a very positive way. and i questioned that tremendously. we still have a massively segregated society. 86 percent of whites live in the suburbs with less than 1% african-americans in their neighborhood. so i think we thinks that things have changed massively, but the mixed-race movement for example, my kids, what will my kids, how now?my kids identified so i'm not sure, for example, mixed-race identity, i think it feeds off the current polarization of african-americans and and the society. they're still a great polarization between african-american and in society. although i think there's great potential for those two groups, whites and african-americans to come together in some form in the future. >> thank you so much. we been talking with robert m. moore iii, author of "they always said i would marry a white girl."

>> thank you. nice having you. >> harvard business school lecturer robert pozen looks at the causes of the 2008 financial collapse. he argues for changing the incentive system on wall street and calls for strengthening the government regulation and financial markets. the center for american progress in washington, d.c., host the hour-long event. >> welcome all of you, and i thank sarah and the progressive center for hosting this little discussion group, and i hope it will be very useful. so i'm going to begin with a question to the audience because i believe in audience participation. the question is, what is people's perceptions about how often we have a financial crisis in any place in the world? so does someone want to say

whether we have one every 10 years, every 20 years? or let's look at it this way. since world war ii, how many financial crisis do you think that we've had across the world? sir, what do you think? >> every 10 years. >> does anyone think it is more frequent or less frequent? >> more. >> more? more frequent. let's look at some of the numbers here. the left side, we have professional i can dream from berkeley's numbers. he includes essentially any crisis, whether it be a debt crisis or banking crisis in any country in the world. and what you can see are two things. one is there are a lot of crisis, and second of all, the frequency of crisis is accelerating. the reason why it is accelerating is because of globalization to and therefore,

these markets are much more correlated. there is lower cost of information, and so crisis can easily build across the world. now on the right side of the screen are harvard's numbers. he has a very narrow definition. he is saying major banking crisis, so we're taking out all sauber defaults, major banking crisis in advanced industrial country that is taking out all latin american issues, etc. but even under his numbers, you see we have 22 in the 50 year span. so with the narrowest definition, we have financial crisis roughly once every 2.3 years. so it is clear to me that over the next 10 to 12 years we're all going to experience at least two major financial crisis. we don't know where it's going to be, but unless we do something in terms of regulatory reform and financial reform, this is pretty much coming down

the road. now, just sense a sarah has given me a total of eight minutes, i'm going to give just four main things here. the first is what is this concept of too big to fail? we have a certain number of institutions that we say are too big to fail. and i think we would probably have a consensus that institutions like fannie mae and freddie mac were in that category. at here, the question is, how many financial institutions do you think that the treasury has put capital into in defined bailout that the treasure is putting government capital into? how many in the last 14 months do you think that we've had? can i have a show of hands? how many? [inaudible] >> for. how many? 6-under. the number turns out to be 690. 690. that is the number of

institutions which the treasury has recaps allies. whatever your theory is of too big to fail, i doubt that it comes up to 600 or 690. so we clearly have a situation where we are basically allowing anyone to yell in a crowded room systemic risk, we give the money. and it is my view that we need to develop and articulate rationale, and limited rationale, and in a much more disciplined process by which we decide when and where we are going to bailout institutions. and also have some system of accountability. right now over a weekend, something happens, lots of people gets it about. that's one of the major themes of my book and one of the things i think are really important to financial reform. a second theme is boards of directors. i think many people are wondering how involved is the federal government going to become a with things like executives?

we have ken feinberg of proving financial, in particular institutions, and we have defined that now taking do that they are going to look to see to prove or disapprove whether comp is risky or not in essentially a thousand institutions. one of the things that the fed would say is, the boards dropped the ball. why are we doing this and not the boards? this is what a board of directors is supposed to do. it is supposed to set and design compensation and approved it. now what's interesting is, as many of you know, in 2002 after enron, we had sarbanes-oxley, we had requirements that most of their erectors be independent and that they followed the latter procedures. the interesting thing is that if you look at a board like citigroup, they did all that. they remain independent directors. they followed all the sarbanes-oxley procedures, and they don't seem to have had very good sense of how risky that

institution was bored what was really happening. and when we look, we can see three things that i believe the account for the. one is, these are very large boards. citigroup's boards was usually about 17 or 18 people. when you have that large a board, the psychologist will tell you there is a lot of moral loping, there's a lot of avoidance of personal responsibility. second is, surprisingly, most of the boards of these megabanks had very few financial sophisticated institutions people. citigroup there was only one person who had ever worked for a financial institution on the board. they were distinguished people but they did not have a high degree of financial expertise. a third thing is they would meet one day every other month. and the question is, in six days a year, can you possibly understand an institution like

citigroup? so one of my proposals are let's have smaller boards, let's have people who are experts, and basically let's have a professional group of directors. that's the main thing they do. if we want to hold management accountable we have to have a board of directors who spends more time and knows better what is happy. that's not what we have no. at least for those 20 institutions that have more than $100 billion in assets. that's what i call megabanks. third point is, we see various political officials bringing in banks, beating them up and sing, why aren't you loading more? we've given you more money, how come you're not loading more? well, in 2006 before the financial crisis, and banks accounted for what percentage of total credit extended? the summit want to say what percentage of credit extended? how many people think it was 50%? how many people think it was more than 50%?

how many people think it was only 20%? well it turns out it was 22% that banks only accounted for 22 percent of credit extended in that year, and the majority of credit in the u.s. is provided by non-bank lenders, credit card comedies, auto finance companies, mortgage brokers. and they depend very heavily on loan securitization. in 2006, we as a country securitize roughly 1.2 trillion in loans. this year and last year, we are running at about 30 or 40 billion. loans securitization is what drives loan volume. that gives the ability of the originators of loans to sell it to the secondary market and have it packaged. and that means they have money to make more loans. we have a total breakdown and loan securitization. we need to fix that if we're going to get loan volume going. and loan volume is critical, in

my view, for economic recovery. we can beat up on the banks all we want. we're not going to get a lot more loans unless we fix zone securitization. last point. there are lots of bills, as sarah says, before a congress that the house has a bill. now the senate has a series of bills. and i believe there will be financial reform this year. there are lots of things that we can say about this, but i think probably from my point of view of the highest is where there have been the biggest gaps. the first area is financial derivatives. in 1999, and 2000, there was an expressed decision by the administration and by congress to exempt all these basically from the commodities laws and from the sec laws. this turned out to be a very bad decision. in 1999, there were about $1 trillion in credit default

swaps. by 2006, there were 60 trillion. and this is essentially unregulated. this needs to be supervised. we can debate exactly how, but clearly letting that sort of market develop unsupervised was too much. hedge funds, again, very aggressive, very huge, increase in assets. essential he unregulated. global insurers, as we saw from aig, you have four or five very large insurers in the u.s. they are regulated by 50 states. there is no federal regular. very hard to come to grips with those. and systemic risk that we can argue about what we mean by systemic risk, but clearly the whole system, the whole regulatory system was geared to look at particular institutions in a narrow focus. and people were not looking at overall systemic risk. so i think these are for other things that we need to talk about. and i'm going to end their and open it up to more discussion.

thank you very much. [applause] >> well, one of the things that is particularly notable about the book is that in contrast to the very high level, there is in each of the chapters a very accessible and well-informed but still simple description of the issue, where the problems emerge, and i think is unique in the panoply of crisis posed hoc analyses discretion. the book, i think we're up were 140 recommendations are something of that. and so it's you odyssey bob didn't have a chance to go through all of them. [inaudible] >> or other important trivial data.

>> so i encourage people to take a look. there is enough in there for people to agree with large portions of it and to take issue with plenty as well. so with that i want to ask you, rob, at the level of framework, do you have general thoughts and reactions to both the presentation and the book? >> sure. first off, i would say that we are in a society now where the notion of too big to fail is synonymous with unfairness. and the notion of expertise whereby you ought to defer to the experts because finances complicated, is, let's say that process is starting. people do not have faith or trust an expert, given that experts had very little to say by way of preventive medicine prescription, or even adequate diagnosis. and i think bob pozen has done us all a great favor, because in this book, which is a very readable and very lucid, he has built a bridge so that we can go through the window and

participate in the diagnosis. participate in exploring different possibilities for repair and reform and understand better what happened. and i think helping, which michael repair the hearts of the population and allowing them to engage, is quite an important part of the ritual of bringing our society back in place of consensus. >> thank you. >> one of the things though i think that both, as i talk to you before, of you have focused on and maybe rob, why don't you start with this, the book talks a lot about what the rules in the future ought to be. you do have prescriptions about how we might change who the regulators are for different folks. but any sort of spectrum between sort of radical change from the status quo, and kind of leave the boxes as they are and change, i would put you more on

much closer to the administration's proposal in the house bill, not as much radical change. rob, do you want to start maybe by talking a little bit about what you think the goals of that, what are the ground rules, whoever is doing it? and then maybe we can talk a little bit about what you think it matters who's doing it? >> sure. first of all, as i have mentioned, the real eyesore for our society is the too big to fail. so the question or the challenge becomes how do we eliminate that possibility. you and jamie diamond, chairman of j.p. morgan has written about it in the "washington post" just that there is no place for too big to fail in our society. as a result, one has to have credible mechanisms for resolving financial institutions. i break into three parts. the first of which we might call the turns. what rules or policies can we put in place. like dilution of stock, firing of management's mandatory

restructuring of the creditors. in the event of and solvent institution which will show people ahead of time that they will pay a price. someone unlike the spirit of t.a.r.p. last fall. secondly, is the matter of detection. to credibly detect when an institution becomes insolvent, you have to be able to measure what's on its balance sheet. in particular, they have to be able to measure it. so that complex and opaque instruments, that were at the core of his last crisis have to be simplified. and in particular i think derivatives market reforms that bob pointed out to a new regulatory gaps are vital, because until you can measure what assets really trade at, we're not talking about fictitious mark to model rocket scientist. we're talking about actual

transactions. until you can measure that, you can't measure the value of assets, and you can't measure capital. and if you don't know what capital you have, you don't know if you are solvent or insult. so you've got to be able to detect insolvency when it arises. finally, with regard to resolution. many proposals focus on the question of one isolated institution in trouble. but i think we've seen in this experience we had a whole constellation, a large oligopoly of institutions in trouble together with the danger that each could cascade into another and amplify this disturbance. many people who are officials say, how can we credibly resolved the institution? how can a treasury secretary come up on deck in the morning with these newfound resolution powers that are in the house

bill and actually close an institution? well, i would argue that that individual was responsible to society not to allow spillovers to the real economy has to be able to come on deck, has to be able to assess the intertwined, the spiderweb of interconnections between the firms, and that individual has to also, and this is a dimension perhaps of, bob would like to discuss because it's mentioned in his book. we do have have an international regime. the big firms are international firms. and if you're going to do sharing and restructuring, in order to restructure or close a firm, you've got to be able to share the burden around the world because there are creditors in different legal jurisdictions, switzerland, london, what have you. so what i am concerned about in current legislation is that without adequate derivatives reform, that i do not believe is what's on the table is adequate, things will be opec, things will

be complex and officials will be deterred. they will be induced into continued forbearance, much like we saw with bank of america and citicorp in the spring of 2009. rather than to take forced restructuring. we won't be able to detect the time in which we would want to do this, and we won't be able to handle things internationally. i think a portion of what must be mandated by wregget toward authority is the international agreements i can to the kind of agreements that you have from the world trade organization for free trade. there's an old saying, if there is a will, there's a way. big multinational corporations want free trade, we can encroach upon the sovereignty of many nations to create a harmonized bankruptcy regime so that no country has to endure induced forbearance and too big to fail

firms being bailed out over and over again. >> do want to start maybe the international and that we can go to discretion that there's so many topics there. >> robbery so many points. let me talk a little about his three deterrents of resolution, and then about the bureaucracy issue versus functional issue. so i agree that one of the keys is deterrence, and i think the most important deterrents is to have higher capital requirements and differently designed capital requirements. i think there's a consensus that we should have higher capital requirements, but people don't realize how badly designed the capital requirements are. we had one international agreement, and people spent 20 years in basel and they came up with basel i. bottle once said the capital requirements for bank, if you have normal loans, standard loans, is 8%.

but if you have mortgage loans it's only 4%. and if you have mortgage-backed securities that are rated aa, it's 2%. so we had a system of capital that didn't recognize differences between subprime mortgages and good mortgage is. so the international agreement basel i is an important factor in causing the crisis because it skewed incentives. now we're in something called basel two. basel ii says every large bank can set its own capital requirements. and it sets them by doing their own risk analysis with these risk models and then it goes through an elaborate set of formulas. well i have come to be, i would say basically opposed to these risk models. if you've ever seen them, you can't understand them. if you don't have a phd from mit in math, you have no chance. i doubt whether there is a

director in any bank that understands these risk models. but we know one thing about them. they were wrong. all these geniuses were wrong. because they made assumptions like once every 100 years housing prices will go down in the u.s. if you make that assumption and you put it through a lot of formulas, it looks pretty good for mortgages. the question is, is the assumption reasonable? and i don't think it is. and the basic idea of all these risk models, and i critique this in chapter four of my book, is that there is a normal distribution curve. and it looks that nice bell curve. the reality is that in many financial markets, it's not a normal distribution curve. so this whole idea of modeling and having capital requirements based on that, just seems to me a big mistake. now, in terms of monitoring, i agree with what rob says about

valuations. i think it's unfortunate we had a system, we do have a system of fair value accounting. i would say there's been a huge political backlash. i didn't see anybody complain when people were marking up their assets, but when they started marking them down and i saw a lot of complaining. now there are some legitimate questions about truly illiquid assets, and i actually think that we have been pretty responsive in setting up certain exceptions. but there is a move in congress which was expressed part in the house though to actually overthrow the sec as accounting decision-makers and let that go to some banking council. i think that would be a terrible thing. we will have two very different groups. we have investors who want to see and regulars who should want to see on a regular basis, what's the valuation. that doesn't mean just because you mark it differently that you had to say okay, for banking

purposes, you're insulting. that's a different question. but if we start intentionally giving everyone so many exceptions that we can't tell what these things are valued at, i think we've made a terrible mistake. now, just to go to bureaucrats, and this is -- i think some bureaucratic and organizational issues are important, others are not. i think if you took accounting standards out of the sec and put into the banking agencies, you would clearly have a system that was much more geared to protecting bank solvency than tn explaining to investment, and i think that would be bad, that's a well-known tension. however, i'm a little cynical about, you, about the process of letters to the homeland security department, and senator dodd had this proposal, take all for banking agencies and merge them into one. those for banking agencies do joint rulemaking.

so all the rules are pretty much the same. and there's a little difference in implementation. but it would take a huge amount of political effort to consolidate those for agencies. and my concern is that would divert us from the sort of goals that rob are talking about. people would spend a huge amount of time arguing about that. and that's what really worries me. so i think we should be careful not to spend a limited political capital we have, bureaucratic scum and less they are really important to achieve the functional goal. and i don't think actually it matters whether we have two, three or four banking agencies. we have for now, and if we have three or two or seven, i'm not sure it would make that big a difference. so i guess, i hope that we're not going to get diverted that way. >> one thing that i think from where there's a place of agreement on the organizational chart, i noticed in the book that you are supportive of the idea of creating a consumer

financial protection agency, although i think in the book you only limit it to mortgages. and i don't know, rob, what your thoughts are on that. i think your microphone in a be working perfectly. wanted to just generally ask you about the notion of these bank regulars whose primary purpose is to think about the solvency of these institutions and protecting the depositors in those institutions. whether they are likely to be successful in doing the consumer protection functions, and whether there's a benefit in taking those financial -- those responsibilities and bringing them together. and i want to ask a little also about systemic risk, but let's do the consumer issues first. >> well, in my book, and i hope you can hear me, is i sort of take a middle ground position. unfortunately, the original proposal for the consumer protection agency was so broad,

it included every financial instrument in the world pretty much. and i was very concerned that it would just have a lot of overlapping jurisdiction, a lot of conflict. i mean, for instance, it covered deposits. it covers all savings programs. well, why do we need, you know, the banking agencies are going into the banks, and presumably they're looking at deposits. and they ought to look at them in connection with what assets. and so i just couldn't understand why we want to be that broad. i think on the other hand, there are certain areas, mortgages is a good example, where we have seen that the agencies haven't done a very good job. and where we have done a lot to the states. we put in this state licensing mortgage brokers, and i guess i'm very concerned about not having a strong federal agency and mortgage origination. i would also say it's not just mortgage origination. i would say from payday loans, for lots of things in which we

have mainly non-bank lenders. anything more we have non-bank lenders mainly. that should be in the consumer agency. and in products where we really feel that the banking agencies aren't doing a good job. i think that probably the most controversial area is credit cards. because we have now made all credit card banks national banks. we believe, and i think rightly so, there should be one national regime, and we should have lots of state interfering. and if are going to have -- we've got to have one group is setting. now, as you know in the house bill, in the end of the compromise was that the consumer protection agency sets rules for credit cards, but they are not allowed to examine, i think, 8000 of the 8200 banks. so i'm not sure this is a sensible compromise. because i like to see people set the rules have responsible for them. so i think it was unfortunate that it started so broad.

somebody should have, and so what's happened is it's gotten paired back. i notice for instant auto finance was taken out, which is a mistake. because that is a non-bank lender where we really don't have people involved from the federal banking agencies. so we need a set of principles. and my principles are, let's concentrate on the non-bank lenders. let's concentrate on the new facilities which go to low-income people, and let's try to minimize overlap between the banking agencies and this agency. >> i think i'm going to take us up about 10,000 feet. which is, we have a society that particularly since the time of ronald reagan, tends to think that the government is the problem rather than the solution. prior to that, people will call changing, people thought the government was the solution and the market was a problem. we are now in a period where

there is a tension where nobody believes, particularly after watching the bailout, that the government is the solution, but nobody is very romantic about federal free market anymore either. and in this pragmatic void that we must now address, i do think we have to affirm that there is a social purpose and financial regulation. otherwise, we will be just chafing at kind of ideologic, at an unconscious higher altitude, we will be chafing about whether things are -- i mean, i agree with you that too much overlap and so forth is just costliness. on the other hand, people will argue that any interference intrusion or rules is costly and unnecessary. and i think we have to move beyond that as a society, that the scale and scope of the

crisis we have just experienced, and the frequency of the crisis that you showed in your charge, suggests that financial markets, more than any other, with a destitute of how we say the volatility in the destitute of shifting expectations and so forth make for a domain where regulation is warranted. . .

>> i think credit cards and i've talked to elizabeth, who i very much respect, and i think maybe these are all national banks now. maybe what we need to do is set up a separate division of the comptroller that's more consumer oriented, and let them be the ones who do this, because since they're all national banks, and many -- or the other possibility is to say, credit cards have to be organized as a separate bank, and then have one agency with jurisdiction. if you have credit cards as a function within a national bank, and there's already the comptroller regulating them and then they're mixed with others, that's where you get in to complications. >> i think in some ways what this conversation has suggested

is that there is a tension between whether multiple agencies regulating the same entity for different purposes, inevitably creates confusion and difficulty for the institution. on the other hand, there's a question of institutional culture, and whether or not a different institution, which is set up, for example, to think about safety and soundness, is going to be institution by institution, good at systemic risk, or is that isest up to think about the prudent financial management is going to be good at thinking about consumer protection and i think that's what a functional set of questions, how do you balance between the functional set of questions without creating a kind of bureaucratic nightmare for a regulation for the institutions is what's at the heart of the dialogue and there's lots of possible ways to end up resolving that here. let me just ask you briefly to talk about systemic risk and the discussion has been again about

the boxes, whether or not the fed should be the systemics risk regulator, how do you think about systemic risk and the role of the federal government and whether it belongs separately or together with this same function. >> sure. first of all, i do think that the federal reserve, as you mentioned, people who do not have a lot of faith in experts, and the federal reserve, which is the place where i started my career, has always had what you might call a very strong reputation, has had that reputation tarnished in this episode and they have to reearn the confidence of our society. and i think that's an unfortunate -- we say by product of this crisis where the fed was asked to could essentially a back door bailout.

here, they essentially became the fiscal agent of the united states. in a way that was, what you might call, revealing that their structure, which is not a purely democratic structure, could be seen to use taxpayers' money to favor financial institutions. when you talk to people at the fed, or at the treasury and others, they say, and perhaps rightfully, what did you want us to do, sit there and watch while the real economy melted down 70 do you want us to teach a few lessons to speculators and traders, and watch the economy crash? and the answer is obviously no. but there are ways to handle systemic risk and there are ways. handling things as the federal reserve system did in the aig bailout, where the american taxpayer used -- was -- money

was used through the conduit of aig to fortify financial institutions, some of which are foreign and not under the literal protective umbrella of the united states, to manage systemic stability, was a tremendous abuse of american taxpayers. because in the aig bailout, had they bankrupted aig, and marked down all of the exposures to those counterparties, and then the american people would put up exactly the same amount of money in recapitalizing all of those forms, the american people would have owned stock in this recovery and they would have owned a piece of these firms that are all doing very well again. i think the thing that disturbs memos about what people in the regulatory world are saying, particularly at the fed, is if they say to you, what did you want us to do, sit and watch the ship go down? they are making the case that

the real economy is affected by the spill overs from the financial system. and that's what systemic risk essence is. if they're willing to make that case, they have to peak the case for strong prior restraint on those financial institutions, restricting their activities, just like you make the case for restricting polluters from the side effects, what they call the externallalities and the spillovers that affect our economy. when i look at the systemic risk, i feel like the fed is defensive and the treasury is defensive about what happened and we need to open up about what happened at aig, not like eliot spitzer said in their op-ed of about the end of the year. we have need to open that up and examine it and make sure the legislation we're trying to pass in the regulatory reforms we're trying to do actually cure the disease that was revealed by the

aig episode. >> well, let me comment on a knew points. first of all, on the aig, i absolutely agree, it was $62 billion handed out essentially, and $40 billion went to non-u.s. institutions, and all of these people had essentially made a mistake. they had chosen the wrong counterparty. these are the most sophisticated financial institutions in the world and they all got 100 cents on a dollar, and if we don't make them take any penalty for making a bad judgment about counterparty risk, then we don't have anything in risk management. it's all for naught. the second thing, and i actually calculate this in chapter 7 of the book, is how much exposure did the fed have? and it turns out the number unbelievable live was $7 trillion. i mean, remember, congress only appropriated $700 billion, but then what treasury would do is they would give $100 billion to

a program and then the fed would lend out a trillion, and the fed -- the treasury would sort of act as first loss. well, this is why the fed's reputation has suffered, because it's allowed itself to be levered up by the treasury, and get into these programs. and so i think that the political pressure that's on the fed now is really very understandable, but the fed ought to get back to its role as a monetary authority and if it doesn't get back to it, we're going to have more people like ron paul writing books called abolish the fed, and that's not a good thing for the fed. to talk just for a brief moment about systemic risk, the real problem is not who is going to do it, but what do we mean by systemic risk? it's easy for everyone to say, ok, now we're going to be focusing on systemic risk. what exactly are we going to do?

we know the nature of most bubbles are after the fact, we're very brilliant about it, but during the process, we're not so brilliant, and you know, some people who look in 2004, by schiller at yale who wrote the foreward in my book said the housing market was out of control, he showed you all the numbers, but you know something, people didn't listen and many people made money between 2004 and 2006, so i guess i tried to say, what are the things that have historically led to financial crisis, and if you go through all of the history, there are four things that to me, are ones that we should focus on, if we're going to look at systemic risk that's likely to become a financial crisis. the first is, a real estate boom, especially a bubble that's financed by money from outside of a country.

that leads to a financial crisis sooner or later. it was not just the u.s. we saw that in ireland and spain. the s.e.c. made a terrible decision in 2004, to let the five big investment banks go from a 50-1 leverage to a 30-1 leverage and we really paid for that. a third thing is, when we have a new product and we have lots of good new products, that become very huge, very quickly, without regulation. that's essentially credit default flops. and i think those are three of the things that do it and the fourth is, a mismatch between assets and liabilities. we have long assets and shore liabilities, there's a mismatch. that's what happened in the s & l crisis and that's what happened in a lot of these mortgage backed securities. the issuer of these securities had mortgages, 15-year mortgages, 30-year mortgages and many of them issued 60 day

commercial paper that had to be rolled over and rolled over, so that's what makes you very vulnerable to a liquidity crisis. so i'd like to see a lot more discussion about whether these are the right four factors, or we have more factors and less discussion about what the bureaucratics are going to be about what agency is going to look at that. >> once again, with regard to systemic risk, we're not in a situation where you're resolving one failed financial institution. as you were in throes of the period around bear stearns or up to the lehman episode, if you walked into the cfo office of any of the nine or 10 big money center institutions, investment banks and banks at that time, and you asked them, are you solvent? first of all, with the complexity on the balance sheet, they may not have known, probably didn't, but secondly, if you asked them, are you solvent and they gave you an

honest answer, the honest answer was, it depends on the eight other guys. and we had a situation, which i think calls for something akin to a bank holiday. where you close them all, you measure them all, you recapitalize them in parallel. and instead, what we had was a process of a bear stearns where the politically strong can get to the back of the bus. and then you do bear stearns, and then you wipe out a couple of others, and you recapitalize others, and the politically strong at the back of the bus, after you resolve the other seven, can look at you and say, yeah, of course we're solvent and what ended up happening is there was a horrible microeconomic violence where the politically strong get to the back of the bus, and their management stock options and their stockholders are preserved because you've sacrificed the people at the front of the bus. now, what's the problem with that system?

the problem with that system is once you identify that you're in a crisis, the politically strong have tremendous incentive to delay resolution, so the depths and the duration of the mounting of the crisis and the spillovers and consequences goes on and on, before you've sequentially resolved everybody because the politically strong can resist being resolved. and we need in this ethic of governance of the financial system, the ability to bring everybody in in parallel, look at them all, this is not unlike what the reconstruction finance corporation did in the 1930's or what franklin roosevelt ordered and we need to reassert that society is in charge of the financial markets and they're a means to an end, rather than the dominant political entity. >> i want to spend just a couple

minutes on housing finance. you spend the first probably 25% of the book on the mortgage market and the securitization process and the gsc, fannie mae and freddie mac. they in a large part started much of the unraveling. here at the center, we have convened a mortgage finance group and we're spending a lot of time talking about what comes next in the financial system as we try to disentangle the federal role, which is essentially now supporting almost 90% of the housing finance system. we could talk a lot about the diagnosis of how that went, but i want to talk a little bit about, particularly the future, because you argue, we won't have mortgage lending or many other kinds ever lending, unless we figure out the securitizatio sen procession and you've talked about the mismatch between the short term and long term. 30 year fixed rate is a core

concept in the u.s., it's relatively unique. there are only a few other systems, the danish models, that have been able to produce long-term finance and the ability to know what your obligation is going to be over time makes housing a more stable investment for individuals and makes is available to -- makes it available to more people. do you think more, if, as you recommend, the gsc's are somewhat unwound and much of that market resumes, is imagined largely -- managed large my by a private sector that we'll be able to retain a 30 year fixed rate and is that sort of a basis for homeownership? >> one thing that is good to do is look at canada. canada has a pretty good home mortgage market and there are two things that are characteristic. one thing is, people actually made down payments. they had 10% or 20% down payments, and when you go to canada and you tell them about all the things that happened in

the u.s., they shake their heads, because even now, fha has a 3 1/2% down payment and you can reimburse yourself. it's financeable. it's good of to down payments. -- of to have down payments and if people really can't afford a down payment of 5% or 10%, we want people to own houses, but maybe we're going too far. the second thing is they don't give in canada, a tax deduction for all mortgage interest. and i'm in favor of a tax for your primary residence up to a certain point, but we give a tax deduction for everything. you get a vacation home mortgage, we give it to you. a home equity loan, and we say what happened to the personal savings rate in the u.s.? well, home equity loans made it negative, because people took so much money out. so i think we have gone overboard in encouraging the homeownership and i think that we really need to sort of

realize that we're sort of implicitly subsidizing that in a very substantial way, and while homeownership is a good thing, we've gone too far. now, that does lead me to the view that to me, there are lots of people, lots of critiques of fannie mae and freddy mac, but to me the most difficult problem is there is an implicit subsidy of the housing market in fannie and freddy. people have lots of debate, i give a hot of studies. but a lot of that subsidy is going to the middle cast or perhaps in some juries decks, up to $700,000 mortgages. well, my view is, as a government, we need to be subsidizing the low income family housing, and that that's most efficiently done by subsidizing them directly. and then as the middle cast and higher housing, i'm ok with

letting the private market operate. and if the result of that is that in the middle class and up he were class markets, you can only have 15-year mortgages and not 30, my view is, well, that's what the market tolerates, that's ok, because we shouldn't be using government resources to subsidize $500,000 mortgages and $700,000 mortgages. and that's -- that's just a strong view, and then, in terms of people who really didn't -- do need the government subsidy, i'd like to see it done as directly as possible, and as efficiently as possible, and my concern is, when you mention all these things together, where you're trying to do the low income and the high income and you have an implicit subsidy, we wind up not knowing exactly what is happening. >> do you want to -- >> what i think is tricky right now, is that people do

experience a subsidy and taking away the subsidy when the housing market is very fragile is a timing problem. >> i agree with that. this is probably not the time to do it this year. >> is so i think we need concre plans about what we want to do in the longer term, but not to be shocking in an abrupt manner, and i think the -- what you might say, the goal of housing as a social goal, even a non-economic goal, and using housing subsidies as a means to an end is worth arguing, and worth discussing. i tend to concur with your perspective that upper middle class and upper class subsidies probably wouldn't be one of my social goals. but let me also adhere, i think the most profound statement you

made in your opening statement, and it's the challenge in your book that i think is rolely most important, is this notion that it's the securitization markets that have collapsed and cut off the flow credit, much more than the banks, and we come as a society out of the experience of the 1930's, where the roosevelt administration had a very successful experience forthfying the banks, but the market structure at the wallison at the tim -- onset of this crisis, ths were at 22% and we lurched in and supported the banks and supported the 22% in a bigging y and their portfolios are co-mingled, but the architect of the future is how to put a safety net structure around the incentives of the securitization markets to keep credit flowing. and in no place is that bigger than in the housing market. >> and i agree that it's the

irony, or anomaly or unfairness that the other -- that the banks became a much smaller part of the market, but that's the ones we bailed out. and when -- in many cases, it was other institutions and other sectors that actually were more important to credit. the question is, we had a trucking company come in, and say, they wanted money from tarp, and they said, hey, listen, two biggest trucking companies go down, that will be very bad, so we're too big to fail and when you think about it, it's not as crazy an argument as you think, because the banks are only 22%. what is it that's so special about the banks? my view is there is a payment processing function of the banks that is special, but that's probably limited to five or sex banks. if we were bailing out the banks because we thought they were critical to loan generation, why did no administration, either

the bush administration or the obama administration require the banks to lend more? you would think that would have been the logical result. partly the answer is complicated in terms of where they were in terms of loss reserves, but partly because we've argued, loan securitization is what drives volume. now you're correct to say in the current market structure we have, it's even more anomalous that we bailed out the bank. >> also not surprising when banks were allowed to co-mingle traditional banking activities with securities activities and their securities portfolios got devastated that they pulled in their horns on traditional bank lending, so one may have exacerbated the other. >> let me just put a pin in another topic that's related to this, that we probably invite you back to be part of other discussions on. we've talked about the whole securitization process, and housing markets in terms of single family. but in fact, also, probably one of the lessons of the crisis is

that we have given inadequate policy focus on financing affordable housing for those individuals who whom homeownership is not the appropriate result. >> and we would be in much better shape if it wasn't an all or nothing, if we had some subsidies for rental house. >> that's right and there's both a subsidy issue and also an access to credit where over the last few years the housing goc's, we talked about them in terms of single family, but in fact, they became almost exclusively the source of access to credit, to finance affordable multifamily housing, so whatever the redesign of the system is, we need to put access to capital for rental housing to be one of the high priority goals of that system, it's something we'll be all talking about here, so with the audience and see if theyo would like to get into the conversation. please wait for someone, my colleague with the microphone will come around, i will ask you to identify yourself, and you're

welcome to make a brief comment, but very brief, please focus on a question and let us know who you would like them to cat with, so why don't we start over there and we'll go to barry. >> yes. hi, my name is steve brandt and my question is for -- excuse me, i'm a little nervous here. mr. johnson, you talked about the social purpose of financial regulation. the great 30,000-foot comment, and in a world that should have both carrot and stick, i'm thinking of the social purpose of our economic system itself. because the regulators are going to be social motivated. how far about the culture of whether regular lating, being looked at, i mean, jim wallace

has a new book out and he's calling for a dialogue literally on why do we have economics, management people like dr. demming used to say the purpose of business is to serve people and make money as a result. not to make money whether you're hurting people or helping people, so can you talk about the idea of getting at the culture of not just the regulators, but the culture of the organizations being regulated, and get them to look at maybe, it's literally anti-american, to make money by hurting people? >> i guess i would go two places. the first, which is kind of humerous, joseph stigletz was holding a panel last year and we were talking about the problem of values and he said rob, how do you get these speculators, like back on the track and i said well, they have to discould have me -- discover belief in the after life.

they have to believe that somebody is going to measure them and there's something that matters and they can't escape detection or they can't buy their way in. i think the -- that's the biggest -- that's the highest altitude regulatory comment oil make there. >> that's the big of the regulator we've got. >> i'd say that you're really talking about a system and a% for a life and for a society, and at some level, not adam smith, because if you read the wealth of nations, he doesn't talk like this, but some of the modern free market fundamentalism has tried to act as if -- excuse me, if you are in the marketplace, you are therefore virtuous. and i think that that's just -- that's an over simplification, people like jim wallace have to challenge now and probably no better place, he's a theologian,

so probably no better place than religious teachings. gary dolian has written a terrific book, and i think examining the social gospel movement of the early 20t 20th century and their sense of social purpose can help us have the conversation on values. how you pit that against what you might call the hubris of money, and particularly large, large, kind of money that supports stars and financiers -- that sports stars and other financiers have to make, we have to talk about social psychology and bring some psychologists to the table. >> we at cap think about the art of the progressive movement and at the earlier part of the century and very early part of the last century and there was also a similar discussion about what the purpose of many of our social institutions were, and a look empirically at beginning to

apply information and evidence to understand what role they played in changing people's lives and i think there's much in that progressive tradition that can help inform us again as we begin to think about some of these questions. all right. so now, christine, if you would, we had in the front row, barry and dana. >> my name is barry ziegus with consumer federation of america. thank you both for your thoughtful and coagent comments. i'm impressed. i'm going to take us down quite a far ways from the last comment. the idea that's sort of coming up quickly with a bullet if you will in this arena is let's restore glass stiegel, and the role its played and the role its restoration might or might not have played. >> i looked hat this pretty closely and there are people who have this, what i come it see as sort of a nostalgic view of banking and i'm afraid i have to come out with a conclusion that

it does not make a lot of sense to reensate glass stiegel and that's for thrones. glass stiegel allowed thanks to get involved with securities underwriting, and there were 25 banks that were put into receivership in 2008, and none of them were significant players in the securities underwriting. and then you look at some -- a bank like citigroup, and it was involved in securities underwriting, but if the securities underwriting was a problem, then we should have seen in their portfolios, the dregs of the underwriting that they couldn't sell. instead what we see is the aasa a mortgage-backed securities that they kept and then they went out and bought more, so unfortunately, it's a much more fundamental problem that is -- that they always could buy aasa a securities and -- buy triple a

securities and it was a poor bet. i guess they believed their own model. the second thing is what we've learned over the past two years is the most fragile financial institution is a large financial institution that is not a bank, because banks have two big advantages in terms of stability. they have access to the feds' borrowing window and second of all, more importantly, they have stable retail deposit, and when you look at lehman and you look at bear stearns, what you saw is, the only short-term financing they have are very sophisticated lenders, institutional investors lending them short term and those guys pulled the plug very soon, so ironically, if we were to tell citigroup now, you can't do securities underwriting, we put that in a separate entity, that would be the entity that would be the one most likely to go under, and if it's big, unfortunately, until we get a new theory of too big to fail, we'd probably bail it out. the third thing is, glass

stiegel never applied outside of the united states and in a global market now, you just know that it would only take a new york second before people would figure out how to do this, and france and germany and all these other places. so my solution is twofold. one is, let's not approve mergers allowing people to get bigger and we surely have done a lot of that and second all, if we think certain activities of banks are risky, we ought to have high capital requirements for those activities and then people can decide whether to do them hornot, but unfortunately, i think the day is passed when we can bring back glass stiegeling. >> glass stiegel nostalgia essential? >> i will strongly say glass stiegel was nostalgia. first of all, at the prodding of thomas ferguson, legal scientist and economic historian, when i worked for the senate banging committee, i used to go through

the hearings from those eras. glass stiegel wasn't great public policy, designed to cut j.p. morgan company in half when they were the bee high hot. and that was industrial combat where other banks were looking to break j.p. morgan hey part. but more substantively, i think there are two reasons to decompartmentize. one is when there are conflicts of interest across the department, proprietary trading operations, front runs the customer book and decompartmentizing and not rely on the vague notions of chinese walls, is worth consideration and the second is that which you have under the safety net, like deposit insurance protection, act access to the discount window,fdic guaranteed bonds, shouldn't be used to subsidize some activities on the asset side like proprietary trading,

derivatives market trading in the oct area. so what we need to do in this architectural exercise is consider what's outside of the safety net, what kind of things can be subsidized and it's a very tricky problem, because if you just say, throw the risky stuff outside of the safety net, then your safety net doesn't protect the real economy anymore. but there's -- but this notion, and i know paul volcker has been saying i'm not nostalgic about reinstating glass stiegel, similar to the mccain and cantwell bill and turning the four or five main ones into a public utility where they're serving the economy and serving society. >> all right. dana and then we'll do one more in the back and then we need to have to close this down. >> thanks to both of you, and a question to both of you and thanks to the center for holding

this important form. my apologies not to be at the 30,000-foot mark and i guess without getting into the leaves either but somewhere in the middle ground stipulating that you're both -- that we agree, that there's some very serious flaws to the current american financial regulatory system, that they need to be addressed, and that we're suffering as a result of these flaws. but also, that the senate, is battle weary, has been dealing with health care, that its agenda is full of high priorities, that this set of issues is very complex, and that the forces on behalf of the status quo are strong. how do you make the argument, what do you say to the senate, that the time is now to address this, to address this in a

serious way and a comprehensive way. what are you saying? >> do you want me to start? >> sure. >> next november, people are going to relieve you of your job. you don't exercise your responsibility. there isn't anybody in the united states that don't think we need financial reform. now the question is, there are ways and there are ways. in other words, could we have cosmetic financial reform pretending to address the job and not do so. i think that's a very high likelihood unlikely, because of those counterveiling powers that you mentioned, but almost everybody, when you talk to a senator, i'm month talking about in a public forum, but when you talk to them privately or a member of the house, they know that something is rotten in this process and they know that there's real major repairs that are needed. so i don't think you have to

convince them that we need it. you have to help them see how we're going to bring pressures, other than lobbying and campaign money to bear, to get the needed reforms. >> and i just want to add, i think that senator dodd's decision not to run is actually helpful to this process. before i think he was extremely sensitive to how everything he did played in terms of a public image or this, that's actually not particularly helpful to the legislative process. i think this is sort of like his swan song. he has a chance now to make it happen and i think he wants to make it happen and he doesn't have to worry that, you know, somebody in connecticut is going to second guess and, you know, sharpshoot him on every issue, so i think actually, that's a very positive development, which should happen and if i had to predict, i think exactly what

rob said, this summer, it will pass or maybe in september. >> all right. we had one last question. i can't unfortunately -- yes, two rows back behind the last question right there. right in front. >> harold watkins, and just a question to go to what you opened with, talking about structured finance and the need to restart it. what do both of you suggest as the strategy to get structured finance to come in and play something similar to the role it was playing two years ago? >> well, i'll give you -- there are three points that need to happen. one is everybody needs to have skin in the game, and that's in the house bill. we can't have originators of loans selling loans to the secondary market, with no risk of loss, because they don't have the right incentives to do the due diligence. second of all, we had this terribly complex structure

off-balance sheet where -- and you see this in the investor community. you need simple transparent structures in which people really know what's happening. people don't want to buy the stuff, because you had second, third, fourth tier, you know, cdo squared, cdo to the third or cubed and -- so we need simple structures, much better disclosure. the s.e.c. can do a lot more on that. the third thing; you know, a lot of investors depend on credit rating agencies and basically, we have a forum shopping program. as long as we have bond issuers choosing the credit rating agencies, investors don't have confidence in that. there have been a lot of proposals for more disclosure, etc., but mine is very simple. let the s.e.c. appoint an independent person for a day to represent investors and pick the credit rating agency and then let the market work, but as long as we have the bond issuer picking the credit rating 8 single payer and those - -- cret

rating agency, i don't think investors really are going to of confidence and in the end, that's the key, investors don't want to buy the stuff because they don't have confidence in the credit rating agency. so you have to do all three of those things. it's not an easy answer. >> we cover an enormous range of theology and very detailed policy across a wide range issues today. obviously, there are many layers to go. let me encourage you to pick up the book, to go to the new institute for economic thinking and of course to the center for american progress at www.american progress.org, and also, finally, ask you paul to join me in thanking our panel. [applause]

>> robert pozen is chairman of mfs investment managements and a lecturer at harvard business school. he serves as chairman of the s.e.c. advisory committee on improving financial reporting from 2007 to 2008. and was on president bush's commission to strengthen social security from 2001 to 2002. for more information, visit bob pozen.com. >> in depth welcomes british historian and former adviser to margaret thatcher, paul johnson, author of over 40 books. his latest on winston churchill. join our three-hour conversation with your phone calls for paul johnson, hi from london, today at noon eastern on book tv's in depth. >> because of a dispute over royalty rates, mcmillan published e books became unavailable for purchase on amazon.com last week. mcmillan will raise its royalty

rate from 20% to 25% on digital editions, changing the on-line price from $9.99 to $14.99. last sunday, amazon announced it would capitulate to mcmill yap's terms and adopt the model and the buy buttons will be returned to pick millan's title ton. barnes so much of spue mc

>> mika played oprah on my book tour and asked three questions. i am playing oprah, despite the fact -- where's the young man, the brilliant man who said i look to thin in person? >> i think he was talking about me. >> no, i think it is about me. thank you so much for coming. but mika, let's start by talking about your book, and begin by talking about the title of the book, "all things at once." >> well, i actually stole it. it's -- here come the microphones. i took it from my mother, who, as i was writing the book, increasingly i realized the messages would not be mine but they would be hers. does this work? can you hear me? not so well. maybe i need to turn it on. how's that? how's that? oh. terrific. and my mother actually is a brilliant sculptor, she's working right now on three shows across t