and says don't tax me. my service or my good should be excluded from this, and pretty soon, you have a very complicated tax. i just have to say and this is coming from me as an administrator, not as a policymaker, human nature being what it is people are going to come in no matter what tax we have for special rules and special rules make complexity. >> host: nice to see you again. we appreciate coming in from time to time to answer viewers'l taxpayer advocate created by congress in representing you the irs.

>> good evening and welcome. this is the first time our republican candidates for governor will debate. we're airing live throughout texas on television radio and online.

i'm kera news direct or shelley kofler. we've asked the audience to hold applause during the debate. but right now put your hands together. you are invited to welcome our candidates. [applause] our candidates are -- let's introduce our candidates. our candidates are set to come a three term u.s. senator and former texas. senator hutchison is 66 years old and grew up near houston. debra medina former republican party chair and registered nurse. ms. medina was born north of corpus christi. she is 47. and rick perry has been governor since december 2000 is a former lieutenant governor from a

native of paint creek near abilene. now for the next hour i'll be joined in questioning the candidates by mariemaria renee barillas a reporter with kuvn univision 23. and some 11 montgomery chief for the star fort worth telegram. joining us is the news anchor for cbs 11 t. xa 21 in dallas were worth. dogs in the audience aeneas nor now about this debate. schenectady mutuality watching statewide. here's the format to the debate tonight. all three candidates have agreed to keep answers to one minutes, but also respond to an anticipated follow questions by. now the shoe generates debate or differences among the candidates the moderator may allow for additional discussion. each candidate will also give the opportunity to ask each opponent a question in addition to what do you ask us tonight obeah tonight show pitcher fielding questions from voters in the audience and social media of our time permits.

>> back to you to get the debate underway. mac thank you. our first question just while the candidates tonight and the order of antler growth on a drawing. so governor perry first, senator hutchison max and ms. medina third. here is the question. and for the current in washington. governor medina in particular tax and may be interestedh in succeeding for the united states. we want to know how far would you go to break ties in washington? name one federal program to you really like and then tell us whether you would wish to end any specific program or law. governor perry. >> the program that i love the most that the federal government is involved with is our united states military forces. there is not anything that i would do except make sure that

we take care of those veterans who come back after spending time that they have looking after our freedoms. but that is the greatest program that the military or that the united states government has. i would tell people i said are three things the government ought to do really well. two of our mail, stand military and defend our borders. i guess one out of three ain't bad. [laughter] >> will governor you've also been critical. there is a word that a sort of on the campaign circles these days. nullification or it talus, which you want to know if i or end in a specific program, any federal program that we are now involved with your deck this? >> i was talking on a radio program enough a question. i said here is the real issue. health care is a great example of what people are talking about on the nullification issue. we have to be working every day and spending every waking hour that we can push in washington back on the explaining to people just how bad nationalized health

care will be. how much it will cost this country and how poorer health care will be. that's the real job we need to be doing in set of talking about someone it's an what if that happens. i think that's a waste of time frankly at this particular point in time. we have heard that it is hanging by a thread. you know, i hope that our senior senator will get back to washington d.c. and cut the thread veered that's where she needs to be. >> is there any program you would know if i or end? >> or is not a program that i know from the nullification process. again, i'll get back to what i said earlier is that we need to be working to stop his programs before they ever get to the point where you can start talking about the concept of nullification. >> you been critical of a stimulus package and yes we have $12 billion in our state budget that comes from stimulus money. some people think maybe that's a hypocritical position. >> shelley, we spend a lot of

money to washington d.c. billions of dollars to washington d.c. i wish we didn't spend that much money up there. i will be a whole lot happier if the gasoline tax would discount it all in the state of texas and belt are roses instead of sending it to washington d.c. and they send as 70 cents of it back just for road construction. i think texas would be a lot better off we didn't have the money up there at all from the standpoint of a gas tax. but the fact is we spend billions of dollars in income tax. and when it comes back without strings attached -- you bet your we're going to take it. >> thank you, governor. senator hutchison, the same question please. he's been part of congress and you've been familiar with washington. can you name the federal program that you like most and then tell us if you would whether you would push to end or nullify any specific federal program. >> well, first of all, it is our military that is my favorite program and i serve on the military committees, have been

chairman and now ranking member of our military construction of veterans affairs. i think our military does a great job and that is the key thing that we ought to be doing rights in congress. but i do want to say, shelley, that i have been in congress. i am fighting against the government takeover of health care. i am fighting against the government encroachment in so many parts of our lives. i am fighting against new tax increases on energy. this cap-and-trade bill that is coming after health care reform is a terrible encroachment. i do want to differ with the governor in one respect and that is in highway funding. when i came to the united states senate we did get 76 cents back for every dollar we send to washington. i fought hard with our congressional delegation to get that up to 92 cents. and we do have 92 cents return. it is not 70 cents. and the tax thought that

government control pass it on their website that it is a 92% return. and i'm glad to know that he is supporting the bell that i've actually introduced that would give us 100%. we should be able to opt-out of the highway trust fund. >> i think in reality -- i'm sorry. isn't it true there would need votes on capitol hill to take taxes out of that fund? >> you are right. where to start thinking differently and start taking the first step. in the first step is to introduce legislation that says why do we need a highway trust fund now? the purpose of the highway trust then was to build a national highway system for national security. that system has been dealt out. why should we send a sense of our dollars to other states? i do want to do that. that's why ventured is the legislation because we need to start talking about it and other states that have want to do the same ring when i came to congress that was 76 cents and it was a lot of labor on my part to get it to 92 cents. for him to say 70 is absolutely

wrong. and i think he knows it. >> senator hutchison, very quickly in a specific or graham in place with the federal government of the joint texas that you would eliminate? >> support for acorn. we have been supporting acorn not knowing some of the activities that they were doing that were really stopping the free voting that we have in our country. so, yes. the government encroachment that we are seeing in this administration is scaring people to death. >> thank you very much. as the dean nassar same question. any federal program you like and which one would you know if i? >> well, shelley, before answer that question actors they thank you for all of texas to make sure we have a voice on the age tonight. with an average citizen can fit with a senator and a governor, it shows that it's still as a government of the people and by the people. you know, both have commented

that we have to be proud of our military and we certainly all would salute the men and women who once served us in that regard. but i am not sure that we could apply the federal government for taking care of our u.s. military and saying that that is a job they've done well. we've let the veterans down time and again in providing equipment and needs on the battlefield and then we don't take care of them when they come home. so i am hard pressed to say that there's anything that that washington is doing well. >> the question really is is there any federal program you like. you have done interviews in which you have said only federal responsibility that you're supporting is their ability to make treaties. >> iraq. u.s. constitution article i section eight to find what the u.s. government ought to be doing and i would maintain that they are not doing anything that they ought to be doing well.

either things that they should nullify? gas. we must nullify the nationalization of our health care and i think in texas we all have to be very concerned about the epa. it had to be running a very close second on the heels of health care. get the environmental protection agency out of energy and out of agriculture in texas and let texas take care of farmers and energy producers and with the tremendous economic gains in this day. >> thank you very much. our next question comes from the audience, for my listeners and viewers. with go to doug dunbar for that. >> shelley, were going social edf. this is from sherry wilken. scheer is a mother who is unemployed and lives in arlington right now. your husband is a construction worker and she fears that she is about to lose her unemployment benefits because of the limits. her question is very simple, what do you plan to do about unemployment which is now obviously standing at 8% here in the state of texas and we will

begin with ms. medina. >> thank you, sherry for calling in tonight and participating in this debate. the government solutions. we texans understand that our free society rest on three pillars, individuals and families, communities and churches and the government. we must do things to get the government off at the back of the people so we can once again learned to care for one another. when we do that, when we get washington and epa out of bag and energy, when we restore true driver property ownership and eliminate property tax, that alone adds $3 billion to net personal income in taxes than 150,000 new jobs. those are real jobs, real economic and dvd that will help people like sherry and their families. >> ms. medina, thank you. governor kerry were at a% by

now. this is under your tenure as governor of the great state of texas. what is your plan for unemployment? tonight nobody gets confused this is the best in the nation to be living in today. we were up in frisco for an event a couple months back and a man came up to me and said, i lost my job, but he said i will value that there is no other state in america i would rather be living in with having lost his job in texas because i know that the program that you will put in place i'll be able to find a job very thin. and that is the type of can-do spirit that you see in the state of texas. we lead the nation in the production -- in the development of jobs while america was losing 3 million jobs because of the washington type of spending it all spend it now approach. texas was getting almost 100,000 jobs, just this last november. and october re-created jobs in the state of texas.

as what people want to see. low taxes and regulatory climate that is better. and a skilled resource which means our schools are funded and accountable. that is what people are looking for. taxes texas -- creating an environment for people to have a job, single most important thing that a governor will do. >> governor comment by the way wondered about the jobs you said you created under your administration in 2008 that would last well beyond that now, correct? >> no, sir. and we created more jobs from november of 07 to november of 08. texas created more jobs than the rest of the country combined. that's a fact. >> in texas did not lose more than 100,000 jobs. is that what you're saying? >> i'm telling you we created more jobs here if i do not display a message you any simpler. [laughter] governor, you are using the numbers from post 7208.

>> let's talk about 09. >> in 09 we are creating jobs in october and november. that was not a state in the nation. name me one state in the nation, senator or mrs. medina that were creating jobs. it really wears me out the week that two people on the stage that want to tear texas down when the fact is everybody understands this is the state you want to live in. we want to come here. the state is growing by a thousand people a day not because were overtaxing them. they are coming here because they know this is the place to be, the land of opportunity. >> senator hutchison, please. >> the way we can create jobs for the women in arlington is to lower the burden on business so that this is the higher people. governor perry has increased taxes on business. the business margins tax, the unemployment tax because of the mismanagement of the funds has increased the burden on business and that means business is goin

to hunker down and not hire people. what we need is an education system that trains are young people so that they will get the good jobs of the future and win 30% of our young people are not graduating from high school, that is not a state that is going to create the good jobs of the future. yes texas is the best state in america. it is not going to be the best state that creates jobs in the future if we don't lower the burden on business. and by the way, we definitely lost more jobs in texas this year than we gained. we lost 300,000 jobs in texas alone this year. that is not a record to be proud of. our unemployment rate is higher than every state in the surrounding area. so i think the governor talks about how good things are in texas is the greatest state in america. but if we don't do what the problems in this state we are not going to remain the best state in america and hiding from it is not the way to make it

better. >> thank you, senator. we are going to move on. if you want to talk about what you do today to create jobs, we can do that. >> cut business expenses. if you are adding business expenses as the governor is, to our businesses and taxes are not going to create jobs. lowering taxes at the federal level would alter the same thing. >> thank you. ms. medina. >> it's important to point out we've lost jobs in the or. all those jobs that governor is talking about have come in the government sector. that's not economic prosperity. that is a greater burden for the businesses in the state and for the hard-working individuals in the state to kerry. we have added 14,000 jobs in the government-backed your -- lost 14,000 the area and added 156,000 jobs in the public sector, and the government

sector in texas. >> we are going to move onto the next set of questions if you want to -- >> hold on a second. i'd like to respond to that because the fact is no governor has taxes more than we did. we got the business tax from 4% down to 1%. we cut property taxes by one third grade people are not moving to the state of texas than coming in the state is not growing by a thousand people a day because they are overtaxed. the texas association business didn't stand up with me when we were redoing our tax burden senator because they would taxis were. they saw the opportunity to cut taxes, our taxes are fair, lower, and broader. >> the news alone said you raise taxes more than any other in the history of texas. [laughter] the largest tax increase that we have had in our state is yours. it is the business margin tax the use science governor.

the mac you are talking to oranges. when the tax association of business says this is the structure we want our taxes and senator that tells me something. you can talk and argue all you want about whatever it is. that is not a fact. >> you were supposed to lower property taxes and he didn't. >> i won third. >> let's move on. let's move on, please. we'll have more opportunity to talk about taxes. >> i hope so. [laughter] >> we also asked him questions that are candidate specific and dave have the first question for senator hutchison. >> senator hutchison, could you clarify your position on abortion. specifically do you believe that rove versus wade should remain in force or be reversed by the state republican advocates?

>> let me say that my record is one that is always come down on the side of life. on my record in the section i have voted against partial-birth abortion, funding of abortion, content restraints, restraints on abortion without parental consent. i've promoted adoption and if i am governor of texas, i will do everything i can to limit, lower the number of abortions in this state and promote adoption. we don't want unwanted pregnancies. that's not good for anyone. talking about the supreme court of the land, we have had restrictions on abortion that has become the law of the land. and i think that is good. i don't want abortion havens. i don't want to have a freedom so that some states would allow partial-birth abortion and there are states that have actually have referendums that i've said they would want to a partial-birth abortion. so yes, that scares me.

>> but still, your position on abortion has given some discomfort to republican activists in your party who take a pretty strong position on reversing roe v. wade. you think it should remain in effect are again be -- >> what conserves me as we would have some states that would allow a person as the baby is coming out of the birth canal. and i would never support that. i have voted against it. i don't want that to be in any state in our country. and that is the reason that i have stated that position. >> so you would not support the overturning of the roe v. wade? >> what i am saying is if it is overturned, you are going to have abortion havens. >> is there a yes or no to this? >> look i'm just telling you why i am concerned about having it overturned and then having abortion havens all over our country. >> are you saying it is

overturned and waiting to black-market abortions essentially? >> legal abortions. that is what concerns me. i think you are looking at a whole -- but now we have restrictions that require reasonable that are the law of the land. >> so keep roe v. wade on the books? >> i think you have to look at what happens if it goes away. then, every state is allowed to do whatever its state legislature passes and we know there are states that would allow abortion under any circumstances, including partial-birth abortion. >> thank you, senator. the next question is from rené -- maria renee barillas enter question goes to ms. medina. >> gas, you can call me maria. senator, you have indicated that you oppose laws that indicate the right to bear arms. in fact year stated that you carry a gun in your car and that you don't have a concealed handgun license out the window

and taxes you don't need one to carry one in your car. given how you feel, is there any type of restriction or limit as to who can carry a weapon, what type of weapon, and where? do you feel there should be any? >> i think again, here is a classic example between someone who understands a constitutional republic, understands the u.s. constitution and the answers that both the sender and the governor will give. we've had too many tragedies to count in recent memory. we have at, virginia tech, 9/11, for good. every time we have that sort of tragedy, the big government answer is to dr and the people and the other founders understand the importance of gun ownership as an essential element of freedom. either property ownership and gun ownership, the two things

essential to a free society. if we want to talk about safety, security and freedom in texas, we have to be eliminating gun registration. we would recognize that nonregistration has been used to read history for one thing only and that is gun confiscation. so, yes i am a strong advocate of the right to keep and bear arms. >> but where would you draw the line or the limit? you said the private sector should be as or better armed than the government. to avoid irony. >> correct, correct. >> so where do you draw the limit? >> the 10th amendment says those powers not delegated to the united states government are reserved to the people in the state. so the texas legislature and the people of this state will set limit on gun ownership and they've done now. but what we have done is we have made every other law abiding citizen and the state said jack

to onerous regulations ever headed them from being able to protect themselves and their family. we cannot deny man the right to life, liberty, and property. we must restore true gun ownership in texas. >> to observe a concealed weapon law in the state? do you take your handgun into grocery stores? >> i do not. i do observe the law. i do not take my gun into the stores. [laughter] i'd like to, but he don't. >> okay, thank you. next question for governor perry. governor, the farm bureau says the biggest reason it is opposing you in this election is eminent domain. not only have a poster in the trans-texas corridor issue, but in 2070 vetoed legislation legislation that would have compensated property owners for the value of their land or business dropped because of a new road by your project backup access. some people off the shirt over the senate have been fair. explain to the landowners of texas why they shouldn't be

upset with you. >> well, having been the only candidate here on the stage that really has a rural background and grew up on a farm and spent the bigger part of my time on a farm, that certainly knowing what is going on a world texas, i know that. the problem with that piece of legislation wasn't that i'm not a proponent of eminent domain. as a matter of fact, we passed a very sweeping intimate domain that is passed by the people who stated texas this last fall. the individual who was the originator, if you will, of that k-kilo case, the lady who lost her home was done working with this en masse so we strong support all across the country in the stadium on the eminent domain issue. the reason that piece of legislation.vetoed was because it was going to expand the

concept of the legal side is being able to comment and to end it was another cottage industry for the personal injury trial lawyers the way of the data. >> the landowners that i do higher the attorneys and paper them out of their pockets felt like they were the ones footing the bill. whether the lawyers cost them or somebody else. they felt like they were the ones who lost. >> our state went through a rigorous debate past in 2003 about lawsuits in this day. matter of fact we took it to the people, defending doctors, defending medical professionals, defending small businesses. and it was passed overwhelmingly in the legislature and passing a constitutional amendment. so i think the people in the state of texas understand that the last thing we want to do was turn back the clock on the game that we made on legal reform in the state. one of the reasons that we are such a good place for people to live in where such a god creating state is because people know they can come here and not

be frivolously food. and as long as i'm governor and pieces of legislation come before me that are going to turn back the clock on toward reform you can bet they will make my veto pen. >> very quickly, if this piece of legislation came to again and you were concerned about the attorney fees, would you sign it? >> sure. we are defined a bill basically does that. >> thank you very much. we now have an opportunity in this debate to have candidates asking the other candidates questions. we've drawn for this as well and governor perry gets dressed up for his candidate as one of its first question of one of his two opponents. governor perry. >> i know that the senator has had some issues with consistency. as a matter of fact, heard a while ago when we talked about -- you know, you voted to continue sub six. you got some rather accolades

from a pro-choice group for your support on a ban on partial-birth abortion. but the consistency issue is what i am having trouble with, senator. and you told people in the state of texas that you were going to put vote for the bailout. in september of 07 used it in front of the tax incidence that i'm not going to vote for the bailout and many went to washington d.c. and you voted for it. and then you came back inside, some months later you said that was probably a bad vote. and then a couple months after that, you voted $20 billion to bail out the automobile industry. >> let's get to the question. >> that is the question. would you address that 20 billion-dollar to the automobile industry? and all of those bailouts. >> well, first of all, let me say governor that when president bush came to our united states

senate and talked to senator korn and antony about the global meltdown of the work is in our country. when people were losing jobs, when people couldn't get loans for their businesses. he asked us to help shore up the financial institution. he hated to do that. we hated to make that vote. but we did vote to assure that our financial institutions would he sure death. now, i will have to tell you i never said i wouldn't vote for the bailout. i said i would give $700 billion to anyone and i didn't. we changed what they asked for. we split it in halves or that we would see if it was working. and in fact, we didn't like what it was working so we didn't vote for the second half. so there was never a 700 billion-dollar vote. and when i said of course i did my quite happened afterward, it was because i didn't like what happened afterward.

advertisers, governor perry, you are the one that is disingenuous on this issue because you wrote a letter to congress saying pass this bill. we need to shore up the financial market and the governors association supported it. it took a lot of leadership to do something that would be right for our country and governor, u.s. for it to. were for it before -- >> can i respond to that? >> briefly. >> the governor and i did read a letter to you. we thought you were all smart enough to understand but were talking about to cut the spending -- by which we made have made it clearer for you. smack maybe you should ask, governor. i'm sure we just didn't get it. >> bet that we do it in our economy. >> governor, let me tell you something. you wrote a letter that said we need to do it now. the only bill that was before us was the one that was before us. so i think you're trying to have

it both ways. >> thank you, governor. let's move on and give ms. medina an opportunity to ask a question. >> i think texas is ready. you need to pose a question. >> this squabbling isn't getting us anywhere. governor, you were a democrat before a republican having worked out for al gore as his campaign manager. you've broken promises on education, securing our border, and property tax reform. he failed to listen to texans on issues that the trans-texas corridor. what evidence can you get to be texans that you will keep your word this time around? >> ms. medina, i made the same decision ronald reagan made back in his life that the republican party was the party that i wanted to be associated with. and i'm glad i did and i'm glad he did. and i am glad to be a part of

the party of ronald reagan came to. when the standpoint of putting our promises and plays, i promise that i will do everything i could to make the state a place where people were proud to live and i think we've done that. when you look at what we have created in the state over the last eight years out of when you look at walking into a budget deficit of $10 billion in 2003, cutting that budget, reducing the taxes, the tort reform that we passed -- i will tell you the doctors all across the state are proud of what we've been able to do. people are proud to live in texas and in a state where they can keep more of what they work for. >> can i respond? >> very briefly. >> you talk about the great economic state that we are in, but the reality is texas nonconsolidated annual financial report shows under your leadership our debt has tripled and per capita taxation has gone up 49%. that is painting a rosy picture that doesn't exist.

texans are suffering it has texas is marching right down the same path that california did. if we do not change our course, we will find yourself there. >> thank you very much. senator hutchison. >> thank you, ms. adina. governor perry promised that property taxes would be cut by a third. he said it tonight. and yet i go around to my town hall meeting and the people that i am meeting with throughout texas and i say, raise your hand if your property taxes have gone down. and i've never seen a raised hand yet. and i'm just wondering what your experience has been. what do you think is the property tax truth in texas today and why do people say when you go to your meeting that you would've done all over texas? >> i think we are hearing that we have a 16 billion-dollar hole coming in texas 2011 as a result of unfulfilled promises on property. the answer is not more property

tax reform. the answer is the elimination of property tax in texas. texas will benefit from a broad-based sales tax to fund the essential elements of government service that we will see a 3 billion-dollar increase in the arsenal and come in at 100 jobs. this discussion about property tax reform that the government has championed is a diversion. restore true private property ownership in texas, eliminate property tax and use of sales tax to fund government service. >> thank you. but go to www.who is here with another voter's question. >> beat 19-year-old lauren lutz and lauren is attending johns hopkins university. tommy witcher question is for the candidates. >> biggest hospital ethics panel for life-giving care of any patients whose causes futile if they are not able to transfer another of ten days of the

decision. these panels however have come to consider a speedo patients who are conscious, able to request care and be able to pay. so keeping in mind that texas is the only state with such a law, what changes would you support being made to the texas advance directives act? >> begin with senator hutchison. >> to be very honest with you, i had not heard that we had an act such as that. i would be very concerned about pulling the plug on a patient that did not have the rights and a family or some protection against this being done indiscriminately. >> governor perry? >> ioa stand by the side of life. and in this case, it is no different. you do everything you can to keep those patients alive and certainly working with the physicians that are there. if they don't have -- do you

stand by place in this state. >> so would you make an effort to repeal it? >> absolutely if that is the case of what we are seeing in texas today, absolutely. >> ms. medina? >> i am a registered nurse. i've been at the bedside of patients affected by the advanced directive asked. i know the grieving through. the governor does a great job of giving lipservice to pro-life issues, but he has done little to reverse abortion in texas and has done nothing. nine years if you're going to repeal the act, why haven't you? it has been mayor. we have denying care. we've been pulling patients off a ventilator sunday in their families didn't want that to happen because the law in texas allows. texans deserve pro-life support. the governments job is to ensure justice and protect innocent

life. there is none more innocent than the unborn baby or the frail injured and dying. >> more in common thank you for being here. >> the law was signed when you were governor. were you opposed to it as well? >> i wasn't aware of that. >> okay, thank you. >> okay, thank you. we are now going to engage in another round of candidate to candidate questions and ms. medina has the first question. >> senator hutchison, the u.s. constitution is roughly six pages in length and yet we have been at the federal level a failure to be bound by the change that it places on our government. in fairness, you alone aren't guilty of that. we have a whole federal government that has gone way beyond its bounds. but the texas constitution is 350 pages long. but evidence and assurance can you give texas the gilby bound

by our constitution? >> well, first of all, it's wonderful that the federal constitution is so short because assuredness is that whatever is not reserved to the federal government is left to the states. i share your concern and the governors, frankly, that we have gone way beyond what the founders intended with the federal government continuing to encroach and mandate on state governments. i have fought it at every turn. when i could, so many of us have stood up and said, why are we mandating unfunded mandates among the worst things that congress does? our state constitution certainly -- i will abide by the state constitution. it's the law of our state and i respect that. but i vigorously agree with

everyone on this stage, i think i'm about what we need to do is remind the congress and the federal government to they should not encroach on states rights the way they do and i have been consistent in that throughout my term in the united states senate. >> thank you, senator hutchison. it is now your turn. >> i would ask of governor perry, you are running an ad that says that you have cut taxes on business in texas. in fact, you have increase taxes on business in texas every employer in texas is going to pay higher unemployment taxes. the business margins tag you say you cut it. you cut it for two years to get to the election season. it is going to come back. a few small businesses got that -- but in fact, you have permanently increased taxes on our businesses. that is not conservative. how can you say in your ad that

you have cut taxes on businesses and lower the growth of government in taxes when it has increased 80% during your term? >> senator, i know the truth is sometimes hard to just recognize when you've been in washington for 16 years weird but the fact of the matter is we have the lowest -- the second lowest tax burden in america in the state. and that is the fact. we lower the business tax from 4% down to 1% produce lower, flatter, and fairer than ever before. we have a state that is growing. people are moving here. people understand that texas is the land of opportunity. we are chosen as the number three state for entrepreneurs this year. only two smaller states in front of a. big states are dreaming. people are leaving their states to come here. they wouldn't be coming to texas, senator, if it was the place to you been trying to paint it over the last six

months or so. >> governor, there you go again. if you keep adding the burdens on business and acting like it was a tax cut, how can people believe that anything is going to be different in the next four years? we cannot continue to increase the size of government, which you have, increase the debt which ms. medina pointed out. increase the taxes on business, but say it is a cut. save the lower property taxes, but you know you can't control up results. and therefore you know that property taxes have not gone down. i just want to ask you how you can run and added that says exactly the opposite of the truth and expect texans to believe that things are going to be different with fewer term after 14 -- after ten years asking for 14. >> or burner, do you want to answer? >> is in my time to ask a

question? i thought so. speaking of telling the truth and given the consistency thing down. are you going to resign from the united states than it? [laughter] >> governor, i think you're supposed to pose your question to ms. medina. >> i'm sorry. i will not resign from the united states senate. >> ms. medina, and a question that i was asking a little bit earlier, not that i asked earlier but thought about earlier. you have said or released you said you would consider legalizing drugs in texas and i would like you to expand on that for the audience. >> i have said that is a power that out to be reserved to the people in this day, not something the federal government ought to be doing. we have certainly seen both at the federal level and the state

level a tremendous amount of resources poured into a drug war with little effect. i had the opportunity to ride with the dallas city police officer, 11:00 p.m. to 2:00 a.m. he said 95% of what he does is drug related crime. we are spending a tremendous amount of resources frankly that we don't have in a way that's in effect gives. we've got to get beyond this emotional debate and look at objective outcomes and results. texas has got to be courageous enough to have this discussion and under a debra medina governorship we will. >> thank you. a question while a panelist from dave montgomery. >> whoever is governor is going to confront a huge budget mess right at the start of the turn. sales tax revenue has plummeted and lawmakers are going to be facing a shortfall, possibly about to $17 billion when they

meet again in january of 2011. just how are you going to deal with? web services are you going to have to cut and will attack screeds be inevitable? >> i believe this goes first to ms. medina. >> the new kid gets the toughest question of the night. i have talked about the importance of restoring true private property ownership in taxes, not because it is a fiscal issue, but because it is a freedom issue. the funny thing about freedom is the marches hand-in-hand with prosperity. when we eliminate private property tax and taxes and fund our government with a broad a sales tax, we'll see a 3 billion-dollar increase in personal income and will see 150,000 new jobs added to the texas economy in the first year. we've got to look at transparency, efficiency and

accountability in all areas of state government. we have seen cloth, if you will, sloppy management in texas, youth commission and criminal justice in the texas department of transportation where they misplaced $1 billion. there are lots of opportunities to look for accountability and transparency in the government e4 we start holding hostage the texas taxpayer for more money. they have had to tighten their belts. we have had a tiger pelts of individuals on the government must do the same thing. >> what you say to those who say the sales tax but it's a burden on the underprivileged in the low income? >> when you structure the sales tax in a way similar to what texas has today, where we exempt medicine and food, that is the least word and some tax to the society. the least burdensome tax to the economy, certainly do not need to have the business margins

tax, which is an income tax in texas and ought not have a property tax in texas. >> for senator hutchison. >> yes, first of all, i have balanced a budget. i have run a small business. i have known what it is like to have to cut expenses in order to make a profit and i think that is the best experience i've had for for being in public office. it is a 17 billion-dollar deficit and we are going in with. part of that -- part of the reason for that is the governor decided to take stimulus money and spent 4 billion of it and recurring expense it so that's going to have to be made of. and that is according to the legislative budget board itself. so the way that we are going to have to cut is either across the board. and i think lieutenant governor dewhurst did a good day last week and i supported to start the cuts now. don't wait until the body and

starts for heaven sakes. we should start cutting across the board now in our state agencies. we have over 300 state agencies. forty-five of those agencies are related to health care. i'm just wondering why we couldn't consolidate some of the state agencies. texas lost $1 billion in an accounting error your. so i think we have too look at waste. we have to do a scrubbing of our budget. which frankly has not been done in the last ten years to see where we are to be spending money and where we should cut. thank you. >> i think we should be consolidating. >> there are 45 that have different health care funding -- and i just think we ought to look at those to see where you could put the ones that would be similar to gather and get the bureaucratic cost of the boards and commission costs. >> or burner. cutting the budget. >> way a verdict on this. in 2003 became an -- by the

executive leadership party under the belt of having done this. i think it is a -- it is interesting that you would bring david dewhurst. he is a partner of us in the legislature and every criticism that you are laying out the you are laying on david dewhurst. you are laying on republicans who have made our decisions, senator. i think it is pretty rich that an individual who voted 95% of the time for every budget that came before you, you have raised the debt limit ninepence in washington d.c. and to stand here in front of the people in the state of texas and they trust me, i'll balance the budget is a tough to understand. >> well, first of all, let me say that you governor of the one that is criticizing republican members of congress and republican senators like senator cornyn and myself. when we are fighting the takeover of our health care system we are fighting against

cap-and-trade, fighting against his government encroachment encroachment and uart lumping republicans with the democrats that are doing this. and number two, i'm not criticizing governor dewhurst. i'm criticizing the leadership from the top or the buck stops at your desk. you have not provided the leadership to the legislature and you are presiding over a budget that is getting ready to go into a 70 billion-dollar deficit. >> we will cut it just like in 2003, senator. we had the experience. >> we will now go to maria. he goes first to senator hutchison. stacked the question is on illegal immigration. in recent years several cities in texas have tried to tackle the issue of immigration, citing the lack of control at state and federal levels. some have even tried to ban illegal immigrants from renting apartments. the legislation would he support of the state level to control and geopolitical population already living in texas and would you consider limiting or

denying certain services to illegal immigrants? >> and if i may say we are tight on time if you could teach very briefly answer in 30 seconds. >> the state of texas does not use the verify system to determine if someone is legally in our country when they apply for a job. when i'm governor of texas, we will. in my office we use the verify. is the easiest, simplest and cheapest way to find out if someone is legally in our country and the state of texas should lead the way. >> or burner peary. >> senator, you voted for sanctuary cities. >> that is wrong. >> you have supported sanctuary cities. we should find anyone who hires illegals to work in the state or that is one of the quickest ways to stop illegals coming into texas. in washington d.c. has done an abysmal job of securing our border. that thank you.

>> both the governor and the senator continued to give lipservice to a problem that is plaguing texas. it is hurting all of us, immigrants and citizens alike. we must get serious about illegal immigration, deploy the texas military force to the border to assist sheriffs and local law enforcement. and we must stand up against washington d.c., a primary reason for the rising health care costs is a federal legislation we need to stop those incentives. >> thank you. i wish we had more time that we are at the end of our debate portion and we now have time for closing statements. we have john for these as well and ms. medina, you go first. >> many of you had to work very hard to ensure that we had a voice on this stage tonight. i hope you can tell by my answers that i would lead us along the path less traveled and that will make all the

difference for texas. we have a real opportunity here to restore true private property ownership and gun ownership in texas so that those pillars and principles that our founders fought for, freedom and prosperity are restored in our state. we will restore our sovereignty of the state. there is not about taxes, except for the article i section eight special delegations to the federal government. texas must stand strong and affront her sovereignty. texas will decide about health care and energy and agriculture. and we must address illegal immigration so that we have a healthy immigration process. one that draws people to our shores, but one that respects the robot in the private property rights of land owners in south texas. i look forward to leading texas. join us, vote deborah adina in

march. >> governor. come your closing statements. >> i want to say thanks for allowing us to participate and thanks to my colleagues here today. thank you to each of you who have come out today. it has been a great opportunity to exchange ideas and i hope none of us never forget the reason we have those opportunities to exchange these ideas freely is because they are young men and women halfway around the world defending those freedoms you matter of fact, i talked to sergeant ken mondor deyoung ladies stop the terrorist fort hood. she had a knee operation and i think her for her service. it is people like that allow us to get up every day and enjoy the wonderful freedoms that we have. and the simple truth is that we have people that work in texas and we have to work everyday to make sure that every texan who wants a job as a job. but the other simple truth is that texas is the land of

opportunity. you look across the country and you know that. you see is that people move your that there is something special going on in texas and the question that gets asked, why is texas finding itself at this very unique place compared to the other states? it is because we have made disciplined, decisions, fiscal conservative decisions over the course of the last six, eight years that is the texas on the course to where it today. we've got challenges in front of us. with that many people showing up in texas every day whether its transportation of her structure or electricity or water, we have to have a real vision put into place. i hope were the course of the last six to eight years you've seen that leadership out of me and ask you for your vote. thank you. >> senator senator hutchison. >> thank you. texas is the best place in america. i have running for governor because i want to make sure that we are the best place in america 20 years from now. and i don't think governor peary has prepared our state for the

future. in education, it is not a success when users 30% of the young people who enter high school to dropouts here that is not right. i will change it is governor. transportation, the leadership of tax thought is the most arrogant in our state's history. the people who work they are are great. they deserve better leadership and so do the people of texas. i will provide it. border security, we can do something that the state level for border security and it's not just talk about it. it is actually doing the things that are available. we need to protect private property rights. governor perry vetoed the bill that would really do that. we need ethics reform and i will provide it. hernias and is creeping into our government in austin. that is unacceptable and i will change it. i have thought most of my adult life for texas. i do want texas to be run over with toll roads. i do want my taxes to whenever

private property rights. i don't want my governor to mandate vaccines for 12-year-old girls that are not yet proven. that is not the kind of texas i grew up in. i want us to leave texas better than we found it. we owe it to our children. god bless texas. thank you. >> candidates we say thank you and thank audience here tonight. thanks for being with us. this is the texas debate. we hope you have heard something tonight that will help you make an informed decision when you vote. if you tuned in late you cane ee online at texas debate.org. goodnight from umt. ..

>> now k2 of public hearings by the financial crisis inquiry commission. witnesses include attorney-general eric colbert

and financial industry regulators. the congressionally appointed commission is made up of six democrats and four republicans. former california treasurer phil angelides chairs the commissioner and former house ways and means committee chairman phil thomas of california is co-chair. >> good morning. the meeting, the public hearing of the financial crisis inquiry commission will come to order. there is a quorum present. welcome to our second day of public hearings. on the causes of the financial economic crisis that there gripping this country. as i said, and is the vice chairman also indicated yesterday, we are a panel that is going to do our level best on behalf of the american people to

try to discern the facts and the causes of the current crisis, which has affected so many millions of americans. yesterday we heard from a range of experts and folks from the private sector. today, we have the number of people with us to our federal state and local level who have been involved. and grappling with the consequences of this crisis, and i am looking forward to today's testimony and i want to take a while the commissioners for all the hard court yesterday and what we will do today and i wanted thank the folks in the audience and the people watching this hearing as well as all of the witnesses that will provide testimony to us. mr. thomas the want to make in the opening comments this morning? >> no thank you mr. chairman. i will say thank you very much for appearing before us and we look for to continued cooperation. thank you.

on the first panel, and we have before us the attorney-general of the united states, mr. holder. we have before us mr. leonie breuer. we have sheila bair who is the chair of the fdic and mary schapiro who is the chair of the sec. we are going to start, as we are with all witnesses, as well be, as has been and will be our custom that this commission. we will swear all witnesses so i would like to ask all the witnesses to please stand and be sworn before us. do you solemnly swear or affirm under the penalty of perjury that the testimony you are about to provide the commission will be the truth, the whole truth and nothing but the truth to the best of your knowledge? thank you very very much. we will now cummins. i will ask that each witness provide an opening statement. we do have written testimony

from the witnesses, and i would like to ask if each witness would provide up to ten minutes of oral testimony. it is my understanding that mr. holder will provide the testimony for the department justice, and i will also note that mr. holder rearranged his schedule to be here and we'll be with us for the opening statement and a couple of brief questions and i know his schedule dictates the house to the park but let's start with mr. holdren then go to ms. bair and mr. pero. >> thank you mr. chairman. chairman angelides pies chairman thomas thank you for inviting me to address you and the other distinguished members of this commission. these inaugural hearings i believe mark the critical step toward a better understanding the root causes of the financial crisis that has held our economy in its grip over the last two years. i appreciate the opportunity to participate in the commission's work and to assist in your

inquiry. this morning i'm joined by the assistant attorney general for the justice department's criminal division. lanny spirits many of our key experts investigating prosecuting and punishing financial crimes. he has submitted written testimony which provides a comprehensive overview of the department's work in these areas and he will be available to answer any additional questions you might have. we must be vigilant in our efforts to safeguard and to strengthen the american economy. our efforts to fight the economic crime or a vital component of our strategy. strategy that seeks to foster confidence in our financial system, integrity and our markets and prosperity for the american people. in carrying out the strategy the justice department has long focused its efforts on combatting financial fraud. across numerous administration's democratic and republican alike, the department has worked hard

to protect fraud-- and recovery lagat and gains for the benefit of fraud victims. despite these efforts we know financial fraud process. and fett "the wall street journal" reported earlier this month that crisis and fraud in the securities and investment banking industries are at their highest level since records began. the current economic crisis has brought these challenges to the forefront. now let me state at the outset what role the department plays and does not play in addressing these challenges. put simply the department of justice investigates and prosecutes the federal crimes, as i sit here today prosecutors in washington and 94 u.s. attorneys' offices around the country are hard at work investigating a wide array of financial fraud cases from mortgage fraud to medicare and health care fraud to securities fraud to corporate malfeasance. i am proud that we have put in

place in law enforcement response to the financial crisis that is and will continue to be aggressive comprehensive and well coordinated. but while the reach of our investigative prosecutorial function as broad we do not purport to have all the answers. as a general matter we do not have the expertise nor is a part of our mission to opine on the systemic causes of the financial crisis. whether the justice department's resources are focused on investigating and prosecuting crime. it is within this context that i am pleased to offer my testimony and contribute to your vital review. the department has a long history of prosecuting financial fraud and we will continue to do so, working in concert with their federal, state local tribal and territorial partners. the justice department is using every tool at our disposal including new resources at bense technologies and communications capabilities and the best talent

we have to prevent, to prosecute and to punish these crimes. and by taking dramatic action our goal is not just to hold accountable those who conduct, whose conduct may have contributed to the last meltdown but to deter such future conduct as well. the cornerstone of our work in this area is a new interagency financial fraud enforcement task force which was established in november by executive order of the president and led by the department of justice. that the core of the task force's mission as a more robust and strategic law enforcement effort focused on combatting four types of financial crime. number one, the mortgage fraud. from foreclosure rescue and loan modification fraud to systematic lending fraud in the nationwide housing market into cough securities fraud preparer from traditional insider trading to ponzi schemes to accounting fraud to misrepresentations to investors. third recovery act and rescue

fraud including the that the federal stimulus funds and illegal use of taxpayer dollars intended to shore up financial institutions and forthcoming financial discrimination including predatory lending practices in minority communities and the sale of financial products that exploit the elderly and the disadvantage. in combatting financial crimes we will aggressively leverage the criminal and civil enforcement resources of the federal government. we will tackle every fraud case with the aim of recovering stolen funds from victims. and we will enhance coordination and cooperation among the federal, state, local tribal and territorial authorities so that the perpetrators of these crimes are brought to justice. now on this glassman point let me be very clear. when we find business those or individuals whose disregard for the law has hurt the pocketbooks of average americans, we will use every available measure to

hold them accountable. even before the launch of the task force, the department aggressively respond to the financial crisis by redoubling our fraud fighting efforts. in addition to conducting bernard maid of who perpetrated the largest ponzi scheme in our nation's history lester were arrested the ringleaders of what has been described is the biggest hedge fund insider-trading case in history and we secured 30 year-end 25 year sentences for executives of national century financial enterprises following their convictions on conspiracy, fraud and money-laundering charges. we have also devoted substantial intention to prosecuting of mortgage fraud. right now the fbi is investigating more than 2,800 such cases, up almost 400% from five years ago. until recently enacted budget for 2010 will enhance these efforts as well be and has legislative authority congress

provided the department last year in the fraud, enforcement and recovery act of 2009. i am confident with the new authorities, with the resources and a bold new plan of action we can and we will make measurable meaningful progress, and working together with their law enforcement and regulatory partners, we will succeed in restoring the integrity of our markets, preserving taxpayer resources in protecting the vast majority of part working americans, investors and businesses who play by the rules and to adhere to the law. i thank you again for the opportunity to participate in today's hearing and to outline the department's ongoing efforts and to address financial fraud in the wake of our crisis. i look forward to working with you and along with the assistant attorney general breuer would be happy to answer any of your questions. thank you. >> thank you very much attorney general. ms. bair.

>> chairman angelides, vice chairman thomas and commissioners i appreciate the opportunity to testify on behalf of the federal deposit insurance corporation. my testimony will focus on the failure of market discipline and regulation that led to the financial crisis and suggest reforms to prevent a recurrence. the last major financial crisis, the thrift and banking crisis of the 1980's resulted in enactment of laws designed to improve the financial regulatory system. these lots significantly strengthen bank regulation and provided banks with strong capital levels with less risk. but at the same time they created unintended incentives for financial-services to grow outside of the regulated sector in a so-called shadow banking system. in the 20 years following this reform, the shuttle banking system grew much more quickly than the traditional banking. at the onset of the crisis it is

estimated half of all financial services were conducted by institutions not subject to provincial regulation and supervision. products and practices originated by the shadow banking system have proven particularly troublesome in this crisis. many of these on banks-- nonbanks grew to be too interconnected to resolve the existing bankruptcy laws. they also could not be run down under the current receivership authorities. we are now poised to make far-reaching changes that will affect how we regulate the entire financial system. our approach must be holistic in give regulators the tools to address risk through the system, not just in the insured banks where we have long recognized credentials a provision is necessary. to be sure we can improve oversight of insured institutions, but it performs only they are more regulation upon traditional banks it will just create more incentives for

financial activity to move to less regulated than use. such an outcome would only exacerbate the regulatory arbitron is that failed the crisis for that occurs reform efforts will once again be circumvented as the war over the past two decades. nemis problems in our financial markets and regulatory system have been identified since the onset of the crisis. in 2002 and early 2003, he encouraged by a record low interest rates there was the boom in the volume of mortgage originations. these originations were driven primarily by the refinancing of existing mortgages. mortgage origination platforms crew to accommodate the surge in mortgage demand. by 2004 house prices were rising at double-digit rates, setting the stage for the dramatic changes in restructuring and funding of mortgage loans. because many prime borrowers said locked in their loans by 2003 the mortgage industry shifted its attention and its

sample lending capacity toward less creditworthy borrowers and homebuyers struggling to cope with the high cost of housing. one result was a rapid increase in sub-prime lunner originations which more than doubled in 2004 and peaked at just over 20% of all originations by 2005. declining affordability and high-priced housing markets also contributed to a shift towards nontraditional mortgages such as interest only in pay option mortgages. the limited reach of prudential supervision allowed risky practices to grow unchecked. for example sub-prime and nontraditional mortgages were originated in securitize primarily by brokers and mortgage companies and by non-bank affiliate's debts of banking institutions. securitizations provided funding for these loans. growth in private labor mortgage-backed securities was enhanced by the development of the cds market. the size and complexity of the capital market activities that

fuel the credit boom meant that only the largest financial firms could package and sell these securities. compensation schemes fueled the growth. minnick compensation systems were not sufficient to risk-management. bailout high short-term profits to be translated into generous payments without regard to any long-term risks. mortgages and many derivative bonds created long dated risk well compensation was weighted toward short-term results. creating perverse incentives for risky behavior. another important cause of the crisis was the lack of strong consumer protections especially in the non-bank sector. increasingly complex financial products combined with opaque marketing and disclosure practices prove toxic. as a result foreclosures are nearly 3 million per year and would and 15 million households are saddled with underwater mortgages. finally many financial firms grew to such size, complexity

and interconnectedness of the market implicitly assumed that they were too big to fail. credit rating agencies recognize this implicit guarantee providing to ratings one with than one without government support. as a result of the too big to telsat as these firms and joint funding at below market rates for the risks they were taking. the financial crisis reveal the risks crew across the financial system unimpeded by a stovepipe financial regulatory framework, one framework for insured institutions and another less stringent 14 non-bank entities. to princess and the regulation of capital, leverage and consumer protection among institutions in the shadow banking system and traditional banking sector and the almost complete lack of regulation of otc derivatives allowed rampant regulatory arbitrage. the massive expenditure of taxpayer funds and their collapse of the financial system demonstrated need for major financial reforms that reduce moral hazard and improve the

system's resiliency. these changes should include a resolution mechanism that makes it possible to break up and sell a large complex interconnected firm without taxpayer support and i am very pleased the bank ceo's talking with yesterday endorse this. we believe there should also be a prefunding resolution reserve to provide working capital for this resolution process. we also support the creation of a systemic risk council to provide macroprudential oversight and strengthened and harmonize pridgeon liquidity standards as necessary. more effective oversight and improve transparency that derivatives markets is needed and finally able making authority to ensure uniform consumer protection throughout the financial system. these reforms would go a long way toward preventing another crisis but as the committee examines the causes of the financial crisis i urge you to also consider other of longstanding u.s. economic policies that may have played a

role. this crisis with the combination of the decade-long process where national policies have skewed economic activity away from saban sentor consumption, away from investment in our industrial base in public infrastructure in toward housing and away from the real sectors of our economy and toward the financial sector. examples include federal tax in credit subsidies for housing, compensation practices that promote short-term profit without regard for long-term risks and implied, no explicit government backstops for large financial firms. such backstop subsidize excessive growth and risk-taking. no single policy is responsible for these economic distortions and no one reform can restore balance to our economy. we need to examine national policies from a long-term view and that's where they create incentives that will lead to better and sustainable standards of living. our financial sector is grown disproportionately in relation to the rest of our economy.

whereas the financial sector climbed less than 15% of total u.s. corporate profits in the 1950's and 1960's, it shared 25% in the 1990's and 34% by 2008. financial services are essential to our modern economy. but the excesses of the past decade were cost diversion of resources from other sectors of the economy. we must avoid policies that encourage such economic distortions, et mixing regulation can only accomplish so much. longer term, we must develop a more strategic approach that utilizes all available policy tools, fiscal, monetary and regulatory to lead us toward a more stable and more widely shared prosperity. thank you. >> thank you ms. bair. mr. pero. >> chairman angelides, vice chairman thomas and members of the commission thank you for the-- into the causes and

lessons learned from a crisis. the work of this commission is essential to help and policymakers in the public better understand the causes of the crisis in bill that better regulatory structure. many of the foundations of securities regulation and indeed the sec itself resulted from the efforts of the investigation following the stock-market crash of 1921. when i became chairman of the sec in january of 2009 the agency and financial markets were still reeling from the events from the fall of 2008. since that time, the sec is work to redo its policies come improve its operations and address the legal and regulatory gaps that the crisis has laid there. there were many interconnected factors and mutually reinforcing causes of the financial cost acela i appreciate the enormous challenge facing the commission. my reinstatements discusses many of these causes in detail but i but like to use my time is moyne to highlight the seven of the lessons. first, the requirements of

around assets securitizations must be strengthened. i believe this is essential as one of the major factors in the financial crisis was the rise of sub-prime mortgage-backed securities. the securitization of mortgages lead to an unintended facilitation of weaker underwriting standards by originators and excessive reliance on credit ratings by investors. in short the financial crisis has pose serious gaps in the asset-backed securities market. as a result today the sec staff is engaged in a broad review of the way in which asset-backed securities are regulated. we are looking to disclosures, offering process and reporting. the are considering changes designed to enhance investor protection in this market. this is a vital market and i believe the change is critical to restore investor confidence and facilitate capital formation. our proposals will seek to align the interests of investors with those selling asset-backed securities. among other things the proposals will seek to provide to the more

time for investors to conduct a careful analysis before investing part of the process will require low level data has provided in a format and manner that is accessible to investors in the proposals will seek to create a mechanism for ongoing disclosure. the second lesson growing out of the crisis is investors and regulators in some cases conover rely on credit rating agencies. throughout the crisis credit rating agencies performed poorly. by among other things providing high ratings to complex financial products with low-quality assets including sub-prime mortgages. nonetheless many relied upon these ratings as a quality risk and liquidity. in response the commission is undertaking a series of rule makings designed to improve ratings quality and reduce reliance by fostering accountability, transparency and competition. the third lesson is that standards are weekend and regulatory gaps emerge when the

risks of deregulation are not adequately appreciated and when markets are considered to be almost always self-correcting. indeed it was quite recently when many deregulations particularly in financial services as the key to foster a market growth in ensuring u.s. competitiveness. unfortunately this meant main elements of the financial landscape such as over-the-counter derivatives and hedge funds were subject to minimal or no regulation and it meant that regulators lacked the necessary information to identify, understand and address risks in these areas. the results were proliferation of complex financial products including derivatives with a liquidity and other risk characteristics that were not fully transparent or understood. one very significant gap in the regulatory structure has the inadequate regulation of the otc derivatives which were largely excluded from the regulatory framework in 2000 by the commodity futures modernization that. this gap lead cinnabar generous

loading market almost entirely out of public and regulatory cupric a to address these arbitron is dangers we need greater transparency and oversight of the otc derivatives in major disciplines and dealers. such products should be subject to the greatest extent possible, so clearing. the current absence of transparency should not be-- a fourth lesson from the crisis is there can be a direct relationship between compensation arrangements and corporate risk-taking. in fact many major financial institutions created asymmetric compensation packages that paid employees enormous sums for short-term success. we know some of the same decisions resulted in significant long-term losses or failure for shareholders in taxpayers. in december the sec adopted new rules that was a bit bigley improve disclosure in the key areas of risk corporate governance ends director qualifications. the rules require companies to

disclose compensation policies and practices for all employees, not just executives of these policies and practices create rest that are reasonably likely to have a material adverse effect on the company. fifth the financial crisis revealed a silo regulatory framework is unable to monitor and reduce risk flowing across entities and markets. for this reason i support the establishment of the council of regulators with the power to evaluate risk across the financial sector to identify and address-- in addition i believe large interconnected institutions should be supervised on the consolidated basis. however consolidating supervision is not a panacea and policymakers should remain aware of the limits of such oversight and regulation. this is particularly the case for institutions with many subsidiaries engaged in different often unregulated multiple countries. systemic risk management requires meaningful functional regulation active enforcement

and transparent markets to be effective and while the consolidated regulator of large interconnected firms is a central component to identifying and addressing systemic risk other tools must also be employed. these include more effective capital requirements and leverage limitations, strong enforcement functional regulation and transparent markets that enable investors in counterparties to better understand the risk associated with a particular investment decision. a sixth lesson of the crisis is markets and market regulation should promote not undermined investor confidence is central to the flow of capital and long-term success of markets and our economy. but since the financial crisis began there is growing fast-track been growing-- the roots of the efficiencies and market structure must be addressed head-on to ensure markets are transparent and investors are treated fairly. accordingly the sec is taking a fresh look at market structure and trading activities to ensure they foster affair orderly and

the vision markets designed to protect investors. this includes activities such as high-frequency trading flash trading in dark pools. finally the financial crisis has taught as consistent and they chris enforcement is a vital part of risk-management and crisis avoidance. particularly in times of substantial financial innovation. through aggressive been evenhanded enforcement we hold accountable those his violations of the law caused severe loss and hardship and we deter others from engaging in wrongdoing. we also help indicate the principles fundamentals of the fair and proper functioning of financial markets that investors have a right to disclosure the complies with the federal securities laws and they should be a level playing field for all investors. for the past to the sec has taken steps to improve this bill and effectiveness of its enforcement efforts from streamlining procedures and removing a layer of management to treating specialized investigative units. we also are currently investigating a significant

number of matters growing at of the financial crisis and we have brought more than a dozen cases recently against entities and activities associated with some of the worst practices. there's still much work to do to ensure we do not see these problems repeated in the future. for example lessons learned broker-dealers with significant positions are now providing enhanced information about positions and the commission strengthen capital requirements by limiting the ability of large broker-dealers to use risc models for regulatory capital purposes. most impregnably have established an internal task force to review all aspects of the ages broker-dealers to determine how such regulations can be strengthened. when the sec cannot get the nitzan we work with congress to address the problem of too big to fail to ensure strong regulation of otc to rip this to close loopholes that allow to-- hedge funds to avoid oversight imposed the high standards of

conduct on those to provide financial adviser and invest resources to keep up with products, properly oversee the financial markets and better deter and hold accountable entities that might be inclined to commit to maryls financial clients. in conclusion there were many lessons to be learned from the financial crisis. the normandy in worldwide scope of the crisis in the and press the did the government response required to stabilize the system demands a full and careful evaluation. no one should hesitate to admit mistakes, learn from them and make changes needed to adjust and identify and reduce the likelihood of such another crisis would occur. thank you very much. >> thank you very much ms. schapiro. we will now go to questions and as i indicated at the beginning attorney general does have to depart so what we'll do is maybe a couple of questions from the vice chair at which point we will go to questions to all

panelists. so let me start very quickly. mr. attorney-general one thing i would like to ask you today, and i don't know if you have already but if you haven't, i would like you to look into a matter and report back to us please. which is in september of 2004, the fbi warned or it was the head of the criminal division of the fbi assistant director, warned about a "epidemic and post of-- corson across this country ahead and indicated that if it went unchecked it could end up with a financial consequence as the crisis as large as the s&l crisis and without saying that was the genesis lowly of what has occurred here even the testimony indicates from many people including mrs. bair and other

folks indicate fraud was a significant contributor hear one thing i would like to test the to do with the department has not already done this is to evaluate what steps were taken in the wake of that 2004 fpi warning ansel let me just quickly ask, has anything been done in that regard and it's not will you commit on their behalf to do a review of what was done in the wake of the 2004 warning? >> we are constantly in the process of reviewing that which we can do better. i am not familiar myself with the statement but we will look at that. i will certainly equate myself with that statement and what caused the statement to be made and we will review what the justice department has done since that time. and make the results of that search available to you. >> what time-- timeframe to you think? maybe i will ask you to get back to us what a reasonable timeframe for that evaluation. >> i don't think it should take an awful long period of time.

we are constantly in the process of trying to with gallie wait what it is we have done and how we can improve on what we have been doing so getting that information to you should not take long. >> as part of that would i would like to indicate to you is i have been told by folks who served as assistant u.s. attorneys in places where there was particularly high levels of potential mortgage fraud that was an issue visited up the chain so i am interested given the consequences then the question i asked of private sector yesterday, wendy formation was available what kinds of action took place so i am interested in what happened on the public side and what happened on the sector side. the additional question i have for you was coming to you have currently in your opinion, or did statutory authority sufficient exist to prosecute, financial crime specifically

mortgage fraud, crimes across this country. did it exist as it does today? >> i think we certainly have had tools. to help us in the fight against an combatting mortgage fraud, and as indicated in my opening statement the number of cases that are under investigation by the fbi is over 2,800 now, but with the passage of the fraud enforcement and recovery act, fera in 2009, we were given i think additional enhancements that allow us to look into these cases. i think to a greater degree and with more abilities. fera extended submit the a number of criminal statutes including the bank fraud statute that allows us to reach the conduct of private mortgage brokers. that is a tool that we did not have before. this will make it easier for prosecutors to charge private mortgage brokers to engage in fraudulent conduct so in addition to those tools which

did exist, we have had these enhancements from congress as recently as 2009. again. we are constantly in the process of trying to review what tools we have, where there are gaps in our abilities to prosecute these kinds of cases, investigate these kinds of cases and we will not hesitate to interact with you and with congress and requesting additional tools should we identify needs in that regard. >> i have one more request for you in this regard. as part of your evaluation that asd to undertake, and maybe a bridge of it is were there sufficient, if there was knowledge about potential clients across the country and the magnitude was there at the time sufficient enforcement capability as well as authority? bair's been reports in the wake of the terrorist attacks of september 11, 2001 that there was a diversion of 500 white-collar crime investigators in the fbi away from

white-collar crime to terrorist activity so part of that evaluation what warnings were set up including the fbi warning as well as what resources and authority existed, didn't exist, was deployed or was not deployed? >> i think it is a very good question. certainly there is that movement i think fairly recently and understandably so in moving investigative resources to the national security front given what happened in september of 2001. i was looking at some numbers and their budget for 2010 we have made combatting white-collar crime a real priority on the budget request that has been passed by congress and signed by the president provides only $50 million in program increases to the department to pursue white-collar crime including both financial and mortgage fraud and that has the very concrete impact. we will have 50 new fbi agents and 135 new attorneys who will have the ability to work these

kinds of cases. our resources even given those additions, are relatively limited and these cases are complex ones. they take time and money in the order to bring come up but we are determined given the resources that we have and the enhancements that we are going to recede to make this a priority area for this justice department. >> thank you and i think now that i've st series of questions i think what i am after with the 2004 report from the fbi being one of the pieces is in the valuation by dew to the extent to which we may determine or may not determine mortgage fraud was the driving force here, the extent to which a story or resources or actions existed, were taken or not taken and i think that would be very helpful to us to see if that is uphold that hadn't been plug with that made immaterial difference. mr. vice chairman. >> thank you very much mr. chairman. thank you all for coming.

mr. attorney general on page 6 of your testimony, you indicated that based on your area of responsibility, law enforcement, putting in place from your structure a response to the, in response to the financial crisis that is and will continue to be aggressive, comprehensive and well coordinated. as you know our charge from congress is to put together an explanation for the financial crisis, and given the timeframe in which we need to fulfill that statutory responsibility we are forced to be aggressive, as comprehensive as we can be in the timeframe. one of my concerns is that we probably aren't as well coordinated as we should be in the collection of the necessary information for us to fulfill

that function and if you will allow me, i will ask briefly of both the sec chairman and the fdic chairman a question which should be easy to answer prior to my asking you in essence the same question. on the sixth of january, the fcic into into a written agreement with the federal reserve had signed by their chairman. for access to and sharing of information. as you might expect, the federal reserve deals with some very sensitive information. there was a period of negotiations to come up with an acceptable agreement on both sides. um the 11th of this month the office of the comptroller of the

currency entered into an agreement with the fcic with the appropriate adjustments given the responsibilities that they have. today, we are going to have an agreement signed by the office of thrift supervision. my understanding and ms. schapiro you can correct me if i am wrong that by the end of the date the fcic and the fcc will enter into essentially the same agreement that you will sign? >> that is exactly right. >> thank you. my understanding also and ms. bair he can correct me if i am wrong, the fdic will reach the same written agreement with the necessary modifications given the differences in the jurisdictions that you have. is that correct? >> yes sir, that is correct. >> thank you. i assume you know the question that i am going to ask you mr. turnage general. >> and you may know the answer.

>> well, if it is c.s then we can move forward. although there has been cooperation and clearly given the focus of your law enforcement and the necessity for not divulging information in the pursuit of justice. there are a number of areas that would be helpful to us if the department of justice then the fcic could reach a similar negotiated agreement. i know we haven't felt that it was necessary to do so up to this point but i hope you can appreciate, as it takes a long time to get some of the cases that you investigate to conclusion. our conclusion is pinned on the wall and it is the middle of the last month of this year. so, in anticipation of making sure that we continue to have a

smooth working relationship, is it possible for you to give an affirmative answer to my question? is it possible by the end of this march to reach an agreement similar to the others with probably even more necessary understandings of what type of information between the fcic and the department of justice? >> we will certainly work to make such an agreement possible, and i would think that that would be a sufficient amount of time. i think we have to understand the department justice, we have a series of rules that prohibit us from sharing information, the federal rules of criminal-- the privacy act with regard to were investigation zinn with regard to the ongoing investigations the ability to share information is difficult. having said all that is our desire to provide you with the information that you need and we would endeavor to work with you to try to reach an agreement as quickly as we can.

>> i don't interpret that as yes. negotiating with the fdic and others they are also similarly constrained with statutes that do not allow them to share information and one that would be most obvious is in dealing with private entities in terms of proprietary or as the lot is called, trade secrets act. we were able to work away through those difficulties as well. my assumption is since we haven't placed a letter in front of you, andy wet indicated that you are more than willing to work to reach an agreement and you indicated that the end of this month seemed a reasonable and appropriate, let me say that i will accept your answer as a probably and by the end of the month, hopefully it will have become a certainty if it

hasn't-- you might be assured that we will revisit you because we simply cannot conclude our job in the timeframe of congress has assigned us, if we aren't able to get the appropriate necessary and protection all structure in place to find out what the government did or didn't do as well as with the private sector did. or didn't do. i appreciate your willingness to go as far as probably today. >> okay. >> thanks. do you have additional questions because i have a couple. >> actually but i was going to do mr. vice chairman is i to know the attorney general schedule requires him to the parton mr. breuer will stay with us. i want to thank you for being here and advance in helping as to what we need to do. as mr. thomas said let me

reemphasize something. we are here not just to examine what went wrong in the private sector. we have an obligation to as the early and vigorously examine what happened in the public sector, what happened in the regulatory agencies, what happened in the enforcement agency and helping us understand the full record of what did and did not happen, actions come inactions is important to our inquirer. >> and the attorney general is a probably at the current time. >> please don't misunderstand. there is a desire on the part of the department to cooperate. this is an important inquiry that you all are back. is "important for nation going forward. it is important for historical purposes to understand why we are in the present situation would have to confront. the only concern i have are the rules and regulations that govern the dissemination of information the department of justice accumulates into the extent we can work our way through this we will get the information to you. it is our strong desire to

cooperate with you in the effort that you are about. it is an important one, eight vitally important one. the information to develop the reports will help us in our ongoing in enforcement activities so we want to cooperate with you. >> elevated to most probably. >> thank you very much mr. attorney general. >> thank you very much. >> thank you very much. now, i have a couple of minutes i'm going to take write-downs in the vice chairman probably has a couple of questions and then we will go to commissioners and i am going to hit quickly here and ask a couple of questions. ms. bair i want to ask you very squarely, and that is that early on in your testimony you talked about the ability to curb sub-prime mortgage products that the fed had a report in 2000, did not act on it, and i know

our hearings have just begun but the more listened yesterday the more i read testimony, the extent breadth, nature of these products in the marketplace seems to have been a very significant force here indices set in the end ended up being bundled in package but the largest institutions in the country and i guess it there was a moment at which-- where was the primary responsibility for choking off the development of the sub-prime products that ended up polluting our financial marketplace? >> at that point in 2000 this really was a type of lending that folks were doing and really at that stage would have been much easier to choke off because not that many folks were doing it, so i think the only place to tackle that on a systemwide basis with nonbanks was through the hoepa rules, the consumer-protection rules that it did the fed the ability to

apply rules against across the board for banks and other banks so looking back i think if we have had some good strong constraints at that time the sample standards like you have got to make a loan, minute, make sure they can be patty alone and the reset read as well we could have avoided a lot of this. >> i think it is fair to say that was a critical point come a critical decision point and ups and that we were left with a number of state authorities and others who had differing levels of authority. danette constraints and at times were fighting preemption efforts. >> that is right. the states try to tackle this one by one and i to believe these separate reported in 2004 when the preemption state consumer laws for national banks was significantly ex-minute as to how it existed before 2004 and yes this to make it more difficult for states to deal

with these practices within their borders and the interested representatives will be talking more about that. >> i want to ask both you and mr. peril and other quick question before we get to the vice chairman of the commissioners. rating agencies. you speak very clearly about in a sense the multiple-- not just their ratings themselves but the use of those ratings in capital standards and it seems that that was an enormous pull but it seems to be able unplugged. no substantial reforms, still not competitive environment, still in a sense deference instead is given to those ratings. >> of the whole system is essentially broken? it was proved to be worthless, broken and it remains so today. i am going to else, it is still little pejorative but please respond both of you. >> i am happy to do that.

clearly rating agencies holding large responsibility for products that got into high level ratings. the congress gave the fcc the authority after 2006 to begin to regulate these entities and before that the authority did not exist in the agency engaged in a series of rule makings of the next two years to try to do, to try to bring more competition to this space, to bring more accountability to this space and try to give investors a better context within which to understand the quality of freighting so for example rules that required the disclosure of the performance of ratings over a period of time so you could see how they performed, done grades upgrades, conflict of interest disclosures, and most recently we have proposed a new concept release that rating agencies be subject to liability as experts and no longer receive that favored status under the

federal securities laws but i don't disagree with you. the fundamental problem to my way of thinking is this business model which is relied upon by the investor the buyer of national securities be the fundamental conflict of interest that is very difficult to square so many of the rules we have done have been in an effort to move towards a realignment of the rating agency's interest without of the investor as opposed to the issuer pays part of their number of rating agencies that have a subscriber pays model and that is helpful but we really will encourage entities to come to us with a new business model. we are very open to improving that in the context of our existing authority to see if we can break down the walls here and get some genuine competition into this space. >> alright. ms. bair. >> thank you. our piece of this i guess is whether ratings can be used to set capital and we have been relying on it in the past. going forward i believe the

regulators of an interagency bases will be proposing new capital rules and one of the things we will be doing is eliminating the ability of an institution for structured finance products to rely on their wedding to set their capital unless the actually identified, can identify the assets ultimately undermine the structure product into their own low-level analysis of the credit quality of those assets and unless they can do their own due diligence and validate the risk associated with securitizations and the structure products they will not be able to rely on the rating. again that is going to go up for comment but i think the general approach has been agreed to by the committee when this is one area where we to agree so think this will help a lot to make sure that the assets that actually underlie the securitization, somebody has identified them and looked at them. they just haven't used mathematical models. we are also trying to get our

own house in order. our premiums for large banks right now, a component of that is their credit rating, their long-term debt credit rating so we will be eliminating that is a factor in going forward in setting premiums for large banks. >> mr. chalmette i get one thing, the fcc is remove references to ratings in hipaa doesn't of our existing rules that can to reduce our reliance on them and we have made it clear for example in the context of money market funds that have quality restrictions on the paper that they cannot rely on their breeding and they must do an independent credit analysis so this important across the government that we start to move in this direction. >> mr. vice chairman. >> in regard to the rating agencies in the act, the act was signed into law in those six did you say ms. schapiro? and this is 2010, and i am most

familiar with having to get structures in place to oversee it and i'm quite sure that the act that was passed was perspective although clearly the origins of a lot of the problems we had precedes 2006. was there any action taken with the lot notwithstanding some structures in place in those seven? >> absolutely osd you say the law was passed and the six in the agency commence rulemaking but in 2007 there had been no fewer than five separate rulemakings undertaken by the sec under the credit recency at. much greater levels of disclosure about conflicts of interest that rating agencies face including proposals to have them disclose revenues from the major issuers that they are rating, the performance histories, disclosure about how the two diligence for structured

deals, a recent proposal is that it would require issuers to make available to old rating agencies information that would allow any rating agency not just the one they pay for the rating, to do an unsolicited rating so investors would have a point of comparison. we have also proposed to require disclosure of rating shopping subcitify jiminez undiet gun to three rating agencies and said what is your preliminary view of what the securer as a rating and if you tell me double the end one is a aa but i know have to disclose the to double bead ratings as well. >> that obviously is some of the information that will be most helpful to us in trying to analyze the pre-passage period with rating agencies's passage, and i want to thank you again for agreeing to share some of that information with the appropriate safeguards in place

because that allows us to understand an environment that needed to be changed but simply wasn't because what they were doing that may not have been right under someone's understanding of what is right but it was not illegal, because we didn't have a structure in place. thank you. ms. bair your comments were very good, especially your willingness to go outside of your narrow area of responsibility. and i thought it was most appropriate in this particular hearing room based upon the rule of the ways and means committee in terms of being frankly the only committee in the house under the constitution and the ability of the purse strings originating in the house to deal with the tax code. it is amazing to me that a lot of folks still haven't focused on the fact that notwithstanding in the 1980's we were able to

remove the deduction of consumer interest as an itemized deduction. there is still an overwhelming financial windfall in the tax code for homeownership versus for example the same roof that you rent rather than own, and that what might be helpful from an economic point of view for the individual was almost responsible for the collapse when that individual ability is collectively exercised i.e. being able to literally with some of the financial agreements cash out every month the equity that you had in your home, which then could be deducted. just a point of interest that we came very close in the mid '80s

to dealing with. the deduction for consumer interest in the disguise of mortgage interest. the same thing we do with individual retirement accounts and get penalized in some way if you withdraw the other then the purpose it was placed in the text preferred position, health savings accounts, and the number of examples but yet we still haven't even talked about to any great extent penalizing people who utilize the mortgage interest deduction privilege for in fact the funding consumer debt. and, that is an example of how far we need to go not even touching on tort reform or any other number of areas, to really

get at the bottom of this. some of them shouldn't be that difficult, but obviously all of the focus is on committees that have the jurisdiction for oversight and regulation of financial institutions, and why this particular commission notwithstanding the time difficulties that we have is truly unique because we don't have boundaries and i am quite sure that the final report will comment on aspects of the tax code in other areas, which if you begin to lay out the scenarios and the consequences of decisions, which seems somewhat appropriate, if we hadn't allowed that kind of deduction, the equity in the homes that people have what it had a severe jolt to them but many of them would have accumulated, which was the concept overtime, sufficient equity to be not upside down but when you push it to the limit

for consumer use, and you to get a downturn and as the panel we have in front of us yesterday, even those in extremely sensitive, it's difficult in technical areas indicated that they never thought home values would never go down. that is why do you were supposed to build up equity. let me ask you some questions that i think are specifically in your jurisdiction, so that somewhat the same phenomenon could be illustrated based upon your answers in your particular area. my understanding is that you did not, not you personally, the agency which you oversee did not collect insurance premiums for a decade before the crisis in terms of the fec regulatory structure. i mean, do you think that you had an overly optimistic view of

the agency had an overoptimistic view of the balance sheets of banks, many of which held a lot of the mortgage? >> actually, congressman essay understand in 1995 congress eliminated the ability of the fdic to charge premiums for well-capitalized banks which was 98% of all things during that ten year period you talking about. ..

numerical decision quek >> that is a supervisory. >> no, there is not. it s. for regulatory standards than we did not charge premiums. >> thank you. >> all rights. ms. born. >> thank you, chair angelides and i want to thank the panel for all your very helpful testimony. i wanted to start by asking chair bair about her testimony. i gather from your written testimony that you feel that the over counter derivatives market plays some role in the financial

crisis. and i would like you to elaborate on that. >> so i do. i think it is factored in the underpricing risk. it creates an illusion of people were hedged when they work really. i think the unregulated nature of it allows large institutions to take some significant risks with competition structures that front quite a long feel to them. but there wasn't a sufficient oversight at that. and that it also the losses once, you know, the underlying losses on the mortgage is actually going into default with one set of numbers here that was exponentially multiplied by the losses on easter of their contracts that were based on the performance of this underlying mortgages. so if it into the underpricing of risk by creating involution that people went ahead when in reality they weren't. and then when the mortgages started to go back, and magnified the losses. >> house at all complicated your

job and resolution of failed banks? >> well, i think this anti-creditor issue is something that does fcic is concerned about as well. what kind of market due in particular having creditors of institutions when they start to get into trouble. traditionally financials duchenne start to get in trouble they were creditors for a worker them to restructure the debt to stabilize them to keep them out of bankruptcy. if you have a large cbs position, even if you're some debt exposure or make more under cds if the institution fails can create very skewed incentives to an right now, there's very little transparency in the market. as the chairman of the fdic i cannot access user information in the cds market. a lot more work needs to be done. >> do you think the market still poses a systemic risk and that any regulatory reform is needed

by >> yes, i do. i think it is absolutely probably the top of my list in terms of things i believe we still -- and more than anything it is reversed or national action because of laws that were passed you for that basically move this market from regulation. i think it should be very high priority for congress and only so much regulars can do until the legislation is enacted. >> chair schapiro i want to know what your views on this issue are. did otc diller derivatives play a role in the financial crisis and if so what? >> i agree with chairman bair withal she sped in the end macroeconomic issues. on a more micro level of the contributing sense that's because the otc derivatives could become an enron around the regulated to branch financial instruments come in the futures

markets in the securities markets in the options market. they allowed illegal conduct to some extent in with a couple cases in this regard with insider-trading and cbs. allow those markets to resort to illegal activity that moved out of the side of the regulators and law enforcement. so i think on that level as well as the macro level it's concerning. i also think that with respect to issues like anti-creditor, we've got to have transparency of this market. if people understood the size of the positions that were being taken, not just regulators that the public and counterparty from potential counterparties can understand the size in positions of these markets it would have been enormously positive effect on market behavior, i believe. >> what regulatory reforms do you think are necessary? >> well, i think a lot of them have been discussed obviously to great extent in the regulatory

reform debates. i really do believe that we need both regulation of a product in the sense that they ought to be to the maximum extent possible with your central is. i think we all know that while ron and well-regulated counterparties help to mitigate risk and potentially eliminate counterparty risk that exists in the bilateral relationships. exchange trading, price transparency, full oversight of the clearinghouse and all that brings with it. and i also think we need to regulate the dealers in the marketplace. and while some of the legislation that's floating around takes a step in that direction, there are still some holes obviously with respect to end-user exemptions in the amount dealer participation that would actually end up in central clearinghouse is in on exchanges. the regulation of the dealers so that we have sufficient capital, you can transparency, management systems in place, internal

controls within the dealers and transparency again to the public as the regulators i think would make these markets much more comfortable i think for the regulatory community. >> hideaway, ms. born we allocated three minutes per question her. mr. thomas and i have spoken and given the ground we have to cover we're going to allocate three more minutes to each commissioner so why would you proceed for another three. >> thank you. chair bair to agree that the regulatory deforms untransformed that chair schapiro needed? >> absolutely. i think this is a high priority for congress. and again make sure it strengthens and gives the regulators enough flexibility and tools to do it this market. >> i'd like to also ask chair schapiro about a program that the sec had adopted in 2004

called the consolidated supervised ntt program, which i think was intended to bring some prudential supervision to the large investment bank holding companies. and i think it covered bear stearns, lehman brothers, merrill lynch, goldman sachs, and morgan stanley, some of which -- one of which failed, some of which had to be acquired and the others became bank holding companies during the financial crisis. did the program fail in providing sufficient prudential supervision? >> i think we have to conclude that the program was not successful in providing prudential supervision. the program as i understand it was developed as a way to change

european law that required that the five largest u.s. investment banks subject to consolidated supervision by some entity and because they were investment banks are not commercial banks they elect it to be supervised by the fcc. at the fcc the program prior to that investment bank holding companies were not subject to any supervision at all. so that was due to be a good thing to bring them under the umbrella of regulation. i think -- i have lots of concerns about the program and about many of the specifics. i may say that generally i think there were several problems. one is that it required the sec to become a prudential regulator which is traditionally what the sec had been. if that capital rules that were quite conservative with respect to broker-dealers and enforcement orientation to a

large extent driving out of its examination program, rather than a prudential garage. i don't think it was adequately staffed. they're a handful of people who were responsible, not even necessarily on a full-time basis for the five largest investment banks in the world, frankly, not just in the united states. and i think that the combination of really a very new way to approach regulation, inadequate resources, and some of the specific changes that were made to the capital rules in order to get the holding company's supervision broker-dealers were allowed to use value at risk models rather than prescribed haircuts and calculating their capital requirements which allow to frankly lower levels of capital to start larger and larger positions. in combination, it led to a program that clearly was not a success. it is one of the things were looking at and really taking the lessons learned as we try to

rethink entirely broker-dealer capital. >> right. >> thank you. >> thank you him and ms. born. back on my time for a quick question. ms. bair, picking up the sign of question you refer to april 2004 decision in your testimony come in the april 2004 decision on raising kind of the lifting the cap on leverage for broker-dealers. i won't trust both of you, did that affect the holding companies? >> unturned in other words, when i look at the balance sheet by talk to mr. lloyd blankfein about that yesterday. was it the decision that the sec that affected that? >> it is my understanding that the investment bank holding companies are subject to any capital regulation prior to 2004.

they did under the csc according to the basel ii program should be subject of intense scrutiny here. the changes that the sec made related to broker-dealer network a. shame. >> i think what i'm doing is referring to -- this is really yours a meant ms. bair, page are doing at your testimony when you say for example, 2005 -- i think it was 2004, but you say the sec allowed large brokerage dealers to develop their consolidated forecast that are both. i think you go on to say that in 2008, two of the finest additions using the capital rules collapsed. i just want your opinion to both of you as whether the recent capital standards in fact were seminal? >> i think what happened here, chairman schapiro is right. the csp framework advantage

appropriate for capital. we be fdic has been a very strong opponent of those rules and we blocked so far frankly than being used by the commercial banks and bank holding companies and we continue to have dialogue with our fellow regulators on this. but we have basically said if there is approaches are to be used that may not reduce capital. so it is a monospaced formula. a revised on based on estimates about what the capital should be. and so we have said they should not be used to lower capital and we've resisted that so far. and that commercial bank and bank holding companies were not using this at that time. so there was -- there was reduction and a capital increase in leverage from the investment banks as compared to the commercial banks because they were using them. >> all right. let me move off. well, i just want to know yes or no whether that 2004 sec decision was one of the factors

that led to the explosion in leverage in there for collapses of those institutions. >> i would say yes. >> your opinion is yes but >> i think if they contribute factor. it is hard to say to what extent, but clearly within the broker-dealer the ability to use models that generated smaller haircuts on positions allowed ledger positions to be maintained on a smaller capital base. >> and one other question i'd like to us before we go to the rest of the commission. this will probably be my last question. and that is, i asked yesterday of mr. blankfein and i will invite enough can be other financial institutions before us whether in the wake of the calamity that occurred whether they had done an internal review investigation audit of what broke down in their institutions. you know, given just the magnitude of what occurred it would seem logical prudent to

do. and so i made that request to mr. blankfein and intend to make that to the other institutions amounts to ask for that report. i would ask each of your entities whether in the wake of what appears to be a certainly a potential colossal failure of the regulatory oversight of this nation, of our financial system. as the sec done an internal review, audit investigation of what came apart in number one. and if so, can we have that document? >> i can tell you there were multiple internal reviews, slices of the financial press. her stern, lehman brothers, cfc program and others. we are happy to share that information. it is important to me as well because of the new leader of the sec and having brought in new leadership across the agency i want everybody informed by the things that didn't work out well so they can make appropriate changes going forward in

building much stronger regulatory program across the board and across foliage of the spirit >> two new mac. ms. bair? >> with an ongoing self-examination with a number of changes than i would have happy to give you some of the documents that describe that. i would also say when when banks fail there is an investigational by the bank failed interview of the supervisory process. i think one piece of that that is missing is because the large institutions were buildout that did not fail. the statutory provisions requiring what we call the material luster views of his investigations have not applied. i think it's very helpful to reap provide -- we need to look better at what the supervisory issues were leading up to those larger institutions becoming unstable and on the precipice as well. again -- >> and you have those documents? >> we do for the smaller, not the larger and. >> but both of you will provide us your internal reviews of what broke down pikes >> i don't know if you have done

this. i asked earlier today at the attorney general are particularly with respect to mortgage fraud we would like to see that report. have you done any other examinations of or enforcement by the broken down? >> mr. chairman, i'm not aware of that. but i am aware of is that of course we got back now for the last few years quite a number of mortgage fraud task forces throughout the country that actually were prosecuting the case is and a good attorney general said, our mission of course is not bad at the regulator regulator. our mission is to tell hold those accountable but a broken law. >> do me a favor. i do want to follow up. i think what was or was not done justice would be very important to know in the wake of potential evidence of mortgage fraud across the country. all right, let's go to mr. wallison. >> thank you, mr. chaiman.

chairman bair, master with you. for banks would lie in regulation to protect us because there is much reduced market discipline has the backing of banks by the government. and i want to congratulate you and thank you for what i thought was very candid testimony about the deficiencies of regulation in general. but there is one paragraph the common attention in particular it like you to ask about. you say in your written testimony the traditional roles used by cd upon as regulators like your institution analysis did not detect individual institution access is because many of their peer institutions also analyzed engaged in the same riskier dvd. these activities were profitable and took risk yet it is undertaken by all became unsustainable. what that sounds like is that it is okay or was okay if everyone was doing it. is that what you meant to say?

>> i think the supervisory process going into this crisis did rely a lot on peer review and peer comparisons and that is absolutely right. as everyone is doing it and making money there wasn't enough scrutiny even within the institutions. i think that's absolutely true. >> so are you going to change that? >> well, in terms of the fdic, guess what we do scope advance now and drill down much further on loan quality. the ones performing our making money. much less relies on notes and relies on the fact that the guy demonstrate may be doing the same thing. i do think that feeds into the larger issue of having a systemic body to monitor even though something on an institution basis i look okay, if you look at the system of the whole you might get a different picture so i do think this is also relating to the need for a council that has a macroprudential framework and mandate. >> there were a few other things

you said that i thought were quite interesting and should be in the record. in your written testimony, again, you set record profitability within the financial services industry also served to shield it from some forms of regulatory second-guessing. another statement, often the potential risks associated with strategies that give rise to outsized profits are not obviously especially when supervisors are examining new bank products are dvds. and then finally, it proved difficult for regulators to bring in profitable legal financial act to deduce without hard evidence that the act if these were created unwarranted risk. now, all of those things suggest that when activities are profitable, it becomes very hard for regulators to stop them. what are the come and you should know this by now, what are the

pressures that come upon regulators when profitable at dvds are going on and you might like to stop them? >> right. well i think we saw that in late 2006 in 2007 when the bank regulators, the fdic working very diligently with our colleagues to tighten up on subprime to tighten up on alt-a and nontraditional mortgages and commercial real estate. a lot of industry push backs and some pushback from the l2 want some of that. so it is regulators, someone has to take away the punch bowl and can be very difficult to take away the punch bowl when people are making money at it now. i think going forward, this is a key lesson learned. but hopefully, you know, the leadership of the audience and that regulators need to be supported when they try to do that and not pilloried i think would be helpful. >> do you think this has been

learned by congress? >> you know, i hope so. i think yes, we have this -- i think there is some pressure to forbear were obviously banks are being closed now by their charter in authority and that's not always a popular thing to do. and the more that occurs there would be more bank failures this year. i think there would be more pressure to forbear india's regulatory standards perhaps. and were trying to strike a good balance your obviously, but as we learned from the sub ten days longer you wait eventually they will have to be closed. there are virtually a lot of people that still live for the set ten days and remember that. >> mr. chairman, how much more time do i have waxed >> another three minutes and 11 seconds. i will yield your three seconds back for my answer. >> good. thanks i can use that. i just did.

[laughter] i shouldn't have asked. >> i'll give you 20 seconds. >> in conclusion, you say, and i want to just follow this up a little bit and then ask a question of chairman schapiro. but in hindsight, this is your testimony. it is fair to say that regulators either did not have sufficient information to fully understand how concentrated risk of becoming order for regulators have access to the information and probably some regulators did, they were unable to understand and identify the risks. now why would they be unable to understand the risks? >> well, i think we did -- there was again another reason why we think we need a system of risk council is the information collection was stove piped as well. you know, we might have information on what is on the books have ensured a posture and editions, but is going on in their affiliates has been paid to us. and of course the nonbank sector

and third parties that might be funded by banks, and their issues and the strength of their underwriting might be even less apparent to regulators. so i think this does have the need for again a more holistic approach, macro as well as micro mechanisms to collect, analyze information. this is another reason why we need a council is very important and again in terms of analyzing what we saw to not understand it well enough gets back to the issue of not being and ask for the kid ourselves. this determines what will happen six months or a year or not worth the market goes down ten points. not enough of that analysis was done. >> so this is not a question of the capacity of regulators to understand the complexity, but rather the fact that your scope isn't broad enough. >> i think because we do have a stovepipe regulatory structure the ability to provide -- access systemwide information and

analyze that is lagging. i absolutely do. but i would also acknowledge with regard to the information could have an access. none of us did as good of a job as we might ask in analyzing. >> thank you very much. chairman schapiro, i really have one simple question for you hear it and that is there is quite a lot of discussion at the time that we were going to the crisis in 2008 in the month of june, july, august, september and so forth about manipulative shortselling. now these things seem to come up every time we have this kind of market crisis and the allegation is that they are -- but the short sellers are creating rumors and they drive down the stop races and they profit from that. the sec has investigated that quite a lot. how do you continue to investigate that? have you found in the indication that is manipulative shortselling going on?

>> it is a great question and we do confront shortselling issues virtually daily. but i would say we still are investigating it. it is extremely complex kind of an investigation to conduct. for example with respect to rumor mongering, to separate the rumors from the reality come if you're looking at bear stearns or lehman brothers is not a simple thing to do. and the extent to which shortselling has added real information to the marketplace about what the appropriate price ought to be for the stock of a particular company, that's a good name. to the extent it is based on rumor mongering or driving down the stock artificially is a terrible thing. and so are investigations are really trying to find the path to enormous amounts of data, you know, trading billions and billions of shares a day in this country and understand whether

we have cases that could be brought for many political shortselling. >> ms. chairman, this is very obviously question to us and obviously a verbal answer the time we have will not be sufficient. so if you would allow us to france and questions to you for response we would appreciate that very much. >> i would be happy to do that. >> on my stomach universal a statement. ms. bair i have some follow-up questions and we appreciate the willingness and have you get back answers to us. is that appropriate? you most probably are willing to respond. i understand that. >> i think that's fair, mr. vice chairman. i think with respect to questions we will be able to answer them. >> that's probably most probable progress. where making progress. thank you.

>> mr. hennessey area to >> thank you him and mr. chairman. a follow-up question for you ms. schapiro. if we could get a memo from your economist on the uptick rule. i have lots of people argue passionately on both sides of the uptick row question. i've yet to find an economist i respect that says that it matters one way or the other. so i just -- for later follow-up i got to hear what the best thing is from your economist. >> we would be happy to provide that as you can imagine we've spent many, many hours analyzing of the economic research is available, soliciting their research and data quite broadly. we would be happy to provide that. stack i'm not sure we need to care about that, but maybe you can tell me. >> many people care about it on both sides. >> chairman bair, someone said that the financial crisis is over. you possibly more than anyone are having to deal with that

minimum the ongoing effects of the financial crisis among both with foreclosures and went dealing with failed depository institutions. so i just want to ask you a couple questions about that. when this again sort of one of these requests for follow-up. read two witnesses yesterday who were pretty aggressive in criticizing the camp in a few could give us your best thinking about houston best case for the hamper i don't know what you're thinking in terms of modification and don't want to get into that now. in particular, just in terms of how effective you believe it's been in terms of number of foreclosures avoided that would be very useful. but what i would like to focus on is you are still having to do with feeling depository institutions. and as i understand that come as resolve this institutions you have to tap into the deposit institution fun. you something like in a billion dollar deficit and not now. one expert told me to get back up to sort of your target

reserve ratio it's in the ballpark of 75 to $100 million that you need. as i understand it, you've got a proposed rule out there for a new fee to help close some of that gap tied to bankers pay. what we've got just today now is we've got a new proposal from the ministration, which is saying let's take $90 billion from large financial institutions and i want to ask him questions about that. in particular, about how it effects your ability to have the funds you need in the deposit insurance fund to resolve these institutions. one is, as i understand it, incher depositories are a part of the new administration proposal. are you concerned that that conflicts with your ability to get the money you need from them for the difference. >> well, a couple things.

>> excuse me, prior to answering that one of the things we always try to do is if anyone is watching to try to keep them in the loop. and you mentioned hamp. >> sorry the mortgage foreclosure -- the harm owners owners -- under the president -- it is just that as we carry on these discussions there are a lot of folk who aren't absolutely tapped in to the jargon. >> do you want me to start with a hamp program? there's been some misunderstanding about the advanced artist proposed rulemaking asking the question of given there is a lot of frontloaded compensation structures encouraged risk-taking and contributed to some of the problems we're having. so we've asked question about whether that should be factored in our risk-based deposit insurance premiums. if we do this it will be revenue neutral. this is a question of should we

reallocate so that those who have these frontloaded compensation should pay more, meaning that those would pay less. so i think there's some confusion. that all came out at the same time. i have not seen the administration's proposal here to read about it in the paper. i understand it is a liability pasty and they are taking deposits out so that they're presumably would not be double counting. because obviously the depositors institutions have been paying a lot in premiums. i would say we also have tried to be very mindful of the balance between maintaining the integrity of our industry base deposit insurance fund i think it's very important to keep its industry funded and avoid, i never say never, but try everything we can to avoid from having to bar from taxpayers here but we have tried -- with one specialist estimates that we realize the industry is so understaffed now and so we did a prepayment of three years worth

of premiums, which brings us the cash up front that they can expense over time so they don't have to immediately take the hit to capital. so i think this is a good balance. we've a 67 billion cash liquidity now which is based on our current production should be sufficient. >> my understanding of your proposal is that deposits have been taken out, but in short depositories have not. >> you know, i have not seen it. i've read about in the paper and i want to find out and i will more thoroughly respond to you. >> more probably, your testimony talked a lot about the too big to go question in these large financial institutions which i'm very concerned about. and in particular about regulatory arbitrage and firms that pose large financial risks does play in a for the regulation. your system of deposited insurance is as i understand it roughly with made system and is designed to cover your entire universe of insured institutions. my understanding of this

proposal is that there is significant large financial institutions, fannie mae and freddie mac amid the auto finance companies, who we clearly have evidence have pose systemic risk, but are exempt from the new tax. does that concern you at all? >> i would like to respond in writing month of actually seeing a written proposal. again, i'm operating on press reports and don't want to answer. i'd be happy to respond to that in writing once i've actually the proposal. >> and a further element of that is they've got $90 billion they think coming in from the new proposal. you need somewhere and that ballpark for your deposit insurance fund. you can't use the same money for two or three purposes. so if you've got money coming in, i understand possible uses of the funds can be to pay the taxpayers for losses from other firms in our back into close the hole you've got into the fund.

three is to pre-fund liabilities from the possible future failure of these too big to fail firms. i'd be interested again in writing for you to give us your views to the extent that there is a new proposal to address too big to fail an address that was proposed by it should those funds be first targeted to address the ongoing probe rams that we know about. sorry problems that we know about,. >> well, i'd be happy to respond in writing. i think we have an estimate of a hundred billion dollars over a five-year period, 2008 on. we party reserved or guardian for those losses and reserved about 66 of that already. so i think we feel again based on our stress that unless the economy really gets into difficulties that we think the problems now are sufficient and

there should be no additional news for premium increases for additional assessments. again, i was asked we happen to qualify based on economic conditions. i would say now that the stress is being driven by the economy. early on we were dealing with the unaffordable mortgages and the added serial ending and the residential construction development, there is still some of that. it is now being delivered by the economy and regular deterioration because people lose their jobs. >> could have 20 seconds to post one more question for follow-up? >> twenty. >> what would be great i have heard two different views on market to market accounting. when a citizen accounting problem into it is the regulatory capital problem. it would be fascinating maybe even coordinated responses from the two of you as to your views, which is pro-cyclicality, what is the most effective way to address that? on the accounting side or the regulatory counts. thank you, mr. chairman.

>> thank you mr. hennessey. >> it's probably faster. >> all right, mr. thompson. >> thank you, mr. chairman. it would not be unusual in the aftermath of a crisis for the regulators to say we need more regulations or we need better regulations. i guess my question centers around beyond over-the-counter derivatives. were there adequate regulations in place at the time of this crisis that could have prevented the crisis had we executed better within the regulatory agencies that we have in place today and the laws we have in place today? -based schapiro, we'll start with you. >> i'd be happy to an love to be able to supplement my answer because i can think of a lot of things that are worthy to talk about in this context in addition to over-the-counter derivatives, hedge funds, which were not generally thought to be

central feature of the crisis because we have almost no information, census type information about hedge funds and how they operate in our market. we don't really know. i will point to two things in particular. one, talked about them in testimony gas at securities market. the mother was regulation in place, we think that we could do a lot better in terms of the quality of disclosure at the asset level for investors in a way that doesn't just a beloved disclosure on them. it gives them the tools to understand the quality of the asset of the pool level disclosure, ongoing disclosure after the first year which is been a big issue. time to do due diligence all of those things. i think the asset-backed securities and i know the fdic is working on something from this regard is one where we can do a much better job with regulation. and secondly, i was a supervision more generally. as i look out over the sec's program for consolidated supervised and these we have a

lot of lessons learned about whether models are reliable, whether stress testing was sufficiently robust and strong to really understand what was going to happen in very dire situations. whether putting assets off of a balance sheet into the special purpose entities billy mother off under off timesheets or reputational risk they were going to have to come back on. i think they're a number of areas like that where there is perhaps a failure of supervision, perhaps a failure of vision to understand where some of these products and practices might take us. but also where they were just weren't accurate rules and regulations in place. >> a yes or a no? the >> i forgot the original. >> in other words, could be additional regulations in place today -- if well executed have prevented this? >> i think it is more the supervision frankly than purely the regulations.

>> ms. bair. >> i think there were two key missing element. one was the lack of consumer protections that applied with banks and non-banks. i think also there was no systemwide accountability with any potential entity in which is why we think there needs to be a new body for consumer rules and also systemic risk. >> if you were to look at some countries outside the u.s., uk, germany, japan, they have one entity that regulates what goes on across these markets. yet we have, for lack of a better term, a patchwork quilt of agencies that are multiyear. would we not be better as a country to have a single agency doing this as opposed to the multiplicity of entities we have today. and is that not what the council is trying to solve? >> well, i think that the council is a bit of a hybrid here at some of mega-regulators prove to be very frankly captive

in a particularly robust. and so, there are some problems there, which is by preserving some autonomy among the individual regulatory agencies with their sphere of influence but all of us can of serving on a check of each other in the council in leeson prudential standards is the best model. you have some better checks and balances in a monolithic regulator but you have some ability in ownership to look at the system and take accountability for the system. >> ms. schapiro? >> i am in agreement with that. i think the monolithic model did not prove to be more rizzoli and or affected during the crisis -- the >> how about in recovery? >> did not approve to prove to be much more effective than the u.s. system. we also very much support the concept of a council being diverse did about different institutions, products, and

strategies to the broader group said that we can all have a better understanding of what the risks are that are flowing across the marketplace. that is to be coupled with effective supervision, particularly the largest consolidated entities by systemic risk regulator. >> so yesterday when the bank presidents were here, several of them said that they created instruments that really had no value, hence the sids if you will. they were off-balance-sheet that we saw and the collapse of enron, yet they were a part of the amplification, if you will, of this crisis. how was it, ms. schapiro, do we get have asked balance sheet items of the magnitude that we did in this crisis post-enron? >> it is really an excellent question. my understanding is that after enron the accounting standards for the u.s. public companies did revise her accounting off-balance-sheet instruments and arrangements, but was

primarily directed at arrangements such as with all of enron were there was not financial ss. they were being held off the balance sheet of the public company and did not affect at the securitizations of mortgage loans off-balance sheet, which is certainly central to what's happening in recent history. the reporting of assets and in 2008 come again before i security stations. as b. went ahead and did that in arrived at the sec, the the middle of last year and we commission asked us to improve really do believe that the new standards will result on balance sheet presentation for securitizations. that said, very clever industry and we have to be very watchful to ensure that in fact it does come back on the balance sheet and that we have full transparency. >> well, the clever nature of the industry gets translated by them into innovation, financial innovation. so can the sec and the fdic and every other or any other regulatory body really keep up with the pace of innovation in the industry, the cleverness, if

you go, the innovators. >> i think that is such a great question because frankly there's innovation that is valuable and moves us along as a society and innovation that generate additional fees for the innovator. this is a big focus that we've had in the past year at the sec as i think historically we haven't been able to keep up. we created a new division of risk strategy and financial innovation in september we brought in some really cutting-edge experts on modern financial markets and the intersection of innovation and the law. and it is our hope that this group of experts, who are available not just the sec staff, but actually to other agencies as well if they are interested, will help us understand and i stacked new projects much more efficiently to see whether this melee so that we can either prevent that from going forward or make sure investors are well-informed and great letters have a good handle on the risk they are creating.

>> ms. bair? >> we were highly supportive of 166 and 167 that brought the stock on balance sheet. this is a big problem and concern for the fdic because they were the balance sheet and holding capital against them which their capital levels are being overstated. we were highly of that and i see going forward is a lesson learned. and i think in terms of integration, yes you don't want to discourage them and you need the flexibility to deal with it when it takes a bad turn. >> thank you very much. >> thank you, mr. thompson. i will take just a couple minutes of my time to follow up on the question that mr. thompson asked. so, in the wake of enron, and i watched that very closely because they summon the board of our state pension funds. we took enormous losses from enron and worldcom. those were in a sense warning signs that much bigger things were on the way.

so how in the construction of the rules on sigs, how on earth for mortgage securities, which were already pretty substantial in the marketplace. how are they excluded end-use decision was that? was culpable responsible with the sec, was that the public corporation of county oversight board? who missed that expert was a matter of law be that they excluded here to >> i don't know the answer to that in order to supplement the record. it happened many years before i got to the sec. of my understanding is it was focused on nonfinancial assets being brought back into the balance sheet at opposed to mortgage assets being securitized. that is not a satisfying answer i understand. i have to supplement the record or >> would you please looking into -- i am asking if it has an sec. >> that was set by fast be.

>> if you could get that to us and i'm particularly interested as to whether or not there is any act of advocacy by folks to exclude affect act mortgage related assets as somehow being different and i would love to see the arguments made for the exclusion if they were made. >> we can certainly ask them about that. >> or relevant to mr. thompson's question they just didn't get enough to understand the different vehicles out there. thank you. >> i want to piggyback as well. to a certain extent we had an earlier discussion, chair bair, in which you gave me an answer in terms of the well-capitalized banks and the lack of any real discussion to deal with distraction that was there. this is part of our ongoing

process. i am informed that you have provisions called pop collective action provisions in which regulators can love for a banks reading the low well-capitalized on subject did ground. and i guess it is back to the question about devices tied to real estate. i mean, if you were looking at the bank notwithstanding under the structure that was there and they were well-capitalized. did the fdic look at -- do you think they should've looked out but i guess is the excess sick bowsher by some of the institution for what we now believe to be risky housing related assets? >> well, i think there is -- it is absolutely true that the integrity of the capital or ratio will depend on the honesty of reserving against projected

loan losses. so the reserves are low. the capital level will be overstated. if you're talking about the period 95 to 2006 where we started charging premiums i don't think -- >> let's just look at it in the context of finding out that by 07 you looked at 02, 03, 04, 05 you had the ability, if you are discerning enough to believe that the assets were riskier than what would otherwise be required and obviously that makes you press the end and others weren't. but i guess i'm asking you is the fdic pressing? >> i think we were earlier. we started doing special exams on subprime, very early. we were the primary regulator of only one major subprime liner. we ordered them out of the business in february of 07.

so i do think we were on top of this earlier perhaps another's mother was early enough i don't know. again high design is 2020. we very much heller examiners now to go when you dig down into the loan books and makes her they are adequate and that will decrease their capital. >> and i guess given the area of jurisdiction that is what i really kind of interested in. i'm a banks failed in 2008? roughly. >> in 2008? probably about 25. and last year there were 140. >> and you have a watchlist obviously so that you can look at the sick dogs. >> and i could back up for a minute. i think it is important to understand and most of these toxic clothes were not on bank balance sheets. they were outside banks. >> i understand that but to the degree they were -- i want to

look at that. how many banks are on the watchlist now? >> worked about 552 as of the end of -- 552. >> two of a number you could produce for 06 or 07 so i can look at that. because in retrospect, notwithstanding the limited involvement, how many of those failures were directly related if were able to make that judgment to that aspect, which could have been available to you under the prompt collective action privation, had he been fully aware of how somebody back there is shaking their head no. >> the pc process is played out in statute and there are various steps in the process. i think it is better to just do this in writing. >> everybody missed everything to a certain extent.

so not trying to pin you down. it is just that i'm very concerned that we are looking up that on an ongoing basis. so if you give me the data we will go from there. thank you very much. >> mr. georgiou, i'm a minute or so remaining i will ask one follow-up to this because it is relevant. have you done any data collection or can you give it a read here about how many of these failures are related to sub ran toxic asset versus the collateral damage that resulted from the big meltdown? >> yes, i think we could get that, too. >> all right, mr. georgiou. >> thank you, mr. chairman. having spent the better part of a decade investigating and prosecuting the fraud at enron, i attempted to go into the special investment off-balance sheet vehicles, but i'll temper my desire to do that. i would like to focus out and

follow-up on something that i approach the private sector people with yesterday. really the credit rating agencies issue is more serious than just investor paid -- the issuers pay for rather. it is that they actually pay as a percentage of the issue very frequently. and i think it is important for the public to understand what happened here. institutional investors for the most part, particularly pension funds, can only invest in securities that are rated aaa. and since the credit rating agencies only get paid if the issue gets sold and get paid for gimli as a percentage of the amount of money of the securities that are sold and since they only get paid if they get bought and can be bottomless they are aaa rated, this is a conflict of interest of gigantic proportions. and it strikes me that the point i tried to make yesterday is a

credit rating agencies aren't the only ones who operate in this way. the auditors are paid by the issuer who audit the financials of the issuer. the lawyers to drop the prospectus says and obviously the investment bankers who charged are paid in cash as a percentage of the issue when it is sold. and customarily, they lack any financial consequence for the success or failure of the securities after they are sold. and we have been talking here about how financial innovation sometimes alludes the abilities of regulators to regulate because it is so innovative. do you think they're any market mechanisms that any of your agencies could put into place that would actually assist in enforcing accountability afterwords? for example, one would be good some percentage of the fees be

taken in the securities that were actually issued rather than in cash? so that if they perform as represented then everybody does fine, including the people who were responsible for the due diligence to originate and. and if they fail, well then they suffer some of the consequence of the failure as well. >> i do think looking at risk retention is a very interesting concept with respect to the rating agencies that eating their own cooking so to speak, would be interesting for us to explore. i will say there there's one other difference between predatory agencies and the other gatekeepers like auditors and lawyers. and that is the credit rating agencies have been shielded from liability whereas the auditors and the lawyers are frequently sued or can be sued when transactions go outside. so we have proposed and asked in a concept release whether credit rating agencies ought to be

subject to experts playability just the way others are in the offering of securities and whether that might impose some additional discipline on how they conduct their business and be an effective check on their enthusiasm for highly rating everything. but i think one of the things we are quite interested in exploring is with respect to her new securitization proposals at least with respect to sponsors who would like to use this self registration process which is a much faster way to get to market that there be a risk retention requirements. >> interesting. do you have any thoughts of that, ms. bair? >> yes, you think the idea of them being paid overtime and high in their compensation whether the securities that they raided and aaa security i think that deserves a lot more thought. it has some major advantages obviously. i think in terms of having some

risk retention for the originator of these loans, too, when they go when it's also helpful for they keep more of a skin in the game and these assets are secure to anna godfrey dean to make sure that we have better underwriting quality for securitized loans. and then i also think just to get back to the earlier point, transparency is key. if the market knows -- if the public another market can access the securitizations independently evaluate them and second-guess the rating agencies so to speak. any of that will have a good discipline effect on the process. >> but i decided that quickly because i think it is so important. investors relied on relating in this complex structures because they didn't have a lot of choice in many instances. we would like to look forward with low-level disclosure that would give investors the ability to really second-guess what the ratings agencies are doing. we want to do without such a way that provides standardized

formatted information so that investors are just dumb twit massive amounts of low-level data and that is a project we have well underway at the sec. >> if you could report to us in writing on the progress of that investigation. >> i would be happy to. >> this general concept of fixed and accountability for the success or failure of the securities that became toxic and became a liquid and clog up the system and contributed to the financial crisis is one i think will continue to explore as we move down the road here. and i wonder, to direct to mr. breuer if you have any experience or discovery of really up the line involvement or conspiracies, if you will, to generate numbers of loans that are particularly juiced up, that

are having high interest rates that are able to be securitized into package were to do that ultimately sold. and to the extent to which there is of capital and accumulators of capital might have been involved in an encouraging brokers to provide loans, to create loans that could be -- but everyone could benefit from an earned money from all along this chain. ..