and am curious as to what t.a.r.p. has evolved into as of today. i think that many americans share a fear that i have that an emergency piece of legislation at was moment for economic stability has now morphed into essentially a $700 billion revolving bailout fund for the administration. i am concerned that the priest administration -- previous administration crossed a line in investing in gm and chrler, something that this administration continued to do. i fear that this administration crossed another statutory line in favoring members of the uaw in those reorganizations over similarly-situated creditors and secured creditors. i feel like e administration crossed another story lin in giving fiat 20 percent of chrysler, up to 35 percent, a

company that i understand was not owed one dime. and they will receive this if they get, produce a car capable of making 40 miles per gallon. i'm having trouble somehow rectifying this withhe charge of taxpayer protection and of financial stability. i continue to be concerned about the issue of taxpayer protection, although certainly not all of it. i need not tell you that we have the first trillion dollar deficit in our nation's history. i need not tell you that recently omb had to change their debt outlook. they missed their figure by about a third, and we're looking at $9 trillion of debt instead of 7. part of this is. the a.r.p.. recently the cbo said they expect more loss in the chrysler and gm programs, so that continues to be a concern, and i look forward to hearing from you, mr. secretary, particularly

after the president announced last night that your administration has saved us from the brink of economic ruin, and i paraphrase. i don't have the quote in front of me. if that is true, why do we continue to need this t.a.r.p. statute that many of us believe is no longer about financial stability? so i look forward to hearing your testimony, and i yield back, madam chair. >> thank you, congressman. mr. silvers? >> yes, thank you, madam chair. good afternoon, mr. secretary. like my colleagues, i very much appreciate your presence here with us today. as was notedit's the second timeou've appeared, and we're grateful. i also wish to express my appreciation tort support you've -- for the support you've given to mr. allison. i believe congress and the american people should a three

basic questions about the t.a.r.p. program. first is it preventing and/or calming acute crises in our financial markets? secondly, is t.a.r.p. leading to the private financial system once again playing its appropriate role as provider of capital to the real economy? and finally, is the public as provider of funds to the financial system receiving fair terms? when you last appeared before us, i focused on the question of whether the public was being treated fairly. i remain deeply concerned about whher inappropriate subsidies are being extended in areas such as transactions with weak banks such as citigroup, credit enhancements, and the repurchases of warrants from banks that have repaid capital purchase plan investments. however, i bereave that you and -- believe that you and mr. allison have made progress in these areas as evidenced, for example, by the price treasury ultimately received for goldman

sachs' warrants in our july report. today i hope to discuss the question ofhether t.a.r.p.'s strategy is leading to the revival of the credit system with particular reference to the contind weakness of three of our four largest banks, a subject dailed in this panel's augu report. this question is tie today the important question of what treasu, the fed, and the fdic's strategy is for ultimately withdrawing public support for the financial system. and you addressed these meaters in some -- matters i some detail in your written testimony today. looming over this is the precedent of japan's lost decade and the current talk of wnd l-shaped recoveries. despite optimistic statements that we saw from the regional fed banks yesterday, the numbers th we see tell a tale of rising unemployment, of rising foreclosures, of growing crisis in commercial real estate which has been addressed in this panel's earlier reports, rising small bank failures and falling bank business lending.

together this data warns of the danger of vicious circle that could overwhelm both the stimulus and treasury's parent strategyf hoping -- apparent strategy of hoping the banks earn themselves back to health. i believe the treasury, the federal reserve and the fdic can take credit for calming the acute crisis of last fall, another matter you address in your written remarks. i also bieve the decision to infuse capital karatter than -- rather than buy troubled assets that you have carried forward was the correct decision and has borne substantial fruit for our country. i also believe the stimulus package is a critical part intertwined. are we addressing -- or are we hoping that if we close our eyes it will go away? i look forward to your thoughts on these matters. thank you. >> thank you. commissioner adkins?

>> thank youmadam chairman. good afternoon, and i join my colleagues in welcoming secretary geithner, and it's a privilege to be here today. thank you very much for appearing today, and what i understand you have a meeting for the third quarter of 2009. it's a privilege for me to be here today to serve the american taxpayers on this panel in our oversight role over the troubled asset relief program n. the context of the current federal budget in programs costing trillions of dollars, t.a.r.p.'s si of 700 billion seems almost quaint. since we are in the building named after him, i'm reminded of senator everett derek seven's line about a billion here, a billio there and pretty soon you're talking about real money. t.a.r.p. is large and invites potential problems. thus, congress has set up this robust oversight framework with a special inspector general, a separate audit and, of course,

this panel. i take this accountability and transparency mandate from congress very seriously. press reports indicate that you and mr. barofsky have resolved ambiguities in his reporting relationship to the treasury in favor of independence, so i think that's an appropriate result of dhe unusual nature of the program. i also understand that the information-sharing relationship between treasury and this panel has been problematic in the past and perhaps can be improved. there's now a special liaison, i understand, in treasury assigned to work with this panel, and i look forward very much to working with y'all and experiencing for myself the state of interaction. we're approaching the one-year anniversary of the passage of the eesa as representative hensarling said that set up t.a.r.p.. treasury has created an alphabet soup of programs under t.a.r.p., and that does not include the other programs of the fed, the fdic and other banking agencies. several questions arise: how

effective have these programs been, have some been more effective than others? has t.a.r.p. achieved its original purpose and mission? what are the costs not just in terms of out of pocket expenses, but also other real costs such as moral hazard? is authority under eesa expires on the 31st of this year. the treasury secretary, of course, in the past has the authority under eesa to extend t.a.r.p. until october of 2010. will t.a.r.p. be extended? if not, what criteria will be used in making the decision? what are the conditions under which you might make the decision? the statute provides only vague guidelines. for example, it requires a quantification of expected costs taxpayers of an extension, and that cost cannot be quantified without a rigorous economic analysis including direct and indirect costs. so with that i, madam chairman, i yield my time, and i look forward to the testimony of the secretary. >> thank you, commissioner

atkins. now superintendent of banking for the state of new york, superintendent nieman. >> thank you. mr. secretary, thank you very muchor being here today, and i will keep my comments brief as well to maximize time for questions. first, i do want to acknowledge treasury's responsiveness to the panel's inquiries on behalf of taxpayers. when we first met with you five months ago, you pledged that you and your staff would be available to us and maintain open lines of communication. from our public hearings over the summer with ron bloom and herb allison to the many conference calls and face to face meetings between members of your staff, i thank you for your level of cooperation and for supporting our oveight work. you also responded to nearly 30 questions that i put to you directly from members of the public, some of which were very tough and candid. these questions and responses are now posted on the internet to serve as a resource for all concerned americans. second, although financial

stability has not yet been fully achieved, you deserve credit for making substantial progress. we are by no means out of the crisis, but there are positive signs such as decreasing credit spreads and the revival of areas in securitization markets. nevertheless, our gains in financial stability remain fragile. addressing the millions of homeowners facing foreclosures is key to breaking down the downward cycle and achieving sustainable results. the home affordable modification program is integral to this effort, but itial results have been mixed. i intend to explo several of these issues with you during my time here including issues around delays in service or participation and uneven service or performance, a borrower frustrations around eligibility standards and access to account information, and the need to compliment the program with additional initiatives to address foreclosures stemming from job loss and recession.

finally, with congress returning this week it is widely expected that your regulatory reform proposals will experience significant movement and debate. i will be asking about your vision for developing a regulatory architecture that best supports consumer protection and long-term financial stability. i look forward to your testimony. >> thank you, commissioner. >> [inaudible] >> please, we'll -- let's go forward. mr. secretary, we received your remarks this morning. thank you very much, they will, of course, be part of the record so that we will have more time to be able to question you and hear your answers. i'm goi to ask that you keep your oral remarks to 5 minutes. of course, anything else that you wish may be entered in the record. mr. secretary. >> it's a pleasure to be here again. let me begin by saying this is my 16th time testifying before the congress of the united states and the oversight panel this year. glad to hear you still want to

see more of me, happy to come and try to do it again. i think this is an important part of the process. congress didn't just give the executive branch unprecedented authority, it did create an unprecedented level of oversight with the establishment of the sigtarp and, of course, giving the gao its usual mandate for oversight. we take that process very seriously. we have examined carefully everything you've written, recommendationyou've made, adopted many, many of the recommendations you've made of the oversight panels, and i think they've made our programs more effective than they would have been, so i compliment you for the thoughtfulness and seousness of you approach. also want to thank you, mr. silvers, first, what you said about herb allison. i have the privilege of working with exceptionally talented, dedicated people at the treasury. it is a good thing that people are willing to come work in government at a time of crisis and bring great experse and talent. you want to have working for the

american people people with the greatest sophistication about the financial markets, and they can drive a hard bargain in the interests of the taxpayer. just a few initialemarks. last september, of course, we faced the risk of catastrophic financial failure and the risk of a great depression, and today i believe because of comprehensive policy actions put in place since then we are back from the edge of the abyss. the consensus among private forecasters now is that the u.s. economy is now growing again. the financial system is showing very important signs of repair, costs of credit has fallen dramatically not just for homeowners for households, but for businesses as well. because of these signs of early progress, we are now in a position to start to adjust our strategy moving from crisis response, from the emergency response to recovery, from rescuing the economy to repairing and rebuilding the

financial system to repairing and rebuilding the foundations for future growth. and as we enter this new phase, we have to begin winding down programs that are no longer necessary and that b design do not need, are less needed, less important as the economy recovers. let me just highlight a few things that underscore this transion we're in the midst of now. earlier this year we put a reserve fund in the president's budget that would have -- recognizing the possibility we might need an additional $750 billion of authority to fix this problem. today we believe that money is unlikely to be necessary. we removed it from the budget projections. we are borrowing less already than we expected to resolve this crisis. later this month the treasury's money market guarantee fund will be allowed to expire. earning more than a billion dollars in income, no cost to the taxpayer. fdic's program to guarantee senior debt which has generated more than $9 billion in fees has seen very, very dramatic

declines in usage. the suite of facilities the federal reserve put in place to provide liquidity to markets, provide broad support to credit marketing have been, have seen dramatic reduction in usage. so we are now at a point where reliance is basically down 80-90 percent from their peak. from swap lines to foreign central banks to a backstop for the commercial paper market, the details are in my testimony. when i took this job, the government had outstanding commitments in terms of capital to the u.s. banking system in the range of $240 billion. today we have $180 billion outstanding. so that is a dramatic reduction in the scale of our exposure, direct exposure in terms of capitol to the -- capital to the financial system in large part because of the efforts to force a greater level of disclosure and to make it more possible for private capital to come in and recapitalize this financial

system. the dividends paid on those investments now total $12 billion, and for the 23 banks that have fully repaid, treasury has earned an annualized average return of roughly 17 percent. all these steps underscore our commitment to unwind these extraordinary programs put in place during therisis as soon as conditions pert. at the same time, though, we have to recognize that we have to continue to reinforce this process of repair and recovery until it is truly self-sustaining led by private demand. the govnment's not only acted too late with insufficient force, but they put on the brakes too early, and we're not going to repeat those mistakes because to do so would increase the ultimate cost of this crisis in terms of the damage it causes to the fabric of the american economy. now, millions of americans are still suffering deeply from this crisis, still facing probably the most challenging economic environment we've seen in

generations. unemployment is still high, the mortgage market oside supported directly by fannie, freddie, fha is still significantly impaired, small businesses in part because they are more dependent on banks have less options to access credit in this difficult environment -- >> mr. secretary, 5 minutes. >> i'm winding it up. and foreclosures are rising significantly because of the high rate of unemployment we're seeing as a country. because of those challenges, we need to make it clear that we're going to keep those programs that are necessary to recovery in place as long as contions require. there's a lot of concern that as things have improved that we're going to let the market go back to the conditions it enjoyed before the crisis, and we're not going to let that happen. we've seen dramatic restructuring in our financial system already. if you lock at the list of the -- look at the list of the top 20 firms in the country two years ago, a substantial

fraction no longer exist today as independent entities. the financial system is going to rongdhat's abut it's going to be fundamentally healthy, desirable thing for our economy. but for that to happen the congress of the united states need to come join with us in passing comprehensive financial reform so we have much stronger rules of the road to prevent this from happening again. >> thank you, mr. secretary. >> i look forward to your questions. >> thank you. [laughter] so -- >> that was only about 6 minute >> and 19 seconds. [laughter] a year ago secretary paulson told us we were in a financial crisis because of toxic as sents on the banks' books. in ft, he came to congress and explained that congress needed to give $700 billion to the treasury department to deploy in order to remove those toxic assets. and we've had a year to get rid of them. does treasury know how many toxic assets remain on the books of the banks?

do you have a dollar figure thar that? >> partly because of the stress test we put the u.s. banking system through, you now have an unprecedented level of disclosure for the 20 largest banks in the country about exactly what loans and serities they hold with a pretty careful estimate of the potential losses on those exposures you might face in a worse economic environment. that gives us a much better picture today, but the critical thing to recognize is and the reason we care about these toxic assets and their losses is because they require capital. and we came into this crisis with a banking system that did not have enough capital to cover losses in a deep recession, and that's what helped produce the worst financial crisis in generations. because we put the system through this incredibly exacting set of what we called a stress test with much more disclosure, the banking system today has much more capital in it, and that makes it much less likely

that the financial system is going to be a source of headwinds, that can strain on future recovery. if they had not been able to raise private capital, if they were still left with too little capital against potential losses, then we'd be facing a much greater challenge. but the problems posed by those assets are substantially addressed by the -- >> so let me see if i can just pin this down though. you say dor the 20 largest banks for which we have stress tests you believe we have a sense of how much is left in the way of toxic assets on their bks. >> absolutely. >> do we have a dollar figure that for that? >> i'd be happy to have the fed summarize for you. they put out detail -- >> and for all the banks for which a stress test was not run, do we have any sense of how much remains -- >> my compliments to you for hiring this country. we're a country of 9,000 banks -- >> although fewer every day. >> fewer every day, but that's

sort of the necessary process of repair and restructuring that we're going through. many of those banks cam into this crisis with more capital than the big banks, but many of them had more expose your to real estate stuff. -- exposure to real estate stuff. we chose not to, decided not to put the rest of the u.s. banking system through the kind of exacting stress with apply today the biggest institutions. you're right to point out that we are left today wit somewhat less exposure, but the supervisors of the country are spending a lot of care and attention looking at those risks in those institutions, helping them work through that. but you're right to highlight this as a significant challenge ahead. but i want to recognize they are, those banks, those remaining 9,000 banks together account for between a quarter and a third of the u.s. banking system. >> all right. >> and smaller shares, so we are

probably likely as a country to be able to manage through and withstand those remaining pressures, and we can do so with much greater confidence because of the actions we took to destabilize the rest of the system. >> so when "the wasngton post" this morning summarized yesterday's federal reserve report, the beige book, they summarized it by saying the banking sector remains a mess. would you take issue with that characterization? >> i guess i would say it this way, i think the u.s. financial system today is in substantially stronger state than it was three months ago, six months ago, nine months ago and on the eve of this recession. there is, again, more capital, greater recognition of losses, and we are in a better position to get through this. but, remember, this is just the first quarter. we're just starting to see signs of growth. it is very early, and we did a lot of damage to the financial system of this country, andt's going to take a while to get through this, and it's going to take longer to do it because

we're going to do it right. so i would not want anyone to be left with the impression that we are not still facing really substantial and enormous challenges throughout the u.s. financial system. and where there has been improvement, it's been dramatic. much more than i would have expected at this stage in the crisis. but a lot of that has come through the direct effects of policy, policy to put capital in banks, policy to provide support for the markets that were most damaged. we do not have a mortgage market today except for that directly supported by the government, and that sort of underscores the basic fact that we've got a lot of challenges ahead. >> okay. thank you, mr. secretary. congressman hensarling? >> i thank you, madam chair. mr. secrary, under the eesa statute how do you define financial institution? >> i was looking forrd to this discussion. and i think i understand where you're going. the statute was written, as you implied in your opening statements, really quite broadly. and as you also said in your opening statement, my

predecessor, the previous administration made a budgment not just within the economic system of the country to provide support for the automobile industry, but that it was legal and appropriate to do so using the eesa legislation. >> and you concurred in that opinion. >> and, obviously, we would not have spent a penny of taxpayers' money using that authority if we did not concur in both those judgments. >> if you concur then, clearly you believe that chrysler and gm are financial institutions. is at&t a financial institution? >> i, again, i understand, i understand why it would appear. and if you look at the basic, plain facts of what i inherited in terms of judgmen like this why it might be hard to explain why a automobile industry is a financial institution. but again, that was a judgment made by my predecessor -- >> i understand that, mr. secretary, but you voluntarily to continue the practice, and i'm still trying

to figure out your legal interpretation of the eesa statute. and so clearly i assume you don't believe you're breaking the law, so you believe that chrysler and gm meet the statutory definition of a financial institution, so -- >> as the law was written. >> well, of course. so again the question is, is at&t a financial institution? is american airlines a financial institution? >> no and no. >> no and no. >> but, congressman, i think it's important to recognize two important things. one is that the statute -- i did not design this statute, was not in office when it was written -- >> [inaudible] >> but it did what was necessary for the country which is to give the executive branch of the united states broad authority and discretion to fix this. d the fact that we waited so long to me that authority available made this crisis more damaging and worse. one important fact in reality,

in a crisis of this severity, a recession this deewe have to do things that are completely -- we would never want to do. >> mr. secretary, i understand that. and as you well know, congress had -- the house had legislation thatealt specifically with the automotive industry, so ther were some members of the house who clearly did not believe that chrysler and gm came within that statutory aim. so what i hear is chrysler and gm, yes, are financial institutions. at&t, american airlines happen to be two dallas-based companies are not, so is there any additional clarity, and i believe one of the things the markets continue to demand is clarity of public policy? who will you bail out, who will you not bail out? and so i again ask you for ome clarity on what is a financial institution. >> congressman, i don't, i don't think we're going to be able to take this further. but i want to revise slightly how i responded to your question

about at&t and american airlines. i do not believe you can read the statute today. now, things might be with different in the -- might be different in the future, but i don't think you can read the statute today to justify action beyond the scope of the actions we've taken in this context. >> well, i personally hope, mr. secretary, that the legal interpretation o a statute doesn't change with the passage of a handful of months n. the remaining time i have -- >> no, no, that's clear in the sense that we have to pass two tests to use this north. authority. one test is does the law give us the authoty to act? and the other is are those actions necessary and prudent in the interests of fixing this mess, restoring financial stability? it's not the simple test of what -- >> mr. secretary, forgive me. unfortunately, our time is constrained, and i may have time

for one more question here. leaving the question of the definition of a financial institution, there are roughly, i don't know, six, eight major programs under t.a.r.p. now, and i'm curious having been serving on this panel for almost a year i think with perhaps one exception i'm having trouble discovering ere treasury has identified any particular metrics of success beyond financial stability the. >> oh, i can help -- i'd be happy to help you. >> i look at the capit program its purpose is to stabilize the financial system, the automotive program, prevent signicant disruption of the automobile industry that could pose systemic risk to the financial market's stability -- >> i'm going to have to stop you there, congressman. i'm going to be disciplined about time. >> could i extend this time? >> i'll give you 20 seconds. >>kay. you can look at each of these programs, and this is the great virtue of the markets we live in today, and you can see almost

day-to-day evidence of whether they are having an effect in lowering borrowing costs, improving confidence in the stability of the system. and one of e great things of what you can see today just thinking back is you can look to the cost of borrowing for businesses and families, the cost of mortgages. confidence in financial institutions. we're -- those things are a good day-to-day indication of where these programs are having effect, and you can see -- >> thank you, secretary. thank you, mr. secretary. let me say we all have to be quiet here or else we'll have to clear the room, a then we'll lose our opportunity to talk with the secretary. mr. silvers? >> yes. mr. secretary, i want to pick up, i think, on the threads of your testimony which i think flow very nicely into the real issues facing the country right now which do include the question of the unemployment rate. a couple of weeks ago in two parallel stories in "the washington post" the following

statement was made on the front page: the wounded u. economy, and i quote, has shown signs of improvement in recent weeks, but many economists are success seven chaiting the -- accentuating the negative. bracing for headwinds that could cause the recovery to be weak. huge swaths of the financial system have been damaged which could lock consumers and businesses out of loans for years to come. next to that story was another story about asia. you're smiling, you probably read the same papers i do. and that story says the asian recovery was -- i won't quote it, but to the effect the asian recovery has been far more robust than ours, and a key factor has been the relative strength of asian banks. ..

roughly at an average of 2.5% a year. for an emerging maet economy -- >> japan was the comparative. >> i doubt you are going to seek a more robust recovery there. he need to think about that relative comparison. -- you need to think about the relative comparison. i think we are in a position that it is much more less likely today that weakness in the financial system proves to be a substantial constraint on the pace of recovery. the >> the dominant constraint of recovery here is the basic reality as a country we borrowed too much. saved into little. lived our means, and the process of correcting, that pattern of behavior, it's going to necessarily produce a sler recovery for the united states. >> y. isn your view that the weakness of the banking, and particularly the three '04 largest banks, you are correct in not allowing to repay tartly.

in light of commons to take an example, the mortgage market is a creature right now of your efforts, and secondly, as you ted in your written testimony that small businessmen business lending by banks is going the wrong direction, quite seriously. why is that not a problem? >> i think it is a problem. we are in a much better position today than we have been a i think we could have expected to be. so it is much less likely today that there will be a constraint. just a few observations. bank lending as you point out correctly is declining but it is declining much, much less than it has in past recessions. in part because we have been again relatively effective in restoring some confidence of stability. the decline in bank lending has been more than oset by the increase in borrowing in the securities markets. so overall, situation now where

mostly we are seeing a reduction in demand for credit. again, as people improve their balance sheets, save, spend less, less evidence of substantial contraction in the supply of credit. but still early. largely because of the forceful actions we took and the support we continue to provide, and so it would not be appropriate or prudent for us to differ from that sign of progress we are at the point we can start to wind his back completely. >> jet to come. >> jet to come back to $0.01 in in a written judgment in a written judgnt which i come upon the most interesting. no offense to the re of it. is it really a good thing that essentially credit provision has moved away from the banking system to the extent that it is going on, particularly with respect to the fact that most employers, most creators of jobs can't accesshe bond market? >> it is an interesting question, but remember, our banking sy took on too much

leverage. >> unqstionably. >> so the banking system leverages will have to come to. i was a necessary thing. the consequence of that is, you will see less growth in lending by banks. the strength of our system, important that there are alternatives to banks in the capital markets actually work. so weakness and banks offsetti offsetting, and vice versa. part of the process we are mmitted to is to not make sure they're stronger capital in banks, much stronger shock observers in banks, much better capacity to absorb risk, but the security market have a stronger more robust framework because that will make our stem more stable in the future. >> my time has expired. i will come back to the next round. >> thank you. >> thank you, madam chair. i wanted totart out by looking ahead i guess if we could. does i said before the authority under eesa expired at the end of this year and you have the authority to certify that it should be extended with the

justification under the statute, and no one would be happier than i to see it, you know, meet its end. but according to the statute, your certification should include why the extension is necessary to assist american families and stabilize financial markets, as well as the expected cost of the taxpayers for such an extension. so i guess my first question is, have you made a decision yet? >> no, not you decided that we will think that carefully. >> that's what i want to explore, because this is rather were statute, no offense to the congressman here, but it's very squishy and it's really questionable to me what, like for example, to stabilize financial markets. you just said that you have been relatively effective in restoring stability. so when you determine that the markets have been stabilize are you comparing it to a year ago, in which case they are much more stable, three years ago in which

case they might not be. what kind of market would you look at? u.s. stock market, commodities international markets, the dollar? i think all of these things jeed to be carefully looked at what i don't know if you started this process. >> i completely agree with you. you want to look at again, what is the capacity of the financial system to live on its own now without these exceptional support. how likely is it that you are going to see enough repair and strength in the securities market, not just in the banking system, for us to withdraw that support. i think that some of these programs realistically are going to take a longer time. for example, the expected foreclosure in the united states will last a long time. so it is very, very unlikely that we will be at a point in the next few months to have said that the housing market is at a point where we can be confident that we can withdraw these exceptional action. there are parts of the credit markets and asset-backed teachers would have been

implemented, but a lot of it has come on the strength of the basic stuff we have ovided. we want to ok at a broad set of msures of basic health in the stem. we want to make sure that people are confident that when they get this thing in a strong foundation, because what i said is a classic mistake people eclairs they put the brakes on too early, they withdraw these things a in the system has to go back and build more assunce. that couldntensify the recession, or reignite. >> you can also make a mistake of leaving the crotch on too long and the patient then gets too dependent on that. we're talking about moral hazard, which i hope that as you ll do, your cost and oscar you have to take that into account because i think that is a huge underlying factor of our financial society. >> i complete agree with you and i think he said it right. let me point out one thing that is sort helpful on that front. largely, these programs are designed so that they will be

expensive when things normalize. that's why you've seen the use of programs dramatically declined as conditions have improved. that helps mitigate the risk that people rely on these things too long, detailed on the too much. >> i think you can argue for example the warrant even now are relatively underpriced. the taxpayer is making a nominal profit, but query whether or not in relationship to the humongous risk that the taxpayer took a year ago, you know, is that we could but, you know, commensurate with the risk that was taken? >> also i like the widget for there. when you look at two types of things and measuring the effect of this program. one is what was to directly measure benefit to the taxpayer in terms of the return on the wrist we talked. but that is not sufficient. the best way to measqre the effect has to take a broader view of what do you do to help t this economy out of crisis

into recovery. and that is a harder thing to measure. but still if you look at almost any measure of cost o credit, confidence in the financial system, availability of credit, concerned about risk, all those measures are dramatically lower. and that is the fair way to capture the return on these investments is to look at those things also nudges the 18% return on average. >> so that arguing for ending the program. >> i don't think he does because the art of this, a there is no science. no perfect thing. if you commit to do enough and you make that credible to people, you will not be behind always chasing a crisis that you're more likely to solve it at lower cost. if you prematurely pull it back, you're going to live with too much risk that would be more expensive in the future. that is the basic central design of effective strategy in

financial crises. >> thank you, mr. secretary. >> think you. mr. shadegg on the new treasury service report on mortgage modifications represent i think an important step in data access to accountability. but it also confirms in the report just issued this week that there are wide disparities among the rates of modifications. some firms, as you well know have not started any trial modifications, while many more firms have really started in the low single digits. you how an important meeting with svicers on july 28 to discuss these very issues. i was also encouraged yesterday to hear secretary barr's testimony with respect to new commitments that have been made in key areas such as the speed of implication, data collection and bar were average. the report does use issues shows that there is a trial modifications for in e numbers around 360,000. these would indicate really only

about 12 percent of estimated eligible borrowers. secretary barr indicated that servicers have committed to increase that number to a total arou a half a million trial modifications by november 1. based on that, your benchmark of reaching three to 4 milln homeowners are at risk. are you satisfied we are on the track? have we set realistic expectations? and even more important, is the real risk and challenge in converting those trial mods to permit sustainable modifications? >> youust described that absolutely right. it is not enough. it's not enough that you have something like in a close to happening offers extended. it is not enough that you have more than 350 households now benefiting from substantial reduction in mortgage interest rates. you need to make sure those are converted into things that are

going to work over time. and we are very focused on making sure this program reaches as many eligible homeowners as possible. two important things to point out. it is very helpful to do what we just did, to put in the public domain every month detailed numbers that allow the american people to see how many people these banks are reaching. and i am quite confident that will produce much, much faster modifications much more quickly because institutions do not want to live with the consequences of being so far behind the curve of what is possible in helping families get through this exceptional set of problems. the other important thing we're doing is to make sure that we are going in after the fact and looking at whether people are denied eligible homeowners access to modification. so there is an important call a second look program. has a softer reform than what it is which is actually a program of auditing to make sure that

they are not denied eligible homeowners a chance tourchase a. so i think we're going, this is going to reach a substantial share of people that are eligible. but it is important to recognize that this was just one part of a set of actions we took to help stabilize the housing market, bring down mortgage interest rates. and those actions looked in total that helped bring down mortgage interest rates to a very low levels and it has helped bring a measre of stability to housing prices, housing activity faster than many economists had forecast. and fundamentally, it is that broader measure that should be the ultimate test of this program. >> i think i would be interested in your comment about the continued obstacles to effective in increasing the effectiveness of service or participation but i would do that in a follow-up. but what we are hearing and talking to servicers is there is to concern about outrage, getting documentation back from

servicers. some creative approaches that i've heard from servicers are collective not responding going out physically and visiting. i uld like her thoughts on other creative approaches. i suggested in the past possibly even letters from your cell or even ideally the president of the united states to assure that people are opening their mail realizing that it's not just another cretor, or notification, but a real response involvement from the government. >> welcome those suggestions. and of course we are very pragmatic. we want this to work, and we will take an act of any reasonable suggestion. i think you're right to point out for this to work, people need to take some initiative. and to find out how to make sure they can get help, but as you are saying, 350,000 families today have or seen a dramatic reduction in the cost of carrying their mortgage in ways that lets more money in their

hands at a time the're going to enormous challenges. and the pace of that curve is very rapid. >> that your time. >> we will be holding a hearing on september 24 into a dud very issue and we would look for support from your office to assure that we have representatives from the treasury and fannie mae and freddie to go over those very programs that you referenced, particularly the second look. >> and could use other extra 20 seconds there. thank you. [laughter] >> thank you superintendent nieman. so i would like to return, secretary geithner, to a point you raised. and that is that the stress tests are effectively the tool by which w have measured the strength of the 20 largest financial institutions. and at is what gives you confidence. both that we understand the risk of exposure on the toxic assets, and the overall projectionsn how stable these institutions are. but the worst-case scenario

under the stress test for 2009, projected average unemployment throh the year at a .9%. as you know, the current unappointed rate is nine points haven't%. average for the year has now reached a .9%. so the panel has recommended that under those circumstances, the stress test be repeated for these financial institutions. does treasury plan to do that? >> i think there's iortant thing to start with and looking at whether this was a conservative in a stress test it in a measure of that is not actually meaningful in. the forecast for growth and employment that was framed as part of that scenario. the most important thing to look at was the loss rate that were assumed the worst-case scenario. and if you look carefully, as you have done, at what the fed designed and produced, the loss rate that were assumed in the

stress scenario were worse than the losses experienced by this country in the great dression. so they assumed roughly loss rate in the stress test could se as much as 9%. we are now more in the two to 3% range. and if you look at what's happened over the last quarter, bosses are running well below that level. and in earnings are running substantially above the assumptions. >> mr. secretary, i'm sorry. let me stop there because you are the one who put out what the appropriate details weren the stress tt. >> the fed designed as you would expect. >> that try. that they decided you are the one who advance it and said we could rely on it. one of the featured elements was unemployment, and we all know that unemployment relates very closely to the level of foreclosures which in turn relates very closely to the vae of the toxic assets. the decline in taiga. >> but the constraint inhe stress test was the loss of

assessments that were applied in the army estimates that were constrained. and those did not relate to the unappointed forecast. again, what matrs -- >> is not what you advertise matter? >> again, the great virtue in this assessment was that we put in the public domain for everyone to see and aess for themselves what the lost rates were. so people can judge underdone. >> that raises a question. we would like to be able to rerun the ress test. and i had understood from conversations with you that we would have enough information about how the stress test is composed that reasonably pull could sit down, build another assumption, and see how the stress test would come out with these major banks. and in fact, we don't have the risk model and we don't have the data input to make the necessary to repeat in. >> i ould happy to spend as much time as you like going

through this. again,. >> i will take just as an intricate. >> i need to change what you framed it. this war and an porton implement in the market capacity to assess risk in these institutions. on the strength of the input capacity, you have seen a bstantial amount of private capital coming to the private system. we never said it was sficient. there is no certainty like things could go to change going for. we have a basis we had to work with you on it for people to immediately assess whether these assumptions were rigorous enough, whether they need to be revisited. >> to let me ask the other half of that, and that is also we asked the question about a pending the stress tested midsizbanks and perhaps even smaller banks in a somewhat modified for. is treasury willing -- >> we said publicly and i'm not going to change the view. at the time we're not going to conduct a similar exercise the bank by bank across the 9000 banks n the country. but what supervisors have done --

>> what about the other's? >> what they have done, is applied or a careful exacting framework for the supervisor process to those institutions. so that we can have a bette sense for ming judges about the rest of the strength of the remaining system. is not realistic or feasible for us to conduct, for the fed, to conduct the level of detailed assessment required for this to be credible for a banking system that has 9000 additional banks. >> thank you. mr. secretary unser, congressman insulin? >> thank you, madam chair. mr. secretary i do want to reply the old ground on financial institutions. i agree with you we probably made about as much headway we're going to make on that. but i surely think it is reasonable for anyone to conclude that there is a fair amount of subjective power that is assumed by treasury in deciding who will receive bail

out or economic recovery funds under eesa. i do want to starr report some old ground in my earlier line of questioning because the american people to know what are we getting for our $700 billion today? again, having been on this panel i started reading from treasury's website on the purpose of these programs. and frankly, withhe exception of the foreclosure mitigation program, where you offer the goal of assisting seven to 9 million homeowners. i think today we stand roughly 350,000, if my records are correct. i can find no demonstrable metric of success by the administration. so can you enlighten me? >> again, happy to walk you throug again, like h given testimony in any substantial reports the fed and the financial stability oversight board has provided. i would be happy to do it but i just don't think ue're saying is there. the virtue of these programs

are, you can see directly, not just how much money we're spending, where we are spending it, but what is actually happening to barwick conditions. i will give you an example. one of the most important things we did was this program, designed to provide a backstop of support to the lending markets critical for small businesses for auto finance, for student finance, credit card, etc. you can see in detailed evidence how much issuance has come with this program, what's happened to the cost of issue is, how much has been directly funded by these programs rather than indirectly supported. >> what you are asking us to do though is to draw in essence the cause and effect, happy to look at the statistics in the economy, but again coming from an oversight pel here, it's hard not to conclude that essentially you have the subjective power to invest $700 billion on a revolving basis on any institution you deem as a financial institution.

and any program will be judged as a success if you deem it a success after the fact. >> i don't agree with that. i would never cim that. i would just remind you of two things. the congress of the united states designed the authity treasury was provided. >> mr. secretary, you have the ability under the programs that you decideo say here other metrics. >> and i'm giving you than. but again this is a great virtue of this program. you can see much of the retargeting when people repay, price we are getting bolted to the market. but you can see directly program by program what's happening credit conditions which is the ultimate test of what we're trying to do. that is the great virtue. you can do better than that. >> let me ask. of what is happening in the crit markets is the ultimate test, and again we can question cause and effect, you know, clearly the libor spreads one month were incredible back in the crisis in september of 2008. by the time your adminisation

took office, they went down from 300 basis points to 20 basis points. now, since your administration has come into power, apparently they are down to 10 basis points. so certainly that is an improvement. but it sounds like a lot of this happened on the previous watch. again, i don't know what the cause and effect, relationship is. >> the cause and effect is difficult in economics and finance but it is much easier and more clear in these programs, most of the things we'll try to measure the effects of economic policy. and yo were right to point out that the actions taken by my predecessor, of course i was part of, did have an important effect in eaking the panicn the fall of 2009. but it is also tru almost any measure of financial help for this country, in january of this year, was still in signs of emergency. >> mr. secretary, again the question is what is the taxpayer getting for their money today? we can debate what purposes you

are gettin >> you have a financial system that is more stable. credit is more available. people can borrow at much lower costs, and the taxpayers of the united states can see in the investment we've made in the banking system returns in terms of actual billions of dollars. >> will -- >> there is no better measure of the return of these programs en i think any we have seen. i would be happy to speak how abouan additional two and a half million jobs lost, the highest unappointed rate that we've seen in 25 years, mortgaged a link with these and foreclosures up. mr. secretar it is a xed report card. i was very clear in my statement that it is only now we are seeing positive growth for the first time. unemployment is to very high and could stay high for some period of time. we are not close to being through this. but on the clearest erect measures of the program we were tasked with executing, we have

made more progress than i think people reasonably expected. not enough yet. not enough and we will keep adding. >> thank you, mr. saturday. mr. silvers. >> i want to take sort of a different angle. i think one of your achievements clearly, not the prior administrations in the stress test, was put in into the fiction that all banks were equally healthy. i understand why that fiction wasn't built originally. i don't think it was done out of bad faith or anything other than the best of reasons. but it was important to put an end to it. however, i think many other characterizations of success that you have just been filled in with my colleague are due to unwinding funds that were given to strong banks. when they paid him back, they paid them back at a profit. and that was never where the risk was anyway. there was always some risk, but the bigisks were not there. i want to turn to weak banks.

i hope you'll indulge me. what maye a little peculiar sort of questioning. can you explain to me and to the listening public, what is a zombie bank and why is it so dangerous? >> i don't ever use that term is up because i don't think it helps anything. the risk in any financial crisis, ifou have the banking system that doesn't have enough capital, they would have to reduce lending act and a viable businesses or families will have access to credit. and therefore they will be forced to thank or go out of business or delay a college education for their children. that is why the health of the banking system matters, and that is why it is a good use of policy and financial resources to try to make sure you bring capital in. so you're not living with a s of institutions that are too ak to lead. >> two-week olympic visitors are those people who like the term saudi bank mean by it the

walking dead? meaning an institution that is not in receivership or insolvent, but is too weak to lead? is that a fair characterization of that term because i think i decided. again, -- >> no. >> i am less graphic than you but i think you have the right concept. >> where are you going with this? >> i thought i got to ask that. where i'm going with this is whether or not, whether or not you like graphic terms, graphic term sometimes had t ability clarify things that otherwise in very mysterious. whether or not you like graphic terms and whether you use terms, i just use the terms you use. in your view, is citigroup such an institution today? >> no. >> why? >> this won't satisfy you, mr. silvs, but i can't talk in this context and i want to talk in this context. i said about the nr country, in this case, so i want to return to why began which is the best

test of whether these things are working is whether you are saying private capital, private investor in this country and around the world willing to come in and provide capital to those institutions, to provide funding for them. and one of the great virtues of the stress test was it gave him a chance to make tt choice, and they basically in a sense voted with -- >> mr. secretary, how can you be sure, and i recognize the cause and effect issues that you mentioned earlier are real. but how can you be certain that what you didn't really do it in the stress test was signal that you, the treasury department, and the federal go to further hammer the capital structure of these banks and that they could be invested because they wld add guarantee behind them. even though they remain at their core, zhao, you know, not really functioning institutions. or to use a graphic term, the zombies. >> again, you're right to point

t that we did a range of other things besides just making it possible for private capital to come into these banks. part of that were a set of guarantees that the government andhe fed provided together. that were importa necessary things. they have been helpful in restoring confidence, but again, i think by anyeasureou have the system that we have today is in a smaller but stronger capacity to support the economy going for. that is the ultimate test of what we are targeting. to back mr. secretary, i am going to refrain because i think folks at citigroup may feel i'm picking on the. i was going to ask you about the minority or, spend time doing that because you are not going to answer and they appreciate that it would be inapproiate. those three institutions are a macroeconomic problem. and they go directly to jobs. as this panel has gone through the country talking to people who are trying to create jobs, we hear over and over again,

that from various ways, depends on whether it is at gore commercial real estate or large firms or small firms, we hear over and over again that the system is weak and the large institutions are not stepping up. spec that is our time. >> i'm done. >> thank you, madam chair. i want to go back to the statute did it because one of the other provision of this that under statute regarding a.r.p. is that the government accountable the office used to do and audit and i think significantly it is not under a government county rules but under gaap and gaas which i think will be interesting. so do have to get some of these ises if they're going to do a balance sheet, p&l statement and all that sort of thing. they will have to look at costs and what not. so i guess my question is for so long, has this been scoped out yet as far as the audit does? where does that stand? >> i don't think i can do adequate justice too today but

would be happy to get back you in writing exacta with a process stance. i know we have coming up something where to put out which include estimates of those measures. but in terms of the process i don't know the details of that right now. >> okay. as far as what might be public? >> can't tell you. have to get back to you or do it myself or to. >> another issue and you brought it up in your opening statement is regulatory changes that you all have proposed to congress. and i guess having come from independent agency, you know, i value that sort of tradition of indendent from the administration. and earlier this ar there were reports in the press about i guess i would term it as maybe exssive pressure from the administration, escially treasury secretary with respect to your colleagues, presidents working group and elsewhere. so i wonder where that stands as

far as you're concerned as f as dealing with others as independent agencies, they're not part of the administration course, and how you do your interaction. >> i actually believe that despite what you rea that there is a lot agreement across those agencies on the core things we try to achieve. and i think on the broad structure,nd y can say that in a framework for protection derivatives we put out on resolution of 44 p.m. wytheville institutions in the future, you can see it in terms of the core provisions on capital. you saw the outline a couple of weeksgo. there's a broad base of agreement across the agency on the core parts of reforms. there is an aries though where they would prefer that we leave existing authority to have with him. and so as you've heard from them in public to focus on some of their concerns have been where proposed to take authority from them and put it in a

different place. most conspicuously in the area of consumer credit protection, what i think by any measure you look at our system and it has failed and our belief is to put in place a stronger system you had to put in a single entity, both the authority to set rules and enforce them. but that is i think the best example really of where there is still disagreement across these institutions. you would expect that. nothing surprising. >> i guess we will have another chance to talk about these particulars later on. with respect to the programs under t.a.r.p., do you have any expectation of expanding the list if you have now? >> again, what we tried it earlier in the year was lay out a broad framework to recapitaze the system d to provide targeted support for the credit markets that are necessary for recovery. and as many of you said we put

out a pretty broad framework of programs in that area. that was our best judgment at the time about what it was going to take. would want to have some capacity to modify and adapt those overtime to make sure they are doing what they need to do. and to widen down. at this stage, we don't have any specific plans to substantially expand out of the scope, enties, of areas we would target. but it i possible that looking at the damage in the system remaining, we might make that judgment. that we would wanto set a greater high bar for doing so because we want to demonstrate to you that that is an appropriate use of taxpayers money in terms of returnse're going to get. >> speaking of which, what issues i think that is still in questi is whether or not t.a.r.p. is a revolving type of arrangement, whether the money's there payback i've been available for the future. do you have any legal analysis of this? >> in previous testimony we

provide a pretty extensive responses to the congress how we interpret, how we think that a third was gratitude i actually think there is broad acceptance of the deal in theongress by the architects of that legislation. the way it works is this. if $1 comes back, and of course as i said, substantial billions of dollars come back to the treasury from the financial system, that goes directly to the general fund to reduce debt outstanding. but the law is designed to still give us the authority to give that if we think we need to do it to help ptect the system. >> i guess i would like to see that. >>appy to get. >> superintendent? [inaudible] >> your proposal includes merger of thecc and the ots, and i support that change. some including our nation's largest banks have propose going further to create single

monolithic federal bank rate at which raises in my opinion serious concerns. creating single regulators as a means of improving financial regulation relied in my opinion on the faulty assumption that regulatory consolidation leads to a stronger and safer banem. in my opinion, the opposite is true. such a propol would increase the fragility of theystem by increasing iustry consolidation, by eliminating needed checks and balances, and subordinatedhe interests of the consumer to the business goals of a handful of megabanks. might expect multiple regulars yield better results for consumers and for financial stability much like multiple judges are used in the olympics to arrive at the right score. what are your concerns about the proposals toreate a single monolithic regular? and how important was it for you in tracking your proposals that the fdic and the federal reserve

retain examination authority to better inform their respective missions of deposit insurance and lender of last resort? >> thank you for raising that qution. you've framed the choice is probably. one of the most important things we decided we had to do was to eliminate the weakest part of supervision in the system and eliminate the opportunity for people to figure this out uighurs supervision and flip their charter or shift risk to ose parts of the system. one o the principal exams of that, unfortunately, was in the difference between the centers apply different endings that banks. without eliminating that was a neceary absolute essential condition for reform of. if you look beyond that, there is less evidence that having the federal banking system we have, with two entities responsible for different types of state-chartered banks, alongside a single federal supervisor would create really meaningful risk of arbitrage in the future.

if you look at the standards applied by bank supervisors, in general, they are more evenly applied and more effectively enforced. so we don't think it was nessary or desirable to try to force all of that into one new entity. partly because of the concert about concentrated power you can partly because we are asking the congress to do a lot in a very ort period of time, and a guiding principle, we want to make sure they are@ focusing tht they are essential to do, and on those that might be desirable to some people but would not offer a benefit that was proportionate to the political difficulty or the practical difficulty of doing it. further, dramatic consolidation of bank supervisors, we didn't think met that test. but of course we're open to suggestions and if there is well in the congress and interest going further, just consolidation, we would of course be happy to be supportive of that. but i think you have to balance the factors that you laid out in your comment >> and you would share my concerns over the role of the checks and balances that i often

use as an example, the role of independent fdic in raising issues the import of the leverage ratio is an important checks and balancen the regulatory scheme. >> i think you a right that there is virtue in multiple pairs of eyes looking at these institutions. but on the other hand, opposition across regulars creates risk also. waidn't get that balance right. we thought we propose, how to fix the weakest part of the problem, greatest solution but of course he will be open to suggestions about how to get that balance better. i yield my time. to time going to pick it up pretty tort reform in the next round. >> that you. >> assuming we'll have an extra. >> i hope the. thank you. aig has received about $70 billion in t.a.r.p. money, about $100 billion in loans fm bad. do you know where the moy went? >> absolutely. the money, and of course happy to provide any details tt you would like to see on this. the money in that context went to help prevent the fault, help

stabilize the very damaged institution that would oppose we think vy substantial risk of systemic -- >> maybe i should ask it with more specificity. was treasury aware of who the counterparties were ev going to receive payment in full on the credit default swaps, when $170 billion went to aig? >> they have hundreds of thousands, i'm sort hundreds and thousands, maybe thousands of counterparties. but i'm sure that the supervisors involved and people at the fed who were at the front lines of this stuff would have access detailed information. >> so they knew who was going to get the money, the counterparties? >> i think they could have known. whether they knew at the tim i'm not sure they knew. but they would have access to that. >> you know they ske with any of the counterparties? >> in what sense? >> in any sense. >> about what? many of the counterparties are

institutions so i suspecthey were talking all the time to expect they were holding pieces of paper from an entity that was glory insolvent,nd the question othe government infusion of dollars there was going to make the difference between whether they got paid off in full or they ended up with nothing. >> right, but may i finish. so what would you like, what would you like to? >> i just want to know. was treasury have conversations with any of the counterparties who ultimately profited from this infusion of cash? >> at the time of the initial, i wasn't there. of course i was into the basic we reach together to prevent the fall by aig. i am sure that was right at the time and you are right to point out that that action did help make the system more, have broad benefits, including the direct counterparties. but i want to do one important thing because i think in the

premise of your question, the reacon why aig posed systemic risk was not principally because or significantly because of the direct exposure, of those institutionsthose counterparties. the ggest risk a bit to the system was in the damage it would have done to both retail people who bought injured protection, as well as the type of risk is all he would present to the system as well. it is a more competent a picture of. >> let me follow. i understand the decision uart drawn. we just finished our auto report and chrysler and gm, insolvent cubby, aig insolvent cubby. chrysler and gm have bondholders, unsecured creditors, employees. and they all took big haircuts. aig had people holding credit default swaps. they took no haircut at all. they ended up with money from federal government of $0.100 on the doll and i try to understand why those are different from each other.

>> you understand this better than many people. it is sort of the tragic failure about the regime we came in with because we did not have the gal capacity to manage the orderly unwinding of a large complex financial institution. capacity we do have four small banks and thrift but did n have when energy like aig. thatorced us to do things like we would not ever want to do. >> are you saying you couldn#t find a way to pay less than $0.100 on the daughter but said said you could find a way -- >> of course the. we would've done that in the second ever could have done that. buin deciding that default by aig were represented the rest i can risk to the rest of a very fragile system we've made the judgment to prevent default it by preventing the falls we have aig meet i financial obligation. not just the people who bought injured protection, savings protection products, but to its broad categories. that is the consequence of that. if you think you're -- >> but not the same for the auto

industry. >> you are right, but if you think through what happens when you let default happen, you can look at the wake of the trauma caused by lehman's deflt to get some sense of the damage that can cause. again, that is why we moved so quickly to propose broad resolutions authority to give us better tools to do with these in the future. >> i appreciate that. let me ask one quick questio if i c@n slip it in before we run out of time. thats a year agoe worried about banks that were too big to fail. what in the last year, big banks have gotten bigger while 84 small banks have been allowed to fail. and some experts are estimating that a thousand small and midsized banks could disappear before this crisis is over. i just wanted to, are we more at risk on the question of concentration and we were a year to? >> i don't think so but it depends largely on what congress ultimately decides to enter the financial reform. thenly way to deal effectively with the moral hazard risk created by the consequences of

this crisis, and by th too big to fail problem, is to make sure the senate reforms in place that make us able to withstand the failure of large institutions so we don't have anythingo put taxpayers money at risk to prevent them or provide more orderly resolution. that requires resolution of 40, stronger capital, better derivatives protection, a whole set of cushions and safeguards to limit the risk from spreading. that is why a given reform is so important. that is the only way i think the system is safer for future failure. >> thank. congressman hensarling? >> thank you, madam chair. mr. secretary, i continue to be concerned over the president thinks that for the taxpayer and our financial markets with the chrysler and gm intervention theory you are well acquainted with the facts said it was your team that helped put together three organizations. but gm bondholders were asked to

swap 47 billion in debt for initially 10%, equity. the uaw agreed to swap 20 billion for 17.5% up, equity. 9 billion preferred stock. and the uaw ends up with 55 percent of chrysler. they end up with 17.5 percent of gm. when you talk about the success of your administration in stabilizing the financial markets, i am just very concerned about how, when senior secured bondholders, are tated less equally than those who are unsecured and equally unsecured creditors, still we see e uaw received preferential treatment warren buffett, perhaps the most famous investor in america, said oh, if priorities don't mean anything, that's going to disrupt lending practices, abandoning that principle would have a whole lot of consequenc

consequences. "the wall street journal," some would say, i guess the investor journal, wrote an op-ed back in may by stepping over t bright line between the rule of law and the arbitrary behavior of men, president obama may have created a thousand new failing businesses. that is, businesses that might have received financing before but now will not since lenders face potential future government confiscation. investors business daily, this undermines the reason for buying a bond at all, accepting lower returns in exchange for legal guarantees, that in turn will reduce the willingness to buy bonds. now i must admit it is somewhat at a total, but when i speak to investors, i believe there are hundreds of billions of dollars that are sitting on the sidelines that are concerned about not knowing what the government policy is concerned about the potential, to

confiscate their investment. i have smal businesses, at least throughout the fifth district of texas, but tell me they can't get lines of credit. so i know there is a huge stabilization by the time your administration took office. i'm not sure i've seen a lot of improvement in, and i simply question what precedent have you set and what is the impact for financial stability in treating the uaw so differently than senior creditors or those who are equal? >> you guys have had a lot of time to look at this. i know you had testimony in this before, and asked him to concerned you are raising. raising. as you said many people raise those concerns for some time. that this was a process overseen by a bankruptcy judge. that bankruptcy judge looked at the terms of the agreement and reached the judgment about whether that was acceptable. >> it was a plan finance with taxpayer money undercard.

>> i think you know you don't agree with it, you oppose this action would understand for thoughtful principal reasons. but we took this action because we thought it was important and effective to do in the face of this crisis and recession. and i think this will be judged as an exceptionally well-designed dramatically reructuring. important thing to point out is the scale of the restructuring designed and approved through this process went well beyond what was contemplated by many people in this congress. >> i'm circuit we have limited time. but another aspect of this i sadly don't understand is how fiat is brought intohe deal 20% i believe of chrysler, up to 35% if they will produce cars that receive 40 miles to the counter i know the president is passionate about the global warming agenda.

we can have that debate, but under eesa, i am having trouble finding out why the yahoo wasn't owed a time i don't really put a dime into the deal. what having them use a t.a.r.p. money come u.s. taxpayer money to produce these cars sometimes in the future has anything to do with taxpayer protection or financial stability. i just don't get it. >> a gigabyte of don't thi i'm going to talk you out of any concern. i think we're much better off today because of those companies were not forced to go into liquidation. i think that was a prudent sensible use of the authority that congress gave us. >> thank you. thanyou mr. secretary. mr. silvers. >> mr. secretary, my colleague seems to be under the misapprehension pejorative of the judge. ar you a bankruptcy judge? >> the last time you asked me i was and invest that baker and i

said no then. but i've also never been a bankruptcy judge. i recalled the term banker does se to apply to the federal reserve bank of new york. >> that would be stretching the definition. >> it is not a bank? anyway, you're not a bankrupted judge, are you? >> no. >> the re of t t.a.r.p. in respect of any bankrupt entity is a provider of debtor-in-possession financing. >> in that context, yes. >> provider of such financing makes strategic decisions about how they want their money to be used. mr. buffett, if he was a debtor-in-possession, financer, i would assume the treasury would as well. >> we did so and what we do with the best financial terms for the taxpayer and for the country in that sense. those judgments were overseen by a bankruptcy judge. >> let me move on. you have made references in your

testament to regulatory reform. one criticism of a program which i personally believe it pretty serious that they ever put out is a criticism that doesn't deal with what structure went wrong in our banking system and financial markets in that it doesn't deal with the accommodation and risk associated with investment banking in particular proprietary trading combined with commercial banking and short deposits. i particularly concerned about this problem because of, to go back to my prior questioning, essentially a zombie bank probably give you a very weak financial initutions, particularly ones who think they have it explicit or implit guarantee. they've not been resolved. they are reay very weak. the temptation to gammill is almost irristible. can yu comment on your views as to how this problem should be addressed and will be addressed under the administration's program?

>> again, in some ways the most important thing that we have to do is make sure that institutions hold more capital in a higher quality of capital against the risk they might face in the future. capital is sort of like a rainy day fund. its resources they can draw if things don't turn out so well. it is probably the most important protection we have against the risk of future crisis. it will make the system better able to withstand the stress that might come if one institution faces the risk of there. that is the centerpiece of reform we laid out last week for formg capital standards. if you ensure that they hold more capital against the risk they take in whatever form,nd there is more capital held against the most risky activities, you can, it is probably the most important thing we can do against risk your framing. if we had adopted a strategy, mr. silvers, of simply guaranteeing the liability of

the financial system, not forcg recapitalization, not conditioning our assistance on the restructuring, then i would be more worried about the risks of that you ref to. >> is it your view that an aggressive proprietary trading desks is consistent that allowing an aggressive proprietary trading desk is part of a holding company that has significant insured deposits is a wise form of public-policy? >> i think it is her important to make sure that you hold institutions, institutions hold about cabot has all the risk they take it if youook at this crisis, of course we'll be looking at thisor a long time, most of the losses that were material for the weak institutions and the strong relative to capital did that come from those activities. it came overwhelmingly from what i think you could fairly describe as classic extensions of credit, particularly where they are backed by real estate.

and those choices are classic banking type of decisions that this is sort of the tragedy of this crisis. >> i'm not so sure about the. i think if you look at where the big holes came in the major commercial banks, they were substantially, i will give one example. i hadhis very interesting conversation with one large bank where they said we didn't make any subprime loans. so how did you get in so much trouble. they said we had something on the capital markets desk and they were in the business of repackaging otr peoples sub prime loans and putting them on off balae sheet vehicles. >> maybe we are a green. what you're calling trading i would call extenon of credit. these were extensions of credit. >> underwriting fees. >> you want to make sure that if firms are forced to capital against the risky things they do will be vulnerable again to a crisis and will not let it happen. >> thank you, mr. secretary. >> mr. secretary, i'm glad you

have a lockouts an capital but i think even the capital's levels they were talking that would have prevented what went on last year. and so i mean, you know, i think you have to some of it is a bit of flying by the seat of your pants i think ultimately. >> i think it is necessary but not sufficient. it is essential. >> one of the central things is rely predictability because as you are talking wit a chair about aig, i think xou go back last year, this is a debate for another time, but when yourack fannie mae, freddie mac, and then what happened there, but turned around with aig, i think that frees up the marketplace because people were uncertain than anything else. i wanted to get to the public-private investment program to find out where that stds cover to visit programs under it, the loan program. the legacy security's progr is

the one that is really up and going and i was wondering where the stand, cedy purchases have we made, do you view these as viable in this great scheme of instruments that are out there? >> we are about to i think you will see the asset managers was elected to raise kowtow to lach these programs close on the capital raising. all indications are they are raising a lot of capital, a lot of interest. they will be in a position where they're out in the mouth buying securies. but you know when the program was announced and the details were put out pretty significant effect on prices in the securities. because the prospect of financing capital coming in did help restore liquidity and improve liquidity in those markets. you are seeing positive effect. as i said many times before, we expected to be less demand for these facilities and was initially expected in part because the quiddity has improved and partly because more capital came into the financial

system. i still think they are valuable enough, worth going ahead with. and if we think again, there is a high return to the taxpayer in the overall economy from expanding that we will be open to expand and further. >> okay. well, i think we can probably say that for another day. i know you're time is short. i want to give mr. neiman an opportunity as well. >> thank you. >> madam chair, just briefly. you are very much that if you look back over the arc of this crisis, one thing that is very damaging to conference was the lack of clarity. the government was quick to step in a decisively stabilize the system. but just to be fair to my predecessors and the other people have been living with this crisis, be fair to me, largely that was the consequence of the fact that until congress acted to pass the eesa, the government of united states did not have the authority to step in and provide capital. and it was only with that authority and the subsequent actions by the congress and the president to make sure the

additional resources were unavailable that we really had the broad set of toolshat were necessary to help stabilize. i think you're very right to say that clarity about strategy, matched by resources and authority, is central to confidence. and this crisis was more damaging, more prolonged in part because of the absence of authority of the constraints they put on the capacity of government to escalate. that is sothing we have to fix. . .

things were with that much risk and so few tools. >> we're down to our last question. >> ipod >> i applaud the administration with respect to financial services. i share this commitment, and i have seen first had the predatory lending. particularly by guaranteeing that federal standards would serve as a floor not a ceiling. yet, i have some serious reservations about another aspect. first, i have a fundamental concern about any agency that separates consumer protection. these are not conflicting missions. isn't one of the primary lessons

learned that a loan that is unfair to consumers when made is not a safe and unsound loan. doesn't that lesson argue for greater integration of the two disciplines into a haul listic apoa? i would also question whether it's necessary to create a new and separate agency with all of the start up and consequences or whether expanding the existing agency which is a strong consumer protection track record may have a better ability to achieve the goals without creating new bureaucracies and efficiency in cost. so my question to you is:what thought such as expanding the feral reserve board or increasing the agency like the ftc that may better protect consumersnd not create a new bureaucracy?

>> we looked at a lot of models and thought carefully through the concerns you expressed. let me just say it starkly. we have been living with a country with a system where we gave bank supervisors to enforce the rules. how did that turn out for the country? it did not serve us well enough. it's not a system that works. it's failed, and it's most basic, the reasons were complicated. but i think we had a test of the viability of the model that come wined the authority for consumer protection. and the judgment we reached was based on that record of experience over many decades, past crises that you need to put rule writing and primary enforcement in a seasoning the place where the resources in order to do that job. now by claireing where

enforcement authority is we're not going to be adding to the overall burden of the system. the ftc has a lot too. the credit is as we've seen very hard. so again this is represents in our view of what we thought about the best path forward. i uerstand why you are a supervisor. and why many supervisors look at the prospect of a different model. many banks are not liking that change. i think separating it the would not b a sensible. the rules are risked to be poorly written. >> did you not acknowledge they did take strong action? >> i completely agree with you they provided credit card legislation that congress passed in the mortgage area too.

you said the important thing. when did those rul come? >> but if the federal reserve was directed to statutorily to report to congress toave a governor on the board with consumer responsibility and experience would not be an alternative? >> there are many alternatives. we've had a painful experience about the limits and effectiveness which gave them the rules and enforcement. and it was a damaging failure. some of the most damaging things happened outside banks. part of the failure of the system was not t provide greater protection in place for nonbanks. that's the center piece. >> let me move on to product effective disclosures. they need effective, not more

pages of print. for example, maybe a rating system to clearly communicate product safety and complexity along withne page or two page summary of key terms. i often compare thises to the key slopes. i could not imagine keying without a green, red, or double diamond. don't they deserve the same level of protection? >> agree with you. it's better disclosure. that central to what we made. we're open to suggestions. >> and in my last questions. >> excuse me. we're out of time. >> i had the agreement with the september 24th. i heard you. >> and we'll try to respond. >> your corporation with participation of treasury. >> we'll do as much as we can to make sure you have good communication. >> thank you very much. mr. secretary, we appreciate you

being hear and we appreciate the detailed answers to the question. we look forward to hearing from you soon. >> thank you very much. >> this hearing is concludeed. [inaudible conversations]

>> next month a look at the highest court. >> i don't think it's an understatement to say this building would not b here if nos for the chief justice taft. >> taft thought he needed to have a building of his own. when he became justice, it became almost an obsession. >> supreme court week with inside from historians and justices. and go online now for a tour of the court historic photos and more at c-span.org/supreme court. >> last month japan's ruling party lost in election. now a look at what this change could mean for the united states. you'll here forever professor michael green who served as a

special assistant for natiol security to president george w. bush. from washington university, this is about an hour and a half. >> thank you all for coming to this first talk to the year in the school foreign service agent studies program series. i'm jordan sand, i'm the chair of the department, and it's a great pleasure for me to introduce our colleague, mike greene to enlighten us about the janese elections. mike is an associate professor of international relations here at georgetown. he's also the japan share at the center for strategic tan international sdies. mike has wore many hats and has a remarkable career both in

academics and out in, i guess we call it the real world. in politics. he's the author of arming japan, klumafter university press, 1998. and japan reluctant realism in 2003. so numerous other publications on japanese policy and international relations. he has served in several capacities on the national security cncil, was a fellow for the for the -- in the council for foreign relations. he's also been a staffer in the japanese national diet, which means that we're hearing from a person who can speak from the inside as well an an expert from the other side of the topic. he's a journalist for newspapers both in japan and here, a fellow

at the university, and the list wouldo on. but i have to tell you that mike greene's legend proceeded all of this in my own career when i was started out graduate school in 1991. i had not met the man. but he was already known as the victor in an international debate competition held in the japanese language among team of nonnative japanese speakers in which the legenry mike greene wiped out the canadian and the italians and the fearsome nonnationality team. everybody was talking about the achievement. we were all struggling with the language at the time. i've known him as a figure for a very long time and recently have

gotten to know him a a colleague. and i'm very eagle to hear how he will enlighten us on this interesting moment in japanese party politics. perhaps the most ieresting moment in our lifetime, at least mike's and mine. i give you mike greene. >> thank you. thank you, jordan. that was very genros. for those of you that are students, that debate is not findable. this is a fascinating election,. and a really fascinati time in japanese politics. it's also good chance for us to remember how important japan is. you often hear the phrase japan passing, who worry that china's gettinall thettention and

people don't care about japan. there's a lot of good reasons. japan got a lot of attention in 1988 and 199. people thoughd they were a threat. there were poles were ople said japan was more of a threat than soviet union. today americans in poles like the chicago council poll or puw paid it as the first most wanted cotry. japan is important, it's been because things are going well. this election has addedome spice and excitement as a time to remember how important japan is. i won' get into a debate about purchasing power parody and other things but japan still is the third economy in the world, second largest contributor to all of the major constitutions

that uphold the liberal system. the basis for eagement in asia and quietly one of the closest partners the united states has in the g20 process and the g7 process and in the security council when japan is on the security council. what i want to try to answer today are four questions, which are on everyone's mind i think. first how did this happen? how d the ldp go from 300 seats tohe lower house of the diet, the department that decide the prime minister, go to 300 to 119. and how did the opposition party go from 112 to 308? basically switching positions. secondedly,hat does this mean for the future of japanese politics? are we at the begning of the

end? the end of the beginning? is this a revolution? where does this put us in terms of the next epic in japanese politics? third what does this mean for japan's foreign policy relationship with the united states, with asia, and the japan economy, and fourth, is it true that mr. hatoyama was sent to venus where she lived for two weeks and met tom cruise. i don't know. she has said she was in fact ab ducted by aliens. he said she had a dreams. it's one of the more colorful aspects. we in the united states often had presidents with brothers or mothers who are colorful and interesting. we have here, definitely an interesting character in the japanese political world. to start out why, there are a

lot ways to answer. one would be to look at the post war sucture of japanes politics. the so-called 1955 system called the 1955 system because that's the year that the liberal party and democratic party came together and cormed the liberal/democratic party, which is the conservative party to confuse y. they dominated until this election. they fell out of power once in 1993 briefly. when we look at what's happening this time, they came right back. they have dominated the political world in japan. sometimes people compare it to the cio in mexico or the demoatic party in the united states before world war ii. but it was in many ways even more dominant than those examples. it dominated because it had a

fairly simple governing philosophy which was aligned with the united states in t cold war, opposed communist, grew the economy, and let the bureaucracy and business show their excellence. and in many ways the ldp benefited from the facthat it reflected the international structure. bipolar structure where in asia the u.s. was dominant. and when the cold war ended, it was quite logical that the domestic politics and the structure of japanese politics would change. becae it was basically a reflection of the international politics and the collision between communist and free markets. the ldp did collapse within a few years of the end of the cold war. and prime minister and he stayed

in power for about two years before he was held by scandal. and the ldp came back. that lasted for about a year. then the ldp dumped the socialist and dominated ever since. but in many ways when the cold war ended, the liberal democratic party was a dead man walking. it was like a chicken with its head cut off that was still moving. it was increaseingly corrupt, bankrupt for new ideas, tied to a model that wasn't working anymore. and the collapse of stock market in 199 and the long lost decade in japanese economics. the ldp started to get in trouble. th body started to sag, and it started to go down.

and then they were saved. and the party was saved by the incredibly fascinating lion-mained strght talking prime minister who's son worked for me as an research assistant. he did getlected this time to the father's seat. he's one of the few that made it in. he saved the ldp by running against it. he was a maverick. he got elected in april 2001 not in the traditionalay that leaderred were elected but by appeals to the members of the party and the public. and he stayed in power not with sanctional balance with public opinion, and his popularity was what kept him prime minister. and he left quite popular. he said he would leave in 2006, and he did. but the k was he ran against the party. he didn't care if the ldp died. he wanted to reform and change.

he wanted to break the old dinosaurs of the factions of the ldp. he wanted to bring more fluidity, women, and precisely the kind of people who just came in with the dpj. and in 2005 he won an enormous victory which until this victory was the biggest in post war japanese history. and he won it by kicking opponents of the reform out of the party, standing in elections younger die gnattic interest people known as coesame children. when he stepped down, his assessors, all good men, with one fundamental flaw. they didn't run ainst the ldp. they reverted to the old style

of politics. ey were not willing to see the ldp to save it. they made a huge mistake. they had 71% when they were first elected instead of uses that to call an election, and they waited and in all three cases they were in teens air 20s, and they had to sp down. had any one of them immediately called a election, the most recent election might not have happened. the season they didn't do it was because they were afraid of losing their majority in the lower house. they had 2/3 majority which allowed them to override the upper house which was controlled by the opposition. so they waited. it was like a sinking submarine. and then the next guy came in. it was almost inevitable, afraid to call an election until the last minute basically required by the institution. forced to push bills through

with enormous political capitol and use their 2/3 majority because the upper house could block them. it was almost inevitable. it was made worse by the economy. 1.9% average gdp growth since 1991. the genie coefficient, it has gone up, france has done down. it goes ups a little bit, but not as much as the u.s. or uk. but within japan where the ldp's success was in part based on the idea that economic growth would benefit everyone, the gap was big effort to start to cause a backslash. which started to become unpopular. peopleanted change. but they began to worry that too much change teen much market

reform andree market principals was creating these unjust gaps in income in japan. and the democratic party capitalized on that. it was a huge blow to the government. japan's economy shrank more than any other. you can't win elections given all the other problems, you can't win elections when that's happening. it's t economy, that's what people vote on. the japanese people were fed up, in breaking up the old system. they didn't trust the ldp to do that amore. they wanted to throw the bumps out. just to give you some poll numbers that bear this out. 69%, i can't read my handwriting, i think is 69% of the voters said recently in one poll that the change of government was a good thing. 69% means a lot of people who voted for the ldp also said, you

know, what the change of government was a good thing. this ha h to happen. the old system wasn't working for us. but this is important to keep in mind. 3% of the voters who voted for the democratic party according to one poll said they voted for hatoyama. where he won on the power, that's not why. it wasn't hatoyama. in fact 74% of the japanese public say they were concerned aboutatoyama's social scandal, and they say he has not done enough to explain it. i can bomb back to this. unfortunately, he will be elected prime minister on september 16 has a scandal that could makeim fall within a year. and the public knows about it. 68% of the public in a poll, and

friends forcive me, it's facially more anti-ldp. 68% said that ldp will be back. and 68% in another poll, this one is more pro, they want the ldp to be a viable party. they want a two-party system. 46% said that the democratic party will not change japanese politics. 66% said the dpj won too big, too much. what the japanese public clearly wanted was to throw out the old and create a competitive and dynamic two-party system. the poll suggests they wouldn't be unhappy if the poll came back. they just don't want the same ldp. as one friend of mine put it in

analysis of the election, regime change in japan dot, dot, dot, details to follow. th was mostly about throwing out the old, breaking up the system. breaking up the politics because the japanese people were fed up. and the ldp was not delivering. it was not in my view an overwhelming endorsement of mr. hatoyama or the dpj. they have real questions about the dpj delivering, and that goes for the people who voted. but they wanted a real blow. in oneense this is a resolution. the japanese people have cut through the ballot box and forced regime change. 1992 was differe. 1993 was in the diet. coalitions formed, it was not a popular vote that created the change opinion this is the popular vote creating regime change. in that sense, it's a real revolution. but there was questions about what really changed.

the next question is what will change? or what's new? i think there are going to be some important changing, at least in politics. policy is another question. but in politics there will be some changes ihink. first the democratic party ran one of their principal theme was anti-bureaucracy. it got a little old promising to cut salaries and bashing in japan. but the public is frustrated with a bureaucracy, especially the one that manages pension, and things about their daily live. they are n as unhappy with defense or finance, but health care or things that affect their daily lives. the dpj is going to make institutional changes that will weaken the japanese bureaucracy. they have enough. they are eliminating the meeting of deputies in a top positions

are politicians. but the administrative vice minister, what we would call the deputy secretary. the politicians come and go but e bureaucracy runs itself. some people have it stove piping. what former national security advisor calls cylinders of stove piping. years japan has been a feudal system with warring clans. accept now they are bureaucracies. 200 years ago, it was samurai, now in bureaucracies. but the warning clanulture as more powerful, some argue, that modern western institutionalization. it's a little overblown.

but the is something to it. the dpj wants to break that. so they eliminated the meeting of the vice ministers. and in this meeting the vice minister of trade, finance, foreign ministry, they decide what goes to the cabinet. and they arbitrateey issues among themselves. typically they have a veto. and they come out usually with a conclusion saying i'm not going to touch your rice bowl if th don't touch mine. there are a lot of issues in japan's society that are hard to solve because of this stove pipi. and the dpj says no more. from now on the politicians will meet and we will decide how we're going to resolve these disputes. and we' going to force them to work together, and we're going to take power and give it to another. that's a real shock to the japanese bureaucracy. they've also said they are going to put 100 political appointees

in. at first people worried they would be chopped off the top 100 bureaucrats. as much as bashing is popular, the reality is japan has no strong think tanks. thepj has never been in government. they won't be able to run the country without the bureaucracy. if they would have fired 100 bureaucrats, it would have been chis a. it would have been like monkeys trying to fly an airplane. and it shows you what the bureaucrats think of the politicians. what they are going to do with the 100 political appointees is not fire all the bureaucrats but have lots of politicians watching over them and keeping tabs on them. e bureaucrats won't like it. and it's going to force them to respd more and more to these

quasi political appointees. the politicking will be there to run who had the liberal democratic party. the dpj has created or will create theational strategy bureau. kind of like in the u.s. system taking nsc, the national economic council and omb, and putting them in one office under the prime minister. why? so they can control decisions. and the first thing this national strategy bureau will do is decide on the budget. and they are going to have to decide over the course of the fall what the budget priorities are. right away they are going to be from the prime minister's office. now the bureaucrats have already put toward the proposals.

there's no doubt the ruling party will nt to make its mark. the head of is this new bureau is now deputy prime minister. and so it will have a lot of power. and another thing that's going to probably change is the ldp. you don't lose an election this badly and just sort of keep whistlin past the graveyard i don't think the ldp is going to die or go away, but it is going to have to rejuvenate itself. one thing is toatch whether they pick somebody young and dynamic. people talk about whether they go to old or older and go go back to the old factional leader. openfully for japan, they will go younger. the ldp is probably going to have to change. which the japanese people say they want competitiveness. big business is going to have to change.

the business federation has been extremely cozy with the ldp. they started giving money to the democratic party when they realized they might win. but for most of this 1955 system, they gave major funding to the liberal democratic party. mainly to be left alone as much as possible. let the ldp gerrymander, protect agcultural, keep their majority by keeping the rule voters happy. and big business will continue exporting and focusing on production over consumers so they continue growing the japanese economy. that was the basic deal. well, the dpj is back by the federation of labor unhons. and labor unis, at least for now in big business out this new center for the national strategy council will be

replacing a previous group advisory group that was mostly made up of business leaders and economics that was supposed to chart economic and industria policy. it appears that the new national strategy bureau will have no business representation& so the business federation is out in the cold. that's not necessari. it's a bad thing in some ways. it's a bad thing because the dpj is talking about some policies that are very pro lab union and bad for business like manning part-time laborers, one the labor union's big complaints. and the business leaders have sa if you say we can't hire partim workers the result is not going to b that we hire more full-time workers, the result is we're going to set up shop someone else. i'm not sure how sustainable it is. but it is a problem. another one i climate change. it's a good thing that japan is

going to be active, but the proposals for cutting emissions are so aggressive, it's ing to drive manufacturer offshore. one the problems is they are hollowing out,ike our economy. it the japanese version of ohio that' in rubble because it's easier to build in vietnam. one good thing about him being out in the col they are going to have to rejuvenate to. the head is typically from an industry like steel or petro chemicals. not exactly the economy of the 21st -- the green economy of the 21st century. much more reflective of the heavy industrial economy of the 1970s. so the power structure and business federation is probably 34 years out of date. and this is an incredibly impressive organization to bring

together business and put out policy proposals. but it's also wheed to an older model of the japanese policy. d finally in terms of japanese politics, one good thing that i think will come out of this that will last is that the process, the policy process is going to be morepened up. no matter whether the ldp comes back or not. this was a vote for different kind of pross. i think in japan where civil society has been compared with korea, for example, or taiwa where civil society has been slower, the dpj is gng to be supportive in changing tax laws. that's a good thing, i think, for japan. i think women are going to have a more active role in the dpj. it's going to break open the holds on political participation. immigrants in japan. korean citizens living in japan

or cleans with japanese citizenship, new immration. i think they will -- the likelihood is the dpj is going to be more open. these are all going to make japan is more dynic place. that's all good. although it isntirely possible that this time next year i'll be giving a talk about how the ldp game back. because the ldp is within striking distance of a majority in the upper house. the economic forecast aren't great. the dpj experiences a problem. and it is quite possible that in the upper house election next summer the dpj will find itself in the reverse position with now the ldp in the upper house forcing the dpj to resolve and then unravelg them. i think the changes are akely to continue, in some ways anticipate them. it doesn't mean the dpj will be

the ones that benefit or implement them. the policy, the dpj put out a manifesto policy before the election. it was the third one of these they put out. and as by far the most moderate and fuzzy and centrist. but it sti had some things that will be a headache for the obama administration. reviceing the agreement that governs how our troops are treated and their legal recourse in japan. reviewing the bases in japan and moving them to guam. things like declassifies nuclear agreements which mostly date before i was born. they were looking to find a bureaucrat to blame. they can't find anyone who was

alive, who was involved. but it's going to be a problem if the new government started randomly declassifying secret agreements. not that anybody cares fro 1959,ut the hole idea of sort of throwing out all the secret agreements is not going to build a lot of confidence about sharing intelligence or new secret agreements. so that's going to be a headache. proposals to, this is not a manifesto, but it's part of the earlier promise to pull the ships out the indian ocean. in the effort against afghanistan. any and all of these if really pushed would be a major headache. they don't have the bandwidth to deal right now. they've not pushed hard, the dpj since being elected on these. in mississippi phone call, he was very general in his meeting. he didn't deal with any of the specifics. he sent good signals.

on thether hand, a few weeks ago mr. hatoyama put an article in the "new york times" bashing globalization, blaming the cris on the united states, and promising japan would have with passing reference to the alliances and saying they will recab bait with asian. although it's not special, it es not look like a very ambition or positive agenda. so there are mixed signals coming out. the dpj haslso got to nage its coalition partners. it doesn't have majority in the upper house. it needs to rely on the soalist. the socialist came into govement a decade or so ago. they changed all their policyies to the party, dropped all the position to the alliance and u.s. bases, and then they dumped them. when they were back out in the wilderness, they had no political base. their successor party, the

democratic socialist, the social democratic party does not want to repeat that mistake. they are demanding the dpj hold to the promise to pull out of the u.s. bases and pull out of the war on terror. they have moed away and promise to continue talking about these things but not pressing that hard yet. but the dpj won't won't -- assume, the socialist party won't drop these. so the have to manage their coalition, and the number of senior political figures in the dpj have said that they will in the past -- have said they will pull out, they will block the agreement. you know, barack obama made a lot of promises he didn't keep on foreign policies,nd it was okay. the difference between campaign good afternooning is big.

and a lot of people are advicing the democratic party to find ways to keep moving to the center. what's siking is they are still remaining big. the general consensus is not to push the u.s. on the issues right now, butn the to drop th either. and to hope that as he mee obama they will develop a good relationship and barack obama will say he's a good guy. we don't need our shi for the indian ocean were or he seems like a decent guy, we'll redo the agreement. i tnk that is increasely evidence that this i wishful thinking. e agreement was negotted by secretary defense gates under the bush administration who is the secretary of defense for president obama. ere's not as much give as people in tokyo are hoping. but the good news is raer than come out of the gate demanding

things, they a going to try to build a relationship. a couple of things worth keeping in mind. although he in his "new york times" article and some ofis speeches has put out the themes of ai-globization and moving away from the u.s. towards asia, this is not why they got elected. and that is not where the japanese public is. in the cabinet, the government polling, 73% of japanese said they feel closeo the united states. 66% said they do not feel close to china 72% said japan/china alliance would be a bad idea. you will often hear people say, younger japanese don't get it. for 20 to 29 years old, 80% said that. there is not a big sort of

popular base or even push for the hat to yes, ma'am ma government toove away from the u.s. the japanese people in the most recent polls, 71% said they want hatoyama to succeed, and they are backing him. that by the way is the exact number that the last officials got when they were elected, and they ended up with 15% or less before they went out. t 71% isn't bad. how many support president obama ? 72%. why are they doing this? why is the theme out there? part of it is trying to capture and tap the resentment about the -- about their situation economically and try to blame him for being too prou.s., too much adopting american free

market principals. it was a good campaign slogan. 's n something they can govern on. also because they were out of power, and because there are strong think tanks, a number of advisors have logged on who are shaping this narrative. they are friends of mine. i know them all. jordan probably does too. interestingly, they are all quite affectionate andpent time in the u.s. these are not anti-american people. but they are definitely pushing the theme again globalization and moving towds asia. one is bara, he graduated i michigan with a degree in economics. he wrote a book calle "beyond capitalism" whi is what he called post centric. proving he went to a american

university. which was saying the asia values are different, collective goods are more important. free market doesn't work as well. still people have some validity, and had new development model that took care of the people. then he proceeded throughout the course of the 199 to have titanic struggles with the clinton administration. the united states was incredibly strong in the 1990s, and when the class of the soviet union and the arab. and when the asian financial cris instruct, the clinton administration was slow to respond. the finance ministry championed the fund. we don't need the ims. he's a fascinating figure. he's a product of the collisions between the u.s. and japan from the late 80s and early 90s when we thought we had total models and were adversaries.

another prominent advisor is someone who was brooking institution for a long time. again fluent in english, lots of american friends, very knowledgeable about the u.s. i would not cl him atlanta american at all. he adviced hatoyama in the 1990s that japan needed to increase its leverage to the u.s. coming out when the u.s. was 10-feet tall, and the clinton administraon was pressing to change. he start the arguing that checkup leading to align with china. for a while when he was prominent as the leader of the dpj, he sort of liked this idea. this triangular relationship. and you can see i think quite clearly in this new york "new york times" and other arguments, you can see especially those of us who lived through it, i was a

graduate sdent, you can see a fascinating, almost nostalgic replay of the old debates from the clinton era when we really were clashing, and disagreeing. the thing is in the g20 and the g7 and pac, the japanese public gets it. i'm not sure, this is a question not an answer. i'm not sure how much of this is campaign mode. i worked on john mccain's campaign. let's say some ademics gave some idea that he put o there that were never going to be policy. the same is true for barack obama. i'm not sure how much of the current flavor of anti-globization is just campaign rhetorichatil suck suck -- subside. he wants a goodeeting with

president obama, the public is not interested in changing alliance that much. and there's frankly nothing that japan would do that the u.s. would objt to. if japan approves of relations, that's in u.s. interest. the u.s. needs, japan was our most significant ally. we need japan to have good relations. so there's nothing inherently bad about pushing a emphasissing relations with asia. so i'm hopefuh that this will sort itself out. t to b hones i'm worried about the margins. because i'mot sure the dpj has never had to resolve the contradictions. and i'm not sure how they will do it. briefly on the economy, this is frankly one other reason why i think that foreign policyill change fairly little. because the dpj was elected to change politics and then to do something about the economic, second.

and the manifesto the party p t has 55 key recommendations. five of them are on foreign policy and defense. almost all the rest are about people's lives. and that's what the voters care about right now. they are not unhappy with japan's foreign policy, they are were unhappy with what's happening to the political economy at home. so the dpj has promised a lot. , an awful lot. they hav promised massive stimulus. they have a broad philosophy which is good abou the economy which is japan needs to move away from export towards me domestic demand. american officials have been calling for that for three decades. the specifics are about giving people money. benjamin franklin warned politicians can stand by just

giving people money. cutting highway fees, cutting school taxes fees, not raising e consumption tax which they say has to happen because of the aging of society. you can't kp getting revenue from income tax. you have to tax consumer gds. it's aggressive, but you have to do it if you're going to maintain your revenue. but they are saying they won't touch it. increasing pension benefits, money for children for families with children. yes, it varies, but adding somewhere between $75 in entitlements to the japanese economy and lding many people to expect japan's debt to gdp will go up to 200%. which would be people in glass houses should not throw stones. 80% of the debt is held by the

japanese, and much of our debt is held by china which we can do because of the dollar. but it is going to be a problem. it's not sustainable. it makes a lot of political sense. if you want to keep together a coalition that's devices on defense issues and you have to win an election, you can afford for one year to just throw cash at people and make big promises and beat up the bureaucracy. so it's good news clash bad news. the good news is don't create o much trouble. they have to look like they are competent. make people happy as much as you can. it may not wor the japanese economy may not turn around i time to do tt. that is going to be the real test, frankly, is the upper house. anteman who's the real power behind the democratic party, the one is calling him carl rove doesn't justice.

not because i like carl rove, but because he's more powerful. ichiro had to dep down because of the a scandal. he's the war tect this victory. hundred and 20, 30 of the new people brought in were picked by him. so when pele used to talk about children, he has a large amount of people that owe their seats to them. here is clearly the power behind the thrown. interestingly, he's the veteran of the ldp. which was famous for being the power behind the throne. he wrote a book called blueprint for a new japan which argued for much of what he pushed for, taking more risks both abroad and at home. he's dropping some of that. although he has been problematic, he visited japan,

and he was critical of the united states. in my view, he is the ultimate machiavellian, he wouldn't poison or stab, but he is the ultimate. i worked one of my other jobs in japan. and i saw him up close in elections in 80s. let's just say he's the ultimate machiavellian. frankly, that's very reassuring. she's going to do what he has to do to get the victory. he's also in the long run, as long as he exerts influence, have a power-oriented slew, but once he has a majority, he's going to have an interview of the international system. and he's not going to fall for dreamy ideas of the left. and my guess is if he wins in e upper house election he will dump the socialist and the left like cold soup or cold pizza.

so watch him. he's not going to help us in the united states solve problems. he's going to want to keep distance from us. he's not going to want to be the problem solvers. but he will be the k that while we may not love him, he's going to keep the government focused, think on pragmatic solutions and good governance. 's very ironic is that the big hope is the guy who gave us the most trouble. he's the machiavellian figure that i think we might be able to count on him. in the long run, and i'll end with this, i see this revolution as being a revolution of the political structure and process, not a change in japan's trajectory. in fact, i feel frly comfortable predicting that in a few years if we were to gather and talk about what happened in

retrospect, that what we will see ishat there's a tilt to the left because of the res of this election, the socialist come into coalition. their ideas are tested and fail. and in subs went elections this party and japanese politics move back to the right. and that's the general trajectory. and that you may i security policy in particular look back on this election and say there was tilt to the left. but it actuall was a poison carrot for the left. and just as it was for the socialist in '94 when they came into government. and what people called the panese security policy, japan asserting itself more, using the self-defense forces, considering seriously changing article nine. this election maybe one of the things that people point to it and say that election was that really did in the opponents of some of the elections and what

happened to socialist in '94 and '95, testing their ideas, forcing them to confront reality, and kicking them out. that's where i will leaf it. it's going to be a bumpy couple of weeks, months, maybe years. on the hole, this is going to be a good thing. most people seem to think so, and i think that a probably right. thank you. [applause] >> do you want to me to just call on people or ? >> i suppose. >> i think we are going to 1:30 about. >> all right. yeah. i'm curious, you're describing the sense of resolution and process. in some ways there isn't much evidence that we should be optimistic to develop a competitive party system or a much more accountable government. what would you say would havto happen structurally before we

could regard japanese politics as opeting to standard westn model? >> it's a fair question. i think there will be more accountability and transparency. that's clear. the bureaucrats ability to control information, especially on social welfare issues is going to be reduced inhe role of the otherroups that's going to be increased. that's going to be a lasting change that the japanese pele will expect. the two-party system, everyone thought after 1993, one of the things he did was introduce new legislation which moves the lower house election directions into a new system. and the old system was something like germany if you follow german politics. but in one district, election district, you would have three or four seats elected. they shifted from that to a system phat looks like what we

are familiar with. single-seat district. so in every japanese distribution you're voting for one candidate. there's a list. and a certain number that can get elected. : labor vote. and it reinforces pork barrel d spending to certain constitut groups. where man o y mano. we do have a change of parties. there is a two-party system

taking shape. in some ways it's been less than expected. there ar very different polic views, specially on national security. you can go to someone like sage on the right and be >> and be about as far apart as the right wing of the ldp and he left ring of the social democratic party. there are about 30, 40, 5 politicians in each cam and this new group a l of them are sort of, not quite sure where they will go. so a lot of peopla including the expected, that big problems, north korea crisis, economic choices would force debate in parties. in some ways that has happened but in someays hn't happened because in each of these districts support group for the politicians don't want their guyshange inside.

in many districts, mainstream religious organizations are baing the dpj candidate against the ldp cdidate because he dpj candidate is being backed by a new 20th century religion that the older religions view as a threat. so some of these politicians, are conservative enough that one point they might have defected to the ldp in three. but he couldn't do it because he couldn't take his support group within because the support group wa't going to work with the other support group. so some of tse rigid battlelines within districts, religious groups, are so rigid that national policy debate sometimes doesn't, makes it almost impossible for politicians to switch. that said, i still think you're going to see some realignnt.

if the ldp were to win a few you may see people break off if the dpj wednesdayill see people break off from the ldp. there needs to be more political realignment and i think some of it will happen. it will not be two-party system in the sense we think of with democrats and republicans, but even we are learning with blue dog democratshat we don'tave a two-party system. we have a three party system right now. hasn't even we are not sort of the model of two-party democracy. >> thanks. >> i am from japan and i thank you very much for your presentation. it sounds to me your presentation made by politicians. unit, disappointed by the election. it is true, there are so many groups within the dpj, for

instance. but that is so different. also, the ldp, they put monies in. the thing is that in time of. [inaudible] are you very pessimistic? >> no, i am not pessimistic. i am quite optimistic, actually. for all t reasons you just said, because of some of the basic public opinion polls, you know. went 80 percent of japanese, 20,

29, when 75 percent of janese in almost all polls say they felt close ties to the u.s. that means something. you don't even look at the polls. you can step back and look what's happening in asia with the north korea nuclear threat, with china's rise. there is a certain natural visit to the u.s. japan having close relations. there is nothing worth fighting about close issue. we are in general agreement, the u.s. and japan government, and wille with

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