amol conversations and ogle conversations >> the committee will come to order. after consultation with my friend and colleague from alabama we are going to do is i am going to -- we have two items to deal with, obviously the hearing this morning dealing with systemic risk but we also have to go into executive

concession to consider in the original bill entitled public transportation extension act of 2009 and we believe 12 members here to actually vote out this bill but i think what we will do is i'm going to have a brief set of remarks about that bill, very brief. senator shelby will make brief comments about it and as soon as we get the 12th member to show up we will have a voice vote on that bill but in the absence we will go for work actively with the hearing so we are not wasting time and having people wait around until the 12th member shows up. we are getting close here three, four, five, six, seven. we will be considering as i mentioned here to public transportation extension act of 2009. this is a bill that authorized, been authorized under the safe accountable transportation equity act a legacy for users. this bill was developed in a

bipartisan fashion with my colleague and friend senator shelby and his staff and extensive public transportation programs for 18 months from october 1st of 2009 through march 31st 2010. at fiscal year 2009 authorized funding levels. we expect this bill will emerge with similar bills from the environment public works committee, commerce committee, finance committee's on the senate floor next week. let me just express if i can my view. while i agree with the administration and leadership on this and then there is simply too much on our plates as an overall body to move a transportation bill, surface transportation bill through congress this year. i am not ready to concede we cannot move forward on a bill next year. by get the 18 months is there. it depending how things work this year we could get to a transportation bill next year and the at fenestration

presented its 80 month extension proposal to senate leaders i advocated for six months instead so we could try to get a bill next year rather than wait until 2011. regardless of the length of the extension as i intend to work with colleagues on this committee principally but also with others try and move a bill early next year if the opportunity presents itself investing in highways and bridges, transit systems, high-speed rail, i think it is too important for the nation's future economic competitiveness and growth and quality-of-life to put off for too long and in these difficult economic times it's important to remember these investments made good and decent jobs to people across the country. a new transportation bill is needed to both reform the way we approach transportation policy and to increase the amount of funding we invest in our transportation infrastructure. one change needed in the transportation policy a special interest in this committee is the need for renewed commitment to investing in public

transportation. it's our jurisdiction we must assume responsibility for and if we are to address the challenges like climate change, energy security the worsening traffic congestion that all of us have to confront not to mention a significant population growth and demographic changes we need to take a look at public transportation and for all of these reasons i'm going to continue to work with colleagues on this committee as well as those in the full senate and house and of course the administration to look for opportunities to advance a transformational transportation bill early next year or as soon as we possibly can. i'm going to turn to senator shelby for any comments he may have. senator bob menendez has an interest in the subject matter and wants to be heard roswell and again as soon as we have the 12th member they both will be allowed. senator shelby. >> i would like my statement to be part of the record and other than that i want to associate myself with your remarks. this is an 18 month extension.

it's clean. but what we really need is to do the real bill. we need to continue to do that, and if we did there will be certainty out there for a long time i hope we will not wait until the deadline because it's not working again. >> i appreciate that very much and will now switch gears and moving to our hearing this morning. i will make some opening comments and turn to senator shelby for his and then invite our distinguished witnesses to join and i advanced apologize if we interrupt your testimony. once the 12 member our rights to go back into calendar deal with this legislation. let us shift gears if we can now to the hearing and that is as i mentioned earlier, the hearing to establish a framework for systemic risk regulation. let me share some thoughts if i can and again we've had a lot of discussion about the subject matter over the last number of months. we've had some 40 hearings since january not all that on this

subject matter but the bold have been on this issue how to modernize our financial regulatory structure, not only to address the problems that brought us to this point but also how do we create the architecture for the 21st century to allow us to move forward with innovation, creativity that's been the hallmark of the financial service sector and once again restore the credibility of safety and soundness that has been the hallmark of our core financial service sector for so many years and it collapsed on the view of many over the last number of years resulting in the economic problems so many fellow citizens are facing with joblessness, house foreclosures, retirement accounts being wiped out an ancillary problems the congress is suffering. systemic risk will be an important factor in all of this and i can't begin to express my gratitude to my fellow members here because unlike other matters the congress is dealing with, my sense on this matter this is not one that has any ideology i can sense to it at

all. whittle's one to figure out is what works best, what makes sense here. not that we are going to solve every future problem. i think we make a mistake if we are sort of promising what we cannot. if we look back and see where the gaps have been either one where there was no authority or not to it was authority not exercised and how we felt those gaps in a way that makes sense i think will be a major contribution and i want to particularly thank senator shelby, the former chairman and ranking member now. we've had conversations together. we don't have a bill ready. there's been a lot of talk at this point but i get a lot from my colleagues that we share common views about this and that is a good place to begin. it doesn't mean we are going to agree but i since the overwhelming majority here are committed to that goal of establishing what makes sound and solid regulatory process. the economic crisis introduced a

new term in the vocabulary systemic risk. malta words we use much. i don't recall using those at all back in the years. it is the idea that in an interconnected global economy it is easy for some people's problems to become everybody's problems and that is what systemic risk is. the failures that destroy the nation's most prestigious financial institutions also devastated the economic security of millions of working americans who did nothing wrong and never heard of these institutions that collapsed and put them at great risk. jobs, homes, retirement security, gone in a flash because wall street, agreed in some cases, regulatory neglect and others, resulted in these problems. after years of focusing on short-term profits while ignoring long-term risks, a number of companies, giants, of the financial industry found themselves in very serious trouble. some, as we know, tragically failed. some were sold under arrest and an untold number only survived

because of government into interventions, loans, guarantees. taxpayers have no choice but to stepnwh')+úi)ú))úú

someone looking at the whole economy for the next big problem with the authority to do something about it. the administration has a bold proposal to modernize our financial regulatory system that would give the federal reserve new authority to identify, regulate and supervise all financial companies considered to be systemically important. it would establish a council of regulators to serve in a solo advisory role and would provide a framework for companies to fail if they must feel in a way that doesn't jeopardize the entire financial system. it is a thoughtful proposal but the devil obviously we all know is in the details and i expect changes to be made in this proposal. i share my colleague's concerns about giving the fed additional authority to regulate systemic risk. the fed hasn't done a perfect drop to put it mildly with the responsibilities it already has.

this new authority could compromise the independence that it needs to carry out effective monetary policy. additionally systemic risk regulation involves too broad a range of issues in my view for anyone regulator to be able to oversee and so i'm especially interested to hear from the witnesses this morning and their ideas how we like to get this right. many of you suggested the council with real authority that would effectively use the combined knowledge of all the regulatory agencies. as president obama said when we've rebuilt every economy we must assure its foundation rests on a rock, sand and today we continue the work to lead the cornerstones of the foundation, strong, smart, effective regulation that protects working families without hindering growth, innovation, creativity that has been again the hallmark as i said earlier of the financial-services sector and with that let me turn to senator shelby and then introduce our first panel. >> thank you, mr. chairman.

core of the administration's financial regulatory reform proposal is the concept of systemic risk the president believes it can be regulated and that the fed should be the regulator. but as we begin to consider how to address systemic risk my main concern is while they're appears to be a growing consensus for a systemic risk regulator there is no agreement how to define systemic risk let alone how to manage it. i believe legislative malfeasance to simply tell a particular regulator to manage all financial risk without having some consensus on what systemic risk is and whether it can be regulated or not. should we read such a consensus i believe we then must be very careful not to give our markets a false sense of security that could actually exacerbate our too big to fail problem. if market participants believe that they no longer have to closely monitor risk presented

by financial institutions the states will be set for the next economic crisis. if we can decide what systemic risk is and that is something that should and can be regulated i believe the next question should be who should regulate. unfortunately i believe the administration's proposal largely places the federal reserve in charge of regulating systemic risk. it would grant the fed has understand the paper the authority to regulate any bank securities firm in sure, investment fund or any other type of financial institution that the fed deems a systemic risk. the fed would be able to regulate any aspect of the firms even over the objections of other regulators in effect the fed would become a regulator one giant of unprecedented size and scope. i believe expanding the fed power in this manner could be very dangerous. the mixing of monetary policy

and bank regulation has proven to be a formula for tax payer funded bailout and poor monetary policy decisions. given the fed ultimate responsibility for the regulation of systemically firms will provide further incentives for the fed to apply its regulatory failures by bailing out troubled firms. rather than undertake the politically painful task of resolving failed institutions the fed could take the easy way out and rescue them by using the lender last resort facilities or open market operations. even worse, it could undertake these bailouts without having to octane the approval of the concourse. in our system of government elected officials should make decisions about fiscal policy and use of taxpayer dollars not on elected central bankers. handing over the public purse to an enhanced failure simply inconsistent with principles of space government. augmenting the federal reserve's

authority also risks burden with more responsibility than one institution can reasonably be expected to handle. in fact, the federal reserve has already overburdened with its responsibility for monetary policy. the payment system, consumer protection and bank supervision. i believe anointing the fed is the systemic risk regulator will make what is proven to be a bad bank regulator even worse. let us not forget that it was the fed that pushed for the adoption of the fault ball to the capitol records right here in this committee which would have drained the banking system of capital. it was the fed that failed to adequately supervise citigroup and bank of america setting the stage for bailouts in excess of $400 billion. it was the fed that field to adopt mortgage underwriting guidelines until well after this crisis was under way. yes, it was the fed that said there was no need to regulate derivatives, right here in this

committee. it was also the fed that lobbied to become the regulator a financial holding companies as part of gramm-leach-bliley. the fed one the fight and got the additional 40 it sought. ten years later however it is clear the fed has proven it is incapable of handling that responsibility. ultimately i believe if we are able to reach some sort of agreement on systemic risk and whether it can be managed by strongly believe we should consider every possible alternative to the fed has a systemic risk regulator. thank you mr. chairman. >> thank you, center and we are still missing 1i think. i need 12. if i have a colleague that can count walter i'm willing to move ahead. after all, this is washington. [laughter] >> we will wait for the 12 to arrive. >> is their someone sitting here?

[laughter] let me invite sheila bair and mary schapiro and dan tarullo and injured as people who hardly need an introduction people who've been before the committee on numerous occasions. sheila bair as we know is the chair of the federal deposit insurance corporation, served as assistant secretary of the treasury extensive background in banking finance and of course many appear have known her over the years when she was legal counsel to bob dole and did a great job in that capacity as well. so very familiar with the senate institution. mary schapiro was the chair of the securities exchange commission and prior to her appointment this year she served as ceo of the financial industry regulatory authority finra and also served in the sec under ronald reagan's administration and president bush 41 and the clinton administration. dan tarullo, i will finish this and turn to executive session is the new member of the board of governors federal reserve system

and a familiar figure many of us serving in public life on numerous occasions in the past according to the concluding assistant secretary of state for economic of business affairs. before he served as chief counsel for employment policy on the stuff of our good friend senator ted kennedy as well and taught at georgetown university law center and worked in the clinton administration so thank you, dan, for your service and as well as mary and she lived. let me turn if i can to the market and i just informed my colleagues who arrived after statements were given were considering of course this extension of the transportation bill and we have completed our statements. bob menendez has not arrived but i am going to do this when he comes and we will allow him at an appropriate time to intervene and make comments to apply to the conversations we've had about transit bill i want to move along if we can. ..

when will as reconsider who modernization of the federal regulatory structure will be included in the record and that is true of all our colleagues here as well and we like if you could try to use those remarks to five or seven minutes so we can get to the questions as quickly as possible. thank you for joining us. >> mr. chairman, members of the

committee, i appreciate you holding this hearing. the issues under discussion today approach to the imprints that is before the congress in the wake of the great depression. we are emerging from a credit crisis that has wreaked havoc on our economy, homes have been lost, jobs have been lost, retirement and investment accounts have plummeted in value peridot the proposals put forth by the administration to address the causes of this crisis are thoughtful and comprehensive. however, these are complex issues that can be addressed in a number of stairways. it is clear that one of the causes of our current economic crisis in is a significant regulatory gaps within the financial system. to assist in the regulation of capital, leverage, complex financial instruments and consumer protection in which are adjudge became rampant. reforms are urgently needed to close it is regulatory gaps. at the same time we must recognize have much of the risk in this system and all financial firms that were already subject

to extensive regulation. one of the lessons of the past several years is that regulation alone is not sufficient to control risk taking within a dynamic and complex financial system robust incredible mechanisms to ensure that market participants will actively monitor and control risk-taking must be in place. we must find ways to impose greater market discipline on systemically and foreign institutions. a properly functioning market economy there will be winners and losers and when firms two their own mismanagement and excessive risk-taking are no longer viable they should fail. actions that prevent them from failing ultimately distort market mechanisms including the incentive to monitor the actions similar situated firms and allocate resources to the most efficient providers. unfortunately the actions taken during the past year have reinforced the idea that some financial organizations are too big to fail, the notion of too big to fail creates a vicious

circle that needs to be broken large firms are able to raise hues amount of debt and equity in there given access to the credit markets as a favorable terms without sufficient consideration of risk profile. investors and creditors believe their exposure is minimal since they believe the government will not allow them to avail. the large firms leverage to them and become larger which means investors and creditors more complacent and more likely to extend credit without fear of loss is. too big to fail must then. down today shareholders and creditors of large firms rationally have every incentive to take excess -- excessive risk and enjoy the upsides other downside is capped investment and went too big to allow the government accepts that. for senior managers incentives are more acute, paving large perth to stock options, a senior managers have an even bigger and some say in going for broke because they're upside is some is bigger and a possible loss. and, once again, with two big to

fill the government takes the down side. to end to big to fail in the to solution that is as practical as i did and highly credible mechanism for the orderly resolution of the institutions similar to that which exists for the fdic banks. when the fdic close is a bank shareholders and creditors if the first loss. when we call for resolution mechanism we are not talking about propping up the field firm and its management. we are talking about a process with bank is close, shareholders and creditors suffer severe losses and management is replace in assets of the failed institution are sold off. this is harsh but it quickly reallocated act -- assets and to the private sector into the hands of better management and also sends a strong message to the market that investors and creditors will lease losses in when an institution fails. so-called make assistance which put the interests of shareholders before that of the government should be prohibited. make no mistake i support the

actions regulators have collectively taken to stabilize the financial system. lacking in the price the )x%áix% lxá

and institution and create a river that proactively identify issues that pose a risk to the system the new structure featuring a strong oversight council should address such issues as the industry's excess of leverage and adequate capital and over reliance on short-term funding. it council of regulators will provide this is our perspective and expertise to do this is a holistic play. a wide range of views makes it more likely will capture the next problem before they happen. as with the fdic board becoming a systemic risk council cannot accurately and efficiently in a crisis. the combination of the approval process of orderly close and, your supervisory structure and counsel that anticipates an mitigates risk developing both with outside the financial sector will go a long way to

assuring the problems of the last several years on not repeated and that any problems that to rise can be handled without cost to the taxpayers. thank you very much. >> thank you very much. in chairman bair chairman schapiro. >> thank you, chairman and members of the committee, i am pleased to be here today with my colleagues from the fed and fdic. there are many lessons to be learned from there is some financial crisis and a key one is that we as regulators need to identify it and monitor and reduce systemic risk before they threaten stability of the financial system. however, inner areas to minimize the potential institutional failures to francis and we must take care not to unintentionally facilitate the growth of large interconnected institutions whose failure might later pose even greater systemic risk your crown to best address these we must rely on two lines of defense. first there is judicial oversight and regulation.

this includes enhancing existing regulation, filling gaps, increasing transparency and strengthening enforcement to prevent systemic risk from developing. second we should establish a workable macro credential park and resolution regime that can identify to reduce an online systemic risk if they develop. close and regulatory gaps is an important part of reducing systemic risk. if participants realize they can into this same economic dance with your costs they will do so quickly, often with the size and leverage. we have seen this time and again as recently with over the counter in derivatives instruments which major institutions engage in enormous for chile unregulated trading in synthetic versions of other off a highly regulated financial products. we can do much to reduce systemic risk close this gap cynosure similar products are regulated similarly. in addition to filling gaps in

its rich heritage transparency of risk. transparency helps reduce systemic risk by enabling market participants to better allocate capital and giving regulators more information about risks that are building in the financial system. transparency has been utterly lacking in the world of unregulated over-the-counter derivatives to hedge funds and dark pools. additionally we need to recognize the importance of horsemen place in sending a strong message to market participants. as the second line of defense and there is anita summers in the primer for macro credential oversight, a key element of the administration financial regulatory plan. within the framework family of the most appropriate approach consists of a single systemic risk regulator and a very strong counsel. in terms of a systemic risk regulator and a breather in is to be a governmental entity responsible for monitoring our financial markets for system one risk. this could be performed by the

federal reserve or buy a new entity specifically designed for the task. this is an aggressive regulator should have access to information across the financial markets about institutions that pose significant risk. and to be able to monitor whether institutions are maintaining of appropriate capital levels and should have cleared delegated authority from the council to respond quickly in assuring their circumstances. most of primly the regulators to serve as the seconds of bias of the institution's failure might put it at risk. at the same time i agree that the systemic risk regulators must be combined with a newly created counsel. a believe any council must be strengthened well beyond the framework set forth in the administration's paper. the council should have authority to identify institutions, practices and markets that a potential systemic risk and to set standards for liquidity, capital and other risk-management

practices in a institutions. this hybrid approach can help minimize systemic risk in a number of ways. first the council would bring different perspectives that identification of risk that individual regulators -- are considered too small to warrant attention. second the members on the council would have experience regulating different types and sizes of institutions so the council of the more likely to ensure that risk-based tableaus to leverage requirements do not unintentionally foster greater systemic risk. and the council would included multiple agencies and thereby reducing potential conflicts of interest to regulatory capture. in finally the council would monitor the growth and development of financial institutions to prevent the creation of institutions that are either too big to fail where too big to succeed. at most times alice by the council and systemic risk regulated to work with and through primary regulators who

are experts on province and the activities of regulated entities. the risk regulator gambrinus second layer of review of the activities, capital and risk management assistant clyburn institutions as a backstop to ensure that no red flags are mess. to ensure that authority has attacked the decision is not arbitrary the council would remain the place where a general policy is that and differences remain between the council and pri regulator the more stringent standard should apply. for example on questions of capital the new systemic risk from our should be in a position to raise standards for regulatory capital with institutions not lower them. this will reduce the ability of a single regulator to compete with other regulators by lowering standards driving the race to the bottom. and finally the government needs a credible resolution mechanism for unwinding systemically and foreign institutions. currently banks and dealers as subject to resolution processes

but no corresponding resolution process exists for the holding company's the seventh place in the area of financial institutions here and i believe we have an opportunity to create a former fl hub prevent the risk that it and have it in our financial system. and i believe we can trade a credible regulatory regime that will help restore investor confidence. i love for two working to adjust to the issues and doing all it can to foster is a for a dynamic and more nimble and financial system. thank you. >> thank you very much chairman schapiro. mr. tarullo, welcome to the dominican and thank you, mr. chairman and members, i prepared statement sets forth in some detail the positions of the federal reserve on a number of proposals that have been brought before you so i thought i would use the center -- remarks to offer a few more general points. first i think the title given this hearing captures the task 12. establishing a framework of

systemic risk regulation. the task is not to enact one piece of legislation or to establish one overarching systemic risk regulator and then to move on. the shortcomings of our regulatory system or to widespread, the failure of risk-management to financial firms two pervasive, and the absence of market discipline to apparent to believe that there was a single cause of much less a single solution for. the financial crisis we need a broad agenda of a basic to changes at our regulatory agencies and in financial firms into a sustained effort to embed market discipline in financial markets. second, the too big to fail problem looms large on the agenda. therein lies the importance of proposals to ensure that systemically important institutions are subject to supervision here to promote capital and other kinds of roles and that will apply more stringently as systemic importance of an institution

increases and to establish a resolution mechanism that makes the prospect of losses for predators real unit of the largest of financial institutions. but too big to fail for all its importance was not the only problem left unaddressed for too long. the increasingly tiny round connections between lending and capital markets including the explosive growth of that shadow banking system was not dealt with as leverage to build up and threw out the financial system. that is why there are also proposals before you pertaining to derivatives, money market funds, rating agencies, where is projects and a host of other issues involving every financial regulator. third, in keeping with my first point on a broad agenda for change, that is a few words about the federal reserve. even before my confirmation i had begun conversations with many of you on the question of

how to ensure the shortcomings of the pass would be rectified and the right institutional structure for rigorous regulation put in place and particularly in light of the need for a new emphasis on systemic risk. this colloquy and continued to the prior hearing conducted empire subsequent conversation that i've had with many of you. my colleagues and i thought a good deal of this and are moving for the series of changes to achieve these ends. for example, or instituting closer coordination and supervision of the largest holding companies with an emphasis on horizontal reviews that simultaneously examined multiple institutions. in addition building an experience with the process that do so successfully upon the analytic financial capacities of the divisions of the board, we will create a quantitative surveillance program that will use a variety of data sources to

identify, developing strains and imbalances affecting individual firms and large institutions as a group. this program will be distinct from the activities of the on-site examiners so as to provide an independent perspective on the financial conditions of the institutions. fourth and finally, i would know that there are many possible ways to organize or to reorganize the financial regulatory structure. many are plausible but as experience around the world suggests none is perfect. there'll be disadvantages as well as it manages to even good ideas. one criterion that i suggest you keep in mind as to consider various institutional alternatives is basic principle of accountability. collect the bodies of regulators' concern purposes examining laden problems, cornyn in response to new problems, recommending action to plug

regulatory gaps and scrutinizing proposals for a significant regulatory initiatives from all participating agencies. know when it comes to specific regulations are programs our implementation though collective bodies often diffuse responsibility is continuing to lines of accountability which i know this committee has been so much attention to. achieving an effective mix of collective process and agency responsibility with an eye toward relevant institutional incentives will be critical to successful reform. thank you very much mr. chairman and i'd be happy to answer questions can i thank you very much. we appreciate your testimony and involvement with the committee as well here and i asked the clerk to put on six minutes and try to keep an eye on that, we have a lot of participation and want to make sure we get around to people and ask the staff to give a very accurate account of their arrival of members in terms of the order in which asks

to address the questions to our panel. let me begin with you, mr. tarullo, if i can. i suspect a lot of the questions i will raise a you will hear variations of the same questions and i suspect there is a thing that will emerge here. you testified that the administration's proposal and to give a the fed supervision is incremental and bills omnibus authority and the bank holding ag in the till your plan for new surveillance program but you have mentioned here for a large complex organizations that look emerging risks to the system as a home. of this land as biggie about you because you are new to this been given the federal reserve history and record on this as an institution as we look back. why should we in this congress have any confidence in the federal reserve and that no one is said and today, but given history of the federal reserve you can argue this authority has

insisted and don't need you who authority and had that for a long time. serve and all the powers are there in@@@ includes in the attic

with whom were flawed approach to supervision and the banking agencies including the fed second, i will say that i think that history steps, history since and the relative position of agency shift overtime. i remember when i was in law school standing this set of issues. the federal reserve was regarded as the most aggressive of the regulatory agencies and the other agencies were regarded as somewhat more accommodating so i think there is a rhythm that goes with the times, with the leadership of an agency, and with a general orientation of public policy. sissons i have gone to the fed or before that, since i began having conversations with you

and other members, what i have been trying to determine is the degree to which has the capacity and the resources are present to do when what is in some sense the same job but that should have been done better to be honest and some sense is endeavoring job because i don't think anybody actually was focus on the system a part of the problem as much as they like to have been, it was more silo approach to regulation. and that is why i think both with respect to making some changes in prevailing loss of that it is clear that a supervisor of the holding companies has authority to do examinations of a functionally regulated subsidiaries when necessary, those sorts of things need to move toward hipaa and things are fundamentally one has to be done the kind of thing and mentioned a moment ago which is to put in place a system within the institution that has its own

kind of cross checks, john upon the substantial resources of a agency and are substantial resources there and the research and monetary affairs parts of the board's to provide exactly the kinds of information that will enhance a provision. and that is i think the task which someone has to perform center, and that is either going to be done her by the federal reserve, another agency, is out to be done somewhere. my belief is based upon my six month experience with the fed that under chairman bernanke leadership, it can be done. but i don't think anyone should underestimate the task and i would just seconds something you said in your a introductory, i hope people are not expected that anything the sec or fdic or anybody else does is going to limit potential for systemic risk, is just not going to

happen. and that is where i think we've had to keep in mind. let me tell you one final thing -- the proposal, the administration's proposal out of many very in much have they really mean to invest in a particular agency. back and arm are cheering you and i talked back-and-forth a good bit about the different possible functions of a systemic risk regulator. with the possible exception of some of the proposals for the council as have been described most proposals don't talk about a systemic risk regulator, they talk about allocating a set of responsibilities to agencies more collective groups and i think that's the way it should be. is it really don't thank you need or want some much responsibility as well as authority and money one agency to say have responsibility for

having carried out with the problem and have authority to do what every think is necessary. >> let me turn to you for two quick questions and play the devil's advocate. again i am still agnostic on this although i am leaning toward the council approached. but let me take his side and the arguments of the administration and raise it with you -- i will give my best shot and give the sign the agreement the this is a new idea or fooling around with a council and agencies that don't necessarily have a can of expertise and background of a federal reserve hearing that will spell this out a bunch different agencies so no one is really in control of authority and the federal reserve has experienced, they've done a bad job over the years but to start with the have the capacity and knowledge to his desk. we know about the fed and you're asking me to preach something altogether new and may not function well off to handle systemic risk, and very

important issue. why should they take a leap of faith in something trading in whole new entity that may include the fed but is going to have the problem of spreading out the responsibility in such a way you'll never figure out who is running the shots in a sense the seventh risk suffering terribly and spites given a nice name and hiring nuys people, it will not make the kind of decisions needed that a single regulator but experience to do the job. why is that not a bad idea? >> well, obviously we disagree with add. we think the council with rulemaking authorities to have some authorities. it would be highly effective marceau and monitoring force a summit risk in taking action to address it. the more ice you have looking from different perspectives and see the fdic difference from the sec who so i think bringing the prospectus together will strengthen and not making it. you are talking about tremendous

power invested in whenever the entity will be and i think in terms of checks and bounces it is helpful to have multiple views expressed and coming to a consensus. it is a lot of this informally but there is no forcing mechanism and there are discussions about otc derivatives and harmonizing capital standards by having it formalized group with a head off chairs with dealing with a kind of setting issues, harmonizing standards to make sure there is some arbitrage and may share risk of the system is appropriately address. i think is extremely important here and i was and i think we have a middle ground in terms of institutional regulations and would not advocate the fed losing its holding company, they do that and other risks to the extent there are other systemic institutions that are not under that prudential framework and we think the council should make a determination regarding that but was say it would be fine per the fed to be the regulator for the

institutions. but i think the power that is contemplated in and frankly is needed and in much better invested in a council of regulators so i think can work together member has three agencies and make decisions quickly. >> i will wait for another round of consumer financial products safety agency idea and delay that. >> thank you mr. chairman. mr. tarullo, in your testimony you. to believe interest obama's reform proposal and i'm curious to know if you buy this position as a member of the board of governors after conducting independent assessment of the plan which i hope is the case otherwise would call into question the so-called independence of the fed. could you provide the committee with the data and analysis that you used to make the determination that the obama plant was optimum approach?

>> center, i would not say that the board's position is endorsement administration's plan and i think which you saw in my testimony would reflect the position of the boren is a sense that the administration is moving in the right direction on these key components one that there are obviously a lot of details many of which we don't know and didn't come based on the white paper only to find out as they set up legislation to you, i think -- >> that is not our legislation, they want to send it up and go to think we should prepare our own? >> all i am saying is we couldn't figure out in some cases exactly what of their proposals meant which is why the testimony in his praise in such a way as to agree with a concept meaning to have every system grandpa and institution

supervise and leading to have a resolution mechanism. as you probably saw spend it -- the fed is not having them. the new consumer agency, not posing an either. >> let me get into that, safety and soundness regulation imprint. in your testimony states there are synergies between the monetary policy and systemic risk regulation. in order to counter the synergies you argue the fed has become a systemic risk regulator as i understand. yesterday chairman bernanke testified he believed there are synergies between bank regulation and consumer protection. this argues in favor of establishing one consolidated bank regulator. do you agree with chairman bernanke that there are synergies between supervision and consumer protection and to

you believe that the obama administration's call for a separate consumer agency would undermine the safety and soundness regulation that we have? >> center, as i said in my introductory comments there are multiple ways to organize a financial-services regulation. many times you have competing ideas each of which has mayoress in each of which have demerits with respect to the consumer protection issue the administration made a proposal which i think a lot of people have some sympathy with because it focuses on consumer protection and say we will get one agency the exclusive authority to regulate a consumer matters and thus they will be 100 percent devoted to doing that. what we have in the testimony is meant only to suggest that there are some things that would be lost by doing that as well as

things gained and with the chairman was suggesting yesterday is there is a synergy or interaction between prudential regulation and consumer protection regulation at least both been done well. the synergy is both in the substance of things that is having some sense of what makes and an eye to consumer protection regulations because you know the way in which institutions operate but also and a practical sense as you have got one court of examiners is an economy of scopa in having them who've looked at the multiple sets of issues within the same realization so i definitely think there are synergies, there are some benefits to go back and forth. if you take consumer protection away you probably lose some of those. i guess the position would be joaquin things along the line. >> chairman bair, the obama

administration's proposal would have regulators designate certain firms systemically important, these firms who would be classified as tier one financial holding companies and would be subject to a separate regulatory regime. and some firms are designated as a cynical important, when the signal to market participants that the government will not allow these firms to fail and if so how would this or some are too big to fill a problem? >> we do have concerns about formally designated institutions and is a special class. the same time we recognize there may be large interconnected financial entities that are not yet subject to a consolidated supervision and most other result of the crisis but some type of formal designation i thank you need to think about for other reasons to express. in any recognition should be a

stigmatizing and designation, not something that is favorable and this is why we do feel so strongly airbus resolution mechanism needs a very large and financial combination with any type of new entity to provide supervision or recognize the mace be systemic. >> i want to get back on the consumer protection. there is testimony last week on that that this would change the whole model from a classical approach to consumer protection to a haverhill approach. have you done some work in that area? avila that closely at? >> i have to be honest, i am not sure what that refers to hear and i can only tell you the way based on what i have learned since i have been an the fed the way in which the division says consumer protection and generous proposal is one that has a

fairly important behavioral orientation of to and including the type there is a sense of consumer testing done before regulations presented to the board to make sure for a sample i) iá everyone involved.

>> thank you very much and i will point out that as a jim bunning points out on countless occasions we gave sec the authority in '94 to deal with consumer protection and give them 14 years to promulgate a single regulation so i appreciate the concern about consumer protection. senator reid. >> thank you mr. chairman, thank you chairman schapiro and chairman bair and governor tarullo. i will start with chairman bair, a general question for everyone. as i understand the proposal by the lighthouse, the ot as would be eliminated so effectively all financial and regulation would be lodged in the federal reserve. that there would impact be at least the elimination of the

withholding act and those would be financial holding companies under the federal reserve. so direct regulation after this legislation by the fed would be comprised most if not all the systemic institution say perhaps insurance companies that might be outside to deal with that and very large now so large ones but operating in very recklessly. so with that framework what does the council, how does the council relate to that to regulator that has full and direct authority and, in fact, in the proposal would eliminate that a function of the regulators? so that i think a look through every part of the institution. what role does the council play in that reality or should play? >> well, i think there are still issues regarding across markets

cents a function is within the holding company that may be individually regulated and there will still be practices and products that may be outside that system and seduces may do. you have a lot of third-party mortgage brokers originating the bad marriages that are being funded to multiple forces including non -- finance companies and wall street firms so i think that there is plenty of opportunity for risk to be in assess across the system by any entity in terms of products and practices and also within the large holding companies reservoirs' of expertise and investment banks and dealers from the sec in national league tournament, the provincial regulator and the fdic. i think in particular capital standards applying across the board making sure there are no opportunity to barbara josh and i think that was a very major

issue. i think otc derivatives, some derivatives will be traded on exchanges as on central clearing houses and others still be done by the otc derivatives market makers and seeing how capital across a system of tax incentives whether it made can get together to drive this to a more standardized training those are interagency matters and go across agency rulemaking. i actually see a lot of credit counselors preserving subpoena authority to make institutional regulator. >> specifically with the council in your view designate the tier one warrant the entities? >> that is tremendous power to say to an institution we are going to bring in so i think that power is needed but it is better to be exercised by the council whether diversity system of checks and balances. >> and the council would

formally begin of the resolution process? >> i think we could discuss that. i think we have been talking about that internally and for systemic institutions those men have it systemic impact that might be a role for the council and, on the other hand, to the extent resolution will in all potential short-term assistance. what we call the three keys and the fdic, the fed, the treasury in consultation with the president might be another model to look at and those of the three that have to put the money on the table so to speak to deal of the situation so that is the way the system works now. if you rely on the system this estimate risk i indicated should be much harder to provide assistance. >> chairman schapiro, a 91 governor tarullo comment to. can i thank you, i agree very much with what sheila said it. i think it council is credited to -- critical about the

financial markets to the deliberations of all the regulators. and this diversity of views does need to reach across equity markets, futures and derivatives markets, the banking institutions, clearance and settlement systems and across all huge riding of derrin products and women don't bring diverse perspectives we run the risk of any one regulator not appreciating risk developing or not understanding the risk that may impact other and ansel as the dishes for which that doesn't have direct responsibility so i think both the ability to designate the institutions that need to be subject to additional regulation and establish capital standards, liquidity requirement other procedures for those institutions in conjunction u.s. the primary regulators, is a very impressive box stop. >> governor tarullo, this is a lightning round [laughter] >> senator, i think it depends a

lot on how you structure things here and i guess one model which may be what sheila and mary are talking about, one model has the counsel basically as the rulemaking in today for a thing systemically important common designation of the tier one and capital rules i assumed deposit insurance to the degree of pride to the system as well or money-market fund regulation and then the question for you and everybody is going to be two what a system in which each major regulation and that has the seventh importance as chairman schapiro said it something that will apply to regulation and duties of a other regulators, the you want that done it formally in a council by a vote of some sort or into wanted to be done through a lot of scrutiny, a lot of discussion perhaps bringing in sign outsiders as some people as well

as, the agency is to ask the hard questions and require that agencies and that have responsibility for the regulation to defended and making a better regulation but then ultimately to nsl have the responsibility to implement and that is the joys and when i was alluding to in terms of the trade up. you get the incentives right to men thank you, senator reid. senator corker. >> thank you for your testimony. chairman bair, very much as a per share outlook as it relates to the resolution issue and i'm surprised that the administration's proposal and wanting to continue to support companies that fail much like is being done with turban hope that will evolve but let me ask on the issue of systemic risk, if there had been a resolution

which mechanism in place when that not have an eye to the even though there was risk in the market, with that not have actually reduce the risk to some degree -- and of the rich and you have the ability to deal with the lehman brothers or a i.t., would that add to the have reduced their risk of the system and the first place? >> i think it would have for two reasons. it already in place for some time and have had better market discipline across the system and seconds and the problems kids and will always have cycles, always have cycles there would have been a consistent mechanism in place that could be applied to all these which would reduce market was sent to about who was meant to be next to no win and lose. so i absolutely think it would have reduced the going into this and we had such mechanisms. >> i think that is a big point and i think that is something

that we're looking at creating something new. and i know we will debate that and may come up with the resolution of the plant is if we had an effective market disciplines in the first place with the rent and is used whenever tubing to tell the could avail the risk itself would have been less and i think that is important -- let me ask, i'm certain on several public company in torrance and surly not have the size of the companies we are talking about here, but i have been before a lot of them in each of the board members if a plane a respected individuals that have a focus on the on companies and i respect people and the opposition very much, but is there something we should be thinking about as it relates to boris? they show up and really don't know squat about what is going on inside the company and it is

a nice social event. it is just the way boris are set up and most ceo's like a ballet i was of serving on highly social boors,. [laughter] is a fact. let's face of the board members really as good as they are, the respected individuals may have their own companies and fish to fry in many cases, they really don't know what is happening inside these companies and the greatest regulation of and just be knowing that people on these boards and ashland and assam is happening in the company. i know most ceo's don't like that much, but i wonder if he might respond both mary enzi lead to that, chairman and chairman to that. >> mary is just fine. [laughter] i think governance is an enormous issue and i don't think in this by now intention of

neglect than some other institutions got into so much trouble but i think we have a serious examples of boris that are not paying close attention when didn't understand the business the company is than ever on the prospective there are a couple of things we want to do about that and one is we propose new rules require much greater disclosure in the process which will learn to sketch in quote about qualifications to serve on a particular board and a risk of a for compensation committee or other committee that might require particular expertise so we can encourage parents to nominate people to sit on the boards who actually bring that value to the company. i think the second problem is with compensation to the extent compensation in some of these institutions have excess of risk taking and holding boards accountable through better disclosure of compensation schemes and the compensation

programs and risk-taking i think will help shareholders to a better job of holding boards accountable for having utilized compensation. >> thank you. >> i think the direction of the sec is going is great and much needed. our on focuses regulating banks obviously and identify witnesses and management, we live to the board and want to make sure that have people who understand banking and over c management's but their primary responsibility is to make sure the management will run the bank in sound manner so we have put a focus on this and i believe the fed has said the company level and we want real boards and people who experience what is going on in the company and other san derivative positions and how the compensation structures impact risk-taking behavior. >> and other question for any board member, the opera's question they ask the company is how much insurance you have a.

i want to do was to be on this board but i don't want any liability and insurance isn't enough, i think that is something that we ought to consider as a move ahead again not without any disrespect to the individuals themselves. so i think in a resolution had been in place the risk would have been less. if we had the words that somehow had some mistake in the gone are some different relationship that would reduce risk so let me move back to the notion of senate regulator which i know we will debate but what powers governor tarullo if company a it was engaging in buying one sign of a risk in a major way and intelligently, what would have the power of this summit

regulator be two stop that action? >> well, again it depends on how congress would choose to define it@@@ lá iá supervisor institution there is a set of rules and supervisory expectations that there are rules on leverage and capital

and on liquidity. there are supposedly conforming to those and if they are conforming to those there should be a contain it to the kind of risk you're talking about. the backup average is supervisory examination which goes beyond the rules and that works well and identifies these things and then allows the supervisor to give guidance to the firm to say we thank you ought to be moving away from this practice or to research and rest but i think your question raises and import point which is if this were let's assume the administration's proposal on tier one at hd was enacted there would still be a substantial universe of firms out there which would not be regulated by the fed. which might be engaging in a kind apprentices' you weren't talking about even if no one firm is systemically important. in the african a practice and games in firms can create

problems so you'd have to ask to be able to regulate that. >> i think that answer was really interesting mr. chairman from the standpoint, nothing -- the answer is nothing so the notion of having a single person, a single entity overseeing so they can and swiftly is not even relevant. because there would be no power and at the end is all conversation, looking scum of regulation and those things can be done by a group. i just think that is where the of hearing one of the governor said. no action. >> senator, just to slightly maine to ann or what i said -- it is important to look to see what those rules are that puyallup. the roles of leverage, the rules on capital, the rules of liquidity are themselves

supposed to be based upon a concept of risk and i believe they are based upon a concept of risk which should contain these risks. i think that if you sent the rules properly you have gotten a fair way down the line to containing risk within those institutions. what i was saying before about the backup supervisory examination authority is there can still be practices that a rise, that somehow are eating their roles were not falling and of the rules and then you need to determine whether it is an unsafe and unsound practice and make the judgment about that, so i don't think anybody should promise to you that as soon as any firm stars doing anything dangerous that summing later is going to be able to stop it, it's going to have to evolve over time and if the rules are set right you should be contained a good bit of that to begin with. >> thank you very much, senator

tester. >> thank you mr. chairman. all of you have talked about regulatory gaps and systemic risk and all of this. governor tarullo, one of the points he made was on accountability, you can diffuse the responsibility. later on you talk about silos and i don't want to put words in your mouth but you were opposed of one agency determine the solution to the problem and i may be wrong when i heard but that is what i thought i heard. we are at a point where we know there are regulatory failures and i think there is an opportunity to fix what the president put forward with this proposal, but shouldn't be push for further consolidation to stop the gaps to allow ourselves

to focus and have that accountability that you talked in one of your main points, mark consolidation fax. >> you keep referring to my prior job which i guess is a good than. a i spent a good bit of time attlee as an academic looking and the different ways in which countries such as the regulatory systems and there are some countries, the u.k. and japan among them that have china fundamentally to consolidate of financial regulation in a single entity. in i don't think there is any denying there is some it manages to that and you do get some of the cross pollination and you do benazir incentives to the cost of the system but protect our example deposit insurance fund and you get a lot of those

incentives. i think that people in those countries also said there are down sides to that as well how. the advent of the crisis in the u.k. suggested to lot of people that model was a failed state so i should say if the fed does not have a position on was consolidation but as kind of a policy observation i think there would be teens to trying to get more focus and consolidation so that you have some sense of who is accountable for what. but i think most of us and i suspect all three of us at the table would also agree that some measure of adenosine is actually not a bad thing, that is sometimes i want accountability but sometimes it's not the worst thing in the world to have multiple pairs of eyes and even somewhat overlapping authority. >> i would agree with that but then when happens with

instrument developed that has a regulation that falls in those gaps we talked about and then everybody says it was theirs. >> that is absolutely, i think that is a very good point and so the question for you will be in the architecture that you may choose to legislate the, you provided that summer there is going to be residual rafal the authority to address the anticipation. >> chairman bair, the administration proposes leverage in the impacts and the impact is a failure would have run a line is a system and the economy when determining if a firm is systemically important. in this kind of aid to edge sword, once again, but if affirm size in the metrics are developed around not and we could talk about what those

metrics might be and we might if we have time, but wouldn't that provided from a safety standpoint, wouldn't that provided competitive edge advantage for those bigger banks persists committee banks it, in fact, their size and leverage determine them to be they can't fail so we are going to make sure that they don't perambulations. >> we think any designation is systemic to be a bad thing not a good thing and if that occurred there should be the specialists resolution regime. to resolve a lunch interconnected firms the same that applies to small banks and also should have to pay assessments to provide working capital and they have to be resolved. we are not sure you need a special tier one category, the assessment could be anyone who could be system based on other criteria.

it could be used as a means of the forest cut to pay the investment but you're right, if you have any systemic discrimination without resolution of the money and we think assessments would be helpful as well. it is going to be viewed as a warning and reassurance and you want to end it. >> i am not tracking as a consumer how to stop it from being a reward and not a liability? ..

>> well, let me just say it's been just a very, very interesting discussion and i appreciate you being here. i will tell you what i said a few weeks back, maybe a couple weeks back i tend to favor the counsel -- the idea the federal reserve i think it's fraught with a lot of problems, so at least today that is where i am thinking. but discussion today has really raised i think in my mind at least some very important fundamental questions. it seems to me if you have a

consul, chairman bair, i would tend to agree with you the consul what does it need who is classified as somebody who would fit within this. but that raises the issue of how broad is that power which probably brings back to even a more fundamental question of what are we meaning by systemic risk? is that an institution that is so in tangled with the overall economy that if they go down it could literally shake the economy or bring the economy down, is that what we are thinking about? >> i think you are and i think it should be a high standard and i also believe through robust regulation higher standards proposed resolution mechanism as well as assessment mechanism they will provide disincentives for institutions to become that large and complex as opposed to

now where the incentives are to become so big they can basically black melos because of a disorderly resolution and this is one of the things we lack is a lost government to provide a resolution on an orderly basis. it rewards them for being a large and complex. >> cylinder that analysis, very, very clearly you could have a large operation fall within that but you could also have a large insurance company fall within that. >> that's right. >> he could have a large power generating company fall within that. but if i somehow have the wealth and capital access to start buying power generation and all of a sudden someday you kind of look up and i own a 60% of it? that's a huge risk to the economy if i go under power generation is at risk. is that what we are talking about? >> we are talking about

financial intermediaries, and i think there are things in terms of the reliance on short-term liabilities to find themselves as well as the creditors and bar was dependent on them for also continuing, continuing credit flows. so there are things different about financial intermediaries that make it more difficult to go through the standard bankruptcy process which can be uncertain. can't plan for it. the government cannot plan for it, they cannot control the time and it can be protracted a and take years and its focus on maximizing returns for creditors as opposed to the resolution mechanism which is designed on protecting insured depositors but also making sure there is a seamless transition so there are no interruptions for depositors and also for borrowers and for the process of the super grocery process polis legal authorities for resolution we are able to plan for these and you in

advance and i would assume this would be the same situation you would have as senator reed pointed out the said virtually regulates everyone and that would be the case. i would also say that i really don't think a very large -- plaine futrell for cappoli in short i don't think they would be systemic. i felt aig got in trouble because it dpp could deviate from its property-casualty insurance and when it is a high risk activities. so again, a few penalized being systemic i think he will reinforce incentives to stick to your knitting and more basic low-risk activities as opposed to getting into the higher risk of endeavour's that can create systemic risk as we have seen. >> chairman shapiro, do you agree with that? >> i do agree. i think if you have an adequate resolution of they will in fact be used.

it can cancel out the competitive that faint that might be perceived to exist for an institution that is systemically important and therefore the government will letiá@@@ )ú)árb is an important component of any program to address too big to fail. but as with each of the other components i don't think we

should look at it as a panacea. this is not something we have done before. it's something we think needs to be done and i agree with senator corker's earlier observation if it had been in place before it would have reduced risk but he didn't say eliminate risk and eliminates the problem and i agree with that. i think you are going to need a good, sound resolution mechanism. i think you're going to need other mechanisms to enhance market discipline. referring to the capitol structure of the firm for example, and i think you are also going to need the sound transparent regulations because i don't think that going forward we can rely on any one instrument. we are going to have to rely on a set instruments to try to contain this problem. >> my time is expired but if i could offer this thought. i think the chairman is absolutely right. i don't notice any political

agenda. i don't think it is a partisan sort of thing we are trying to come to grips with. my hope is that as we start working through this and putting pen to paper that the administration will look at this from the standpoint there are a lot of ways of dealing with this problem and preventing what happened. and of wade walking down on just a single approach, like it's got to be the federal research or it can't be anything but having said that, and i will reiterate. i'm hoping that at some point we can move beyond who manages this and resolve the dispute because there are some very important issues about who does this apply to? what are the unintended consequences of trying to define that? and i think that is where you

get into where the rubber meets the road how you structure this in a way that makes sense that deals with the problem without going off on a cul-de-sac that really is not where we want to be today. >> let me just say and i appreciate my friends and colleagues comments because he is on track and my sense is with the administration as well this is dynamic setting up ideas and proposals and that is as they should do i suspect, but my sense of it as well is i don't get a lockdown view on this. so i think we are still in the dynamic process thinking through these ideas and you are absolutely correct, we are spending a lot of time on the who. bob corker i think raised an important question i raised many times not just the who but what, what powers? identifying who is going to be an important question but what power are you going to give them is equally important if you're

going to give any power at all. so i think there's a lot of important issues and again i am very optimistic about the process we have in place for archiving and some of these answers sali thank my colleague very much. senator bennett of colorado. >> thank you mr. chairman. i want to pick up right where you left off and senator johanns left off because i think this is by the way a fascinating conversation and i appreciate all of you being here today. i think this is fraught with incredible amounts of in and intended consequences and we need to be enormously careful keeping our mind or focus on what is the problem we are trying to solve because i am enormously skeptical of our ability to predict the regulatory agency's ability to predict these economic cycles and then to be able to respond in a way that actually dustin to compound the problem we are

facing. i think we have just seen 20 years off leverage piling up on the system and lack of intention to that that has led to the destruction of, you know, our economy and the dreams of a lot of people that live in my state and other states. but i fully agree that we need to -- having read resolution authority in place would have made a difference and kept us out of the alice-in-wonderland world where we are now having conversations about how people get paid and private institutions where the taxpayers had to come to the rescue of the firms we should never have had to rescue and the fed chairman and treasury secretary have been doing good work trying to get us out of here and they are right to say that we were left with an assortment of terrible choices, and we took the least bad.

our objective needs to be to make sure we never find ourselves in that place again, and i guess the question i have for you, chairman bair, is when you talk about the counsel -- and again i don't have anything against the council or anything and it might help, we talk about a council that anticipates risked life and i get that little skeptical but i get it. you also talked about the council that mitigates risks. can you tell more about what that means, put some flesh on those bones? >> litigator reduced risk. we are a capitalist system so there has to be some risk in return. that is excessive risk perhaps should be a better example. in terms of the systemic risk council i would put at the top of my list and their capital margin and other constraints on leverage. there was too much leverage built upon the system, and i would say that we would believe

this council should have the authority to set minimum standards, as to the coast of the council decides they are not sitting up high enough capital standards for the bank or if the fed isn't setting a high enough standards for its holding companies or for the quality of capital the council could step in and raise those standards. so i think there are checks and balances as well that you may not get with investing the power in one entity. >> that's an interesting idea and would effect of that be to remove some of the risk of regulatory capture of the other agencies? >> i think that's exactly right. >> a question for the panel, generally, one thing we've learned in this economic crisis is that the united states economy is not isolated from the rest of the world. as we think about this set of new with laws and regulations, how should we think about how we connect to the rest of the world or the regulators connect to the

regulators across the globe? >> well, i think we should lead the world. it could be a very long time based on my limited experience with some of these international groups. and i think especially on resolution of 40 they are using the united states to define a model and i think you should seize the moment and forge ahead and not follow because i do think there are still a lot of folks looking to us for leadership and we can define what the ultimate standards will be. >> mr. chairman and i will end by saying i hope whatever it is we are right out and whatever we do the administration leads towards a by is that when firms need to feel they fail and we can make sure we do that in an orderly way and that we are not ever again in the circumstance today which is to prop up institutions simply because we had no other choice.

this is a shame the tax payers have found themselves where we are. thank you mr. chairman. >> thank you. i couldn't agree more by the planes made by several and the option is one, to pour billions in order to collapse them. there has to be alternatives within the two bookends to get far more flexibility to respond to the situations and if we don't do anything else i think the wreck resolution mechanism is going to be important to this and again as i listen as the chair of this committee my job is to listen to all of my colleagues, and as i listen to this while we haven't settled on a process now i am certainly beginning to sense a consensus developing around those issues sali thank my colleagues and senator bennett for raising that issue. senator bunning. >> thank you. i would like unanimous consent to enter my opening statement into the record. >> chairman bair i've asked you this question before and probably will ask you again. when do you expect to and the

temporary liquidity guarantee program? >> october 31st. >> for sure? >> for sure. [laughter] yes, all indications we will be able to exit the program. the balance guaranty balances are down. use of the program is down significantly and i anticipate we will be in a good position to exit october 31st. >> good. this is for all the witnesses. so, this question has two parts. as i said before i doubt we can accretive regulator that will be able to see and stop system eckert ask. so the first question for each of you is if you really think government can assemble a regulator that will not be all smart by wall street first of all, in other words can the government really understand what the financial industry is doing and spot the risk ahead of time or at least as they are

happening? and second, it seems to me a more practical and effective way to limit the damage firms can do is to limit their size and exposure to other firms in other words the interaction between major firms. that also has a benefit of allowing the free markets to operate but within reasonable limits. my question for each of you is do you agree with that and answer also the first one if he will. you can all take a shot at it. and no order. [laughter] >> i think, look, we can have better quality regulation. we can have more even regulation but even regulation will never correct all of this. you need market discipline which is why we have an effective

resolution mechanism the market will understand if these institutions get into trouble those who invest them or extend credit are going to take losses. on the interconnectedness' and exposures, yes, senator i think you are correct to focus on that. one thing we suggest in the testimony that would be up for consideration for council if it was formed would be to look at whether there should be some limits on firm's reliance on short-term liabilities. >> shouldn't we include everything in other words we are talking about things that are not regulated at all and subcommittee chairman reed and myself are having hearings on those things outside the regulatory body right now. >> i think you're right. the relationships of the financial intermediaries to others in the economy stress to those on the market wide basis i think are all things that require a lot of interagency cooperation and something the council would be well equipped

to provide. you're absolutely right interconnected this is a key indicator of systemic risk and it's something i think we can do a better job through regulation and containing. >> ms. shapiro? >> senator i think we can do better as regulators. we will never do be perfect but -- >> we all know that. >> i feel we can constrain risk-taking through capital requirements more effective capital requirements and margin but i want to address the second question because i think it is a particularly important in the context of the example of the over-the-counter derivatives which trade in the hundreds of trillions of dollars on a bilateral counterparty to counterparty basis without transparency, without in many instances sufficient margin or collateral -- >> the just trade. >> exactly. so the goal of moving as many of those transactions on two central clearing platforms so that we take out the

counterparty risk and remove the bilateral nature of the contracts of clearinghouses between all the parties i think would do an enormous amount to reduce the systemic risk and reduce the exposure for financial institutions to each other. >> just by registering? >> by clearing them through a central clearing house. >> with respect to the first part of the question i would agree and go further. i think part of what we have observed is not only that the government observers can't figure out every instance of systemic risk but market participants themselves are sometimes unaware of the fact they are engaging in practices that are subject to the domino effect of everything falling down. i don't think that means we should give up. i think it means we have to go into the exercise with a realistic sense when you can and cannot accomplish, and you're going to have false positives and false negatives which means that there needs