue to work. >> thank you. mr. scott, may i add a comment to that? going back to the chairman's opening statement, there are some aspects of insurance, some lines of insurance and in our okay reinsurance where a financial regulator would in fact enhance the kind of relationship at the consumer level you want, the lack of a federal regulators calls outs for the problems associated with

international agreements, focus on international insurers and reinsurers doing business in the company. i would suggest even suggesting your promise about the consumer concerns, there's still aspects of regulation, where a federal regulator would enhance that. >> however, may i add to that? the ultimate consumer protection, congressman, is when your constituent pays a premium and doesn't have a claim for several years that the company is not only able to -- not only around to answer the telephone but able financially to pay the claim. reinsurance is an essential part of solvency and solvency is the core mission, core purpose of consumer protection in each state. and for that reason it's appropriately a subject for state based regulation. >> thank you very much, chairman. >> thank you, mr. scott.

>> now the gentleman, mr. pro sek. >> we heard about two issues today, one is international harmony and the other is about regulation. and i won't go into the harmony because there's not time, we know what has when asia gets in and south america gets in, really too large to even discuss too far here today. but as you've heard most of our colleagues discuss today, many of us believe clearly that the regulation of insurance is a state's right, purely and simply a state's right. reserved under the states and the biggest violation of consumers that i've seen quite frankly has been by companies that write health insurance, for example, under arisa, every

state except the state they reside collect premiums and don't pay claims because the federal government does nothing about it. it wasn't until states got together several years ago and crossed state loans for the first time in history to prosecute health insurance fraud. if we left it to the federal government they would be plunderring people in 49 states, unfortunately. it is clear that if your testimony today was true, very few of you need any more useless bureaucratic regulation. and who would have ever thought that after the s and l crisis so relatively shortly after the s and l crisis with all of additional regulation that was put in place following the crisis, that we would again find

ourselves in this whole of a financial crisis. if regulation would solve the problem we wouldn't be here today because brighter minds creative lawmakers threw a bunch of regulation at the end of th s and l crisis and obviously it didn't do anything, why we would think we would be successful in trying to advance outthink a creative risk taker, defies logic. i think the answer is to hold people who harm people accountable. you know, we pretty much, i think agree that the cause of the crisis that we're in now has been caused by grief. we have greedy executives and apparently it not illegal, who put the long test best interests

to the financial relationship they have with their customers or their clients or stockholders behind their personal ambition for short term gains and grossly exorbitant bonuses. that's why we're in the problem we're in now. i think everybody pretty much agrees with that. i don't think you'll be able to ever craft a law that is going to outwit these creative -- i hate to use the term but geniuses, some of the schemes they come up with seem good for the short term to improve their life. if you hold the people responsible who violate these relationships like they do in some industries, and for that i realize there's not enough time for all of you to respond. i don't expect all of you to agree with that, but i would appreciate it if you would

respond with your thoughts in writing to the chairman and he could see the rest of us would get a copy of it, what your thoughts would be, where you would draw the bar. what kind of bound draries you would recommend to legs legs late better -- they've plundered the world so to speak. if regulation would take care of it. the attorneys would have prosecuted bernard madoff ten years ago when his scheme was exposed to them and they refused to take any action. i think it's going to have to be a a matter of criminal and civil accountable on a personal level if we're going to change the course of the future in this regard. thank you, mr. chairman. >> thank you very much, mr. posey. the panel wishes to send the response in, we'll make sure members of the committee receive it. >> thank you, mr. chairman, i

would like to ask unanimous consent to enter the written statement of the steve bartlet, president and ceo of the financial services round table into the record. >> without objection, so ordered. >> i would also like to acknowledge some of the testimony in response to some of my colleague's question that no one is advocating for a national insurance charter in any way is suggesting that we lower consumer protections. in fact we're starting at the baseline nic models and improving by adding a national insurance commissioners that would@@@@@

billion of federal tax dollars that had gone to shore up life insurance subsidiaries that took risky bets through the securities lending programs that notably were approved by the state commissioners? >> in a follow-up question to that, what resources have been put in place subsequently by you and our commissioners to oversee the lending program. >> thank you for that question. securities lending have come up in other comments as well. it's important to understand that the problem, first of all that the new york department of insurance was working to reduce the level of securities lending in the aig subsidiary before the crisis. the crisis, remember, was a result of essentially a

collateral call on the aig holding company resulting from the credit default swaps. this would not have been a problem but for the cds failure and it's also important to remember that the securities in which were involved were aaa rated securities at the time. it points to the need of better regulation of the credit default swap market. -- >> where would the 44 billion have come from? >> let me answer that. i will get to that. you also asked about reforms that have been undertaken. we have increased capital requirements if companies are engaged in security lending and enhanced recording and we are looking at how to revise our accounting standards in that last improvement is ongoing. in terms of $44 billion, it's important to understand that each insurer, of course, has significant capital requirements

to begin with. their assets cannot be used to sats fi the debts of the holding company. even if these subsidiaries, i think it's an open question, also congresswoman, whether it's -- without the 44 billion, whether the companies would have actually become insolvent. many financial regulators would argue they would not have been insolvent without the 44 billion. if there had been a question of solvency, the companies would have placed into receivership and insurance is not like the fdic, for example, where you need liquidity in cash immediately. insurance in the guarantee system replace the contract, they don't have to -- and the coverage, they don't have to generate cash immediately. because of course, not everyone dies, god forbid everyone dies on the same day or everyone has

a car accident on the same day. for this reason, $44 billion would not have been needed immediately if hypothetically it would have been needed at all, it would have been managed over a period of many years if not decades. and this is what happens and does happen through the course of state based receiverships of insurance companies. the state based system would have been able to handle it and it would have been again, a, a protected the consumers, the policyholders first. >> appreciate your testimony. what has been done to address the gaps that exit in the current system to protect policyholders and again it is those who oppose legislation to move towards a national charter who suggest that there be any wa weakening of consumer protections and the $13 billion of savings to the industry to get passed onto the 50 state

system. thank you and i yield back. >> thank you very much, mrs. bean. now the gentleman from illinois. >> thank you. i find it interesting that some of you there think that you could ask the federal government for so much and then in your own wisdom stop it and then you would be in a position later on where you're complaining that the federal government went too far. and i think mr. royce in his own questio questions went beyond his own bill in setting up insurance information and then his question and this is mrs. bean's bill also, what good does it do to have information if you have no authority to act upon it. i mean, i come from illinois. and one of things that we do right in that state is regulate

insurance. we have the cheapest insurance rates probably in the country. mr. mcraith, my understanding and correct me, is that aig was in five pieces, five separate entities, call it what you want. and that the life insurance aspect was cordened on by fire walls by the investment side that went sour, is that correct? >> that is correct, congressman. every state has adopted what we call a holding company act. the holding company act along with our other financial regulations requires each insurer to be financially independently viable. we have very strict capital in accounting and investment requirements. one function of the holding company act is that that insurer, the life insurers

cannot release capital to the holding company to support the holding company without regulator approval. >> so the investments that were made by the aig life insurance section were separate from the investment arm that went sour, is that correct? >> that is correct. aig financial -- aig in our conservative estimate had 247 different companies. 71 of those were u.s. based insurance company. each one was independently financially viable. the financial products and the jet company leasing, jet leasing company, those were regulated in other ways by other agencies in which the insurance companies in the insurance companies were not threatened by those operations.

>> so the life insurance side of aig is always been sound? in terms of -- you would have to have all of the insured dies in one day or a week in order to threaten the solvency of the insurance end? >> it is very smart experienced financial regulators in this country would say exactly that. >> why would anybody want to regulate the life insurance company on a federal level? how can it done any different, any better than what's been done on the state level? our position is that it cannot be. your colleagues have pointed out numerous examples of why that cannot be the case. i was asked by reliance company and would a federal regulators have discovered the misconduct

of its principal. they didn't discover the misconduct of mr. madoff either. >> if i could stop you right there. that's my point. the sec, the man -- the whistleblower, can't think of his name right now -- testified that he had been screaming at sec for five or six or seven years and no one would listen. the authority and regulators were in place but they just failed. and the same thing with the federal reserve. you said, mr. mcraith, that quote, we restrict the nature of investment companies and the federal reserve has jurisdiction to restrict the nature and extent of mortgage instruments

and underwriting standards. and they sat on their butt and did nothing. chairman bernanke testified here in october of 2008 that it wasn't until december of 2007 that the feds ever got involved in the whole subprime housing market. i find in a astonishing. mr. -- has given you hell, where were the states when this went down the tube, but it was the federal -- it was the federal agency with direct jurisdiction that did absolutely nothing. now we're talking about using that standard, the sec standard that blew it with madoff, the federal reserve standard that blew it with doing nothing on governing these instruments to top the 327 and making sure that

people that took out loans could afford to buy them. now we're expected to sit here and have a federal insurance regulator? why? you plead the tenth amendment on some certain areas and i can understand what you're trying to do. the problem is, how do you say you can stop the fed from going only as far as you want them to go and then not going beyond the area where you don't want them to go? that's a tough question. but if you want to handle it, go ahead. >> i would like to try. i owe that to you. >> go ahead. >> if i could have more time -- >> i'll take anything i can get. >> thank you. >> i'll try to keep this in the context of the purpose of the hearing which is systemic risk if the chairman would indulge me except for 30 seconds. i've been coming up here for seven or eight years, long before aig became the household name and long before there was a

financial crisis. and we're up here advocating for a federal charter because we thought we could serve our customers, those who do business on a national basis, much of the life insurance basis better. as congress woman bean suggested, there are billions of dollars of annual operating expenses that would be saved if we had a single regulator rather than 51 regular laters that ultimately gets past onto the customers. in terms of systemic risk, what we've been talking about is whether it's federal or state in the past there had been failures of regulators on both sides. i think the purpose of this hearing is to try to make it better, try to improve and tried to bring all of risks from the entire financial services industry together to keep this from happening again, which given the amount of sleep i've lost in the last eight months, i'm all about. if we are indeed here to talk about a federal systemic overseer or regulator, we don't

think that you can regulate just systemic risk of the life insurance industry without asking the expertise and collaboration of a functional regulator and that is how we bring this all together. >> that's a good answer. appreciate that. >> i do have another question but i know i'm past my five minutes. >> start around round to get -- >> okay, that would be fine. >> the gentleman from florida, mr. grayson. >> thank you, mr. chairman. i don't want to talk to you or ask you questions about whether we should have a federal regulator versus state regulators for insurance. i do want to talk to you and ask ut questions about the subject of systemic risk. you're a panel of members that are here to represent the insurance industry and i would like to start with the simple question, assume that systemic risk reflects the idea that the failure of one particular company would cause its

creditors to also fail, to go bankrupt and reverb rate throughout the financial system to the point there's a dryout nationwide or worldwide. the question i want to ask you, mr. mcraith which companies does that describe? which existing companies pose systemic risk if they fail? >> not one insurance company based in the united states presents systemic risk according to the definition you provided. >> what about aig? >> aig, 71 u.s. based insurance subsidiaries, were financially strong, remain financially strong. not one of those companies independently ever presented any systemic risk. >> as a group do they pose systemic risk? >> as a holding company, its financial products division, which out of london, which is not appropriately regulated and not a matter of