the elements because i was a man in uniform. now have legitimacy through the election process. however it depends on the people of pakistan. i don't want to enter politics and be a part of the fray going on with another person shouting around the place. if i have to do something i have to have the authority to do something and that can be given to me buy the people of pakistan. and if those people want me to do that they had better give me that authority and if i feel they will then i will do it, yes indeed. [applause] >> for the last

question, excuse me, i am sorry. we have the questions in the order that i have chosen. thank you. for the last question, what is your preference for the next up for the united states to take in your part of the world? >> in mind? >> pakistan and the surrounding area. >> in your region what should the united states do next? >> [laughter] the problem in that region there is a problem a conflict in the minds of the people of pakistan as far as the united states is concerned. if you ask a pakistani in the street to there on the taliban and al qaeda, 99%

will say no. but did you ask them their opinions of the united states, 99 percent would give a negative opinion. white is this so? . . [gavel sounding]

>> will the photographers please stand down? the only thing we could see is volcker. now we can see everybody. this hearing will come to order. it is an important hearing that is relevant to the legislative task before us as members know. the senate had been considering very much the question of what the supervisory breach of the federal reserve should be. we obviously done with this in a bill that passed the house. we will now go into conference sometime in april or early may and one of the questions will be the appropriate role for the federal reserve. this is a subject which the chairman of the subcommittee on monetary policy has given a great deal of attention to.

it predicts many of us have felt that the senate's initial instincts were insufficiently recognizing the importance of the role for the federal reserve. there has been some movement and the differences are less than they were. i now believe that we're entering a range where the desire and the need for a bill the greater than any significant individual difference. i believe we are going to be able to make some movement. an important part of this is how should the supervisory role of the fed be structured. we are pleased to have the chairman and the past chairman with us to talk about this. while we are here, i want to make a couple of announcements that are relevant.

i received a letter this morning from our colleague from ohio and from the ranking member asking for hearings into the information that was contained in the examiner's report on lehman brothers. that is obviously something we should do. it is something that we address in our legislation, this whole question of off-balance sheet activity is a -- is important. we lost that week and we are doing make up the days. in april, we will be having a hearing. it will be a full committee hearing because the people involved include some people at the department. we will be having that hearing and we will proceed today with this hearing on the question of how to do the regulations.

i am going to yield back the balance of my time so it will be made available to the chairman of the subcommittee and i will now recognize the ranking member but the driving force here and the member who has put the most effort and considerable thought into this is the gentleman from north carolina. i will not turn the gavel over to him and he has the remaining three minutes to allocate as he chooses. the gentleman from alabama is now recognized. >> as congress looks at ways to reform the country's financial infrastructure, we need to ask whether bank supervision is central to central banking. it is worth examining whether the federal reserve should conduct monetary policy and at the same time, if it supervises

banks or whether it should concentrate exclusively on this macro economic responsibility. it is no exaggeration that the health of our financial system depends upon giving this answer correct. frankly, the fed's performance as a holding company supervisor has been inadequate. in spite of oversight, many of the large complex banking organizations excessively leveraged and engaged in off- balance sheet transactions that helped precipitate the financial crisis. just this past week, the report of the lehman brothers examination was made public. it reports how lehman brothers used accounting gimmicks to hide their debt and mask insolvency. according to the "the new york times,"agencies were examiner's

-- in its headquarters were located in lehman brothers. they were provided desks, phones, and computers. despite this intense on-site presence, the new york fed and the sec stood idle while the bank engaged in balance sheet manipulations detailed in the report. this raises serious questions regarding the capability of the fed to supervise banks. it is not clear that oversight release informs monetary policy. it supervision does not make monetary policy this -- policy decisions better, the to do not need to be coupled. one said that the

responsibilities in one institution is like asking a plumber to check the wiring in your basement. it seems that when the fed is responsible for monetary policy and bank supervision, its performance in both suffers. macroeconomic issues cloud supervisory judgments and therefore impaired safety and soundness. there are inherent conflicts of interest that they may conducting monetary policy that heights mistakes by predicting the supervisors. an additional problem arises when the supervision of large banks is separated from small institutions. under senator dodd's proposal, the fed would supervise 40 or 50 large banks. 7500 banks or so would be under the regulatory purview of other banking agencies. if this were to happen, the

fed's focus on the mega banks would disadvantage the regional and community banks. on this, you and i are in agreement that there should be one regulator looking at all of the institutions. hr 3311, the regulatory plan would correct these problems. it would refocus the fed on its monetary policy mandate by relieving it of its regulatory and supervisory irresponsibility and reassigned to other agencies. by contrast, the regulatory reform legislation passed by the house in december represented the largest expansion of the fed's regulatory role since its creation almost 100 years ago. senator dodd has strengthened the fed even more. his regulatory reform bill empowers the fed to rikki lake systemically significant financial institutions and to --

to regulate systemically significant financial institutions. it creates a new financial protection bureau to be housed and funded by the fed. thank you for holding this hearing. i look forward to the testimony. >> thank you. let me see if i can use some of the chairman's time and my time to frame this hearing in this way. we can kind of get a balanced view of what the folks are saying. the federal reserve has extensive authority to regulate and supervise bank holding companies that are members of the federal reserve system and foreign branches of member banks among others. last year, the house passed

legislation that substantially preserved the fed's powers to supervise these institutions. the senate bill recently introduced by senator dodd was stripped of this authority to supervise all but approximately the 40 largest financial institutions. this hearing was called to examine the potential policy implications of stripping regulatory and supervisory powers over most banks from the fed, especially potential impact this could have on the fed possibility to conduct monetary policy effectively. proponents of preserving robust fed supervision authorities cite three main points to support their positions that the fed should retain broad supervisory powers. they say first that the fed has built up over the years deep expertise in macroeconomic

forecasting financial markets and payment systems which allows the effective consolidated supervision of financial institutions of all sizes and allows effective macro supervision over the financial system. proponents of retaining the fed supervision say that this expertise would be costly and difficult, if not impossible to replicate and other agencies. the proponents say the oversight of the banking system improves its ability to carry out its central banking response abilities, including the responsibility for responding to financial crises and making informed decisions about banks speaking and lender of last resort services. in particular, proponents say that knowledge gained from the wrecked banking supervision enhances the safety and soundness of the financial system because the fed can

independently evaluate the financial condition of individual institutions including the quality and value of these institutions collateral and the overall loan portfolio. third, proponents say that the fed for keeping interest rates too low for too long in the early 2000's which some say puled and asset price bubble and the housing market and the resulting subprime morgan -- subprime mortgage crisis. some accuse the fed of turning a

blind eye to predatory lending throughout the 1990's and 2000's reminded us that congress passed legislation in 1994 to counteract predatory lending but the fed did not issue final rulings until well after the subprime crisis was out of control. other critics accuse the fed of ignoring the consumer protection role during supervisory examinations of banks and financial institutions across a wide range of financial products, including overdraft fees and credit cards and other things. perhaps the appropriate policy response lies somewhere between the proponents and critics of the fed supervision. i have tried to keep an open mind about the bowl of the fed going forward and hope to use today's hearings to get more information as we move forward to more discussions with the senate if the senate ever passes a bill. we're fortunate to have both the

current chair and a former chair who are appearing today to inform us on these difficult issues and with that, i will reserve the balance of our time and recognize my counterpart, the ranking member of the subcommittee. >> i thaink the chairman. >> markets were finding out what could be said at 2:15. they were looking for two words, whether or not they would exist. extended period. whether this process would continue for an extended period. this, to me, didn't change the power and control that a few people have over the entire economy. the economy is virtually at a standstill and immediately after the announcement, billions of

dollars can be shifted. it is a system that i think is not having anything to do with the free-market capitalism. it has to do with the managed economy and economic planning but it is a form of price- fixing. interest rates fixed by the federal reserve is price fixing and it should have no part of a free-market economy. it is the creation of credit and people making mistakes. it facilitates the deficit. congress does not want to challenge the fed because they spend a lot. without the fed, interest rates would be much higher. to me, it is a threat that those of us who believe in personal liberty and limited government. hardly this the process help the average person. unemployment rates stay up that 20%. the little guy cannot get a loan. yet wall street is doing quite well. ultimately, with all of this power, the fed is still limited

by the marketplace. if they can inflate like crazy and have financial bubbles and housing bubbles, but eventually the market says it is too big and it has to be corrected. mistakes have been made. they come in and the force deflationary. congress and the fed does everything to maintain these bubbles. it is out of control. once the change of attitude comes when that inflated money- supply decides to go into the market, prices are to win up once again and the fed will have difficulty handling that. the inflationary@@@@@@@ @ e mno

with. we are going to be talking about how we regulate this risky behavior. you cannot touch that unless we deal with the subject of the risky behavior coming from easy money, easy credit, artificially low interest rates and established principle from 1913 on that the federal reserve is there to be the lender of last resort. as long as the lender of last resort is there, all of the regulations in the world will not touch it and solve that problem. >> thank you. we have about one minute and 30 seconds left goes to mr. sherman. >> thank you. too big to fail is too big to exist. as we examine the power of the fed, it begs the question of the audit of the said. the fed is exempted from audits not only in the area of monetary policy but also foreign agreements. all of the efforts to defend

their exclusion from all that have focused upon how it could affect monetary policy which begs the question, why is the fed demanding an exemption for a continuation of exemption of its foreign agreements from the audit process. it supervision informs monetary policy, we have to ask why the other banks are unwilling to share information with the fed and why economic statistics are not being shared not only with the fed but with the american people. finally, as the supreme court decides that corporations can control who holds governmental posts by spending unlimited amounts of money on campaigns, at least in order to get a particular person selected for governmental authority, they have to convince humans to vote for them. the one exception to that is the fed regional board where

corporations get to select who sits on these boards and who exercises government power without them being responsible to the voters at all. in a democracy, every agency of government the power should be responsible to the electorate. >> thank you. we are fortunate to have the chairman of the board of governors of the federal reserve, the hon. ben bernanke and the chairman of the president's economic adviser recovery board, former chairman of the federal reserve, the hon. paul volcker. we will recognize the chairman and then mr. volcker. >> thank you. i am pleased to have the opportunity to discuss the federal reserve's role and the actions we are taking to strengthen our supervisory

oversight. like many central banks around the world, the federal reserve cooperate with other agencies in regulating and supervising the banking system. our specific responsibilities include the oversight of about 5000 bank holding companies, including the umbrella supervision of a large complex financial firms. the supervision of about 850 banks nationwide that are both state chartered and members of the federal reserve system -- >> will the gentleman pause for just a second. ma'am, you are going to have to take that out of here. you are breaking the rules. you are either going to have to leave or we will have to have you removed or you will have to take the sign out. [inaudible]

>> this confirms too broad set of benefits to the country. because the wide range of expertise, the federal reserve is uniquely suited to supervise large complex financial organizations and to address both safety and risks to the stability of the financial system as a whole. second, participation in the oversight of banks of all sizes significantly increase its visibility to carry out the central banking functions including making monetary policy, lending to the discount window and fostering financial stability. the financial crisis has made clear that all financial institutions that are so large an interconnected that their failure could threaten the stability of the financial system must be subject to strong and consolidated supervision. promoting the safety and soundness of individual banking administration's requires traditional skills of banking supervisors such as expertise

of examining risk-management practices. we have developed such expertise. the supervision of a large complex financial institutions and the analysis of financial risks to the system as a whole require not only traditional examination but also a number of other forms of expertise including macroeconomic analysis and forecasting, insight into regional and global economic developments, knowledge of a range of domestic and international financial markets, including money markets, capital markets, foreign exchange markets and derivative markets, and a close working knowledge of the financial infrastructure including payment systems for procuring unsettling financial instruments. in the course of carrying out central banking duties, we have developed extensive knowledge and experience. for example, staff members have

expertise in macro economic forecasting and the making of monetary policy, which is important for identifying economic risks in institutions and markets. in addition, that require indefinite market knowledge to daily per dissipation in markets to implement financial policy and to execute financial transactions. the federal reserve's extensive knowledge of payment and settlement systems has been developed through operation as some of the world's largest systems, its supervision of the settlement services and its longstanding leadership and the international committee on payment and settlement systems. no other agency can or is likely -- or is as likely to replicate the death of relative expertise that the federal reserve brings to the supervision of large, complex banking organizations in the identification and analysis of systemic risk. even as the fare reserved function enhances supervisory expertise, its involvement in supervising banks of all sizes

across the country significantly improved the ability to carry out central bank responsibilities. perhaps most important, as this crisis has demonstrated, the fare reserved's ability to identify and address diverse and hard to address threats hangs critically on the power that they have as both a bank supervisor and central bank. not only in this crisis but also in episodes such as the 1987 stock-market crash and the terrorist attacks of 9/11, the federal reserve supervisory role as essential for it to contain threats to financial stability. the federal reserve is making monetary policy also benefits from supervisory experience. the federal reserve's role as a supervisor of banks of all sizes, including community banks, offers insights into conditions and prospects across the full range of financial institutions, not just the very largest and provides useful

information about the economy and financial conditions throughout the nation. such information greatly assists in the making of monetary policy. the legislation passed by the house last december which preserved the supervisory authority that the fed to -- that the federal reserve needs to carry out its functions effectively. the federal reserve strongly supports-regulation and closing regulatory gaps -- regulatory gaps. as we await comprehensive legislation, we have been conducting an intensive self examination of our regulatory and supervisory performance and had been actively implementing improvements. we have played a key role in the international efforts to ensure that systemically critical financial institutions hold more and higher-quality capital, have enough liquidity to survive highly stressed conditions, and meet demanding standards for company-wide management. we have been taking the lead in

addressing flawed competition practices by issuing proposed guidance to ensure that compensation structures provide appropriate incentives without encouraging excessive risk- taking. thus formally but equally important we have been leading cooperative efforts by market participants and regulators to strike the strengthen the infrastructure of key markets including the market's for purchase agreements and other derivative instruments. to improve both our consolidated supervision and our ability to identify potential risks to financial systems, we have made substantial changes to our supervisory framework. so that we can better understand linkages between firms in markets that have the potential to undermine the stability of the financial system, we have adopted a more exclusively multidisciplinary approach making use of the expertise and payment systems and bank supervision which i alluded to

earlier. we are also of meeting our traditional supervisory approach that focuses on firm by from examinations with greater use of horizontal reduce to identify common sources of risk in best practices for managing those risks. the supplement and for mention from examiners, we are developing a quantitative surveillance program for large bank holding companies that will use data analysis and formal modeling to identify vulnerabilities at the firm level and for the financial sector as a whole. this analysis will be supported by the collection of more timely and detailed data from regulated firms. many of these changes draw on the successful experience of the supervisory capital assessment program, also known as stress tests, which we lead last year. representatives of primary function of supervisors will be fully integrated in the process. participating in the planning and executing of horizontal

exams and consolidated supervisory activities. improvements in the supervisory framework will lead to better outcomes only if day-to-day supervision is well executed with risks identified early and promptly mediated our internal reviews have identified areas of improvement. in the future, to facilitate swifter and more effective supervisory responses to buff the oversight and control of our supervisory function will be more centralized with shared accountability by senior board and supervisory staff and active oversight by the board of governors. supervisory concerns will be communicated to firms promptly and at a high level with more frequent involvement of boards of directors and senior officials. greater involvement of senior federal reserve officials with strong systematic follow-through will facilitate more vigorous mediation by firms but where necessary, we will increase the use of formal and informal enforcement actions to ensure

prompt and effective mediation of serious issues. in summary, the federal reserve's wide range of expertise makes it uniquely suited to supervise large complex financial institutions and to help identify risk to the financial system as a whole. moreover, the insights provided by our goal is supervising a branch of banks, including community banks, significantly increases our effectiveness in making monetary policy and posturing financial stability. we await enactment of comprehensive legislation, we have undertaken an intensive self examination of our regulatory and supervisory performance. . .

i will let them make clear my long-held view -- i would like to make clear my long-held view. monetary policy and concerns about the structure and systems and the banks are inextricably intertwined. if you need further proof of that proposition, consider the events of the last several years. many have a legitimate interest in regulatory policy.

but neither monetary policy nor the financial system would be well served if the four reserve is denied influence over the financial system. today,@@@@@@@@ @ @ 'au @ "n)@ b monetary policy, for regulatory actions, or four votes? how can they be coordinated and

implemented in the midst of a crisis and a matter of days? the practical fact is that the federal reserve must be involved in those judgments and that decision making. beyond its broad responsibility for monetary policy and its influence on interest rates, it is the agency that has the relevant technical expertise growing out of working in the financial markets virtually every day. as potential lender of last resort, the fed must be familiar with the conditions of those to whom it lends. it oversees and participates in the basic payments system, domestically and internationally. in sum, there is no other official institution that has the breadth of institutional knowledge and experience to identify market and institutional vulnerabilities. it also has the capability to act on very short notice. the federal reserve is the only agency that has financial resources at hand in amounts capable of emergency response.

more broadly, i believe the experience demonstrates consistently -- conclusively that the responsibilities of the federal reserve with respect to maintaining economic and financial stability require close attention to matters beyond the specific confines of monetary policy, if defined narrowly as influencing monetary aggregates and short- term interest rates. for instance, one recurring challenge in the conduct of monetary policy is to take account of the attitudes and approaches of banking supervisors as they act to stimulate or to restrain bank lending, and to adjust capital standards of financial institutions. the need to keep abreast of rapidly developing activity in other financial markets, certainly including the markets for mortgages and derivatives, has been driven home by the recent crisis. none of this to my mind suggest a need for regulatory and supervisory authority to lie

exclusively in the federal reserve. in fact, there may be in bandages in some division of responsibility -- advantages in some division of responsibilities. a simple regulator may be excessively rigid and insensitive to market developments. but we do not want competition in laxity among regulators aligned with particular constituencies or exposed to narrow political pressures. we are all familiar with weaknesses in supervisory oversight, with failures to respond to financial excesses in a timely way, and with gaps in authority. those failings spread in one way or the other among all of the relevant agencies, not excepting the federal reserve. both law and practice need reform. but however these issues are resolved, i do believe the federal reserve with the broadest economic responsibilities, with the perceived mandate for maintaining this financial

stability, with the strongest insulation against special political or industry pressures, must maintain a significant presence with real authority in regulatory and supervisory matters. against that background, i will respond to the particular points you raised in your invitation. i do believe it is apparent that regulatory arbitrage and the fragmentary nature of our regulatory system did contribute to the nature and extent of the financial crisis. that crisis exploded with a vengeance outside the banking system, involving investment banks, the world's largest insurance company and government-sponsored agencies. regulatory and supervisory agencies were neither reasonably equipped nor conscious of the extent of their responsibilities. money market funds growing over several decades are essentially a pure manifestation of regulatory arbitrage. attracting little supervisory attention, they broke down under pressure, a point of significant systemic weakness.

the remarkable rise of the subprime mortgage market developed through a variety of channels, some without official oversight. there are large questions about the role and supervision of the two hybrid public/private organizations that came to dominate the largest of all our capital markets, that for residential mortgages. undeniably in hindsight, there were weaknesses and gaps in the supervision of well-established financial institutions, including banking institutions, major parts of which the federal reserve carries direct responsibility. some of those weaknesses should have been closed by more aggressive regulatory approaches. but some gaps and effective supervision -- institutions owning individual banks or small thrifts -- were loopholes explicitly permitted by legislation. the federal reserve is thrust

into direct operational contact with financial institutions and markets. beyond those contacts, the 12 federal reserve banks exercising supervisory is -- supervisor responsibilities provide a window into both banking developments and economic tendencies in all regions of the country. in more ordinary circumstances, intelligence gleaned on the ground about banking attitudes and trends will supplement and color forecasts and judgments emerging from other indicators of economic activity. when the issue is timely identification of highly speculative and destabilizing bubbles, a matter both important and difficult, then there are implications for both monetary and supervisory policy. finally, the committee has asked about the potential impact of stripping the federal reserve of direct supervisory and regulatory power over banks and other financial institutions, and whether something can be learned about the practices of other nations. those are not matters that permit categorical answers, good

for all time. international experience varies. most countries maintain a position, often a strong position, particularly strong for central banks on financial supervision. in some countries, there has been a formal separation. at the extreme and contrary to earlier approaches, all sue -- all formal supervisory and regulatory authority over financial institutions was consolidated in the u.k. into one authority, with rather loose consultative links to the central bank. the approach was considered attractive as a more efficient arrangement, avoiding both rape -- both agency rivalries and gaps of inconsistencies in approach. the sudden pressures of the developing crisis revealed a problem in coordinating between the agency responsible for the supervision, the central baghdad -- the central bank which needed to take action, and

the treasury. the bank of england had to consider intervention with financial support without close and confident appraisals of the vulnerability of affected institutions. as a result, i believe the u.k. government is reviewing the need to modify the present arrangement. for reasons that i discussed earlier, i believe it would be a grievous mistake to insulate the federal reserve from direct supervision of systemically important financial institutions. something important, if less obvious, would also be lost if the present limited responsibilities for smaller member banks were to be ended. the fed paused regional roots would be weaker and a useful source of the formation loss. i conclude with one further thought. in debating regulatory arrangements and responsibilities appropriate for our national markets, which should not lose sight of the implications for the role of the united states and what is, in fact, a global financial system. we necessarily must work with other nations and their financial authorities.

the united states should and does still have substantial influence in those matters, including agreement on essential elements of regulatory and supervisory policies. it is the federal reserve, as much as and sometimes even more than the better -- and the treasury, that carries a special weight in reaching the necessary understandings. that is a matter of tradition, of experience, and of the perceived confidence and a party of our central bank. there is a sense of respect and confidence around the world, matters that cannot be prescribed by laws are easily replaced. clearly changes need to be made in the status quo. that is certainly true within the federal reserve. i believe regulatory responsibilities should be more clearly focused and supported. the crisis has revealed the need for change within other agencies as well. consideration of broader reorganization of the regulatory and supervisory arrangements is timely. at the same time, i urge in your

deliberations that you recognize what will be lost -- lost not just in the safety and soundness of our national financial system, but influencing and shaping the global system if the federal reserve were to be stripped of its regulatory and supervisory process -- rest -- its regulatory and supervisory responsibilities and be no longer recognized here and abroad as "remiss interpol arrest -- "primus inter pares" among the agencies concerned with the safety and soundness of our financial institutions. let us instead strengthen what needs to be strengthened, and demand the high level of competence and performance is that for too long we've taken for granted. >> we want to try to stick to 5

minutes, so i recognize myself first for 5 minutes. chairman bernanke, the current system we have as a division of supervisory responsibility between the fed, the fdic, the occ, and a third agency -- a fourth agency that would be consolidated under the house bill. how has that worked? how had you been able to compensate for the things that you say are so critical in that framework? >> mr. chairman, i think there were some balls at each level. there were flaws at the level of the legislative structure. there were flaws at the level of execution. i think we need to look at all of those. there two main lessons from the crisis. one is that every systemic large

institution needs a supervisor that can look at the whole company and understand the risks that are faced by the company. many of the worst problems at the banks and aig and other companies and markets were areas where there was no strong supervisor, where there was just a gap. and we need to fix that as we go forward. we also need to strengthen concept of consolidated supervision. we currently have a system where each supervisor is assumed to defer to the functional regulator of each subsidiary, which is not appropriate when one person sees a problem in a subsidiary. they need the authority to go in and look at that. the other broad concern, at the

very highest level is the need to look at the system from a systemic perspective, not just each individual firm but the broad risks to the whole system. i think some of the ideas advanced in the house bill and senator dodd's proposal, such as creating a systemic risk council, broadening the responsibility of some regulators, they would help to address that problem. and what tougher regulations like higher capital standards, that would improve our oversight considerably. >> the dodd bill recently introduced sets a $50 billion threshold for supervision of the fed. is there any rationale for either that $50 billion threshold, or any other threshold?

how does this cut in terms of actual need to be able to be involved in these things, to determine or set monetary policy? >> mr. chairman, we are quite concerned by the proposals to make the fed or regulator only of the biggest banks. it makes us the "too big to fail" regulator. we do not want that responsibility. we need that have insight into what is happening in the entire banking system, to understand how regulation affects banks and to understand the status of the assets and credit problems of banks at all levels, at all sizes, and small and medium sized banks provide irreplaceable information both in terms of making monetary policy and understanding the economy, but also in terms of

financial stability let us not forget that small institutions have been part of financial crises in the past. we think it is important for the federal reserve not just to be the big institution regulator. we need to have exposure to the entire economy and to the broad financial system. áiá "ú á if you have only one regulatory agency, and i have some sympathy

for that, if you have to have some division of responsibility. where you place that, i do not know. i do not know the implications of $50 billion. if the federal reserve maintains smaller member bank supervision, what the fdic would have been the occ would have, it seems that is say arbitrary matter. i do think that we do not want to to have institutions that are too big to fail. particularly non-banking institutions can fail. that brings up many other issues in financial reform. they do not rest significantly on quantitative announcements.

>> my time has expired. i will recognize the gentleman, mr. bachus. >> was the federal reserve aware that lehman brothers was using the accounting technique, repo 105? >> the federal reserve was not the regulator for lehman brothers. we did not have that information. we had only a couple of people in the company whose primary objective was to make sure we get paid back the money we were lending to lehman. we were not the supervisor, and it and any case, we would not have the authority to address accounting and disclosure issues. >> the federal reserve had run three stress test on lehman, and

in the course of the stress test, when you have found out that they were using this accounting gimmick? >> no, sir. we did liquidity stress test. we determined that they had enough liquidity to deal with a stressful situation. they've failed all three situation -- we were determining if they had enough liquidity to do with a stressful situation. they failed all three situations and we shared that information. >> you are seen as the lender of last resort and you might have direct access to bank data to assess their credit worthiness and the collateral of the would be barred. the new york fed won't lehman brothers -- they made the discount window available for cheap money with this going on. and all last chairman volcker, doesn't that trouble you? and then i will ask chairman bernanke. >> we accepted the value of the

collateral and they took a hair cut. and we were repaid fully. that part worked fine. again, we were not charged with supervision of the company. it was a very troubled company, and if we had not had some kind of provision to take a non-bank into the receivership, we would applaud that. >> chairman volcker. >> this is an issue of why you need reform so that an institution of that size will have some kind of oversight. if you do not have the reform we're talking about, non-bank institutions would not be relevant, because that would be under the so-called resolution the party, that would have the power and resources to provide

suitable liquidation or resolution of that institution. the federal reserve would not have to be involved as a lending institution. >> at their lending money to it through the discount window. >> they would not have to be put in that dilemma. we ought to have a system that could provide -- >> de support our efforts -- do you support our efforts to bail out in the last year? senator dodd says that 13-3 cannot be used. it cannot be used for an ad hoc bailout of a non-bank financial institution. do you believe that? >> if you have resolution authority, you would not need 13-3. >> he said that we should not

lose sight of the implications for the role of the u.s. in what is in fact a global -- and we must work with other nations. how about of all our role? bridging what about the volcker rule? what other countries do not adopt that? would that put us at a disadvantage? and could we instead use capital requirements and maybe restrictions on leveraging, or restrictions on coming to the discount window to achieve money? >> the first thing we ought to do is get the other countries to go along. and then we would not face that kind of a problem. i am hopeful that will be the result. >> if they do not? >> we can still apply it to the united states. they are american institutions and i think it would present

relatively minor problems. what activities are we talking about? on a small part of the activity of very few american banks. >> thank you. >> the gentleman's time has expired. mr. kanjorski is recognized for 5 minutes. >> thank you very much, mr. chairman. chairman bernanke, you referred to some loopholes and legislative holes and things you can and cannot do. has the federal reserve done a critique of the legislation put together by this committee has passed in the house, and a critique of the dodd bill so that we can have a criticism as to whether or not loopholes exist that should be covered, or if not covered, what the impact will be? >> no, sir, we do not have a critique of these individual

bills. we're clear about what we think is the right approach and i would be happy to discuss that. >> could i make the request of you -- i appreciate the discussion, but could i ask you, if you could have your experts make those car reviews so that if there are any loopholes that have to be closed or considered or at least identified -- there are many members of the committee, including myself, that would not recognize a loophole if we walked into it. but i am sure the expertise of the federal reserve sees them and sees that they are there. i would like to be informed of them. if you could have your experts at the federal reserve review our piece of legislation and the dodd bill and any other bill that hopefully comes out of the senate and give us that critique, so that we may use that when we go to conference committee to address those loopholes? >> while we have been doing is

to provide technical assistance on each issue, we do not want the overstep our bounds and say this is good and bad is bad. we would like to help wherever we can. >> on the part i am responsible for, do not worry about overstepping your bounds. mr. volcker, unfortunately we did not have the volcker rule before us when we went through the house i regulatory reform, but it is included in the dodd bill. i have this open question -- did the dodd bill include the entire volcker rule or important portions that may be left out that we should look at an address if we go to conference? and then, if you could for the record indicate why you think it is so important that we have mandatory provisions such as the volcker rule?

>> the first part of your question -- is a big step forward. there may be a few areas where additional clarification would be desirable. i am not in office so i have no need to not overstate my party. i do think it should be mandatory because it is very hard to take top, restrictive measures before the crisis. after the crisis, it is too late. in an area like this, to me it is quite clear. the law should be as specific and mandatory as possible. senator dodd's bill goes considerably in that direction.

>> i yield back. >> the gentleman from texas, mr. poe. >> i have a question for chairman bernanke. during the early part of the decade, a lot of the free markets and would say that there was a financial bubble and there had to be a correction. we did in 2008. since 2008, many of the mainstream economists have more less agreed with that assessment, because we'll hear them say interest rates were held too low to long. even secretary geithner has made that statement. where you come down on the perfection -- where did you come down on that perspective? >> i had given a speech on this. the bottom line is nobody knows for sure the evidence is quite mixed. i would say that even if there were -- they were held to low

too long. management of the error was not enough to account for the huge crisis that we had. what caused that was the failure of regulation. i would toss the fed in there, too, because we did not do enough. we did not do enough regulation. i think the weakness of the regulatory system, not arbitrer policy, that was important. >> i cannot agree with that, of course, but if you assume for a minute that it was too low too long, what is the harm of that? do you see any damage by interest rates being artificially low for a long period of time? $1 possibility --

>> one possibility is that you keep them low, you get inflation. you need to keep prices stable. >> do you think the investors and the businessman makes a mistake and if interest rates are locomote 10 interest rate is since -- is an indication that they are saving. but if the interest rates are low because of the newly created money by the fed, doesn't that send this false signal to some business people? >> interest rates are below their level because the economy is operating at a low level. we are in such ways and where a lot of people are out of work and consumption is well below its normal levels. low interest rates serve the function of increasing demand and putting people back to work.

>> but if interest rates are 3% instead of 6%, without artificially low interest rates, there would not be a temptation for people to build too many houses or for people to try to capitalize on the fact that they are anticipating inflation and participate in the bubble? >> interest rates are low right now and i don't think building too many houses an important problem. >> but in the boom cycle, people do things that might not be proper and the best for the economy. and then when the bust comes, we resort to the same policy of keeping interest rates extremely low for too long. what are their -- are there any chances that we will look back and see that they were too low too long, there were also that way in the latter part of the

decade. when prices go up too late, you have the job of reigning that all in. >> fiscal banking is an art. rigid central banking is an art. we need to find an appropriate policy that gets us as close as we can to both sides of the mandate. >> the free-market sees that the regulation is imaginary because the fault is, all of these mistakes are made in the have false information you cannot run the economy that way and that is why socialism failed. you fix the price of interest rates, that is one-half of the economy because you are messing around with the monetary system. and then we'd just say we need more and smarter regulations and we're cortisol all of these problems. it does not concern you at all? >> we need some system to set

the money supply. i know you are a gold standard supporter. >> fine for the constitution. >> every country in the world currently uses the central bank to make a decision about the money supply, to keep it stable or move it around. it is the choice that is made. >> that is not good and permission for an investor, unfortunately. >> the chair -- that gentleman's time has expired. >> i think those in the financial world understand the damage done to our political and social institutions, done to the social contract by the bailout, with these institutions branded too big to fail. chairman volcker with three

federal provincial -- prudential supervisors, how can we get consistent, comprehensive, and effective regulation and supervision of all banks and similar institutions? shouldn't there be a single body for setting out one set of rules that all supervisors can apply consistently? >> conceptually, there should be one supervisors. most countries have it that way. we have our own traditions which is led to a multiplicity of regulatory agencies. it is fair to say there is a certain amount of confusion. you've got to do better in coordinating what they do. we have extremely weak supervision outside the banking system. that is a matter of historic

development. but let me say on the other side as i said to my statement, and this is a political decision, there are some advantages in having more than one regulator. many instances, countries find one regulator gets -- and its bureaucracy and there are legitimate complaints by the financial institution that there is no room for innovation and flexibility and freedom. on the other hand, you don't want regulatory agencies competing with each other. >> can i agree with you on that? >> what i think this comes down to -- >> i have to interrupt you because i have two questions to squeeze them. chairman bernanke come you have outlined the advantages of

mixing regulatory policy. i would ask you not -- please address the disadvantages. bureaucracies eight that have lines. -- hate bad headlines. they do things behind the scene to avoid the headline that the break-prudential regulators areg to get bad headlines if a big institution fails, particularly under some circumstances. they can prevent that the year if they could just put it off for six months, and their reputations and careers can be saved. monetary policy, just cutting the interest rate by a 1/4 point, can save the troubled institution. how can we be sure that monetary policy is not influenced by the natural human desire of banking regulators to save institutions

long enough for them to move over to another department? how do we make sure that monetary policy does not meet the clear needs of bank supervisors? >> i don't think that is a very realistic scenario. if the bank was that sick, i don't think a quarter port change would help the very much. >> every dying patient is on the borderline at some point. and there can be circumstances where it is touching go. -- touch and go. >> i don't think that is an efficient or effective way to achieve that objective. i suspect the central bank chairman would still be all round and concerned about his or her reputation with whatever problem might arrays with that interest right -- might arise

from that interest rate policy. of course i'm going to squeeze in one question and you can answer on the record. why should be exempt the fed from audits of transactions for or with the central bank, the government of a foreign country, or non-profit international financial organization? and are you willing to provide for the record a description of all such transactions from the 1990's so we can get an idea of of what the bank was doing at an international level? >> you have been invited to submit your answer to them for the record. i think you of already done it on several occasions, but do it again. >> could i comment on the previous question? i think you put your finger on that "not on my watch" syndrome. that is why it is so important to get this resolution

authority enacted into law in a rigorous way so that the policy maker is not faced with something that seems to be an awful dilemma of letting an institution fail or rescuing it. >> i assure you that the resolution of party -- resolution authority is not a bailout. >> the gentleman's time has expired. >> thank you, mr. chairman. i want it goes through this process of the fed being a prudential regulator. we have had all lot of people come in here for the last 18 months looking for the bogyman and all the calamity that has happened in the financial market. everyone says that it was not my fault. the bottom line is, on the the

propose structure of the house or senate version, basically, the fed had regulatory authority over many of these entities that people are saying were part of the problem. the question i have is, if it did not work before, how does it work now? and the second part of that is -- these large financial institutions, if you had gone into them, let's say, 18 months ago and said we were concerned about what is going on here, and they say, we have record earnings and we're making lots of money and we have good liquidity, good balance sheets, and our ratios are right in place. you want us to stop originating mortgages? you want us to slow down our securitizations activities? you want us to get out of the credit default swaps activity?

how did you miss it and how would you have done a different course remark if you're not willing to do it different, then we are moving in the wrong direction. i'll start with chairman bernanke. >> that is the $64 billion question u.s.. >> know it is the trillion dollar question. >> mistakes and problems throughout the system, and other regulators and the federal reserve, private citizens and the congress made mistakes in this crisis. we can only go forward and mix -- and fix the mistakes. we're recommending changes to the overall statutory structure to address gaps and other problems in the system, but we are also taking action are so. we're strengthening capital requirements. liquidity turned out to be a big issue in this crisis. we are strengthening that substantially. executive compensation. we have -- execution is very important so within our own supervisory system we are doing

a lot of soul-searching and changes, and those changes are at the level of framework of supervision, which needs to be more systemic, so macro- potential, and we've found situations like you described, where we were not passed or forceful enough, and we need to change our culture, our structure, and our instructions to examiners to make sure we do a better job next time. everyone has to do a better job. we are working to do a better job. there structural reasons that the central bank needs to be involved in the process. >> chairman volcker? >> you caught me with the same question. let me make a general point. with a discussion on supervision and caps and supervisory policies, supervision is a tough job. you are dealing with a very complex situation where there

are known and unknown factors, and a political world where your tools are limited. you have to explain what you're doing, which is very hard in a constructive role when things are going world. so don't put more burden on the supervisors that is necessary. but if there are structural factors that you want to promote or eliminate, do it by legislation. don't leave everything up to the supervisor. give the supervisor of very clear flame work in which the word -- a very clear framework under which to work. >> i do not disagree with that. i am a "less regulation" person. but the point is that we actually had regulation in place. we have regulators in place.

there is an unreasonable expectation here that somehow we're going to fix the s -- we have bank regulators today, but we had over 100 banks fail, and some people think, by expanding or reshuffling the deck where you're going to have a better outcome. i think we would have a much better outcome if we had people doing the job they were already supposed to be doing. >> i cannot deny that. but there were gaps and regulatory authority. one was in the investment banking area. you had gaps in the subprime mortgage, some regulatory authority but not over other parts of it. you had a big gap in the resolution authority. there was no resolution authority there to get the

supervisors are reasonably effective and efficient way of closing down an institution without doing damage. that is something for the legislature. >> the gentleman's time has expired. the gentleman from new york is recognized. >> thank you, mr. chairman. thank you for your testimony. let me ask chairman bernanke first. we've got this language in the house bill empowers regulators to deal with systemic risk. my question to you -- do you think that the language we have in the house bill is sufficiently strong enough to expedite the removal of systemic risk? there was a question, do we need something mandatory why it volcker rule. we asked mr. volcker, and i would like to get your response on that. >> i like to answer you in

writing on that because it is a complicated bill. the general direction is good, but there are some areas where we think, if we had our preference, we would make some changes. it is a complicated bill. >> i would gladly wait for you to give us a response to that. i want to see if you think that you have the authority from what we put in there, or you don't mr. volcker? >> are respond to the previous comment. this so-called volcker rule, the division between proprietary trading and hedge funds, is a provision that it is voluntary. it turns it over to the regulators and supervisors. i think it is unlikely that they will invoke that prohibition until the crisis came, and then

it is too late. that's why you wanted in the legislation. -- you want it in the red coat -- you want it in legislation. >> with the region@ @ @ @ jjdm r

i can tell you that off the top of my head. >> that would be great. mr. volcker, when you are chair of the fed, can you tell me the fed spent the majority of its time? >> i must say, through history, i think the federal reserve activities in this area very depend on the leadership in place. specifically during my time in office, we had some big problems. we were fortunate at one point in having an extremely effective head of the supervision area and regulation area. he made a big difference in the effectiveness of the way we went about our work. i cannot emphasize the importance of having the

effective people on the job and effective leadership in the organization. i have been an advocate of something and the dodd bill, having a new position in the federal reserve, one of the governor's designated as vice- chairman of supervision. i think you need a continuing focus and a clear sense of responsibility, so that the attention of the federal reserve is less subject to the ups and downs over time. it would be built into the organization. >> i agree, but sometimes in our congressional offices, if you have to prioritize. something is more important than another, and those priorities -- in my office, i make a priority

and something else might come up. that is generally the way that things were. i wish to see what the chairman. i do have some concerns about what you do in the offices. >> it is his priority by law to pay attention to this. to report to congress as appropriate, and be confirmed on the basis that he has a particular responsibility for overseeing the federal reserve. >> the jobless thomas's buyer. -- the gentleman's time has expired. >> chairman bernanke, watching the trends of the market for treasuries, it appears as though major creditors, japan and china, have begun to scale back their purchases of u.s. government securities, and

filling the void in demand have been other foreign governments, or other foreigners, as i say, i assume foreign banks and hedge funds, and also u.s.-based financial institutions. clearly there is market place your -- market plate -- the carry trade is in effect here by these banks, which essentially amounts to borrowing at next to nothing from central banks and lending it back to the u.s. government had 2%, depending on how far out they go on the yield curve. have we backed ourselves into a corner here? if you raise interest rates, that carry trade evaporates as does the demand in the treasury market and our ability to finance the 1.5 -- the $1.5 trillion deficit this year. who is going to lend to us if we

do that? if foreign governments are scaling back and financial institutions can no longer make money in this market, where will the demand for treasuries come from? >> this is a very large indeed market. -- and deep market. the dollar tends to strengthen because the money goes into the u.s. treasuries, but i have not seen any reduction in demand for u.s. treasuries. the foreign demand remains quite strong. i anticipate -- i do not anticipate any problems. there is always the question of price, and there the question is, well all of our creditors, including domestic, remain confidence in the long run fiscal stability of the united states? there is important for the

congress to devise a plan to create a trajectory whereby we have a more stable debt position going forward. that is very important. >> i concur on the points that you have made publicly. but getting back to the question of the extent that we are dependent upon the carry trade to finance our debt, do you think there's an element of truth to that point? >> there's sometimes a misunderstanding that they carry trade is an arbitrage opportunity. it is not. if that is a long-term security, there's a considerable risk on the life of the security. as short-term interest rates go up because the economy strengthens, then long-term rates might go up as well. that would affect our off-

financing of deficits, and another good reason to get deficits under control. but we will do what is necessary to attract demand for securities. i don't see any reason to think there will not be demand. >> let me ask a question of mr. volcker, too. with the introduction of mr. dodd's legislation in the senate, we now have regulatory reform bills in each chamber that institutionalizes rather than eliminates this "to big to fail" concept. the ultimate cost of "too big to fail" will be borne by our capital markets and the broader economy. the approach put forward in these bills essentially bifurcates our financial system, and those institutions that will be labeled systemically significant will likely see lower borrowing costs and greater access to capital compared to their smaller competitors. that would give these firms a significant competitive

advantage. this is what happened with fannie mae and freddie mac. they wiped out the competition and they formed the duopoly of the secondary primary mortgage market because they're perceived to be government-backed. mr. volcker, are we recreating the moral hazard problem by labeling these institutions "too big to fail?" how would you expect counterparties of these institutions to react to this label or even make -- even making the label official? >> with fannie and freddie in particular and the moral hazard, i think it is very real and it will be a real challenge to change that in the future. you're not going to do right now, but the market is wholly dependent -- mostly dependent on government participation, including support for fannie mae

and freddie mac. so you're stuck with it. i don't think we need to get ourselves in that position in the future. i hope that is on your agenda next year when we reorganize the mortgage market. so far as other financial institutions are concerned, i hope your opening comment that the institutional station of "too big to fail" is not correct. i understand your concern about labeling and i do not want to do that. that is part of the reason of the kind of proposals that i've made. i don't want that resumption to excess particularly for non- banks. banks to have access to the federal reserve. they do have deposit insurance. they are also heavily regulated. and that is the balance. so they do not have that much competitive advantage.

the others do not have a competitive advantage. if they are extremely vulnerable. >> the gentleman's time has expired. >> these are what are behind my concerns. >> the gentleman from new york -- the gentlewoman from new york, ms. maloney. >> thank you to paul volcker, a great president of n

as a regulator of the banking system, we will be able to see what happens and be able to make better decisions about how to address any potential risk to the broad system those kinds of products might pose. @@@@@@@ @ @ @ @ @ @ @ @ @ @ @ >r le, and i certainly have an

open mind to that argument, but is an historic evidence -- isn't the empirical evidence kind of murky if you looked at the u.k., if you looked at japan and sure many. clearly they did decouple the two. -- japan and germany. clearly, they did decouple the two. can you please elaborate on the evidence that is out there that might be convincing to members of this committee'? >> it is interesting. as you point out, there was a decoupling in the central spanking function. i believe in all three the current trend is strongly towards giving back the central bank to supervisory

authorities, and in europe, the european central bank is being made essentially the financial stability regulator for the continent. i think the perception in each of those countries was moving the central bank out of regulations deprive it of information it needed to be affective in the financial crisis, including executing its last resort function verio -- function. >> clearly we have not the couple. we did not avoid the recession. >> that is absolutely right. >> the question is we can identify problems. i have tried to identify some. there is some in the execution. surely, there are problems. i think the lessons of history are generally on the side of having integration in monetary

and supervisory functions. >> on the next panel, we are going to hear from the doctors sitting over your left shoulder he was kind enough to quote me in his testimony. i will quote him. it is another way to fit the public's first. systematic to others who caused them. -- which clearly takes us again to the whole question of too big to fail. i have a two-part question, and is that really in the eye of the holder thelma -- boulder? if so, in order for you to execute your charge in price

stability, is it not counterproductive to have any type of designation of of fund that creates the impression there are firms too big to fail. is there not another message as you have argued for that would avoid creation of an explicit fund, and could not the proper standards be used in order to avoid the designation of too big to fail but essentially solve the problem?

>> the industry and not the taxpayer would bear the costs. i think it is important to make sure -- if an institution threatens the entire system that has failed, we need to be especially careful. in particular, going back to a question raised earlier, we really have to address too big to fail, and the means the resolution regime has got to be one that makes sure all the providers of capital, including subordinated debt and so on, will be wiped out, but they will not be protected, and that the authorities have the ability to go further oup the obligations o the extent it is consistent with civility. we can only do this if people believe they think of send -- to

take office. we did not have the flexibility in many cases to impose losses without creating the bankruptcy we were trying to avoid, so the well-designed resolution regime, we can impose losses. >> the gentleman's time has expired. the young lady from california is recognized. >> i would like to thank both of you for being here today, and while we are not going to get into the volcker rule, i understand we're going to hold hearings to talk about it more, and i understand the president is very interested in what he calls the volcker rule very good i am looking forward to having you back with us again.

having said that, i want to go to chairman bernanke. it was not until 2008, well after the mortgage loan products have done their damage, the the fed finalized its rulemaking, for the act which covers gustin 1994, mandating the federal reserve prohibit this lending. you mentioned they examination the federal reserve has taken of its supervisors. i really do appreciate that. i am not going to get deeply into the consumer finance protection agency, which we have talked about so much, and the dodd bill, but here is what i want to try and focus on. i have this notion there are some products so bad, so

predatory that they should have never been on the market. it seems to me that slides in the face in what those of you in the industry think about, the ways you think about it. you feel that in a free market society businesses are able to come up with all kinds of ideas about how they want to provide products or services, and it is up to use to regulate them, not to prohibit them and say, you cannot do that. i do not understand why a regulator cannot take a look at a product and say, this is so bad, this is so predatory it should not be on the market, and we are not going to allow it to be on the market, or we are going to discourage it, and that is one reason i am so interested in different -- the consumer

protection agencies. do you feel as a regulator said you should have the ability to say no? you cannot put the product on the market. it is too bad. it is to predatory. absolutely -- >> absolutely, and we have done it. we have them practices like double cycle billing. if there are practices a consumer cannot understand, there is no reason to allow it. >> if i may, those were banned after they had been so abusive and out in the market for such a long time. we do not get to see these mortgage products. they are calling my office every day, and i am looking at an elderly couple who took out an interest only loan, and after

five years that adjusts, and they had a 30-year adjustable rate, which is a contradiction in the way they show alone to work, and what happens this -- shows alone to work, and what happens is that loan was 4.5% of your years ago, and that alone can go up to 9% after it resets. the couple was over 65, and in the next 65to 10 years, it can go up to 10%. we do not know what the interest rates are going to be, and they said they did not have that when they first took out the loan but an amendment was put in there, and they signed off on it. what can we do about that kind of thing? >> the federal reserve or whoever is in charge of consumer protection needs to make sure the products are safe for people

to use. you were right to criticize the federal reserve for being late in doing the mortgage regulation. we did do some things, but we did not do enough. once we did it, and we have worked hard on these areas. we bend a lot of bad practices, and you cannot offer a mortgage that has these practices anymore. i did not know about this particular case. we are looking at features -- some of them wages event because the public cannot understand what they are about -- we just banned because the public cannot understand what they are about. >> first question. i have a bill the suggests the gfc should be on budget.

quick question. their obligations -- are they sovereign debts? the government has been pretty vague about it. i thought i knew were the chairmen stands. where do you stand? >> my interpretation is standing behind -- >> do you think it is sovereign debt? >> whether it is legally sovereign debt, i am not the quick to tell you. we did not see equipped to tell you. >> i agree. -- i am not equipped to tell you. >> i agree. >> let's move on to the other questions. the report with regard to the lehman situation. it seems as though the answer you gave was that you were not

the primary regulator in that case. let me ask it this way. the fed was on scene. the paper reports of your people being over at lehman. was the federal whereof one of the -- aware of the situation? >> no. >> and the reason was because? >> they were hidden. we are currently the principal regulator of goldmansachs, and we have a dozen people on site and another dozen who are looking at the company. we had two people assigned to lehman, and their main obligation was to make sure we got paid back. >> the paper reports there were a dozen people.

only a couple of the more. >> that is my assessment. >> before, women would not have had access to the discount window at this point. is that correct? >> our objective -- lehman would not have had access to the discount window at this point. is that correct? you did get paid back, but is the because the collateral was adequate? >> it was largely the collateral. also, the loan we made was to the brokerage and not to the holding company, so that was a bit of distinction, but if we took collateral to make sure it was safe. >> you tell me you only had a couple folks at: -- at goldman. >> there were about a dozen folks. i got this number this morning.

about a dozen people who go to goldman every day. >> i am not going to hold you to that number. in light of these reports is the something we should be concerned about? if that's something we should be concerned about or something the fed should be concerned about? are you looking into it?

position independent of this accounting. " that is interesting, because new york did -- >> that is interesting, because new york did 3 liquidity stress test, and each time they failed those. >> correct. >> were any additional recommendations made? >> we pushed them and secretary paulson pushed them to improve their position and raise capital if possible, but they were unable to raise sufficient capital. >> my understanding is the new york fed required no reaction from women in response to the stress test. is that correct? >> we have no authority to require them to do anything. >> did you indicate to the regulator they should require them? >> i did not have the exact

information. >> if you can get back to me on this point. >> chairman bernanke and former chairman volcker, thank you for your public service very did you both have had to take some unpopular actions during -- for your public service. you both have had to take unpopular actions, and with an -- without an independent said i do not think where it -- we would be where we are. last week the house approved a strong bill favoring a consumer protection agency, and senator dodd's proposal contains of euro located in the fed. chairman volcker, would you -- contains of euro located in the fed. chairman volcker, would you support this so each job could -- each party could do their job better? >> i think there is some overlap, because some of the

consumer protection. i think they are distinctive enough that you can separate them. >> thank you. with respect to the banks, i am concerned it will turn the cents per three defense focus from smaller institutions and focus its only on the largest -- it will turn the said's attention away from some -- the fed's attention away from smaller banks. >> we care about smaller banks. it keeps us in contact with the country as a whole and not just wall street, and we hope very much to retain actions. >> if the senate's proposal became law, what would that mean for community banks and our local economy back in kansas? >> the law would give the oversight to the fdic.

for state banks, but what it would do from our perspective, besides being quite disruptive for banks and regulators, it would close off an important source of information and connection to the broader economy. >> thank you. any thoughts, sir? mr. volcker? >> this is one area we agreed earlier as to whether you have one regulator or a variety of regulators. there are a lot of small banks. i think this is one area where it is possible to argue having more than one supervisor is not a bad thing. it does not pose the same systemic risk, but there is value to the federal reserve and

may be some value to having more than one agency, because the fdic has a legitimate interest in knowing what is going on among a lot of institutions. >> another issue i am interested in is looking at how we have become dependent on debt across the board, especially financial firms. the president of the kansas city fed wrote last month, the financial crisis has shown the levels risk-taking and leverage can go when our laws it -- our largest institutions are protected. a stable and robust financial industry would be more and not less competitive. equitable treatment of financial institutions will end the enormous competitive advantage the largest banks enjoy all over the country. as we think of how over leverage the largest financial

firms became leading up to the crisis we experienced, if the fed is disconnected from smaller financial institutions who are not over leverage and leaving the fed with nothing to compare to, when that hinder the fed boss supervision of larger institutions? reading the fed's supervision of larger institutions? >> -- would that hinder the fed's supervision of larger institutions? >> you can learn about the impact of regulation, and small banks can be involved in financial crisis as well. i think there's a lot to be learned from not restricting yourself. i agree we have to get rid of too big to fail. we have to have a system the where the creditors and shareholders can take office. >> thank you to both of you for your service to the country. >> the gentleman's time is expired.

mr. paulson is recognized for five minutes. >> the document you sent contains the statement. whee recognize bank supervision, including ours, needs to be more effective, and we will review our performance at multiple levels. i just came from a meeting with multiple bankers, and they talked about money for credit, and they want to lend it out, and their overwhelming concern was in regards to the uncertainty of regulators. these regulators are being inconsistent in a sense that when they come visit of thank, their demands are essentially preventing to loans from current -- preventing good loans from

being made. i think every member of this committee raised this issue, and they've responded by saying they have told the people in the field to take a step back in regard to what is happening, so there is still a disconnect. i met with 37 bankers, and it seems nothing has changed in recent times regarding the examination. what can the federal reserve do better to create some consistency for the bankers so credit is being put out in the market? >> this is one of our top priorities. what we need to do is get an appropriate balance between making sure the banks are safe and making good loans. on the other hand, making sure the economy can grow, so we need to find the appropriate balance, and we have done that the number of ways. we have taken the lead issuing

guidance on small business lending, on commercial real estate lending, where the emphasis is on finding that the appropriate balance. it gives you some insight into what criteria to apply when you are looking into a loan. one point we have made repeatedly is just because the asset value underlying alone has gone down does not mean it is a bad loans. as long as the borrower can make the payment, that still can be a bad loans. we have issued those guidances. we have done an enormous amount of training to make sure they understand it. we have been gathering feedback from the field, including asking for more data and information but also having reserve banks have meeting bringing in

community leaders to try to get into details of what is going on. we have also tried to support the small business market with our program that has helped bring money from the securities markets into the small business lending arena, so it is a very important priority for us. we were asked before about the interaction between being responsible for the macro economy and being a supervisor. here is one case where what is going on in the banking industry is extremely important to knowing what is going on in the economy, and we take that seriously. i realize it is still an issue. it is going to be a concern, because standards have tightened up. some people who were credits- eligible before are no longer eligible because their credit conditions are worse, but we think it is important that borrowers be able to get credit.

>> this is an old problem. i remember when i was young learning about the federal reserve, a chairman in the 1930 's repeatedly complained that the sole responsibility for banking supervision -- they were being too tough because they have a lot of losses on their watch, and they were over reacting in terms of strict regulations when it was inappropriate because the economy was in recession. there are a lot of times when and if you're just looking and banking regulation as your only responsibility, maybe it is going to be too easy when the economy is going well.

i think really, the federal reserve is in a better position to get a balanced regulatory position, a regulatory approach, simply because they are responsible for monitoring policies -- monetary policy and business practices as well. that is one of the effects. >> the gentleman from georgia is recognized. >> thank you very much, and welcome, chairman bernanke and chairman volcker. let me ask you, chairman bernanke, as we grapple with this whole issue of stripping the fed of its supervisors and concentrate on the larger banks, i must admit you make a good argument, but i am torn. let me give you an example where there has been a massive failure on the part of the fed.

i represent the state of georgia, and in the state of georgia over the last 36 months, there have been 27 dain failures of smaller banks, and -- 27 bank failures of smaller banks, and that accounted for 26% of all the bank failures in the country. one state. the issue becomes, where was the fed in this? is this not a sign of realization as to why maybe we are asking too much of the fed as we move into this new economic climate. i am wondering, where is the fed? how does this happen under your watch for one state accounted for 26% of all bank failures in only a short time in 36 months. 27 banks failed in one state.

>> i make two points. the first is fear multiple regulators, and the question you have to ask is, did the fed do as good a job as everyone else? i think we have done a good job with small and medium-size banks, but we have been leaders in this area. one issue in georgia has been commercial real estate, and the federal reserve in 2005 took the lead in developing some guidance on commercial real estate about not having too much, about managing the risks better, about not having too much geographic concentration, and we got resistance on that, and it took longer to do, and banks resisted. it took longer than it should a half, but that is something we thought was important -- then it should have, but that is something we thought was important. banks have done better, because that has been a risk area.

i would say we to those issues into consideration and did a good job of trying to address them. >> how can you say you did a good job when the fed's policy became -- made a decision not to examine the books but to allow the

sure they met appropriate capital liquidity standards. it turns out they should have been tougher. we have done a lot of work internationally to strengthen those standards. >> i have year -- it might not be with you, but the fed announced they would no longer directly examine banks' portfolios but would instead rely on thanks self examination and self assessment. >> that is not our policy. >> that policy has changed, and this is inaccurate? >> it probably relates to the notion of the structure of banks using proprietary models as a way of evaluating risk of some of their physicians. it was never implemented, and

clearly, it is very important whenever models are used that they be closely evaluated, and again, we are going to be very careful to make sure banks are meeting the appropriate standards. >> you were aware, or were you not aware of the portfolios of these things were averaging between 75% and 80% in total real estate? >> the gentleman's time has expired, and i am being tough on him, because we have just been called for votes, and i would like to try to get the other three members who are here. if you can respond to that in writing, that might be helpful to us. the gentleman's time is expired. we now recognize the gentleman from texas for five ministers --

5 minutes, and i encourage you to exercise your restraint as best as you can, and allow us to release this panel and the sec to go with the next panel immediately after this series -- and let us be able to go on with the next? immediately after this series of votes is over. >> i would like to ask you about the interconnectedness of fannie mae,, which is own -- the largest shareholder is the united states government, and arguably every loan that is originated today is explicitly guaranteed by the treasury. when the mortgage-backed securities -- when they package

the mortgage-backed securities, the fed is a principal holder of mortgage-backed securities. you have one trillion dollars of the hour days. fannie mae and -- you have the authority of one trillion dollars. fannie mae has accrued a loss on the loan the treasury is making, and the treasury is assessing fannie mae at a rate of 11% every month, and they are loaning fannie mae the money to make the interest payment. at what point -- who exit's first? does fannie mae slow its lending down so mortgage-backed securities slows? does the treasury lower the

interest rate to fannie mae so the losses are less? ford does the fed exit the mortgage-backed security, its holdings in mortgage-backed securities? which part will move first, >> first, the federal reserve was very concerned about fannie and freddie for many years. this is an issue we pointed out. my assumption is sometime soon that congress will be able to reform fannie and freddie or perhaps break them up. at the point, there will have to be decisions made. my assumption is the mortgage- backed securities, which are

already outstanding, will be grandfathered and will retain u.s. government backing they currently have, so at some point, there will be a change in the structure, and there will be no more of the current one created. the existing will be assessed until they are either expired or purchased back. >> a couple weeks ago, i read the treasury had sold $200 billion worth of notes and had deposited that with the fed, and the explanation was to provide liquidity for the fed if the fed decided to liquidate its position of mortgage-backed securities. is that correct? >> the treasury restored what it had last year, an account at the

fed. we pay interest on that account so the fed is not losing any money. that gives us more flexibility as we manage policy going forward. >> my last question -- how does the fed acquire the mortgage- backed securities? does it require them directly from auctions, or do they require them as collateral from banks that are borrowing against them? >> we buy them in the open market. >> thank you. >> the gentleman from kansas city is recognized. >> thank you for having me here. my office is three blocks from the fed.

i know him very well. we flew in together on monday. i am concerned about reasonable issues. first, chairman volcker, here in this post-economic crisis, how should the fed and regional banks relate? right now it appears we have two seats of power -- the one you lead, mr. bernanke, and new york. i am concerned what happens to the regional barracks. are we going to a emasculate of further?

how should we create a relationship between the federal board and regional banks? >> taking off of basic point that chairman bernanke has been emphasizing about the importance of regional banks in terms of contact with regional financial institutions, it has been a great strength of the federal reserve. that is anchored to some extent in supervisory responsibility. supervisory responsibilities are shared between the board in washington and the banks. it is fundamentally the responsibility of the board in washington. they are delegated in substantial part through the banks, and i think that works out to the mutual interest, and what you do in terms of parceling out these regulatory

responsibilities will inevitably bear on the point of the federal reserve if not immediately, over time. god knows how many years -- 95 years almost -- issing regional system clearly controlled -- i think the regional system clearly controlled by the senate, yet it serve the country well. it serves the independence of the federal reserve and the credibility of the federal reserve. >> it should remain the way it is? >> you may consider this heresy, but the regional bank presidents and regional boards could be viewed as captive of

the regional bank industry, since the president is chosen by the regional banks in the region. three of the regional bank board directors are chosen by the fed. three are chosen by regional bank members. what would you think of having the three chosen by the region shows by d.c.? -- chosen by d.c.? >> to begin, i want to make clear the perception of conflict is more perception and reality. the members of the board are completely isolated from for supervisory positions, and most of them are lifetime employees.

they are all approved by a board of governors in washington, so the conflict is not as great as it is made out to be. that being said, i think we would be open to changes of that type to try to make sure everybody understands their role of those boards regionally is to represent their area, their broad public, and to give us the information provided by vegas and other community development people, business leaders, and so on -- provided by banks and other community development people, business leaders, and so on. >> you have got five seconds. which you just lost. the gentleman's time has expired, and i am going to go to mr. foster for a minute. thank you for waiting around until the end. >> of "the wall street journal"

's list of recommendations, the number one recommendation was improved capital standards, including the corporation of capital region the incorporation of capital. -- including the incorporation of capital. i understand it is being dealt favorably in the senate proposal as well. what do you view the role of the fed in administering capital and in possibly administering the stress test? -- administering the stress tests often thought of the trigger? do you think that is appropriate and one likely to happen? >> we have a couple discussions that take place, and we have put the contingent capital idea on the table internationally. assuming we maintain our consolidated supervision and oversight, we would be working

with functional regulators to develop stress tests at that level, so we would be very much involved in the setting of standards and analyzing whether or not the contingent capital should be converted or not. we think that is an intriguing idea with details to be worked out, but we are looking at it pretty actively. >> thank you. countercyclical mortgage underwriting standards are being implemented at various levels in different countries around the world. simply put, when a housing bubble begins to develop, you turn of the down payment, and my first question is, and these policies been in place in the previous decade, how effective would they have been at damping down the housing fell, and secondly, -- the housing bubble, and secondly, would countercyclical underwriting

products been implemented? >> it is a speculative question. i cannot give you a precise answer, but there are some countries where they are using variables, and that is an interesting idea, and it is clear in retrospect that because of piggyback mortgages and other instruments that loan to value ratios got way too high in the u.s., and we are being much more conservative, but that is another interesting idea to look at. >> it is a concrete proposal i will get to you in writing. thank you. >> the gentleman yields back. i ask unanimous consent to insert into the record the fed policy statement for the role of

a regulation. i ask unanimous consent to present my opening statement. hearing no objection, that is so ordered. we thank both of these distinguished gentlemen for their patience and time. we will release them, and i will announce that as soon as the votes are concluded, we will co panel, and we will be back promptly. we are staying in recess until after the vote. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2010]