10:00. don't come before. duh. don't come before 10:00. well, that didn't work. i'll show you some slides in a minute. this is how extensive our organization was, our medical director was the incident commander. we literally put this together in the context of the incident command infrastructure. this is what we saw when we got there. so we told them don't come before 10:00 and this is 8:30 in the morning. we had several hundred cars lined up. and actually it worked to our advantage because we were able to get out the paperwork to those several hundred cars well above the start this time one of the things we blew -- we forgot to tell the sheriff's department you better get in here early. and they were in conference. and was that the message for us the next time around.

what you see -- this is the from the other side of the toll booth, the cars that were on the other side coming toward us and we pointed out this one particular car and let me tell you what the punch line in case we ran out of time. you know, we were trying to make sure we had a way to get the cars through, get the paperwork done and as you'll see in a few minutes -- by the time they got to the toll booth, they had their window rolled down, their sleeve rolled up and nurses were in the toll booth, and we were getting people through seconds and not even minutes. i'll give you a punch line in a few minutes. you don't prepare for them. this car that you see here broke down. never thought about that. what do do you if a car breaks down in a line? and we quickly -- the medical director, myself the field director pushed this guy out of the way. but it made us recognize that there are things in congress

congress -- in the planning. >> did they get their shots. >> yes. having them fill out paperwork so everything was done by the time they got to the booth. and our objective was to get these information sheets to cars before they got to the booth and we were 97% effective in doing that. media, how to handle the media. the commander and myself as the department head, i was the media guy. so any media questions were all directed to me and i did many, many interviews that day from local media asking any questions why are we doing this and what was the issue around influenza? we even had our environmental health folk thinking about -- we got these long lines of cars idling will we have problems with carbon monoxide so we had monitors out there to measure the carbon monoxide levels as people were driving through. we allowed 16 seconds in our plan to administer the injection

and if we used all nine lanes and 100 cars per hour that would give us a certain end point that we know we wanted to reach. here's another problem. this guy was -- this truck here -- he was coming in to deliver some dirt. and we hadn't figured on him so we actually had put together a special needs area and our analysis was this guy should have been shuttled immediately to special needs and not allowed to get in line. we also set a -- a number of people in each vehicle. no more than three, duh? so here comes a van with eight people. and the adaptiveness of our nursing staff was wonderful 'cause the three or four nursess jumped out of their booths and saw eight people in the vans. they went into the van, immunized everybody and then moved them along in a very, very quick fashion. here's the guy that broke down that we pushed off to the side. and there's a special needs area which we had created for any special situations like too many people in a vehicle.

oh, this photograph on my right here -- i guess it would be your -- in the corner, once we started seeing a slowdown in the number of cars coming, we actually started shutting down lanes to keep the pressure on to make our goal to get a certain number through and with a certain number of people. we had multiple partners, as i mentioned, the police, fire, the sheriff's department, ems. everybody was there on the scene with us. we even had this very, very high tech traffic radar photography thing set up so that we could get a look at the entrance to the fairgrounds from wherever we were in our operation. and here's the math. we wanted to do 10.5 cars per minute. that's one car. this shows you how finite we did the operation. one car would be 5.7 seconds, et cetera, and you can look at the numbers. and looking at the population that we have and our desire to be able to put together a

procedure that could accomplish our entire population in a short period of time we felt we would need 31 drive-thru pods. the next step of this was to find banks which were ready to step up to the plate so now we have banks throughout our community that have similar situations with three or four lines that can now -- and we, in fact, did an exercise with them. that's the bottom line on that day. we did 1,000 flu vaccinations un 40 minutes which is absolutely amazing so we have set up a process that if we need to, we can put into place with all these drive-thru parks throughout the city and because we have worked with the school systems prior to this and have set them up as pods as well, we now have the school system ready to go. and by the way, schools started in metro louisville last week. so if you're looking for a sentinel location to see what's going to happen, we're already having conversations about, you know, hand-washing and social

distancing and communication messages, et cetera, with our schools. very quickly, this is the part, exercise, we just did recently with the banks. and just to show you numerous partners, ups was involved, the tarc system, public transportation, being people so the locations we're staging it very military-like staging area at one of the stadiums in town where everything was gathered and brought together and then from there, the vehicles took us out to the pods on public buses. this is one of the banks, and you can see the tarc official leading this bus, which is from the kentucky national guard where the s & s -- the strategic national stockpile was brought to us to break down. that's upstairs and another bank. i'm moving a little fast because of timing. i wanted to stop for this for a minute one of the things we recognized that in order for us to be able to address anything at any time, we had better do

some prepreparedness work. we then establish about a dozen of these trailers with everything that we would possibly need at any one location throughout the city. they are sitting ready right now in something called louisville underground which is a big cavern in metro louisville. all we have to do is hook up a truck to these and take them out to the location, break them down with our staff and we're ready to go. all this exercise has been very helpful to us to get us ready. let me go through a few slides on some local considerations and then something from our national association of county and health officials. obviously, the necessity for partnerships and much of this has been mentioned so i won't spend another mention on it. crisis communications, certainly, critically important. the availability of the vaccine has been talked about. we're waiting to see what it will look like. the recommendation that there be a focus on the mass vaccination program with the school system as the primary focus is what we are working on along with our school system for obviously reasons. and then, of course, the importance of partnership with

the school system can't be underestimated. we now have a mixed team in place that has our staff as well as staff from the school system, there's a regular communication between myself as a director and the superintendent of schools so that we have consistent messaging and methodology in the work that we do and i mention that we have school setup -- that can be set up as partners if we need. remember surge capacity. yes, this is what we're all saying. this is a relatively mild disease but there is the opportunity for multiple visits to hospitals either emergency departments and/or hospital admissions and what is the surge capacity of your hospitals in your neighborhoods and your communities when it comes to this year's -- and what are you going to do if you're overwhelmed by that surge capacity. making sure the plan activate is done at all levels, a definition of medical surge which i'm not going to go through in reading because you can read as well as i can. you have a good idea what surge capacity, means, i think. other considerations, community

dynamics. now, i talked a lot about. what are the social issues in your community that affect the ability to get everybody the access to vaccine isn't it so what's the level of poverty? how many kids in your school ride school buses that the photograph pointed out before. what's the level of physician/patient ratio? access to primary care clinics? fairly qualified clinics? what are those dynamics in your community and what has to be addressed to make sure there's equal access to these vaccines once they come out? and then from these two or three slides these are similar to what we talked about. the issues are number one -- this is, of course, looking at all public health departments across the united states. continuing to employment community preparedness and the focus on other things that we mentioned hand-washing, coughing, sneezing techniques, staying home when you're ill. this is not a public health response which we talked about.

collaborative community response. i mentioned the group earlier. but public health as the lead agency in this regard. providing protection, mitigation and coordination of mass vaccine programs. and obviously in support with the school system and others. that we have -- and this is critically important. collaborative relationship with media. it has to be a two-way communication. media should have been by now a part of your local planning. if not, you need to get them at the table not just to let them -- not just to tell them what the messages are but to have them sit with you and come to those messages together. they need to understand their role as an educator and a supporter and not a place to potentially fan fanaticism in some instances and panic in others with the message that they put out. media has a tendency to do that. if there's any media people here, i'll be sorry about that. but i've had my own personal experience where the media goes to the sensational and not

necessarily as a supportive partner in the events of this nature. strong partner for the school system, obviously, in this instance has to be critical. understanding how the decisions are made about school closure. yes the school superintendent is the ultimate authority but if you can build a relationship where the superintendent looks to you as the public health director to say what do we do? what's the recommendation? how do we make this happen? then you've got a great situation going. the affect on job absenteeism was mentioned. social to social distancing. making sure you have presentations to all concerned that parent/teacher association, critical arm of getting the families involved in this. the unions, teachers unions, the school workers, those who work in the cafeteria. are we talking to them as well about these issues? and then, of course, the role of school health personnel if you're fortunate enough to have nurses in your schools you're a long way to make this work. joint planning and ongoing communications and then some special issues that we've been

talking about. is there an informed consent protocol in the schools that you're working with? well, we're not so sure that there is. as a matter of fact, there isn't. we had problems with this for several years. how do we find a way to make sure there's an informed consent signed by the parent giving us permission to give a shot to their children if there's a problem? the cdc is even asking a conversation about a national standardized consent form as something you should look at in your venues. liability, shouldn't be a problem but you start talking about bringing in volunteers, medical reserve corps, other people who are not actively working or licensed, giving shots. they're concerned about liability. what if something snaps am i going to get sued? so there has to be a way to make sure you take care of that blob it comes to addressing those issues. is there -- are there sufficient personnel? are there enough people out there to, in fact, do the job so we're talking to the dean of

school medicine, deep of the school of nursing and several in our community to provide us with medical students, nursing students from various colleges that have been trained to do vaccinations under the umbrella of this liability waiver that we hope to put in place so we have enough people to, in fact, address the hundreds of -- we have about 100,000 kids in our school system that we want to address as well as those others in the groups that we're talking about. and then, of course, the availability to vaccine. we talked a lot about that. when, how much, one dose or two? you want to talk logistics and if we are in a situation where you have to give three separate shots, not even two at once but three separate shots, the logistics for local public health department and school systems to address this issue is going to be -- not overwhelming but certainly a major problem. to get people in once -- if you've done flu programs, to get people in once for seasonal flu is a real challenge. to get them now in two more

times for h1n1, i don't know. we're crossing our fingers and praying to a higher power that this is all going to work out but it's going to be a real logistical challenge for us. and then last but not least and dr. benjamin mentioned this in his presentation. there is already some community concern regarding autism and thi-marisol. we've been informed and giving good information on the scientific basis that the question of the vaccine in autism is not a real issue but nonetheless the community still believes it is. there's a new vaccine coming coming o out. but it becomes a potential problem that could, in fact, derail our efforts. i think this is my last slide. going back to this 'cause i feel very strongly about this. that there must be a special concern given to ensure equity and access to information and vaccination services for populations in low socioeconomic

groups and those generally left out by virtue of color, class, language, neighborhood, and insurance status. just think about katrina and what's possible in any country certainly becomes an issue that needs to be addressed and addressed head on. that's my contact information and i thank you for your attention. and i think we're back on time. [applause]á?ñ >> let's give another round of applause for dr. benjamin, fran francois and troutman. [applause] >> i don't know if we're going to have any q & time. are you going to be around for a while? you got to run. he's got to catch a plane. but you two will be here. and we'll have a chance -- you got their mug shots, okay? make sure you walk up to them and talk with them. there'll be time throughout the conference to dialog with them. but we want to trysv÷ to move

forward. what i'd like to say -- one announcement, i've lost something in one of the bags. it's a black binder. all it has bills in it if you want to pay my bills, it's okay. [laughter] >> but if you happen to find it, just leave it at the front desk for me and that'll be great. we're going to go ahead and break now. do we want to take just one question? are there any questions at all for us? maybe we could take a question. a really burning question. there's a burning question right there. >> can you hear me. >> yes, we can. >> none of the speakers mentioned swine origin

influenza. most speaker talked about h1n1 and h5n1 influenza, that's true. maybe confusing as de novoa what it means a continuance mutation. as a matter of fact, we know that. it's made of seven. and as it invades the cells it's open and then releases it into the dna. swine is only animal that has the capability to go into the receptor to accept human influenza and gi acceptor that has its own influenza. it's made of human, swine and avian. i'm not worried now. i'm worrying in the future because this virus is not that aggressive but i'm worrying in the future we might have more

influenza that is more ineffective, more lethal and more effective. thank you. >> the question was about the next phase in the development of influenza and where this virus may go. i remind people this is an r & a virus and what r & a viruses do is they replicate themselves. and they replicate themselves with great efficiency. but they don't replicate themselves with efficiency with copies. they go into cells and they make copies of cells. some are like the parent but most of them are different. they reassort their genes very quickly and so, yes, there will be lots of different strains of

influenza that will develop out of -- out of any encounter when the virus changes. now, having said that, history tell us they change frequently but they only make major changes not very commonly. but when they do, they cause pandemics like this, 10, 20-year cycles. so that we can always expect that this virus is going to change. and we should anticipate that. and i think as you heard earlier from one of the other speakers, our great fear is that it will combine with some other virus which is also more lethal. another influenza virus is more lethal but to date there's no evidence that's tha -- done that and i guess that's a good thing. >> one more burning? okay. the mic. thank you.

>> two real quick questions, if i may. first of all, for the moderator, are we going to get the presentations that weren't in the package? are we going to have those on the website, do you know? >> let me follow up with the administration with that. >> that'd be great. appreciate it. good information so i don't want to lose it. secondly, as far as the vaccines, the one big red flag that i've seen so far -- well, there's probably several, but the biggest one is that vaccine production seems to be much slower than is anticipated and so, you know, if you do the math, 6.7 billion people -- it looks like, i think, 1.6 billion if you take that 33%, the higher percentage of the vaccine they expected so 1.6 billion vaccine doses might be available and if you have to have two doses that's 800 -- or let's see. yeah 800 million people that can

be protected. so that's not going to cover even those targeted populations, let alone the rest of the world, right? and that's in the first year. that's from this october to next september, let's say, as far as vaccine production 'cause that was vaccine production in the first year. that just doesn't seem to get much play. but am i reading that right? >> yeah, i think the slow production has created some issues for us but also remember that once we get through this year, then the folks that look at this and decide what's going to be in the next year's seasonal vaccine, it may turn out that if this becomes a predominant strain it becomes one of the major strains in the next seasonal vaccine and then fortunately next year we only have to give one shot again. but again that remains to be seen. >> and hopefully remains a mild illness so that while vaccine strategy -- vaccines are very important, it may or may not be as essential as it would be if

there was a high morbidity and mortality. >> well, if i may add, again, in the u.s. there's always an issue of timing between the production of vaccines, the distribution and the administration of vaccines. those three components are not always concordant but what i can tell you is that every year we throw away a surplus of the regular flu vaccines so it's never really been -- we've never really had a shortage, specifically, because at the end of the year we always throw away an excess. if that's the history, we should expect that in the fall with the new h1n1 vaccine that we should

expect some problems. >> any other burning? okay. well, we can all go to lunch and we can return back at your sessions. make sure to look in the back -- your presentation on the package to see which room you're going to be going to next after lunch. we'll look to see you at lunch and we'll look to see you later on this evening. [inaudible conversations] >> this afternoon we'll bring you lunch from the white house briefing. you can see his remarks live at 1:30 eastern c-span.

>> as the healthcare

conversation continues, c-span's healthcare hub is a key resource. go online and follow the latest tweets, video ads and links. also keep up-to-date with healthcare events like town hall meetings, house and senate debates. even upload your opinion about healthcare with a citizen video. the c-span healthcare hub at c-span.org/healthcare. >> this fall, enter the home to america's highest court from the grand public places, to those only accessible by the nine justices. the supreme court coming the first sunday in october on c-span. >> starting in about five minutes, a house hearing from june on regulating the insurance industry, specifically, in the financial sector. but first to get a background on possible legislation this fall we talked with a capitol hill reporter.

>> we're joined by phil of "congressional quarterly." why is congress considering a plan to regulate the risks of the financial system. >> well, i think if anything has been clear over the last two years there's definite gaps in the system. congress is hoping at some point to be able to close those gaps. the main goal at this point is to have some type of systemic risk regulator that's kind of the buzzword at the moment where there would be one entity or a committee of regulators that could oversee the entire industry so as not to end up having an implosion like occurred. >> how do the lawmakers ideas compare with the regulatory overhauled proposal that the administration has proposed? >> i think broadly there are several aspects that they agree upon. there definitely needs to be something overseeing systemic risk. there needs to be in terms of the nonbanking industry, the mortgage lenders who weren't necessarily under the purview of some of the federal regulators, those need to be overseen, but i

think in the details is where the biggest issues are coming. the administration has proposed the federal reserve be the primary systemic risk regulator. senator chris dodd of the banking committee, barney frank of the house financial services committee has pulled away from that. they think more of a committee of regulators, a council of regulators is a better idea at this point. >> tell us about the opposition, both those on the hill and outside groups. what are their arguments against regulation? >> well, obviously, the banking industry is a very powerful lobby. it's a very powerful group. it stands to lose a lot. if regulation is too tight. their argument naturally is that if you tighten the reins on them, they cannot perform, they cannot innovate. they cannot make money. if anything has been proven that the banking industry is intrical to a society as a whole so they're trying to do their best, look, we understand something needs to happen. we're fair game for that but don't tighten that too much. within congress is the republican party which is

certainly not in bed with the banking industry by any means but they have a similar free market approach. their hope is that any regulation that is passed, any regulation that is put into play is not too proscriptive. >> you, quote, jonbenet hensingling that the plan will have a permanent government occupation of our economy. >> yes. house republicans, senate republicans. the big government fear is certainly palpable and i think what the congressman is trying to say is, look, you're putting your hands in places where they ought not be. their hope is that as they fight this -- obviously, they're in the minority a pretty large minority in the house. they may not have a huge say but they keep that in mind that you keep private industry private. >> lawmakers are exploring the improvement of it. >> that's an industry for years people have said something needs to be done. we're not really sure what.

there's been a lot of proposals. most of the big national firms are hoping for an optional federal charter-type thing where they would be able to be regulated on a national basis instead of a state-by-state basis as the industry currently is. obviously, with the aig issues, that's a monster insurer that has essentially been the poster child for things gone wrong over the last couple of years, the desire is there to make a change. lawmakers are tiptoeing around it. they are not sure how to come in or how they would come in. >> lastly, so muchç on the congressional plate on healthcare, energy, where does all of this -- this re-regulating of financial regulators, the changing of the regulatory system where does all of this fit into that. >> that's the big question right now. obviously, president obama has said by the end of the year he wants something on his desk that he can sign. the treasury has been aggressive getting their proposals out. they've sent legislative language to the hill. i think in the house, it's

almost assured mainly due to the majority, just due to the rules of the system that they will move something in the fall and probably early fall. they're going to in a piece by piece basis, separate bills and combining them into a separate package. the big question is the senate. floor time at a minimum. healthcare is the big issue and energy which is just as contentious. chris dodd, the banking chairman is one of the leading democrats on the healthcare battle who has been, obviously, pulled away from financial regulation. i think they want something done by the end of the year. how they're going to get it, i think, at this point especially in the senate is, you know, anyone's guess. >> phil mattingly with "congressional quarterly" thank you. >> thank you. ..

>> it also appears likely that we will soon consider reforms aimed at mitigating systemic risk. as such, it makes sense to us to drive a bit deeper today into the issue of systemic risk in the insurance industry. while we have yet to learn much about the specifics of the administration's plan for insurance reform, we have spent enough time debating these issues to come to some conclusions. for example, i believe that only ostriches can now deny the need for establishing a federal

insurance resource center and a better regulatory structure. insurance is a complex and important part of the u.s. financial industry with more than six points 3 trillion in assets under management. and one point to 3 trillion in annual premiums. we need to recognize this reality by modernizing the overall regulatory treatment of interest that we also need to protect against the risks certain sectors of the industry may pose, and addressed the greater sensitivity in some industry segments have two extra weight is. during this crisis, we saw a company that started out as an insurer spread far and wide in its activities. and its international presence. american international group, however, lacked a federal regulator with real expertise about its vast insurance operations. rather, the holding company purchased a small thrift and shows the office of thrift

supervision as its supervisor. early, several other insurance holding companies have a federal banking regulator as their primary supervisor. and more than six dozen similar entities avoid any form of federal oversight with a selected states instead monitoring them on a consolidated basis. because a number of these businesses could pose systemic risk, i believe that the federal government should directly examine all complex financial holding companies, including those whose primary activities involve underwriting insurance, and those who play with credit to default swaps. in addition, our financial services markets are global and complex. insurance is no exception. in order for effective communication and dialogue to take place on the international stage, we must have a single point of contact for the united states on these matters. moreover, insurers must have a federal regulatory voice on par

with the banking and security sectors in our financial markets so that the industry can't communicate with its pure regulators at home. in short, we can no longer sleep insurance regulation under the rug and cross our fingers that nothing will go wrong. we tried it before and learned that such an action may pose greater problems in the long term. as such, when the administration reveals its white paper tomorrow, i very strongly hope that it will recognize today's market realities, and call for the establishment of better oversight for insurance holding companies and certain insurance activities, especially those most likely to pose systemic risk. moreover, i am confident that this administration will recognize the wisdom of creating a federal insurance office to advise a systematic risk oversteer of the risks of the

insurance sector, provide expertise in administration and congress on insurance policy matters, and communicate with foreign governments. i have long advocated for such office by introducing advancing the insurance information act. as part of the congressional restructuring of financial services regulation, i ask my colleagues to join me in the effort to enact this legislation. with any luck, the administration with its white paper will also hopefully advance the debate about federal insurance regulation in other ways. personally, i now believe that the federal government should actively regulate some specific insurance lines. especially those that pose systemic risk or which have a national significance. using these test, federally regulated lines would include bond insurers, mortgage insurers, and reinsurers. i also believe that we should examine how we can promote greater uniformity in the industry. with or without the

establishment of a federal chart. the administration might reach similar conclusions. in sum, before the administration proposes its white paper tomorrow, we have many important issues to discuss related to regulatory restructuring as it affects the insurance sector today. i therefore look forward to the testimony of eyewitnesses, into a vibrant debate in the weeks and months ahead. i would like to recognize our ranking member, mr. garrett, for four members for his opening statement. >> thank you, mr. chairman. thank you all to our witnesses as well. especially after skinner, who i understand him all the way across the ocean to be with us today. we have a fairly large panel, and wide perspective of different opinions on industry so i look forward to all of your testimony. tomorrow as you indicate we are expected here for the obama administration on its plan for a financial regulatory reform. and from what i can tell it seems unclear as to what extent it proposal address insurance

regulars and. different ideas have been floated but within the administration and beyond it seems that a clear consensus as to what to do with insurance has not totally been in crystallized. part of the difficulty in reaching a consensus and what it is related to the difficulty in reaching a consensus on what is a systemic risk. furthermore, how do you identify it? if that is even possible in the future. how should it be addressed if it is a unified and how should it be cleaned up once it has been identified, it is not too late. i would add another issue that policymakers should be thinking about. how can the policies be put in place so that incidences of systemic risk are actually encouraged in the first place wrecks or exacerbated or even institutionalized due to government actions or unintended consequences. i worry that some of the policies being considered by the administration will likely be part of its plan will do more harm than good if they are actually implemented. systemic risk regulator in conjunction with regulation or bailout regime will set up a situation where certain

companies are either implicitly or explicitly proceeded to fall under this yet another new layer of supervision be seen as too big to fail, gain an unfair advantage in the marketplace, and threatened further taxpayer paying. and further complicating the resolution authority proposal is a question of how to pay for it. if only large firms potentially subject to the accord are asked to pay for it, then able to explicitly be seen as beneficiaries of that regime. but asking a broader swath of the industry to pay for it would not be equitable to small firms have no chance of ever benefiting from it, would be asked to consider a system designed and propped up their larger competitors. additionally, i don't believe that individual taxpayers should be asked to contributory fun that is set up to bail out a field large firm and its creditors. such a fun great for the resolution authority would need to be very large and is very costly for the firms that had to contribute to a. at the same time we do not like to be big enough as truly significant. as i said i would argue that the

first and foremost we should concentrate on policies that do not encourage future bailouts by promising firms that the government always come to the rescue. the republican plan that was put forward last week addresses various policies that put the taxpayer at risk but has no bailout. in the future. and its goal is no more bailouts. in returning to the theme at today's hearing, my primary questions are our insurance firms by their nature systemically insignificant i am looking for doing from different participant on the panel. and certainly it would be a mistake to view the entire industry broadly as a single entity. today's hearing, the breadth of industry will be on display as will be hearing from the mortgage insurance industry, bondage earth, life insurance, reinsurers as was from the pnc sector as well. and we will also be hearing from the aic which is actually in charge of insurance revelation in this country as we speak. i am hopeful that its perspectives on system aggress how we might address it and what

further actions could be done will be enlightening to everyone here today. finally, mr. chairman, as you know you have introduced the office of insurance information bill, the oai bill and i know this legislation will be addressed by several mirrors of the panel today. so i am interested to hear as to how this legislation will address the deficiencies in our current framework. and i particularly interested in this impact on regard to market for the united states companies abroad and related international agreements as well. once again i welcome all the witnesses and i look forward to their testimony. i thank you, mr. chairman. >> thank you very much, mr. garrett. now i will hear from the gym in from california, mr. sherman, for one minute. >> underlined these hearings is the question is what is injured. derivatives are at best insurance. at worst they are a casino that. aig sold fire and life insurance through its regulated subsidiaries and those subsidiaries are pretty much

okay. it is old portfolio insurance through unregulated subsidiari subsidiaries, convincing the world that it wasn't insurance, and they took down the company if not the world economy. the fire insurance policy on my house protects my lender in case my house burns down. but if my lender wants protection from the much greater risk, that the value of my house goes down, or the value of my mortgage goes down, they also buy insurance. they call it a derivative. and it is completely unregulated. we need to make sure that credit default swaps and similar derivatives are classified as insurance and are subject to reserves. i yield back. >> thank you, mr. chairman. and now we'll hear from the other gentleman from california, mr. royce, for two minutes. >> thank you, mr. chairman. and i would like to briefly thank mr. skinner for making this trip here to testify and

also congratulate him on his recent election. he has been a leader in the european union and in parliament. he has been a leader and champion of the directive, which provides an important yet relevant example of an effort underway to create a more efficient regulatory structure. in yesterday's op-ed in the washington post by larry summers and tim geithner noted the importance of international coordination among regulators. and reiterated the administration's commitment to leading the effort to improve supervision around the world. unfortunately, with our fragmented regulatory regime of insurance, we are lacking at this point. we are not leading the rest of the world. as solvency to work to you type the insurance market in 27 member countries, we continue on the other hand to struggle with a patchwork system of 50 plus state regulators. with the implication of this

directive naehring, it is becoming more apparent that the framework potentially will be at odds with the u.s. regulatory structure. it is unlikely that the eu would find the current vulcanized u.s. state -based regulatory structure equivalent. this means the ability of our regulatory system to detect offshore risks will be weakened and it also means that many of our us-based institutions will be forced to shift significant operations overseas if they hope to continue to do business in the eu. certainly, an office of insurance information would be a logical first step to address this. and to address other problems we face an international insurance insurance market. however, and oh why i would rely heavily on the various state insurance commissioners to implement the regulatory policy without strong preemptive authority over the states, the ability of an oi y. to enact policies nationwide and

consequently the ability of oiy to represent the u.s. mortgage would be greatly weakened. i remain concerned however, that at all oiy will not go in a. maintaining solvency regulation at the state level will limit the effectiveness of a potential systemic risk regulator, as well as coordination efforts with foreign regulars. certainly, noting the failure of aig, once the nation's largest insurer, is relevant given the focus of today's hearing. dating back to 2006, the paulson treasury department noted systemic gaps in the state -based system, which aig exploited. the blame for the collapse of the company should start with aig. from a regulatory standpoint, there were failures at both the state and federal level. using capital from their insurance subsidiaries, with the

approval of various state insurance regulators, the securities lindens untranslated division antenna with a financial product unit put at risk the entire company and the broader financial system. half of this game from the securities lending division, the other half from the financial products unit in terms of the over leveraging. with more than 250 subsidiaries operating in 14 states and more than 100 countries, aig is the poster child for both the need to open up lines of communication among regulators worldwide and the need to establish a domestic insurance regulator with the ability to oversee these large and complex institutions. and again, mr. chairman, thank you for holding this hearing. >> thank you, mr. royster and now we'll hear from the german from georgia, mr. scott, for one minute. >> thank you, mr. chairman. i think this of course is a very important and timely hearing. the issue is of course i think what is systemic risk as it relates to our insurance

industry. and where and how is it best to regulated, state or federal level. but i think that the major model that we are using aig is flawed at its best. because we look back at it, what caused the problem that aig was their financial products division based in london, which again, was regulated at the federal level. so the question becomes, if we use a federal charter or regulate insurance at the federal level, would that have prevented the situation at aig. i think going forward we have to be very careful to make sure that the points we take into consideration are these. that we have the sound consumer protections in place. that they also do not deter competition. that we do not bring on excessive operating causes and impact, and our efforts to do some good, that we do something that could very well be

dangerous down the road. so the question becomes, do we do it at the federal level or at the state level. and of course, as i say, we have to look with a very jaundiced eye to make sure that we are looking right when it comes to the cause of aig because if we did have federal intervention there, as we head, and it didn't prevent it, what's to say that the federal charter and federal regulation is the way to go. i think there is a lot to be said with making sure that we have regulations at the state level that works. thank you, mr. chairman. >> thank you very much, mr. scott. and now we have the gentle lady from illinois, ms. biggert for two minutes. >> thank you, chairman kanjorski. i am please were having a second hearing to examine insurance regulation. as i mentioned at the previous hearing, this is an important

part of the conversation as it relates to systemic risk. fortunately, the insurance industry is in good shape due to sound state regulation. i think the state insurance regulators are doing a good job. and with that, i would also like to thank and welcome to today's hearing illinois department of insurance director mr. mcraith, and representing transit. i am really happy to have something good to say about illinois. that doesn't happen so much these days. but it is important that we roll on to the debate on systemic risk, the role of the federal regulators when it comes to duly regulated entities like aig. i think ots dropped the ball and that is why part of our republican regulatory reform proposal preserves the option for a thrift charter rules ogs into the occ. and in addition, our proposal addresses risky behavior that

aig, like entities, like entities may engage in such derivatives and i think we established market stability and capital adequacy board comprised of all federal regulators and possibly others to look at what should be done with regard to derivatives regulation. we recently had a hearing in this committee to discuss how over-the-counter derivatives could be put into the three buckets of regulation. i also think that we need to improve the dialogue among regulators and insurance needs to be part of that dialogue. that's why i joined ranking member -- joined chairman kanjorski with his office of insurance information bill. and with that i look forward to hearing from today's witnesses who represent the very diverse insurance industry. also look forward to working with them and my colleagues to strengthen the balance on this matter. with that, i yield back.

>> thank you very much, ms. biggert. and now we'll hear from the other lady from illinois, ms. bean, for three minutes. >> thank you, mr. chairman. being from illinois i would also like to give a shout out to mr. mcraith but also all of our witnesses for sharing your expertise. in the insurance industry is centered on whether to establish a federal insurance regulator. i have worked with congressman royce on legislation to establish a federal regulator for the insurance industry. last congress a bill is focus on consumer choice and protections, advantages for agents and industry deficiencies. not much has changed in our financial system. since the last congress. the collapse of aig, the world's largest insurer has proven to be one of the most costly and dangerous corporate disasters in our nation's financial history. with nearly 180 billion of tax dollars committed to aig, plus 22 billion to other insurers. the federal government has made an unprecedented investment in an industry over which it has no

breaky latorre authority. the need for federal regulatory oversight has never been greater, and having a federal insurance commissioner who can work with the expected systemic risk regulator or council is vital to ensure proper oversight of an important pillar of the u.s. financial system. in april, congressman royce and i introduced h.r. 1880, the national insurance consumer protection act. unlike previous legislation, our bill deals with systemic risk. recognizing that congress would create a system at risk regular and subject all insurance companies, national or state charter, to a systemic risk review. the systemic risk regulator would have the ability to gather financial data from insurers and other financial services affiliates. within a holding company structure to monitor for systemic risk. based on their financial data, a systemic risk regular can make organizations to appropriate regulators for corrective regulatory action, including the national insurance commissioner. the activities and affiliate of

a insurance coming life in aig financial products unit or any product or service of an interest in it would have serious adverse effects and economic conditions. in this instance the systemic risk regular can recommend to the federal or state interest regular and activity practice practice, product or service must be restricted or prohibited. in instances where the regular refuses to take action, the systemic risk regular would seek approval to override the functional regulator from a cordoning council of financial regulars established in the bill that consist of the current members of the president working group on capital markets, plus the federal banking regulators, the federal insurance commissioner, and restate financial regulators from the three sectors, insurance, banking and securities. finally, if the regular determines that it is significant, it is required to consult with the national interest commissioner to determine whether the company should be nationally regulated. i believe all financial activity, including that of insurance countries, should be subject to review by a systemic

risk regulator. some suggest the insurance industry does not pose a systemic risk to the financial system. but we know from our expert at aig that it could pose a systemic risk and not just through the financial products unit. but didn't securities and program which was regulator by the state insurance commissioners and has led to over $40 billion in taxpayer money being invested. as we move forward in the next few months to establish a systemic risk regulator or council, we need to provide this regulatory body with all the tools to properly review and evaluate the activities of insurance companies. that should include federal regular for insurance that can work with a systemic risk regulator in a similar manner as the occ and sec do for their respective regulated industries. thank you, and i yield back the balance of my time. >> thank you very much. and now our final presenter, mr. hensarling of texas for two minutes. >> thank you, mr. chairman. thank you for calling this hearing. obviously very important issues

for us to consider. there is no doubt each of us know what a critical role the insurance industry plays in our economy today. however, i am not sold on the believe that anyone insurance company is necessarily an agent of systemic risk to the entire economy. and if i did believe that, it and i can think of no greater self fulfilling prophecy and to designate a firm and a systemically risky. then it becomes systemically risky and we know what happens after that. $173 billion of taxpayer money later, aig essentially become a conduit for transferring of taxpayer wealth to counterparties, some which include foreign entities. congress has to be very, very careful about introducing moral hazard into the equation even more than it already exists.

we simply cannot enshrine a too big to fail bailout policy. there is a huge difference between the government walking in and bailing out an individual institution, and having emergency provisions for liquidity and stability aimed at the market as a whole. we also have to remember that federal regulation is not a panacea. witnessed fannie and freddie, wachovia, blogger, bank of america and the list goes on. finally, with respect to aig, we had their chief regulator here on march 18, 2009. and the regulator said you know what, we had the resources that we had expertise. we had the authority. we just simply missed it. sometimes regulators get it wrong. the ultimate goal here should be not to designate certain firms as systemically risky so that we have more taking timebombs like fannie and freddie throughout

the economy that will ultimately blowup on the american taxpayer. but we don't necessarily need -- we need more regulation, smarter regulation which will help the consumer and with that, mr. chairman, i yield back the balance of my time. >> that you very much, mr. hensarling. now we'll have a panel. that panel is made up of eight members. that is why we try to do some of our presentations by members, and appearing before the subcommittee today, each of the panelists will be allotted five minutes. and without objection, their written statements will be made part of the record. first on the panel, we had the honorable peter skinner, a member of the european parliament from the united kingdom, and most recently reelected. congratulations, mr. skinner. i look forward to hearing her tenure at mr. skinner? >> thank you, mr. chairman,

congressman garrett and honorable members of the subcommittee for inviting me here today. i know this is a special occasion for me, if nothing else, the effect that i have just been reelected but also to come here to know that i am usually sitting on your side of this table rather than here. but it is a great honor to be here and i appreciate that. i am peter skippered i've been a member of the european parliament since 1994. and this month guess i was elected to my fourth term. i am a member of the economic and monetary affairs committee and directly involved in what is known as the transatlantic regulatory dialogue. i had a discussion between congressman shelley berkley i believe chairs the subcommittee with the european parliament. so we talk regularly about issues like this. i was previously sponsor for the on the reinsurance in 2005 and solvency to which has now been passed as a long recently in the european union. and where ashley passing into the statute books of independent countries by 2012 but each

country is already moving towards the introduction. let me say i fully understand and respect from the start the need for each trading block to establish its own sovereign rules and practices. and therefore, wish this committee every success in its collaboration's. we have to take into account what i think we have already heard, however, and that is taking approaches during a global recession, matched by the kinds of things that we know about across the atlantic and around the globe will actually to the wrong conclusions. we need to agree, and approaches, and common regulatory structures. but this doesn't mean we had to say exactly the same thing. in terms of systemic risk and insurance industry, it is the management of that risk that is important for the european union is the chain of events which lead to systemic risks, and this begins with the failure of management and the supervision of such risks. the eu's focus has been to try

to get eliminate any failure by predicting behavior, using reasonable models, and testing against them. in fact, we have been having impact assessments which involve american companies inside the european union, giving evidence to that effect. in europe, a committee led by, you may have heard of him, a former managing director of the international monetary fund, has proposed sweeping changes to the way the european financial services are regulated. these changes would result in a european systemic risk council. an independent body responsible for safeguarding financial stability, and conducting macro prudential supervision at the european level. europe gets its information on the insurance business from the 27 regulators it has representing all of the individual meditate in the european union. and these need under one body.

it sits in frankfurt and agrees common standards which are applied to the solvency ii law across the european union. in terms of the cross-border oversight, we have developed a system which is coming again from the report which highlights the need for greater integrated supervision. the proposal is to bring together the work of the three committees in the capital markets insurance and banking through the supervision through one financial sector type of regular toward body. in terms of developments from abroad which may affect the u.s. market, and again i come from a european perspective, i can only talk really about how our markets are interconnected. and we've seen that the new financial meltdown has meant that actually when you get a gold in california we feel this these effects in london on in frankfurt, and wrote. solvency ii was set outside of this financial crisis, was try to look at predict what might go

wrong already. it is a radical overhaul of the prudential regime for insurers in the european union. the objectives of namic art deepen integration in the eu entrants market, and hans policyholder protection, and of the international competitiveness of eu insurers and reinsurers. international communications amongst regulars can be difficult. in order to be able to get this moving we have to try and do something about this. it's difficult if we don't have a single regulation person to speak to. in fact, the u.s. i understand is the only country around the world not represented by a single national insurance regulator at the international association of insurance supervisors. and as work begins on third country equivalent in the context of solvency ii, we will be faced with the same question as we always face, who are we going to talk to, who speaks for the united states? and i believe for us this is a

question about how we move on. that is up to you, but on maintaining the standards and enforcing the rules at european level, i can tell you that along with the regulators we have the european commission, which ensures if you like an administrator level, that the european directors are sicily applied in each country and as those are applied, with american countries and this is in europe, it allows for a passport scene for each company to do business state-by-state by member country by member country. on systemic risk and insurance i am just a short comment if i may. during the current crisis, the insurance companies that were most likely to be affected and i've heard it already today, were those involving significant ways i banking activities. that is a fact. there are second order effects as well. we are aware of that and i think that we have to appreciate that they were not directly involve the facts which lead to greater systemic risk.

it is the view to use appropriate controls and manage risk that we believe leads to the problem of systemic risk. on europe's attitude guaranteed funds, burden sharing and compensation schemes are not necessarily practice at every member state across the european union, but we are now considering how to change that to introduce it. so in conclusion, if i can say that if there is anyone who has been close to this committee's work in what you are going to do, it is i. i look forward in any way to help, too offered hope, to be a resource anyway from the european union, and through our committee and european parliament to offer fraternal greetings and to respect to what you do here to come up with common approaches and common deliberations to face a global crisis. thank you. >> thank you very much, mr. skinner. indexable here from the honorable michael mccrae. director of the illinois department of insurance testified on behalf of the national association of insurance commissioners. mr. mcraith.

>> chairman kanjorski, chairman of the committee, thank you for inviting me to testify. i am director ventures for the state of illinois. and as mentioned i speak today on behalf of the national association of insurance commissioners. the insurance industry even in these difficult times has withstood the collapses that echo through other financial sectors. we likely agree that insurance regulation must not only serve industry needs, but also prioritize u.s. consumers. consumer protection has been, is and will remain priority one for state regulators. it bears repeating that we supervise 36% of the world insurance market. our state individual states, include four of the top 10 and 28 of the top 50 world markets. and a loan, we surpassed two, three, and for combine.

to be sure, as with any dynamic industry, insurance regulation must modernize, and it does. we worked with your great staff, mr. chairman, to fashion the office of insurance information, which if passed would provide a federal focal point for international trade matters and federal data analysis. the naic maintains the world's largest insurance database. while the states do and will provide data to federal regulatory counterparts, we agree that insurance sector data should be available within the four walls of the federal government. consolidated oversight of holding companies will be enhanced by council of regulators that build on the existing data and expertise of functional regulators. state insurance regulation is of course inherently compatible with a systemic stability council. any financial stability regulator should develop best practices for risk management,

required for u.s. insurers, but glaringly lacking in other sectors. information sharing and confidentiality protocols can be established and coordination for long regulators formalize. under no circumstance though should a viable insurance subsidiary be sacrificed for the benefit of another entity within a corporate family. internationally, the development of accounting standards through the international accounting standards board leads the u.s. and others within the u.s. in years to adopt the county says based on the international financial reporting standards. we have undertaken a solvency modernization initiative that will evaluate lessons learned nationally and internationally, and examine areas appropriate for refinement. we were internationally with a g-20, the join form, the financial stability forum, the international association of insurance supervisors, the oecd and others. we work collaboratively with our

international counterparts to develop and improve international standards. we brought our foreign counterparts to the united states and develop a standardized in ou to allow for international information sharing. with the world's most competitive mature marketplace, we, your states, are the gold standard for gold untrimmed revelation in developing countries. through the holding company act we mark the release of capital from an insurer and support our system of a multi-jurisdictional predation. our expertise can be applied to international cross-border transactions, but all insurers operating in our country must be independently viable. our financial analysis working group coordinates leading financial regulators from multiple states for the court untrimmed purpose of marketing and coordinating action involving major insurers. internationally with supervisors from other countries, we participate in colleges, aig's

sir, ing, ollie oz, among others. indeed, insurance is not a source of systemic risk and not 1 inch or imposes systemic risk. insurers may be challenged by failure and other sectors as with aig. but the most vibrant markets in the world being the demise of any one insurer will not alter our country's financial stability. also, contrary to misleading alarms, our state guaranty fund system has the wherewithal and the creative force to resolve an insurer failures. even multiple concurrent failures while protecting consumers. we support systemic regulation, pledge our good-faith interaction and renew our commitment to engage constructively with this committee. thank you for your attention and i look forward to your questions and reply to comment made by mr. skinner and others. >> thank you very much, mr. mcraith. next we would hear from

ms. rice, on behalf of the mortgage insurance companies of america. >> thank you, mr. chairman. ranking member garrett, members of the subcommittee, i appreciate the opportunity today to testify on behalf of the mortgage insurance companies of america, the trade group representing the private mortgage insurance industry. mortgage insurance enables borrowers to responsibly buy homes with less than a 20% down payment. many of these are first time and lower income borrowers. since 1957, mortgage insurance has helped over 25 million families purchase homes. today, about 10% of all outstanding mortgage loans have a private mortgage insurance. this morning, i would like to make three points. first, we did not cause or

contribute to systemic risk. to the contrary, we absorb risk. if a borrower defaults, mortgage insurance pays the lender or investor 20 to 25% of the loan amount, plus expenses. the insurance payment plus the proceeds from the sale of the house makes up much of the lenders or investors lost. in the current crisis since 2007, we have paid over 15 billion in losses just like we are supposed to do. i would also note that because mortgage insurance companies have their own capital at risk, we have very clear incentives to mitigate our losses by taking action to avoid foreclosures, if at all possible. last year, mortgage insurers were able to save almost 100,000 people from losing their homes.

my second point is that the industry has adequate capital to continue paying claims on existing loans into the future because our state regulators require us to have sufficient capital reserves. the backbone of the industry's financial strength is the state impose reserve requirements, and specifically the contingency reserve. half of each premium dollar earned goes into the contingency reserve, and generally cannot be touched by the mortgage insurer for 10 years. this ensures that significant reserves are accumulated during good times so that they are able to be there to handle claims in bad times. the history of the mortgage insurance industry illustrates the value of his reserve structure. mortgage insurers paid out millions of claims as a result of regional recessions in the 80s and the '90s, after each recession we build up capital and were able to meet the next

stress period. mortgage insurers and the banks that face a similar default risks, but only mortgage insurers raise capital in this countercyclical manner. in fact, only now in our federal banking regulated are working to construct a similar system for banks. my third and final point is that with additional capital, we can significantly help the housing recovery by responsibly expanding the number of new home buyers. as the subcommittee knows, the members of mike i have requested assistance from treasure. as i have explained, we do not need help to meet our obligations to pay rejected claims on our existing loans. and said, we are asking for assistance in order to increase the number of loans we are able to ensure while maintaining strong capital reserves. every billion dollars of capital mortgage insurers hold to translate into approximately

100 billion of new funding for home purchases, more than 650,000 new mortgage loans. a $10 billion program would increase market capacity by enabling 6.5 million loans to be insured. such a government investment would dramatically benefit the housing market, and enable more borrowers to realize the dream of home ownership on terms they can afford and sustain. so the bottom line is that with additional capital, the mortgage insurance companies can assure more loans. we hope it is forthcoming. in conclusion, i want to thank you for the opportunity to testify today. the private mortgage insurance industry continues to absorb risk just like it is designed to do that mica strongly support the state regulatory system and believes the structure assures that we continue to meet our obligations during these very challenging times. we also would like to contribute

still more to the housing recovery. we could do so the day after we receive additional capital. that is a housing recovery program that is ready to go. thank you. >> thank you very much, ms. rice ms. rice. inexorable here from mr. sean mccarthy, chief operating officer. mr. mccarthy. >> chairman kanjorski, ranking member garrett and members of the subcommittee, my name is sean mccarthy. today i am testifying in my role as president of financial security assurance holdings, or fsa, and short guaranty corporation which is expected to complete the acquisition of fsa on july 1. we appreciate the opportunity to testify at this hearing to improve oversight of the insurance industry and every circuit of the federal government role with regard to insurance products. as monoline insurance companies would provide any case of fsa,

bond insurance for the u.s. miscible and global infrastructure markets, and in the case of a shirt, bond insurance for u.s. municipal, global infrastructure and structure financings. insurance utilized only in the financial markets is a very different product from that of property casualty, life and health insurance companies. article 69 was enacted by new york state to segregate financial guaranty insurance from olduvai products and the risks those entail? while it was a good step, it is not strong enough. we believe that we require mandatory federal regulation that is closer to that of the banks, and that being centralized and encompassing all aspects of regulation, including required capital. the current decentralized regulatory regime from monoline is aimed at preserving their

solvency, rather than their financial stability. there are no uniform consistent credit capital and financial strength standards. recognizing this, the new york insurance commissioner, eric banal, was recently announced that he is leaving, had noted the potential need for federal regulation of the bond insurers and monoline industry. important, due to the lack of a single regulator, the rating agencies have become de facto regulator's of our industry. while we continue to strive to achieve the highest possible ratings, we believe the rating agency views plate in our financial strength. ratings are based on criteria that very and include many subjective characteristics. and rating agency methodologies are not readily transparent. additionally, all three rating agencies have different sets of guidelines. which present conflicting goals

and make it impossible to manage a stable company. though investors cannot easily evaluate raising agency conclusions due to the impact of their ratings on trading value of securities that monoline haven't heard, investors are forced to accept the impact that ratings have with respect to financial guarantors. the end result of this de facto regulation by rating has been to destabilize markets and reduce municipal issuers, cost-effective access to the capital markets. this has not -- this is the most difficult for small municipal issuers of complex bonds. for bond insurers homogenize the credits providing market liquidity and market access. the penetration of the bond insurance industry for the first five months of 2009 has been 13%. the letter of credit has now declined to about 6%.

certainly, there is no question that some financial guarantors took large concentrated risks in mortgage-backed securities that severely underperformed which in turn caused downgrade or failures of five of the seven primary guarantors. notably, many of these now problematic transactions were rated aaa by the rating agencies at the time of issuance. the financial guaranty industry is now in a rebuilding phase, and a number of potential new entrants are poised to participate in the market. assured and fsa have come to this unprecedented and strong capital decisions. about the financial guaranteeing model we are confident that investors continue to see value in guarantors that provide capital strength with diligent

experience credit selection skills. in conclusion, we would like to see mandatory federal oversight of our industry that will provide regulation by design, not by default. we believe that licensing requirements should be stringent and require high but predictable capital levels. guarantors should provide detailed disclosure of risks to all constituencies, and should be subject to an annual stress test that would be applied equally to all companies. this would increase investor confidence and provide much-needed transparency and stability to the capital markets. thank you. i look forward to your questions. >> thank you very much, mr. mccarthy. next we have mr. kenneth spence, executive vice president general counsel at the travelers picked mr. spence. >> chairman kanjorski, raking

member garrett, subcommittee members, thank you for the opportunity to testify today on systemic risk and insurance. my name is ken spence i'm executive vice president and general counsel of travelers. travelers offers a wide variety of property casualty insurance products, shorty and risk management services to numerous businesses, organizations and individuals in the u.s. and abroad. our products are distributed primary to the u.s. in the u.s. through independent insurance agents and brokers and the company is a member of the american insurance association. there appears to be an emerging consensus that they should be systemic risk and regulation at the federal level. i will share some of travelers specific systemic risk regulation recommendations in a moment. however, for any systemic level oversight to be meaningful across financial service sectors, there must be an insurance regulatory presence at the federal level to ensure that a great information is provided and analyzed and to ensure that

any systemic level directives are effectively into the. as to the chairman has proposed in his legislation, would bolster the federal government presence and an understanding of the insurance sector. the oii would bring the information about the insurance marketplace to washington and to any national systemic regulator and we give the united states a single voice with which to speak on international insurance policy and trade matters. we believe a comprehensive approach to federal financial services modernization will not be complete unless it also includes a broader federal insurance presents that encompasses federal chartering for insurers. this will ensure robust and consistent regulatory oversight. strong consumer protections, and a healthy competitive insurance industry. we have been carefully considering the notion of systemic risk regulation. as an initial matter, we are

mindful that the determination as to whether a company is systemically important does not necessarily depend upon its size or industry. but rather to the extent to which its financial condition is potentially so interrelated with other institutions that its failure could cause widespread and substantial economic harm, extending beyond those stakeholders that would assume the risk. for example, any unregulated holding copy with a strong credit rating from this underlying operations could have underwritten credit default swaps, which played an important role in the current financial crisis. in addition, we think it is also relevant to consider the systemic risk that may be present on an aggregate industrywide basis. for example, even if a particular community bank or insurance company would not present systemic risk, the widespread good of community banks or insurance companies could. a natural or man-made catastrophic event or series of

events, for example, could cost more than an isolated failure of property-casualty insurance companies, which in turn could be systemically significant. there are two elements in particular that we recommend for your consideration any reform proposal. mandated in journal enterprise risk oversight through board level risk committees, and substantial enhanced requirements related to risk. i must emphasize at the outset that our two recommendations are not intended to be a comprehensive solution but instead we believe that any such solution should include these two essential elements. corporate governance reform should require systemically important companies to assign responsibility for risk oversight to a committee of their board of directors with a management risk officer that reports directly to the board committee on a regular basis. travelers has for many years had a board risk committee, and the relationship is akin to a board room audit committee relationship with the company's

chief internal auditor who often reports directed to the committee. a board of this committee would be responsible for overseeing the company's risk related controls and procedures, and the chief risk officer would be responsible for implementing and managing those controls and procedures. this protocol recognizes the importance of risk management and it provides a clear responsibility and accountability for the management of risk. second, systemically or potentially systemically important, financial institutions should be subject to a robust disclosure regime in order to provide regulators rating agencies, and the public with the information necessary to provide a comprehensive understanding of an institution's overall risk profile and to be able to identify those institutions that pose or that could pose a systemic risk to the economy. market forces would in turn help eliminate companies incentive to take risk that could potentially undermine its own long term

success and a result, the larger economy. it should be principles-based and flexible, but include additional quantitative disclosure transactions and risks and other factors, including mandated stress testing that could cause a systemically important company to fail. thank you for affording me the opportunity to testify today and i will be happy to respond to questions you may have. >> thank you very much. next we have mr. nutter, president of reinsurance association of america. mr. nutter? >> mr. chairman, mems of the committee, thank you very much. i am frank better, president of the reinsurance association of america represent reinsurance cubbies doing business in the united states. reinsurance is a risk management tool for insurance companies to improve their capacity and financial performance to enhance financial security and reduce financial volatility. reinsurance is the most efficient capital management tool available to insurers. reinsurance is a global

business. in encouraging the participation of reinsurers worldwide in the u.s. market is essential because reinsurance provides that much-needed capacity in the u.s. property for cash and life risks. including their u.s. subsidiaries, foreign-owned reinsurance companies accounted for nearly 84% of property-casualty premiums ceded on u.s. risk by u.s. insurers. because of reinsurance transactions between sophisticated business parties, the regulation of reinsurance focuses almost exclusively on prudential regulation, ensuring the reinsurers financial solvency with no consumer component. because reinsurance is a business-to-business transaction involving knowledgeable commercial parties, there are no reinsurance guarantee funds at the state level and there is no need to create one at the federal level. as this committee is well aware, there is no federal entity with statutory authority or designated responsibility for oversight of insurance. consequently, when an insurance issue arises there is no source

of information at the federal level to a program to advise policymakers. at a minimum come there is a need for federal entity that can utilize information and data from state regulars but which is empowered to conduct its own analysis and provide advice on a broader perspective than individual state interest. we believe that chairman's office of insurance information legislation is good and timely, and goes a long way toward addressing this problem. reinsurance is an important part of the risk transfer mechanism of modern financial and insurance markets. yet there are clear dissensions between risk finance and management products that are relatively new financial tools developed in unregulated markets, and risk transfer products like reinsurance news issuers are regulated by u.s. regulars or by their non-us regulatory domicile, and whose business model has existed for centuries. in the case of reinsurance, regular reform is necessary to improve regulatory and market efficiency and maximize capacity in the u.s. and that reform

should focus on licensing, prudential revelation, and international coordination and cooperation. it has been said just that the authority of a systemic risk regular should encompass traditional regulatory roles and standards for capital liquidity, risk management, collection of financial reports, examination of 40, and authority to take regulatory action if necessary. we are concerned that the systemic risk regular in vision or by some, one without clear, delineated lines of federal authority and a strong preemptive powers, would be redundant with the existing state-based regulatory system. we also note that without reinsurance regulatory reform and a potential federal reinsurance regular, a federal systemic regulator would be an additional layer of regulation with limited added value, create due process issues for apical firms, and be a regular conflict with existing system of revolution. foreign government officials, unlike mr. skinner today, have continued to raise issues associated with having at least

50 different u.s. regulators which makes coordination on international insurance issues difficult for foreign regulars and companies. the time has already arrived when this lack of a single voice is adversely affecting impacting u.s. reinsurers. the interaction between u.s. and its foreign counterparts on issues like european union solvency to the likely impact not only the ability of u.s. companies to conduct business abroad, but also the flow of capital to the united states. the possibility that the entire 50 state system in the u.s. would be deemed equivalent appears questionable, at best. thus without a federal involvement by a knowledgeable entity tasked with responsibly for international policy issues, the u.s. reinsurance industry will continue to be dissipated in these equivalent discussions. the current multistate regular season is an anomaly in the global world. the u.s. is disadvantaged by a lack of a federal entity with constitutional authority to make decisions for the country, and to negotiate international insurance agreements.

they were encouraged by the inclusion of a system of supervisory recognition among countries in the national insurance act of 2008, introduced in the last congress. supervisory recognition seeks to establish a system where a country recognizes the reinsurance regulatory system of other countries, and allows reinsurers to conduct business based upon the regulatory requirements of their home jurisdictions. a single national regulator with federal statutory authority could negotiate an agreement with regulatory systems of foreign jurisdictions that achieve a level of regulatory standards, enforcement trust and confidence with their counterparts in the u.s. financial markets are global and interconnected, and no sector is more global than reinsurance. . . will

not business on its implications for financial regulatory reform reported -- i like to lead off with a a premise that the is life insurance is by any reasonable measure systemically important. and from that, it follows that whatever regulatory reform package you advance must include the life insurance industry in order to ensure that the new regulatory structure operates as effectively as possible and minimizes the likelihood of a similar crises occurring again. here are some highlights of the importance of the life insurance business, life insurance products provide financial protection for some 70% of u.s. households. there's over $20 trillion in life insurance and our companies hold $2.6 trillion in annuity

reserves. annually we pay out almost $60 billion in life insurance benefits, over $70 billion in annuity benefits and more than $7 billion in long-term care benefits. we are the backbone of the employee benefit system, more than 60% of all workers in the private sector have employer-sponsored life insurance and our companies hold over 22% of all private employer-provided retirement assets. life insurers are the single largest source of corporate bond, financial and hold approximately 18% of total u.s. corporate bonds. i'd also note that without financial protection provided by the life insurance companies, american families may very well need to rely on federal government for assistance. that said, we don't believe any individual life insurance company poses a systemic risk. so the question becomes how do you deal with an industry as a whole that's systemically important but doesn't have any

individual companies that poses systemic risk? first, we assume life insurers will be covered in whatever broad systemic risk oversight is made applicable to the banking and securities industries. beyond that, we believe it is imperative that congress create a federal functional insurance regulator and make it available to all life companies within the industry on an optional basis. there is ample justification for the creation of such a regulator prior to the crisis and there's even more -- the case today is even stronger after the crisis. absent a federal functional insurance regulator, there's a very real question regarding how national regulatory policy will be implemented vis-a-vis insurance. whatever legislation this congress ultimately enacts will reflect your decisions on a comprehensive approach to financial regulation. your policies need to govern all systemically significant sectors of financial services industry and need to apply to all sectors on the uniformed basis and

without any gaps that could lead to systemic problems. it's also worth noting that critical decisions are being made in washington affecting our business today but they're being made without any significant input or involvement on the part of our regulators. some specific examples include the handling of washington mutual, which resulted in life insurers experiencing substantial portfolio losses. the suspension of dividends on the preferred stock of fannie and freddie which again significantly damaged our portfolios and directly contributed to the failure of two life insurance companies. the mistaken belief by some that mark-to-market has no adverse implications for life insurance companies and the provisions in the proposed bankruptcy legislation that could downgrades to life insurers aaa residential mortgage-backed investments. the industry also supports a level playing field at an international level as regards

financial reporting insolvency. it should be dealing with customers and basically slugging it out and improving your business model. it should not be capital accounting arbitrage. we have no regulator there with authority that can engage with mr. skinner and other international regulators. i'd also like to make the point that concerns over regulatory arbitrage in the context of an optional insurance charter are without merit. the life insurance business is not seeking nor this congress ever considering acting a federal insurance regulatory system that is weak in terms of consumer protections or solvency oversight. they consistently advocated for a federal alternative that is as strong as if not stronger than the best state regulatory systems. if anything, a properly constructed optional federal charter would result in the states being challenged to raise their standards to meet those of the federal regime. mr. chairman, there's a number

of ideas being considered on how to address insurance in the context of overall regulatory reform. we applaud you for reintroducing legislation that recreate an office of insurance information within the treasury department while our ultimate goal remains an optional federal charter and oii would certainly be a step in the right direction. we're appreciative of the representatives for introducing the consumer protection act which sets up a framework for. we are against a federal tools approach to insurance regulatory reform as detailed in my written statement, the constitutional and practical limitations of this concept make it ill-suited to deliver the type of reform that would be in the best interest of the insurance industry and its customers. we again thank you, mr. chairman, for holding this hearing, pledge to work with you and members of the subcommittee to see that insurance regulatory reform becomes a reality and we'd be happy to answer any questions. thank you. >> thank you very much, mr. baird.

and now we'll have mr. john t. hill, president and chief operating officer magna carta companies. mr. hill. >> thank you, mr. chairman. good morning, chairman cannes cannesor -- kanjorski. my name is john hill. i am president and chief operating officer of magna carta companies. it was founded in 1925 as a mutual insurance carrier for the taxi cab industry. although we no longer insure taxi we insure individuals and write in 22 states. we are a main street mutual inferer with $170 million in underwritten premium. i'm here on the national mutual insurance companies on to present our views on systemic risk.

we represent more than 1400 property and casualty insurance companies ranging from small mutual carrys and to large national riders. members serve the insurance needs of millions of consumers and businesses in every town and city across america. i serve as chairman of the financial services task force which was created specifically to develop the policy response to the financial services crisis. our nation faces uncertain economic times and we commend the committee to hold this hearing to explore the role of systemic risk regulation in the insurance industry. the property/casualty insurance industry like millions of americans and businesses did not contribute to the current financial crisis. however, we too have felt the negative impact of this crisis. just like most american citizens and businesses, the property/casualty insurance industry has played by the

rules. we are solvent and continue to serve our policyholders the same today as before the economic crisis. if you exclude the very few companies that are linked to financial markets, our analysis concludes that our industry poses no systemic risk. we disagree with the suggestion that we need to completely rethink the regulation of our industry. the property and casualty marketplace is well-regulated, highly diverse, very competitive and is open to anyone that is willing to play by the rules. it is important to understand the distinction between the property and casualty insurance industry and others in the financial services sector. the fundamental characterics of our industry including conservative and liquid investment portfolios, low leverage ratios, strong solvency regulation and a highly competitive and diverse marketplace make it stand out as unique and work to insulate the

property/casualty insurance industry from posing systemic risk. today, as other financial services companies are failing and seeking government assistance, property and casualty insurers continue to be well capitalized and neither seek nor require federal funding. our industry remains one of the well functioning bed rocks of our financial structure. the record shows property and casualty insurers played no role in causing the current financial crisis. moreover, it is exceedingly unlikely that property/casualty insurers either individually or collectively could cause a financial crisis in the future. for one, the capital structures of property and casualty insurers and the nature of their products make them inherently less vulnerable than the highly leveraged institutions when financial markets collapse. additionally, the nationwide state-based guarantee funds system also reduces the systemic

impact of any failing property/casualty insurer. we believe that any new oversight of systemic risk should focus on products, activities, and market-oriented events and developments rather than broad corporate categories or industries. it should be carefully designed to address the kind of market-oriented problems that have the ability to cause system-wide access. only institutions that offer products or engage in transactions deem to create systemic risk, including insurers, should be subject to systemic risk oversight. the current crisis demands that congress act. but congress must act prudently and responsibly focusing limited resources on the most critical issues and avoid the inclination to rush to wholesale reform. we do believe that congress can strengthen the regulatory process, improve regulatory coordination and monitor

systemic risk by establishing an office of insurance information to inform federal decision-making on insurance issues and facilitate international agreements. we would also recommend expanding the president's financial working group to include insurance regulators. we believe such reforms are measured, appropriate, and timely responses to the present crisis. as the process moves forward, we stand ready to work with the committee to address the current problems and regulatory gaps. we urge congress to keep in mind the dramatic differences between main street businesses that have never stopped meeting the needs of local consumers and those institutions that caused this crisis. again, thank you for the opportunity to speak here today, and i look forward to answering your questions. >> thank you very much, mr. hill. and thanks to the entire panel. it's interesting testimony. i look forward to my own questions and those of the committee.

i'm going to put you on the spot for the first question. in pennsylvania we had a company that in 2001, reliance of pennsylvania -- i imagine you're familiar with it? a mr. saul steinberg who took the insurance proceeds of that and then -- that allowed him to play the role of a multimillion air of the wharton school and art patron. do you recall those transactions? >> i'm certainly familiar with the company. i wasn't familiar with the wharton school. >> subsequently, that company defaulted on bonds and bank debt and it had chosen its federal regulator to be -- of its own choice because it was a holding

company. how would you say the effect of what happened there with that particular company -- is that a failing of the state regulation, state to state? would that have occurred if we had a federal regulator in place or do you see any difference? >> the unfortunate reality in any capitalist economy is that companies will fail. companies -- insurance companies led by individuals with ethical or a lack of ethics are companies that are more likely to encounter cash flow problems and ultimately suffer the demise -- the demise similar to reliance. a federal regulator would not have assisted or prevented that solution. i'm not familiar with the holding company challenges at

reliance. the individual insurance company -- those challenges occur and they have occurred for decades in the insurance industry. as soon as we learn of them, we place the company in receivership. the policyholders are protected. because the capital requirements we impose on companies is so significant, the shortfall at the end of the day for the guarantee system is relatively nominal, and we in that guarantee system is also intended to protect the consumers. >> i thank you very much. my good friend, mr. skinner. do you believe that the united states companies will have adequate access to the european markets after solvency is in effect and do you believe whether european companies have adequate access to the u.s. markets? >> it's an interesting question,

chairman. the law comes into being in 2012. what it's dependent upon is something called equivalence. equivalence from a european perspective is looking for something that can match the deeds and the purpose of the legislation, the final outcomes of that legislation. certainly not the latter on the dot and the t and the cross of the laws but something which does the same thing. for that we need to find a single voice to talk to at the u.s. level from an e.u. level 'cause we are actually only permitted to get agreements country by country at an e.u. level. there's no sense in beating around the bush on this. so for u.s. companies to do business inside the european union -- and there are a few of them who do this very well, they will have to make sure that there are regulators in the u.s. are people who can talk to the european union about matching up these credentials. if they don't get matched up, it will be down to each individual member state, therefore, has has been said whether it's

memorandum of understandings or whatever to impose their own requirements upon those companies. and we don't really want to be there because i don't think there should be any discrimination about this. if we get the match to work and we can talk to each other about this dialog and how it works, then i think there should be no discrimination for u.s. companies. in fact, u.s. companies, i believe, as a result will be competitivively enhanced by getting access to the market as a passport across all 27 countries. >> so it would be your conclusion that anyone opposes a federal regulator here in the united states would be in some way impeding their progress in competition in areas like the european union? >> from a commercial point of view, i think that most companies would want to make sure that they had the fewest number of regulators to have to work with. i think that's almost a commonsense statement. i think from a u.s. perspective, i think this is something you're

grappling like we've grappled with. we still have multijurisdictional, multilegal personalities in terms of the companies we have at european level. they have their own laws, their own regulations, their own standards. we just introduced solvency 2 and it's actually just changed the whole thing. it's harmonized it and brought the standards up in countries where it wasn't competent and you didn't have the capacity. as a result we want to make sure they are maintained for companies coming into the european union and i think you would want the same inside the u.s. as well. >> i see my time has expired. we'll now hear from mr. garret from new jersey. >> thank you, mr. chairman. i'll begin there. thanks for coming on over. you heard a number of people on the panel testify from the p & c side and others as well that the problem that we've had in this country that was not caused by the problems in the insurance industry. we've heard that from other panels as well. i note in your testimony you said that the legislation you're

talking about is going to go into effect in 2012, right? if we were having a panel like this back overseas, would that be the same testimony that we would hear over there as well? that the problems in the marketplace and everything that's going on in europe was due in no part from the insurance industry as well? >> yeah, i think in many ways we hear the same discussion. you'll be pleased to hear there's an economic and financial services committee that i'm involved in and represent today, we would be talking about same issues and classically we would be talking about derivatives and we would be talking about the effects they've had. but i think as one of your honorable colleagues said already, the securitization issue is actually a kind of a reinsurance in itself, isn't it? it's the spread of risk. so the insurance industry as a whole is not immune from systemic risks as such. we believe it's about the management of that risk in having -- >> but coming up -- coming up to

this point in time, would you agree with some others who have said here that you can't point to this company or that company as being the systemic problem which is what some of the members of the panel would be arguing for as far as this country is concerned? >> yeah, i think it's true to say that you can -- you probably have to put to one side the individual -- certain companies and you have to start talking about the industry as a whole. >> thank you. mr. mcraith, you were making your case on the benefits and the upside it would bring about the sharing of the information but as you get near the end of your testimony you seem to be talking about some of the great things you all have been doing as an organization in these areas already, if i heard you right. >> that's correct. >> so i almost, gee, we're already doing that on the one hand. so why do you then take the other side at the beginning of your testimony saying we still need this help out there. >> well, listening to at least

one of the panelists today would imply that the state regulators are not engaged in international discussions. we are engaged developing standards working with our international counterparts on every continent, in multiple forums. my testimony, congressman, regarding the office of insurance information reflected the reality we know which is not a question of standards or supervision or regulation. it's a question of international trade agreements. and we are aware of the limitations of article 1, section 10 of the united states constitution, which says that a state cannot independently enter into a treaty with a foreign government. and we join in that initiative without the preemptive impact, but we do engage in our -- and always consistently engage internationally with our foreign counterparts. and at some point in time i'd be

happy to talk about solvency 2 but i'll hold off on that. >> let me just jump down to mr. baird. you know, in your testimony you stated that the life insurance industry is either significant -- systemically significant or systemically important, one of those terms at the beginning of your testimony. mr. mcraith said in his comments that the industry -- or rather that the too big to fail concept does not apply to insurance per se. >> i'm sorry, not to any one company. the sector, of course, is significant. >> okay. so maybe that answers the question. i was going to go to you, mr. baird, to address that concern but maybe you addressed that, mr. baird. >> i would say this is one of those instances where director mcraith agree. we think the entire industry is of systemic importance but no one company is. >> one of the proposals coming out of the white house seems that we'll need a systemic risk

regulator and go into the federal reserve which a lot of us disagree with but assume that happens. and you put it into the federal reserve -- into the federal reserve and assume forsake of argument that it also has a insurance component. does anyone on the panel have a concern that you may have a bank regulator who has no past experience or what have you dealing with the insurance industry to be basically your supervisor or regulator in this area, mr. hill? >> that would be our -- that would be one of our concerns, congressman garret. that you would have someone regulating insurance that really has no real insurance background and again, i would reiterate that i think our position is that the best way to look at systemic risk is to look at market-oriented products in any firm that's engaging in those products should fall under the purview of the systemic risk regulator, but to just isolate a

particular industry group and just say that the systemic risk regulator is just going to oversee that, that could potentially miss something that's occurring elsewhere in our global economy. so our recommendation is it to be more product and market-oriented. >> as the financial guarantors we think the fed might be a logical place to oversee our industry primarily because the service that they provide to the banking industry would parallel the kinds of financial activity that we have in the capital markets. so we would think perhaps -- >> you're a little bit different than from some of the other? >> that's right. again, financial guarantee, we have, you know, one nail and we're trying to hit it. >> yeah, yeah. >> the multilines have a lot of different kinds of risks that they're taking and really not just our solvency but really our financial stability as an industry is what's critical. >> gotcha.

thanks a lot. it's up to him. >> i just wanted to add to directly address your question. i think that is a concern to the life insurance industry however it is resolved. if the congress creates a federal functional regulator which then presumably the two federal agencies that adopt with one another, we think the creation of a federal functional regulator would give a federal agency again the expertise to properly regulate the life insurance industry and cooperate and give information to the systemic regulator. >> but absent that? >> absent that, then that is a concern. and we think it's incomplete. >> gotcha. >> and congressman, if i could also just add -- mr. chairman, if i might add just very briefly that is, of course, a very serious concern for state insurance regulators. the regulation of the insurance industry is significantly different from the bank industry. so we do as the regulators now have expertise that can be integrated with systemic risk regulation but should not be displaced. so one of the priorities for any

systemic regulator is to recognize and value the expertise of the functional regulator, facilitate communication among those regulators, prevent the systemic disruption that we've experienced. >> gotcha. thank you, panel. i appreciate it. >> thank you very much, mr. garret. >> thank you, mr. chairman. ladies and gentlemen, thank you for being here. it's interesting that i heard pretty much everybody say that the insurance industry doesn't threaten the system. i'm just curious, are any of you familiar with the acnism -- acnism tria and everybody was afraid they were going to take down the economy at that time? did anybody hear who now thinks that the insurance industry didn't provide a risk and that you came up not to do tria because everything was fine?

i don't think you did? >> actually, the mortgage insurance companies did. but our business is such a different business than, you know -- >> so you don't think we should have passed tria. >> that was our position at the time. >> good. >> we got ourselves exempted, i apologize. >> i know you got yourselves exempted. i know that. but the question is, do you think we should have passed the tria act? does anybody think we should not have, i guess, is a better question. so we should have? and i agree. >> congressman -- >> go ahead. >> the issue with terrorism is the absolute impossibility of predicting the risk. what tria does is facilitate the property and casualty market that would not exist, manhattan, chicago, as major urban areas would not have access to coverage for terrorism in events in the -- >> i understand. it was the ability to ascertain the risk similar to the ascertain the risk on cdos and

cdss. the ability to ascertain risk is the same. the items are different? so we should have passed tria. now everybody thinks there's no one company that somehow provides systemic risk? that's what i heard in i don't think i heard anybody say anything different. has anybody here heard of the company aig? i know it hasn't been in the news lately. >> but congressman, to be clear, aig is kind of referred as the -- >> excuse me, excuse me. >> it's -- >> the chicago that does different lines and the problem that i have with it is that it is one company that was into so many things that the state regulators chose not to regulate. the federal government didn't have anybody to regulate and the states collectively said we don't need to look at what aig is doing. we'll only look at this slice, this slice and this slice. that's all.

.. >> that there is some need for some generic national oversight of what is happening in the

insurance industry. understanding full well the federal government should not and need not be doing things that some of the states are doing very well. particularly that aspect between the company and the customer. i agree totally the federal government doesn't need to do that. states are doing that. that is the consumer side. on the investment side, no one is looking at it. one company has and could again tomorrow our did i miss something? has anybody on any level today, up until this point said that there could not be another aig tomorrow? travelers, if they chose you, couldn't choose to invest all of their receipts into credit default swaps, if they chose. i don't mean to pick on travelers. you just happen to be your. or any other company. the answer is no, i think. the go ahead and correct me if i'm wrong. >> the answer is no. >> that is why we are here to try to say okay, we all screwed up by not looking at a huge segment of the business, the

site for people and us, when companies invest we need to correct that. states cannot do it at an individual level. we need a systemic regulator i don't even like the word regulator. i think that implies overactivity. at least a systemic monitor, maybe a regulator. to review what is going on. does anybody disagree with that? thank you, mr. chairman. i yield back. >> i know you don't -- [inaudible] >> it's my money. >> the gentleman from georgia, mr. bryce. >> think you, mr. chairman dick i appreciate the opportunity for this hearing. i think this is been an excellent panel and information that you provide has been very, very helpful. i think it is important to appreciate that federal regulation of insurance is different than instituting a systemic risk regular for insurance. and i think it is important that we keep that in mind and we

sometimes combined apples and oranges here. i want to shift gears a little bit and talk about, get some response regarding the financial products consumer safety commission that has been bandied about by the administration. it appears to many of us to be kind of a command and control apparatus for different industries, including the insurance industry. and i wonder, and i know oftentimes congress and the administration can go too far, in fact, that seems to be the order of the day and going to far. i wonder if, starting with mr. spence and kind of heading on down the table, do you have any thoughts about what would be too far for the insurance industry, or what the effect of this would be on the insurance industry for a products consumer safety commission? >> thank you, congressman. we believe the creation of a federal financial services product safety commission that includes answers raises two

concerns. insurance products are already regulated so this would add another in regulation and regulatory delays without gaining any consumer benefit. and we are concerned about possibly separating product regulation from solvency regulation, which could lead to poor regulatory decision-making because the product regulation would lack the information necessary to fully understand the industry. and there could be competing -- >> so there is a line beyond which we go, if we go beyond which results in limiting the ability of you to serve customers and help americans enter themselves in various ways? >> we believe so. >> mr. nutter. >> isn't a business-to-business operation and there is no direct label on the occasion to the consumer and therefore reassures revelation tends to focus on solvency. it would appear not to apply to reinsurance contracts, the consumer aspect. >> thank you.

>> when we design a product, we feel we are making promises to our customers to deliver benefits 20, 30, 40 years into the future. at the point in time where designing a product, we have to bring in solvency capital markets people, solvency people, marketing people to make sure we are designing something that somebody values, to celebrate that and have an agency only focus on the consumer side. we believe is not complete. if we didn't have all of our pieces if we didn't have all of our disciplines at the point in time we designed a product, that product would fill. >> what could we do or what would we do? what might we do that would limit your ability to allow americans to have a greater opportunity to insure themselves against challenge is? >> yeah, i believe that, you, obviously the life insurance industry is about strong consumer safety standards. i believe it is looked at in a vacuum, and not part of a

federal function regulator and a solvency and title workers risk that that regulation would not be complete and would therefore slow down the process. and you have regulators, if regulation is bifurcated, you have regulators with different standards and different agendas. and that would keep us from designing the product of the customer needs most. >> mr. hill? >> congressman price, we rapidity property-casualty guitar membership is mainly property-casualty, and we see this as more geared towards financial products which we really don't -- >> so if we do into your business that would be bad. is that accurate? >> just. >> thank you. i want to switch gears to mr. mcraith. you mention that you wanted to comment on the solvency ii framework and i wondered if you had an opportunity to look at the consequences that that will have or may have four states. >> yes. thank you, congress and.

first of all, i do want to commend esther skinner and his colleagues in the european union for developing solvency ii. it remains in its infancy stages as we heard, not even to be adopted by legislation until 2012. of course, at the states, you know, we have 64000 company years of regulating solvency, so we look forward to working with the eu as they further develop their approach. one report mentioned earlier by mr. skinner was what's called a report and what was interesting about that report was that he commented to reflect upon and approve the battle to capital standards. you might recall several years ago there was a clamor in washington our own banks the capital freedom that basal ii allowed for european institutions. and for that reason, solvency ii

i think warrants some scrutiny. but i think it is fair to say if solvency ii had been in place during the current crisis, the economic impact would have been significantly worse for companies and consumers in the united states. >> thank you. thank you, mr. chairman. >> mr. bryce, may i? if i may also comment on the solvency to matter. if i can actually take a sentence out of mr. skinner's testimony it seems this is the concern about solvency ii, and the statement from mr. skinner's testimony is his equivalence decisions will have to be made at the country level, this fact alone will make it almost impossible to find the usaa equable and under solvency ii in less changes are made to the current insurance regulatory framework in the u.s. the global market in reinsurance is one defendant upon regulatory interaction and comedy you can would strongly encourage a

federal regulator to facilitate that kind of international trade agreement. >> if i may, i'm sure the question was directed as much as everyone had something to do with solvency ii. the correct impression, i often think that like your house when you have a vote on it you effectively think of it as law that it has to go then afterwards to each member states and have them ratify it in the statute book. solvency ii there for once it has been adopted in the european parliament, which was in the 22nd of april at this year was law. it now has to use to be intimated by the regulars on the ground. i think we should be absolutely clear about this so there is no false impression left as to whether or not this is legislation. secondly, it deals with the three principles that we wanted to base our legislation on. i'm not so sure what ago by comparing what's happening with the u.s. and what is happening in the eu. we went for a risk based approach, a principle-based approach and economic-based

approach. this has been 10 years in development with practically every industry that was to be known in the insurance, in europe and from elsewhere. getting involved in consultations about getting the peace meal issues involved and out of the way beforehand. now we have implements and processes where regulators are about to introduce this on the ground where we will begin team and looking after policyholders interest far more than we ever could have done in the past. not in a piecemeal way, but in absolute harmonized way. and i think we're looking at the best and the highest of standards. i think i'm afraid, i must correct the impression that was left with you, that solvency ii standards is anything that we expect you to apply in the u.s. that is now we are saying either. what we are saying is we have gone this way in the european union and it matches the development that is happening elsewhere in the world. it is happening with what's happening in the iai with 11 countries choosing to go ahead, the united states not so. the danger is in the risk is, for policyholders and for companies, if they can't be

competitive in the global situation, that we will not be fighting like for like. you have a market which has 85% penetration in foreign companies. so that means you have 15% left u.s. companies. in terms of your global reach, you have got companies that can do it. i would say you have to consider whether or not not changing the rules, not moving along with an international global standard is going to endanger many of those other companies that you have with international ambitions. >> thank you, mr. skinner. >> thank you very much, mr. chairman. i think you and ranking member garrett for holding this hearing today to discuss systemic risk. treasury will release its regulatory reform proposal tomorrow, june 17, which makes this hearing all the more

important. i have always supported state regulation of insurance and i will continue to rally behind the regulatory construct. if the national association of insurance commissioners is correct, that even the failure of a major insurance entity based and operating in the united states will generally not impose systemic risk, we need to pursue this claim further and not rush to judgment on the capability of state insurance commissioners to properly and effectively regulate the insurers. are the more, i cannot support a system in which an insurance company headquartered in one state is given permission to operate in the remaining 49 states, based on their home state insurance regulations whereas, this might be accepted and feasible in the european union, i am not certain that comparing sovereign nations to state in the united states is

appropriate. we might be comparing apples and oranges. so i ask my question and direct it to mr. mcraith from illinois department of insurance, and if possible, give me a second opinion from kenneth spence with travelers insurance. >> what do you like, or what would you like to see in the administrations regulatory reform proposal? >> thank you, congressman. first of all, i think it is important to appreciate the strength of our current system, as you clearly understand. we are a nationally coordinated system of states. we have multiple sets of eyes, of multiple sets of experts looking at one company. so that it is not a single regulator. it is multiple regulators

working together in a coordinated fashion with a national system of solvency regulation, a national system for people like mr. nutter and others and his constituency and internationally that there is that national system that can be recognized. in terms of systemic risk, as i mentioned earlier, there needs to be, there must be a primary role for the functional regulators. and in our case, of course, it is the expertise that we have, the information we have, in the experience that we have in relation to state insurance regulation, systemic regulation can integrate. it is inherently, state revelation is inherently compatible with systemic regulation. we need to formalize regulatory cooperation, reduce barriers, enhance communication. the systemic risk management, as i alluded to earlier, as

regulators of the insurance industry, we require extensive, exhausted risk management for any insurance enterprise. we need that at the holding company level. and of course, that is a cynically institution institutions that it even more true. and in the circumstance in which the function of regular can be preempted must be extremely narrow and extremely limited, only if there is an actual, possibility of not just a risk, but disruption to the system. and those circumstances are very narrow indeed. the primary function and purpose and service that a systemic regulator will provide is to enhance the communication in using aig as the poster child, there was not sufficient interaction and communication among the function of regulators. we support systemic regulation, congressman. >> let me ask mr. spence with

travelers insurance. how do you all see it as an insurance company? what would you like to see in this reform proposal? >> thank you, congressman. as i indicated, we would support the concept of systemic risk, or the systemic risk regulator for a number of years, travers was part of a financial holding company that was regulated by the fed. the insurance operations were not regulated by the fed, but they did soundness and safety reviews of the company, including the insurance operations. and that process, during that process, it demonstrated the lack of federal knowledge, or knowledge at the federal level of insurance operations, which is why we think the chairman's oii is a sound proposal. and we think that depending on what a systemic risk oversight would do, even called for the

need for a functional regulator to implement whatever directives the systemic risk regulator might choose to implement. and then as i indicated, whatever the regime is, we think that the two key components are mandated risk committees and enhanced disclosure. >> thank you, mr. chairman. i yield back. >> thank you very much. mr. was of california, five minutes. >> thank you, mr. chairman. i pick up on mr. spence's point, insurance operations were not regulated by the fed. the new york insurance department reviewed and monitored aig's securities lending program. aig program heavily invested in long term mortgage-backed securities. as a matter of fact, that money from insurance subsidiaries. aig life insurance suffered $20 billion in losses, related

to their securities of any operations last year. and of course, the bottom line, the federal reserve has provided billions now to recapitalize aig life insurance companies. so you know, we've got a patchwork quilt here of regulation. as i said in my opening statement, we had problems with financial products in it. we have problems with the securities lending unit. and the security lending program. so we've got a difficulty here. now, as we have discussed at this subcommittee, there was an implicit belief in the market that should fannie mae and freddie mac get into trouble, the federal government would step in to save them. in part, it was that perceived federal lifeline that enabled these firms to borrow cheaply and take on so much risk.

as we discuss reforming our regular tour structure to address firms that are too big to fail, i am concerned that we run the risk of bifurcating our financial system between those that we designate as systemically significant and everybody else that is in competition. as our experience with the housing government-sponsored government enterprise chemistries, this would be a big mistake. and it would provide competitive advantages to companies that have implicit backing of the taxpayers, and they would be an sanitized to engage in high-risk behavior. that is what economists advocate this model tell us when they fret about what we are doing here. so in the context of systemic risk regulation, do we run the risk of restoring the market by labeling those institutions that are too big to fail, as such, and would it be more effective for a systemic risk regulator to focus on potentially high risk activities in the market instead

rather than a set of large financial firms. mr. spence? >> is a tricky to me? >> yes, sir. >> thank you. we agree with you. we think that systemic risk regulator, it's not a question of labeling companies that are too big to fail but it is determining in advance and preventing companies to become too big to fail. >> thank you. and my last question goes to mr. skinner, because mr. skinner, you have spoken at length on the need to establish a federal presence on insurance in the united states, as well as the problems you regulars have run into when trying to negotiate with the various state insurance commissioners. there appears to be a consensus that something should be done in this regard. but to what degree remains obviously the question. windows and office of insurance information just an office to collect data?

if this office is created without strong preemptive authority over the states, weakening the ability of an office of insurance information to enact agreements nationwide, how effective would it be in the long run? >> thank you very much, mr. royce. i suspect that you know the answer herself that in many ways amah at any international level its countries and groups of countries that have to work together in order to get the global rules which will prevent future systemic risks. and those systemic risk as we have discussed today are at the root level, the company management processes, the risks it takes, the premiums it doesn't charge, etc. etc. so we need something that is standardized, harmonize, that we can agree with. i think the office of insurance information is a great idea. don't get me wrong. i think that is what perhaps, you know, you will end up with i

think we still have a fundamental which underlies the exact one in which we will approach each other over specific laws and ways will apply laws. and whether there is an absence of that particular bridge, you know, there is likely to be a gap. so we have to find a way through that. i suspect that it isn't anywhere else, to come up with ideas and to talk to us about that should happen. and we should be an open door for your. you know, we're not going to say how you should do it, but we are a compliant group ourselves inside the european union to the european parliament wrestles with the same issues that you wrestle with. we just want to work with you to make sure that you can do what is best for policyholders as well as the international competitiveness of companies. and as i say, those demand future organization and new approaches to regulation. >> thank you. thank you, mr. skinner. thank you, mr. chairman.

>> the gentle lady from new york, ms. maccarthy. >> thank you, mr. chairman. and i appreciate it. i think many of my colleagues have said that this has actually been a very interesting journey that many of us have taken on this committee over the last several months. i want to ask you, as in alternative federal regulations, some have recommended moving to federal minimum standards that would enforce by the current state insurance regulatory structure. would that solve the regulatory burden in areas such as licensing, market conduct, and the speed to market if not, please explain why. >> thank you for the question. we believe it does not. we believe federal minimum standards, many of us run national businesses. we unlike the property and casualty industry, we price a product one time for all 50 states. our producers are often national. are producers often have our

customers move from one state to another. so when someone suggests that federal minimum standards is the answer, what that means is those minimum standards will be met, but there will still be 51 different sets of rules and regulations that we must file product approvals for, design products around, and producers must license for. so we think that solves very little, if anything. >> mr. skinner, listening to your remarks, when we think about it and you talking about, you know, working with all the different countries that you are working with, we have to work with all the states. and i would tend to think working with all the states is like the same as working with a different country. and i think that will be what we are going to have to solve because obviously a lot of the insurance companies do want to do global marketing. they are going to be into all the different countries for the -- i keep saying uk.

eu. so as we follow through. if you could follow through with what you were saying before, just a little bit further on how you could possibly see all of us. this will be difficult. each state, we all represent, you know, we represent our districts, but we actually represent our state so what goes on in the state is going to come to us, and then they will put the issues in front of us as we fight for the regulations that are going to come down. i mean, they are going to come down. anyone who thinks that they are not is not a wake in the real world. we cannot allow or afford what has gone on in the last year and a half, two years to happen again. if you could follow through with that. >> thank you very much. i do think that we are dealing with multijurisdictional districts, regions, countries, states. and you are right, it is how do we harmonize. had we get the rules to get the best safety for consumers.

how do we help companies expand capacity to areas where they have been offering insurance before and at lower rates. had we get efficiencies into the industry without running against risk. all these things have to be based about what is potentially sound, what is economically beneficial, and sound, and what is hopefully subject to risk management. those things are the clues that we went through in terms of over 10 years in trying to sew together 27 countries, 500 million people. and not everyone had the same level of competence. this is a serious issue. thank you for recognizing he come from the uk. issue, london likes to think it is a head of the world anyways along with new york and financial regulation. but the truth is actually, we can all to be alert and what comes across our borders are some things that we don't expect and can be beyond our control. so when we talk about systemic risk, we are talking about control over groups. groups that cross borders. branches and subsidiaries.

so i want to singles and the same panels and the same tools to every regular ad at a maximum level so that they can be enhanced in the job that they do and that we know that consumers in lithuania, latvia, and london can have the same kind of expectations about their policies being in good order when they finally come to have been paid out. and most of all, that they can't afford them. and as i know in terms of an economic crisis as we are facing at the moment, many people are turning their back on injured in thinking well, do i have to take the insurance bill for my house? the consequences of that could be enormous in terms of the social impacts as well so i don't want to price people out of the market. so capacity and competence has driven us to make sure that we have one market in insurance. >> i appreciate what your thoughts on that because i actually do believe that people when they are cutting back and the syncing is happening here in this country, they are looking where they can cut back, just to survive by paying their mortgage or whatever. and if they can get away with whether its car insurance, letting it lapse, hoping they

don't get caught, health care insurance. obviously we are dealing with that so we are getting with it. i'm sure, my time is up. thank you, mr. chairman. >> thank you. and now we will hear from the gentle lady from illinois, ms. biggert. >> thank you, mr. chairman. mr. baird, in response to doctor price's question you basically said that the functional regulator in charge of regulating the safety and soundness of a financial institution should also be the regulator in charge of regulations, related to consumer products and practices. why is that and why should it be the same regulator that looks at safety and soundness as well as consumer related products? >> thank you for the question. i certainly didn't want to get

into the issues of congress and determine who reports to who. the remarks i made, and i want to make this very clear, we think that they have to be together in the collaborative or co- operative or perhaps one does report to another, and you will decide that, not us. but you cannot separate and bifurcate consumer standards, consumer safety standards from solvency regulation. >> thank you. been director mcgrath, what sort of coordination took place among the regulators following the aig debacle? >> thank you. congresswoman, at the national level, there was coordination within the days and weeks, of course, there is coordination constantly. but we were, as we learned about the holding company problems that aig financial products division in london, we learn

that their holding company challenges could have implications for the insurance subsidiaries. and immediately nationally, the regulators worked collectively daily, multiple calls, meetings, visits regulators from around the country, because of course policyholders are based in every state of the country with aig. in addition to that, led by the new york department, the state regulators led national -- or i'm sorry, international conference calls giving our colleagues from the eu and all continents the opportunity to participate in the discussion to understand really the root cause of this problem is in a financial product division based in london. it is not a u.s. insurance company problems, and those

conversations still continue to this day. . . >> we have been working together for over 100 years. as i mentioned earlier, 64,000 years of company regulation. we understand the importance of working to the so that the

consumers in illinois understand the impact of an aig challenge, for example, that the regulators in illinois collaborate with aig in new york and pennsylvania and all the other states. so the primary and essential systemic -- let me back up. one other key component of insurance regulation that was raised by congressman, we restrict not only what types of investments insurance companies can have, but how much any one company can invest in my one type of investment. that type of capital and accounting requirement presents the crisis in the insurance industry that we've seen in the banking and other sectors. >> i have one more question in my time. if we were to have the federal markets stability and capital

board as we're comprised of all the federal regulators and maybe some outside experts and others to look at what could be done with regard to the derivative regulations, should an insurance representative or representative be at the table and who should be at the table, should it be a rotating state regulator or should it be set up the opposite of insurance regulation. if we set it up, it would be the head of that to be involved in that. >> congresswoman, a state regulator should be involved with the council. >> should it be rotating or could we use the opposite insurance information? >> that's right. i expect it would be rotating. i think there's value in having that diversity of an opinion. although a consistent standard message diversity of

perspective, absolutely. >> thank you very much. i yield back. >> thank you very much, mr. biggert. now we'll hear from mr. scott. >> thank you. let me ask -- we're here debating this largely because of actions that stemmed from the problems that aig with excessive trading and credit default swaps in london that was not regulated by state commissioners but by the federal government, the office of the supervision. however, some are using the collapse of aig to argue for the creation for an optional federal

charter for the insurance industry. and as i said in my opening statement, this is somewhat problematic because here we've got an entity that had the federal oversight. would an optional charter have been in place would it have prevented the collapse of aig which, again, is already federally regulated? may i get your point? we look at from our narrow perspective from the industry. the first word that used optional is where the trouble is i think in that an optional

charter would leave itself a little bit. meaning that people or companies would have the about to grab and take towards the most liberal. the hasn't tour federal that would all companies whether it's just the model lines or whether it's a broader clash of companies would address that. the second issue that if there was federal regulation, whether it was -- and it was focused on products with the ways to look at perhaps the aig issue is participation. inside those credit default swaps, the requirements for them to post collateral was really was the reason why they ended upleaps -- collapsing. it's the product itself and the nature and terms that are inside

that product. federal mandatory sort of applies to everybody, no possibility was important. but second had in been in place and focused on what was the terms and the product that would be the case. and that's why we think in a financial fashion driven companies such as ourselves that this looks more like something that the fed would do for banks in terms of permissible. >> thank you very much. the part of my question is that let's move to the state regulation because in our analysis and the whole reform issue, i want to do what's best for the nation. but certainly i want to do what's best for georgia. we're a comprised of 50 states. 50 different states. and i believe that state regulation over the insurance industry is a legitimate, regulatory entity, because

states are able to make their own rules to comply with what that state deems important for their own population. we are one nation. but we're 50 different states with 50 different kinds of constituencies, history, geography, climate, all of the things that make the great diversity of the nation. and so i believe we have to have room for states to deem what is most important for their own populations. that would have the independence to grow in their own way and their own time and most importantedly, ensure consumer protections for that kind of

constituency. and ensure competition within the industry. am i not right about this? is this not not -- should that not be the case? >> well, i would agree with that. i believe that what we found is that the state insurance structure has been a real asset, we believe to our industry. as you can imagine we're obviously participating in a mortgage market where we are subject not only to some of the issues of loans that were originated but also to a lot of macroeconomic issues like unemployment, et cetera, and yet we're in a position to be able to continue playing our claims because of the structure of the reserve system that we have with the states. and what we found that that has been a structure that has helped us really survive through this

challenging time. at the same time, it's been very clear that the regulators themselves have been talking to each other and coordinateing as well as in our case sharing information with the fhfa. and so we believe that structure is working and will continue to work. >> thank you. mr. scott may i just add a comment to that. to represent the insurance industry, going back to the chairman's opening statement there are certainly some aspects or lines of insurance or reinsurance where the federal prudential regulator would in fact enhance the kind of relationship a the the consumer level that you want. that the indeed, it cries out for the problems associated with international agreements. focus on international insurers and reinsurers doing business in the country.

so i would suggest that even the premise about the consumers concerns, there are still aspects of regulation where regulator would enhance that. >> however, may i add to that the ultimate consumer protection, congressman, is when your constituent pays a premium and doesn't have a claim for several years that the company is not only able to -- is not arnold to answer the telephone but able financially to pay the claim. we insurance is an essential part of solvency, and solvency is the core mission and purpose of consumer protection in each state. for that reason it's appropriately a subject for state-based regulation. >> thank you commissioner, scott. >> now, gentleman. >> thank you very much, mr.

chairman. we really heard about two issues today. one is international harmony. and the other is about regulation. and i won't go into the harmony because there's just not time you know what happens when south america gets in. it is really too large to discuss here today. as you've heard, most of our colleagues discuss today, many of us believe clearly that the regulation of insurance is a statement. and it's purely and simply as the states right. it's reserved under the states. and the biggest violation that i've seen quite frankly has been by companies that write health insurance, for example, under arisa. they will do business in 49 states, every state expect the state they reside. because the federal government doesn't nothing about it. and it wasn't until the states

got together just several years ago and crossed state lines to prosecute health insurance fraud. if we left is to the federal government, they'd still be plundering people in 49 states, unfortunately. it is clear that your testimony today was very few of you need any more useless bureaucratic regulation. who would have ever thought that after the fnl crisis so relatively shortly after the fnl crisis with all the additional regulation that was put in place following the crisis, that we would again find ourselves in a hole of financial crisis. if regulation would solve the problem we wouldn't be here

today because brighter minds created lawmakers through a bunch of regulation at the end of the fnl crisis. obviously it didn't do anything and why we would think that we could be successful in trying to advantage out think a creative risk taker kind of defies logic. i think the answer is to hold people who harm people accountable. we pretty much agree that the cause of the crisis that we're in now has been caused by grief. we have greedy executives. and it apparently is not illegal to put the long-term best interests of the relationship that they have with their customer, their client, their

stockholders, behind their personal ambition ,000,000,000 for short-testimony gains and bonuses. i think the everybody agrees with that. and i don't think that you're going to ever be able to craft a law that is going to outwit these creative i hate to use the term but geniuses for the short-term to improve their own life. i think the only answer is going to be if you hold the people responsible who violate these relationships like they do in some industries. and for that, i realize there's not enough time for all of you to respond, i don't expect all of you to agree with that. but i would great if you would respond with your thoughts in writing to chairman and he can have the rest of us to get a

copy. what kind of bar and boundaries would you recommend to legislate accountability for these people? if regulation would take care of it, the fcc's 1100 attorneys would have prosecuted bernard madoff ten years ago. so it's going to be have to be a matter of a matter of criminal accountability on a personal level if we're going to change the course of the future in this record. >> thank you very much. the panel wishes to send the respond in and make sure the numbers of the committee. the gentleman from illinois. >> thank you, mr. chairman. i'd like to ask you now to enter the written statement of the honorable steve bartlett of the

financial services round table into the record. >> without objection. >> thank you. and i'd also like to acknowledge some of the testimony hat no one is advocating for a national insurance charter, and anyway suggesting we lower consumers protections. we're starting at baseline of nicc models and only grooving by adding a systemic risk and regulator that would have oversight of company information both for insurance and other insurance like aig financial who could prohibit that put those companies or the policyholders at risk. and also the testimony that you mentioned of a federal prudential regulator only enhancing consumers protections. my question is for mr. mcgray, if the federal government had not stepped in, how prepared for the state regulators and reserve

funds to deal with the fall out? how would of states come up with the tax dollars that had gone to shore up who took risky bets through their securities lending programs that notably were approved by the state commissioners? and the follow up question for that what resources have been put in place subsequently by you and other commissioners to oversee insurance subsidiaries programs? >> thank you for that question. because security lending has come up and other comments as well to understand that the problem first of all that the new york department of insurance was working to reduce the level of securities lending in the aig subsidiaries before the crisis. the crisis, remember, was a result of the essentially a collateral call on the aig tolding company resulting from the credit default swaps. this would not have been a

problem, but for the cds failure. and it's also important to remember that the securities in which were involved were triple aaa rated securities at the time. so it points to the need for the better regulation of the credit default swap market. >> where would the $45 billion have come from? >> let me get to that. you also asked about reforms that have been undertaken. we have increased capitol requirements. and enhancing reporting and we are looking at how to revice our accountable standards and that last improvement is ongoing. in terms of $44 billion, it's important to understand that each insurer of course has significant capital requirements to be begin with. their assets cannot be used to satisfy the debts of the holding company.

even if these subsidiaries, i think it's an open question also congresswoman, without the $44 billion whether these companies would have become insolvent. many financial regulators would argue that they would have okay. however, if they had been a question of solvency, then the companies would have been placed into receivership. and insurance is not like the fdic, for example, where you needily kidty and bash immediately. the insurance and guarantee fund system replace the contract. they don't have a generate cash immediately. because of course not everyone dies, everyone dies on the same day or everyone has the car accident on the same day. for this reason the $44 billion

would have not been immediated immediately or needed at all, it would have been managed over a period of many years if not decades. and this is what happens and does what happens through the state-based system. the state-based system would have been able to handle it and it would have been a protected the consumer policyholders first. >> thank you for your testimony. it has been done by the nicc since the time to address the gaps to protect policyholders. it is those who oppose legislation to move towards the national charter that would suggest if there would be any weakening that would acknowledge to the industry that would get passed on to consumers from the redundancies of the 50-state system. thank you, and i yield back. >> thank you very much. now the gentleman from

illinois. >> thank you. i find it interesting that you think you could ask the federal government for so much and then in your own wisdom stop it and then complaining that the federal government went too far. i think mr. royce went beyond. and his question was and bean also what good does it do to have the information if you have no authority to act upon it. i come from illinois, and one of the things that we do right in that state is regulate insurance. we have the cheapest insurance rates probably in the country.

mr. gray, my understanding, and correct me is that aig was in five pieces. five separate entities, call it what you want. and that the life insurance was courted off by the investment side; is that correct? >> that is correct, congressman. every state has adopted what we call the holding company act. the holding company act requires each insurer to be financially, independently, viable. with very strike capital and accounting, and investment requirements. one function of the act that that -- the life insurers, for example, cannot relace capital to the holding company without regulator approval. >> so the investments that were

made by the aig life insurance section were separate? aig and our conserveative estimate had 247 companies. open one of those was independent financially viable. the financial products and the company leasing -- jet leasing company, those were regulated in other ways by other agencies in which the insurance companies and the insurance companies were not threatened by those operations. >> so the life insurance side of aig is always been stable? in terms of -- you'd have to

have all the insurance, life insurance die in one day or in a week in order to threaten the system of the insurance end? >> it is some very smart experience financial regulators in this country would say exactly that. >> well, then why would anybody want to regulate the life insurance company on a federal level? how would it be done any different or better than what's been done at the state level? >> well, our position, of course, congressman, is that it cannot be. and i think that your colleagues have pointed out numerous examples of why that would not be the case. i think i was asked earlier about reliance company and what a federal regulator had discovered the misconduct of its principal. fcc didn't discover the misconduct of mr. madoff,

either. >> if i could stop you right there. that's my point. the fcc, the man -- the whittle blower. i can't think of his name right now. macopolus testified that he had been screaming for seven years and no one would listen. so the authority and regulators were in place, they just failed. and the same thing with the federal reserve. now you said that quote, we restrict the nature and extent of investments of insurance companies. and the federal reserve has jurisdiction to restrict the nature and extent of mortgage instruments and underwriting standards. and they said on their butt and

did nothing. in fact, chairman bernanke testified in october of 2008 that it wasn't until december of 2007 that the fed ever got involved. and the whole subcrime housing market, i find that astonishing. we are giving you hell that the -- where were the states when this went down the tube? but it was the federal -- it was the federal agency with direct jurisdiction that did absolutely nothing. and now we're talking about using that standard, the fcc standard, the federal deserve standard that blew it with doing nothing on governing these instruments 228 to 327 and making sure that people who took out loans were afford to buy them. now we're expected to sit here and have a federal insurance

regulator? why? i mean looking at your testimony, you need the 10th amendment on some certain areas. and i can understand what you're trying to do. the problem is how do you think you can stop the fed from going only as far as you want them to go. and then not going beyond the area where you don't want them to go? that's a stuff question. but if you want to handle it, go ahead. >> well, i'd like to try. i owe that to you. and i appreciate it. >> if i could have some more time. i'll take anything i can get. >> thank you. >> i'll try to keep it in the context of the purpose of the hearing which is systemic risk. if the chairman would indulge me, i've been coming up here for seven or eight years, long before aig became a household name and long before there's a financial crisis. we are advocating for a federal charter. we thought we could serve the

customers, those of us who do business better as congresswoman said and you had a bigger number that i would have in my pocket. but there are billions of dollars that annual operating expenses that would be saved if we had a single regulator rather than the other regular -- regulators. what we're been talking about today is whether it's federal or state in the past there have been failures. failures on both sides. i think the purpose of this hearing is to try to make it better. to prove and try to bring all of the risk from the entire financial services industry together to keep this from happening again, which given the amount of sleep that i've lost in the last eight months i am all about. if we are here to talk about the federal overseer or regulator, we don't think that you can regulate just the risk of the life insurance industry without having the expertise,

collaboration, and cooperation of a federal, functional regulator. that's a good answer. i prior to that. another question -- i'm past my five minutes. >> we'll have another round later. >> okay. that'll be found. okay the gentleman from florida. >> thank you, mr. chairman. i don't want to talk to you or ask you any questions whether we would have a federal regulator versus state. i do want to talk and ask abouts about the subject of systemic risk. you are a panel that are here to represent the insurance industry. i'd like to start with systemic risk reflects the idea that the failure of one company would cause it was creditors to also fail and go bankrupt and go throughout the financial system to the point where there's a dry

up. the first question i want to ask you, we'll start with mr. mcgraph, which companies does that, which existing companies owns the interest if they fail? >> not one insurance company based in the united states presented systemic risk according to the definition you've provided. >> what about aig? >> aig's 72-u.s. based insurance subsidiaries were financially strong, remain financially strong, not one of those companies ever presented any systemic risk. >> as a group do they pose a risk? >> as the holding company, it's financial products division out of london whiffs not appropriately regulated but not a matter of insurance regulation, by the way, that clearly presented systemic risk to the count. >> so what you are saying that only the financial product

section of aig posed any systemic risk, not any of the insurance operations and the financial product section was not an insurance of course in your view, that correct? >> according to the definition, yes. >> good, let's go on to mr. spence. which insurance entities today pose systemic risk to the system? >> thank you, congressman. as we detailed in our testimony, i agree with mr. gray. i think that on an aggregated basis insurance companies in the u.s. could, if there, a catastrophe or in the event of a terrorists attack. >> well, that's an interesting point. so what you are saying is the aig. that wouldn't pose the kind of systemic risk. what you are talking about there is some sort of attack or natural disaster that would impose trillions or hundreds of

billions of dollars potentially, i'm talking about, for instance, a nuclear blast, hundreds of billions or trillions of dollars of loss. at that point do you think that would be a systemic risk and would that be the least of our worries? >> as we indicated we think on an aggregated basis insurance companies in the -- those events could be systemically at risk. correct. >> all right. is there anything that systemic risk regulator could possibly do about that? >> that's a very good question. what the systemic risk regulator would be to be to try to ensure that that examine nation of insurance companies exposure to natural caps properly managed, whether thing a grace of risks in urban areas were properly managed, there's things they could try to do to improve the situation, but you are connect,

depending on the situation there may not be much? >> there are any entities that you identified being the ones to watch? >> again, we've looked at it more on an aggregated basis. >> all right. and i don't know if the regard this question as fair or not. but if your company went broke, who else would go broke? >> we don't have that many counterparties. i'm not sure we can answer that question. >> as far as you know would any other major entities go broke? >> no, sir. >> all right. what about you mr. garrett? >> you're asking me to use my imagination as to what a systemic risk regulator does. because i've thought about that a lot. >> no, what i'm asking are there any current companies, include your own, that you believe pose the systemic risk. if your company fails so many

others would fail that it would result in the mass destruction of the credit in the country or even the world. >> okay. if all elsewhere the same, if the reason for our failure did not impact any of the other companies or can i think of any other single company out there in the life insurance industry, if the reason they were going to fail did not impact any other company, the answer is no. >> okay. and going back to the previous answer, what you're saying is there are certain scenarios we could have something like a terrorists attack, a mass disaster, those are the kind of scenarios? >> in the property casualty, yes, in the life insurance industry, it could be a broad array. >> to me this has been very helpful. if any of you want to supplement, i'd be grateful.

my time is up. >> thank you. we're going to try another round quickly. those numbers are taken the five minutes if they can so desire. >> we're going to go to my co-host here mr. garrett of new jersey. >> and i'll run quickly through. i don't want to hold the panel up. i appreciate the panel being here. i saw mr. skinner maybe disagree with you. my wife always says that, with regard to the aig situation. you were running down the scenario with regard to who's looking at it and you made the comment portions of units over seas and london specificically. and i believe i've heard that before. part of issue was not the state

regulator necessarily but the federal regulators ear raising one as well. it maybe missing it as well as -- do you want to chime in on that? >> i think the important point is that regulators need to have formalized information sharing for communication not because of the risk because frankly there are large companies who will present risk if we avoid the destructions. the structure of the stability. >> but i guess what i heard, and you can comment on it, was this a failure not only the federal regulators and also a failure from @ europe regulators as well looking at that situation and not catching this and going into it? >> this is very interesting. as i'm listening to this i gather that you believe aig

functioned as it did in the united states. aig functioned country by country. and now we are saying you have to behave as a group. you're inside an internal market. you're now going to have to put your hands up and say be a group. if you say group, we would be able to administer and supervise. it just seems to me strange to keep picking on london. london was trading. it was appropriately regulated at the time. i don't think that's true. it's not rational either. but the reality is actually what went on was due to the market and we know why it went bad. but we don't need to go there. if we think that aig in the united states has to blame what went on in london for the failure, then i think that's taking a step too far. i think we have to say why

supervised in the united states, who had oversight of it, why didn't state regulators, if they had a close relationship, now about the kinds of investments and what proposition did it make in terms of trying to stop those investments? >> i appreciate that. a lot of what we do here is to make the questions had we had different regulations would we have presented it. it would seem as though, maybe not. mr. skinner, we talked earlier in your testimony with regard to equivalency. that's something we need to move to. to you have that oia regulation? it's an office of information -- insurance and information with information would that bring us

to just having that? would that bring us to it alone? >> we want to know a collection of information itself that would not be enough. i think what we're looking for is this to be the platform. it's up to you where you go. what we want really is to examine what you bringing in terms of regulation. then it has to have some national level. >> i guess the last question is we see that the economy here between the two approaches. we made the comment i think that he -- i don't want to put words in his mouth, seized the need for state regulations with regard to the consumer protection aspect from him. mr. garrett, you can see the problems along mr. price's line of thinking if you have if you don't have the consumers protection as on the same level or combined, i don't know you don't want to get into who

regulates what, combined, you can see a problem there, indicated; right? >> yes. >> so you would also see a problem then if mr. capuano, if you continue those devices between the state and the federal with the consumers protection here on the state level as he seems to be supportive of and the prudential regulator here. you would see a diversion or conflicts of approaches of interest? >> that is right. >> beside the inefficiencies. >> beside the inefficiencies. when we get it right. when we design a product that allow us to be prudent and reasonable so that we can deliver on promises we bring together or solvency people, our financial reporting people, our pricing people, and our -- we have committees in our company that we would you want your

company to own the committee. we are making it right. all those come together in the same place. to regulate us any differently, i think would fail. >> if obama comes out and does nothing with regard to insurance, that's not just on the table. but he does give us a systemic risk regulator perhaps in the federal reserve and over here he has a division in some other area, that would be, neither one of those without, that would be a division that would not work. >> if that includes insurance products, that does not allow us to bring it together to serve the customer. >> nor will it work if you have in your opinion mr. capuano approach some here and some on state and federal. >> thank you very much. >> thank you, mr. chairman.

during your testimony you highlighted that the nicc worked actively with international regulatory bodies. what authority was the nicc have to compel states to comply with any changes or recommendation with the international community would like to see? >> well, the first value of the nicc after that process a coordinated interactive agency to work with our international colleagues. there are 27 countries in the eu, there are countries around the world who have similar guidelines in terms of the preemptive authority, it's role is not to preempt the state, it's to supplement and support the state regulation. so in that sense as it develops as internationally as our developed standards, we support

the development of those standards. and that's the measure by which we will determine e levlen si by the way is the development in compliance with international standards. >> so you support the standards and you ought the states but ultimately you don't have the authority to compel them to comply in the same way the nicc has tried to across the states and has been unable to get all the states to move forward towards agreement on standards as well? >> well, quickly i think that a fair comment is that there are differences among the states. i think your colleagues have mentioned, for example in illinois, we have a rating system where that works for our state. companies don't need prior approval on property and casualty rates. that system would not working i think many legislators would argue in the gulf states or on the pacific coast.

so those differences, while they might present a system that some of the largest players in the industry is difficult provide essential consumer protections to the people that live in the districts and states. >> thank you, my question for mr. skinner is from the european perspective, how successful is nicc in implementing with european counterparts? >> to be honest, reinsurance in particular where we've had some problems for charges and the poor, the european commission holds out this is entirely discriminating inside the united states which is $40 billion worth of collateral health. there has been a move to move toward the rate process in itself it seems. with the higher ratings being required, very high ratings required for our anxanis.

and very much less it seems for domestic companies. if you're operating in a global market business to business doesn't make much sense. obviously i understand the necessity of covering risk. but we just in a way we're collateral inside the eu, we think it's a blunt instrument. we wonder why that is still, of course, here whenever the niac comes to the european union and says this is what we're going to do. we're still shocked, and we don't think it's a modern technique. we perform to look at risk management. that tells you how they are behaviors and predicting their risk. which is far much more essential to how much money they have in the bank. >> in 1989, delaware became to become a corporation. at the time they explained that delaware laws were conducive to

corporations. why did the niac decide they should be able to have their headquarters, but they didn't have the operation of federal charter to better serve their customers? >> excellent question. let me comment on the collateral issue with this very brief antedote. it's interesting to have this diversity of opinion. although i appreciate the perspective. in terms of the delaware, i don't think it's a mystery to anyone in the country that delaware is a home place for corporations to be incorporate president the naic as you occluded to earlier is not in

and of itself is regulator. and in that sense, it is not delivering directly to consumers the products. it's also not a company. it's not delivering products, it doesn't have solvency requirements, it's not selling complicated insurance policies to people in every state around the country. for that reason, companies should be domiciled within states and the regulation of those states in which they sell products. >> thank you for your response. i yield. >> thank you very much. i have no further questions. do you have further questions? >> thank you, mr. chairman. i want to thank each and every one of you for your time and testimony and forthrightness is appreciated. mr. skinner, you are right, there has been a big difference between the requirements for

domestic and nondomestic. i think just in the last couple of years though, we have been so plundering and abused by the reinsures that have done business, all of whom haven't had the exact same rates. you'll see the states dropping those requirements. the purpose of that was so that if we caught them misbehaving, theoretically we could put them in jail and hold them accountable. if they were domicile some other place in the world, that becomes more problematic. that becomes more as a matter of probability than it was protectionism, hopefully. talk about a systemic regulator. i wonder, and you've come the fartherrest, mr. skinner, you might have the best ideas on this. how in the world could we expect

a systemic regulator to regulate? from a practical application i have not heard anyone else explaning how somebody could evaluate them and then regular them. in theory we say we need somebody to regulate this and make it right. i haven't heard a practical example of how they would regulate complexities. >> in all honestly, i think the feelings do question. one of the things these products went ahead of some of the regulators regulating them. and some of the boards of the companies were -- who were in charge. you also have the chinese between agencies and rate them and the designing products. and everybody made money in this. it was the wrong incentive for

any of these things. in terms of having oversight, clearly one of the things on an european level is if you start with derivative, we think you should retain some of that to spot any problems down the line where it came from. one of the things was there was principal derivatives. we just introduced the law to capital requirements so ensure that up to 5% have to be maintained. there's something i know is being discussed elsewhere. it is clearly from our perspective it is only from that particular time to start, and we can hope to look at this market. one thing is for sure. we need a industry where it is built. and the insurance depends upon that just as much as banking. we have to stop the unethical behavior and certainly some of the greed which led to the most uncertain derivatives. >> congressman, --

>> yes. i think you're asking the million- -- the multi-billion-dollar question. i think the chicago mercantile exchange had a proposal, that is to have an electronic trade and pricing transparency and counterparty certainly. those two things in conjunction would have prohibited or limited in the impact of the crisis we've seen in our suffering for now. >> my -- yes. i wanted to come back to the reinsurance comment. but i'll be glad to defer to the the comment about credit to fault swops. >> i would like to make one point. the critical part of a regulator, and we think perhaps the fed is to analyze the instruments themselves. the difficulty with credit to fault swaps and aig with

leverage and the huge number of transactions that they did. and the leverage that was embedded in each one. it's critical and that would be interesting to see what the -- mr. gray would say about this. a lot of staff that it takes to analyze and regulate them and think which is permissible or not. we think more than what eric or one of the state regulators would be able to do with staff and with able to stay on top of that particular find of financial instrument. >> so do you think that the peep that are putting these together are highly valued making tremendous choices. does anybody have the notion if we would be able to hire those people and they would want to work for the government at a

qpáe som if i'm wrong, tellmlv me why you think that's a practical idea. it's that expertise that they were going to belí# able to evaluate the complex that's throughout the financial market and they are going to work through the government and which are smart and which are dumb and which are risky and which aren't. i think that's an absolute obvious security to think that they would happen. >> congressman, the one public sector employee on this opinion, i'd like to offer thereby many smart, committed regulators who sack fiesed short-term compensation to provide to the greater society. well, and we're going into new war here now. and i think that's what we already discussed that what we

saw with the fcc and what we saw with all the agencies that failed to prosecute and en on. but to start this from scratch is bureaucracy. we're going to solve all the problems, and it's unrealistic expectations. aisle saying the level of expertise that's required here that the person could have its own independent evaluation for the rest of the world and maybe serve a greater good than trying to have the government do it. and there's certainly nothing wrong with having a database. we talked about that before and if you have one and you foul one, you list every component you put that on an index which you can get online. and just for transparency. and then of course the world is we're registered with this and

this. and this implied the value to that. that an -- who we're trying to look out for might not understand. and thank you, i think you gave me some extra time. mr. chairman, i appreciate it. >> mr. chairman, if i might comment about the comment about reinsurance. one of the reasons that we support a regulator at the federal level is in fact that much of the market is nonu.s. based market. and the lack of expertise and capability as well as the lack of legal framework between countries that are major trading partners with the united states is the reason that we think it's appreciate to have a federal regulator. we commented earlier that the lack of constitutional authority for states that enter trade agreements is an impediment to dealing with that. i would also disagree of the reinsurance market. in fact it's contributed an enormous amount of money.

after hurricane katrina and wilma, after the hurricanes last year. it's been a responsible market in paying its claims. >> mr. chairman, i didn't say they weren't responsible and i didn't say paying claims. i said they all had the same rate. we've seen a little coincidental. >> thank you. very much. if anyone has additional questions in writing the record will remain open for 30 days. you may submit and their responses will be part of the record. the center for insurance research, the property casualty insurance association of america, the cea, a trade association of european

insurers, without objection it is so ordered. i want to thank in panel for their contribution today. and taking all -- we did it in three hours. which is pretty good. and maybe next time we can keep it inside. it'd be another opportunity to visit for mr. skinner. call him over there. i enjoy that. i think we gained a lot for the international little poa sure. but all of the participants on the panel were extraordinarily contributive today. and i think even the doubters on the committee tend to say we moved the ball down the field a little further with the result of this hearing. i want to thank you again for being part of it, i look forward to some future hearings on this subject. and now the panel is dismissed, and this hearing. >> before you adjourn -- just to

enter something in the record. the letter of june 5th from larry summers. didn't mean you hold you up, but i did want to make sure that got into the official record as well. >> thank you. >> thank you, mr. chairman. >> thank you. >> thank you. >> you've been watching the hearing on regulating the insurance industry, specificically in the financial sector. it was held in june by the house financial services subcommittee. to get more background and possibly legislation that could make its way through congress we spoke with a capital hill reporr .

>> how do the lawmakers's ideas compared to the regulatory overhaul proposal that the administration has proposed? aspects they agreed upon. there needs to be something overseeing systemic risk, in terms of the non banking industry, the mortgage lenders who were not necessarily under the purview of the federal regulators, those need to be overseen. in the details is where the biggest issues are coming. the administration proposed the federal reserve be the primary regulator. senator chris dodd of the

banking committee, barney frank of the house services committee, they have pulled away from that. a committee of regulators, council of regulators is a better idea at this point. >> tell us about the opposition on the hill and outside groups. what are their arguments against regulation? >> the banking industry is a powerful lobby, a powerful group that stands to lose a lot. if regulation is too tight, their argument is if you tighten the reins they cannot perform, they cannot innovate or make money. if anything has been proven over the past couple years the banking industry is in trouble they are doing their best to say we understand something needs to happen. we are fair game with that but don't tighten it too much. the other aspect within congress is the republican party which is not in bed with the banking industry but they have a similar free-market approach. their hope is in any regulation that is passed or put into play

is not too prescriptive. >> you quoted an ehrlich -- article earlier this summer saying it would result in permanent occupation of our economy. >> absolutely. house republican, senate republicans, big government fear is palpable. what the congressman is trying to say is you are putting your hands in places they should not be. their hope is there in the minority. pretty large minority in the house. they may not have a huge say but at least they keep that in mind, you need to keep private industry private. >> lawmakers are exploring the idea of oversight of the insurance industry as part of this regulatory overhaul. how does this fit in? >> will be tough. it is an industry that for years people said something needs to be done. we are not sure what. there have been a lot of proposals, the national firms are hoping for an optional federal charter, where they

a national basis instead of eight bases, like the industry currently is. obviously with the aig issues, the monster insurer that has essentially been the poster child for tngs going wrong over the last couple years. it is there to make a change. at this point lawmakers are tiptoeing around it, not necessarily sure where they need to come in and how they would come in. >> so much on the congressional plate, health care and energy, where does all of this regulating of financial regulators, the changing of the regulatory system, where does this fit into that? >> president obama as said by the end of the year he wants something on his desk that he can sign. the treasury has been aggressive. it is almost assured do to the majority, the rules in the system that they will move something in the fall, early fall, they're going piece by piece, separate bills combined

into a single passage. health care will be the issue, then energy is contentious. senator chris dodd, the banking chairman, is one of the leading democrats on the health-care battle, has obviously been pulled away from financial regulation. they want something done by the end of the year. the way they will get it is anyone at the guest. >> thanks for joining us. >> thanks for having me. >> here's our schedule. next, discussion of the economic recession in mexico. ken a collision of the egyptian organization discusses u.s./the egyptian relations at the upcoming elections in that country. after that, remarks from health and human services secretary kathleen sibelius' on medicare

fraud. earlier today, cbs news reported 60 minutes producer don hewitt died of pancreatic cancer at the age of 86. he joined cbs in 1948, and that you directed the first network television newscast. he also produced the first televised presidential debate in 1960 between john f. kennedy and richard nixon. >> this fall, and the home of america's highest court, from the grand public places to those only accessible by the nine justices. the supreme court, coming the first sunday in october on c-span. >> next, a discussion on the economic recession in mexico. officials predict the economy will shrink between 6-1/2, and 71/2% this year. posted by an organization called

the inter-american dialogue, this is 1 hour and 20 minutes. >> good morning. welcome, you are all here in the air conditioning. but thanks very much. people say you can't do anything in all of this because people are not here. i suggest the continuing importance of mexico, despite the headlines brought by other countries, the hemisphere recently, the persistently crucial importance of mexico. to the u.s. and to u.s. audience, let me say to start with, the question that i was thinking over what i would like to learned today to 3 panelists

that change their presentations. i think we know how far down mexico is going to go, in other words we may not know the exact number, but it is very serious drop in economic activity. the two questions i have is, treason the united states recovers, will mexico ride up the same elevator that it came down. is that likely to happen? secondly, is there any other source of growth that mexico has exploited in the past that it can to moved back into recovery my focus is optimistic on the

recovery side, and in any event i hope we get to those and an extraordinary group, extraordinary panel here this morning to discuss the entire issue of mexico's economic outlook. my immediate left, vice-president of the inter-american development bank in charge of sectors and knowledge if you want an explanation, say a few minutes after word. he was the chief economist before that. he has a long distinguished career in mexican public service, he was the overall general director of the mexican social security institut which is a mass of public enterprise, his deputy minister and the

finance ministry, he was largely credited, not having certainly invented the foot into practice as orchestrated the opportunity for the program formerly called progressive. also, very productive scholar, intellectual, putting out more books than i can read. in any event, thanks very much for joining us. lisa shineller is director of sovereign reading that standard and poor's, responsible for the sovereign analysis in the latin american group, she also teaches part time at columbia university school, public and international affairs. she worked at the federal reserve board of governors in washington. let me say that the job is to put all of this into a single

number which is not so easy to do, it takes an incredible amount of analysis. you will see why we invited lisa to be on the panel. all of these variables she has to get there. finally, my pleasure, my colleague, claudio loser, senior fellow at inter-american dialogue, he works on a wide range of issues mainly outside the dialogue he has made. traveling a lot through his own country, argentina. he served as the chief of the latin american western hemisphere program at the international monetary fund. welcome back to the dialogue. it -- claudio will start us off. he has written a recent paper on mexico, he sounds a little bit

like the pessimist. maybe the summer has mellowed him a bit. >> thank you very much. in different to your very strong -- >> more than 10 minutes. >> in deference to your very strong feeling, i will not be able to -- the powerpoint, held in the eloquence of the economy. i really think this is a great opportunity given my two coke analysts who are extremely knowledgeable. when i used to go on a mission to mexico i was always very interested, it was always intellectually challenging, always a pleasure to visit

santiago. how much i could learn, lisa has been working on these things for a long time. standard and poor's has been the cover, the most objective of the agencies in mexico. that was something very good. let me just start by saying mexico is in its worst economic crisis since 1994/1995 and it is expected to fall by about the same percentage as 1995, when i was dealing with it. i didn't lose at a time -- that is the main explanation.

i don't think i will lose much more now. fundamentally, mexico is in a difficult situation. it has a government with an economic team that i think is excellent, but the conditions that mexico faces, the problems, politically, that mexico has, makes it very difficult for the authorities to be able to operate effectively, especially after the elections at the end of june. as you all know, mexico is the second-largest economy in latin america after brazil, it is three times larger, as large as argentina, the third largest economy between the two

countries. they are 2 thirds of total gdp. when we talk about latin america and mexico, mexico, i would say, up to now, in 2008, and 2009, a country which was really benefiting from a significant improvement in macros to the economic, during all my professional life, which has been a long one, mexico was always in crisis related to the extended period for from 95 on, things worked well but suddenly things are looking very complicated. mexico, although it is macroeconomics, conditions have

been good, they have no inflation and the balance of payments is not an imbalance. it has had a very poor growth in performance. effectively, in the last 10, 12 years, mexico has been growing less than the world average. if one really looks at the gdp per-capita, not much has happened. for which it has lost its relative importance, even as it became integrated in the rest of

the world, with the united states in particular, it more and more problems in terms of keeping up -- the neighborhood did poorly, but in terms of the big, growing countries in asia. mexico was hit very hard in 2008/2009. exports plummeted. as i say, it is expected that gdp would decline by 7% this year. projecting bigger declines over the last nine months, i was behind the curve. i really was because i was looking at some notes two months ago saying mexico might have declined by 3%. we are talking 7%.

it is broad based, exports, car exports have declined by 40%. in the first six months of the year. remittance is another big item. it has been declining at the rate of 10%. you have the big issue of violence which is overstated but still it is affecting tourism together with problems with the flu that we all know about. this is serious, serious -- then, there is two issues, the private sector has had difficulties for its toxic assets that people didn't know about, most people didn't know about, that hit mexico very hard

last year. this may be adjusting now. the public sector, which is not in bad shape if we look at it now, but which is in bad shape if we look at it over the medium-term, even the secretary has said last week or so that mexico faces a most serious crisis in the years ahead because production is declining. i would have to say it is the largest oil company in the region, larger in terms of revenue, it is larger -- it is smaller than venezuela but other than that, it is the largest.

production is coming down very much. it has been milked effectively in terms of resources in a substantial way. maybe this year, the government did very well by protecting the price of oil but fundamentally, it provides about 1 third or more of coastal revenues in the government. this is very likely to shrink to 1/2 of that. the government is faced with something very difficult, they have to do a reform of taxes, taxes other than oil in the larger countries, latin america, but worldwide. mexico has to find a way to track other activities.

mexico, i am not saying they have to have a major growth in the government, fundamentally, you really have to find a new source of revenue. and this makes us to be strengthened, reinvest in many of the resources being taken out. fundamentally, what you have is a situation where mexico is as solid from the macroeconomics point of view but from a microeconomic point of view, i have talked about the comparisons with the number of other countries, how mexico and latin america is doing because mexico and latin america, not the emerging -- a number of asian countries, you would find we are doing very poorly in terms of a -- in education,

quality of education. this is a general problem in latin america but it is very serious in mexico. one issue is, here i have to mention one item i have been -- emphasizing of losses in recent months. mexico is the highest country in terms by the rating agency. that has been the most cautious, saying -- i don't know what has happened over the last -- over the last month or so in this regard. fundamentally, mexico has to be observed very carefully. i think the rating agencies have been too generous to say the least, in terms of its rating.

it is two notches higher than brazil and other countries. there is a problem in terms of finalizing my presentation. the authorities, mexico has serious problems for, these problems have been aggravated by the fact that we will have control of congress in mexico,

this will make the situation i will go through that in more detail. the question of how difficult pressures challenges will play out in the next several years. and some deterioration in mexico's at external indication as well. a key issue for us is one of the things we're looking for, how the government, that includes the executive conference will respond to what we see as

deterioration. several points to highlight. mexico is firmly in a deficit race with foreign-currency investing in -- we are three notches into the investment category. mexico's profile, external indications do not fit very well in this low investment-grade category. we had a track record of institutions. policy predictability. along with the indicators we look that, the policy framework, macrostability, investment grade. we see the possibility of a downgrade because we see the trends were negative. the risks are tilted to the downside. they are not evenly balanced. it is a greater chance we see of a downgrade today than not.

doesn't mean one will happen but there's a greater chance. if we look at our data, 2 thirds of negative outlooks have been followed, doesn't mean this is not a probability, this is what has happened. the outlook speaks to the six months to a year time frame. the perspective we are looking at is highlighted in our analysis. we want to see housing's play out later this year in terms of discussion on the reform measure that executives are working on in concert with congress to see how the political dynamics are enforced. we could keep a negative outlook later this year and see what it comes out to. we could get to stable, these at the options on the table. i want to give some thought on

the overall profile, why the negative outlook. we move mexico to investment grade in february 2002 and then follow two subsequent upgrades. this reflects the combination of factors, pro-active debt management, much stronger government debt profile, reduction in the external fulmer abilities and this commitment to macrostability. this concludes across party lines, track records in a downturn. all of these improvements we have seen provide greater policy flexibility and room for maneuver ability today verses 10 years ago. this is why mexico has mov there. this is important to keep in mind as the economy faces the deepest recession, we're working with numbers similar to 7-1/2%, modest recovery next year.

currently, 2-1/2%. the medium-term issues on the growth outlook put mexico to the u.s. and our view on the u.s. we are modest on the group that rebounded in the u.s. next year. in terms of institution, mexico has an independent central bank, greater monetary policy flexibility, exchange rate flexibility today, we are not talking about the exchange rate we need to defend with losing reserves. this is a different picture. those cut rates to the tune of 375 basis points as opposed to having to hike rates to defend the currency. inflation is in single digits, we are not talking double digits, compared with some other countries, less room to cut, inflation has been worsening. big picture perspective.

why the investment-grade verses not? the banking system, well-capitalized, what you saw in this crisis, if anything, the fact that credit is only 20% of gdp, that is negative for the medium term prospects. what it does do is the global stress we are seeing, there is less of a financial contingent liability. of all the triples, mexico has the lowest potential risk in the financial sector, spilling over to the public sector, the government to stepped in for two reasons. it is stronger in latin america. also, domestic credits are low. the way we look at this, we're talking potential risks, 6% of gdp. compare that with the triple, average, median, over 20%. it is a weakness on one hand and

strengthened the other. it feeds into the growth outlook. on the fiscal side, this is a key area of challenge, let's think about the perspective in terms of track records that have developed. stabilization fund, formalization of rules, oil prices in the budget, profile is highlighted much stronger. we are not talking about a role risk in mexico today. there is some deterioration, you had a strong improvement in the profile, 85% of central government debt, local currency, relying more on multilaterals, deterioration, very different picture, the deficit, 6% range, in the 90s, 2% average the last 5 years, we saw that rose last year, we keep going up, a little bit of pressure we are seeing. all of these things, what we

have seen on the external debt side, very much down today. it is an investment grade. why the negative outlook? we see deterioration in the fiscal picture this year, and the next couple years. the picture is deteriorating. it is a matter of degree. if you think about the detraction, moving the deficit up from public sector borrowing requirements, three last year, 3-1/2 on the outside which is in on what the government is for, that is not significant deterioration, it is in line with its peers. we see the pressures looking over several years. the global pressure, the current scenario is highlighting,

reenforcing exact ratings, underlying structural vulnerability. limited fiscal flexibility. higher than the past, but more limited, we're talking a matter of degree. budgetary dependence on oil, with limited resources in the stabilization. there is stabilization, we are talking resources of less than 2% of gdp, contrast this with chile, resources over 10% and that much lower. it has much more room to run. its ratings -- you have a strong dependence on oil with limited resources in the stabilization fund. you have a low, non oil tax base, the lowest in the region, 8% to 10% gdp, central government verses public-sector. there has been reform, trying to enhance the tax base in recent

years but it is challenging. the bottom line is the revenue base doesn't provide significant flexibility. prepare overall government revenue, public-sector revenue, on the upside from mexico, 24% of gdp, public-sector revenue. that compares with our triple median for general government, less inclusive of 36% of gdp. smaller revenue base, mexico on the low end, it limits the scope of oil revenues compound. these provide the challenges. the government has taken pro-active steps over the last year and this is why we have the rating down. why we have tilted it to the downside. the issue is the recourse to more temporary measures. oil civilization this year or

next year. the oil was very prudent but we don't have access to that. relying on the resources this year, being able to spread over two years, the pressures have become deeper. all of these issues highlight the challenges to the picture. the government has highlighted across the years since the end of last year that it wants to address these issues after the midterm election. this is what we are looking at, how these things will play out. the fiscal challenges, what we see as potentially low, medium term growth. looking at underperformance compared to emerging-market in general. the outlook for the u.s. economy, reliance on the u.s. economy, this raises questions moving forward. the issue of public sector in

security, very important, strong policy commitment that will yield longer-term benefits that we have seen elsewhere globally. there is a question in the near-term, what this might be in terms of -- it is a question on the table. there are other constraints on the growth that we have talked about, the outlook for oil production provides another -- before concluding, the issues are key elements. we see the risk tilted to the downside. another element we highlighted, financing needs, external financing needs in the corporate sector. the thing that is important to highlight is we see deterioration in external debt profile. if you look at financing, despite pressures in the market earlier this year, mexico's

financing needs compare well with the triple b peer group, they're not as strong as brazil and peru, lower rated. there are other weaknesses in those ratings. we can talk more in the q&a. despite the pressures, and stressing, fall in international reserves, non rollover in corporate sector paper, you come out with financing needs, better than the triple and stronger than some other credit, weaker than some. that is an important element to highlight. we are seeing in the corporate sector, we have had a number of defaults but we have refinancing going on. we are coming out of that. you have seen issuance, top names being able to tackle the markets but beginning in august

we have seen speculative grade issuing globally. there is some stabilization but that is certainly a risk. >> thank you very much. >> good morning. that me begin by thanking peter and the dialogue, is a pleasure to be here with old friend and -- claudio and new friend lisa. let me not talk about the crisis first. if you look at mexico in june 2008, we looked at that expression before, we have this longer-term perspective, the story of mexico, after the 95

crisis, it was an economy that had achieved stabilization, it was a deep problem. moss 96 things began to come in to shake. if you look at the long term for mexico, what you see is a substantive issue with media growth. in the period of 2002 to 2007, spectacular period by latin american standards, world growth, an unusual combination of favorable circumstances, the best in three decades, mexico performs below the average. if this is an economy that has a chief macroeconomics stability, but is not able to achieve growth, that is the central question. i will come back to talk about this. central to the story, this

effort, no growth--a major condition to democracy. the transition to democracy, has two implications. the good one is the transition is accompanied by a societal consensus for stability. this is not an issue of the executive anymore, this is not an issue of a particular political party anymore. this is fully internalized by mexican society and as reflected by the political parties, even political parties to the left, then realize that mexicans are fed up with the every six year's crisis, exchange of explosions, and they do want that. the transition to democracy is accompanied by a stability, that is a good sign. it is accompanied by the absence

of consensus anywhere else. what you say is an economy, basically stole the fundamental reform through mexico competitive, not only latin america but what is happening in the rest of the world. the rest of the world is moving along, mexico after 1997/1998, a political period in which there is no societal consensus in terms of further reforms and competitiveness. and prior reforms turn out to be implemented. it was a fairly naive view of the state. carrying reforms from the executive by itself by command and control methods in which these reforms are reverted or don't produce the results you were expected to produce in

various sectors that we deregulated and in which they are not as efficient as you expected. the concentrations that you were fighting. so the mix of reforms that didn't go as deep as they should have gone back fired, a very complex period in the economy that is characterized by stability but not much else. that is the scenario for the crisis. the crisis in 2008 really occurs in a most unfortunate situation. by and large, the authorities have done the best they could do. the response of central bank and the ministry has been competent and responsible. there is little room for maneuver because there's a deep underlying structural weakness which is fundamental to what happened in mexico, there's a

major physical problem. it has been able to tie along because there is consensus for stability keeping core expenditures below and making up the difference. and the use of oil rates is not the best possible use for expenditures. in the context of very weak fiscal base, the lowest tax bases, we collect our rent and get away. and there is little very room for it and yet the authorities must announce them, and by and large with the end of last year it is clear that you can't implement much. it is counter is to the cyclical. i'm not criticizing it. there's little else. that creates a short problem.

it is complicated by the fact that midterm elections present complexity in congress and the ministrations. that said, i am not worried about that. i am not worried about that because even though it is going to be a noisy discussion between now and november, and a lot of push and shove between now and november, at the end of the day, the societal consensus on stability is going to prevail. by some combination, we finished cuts here and there, the budget will be passed, stability -- the central issue, it is 2010,

middle of 2010, 2011 to mexico, has somehow been managed with high costs and all of that, are you in a contest to grow again? if you go against in the united states or is mexico finding its own source of growth. why hasn't mexico been growing for the past 20 years despite the fact that it has 95. macrostability, societal consensus which is incredible, which is reflected in central bank, including budgets by and large. a couple of points. if you look at fact accumulation, the labor force, compared that to the united

states, mexico's story is not -- is not that mexico is working less hard than americans, it is, in fact, not the case that years of education -- capital accumulation has slowed down a bit but it is not -- the story of mexico is an issue -- that is the deep central issue and my deep concern, as i look at the medium term. this is really driven by an incentive structure that produces productivity and what has not been put together in this reform, the studio reform or so far with president calderon, what mexico has not been able to do together is

seriously inducing environment and incentive structure for work. the underlying distortion in various sectors, the underlying powers, the issue is more deed because it is a question of personnel. it was because they have all these links to groups and a change to the pan would allow you to pay for that and then you have -- you realize you are escaping from that, maybe is a case of the personality of the president but with a different president it will change and now you have a person who is a

different personality and still -- the deeper issue of what you might want to call a very entrenched political equilibrium in which various groups in the business sector, in agriculture, in the public sector, in particular sectors of the economy are actually extracting rents in a concentrated, rent seeking situation. 60 seconds for my own work. the situation is complicated. the social policies, more and more social programs, very --

there's very little innovation. what you see is a large amount of subsidies going through the budget. after subsidizing the formal sector through the social programs, this is the nature of it. this is integrated with the u.s.. if you look at the 95 crisis, mexico -- naphtha pulled along very fast and the u.s. was experiencing a high period of growth in the 90s.

if that doesn't occur, the contract is complex. world growth the internally, they really have to change the political equilibrium. >> thank you very much. let me start with a question and open it up for questions. it is more of a conceptual question, your presentation was conceptual in some ways. brazil had a very slow growth during the early 2000s. maybe i am wrong, but i didn't think there was any big jump in productivity or anything that

looked like -- suddenly a round of 2004/2005, i don't remember the exact -- the growth curve began to go up, it would significantly exceeded mexico. what was the distinction between brazil and mexico? and looking forward, the analyst suggests brazil has this little inconvenience of the global financial crisis, but it weathered it very well, brazil is ready to retake -- i don't see the same kind of impediments to productivity, from what i know of brazil, are present as they are in mexico. the same social programs. >> i am happy to --

>> for you -- [talking over each other] >> this is very interesting. it is important to keep in mind, mexico has a longer track record of macrostability. i think brazil benefits very much with the transition to the new administration, and the consolidation of that stability is benefiting more recently from that sense of stable rules of the game. that was a very important role, verses mexico, you could say, gained very much after the tequila crisis, it grew faster comparatively speaking. not as fast as we would like. brazil gained more recently since consolidation of macro verses something waning in mexico. it is interesting that productivity, we have

improvements in brazil, speaking -- if you look at investment as a share of gdp, higher in mexico than brazil, brazil was in the teens. it went up, going back down, there's a peak towards 19% of gdp from mexico in the 20s, mexico has grown less, this is a productivity issue, the discussion that i will put on the table in terms of informality, where brazil has benefited the last several years, very much from formal employment gains, that is a key role, you have both of them helping in terms of consumer demand. but you also have real formal employment gains in macrostability, more of a vibrancy, a decline in in formality coming from a sequence of ipos and deepening of capital markets in brazil which in terms

of fixed-income are less than mexico but brazil benefit from these things today but the question, if they don't pursue reforms, lowering the tax base, held their growth rate, it is a matter of timing in some ways. >> it is better to be late. >> we are benefiting from something that mexico may have benefited from before. >> that is why per-capita income in mexico is higher than brazil. >> yes. >> but still -- >> we don't fully understand. economists have been struggling with this for 30 years. at the margin, i think brazil and mexico, the last five years, growth in brazil, the margin,

formality has been growing in brazil and mexico. you can argue cause and effect but it is highly correlated for growth with formalization of the economy. >> i will open it up for questions. i will take two or three. give the panelists a chance. will ahead. go-ahead. >> what we call the example in 2010. wondering if we can talk about this policy and recommendations for mexico. we mentioned at the political side of these, the ameliorating -- it would be easier or harder in mexico this year. >> okay.

>> the question for these -- >> speak up a little bit. >> talking about this -- the impact on productivity. what will georgia's system -- what needs to be done? the productivity in the administrative sector is increasing, producers are taking market share away from some other producers in the united states. is it possible to have a dichotomy. the activities we are seeing is declining, and if i may, you have a lot of experience on brazil, how do you compare some of the key ratios like gdp, between these two countries?

>> how far has the stagnation really influenced mexico? it lifted a way to china, the integration of north america and, basically has not stalled but has not developed as rapidly as we expected. >> let's take these questions. >> in terms of the question on the prosperity plan, that illustrates again santiago, which is the fact that mexico, because of the small margin it has, it has no shore is but to

have pro cyclical qualities. here, of course, mexico, i would say, is not alone. there are very few countries that have margins of operation to have cyclical policies in latin america, peru, colombia, brazil to some extent, mexico, has no opportunity in this regard. they have a very significant loan that they can use. the question of signals in terms of the use of these resources. they can use them without preconditions but if they use them, it may be something for, things are not so good. this notion, very important that they want to maintain macroseconomic stability. they have no choice with oil production coming down.

with oil prices, for the mexican makes a, well below the $67 that it is today, mexico has to maintain the discipline and in this regard, having to repeat the stories in the past whenever they have a crisis. the macro party is so much better, they can be better and with the cataclysmic consequences that you saw from 1976 on. >> the question in terms of the outlook given the gains made,

before the election, we assume there are some gains, the margin came out wider than we were expecting. we were assuming gains, the basic picture of meeting across party coalition, building negotiation to pass the budget, to pass any kind of reform was our base case. the spread is a bit wider but the message is the same. you have seen the reforms that haven't passed, the budget hasn't passed across party. partly why the negative outlook. the topic is on the table, improving fiscal flexibility, perhaps looking at the oil sector. those are fundamentally political challenging topics in mexico, period, for any party. in certain that is our perspective. ..

>> and these are the large exporting of the mexican economy. but they are not even all of the tradeable section. there's an important segment of also tradeable production for the domestic consumption that fluctuated from trade costs and customs. that's a very low sector, characterized by very small plans. a long with a very large segment of the nonsegment. what you find is an -- very few

farms competitive, a very large number of firms, very small, many of them informative. their initial gains are associated part with the gains of nasa. both of the -- together with the u.s. growth. that begins in 2001 and 2002 and the fact that china and mexico lost competitive along the way. >> going to the brazil, mexico debt, there's no comparison. i think there for brazil, government debt to gdp is higher. we have it going up with the way we calculated, i could talk about that offline, 50% of gdp. net general government debt.

mexico for the general government high 30s, if you lack at the broader subpick sector you're talking mid 40s, we look at the blend because the two because of the issues we've highlighted. the revenues, et cetera, you have some of the other offbudget that is in the public sector versus general government, et cetera. we look at combination. bottom line, brazil's debt burden is higher, the way interest burden is still heavier. revenue is -- interest revenue to gdp is higher in brazil, the come significance of brazil's debt, you're talking a 30-year yield curve in mexico, 10-years in brazil. moving into macrostability. on the external side, brazil has stronger indicators. you're talking overall external

debt to the public and private sector, net of liquid assets, relative to the expert base. brazil is a creditor, mexico is a debtor. and that is not the order of moving towards 40% was lower moving up, okay, over the next couple of years. we are relying more. and mexico is a bit weaker, bit, than the triple median there. so externally, brazil is stronger. you also look at financialing needs. as i highlighted, mexico is better than average but brazil is even stronger. >> one thing about the political situation. although i believe that mexico has always shown contrary to my country, the capacity, to make an opportunity out of the

crisis. argentina, where they say they convert every opportunity into a crisis. i believe that we have a -- in the case of mexico. in the end i think that we will come closer to the government position. but at the moment, they have to -- they want to flex their muscle to the party in power in congress, and that would make it work, the job of the government, very difficult. why? because they're doing -- they're presenting a party that they write proposals but at the moment it is not yet whether they should play through the position or sort of a supporting of position that may win the presidential election in the year. so i think that the next six

months would be very difficult. it would be very difficult. >> and it's been a couple years now i think since mexico adopted a modest tax reform. one was what you might call an alternative minimum tax break in the corporation, the other was a tax on bank deposits aimed at the hidden economy. now i haven't read the statement about austerity. but austerity can mean either cutting outlays or increasing revenues or a combination of both. i wonder, first of all, i'd be interested in any comment about the degree of success thus far in enforcing these two. and being whether or not you think they are enforceable, and they would make any difference. i should add, my name is joe,

i'm an energy analyst. i'm not optimistic about the outlook than most people are. i think oil prices are going to stay high or even go higher. and i have a lot of faith. >> i was wondering if there's any of the future insights into the mexican economy that will take into the account of the economic position of the indigenous people in mexico. although mexico has had wonderful cultural rights recognition for many, many decades, there's still economic probables of indigenous people in mexico as in many other latin american countries. indigenous people -- and so the question i have, they have a high poverty rates and there are half a million indigenous

people, although they are called latin knows, they have come from mexico. and they did not really help the indigenous people in mexico. >> the political debate, the enormous prop in gdp in mexico, the uncertainty the criticism that mexico gets from international organization, international issues like pandemics and all, how does that enter into the debates, political debates. there any sort of debate about economics? or is it tending to be more of a sort of a popular story?

what is the nature of the political debate over the economy? >> do you want to -- >> yes. >> one comment. you talk about productivity throughout competition. and it's kind of the overhanging kind of black crowd that basically is over mexico. in your view where does that consensus -- what is it going to take to go around that kind of topic? what's going to drive that kind of competition? >> not competition. >> yeah, competition. >> we take these for -- >> so the last two. no clearly the competition issue, that's why when i talk about these sectors of the economy, telecom and energy and

all of that, some public, some private, in which there is some issues. i think there's an increasing recognition by the public that these are issues that need to be tackled. but they are associated in either case public or private. we very strong and trench interest group. and it's not easy to tackle. i would say these debates on economic policy. i would say buy and large there's a recognition that these assets of competition is not only a real drag on productivity, it's also from the point of the distribution. but from that consensus to the actual legislation and then not only the actual legislation but the complex process because of the mexican system to the actual changes is a long road to go. and on your question, peter, i would say, you know, people are

extremely concerned, and have been concerned for a long time, a decade or more, as it has been become clear that the process of reform didn't yield the expectations. there's a national epidemic in which congressman participate. what is difficult to put that into political action. people are aware. you might emphasis more than one than the other. it's just the difficulty of translating that in this democratic position that mexico is experiencing into concrete legislative actions. that's where the matter is. >> are they -- the government's new plan. i don't know the details of the recent analysis plan.

but the intent of the tax performance -- first of all, i would say the plan if i know i would think this well enough, i'm sure it will be the scissor's approach, you need both sides to deal with it. now one serious issue not only in mexico but certainly it is in mexico, and that is the tax system is fairly inefficient in terms of taxing sort of the higher levels of income. there's a serious problem in latin america and mexico and brazil are the stronger indicators. you have a high levels of work if you look at the average worth of the rich individuals in mexico and brazil compared to latin america compared to other

areas of the world, it is fairly high. but the tax system is not capable of sort of dealing with this. there are a number of, i'm not saying the tax avoid dance is more a question of tax. it's more tax than given the system because the interest groups are so horrible. so i would say that the taxes that has been taken at the time when they -- when mexico introduceed tax on the back transactions, i was very opposed to it. i would remain very opposed to it. it was something that gave enough money. but basically they said lots has to be done in terms of income tax. no so much in terms, but they are all sorts of discussions whether you want to have a tax like the sales tax or value-added tax which is maybe more regressive but more effective versus the tax on

income. i think the mexicans have started -- it's not something that they don't know. it's just a question. i don't know if anybody wants to add -- or if they are in the position to answer. >> about the economy and the tax -- that's -- i think it's -- i think it's a hard question in part because if you look at the trajectory of tax revenue to gdp for the performance done in 2010 and the tax and deposits came in 2008, these are phasing in after that.

you still have to have a continual deline. from the 2002 it went up a little bit in 2007, but the 2008 the 8.2% of taxes by the federal government. downward trend. but given the way the economy -- it's not clear how much it is on the couple of reform, how much is the economic dynamic? i think it's a valid question in terms of loopholes feeding into collection of some of the these new taxes so this is -- i think it's a challenging, it's certainly a challenging area, and it's not a clear cut answer. it's not clear they are yielding what they intended to yield. >> yeah. just a quick question. i think here at the margin i think for the last decade or so,

the growth in various social programs for the poor in general have benefited indigenous groups to the extent that many of the poor are made up. it's not that they designed the program for indigenous group is that there have been very effective programs against the poor and since the poor indigenous, they have benefited. if you look at some of the basic indicators of the years of indication, no politicians, years of indication and present consumption, it goes down. that being said, there's a huge amount of migration from mexico to united states both ding nows and indigenous groups and some of the groups that are you referring to before. >> it's time for a couple more questions. go ahead. >> much of the investment in mexico comes from the united states and canada, jeremy,

korea, japan. so the manufacturing technology in mexico is really important. they have been improvemented in productivity in the united states tremendously between 2002 and 2008. regardless of productivity, it delined in the actual number of people employed in manufacturing. these improvements of productivity, it's logical they will be yet decreased in manufacturing employment in mexico. how are we going to increase consumption if we haven't declined the appointments. >> two questions. one you talked about the history of the past reports. but what kind of reforms would you see being proposed in the coming year with the new congress and what kind of support is there from business and from all sectors to support some new sort of tax reform?

and the second question would be about brazil and recently talked about maybe pretrade agreement between mexico and brazil. would you see that as something that would increase the export -- mexico's export by its economy on the u.s.? thanks. >> the hot issue here in the u.s. as it relates to mexico, although we tend to come back is undocumented from the illegal aliens currently wish to use. and my question with economic stand point is especially remit than and going down. when we talk about economic use. does that create a bit of a brain drain and steel workers are leaving mexico for the u.s.? >> go ahead.

>> i would like to understand that it would be like coming out of the next one. what would they -- be the main source? >> okay. the issue of activity gains and the saves, it may reduce employment. this is not an mexican issue. this is an issue that is global and still employment has been growing, thus in china, it's also -- you had this major increase in employment and there has been an enormous increase in productivity. i don't think that the fact that manufacturing employment does not grow that much in a serious problem in terms of mexico's growth.

i think service in mexico will have to increase its total factor productivity. this is really the issue. the question is not so much that it is imported technology, it's more of a question of productivity increase. i do not have an answer for the area of serious problems. now in terms of what tax reform would we support by various groups? nobody will support openly tax reforms that are incoming on the taxpayers on your own group unfortunately. it is what it is. it will have to be some type, it will have to be a combination of a more efficient, broader tax, value-added tax system together

with an income tax system that is more effective. and again, it's more a question of closing loopholes and tightening the system of controls. but -- if it is difficult in the united states, it's difficult in mexico and other latin american countries too to come up with a decent tax reform. i just want to say one thing about calderon, this is high times for brazil and mexico to get together. there is very profitable competition between america and brazil in terms of the only country in america that could sort of effect or constrain their sort of sense of being

that the important country i think the fact that it's starting to cooperate is a tremendous possible piece of good news. how it will work out, i don't know? but it certainly will be good for both countries and for the region. and for the region overall. in terms of the kind of blend of the two, the blend of the two questions, it's not clear what kind of reform the government is planning on putting on the table. they are obviously discussions in the press, discussions within the -- within the political parties. it signals that have been sent so far. it's certainly going to be a mix on the expenditure side and on the revenue side. and on the revenue side whether you are talking about addressing some of the issues with the

gasoline/diesel subsidies, and with that, it's certainly something that has been put publicly on the table. there's the question of loopholes. on the consumption comes syntaxes. there's also the potentially addressing issues in the competition -- issues of competition. competitiveness, you know kind to feel what the medium term growth project ry. enanswering the stabilization fund. it's not clear what's going to be put on the table. and then for us, the question is given what's put on the table, what is actually politically feasibly implemented? what is economically implemented, and this will feed into the track record of being

able to collect and increase efficiency from consumption. we don't make a recommendation. what is the reform we're looking for? we need to wait to see what the government puts on the table in kind of the mix of measures. and then make an assessment of what we think this may do to enhance fiscal flexibility potentially to address some of the issues on the growth outlook. and that's a judgment call. >> on the tax issue, i think the most disturbing tax that mexico has today is the on tax on legal formal labor. through the whole range of regulatory and taxation aspects that create a wedge by my numbers of 35% between hiring a workers formal and informally.

but a wedge of about 35% of your wage built between hiring somebody in the formal sector, there's no surprise, that's the informal sector is growing. the deepest issue that has to be tackled is to eliminate that tax which has to be the job creation and the quality of jobs and productivity. the other things might be revenue enhancing measures. but they are not going to be productivity enhancing measures. and the issue is not a revenue issue only, it's a revenue and productivity. if you only think about revenue, and not productivity, you're going to be repeating the same misstatement. you really have to tackle both if you want to have more jobs and higher productivity jobs. that's goes to my question. there is some literature that what you say is correct.

there's the process of self-selection, and people with somewhat more risk-prone attitudes or talent or whatever label are more prone to migrate to other people. and it's very costly to mexico because we're losing talent and labor force. i am of the sense thiemiauation is a loss to mexico. the problem is not going to be fixed unless there's better opportunities at home. and the incentives for firms to hire those people within mexico. and i would put that at the central of the tax reform debate more than the issues of the income tax for the taxes. >> thank you. this was an excellent session. thanks very, very much. [applause]

this is the second half of it. [laughter] >> coming up next on c-span 2, a coalition of egyptian organizations discussed u.s./egyptian relations. later remarks from kathleen sebelius on medicare fraud. and after that a discussion on the role of states in the emergency management. >> now the coalition of egyptian organizations discussed u.s. egyptian relations including upcoming elections and alleged human rights abuse. they also looked at the future of the u.s. role in the middle

east. at this event taking place in washington. it's almost an hour and a half. >> i think you all know why we are here. we're here on the first visit of the egyptian president. we are a coalition comprised of u.s. limbs and nubian alike. we are here united by a common desire to see a democratic egypts that respected human rights and is abided by the rule of love. i will be introducing all the panelist here. i will become by giving a statement on behalf of my v, voices for democratic egypt, and we will have dr. abdelmannan.

after that we'll with cameel halim. after that we will have el-shazly and then we have abdelmannan. and then we will have mr. ibrahim hussein who is representing of the members of the coalition. followed by the american society, and the chairman for the center of development studies. i will go ahead and get started with the statement on behalf of my organization as i said. i'm here today on behalf of voices for democratic egypt to

express my grave concern over the path that egypt is taking that is taking freedoms, respect for human rights, and principals of good governors. i'm concerned that despite promises to abandon old u.s. policies of supporting friendly dictators, the administration is sending the status quo of e crypt. the my here is that the administration is insufficiently attendilg to the goals of the supporting the people for the middle east for human rights and governments. those of which are becoming strategic impairives in my view. peace in the middle east and security should come at expense of advancing cause in the government and human rights. while egypt is the u.s. partner, the administration has recze