... creditor, extreme version, doesn't have been a very much but in this extreme example you would have a creditor who would rather than wanting to work with what the bar where to avoid

bankruptcy, he would love to grease the skids to make sure the person goes into bankruptcy. now even if you don't have that extreme example if you have a creditor who has actually lent money that creditor has weak incentives to work to avoid bankruptcy and certainly it is the bar were not aware of the creditor house bought credit-default swaps. he doesn't understand why he's trying to negotiate with the creditor what is happening, and if the bar were actually goes into bankruptcy there's all kind of complications, disclosure and substantive complications within bankruptcy and in terms of whether this is real or not and if it happens, this empty creditor phenomenon, i wrote an op-ed as some of you know and the apr will street journal about goldman sachs. there was a curious incident in

retrospect. in september as you recall aig, lehman brothers collapsed and aig was teetering. the fed felt compelled to prevent them from collapsing. the september 16th goldman sachs said its exposure to aig was not material. that's fine. but come the middle of march, it turns out of the initial 85 billion of the federal bailout money aig received, about 7 billion went to goldman sachs. well how do you reconcile? this goldman receiving 7 billion had no exposure to a aig.

goldman was an empty creditor. goldman bought credit to default swaps from aig from, quote, large financial constitution's so care terribly much what happens to aig and it indeed was quite aggressive in terms of calling for collateral from aig. >> but it didn't work. >> what was interesting is it did work for goldman but it illustrates this issue, social issue. >> we are still wondering where the bottom is on aig. islamic and using this to illustrate the concerns you have is as a public policy matter we should be concerned about these creditors who used to care about ensuring our worst stay out of bankruptcy. that they have much less

incentive to do that and that in today's world -- >> we better corrected. >> we might want to consider correcting that. >> thank you very much mr. chair. >> i would like to add if that is okay for a moment. >> please do. >> it's important we think about the reasons why a company might want to use credits the fall swaps or a bank for that matter. for example i could be in the supply chain of an industry and worry the company to whom i supply goods or services may not actually perform and might go into default. the ability to buy credit-default swaps against that company makes it much more economically attractive for me to enter into a long-term sales agreement to provide goods and services to that company. i don't own the bonds but i do have a position over time as being a creditor of the company

as a supplier to them. another ex sable, and this one strikes home because we lend money to a variety of companies around a world in the united states, companies to the biggest fortune 500. there is often no market for credit to default swaps for midsized companies. if i want to be a significant lender to a portion of the economy where i observed a substantial amount of industry risk for the airlines let's say i want to lend money to a regional carrier, i can't buy a credit default swap on the regional carrier blight can buy a credit defaults flops on american airlines, delta and others. it would help me manage the industry specific risk that i have and most importantly that reduces the cost of capital for the midsize company visa fi the large companies of credit

defaults will play a very important role allowing pension plans and other lenders to midsize companies in america, to allow them to reduce industry specific risk and reduce the cost of capital of companies in america that have created the most jobs over the last 30 years. >> mr. pickel, i think for buddy -- >> he deserves a good answer. as briefly as possible. >> i would say in the derivative space for 25 years the developments were on market risks, interest rates, currency, equity, commodities where you are managing risk. credit risk is a relatively new derivative and i would say we are still understanding some implications of that and i think that professor hu's work has been interesting in that regard. i would say regarding that empty creditor issue, the fact is every time somebody is going into the market and buying protection which is what he's suggesting someone is doing he's

sending signals your business plan isn't working, the yellow light is getting brighter and brighter and so when it comes to the end and somebody says time is up, i am not going to continue to lend to you i think that's a natural evolution but it's certainly understand that. i would also mention the credit stifel swaps are becoming embedded in various ways. if they are being used for pricing loans. it was done with the rollback of scotland extension of credit by the u.k. government and today in "the wall street journal" it was mentioned s&p has developed additional means of providing information on credit exposure to the marketplace that incorporates credit defaults slops so we see continuing evolution and about to be encouraged. >> jury quickly senator joe hans deserves his round and at the end of we have time we will --

>> i'm not worried about to people on one side or another of the market so if somebody wants to buy and sell -- you've heard but symbols of the utility of the credit devolve swaps. the concern i have is the small airline, the small company doesn't have it treated market that we can use to price these contracts. so, again we have the lawyer poker scenario which is you have a trader firm on one side and they've decided the implied spread on the debt of this company is a good way to price redefault contract. the trouble is most people on wall street trade these instruments like options. the use them for delta hedging, various expose sirs and these are great examples, they have wonderful utility but the problem is i suspect the pricing is wrong in other words it's not priced like insurance so when that contract goes into default and the provider of protection has to come up with the money you've got to ask yourself going back to the question about the

supervision of dealers, is that person doing the work so they are actually cognizant what the cost of the fault is this is the spread on the bond. lehman brothers, you could have bought protection of lehman brothers before it failed at 7%. the next week you had to come up with 97% of cash. so it is a pricing issue that i think is at the core. it's not whether there is utility. polis obviously utility and these strategies. >> i'm hoping somebody can answer this question. this whole bank of business kind of an artful term but this entire business arena, what percentage would be of that classification that's not easily valued? >> i think most over-the-counter contracts don't have a problem in that regard if you're talking about energy, currency, whatever it is if there is a vigorous

trade market it's easy to come up with a derivative. but if it is a very complex derivative. but when you were talking about a liquid corporate bonds or loans to corporations if you're talking about a complex structured asset two or three levels of packaging away from the reference asset it's supposed to be derived from that creates complexities in terms of pricing that i think is daunting and i will tell you now there are very few firms on the street that if the people, the resources and money to do the work. let me give you an example -- >> doesn't that get to the point i was raising on the previous questioning? you know, you've now got a whole regulatory scheme. you've got somebody that's going to regulate and they are hired and paid -- and they are probably going to take the safe route and say i am not sure understand this. i am not sure it can be valued.

it's 100 million-dollar contract. we want capital. >> and that's appropriate. >> okay, so isn't that just another way -- how will capital be posted in a circumstance like this if you have the capitol you probably either alone or not alone and it's a bad deal you wouldn't want it. but anyway, what i am getting to is this, doesn't that basically put that segment of this arena out of business? >> it may and i am not sure that wouldn't be inappropriate and i assure my colleagues will disagree that most people on wall street are competent to be a rating agency. and if you are talking about calculating probability of the fault of the company or security, that is not a trivial exercise. it takes a lot of work and i don't think most people will

st. dewitt. they look at the bloomberg terminal and by consensus the have all agreed to split on the bloomberg terminal is the price you're going to deal with three is right or not. >> you know i would say to you, mr. whalen, listening to your testimony from a sterile standpoint and saying if it's that kind of risk maybe it should that's probably okay unless that's the only regional airline in town. and when that one goes away, guess what? air transportation for western nebraska goes away. >> i don't know any airlines that can't hedge their fuel costs -- >> i'm not talking about fuel costs but you know what i'm getting at here. there are always unintended consequences and i just want to understand. if we are going to put a lot of little guys out of business tell me that. >> here's the thing i want your

little guy to have the same facility of pricing a contract as the dealer. how do we do that? that goes to transparency but if i have transparency of an instrument that's still opaque even after of legislated transparency than i have a problem. >> and the tools that we have been given i think in the end is when to be the capitol requirement. that's the alternate protection, and we, when you talk about what we require, treasurys, to me like you're talking about cash. you're probably not going to take something very risky, right? >> i think the standardized tests to bring those down over time though i really do. >> in the credit to default swap area we have introduced a very high degree of standardization to the first point about which of the contracts would be most standardized and i think in the credit-default swaps base we do

have contracts that will be easily to move into the clear environment perhaps more so in two and electronically traded or exchanged treated environment so those things are in place and yes people look to bloomberg screens but it is a collective view of the marketplace and not a rise on wall street. we have active dealers around the world who are expressing views on these contracts and it is that collective reflection of the market judgment that indicates the spread at any particular point in time. >> i think the question you are opposing about capital and will the regulation of this market increase the amount of capital required in the marketplace the answer is not as clear-cut as one might imagine is in today's market structure if i buy credit protection contract from goldman sachs, i am just as likely to eliminate line economic risk but not my counterpart risk by closing the contract with morgan

stanley. i will still be was in march and as a customer to both of the firm's. it's incredibly inefficient. if i had a central clearing house i would open the contract with goldman clearinghouse, morgan stanley to a clearing house and i would have no capital as a customer out the door any longer. i would actually have capital that comes to me. i think it is a very important concept to under the stand when we think of clearing houses this wouldn't in any way increase the amount of capital demanded of the system as a whole because the tremendous efficiency inherent in netting. the other key concept we should keep in mind is price transparency will most favored the smaller less frequent users of derivatives, citadel, the other world's largest asset managers. we can price of the derivatives we commonly trade with a great

degree of precision but we have a tremendous investment infrastructure to do so. for smaller companies that's outside of their range of capabilities. but in exchange, a visible exchange traded price gives the cfo of a small company confidence and part of what we want our capital markets to do is to create confidence and all americans that the markets are fair. they are transparent and they are just because that reduces the cost of capital for every company in america. >> mr. griffin i will wrap up with this, mr. chairman, i appreciate your patience. nobody is going to disagree with you were last speech. that is about as motherhood and apple pie as we can get. nobody disagrees with that. it's like i said, i just want to

know if this is where we are headed what impact is it going to have on the marketplace from the small to the very large. my experience is the very large survive and they get bigger. >> actually, you would be surprised where every analysis on this ends up. today the largest dealers have the defacto monopoly in the business. it's because of their credit rating privilege as credit intermediaries to almost every contract they durham extraordinary economic profits. where there is a clearinghouse for it simply in the options market, the occ act as a clearinghouse for all listed transactions. you find there is a vibrant, incredibly vibrant market of small trading firms that had a tremendous amount of liquidity to the marketplace. citadel for example the single largest in the united states. we started from scratch seven

years ago with zero market presence. our ability to get to number one was because of a lack of barriers to entry. we were allowed to compete on a level playing field with other incumbents. in the credit devolve swap interest markets the barriers are enormous. who would want to take as a counterparty anyone but quote on quote the firm's view today has systemically important or too big to fail. >> here is again to wrap up the second time here is what i would ask. if there are that many small firms that are going to benefit from this my address is on line, my phone number is online. mr. pickel, you probably represent some big and small people. i hope they overwhelm me with letters over the next 72 hours or e-mails saying mike, this is

great. we want this to happen. because of the am worried and concerned and i don't want this in the end to create a situation where literally by our regulatory effort we have damaged and created a very phenomena that this hearing is for and that is the big just got bigger to the point literally we are all scratching out ahead about the too big to fail. i think if we look back in 20 years and found out that is where we ended up that would be a tragedy. thanks for your patience. i really appreciate that. >> i want to thank you all, gentlemen. if there are additional questions by the colleagues -- live in also, professor hu has been trying to get recognized. can i give you a minute? >> [inaudible] >> all right. put on your microphone.

>> i think that these clearinghouse of arrangements we are moving into will reduce systemic risk. they will reduce the profits in the sense now available to the derivative dealers. it will be cheaper for everybody in terms of the standardized products. i think one of the very interesting issue used to think about in connection with these clearinghouse arrangements and the data that we are going to be requiring of all derivatives in terms of customized derivatives for instance one of the issues is how to solve this informational a senate trade between regulators and regulated so for instance in terms of this general movement to more information being provided to the regulators to what extent should regulators actually ask for modeling information? regulators can't develop them, can't understand how to value these things on like citadel.

to what extent should they require this information and if we require this proprietary information how do we maintain safeguards in terms of respecting the proprietary nature and so i think that this is the start of a very long process. >> thank you. you had the last word this evening but not the last word because it is a long process the this testimony has been excellent. some of my colleagues might have written questions which they would forward within two weeks please respond. all of your written testimony as part of the record and by thank you all for excellent testimony and your presence this afternoon and i will adjourn the hearing. thank you. [inaudible conversations]

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how is c-span funded? >> through donations. >> i.t. to get a little bit by the federal government. >> mabey from sponsors? >> government funding. >> the viewers? >> how is c-span funded? 30 years ago america's cable companies created c-span as a public service. in private business initiative, no government mandate, no government money. author akaka bradley graham joined washington journal to describe donald rumsfeld. this is one albert. >> host: bradley graham covered the pentagon for the "washington post" for many years and now a book that goes on sale today on donald rumsfeld, "by his own rules: the ambitions, successes and ultimate failures of donald rumsfeld." how did donald rumsfeld viewed the role of government official of public service? >> guest: he was a very

interesting public service from a very young age, he was inspired in college senior year when adamle stevenson came to talk to his courage reading class at princeton urging of the students to put their work in public service and not long after that rumsfeld ran for congress and became the youngest republican member of congress in the 1960's and believed very march in a public service. he served not only in congress but in nixon and ford administrations and then came back of course and the bush administration but even in between when he was a corporate executive he stayed involved in government serving as a presidential envoy and a couple of government commissions. >> host: the book is 800 pages and extensive biography certainly some presidents don't

get this sort of treatment. you talked about his running for congress. did he ever have presidential aspirations? >> he did. some of his old high school classmates remembered rumsfeld expressing interest way back then as a teenager and becoming president someday. a lot of kids may be express' that but what was interesting was to hear a number of rumsfeld's former classmates say that they, with rumsfeld to get serious. they thought of any class mates ran he would be the one and he did try and 1986, '87 to run and he didn't get very far put out of government for over a decade at that point and he couldn't get much attraction or raise much money. you mentioned the length of the book, and it is quite long but he you know, rumsfeld is a very consequential figure, very powerful figure. the most influential secretary defense that we have had since

mcnamara as well as the most >> host: have many times did to get to interview him for the book? >> guest: i talked to him eight times. >> host: how long would the sessions co? >> guest: some went several at a worse. i spent much of the day with him in his home in mexico, i saw him in number of times in his office but he still maintains here in washington. i've been to his home. you know, he was wearing -- and cooperating he wanted to make sure that there was that this couldn't be seen as an authorized biography and it is not. he had no control over it. but i think he felt in the end of was when to write the book anyway so it was probably better for him to cooperate with me

more than not. >> host: in the and you write the in the ambitions successes and failures he has had quite a public service figure. what are the ultimate failures and with the former secretary agreed with that assessment? >> guest: you know, he is in the end in my view a tragic figure. rumsfeld was enormously successful for much of his life both in government as well as an business. and he entered the pentagon under george bush age 68 with a lifetime accomplishment. he is the only person to get a second shot at being secretary defense because he had been under president ford and had enormous potential, a lot of talent and much of the story in the book is how then he ran into

trouble and was eventually compelled to resign six years later. in terms of the failures, failures to adjust to the changing conditions, failures in his relationships with the military, with congress, with colleagues in the administration and ultimately leadership. it's a tough book. i do try to be nuanced and balanced. >> host: used for the book with the end of his career as the secretary defense in december of 2006 and his resignation. we showed you was a little of the farewell ceremony before the trips. why did you start at the end? >> i think that was one of the moments of his life that hadn't been fully