morning. we're going to take you live now to their second day of hearings. panel two with a number of state officials. live coverage hear. >> as i announce every session, we'll be swearing all witnesses. consistent with that, i'd like all of you to please stand and be sworn. do you solemnly swear or affirm under penalty or perjury that the testimony will be the truth, the whole truth, and nothing but the truth? thank you very much. you may notice that mr. holtz-eakin is sitting to my right. there has not been acoo. mr. thomas had a commitment that goes back one year.

and he had already altered everything to be with us yesterday and today. he has to depart for the west coast. mr. holtz-eakin will be sitting in the vice chair seat. and he'll be working with me on the allocation of time for commissioners. so let me start this by reminding witnesses, first of all, thank you for your written testimony. it was very well done and we appreciate the effort that you made. we will ask each of you to give us a statement of up to 10 minutes. then we'll go to commissioner questions. and we will start today with the attorney general of illinois, ms. matagan. >> thank you. my testimony is going to focus on my office's effort to combat

the practices that grew in the mortgage industry over the last financial crisis. the state attorney's general who serve as first responders when problems emerge were keenly aware of the wide scale abuses in the mortgage lending market. we were taking aggressive effort. my testimony will see the failure of federal regulatory oversight and need for enforcement regime to protect consumers in the future. i have served as the illinois attorney general for seven years. from day one i have focused on protecting homeowners and borrowers from unfair and deceptive mortgage-lending practices. since the late 1990s, illinois often in conjunction with other states, as investigated some of the largest subprime lenders in the company. first alliance, household

finance, ameriquest and others. we sued these lenders for putting homeowners into risky loans that they didn't understand, couldn't responsible afford, and couldn't get out of. our investigations reveal the pattern of predatory lending practices that will eventually permeate and destroy much of the mortgage industry and our economy along with it. these were driven largely by the rise of the mortgage securization process. which allowed lenders to bundle and sell off and deshed all liability for their soundness. once they already freed for responsibility for failure, common sense underwriting standards quickly deteriorated. mortgage lending had been turned on it's head. lenders made for money selling high cost loans than sound loans. for the simple reason that wall

street paid more for subprime loans. we see that in 1999, subprime loans were only 3.8 and a loans were only 1 hadn't 7%. by 2005 at the height of the lending frenzy, almost 50% of the lens originated were either submime or at a. to respond to wall street's growing command, lenders created compensation structures that incentivized loan officer to add risky features to loans. in our investigation we examined rate sheeting lenders used to determine compensation for loan officers. what we found was alarming. lenders paid brokers and loan officers more for loans with low introductory teaser rates. lenders also paid broker more to place borrowers into no documentation or low dock

numbation loans which allowed brokers to state or inflate a borrowers increase without verify indication. this type of underwriting permitted lenders to place large number of borrowers into subprime loans without reviewing their ability to repay them. according to one report by 2004 no document loan was 40% of the subprime market. they were also paid more for putting borrowers into loans of 100% of the value. in fact, the percentage of the nonprime loans that ltd over 100% increased dramatically from 2000 to 2006. additionally lenders paid more for a number of other risky features. such as highest interest rates, payment options that didn't even cover principal on the interest that acued on the loan or prepayment penalties. all of these risky features were common in the loans we reviewed during our investigations.

addition to reviewing loans, we have talked it thousands of homeowners struggling to pay their mortgages. the stories we have heard from these homeowners adds to the picture of the lending industry predatory practices. time and again, we hear from borrowers who didn't understand the terms of their loans. for example, many borrowers thought that they were being sold a loan with a fixed rate only to be presented at closing with papers with an adjustable rate. worse, some borrowers didn't know their mortgages had adjustable until two or three years later when the interest rates reset. borrowers have also told us that the most complex financial transactions took no more than 15 to 20 minutes to complete. based on a study of high-cost loan in the chicago area, and many of the borrowers have we heard from, we have found in the lending industry practices were offer concentrated in minority communities. i and other state attorney

general have been aggressively pursuing for over a decade. we continue after the crisis. there's a parallel story to the record of the state. one that is equally critical to the full understanding. federal regulators often showed no zest in the regulatory authority or worse affectively hampered state authority. the federal reserve had the authority to tighten underwriting standards for all loan products and lenders. but it chose not to exercise after -- exercise until after the market collapse. by putting out guidance on nontraditional mortgage products, but the bulk of the damage had already been done. even as the fed was done little to protect the consumers and the financial system from the effects of predatory lending with, the otc was putting out

efforts to thwart the crisis. in 2004 of sweeping preemption rules that federally chartered banks are generally subject to state laws. in the wake of the federal regulators push to curtail state authority, many of the largest mortgage lenders shed their state licenses and shelter behind the shield of the national charter. and i think there's no consequence that the era of expanded federal preemption gave rise to the worst in the nation's history. a major lesson tour drawn is federal chartered must not be mistakingly viewed as giving lenders exemption from state investigation and prosecution for violations of consumers protection laws. in conclusions, some lessons to be learned are to preserve sound underwriting standards. which evaluate the borrowers ability to repair their loans.

and not to compensate more to place borrowers and loans with risky features. there are signs that federal regulators recognize. last year the federal reserve finally put in place stricter underwriting standard for higher-cost loans. unfortunately, those stand while they would apply to subprime, won't apply to prime conduct, including pay option a.r.m.s. i believe common sense deck indicates that we need strong underwriting standard that apply to all home loans. in addition, the federal reserve has recently are proposed the rule to provide incentives to pay borrowers in riskier loans. i along with others drafted and submitted comments to federal reserve to adopt that rule. this crisis resulted from a

combined failure of regulatory system and government. and it's resolution depends on the willingness of every participate, federal and state to commit to common sense reforms. the state attorney general and their ability to investigate in mortgage lending must be preserved. our strong record of pursuing lending practices and responding to the problems of our consumers makes us a necessary part of any future solution. thank you and i'd be happy to answer any questions that you have. thank you very much, general. attorney generalsitters -- attorney general southers of colorado. i appreciate the describe my office, a many smaller offer. in the midst of the response. i'd had the honor and privilege

of serving as colorado attorney general since 2005. that means i came into office just as we were starting to hear about problems to come in the colorado housing market. in my view, which is largely hindsight, the states were not well equipped with legal tools to deal with much of what has transpired over the ensuing five years. like many states, colorado had passed legislation in 2002 dealing with so-called predatory loans. in part after the federal home ownership and equity protection act of 1994. unfortunately, like it's federal count part at the time, colorado's limits on blue payments and prepayment penalties and it's prohibition on the loans applied to such a small subset of the highest cost loans that it proved to be very little deterrent to abusive lending practices. loan originators were able to push more exotic loan products who's rate and low minimum

payment formulas with significant cost paid outside of closing took the products beyond the coverage of such laws. in 2005, colorado was one of only two state that is did not regulate loan mortgage. we are still one of the few state that is does not regulate of nondepository lenders. with respect to the laws we did have in place back in 2005, as general madigan indicated, we were powerless to enforce the lawing due to the aggressive stance federal regulators took to preempt state law. even with respect to discriminatory lending and deceptive advertising. i join to encourage you to examine the advicability of the federal preemption in the regulation. as things began to unravel, my office join the task force and

coordinated our enforcement efforts with colorado district attorney and united states attorney in colorado to ensure the cases were pursued by the most effected meaned. my office focused on enforcement by deceptive advertising on local borrowers and egregious cases. we examined the advertising of dozens loan originators for act violations. seize and assist letters went to those advertisers who were not disclosing an apr or who are disclosing inaccurate apr. by late 2006, our newspapers were full with option payment a.r.m. loan. they failed to disclose the

borrowers would experience if they made over the minimum payment. they were led to believe they were buying a fixed-interest rate when only the first monthly payment was at the advertised rate. we issue subpoenas and conducted numerous depositions. the witness told us the teaser rates really quote, made the phones light up, unquote. it was clear that thousands of colorado borrowers got into the loan without knowing the true nature, the significant negative amityization that they were added and the penalties that came with the loan. a number went out of business. we reached the settlement with seven companies that prohibited them with such advertising. several companies refused to settle. we sued them for deceptive advertising. we also brought a series of civil and criminal against lenders and loan originators engaged in fraudulent

transactions and against individuals engaged in the real estate schemes. we've summarize these in the written testimony. we've joined with illinois and other states and multistate actions against ameriquest and countrywide. we've also pursued local companies in california. and we aggressively pursued criminal cases. i think the fact that we got sentences up to 30 years indicated how egregious judges felt the conduct was. i want to turn to current trends. over the past two years, my office has seen a dramatic shift in consumers complaints. we are receiving fewer complaints. we now have complaints about mortgage services and foreclosure relief scams. in addition to working on individual complaints, my office is participating in a multi. state effort to work with loan

servicers to encourage loan modification and other sustainable long-term solution. the state foreclosure prevention working group is comprise of 15 state attorney general and the conference of state bank supervisors. formed in the summer of 2007, this group met early on with representatives of the 20 largest loan servicers in the united states. since that time, the working group has been collecting data from 13 much -- 13 of these companies. i'd indicate to you the majority of the 7 who are not disclosing the information are claiming federal preemption and no requirement to do so. this data collection effort has led to the publication of three reports during 2008 with the fourth report covering 2009 to be released shortly. unfortunately, each of the first three reports relieved the wide between the level of serious

subprime borrowers and effect i have loss efforts with as many as seven or eight out of ten borrowers are not in any loss mitigation process. while those numbers are believed to be improve over the last year, there are still far too many borrowers who are not aware or who are frustrated by the delays working out a nonforeclosure solution. foreclosure release scams are a very significant problem for the states. shortly after i came into office i was approached by the number of local officials handling in colorado. about a rapid increase in the number of individuals who were soliciting homeowners in foreclosure for a variety of services ranging from finances and loan modification to investment schemes designed to allegedly save a home from foreclosure. i form add task force of public and private parties to look at

the problem. in 2006, the task force was instrumental in drafting a securing passage of the protection act. the act prohibited the upfront fees, from taking the financial interest in the homeowners property, and requires that foreclosure contain language designed to protect consumers. investors referred to equity purchasers are subject to strict written contracting procedures, a three-day cooling off period during which no documents can be recorded, and special provision relating to sale-back. not surprisingly, complaints have outstripped all over mortgage-related complaints. delinquent homeowners are arriving at the door, over the box, and on the internet. we have now taken action against 33 foreclosure rescue and loan

modification firms. we also have investigations of dozens of additional companies ha are aggressively advertising colorado homeowners facing foreclosure. many of these companies are located outside much colorado. 17 of these actions were announced as part of two separate sweeps in july and november of 2009 that approximately 25 state attorney general offices coordinated with the federal trade commission. let me briefly touch on other continuing concerns. as more colorado consumers have fallen behind, we have seen an increase in the marketing of other services to those same consumers. in addition, to the foreclosure we've seen an increase in payday and other high-cost loan and an increase in debt settlement and credit repair frauds as well. under colorado law, payday loans are limited to amount, finance charge, and deliberation. in 2002, the total loan amount

reported in colorado was 245.9 million. by 2007 that number had increased 160% to 639.5 million. these figures do not take into account unlicensed payday lenders operating primarily on the internet attempting to avoid state licensing. let me say about debt management scams. since colorado service act took effect in 2008, my office is investigated and taken action against 26 debt management companies and has issued 22 cease and assist orders. violations include failure to make the disclosures and charging obsessive speeds. we've required the company to refund more than $1.3 million and $135,000 against them. also a problem. we're seeing a lot of credit

repair scams. let me conclude by suggesting the cause and effect of the crisis, as you folks are finding out, are varied and complex. we in the state are dealing with the fallout. and that means the effects of record home foreclosure, spiraling credit card and debt and unfortunately the growth of other industries to take advantage of the financial struggle of our good, honest citizens. thank you thank you. >> thank you, general. >> good morning, mr. chairman and members of the commission. i'm ms. crawford. >> could you lean a little in. >> sure. i'm a texas security commissioner. i'm president of the north american security administrator negotiation, also done as nasa.

i'm very honored to be here today. it's instructive to examine the regulatory responses to the major financial scandals over the past decade from exposing security and conflict and mutual funds to the auction rate cases, state security regulators have consistently been in the lead. indeed in some cases at the time the state began the investigation, it was unclear whether the federal regulators intended to pursue it at all. it was with the auction rate security, ars. billions of dollars of these security were sold to investors by major brokage as cash alternatives. in february of 2000, the market collapse. they were left with ill liquid securities. in june of that year, they brought a civil against charging

that the firm sold to customers with false representations. a month later, new york called the lawsuit against. in july a similar action was filed by merrill lynch. and on august of 7, the first settlement with citigroup under which the company would fully reimburse it's 40,000 customers who had been unable to sell their auction-rate securities and pay several penalties of $100 million. significantly, the sec took no public action with respect to ars until august 7, 2008 when they announced a preliminary settlement comparable with members. sadly, state investigation into corporate abuse that is federal officials have missed through the years have resulted not in

reform at the federal level but increases in other states. some federal agencies have responded by issues regulation broadly pri efforting the state law or even bringing suit against state officials. states have a battle against current federal agency simply to pretear the authority to protect the interest of the investors. the national security mortgage improvement act of 1996 significantly impacted the role of state regular -- regulators. it prohibited the state from taking preventive actions in area that we now know have been substantial contributing factor to the current crisis. congress, federal regulatory agency, have created gaps in the entire investment protector

regime. we provide several example of problems that have been investigated by the texas state security board. in the final analysis, he obstructs the state's ability to investigate the violators when they become participates. by the way of example, another enforcement case in texas is worth mentioning. investors in nrs recovered 60% of the amount they invested. most of the them were retirement funds. it's rare to have such a large recovery in the security case. and in court the sever told the judge that the texas state security board had acted before they even had a single complaint. investigations such as nls are trademarks of the regulators. no lead is is too small to

warrant at least a review. the failure at times is to see similarly swift action on the part of the federal regulators. state securities regulators enforcement statistics show our effectiveness. from 2004 to 2008 weapon conducted more than 11,000 enforcement actions. which led to over 230 million in monetary fines and penalty and more than $3.7 billion order returned to investors. we are also responsible and this is significant for seeing that the defendant in these cases were sentenced to more than 4,000 years in prison. the calls for preemption or more sro authority at the expense of state jurisdiction defie common sense. only because the evidence

clearly demonstrates the state security in their structure actually work. now i'd like to make a few recommendation for your consideration. first, state security regulators observed the rise in the number of made pursuant to the rule that we referred to earlier that have late been determined to be fraudulent. although congress preserved the state's authority to take enforcement after the fact in these cases, that powers no substitute for the state's ability to scrutinize the cases before they are made. the scc does not review the form defilings and rarely investigates the 506 offering with which they are connected. the preemption of state regulation has vacuum which is significant because these are often billion-dollar deals that have an effect on our economy.

today no one regulates these offerings. nasa believes that the congress should reinstate the regulatory authority of the state in all of the offers. since the repeal of the glass-steele act, we've seen obsessive risk taking with federally ensured deposit, which you examined yesterday. key activities are incapacitiable. these include underwriting, dealings of securities, derivative of such securities, principal investing and managing of hedge funds. i believe that the nonbank financial intermediation would quickly emerge following theglass- -- glass-steegel with

the systemic risk regulator. third, as ed by the inspector general's report on the testimony of chairman sha pyre row and staff before congress, the bulk of federally covered invest. advisers are examined. a clear oversight gap has existed for some time. it is now emerging into public view. nasa remembers are fully prepared to fill the gap by expecting responsibility for the oversight with up to $100 million under management. nasa members possess unique qualification that ensure the permanent closure of the gap will be made or geographically near these folks it's more economical and easier for us to go out and look at them. this is the trend that tremendous is moving for and

moving away from the business model. because ia regulation subpoena different, the experience the nasa members is all the more critical in that area. : the complexity of the financial market has exceeded competency capacity of federal regulators,

providing evidence for the need for state bank, insurance and securities regulatetores on the systemic risk council. fifth, the current levels of funding for state and federal law enforcement agencies is low. increasing enforcement to more effectively deter fraud is much more cost effective than after the fact compensation of victims and economic damage repair. in conclusion the unique experiences of state securities regulates or the front lines of ininvestor protection provided flame work for my testimony. we provide an indispensable layer of protection. as you continue to examine the causes of our current financial cries crisis develop recommendations to prevent reoccurrence, i strongly suggest you consider restoration of state authority preemthe over the last 14 years.

our presence did not contribute to the crisis the fact that our regulatory enforcement roles have been eroded was a significant factor in the severity of the financial melt down. thank you very much. >> thank you. thank you for summing up. mr. theobald. >> good afternoon, mr. chairman and members of the commission. i want to thank you for the opportunity to testify before you today about the miami-dade police department's effort to combat mortgage fraud. facing a wave of mortgage fraud investigations, miami-dade county mayor carlos alvarez established the mayor's mortgage fraud task force in 2007. this public/private partnership use as comprehensive approach that blends legislative change, prevention, enforcement, regulation, and prosecution to reduce mortgage fraud and prevent victimization of individuals and businesses. according to the finsn, mortgage fraud is one of the fastest growing white-collar crimes in the united states. from 06 to '07 florida held the dubious distinction

ranking first in the nation in mortgage fraud. according to the mortgage asset research institute. known as mari. miami-dade ranges in top five areas hit by that crime. number of suspicious activity reports from financial institutions reported by fnsn more than tripled from '04 over 17,000 to over 64,000 in 2008 and, it is closing in on 70,000 in 2009. mari estimates 70 to 80% of all those foreclosures contained some type of mortgage fraud. it seems clear that foreclosures and mortgage fraud are intertwined to some degree. in both 07, and '08 from ranked second in the nation in foreclosures with miami-dade being hardest hit area in the state. traditionally the fbi and hud inspector general's office handled mortgage fraud investigations. in many areas though the fbi ace thresh hold for handling these cases is set at certain dollar amounts and

cases fall below these thresholds must be handled at local level. fbi miami office for instance had a one million dollar threshold, 98% of the all the cases did not meet. compounding that problem, that was the fact that no state statute existed to address mortgage fraud as a crime and local law enforcement investigators and prosecutors did not have sufficient knowledge, experience, or training in taking on mortgage fraud cases. in addition, the combination of questionable mortgage industry professionals, the lack of appropriate resources for state regulators to accomplish the legal mandates of their office, and relaxed lending requirements by lending institutions led to a rapid increase in mortgage fraud that has had a detrimental effect on miami-dade county, the state of florida and the entire country. our response in miami-dade because local law enforcement had lacked the authority and ability and tools to investigate and charge subjects with mortgage fraud, the task force drafted and lobbied for the passage of a florida state statute which allowed

local law enforcement throughout the state to arrest perpetrators for the crime of mortgage fraud. this legislation formed the cornerstone of the task force. nevertheless, a multifaceted approach was necessary because the mortgage fraud crisis was not created by one or two different components gone wrong but an entire breakdown of the real estate industry. to address the various strategies for reducing mortgage fraud, the miami-dade police department consulted key stakeholders, county and state elected officials leaders of local government, business executives, law enforcement professionals, prosecutors and we formed five committees. the first committee was the law enforcement committee that is responsible for detecting, investigating, apprehending and prosecuting mortgage fraud subjects and enterprises. the committee comprises largely investigators and supervisors from the miami-dade police department's economic crimes bureau, our economic crime bureau detectives work with other local, state and federal law enforcement to solve cases and apprehend subjects. the state attorney general's office, the u.s. attorney's

office and miami-dade state attorney's office prosecute the cases in the respective courts. legislative committee. which enhances current laws, creates new laws and ordinances. several of the task force members are state legislators who have assisted sponsoring and passing state laws to achieve the task force's goals. the regulatory committee which enhance and enforces state regulation on all parties involved in a mortgage transaction. the business partnership committee which creates and transmits effective business practices and ethical code of conduct to enhance cooperation with law enforcement and different professions involved in a mortgage to attack the problem and stop fraudulent loans from actually being written. and education component, which helps law enforcement, prosecutors and industry professionals build awareness about mortgage fraud through extensive community visibility and guest speaking events, news conferences for major sweeps, arrests and new legislation. to date, mayor alvarez's mortgage fraud task force is one of the few

public/private task forces at county level in the entire united states and it has a tremendous impact on the way mortgage fraud has been viewed in florida. the law enforcement committee has shouldered a number, a lot of the burden in achieving this goal. to date there have been several thousand reports and inquiries and currently 682 investigations are active. the economic crimes bureau has made more than 189 felony arrests for mortgage fraud and related charges which represent more than 60 million in losses. we have created a training manuel and train more than 400 investigators and prosecutors in the state of florida. as far as legislation goes, the legislative committee crafted new legislation and enhanced the current mortgage fraud statute which was sponsored by our state representative carlos lopez-cantera and state senator gwen margolis. these bills were signed into law by governor crist and effective july 1st, 2008. they enhanced the law enforcement ability to notify the county property

appraisers office when an affected property has shown mortgage fraud and there is probable cause that a mortgage fraud occurred and this is important because the property appraiser's office is now required to reevaluate not only the affected property but properties around that particular home or that condominium. this will reduce taxes and has reduced taxes of all properties affected by the fraud. not only individual property but everyone involved in the scheme. the bill also created a second-degree felony for the mortgage fraud that occurs over $100,000. in 2008, at federal level, house resolution 6853, the nationwide mortgage fraud task force act of 2008, sponsored by congressman kendrick meek was passed in the house of representatives and, it was amended as nationwide mortgage fraud coordinator act of 2008. unfortunately ran out of time in the senate but was filed again on january 14th of 2009, as hr 529, the nationwide mortgage fraud task act of 2009. the legislation sought to

create a nationwide program modeled after miami-dade's mortgage fraud task force to address mortgage fraud in the united states. on may 20th of 2009, president obama signed public law 111-22. a sense of congress encouraging the creation of a nationwide mortgage fraud task force act. the act, which was senate 896 was sponsored again by congressman meek and senator bill nelson, both of fraud. as far as regulation goes, following the recommendations of the task force's regulatory committee, the florida office of financial regulation and department of business and professional regulation enacted regulations to expedite emergency hearings to suspend licenses of real estate agents and mortgage brokers involved and arrested for mortgage fraud or other related fraud. the immediate sus send pun will prevent agent or broker from victimizing unsuspecting home purchasers. regulations required background checks and licensure for all loan originators. additionally complete overhaul of the state

statute regulating the mortgage industry was in this year's legislative package. the business partnership committee created a real estate best practice manuel to distribute to miami-dade county realtors. the committee sought and reprivate funding and from florida bankers and other professions involved in the mortgage business to assist it finance costs involved in investigating and practices cuting mortgage fraud. the education committee has created a public complaint form with web site access to report mortgage fraud and is is on the mayor's web site. there is also an established database of speakers available to appear at engagements and speak on behalf of the task force. additionally, an aggressive media campaign to educate the public and prevent victimization has been you know taken. in conclusion, mr. chairman the task force is committed to making a difference in the quality of life of citizens of miami-dade county by reducing number of incidents of mortgage fraud. all they is a tremendously large problem in the united states the steps have been taken in miami-dade can be duplicated elsewhere and in florida and throughout the

country. the task force's comprehensive multidisciplinary approach that has proven to be successful in miami-dade county is being sought as a model for attacking mortgage fraud in the united states. the mortgage fraud task force and its accomplishments can provide a solution to the national financial crisis. with the task force model, hard work and perseverance by dedicated public servants and industry professionals can unravel the mess created by greedy lenders and fraudsters. i look forward to working with you and other members of the committee solving this serious threat to our nation's economy. thank you for allow being me to testify before you today and i look forward to taking your questions. >> thank you very much. we'll now start the questioning. i will lead off here. attorney general madigan, i want to talk about a what appear to be deep systemic failures at the federal level. let me first visit this issue of the combined lack of federal enforcement, coupled with then efforts to

preempt. tell me a little bit about your visits with, you're talking with the federal regulators. you've been on the scene now for seven years. did you go to the federal reserve, did you go to the occ did you go to other federal regulators tell them about what was happening? can you tell me what happened? >> sure, i have spoken with people and this would have been, you know, 2005, 2006, if memory serves me correctly about the problems we were seeing particularly with subprime loans, particularly with low doc, no-doc loans. those are very specialized products, until this crises crisis got underway were very rarely used. they were were used for people in general who had group credit but may not have an active stream of income. so let's use example of a medical student, recently graduated. secured a job. you know wants to purchase a hem. but doesn't have any at that

point. but, reasonably you can look and see that person will. that was the intent of, say a low-doc, no-doc loan. when you looked what happened in the lending industry, those types of loans become almost standardize, in large part because because there was a lot of money to be made by putting people in those loans because it would cost little more to put somebody in that loan so there would be a greater revenue stream and therefore more interest and more ability to sell that off to wall street, and unfortunately, there was a lack of, either appreciation or interest in the problems that were occurring on the ground, not just in the state of illinois but throughout this country with those types of risky loans. in addition, -- >> can you ask you specifically, did the state attorney generals, visit with occ, federal reserve,

and visit these issues? >> i think in 2005, you might be aware there was an action brought against, at the time, attorney general spitzer, by the occ, attorney general spitzer at that time, had attempted to initiate fair lending investigation of a number of national banks, and the issue of preemption arose then, going all the way up to the united states supreme court. it was resolved earlier this year. so the occ was well aware, and we did obviously make the occ aware we were looking into, not just fair lending practices but other practices of the lenders in an effort to combat the erosion of underwriting standards. they just had a different agenda. >> let me ask you about this notion of higher payments for riskier loans. that's because, what mortgages were being paid higher amounts to pedal

these loans? or was it, that -- pedal. commissions were the tell me the correlation between risky loan, higher payments. making those more attractive for wall street. i want to understand that as best i can. >> ultimately you're looking at what is the income stream out of that loan. so the higher the interest rate is, the higher the income stream should be. the higher those payments will be. and so, brokers, as well as loan officers, in-house lenders as well as originators, as well as, independent brokers who were selling loans were incentivized to put people into high-cost loans and then, to complicate the problem, add risky features to the loans. so the prepayment penalties, the balloon payments, things of that nature that would trap people, certainly with the prepayment penalties into those loans, again

insuring, an income stream in the -- >> those were calculated into the income streams? >> they would be. and, here's what you're concerned about. they're calculated into what the payment is going to be to the broker or the loan officer, and so that was the incentive that we've seen. as i said, we have seen the rate sheets show the amount that he can broers and loan officers were paid, based on the features of the loan, based on interest rates of those loans. >> you can provide those to us? >> it was part of our litigation with countrywide. so i will see if i can. >> all right. miss crawford, you've been in your job for 28 years as texas securities regulator. what kind of grade would you give the federal regulators or the specifically, your greatest interaction was sec? >> yes. >> what kind of grade would you give them for the last decade? >> for the last decade i would have to give a grade

of approximately d minus. and the reason that the grade is d minus is because, there have been some actions on the part of the sec, but, the problem is, that they have missed the boat with regard to the most dramatic threats to the investing public. there seems to have been a lot of activity there but the activity has not been focused in a meaningful way in addressing these problems as they relate to individual investors, and really, large investors as well. so, there has been a lack of leadership. much has been said about the lack of resources, but the problem with that argument is that, there are never enough resources, and what has to happen is that you have to have good people who will strategize to deploy the limited resources they have, in the most effective way to protect investors.

and that is the mission of the sec, and, is at the forefront of what they're supposed to be doing. we found on a number of occasions that they just weren't there. these major frauds that i mentioned before that turned out to be systemic and would have been exactly the kind of systemic national problem that the securities and exchange commission would have been expected to address, was not addressed. and therefore, the state securities regulators had to step up to the plate, and fill that void. that is not the kind of thing that i want to be doing on a daily basis. >> was there a collaborative, let me, has there ever been a collaborative relationship with the sec? you're talking about limited resources. it would make sense organizationly if i was at sec which i'm not, look at counterparties across the nation, talk on a regular basis talk about what they're seeing in the field, in a sense coordinating

enforcement. has there ever been that kind of a relationship? >> mr. chairman, that kind of relationship does exist at the regional offices of the sec. the regional offices, i would give probably an a-plus grade to because they work very closely with their counterparts in states. they work collaboratively with state and federal prosecutors. it is really a beautiful business model for regulation. on the regional level at the sec. it is only in washington that we've had this problem. and, it's not always been the case. prior to about 10 years ago the sec was in our estimation the crown jewel of the federal agencies. they knew what they were doing. they knew what they were supposed to do. they knew how to work with all the other players to get the biggest bang for the buck. so it's been very disheartening for all of us,

state securities regulators, and others, to see this occurring. >> okay. mr. holtz-eakin. >> thank you, mr. chairman. thank you to the witnesses for taking the time to be with us today. let me begin with the standard admonition we thank you very much for your answers to the questions we get to ask now but, we would ask your cooperation as well in answering questions we would submit in writing after this hearing and look forward to working with you. i have a couple of questions that are going to reveal i know nothing about the kinds of things that you do. i guess the first one, goes to you, attorney general madigan. which is, it seems to me very commonsensical that someone would pay more for a mortgage more valuable to them. so what's wrong with that? >> what was wrong with that is that, at the broker level, they were no longer looking to determine, as part of the underwriting practice, whether or not the borrower could actually afford to pay

the loan. >> not so much the fact that you pay more for a mortgage that gives you greater income streams. that makes perfect sense. it is that underwriting standards again have deteriorated? >> correct. so there was an incentive to put people into higher-cost, riskier loans when they were not appropriate to be in those loans because they ultimately may not be able to pay them off. and as, we've seen, that was in fact the case. >> okay. and, can you, i guess, this would be a general request to everyone, if you have information again on the pervasiveness of fraud in mortgage origination i think this is central to the investigation, you know, what fraction of mortgages, by value or number were affected by fraud over the period from say, 2000 to the present, getting a sense of the magnitudes i think is imperative. >> i think it is essential when you ask that question to decide, what you mean by

fraud. i think, you will find, if you include deceptive advertising, as fraud, you're going to have a very high percentage of the problems attributable to fraud. if you actually get into fraudulent mortgage schemes, some of these complicated things, may not be a big percentage. but in terms of the number of borrowers that got into these things as a result of the teaser rates, as a result of not knowing what negative amortization was and all that sort of thing, i think you've got a very high percentage of the loans. we'll try to do our best job of an is looking that for you. >> i appreciate that very much. i did want to ask you, a little bit of a follow-up to the issue of loan modification because, it wasn't clear from your testimony, at least to me, whether these were instances of illegal actions regarding loan modification or simply the failure to act in some way. so we're not asserting widespread fraud until loan modification? >> no, commissioner, we're not. what we're talking about is

all of a sudden pressure from all sorts of places, the federal government, state governments, let's get into loan modification process. our personal belief is, loan servicers are absolutely overwhelmed. they were not geared up for this. and, i also believe that despite our best efforts through foreclosure hotlines and everything like that, we have a very small percentage of all the people, maybe it is our fault, in terms of our ability to outreach, actually, trying to get into this modification process. i'm not alleging any wrongdoing in that process. i'm saying that our hoped, hoped for situation with lots of people participating in the process, at least over, up until recently, and i haven't seen the latest record, has not faired very well. >> thank you. miss crawford, i want to go back to auction securities,

because that was one of the seminal moments in the financial crisis both in short of shocking magnitude and its duration. the market stayed frozen completely for a long time. i think understand your complaint about the absence of, after the fact action by the part of the federal level officials but was there something that you can identify could have been done in advance to avoid the freezing of the auction rate securities market? or was it going to be one of those pieces of the fallout of the crisis regardless? >> well, one of the problems that has not been discussed is the privatization of governmental functions, and in the case of securities regulation, we do have an entity called finra that is a private entity that is responsible for actually looking at broker-dealer operations, and they tend to

focus on very large ones because that is where the sec emphasizes its regulatory authority. however, for whatever reason, finra failed to uncover these unsavory practices at all of the major wall street firms. and i think that if finra had done a better job, or better yet, if the sec had assumed the responsibility, and accountability for looking at those firms and their practices, perhaps, we could have stemmed this early on. >> thank you. mr. theobald, i guess the question i have for you goes to these magnitude issues. the number you quoted in your testimony, 70 to 80% of those mortgages that are in foreclosure show evidence of fraud? i think this is from the mari folks. does that mean the foreclosure process is fraudulent or does that mean somewhere in the chain, from

origination all the way through there was some evidence of fraud? >> what we found somewhere in the chain. the number was quoted by mari, talking about either fraud for profit or fraud for housing. again you're talking about two different animals. somebody might fudge the numbers to get into a property they really can't afford. so that in essence is a fraud. however, it is not something that we are really going after. we're going after the fraud for profit and criminal conspiracies that are involved in that. >> i see. thank you. that's all. >> let me, on my time ask just a follow-up to this, which is, let me understand it. in the 70, 80% number does include both the fraud for profit, conspiracy for profit, as well as the fraudulent documentation? >> that's correct. and, but what's happened is, the fraud for profit has actually hurt the market and hurt economy as well because now you're looking at all the foreclosures that

occurred because of that. >> i do want to emphasize, i think whatever data you can provide on pervasiveness on fraud and direct our staff to make this a work item. i think one of the other things, there is a term, i think it is controlled fraud which sometimes you have entities, very nature of which from start to finish, what they're moving into the marketplace is, something that's fraudulent, non-sustainable. i would be interested in particularly, i think, the non-financial institution, mortgage originators. these monoline originators. i would be interested in some stats from our staff on the extent to which there was kind of widespread failure of mortgages. that's really directed to the staff. to look at some entities to see where there certain entities in the marketplace, the very product of which was unsustainable. all right. let's go to questions from commissioners, ms. born.

>> thank you very much. i am concerned by your testimony relating to preemption of state law in areas of financial regulation, and regulation of market participants. during the last two days we've been hearing testimony about weaknesses in federal regslation. for example, the failure of the federal reserve system to institute effective predatory lending bans. problems with the sec's oversight of asset-backed securities. problems with the sec's oversight of credit rating agencies. and now we hear that, in addition to the problems on the federal level, there's

been federal action, either by congress, or, by federal regulators to prevent states from stepping in where the federal government has not been successfully regulating. i would like to ask, for example, attorney general madigan, what the motivation for preempting the states has been if, you know? >> i'm probably not the best advocate for preemption so i don't know if i'm going to give you a satisfactory answer. certainly, from our perspective, clearly over the last decade in this financial crisis it has been demonstrated, there needs to be and i think everybody on the panel spoke to, there needs to be a strong system that includes federal regulators and state regulators in large part

because we are the front lines. we get those consumer complaints. however, there are arguments that are made by docc, and others at the federal level, that, banks in particular, they don't want to have to contend with 50 different state laws. we would counter and say, in many areas they deal with 50 different state laws, but, if there was one strong standard, that the states could enforce, there wouldn't be a need for different state laws. and, so, attorney general sut they ares -- suthers testified to it, and with his experience in illinois and we went in to illinois and to our legislature and say, we have to change the law to require a fiduciary duty of brokers to insure they are in fact putting borrowers into loans that they can afford to repay, and that is the best possible loan for them.

however, very difficult for us at the state level to pass those laws when the brokers and other lenders can look and say, well, if they're not doing it at federal level, it doesn't need to be done here. there isn't a problem. so we have some real significant problems obviously when there is not coordination with federal regulators in the federal government. . .

>> in the case of the occ, i believe that it's a regulatory turf battle. i believe that the occ wants to capture all of that space. with regard to the sec inside the beltway, i think there's a little bit of fear, sometimes fear can be a good thing. that it can be a motivator. i do believe in regulatory competition to the extent that it results in better protection of our nation's investors. however, for the sec, that is a significant problem. so washington worries about that. on the other hand, the regional offices that image before it don't worry about it at all, seemingly. they just want to work collaboratively to get the job done. so there's a bit of politics

there. the last thing i want to mention that is really rather insidious is that from time to time, federal agencies to suffer from regulatory capture. and what i mean by that is they have become so close to the entities that they are sworn to regulate, and there is so much moving back and forth between those entities and the regulators, sort of a revolving door system, that i believe that their mission gets lost in the process. and some of that has occurred at the occ in my view. >> commissioner born, which woni would like to be able to let attorney general suthers respond, if you would like to. >> thank you, commissioner. i've watch the arguments about federal preemption for many years now. typically the proponents tell congress that subjecting our

industry to 50 different state regulatory schemes will interfere with interstate commerce, and congress and congress bases the preemption on their powers over interstate commerce. i think what bothered me just as we can do somewhat of a knee-jerk reaction to fight preemption, a lot of the lobbyist in industries that come to congress have a very knee-jerk opposition to any kind of state regulation, and seek preemption. and nobody really takes the time to decide the extent to which any state regulation would really interfere with interstate commerce. for example, keeping us out of pursuing these companies for their deceptive advertising. at the front end of this whole thing, i think would have been very beneficial for us to be able to not just pursue those

entities. we had jurisdiction over, but as you know, the occ was very, very aggressive in stopping any efforts by the states to get into some of these areas. >> just to clarify one thing. are you suggesting that the major arguments and pressure for preemption are coming from the regulated industries, either their advocacy before congress or their advocacy before, for example, the occ? >> i certainly am. >> thank you. >> all right. commissioner wallace and? >> thanks very much. i've looked through your testimony, all of your testimony, and you make very strong case is that there is very substantial abuse of mortgage lending going on in

your states. and that's probably true if we had 50 of your counterparts here. i do want to stress, however, that our job is to report to congress and the american people about what caused a worldwide financial crisis. and that's why it is so important for you, if you can, to be able to provide us with information that would allow us to assist the dimensions of the fraud problem in relation to the entire subprime lending problem. there are probably 26 million subprime and alt-a loans. that's a huge number. it probably is well over a trillion dollars that we are talking about here, in terms of potential losses throughout the world financial system. so we have to, to the extent possible, get that information,

the chairman has asked our staff to look for it. and i'm sure they will because they are skilled, and they are good investigators and they will find this data, where it exists. but if you have that data anywhere, within your jurisdictions, that would be exceedingly helpful to us. and in particular, ms. crawford, i would like to ask you in your role with the north american securities commissioners to see what they might have within their jurisdiction. because of course they cover all of north america. and if there's something in their files, and studies have been done, that might give us a sense of the dimensions of this. we very much appreciate it. i would like to give you each the opportunity to tell me, if there's anything you know of, or anything that you think any place you think we should go to find this information. please tell us now. we will be asking you, as the

chairman and others have suggested, we will be asking you in writing for this material. so you'll have a chance to go back to your offices and think about it, but if there's anything you could think about it would would be very helpful. >> let me direct the commissioners, as well as your staff, there is a gao report that came out on july 28, 2009, regarding the characteristics and performance of nonprime mortgages. and there's a lot of information that i think would be very useful to the commission enclosed in there. it may not cover, however, you pay option arms, which are categorized as prime mortgages which are the ones that are now default in in record numbers. and so they will have to find additional studies, but we're happy to look for the information and provided to you. >> anyone else? okay.

i only have one other question, and that is for commissioner madigan. i think you mentioned in your statement that pay option arms were part of the predatory or otherwise abusive loans that were bought by wall street. is that correct? >> what i reference is the fact that pay option arms are the most complicated and risky loan product that we've ever seen. often, they include we've been talking about low introductory teaser rates. the low introductory teaser rates on pay option arms can be as low as 1%. that teaser rate only lasts for 30 to 90 days. at which point, the borrower then has the opportunity to pay for different ways. either you can make a minimum monthly payment that doesn't have your principle principal, doesn't cover all of the interest. you have an option of paying

what would be a 30 year amortized payment. 15 year amortized payment, and is one option i'm forgetting, but another one that exists. we have seen that the vast the jury of people who took out these loans that were coming in, originally intended only for very sophisticated investors, unfortunately the majority of people took out these loans didn't fall into that category, and they are treating their home mortgage loan the same way they would treat their credit card payment. so they are making only a minimum monthly payment, and the real concern about that is that within three to four years those loans than will be larger than the actual value of the whole. so people end up upside down. when that happens, the borrower has to make a fully amortized payment. so it's incredible shock. i believe that in the countrywide complaint that we filed, there's actually quotes

from angelina moceanu basically indicating that he was unsure how borrowers were ever going to deal to pay these loans have so. >> that was a good answer, but i had a much more specific question. that's okay. it's useful. the question i had is where those loans sold to wall street? >> to the best of my knowledge, they were. and i would have to look at what percentage is. i think that when you look at how subprime i could tell you that subprime loans, three fourths of them, were eventually securitized and allegedly the quarter that were not probably have different values. may be better loans that they weren't as concerned about getting the risk on those. i would have to find numbers for pay option arms and prime loans. >> my question is what is. in a normal securitization that wall street did, of course, they were assuming that interest was going to be paid on these loans. one of the reasons they were

paying up for subprime mortgages, as you suggested an answer to commissioner holtz-eakin's questions is they were looking for that stream of revenue to pay through the securitizations. the pay option arms, any other negative amortization loans, wouldn't support that idea. so i'm just trying to find out whether, in fact, that was part of what wall street was buying. >> well, if you want to look at much of this as sort of an equity stripping scheme, as long as, and with many of these loans, both the pay option arms as well as sub prime alt-a loans, and a lot of the promotion of them to borrowers was that if you do have a problem, we will revive you. and so as long as people still had equity, when they got into

trouble, they were able to re-fi into another loan product which would then give the originators more money, more fees and continue to feed the beast, essentially. and so i think that's another one of the situations that you would find putting people into the pay option arms, incredibly low teaser rates. people making minimum payments, and if they got into a problem, presumably, until critter was no longer available, and home values were no longer going up, they could re-fi. >> let me just respond to that, mr. chairman. i know my time is up. >> forty-three seconds. take the time to. >> i know i have 40. all right. the question i had really assumed what you're talking about, but when one of these loans is refinanced disappears from the securitized pool, so that it's actually a problem for the securitize her to have these

loans refinance, they preferred loans that wouldn't refinance quickly. so that's one of the issues that we have to be looking at. >> and you need to look at the securitization contract because there were provisions in them, and i don't at all want to say i'm an ex-byrd on this, but there were provisions in terms of the representations and warranties that in times if there was a loan that would default on, it could be swapped out for a new loan. but you have to look at those individual contracts to determine what was allowed and what wasn't allowed to. >> thank you. >> good, thank you. mr. hennessy? >> thank you. peter, to a certain extent still my question, but i want to see if i can give my version of it as low. this is both for the staff, and then if you all can help us at all. thinking about something quite close to what he was thinking about. i look at this at the universe of foreclosures that we have.

and there's always, they're sort of a baseline level of foreclosures that naturally occurs in normal times. and then obviously, we clearly saw a dramatic increase and are seeing a dramatic increase in foreclosures. i'm interested in both a component of the baseline level of foreclosures and the increase in foreclosures. and if you look at those people, and my simplest way i divide them up into four groups of people. the first group are victims. people who were suckered by some bad lender, mortgage broker, someone who fooled them into taking a mortgage that they never should have taken. these are people we clearly feel sorry for, especially on the backend now when their property is being foreclosed on, they are being hit in all sorts of ways. the second are knowing but unlucky people. people who understood that they were taking a risk. they basically understood what they were doing. they wanted to get in the home.

the mortgage was available to them. they knew they were taking a risk, and the economy tank or they lost their job, or what ever happened. and so they are about to lose their home. the third are gamblers. people who were knowing and were intentionally speculating on home prices continue to appreciate. maybe there were more of those in certain areas of the country than others. i don't really know. and then a fourth category are the fraudulent individuals, but people who were doing the fraud from the borrower side rather than the fraudulent behavior on the letters i. these were people who were lying in terms of the information they were providing. i'm try to think about it from the standpoint, not of the universe of mortgages that were out there, but if you look at a universe of 100 people who were facing foreclosure, kind of what's the breakdown. because if this is a present victims, that says one very significant thing about how we

should be thinking about the foreclosures. it is 80% knowing people, what can you tell us about what you see and how that might influence our understanding of the relative components of the universe of people who face foreclosure? mr. theobald, anything? sorry if it's too complex of a question. >> that's quite all right. >> and i had two more categories. >> it is a very good question. and what we have seen, the difference cams that are involved with the foreclosures, folks are knowing, got into these properties, knowing they couldn't afford them into first place, however, they fudge the numbers to get into the. that you put them into one of your other categories as opposed to the fraud that technically they did commit fraud. >> i have that person in category four, where if they foreclosed on, i have no sympathy for them because they live in getting their mortgage. >> but what has happened is the

phenomenon of the artificial increase in the property valuations. and folks got into properties and paid far too much money than what they were actually worth. and then when the bubble bursting all those properties went down, to what they were actually worth, folks are holding half a million dollar mortgages on a $200,000 property. their best move is to go into foreclosure. not to pay that half a million dollars. now, that brings us to the next wave of fraud because now they are identifying a party to sell that short sale due at the lower rate, and then quit claiming the property back over. so in essence, giving $300,000 from the lender. >> so let me focus then in the universe of fraud that you're dealing with, what's the relative balance of fraudulent lenders, i'm thinking of these as firms that are using these deceptive advertising practices and basically fooling borrowers,

versus individuals who are trying to take a page of either other individuals or of the lenders. >> and there are a number of folks that are part of the industry that work in different various aspects of the mortgage industry that had been involved in this. maybe knowing or unknowingly, by the many institutions. and those people are the ones that probably caused the most damage because they were able to approve or, you know, allow those fraudulent loans to go through. what we have seen, it's a myriad of folks that are involved in this, whether its folks that are real estate agents, mortgage brokers, appraisers to everyone involved in the process had something to do, title attorneys, closing agents, everyone that is involve. >> all of those people, and my simple model, they are on the industry side. its bad behavior by people in the industry, rather than the guy who wants to get into the half-million dollar house so he touches the numbers.

is looking to live in a. it sounds like you are saying that universe of individuals who are lying to get into homes is a small proportion of the total amount of fraud, is that -- one minute is all i need. >> that is actually a significant portion, because of the market and what had happened in the market. because the market went -- artificially inflate where people couldn't afford to live in florida anymore due to the increasing taxes, due to the increase in insurance. so they had to fudge the numbers in or to get a mortgage, to be able to get the property. >> all right. repeated back to make sure i understand it. in florida in particular, there were in fact a significant number of individuals who were not affiliated with this industry who were in a position that they felt they had to

behave fraudulently because it was the only way they could get into a home? >> exactly. there was nothing else to increase the valuation of the property. we didn't have a body weight in industry, salaries that went out. it's just that the speculation on the properties and the condominiums and single-family homes, went up and to a point where folks could not afford to live. so they have to do something in order to get into a property. that's what you saw the option arms and the sub primes and everything else. and the numbers -- >> so the housing price bubble encourage bad behavior i some people who wanted to own homes? >> it exacerbated the problem. >> that surprising, thanks. >> mr. thompson's? >> thank you, mr. chairman. i think you all brought some texture and color to the shape and nature of the problem. not just in 2006 and 2007, but the problem that lives today,

lives on in our communities around this country. you also represent what we all know of this first responders, and in many respects we think of first responders as firefighters and policemen and what have you. but in fact, in this particular fight, you are the first responders for us. i'm struck by the preemption problem, because i think it represents a real conundrum for us. because here we sit in a time when, quite likely, funny for state and local governments is under enormous, enormous stress. and so even if we were to say yeah, let's clear away the conflicts and perhaps put more authority back into the states, how are we assured that there will, in fact, be funding to support what has become a massive, massive national growing problem? not just a problem in illinois or a problem in colorado.

so i guess what i would like for you to describe for me is what are the conditions under which we can have a more cooperative relationship between state and local government, and the federal regulators that you interact with, recognizing that there's not going to be infinite funding. there's not going to be perhaps significant changes in law that would shift these things about, but we've got to fix what appears to be a broken interaction between the states and the federal regulatory process. so, general madigan, let me start with you. >> commissioner, i appreciate the question. one of the things that has occurred, i would say during this past year, has been an increase in the level of cooperation. in particular, with the federal government and state attorneys general. so a number of meetings have been had at treasury to discuss some of these very issues, as well as what generals others talked about, which is the

concern we had about the foreclosure rescue fraud. and as we see, there's a number of task force working group that had been put together to contend with mortgage fraud in the whole series of different areas, whether it is the origination in or if it's the backend, or if it looks at discrimination. and so we have been working with attorney general holder. we have been working with secretary geithner, we have been working with the hud secretary as well and we look at the modification programs. and how they are working, or need to be improved. would have been working with the ftc, which is a long-standing relationship, but one that i think has been invigorated over the past year to look at a lot of the fraud that's taken place. and so that is, from what i've been told, i have been -- my counterpart in iowa has been the attorney general for upwards of 28 years. and what he has said is is

unprecedented to have this type of dialogue, this type of relationship with federal regulators. and so again, we are heartened i think by the change, but obviously, as proposals are made to congress, about what do we do to prevent this crisis from happening in the future, we know that right now certainly in terms of putting in place consumer financial protection agency, a large part of the argument is whether or not state level enforcement will, not just remain, but actually be expanded to where we believe it should be in part recognition for the work we've done and apart from recognition that the resources are limited and more cops on the beat, hopefully should deal with these problems. >> commissioner crawford, can i hear from you? >> yes, sir. commissioner, i think that you raise a very important question. and right now there is a higher level of cooperation. because there's a great deal of fear. this is a huge huge problem, and it's beyond the ability of

either the federal regulators operate or the state. so the fear factor has caused more greater indication and collaboration. the problem is going to be on a going forward basis where perhaps the fear level is not quite as high, how do you ensure that there are mechanisms in place that will not allow for this same sort of situation to develop. and i think that the systemic risk council holds out great opportunities for us in that regard. as long as we have both federal and state regulators represented on the council, and it's written into law and its mandated that those folks speak to each other and we were together going forward, i think that we lessen the probability of a major systemic crisis. >> thank you very much. >> would you like what i'm?

>> no, that's fine. >> mr. george of? >> isn't it the case that the push for extensive securitization of these mortgages enabled in a certain sense the proliferation of mortgages some of which were motivated by fraud and others of which simply never looked to be able to be paid back? and let me try and be as little more precise if i can. once you buy a whole pool of mortgages and you securitize them, everybody involved in that process gets paid when the security is sold. the lawyers who write the prospectuses, the auditors who are the financials, the underwriting investment bank, the ratings agencies that issue them. and none of those parties retain the risk that ultimately the failure of the underlying

mortgages will imperil the securities themselves. that risk falls exclusively on the purchasers who are customarily pension funds and other investment vehicles that had accumulated the potential retirement benefits of others. so i guess, my question really is, is when you talk about the option to a arms and these picture pena, we call them pick your payment mortgages, at the end of the day, who, if anybody, has undertaken responsibility to pick up the pieces of those lost -- those lost opportunities? and once they are purchased, i don't really know even what the assumptions are made as to what the amount of interest that would be generated by those particular loans, what assumptions are made in the securities, you do, will they pay 1%? will they only pay 1 percent for

three-month? will they move to 12%? i just don't know the answer. and can you speak to what the accountability question, how it may have motivated the underlying fraud? >> commission, i think you do a very good job of really explain the problem. and so in the end of the day, the people who have the risk were on the very front end, the borrower, and on the very back end, the investor. all the other market participants were paid along the way. they did nobody any of that risk, and so the previous panel, there was some conversation about risk retention. and on capitol hill that has been conversation about requiring a certain amount of risk retention such that you don't incentivize this lack of underwriting standards, and you don't incentivize just kind of volume sales so as making money off on the way, when ultimately you don't bear any responsibility, if that is going to be a sound loan that is ultimately going to be paid on. so what we have seen is that the

breakdown. right? securitization process allowed everybody along the chain to make money, and none of them to have to do with the consequences of the risk. except as i mentioned on the front end and the back and. >> when commissioner hennessy gave his breakdown of categories that dim, knowing but unlucky, that's exactly what occurred to me. i do think there's a large note but unlucky category here. people who knew what they're getting into but still should have been getting into it, and no one had the incentive to keep them out of it. i really do believe that, that this is a big part of the problem which goes to exactly what you're describing, the lack of risk for the people who were putting them in this. >> i think you have done a superb job in articulating the nature of the problem, and the thing that's very disturbing is that almost any product can be

securitize. so it's very possible that down the road, or even as we speak, the great minds of wall street are figuring out new products that can be securitize in a similar fashion. so as long as we have a situation where you can offload 100 percent of your risk, at each stage, we face the possibiy of another financial meltdown. so this is a serious problem, and it does need to be addressed. >> just very briefly. >> take two more minutes. >> thank you. i just want to say that you know, i appreciate you coming in me for my questions and i guess i would return the compliment, and that i know the national association of attorneys general, with whom i've worked extensively and a north americans association

administration is on top of this eric and i guess i would remind all of us as commissioners how important it is to empower the frontline and the local officials, i don't mean to not include you, mr. theobald, to empower people who actually are the closest to the problems. because you are the early warning systems in many respects for these issues, which ultimately may come to federal attention at some point. but abuses are more quickly identified to you and the problems are brought to you at the local and state levels. and securities and attorney generals and law-enforcement authorities. and i guess i think, you know, we need to examine the extent to which we've reduced the authority of the locals to the point where we create a greater

systemic risk. as a result. thank you, mr. commissioner. >> thank you. ms. murren? >> thank you, mr. chairman. i have a question for commissioner crawford. if you could talk a little bit about what he believed there were any specific actions that might have been taken over the course of the last several years that would have led to a diminishment and what you characterize as being regulatory capture. >> yes, i do. i think that it is a problem that when you go to work for federal agencies, particularly the sec, thereti whatsoeve the u can immediately leave and go represent wall street firms, work on wall street. and what i think that that does is it tends to have a chilling effect on the zeal with which

you regulate those people across the table from you. in addition, i think that there are some systemic issues that need to be looked at by all the federal regulatory agencies. one of the problems with washington, and you hear this over and over again, is that they are too removed on what's happening on a day-to-day basis. and it makes a big difference if you are a regulator and somebody literally walks in off the street and sits down and gives you their documents and says, i think i've been defrauded. you have to deal with them. that doesn't happen as often in washington, d.c., because people don't ordinarily get on a plane and fly to washington and lay out their problems before representatives of federal agencies. now, that's probably always the way it's going to be.

but i think a recognition of that fact is so important in terms of trying to keep financial meltdowns from occurring in the future. and that's why i really do hold out great hope that the systemic risk council will enable local, first responders, to interact with their federal counterparts in a way that creates a sense of urgency and humanizes issues that we all need to be addressing. >> thank you. attorney general madigan, you had mentioned in your testimony that it is you believe that consumers require a need to have more protection, and certainly i think all of you have described a lot of reasons why that's the case. but do you believe that if we were to fully maximize the effectiveness of the regulators that we currently have, that that would give consumers the protections that they need? or do you feel like we need to do something different?

>> excuse me. i think that the current proposals that are being talked about in congress are very important. i also -- the other panel earlier today had different views on what the model should be. should it be one consolidated regular, should it be a panel of people who work together? the concern that i think we, as the state attorneys general, who are really the front lines of enforcing consumer protection laws in our states have is that there has to be somebody who's primary or sole responsibility is consumer protection. because we have seen that when that is not a component, we have seen what happens. and we have a flood of foreclosures across this country. and so it depends what the ultimate structure is going to be, whether or not it would be

sufficient. i think at this point it is safe to say that there is no federal regulator who was involved, whose primary responsibility was consumer protection. occ, ogs, federal reserve, all of them could do work on a consumer protection. but that is not their primary or sole responsibility. so there has to be consideration, not just given, but responsibility given and prioritization of consumer protection. so we will see how that plays itself out. >> thank you. and just one remaining question. >> take a couple minutes. >> mr. theobald, could you talk about perhaps anything that is lingering that you might be saying since you are on the front line, you've obviously done a trigger job of being able to pull together your task force for mortgage fraud. and all of you have identified the fact that there were some early warning signs about the problems inherent in that. i'm wondering if there's

anything that you are seeing today that continues to concern you as we look at our financial system going forward. >> actually, there are a lot of concerns, and one of the most particular concerns is the state and local folks working with our federal partners, pushing the work down to the state and locals in the only way we're going to get on top of this mortgage fraud. there's far too many cases to handle for the fbi or the inspector general. they have to push this down and in order for us to move forward, we need training for local law enforcement. we need to do these things and we are accomplishing that through the department of justice and bureau of justice assistance by pushing trinket but as far as trends that we're seeing right now, we are seeing a lot of loan modification fraud. and that is coming from businesses that are opening up shop, and these are people that are behind on their mortgages and they can ill afford to pay 1500 or 2000 to hire someone to

help them modified alone. and all they're doing is taking that money and doing nothing. so that's the next way that we are seeing. the short sale frauds, which i describe it for, as far as folks i got into the property back when they pay too much for the property and now are trying to unload it at a short sale price. but then signed it over and quitclaim it over to a friend or relative and didn't have it back again. >> great. thank you. >> senator graham? >> thank you very much. ms. crawford a couple of questions. first, your organization starts out north american securities. doesn't indicate that canada is also a part of your association? >> yes, sir, it does. all the canadian provinces and territories, mexico, quam, puerto rico and the virgin islands are members of nasaa. >> among the economies of the world, canadians have stated to be one of the least affected by

the financial crisis. has that -- have they done anything in this particular area of mitigating housing fraud that may have some lessons for the united states? >> i think there are a number of lessons from the canadian experience. and this commission may want to even explore that. of course, they have had problems in canada, but not nearly as severe as what we've had in the united states. and i don't consider myself an expert with regard to their regulatory regime, how they do things in canada. that it might be worthy of exploration. >> i'd like to ask if it wouldn't overburden you come if you could develop some lessons that we might learn from our neighbors to the north.

>> absolutely. yes, sir. >> let me ask a second question, which i asked of the earlier panel. back in 1995, congress passed legislation on litigation relative to the securities industry, which was intended to raise the bar, make it more difficult for a private litigant to bring a case of securities fraud. in your written testimony, you alluded to this. what's been the effect now, some 15 years later is, of this legislation? and would you have any thoughts as to whether it should be modified, repealed or otherwise changed? >> i am thrilled you asked that question, because we have very strong opinions on that. it's impossible for regulators, either federal or state, to address every single fraud. private enforcement of the securities laws is absolutely

essential, and it's pretty clear that the legislation that you refer to has had such an overwhelming chilling effect on the ability of people to bring really good cases, but they are stymied because of the requirements to get into the courthouse. that is detrimental to all of us. we can't be there all the time. taxpayers cannot fund every effort to bring about justice. and these cases are vitally important, and i'm hoping that this will be revisited by congress. >> mr. theobald, as someone who was born in and still lives in miami-dade county, i was particularly interested in your commentary and would look forward to discussing this with you privately for there. the legislation that was passed

states that the law-enforcement official who comes into contact with some fraudulent activity is to report that to the county property appraiser's office. do you know how many cases of fraud were, in fact, reported to the county property appraiser's office? >> yes, senator. and if i could for a second, i don't know if your member, about 16 years ago you were doing jumped out with me in one of the roughest neighborhoods in miami-dade, and this is -- >> thank you for covering my back. >> yes, sir. but so far to date we have delivered over 100 cases to our property appraiser's office and is the significance of that is the fraud that occurs in neighborhoods, the fraudsters were having to have two comparables in a particular neighborhood. and those two comparables brays the valuation of the properties in that entire grid that the property appraiser uses. so all the other folks that were

not involved in the fraud, their taxes went up because their homes were artificially inflated by the fraudsters. and especially in condominiums in miami-dade county, and you know better than anyone down in south of the city of miami in the quarter, there are 25%, 30% foreclosures and buildings in that neighborhood. attributed from these fraudsters. >> this is to all the panel, many of the people who are involved in these activities are licensed professionals, realtors, in most dates mortgage brokers are required to have a state license, etc. how effective have the professional regulatory agencies then ineffectively prosecuting cases of license removal or other form of sanction against these professionals?

>> in florida, the statute was on the books to have these hearings. however, the personnel that is assigned to these regulatory agencies is very minimal at best that they don't have the resources or the personnel to do it. however, since the heightened awareness and the mortgage fraud crisis that we had in the state of florida, the increase in the licensure removals and suspensions has increased because we are now constantly communicating with those agencies, and they are having these hearings now to pull folks licenses. and again, prevent them from victimizing other people. >> senator, we were one of the seats until recently did not license mortgage brokers. and interestingly enough when the department of regular agencies looked around the country, foreclosure rate and other problems associated with it was a full licensing and in our state where there wasn't, there wasn't a whole lot of

difference. but one of the things that we have noticed is that there's an amazing number of felons who are now unable to get, at least when people were applying for mortgage licenses, were being disqualified as a result of having criminal records. so at least there was a subset in this group that actually had criminal records and is now being excluded. i will tell you that since this occurred, this collapse, one of the things that's gone on in colorado, is an incredible increase in the scrutiny of appraisers. we have greatly tightened our laws, and as a result of a problem with the fraudulent appraisal of conservation easements, we are now suspending high numbers of appraisers in colorado. >> thank you, mr. chairman.

>> if i could take the lasso that of my time. i just want to go back to that last question to make i understand that the characterization often given of the mortgage crisis is that it occurred in certain states, california, nevada, arizona, florida. bubble states, and that it was the states specific licensing and oversight of the mortgage brokers that should be the focus of attention, that really wasn't anything to do with federal policy. it was the state. and so what i want to be real clear about is the licensing was clued within the state domain, but were the preemptions from either the 96 law or the consul of the currency, 2004 action, that inhibited your ability to prosecute and generally oversee mortgage brokers conduct in your state's? >> let me do two things.

let me give you some statistics, and then let me also respond maybe more directly. because we obviously hear this all the time. the contention from chairman dugan at occ, that this wasn't a problem with the national banks. and in fact, national banks funded 21 ashman of the 25 largest subprime issuers, that were doing business in the lead up to the crisis, and it was national banks and federal thrifts and other of their subsidiaries that were responsible for almost 32 percent of subprime mortgage loans. 41 percent of the alt-a loans and 51 percent of the pay option in interest only arms that were sold. and that's for 2006. and i believe that information comes from -- i will find what comes from for you. and so it's been recognized that yes, some states have very few resources. and so while enforcement actions are taking place, and, they are

a drop in the bucket in terms of the entire problem. that doesn't mean that enforcement actions were taking place. when i look across the country, we see that enforcement actions were taking place against every single participant in the chain. this was taking place at a state level, and again, not being supported by the federal regulars. in fact, oftentimes being challenged by, and so to the extent this problem existed and was funded by national banks and thrift, and they just went down the chain, very hard for states to go after that problem when arguably we had to decide i'll be going to spend our limited resources on fighting a preemption battle or are we going to go after the lenders that are operating in our state. >> i would agree. with general madigan. >> thank you.

>> can i -- i want to ask a follow-up on the percentage. user 32 percent of the subprime loans, is that a national figure? >> i believe that is a national figure spirit that was 32 percent of the sub prime loans were originated by -- sayegh and. >> national banks, federal thrift or their subsidiaries. >> so the balance, the other 68%? >> not depository lenders that had state-chartered. >> okay. yes, absolutely. let's use all that up. >> another follow-up question. when you encountered these cases involving federal institutions and where preemption was lodged, did you have a file over to the federal agency that was asserting the engine? and if so, what action did the federal agencies take with those

files? >> what i can tell you again is that when these cases and usually tend to come to states the way it was described in texas, so every year we taken the illinois attorney general's office approximately 30000 consumer product of plates. a whole variety of them. some section of them are going to be related to consumer debt. so when somebody comes to us with their stack of mortgage document and we review those, then we start to see patterns, that's when we start our investigations. and so what we do is make a determination, is this somebody, is this, you know, an organization that we have the legal authority to do something about. when we do, those tend to be the ones that we decide to pursue, versus the ones arguably were preempted. yes there are times when that information has been given to federal regulators across the country. and we can probably work to try to get you examples of that and

report that back to the commission because i think it would be valuable for you to have. >> what did the federal agencies to win and they were so alerted? >> we can include that. i can tell you in one report i have read, that between, i believe it is 1995 to 2007, i believe it's the occ initiated 13 consumer protection actions publicly. 13 over that time period. >> editorially, it seems to be the corollary of preemption is the assumption of responsibility. it's not just to abdicate to the bad people and give them a free firing range to operate upon. and it would be interesting what was the response of the federal agencies when they were given the opportunity to carry out the other side of preemption, which is responsibility.

>> commission, additional two-minute? >> i just wanted to clarify something if i understood it. you said that 68 percent of the mortgage fraud or subprime lending or alt-a lenny, came up through non--- >> subprime lending. >> 68 percent of subprime lending was -- 32% was national. banks and thrift which means 68% would have been other. >> okay. for the 68%, you do have authority. the preemption occurred as to the 32%. let me just check to make sure that everyone on the panel here has jurisdiction over non-preempted organizations, such as mortgage brokers, nonbank, non-federally regulated bank institutions.

is that direct? >> i actually do not have that authority over that particular group, because we are restricted to securities. but i can tell you in my state there isn't an entity that does. >> okay. there is at least in your states, mortgage brokers are regulated. yes, attorney general? >> those are the entities that we went after as states attorney general. we went after the largest of the subprime lenders so the time we were investigating household, ameriquest, countrywide, they were the largest subprime lenders in this country and we direct our resources towards them. what's also interesting to note is that when we started doing these investigations, particularly out of illinois with countrywide, almost immediately they change their originations. they were no longer originated under their state-chartered and moved to find the protection under the federal charter. and so there are very few, if any, state-chartered entities

left out there doing mortgage originations. >> thank you. >> i just have a couple of wrapup questions. you mention in your testimony, commissioner crawford, the national security's market improvement act of 1996, they always have such nice names, commodities future modernization act, but you talk about how some of the authority, oversight authority or the rating agencies were pulled away. from states. no longer registered investment advisors. was there any practical effect to that? i mean, pre-and post? was there a different real level of scrutiny in terms of rating agencies where states bringing actions? >> white honestly, no. but if you remember back in 1996, it was just before things started going downhill. in terms of there being very

obvious conflicts been pointed out. people were beginning generally aware that it was an inherent conflict to pay for your rating. and i won't say what we would have done had we had the chance, but the fact that there was no backstop there in the states is not a good thing. >> so maybe the only observation is no backstop in purses measurable effect. >> i think that's their. >> attorney general madigan, i just want to clarify one more time when you're talking about more payment for the riskier loans. i can understand obviously maybe the desire to have quote unquote higher paying loans as it turns out, they were. they turned out not to be at the end of the day. but were you also saying that mortgage brokers, the fees paid to mortgage brokers that that was the rate chicha talking about? would find a mortgage broker, they nonsupported institution is

doing me if you originate abmc here, you get paid more. we're incenting you because this is the stuff we want? >> exactly. >> but that doesn't necessary apply to the no doc loan? >> no, that -- >> no doggy center you're looking at somebody who probably has good credit, you as the bar will end up paying more because there is no documentation. that put you at a higher rate so yes, you as the broker will get paid more if you're in one of these no doc loan. >> because there is a compensation for the no doc. all right. which is -- i want to serve on the fact that it wasn't to cover the additional cost of no documentation. all right. and then, i don't commissioners have any other questions? i have one last that i have an observation, which is as much for the commission as for all of

you, is that sitting here today, one of the things that strikes me and it's been striking me more as i've -- as i myself learned about the fbi warning in 2004. is one of the things i think as a commission would look at as we look at the causes. to also look at the early warning signs that were out there. i mean, we know that there were many in many places, but i do think you've been very helpful in that respect today. witnesses, thank you very much for coming all the way he. thank you for your time, your testimony that it was extraordinarily valuable, and with thas iheuiry commission is a jared. thank you all very much. [inaudible conversations] [inaudible conversations]

[inaudible conversations] [inaudible conversations] [inaudible conversations]

[inaudible conversations] [inaudible conversations]

>> second day of the financial crisis wrapping up. you can watch the hearing both day online at c-span.org and also see our link to the financial definitions of, definitions of financial terms as well. the associated press is reporting the white house has reached agreement with union leaders early on thursday on a tax on high-cost insurance plans. removing one the major stumbling blocks in the way of final compromise on health care legislation that from the associated press that we're also getting news that congressman is announcing that he will retire after the end of this term. he will retire and not run for reelection in 2010. on politics, candidates fine for the republican nomination. in texas, the texas governor race are debating tonight.

governor rick perry being challenged and warden county chair. we'll have t debate live for you tonight here on c-span 2 at 8 eastern. >> this weekend on the 1965 voting rights, the roll it played, and how it paved the way for future african-american leadership. he'll discuss the book with kevin on "afterwords" on c-span 2. >> the deadline is approaching. $50,000 in prizes. just create an 8-minute visit owe -- video or challenge the country is facing. enter before midnightan20th.

winning entries will be shown on c-span. don't wait another minute. go to c-span.org and upload your project today. >> here at the kato institute in washington. the counterterrorism coordinator is joined by cia and fbi counterterrorism officials to discuss the administration counterterrorism efforts. it runs about two hours and 20 minutes. >> good morning. >> good morning. >> good morning, class. i want to welcome you to the cato institute. i'm jim harper, director of policy studies. a so-chair of the cato's initiative which is made possible by general fill fill philanthropies. we're very pleased to an expert group with us and later in the

obama administration to address and help us president obama's first year in counterterrorism. a year ago today, many of us were hear starting the second day of a two-day conference in which we exemployered terrorism and counterterrorism and worked to it shape and predict the obama administration's counterterrorism strategy. you can review that conference. i urge you to do so at cato.org/counterterrorism. we had over 30 experts in terrorism, security, risk management, and communications. and like today we had many, many people. thank you those of you who have come back. thank you for bearing with us as we test the capability of our conference facilities and our staff. when we met before, i took the liberty of framing counterterrorism in a way that i think probably simplifies or oversimplifies the work of many terrorism experts. i said that overreaction is the

key goal of terrorism. overreaction delivers gift to terrorist when it drains the blood and treasures, when it neutral undecided parties to the side of terrorist, and when it confirms terrorist knavetives about ideology and about good and evil. overreaction can delegitimize the important state. excuse me. this framing has helped me as i continue to think about terrorism and counterterrorism. i hope it's been helpful to others. i hope perhaps it might be helpful to you as you think with us about the past year in obama's counterterrorism policy and the coming years. put my own views aside, last year i said what matters is the incoming administration should have a counterterrorism strategy. how in the view of the incoming administration does terrorism

advance the goals and what are those goals? how will the new administration seek to ensure that terrorist do in the achieve their goals. how will they refang terrorism as a strategy and what are the communication plans for terrorism generally and in the event heaven forbid of a terrorist attack? we didn't get direct answers. we got more than we wanted in terms of terrorism events. the silver lining is our society can learn and grow more familiar with the form of terrorism. we hear today can develop some direct evidence at least to what the administration's approach to counterterrorism is is. our panel of experts represents a variety of respectives. it helps us review year one in obama administration. from your left to right we have

clark ervin, michael german, priscilla lewis, jacob shapiro, and soon to be joining us paul pillar. he will be here within the five to ten minutes i do believe. it would take a lot of the morning to lay out all of the credentials of the fine group. instead of doing that, we put together a biosheet. if you didn't manage to pick it up, i'm sure a neighbor of yours did. you can take a look at it. after the session this morning, they will give us direct evidence of the administration thinking and plans and especially in lieu of the christmas bombing attempt. as a note, between our session

and mr. benjamin's talk we'll have a brief, brief recession in order to reset the stage. you can use that to set your legs or freshen up a bit. don't go too far. now when we started planning the event, i can see the relatively simple structure for the conversation that we would look back on the year just past. look forward with our prescriptions for the next year and the rest of president obama's service and then go to q and a. obviously, christmas brought us an unwanted gift if you will. we're going to start with the discussion of our top lines, what our takeaways are from the christmas bottoming attempt. then look back at the first year of the obama administration, look ahead, and go to q and a with you. if i hurry up and stop talking, we'll have 25 minutes for each. let's turn to the first question. we'll go down the row. what for each of you is a

takeaway from the christmas attempt? please. >> all right. thank you very much, jim. let me begin with i think that largely the response is commendable. i would have preferred for the president to come out sooner. it was three day, of course, as we know, before the president made a statement. i this in times like this, the american people want to see the commander in chief, particularly one as articulate and analytical. when we did come out, both the tone and content it seems to me of everything the president said and announced was right. we talk about that specifically. i'm reminded of what william f. buckley said, he's rather be governed by the first 100 people in the boston phonebook than the fault at harvard. there's a lot of wisdoms that resides in ordinary americans. everything the president announced, assigning a person to be responsible for following up

on all priority leads, more wide-sharing of information within the intelligence and security community, checking the visa status of known or suspected terrorist and revoking visa when there are active visa in place. tightening the procedures to make it easier when there was reasonable grounds to believe that someone is terrorist or maybe a terrorist to put that person on the slight tea list. which would select him or her perhaps under certain circumstances. i would argue those circumstances existed on the no-fly flust list. and of course enhance screening protocols and the wider deployment which we can talk about whole body imaging during the course of the program. all of that made perfect sense. when the counterterrorism expert and had a security experience. which leads to the second point. since they are so obviously, why

are they just now be instituted nine years, almost, after 9/11, eight years after the creation of tsa, seven years after the homeland security creation and what became the terrorist center. and six years after the creation of the director of international intelligence. and if there's anything good, it seems to me that comes out of the christmas day incident, aside from of course the obviously, the fact that the plot was spoiled, not of course through our own government but the heroism of the passenger and the terrorist, it's that it, the incident has served again to concentrate the national mind on the urgency of the terrorist threat. and i would close with two additional quick thoughts. it's -- one the other good things that the administration did and there's no indication that they will change their mind about this as these investigations continue and as these reviews continue.

the administration did not announce that there was going to be any further organizational changes. that is the typical response of government when there are huge crises like this. it seems to me that we have the organizational structured that we need. what is lacking, and the administration has been vague is accountability. the president took responsibility, and, of course, ultimately the president is responsible for everything that goes right and wrong. it's the right thing to do morally. it's politically smart as well. president kennedy took responsibility for the pig fiasco. it proved to be popular for him politically. but as a practical matter, the president does not run his own government. it's people in the system who do. and it's ultimately they it seems to me who should be held accountable. the final thing i would say, i acknowledge the potential danger of overreaction. and i think there are times during the course of the year sense 9/11 when our government has overreacted. a good example of that is the

in-sears program where of muslim men were rounded up and incarcerated for a long period of time. gitmo is an example of that. i am more concerned about the underreaction. we have tended to think the threat has gone away since kr-89 11. this incident serves to concentrate the mind. i hope the obama administration will have new urgency with counterterrorism as a result of it. >> thanks very much for jim for inviting me. i think our intelligence community is still dysfunctional in ways that were far too similar to the dysfunction that provided the opportunity for 9/11 to occur. and i think that is something that we should really focus on.

that this is still a problem of the correct management of the information. after 9/11, the issue was originally that we weren't collecting the right information. it tooked couple of year before the government's information came out. it tooks years and allowed suspiciousless collection. i think what this shows is when you gather a lot of unfiltered hay and make the hay stacks bigger, it doesn't help find the few needles that need to be found. i think that is something that we should take a real serious review of rather than short of trying to create knee-jerk reactions. and, you know, pretty much for the last almost year, i guess,

the obama administration has embraced this concept of suspiciousless collection. there was an opportunity to reform the patriot act and the administration pretty much stood behind having it -- you know, put back in pretty much the way it is. you know, pretty much any of the survey lens powers have not been recalibrated. one of the most disappointed is the statement that the terrorist watch the system works. well, if there's any better evidence that the system watch the system doesn't work, the christmas incident should be it. but you don't even have to look there. in may the department of justice inspector general issued a report indicating that there were huge problems with the terrorist watch listing process that createed error rates as high as 35%. there were 1.1 million separate identities. it's obviously a broken system. that needs to be completely

repaired. and to get to why that is a broken system i think is very important. part of the problem is the terrorist have learned they don't have to succeed. they can take part for the failed terror attempt and it gets the same reaction. i think president obama very quickly gets the facts out as far as what were the breakdowns that allowed this to occur. so that we can hopefully have an adult conversation about what needs to be done to repair those problems rather than sort of knee-jerk problems or solutions to problems that don't exist. but unfortunately, the statement that have come out of the intelligence community and sort

of the options that were given for what to repair don't reflect those problems. things like body scanning, things like adding more names to the terrorist watch list. well, if you look at what actually happen, those are not necessarily the best solution or therefore even adequate solutions for what the problem is. so, you know, i hope that we have an opportunity to completely review what is still wrong with the intelligence community. so we can actually get the solutions that help us and don't help our enemies. and whether it's overreaction or underreaction, i think what we want to make sure is the reaction is correct to address the threat as it exists rather than as different either political or commercial interest would want. >> i'll add my thanks to those of the other two panelist that have spoken. i'm honored to be included in

this panel. i come at this set of issues from a rather different perspective. the work that the organization i codirect focuses among other things on the impact of fear on public thinking about terrorism and on public thinking about appropriate responses to terrorism. and on the opportunities available to political and other opinion leaders to communicate about terrorism with the american public in ways that helped create a climate of public opinion in which it's possible to build public support for constructive far-sided balanced, responsible approached to terrorism. i do come at this for a different perspective. i hope that the kinds of comments i make will add to the conversation. i think they will. because in a very real sense, active terrorism themselves are strategic communications. and our responses to those acts

need to be thought of in terms of communications as well. so there is a connection there. i think as i look back on the christmas attempt, for us it's certainly a reminder of what a perfectly engineered ma liplation of -- manipulation. they lead to emotional hi jacking at the brain which takes place as neurological level which sue presses -- suppresses the action of the preproblemmal cortex to be able to think and feel empathy for people.

the approach to terrorism are suppressed by the things. terrorism act that make us think that extreme measure are necessary. we feel that we are in an emergency in which it's okay and necessary to give up some of our principals or rights in order to greater degree of safety. it also gives us the feeling of being in a state of war. which has it's own implications. among them stereotyping and collectivization of the enemy when you're in a war. the enemy is a group and not individuals. so that's another scheme that gets activated. and in addition, it exploits our tendency to circle the wagon. and to look to authoritarian leaders. there's some profound affect on

terrorism on public thinking that have to do with fear, that have to do with the activation of a sense of being at war. so for us, as we look at the president and the administration's response to the christmas attack, one set of questions has to do with whether -- when leaders embrace or otherwise acquiesce. is it going to be possible to build public support for far-sided, sensible, responsible approaches to terrorism? and a point that follows from that, being the notion does acquiescing to the notion of war also make it impossible for the public to understand some of those measures like increased security for visitors in the country. is it possible for the public to understand that in any terms

other than a war on islam? which is a notion that president has worked very hard to reject and to put outside of the picture. so i think do summarize, i think for us, the question would be has the president and his administration managed to create a continuity between some of his earlier statement of principal and some of his earlier post statements like the cairo speech. and some of the responses that are being developed and taken in the wake of the christmas attempt. so we see this creation of some continuity in a larger picture among all of the elements of the president's counterterrorism strategy as a really important challenge before him at this point. >> so, jim, i'll just reit rate. -- reiterate.

i feel underqualified compared to some of my copanellist. the dangers of reaction. there's never been a time in history when there's a shortage of young men and women willing to sacrifice themselves for a cause. if each of them can go to us for new and more costly security measures, we have a very serious problem. just to put some perspective on that, i think the other thing i want to highlight is it's very easy to look at the christmas booming and say, oh, there was a failure here. right? we did not, he was allowed to get on the plane. there's also a deep success here in the following respect. the security systems in terms of intelligence and screening that our government has put in place since 9/11 meant that the group conducting this ended up with a relatively incompetent, not that highly skilled or well-trained optive. that wasn't the space that he could be developed. and the screening systems that were in place forced them to use

a cumbersome and ineffective device. that's what save the passengers time. there was a terrible failure, we can say. or we can look at it and say compared to what would have been possible five o ten years ago, we've come quite a long way. >> paul pillar, welcome. i want to point out to you and all of our audience that we have policy analysis by randal. >> i apologize to arriving late. my colleagues have made some excellent points. i will make two observations. very briefly. one is that no matter how assiege wowsly we try to reform,

such incidents will happen. when we look backwards at something like this, all of the blinding light of hindsight in which certain things seem to be inexcusable, we collectively forget in the realtime in which government agency and officials have to deal with these fragments of information it looks very, very different. we've been through this all before. and this latest round, to some extent got even silly. references to things like communication intercept makes a mention of unnamed nigerian as something that people should have jumped all over. the population is 150 million. that doesn't exactly narrow down the search for terrorist very much, does it? my second observation is that

despite that reality there is this extremely strong resistance to accept it. we do indulge. and it's partly driven by the psychological sort of factors that priscilla mentioned and we saw it over the last couple of weeks with regard to trying to make political hey over -- political hay over the latest incident. >> do any of you have comments on what you said? i'm interesting in having conversation among you. >> i do. one, i completely agree with paul from whom i have enormous respect that we have to acknowledge and underscore that our government can do everything right and we could still have a terror attack. the odds are always against us. the odds are always in terrorists favor. with that said, it seems to me that does not and shouldn't be used to excuse preventible failures here.

and one the additional thing that is seems to me that's commendable about the president's response which i didn't say at beginning, unlike the typical government response, or maybe i did but it's worth underscoring, here in contrast to the secretary napolitano, the president said the system failed. it was a catastrophic failure. and that there were dots that could have been and should have been connected that were not just clear in hindsight but were clear at the time. just a couple of quick examples of that. in one in particular that paul mentioned. the nsa intercepts that phi gearian was being prepared for the attacks in the united states here on the homeland. my understanding is one of those intercepts, i think there were several, specifically mentioned the first two names of the terrorist. you put that together with the fact that this suspect's own

father, not just any guy all of the street as it's been said in the intelligence community, but a respected nigerian banker went physically to the embassy, talked to not one but two the state department and intelligence agency. it was a missing personals. i'm concerned about my son. he's in yemen. they followed those meetings up with written communications and telephone calls. we know that yemen is a hot bed of terrorism. apparently the intelligence community didn't conceive that they might attack the homeland. which seems to me another figure of imagination. and we also know about al qaeda's fixation on the aviation system. all of that it seems to me not just in retrospect should have been enough to put us in the high alert. that certainly is the president's view. another thing that i would say is that john is famously the

white house counterterrorism advisor has acknowledged that he was briefed by prince himself who was nearly assassinated by an assassin who used petn one the explosives used in this device hidden on the body. this information was not shared with faa and tsa that was an assess nation attempt on a building. seems to me we have much of the failure that imagination. just again to sum this up, this was a preventible failure. if we don't take it to be a preventible failure and learn from it, it seems to me we'll have a failure in the future that is not potentially catastrophic, but is catastrophic in fact. >> i think it's a close call. is it 20/20 hindsight? >> i also agree with you. the problem i think is that bunt -- wasn't the promise that was

made. the promotion that promotion -- promise that was made, you give up your rights and we will protect you. you give us privacy rights to your international communication, and that's the way we'll protect. you give us billions of dollars, you give us unfeddered authority, you take away the burden of oversight. that way we'll protect you. now we find that that was all a wasted effort. that surprise, surprise, us giving up our privacy doesn't help the government actually find real terrorist. it just creates a lot of information that the government has to then filter through in which the very important pieces of information get lost. >> the issue is not whether we are going to apin the label failure again in hindsight, and hindsight is the only thing we have, of course, looking back on a particular incident.

i don't differ with the details that clark mentioned at all. the issue is our failures, even if we say yes, are they going to happen anyway? despite all of the reforms and everything else? i agree 100% with mike. we heard all this before. we had this huge fix five years ago. the office of the national intelligence, the national counterterrorism center. that's what was supposed to prevent this sort of thing from happening. it's basically the same thing with a -- that strongly suggest to me even if we have failures. we want to pin the label of failure of what happened a couple of weeks ago, are we going to have failures? the answer to that is yes. >> i just wanted it make maybe a

sobering observation that while i agree with the assessment that i'm hearing here, i fear that the narrative that the public will take away from this is not that we gave us so much and it turns out it was a waste, but that recently things were allowed to get lax. and that's what why this happened. and what has, in fact, happened in the administration is that there's been a revelation and a wakeup call. that's another set of reasons why i said in my earlier remarks that we think -- my colleagues and i think that it's critically important for the president to be able to draw a line from his earlier statements of principal and from the kinds of comments that he made at the cairo speech, through to the current policy decisions if that's

possible. other than, the narrative that is going to be reinforced is unfortunately at least there's a good probably that the gnartive will be one of a wakeup call. >> let me raise the question. that's the question of status of al qaeda, if you will. the this morning, there was a news analysis. the term al qaeda blurred distinctions, by the zazi case, none of them appear to be tied to al qaeda central, led by bin laden to the extent that we have comments. maybe jake, what do we learn? what's the current thinking on al qaeda? >> i mean my sense is that there are two things going on here. so there's a coherent organization that's the organization that's been -- that

conducted the 9/11 attack. and there are still operating although how much ability they have to be more than kind of encourage people is not clear. but then you have groups kind of in my areas adopting the name because it has a certain cache within the islamist extremist. it's also useful for government. if you label the groups in your country al qaeda related, the united states government is strongly incentivized to come to your side with aide and military and things like that. there are the factors that play in and kind of magnify the sense that there's one coherent organization. and there's not. one the interesting streams of kind of reporting that's come out about the attacker who

killed the cia agents in afghanistan recently is that that may have been more related to one the pakistan taliban than al qaeda. i obviously don't know the details. but there's a great deal of complexity there that's hard to communicate anywhere outside kind of specialist circles. >> i would add to that by saying the following. it seems to me we now have the worst of all possible worlds. after 9/11, commendably, the government put al qaeda central. bin laden, the people who carried out the 9/11 attack on the run. but our focus on iraq or -- for a number of years, there's no question that took our eye off the ball and allowed al qaeda central to regroup. we all know now there's

somewhere along the border, they still provide inspirational support to terrorist around the world. and everything that i've read, both unclassified and classified suggest that think have regained their ability to oppose an operational threat to the united states. in addition to that, we now see increasingly franchises operating around the world with al qaeda and the arabian peninsula being the latest. potentially the most lethal example. but there's also examples in somalia. and there's been activity in male, and ghana. and in addition to that, we have, obviously, these homegrown plots. i don't think we should necessary infer from the fact that there seems to have been an

increasing number of them the past year since 9/11 that necessary homegrown terrorism is a rising threat. it may well be that the number just happened to be a coincidence. but the point is, it is a threat. and i've never believe the the conventional wisdom that we in the united states have less than a homegrown threat than in the case in europe. because our muslim community is better integrated, better educated. that is certainly true. but i think one the things to take away from bin laden, from zawahiri is that terrorist come in all sizes and strips and circumstances. and it's not necessarily the case that if one is led to terrorism. we have a problem of terrorism of one that should be concerned to me. >> i want to take exception.

the term cares the threat that is something that can kill you. so is in being we think about the stance as the stage before you die. this is not a threat that can passenger our society and our overreaction to it. i would agree spreading perhaps the evidence is unclear and certainly kind of overall rates of terrorism have gone up once you drop from the analysis. this is a very different things. because of the ways we count terrorism attacks there. so once you drop that out, there's no quantitative evidence that kind of overall rates of terrorism are increasing. and the amount of damage that they are doing is not going up dramatically in any meaningful way. so spreading, yes, ma that is

sizing describes, plays into the hands in some sense of the political goals. >> with all do respect to jake, it seems that is a pre 9/11 mindset in a post 9/11 world. and i'm really surprised there's anybody that can make that argument in light of the christmas incident. ma it's sizing shows it can kill. their ultimate goal is the mass destruction which would be a game changer. which would pose a threat to this country. if we don't recognize that, it seems to me we are laying ourself open for the ultimate catastrophe. >> and i'll just depend jacob on

this. >> as he said in the original words, there's been a sortage for whatever their purposes have used violence for moving their vision of the world forward. whether that's, you know, and that is never going to go away. you know, in fact, there have been weapons of mass destruction found right here in the united states. all of the components with a dirty bomb together with the instruction to put that together in maine and chemical weapon w the one in maine was found last year. right, this is a prealerted audience. the one in texas was found in 2003 or 2004.

why wouldn't you heard about it? because it was a white supreme ist in maine. the idea that because terrorist is a complex problem and al qaeda is a concept andante si that only experts can get down to the bottom. i think i have a lot of confidence in the american public when they are giving reliable information. i think the con nation of what the threat is a huge part of the problem of our reaction. and n unless we can start to have that conversation where we don't, you know, call al qaeda in iraq the same thing as, you know, bin laden's al qaeda and even bin laden al qaeda, the most 9/11 that it was pre 9/11 every other group out there who

is like a rolex that you buy, not really very much like a rolex. and we do have -- part of where i'll criticize john brennan's remark in the press conference. he was given the opportunity to present what's the why here? why would the 23-year-old man being willing to sacrifice? his response is al qaeda is decaded to murder and wanton slaughter of innocents. i'm not sure that's thoughtful. then he went on. al qaeda has the agenda of destruction and death. al qaeda is determined to carry out. i don't think that's helpful. one the things the government should be realize. this kid was 14 years old on 9/11? raised in wealth in a country that wasn't really part of the conflict that created al qaeda,

why in the world -- we should be concerned about why this 23-year-old kid over the last eight years has decided he personally is an enemy of the united states of america. we should have an adult conversation about how terrorism actually works. because terrorism is methodology. i have a book about this that i talk about their methodology. part of their methodology is to do exactly what they are doing. it requires us reacting in exactly the way we are reacting. if we read their methodology, it will give us a road map to what we should do and what we shouldn't do. a lot of what we're doing now is what we shouldn't. >> our told our panel i'd be doing a good job if i had to break up fistfights. as we continue, i want to draw our attention back to the obama administration and maybe broaden it. we've been talking broadly already. obviously the christmas event

wasn't the only, we had the arrest of zazi, david headley, ongoing event in iraq, afghanistan, guantanamo, and i'm sure i missed a few things. focusing on the action of administration in response to all of the year's events. did you? >> well, maybe i segue into that on response to some of the most recent of couple of comments, jim. the labels, met -- metaphors, they do more harm than good. al qaeda, the name, does more harm than good in making us understand that. there's the tendency to think of one unified organization. that's not the case. the scott shane piece this morning and the "time" is a good corrective to that. i agree with clark in highlights

these. this gets directly to your mention of it, jim. what we are seeing are individuals basically self- radicalized individuals to seek out training and help. that was true in thend northern virginia 5. it was true of zazi and hasan. so that puts the lie in my view to the concept that the main thing we're worrying about here is a group that is the center of instigation and action that is putting it's tent -- tenty calls out. the threat is mission leading. but i'll do it anyway.

the experts get bogged down into what the state? it's somewhat of a diversion. even if you agree, it is only part of the threat. and the manifestations that we have seen, are basically not part of that. they are individuals seeking out other groups. including individuals here in the united states. >> putting you on the spot, priscilla, labels, communications about this, how do that expect communication and public policy? >> certainly as i hinted earlier, the label war is an incredibly powerful one. not just because it's a label, but because it describes a state of mind and a way of thinking; right? that shapes the way people think. not only about themselves but about our kind of collective responses to challenges like

this. but i was thinking as i listened to this exchange that it's not -- it's not absolutely unheard of to have to figure out how to talk about a very serious threat without paralyzing, and again my focus is on you speech to the american public. it's not unheard of to have to talk about something that's frightening in a way that doesn't paralyze and enables them to understand why the reactions might be problematic. i was trying to think how to apply some of what one might have learned from other situations to this. i agree the solution can't be avoid stating truths if there are indeed truths that can be agreed upon. i think there may be two ways of thinking about this. one of them is the importance of being able to point to a potentially positive outcome.

so even as we talk about the seriousness of this threat, can we conjure for the public the possibility of an improvement? obviously not a perfect -- state of perfect safety. but a potentially positive outcome. the second observation in this context is the importance of being able to evoke a bigger picture. one way to get at this is to dig down deeper. in other words you break up the problem. you break up the category. it's not terrorism in some huge sense. it's particular groups, it's even particular individuals. that's very continue. but the other possibility is to kind of look outward. one of the messages and framing approaches that we've commissioned, we commissioned some qualitative testing into narratives that might promote public thinking -- constructive public thinking about terrorism

in the state of fear. and we've done this in a variety of different context in the context of different projects. but one of the kind of promising narratives had to do with helping people understand that while there is a small and very dangerous group of organization and individual who do indeed mean us serious harm, the vast majority of people around the world neither hate us or love us. they are waiting to see how we believe before they make their decisions. and the notion of how important it is not to lose that undecided vote turns out to be a very persuasive and engaging way for people to think differently about this problem. and one the things that it does is puts a larger circle around the problem of terrorism. because you're not focusing just on the group of fanatics which

could so easily be read to be the entire rest of certainly the muslim world perhaps or the sort of others out there that are all fanatics. it makes the others out there a much bigger circle of people who are responsible, understandable, neutral. so that may not prove to be the most effective message. but it gets out what i'm trying to point to the importance of a bigger picture. to put that very serious, very dire threat in a context that enables to see it as not the only way of understanding or describing the world out there. >> let me bring it back to war. and the administration. i think it was fairly clear in the early part of this year that the administration was going to issue the war notion. here in the wake of the christmas attempt, several times

i think i've seen the administration assuring the public that it does believe we're in a state of war. others, do you see that same thing? have you seen the same thing happening? and what do you think of it? >> welcome, you're quite right. in his last statement last thursday president obama went out of his way to say that we're at war. partly because, of course, he's been under political attack from republicans, from conservatives in former vice president cheney pretending that we're not at war. so the administration is beginning to emphasis this. what i'd say generally, and it gets back to your initial question about how the administration is done on counterterrorism the past year is, i think the bush administration overemphasized the war aspect of counterterrorism. and i think the obama administration until now has under emphasized it. i think the proper strategy is to recognize that there are a number of elements to a

successful counterterrorism strategy. we do have to kill and capture terrorist. there is a war at spect to it. and the obama administration, the degree to which they've continue the aspect really has understated. generally people don't realize that president obama has really intensified the effort to go after al qaeda central in afghanistan, in pakistan, the drone strikes have really intensified. he famously after much deliberation is increasing the number of troops in afghanistan. the number one objective is to prevent afghanistan from again becoming a base for terrorism against the united states. there's also law enforcement. and commendably, it seems to me the obama administration has continued the bush administration strategy of moving law enforcement agency in general and the fbi in particular away from the primary focus on making cases that can stand up in court at the expense

of foiling plots and fulling the emphasis on foiling plots. i think the zazi indicates, the dallas case and springfield, illinois case were all examples of that. where the bush administration didn't focus is where, as i said, the obama administration has focused. that is -- this is what priscilla is talking about is the struggle for the hearts and minds of the muslim community here in the united states and around the world. they try to answer this question that mike raised of why. that i agree brendan did not answer well. we have to figure out why young people are perverting the same of islam and use it to carry out terrorist attacks against the united states. it was a chemoable effort to talk to the muslim world and disabuse some of the notion that because the vast majority of americans are not muslim and do

not adhere to the form of islam that we are necessarily ipso facto enemies of islam. it's a multifaceted strategy. we do ourself peril if we underemphasis or overemphasis any of those. the des of war, really use of military and the war theme. what do you have to add? >> the words and concepts does more to confuse than to explain. i absolutely agree with clark in terms of the main driving mechanism here. it's a matter of responding to criticize. that's quite obviously and what the president was saying last week. by what neither the obama administration nor it's critics have been specific about, and i've really like either of both

of them to be specific is okay we're going to call something a war or not. what exactly does that mean? are we referring to the use of military force which is the subject of what chris and i wrote about? are we referring to how we should handle detainees. there's another issue that a lot of the dialogue seemed to be put in the concept. is it war or not? should we try people in civilian court or military exhibitions? those and other issues are ones that ought to be debated specifically on your merits. there are pros and cons to be discussed about what sort of judicial procedure should be used with captured terrorist. and simply batting the label back and forth. are we at war or not at war doesn't clarify those issues at all. clark also correctly points out the change in emphasis with regard to the use of military force and the pacaf theater.

and as a democrat fairly or unfairly, has to be concerned about not being vulnerable to the charge of not being a wimp. so part of what we're seeing in the pacaf theater is a response to that as well. i hasten to add. that does not mean that this particular military instrument does not have a utility as one of the large number of instruments, the others that my colleagues have mentioned are some of the others that must also be used. so, yes, there's a discussion to be had here about the roll of military force. military force does have a roll. but simply batting labels like war, war obvious terrorist back and forth does nothing to clarify the issue. >> okay. i'd like to kind of actually

take paul's very good advice and try to lay out two cons of the war met metaphor for what we're engaged in here abates terrorist goal in two important ways. the first is it plays into the narrative that they are trying to construction the population that they are appeals to is the brave individual fighting the mighty power that oppressing their society. so it plays into that metaphor, it also helps their efforts to create fear and anxiety in our population as a way of pushing us into political changes. it magnifies the threat of the danger that they represent. it seems to me, i'm not as clear on what the advantaging of calling this a war are and

getting the communication strategy. this is another thing during the press conference where the department of homeland security secretary na pap -- napolitano was asking the questions. how do we communicate better american values in this country but also around the globe? well, if the american value we want to communicate around the world is that we if don't like you whatever country you're in, we're going to send a predator drone up and blow up you and your family. and we should probably be expecting some hostility result of that policy. it's ironic that secretary napolitano is saying this as she's implementing a program that discriminating against people who from 14 nations, 13 of which are predominanting muslim nations and saying we don't care if you are the most reliable trustworthy person in

the world. because you've come from that nation, you're going to get extra screening. basically, put forth a discriminatory policy and wonder why they are not accepting that american values and tolerance and acceptance for all different ideas. as a communication strategy, i think weaver missing the boat there. in addition to this idea of war. what is it we're actually accomplishing by this? in we're creating more terrorist than we're killing, it's not an effective way of approaching this problem. >> a lot of what i'm hearing from many of you may boil down to provocative weakness. al qaeda has a plan. it's mapped to their success against the soviet union in afghanistan. while we sit around arguing about how many angels can dance on the head of a pin.

: >> the statement misunderstands

what the terrorist mentality is. they are not looking for military victory. they don't expect military victory. what they're trying to do is to de- legitimate ties the government they are tacking, to say that whatever you say your values are, that actually is a hypocritical statement and i can prove that by provoking you into making, taking actions that violate the values you say you appreciate. that violate the rule of law. because it's very hard as a terrorist to convince people the law doesn't matter. right? i have to convince my followers. you can now become fugitives of justice and throw away the rest of your life because law doesn't matter. until i can prove it. here's how i prove it that i go out and commit a terrorist act and all of a sudden the government violates the normal restrictions on its activities, and therefore creates a new law. if the government can create new law, we can create new law. that becomes a very powerful message for developing a new

generation of terrorists. and i'm afraid that's what we are in now with this new generation that we're not -- were still addressing a problem that existed pre-9/11 rather than looking at this as a copperheads of methodology that is trying to goad us into action. >> just a quick reaction to that if i could, jim. it seems to me that jake come in my judgment, overgeneralize is the issue says that they -- notes is the goal here is to have -- of course you can't prevent that but that's not what we're trying to do here. were talk about small number, thankfully, men and women who have the goal of carrying out a catastrophic attack against the united states. that's the goal. it seems to me that our objective given that goal should be agreeing with paul that we can't prevent every terror incident. at least we should do what we can to prevent those that are preventable, and to reduce the chance of a catastrophic chance that i think we need to redouble

our efforts on preventing terrorists from getting their hands on weapons hands on weapons of mass destruction. the other thing i'd say is that, you know, i want to emphasize that i'm not a thug when it comes to this issue. as i've said before, let me underscore again, there is a war aspect to this. there is a law enforcement aspect, but we really failed it seems to me in the bush administration, and the obama administration is focusing on the hearts and minds struggle that we got engaged in. we certainly can because we can't kill and capture every terrorist, as rumsfeld of all people famously acknowledged in a memo, we have to get smarter about how it is that we can counter the narrative. and we certainly can engage in security measures that perversely create more terrorists. so it seems to me we've got to come up with a balance, just close my eyes saying that george, the cold war strategist was so right at the end of that

long saying, they ultimately don't weigh the united states in particular united states and western was defeated would be to pursue a time in his in a way that is contrary to our own eyes, to become like the. the same is true for us here. i think it is impossible for us to an balance security and liberty. just quickly, i have in my own mind and calculus i go through whenever i try to evaluate a given security measure. does again in security outweighed the munition and liberty? i will give just two quick examples. thanks to richard reid would all now take off our shoes at airports. none of us like to do it but to me that's a small price to pay in terms of inconvenience if it prevents the next shoe bomber in the absence of any real good technology right now that prevents us from having to do that. at the opposite extreme, this gets back to what my glued to her, there was the u.s.a. today story a couple years again that they're trying to get a record, not just telephone calls, between someone abroad and some

here in the united states, one of the war both of them might be connected to terrorism, but further in sa was time to get a record every single call in the united states. that is obviously counterproductive. that puts more hay on the stack when what we need as you said, is to have less say on the staff to find the needle within. we need to strike the right balance is seems to me. we can do that but we can have perfectly good and we can have perfect liberty in the age of terror. >> does an extremely important point that clark is made. at how much security, as you phrase, clark, how much is our security improved at the price of come in what you elaborate on the price of personal liberties. we can expand that way of thinking about any kind of counterterrorist measure, and say how much security do we want at the price, it might be

privacy, it might be personal liberty, it might be the convenience of the traveling public. at my be monetary cost. and often is monetary cost. it might be cost in blood and treasure for military operations overseas, as in afghanistan. the question ought to be asked in each one of these endeavors if it is being conducted in the name of counterterrorism, is how much additional security are we buying at the price of all those things, not just personal liberties. the other point, this puts in perspective a lot of the things that were hashed over last week with regard to the finish of the intelligence and security service and so on, names going on watchlist and all that. this is not simply a tradecraft or administrative matter for intelligence or security agencies but it is a policy issue. it is a policy issue in terms of what criteria we want to use to move some of those half-million

names from the database to the databases that really make a difference with regard to people getting secondary screening or being denied a seat on an airplane altogether. because that's just another subset of the larger question of how much security do we want to buy at the price of, in this case, someone's ability to fly or to fly without getting hassled. one of the most encouraging things i heard, or read in the presidential directive last week was, the part about -- i can't remember exactly which, but basically clarify decried year for movie names from one list to another. good thing for the president to focus on because that's not just a bigot in seat can do or the dni can be. that is a policy issue to reflect the policymakers of how how much agree the american people want to buy at the price of something else. >> as we continue i want to start to focus on the future, what should the obama

administration be doing for the next -- for the rest of the term and however for president obama service goes. >> i just want to jump in here. again, and a cautionary way. suggests that there are not very many prices that the public will not pay, unfortunately, for safety. again, i'm not in any way disagreeing with the content of the arguments that i'm hearing. i'm just reflecting on the research that we've looked at in terms of how to talk about these. >> i've been intrigued by my sense that there is resistance to the whole body scan is. which are an obvious -- and once is obviously an improvement in security, though marginal.

>> the public is 80, 85 percent in favor of. >> i'm hearing -- it's a matter of changing mood on the business about what name should go on no fly list or special screwed in this. there were complaints before. there are too many names. >> if the last scary incident happened three weeks ago, they were all in favor of loading all kinds of names on list or if it's been a few years that have gone by since the big scary incident and we will start grumbling about how many names get on the list. >> i think it's about the information the public gets. every salesman from everybody scanner has been on the news over the last two weeks saying this is the answer, where a british study last year said it is not. and said it would not identify these specific things, powders, liquids and plastics. so is the public got the information that this body scanner machine would not be any edition insecurity, and will

show you naked, do you still want it? >> it would be a much different conversation. it's a matter of getting the right information. >> effectiveness is a more powerful foundation. and another foundation for the debate is the nature in which these are counterproductive. i think that's where you're getting both clarke and paul are getting at the notion of what do you lose by taking some of these measures. and i guess i would emphasize the importance of spelling that out, because as long as it is left as a trade off, between something and safety, rights and safety, liberties and safety, privacy and safety, the majority will conclude that it's preposterous to ask someone to put those other things before safety. so if you're going to make that argument and agree there is that argument to be made, it's important to connect the dots and help people understand how

it is that the cause of some of these measures do not actually may outweigh the benefits. i would just make an argument, please, for connecting the dots and not just asserting it. >> let me ask a question that hasn't yet arisen, or an issue area. and that's the communications. clark talked about counting the narrative and the narrative that is carried worldwide on the internet through videos. this event will be watched around the world by people are keenly interested. we have a different problem that we did 10 years ago or 15 years ago, much less 40 or 50 years ago, in speaking to the world. how do we address that? knowing that everything we say, literally here, but especially the administration and political leaders, everything is perceived around the world. what's the right thing to do? how should we change our

behavior, not just to domestic audiences but international audiences that may have our interest not always at our? >> can i defer to my colleague answer and then at some point, not necessary now, but try to enter the other question you pose. and that is what should the administration be doing going for. i would also like to pursue that. >> made will go down the line, get two minutes each of you on what the administration should be doing. so to the communications then and in our prescription. >> i think i'll add just one piece of evidence here to start the discussions that i recently did a large national survey in pakistan, christine from georgetown and one of the things we did is we study support for four specific organizations. al qaeda, built in spain, sectarian militias and the afghan taliban. one of the interesting things we found is once you kind of take

account of people's social economic circumstances and will level of education, what they think of the u.s. impact on the world has zero impact on their support for any of those organizations. you know, for al qaeda this is a little bit odd because they're articulate and they are doing something to do with the u.s. 40 other organizations this makes sense because all of them when they go to the public in pakistan, are articulate goals about specific things that are very local. so what we're doing on the world stage is really not sensibly important that i think it's very easy for us to think that how we're perceived and what people think about our actions on the world stage will have a massive impact on terrorism. there's not a lot of evidence for that. >> on the communication question, jim, i think the main thing we need to bear in mind in response to the realities that you summarized, is be careful

and be aware of how much is getting out there. that most of that is outside the control of the governmental leaders. so we have reactions to things that say american televangelist may say, which in some instances have had tremendous negative residents in the muslim world. and this isn't anything any bar governmental leaders said not to fault of the bush administration, the obama administration. there are some things that get within government where we need to be a little more careful. winnett general boykin was big in uniform and say my god is better than your god. that doesn't help. a little more disciplined when it comes to those sorts of things are appropriate. i believe as far as what governmental leaders themselves can do, that president obama's type of speech, my personal view was an outstanding speech. it got right to most of the messages that needed to be heard. from the leader of the free world and the leader of the united states.

that part of what he has been trying to do gets back to one of clark's comments, has been very good, very appropriate. >> let's turn to prescriptions. i've laid my now twice now. once per year. every january 13, i asked for a counterterrorism strategy from the administration. clearly my poll with the administration isn't what it should be. [laughter] >> but let's go down the line. what should the administration be doing to set the stage for better in the future? >> that's a terrific question. it merits a lengthy answer that we don't have a lot of time, and i will try to be briefed. just two or three quick points. before that i just wanted to agree with paul on another point, and that is he is quite right that part of our problem is and is apparently being a democracy, it's much easier and it autocracy than a dictatorship. but we are whipsawed by public opinion. if the threat of terrorism seems to be real and imminent because there was a recent attack last week or a couple of weeks ago,

then we go to one extreme. if use past then you get books like overblown or terms like overreaction. we have to use this term that we've used and have an adult conversation about terrorism. would have to be adults about it and recognize it, even when it's not an issue staring us in the face in the headlines. still ought to be a concern of the average american and a top priority concern for the government. i also wanted to defend his whole body imaging machines that we've talked about a couple of times here here, and you have raised a number of times. they are not perfect and there are certain things that they cannot detect. for zerbe, if an explosive had been hidden in a body cavity it could not detect that. but it is the closest that there is now to a silver bullet that if they can by seeing through closing, spot concealed guns and knives, hidden on passengers clothing on their bodies, they can't detect what is hidden is an explosive, but they can detect there is some anomaly on

the body or attached to the body. they would have in this instance noted that there was something odd on mr. abdulmutallab person. that noticing that anomaly there would have been a further physical inspection which case it would have been discovered he had an explosive that i think we need to couple the technology with more sophisticated explosive technology. cancer to talk about that in detail but i think it's a step in the right direction. and that's in part why you've got this in addition to the, what you have this huge public support for that we've seen. what should the obama administration do moving forward? let me focus my comment on the department of homeland security. i think part of what needs to happen is we need to put homeland security back in the department of homeland security. what do i mean by that? part of the reason why dhs is still getting seven years after its creation is so much of what the department of homeland security does. it doesn't have anything do with homeland diggity. secretary napolitano spent a lot

of her time, no criticism of her, because of a presidential directive, that predated her and they obama and ministration continued. so much overtime in the early months of last year were consumed with h1n1 by richard at october tobyhanna by hhs. and by cdc there's actually no nexus to terrorism there. the administration says. i find this hard to believe politically. that they will take up immigration reform at some point this year. irrespective of whether they should or should pick if they do, i would argue that the department of homeland security should not be the point agency for that. it's been announced that dhs and the secretary would be the point people for that. there is more of a security connection to immigration that is the case for the swine flu. the department of homeland security processes immigration benefits and enforces immigration laws. they will have to be involved. they will have to be consulted. but the security component of immigration is really very small. it is largely overwhelmingly economic issue, a social

cultural issue that the point is dhs was conceived in the wake of a terror attack to try to prevent the next terror attack at a counterterrorism ought to be its focus. the second quick point is i worry, and i was part of the transition. i was appointed as the inspector general for the department of homeland security at its inception by the bush administration and i was the cochairman of the transition team for the obama and ministration for the department of homeland security pics i bring i think appropriate and nonpartisan perspective to an issue that i think ought to be nonpartisan. that is homeland security. so one of the things i would about during the transition was the obama administration's decision to collapse the homeland security council that the bush administration created to parallel the national security council into the national security council. i understood and understand and applaud the rationale for doing it. the reason for doing it was the bush administration's tendency, wrongly, to think that homeland security and national security decision had nothing to do with each other.

and they must be as the obama administration has recognized part and parcel the same thing. that said, it seems to me unless there is a parallel structure competing with the nic for the president attention that barring a christmas day incident, the president is not going to hear as much about our latest vulnerabilities in aviation or maritime port land orders as he is about the latest in iran or north korea. the president, i don't know that he explicitly said this, but he certainly implied that he's going to be much more focus on aviation security and other kind of homeland security issues going forward and was the case before him. and if there's any organizational change that needs to happen that i would close by saying before you got here, paul, i was agreeing with you that the last thing we need is another major organizational change here if there's to be organizational change at all i think the administration ought to think of the assuming of the nic.

>> clark and i disagree are far more than just the body scanners. what i'd like to focus on what we do agree on. first that i have tremendous respect for the work he did as the department of homeland security inspector general. and i think that's the one aspect is completely missing from all of our counterterrorism effort. is there is no attentively. and that is what is causing this failure in communication is that the american public doesn't have the facts on the table so it's impossible for them to engage in any meaningful debate about these policies, and all these important issues. and i think that's something that this administration needs to address the media the. and they are already a year behind. a top to bottom review of every intelligence agency, every intelligence authority, every intelligence practice and procedure to gauge its effectiveness, to gauge whether

it's being abused, to engage whether it's a complete misuse of resources that if we don't understand that and we can't communicate that, then all these other debates about what works and what doesn't our kind of meaningless and without facts. the second thing we just need to do is make sure that our policies and procedures actually do express american values. tolerance, transparency, you know, respect for the rule of law and due process. those things ultimately will keep us stronger and protect us better than any sort of effort to stop out who we perceive is the bad guy. and you know, this christmas incident gives us that opportunity to say, hey wait a minute, you know, we received a lot of promises from the intelligence community, but what is actually happening? what are the actual breakdowns, and let's do a review of this. there's a bill in the house that

was proposed by representative barbara lee that would create a congressional body that could do exactly this type of review. and i think that's what's necessary so we can have the facts on the table and engage in a conversation about the areas that we actually disagree once we're all working from the same facts, rather than arguing from our same set of facts. or from different sets of facts. >> i will take as a given that we need at the level of government a strategy, a counterterrorism strategy. so my points will go to what we mean by way of a communication to and with the american public about our counterterrorism strategy. and i would start by saying i think lessons from the last year is that don't overreact while truth is not enough that it is about not doing things rather than what we do need to do,

think and feel about this challenge. that is a big challenge, to develop a positive agenda that represents a real alternative to the war on terror, with all of its potential for abuse and overreaction. it needs to be a communication come and narrative to be shared with the american public that is as compelling, and easy to think as a war on terrorism, if at all possible. i know that is a very big star to imagine from a comedic asian standpoint that it needs to be an irritant that includes all of the profoundly important assertions that were made in the cairo speech, although the principal that mike refers to. but that also tells us how a different approach will keep us safe and has been keeping us

safe. so it needs to calm fears that it needs to promote clear thinking. it needs to enable people to take in fact because as long as the kind of framework for thinking on the war on terrorism, there are facts that will simply not be heard, or that will be rejected because they don't fit that frame. and it needs to be a narrative that is in the hands of everyone who is capable of influencing public thinking, at a significant level. before the next crisis happened. leaders, educators, community leaders, members of congress. the fact that there could have been any sense of not being prepared for what to say after something like the christmas attempt, and after evidence emerged of potentially dangerous homeland sources, or domestic sources of terrorism. but that could've been unanticipated or unprepared for and someone is unimaginable.

those things were so inevitable, i need to prepare for those things are making occasions standpoint is critical and clear to me. and i would just add two more point. one of them being that i think at this point as opposed to a year or two ago, there really is a challenge of trying to present a narrative that includes and takes account of what's being called the homegrown terrorism threat. whether -- how real that is, whether it is growing or diminishing, it is out there and it is beginning to shape public thinking. so this new narrative has to take account of that. i would just -- and i don't have a recommendation here. i would just observe that ironically, the very narrative that helps to promote constructive thinking about how to address international terrorism, the narrative of the counter radicalization, which

leads people to think bigger and think upstream and think longer term, that very narrative may have some potential to backfire when it comes to thinking about the domestic terrorism threat. because it could promote increased public fearfulness about the potential for violence from muslim and arab-american communities. it the thought becomes widespread, that any unhappy or disgruntled or alienated young american muslim or arab is potentially a violent extremist, that could be problematic. in other words, radicalization over there is different from radicalization here. in the last point i would make is as i look back on the -- were talking about a communication strategy or it counterterrorism strategy. those are all sort of top down things. i wondered whether there is an opportunity in the coming year for the administration to engage the public in thinking about how it is that we would like to

respond to the terrorist threat into the next crisis. the obama campaign broke such new ground in terms of engaging people, creatively and actively, in this process. what are the opportunities to reach out to the incredibly diverse american public, and draw on the strengths and insights of citizens to try to solve this problem, and in so doing, to unify in some ways our society and build resilience as we confront this threat. so i see some opportunities and some challenges. >> if each of you take two minutes as defined in scientific terms, we'll have about 10 minutes for the audience. >> you know, the obama administration i think continued aggression against kind of in terms of counterterrorism is great if there was a striking light in the white house report which is that there was a

failure, a assigned response to add a template for the follow-up on high priority. that strikes me as an appalling managerial failure. if someone in charge failed to properly organize their teen. they serve a need to be held accountable. >> the last thing we need is more commissions of inquiry, which have their own motive to justify their own existence by uncovering problems and proposing fixes, even if there are problems and fixes that were uncovered and proposed many times before. i think just looking at the president's directive last week, you get some idea of how this is a struggle, in this case by the administration, to come up with any new ideas. those word ideas that they were exhortations to sort of do what we've been doing all the time. just tried to do it well. improved analysis, make sure somebody is responsible for following up leads. not exactly fresh thinking.

written counterterrorism strategy, i've never been very high on those sorts of things. they are political necessity that they are sort of retrospective cover your posterior kind of necessity. if something goes wrong, at least you can say i had a strategy. you can point to a document that you are in a much stronger position than not been able to point to such a document. >> counterterrorism, there is certain -- only certain tools that are available to every administration that there are certain challenges that face every administration. to the extent one administration seems to be more reactive than proactive, that's the reality of the business. so i don't see what we have are discussed, i will be very commendable change of emphasis that the obama administration has had with regard to the message as embodied in the cairo speech. priscilla has talked about the. i don't see any new changes i would urge. >> thank you all. let's now turn to the audience that we got about 50 minutes to

take your question. because of the brief time we have, i'm really not going to tolerate speech. you all belong appear as endless, but we want to your question for this panel today. so let's start with that. right there in the back corner, the woman in the -- i'm not good with colors. [laughter] >> i'm with the afghan service, voice of america. i just wanted to see if we could widen this discussion out of it. you talked about the franchising of al qaeda self radicalizing individuals. what is the threat, as you look back over the, how do you evaluate the counterterrorism policy of the administration as it applies to afghanistan? >> will put it, i think it is a major emphasis with regard to

not just going directly after a suspected terrorist but then like throat strikes. my personal view is that an over emphasis. it is a political reaction to much of what this president faced. but if you want to change in emphasis, that's where it is. or has been so far. >> i have one down in front here. >> thank you very much for your comments, but none of your comments touched upon the fact that virtually all of the terrorist incidents that have occurred have been done in the name of a particular religion. my question is, to what extent is there a capability, and this is especially -- because you

work in government and the intelligence community. and understanding of why some individuals do become radicalized by islam, and if there's enough of an understanding about that and if so, what do we do about it? >> i can just go with that. i mean, no one, your premise is incorrect. the law center has documented 75 right wing extremist plots that have either been foiled or accomplished since 9/11. so terrorism is a multifaceted threat to this country as i said that there was no dirty bomb found anywhere in the world except the main. a chemical weapon was found in texas. i could've killed 30000 people. there's a multifaceted threat of terrorism, and as a jacobsen, you know, since time immemorial there has been people have use

of violence as a means to achieve palooka goals. and if you look at empirical studies of terrorists, actual terrorists, what most of those have found is that it is not driven by religious fervor or ideology, did as much as it is my personal experiences, including things like alienation from the community and racism. so if we employ racist policies that alienate certain communities, that's counterproductive. so i think we have to be very careful and work from actual facts rather than from any political agenda or erroneous information. >> in surveys of kind of non-terrorist subscription to elements and interpretation of islam, that supports the notion

of militarized individual g.i. is a very good predictor of a positive feelings toward terrorist groups. but actually taking religion seriously in terms of educating our children and spending it seriously yourself, predicts a much less support for al qaeda and the afghan taliban. which are groups that kind of pervert what may be understood as mainstream doctrine. >> i am from fairfax. jim, i like your formulation about terrorism having its goal as invoking an overreaction. so i'd like to hear your thoughts on the panel on why it is so if active in getting that overreaction. i can understand why cable news channels would behave as they do with the flashing graphics and all that. because it's all about the

ratings. but the grown-ups who are in charge should know better. and you were the one who was most supportive of the idea of a war on terror. i which is especially like to hear what you think the answer to jacobs question -- what are the pros of that remark? >> well, i certainly think that there have been as i said, instances of overreaction. during the bush years actually. as i said, the round up of arab lazo mails for months, for years was an overreaction. gitmo was an overreaction. i am appalled by the notion of indefinite detention. of terrorist suspects. by the fact is as i said before, that there are terrorists who are determined not just to kill americans, but to kill us in a catastrophic way. with a weapon of mass distraction. so there must be a recognition of that. and there must be an element of

counterterrorism strategy that includes warlike elements. killing people. the use of the military. and i guess the final thing i would say is that we need to redouble our efforts and i hope and expect others to also comment that this christmas day incident will compel us to do that. to close the bold continues to exist in our aviation system, and our maritime system and our borders is a. that fact we can't prevent every single terrorist attack should not allow us to present ourselves come closing those vulnerabilities that can't be closed, and from reducing the risk to as close to zero as it is possible to do. >> and i think that's an excellent question. and gets to something that clark said earlier, and then just repeat it, the goal of the terrace is to have a catastrophic attack. that is not to go. that's the methodology. their goals are political. the methodology they use is

terror, because they know that creates that overreaction. so what we had to understand, we have to look at what the difference is between their goals and their methods. and if we look at their methods, and if our homeland secure the efforts are to counter their methods, then maybe we're missing a piece of this puzzle that we could address without war. >> and i just respond to that just quickly? >> they've got a couple of goals that we've got to understand that the initial goal, of course, is to kill people. we can't pretend that that is not part of what they're trying to do. they are also trying to multiply the effect of the number of people killed by terrorizing everybody that they don't succeed in killing. so it is both that it is not either or. >> i think it is the method and not the goal. our goal isn't to have more of round the world. that's the method we use to try to create a more peaceful and pro-america.

>> 102nd interjection. >> this is another illustration of the hazards of the collapse. when we talk about they, it covers a wide range of motivation. and that's the source of confusion rather than clarification. >> if you look at one of the correspondence that goes on in these groups, what they're saying is not to kill people but to the right number of people to achieve those goals that this is also a matter of great debate. >> another question. >> hello? this is a merely drawn issue that is difficult to discuss without reference to the context. so i don't do speechifying i want to say that my mindset is formed by me. and then ask a question about the essay leaves of the islam notion and the context of competition between gods, and

expanding western global hegemony. i don't see how we can talk about this without talking about the bobby's and their support of the expansion of the taliban in that region. and they have a particular i believe distortion of islam that they're using for political purposes. i think that priscilla's formulation, taking several several steps back from the particulars of terrorism is an important approach. so i want to hear what the panelists think about that kind of a dialectic that says that you've got the tribalism, these come you got the taliban these. and is perhaps secularism, that said this of all of us that

american policy could focus on to develop a dialogue about, conversation and the american public about and then develop a kind of a tolerance for our responses to terrorism, our engagement in afghanistan, and all of that. because it seems to me that that's the context that we're operating in. >> panel? >> is a big problem. i think the president said in cairo, that you referred to, like the wahabi, we're talking about saudis. recalled in wahabi, because those sectarians. there you are getting into things like policies of the saudi government which have changed greatly for the better with regard to canter terrorism. over the last several years that

specifically since 2003 when they started getting -- of course. and the saudi's are taking that extremely seriously. >> let's go back up your own longer rail. >> we have a formal cia here and have a formal fbi person next. i would like each of you to talk about how this whole agency can cooperate in this global counterterrorism. and also from your observation, what are they doing now? thank you. >> you know, i actually believe a lot of, you know, the agency staff is overblown in a lot of ways. that if you get down to the

street level, even before 9/11, there is a lot of cooperation between agencies and everybody feels like they are on the same team. you know, i think the problem, that occurred both in 9/11 and the christmas attack, is the volume of information being collected. the house-senate joint intelligence investigation of 9/11 said that the problem was the significant pieces of information were lost in the vast streams of data collection. whether those faster and have become roaring rivers with the expansion of the authority to collect without suspicion. the management of information within the agencies has not changed significantly to where they can identify those information in a mass of information. that so we should be getting at, is how do we make sure that our collection efforts are properly targeted, and the information we collect is properly followed up on. i don't think it really matters whether it's an fbi agent or cia jeep or two of them sitting

together is the methodology. >> i agree completely with my people of working levels, do not in the first act when they come to morning look at the organization chart as they are not part of this agency or not under this i don't have to cooperate. cooperation takes place regardless of what the org chart says that my only other point is some of the more better publicized instances of squabbles such as the one between the director of the cia and the director of the director of national intelligence as to who should appoint the overseas intelligence rest were a direct result of the last so-called pics we had, which was to create the office of dni in of dni in the first that it never would've happened if we would've just duck with the old organization. >> let's take one more question before we conclude with this panel. right here in the middle row. >> are we on?

my question deals with technology and airport and fears in economics as a result of it. i think that taking down the plane is much more than just an annoyance. it's potentially an enormous economic potential catastrophe if people don't fly. now the christmas almost bombing showed us that at least in the airport part of it we don't have the mechanism to detect things here i worry very much about this full body scan, and that the only way of detecting things when terrorist judicious use of body cavities in the future, to me is like how do you contact that? and what are we doing along those lines when people get right to the very end that a

chaotic situation is there if we can't really detect well enough people get on planes? it's just a bothersome. how do you feel about that? a real words because i can take that quickly. you're quite right, as i've mentioned that one of the limitations of his whole body imaging technology is its inability spot concealed weapons in a body cavity. we know that drug dealers, drug traffickers for example, have been using that methodology for longtime. it's only a matter of time for tears do. that said, in a typical american fashion, there are technologies and businesses, mostly small businesses working right now to plug that gap. i just the other day was reading about technology to be able to do that. the larger point though is that dhs in particular, the security community in general, tsa in particular, tends to be reactive, tends to focus on the last gap, we close that gap and

go back to sleep until another incident happens with getting another cat. and weak fix that get. one of the things we need to start doing is get ahead of the curve by trying to anticipate additional methods that can be used against us. in closing the gaps before those gaps are exploited. commendably among the many commendable thing the president said during the course of these pronouncements was saying that tsa, dhs, are going to redouble their efforts to work with, for example, d.o.e. and our national labs to develop these kinds of technologies. the final thing i'd say though is, this is the point on it and i think i made earlier, is that all that said, we need to recognize that there are an incident number of targets, an infinite number of ways in which those targets can be exploited and we can never have 100% security. but again, i close by my continued manta which is kind of my game, and that is that is not an excuse by doing what we can do. so i think we need to redouble

our efforts to address this vulnerability because it's one that's going to be exploited sooner rather than later. >> opposition is that the first test has to be ability of this actually improves security against the current threat. and it is very unclear whether this a body scanner would have identified this bomb the way it was hidden with the materials that which iscommon not to make in the body cavities. so it doesn't pass the first test in the second test, if ceramic knife becomes the method of choice, then maybe body scanners are more appropriate methodology. but there are other technologies including explosive detectors that are actually in use. you may have been at the airport and seeing the guy with the one who runs inside your carry-on bag and it sticks the end of the walk into a machine to test it so we can invest in a technology that doesn't have that huge privacy setback, and could be

actually more effective. so rather than to a knee-jerk, let's throw billions of dollars at this technology, we know that terrorist -- that's the most important aspect it was widely publicized at amsterdam airport had the body scan machine and had employed than in 2007. so that al qaeda chose to go through our al qaeda, whoever, these terrorists chose to go through amsterdam knowing that information was a pretty good sign they were confident they could be damaging. >> as effective as the machines, were not used and i think the terrorists knew that as well. >> as i mentioned at the outset, when we break, we will just take a few minutes to reset the stage so don't go far. stand and stretch her legs, but we want to return. and just a few moments to hear from daniel benjamin. before we do that, i want to thank our panel for what i think of an adult conversation. [applause]

>> thank you. [inaudible conversations] [inaudible conversations] [inaudible conversations] >> welcome back everyone. please take your seats. we are ready to begin the second part of our program. cannot have your attention? please take your seats. thank you. my name is christopher preble. and i'm the director of foreign policy studies here at cato. i'm also the cochair of long with jim harper did you already met and my colleague ben friedman of cato's strategic

character is an initiative. it is a three-year project that's made possible by the generous support with additional support from the open society institute. i want to take an opportunity to get to thank them for their generous support of this project. i want to thank also daniel benjamin for joining us today. when we launched our project back in 2008, we identified the top expert on counterterrorism in this country. and frankly around the world. and dan was right at the top of our list. he participated in a discussion that we, that cato hosted in chicago back in late august of 2008. he was unable unfortunately to join as a year ago today, but he was busy with the new administration, the incoming administration. i'm very grateful to him for joining us to take time out to join us today. let me just introduce them to you briefly. daniel benjamin was sworn in as a coordinator for counterterrorism at the department of state with the rank of ambassador at large on

may 28, 2009. prior to his appointment, he was director of the center on united states and europe and a senior fellow on foreign policy studies at the brookings institution from december 2006 to may 2000 that he spent six years as a senior fellow at the international security program at the center for surjit international studies here in washington. from 1994 to 1999, mr. bingaman served on the national security council staff as director for counterterrorism in the office of transnational threats. and before that as a foreign policy speechwriter and special assistant to president clinton. before him and the government, he was a foreign correspondent for time magazine and "the wall street journal." he has co-written two books, the age of sacred terror, posed by random house in 2002, and the next attack any of the war on terror and strategy for getting it right, published by the whole time books in 2005. he also edited america and the world in aged care, a new

landscape. has written numerous articles in "the new york times," "washington post," time magazine and many others that he holds degrees from harvard and oxford when he was a marshall scholar. please welcom join me in welcomg daniel benjamin. [applause] >> thank you very much, chris, for that kind introduction. is really a pleasure to be here today. particular place to be back on the think tank capital of the universe that i used to be an inhabitant of the avenue, and there have been moments when i wondered why i ever left his comfortable home. but that those religious were moments, and let me just say i'm really pleased to have an opportunity to speak with you today about the threats we face in the obama administration's counterterrorism policies for confronting them. and i am particularly please

because you mentioned the project which i was involved in. i had a lot of opportunity to try on some of these ideas in that forum, and there's certain poetic justice bringing them forward here now. one of the critical test of an administration's counterterrorism policy is to see how they emerge from contact with the general terrorist event. the attempted christmas day bombing nearly cost several hundred people their lives on northwest flight 253. make no mistake we had a very close call and we are extraordinarily fortunate that no lives were lost. the event was a stark reminder we are in a constant and race to head off our technological advances. to confront its ability to deploy a change in recruits. the president has rightly taken us to task for some key failures. above all in the realm of intelligence analysis and watch

listing. other shortcomings are obvious. we need to have online the screening techniques and technologies for new generation of explosive devices. we are working those issues aggressively now. equally important, the events of christmas day demonstrated that some of the understandings that underlay how we organize ourselves for counterterrorism need updating. other events in the last half of 2000 i have also underscored how some of our operating assumptions were no longer adequate. let me name them both and in a good understanding i can. it will indeed see to carry out strikes against the u.s. homeland. we can no longer count on them to be focused exclusively on the near enemy on the government in their own countries. in retrospect of course, it is abundantly clear that any group that was prepared to become part of the al qaeda network would embrace the essential approach of the mother group. this strategy would lead the

group to attempt a tax that would appeal to its target audience of potential sympathizers and they could be either against the near any or against the far enemy. that is, against us. as i will discuss later much of our policymaking especially with regard to the region where this plot was hatched has been premised on the conviction that we were headed towards exactly that kind of spread of threat. with our defensive arrangements and specifically our watch listing, for zeb, were not there yet. that was a clear shortcoming. second, for use with known about al qaeda's desire to recruit militants with clean records to deploy against the united states. but we had not experienced any really eye-catching efforts to slip into the country, slipped somewhat in the country leading to some suspected that the united states has successfully deterred such operatives from entering our borders. but as a number of recent events have made clear we cannot afford to have any sense of false security. as we've seen in the last two months into high profile law

enforcement cases, individuals who had been trained and handled from the badlands of the federal administered tribal areas of pakistan have been operating within our borders. a bus driver, was trained in pakistan and now faces charges in federal court for allegedly planning to setup users of bombs in the united states. an indictment unsealed in chicago in december portrays an american citizen, david hedley, allegedly playing a pivotal role in a 2008 attack in mumbai which killed more than 170 people, including six americans, and dramatically raised tensions in south asia. are intelligent and law enforcement tripwires worked. but that is not reason enough for complacency because of the threat we face is dynamic and evolving. let me just say as an aside that the example of david hedley shows that al qaeda is not the only group or the only group of groups with global ambitions that we need to worry about.

they have made clear that his will to undertake bold mass casualty operations with the target set that would please al qaeda planners. the group's more recent sordid conspiracy to attack the guy stays in the sea and bangladesh would only deepen concern that an intake could involve a global terrorist threat. very few things worry me as much as the strength and ambition of led. a truly malign presence in south asia. we are working closely with allies in the region and elsewhere to reduce the threat from this very dangerous group. a third myth i should say has also been dispelled. and americans are immune to al qaeda's ideology. by domestic incidents of radicalization are significantly lower than in many western nations, several high profile cases demonstrate that we must remain vigilant. the recent arrest of five americans in pakistan suggest that al qaeda is inspiring you as individuals to presume violence.

similarly, the trickle of individuals who have gone to east africa demonstrate the groups reach into that region. and even in some purposes they are still becoming radicalized later on. the importance of these cases should not be glossed over. the lesson here is clear. in a long struggle such as the one we're in, there are few greater perils and intellectual stagnation, or bureaucratic space that our foe as the presence of the other day is enable adversary and we have an everett in the race to protect our country and stay one step at. because of the flatness of their organization, the high level of inspiration and ingenuity we need to be on our game all the time. we need to keep in mind the words of the 9/11 report which in this respect got it precisely right. quote, it is therefore crucial to find ways of wood nice and even bureaucratized in the exercise of the imagination.

this is really the paramount and enduring challenge we faced. staying sharp, innovating our defensive systems, maintain our intellectual edge. these are all essential. now having observed changes in the threat, that demonstrate a new adaptive qualities of our enemies i want to add a note of perspective. . .

to adopt inner concessions policy towards hostage takers so that we can diminish this alternative funding stream and such as though thoughts and again in your back really the point should not be overlooked. their financial circumstances have deteriorated. we should not score all the points on one side of the watcher. that's the point of this recitation. at least you fear mongering and builds a picture and undercut our efforts to get our assessments right. another challenge we face involves distinguishing what went wrong in the latter half of 2009 or precisely on christmas day from what did not. in other words, we need to fix the problems that presented themselves and not get into a panic or abandon the other parts of our strategy that works. and what i'd like to do now is turn from the headline in the

last few weeks to the broader strategy. because most of what we are doing is fundamentally sound and will pay off for us in the long-term, let me what future. if i'd spoken to this audience a year or two ago, mankiw would've been offended the united dates have developed and was employed with great skill what i would call tactical offensive counterterrorism capabilities undertaken individual terrace off the street and disrupting operations. yet on the strategic side i was worried we were losing ground in the overall -- in the overall campaign against international terrorism and in particular that we were failing to trap al qaeda's narrative. in my roughly a month of office or view of our tactical capabilities has been more than worn-out. i am pleased to say as well that i believe the administration is addressing that critically important strategic gap. in afghanistan, the president has put forward a clear plan to constrain the taliban and destroy the al qaeda core.

in the administration and congress are putting up the resources necessary to achieve that goal. general mcchrystal's positive comments yesterday suggest we are making progress there and that we should not succumb to an easy defeatism. we are working with pakistan to establish the kind of relationship based on trust and mutual interest that will lead to the defeat of radicalism in that country, which has in recent months seen so much bloodshed. we understand the trust deficit that was put up over decades between the united states and pakistan and created the current situation. we know these challenges will not become -- will not be overcome overnight, but we are on the right track. we are also working on those regions outside south asia where radicalism has been flourishing. since december 25, there's been more than a touch of collective hysteria in the press that a new safe haven crawling with terrorists extremely emerging in

yemen. in fact yemen was arguably the very first front. if you probably backed the last days of the first president bush's term in december of 1992, perhaps the very first al qaeda attack happened there when operatives try to bomb a hotel housing u.s. troops who were en route to somalia for the mission there. long before the uss cole was attacked during number of major conspiracies in the 1990's there were also based in yemen, many of them pointed at saudi arabia. the threat has waxed and waned in the interim, but in yemen by now it is at the peak. al qaeda has always had a foothold in yemen and that's always been a concern. i can't say definitively is that the obama administration has been focused on yemen since day one. on my first day at the state department, the same day that i was sworn in, the deputy secretary of state said to me, here are some of the priorities you need to be looking at an right at the top of the list was

yemen. we work very closely and much more effectively with the yemen authorities over the last several months and were making progress. the result of that engagement has been a forceful actions that were taken last month in yemen and that have continued against aqap and these were by far the most serious actions taken in many years. i note that in today's newspaper there is another report of the senior militants being killed in yemen by government forces. our strategy is to build up the yemeni capacity until the security threats within that country, but also and this is very important to mitigate the beer cute economic crisis that yemen is dealing with. yemen is grappling with serious poverty as you all know it is the poorest country in the arab world and that complicates governance across the country that is larger than iraq. al qaeda in the arabian peninsula takes advantage of insecurity in various regions of yemen and that is worsened by internal conflict and

competition for governance and competition for governance by tribal and nonstate actors. that's why we must address the problem of terrorism in yemen for a comprehensive and long-term suspect the, one that considers various factors including assisting the governance and the moment efforts as well as equipping the countries counterterrorism forces. this effort represents a comprehensive approach to security policy and one that we're implementing an cooperation with other countries including saudi arabia and the united team down. the gulf states are very concerned and there've been press reports worth noting that the ui is allocating more than $500 million for support in yemen. what we are doing in yemen is what we are doing and many other countries, building capacity. consistent diplomatic engagement with counterparts and senior leaders of splitting political will for common counterterrorism object to its spirit and when there is political will, we can address the nuts and bolts aspects of capacity building.

we are working to make the counterterrorism trained police, prosecutors, order officials and members of the judiciary more systematic or innovative and more far-reaching. capacity building also includes more basic lease training, terrorist finance training, this truly represents a whole government approach. this is both good counterterrorism and good statecraft. we are addressing insufficiencies that terrorism thrives on them or help an investor more effectively in confronting the threat rather than looking thousands of miles away for help. we're simply looking away altogether. we also ligula mcauley w. national security by sir john brennan called the upstream fact there is. we need to confront the political, social, and economic conditions or enemies exploit to win over the new recruits, defenders, and those whose task support enables them to fulfill their plans. as we look at the problem of

transnational terror and its long-term implications we are putting up the core of our strategic policy in recognition of the phenomenon of radicalization. but as we are asking ourselves time and again, are our actions going to result in the removal of one terrorist with the resultant creation of of ten more? what can we do to attack the drivers of radicalization so that al qaeda and its affiliates finally have a stinking pool of recruits? and vitally, are we doing to our values and the struggle because that president obama said from the outset there should be no trade-off between our security and our values. indeed, in light of what we know about radicalization, it is clear that by navigating by our values is an essential part of a successful counterterrorism efforts. we have moved directed by the excesses of the past few years by working to close the prison at guantánamo bay by forbidding enhanced interrogation techniques in developing a more systematic method of dealing

with detainees. we also are demonstrating a commitment to the rule of law i try other operatives in our system. the threat is global and our enemies latch onto grievances on behalf of the entire muslim world. we must look to resolve the problems that fueled those grievances. at the top of the list of the arab-israeli conflict. and as you know president obama, secretary clinton, and special envoy george mitchell are working very hard to resolve that. but their efforts, peace in the middle east will take plenty of time. and as we know it will not eliminate all of the threat. i was a big policy challenges matter and radicalization, local drivers are also critical in making them vulnerable to al qaeda's ideology and its narrative. we are developing tailored approaches to alter them, to address the issues of education, health care, social welfare, and economic opportunity that create the conditions of

marginalization and alienation and proceed to a real deprivation. in recognition of this, my first up is than to build a unit within my office focusing on what we in the government called violent extremism. this will look at local communities that are most prone to radicalization. there's a broad understanding across the governments that we have not done nearly enough to address underlying conditions for at-risk populations and we have also not done enough to improve the ability of moderate to voice their views and strengthen opposition to violence. to be sure, terrorism is a common challenge chaired by nations across the globe, one that requires diplomacy and one that the united states cannot overwhelm. the obama administration has worked hard to reach out and on the basis of mutual interest and mutual respect to forge international coalitions. the administration has been

working at reinvigorating alliances across the board and reengage in the multilateral forum concerned with counterterrorism that in all honesty will neglect it for some time and specifically many u.n. entities at the g-8 and in the vast range of regional organizations that are eager to engage on counterterrorism issues. the net effect of our work has been manifold. we are increasing the pool of donors for capacity building. we are strengthening the international sense of resolve against terror and we also strengthen global norms so that countries jointly do a better job to build security together. as december 25 made clear there is still much to figure out and there can be no assurance at the future without real setbacks. december 25 certainly underscore the continuing peril we face and the determination of our foes in the involving complexity of the overall threat. but it is important to keep in mind the contemporary terrorism has been decades in the making

and it will take many more years do i make it. as much we still need to learn especially about how to prevent individuals from choosing the path of violence. but i believe another way framework for policies and ultimately i'm confident this will be two decisions and actions that will strengthen security for our nation and for the global community. thank you very much for coming to listen today and i'd be happy to take your questions. [applause] >> thanks to ambassador benjamin for his remarks. when i have a little bit of time for questions. as always, please keep your remarks brief and 49 in a frame of the question would be the ideal scenario. and please wait for the microphone and right here my colleague, jim harper. >> this morning we had a discussion among experts, many of them still here. anything that came up several times with the concept of an

adult conversation. mostly we were talking about domestic ideas which would not be your real house at the state department. but what is the thinking on the administrations part about having an adult conversation, the consensus seemed to be that coming forward, admitting error, talking about failures was appropriate and calming to the public via i know that also you referred to but many people call the christmas attack as december 25th, which withdraws in a religious connotation from it. is that on purpose? [laughter] >> to christmas attack withdraws any -- [inaudible] >> i think i caught it both. and, you know, i think in the united states more than anywhere else we know how much christmas is a religious in a secular holiday so i guess i haven't been appropriately sensitive to that distinction.

and as someone who sees plenty of holiday decorations every time he goes in the building in the month of december, i guess i'm accustomed to that secularization as a holiday. but perhaps that's a discussion for a different forum on church and state. now, as for the adult conversation, you know, we are having an adult conversation and certainly, you know, the president emphasized on errors that were made in taking quick responsibility i think is meant to achieve that all. goodness, we've had enough adult conversations within the government, some of them rather harrowing. about roles and responsibilities i should say so this has been very adult in the way we've taken this on. in terms of the adult conversation in the broader public about the nature of its rent. well, i think the president has

in a good job of noting how nimbler emissaries have been. i tried to be aspired to maturity in talking about the strengths and weaknesses of our opponents. i know that when we met in chicago, it was a constant theme. i think that when you look at what our colleagues are doing at the department of homeland security. i do want to speak for them, but they've made the word resilience affiliate keystone of their discourse and they think that is an essential component of any serious discussion of the threat we face because, as i said, it's been decades in the making. it's not going to be unmade overnight. so i hope that those are all key elements of this. i think the president also in his last set of remarks, at least i think it was his last

set of remarks on the threat, noted that there is significant challenges and costs to having a perfect security, which i think the nation, you know, recognizes and not a perfect performance every single time is going to be an enormous challenge. but at the same time, you know, his job is to protect the country and is demanding the highest possible performance from his staff. but as a follow-up question to you, i would be interested in what the other elements of administered conversation would be. >> the whole event will be for review on cato.org. at [laughter] >> as estimates that the question i wanted to take it back. so thank you. [laughter] >> in his cairo speech, president obama acknowledged the negative impact the financing laws were having on specifically most charities.

and it certainly, you know, you can expand not to that same negative impact on all humanitarian aid regardless with a charity to conflict zones. and that would seem to be a very live, not just from denying humanitarian aid to those areas, but from the messaging standpoint that can be exploited by the extremists, which would suggest that the united states is indifferent to suffering in those countries. and yet, today you said that you thought anti-terrorism financing was a success. so, how do you tie this together and what are you doing to make sure that you address for president obama said about correcting that negative impact? >> that's a very good question and it's an issue that is constantly being discussed within the administration with regard to a number of different geographic areas. i think the most important thing

to say is that the amount of money derived from humanitarian aid specifically, as opposed to -- is, you know, only a portion of the overall part of what we might call the terrorist budget. we are looking very hard at the individual donors who are moving money -- who are radical individuals who have considerable means who are moving money to terrorists. were working on things such as bulk cash smuggling. we are looking at those charities that have been covers for terrorist organizations and are doing very limited humanitarian work. and in most cases, where we are concerned with issues of, you know, brought spillage from humanitarian organizations, we are taking a hard look at, you

know, what the greater priority is. and, you know, many of us have made the argument that we need to always keep in sight that we get starvation is not going to help us with our counterterrorism equity. so it's a very complicated calculus, but i do think that the important thing is the majority funding streams that we have cut off have not had an impact on the humanitarian issue. now, there's a related issue, which is that muslims understandably want to fulfill this obligation to give to charity and it has been something of a challenge to get particular organizations affirmed as ones that are absolutely not involved in anything that's inappropriate. and that is a process problem and the government is working on it. >> back here.

these identify your self. >> freelance correspondent. ambassador benjamin, i would like first to offer my congratulations to your new job. i hope this will put you largely into a practical use. you mentioned that babylon is a very poor country. i would like to know, do we have a long-term design for yemen in the long-term frame? thank you. >> do we have a long-term economic land for yemen? economic development. well, we're certainly working on that. yemen has a a lot of very urgent threats that need to be dealt with on a day-to-day basis in terms of basic i just poured

overwhelming levels of unemployment and continuing and really worsening problems in terms of the water table being depleted and that the demolition of its water resources. but we are certainly working towards that development plan and i would point to the meeting of the friends of yemen that's going to take place later this month in london as a basis for putting that together. i should note that there is also a lot of work going on with the international financial institutions to address young men's structural economic problems. i don't think we have published the one comprehensive plan and a lot of this needs to be worked on in conjunction with the yemenis because this will not be imposed from without. but i can tell you that there are numerous wheels turning on this issue within the u.s.

government. >> i was gratified to hear your comments on addressing the root causes of violent extremism and making that part of the overall strategy. and i'm wondering how more can be done in that area, particularly in making use of the contribution of civil society, can make not only humanitarian aid and peace building long-term development and education? >> i don't think we have time enough to enumerate them. i think i would turn the question a little bit on its head and say there's probably no success in this area that can happen without civil society, precisely because so many of the societies in which we need to engage in if the ngos that have the ground knowledge, which

is vitally important. it's the ngos that are politically powerful because there are many places where quite frankly our engagement is not direct engagement will not be construct it. this is really one of the big challenges is created these public-private partnerships that are going to make the difference whether it is an education, health care provision, any number of other areas, government and the like. so, you know, you name the problem and i think you'll find about a different ngos working on it. and so much better we need to do a better job within the government. i think we constantly need to return untrimmed rebuild and take advantage of the advantages within the ngo community.

[inaudible] >> that's the best way to describe myself. imagine the tears of the really conflict was a source of inspiration for the radical in the world. how is this assessment and how can we show these two issues when counterterrorist attacks don't have that much to do with the arab-israeli conflict? main example being the 9/11 terrorist attacks him in the main reason given with the stationing of american troop and saudi arabia. >> well, not sure i would agree that the main reason was the stationing of troops in saudi arabia. that was certainly what bin laden and others faded into night 298 and the famous fata. certainly there's untrimmed arab-israeli conflict has been a centerpiece of their rhetoric. i think the more important point though is not what the terrorists themselves say, but

how much concerned about the plight of the palestinians and feel are to achieve the peace has achieved an environment in which the al qaeda narrative has purchased him in which there is this notion that the united states is a predatory power and lead with others to steal muslim countries and steal their wealth and destroy their religion. and as long as the arab-israeli conflict is associated on the web and everywhere else with this argument, then come you know, i think it makes it very tough for us to demonstrate our fundamental concern about the well-being of muslim populations throughout the world. i have no illusions about how hard this is going to be and

this is an important part of how we're going to do our best at the local drivers of privatization. i don't think there's a serious argument that such conflict don't play into the hands of the rhetorical masters of al qaeda and other radical groups. >> pat from arlington. after the christmas incident i read several articles that were calling that may be the visa program should be taken out of the department and give in to say homeland security. is there any likelihood that something like this would actually have been? >> obviously, this is an issue that has attracted some attention from people on capitol

hill. i now know of ongoing discussions in the government to do that. i think that there's a strong feeling that the wide range of back dvds that the affair is does at the state department is best left at the state department because it is dealing with three security issues but also deals with a wide range of other matters having to do with how we function as a country economically, our openness to business, to trade and any other number of issues. so i know that my boss isn't looking to give it up. and as far as i understand, there are no bosses of other agencies that are looking to take it over. over the time being i think will stay organized as we are. >> thank you.

joe caselli american university. my question is how can the united states without alienating the parties because the choice seems right now to be part of the ruling party or you have to join a fundamentalist organization to have any kind of alternative. how can you balance those two backgrounds? >> why don't we cut off the questions a moment ago? [laughter] we recognize that there are governance issues in many different countries and that we are always balancing our security concerns with our values. and, you know, my boss the secretary of state has been very emphatic in saying that we are not moving back from our commitments to democratization and good governance, but that we believe we can do a more effective job in terms of advancing those goals and advancing those values in terms

of by having more discreet conversation with those governance of those different countries. and i don't think that she wants to back away from the idea that we have to create more political space. that's been a constant among u.s. administrations for quite a while. but it is a long-term process and you've identified some serious challenges. >> last one. break here. >> i am with the charity institution network and i guess there's been a lot of reports recently about radicalization, the pre-radicalization process. and i want to get your thoughts about that but also with regard to these medical thoughts any acts of violence. >> thank you. ..

>> and, you know, i spoke about some of the driver of

radicalization. and the ones that, you know, i think we have some opportunities to get at involve social deprivation. but it would be a mistake to suggest that we don't also face a threat from individuals who have encountered nothing in terms of direct deprivation. and there are a large number of these. and if -- you know, one case in point has to do with the november 25. i did it on -- the november 25 conspiracy where the individual in question appears to have had quite a privileged life. you know, certainly the history of revolutionary activity and there's a high-low phenomenon. people who have different circumstances turn to radical

activity. i'm going to leave it to institutions like cato and my former holmes brookings of and cif to deliver more information on we certainly have an awful got of people. it's becoming industry. not a minute too soon. proximate cause proximate cause >> the candidates vying for the nomination on the texas governor race are debating. rick perry is being challenged by hutchison and debra medina. we'll have that life for you here on c-span 2. president obama will speak to the caucus today. he's supposed to get underway at

5 p.m. we'll have that live for you on our companion network, c-span. >> the international peace, this is just under an hour 15 minutes. 45 below a few. >> so i've been been musing about abu libi for a long time. we have been talking about what he is, who he represents.

at first television an interesting story when he escaped in 2005. he was really nobody. he was being put on peripheral proceed ya organization. which is al qaeda's media outlet. people thought he was a curiosity, novelty, he was one of the four who spoke more in some of the debut videos. by 2006, it became clear that he is different. fundamental than the rest of the al qaeda boy who's are the talking heads. you know, i started saying he's a pun didn't, he's a warrior, scholar, whatever. i got a little criticism at first. saying, he's not as important. you as an intellectual, if all you have a hammer everything

looks like a nail. so i had to think for some time whether or not this guy lived up to the hype that i was giving him. this is what we face in our community trying to assess the importance without giving them the creditability that they need. that's what happened with abu ma mom had. he was still the most important thinking within al qaeda. so there's a lot of post modern twist and turns to al qaeda's media strategy. i'm going to try to talk a little bit about that. in september 2008, there was a video featuring a guy that was using the name shaykh.

do you see something else in this video? this is a still from the video. there's a coffee mug on the guy's desk. and it's got the ray sue had media logo. why would they put their logo on the coffee mug and featured on the desk of one of their leaders? shortly thereafter you saw libi giving a talk with the must have been with the logo. what you see are two things. one is al qaeda has adopted the media logo as their official logo. and two, i think they imagine themselves like a new al-jazeera. i think he was the face of this transition. i had been arguing for some time that al qaeda has transformed

from a global terrorism organization that uses media to a global media organization that using terrorism. i think it swings back and forth. when you have al qaeda's senior command in afghanistan. attiyatullah is getting all of the media tang. in just so happens in 2005 al libi escapes from our base. him and three other buddies. it is a great escape. they detail it minute by minute in a two-part video series and transcribe. this is the stuff movies are

made of. these guys are hiding in bails of wheat and they knock on people's doors. some people are against them and some people are for them. they are traversing at night. helicopters and planes. there's this wild escape plan. they made it out. they got to kabul, they hooked up with some taliban and got passed back to al qaeda. this is the first time the world had heard of abu al-libi. date of birth, people say he's somewhere in the late 40 to mid 30s. we don't have a date of birth down that i've seen that i believe. he was a pretty thoughtful student in college. he was very interested in science, engineering, his mind, you know, he really enjoyed studying categories and trying to assess how things fit

together. he enjoys puzzles that it seems. he got to afghanistan, joined up with a fighting group. this is something that people debate in my field. al qaeda has never been clear to the extent to formal religious training. everything goes by the label of sheikh. i think he has the most credentials. he's kind of become the jurisprudential police chief for al qaeda. i think mike called him the pit bull. he does this from a stand point. most rapidly against.

we have come to know him in 2005. he wasn't featured prominently in al qaeda. he was coming out in a different media. you have to roll out the new line. starting in late 2005 within you have a series of videos from la bake. and wind blowing in his hair, he has 50 guys hanging on his every word. he's a fighter. he's a romantic. they start publishing some of

these previous poetries and essays. you start to see he's a comprehensive man. this isn't a guy that's out there just to kill. he was on the council for the islamic fighter group. he is a thoughtful and religious guy. you see him sitting here with a guy that's his right side almost in every video from 2005 forward named abdallah al-shami. one of his escapees, i think abu yahya was grooming him. you start to see abu yahya in these various poses. he's instructing tactical training that i don't think he

has any ability to instruct. everything comes out in november or december of 2005 when he releases a letter to a abu zarqawi. al-queda was saying brother, we know you're going great things in iraq. you're also killing a lot of people. could you stop that? by the way, i've written a lot of bookses. i'm really important. this is what zawahiri. that had no impact. november a buy puts out a letter. you're the best in the world. but there's a few things i need

to remind you. he gives a lecture to zarqawi. the crimes are in excess. you kill too many people, you overextent, he doesn't say -- he doesn't come out and say this is what you're doing. he implies it pretty heavily. second he said the jihaddist movement is always strongest when it consults with one another. this is one of zawahiri's complaints. a by yahya's writing surrounds himself. he trying to be as transparent in his thinking possible as possible. third he says communication is key. you need to explain what it is you're doing, why it is, and this is rooted in an approach pioneered by the god father of

global jihaddist. and fourth he talks about the importance of strategy. doing things sequentially. you see in the mind, there's a certain order. there's the right path that one needs to traverse. and so this letter in concert with the third partner who seems to be a partner in crime seems to get zarqwi to back down. he is lecturing the gatest jihaddist on earth, zarqawi on how to do it. we need the media coming up. here we have him sitting on the floor. he introduce him as abu yahya

al-libi. you see behind him a rifle. everything that they do is symbolically important. what they are reminding you is that in 2000, abu yahya al-libi was a webmaster for the taliban. right in 2000, i think i was still trying to figure out how to use e-mail. he was making web site, uploading news, keeping stories going for the web site. he's a innovative thinking. he's useful. he's charismatic. so they are really branding him as a guy for the new millennium, bin laden 2.0, the upgrade. i think this is an important step. as you move through 2006 and 2007, you start to see what this guy is capable. i think some of the more important contributions that

he's provided is he served as you could call him the religious map maker for al dika. -- al qaeda. he's a jihaddist map maker. movements have gone awry because they've gotten off the right path. i'm going to articulate what the path looks like. then i'm going to make sure you are on the path. i'll scold you if you get off the path. so, you know, you can call him the religious policeman. and he was obsessed with purity, religious purity. and we'll talk about this. but his argument is that islam is being throughouted from within by the embracing of nonislamic con septembers, -- concepts, nationalism, using the word resistance instead of jihad. any time you embrace a concept that's not islamic, you are introducing trojan horses into

islam that will allow the west, the rand corporation specifically, he says, to come in and take over islam from within. it's just a fabrication. democracy is nothing rather than a rouge to take over islam. so he spends most of his time to point out any time there's semantic insurgency. the irony is he's embraced the same approach. he's spent a lot of his writings identifying religious concepts and trying to gut them of meaning, trying to replace them, and remake from the inside out and his own image. another one is global jihaddist movement leader. he makes sure he hits every major field of jihad, somalia,

algeria, he goes through anywhere he wants to point attention to. i think he serves as the al qaeda investigative reporter. he's always on the first on the scene for intellectual ideas. how much time? a few more minutes, okay. you know, just let me show you a little bit more imagery from the earlier videos. here's the night video. he has to get the operational credentials checked. it was silly. he gave a sermon and the three afghan soldiers that he killed. great operation. this was fascinating here. this was a photo shoot that al qaeda released or the media

released of abu yahya teaching in a classroom session. it's important, i think, because every one of these photos is, you know, put out for a specific reason. here's he shows he's relaxed, he's a man of the people, he gets along well with the troops, he's humble, he sits and eats with the the -- he's the kind of general that will come down and walk through the camp. you want to be the guy sitting around eating with abu yahya. this was interesting. a buy making bagels. i think is most interesting, for those of you who know abu al-libi, it's obviously him. the fact that they obscured his face. they didn't know the great general had attended. they let you think that he may

have been the guy. but they don't confirm it. this is something that gets replayed in the recent seed ya that was released. where you have abu yahya at the end after he gives his talk. people come up and hug him. and then you see this image. intentionally blurred. who are you left to think this might be? would obama -- osama bin laden attend? who knows, they trickle you out there and let you believe it. there's this consistency to his videos where somebody, be it him for his handlers are trying to make you think that very important people take his seriously. you should to. this is some of his writings. he talks about the issue of human shielding within islam. he says, the concept of the

ability to kill another muslim because your enemy is using them as a human shield. he spends the first 20 pages going through the justifications saying it's okay to kill other muslims if the west has or your adversary has used them as a human shield. but then he says something which i think embodied all of his writings and his entire approach. he rejects the premise. he says the fact is warfare has changed. the nature of the adversaries we face today and the nature of the wars have changed. therefore, everything i wrote about, that limits or strains our ability to kill muslims is irrelevant. he wipes the slate clean in al qaeda's ability to do what they do. or at least he suggests that he's in the one in a position to rewrite it. at least his ego, despite what

he projects is massive. recently all of his statements have been compiled and put out. this guy, i can't tell you how popular he is on the al qaeda forums. one the reasons is that not only does he approach criticism by rejecting the premise, but sometimes he'll actually up the anti al qaeda came under attack for killing muslims. not only did they kill them. they weren't muslims. they weren't in the wrong place. meaning they shouldn't have been there, meaning they were allied with the crusaders. but we're going to kill more of them. and in fact, you should to. if you are not killing muslims, these muslims, then you are not doing your duty to islam. he doesn't tries to tiptoe around criticism. he embraces it and turns it back on you. and i think that's why, i mean

the movement just loves him. because he's tough, he's macho, he's intellectual, he has every box checked from al qaeda's perspective. so i will maybe stop there and maybe let chris ask why he gave us the strategy for al qaeda so we can get moving on. >> thanks. first off, i want to thank carnegie for having me up there and it's fun to be up here with jarrett. it's good to be able to comment. i have to take any shots at him first. in general, i think -- in general i think that the jarrett's is spot on. he has been positioned as a very unique kind of leader in al qaeda. and jarrett explained why. mostly because he's a religious leader as sort of a cheerleader,

but also as an on-the-ground commander. that's all been done in the media. what i think made abu yahya interesting is that al qaeda has changed. we framed the talk today in terms of who is going to be the next bin laden. i'm going to say that al qaeda has changed fundamentally since bin laden came it's leader. so the next bin laden really may not have that much in common with bin laden. it's worth looking back to what brought bin laden to the forefront the way it was. more in the circumstances in the very unique time period and the relationship with abdullah which game him tremendous help. really critically, he had connections in saudi arabia and he had finances that enabled him to separate himself from others

and provide the backbone for a wide variety of organization where he was a touch stone and could be a touch stone for groups that were operating all over the place. he was somebody that had access to resources that they did not have. i think when you look at al qaeda today, it's operating very differently. and this is well i disagree with jarrett a little bit. you talk theming being a media organization. i think when you look at the way al qaeda is organizized today, the al qaeda we think about in afghanistan and pakistan served as a consulting organization. it's mckinze plus time warner. less so in algeria i think, but

less so with the universe of pakistani-based, what with we call taliban groups. these are the organization that are worrisome today. we see that with what seems like the very sophisticated intelligence operation. we see it with the groups attempt on the subway. we see it within a lot of the organizations. even here in the united states where zazi, david headley, these guys were not connected directly to al qaeda and bin laden but to the other groups that sit around al qaeda but have their own basis. that's where the muscle is coming from as we move forward. so the qualities that we're going to see i think in the next sort of supreme figure in al qaeda, if there is going to be a single supreme figure is going to be someone that has a couple

of qualities. one has need to be smart, abu yahya does those. they need to be able to defend the movement at large from a tax on it. and i'm glad jarrett mentioned that. because this is critical. and it separates somebody like abu yahya from sort of the people that are -- really lack creditability or someone like this this recently comes out and says al qaeda doesn't kill muslim on the same day 80 people are killed at a market. this is a very big distinction. you are exactly right. al qaeda is at it's most dangerous when it defending whatever it does. whether it's killing people that shouldn't be, whether it's killing muslims, it's most dangerous when it stands it's ground. and we need to keep that in mind, because audience for their activities is not the west

primarily. we have to -- we have to understand that's the same thing with the attack in detroit. some folks have said this is a failed attack because the plane didn't go done. that's from a western perspective. from the perspective of the primary audience, i think, which is muslims that al qaeda is attempting to recruit and reach out to, they show determination, continued capability to come close, and a reason to keep fighting. and when we think about it that way, these sorts of things are successful. i think abu yahya communicates with those groups very well. the last thing -- and i think abu yahya is powerful, is two things. one, he's often quoted by the affiliate organization. he clears seems very important to aqim, quotes him quite a bit. they quoted him in somalia. they use him. he is clearly influential in those groups. and because of his background

and the presence of the media which was closely associated with the taliban than al qaeda, he has ties in with the group. that is important at a time when taliban groups and there are -- you know, avenue fan, taliban, and pakistani taliban doesn't come close to describing the complexity of that. but abu yahya, think, is well positioned to communicate with those organization in the variety of those groups. and lead them intellectually. and this is where al qaeda projects power, especially in pakistan. we have to understand that that's how al qaeda is going to project power. by leading existing organization down the road to do the kinds of activities that it wants them to do. abu yahya is in a well position to do that. i would say, however, i'll throw some sand into the mix so we