in terms of a question i would particularly like mr. seiler to answer, the dni does a lot of work on the military intelligence. how much do you know about different attitudes and different groups within the elite, so the social and political attitudes within north korea? thank you. ..

of a hardliner versus moderate debate as a negotiating tactic to read outside of see that type of diversity. there is bureaucratic competition. history of foreign affairs loves it when there's dialogue ongoing. that's their bailiwick. and certainly the science and technician is responsible for the rogue ram and like it when they get to launch a missile or when they get to make a nuclear device go boom in the hole in the cave. but all the sad that there is a good amount of consensus. i would actually say that the scenario that ics is that what we saw in early 2009 is really planned toward the end of the bush administration when it became clear that we did at the

six-party talks for a lot of the analysts thought we would deadlock which was on this issue of verification. in the sampling and access required in order to one cummock and from daschle plutonium production and also to gain insight into the highly enriched uranium position. and this is exactly where the agreed framework had stumbled when you look at the iaea is ability to get the inspection ready to clear the delta between what north korea had declared it actually produced in the way of plutonium and what the iaea and others thought they might have had, which was a few brands, a few dozen grams of plutonium versus kilograms, weapons worth. and so, the six-party talks process had run its course as far as they could go. and north korea could spend to really listen going to get a lot of support for a liberal verification regime.

and this is after the president in north korea from terrorism and then the whole issue of what type of action but we have on the ground becomes central. i would've prine at that time north korea makes a decision that it's going to embark on this path with the new administration bitterly on its nuclear power. to demonstrate early on-q have to pay attention to us, to demonstrate early on as the strategic capabilities and are probably thinking to as the new administration is so committed to dialogue, why not walk into such dialogue with the greatly enriched and? the question is what did they do to this plan? it may have impacted the timing. i'm not so certain what you saw is the ascendancy of a collective leadership that taken in a difficult art direction. as early on in this whole cycle we were expecting that the

possibility of a second tape it on much march diluted basically where we were after this escalatory cycle. north korea's behavior today is what i urge our analysts in particular to stop looking at the tactical question. we are often driven and this is no claim on the press because you guys are just running your story spared the winner of the north korea's coming to talks. one of the six-party talks come again? they were an objective in themselves. that's how it is her in so many questions just for coming back to the table. and this is where the interesting thing in a little ears with everybody calling for strategic patience now in telling north korea joined that going to be rewarded simply for coming back to the talk. what is north korea's behavior at this point? will it continue, you know, will it so compelled to us again do

some type of provocative action or will it actually fear from this and comply with it? and this goes back to the question, which regime do you negotiate? you negotiate with them all, not necessarily exclusive. you negotiate with the current regime because it's the reality at hand. it's the reality that we gained a lot of benefits of the six-party talks process. we do somewhat mitigate some of the more provocative behaviors that north korea. i think the consensus we have in the region helps us of the proliferation issue of concern and we keep putting that message on the table. peace treaty, normalization, all this other stuff, it's all there, just come back, beijing, back to value type. and kim jong ii could care less about that, maybe he just wants

the capability. the rest of the alito is saying where it is their future by? is this sustainable? particularly if the other six-party types remain firm in their position. and i would add to that tehran is watching. other potential proliferate there watching. the whole credibility of any post-cold war npt centric had the nonproliferation regime hinges on how well we handle this issue. other countries are watching a. so it's a multidimensional issue that sometimes week korea hands talk about anaheim third alliteration. there's a long rambling answer to a very simple question. i apologize for but that's basically how we saw some of the leadership dynamics play out over the past year. >> larry.

a >> i just want to make a brief comment about what we've seen in the last month or so. with north korea appeared in three things that seem very different in north korea since the beginning of the year. i don't know what the future will hold, what effect these three developments will have, but the first of these is the statement that is reported that kim jong ii made in january in which he admitted to failing to adequately feed his people. then you have the apology by the prime minister, kim jong ii, about a week ago before what is reported to have been a very, very large meeting of local communist party officials in

pyongyang and an apology about the economic mess caused by the currency change and also by the restrictive measures against the private markets in north korea. and now you have the reports that the regime has begun to lift her straight chance on the market, which it imposed in 2009, actually going back to some degree into 2008. and also it is now allowing people again to trade in foreign currency, which in december was banned as part of these economic measures, the regime put forth. all of this or at least the last two elements in these three changes coming out of pressure public grassroots pressure on

the regime. now, i've never seen anything like this in north korea before. i don't know what it means. but it's something i think we have to watch really carefully. and if something really develops from this comment it seems to me u.s. policy makers really need to examine the question of how do we incorporate a new trend along these lines in north korea into our diplomatic approach to north korea. i would watch this very closely now over the next few months in terms of whether this is just a momentary blip on the screen or whether it's going to be something more fundamental in terms of real change in north korea. >> thank you very much, larry.

leonard. >> okay, from the korean embassy -- [inaudible] i put the question toward dr. bechtol. dr. bechtol clearly explained the immediate threat to the area or so -- with the practical measures for determining the 15th u.s. in korea. the main issues to operational opportunists in 2012 april is just the two years away from now. so my question is, what are the

implementation for the suggestion. there are many people with suggestions and they are requesting reconsideration or more discretion -- thank you. >> let me address that question at two levels. the first level is just approaching this from a general look at unified command. and one of the principles of war is unity of command. so i think unity of command is a vital aspect of any coalition warfare. in nato we have a guy who's in charge. all of the nato forces answer to him. i believe that in a bilateral relationship as important as the one we have with our allies in south korea, unity of command is very important and i don't think the combined forces command of the two separate commands as

they will become in 2012 will function as well when they don't have unity of command, frankly. so that's the first level. the next level is just a more practical level at the operational level of war. when we're talking about warfare, were talking about the street level four, the operational level of work on the tactical level four. the operational level of war is typically the level at just about court, and echelon about court. and at the operational level of war, the south korean military simply is not ready should take over many of the functions that they're expected to by 2012. it onto the seafloor i think everybody now knows was before i heard they don't have the seafloor are that they made. it's very expensive and it's very necessary. they don't even have the joint seafloor c4-i system. it's become so obvious that the

south korean air force cannot function the way it needs to come in the way was originally intended to under 2012 change that they barta said okay, we're going to let the two air forces continue to function under combined command and that's going to be under a u.s. three starters the seventh air force commander. picard acknowledged that the roxbury and courtney b. cannot conduct or lead amphibious operations. i'm just talking large stuff here. there are many issues, many challenges at the roc military is not going to be able to meet by 2012. so i understand the politics of this comes at the unity of command, with take that off for a second and just talk sheer practicality of capabilities of systems that meet the threat. and south korean military simply will not be there by 2012. that is a fact. and i wanted to talk about bridging capabilities as that

word, those two words have been brought up over and over again, bridging capabilities. with the best bridging capabilities is to be the infrastructure as it is. combined forces command is a proven combined command that has deterred the north koreans to its existence. until the south korean military has the capabilities necessary to assume a separate command from the united states forces, my suggestion, my thought, my assessment would be leaving the structure in place, pushing back the date of 2012 until the roc military has those capabilities. >> thank you. dave. >> you know, i'd like to first point out something we see we talk about the outcome issue and say that korean forces are under the wartime upon the u.s. it's not really true. the combined forces command answers to the military committee which is made up of

the national command authorities of both countries. now there is a u.s. general in charge of combined forces command, but he answers to the military committee of both countries. and u.s. forces korea does not tap up compos korean forces. so i think that's important to remember. the other thing i think it's interesting to look at our linux over the last 60 years and our military, the development of our military capabilities has been very symbiotic. that is really what we have in how we have developed the combined command in the strengths of both countries taking place for the weaknesses there. and the symbiotic relationship has in many ways not allowed a south korean unique military culture to develop because the standard by which south korea and the combined forces command judges military operations is

the u.s. standard. and as process taught us, u.s. c4-i is very expensive. because the standard by which they've grown up with is the u.s. standard they have to invest a tremendous amount of resources to develop staff by a stand-alone capability separating the combined command. so it's a real challenge and it becomes a resource and time question. can they commit the resources developed a unilateral capability and do they have the time to do it. again i caveat that if, my personal comments, not official comments, but i would say my personal comments, i think it is correct and it is for the future of particularly what happens in the regime collapse scenario that the korean military be in the lead. it is important for

reunification of the peninsula and what happens in the north than it is the south korean military in the lead for legitimacy purposes and the only way to counter the 60 years of propaganda indoctrination of the north wind people. because of the u.s. forces to leave, it can have a live. but the challenges timing and how we're going to do this. and i think the symbiotic relationship that we have had is a difficult one to break and it's going to be a real challenge for us in the future. back thank you, david. speak up. >> i would just add to what david maxwell just said, over the last 60 years. since the korean war, american troops have been in korea in that same mode, cooperating with

republic of korea military. during this time, there was a transition from president singer read to 1989 into a democratic government. this was at least a 35 year transition with a lot of patience, a lot of development and cooperation. part of it was called military civic action. it was building roads and schoolhouses. it was what we call now infrastructure development and so forth. the status that has been achieved during this military relationship accompanied in the air and enormous progress in

industry and technology. in south korea today is one of the foremost advanced technological countries on the planet. it has a very your, which is accompanied by that democratic process. i find it somewhat surprising that the military has not progressed to the same extent and david maxwell just explained i think the reason why. but the potential is there. and i think the policies, goals, and object does which seemed to be clear, need a strategy in korea for the private sector to help support the development of the capability for the protection of the company. >> thank you, leonard as always. and kathryn, you have something to add on?

[inaudible] >> fine, it's open. push her back in. >> the question about china that she raised as a very good question. i would just say that i think the pretty solid consensus of opinion is that china is aimed with regard to north korea is to prevent instability in border regions, the region that borders korea because of the large korean minority that lives there. so there's a tremendous concern about the consequences of an implosion of the north korean estate on china's own internal stability, internal security. and so rather than supporting north korean adventurism militarily, it would use whatever leverage it has by way of supplying north korea with

significant resources to restrain and there's really no support for the idea that its alliance with north korea on paper would leave it to supporting any kind of military action. >> thank you, kathryn. [inaudible] >> i understand the chinese concern about korean population on the border area. what if there were an implosion in korea, north koreans would go north into china. they would go south into south korea. and we've already been mined three passengers to the dmz. i think the chinese have much different motivations for what they're doing. they see some short-term advantage certainly in the

dublin of south korea and japan and getting concessions out of the united states because they have been promoting dialogue in the six-party talks, not a solution. and so there's a lot going on there which i think that we are willing to talk about thomas certainly not in public and perhaps not even in private regarding the way china and north korea interact. i think it's very important that we let get this especially because fuji and how -- hu jintao has pointed out there've always been correct and therefore has an affinity towards the north korean solutions. i don't want to prolong this, but i think there's a lot more do we really need to look at in terms of north korea. because it's not just north korea. it china as well. >> thank you as always, gordon. interesting insights and comments. with that, then ladies and gentlemen, thank you very much.

meeting adjourned. thank you. [applause] the

>> a senate committee heard from several economic feathers on how congress should do what the rising federal deficit in u.s. debts to foreign countries. they also discussed the current state of health care legislation in the effective of this thing will fall on the economy. this economy for the baby of the committee on finance is about 2.5 hours. >> good morning everyone. i would like to call to order the subcommittee -- there we go. i'll try that again. good morning. i'm pleased to call to order the subcommittee for the hearing entitled, equipping financial regulators with the tools necessary to systemic risk. i want to thank my member, senator corker and senator reed my colleague and a hard-working staff for the question this morning on an issue that's amazing technical tucson but will prove critical as we were to reform and monetize our regulatory structure for the future. i would also like to welcome and

thank our able witnesses who are here today and thank our staff who have been instrumental with regard to technical aspects of this analysis. i'm so happy to continue to delight that we averted the god i had to request for regulators to move beyond examining individual institutions endorse monitoring and managing systemic risk across our financial system. or witnesses that will appear in two separate panels, welcome and thank you for appearing before the subcommittee to give an outline on radio leaders current capabilities for analyzing data. in most apparently what additional resources and capabilities are necessary to provide effective systemic risk regulation. anderson very well the weather in washington the past few days has not been ideal. as matter of fact, some other witnesses have been stranded here for several days. they appreciate the dedication you have shown for being here today. we will be most merciful and are questioning. before i turn to governor

tarullo. and thank you for appearing here before the subcommittee. i would like to submit a few comments for the record you have a somewhat lengthy statement given the technical nature of the subject matter. a bike is meant that for the record but will not read it. but is that all right with you gentlemen? hearing no objection, i'll go ahead and do that. before introducing governor tarullo. first, senator reid, perhaps you would have some, do like to share. >> first vibe like my statement submitted to the record. i want to welcome governor tarullo. i want to thank you for holding this hearing with senator corker. this is a vital area and could i think be overlooked. but it's incredibly important. but we all witness over the last several years is not only great market turmoil but also great market uncertainty.

my question of a lot of the problems with lehman, with her strength, with aig was the fact that regulators and other banking institutions had no idea where their liabilities, where their talent exposure live. there is no way to calculate the aggregate that information. and as a result, i think the regulators were flying blind essentially, doing the best they could, trying to work things out. a lot of it was just sort of flying with instruments that were working in bad weather. it was more the seat-of-the-pants dance aesthetic regulation. so one of the things i think we have to do is create a repository of information available to regulators, available to the public of appropriate delays so that the system is much more understandable and i when there

is a shock to the system, markets don't react out of fear. they react with some knowledge. and thank you, mr. chairman. >> thank you, senator reed. we have on this committee become accustomed to something we call the corker role, were violating or not violating actually breathtaking refreshing difference from senatorial custom, senator corker is known for its brevity in opening statements. to send the requested the hearing today on a list of the major priority of yours, perhaps you have some opening comments you like to share. >> i'll be very, very brief. thank you for having this hearing. i know it's friday afternoon it has been snowing -- >> with entrances to say to have this. >> thank you so much i want to thank governor tarullo for always being available in helping us think through these complex issues. in our second panel especiallespeciall y, governor tarullo, i know it's been holed up in hotels and hanging around for several days to cause this

testimony to actually occur prior to research. i think everybody knows where hopefully working towards a regulatory reform bill. it's important to get this testimony into the public record so we can potentially act upon it. so we thank you all for being here with your ideas and with that mr. chairman, as he walked out the door, thank you so much for having this hearing. i appreciate it. >> thank you and on behalf of senator biden and senator corker, daniel k. tarullo who is senator of the board. he received his education beginning that locks. latin school and then went on to georgetown university, duke university and graduated with his letter degree from michigan prior to assuming his responsibility at the federal reserve he was a faculty member of the georgetown law school and

prior to that served and the clinton administration as assistant secretary of state for business economic affairs and other important responsibilities. again, governor, i thank you for your presence and were listening and look forward to your statement. >> thank you, senator reed and senator corker. thank you both for your subject whose importance to financial great as senator reed said amounted to go you often overlooked in the broader debate about reform. that information is crucial to the success of any form of regulation as it is to the success of any form of market activity. the many features of financial activity make the quality and timeliness of information flows even more significant for effective regulation. most important perhaps is the interconnectedness of financial services firms. and few other industries to major players deal so regularly with one another as a result of

which major problems that one firm can quickly spread throughout the system. the financial crisis revealed gaps in the data about both government regulators and two private analysts. it also revealed the relatively undeveloped nature of systemic or macroprudential oversight of the financial system. with this experience in mind, i believe there are two goals to research agency and congressional action to improve data collection and analysis should be directed. first, to ensure that supervisory agencies have access to accuracy and timely data that are organized and standardized so to enhance their regulatory missions, including containment of systemic risk. and second, to make such data available to other government agencies, two private analysts, to academics and appropriately usable form so that the congress and the public will have the

benefit of multicourse perspectives on potential threats to financial stability. i written testimony details some of the initiatives that the federal reserve to enhance the type and quality of information available to us in support of our exercise of consolidated supervision over the nation's largest financial holding companies. i would stress also though the importance of using that information to regulate more effectively. the special capital assessment we conducted last year, the nation's 19 largest financial firms demonstrated how quantitative horizontal methodologies built on consistent data across firms could complement traditional supervision. it also showed the importance of having supervisory needs and knowledge to determine requirements. we are building on that experience and adding a more explicit macro convention in a quite offended as a permanent

part of large firm oversight. while there is much to the federal reserve and other agencies such as the sec can do and are doing on their existing authority. i do believe we will have congressional action to achieve for the two goals i stated a moment ago. there are number of specific areas in which legislative changes would be held -- not be briefly mentioned three. first, it is very important that government agencies have the authority to collect information from firms not subject to prudential supervision, but which may nonetheless have the potential to contribute to systemic risk. without this ability, regulators will have a picture of the financial system that is incomplete, perhaps dangerously so. second, it appears to me that greater standardization of important data streams will only be achieved with congressional pride. this objective is standardization have for years

proved elusive although most observers agree it is critical to identifying risks and the financial system. third, there will need to be some modifications to some of the constraints on information collection that government agencies, such as authority to share that information with foreign regulators or to release it in usable form to the public. since privacy, proprietary information, intellectual property, reporting burden and other important interests will be implicated in any such modifications. it is most appropriate that congress provide guidance as to how these entries should be accommodated in a more effective system of financial data collection. finally, as he consider possible legislative changes in this area, i would encourage you to consider the relationship between the authorities and responsibilities associated with data collection and the sensitive regulatory authorities

and responsibilities entrusted to her financial agencies. generally speaking, regulators have the best perspective on the kind of data that will effectively advance the statutory missions. indeed, without the authority to shape information requirements, their effectiveness in achieving these missions can be compromised. this is all the more important, given the current state of knowledge of systemic risk in which there are as many questions as answers. in the circumstances in particular, the insights gained by supervisors to their ongoing examination of large firms in the market should be the key, but not the exclusive determinant of new data collection efforts. this does not mean agency should collect only the information they believe they need. the aim of providing independent perspectives on financial stability means that other data may be important to collect for the use of private analysts academics and the public.

the agencies can certainly be asked to collect other forms of information that are important for independent assessments of financial stability risks. but i think this relationship does counsel considerable symmetry between regulatory responsibility and data collection. thank you for attention and again for having this hearing. i'd be pleased to answer any questions you might have. >> well, thank you so much, governor tarullo. and let me first ask a question that this need for better information is not exclusive to the united states. could you comment on how other g20 countries are trying to deal with this and the need for not just a national sort of approach, but an international approach? >> certainly, senator. there are a number of other regulators and overseers around the world authority begun to address the issue of information

among them the various organs of the european unions and the united kingdom, the bank of england. the g20 itself has issued a couple of recommendations that are particularly salient to this question on developing a template for reporting of information of the large internationally active financial firms. now this is of course not an easy undertaking for any one nation, much less for the world as a whole. but it is something which the financial stability board has taken on as a task here there have been some preliminary discussions on how to organize the work of trying to see if we can come to agreement on a template for reporting of the largest most act as globally active financial institutions. it's far too early to report progress there, senator, i can't

say that the effort has been lodged. >> well, thank you governor. as you know we're proceeding down and i think appropriately so legislative that which we hope will incorporate the systemic collection of information. i've got legislation in and in fact i want to err mendelowitz and professor liechty for their professors and hope. but this is going to have to be enough hurt that goes beyond the ifa to understand that but i think it's important we begin here. another aspect of this international question is the issue of sovereign behavior. the greek government now is in a very serious crisis, which is rattling the markets. there also was some indication that another one of our favorite topics, derivatives and credit default swaps have come into it apparently there's reports that

investment banking firms have helped them legally avoid pre-obligation of the matrix et cetera appear the long and the short of it is, do we also have to include sort of sovereign entities in terms of data collection? >> well, senator, i think one of the lessons that international community drew from some of the sovereign debt crises of the late 90's and the very early years of this century was that there needed to be more transparency associated with a lot of sovereign debt issuance. and the international monetary fund undertook to create special battle dissemination standards which would provide more such information. generally speaking, i would distinguish between the sovereign information and private financial firm information as we as regulators obviously have a mandate over

private firms providence urgently over sovereign. it's relevant though for us and thinking about systemic risk as to the degree that of large institutions had significant exposures to sovereigns, which may conceivably have difficulty in servicing their debt, that becomes a matter of concern for the private financial regulators as well. >> one of the issues that repeatedly is made, and points rather than issues is that too big to fail is the first chapter. but the second chapter is to interconnect it to fail. and that raises the issue of a focal point of large institutions might miss the small institutions that could cause systemic risk. in fact, you know, there's the possibility that multiple failures of all institutions could have systemic problem.

the junta resorted to without in terms of these interconnections. i mean, traditionally it's easy for us to go to big financial institution and report x. y. and z. how do we capture everybody, not any pajaro sense, but in a data sense? >> sure. so, let be distinguished while trying to address both the data collection and the regulatory supervisory site. i think with respect to data collection there is little question in our mind of these that the data collection authorities of u.s. government agencies need to extend beyond the universe of firms which are subject to provincial or even market regulation. for the very reasons you suggest a large number of intermediate size for canned themselves have a substantial amount of financial activity, which although not necessarily associated with systemic risk in

any one firm. in the aggregate can define an important phenomenon for mendelowitz development in the economy as a whole. so we do think there needs to be that kind of authority in our financial regulators to gather the necessary information to round out the picture. when it comes to supervisory or regulatory authority, the three of us at least a bonus room on a number of occasions talking about the choices we have in front of us. and one of those choices is going to be how broadly to cast or to draw the perimeter of regulation. will it be only firms that own bags? will it be firms beyond that, which are thought to be themselves systemically important? or will it be some broader set of firms beyond a certain size. and i think those are going to be more difficult to resolve in the data issues where he

personally elitists think there is little argument against the proposition that you need to gather this information. >> thank you. senator corker. >> thank you. and senator, what to thank you for raising this out. i don't think we would've met with our panel without you having brought this forward and i think you're actually responsible for all this been brought to our attention to thank you very much. governor, i think you're probably familiar with the national institute of finance as it's been proposed and they discussed certainly have been done in an independent way. i think you maybe would allude to more bad happening at the fed itself. i'm wondering if you could touch was a little bit about the pros and cons of what you know their proposal to be from the fed standpoint. >> certainly, senator. so, this will surprise you to hear that i think there's some

advantages and disadvantages to each of the different organizational options that you would phase. one such option would be the creation of a single freestanding agency that would have overall responsibility for all the financial data collection and a good bit of the analysis. on the other end of the spectrum would be presumably just giving more authority to a single u.s. government existing u.s. government agency and say why don't you fill in the gap. as i suggested in my written testimony there's probably an option in between as well, particularly as you go forward with thinking about overall rate reform to the degree that a council emerges as a think it might have an important center for coordinating the oversight of systemic risk in the united states among all the various u.s. government agencies.

we may want to lodged some of the data responsibilities in the council as well. the basic advantage i think that a single agency is what one would infer which is to have a single group. they can take an overview. they can say let's try to prioritize. the strategy figure out where the most important unknowns are and will devote our entities in that direction and will do so in a way that were not always stumbling over one another because we're just one agency. some of the costs associated with the single agency apart from out-of-pocket costs which are nontrivial but in the sense of non-immediate monetary cost would include i think some risk that she detached data collection from the process of supervision, the process of

regulation. and i do think it's important and i think her experience over the last couple years of pouring out the importance of having those with the mindless responsibility for supervising and regulating, being able to shape the kind of data collection that they feel are necessary in order to effectively regulate or supervise. in the middle of the crisis, for example, it became apparent to some of the people at the sad that getting information on the kind of haircuts that were being applied to some prepurchase security repurchase agreements was a very important near-term and trying to assess where the system was at that moment. if that capacity had been lodged an independent agency with some of its own priorities perhaps than having to go through the mortgage process, there may and

i emphasize may have been some delays in getting to that end. so i think that as with everything they are going to be pluses and minuses. it won't surprise you to know that from the somewhat perspective of 20th and constitution there would be concerns about losing the capacity to shape and act quickly on informational needs. but i hasten to add that here is with systemic risk generally i don't think anybody at the fed leaves that the fed should be the seoul or even the principal collect her and analyze their data. this has got to be a governmentwide priority. >> the information received now in the data, how real-time is it and i would assume during a crisis, it's very important that it's daily. and i don't -- and how granular is it? >> so that varies considerably,

senator from data stream to data stream. and i think the subject -- let me be clear that when some people say real-time, some people do need a media buy that, but that is a trade happens, but information about the trade is immediately available to regulators and possibly the public. for most of our supervisory purposes, that kind of literally real-time data isn't critical to achieving the supervisory purposes. and of course as you all know, true real-time data is a very expensive thing to put together. but timely, meaning in many instances delete or end of the day trading is very important for making an assessment on a regular basis as to the stability of a firm that may be under stress. one of the things that became

clear i think during the crisis and for me became particularly evident during the stress test last spring, was the substantial divergence in the capacities of firms to get a hold of their own data to know what their entrées were, to know what the round counterparty risk exposures were. so one of the things that we've actually been doing in the wake of the special capital assessment program is placing particular emphasis on the management information systems of the firms requiring that they themselves be able to get a hold of the data entrées are counterparty exposures were certain kinds of involvement with certain kinds of instruments because of they can get ahold of it for their own internal purposes we can get a hold of it pretty quickly. so right now, it's actually not so much a question of our telling them, send a something

you have on a daily basis. it's in many instances much a matter of making sure they have the capacity to derive that information from the raw computer records and then send it to us. >> may ask another question? you know, of course we all tend to try to find a solution that you need can maybe alleviate a lot of just the daily work it takes to be good regulators right. and a lot of what happened this last time could've been prevented with the tools we had it we just maybe have been a little more effective in regulating the way that we should do. and congress overseeing the way it should do. there were certainly lots of issues that caused this last crisis if you will to unfold. so we've had this wonderful

presentation that were going to hear next. and you know, we envision having all this real-time i think at the end of day type of data so we know positions throughout our country so that regulators have the ability to know if something putting our systemic risk is occurring. what should we concerned about from the standpoint of having this thing that sounds really neat and cost money? had we prevented from being being something that really is not that useful but is collecting a lot of data that i imagine takes place throughout the city that's not utilized. and secondly, i would imagine that data like that collected in one place could be used for putting nefarious purposes if it got in to the wrong hands. if we actually have it in collected, what should be our concerns in that regard?

>> with respect to your first question, tom, i mean i do think that the passwords as a group of academics and others who have been promoting the nis and certainly the national academy of sciences in convening the workshop have been very valuable in drawing attention to and moving the debate for word on the data needs that we really do have. and i think senator, just to underscore something i said earlier, the absence of data from the shadow banking system was certainly problematic in retrospect. i think that the two greek to which the tightly wound, very

rapid shadow banking system was channeling a liquidity around the financial system and that's the rapidity at which it came to a screeching halt when things began to break down is something that was at least underappreciated by even those who foresaw problems ahead. so i do think and i don't think it's a coincidence, by the way that some of the names i saw on the list of participants in the workshop at the nis held for the names of scholars who have written quite insightfully i think i'm a sensitive causes of the crisis and of the way in which adverse feedback loops began when things moved into reverse. so i do think we need original data sources. now how to make sure that the

every dollar of governmental funds are spent most wisely and how to make sure that we don't demand a lot of private expenditures that are not going to useful purposes is the kind of question i think we all confront all the time in any government regulatory or data collection effort. and i guess i would say that that's where some of the principles that we suggested in my written testimony i hope will be of some help. keeping the regulator and supervisory agency is closely involved and i would hope the prime movers of the data collection efforts i think will help because whether it's the sec or us or the cftc, we are going to be most concerned in the first instance with achieving our statutory missions. so porous that would be the consolidated supervision of largest financial holding companies and also obviously our

monetary policy and financial functions. that i think is one thing to do it. i think the second way would be to make sure that there is some thought about the requirements coming forward. this is by omb has the rules they have. and as you know, we think maybe some of the paperwork reduction act features need to be changed around the edges. but there is a good reason why that act exists because you do want to put the brakes on people just willy-nilly saying we'd like you data sources. i think actually the council, if the council of regulators were regulated or the group could formalize such an effort, i think it would be useful to have different agencies actually thinking about what new data sources may be important and having the debate precisely to guard against anyone maybe going a bit too far from its own

regulatory mission. on the protection issue, obviously there are as i mentioned these imports in proprietary interest, i.t. interests in some cases where vendors are about, privacy interests were individuals are involved, a little bit less obviously with some of the things were talking about. we have to continue to have those protections. but it's also the case that our country i think was to be protected from financial instability. and my conclusion at least is that the offered to identify potential sources of financial stress unrest throughout the economy is not something that one or even a whole group of government agencies should be the only act as then. i think we do need to enable private analyst, finance professors, people who have expertise, but are not in the government to look at what's going on in the economy, to offer their views to you, to us,

to the american people and let us all filtered through how much of that may be well grounded and where we might disagree. if we're going to do that, we have to figure out how to get this data into a sufficiently advocated for a celesta protect proprietary information but to make sure that it's really useful to somebody out there who is trying to do an analysis and have some insight into what's going on in the subprime mortgage market or over-the-counter derivatives or anywhere else. >> well, thank you governor for reminding me. i have to think of the national academy of sciences because we asked them to convene the meeting and i'm pleased that it produced positive results in your view and other peoples do. so thank you very much. >> and i could just ask one more

piercing mag no, go ahead here absolutely. >> well, now, why don't you go because -- >> so, we decide a number of us have been looking at speed bumps ways for us not to be faced with resolution. obviously if we have resolution want to ensure that this whole notion of too big to fail is not part of the american vocabulary. but we've had numbers of entities in recently today, yesterday, day before talking about contingent capital. and the ability to take unsecured debt in an institution that's moving into problem areas and converting that immediately to common equity. and i would know it's a little bit off topic, but there's a lot happening. were going on recess next week.

i just wanted to see might have some comments regarding not and that's something i think it's getting more and more attention. >> sure, actually senator, we've been paying a good bit of attention to that of the federal reserve. i got together a group of foreign staff and staff in some of the reserve banks to try to think through some of the potential options here. so let me first begin with a little taxonomy because different people mean different into the talk about contingent capital. there are at least a couple of concepts here. one is a concept under which a firm would issue a specific kind of instrument, which would have debt like characteristics under normal circumstances. but by the terms of the instrument would else have a conversion to equity when some trigger event has been. the concept behind that tends to

be the following. there is a period during which a firm may still be somewhat healthy, but is beginning to deteriorate in the capital levels go down to a certain level, there will be a loss of confidence within the markets and counterparties with respect to that firm. .. çsome have proposed that all forms of debt other than specified trudges of debt would

at some moment, whicht( would hw would be the equivalent of being on the verge of solvency, convert to equity. thereby, it would help to move forward what would be a resolution process under another name. you have weigh less debt and more equity. -- you have way less debt and more equity. the first has intrigued some bankers who see the opportunity to create new forms of investment the big issue some new forms of investment. the big issue, there's a number of technical issues but probably the biggest is what is the trigger going to be? if the trigger is supervisory discretion, you probably have an issue because everybody is going

to be wondering whether the supervisor is going to pull the trigger for exogenous reasons or when the supervisor would pull the trigger. it creates a good bit of uncertainty in the markets. a second option is that you have the trigger tied to the capitol levels of the firm. that still involves some supervisory discretion but it's within the context of an ongoing regulatory system. problem there has been the capitol tends to be a lagging indicator of the health of a firm. many firms to months before their insolvency look like they're adequately capitalized. so unless we get a quicker adjustment of capital levels that probably wouldn't do the trick to a third proposal is to have a market-based trick, a trigger that might for a simple be the relationship between the common equity and assets or something of the sort, or the

market price, lagged market price of the firm related to assets, something that gets the market and as the trigger so that nobody can manipulate in any way. the concern one hears from a lot of people about that approach is it can induce a kind of death spiral in the firm whereby people began trading against when they see the price go to a certain level they began trading against. my personal -- this is personal, not the board, my personal view is that all three of these approaches have significant problems. i personally just have excluded full supervised discretion as an option but i think it is worth pursuing the technical challenges are not above the market based trigger and capital trigger and that is what we've asked our staff to do within the

reserve banks and the board to see if there is something here which can be and this is important which can be less expensive form of capital for the banks. i don't want to create anything that costs more than common equity for the banks. that is kind of an effective was undertaking that if we can figure out a way to have capital instrument which is there in the excision circumstances but which costs less than common equity on a normal basis think that is something worth pursuing. i'm sorry that is longwinded but to can tell we've actually been analyzing this. >> thank you. will you give me time to think of a question? no. [laughter] i think senator corker always raised a very interesting point, when push came to shove, all of the varieties of the capitol risk-based capital were

essentially forgotten that stress test for tangible capital, or am i overstating or misstating? >> so, our focus -- here is what happened what i found some interesting during the crisis itself. during the crisis itself, private analysts operating on the basis of less than full information of course and regulators both found themselves on focused on common equity. some of the market guys collect tangible equity but basically it was common equity, and i think that if we didn't already believe it and suggested that if we didn't already believe what we've concluded from this exercise was that common equity needed to be an even more important component of the equity of the financial firms going forward.

the stress test, the s cap were conducted with the assumption that were under a set of standards that and looked to the common equity levels as well as traditional tier one levels, and i think, senator, regulators around the world we talked to in the financial stability board, market analysts and financial institutions themselves have converged around the proposition that common equity really and truly is the most important, not the only the most important component of regulatory capital. why? because if it's adequate it allows the firm to continue as an ongoing institution. there are some forms of equity, tier two, excuse me, tier two capital, which will be available to protect the deposit insurance

fund or senior creditors, but not to keep the firm going on an ongoing basis and since i don't think any of us relish the thought of another boehler round of major challenges to major financial institutions i think we are all focused on finding the best way to maintain higher levels of common equity. when i say all of us a don't just mean regulators. i think that is a market imperative. >> thank you. we had a sidebar which we don't need to continue about basil to and i think we have to spend some time thinking hard with the world's capital going forward but two quick comments about the issue at hand. i don't want to trivialize this but essentially this center would be on patrol for bubbles in the economy. things that could cause not one firm but throughout the economy

real problems. is that too simple? >> i don't think it is too simple, and if i -- if i can go back to the sidebar we had on a different hearing where you and i were talking about -- i mentioned several times in the written and oral testimony the need for independent views of things and this is something i've always believed but my conversations with you have reinforced in this context that no matter how good a job i think the fed can and will do or no matter how good a job in the market regulation i think that the sec can and will do. the uncertainty around financial stability are always calling to be significant because stress and problems arise and new ways and so i think it's important for us to foster within the government but also outside of the government the ability of multiple agents to make a judgment on this.

now, i guess i'd better think that this is something which was within the government was best pursued in a collegial fashion which is why the council occurred to me. i think if we are doing our analyses and the sec is doing it and treasury is doing it, bringing those together in the council discussions and determining whether their needs to be a different kind of analysis or initiative seems to me to make a lot of sense. it also makes sense again responding to some and you suggested to me awhile ago, they also make sense to have the council and have a small staff of people who themselves are dedicated to looking at all of this and maybe doing so heterodox analyses so i am all in favor of that and actually not all in favor of it in the sense we wouldn't oppose it. i personally think it is an

affirmative good. >> thank you very much. we need to move on with the subject at hand. i would like for you to in writing may be reason want just so we can get something on the public record regarding how the wingback to the collateral or the capitol we were talking about a while ago using a be a quarterly stress test that was made public thinking through how something like that might help, but i know we don't have time for that again today. thank you. if you could do that in the next few days that would be wonderful. thank you. [inaudible conversations] thank you, judd alan.

let me introduce the second panel. our first, dr. mankiewicz and former chairman of the board of directors at the federal housing finance board where he served two terms. thank you for your assistance on this. our next witness is professor of marketing statistics at pennsylvania state university. he's also the co-founder of the committee to establish a national institute of finance. thank you, professor. we are also joined by professor robert engle at the stern school of business. professor engle was awarded the nobel prize for economics in 2003 along with his colleague at the time i presume dr. green

durham university of california san diego. finally, our final witness is steve horn, currently vice president for data management integration services for dow jones business and relationship intelligence. he specializes in data integration and analysis of large quantities of disparate data from thousands of sources in the interest of marketing productivity from the resulting information. thank you very much for joining dr. mendelowitz, please. >> thank you. thank you, mr. chairman, senator corker. i'm very pleased to be here today. as a representative of the committee to establish financing bring recommendations and findings of that committee. the committee to establish the finance is an extraordinarily unique group based on my three and a half decades of experience in washington.

i've actually never seen anything like that. it is a committee that has raised no money. it's a committee that represents no vested interest. it is a committee where no single member house any personal financial interest in the outcome of our recommendations. it is a committee we have cover our expenses, what they are out of our own pockets and because we never organized as a vital 1c3 we don't even get tax benefits associated with those expenditures. what is is a group of extraordinarily talented and in many cases very distinguished members all brought together by the commonly shared view that the federal government and renu khator communities lack the data and research capability to effectively monitor and regulate systemic risk and for that matter effectively monitor and regulate financial institutions

in the markets. we have come together and to propose a solution to that and adequacy of federal government capability. and that solution is the national institute of finance. we view the national institute of finance as addressing the weakness both with respect to data and research and analytical capability, and i can't stress the importance of the research and analytical capability enough. a lot of time was spent with the earlier panel discussing data and there was far less mention with analytical keep a politic. the reality is we do not have a particularly good understanding of how financial markets work. because we have never had the kind of stand research effort that would yield those insights. despite the fact there are research departments at large, financial institutions there's a lot of good research being done by very talented people in academia there is research departments of every the three agencies that the end of the

day, the research efforts never had access to the appropriate data or to the sustained funding to do the kind of work that would provide the analytical tools needed by regulators given the challenges that we face today. that's why in our proposal for the national institute of finance we have two key components. one is the federal financial data center and the second, federal financial research and analysis center. and we think the structure of the institute should be set up in a way that ensures that it can in fact play a key role. it would be as we indicated an independent agency ideally. it would be an independent voice on issues of financial risk regulation and policy. it would be independent for several reasons. one hopefully would be free from political influence. secondly it would be free from having to investigate its own decisions and actions. as long as the institute is not a regulatory agency is on tainted by the fact that if it

were investigating itself it would be given an impossible challenge and impossible task if you are looking for a truly independent assessments of what is going on. third, the institute would be self funded and self funded for a couple of important reasons. one, fairness. it is our understanding based upon the research that we've seen and the discussions we have held that adopting the common data standards associated with federal financial data center would produce a significant reduction operating costs on the part of the financial institutions because they would get the benefit it's only fair some small share of those savings would be used to fund the operations of the institute. secondly, given the burdens placed on the taxpayer in the most recent crisis it is not appropriate taxpayer should be asked to pay for it. the monitoring of an industry which has already imposed a tremendous burden on the taxpayers.

and third, there are certain benefits and the ability to compensate the staff and attract folks that go with being funded with not appropriate funds that would make it more competitive. all of this is critical and of course would yield multiple benefits. it would yield substantial benefits in terms of improving the efficiency and effectiveness of the financial regulation. it would reduce the likelihood of the future systemic event. would make the u.s. markets safer and more competitive and reduce the operating expenses of the financial institutions and the kind of standardized data session that would be required would go a long to address in one of the problems governor tarullo mentioned when he complimented on how he was surprised to find the right financial and institutions didn't have a good handle on what their own exposures were and they didn't have ready access to that kind of data. lastly, i just want to say how pleased we are we learned last week that senator reid

introduced s. 3005, the national institute of finance act of 2010. that act is structured in a way that creates the national institute of finance along the way we think would be essential to making it effective and we are very appreciative to see that a legislative measure. that concludes my comments and i would be happy to answer any questions you or the committee may have. >> thank you very much, doctor. professor liechty, please. >> thank you. senter corker i appreciate the opportunity to be here and to again also speak about on behalf of the committee to establish the national institute of finance. i would like to give a little history. the committee established a little over a year ago on a workshop that was jointly sponsored by the office of the comptroller of the currency in the national institutes of statistical sciences. as an academic and professional statistician i was interest in the workshop which was exploring the statistical issues and financial risk and bank regulation.

i consulted some of the big investment banks specifically telling them with issues related to modeling and leaving many of the complicated credit derivative securities that played a part in the recent crisis. i was hoping the workshop focused on systemic risk. but is primarily focused on basil one and basil two and assessing the safety and soundness of the institutions. and focusing on the seeking sound is of individual institutions is important that in and of itself will not ensure the safety and soundness of the financial system. in some ways it is similar to ensuring that a group of cars coming on the freeway or on the racetrack are all individually safe and sound. but then ignore the dynamics of the traffic. for example whether the cars are bunched together they are observing rules are going to fast in a collective group. now because there was a broad collection of regulators, academics and practitioners of the workshop i asked the simple question in my mind does anybody

have the data necessary to monitor and measure systemic risk? and the informal consensus lagat from the workshop was the same consensus i've heard over and over again as we have gone forth for this effort. the regulators do not have the correct data and in addition to get the data they need, they will probably require additional legislation. i spent the bulk of my professional career to the nothing that it's in the systems to go from the dutch information. and i know that just collecting data isn't enough. we have to have the inappropriate analytical tools if we are going to turn that the the into the use with formation to people to monitor and major systemic risk and would not only take more than the data collection that elected more than building the models itself. in my view in some sense it is a fundamental scientific problem that we have to put forth fundamental research efforts in order to people to understand the frameworks to be bought from the metrics and began to get the models in place and then the

data that we need. in some sense i echo the finding that came from the national academy of science workshop which was that we really don't actually know all of the data and we aren't going to know until we have an process that is the fundamental per of the research process. let me listed with an allergy from some of the weather which is very appropriate given the last couple of days. this focuses on hurricanes. when the financial crisis of 20078 hit the regulators and policy makers charge of keeping the financials system safe were taken by surprise. although there were some indications of uncertainty this financial storm hit with the same unexpected suddenness has been weakened hurricane of 1938. the martha vineyard gazette noted that time the tragedy was not of the loss of nearly 10,000 homes and businesses along the shore, it was the destruction of the summer for an entire generation. earlier hurricanes have brought structural response to the u.s. government, the weather bureau was formed in 1870 under president ulysses s. grant with

a mandate to get a of a weather and provide warnings of approaching storms. even though the weather was in place it wasn't able to offer any warnings for the category four hurricane that hit ball dustin texas september 18th -- av comics he's become 1900 and only offered a few hours of warning for the hurricane that hit miami in 1829. by 1930 the weather bureau had better models and had better data but as a "new york times" observer regarding the heard and the weather bureau experts and the general public never saw it coming. i would ask our work regulators and policy makers a better equipped today than the weather bureau of 1938 the rate 1970 president richard nixon greeted the oceanic atmospheric administration with a mandate to do three things, one, collect data to document the national 30 ability and spurred predictive models. never to come develop new analytical forecasting tools and number three conduct essential for long-term research underlie the models.

now the current real time data collection and analysis and infrastructure is very impressive. sycophant and continues to bring substantial benefits to the society and are made possible mainly through largely through the research efforts of noaa. at this point i would like to offer an observation to the question. clearly i put forth our financial markets were at least as important and complicated as the weather. if that is the case why don't we have the equivalent of noaa for the financial markets. when it comes to saving the system, our goal should be brought, expectations realistic and dedication to the task substantial. all the what will take time the benefits will outweigh the cost just as they have done with hurricanes. this concludes my oral remarks and i would be open to any questions you might have. >> thank you very much, professor. professor engle, please. >> thank you.

>> thank you. it is a great pleasure to be here today. i appreciate the invitation from the committee, mr. chairman, mr. corker, mr. reed, is a pleasure to be here. r-tn here because i recently co-authored a report of the national research council that summarized the workshop on the technical capabilities needed for the regulation of systemic risk. the research council is the operating arm of the national academy of sciences the academy of engineering institute of medicine chartered by congress to advise the government on matters of energy, science and technology. the workshop in its report was sponsored by the sloan foundation and were actually in response to a letter from senator reid. after i summarized the report i would like to give you some personal opinions on the national institute of finance and the questions that were in the call.

the one day workshop summarized came to the following set of conclusions i think. first of all we were all convinced that with better data and better analytical tools the problems of reducing systemic risks were actually solvable. research necessary to accomplish the goal is already underway in both academic and regulatory settings but it is now being carried out with purely market based data therefore does not have access to the full range of information that would be needed to make these models as accurate as possible. additional data collection across the asset class with counterproposition the level of the delegation information would be extremely helpful.

nevertheless, it was clear the meeting many participants were unsure how great what data will ultimately be needed. there is an important question that keeps coming up that is whether the total range of everything that you could think of is required or there is a subset that could be required and how would you select the subset of data that is needed? the first step in the process would be standardization classification particularly of the lt sea contract, and this would be i think a substantial benefit to the industry as well as the regulators if this could be accomplished and it is one of the goals of the and i -- nif.

but even more important as allen said a moment ago the and the data were the models because the data alone will not tell about risk. it will not tell about liquidity. it won't tell about bubbles and other features necessary in order to understand the risks that face our financial system and so the analysis phase extremely important as well. so, that concludes my brief summary of the meeting, the national research council, the full summary i would ask be attached to the record. >> without objection. let me say a few other things in my remaining time. beta a gathered by supervisory agencies is already being used in attempts to try to calculate and evaluate systemic risk. the data however is often

available as asked basis in other words it does not flow regularly to the agency's. they need to request it from the agencies they supervise and this gives them on the partial picture in any case. there is additional data up with in the clearinghouses that is available to the regulators but again, regulators cannot get this on a regular basis and this difficulty with sharing it across regulators risk reports by financial institutions on a daily basis and this is the firm not only the risks of the system and they do not have important counterpart information that we would really want to understand the networks of risk across the

system. sudan summary, regulators to have a substantial amount of information available, but it is not on a systematic basis, and it does not -- it cannot easily be shared across regulatory agencies. let me make just a couple more points on more general topics. it seems to me there is a question of independence of the national institute of finance. i am a supporter of the proposal for the national institute of finance. the idea that its independent organization is important because it needs to be insulated from pressures from corporations and government, however this independence could also be achieved if it were housed i believe within regulatory

agencies were already independent in that same sense. there could be substantial cost savings from such a location of the nif. the international effect of this are extremely important and the location of the national institute of finance what necessarily be very important that it be able to collaborate and share data and analytical tools with sister agencies around the globe otherwise we only see a partial picture of this financial system, and then one final comment. the security of the data is extremely important to preserve what i think that an ultimate goal would be to make as much of

this data in a delayed and abrogated a form available to the public as possible. transparency and financial target's is a great supplement to the regulation. it's cheaper and it may be more effective in many ways than much of the regulation we consider, and so an ultimate goal i think the national institute of finance would be to disseminate as much of this information as possible, and that would require congressional guidance. >> thank you, very much. mr. horne, please. >> thank you, senator reid. senator corker, thank you for spending time with us. my name is steve horne, vice president for dow jones as the senator introduced a year earlier. i spent over 30 years building very complex databases and transforming highly complicated data into usable information. i have testified many times over the last year on the impact of

the financial meltdown and the need for the comprehensive analytic database is to capture the appropriate real time information necessary to prevent waste, fraud and abuse of the act and real time i think was discussed earlier including those of the t.a.r.p. program to show the people the money is being used to read it is s. 910 with a companion bill passed for the house h.r. 1242 by a vote of 421 to nothing. these bills have been strongly endorsed by organizations such as the u.s. chamber of commerce, omb and center for democracy and technology. using the same basic infrastructure of the database that would be created under the legislation that i have described, we had dow jones identified over 400 leading indicators that when used together can identify potential systemic risks within the financial system but also about to add other parts of the economy which expand upon what

our esteemed presenters presented today and the challenge is to combine the disparity into a structured data base to be about to make informed decisions and judgments about the risks that are inherent to the system. systemic breakdown is the impact individual geographic markets in this country are caused by a combination of factors including unemployment, bankruptcy foreclosures come commercial realistic failure and other factors. for it simple, in las vegas a huge influx of different socioeconomic groups moved into the market in the past ten years. one of these groups is retirees and win financial market occurred these americans for most living on fixed incomes, savings, retirement investments and social security. they bought retirement homes with either cash or mortgages that were smaller than many but still incurred new debt. over the last three years the income from the year of retirement accounts would negative three it had to dip into principle's the only way to gain cash. as for the for pushers generally grew around them to retirees so

the value of homes decrease in half as well. those who have mortgages were now upside-down, those who did not solve a major investment is but a lifetime building dwindle in value. now this in decisions based in much more difficult situation to be the major portion of the principal on they cannot afford to live on their fixed income and may now have to go back to work. las vegas 16% unemployment does not bode well for anybody looking for a job. the odor of the new mortgages are difficult to get. reverse mortgages are an option because the reduced availability of the programs and the combination of the factors shows how the market for the retirees in las vegas is in a systemic failure right now. so i'm expanding upon the concept of the systemic failure to talk about the market as well as the financial systems support those markets. and the example of this process in the statistical terminology is the complex industries. if we can integrate into an actionable data base regulators

to quickly implement surgical solutions that will apply the appropriate programs from this to the serious problems. the database can be applied for potential systemic failure of the commercial real-estate market that has been highlighted by the congressional oversight board report that was issued just two days ago. in addition we are currently observing the markets of north carolina and tennessee that are at risk of systemic failure. the proposed database and place the government would be in position to better confirm, quantify and tackle these problems collectively. unfortunately the data is in disparate systems that cannot talk to each other. the value of the database that this post and s. 910 is in its ability to combine and analyze this data to predict and prevent systemic risk. the transformation of the data is neither easy nor inexpensive. however the implementation of the proposed database will save significant taxpayer dollars in three ways. first of more efficient targeted resources and serving the areas

in the greatest need. second by enabling the government to ensure the appropriate actions are taken before the systemic failure occurs and feared by helping prevent waste fraud and abuse of the taxpayers' money this shouldn't create additional security concerns. the secure methodologies under the act are in the contractual controls for the use of the commercial data are sufficient to protect this information. in addition to language included in h.r. 1242 that passed the house provides either greater protection for the nonpublic data. the system being proposed is designed to expand to cover the global data although some of the data from overseas may not be accessible due to the loss of specific countries. other international data is in better shape than our own and can be built in to eckert and politics systems because the early adoption of the technology by many countries. in summary data technology exists today to a quick financial regulators with tools necessary to monitor systemic risk. the only thing lacking is the

government action. i want to thank you again, senator reed and senter corker for your time and attention and i'm happy to answer any questions you may have. >> thank you durham, mr. speed. thank you, gentlemen, for excellent testimony. let me begin with comments you made, dr. mendelowitz, it is difficult to review objectively you're own decisions and actions. i think that is a very strong role in every type of human endeavor and particularly in these endeavors and that are deciding strenuously for some type of independent agency. you can also factor in there are particular cultures and agencies that obscure, eliminate and obscure analysis of the data and again i wonder if he might comment on this issue of independence and i would ask all of you gentlemen to do so. >> could you please turn your

microphone on. >> i'm a little rusty at this. it's been awhile since i've been in this hearing room as a witness. senator, you highlighted a handful of critical things associated with the nif proposals and independence of those essential ones. if someone has control over the purse of the nif, they are not independent. if the nif were to have to investigate its own actions, it certainly couldn't be unbiased and so we feel very strongly that this is absolutely in an essential component and no matter how and where the institute this place or structured unless it has those essentials independence safeguards it can't be effective. it's one of the reasons why we propose the director of the nif be a presidential appointee, senate confirmation with a fixed term so he or she would not serve that the pleasure of the president. and it's interesting because not

only is this independence critical with respect to the backward looking past decisions, it's also critical sort of going forward. one of the reasons our proposal includes the fact that the nif would not have any regulatory authority except to said data standards and compel the provision of the data is the fact that if the nif not only had to do the analysis and act on the analysis its ability to report clearly its findings would be compromised. the example i like to give is a provision in the law that i was involved with a number of years ago which requires the treasury department to make an annual report to the congress on foreign countries that manipulate their rates for a trade advantage. those of us who at one time or another followed this issue know that over the years a number of different countries have clearly manipulated their currency for trade advantage where there is

ample evidence the most obvious example currently is the value of the chinese are and be and despite all of the evidence that has been there i don't believe the treasury department has ever been able to conclude to report to congress any country was manipulated from the currency advantage. with the case of the system of regulation, i have to say if a systemic regulator took the data and analysis and use it correctly and acted appropriately that regulator would only be subject to criticism because if he is successful or she is successful we would never see the next system event because it would be prevented by the actions of the regulator definitely will have taken profits away from someone and slow down the good times. if a systemic regulator the nif had rented for responsibilities that leads to conclusions the time would come to present

conclusions publicly and i could just hear the wheels turning in the minds of the director and he or she might say gee, i don't know if we release this, if i act on i'm going to get a lot of criticism but we a little while and see what happens, so the answer is whether you are looking backward or looking for work or looking at budget issues, whether you're looking at the position of the director of the institute this issue of the dependence is essential and critical to the ability to do its job. >> thank you. your comment, there is a similar relationship with cbo that has a degree of independence from us. sometimes we appreciate, sometimes we disparage, what i believe that director is appointed for a term of five years and serves independent of house. they've proven that the last few months rather aggressively. does anyone else on to comment on independence? professor?

>> i would be happy to. i will echo what allen said, dr. mendelowitz, about the importance in terms of political pressure that the institute is able to act in a way that it feels is in the best interest for the country. i have five reasons for being here, joseph, jacobs, matt, tom, my five boys, i want them to have a seat secure financial system that gives them the same opportunity as i had when they grow up and get into the real world and start providing for a family and i think you need to have somebody that has the ability to speak the truth in the middle of a crisis or in the build up to a crisis and can have the protection. there are two rules to think about in terms of system of regulation, one is advisory, sea and understanding the risk and speaking about them, the second is the actual regulatory implementation, the actions you might take in terms of how the capitol requirements for the institutions themselves are

regulated and i think it is important to separate those and make them the national institute would do that. the second point you want to consider in terms of why you want to keep the institute of finance independent and want to also have somebody of high stature involved is a presidential appointee who is going to be able to search malida with the president of fixed term is that if there is a crisis again that does happen in the national institute of finance is in place all eyes will turn to the national institute of finance and it needs to have absolute credibility. it needs to be like the oceanic atmospheric it ministration when it speaks it isn't speaking because it has political agenda because it has to worry about whether its budget this spring to cut or not cut it is speaking because it is trying to serve the best interest of the nation. >> i want to invite the other panelists to comment also put one other factor that strikes me

is it goes to your point about the prize, and if the analogy with the hurricane at 38 plus -- on will vara with. it seems very compelling. but part of this was this was never seriously discussed at the national level, this meeting the growing housing double, the national the growing derivatives trade from the notional value of x to to hundred times x. and as a result, it got lost in the shuffle and i think one of the purposes of having an agency like this is to get critical topics on the agenda of congress and the regulators and then it is our responsibility but if you don't have an authoritative institution supported by the data doing that then the problem i think you have is the next time it will be something different, it won't be a housing

bubble and subprime mortgages, it will be something we are not even thinking about and it will come up, the regulators will talk about it, i'm sure the said debate internally the housing bubbly and ensure that the occ and everybody did but it never broke off because there was no one charged with saying this is a serious systemic risk or should be considered at this juncture. so that's my two bits. dr. engle and then mr. horne. >> i was just going to say i think an independent nif would be very effective but it think it could also be effected if it is within a systematic regulator housed within a regulator because the system eckert regulator had exactly the same target. and the same goals that both of freest and therefore it would give more of a tool for

understanding which data serious need to be examined, which institutions can be explored for the moment and would have to be studied leader without having that being decided by the nif itself who would not since its responding to multiple regulatory and put but no authority would not actually be able to coordinate those decisions. >> thank you. dr. horne. >> i think the words come to my mind and it's probably what you've been hearing often over the past few months in particular and those are the words moral dilemma and i think this is what it's all about, and again my esteemed panelists here have brought up the concept but i think is a moral dilemma if he were in sight of an agency whose job is both to support the

financial markets in terms of being directly involved in assisting them and growing and expanding and the same time regulating them there is a moral dilemma. if you are in an institution whose goal is to make as much profit as possible the same time you want to stick within the regulatory bounds, you have a moral dilemma so the issue that we have and i can only speak for my company is our goal is if we don't get the the the right we are dead in the water because people will stop buying the data so our moral dilemma is getting the facts correct and there is no moral dilemma we get it right or wrong and if we get it wrong we are not in business very long support of the issue i have assigned to believe there's a need for the and agency inside the government to deal with these issues without having to face the moral dilemma. i believe there are issues that have to be fixed by congress but it's going to take a while for that to come together. in the meanwhile i don't think

you can do and continue moving forward with the state of the economy as it is and the current recall systemic bubbles occurring across the country to occur without the information to release them in the short term provide information about where you currently are today and you are in very many cases at a point of stone chisels and negative i might say from a the standpoint turning it into information and comparison to where the commercial market is and the commercial sector is in terms of managing their own information all the way have to say many of these companies as was mentioned earlier that i know of personally because i worked with them in building these systems are now all of a sudden spending hundreds of millions of dollars revamping their own internal risk management and analytic systems including probably all of the top 20 banking and investment

from organizations have incredible plans moving forward for building their own infrastructures which in the long run the government action as relative to what should be done in terms of capturing this data will probably improve their capabilities and therefore improve the trade of information and exchange between the two parties. but again i think you have a long run situation where you need to get away from the dilemma in the short run situation which is you've got to get the information in the hands of the people to do something about it sooner rather than later because there's other bubbles in the horizon that can pop and unless you know they are happening and understand them and on less to spend less money than just throwing it up the whole market you spend it at the appropriate places and are going to have greater push back from the tax payer and having the tools in your possession to be able to do the things that he wanted to. >> thank you, each of you, for outstanding testimony.

something very appealing about the presentation which is, and we thank for spending so much time in the personal office talking about, i know senator reed fills the same way. there's a piece of that's almost kind of eerie feeling on the other hand it's sort of the chaos of the market system and the companies you're talking about, mr. speaker, investing the money to figure beltway's of giving one-tenth of a point off at the year taking advantage of anomalies the excessed and make money and i mean that in a positive way and then on the other hand we are talking about professor liechty creating models if he will treat you referred -- to talk a little bit about noaa, and noaa is an interesting analogy accept that noaa is sort of talking about what is going to happen with the

weather and there's nothing you can do it's just going to happen. on the other hand you're talking no setting up models to keep anomalies or huge systemic risk of occurrences from happening and i guess how do you when you're designing these models keep yourself from interfering in this chaos that can be positive for actually creating self-fulfilling prophecies in ways by virtue of the model the you set up. >> that's an excellent question. it really is. it comes to the heart -- this analogy breaks down when you think about the financial system because it's not a bunch of pressure systems that you can model. it's more complicated in that it is a game. a very large scale game and i did give you borrow from the general scientific tradition the first thing you try to do is to understand and explain.

the second thing you do is try to predict and then finally you see if you can have any level of control over this kind of progressive improvement that happens in your ability to gain scientific knowledge and understanding about the system. i am not sure how far we can go in terms of that path. i'm certain because we haven't gone down that path in the research cents. but i think there's a lot of things you can borrow because it is a game and if we began to study from a number of different perspectives and build a competing set of models -- i want to just kind of echo governor tarullo said and professor engle that you want to have this independent, you want multiple people contributing. you can take for example the her can model approach. there's not one model used in model hurricanes when they look at hurricanes, the is a collection of computing models but giving multiple set of perspectives about how the

hurricane is approaching and the impact. now what we potentially impact the national institute of finance or regulator potentially impact the path of the economy if the interceded in certain ways? that's a very hard question for me to answer. i'm not sure but i do believe we can start to find answers to those kind of questions if we set up this analysis and at least if we do more than we do more with the weather and begin to understand where there are serious risks and potentially prepared ourselves better for those types of defense are occurring i think we will have made important progress in this arena. >> if you are sitting up models to try to ensure that is systemic risk does not occur and information is being made public, do you not automatically in some ways affect the economy

or at least financial markets? how can you not do that if that information is being made public? it seems that is self-evident that is going to occur. >> i think for the -- when people approach this -- i'm sorry the financial markets -- they approach it from a statistical perspective even though it's a bunch of individual agents interacting with each eckert it's too complicated to motley effectively. there are folks at los alamos and dissimulation steady in tokyo that ibm is involved with were there during asian based modeling but typically used to sit back and look at the aggregate summary said a model from that perspective. we have a lot of information that's already about the financial markets is widely disseminated and we'd be talking about adding additional information on top of that. i think when you start to begin to have problems or people began to influence is if you have

people doing the same type of behavior is still lots of people are making mortgage backed securities and selling to pension funds and others similar behavior happening at the meshaal comes through and everyone has to respond in a similar fashion. in some sense the model collapses down to a simpler system because everyone is forced into a corner into where they will have to be saved. and for the most part i think getting more information and trying to model isn't going to have that kind of impact because i don't know anybody will have the ability to nudge the system one way or another but hopefully but we will find is that the system gets to appoint either in essence bubbles can be collapsing and what might trigger the bubbles and how you respond as we to be carefully thought out and it has to be carefully thought out by the systematic regulator and other regulators when the of the information they want to talk to banks quietly or make a public announcement. these are things you have to think carefully about and i am not prepared to lay the guidelines out right now.

>> you're not thinking about creating a world full of an elevator music or anything it would help a degree of chaos in the marketplace. >> would be very complicated. >> professor engle it sounds like you to respond to this and you are welcome to do that but you also mentioned about making information available and just for lehman like myself a different loveless far as mathematical modeling and all of that, what would be for the other senators to london, staff, whatever would be the first three pieces of public information you think that might come out of an institution like this would be helpful for people to know? >> what was going to see before is also related to this. the system that regulator is going to have to use the incentives in the marketplace to

achieve his goal. he's not going to be able to just legislate one thing or another or the use of the capitol standards, capital controls or way of trying to nudge the institutions to take less risk oregon change their behavior in one way or another. systemic taxes are very much designed to encourage institutions who are have systemic risk to avoid the taxes by shedding the sestak risk if you can define and defies the tax in that way. the reason i think making the data public is useful is quick to easily seen in the otc derivatives market where every time you enter a contract you

have a counterparty and this counterparty has a risk they will not perform when the derivative turns out to have the value you want it to the and your counterpart in an outperform -- counterparty man of performance we have to consider the extra risks and it's hard to assess the rescuer counterparty is going to be there if you don't know much about the counterparty is doing. and so, if we had more information on the health of counterparties in other words how much exposure they had to the kind of contracts then the prices of the same deal with two different counterparties may not be the same. there'd be a risk premium and you could decide if you want to take the week counterparty or strong counterparty and would get a different price in the

contracts. the way you would understand what rescue were taking and the week counterparties would not be able to amass the big positions. the poster child for this exit is a aig and investment bankers and final users but a great deal of these contracts and insurance products without recognizing actually they should have gotten a big discount getting them because they were not lucky to pay off because aig had such a big position. so if you could make public information on the basis that set for each counterparty how exposed -- how many positions as the country party have maybe a

week ago on these kind of contracts this book of the market a way of evaluating the risk that they were taking with each counterparty. $#úr

be useful to somebody who is looking at systemic risk. >> i am not an expert but i have spoken to a number of folks and it does speak to the fact you really want a institution to be wide of high stature of high quality individuals to build a world class institution the way you would start out of course, is take existing data in the marketplace many of the ways with other parts could be fairly straightforward.

i believe within 18 months or two years to put together preliminary reentry maps you could see things like aggregation in the low hanging fruit everybody has the same way and you have outstanding things like that a key example using yourself using counterparty information on the repository and other clearinghouses. i would see them will place stage, multi-year so a focus initially as to what can you give from the existing data? he might be able to borrow from existing models then have longer-term more sustained research. i guess it will take six or eight years to see yourself

walk all the way up where you have very fine grained view of the entire network and have large-scale simulations to understand different types of shocks might work through the network and the critical plants and how they may have failures with liquidity crisis. but i would division within 10 years a fully functioning institute and very viable information. >> thank you very much. go ahead. >> senator, i think the difference between what we are talking about, again come i will not speak on their behalf, but they're really talking about building a very structured approach toward managing

risk of a standing back and building models that can take all sorts of abuse and looks at this problem and over periods of time be able to ascertain how to best approach the problems from the academic and regulatory approach. what we're trying to do that is different in the short-term that has a flat -- foundation for the platform what the end af is trying to do i don't know the pieces will to believe it together but we have the possibility, the data that is available right down today is integrated into a platform where regulators can start looking at the government's rules in place today and start figuring out just as compensation analyst do, think of the compensation analyst inside a large corporation, you have a huge sales force that

will say i will break every rule icahn and to make every amount psyche of. but some call up too eight -- risk has probability of but then they say i am not responsible so maybe i should not. so that you get into all of these different types of analogies of how you should compensate people and defend people to move forward. this horrible dilemma is the same problem. you brought up the issue to the professor that couldn't you influence what the markets do? i am thinking it is better to use said near short-term dated that we talk about now to try to help with some of the governance and regulatory rules to get people on the same path and direction.

looking at specific pieces of a lot today, maybe it may be and conflict. the uptick lot i do not know how familiar you are but chretien issues out there, that is a major driver of systemic risk as a way to add value if you would take that out you may find write-off the back there is a factor to be reconsidered. from a government's perspective if you can do these things and the models become incredibly valuable over time because there really start showing the dynamics of the interconnections of a potential failure within the market but in the near term, you have to use some of the information that can be converted to figure out how to manage. i am not a big believer of big government but better

governance and but i believe we got right now is a lot of broad stroke rules that don't allow for the surgical precision to attack the problems where they exist and you have the ability to do so. that is from what we have today and we could have been going through the process of cutting out certain things that make no sense whatsoever am putting some governments back into the process we can be on the same pageano taxpayers do not ha gillette -- dilemma of with each other. >> thank you. i would like to go back 21 of the issues about interfering in the market. we rely on financial markets to locate capital because they do it efficiently and we know from the history

when this society relies on command and control function to do that fails but to do the job there has to be a number of conditions meant and as you well know the markets can. the challenge of the financial markets this is clear the most glaring example of it, the financial markets are prone to sudden cardiac arrest. i want to take credit for that but that is not my analogy but the professor at m.i.t. that government intervention was needed to do with the equivalent of a sudden cardiac arrest. maybe extending the analogy is a bit much but there was the time when you suffered

sudden cardiac arrest there was not much rather best doctor could do for you now we have a dramatic intervention so now you stave off seven cardiac arrest with long-term care and exercise a little healthier. you also that canada to contribute is the equivalent of a healthier lifestyle to reserve from the financial markets. >> thank you very much. i have gone on for a long time to you have additional questions? >> ahead. i have a lot of questions. we spent a great deal of time with each of you and i

am sure court me and my coat and other is will talk with you over the course of the week. you mentioned housing in north carolina and tennessee maybe to purchase a home but i wonder if you would tell me why and what you fed around. i would not be a good senator if i did not ask. >> sorry i did not put it in my speech but i thought it would raise the question of. [laughter] we look at leading indicators part of the issue they are in a separate system. we looked at the housing system and have virtually every parcel identified we know those are in foreclosure and underwater and those sitter delinquent on their mortgage payments. what of the key ratios that are leading indicators is

the 90 day to think with the rate on mortgage payments. relative although across the country if you look at the church, the states like nevada, arizona and florida have a huge market viability from market problems are market viability issues from being upside down on their mortgages. in nevada seven out of 10 homes are indicative value relative to their mortgages. in tennessee and north carolina you are about the national average of 33% of the homes in your state. by relative to your peers, and a 90 day delinquency rate has increased dramatically. that shows this leading indicator out there that says people are not able to pay their mortgages.

then i look at plant closings and phil years. that does not mean they go up but a leading indicator there would be a possibility it would go up. so i start looking at the leading indicator to unemployment and bankruptcy and retail in particular you heard from the congressional oversight panel panel, particularly in the retail sector is up and that is also a leading indicator of potential of not having cash because potentially long-term unemployed so they start to become delinquent on bills such as mortgages. we don't have a database "c.s.i." cannot just run the model then come up with every county or congressional district in tennessee and tell you the factors of that model for the potential for system a press corps fell year.

but from leading indicators cover these pieces of information tell me there is potentials for problems. particularly bad day the day delinquency risk factor. we wait that heavily as a leading indicator people are having a difficult time paying their bills that is what i bring that up and say in those two states because relative to other states that are in the same range, they don't have the same delinquency rate problems that those two states are facing. >> i almost wish i did not ask. [laughter] thank you. >> but i will say that example i think first of all, thank you for your leadership and trying to figure out a solution. that answer irrespective of the not good news related

indication of some of the kinds of data that one might generate an be useful even though you are looking at different types of financial instruments and i appreciate that the. >> thank you for your leadership on this. and for the challenges facing us prevalent to ask any more questions about specific localities. not to be disrespectful but given your access, when did you and your colleagues first get a sense there was a national housing problem? >> i have known the we have over 900 data part paris. one of the largest is the largest collector of steve

come with tax and mortgage property information in the country. when i started to analyze their data and compare with the dow jones individual market segments and tremendous volumes we have terabytes of information. start to look at various factors be called trigger eban's negative a when action taking place that have adverse actions, we saw this occurring frankly before 2007 and saw the bubble before the bubble and could tell the some of these were starting to happen but this is macro data. looking at the specific segment of the database they have not brought it to gather with the bankruptcy findings and commercial real

estate information is separated. but this information and the individual silos prevent us from being able to do do except middle of first to bring the data together in a way to build wheel models of the symbiosis or systemic issues occurring between all of these factors and the market place. they occur within an institution what i think we are talking about is the major source of the groups or jpmorgan lowered aig are extensive and we understand has that counterparty risks are difficult to track it if you don't have access to all pieces of information we have large amounts regarding derivative data and all sorts of different financial instruments but all these segments.

not all of it is available. part of the issue is the investment that needs to be done two build the database. >> we have taken a great deal of your time which is extremely viable, but i don't sense there is a mutually exclusive agenda. i think we talk about the same thing which is building in the short term, met eight analytical capability to help us but in the long term to get to the point* where it is not prediction but maybe some point* and fall. >> senator. the discussion of the housing bubble gives us the insight into the need. well back in 2007, basically

, five years ago we start to predict a major credit in the housing sector. and it was really based upon looking at a relatively small datasets that led to what was happening in the housing prices or income on the default rate on mortgages for what was available data. what is easy to predict a major creditor event because of the widespread nature of home ownership this with the two fall in consumption. >> that is the easy piece of it. they were using the standard model. and when they do you do not see it. what i could not understand

was out what was happening in the housing sector would lead to the collapse of the financial sector. that kind of data we are talking about collecting that would provide that inside. brother is no substitute alternative or a sharp cut at the end of the day you have to know where the concentrations and other risks are. you have to know the nature of the intertwined network of financial firms and obligations and what they are. it is a combination of risk and the exposure of the network that can produce a domino effect of multiple failures to create a systemic risk. it is one thing to see a macro economic crisis but something entirely different when it comes to understanding systemic risk to flow from those concentration. >> think you all for excellent testimony.

thought-provoking and to advance this issue i think we've the pier we need better analysis and if we down to achieve it in the next several months the bubble that might be out there percolating will once again catch us by surprise. we should not let that happen. thank you very much. the hearing is adjourned. [inaudible conversations]

>> let's do one announcement and the week ahead before we get started. hall president obama called

president mandela of this morning on his 25th anniversary from the release of prison and he was very appreciative of the call. to the week ahead, sunday, and nothing tomorrow. he will travel to camp david in return to the white house on monday. >> [inaudible] i don't know. i will get to that. i will inquire but i assume it will be up there. tuesday he will to were and this is a jobs training center in the cavalry's gen. on wednesday he will meet at the white house from spain. on thursday he will be with the dali lama and then

travel to denver colorado where he will deliver an event for senator bennett then travel to las vegas nevada. friday he will hold events with senator reid and las vegas to have discussions with citizens and business leaders about working together to address the economic challenges facing nevada and the rest of america. he will return that afternoon and i will find out your pool time on sunday. [laughter] i do not believe idea of those are fund-raisers but i will double check. no. he has nothing else it could be this weekend i don't have

the date. >> guy 12 ask about the jobs bill and the senate does the president's support was senator reid and the bipartisan bill? what is the stands? >> let's understand a couple of different things, one, i don't think there will be only one piece of legislation to encompass all of the ideas members of the senate have to create a better environment for hiring. that will probably take many forms. away never thought it would go through in one package. senator reid legislation i would not characterize it cut the tax credit is the

schumer hatch a bill that has small business expensing the reauthorization of the highway bill, and the extension of build america bonds. i think this is just one of many vehicles that will likely go through the senate during this process. i think there are a number of ideas that will garner bipartisan support that are not in the initial phase of conversation. obviously she will move. but cobra health care extensions for the unemployed and with that sba lending program there are a host of things that will garner bipartisan support including what senator reid

will go through the process. >> is it as it stands right now? >> good jobs tax credit is akin to what the president had in mind. i think if the structure investment or something that we talk about come with the expensing provisions, all of which the president has. >> what if the way this happened there was a staid released with the senate bill than five fed day's end it was not? >> the legislation that senator reid will move when they come back to town will garner bipartisan support. there are things that democrats and republicans alike agree on and need to

be in the mix, as some of which we just went over there will also garner bipartisan support. again, i don't think it is just one vehicle or just one chance to get bipartisanship but a series of ideas that all of less than three -- at agreed to be put forward. >> this might garner bipartisan support. did the white house see this coming? >> i don't know to the degree which senator reid i see he made his decision before caucus but i do not know. >> speaking of bipartisanship are you encouraged by what appears to be growing bipartisanship with financial regulation? might that be finished by

summer? the you have any sense of urgency bricky flying to the financial protection agency. >> there are strong signals on a number of fronts that have disadvantaged is whether with the financial regulatory reform which the president believes is a big priority this year. one of the points discussed in the bipartisan meeting on tuesday was with senator mcconnell about moving nominee is. with 63 being held for more than a month, a 10 times the number held for more than a month at this point* in president bush's administration. the senate passed nearly 30

by unanimous consent last night. whether provisions to help small businesses, whether move baying qualified nominees for word, i think we can see definitely the benefits to working together. certainly the consumer, i ain't the president still leaves it is a great priority to have the independent authority to ensure that consumers in this reform are protected from the type of loans we have seen happen that have led to massive foreclosure. metrics with credit cards we have seen in the past with

legislation that the congress improved and the president signed. the president continues to be a very strong supporter of that function. >> does that agency have to be a separate entity? >> i do not know the nature of the different proposals, this is something that would need to have independent authority. think that is what is important and that is what consumers want. important for their protection. >> does that indicate there was a local room? >> i think what the president will greatly resist is the notion that the protection of consumers is unattainable and financial reform. >> been without knowing what

exact vehicle might come in a bipartisan proposal from the senate, obviously be a good look at this assuming strong consumer protections and authority was in the legislation but i did not want to get ahead of that proposal and what it might look like. >> just asking if the opinion of changing the rules if the republicans could not demand the cloture votes as often. just looking if they throw support behind the dick durbin go and also harkin they would not be required. >> i don't know if we had a

conversation with senator durbin. our no there has been great frustration on either side on capitol hill or hear about the sheer amount of times we knew that cloture had to be invoked. we've certainly invoked the frustrations relating to noncontroversial legislation and nominees. you heard the president discussed said gsa director that has been stalled for nine months. had to use the cloture but then she was it approved 96/o. you realize this is a rule that is being abused. i will find out. >> to follow-up.

>> the reason given by majority leader reid for scrapping the effort much to the dismay of the other senators, there were protest from seoul more liberal members of the senate. isn't this kind of bipartisan move those four senators have been working on exactly what the president has been talking about and isn't terry reed's move to scrap it regardless, isn't that contrary to what the president is talking about? >> i think we certainly support working in a bipartisan way to get these things done but whether the vehicle is the four items

that senator reid has morale including unemployment and kobren extensions, whether it includes extension for sba lending, a tax extenders, a disaster relief, those are discussions they will have. believe many of these will be implemented and voted on and approved. >> you like this of fort they have been working hard on this ever but then senator reid because of apparent concern from liberal democrats, scrapped it. that had to be disappointing to the president. >> i do not think first of

all,, i do not think the first piece of legislation is the schumer negative jobs tax credit. what legislative vehicle many of the bipartisan ideas, whatever it moves on, i think it is in some ways not quite as important as demonstrating we can work together. it is the centerpiece of a bill that will move when the senate comes back from recess. but the appropriate message but that washington can work together to create an environment than incentivizes hiring more workers.

that this will the president has talked about. >> but then bipartisanship cannot just we adopting one persons set of ideas. ien tristan hatch and schumer were working together but that was the democratic idea ultimately with the president's proposal. >> i think the hiring tax credit is a proposal that the president offered. i am not sure you would consider senator hatch somehow to be overly sympathetic to the white house view on these issues. that is minus your way of saying if you still look at what is in this legislation and what is not but will ultimately move, i cannot

imagine a scenario where extending unemployment benefits for those that of work and have them expire will not garner bipartisan support. extending health care. >> but a jobs version run their president was asked about mitch mcconnell coal coal -- with energy and the president's response of course, they like that those are republican ideas we're offering in the name of bipartisanship. here it is the reverse harry reid taking of the democratic idea. >> you think of lobbying businesses to grow to write off their expenditures is a democratic idea? do you think the highway trust fund extension is uniquely democratic? i think if you would break the four components of that

bill out individually each of those would garner strong bipartisan support. i think in some ways we're over reading some of this peake says i personally believe the four components of this bill and several components in the bipartisan bill not in there rebuild will be bipartisan. i don't think any of the radius i have listed today are uniquely democratic ideas that have dispensed with republican and ideas. >> could you set us straight on it tryout of khalid sheik muhammed will be. >> obviously the decision was made appropriately what with conjunction with the

attorney general. but obviously there are efforts on capitol hill through legislation to restrict the they're the type of or the venue of a trial for khalid sheik muhammed and his co-conspirators that involves the what house and ultimately the president. since this effort has moved from strictly a justice department decision to something in the every now the president is involved. >> he is not in that room with the big mac picking a location. obviously the president and members of the white house staff have the equity given what is going on with capitol hill. >> you can read your note

first. is it valentine's day? [laughter] >> i was wrong. i just got word that pay gil limit will be signed today. that is not on my no. go ahead. following up on the muhammed question when katie couric asked the president have you ruled out trying him in new york city he said i have not ruled it out. wasn't he's saying there that he is essentially not the decision maker? >> he is the commander-in-chief. he said he had not ruled it out.

that we would take into account to the logistical concerns brought forth buy new york city and those would be taken into an account before a final decision is made. >> again, i think you'll have strong equities in this decision and you will hear from a lot of different people. >> [inaudible conversations] >> i don't know but it was not decision-making. >> he will be hearing from a lot of people? they come to him? >> no. he will hear from a lot of people will be allowed in a much larger process. >> again, because congress has become involved in this

and legislation could restrict the venue and type of trial, the white house is more involved. >> wasn't that trying to try them in the york with a different place the plan from the beginning. >> i will remind you some of the people were opposed to the trial were supportive of the child. but we will take into account. now those individuals have a cost of the travel is one thing and it will be taken into account the. >> in the end it is also about bipartisanship and

tone but by doing what he did yesterday having four members and people are saying what is wrong? and then we realized what was wrong. he was about to slap them in the face or as chuck grassley said pulled the rug out from under the effort. >> >> that is the all for reading of the job creation legislation, was the small-business hiring tax cuts. that is now a hallmark of the legislation from the senate. hears july think is most important. are we going to get these individual items not in this legislation passed to benefit the american people

or in a bipartisan way? i think the answer to both questions is yes. >> but it is not of people are actually working together. >> a think you'll have bipartisan votes because you are working together. other presidents example example, that he used the other day when you just have the adr that appeals to one party on this side are just the other side. investment investment is not that built america bonds will have bipartisan support. the hiring tax credit written by republican and democratic senator bayh definition will have bipartisan support but what is not in the bell is the

extending tax cuts will have bipartisan support including the r&d which is extended it year after year. >> that will burner bipartisan support because it is not an original idea. >> the white house is playing hardball tactics. >> i think you are greatly over reading and oversimplifying what is going on. >> day think it was a hardball political tactics. >> i don't see it. [laughter] >> at the end of the day, is that the position of holding the muhammed trial in court?

>> that question proposed is a fair trial can be held in military commissions. he said no and a new openness. >> understanding this that military commissions had traditionally ben something that faced through the supreme court, a constitutional problems until this administration working on a price price -- process reform bill that. >> do appeal the military commissions are inferior? >> no. i think the reform of herds brought about -- efforts brought about is the type that would withstand supreme court scrutiny.

>> [inaudible] >> going back to what i said earlier, there are a series of things being looked at most appropriately the security and logistical concerns of those in new york as a decision is being made. >> are you involved in the consideration of whether to be a military commission or interference with the justice department. >> i explained by the president is involved in how he will take part. >> the following up just if there were military commissions something you were considering you said there is a series of things being looked at i would take at as yes. >> i would just say without eliminating all the factors involved, a first and

foremost, as i said before there are security concerns come of logistical concerns what that means for the downtown area that has to be taken into account. the president said last week he has not ruled out the fact, lead sheik muhammed would still be tried in a federal court in new york. first and foremost, that is what the president is focused on. >> other options? >> focused on the decision at hand. >> kind appointments you talk about those who have not had a chance to come up for a bow to. says the present view like becker who did have a majority but not supermajority?

>> the president has nominated very qualified individuals for the positions he has nominated them for. we hope and believe after the discussion of the president has with senator mcconnell on tuesday it is clear the president heard that enacted and saw the statement last night. he will not foreclose if what continues to stall, if the stalling tactics continue, he is not ruling out anything. of the best way is for the senate to work through the process. >> it is a possibility? >> anybody the president has nominated but has not been approved, they would

consider. >> [inaudible] >> i am not going to go through a whole host of different scenarios. >> the sap president believe that is what was in mind through a provision to give the authority to circumvent the nominees? >> i have not spoken aired constitutionally with the president on his theory. the practical measure, and again, understand what the senate did last night to move a series of nominees that they thought were qualitatively and quantitatively different at that point* held in the bushes administration is still that way but there are 63 but there was half of them instead of a 10 /1 ratio we have five /1. the president believes that is an acceptable number.

the best way to deal with this is have the senate work through the process to vote up or down. >> do you remember is senator obama and jack did win senator reid kept the chamber in session during the last years of the bush and administration said he could not make any recess appointments? >> i don't. >> one more part. i wonder. >> i never heard of it. >> only 12 percent of those surveyed believe they got a tax credit over the last year. >> i say they called the wrong people. [laughter] i think what happened and what of the things i think

we will go through the bipartisan jobs process is state and local aid. if you look at last month's jobs report the number of jobs lost was 41,000 out of that monthly jobs report. in many cases, you see the importance of state and local aid as bad as budgets were last year they are worse this year. and even as people may or may not have felt what they got from the federal government they may have got something different from the state and local government to make up for a collective budget shortfall among the 50 states after it exceeded $125 billion.

is it part of the frustration? of course. 95% of people working saw their taxes go but apparently only 12%. >> back to the terror suspects, but i'm glad to make sure, what exactly needs to happen before we get a decision? nouri waiting for specific recommendations? >> we're in the process of working through the of many issues, some of which we were dropped off to or the concerns of a trial. >> does congress have to act to restrict the funding? >> it'll think the decision

decision, the timeline is held up by the timing of whether or not the house or senate act. >> where do take a specific recommendations? >> i am not getting into the process just to say it is on going. >> will you favor a military commission trial? >> again. i think some bayonet asked that and this is a process. >> robert what about other countries like india who argue with the terrorist and helping the united states on the global war against terrorism? >> i did not get the last part. >> many people think it

is -- , lead sheik muhammed, i forget the exact date he was brought into custody, it has been a long time. one way or the other muhammed will be brought to justice by these decisions. i don't think you can be any tougher than bad. this president has without going into great detail, take in the fight internationally. two terror suspects. we are going to seek justice, justice delayed by the way on the thousands killed on september 11th

because of the hateful acts of somebody like khalid sheik muhammed. >> of the go back to major. >> on the senate jobs bill setting aside the political question is that large enough to have it a large enough capacity to create jobs? >> and outthink what has the umbrella of a jobs bill will be the only component that the house and this and then deal with in creating jobs. i think extending unemployment benefits is something that is important for those who don't have work and in sustaining their effort to come with that is what they will end up with that the end of this recess, but as a proponent of a series of measures the

president outlined the thereat the number keying this speech at the state of the union or in the budget. i don't look, again, i don't look the administration does now look at what will happen at the end of february when the senate considers these provisions to b.v. end of that consideration dealing with economic stability. >> and then they prioritized over any other issues specifically like health care. >> yes. >> that would elongated the process with jobs legislation in a smaller bill. >> the legislative process will work through itself. but obviously you will have to act on because of

one -- unemployment benefits you meet deadlines to expire benefits. we are pleased with the pacing of this. this was something if you go from the "state of the union" to what the senate will consider a common understanding the house has already passed a fairly big package. you have half of the process done. >> addressing "the washington post" editorial section from former general mukasey i will just read it. >> contrast to what the attorney general suggested it is not centered not some policy in place but it required all of us be treated as commercial defendants