>> can i make one factual correction? >> i need it. >> i wasn't chairman of the board. i only became after mr. prince stepped down. i remain chairman of the board for the four or five weeks of the search process, and the search process resulted in vikram. >> why would you make you chairman if you had in knowledge or structure of the company in any meaningful way? >> i had a lot of understanding rt structure of the company. >> right. when you are looking for a ceo, you're going to look for somebody who hopefully has and understands the knowledge of some of the problems. we don't need to carry this out. what i'm saying is we have this problem with -- >> just to respond to your question. >> with multiple denials and then boom you're in a position that's very significant. >> well, i don't think there are multiple denials. i think what there was was an explanation of the affirmative role that the board played in terms of the structure and function of the institution when

mr. prince stepped down. i was then asked to be chairman of the board. which i did. we had a four or five week search committee and wound up with an outstanding selection for ceo. >> i understand that. i guess we are saying we can talk about boards of directors, we can talk about structure function. all we want in terms of corporate models. frankly, there are people in those positions. and you have a higher confidence in some people than others, mr. prince mentioned who he thought was outstanding, we interviewed some of them. at some point, you can't understand an institution by simply following the lines of a structure function model or even the dotted lines. and what we're trying to say is it's really hard for us to believe, especially on my personal knowledge and involvement in any institution that i'm aware you've been involved in of this ability to fall back to a structure function model and argue about

the box you were in. i have never, ever seen you accept the outline, the frame, or the structure of a box. >> well -- >> if you wanted to accomplish something that you felt fairly strongly about, and it's difficult for me to say you're finished. but i wanted to end on a compliment. :

>> we will be adjourned at 12:30. we will recommence at 12:30. [inaudible conversations] udible conversations] >> we're at a lunch break now. when the financial crisis inquiry commission returns, testimony from the u.s. can't go of the currency, john dugan, and former comptroller john officer from 1998-2004. coming up tomorrow at 9 a.m. eastern time testimony from

former fannie mae executives. and also fannie mae and freddie mac and the 12 federal home loan banks. that is all coming up tomorrow. today's live coverage resumes after this lunch break. as you heard about 12:30 p.m. eastern time. about a half-hour from the. meanwhile, conversation about the commission's investigation from today's "washington journal." >> host: on your screen is the new jobs washington correspondent who covered the economy and financial issues for the newspaper based in washington. pleased to say is making for a first visit to the "washington journal" this morning. we will focus in on the financial crisis inquiry headed by phil angelides that may yesterday. everybody has chairman greenspan, on their front pages today. what do you think about what happened yesterday? >> guest: thank you, susan. chairman greenspan offered his analysis of what got us into

this big financial mess. unfortunately, the analysis is not very comforting to many people. he essentially, what happens a 100 year storm. he thinks it's difficult for changes and megatron structure to prevent what happened from happening again. and for congress, which is about to overall financial regulation, that's not dear very good news. the message was we have to increase the amount of capital banks have to hold, the amount of collateral that traders have dual. and those are the main things that can be done. moving around regulatory organization, he sees that as not as important. >> host: will have the clip ready in a minute or so, and it seems to be the money clip from yesterday. that is on his suggestion that he was right 70% of the time. his legacy seemed to be hotly debated at that panel. is that something of the fairman turman of the fed is having? >> guest: e. is used to having a. i think it was a little bit

rough yesterday. this is a man who a decade ago was revered as part of the committee to save the world during the asian financial crises, and his luster has tarnished a little bit in recent years. people said he kept interest rates too low to long. and even more significant yesterday they fall to the federal thing to adequately supervise the banks. and that came a pretty dramatic detail. >> host: here's the clip i mentioned. >> would have been in government for 21 years as i have been, the issue of retrospective and figuring out what you should have done differently is a really futile activity because you can't in fact in the real world do it. i think, my experience has been, in the business i was in i was right 70% of the time. but i was wrong 30% of the time, and there's an awful lot of mistakes in 21 years.

>> would this be one of them? >> i'm not sure -- >> would you put this in a 30% category? >> i'm sorry? >> would you put this in the 30? >> i don't know. it certainly part of it i would. >> host: 30% wrong record makes a c- by any teachers the standpoint. but overall let's talk about the point that the chairman may, which is the retrospective nature of his. this commission is charged with looking backwards. what's the point of that? what is the goal of those who created the commission? how will it play out watching it? >> guest: the creation of this commission was itself a matter of contentiousness. congress mission in setting it up was to create a panel that would do a thorough, and death and compelling report to the people, american people about what happened. and the model in a way is going back decades that produce

authoritative findings. but there was a lot of debate. right now it has six democrats and for republicans, for example, which reflects the fact that there's democratic majority in congress of course but that itself lead to a disagreement that has persisted. and the commission was created last july. it only has until december to do its work. and this is only the second round of hearings that they have a lot of work to do. >> host: critics, you mentioned have said not much has changed. how will was done by this commission be used. >> guest: that's one of the key problems are that congress is moving full steam ahead on this whole overhaul of financial regulations. on the house of representatives that overhaul in december, and the senate is taking it up right now. there is some partisan dispute because the senate banking committee which is controlled by democratic majority has moved toward a democratic public so far there is no republican support. as you know in washington, to get any major legislation don't

typically unique the 60 votes necessary to overcome the filibuster democrats are looking to get a republican vote. all this jockeying is going on behind the scenes and meanwhile, this commission is out there holding these hearings and doing these fact-finding, even though the congress is already moving ahead on legislative reform. when we asked the commission what do you think about that, are your finances going to go into, you know, onto the shelves that contain many other reports? they have said that they hope the report will be so definitive and so thorough that it will remain useful in guiding policymakers for years to come. beyond just the current round of reform legislation. >> host: the other group of people giving testimony were related to citigroup yesterday. you have written about citigroup this morning in the front page of the business section of the "new york times," different part of the process. why the focus on citigroup? they are surely not alone in

this financial melt in. >> guest: they are not alone and we've asked the commission is. the very first of hearings at j.p. morgan, citi, bank of america, morgan stanley, but not citi and everyone was asking where is it? we're told just a way. so right now they're looking at citigroup as kind of as an example of one of the most extreme cases of the securitization that's gone on. where mortgages, many of them subprime mortgages that were bot i buyers who had not otherwise be qualified for home mortgage. were packaged and sold by citigroup to investors. but at such a high rate that investors, when underlying mortgages if there's a big into default, that created a cascading series of actions that lp repair the financial system. >> host: the folks at the financial times were a trick so much it was front page headline coverage of the fact that citi relied on outside advisors on

its decisions about securitization. did you find it interesting? >> guest: i found it interesting but part of the process, been difficult to explain to the public and one thing that has frustrated the commission is the process got broken up into so many different segments. you had the mortgage originators, you had the banks that bought the loans that package the loans, you had the outsider advisers who worked with them. and had investors who bought the securities. and at every step of the game they should have been some diligence done but i think the fact the process became so fragmented and able to each element of the process in a way to deflect some degree of responsibility. >> host: before we go to calls, stay with the commission doctor, talk about the angeles in history of this. >> guest: is a former california state treasurer and he probably was best known before this commission, at least to people outside of california as having run in 2006 against governor arnold schwarzenegger. mr. angelides is a democrat.

he lost that race and he's been teaching various projects since then. and there's some speculation in california that he might be interested in returning to politics, possibly running for the sin in in 2012. he worked obviously helping to oversee california's huge pension funds. knows a lot about california finances but it is a government wall street, washington access. so that is an interesting. >> host: does the vice chairman come from that nexus? >> guest: bill thomas was the chairman of the house ways and means committee who is a real capitol hill kind of legendary powerhouse for many, many years. in a way this is kind of a comeback from him and he comes from southern california. >> host: was it intentional that the chairman and vice chairman come from california with that state in the financial system? >> guest: that's a great question. that would make sense in this commission were about the fiscal crisis or about the fiscal affliction facing the state. but it's not. it's about financial rules and

regulations. one thing windows is a great number of the commissioners are westerners. so i think it might've been an effort. there are two from nevada. we wondered if there might be an effort here to bring in people with a fresh perspective extenss working on wall street. although many commissioners have worked in a financial industries or in insurance. >> host: another big day today. rob rubin going to fully commissioned. >> guest: he was not only influential member of citi's board, he was considered for chairman and ceo showtimes but did not want to take an operator role but also because mr. rubin was secretary one of three during the clinton administration. we will be, i personally interested in whether the commissioners will be asking rubin about the kind of deregulation that existed in both the '90s and the last decade. >> host: there is a lot going on as there has been for quite a while in the financial and in that nexus of regulation and legislation. in the wake of the financial

meltdown. right now just come in addition to these today's a commissioners and also the major speech by the current fed chairman to mr. bennet yesterday when you talk about concern of the debt and the sec is both revealing and making new announcements including about capitalization and reserves going forward for companies to mitigate risk its a we've got lots to talk about today. will get their telephone calls and just dive right into this. let's begin with illinois. this is bob calling on our republican line. you on with mr. chan. go ahead. >> caller: i hope the select peop for this commission who have the ability to predict is happening, you, ron paul has been talking about this for years. peter schiff has challenged allen greenspan. peter schiff being of course the connecticut senate candidate. he predicted this years ago. and peter schiff has challenged alan greenspan to a debate. so i would suggest that they did people that project, predicted

this event to be on the commission. because they have the answers. >> host: to commission has ordered an established where the graphic that has the name of the members. we will put that on the screen and asked mr. chan to talk about whether or not there are any skeptics i guess to characterize it probably, that are among the members who populate it. >> guest: skeptics of the d. regulatory philosophy? assure. i think one of the most interesting exchanges yesterday was with between mr. greenspan and commissioner born. ms. born was chairwoman of the commodity futures trading commission during the clinton administration. at the time it was before she took it over i think a very sleepy, obscure regular agency. the name is incredible to most people. but, in fact, ms. born was one of the major critics to warn against the lack of regulation over the counter derivatives that there was a famous political battle from the late '90s in which she was on one side calling for regulation of these derivatives, and on the

other side was mr. greenspan, mr. rubin whose the treasury secretary, and larry summers deputy secretary treasure and now a top adviser to the obama administration. ms. born call that mr. greenspan yesterday during the hearings. it was very dramatic to watch. blaming the federal failure to avert a crisis and asking whether mr. greenspan what is d. regulatory ideology contributed the crisis. and he basically denied those accusations, but it was quite a stand up. >> host: let's let people see it. >> didn't the federal reserve system failed to meet its responsibilities? failed to carry its mandate? >> and by the way on this, i will yield two minutes for the response. we're over time. >> first of all, the the flaw in the system that i acknowledged was an inability to fully

understand the state and extent of potential risks that were act yet untested. we didn't see what those risks were and still they unwound at the end of the lehman brothers bankruptcy. and i had always presumed, as did virtually everyone in academia, regulatory areas, banks, presumed that risk potential was. having failed there, means that we were under capitalizing the banking system, probably for 40 or 50 years. and that has to be adjusted. >> host: saint louis is next. they are on the democrats lined for transfer of the "new york times." >> caller: i'm not sure but i would just like to ask him i bet you got your and paulson and bernanke and greenspan didn't lose a dime during this fiasco.

can you look into that and see how much money these geniuses lost over the last 10 years? we know the american people were hosed. we know people don't have -- window wall street looted the country, but can you just tells how much money geithner and greenspan and the rest of these clowns lost during this fiasco? thank you. >> guest: sir, i feel your reflecting on the anger out there in the country. we have look at the personal financial disclosures of the gentlemen that you mention. several of them have lost money. the one i know most about is the current fed chairman ben bernanke. he i think lost his stock portfolio would have considerable. that has to be publicly reported. the people you mentioned, we've been is definitely, i'm quite certain the wealthiest because he had a career in investment banking before working in the treasury department. so his net worth has taken some hip and i think he is the wealthiest of the pack because greenspan spent much of his, most of his career in public

service. and certainly geithner and bernanke has long been in government for a few years. it's a very legitimate question. >> host: by twitter, talk about the gramm-leach by the act and the repeal of glass-steagall act of 1933. what was the impact in height sight on these? are these questions being asked by the commission? >> guest: that is being asked by the commission but i wish i had a simple answer but i can sum it down, summon up in this way. there is a lot of controversy in that question. and a lot of people say glass-steagall which of course separate investment banking from commercial banking being that deposit taking banks could also underwrite securities. there's pretty much a consensus that was part of his d. regulatory spirit of the 1990s. the question is whether the repeal of glass-steagall in 1999 actually was a cause of the financial crisis as opposed to just a symptom of the d. regulation. there is uncertainty about that.

some of the companies that failed most by category in 2008 like aig and the american international group, or lehman brothers, these were respectively an insurance company and a broker-dealer. they were not deposit taking institutions ever. and so, there's a movement on the hill, some people in congress are saying restore glass-steagall and repeal gramm-leach-bliley. but others are saying that would really do much. you're not getting at the root causes of the crisis. and i would hope that's one of the interest the commission can answer. >> host: let me dig deeply into what you were report in the scoring story. pay-per-use light airs in oversight of citigroup. these are documents turned over to this commission by the fed, is that correct? >> guest: that's correct. >> host: you say they paint a troubling picture of events oversight of citigroup both before and after mr. greenspan mr. greenspanleft the fed and again after citigroup received three taxpayer financed bailout. tell us more about that, and how it figures into the debate about

whether not the fed should have more power. >> guest: the stock is showing 2005 and again at 2009, but they conducted these to review examinations were the asked parts of their supervision regulation department to take a look at how other parts were doing. they found that for the citigroup examination the oversight was not adequate. what surprised me as a journalist was, i can see 2005 at that would be a big story because those with used all these problems were accumulating. it seemed even more significant in 2009 after the crisis had already a rugged and citigroup have gotten $45 billion in three installment of taxpayer bailouts how to oversight could still be inadequate. so that's what we emphasize in our article today. the current fed chairman, mr. bernanke, has vowed to overhaul supervision and regulation but it's a tough challenge. i think they have about 3000 supervisors across the country. the challenges right now that congress is trying to say to the fed to think that they will take

away a bunch of small state-chartered member banks of the fed system, and they're going to put them in other agencies, primarily the fdic. both will give the fed for the first time explicit oversight responsibility for the nation's largest most interconnected financial institutions, even if they are not banks. so hopefully the aig's of the future so the fed right now is being passed with all this oversight responsibility. the question is can it meet the challenge. >> host: in when presumed a citibank would have been alone in the amount of oversight that it had? >> guest: or in insufficiency of that oversight, probably not. >> host: next is massachusetts. richard, independent line. go ahead. >> caller: thank you. this investigation committee, it's just a big joke. they slap these guys around and tell them they are bad people. and nothing is really done. no one goes to jail, and after all the commissions and all the investigations are done, we all

know it's in the back of the paper and nothing happens. that's what makes me so aggravated is that these people have to be put into a do. and i mean hard do. not country clubs. this is what's wrong with america. this is why the people are angry, because that happened to me. i would lose my pension, i would be in jail. cunningham is not in jail. definitely a guest aggravate that there's nothing we can do about it. i thank you for listening to me and letting me make this call. thank you very much and have a nice take. >> host: richard is like many callers who ask where's the justice department in this investigation? >> guest: the justice department, eric older testified in the first round, the attorney general testified in first round of the hearing. he pointed out what they're doing and they are essential in forcing and cracking down on fraud. notably, he said the number of

mortgage fraud investigations that they have pursued has gone up dramatically. of course, that might have been while helpful to know now, might have been even more helpful had happened five or six years ago. that was the previous administration, previous justice department that comes a time when hundreds of or thousands of sometimes sketchy mortgage originators and lenders were entering the market for the first time because the securitization was exploding at the time. >> host: we're talking to sewell chan of the "new york times." florida is next. go ahead, caller call back i would like to know how much of or read the responsibility from tammy and freddie mac, fannie mae and freddie mac and congress, who actually pushed companies, banks into making loans to people who could not afford them and could not pay that back. they walked away from fannie mae with over and million dollar bonus and she walked out the door. when they were falling apart. >> host: what are some of this

theme yesterday in fact mr. greenspan i believe that congress supported any more people into homes, and so this force and encourage the mood among bankers. >> guest: that's a great question. fan is one of the subject of this week's hearings, and then every together. one was great in the '50s and i think the other in the '70s, word news is in or at the center of this crisis. i think one of the key questions the commission faces is how much. this is where susan i think things have gotten partisan. to the greatest extent possible for my reporting, the republicans seem to be one to shift, put as much of the but as possible on fannie and freddie. the democrats would in general i think like to see more of the point assigned to the kind of wall street firms, investment banks can, that's a good as many of these loans. it's a very competent picture. chairman greenspan pointed out yesterday that under successive administrations, democrat and

republican, there was an emphasis on homeownership on having equity stake in the american dream. and the way to that was through homebuying. homeownership rates were rising so quickly and mr. greenspan's point was had the fed did anything to clamp down on that kind of mortgage lending, it would have been accused of being really bad and much more. he said literally congress would've clamped down on us. the fed is independent, but only to an extent that and i thought i was one of the most powerful point that greenspan made yesterday. that the government has to decide the future of all of the housing future fannie and freddie are entirely worst of the state. >> host: the basic contours of the financial crisis have been known for a while now. in all these additional investigations, both by journalists such as yourself and official investigations in washington, and elsewhere, are we learning more? >> guest: i think that's one of the key challenges. i think we are learning quite a

bit in the sense that so many government documents are being turned over. and it makes a lot of sense. it makes sense, there is a powerful argument for the id of a single national commission to produce a definitive authoritative account of what happened and what the causes were. i think one of the challenges of is the amount of time to have and a very limited budget. they only have a budget of about $8 million. that's really pocket change in washington. the bank trustee was appointed by the court in the lehman brothers case spent $38 million just looking at the implosion of women. so you can imagine multiply that across all the different institutions that failed, this is not going to be an inquiry that could look at that level that could use that level of detail and examine these copies. >> host: this is john on the democrats line. good morning, john. >> caller: good morning. i was wanting to know if you have heard of harold think in a black rock group? he was the originator of the so prime mortgage lending industry.

back in the bears and stearns bailout, that early on right from the very beginning. they were placed in receivership, there's and stearns. had heard of black rock group? >> guest: i've heard of blackrock and i know bear stearns was the earliest big institution that collapsed during this crisis but i'm not, with the individual. >> host: just more generally about the history of some pride, do you know more about it? the whole concept of the subprime mortgage? >> guest: there have always been mortgage is given to people who might not otherwise qualify for them because of either a poor credit history or inability to pay. and these loans gained traction as the impulse toward increasing homebuyer ship and homeownership gains strength. but what i think was a crucial difference was the securitization of these loans. instead of holding the loans on their portfolios and, you know, writing off whatever losses came when the loans defaulted, banks

increasingly packaged and bundled these loans it is agreed that were then sold to investors. that had an acceleration process that magnified the impact of any individual default. instead of just affected the bank that issued the loan, susan, the default had a ripple effect through all the levels of hands through which the loan had passed. >> host: here is a question wanting interpretation of chairman greenspan's argument yesterday. a view on twitter called rock dust that doesn't greenspan's argument that congress would've stepped in to stop at about two i was was a patsy? -- no one would have described him as a patsy. he was such a larger-than-life character, one of the most influential financial statement in the world. he stepped way beyond the traditional role of guiding monetary policy and interest rates of the fed. he give advice to clinton and the first president bush on budgets.

now for him to say that he was constrained by the sphere of congressional intervention is a turnaround. host: the next call is from erie, pa., on the independent line. caller: good morning to you both. chairman greenspan has often stated he is a true believer in the ayn rand philosophy that developed from the 1930's and the great depression, and the regulation that took place there. that entire philosophy now has been called into question because the true believers have just turned their backs are closed their eyes to regulation. truly, that is what fell down is regulation. the entire philosophy stems from the fact, the belief that self- interest will always do what is in its self-interest will always do what is in its own self-interest and that will keep the markets, you know, working but, what happens,

in my estimation from a, casual observer just from average observer, is that, sort of believe that, that the, financial system was the means, human foible. that sort of like spiritualized belief that they will always do what is in their best interest and they will never manipulate anything and what it appears to me is that if you make the regulations we'll figure out a way around them to make money and what happened to me, as a result of that belief that we don't need regulation and that the markets will always do what is in their own self-interest. could you please come comment on that, mr. chen? i think your last comment on how derivatives were produced and marketed was right on. so thank you very much for your time. >> guest: that's a wonderful question. i wrote about this a couple

weeks ago when mr. greenspan deliver ad paper before the brookings institution and in some way it is was amaya cull pa because he called for, he recognized some of the deregulation had gotten out of control. what is really fascinating to me, as an observer there has not been a giant mea culpa from mr. greenspan. he hasn't said i was all wrong. he hasn't said government regulation is highly effective. he still believes to an extent in self-correcting nature of the free markets. what he is saying now a little more nuanced than what he said in the past both in the brookings paper and yesterday, fraud and enforcement do have to be cracked down on. government resources need to be devoted to rooting out wrongdoing and corruption but when it comes to actually judging risk he is not that confident regulators can do that. he does not think regulators can come in and say, there is housing bubble that is happening we've got to stop

it. he says good luck, that ain't going to work. he says regulators increase capital requirements that banks have to hold and capital traders have to hold. he said a major breakdown was not one of regulation but what he calls private surveillance system of counterparty risk. all that means, essentially you're an investment bank, people you're trading with they are ones should know what you're buying and what they're offering. they failed to see the dangers and hazards in the products that were being offered. it is that system that broke down. obviously there are people who are going to dispute that point of view. >> host: i might be putting you on the spot with this question. so you can have time to think about it if you like. if you can get to one or two players in this entire financial crisis and ask them a question or two. who would it be and what would the questions be? >> guest: would you, that is a great question. >> host: you want to think about it, while i take a call?. >> guest: yeah. >> host: bloomington, illinois, bud calling us on the republican line. good morning, bud. >> caller: good morning.

thank you for c-span it is a great service to the american people. >> host: thanks a lot. >> caller: i want to ask you about leveraging ratios. in the run-up to the financial crisis the sec allowed leveraging ratios in investment banks to go from something like, 1220 one, to 40 to one. which means i think for every dollar they held in assets they borrowed something like $40 against that one dollar in assets. i'm wondering anything's been done to put a cap on how much leveraging is allowed in those investment banks? >> guest: that's a great question. actually, i hope to, i can give you a direct answer. yesterday, i was at a briefing with several white house officials including, deputy treasurer secretary and head of economic council.

i asked them that question. this new regulatory environment the obama administration is. put forth the white paper, increase capital requirements liquidity requirement, leverage requirements why not spell out what the requirements are in the legislation? right now the legislation doesn't really do that. it defers to regulators, the decision of what the percent should be. when i asked white house to spell out the number, answer i was give the number can change over time. economic conditions change. so, you can't, you know, their argument don't lock into law something in a few years might seem archaic and outmoded. they pointed out to the need to harmonize whatever our requirements are with the best practices going on in other advanced and wealthy countries. it is a great question. some of the critics of legislation i heard from, we're not doing enough right now. you're deferring decision where to set the requirement to regulators. right now the regulators might be consistent with what the administration wants but how do you know in 10 years or 20 years who

those regulators will be and where they set the levels? it is a really valid question. >> host: i referenced the sec announcement yesterday. here is quoting in "the washington post.". sec chairman mary schapiro on wednesday called her proposals, their proposals of fundamental revision to how securitization is regulated and said changes are both necessary and critical components of restoring investor confidence. one proposed rule would obligate banks and other financial firms that securitize loans to own 5% of the securities they sell. skin in the game requirement which has provoked intense debate. another proposal for the first time require banks to release more detailed data on the loans and asset-backed securities so investors can make more informed decisions wheer to buy them. securities so investors can make more informed decisions about whether to buy them. >> guest: it makes a lot of sense. consistent with what the current sec is trying to do is recover its reputation frankly. a lot of people on the commission are talking about bringing back chris cox,

cheryl of sec during the bush administration for some pretty hard questioning. current commission chairwoman, mary schapiro made emphasis, sec's reputation really taken a hit especially after bernie madoff scandal. they're coming back in a way toughening all sorts of requirements for disclosure. >> host: do you have an answer to my previous question? >> i do. i have to think about it for a little bit. but i would certainly be interested in asking, two people two questions. i would be interested in talking to chairman greenspan a little bit more. he made one of the most critical damning accusations made against the fed under his tenure the fed failed to develop rules cracking down on subprime lending even though congress specifically gave it statutory power to do so in 1994. greenspan said yesterday that statute was somewhat vague. it didn't define clearly what abusive and deceptive practices were for example. i would like to really ask chairman greenspan, a little

bit more closely about that. whether or not he ever considered banning certain mortgage practices out right as opposed to merely issuing guidance and saying hey, there might be a problem here? other person i would ask a question to would be actually larry summers. final treasury secretary in the clinton administration. now top economic advisor to obama. i would like to ask him about, ask him what decisions he made or decisions could have made, what does he most regret from his time as treasury secretary and his time now? he is existing at highest levels of power in two completely different regulatory and economic environments. >> host: and do you see the period which he served as treasury secretary as seeds what happened later on? >> guest: it was about two years i believe at end of the clinton administration. it was a time when the stock market was so high. this was just before or just as the initial dot-com bubble was bursting. that was nothing like what we're seeing now. so the environment kind of euphoria that had accompanied prosperity of

'90s really put a lot of regulatory issues on the back burner. now they have come back in full force. >> host: "new york times", next is philadelphia, this is john calling on democrats line. good morning, john. >> caller: good morning, c-span. when the business-friendly democrats took over the democratic party, 80% of the public's representation went dunn therain. we lost 80% of our representation. picture a table where you have republican party and you have the business-friendly democrats like the clinton wing, sitting at this indidder table, with the business community, the angers and corporations. -- bankers. whatever falls off the table is what we get. we get supply side economics from the republicans. we get a little bit of that minimum wage or a little bit of environmentalism from the democrats. if you go back, it all started with reagan identifying the government as the problem. that is the mantra that took

over. fast forward, to phil gramm and his wife wendy, who put through a favor for enron, which caused enron to go out of business. but all those people lost everything. fast forward again. you had the same actors, the business-friendly democrats, bill clinton, robert rubin. also alan greenspan. phil gramm and entire republican party. glass-steagall act went by the wayside. your enemy today is the business-friendly democrats running that party. and your enemy is the mind set of the business community where we're in it for ourselves and we'll sell this worthless paper back and forth just to increase our bonuses because, that's exactly what they were doing on wall street, those bankers. bankers were selling useless paper back and forth putting their own value on it. bottom line, it was just a piece of paper that had no real intrinsic value except what they put on it. and it increased their bonuses. what they were doing, playing a game. >> host: john, let me ask

you a question. what do you think of the current administration? do you see them as business-friendly democrats? >> caller: let me tell you something. you have summers in there. you have geithner in there. you know, i don't, i'm not too enamored with obama to tell you the truth. it is not, i'm just not too enamored with him. until people start going to jail, you have a mind-set that is, you know every man for himself. get control of this corporation so i can do what i can to, one final thing. we have in this country today people who run hedge funds who earn hundreds of millions of dollars a year and they're in the 15% tax bracket. you two people on that set there, are paying twice the tax bracket than they are. that is what we receive from the people who are anti-government, get government out of the way. >> host: thanks. thank you very much.

we heard your point on that. lots there to respond to. >> guest: i think, most compelling point john made, and i hear his anger and frustration, is this observation, very interesting one, susan, a lot of critics from the left have raised precisely question john has. why this administration, why did obama choose people very much associated with the kind of past or recent past? larry summers, he reappointed ben bernanke who had been the fed chairman for president bush. >> we leave this recorded portion of today's "washington journal" to take you live back now to the financial crisis inquiry commission. the second of three days of hearings today. on subprime lending. this afternoon we'll hear from the current and a former comptroller of the currency. >> with respect to that office's oversight of citigroup and in a larger sense, its oversight of financial markets particularly as it relates to subprime lending and securitization. we have two witnesses with

us here today. mr. john haushg, former comptroller of currency and mr. john dugan, current comptroller of the currency. i like to start doing what we customarilily do for witnesses that come before and after you. that is administer the both to both of you. would you please stand. do you solemnly swear or affirm under penalty of perjury that the testimony you're about to provide the commission will be the truth, whole truth and nothing but the truth to the best of your knowledge? thank you so much. so gentlemen, just one moment here. yes. gentlemen, i'd like, i know you've submitted written testimony to us. i think mr. dugan, you get the record for amount of information, even though you did have a main statement.

but i'd like to ask each of you to start today by providing some brief oral testimony, up to five minutes each. mr. hawke, i am going to ask you to go first as former comptroller. then mr. dugan. to mr. hawke, if you would begin your testimony. if you could move, turn it on but move the mike towards you, sir. >> thank you, mr. chairman. >> thank you. >> and, mr. vice chairman, members of the commission. i'm pleased to be able to participate in the work of the commission and i hope i can say something useful today. i wanted to start by making two points touched on in my opening statement but i think that are very important. one, securitizations were really a creature of the accounting rules. we had seen securitizations for many years. there was a time when they were sort of one-off transactions, an entity that

wanted to increase its liquidity to meet loan demand or credit card demand would securitize a bunch of receiveables or other assets, go to market maybe once a year, twice a year, something like that. securitizations evolved into a constant, everyday method of raising liquidity and that process was facility tated by -- facilitated by the accounting rules which allowed the institutions to treat assets sold into securitizations as off their books provided that certain accounting criteria were satisfied. basically there were no contractual indemnifications or liabilities. if those rules were met, the institution could treat the assets for financial accounting purposes as not on their books and regulators would, do the same thing. the regulators would not

treat those assets as subject to capital requirements. that might be okay, if there were no risks that resided with the institution after the securitization. but what we have come to learn, in painful way, particularly in more recent years is, that, once a bank securitizes assets there are several different kinds of risks they retain. on a simple level they retain a liquidity risk because if their securitizations start to go bad they may have a harder time raising new liquidity in the marketplace. but, more recently what we've seen is that as there were wholesale defaults on the mortgages that were securitized, the trustees of the securitization pools were very aggressive in putting loans back to the, the banks that had sold the

loans on the ground that representations and warranties given at time of securitization had been breached, generally for some kind of fraud. and, there were tens, if not hundreds of thousands of loans that had been put back to banks, and, that has precipitated enormous amount of litigation and controversy at a time when banks themselves were under tremendous pressures. i don't think any of us anticipated that that kind of risk in the process of securitization. and it raises the question about whether we should not have some capital requirements against assets that have been securitized and are treated by the, by the accountants and by the regulators as off the books, to deal with those risks. i think that's a subject that is worthy of investigations.

the other, the other point is with respect to the way we measure capital. there was an old head of supervision at the fed many years ago who when asked how much capital a bank needs said, i can't tell you but i know it when i see it. and we have evolved from that into a very highly technical set of rules for allocating capital. the because sal, as i said, i sat on basal committee rules for six years and they're mind-boggling in their complexity. one thing we don't do with increasingly complex capital rules, is measure the value of capital accurately. we treat assets for the most part based on historical book values. assets may get written down as a result of an

examination but we don't really look at what, what the true value, the true market value of the assets of the books on the bank are. i realize that fair value accounting is very controversial topic. i don't think we need to go all the way to fair value accounting to satisfy the point that i'm making. but we have a system of bank supervision built on the concept -- >> see if you wrap up in the next minute. i should have warned you but, is that yellow means one minute to go. >> okay. >> if you could wrap up in one minute. >> i finish this very quickly. we have a system of supervision based on the process of prompt, corrective action. that is as capital levels fall, there should be increasingly vigorous supervisory action. but that whole concept fails if we're not measuring capital accurately. >> all right. terrific. thank you, very, very much. mr. dugan.

and let me just say to start here because the vice-chair always has a favorite phrase, behavior has consequences. i actually want to thank you and occ of all the endtys we dealt with, you've been extraordinarily prompt in providing documents to us and making available to witnesses and we appreciate it. we understand you've done very well in that respect so thank you. >> thank you. chairman angelides, vice chairman thomas and members of the commission thank you for this opportunity to address your questions regarding national banks, subprime lending federal repreemption and supervision of citigroup all on problems caused by deep losses on residential mortgages. while lack of adequate consume he protection contributed to record levels of these losses there was a more fundamental problem. poor underwriting practices that made credit too easy especially by unegg regulated mortgage lenders and brokers. these included stated income loans, lack of meaningful

cash down payments, payment option loans and teaser rate adjustable mortgages. in addition, without any skin in the game being brokers and originators had every incentive to apply weakest underwriting standard that would produce the most mortgages that could be sold to mortgage securitizers. and unlike banks, most mortgage brokers in the united states were virtually unregulated. so there was no supervisory check on i am prudent underwriting practices. the rapid increase in market share by these unregulated brokers and originators, pressured regulated banks to lower their underwriting standards which they did though not as much as unregulated mortgage lenders. the occ took a number of steps to keep national banks from engaging in the same risky underwriting practice as their non-banking competitors. that made a difference but not enough for the whole mortgage system. all these factors produced the worst underwritten mortgages in our history. when house prices sharply declined it led to record levels of delinquency,

default, foreclosures and loss. however, the weak lending standards that caused the crisis were not the result of federal preemption, of state mortgage lending laws. if it had ban vast majority of subprime lending alt-a lending would have been done in national banks and federal thrifts. but just the opposite was true. ascribed in my written statement, national banks and their subsidiaries made only 10% of the subprime mortgages and only 12% of all non-prime mortgages from 2005 through 2007. conversely, 72% of all non-prime mortgages were made by lenders that were subject to state law. well over half were made by mortgage lenders that were the exclusively subject to state law, and it is widely recognized that these were the worst underwritten loans with the highest levels of foreclosure. i'm not suggesting that national banks played no role in the subprime lending crisis. they did. some national banks

originated poor quality, non-prime mortgage loans. some purchased badly underwritten subprime mortgage-backed securities and some had significant exposure to subprime mortgage risk they did not understand or anticipate. all of which, produced very large losses. but the relatively smaller share of non-prime mortgages made by national banks and their relatively better performance belie the argument that national banks, federal preemption caused the mortgage crisis. let me turn briefly to citigroup. the critical role subprime losses played in its problems and occ supervision of its national bank subsidiary, citibank. the overwelcoming majority of the citigroup problems did not arise from mortgages originated by citibank. indeed the bank's financial performance throughout the crisis was consistently better that on it was for citigroup as a whole. instead huge mortgage losses

arose primarily from collateralized debt obligations struck urded by citigroup's broker-dealer with mortgages purchases from third parties. by far largest exposure of citibank to the cdos came from liquidity puts supported the super senior tranches. in the summer and fall of 2007, the $25 billion exposure to the bank from these liquidity puts came as surprise to senior management of citigroup and to the occ. subsequent review and investigation showed this to be both a risk management and an internal reporting breakdown by the company. it also revealed some of the supervisory problems caused by the legally segregated responsibilities of different regulators and undue reliance on high credit ratings. citigroup, citibank, the occ and other regulators since taken a number of steps to address these issues. in closing there are many lessons to be learned from the mortgage problems that precipitated the crisis but

the one i would like to leave you where is this. i believe the government should establish minimum, common sense underwriting standards for mortgages that can be effectively applied and enforced for all mortgage lenders. whether they are regulated banks or unregulated mortgage companies. if we had such basic across the board rules in place, 10 years ago, on income verification, down payments and teaser rate mortgages i believe the financial crisis would have been much less severe than it was. thank you very much. >> thank you very much. we will now go to commissioner questions. we will start, i will defer mine to the tail end and we will start with the vice chairman. >> mr. chairman i will probably defer most of mine to the tail end. but i want to respond briefly to the a couple of points. first of all tank both of you very much.

in the business of regulation, a lot of folks come and go and i'm pleased to see with just two people we have got a broad scope of history during a period when a lot of this was evolving and that help as little bit based upon the perspectives that you present. over the last couple of days, one conclusion i have now locked down, pretty firmly is simplicity is not conducive to maximizing income. if you're involved in any way on wall street. that's true to a certain extent in other professions. i think magicians learned it a long time ago because you're fascinating with what they do until they show you what you're doing and then you say, that's just because you practice it but it ain't that big a deal. i happen to think, who was it?

thurber, i think, for every complex problem there is simple answer and it's wrong. so, especially in this world today i understand and accept complexity. but having something complex and something convoluted for the purpose of having it be perceived what it isn't are two different things. and one of my worries is, and we're not responsible for setting up a struck ture which -- structure which allows us to advocate to congress what it is ought to be the solution, thank goodness. but one of the things that concerns me, and just a quick reaction because it is outside your area of expertise but it came to me in the comments that you made at the end and that is, i had been concerned for some time about the

influence or, my impression is, of the influence, others may or may not agree, of the tax code on the way in which people began dealing with their homes. homes, rather than houses. you get into the flipping business and the rest. i'm not concerned about that. but that the tax code really encouraged people arguably, to pursue the american dream and wind up owning a home but not the way it used to be where you owned the home, it was better than rent because you could get equity and eventually you would have a mortgage-burning party. and, you aaccumulated wealth in your home. there was some discussion this was one of the american ways of saving, not available to other societies was -- because they didn't own homes nor did the government assist them to owning homes to the degree that the u.s. did in other

societies. but in 1986 on the tax committee, ways and means committee, behind closed doors we fought a pretty hard, tough, battle because there was a desire, and we in fact agreed to remove consumer interest as a deductible item on the tax form. thereby, dam pin down the consumer enthusiasm because the government would cover a piece of the action in terms of the writeoff on interest. . .

>> but of course it went right back into consumer consumer -- into consumption. totally negating and more so the argument about not wanting to have interest deducted off of consumer demand. i think striking. then you have the cheaper money. do you folks feel at all in any way that partially contributed to assisted the environment in terms of problem that we now face? >> well, i'm certainly no expert on tax policy. but i think there were a cluster of things that encouraged home ownership that fed on each other to stimulate -- >> i haven't even discussed the societal and government desire for everyone to own their own home just like going to college. so you do everything you can to

allow access to that, notwithstanding the fact not everybody ought to be able to participate. >> i think it's all part of that pattern that creates the intense desire and demand for bigger, more mortgages and also as you said, the easy access to home equity, through home equity lines of credit. now there was a change. and it allowed much more equity contraction to be used for consumption. it sort of fed on itself. so i am no expert. but i think it did feed the whole notion of greater and greater demand for mortgages, mortgage credit that fed the securization and desire as well. >> thank you. >> ms. murren. >> thank you. thank you both for your very detailed and thoughtful testimony. i enjoyed reading it. and i though wanted to go back

to some of the witnesses that we've heard today and yesterday. i don't know, did you have an opportunity to hear the previous witnesses? >> some of it. but my staff heard it. and i've been briefed on various aspects what they say. some of it. but not every jot and dittle. >> my impression was what we heard from as company, as managers, and as participates in their company and also in the financial crisis, that during the course of performing their duties and also the course of conducting business that they felt very strongly that their risk management systems and the way they dealt with risk and, you know, to use some of the words was excellent, very good, best in class almost to the person. in fact, i think it was the person that they really validated their own upon of their risk management policies and methodologies. does the fact that they also strongly advance it or believe

it surprise you in light of your reports and in light of what's happened? >> it doesn't change our view of what we thought how the risk management was at the time or how it played out, i guess it would say. i think there were things they understand, others less so, we on various occasions pointed out problems. i will say that when we pointed out problems to them, they were by and large quite responsive to them. but i also think when the crisis hit, it revealed some problems that were of significant concern to us. which we did communicate to the company. >> and there were a couple of instances prior to the crisis too where you had a noticed the deficiencies in the risk management practices. could you comment, you said they were very responsive in remedying those things, is that accurate or was it complete? >> i think that is accurate. i think what i was thinking about when i said that was we

did a review of their credit derivatives, trading business, and the bank in 2005 where we found a number of problems and concerns and we downgraded our rating of the management of that business and told them that they needed to fix things if they wanted to get that assessment of them improved. they did curtail the risk that they were taking, and they did take a number of steps to fix that particular problem. and we thought that is how the process is supposed to work. >> one other the things that you mentioned is there a number of different regulatory bodies that govern the overall enterprise, and specifically you mentioned that it was really not inside of the bank company itself which you monitored whether the problems arose, but rather other areas. could you maybe describe to us your interactions with some of the other regulators. because if i'm not mistaken,

maybe you can comment on this, there was some interest in utilizing the information that was produced by the other regulators to be able to determine the safety and soundness of the bank. so to what extent did you or did others that you interacted with make sure the right questions were being validated and asked? >> of course in the way the bank holding structure works, as i think you know, we were responsibility as the primary supervisor for the bank and it subsidiaries and the federal reserve was the umbrella supervisor for the consolidated company and the nonbanking subsidiaries in the holding companies and in some cases the subsidiaries were broken dealers what were regulated by the sec. that was a mixture of different regularlator. also we have future commission merchants that were regulated by

the future trading commission. we have by long historical practice a very close working relationship with the federal reserve as the holding company regulator. they see everything we do, they have access to everything we do. it's quite transparent, i believe what happens in the bank. there is a tremendous amount of focus on what's going on in the bank. it's a little murkier when we go outside the bank to deal with issues that could affect the bank. we rely on the federal reserve with respect to the affiliates for which it has primary supervisory responsibility, when you get to the security brokers dealer by statute were there are restrictions on our ability to get information from those companies. and restrictions on when we could examine those companies. and i do think that did and has created some issues in the process about not having as efficient and integrated

supervisory model as we should have. and that showed up in some ways in the supervision of citi bank and citigroup. >> one the notations that we had made in the earlier conversation with witnesses was regarding some of the creation of the new products which they would of course, i believe, bring to the occ to determine if they were able to sell them; correct? >> not necessarily. you know, there's not a prior approval requirement for new products with the occ. however, particularly in the wake of the enron situation, there was a tremendous focus put on making sure that institutions had new product committee and the right processes and the right due diligence and right controls to examine those new products. we would periodically go and examine those processes to make sure they were appropriately

looking at that. that's the way the process works. >> with that in mind, one the reasons we chose citi bank to look at was the ability to shed light on practices that might have been common throughout the financial services industry. in your opinion, do you think it was common for companies to look at the products and determine whether or not they needed to meet regulatory capital standards? was that one the ways they determined whether a particular new product was attractive to them? >> i am quite sure that factored into every decision. much of the way that companies decide on the profitability of a particular type of product is a risk adjusted return based on the capital requirement that is are allocated to that. absolutely. that is a factor that people look at. >> again, on a comparative basis, when you look at across the financial services industry, looking at a variety of different companies, when you look at them, are there certain

commonalities that they all share in terms of their -- you know, their failures as we look back now. things they might have done differently. >> there are some, yup. >> what would those be? >> so, for example, obviously in the area that you're -- this committee is looking hard at in the area of complex structured financial products and the cdos. it was a surprise in the process, not just as the management of citi but the management to several other companies about the significant sudden and deep losses created on these instruments. and i think there was not a full appreciation, a full examination of the -- of course, these were extraordinary events. but of the -- in many cases, situations where companies had thought they had limited exposure to subprime risk from their direct lending activities, only to find out that they had much more significant exposure than they thought. coming from the securities side,

and particularly from the cdo side. we saw that in several instances. i think the difference with citi and with several other institutions that we do not supervise is, they had so much more of it. it was so much bigger in concentration, which caused a much more significant problem when it hit. >> to the extent that the regulators are also responsible to some degree for examining that very surgeon the concentration of risk, and, you know, particularly as it relates to the holding company, in a practical sense, how would that have been discovered based on what you described as being a little bit murkier in certain areas? >> i think in the case of the structured products, i think it was fair to say that citigroup and its management and i would say also the regulators derived a false sense of security by the very high credit ratings on the supersenior tranches which ended

up causing the big losses. not the tranches below it which were riskier but which had been sold off. interestingly, they didn't not cause as much loss to where they were sold. people used them in different ways. so i think that was something that people did not adjust to or see as well as they should. i think the thing that surprised us as i mentioned in my opening remarks here was on the legendty put. that was never treated even as an exposure to subprime losses by citigroup, even after problems started hitting and we began asking questions, we weren't told about the magnitude that was viewed as something that was exposure of the bank. and that was unique to that institution. >> what do you think explains that? >> i think that liquidity put is a kind of liquidity support

facility that is not unusual in the sense that there were similar kinds of facilities provided for asset-backed commercial paper conduits that have been around for many years, that have worked well, and the actual liquidity facility was viewed as so unlikely to be exercised, that it was not a significant risk. the fact was we did have an extraordinary situation. by the way, it's not supposed to be there for credit protection. only supposed to be there were liquidity protection. if you had losses in a pool of assets, you couldn't exercise the liquidity put. or if huh a downgrade, you couldn't exercise it. but what happened in this circumstances, the market started sensing things before the credit rating agency did. there was a run on the commercial paper. and this sedgingly liquidity only temporary facility ended up being something that was permanent and ended up taking on

the credit risk. partly an extraordinary event, partly because it was similar to things they had done before and partly was only tied to what was supposed to be the safest asset in that particular pool that they never treated it as that kind of risk or calculated even the magnitude of it when they talked about it. >> would you agree one more component is it's difficult to evaluate the concentration of risk when you have so many people involved with analyzing the underlying assets and variety of a variety of organization all of whom feedback up into an umbrella holding company? >> it can be. but a good risk system, of course, and you're exactly right in the sense that, you know, they were analyzing their subprime exposure from various other things and putting them together. this one they didn't put with it. it turned out to be huge. so it was a breakdown. >> thank you. mr. hawke, i don't want to leave you out of my questioning. so i wanted to ask you from your

perspective, having been an observer for some time, what changes in the regulatory environment do you think have influenced where we are today versus perhaps a very early part of your tenure? >> i'm not sure that changes in the regulatory environment, per se, were a major contributing factor to the crisis. i'm one who believes -- and a lot of people disagree with me, that the regulatory structure -- >> mr. hawke, could you pull the microphone just a little bit closer. thank you. >> -- that is regulatory structure was not a major contributing cause. clearly, nobody would have invented this structure if you were developing a financial regulatory structure from scratch. but in my experience, it has worked quite well. not perfectly, by any means. but there's a high degree of

coordination among the agencies. while there are occasionally differences, today the system, i think, works generally -- generally works quite well. there -- a lot of people attribute today's problems to what they generally call deregulation. and they focus on the graham-leach-wiley act of 1999. i don't believe graham-leach- billy ended up turning out to be a dead letter. once citigroup act -- acquisition was evaluated there was very little in the cross industry accusations between insurance and security and banking purposes. pair -- paradoxically it wasn't

until the crisis that graham-leach-billy came an important factor in allowing companies like morgan stanley and goldman sachs to be holding companies where they couldn't before that. i don't think if you characterize graham-leach-billy has a deregulating that it was a contributing factor to the problem. >> would it be fair to say that it would make transparency better if you were to be able to perhaps regulate more strongly or at least to reveal more about what the nonbank entities are doing in the financial services sector? >> let me yield another five minutes. >> sure. >> five minutes. >> i think with that question, that's right. >> thank you. just one final question really on the occ reports on citi bank. there were a couple of notations about their failures of the

regulatory structure there. i wonder how strongly you took action in the face of those things. do you feel that as an enterprise that you have what you need to be able to put the kinds of muscle behind your recommendations or your observations that you need and you had commented earlier that you felt like they were listened to when they were made by -- when you made them to management. is this an accurate characterization? >> yes. it is an accurate characterization, the fact is when we do have a cause to take action, we can do it quite effectively. we have very strong tools that we can exercise, do exercise, have exercised in this circumstances to get the kind of change and action that we want. >> all right. okay. thank you. >> thank you, ms. murren. mr. wallison. >> thank you, mr. chairman. let me start with you, mr.

hawke, if i may. you were the controller during the clinton administration, latter part of the clinton administration and then through the portion of a bush administration. and i think i'm following up a bit on commissioner murren's question because i saw it somewhat broader. did you see any change in the way that regulation was viewed in the clinton administration or the bush administration? >> no, i did not, commissioner wallison. as a matter of fact, i found that in both the clinton and bush administrations, the treasury department was exceedingly sensitive about the independent -- statutory independence of the occ. while we were obviously part of the treasury department and found some strength in being part of the treasury department, i can't think of any instance where in either administration,

we had intersession on the part of the administration that was aimed at the way we conducted our supervisory and regulatory activities. >> so these concerns that there was some kind of environment which did not favor regulation during the bush administration at least that's been one the complaints is was not something you noticed when you were a regulator. >> as i said, i don't think that deregulation was a contributing factor, whether it was graham-leach-billy, or anything early than that. >> i'm sorry to follow this up again. i want to talk about the environment, the write device if you will about regulation. we read and hear a lot about some notion that regulators were

not regulating during the bush administration. did you notice anything like that? >> no, as i said, we kept a steady course in our supervisory and regulatory activities. we will extensive inner agency discussions. but that is among the banking -- the financial regulatory agencies. but i can't think of a single instance where the administration that happened to be in the power at a particular time attempted to influence our supervisory or regulatory policy. >> thank you. let me go on to another subject. you noticed in your testimony that literally tens of thousands if not hundreds of thousands of loans had been put back to banks in the securitization process. that's really important point. because many people act as though this originating to

distribute idea means that no one has any liability after the loan is sold. in fact, the banks or anyone else who has sold the loan does have liability. and you were concerned about that? the question i have, however, is wouldn't it be one of the things that are regular lay a tours ought to look at when a bank is holding loans that it is going to securetize to make sure the loan is a good enough loan to pass a securitization test? >> well, i can -- i can't disagree that would in an ideal world being something regulators might have done. loans passed through banks during the securitization quite rapidly. they were not sitting around for -- waiting for examiners to come

in and look at them. and i don't think anybody predicted this kind of response from the securitization trustees when they started trying to find ways to salvage the loans that were going bad in their pools by putting them back to the banks on the ground that there had been some sort of fraud in the initiation of the transaction and that the representations and warrantieses that the bank had given at the time of the sale of the loan had been breeched. >> let me turn then to the question that you mentioned in your testimony. this is fair value or market-to market accounting. would you favor us with your views on how that affected the view of the condition of financial institutions, particularly banks? >> well, this is a highly controversial subject. i'm not an accountant, i

probably should not delve into this. >> if we leave it to the accountants, we'll never have debate about this. please. >> my experience in this regard was affected by my service as a director of the fdic. that's the statutory role for the controller. it seemed that every time that a bank failed, and as we look back at the last examination report before the failure, the bank showed positive capital. but immediately after the failure, it showed negative capital. and one had to conclude that things didn't change in a period of months so quickly. and my conclusion from that was that the real value of the banks capital was not being adequately assessed, whether by the regulators by by the rating agencies or the marketplace or

whatever. and now moving to full-blown fair value accounting, it is as i said, a controversial issue. people talk about the volatility that that would create. but i think the regulators who were implementing a system of prompt corrective action, have to -- which is what our system is based on -- have to know the real value of prompt corrective action, other than prompt corrective actions becomes a fool's paradise. by the time you are ready to act, real capital may have eroded. the regulators have to know the real value of capital. >> do you suppose that the regulators or the market has a better idea of what the real value of capital is when there is no market? >> well, that's a good question. when there is no market, i don't know that the market has any better way of looking at it then

the regulators do. there are ways and techniques for valuing assets for which there is no -- >> discount of cash flow, for example. >> discounted cash flow, yeah, is one of them. not every asset can be valued on a bank's book with precision. but looking at real values, it is important. my favorite examine of this is the situation in the savings loan industry in the late '80s and early '90s. everybody knew that when the market rates were up around 20% and s&ls had average yields on their portfolios of 6% that they were under water. that have -- and there was no way you could earn your way out of that. we hadn't an insolvent industry. had i think the regulators were aware of that. had the regulators acted on the basis of what real market values

were and had they done it as interest rates started to go up instead of waiting to the end when there was a cliff that huh to dive off. some of the impact of the savings loan could have been debacle could have been avoided. >> thanks very much. let me go on to controller dew ban. you have uniquely served in both the bush administration, you were appointed by george w. bush and in the obama administration. i'm going to ask you the same question i asked mr. hawke. that is have you seen any significant difference between the regulatory environment, i call it the sense of whether regulation is important or not important in the obama administration than you saw in the bush administration? >> no. i do think it's fair, however, to say that the world changed when we hit the crisis and how everybody was looking at this. i think the treasury department

ended up playing a much more significant role because of the money that it was contributing. so it became much more active than would other than be the case. that was true in the bush administration under secretary paulson, carried over to the new administration. but in terms of as mr. hawke said about interference, directing, we have very strict rules, statutory firewalls that prevent interference with the regulator with the comptroller on regulatory matters. that have been observed in every case in both administrations. >> you describe the financial crisis as the result of the worse underwritten mortgages in our history. we've had a lot of focus on citi here. and i'm going to ignore citi for the moment. there have been a lot of questions about that. there will probably be more. there are about 200 banks, small

banks, smaller than citi that are failing or have failed already. there are 700 or so as possible failures. i suppose that all of these are not national banks that some of these are national banks. >> sadly, yes. >> sadly, yes. >> now it seems to me that if there's one thing that a regulator ought to be able to do, it is to make sure that a bank has complete files on loans, and that it is only making prudent mortgage loans. but we hear, at least, that most of these banks are failing because the loans that they had made and most of these banks make mortgage loans either commercial or residential, but principally residential and hold them on their balance sheet. what is the reason that so many of these banks made loans that

are now seeming to be imprudent and what role could the regularlator, particularly your office have played in preventing that from happening? >> well, i want to be careful here, because i was speaking about residential mortgage underwriting, not commercial mortgage underwriting. when it comes to the banks that have failed, there have been a number of thrift institutions that have failed because of residential mortgage problems. but i think all of the national banked that are failed and certainly the overwhelming majority of commercial banks have to failed have failed because of commercial real estate problems, not residential real estate things. in those circumstances while there have been in some cases a decline in underwriting standards, it's as true, if not more true that the problem is a concentration problem. it's a situation where they just have too many of these loans on

their book, too many eggs in one basketball if you like, and we did try to address this in regulatory guidance that started -- there was a long interagency process that dated back, proceeded very controversial. we did finally come out guidance that set some bench marks that were not hard caps on the amount of concentrations that commercial banks would have in commercial real estate lending. very opposed by parts of the industry as being too prescriptive. we nevertheless, finalized the rules. looking back on it, i worry that it wasn't actually strong enough and we should have done more. to your more general point, i do think there is a notion, and honestly, this is a little bit surprise to me when i came from the private sector into the government that regulators don't

set underwriting standards. and historically, that's not how things work. it's not been a notion of if you have a willing lender and a willing borrower, then they should be allowed to make a transaction, provided that it's done in a forthright manner where consumers can understand the risk in a consumer transaction and the lender understands appropriately measures, monitors, controls and manages the risk of the transaction. what i significant is that given the experience that we've gone through, that that paradigm didn't work very well. in the residential mortgage space, and it's a place where there have been --ing if you like, a market failure that does require more preceptive minimum government requirements. but critically, they have to apply the across the board. if one part can run around the others, you have problems.

>> i've read the material and in your prepared statement is higher down payments, for example, for mortgages, i think you were talking about 20% possible down payment. >> i haven't thrown out a number. that could vary in certain circumstances. >> that's a very sensible approach. i guess the question i'm going to ask you now is how do we bring that idea into an idea where we are expecting our banks and other institutions to increase home ownership by offering mortgages to people who cannot make a down payment. >> there is a tradeoff. undeniably, a tradeoff. if you put in, we had a crisis in which credit was too easy and too many people got loans. if you strengthen those standards, fewer people will get loans. that is the trade off. but i think what the crisis showed us was that people got loans that they couldn't handle

and that didn't help anybody. and what i would suggest is that's something that the notice in comment process, how you do is very important to sort out. number one, number two, i think there are different kinds of programs that one could do in an open and transparent way with people of more moderate means whether it's through the federal housing, administration, or va. which by the way has had more success even as they have lowered down payments. there's not a one-size-fits-all thought here, we have to bring back some discipline and common sense minimum underwriting standards. >> you have five additional minutes. >> wonderful. thank you very much. i'm glad you mentioned the open and transparent way. that is of course is a really significant issue. if we want to improve home ownership in this country, there is an open and transparent way to do it. that is to provide some sort of government subsidy, for we'll say, just to imagine it, down

payments. but what we did before was we took institutions that the government controlled in some way but didn't actually fund and said, and i'm talking about here about fannie mae and freddie mac, we said you distort your underwriting systems and you produce these mortgages for us. hands off, we don't have to put anything in the budget that provides that benefit for the people we are expecting you to help. so open and transparent, i think, is a really important issue. i'm grateful that you raised it. i have one other question. because there was something in your testimony that really instruct h -- struck my eye when you read it. you know that 22% of nonprime loans, nonprime loans, originated by national banks and their subsidiaries subsequently entered the foreclosure process,

22%, compared to market average of 25.7%. i don't know. but i was fairly shocked by the idea that 22% of nonprime mortgages in any group of financial institutions would be in the foreclosure process right now. that's quite extraordinary in terms of your knowledge of the industry, what's the multiple over the usual number of mortgages that are -- or homes that are in the foreclosure process at this stage of a deflation of a bubble we'll say? and i'd like to actually, mr. hawke, after you've answered to, because he has also a very strong experience in this business to respond to that. >> well, what i would say is we've never experienced something like this before.

we've never experienced this kind of decline in house prices. including the great depression if we had numbers at that time, i'm betting that you would have seen an actual more significant decline. and i'm, i guess, a little numb to the numbers. we've been collecting the most significant loan level data on mortgages through a mortgage metrics report that we public every quarter about this. and the trends for subprime lending, less so for lending, but certainly there have been shocking. and it's reached into the prime space as well. i'd have to get back to you about the record of historically when the multiples were. but it's an eye-popping number. and it's even in some ways higher for payment option mortgages which in many cases were not subprime mortgages. some of the numbers and some of the states are just shocking how much -- how much of them have gone to foreclosure. but their are multiples of

historical averages. >> thank you, mr. hawke? >> commissioner, i don't have a statistic. but i do have what may pass for an insight. that is that what this reflections is faulty underwriting. not just faulty underwriting, but a basic corruption of the underwriting process. underwriting alone is not a mystical science. the objective is to determine whether the borrowers has sufficient increase to pay interest and principal on a loan without recourse to the collateral. that's a point that we made over and over again in the various advisory that the occ put out and probably have a dozen occasions in recent years where we have made that point. and on the basis of stated

income or data that turned out to be fraudulent or faulty. don't reflect flaws in the underwriting as much as they do a corruption in the process. those lenders that were doing that really didn't care what the borrowers ability to pay current interest and principal on the loan was because they were looking to the collateral. that was certainly true with the alt-a and other kinds of alternatives mortgage instruments. as i mentioned in my prepared statement. banks were not looking at the borrowers ability to handle the fully advertised market rate of interest type obligations when the reset point game and those transactions. and because they were relying on the fact that housing prices only go up. and it was that reliance on the

value of the collateral that rather than conventional kind of loan underwriting that contributed to this high level of foreclosures. >> thank you. mr. chairman, i might have some questions at the end if we still have time. >> certainly. mr. thomas has a quick question on this side. >> just very briefly. i understand that you are focused on national. but in the discussion there's the community banks, i guess what i want you to do is either confirm or deny my thinking in that is with the growth of credit unions in terms of the degaitinging of what banks could do on somewhat of a explosive basis, savings and loans were really packaged on originating whole. as you got into the business of originate to distribute on residential loans and then the warehousing structure, about all that was left is some community

banks as a business focus was some of the commercial lending. and they stretched that farther than they should have. that's where they round up, isn't it? >> that is the issue. that is to say many of the retain loan products came more commodity like and scale businesses. it was harder and harder to community banks to compete a shrinking men knew of -- menu of things. many of which had high housing development in the sun belt and what like. it became a source of business. that's the conundrum of course if you start moving concentrations in that area, it's the basic bread and butter of what you do. >> at the same type, the commercial establishment is looking for loans. the others that were moving into the other products didn't have that much of an interest. they found themselves, unfortunately for a certain extent community banks.

>> that's right. >> thank you. >> thank you, mr. georgiou. >> thank you, mr. chairman. i just want to follow up on something that comssioner wallison began, mr. dugan, that is that back in 2007 you stated a number of times that subprime loans made by national banks in 2006 were becoming delinquent about half of the rate of the industry average. do you recall that? >> i don't recall that specifically. i remember saying they perform better. >> well, because in your testimony on page nine, you now quote statistics showing that the default rate for national banks for nonprime originated was about 86% of the market average. does that mean the national banks relative performances is deteriorated, as worsened over the last few years? >> i'd have to go back and look at the original statement and compare the same data type. not just subprime and alt-a.

>> would you mind doing that for us and follow up in writing to clarify that? >> you know, there are statutory protections under section 23 of the federal reserve act which limit the amount of transactions between a commercial bank and its afilluates in order to commercial the commercial bank from nonbank risk. well, the fed administered, bank supervisors have an interest. i wonder whether the liquidity puts we've been discussing at citigroup were considered a possible 23a in your view. >> i don't know that specifically, but to be a 23a violation, it would have to -- it's kind of a loan to one borrowering kind of con suspect. it'll be a amount of credit to affiliate that exceeded 10% of your capital. that would be a big number with citi bank.

i'm not sure that would be in addition. >> well, the capital was $100 billion at any relevant time. >> right. >> and as it turns out, they took $25 million of losses on the liquidity puts and a total of 30, slightly over $30 billion on the $43 billion with collateralized debt obligations so it ended up being about 1/3 less of their capital. >> let me get back to you on this. i'm not sure whether we looked at it, b, it also maybe the case when you have a contingent liability like that, it's treated differently than something that ended up being that kind of loss to the bank. >> right. and then what about the warehouse lines of credit that were provided by citi to customers on the investment bank such as new century that we heard from yesterday? >> those would be subject to 23 and 23b.

new century, that would be something to lending. they are not an affiliate. it wouldn't be 23a. >> with the lending limits and concentration presumably into this particular area. i guess one the thing that is we were told, maybe i can find it by one of your examiners told our staff that the cdo business at citi was managed outside the bank and changed from an agency business to principal business. we don't know that it's outside of our jurisdiction. graham-leach-billy would not let us look into that. yet, the bank had liquidity that were not reported in any risk system that we had. if that was the case, how serious -- i mean obviously it was a serious problem. how do we remedy that? is the structure preventing us from preventing you and others responsibility for getting at all of the information you need to assess the stability, the

safety and soundness of these institutions? >> i do think this is an issue. there is language in the act that make it is harder to get information from a functional regulators which is when the sec is. i say that not because the scc was resistance, but it creates the silo mentality. things that are done outside are not as routine in per view to see, touch, and feel, and ask questions about and sir up. i think that we do need to have a better way to get at that information on a consolidated integrated basis. that is one the things that was -- is in the financial reform legislation, and i think it is a good thing. >> okay. and it's in the financial reform legislation, what's that's moving -- >> to remove that provision in the graham-leach-billy act that put those kinds of constraints on the regulator that the entity

is now more easily subject particularly by the federal reserve. >> would the gentleman yield on that? in the house-passed version? >> i believe it's in the house-passed and senate-passed version. >> i can check it. i think it's in both. >> how much if at all did you understand the corral rattized debt debt debt -- collateralized debt obligation exposure? >> we certainly knew the broker dealer had a structuring business. that structuring business had cdos. we knee early on that at times they were going to use liquidity puts. but at the time when they first started doing cdos, the underlying collateral was not

subprime collateral. >> i'm sorry, what? >> it was not subprime collateral. >> what were they using 1234 >> regular mortgages. prime mortgages. >> right. >> that was our understanding. later we began to -- >> but they were still using low-level tranches of the mortgages were they not? >> that was not my issue. later they began to use derivatives in a synthetic way to create cdo exposure and that business began to pull some of the supersenior synthetic exposures in the bank. we did learn about that. we did do do an examination of our london branch office, our london office of the occ examined their branch office. and we did get a sense of the

expoture there -- exposure there in the early months of we've. but the exposure we got at the end of 2007 was a little larger than at the beginning of 2007. what we didn't know though was that there was a specific liquidity put on these cdo and they certainly didn't know the magnitude of the exposure. that magnitude was never really reported. and, you know, there were liquidity facilities, as i said before that were with other kinds of conduits, which were inside bank, which we would examine and know about. we wouldn't necessarily know about every liquidity facility that was done. but what i will say is during 2007 when problems started to emerge and we been gap kicking the tires harder, we weren't getting the answers this was a exposure.

it didn't show up until the crisis hit. that was a problem. >> right. and i -- you know, i don't want to belabor this, i'm tiring of saying it again myself. and i'm sure everyone else it. but at some point, this exposure, well, first of all, there is a -- there is been in contention and i think it was some people in the staff of the fed that have suggested this to us and others, that really that was a real regulatory and capital arbitrage game being played here. because in the commercial paper market, basically, most people won't buy commercial paper unless it's backed up a line of credit that's unconditionally so they can roll it over at the time and sell it. if they gave you a 25 -- if they put a $25 billion line of credit, unconditional line of credit on the bankbooks, then

you would see it, you would know it, people would have to hold capital on it, you'd be looking at what their exposure was having to honor that line of credit. would that be fair to say? >> yes. but we'll -- go ahead. >> okay. but my point then being is that by putting on -- putting the liquidity puts, usinglingty -- using liquidity puts instead of a customary line of credit, several things happen. one is its off-balance-sheet, less transparent to you, less clear to you that there's and the capital, at least no more than 1/10 had the line of credit been. >> so here's how this works. that's right. when you have liquidity facilities, and if it's a

liquidity facility that's less than one year in duration, the capital rules say, and this is truly a liquidity facility was the argument that it was only there in case of a temporary liquidity problem, not to back up credit. and then the current capital rules said 10% capital charge, 10% credit conversion factor. >> correct. >> if you had a full guarantee at 100%ing, then you have 100% credit conversion. as i said, the argument was if you didn't actually have a credit guarantee, but only guaranteeing on a temporary liquidity basis, it should only be 10%. you were right that the crisis showed us what was supposed to be the temporary liquidity, and all of the assets came back on the balance sheet. as a result, the basel facility said that credit facilities

can't be at 10%. they have to be at 50%. that's process is working its way through the american regulatory process. but in addition this accounting change of 166, 167 is making it much harder as a general matter to get them off balance sheet at all. >> right. which is another positive development. >> that's right. but i guess to go back to it, because i know chairman angeles december made this point, to trigger the liquidity put. that was because the underlying collateralized debt obligation was composed of all bbb tranches of the underlying residential mortgage-back securities. so those tranches were at the 7%

and below level of the originating security. that is 93% of the tranches were higher rated. so obviously, everything within the collateralized debt obligation, even the ones that were regarded as prime plus or aaa plus, i never got an a plus, i don't know what that is. but the -- so that when the underlying 7% and below rated tranche no longer was getting any cash flow because of the relatively modest of housing crisis and the result in defaults, then all of the upper level collateralized debt obligation failed and had to be brought back on to the books essentially and written off really in a very rapid succession there at citi. everybody who's testified here has said that neither the

regulators nor the risk assess sos nor the originators nor anybody else really regarded this particular product as having essentially any risk of default. anyone more than a 10,000 to one chance of default. is that? i mean obviously in retrospect we know that was not the case. but wouldn't it have been -- did any? let me ask in a different way. aye not being very articulate. did you or any of your people ever look into the credit default obligations. these collateralized debt and have any suspicious that maybe they weren't as solid as they were represented to be. >> i think that they did think there was some pricing risk in one of our examines that we noted with the cdos in 2005. but i don't think there was a fundamental question of the kind that you are suggesting that the supersenior exposure didn't have a remote level of risk.

if the further thing they would say is if there was a downgrade, a credit downgrade as a result of the 5%, the liquidity put could not be exercised. it weren't there to take into account. what happened was confidence got lost before there was a downgrade and investors started to run. that was a true liquidity event, not a credit event. liquidity put got exercised on a tech rare -- temporary basis. one the liquidity squeeze went buy. of course it didn't happen. what was styled and put forward as an extra production proved to be a losery. >> what's to be done about that? >> there's much more suspicious about credit facility in general. the u.s. had -- used to be on the original basel rule, it has 0. we were the ones who put it at

10%, basel bumped it up to 50% and a accounting rules have changed to make it not possible. >> right. one more question. >> i'll yield two minutes. >> thank you. i don't want to go too far into the accounting rules. can we all agree with regard on market to market that whether you believe in it or don't believe in it, one thing we can all agree on is you are not permitted to do it on the upside and not on the downside? >> i guess that's right, although i must say i disagree with jerry on the fair value accounting point. >> but i mean -- you know, we saw historically at several companies not in the financial business at enron, for example, market to market number of assets that they characterize as having increased in value, quarter by quarter. there was a significant element of their recognition of income. but so -- you're not. i mean you certainly ought not

to be permitted to mark it up but never to have to mark it down. >> i don't think that was the case in this instance. once it was in the trading books, it was marked up and down. that's why you had the losses. >> right. to follow up on the capital, isn't it also the case if it's your trading book there's very little capital required to sustain it. >> if hold the piece, not if you sell it. >> it's on your books. it's treated as securitization exposure and the way superrer senior exposures were treated is the same. you are right, however, that in many cases, the trading book evaluations were way lower than what the banking book was and that was true for a number of securitizations. it's one the things we pushed hard to change already as the

basel committee that was making its way back. >> we got somebody for the fed who told us that if it was kept on the trading book, the capital requirement was 750 to 800-1. >> that's true. but you have to remember that was a leverage ratio. it's a matter of risk base capital, but there was a much higher piece that applied. >> okay. thank you. mr. hawke, do you want to respond to that? and then i'm done. >> type clarify any position. i am not an advocate for going to full-market accounting for all purposes. i look at this in the context of the process of prompt corrective action. what the regulators were supposed to be is doing is taking increasingly stringent action as a bank's real capital approaches zero. it's a protection against insolvencies.

and from a supervisory point of view, i think it's important to know what the real value of capital is on the downside. i've heard arguments about the upsideside -- also heard arguments that has a banks assets deteriorate in value, their liabilities increase in value. which is an anomaly. but that's not relative for prompt corrective action services. >> okay. i take it you would agree with dr. greenspan's -- >>ly yield you another minute. >> i'm sorry. :

he embarked on a course of action to require citibank to change its structure. is it reasonable to infer that the prior risk-management structure of citibank was deficient in some respect blacks. >> i think when i would say is that when we have the prices it revealed things that are not apparent but we didn't have a crisis in particular we were quite concerned that their risk management was not sufficiently independent from the line of business and that's in a couple

of very significant cases and have agreed to increase limits and ramp up risk in ways we didn't think. particularly with the problems that were apparent on trading of sine as opposed to the long side and that this is your significant than the needed to be addressed. >> had there been previous occ reports that suggested deficiencies in the structures at citibank? >> there were as i mentioned earlier reports were we did raise american objections on risk management and downgraded with respect to particular businesses as we did with the credit defaults what business. in which they then responded and took steps to address, but it was not a situation where we had criticized the whole structure and believed it should be -- as i said that was more a thought that came out of the deficiency is revealed and the prices.

>> just so i am understand, you did, in fact, issue a downgrade to the risk management rating? >> with respect to theç particular business yes. >> in you satisfied with the citibank response? >> yes. >> the 2005 report does say regarding the role of the boards in particular that traditionally the board provided limited immigration on the risks compacting this entity and consequently unable to come forth assumed in the bank. isn't that a serious charge against the board of directors? >> it is but to have to of a stand it in context, what we are talking about is the bank, the board of directors of the bank and i think citi like others was running the organization by line of business and not paying as much attention as we would like to the legal entity of the bank and separately have been in have the right risk reporting that is particular to that bank and got into our way. you're when i came in it was

particularly robust on that and the company has moved in that direction. >> the response was to say the company is pravda's processes at the parent am band level. what's your personal opinion effectiveness of the board prior two and after your review? >> we believe the board at the bank's level and for quite some time needed to be independent and operate as more of an independent rather than staff with too many insiders on the bank board and so we did believe that was a step that needed to be taken particularly when we became aware of this breakdown that occurred in the engine of reporting in connection with liquidity in the huge liability vacuum on to the bank's balance sheet as a result of what happens. >> thank you, iraq asked the same question. this morning's discussion about city was intended to talk about the industry as a home so i'm

asking you was citibank unusual in any regard of was this tip will of the risk management challenges in the internal reporting and monitoring facilities and industry for national banks as it will? >> citi was unusual in our large bank experience because a bank was a smaller proportion of the overall company and typical even for our largest banks, less than half of the assets of the overall company until recently when they began downsizing so they had a huge non-bank piece of it in that attracted the culture and the way things were done in ways that we're different his starkly than some of the other institutions we supervise. >> so is it fair to say on that they were below the industry standard prius. >> it was different. i think we while they have a firm grasp of risk that they

weren't understood in budget things but that their appetite got bigger and that appetite to take more risk spilled on risk they thought they understood wow, turn into some very big bets on thing is that agreed and quite large liabilities not just for the company but for the bank, and that was different. >> thank you, i wanted to turn to another oversight issue which is the occ to at the request of ofheo in nj to review any man. what can you tell us about the risk management at fannie mae compared to similar sizes? >> so we were asked to go into both fannie mae and freddie mac and and we didn't do in examination and did not review what they would be like under their legal structure and their illegal capital requirements. rastus an office where a bank with its capital requirements be and how they would look.

we have our expert retell examiners work on that review it and where we came out just by simple arithmetic bolstered by the results of what we.com is here to say that they would have been treated as a mcginley undercapitalized at that point. based on fannie mae and freddie mac all other mortgage-backed securities at 100% credit guarantee and in a big world offense is on the balance sheet. the point raised earlier by commissioner giorgio, will have to% carrot -- spreading guaranteed by statute to the roles and their risks based have it in. version of actor that was far reduced on that presumably under that they weren't as risky but that's not the way we would to a and have that come on the balance sheet and the denominator in the numerator they were allowed to count more of deferred tax assets as asset and capital that a lot more we would have allowed. you put those together press the

draft at the way they did their reserving practices, but reserve with the mortgages was less rigorous than what we would do on the bankside. it was a significant attack on their capital position. >> to the surprise you in any way? >> could you repeat that? >> today's finding surprising in a wide price. >> i don't know we were surprised in the sense that it was a company that was totaling 100 percent in the mortgage business and having trouble selling new statute to early they have a regime that had an lorn regular capital ratio than we did. i think the question that the federal reserve and others asking was which reviews of it could take that into account as subsequent policy actions they took. >> one of the and futures -- >> are you going to continue that line are sure to something else? >> it's related. i would never leave you out.

>> i have time to get with. >> cocaine. [laughter] one of the unique features of fannie mae and freddie mac is that you are banks and others can hold limited amounts of securities and petroleos under the assumption that they are as riskless as treasurys. knowing that they were, in fact, not because nothing about this examination surprise to come i did this give you any concern about the safety and soundness of those which you supervised practice. >> the statutory we have always received favored position in what they can be invested in because of quasi intergovernmental status of the institutions and it did have the affect on institutions, cost familiar of a number of banks including several we supervise, smaller ones. so yes of was a concern. >> and did you express this concern to other regulators are

in a way and have to change this treatment? >> we have not taken the write-downs that occurred and it was more in the preferred stock was where the big hit was taking one that got wiped out. that was the part that got done but we have not changed the rules on matt. >> i yield to the vice chairman. >> thank you and it will be on my time and you can have someone if you want. i want to put this in context because i was fine to talk about this later but it's a preview of coming attractions for too long as you indicated it but you asked to look at fannie mae and freddie mac after the the conservatory of -- >> yes before the consumer to ship. >> in your requested to time in by the federal reserve was

conducting an unwanted help from our expert retail examiners because we have tremendous retail. experience. >> .edu reply to your opinion on the regulatory structure that they were ordinarily operating under? >> i then on to use the term deficiencies but perhaps undermanned are anything about at a chang. >> that wasn't the way we're looking at, we were trying to help. there was a -- stream of the only reason you are asked to help as the los who is supposed to row the boat can't. >> the reason why i'm hesitating is they have a different regulatory structure and it mandates and several operating under and we weren't asked to look at those unsafe are your addition, we were asked to say of this or a bank holiday retreated to so we were happy to provide that because that's the expertise we have. >> and why you thank you are asked to look at it that way

which after all was different than the way it was supposed to operate under the regulatory structure? >> i think there was concern at the time by the liberal reserve and the treasury department about the ongoing solvency of the companies and they wanted to get some other judgments about that from different regulators who have expertise with these kinds of instruments. >> you know the old jack about going across the suspension bridge and you don't have the troops to march in step, you want to break that pattern, is a your observation, would you be willing to say that it wasn't just the size but obviously it was the lockstep, this and go the route of -- the single volume of fannie mae and freddie mac in terms of what they were involved in or just the sheer size and what was deteriorated and allow them?

>> i don't know i can comment. as i said before, a company that's 100 percent of the u.s. mortgage business went has a crisis in home values that drops the values of those shortages will bring concerns at a time and at the same time you could say with a throughout industry once been down twice the largest of those institutions have very substantial strains on them as well and ultimately had to be taken over or acquired. >> when dealing with people hopping get a mortgage to own a home on the way up it's all good practice and more is better. >> as i said before i think we have a whole cluster of things that acosta's to loosen our underwriting standards when times are in the name of a, on a ship and fannie mae and freddie mac have statutory down payment requirements, but what happened and how those worn down over time they proved not to be adequate protection for what

later happened. >> just briefly, you're asked to intervene. digit consider it a positive experience and was there some cross fertilization of knowledge and understanding of the people talking about fannie mae and freddie mac not been any more, for you and your particular area of expertise and responsibility? >> yes, i think it was. i think we were appreciated, recognition of our expertise in this area and we learned by looking at this quite unusual institution and i think there was coordination not just between is and cooperation between us and then but also with the office of federal housing enterprise oversight which is now the gst regulator. >> one last question -- were you required to know what the structure looks like, where and how we deal with this and people talk about a super agency or reinforcement?

do you have any sense that if you got folks who have a type of specialty given the complexity and the blending of what's gone on it might be useful to have some folks who on so locked into a narrow area but that you can be called when necessary so that you're expertise is in need but you don't have to replicate in whatever regulatory structure is available? and that might be a partial model that might be useful, coming to the rescue when it's necessary. >> i think it's an idea to tap into areas where particular agencies may have a comparative expertise or the things to contribute in other areas so not just in this area but bunning said the senior supervisors' group in the wake of the heart of the crisis looking at losses and the same ideas there are things or agencies can go outside their normal son to help

in other areas and i'm all in favor of that. >> the downside is it's almost always half of the fact. >> unfortunately, yes. >> i believe mr. holmes, do you want to grant two minutes? braley. >> i wanted to ask you essentially the same questions. you had the good of luck to serve a prior to housing bubble and financial crisis. are you surprised by what you hear about the state of risk-management, risk exposures that we learned about in fannie mae and freddie mac vioxx. >> well, i have to say yes. i never had occasion to look at the risk management systems at fannie mae and freddie mac before. >> do you thank you would have benefited from the ability to examine it under blind economic risk before allowing your banks

to hold large amounts of their preference stock and securities? >> i think undoubtedly have we have information about fannie mae and freddie mac it would have helped deny assessment of investments are banks had and their obligations. >> and kube. >> mr. thompson. >> thank you mr. chairman. if you'd like an eye to focus the discussion. in the leverage to go back to the very first round of hearings we had commissioner barrett and shapiro commented about the attack ms of their agencies and their execution of their role, and when asked, well regulations are more regulations would be helpful when existing regulations and well executed when they have blocked or a stop to this activity or a fact? the answer was it was, in fact,

a supervisory all year so my question -- and was a supervisor in the failure. so my question of you is, were there things that occ could have done in this process that might have the forestalled were at least identify some of the risk and you fill that perhaps there were some shortcomings at occ execution? >> so i would say there are some things that we did it and saw in a timely way and other things less so-and-so when i first came to the agency our examiners were getting very uncomfortable with what was then called exotic mortgages, payment option mortgages, and the like. not only the offering of them but the layering of the risks over that with stated income and other things so we became very active in that area early. we got out with speeches and ultimately with diamonds.

we applied that price strongly and horizontal lead to our banks and basically didn't have piven option mortgage exotic mortgage problem in our system. i regret that we didn't act sooner on stated in come mortgages more generally and a year later i gave a strong grip speech in the context of subprime mortgages, but the stated income area, the area was a place where we lost our way not just the occ but the regulators didn't and it's something that wasn't wrong in and of itself but was an invitation to fraud in the actual doing of the business because it invited people to lie about their income which many people did and it was an unhealthy thing that we should have acted sooner and stronger and goes back to the point i made earlier about we needed to be more muscular about imposing underwriting standards. i think the other piece of that was when i said before, the

restraint on doing that and constrained we did with a nontraditional mortgages you have to get the consensus of all the other regulators and that took time and you couldn't get to this huge chunk of a mortgage system that was operating outside of the adderall perfume. industry participants saying with an eye to in this if it could apply this across the board but if you don't and apply individually to take us out of this business and that's an inappropriate to say we went ahead with that but as a powerful argument and times for businesses. so that's why i feel strongly that having fallen back to common-sense underwriting standards but in a way where you can apply across the board is so important. >> will you comment on the agency's ability to keep pace with the innovation? >> i think that's always something that we struggle with to try to maintain the expertise. we work hard at this, we do it by having two our existing

people but continually trying to renew with external training and hiring industry with expertise in particular areas. i think in many parts of what we did during the crisis actually in some of them as complex areas that supervision approved a very attractive and i wished that we were in a better spot went super senior things, maybe speak of, but honestly we didn't see it but nobody in the industry sought. the only difference to have a lot of losses were those who piled into. >> house table are the exam teens themselves that are a part of their process? attrition rates, skill levels, experience? >> i can comment. we spent an awful lot of time on this as well. we have excellent stability rates although we always worry about demographic of an aging examiner and worse as so many

companies have. we embarked on a very significant hiring process which actually began in former controller box that we continue to make sure we were getting a pipeline of people. we'll return than a whole generation of season examiners that had been to the '80s would retire and not able to replace it but we found a way to do that by having this crisis we are training our young examiners. >> able to get this acknowledged. >> out exactly the way we have done. this occ has a high in court, on this mission and all we do the supervision. and if you look actually add service of best places to work in the federal government and the u.s. we rank high and we prize back. worked hard at it. >> some say that the back and forth between the public and private sector for some of the people will are in oversight or supervisory roles creates an

inherent conflict. do you agree or disagree blacks giving you are from this. >> i am one person and i was a lawyer in private practice and i think it's good to bring some expertise. we do hire people from the private sector as well from time to time although i will send the core of our examiners is made up of people who come out of college and work their way up to the ranks. a commission as national bank examiners and then find their way. i honestly don't think that's an issue at least in our supervision. >> since i've been in and out of the government several times in my duty years in washington, i have a strong view on that. i think it is enriching both to the private sector and the public-sector to have the ability in an act of government. the notion that people come out of government and immediately start trading on their experience and on back and

exercise significant influence over their college is just wrong in my experience. if anything if you go back to your old agency of the time of warranty is over, you're likely to be under heavier burden than somebody who hasn't been there in the past. but in any event i think that people who've been in the agencies and understand the concerns and problems and can transmit that to the private sector and people who've come into the government from private sector can bring perspectives and experiences that are valuable. so i think arguments about the revolving door generally misplaced. >> good. it's encouraging to hear that occ would be considered one of the best places to work in government. does that mean that you don't have challenges attracting talent? >> no, i will say that i have

been very impressed the talent we been able to recruit from colleges across the country and i always worry when they get into the area you're talking about with a more complicated areas, can we find people. i think we have been able to attract talent and honestly when you get into a recession and people don't have jobs to get another a lot of people willing to take the job and there are benefits, not just in the the monetary sense and it's been working for the government that are the same as the private-sector that people value. >> thank you very much. i yield the balance of my time. >> will take a short break. >> thank you mr. thompson. we need a --, yes, mr. thomas is asking for a five minute break. just a private mint -- for the gentleman. for mr. thomas, he needs a

break, five minutes and will come back with miss born and i will have questions and other commissioners with a follow-up weekend. let's make it five minutes, no more than that. so run, gentleman. [inaudible conversations] [inaudible conversations] [inaudible conversations]

today the second of three days of hearings by the financial crisis inquiry commission looking into some prime lending. this afternoon hearing testimony from the current and former comptroller of the currency in about a five minute break now. when memrs resume the hearing we will continue our live coverage. in the meantime a short portion of today's "washington journal" parent. >> host: first of all, as president if you're watching the president explained that this will require ratification by both parliaments in the u.s., that is the senate that ratifies treaties and requires a two-thirds affirmation to approve a treaty. the president announced that the text would be on the internet were citizens of both countries and the world to review before the votes in the parliament and here's a little more of "the new york times" about what the leaders are suggesting they will do. under the so-called new start treating it will pare their

arsenals but still at a point to hundred 50 warheads each on top of thousands of others not covered by the pact. there are concerns with this will mean for security of the nation. peter becker explains the concern in russia are the central russian resistance are american plans on missile defense system to encounter an iranian threats. moscow worries that a shield could neutralize its small arsenal. the missile defense system coupled with russia's deteriorating conventional forces foster in security that will make it harder for mr. obam to move toward goal of

a nuclear-free world. and repression of the center for strategic international studies said the russians see this as potentially making the world safer, american military intervention whenever we want. and he added that it pretension and challenge for the president's agenda. musketeer on calls already robust discussion of this on our twitter falling group. there have been commenting at the press conference otherwise we like to involve our own audience and also put the twister commons. a call from oregon, go ahead please contact i'm excited about this. i think this is a marvelous move and the total keeping with what president ronald reagan was to do also. as the recent republican turned independent i'm ecstatic about this move. >> host: how you think it will make the u.s. and the world safer? >> caller: just by reducing the firepower to an obscene -- we have an obscene amount of firepower both sides now and we

don't need it. on a couple of those can destroy the world. nuclear power? for the future with regard to nuclear power? >> caller: nuclear power can be used for very good. >> host: no, i mean for weapon power, are you a person that supports nuclear-free world or just see a lower stockpile? what is your goal? >> caller: i would love to see a nuclear-free world but it's unrealistic and i would just like to see it used very judiciously. .. caller: yes, good morning. host: your comments on the new treaty announced by the russian and u.s. president. -- mccaw my biggest concern that i have with obama -- caller: my biggest concern that i have with obama doing the signing of the treaty is the protection of the country. i feel that the russians have to also walked the walk like americans have to.

another great big concern i have is with iran's threat. how are we waiting in? what i am seeing in the media today is they are really not addressing the comments from ahmadinejad, how he is coming at obama and running down. and i don't like that kind of image in the world. and we have to step up the plate and talk the talk and walk the walk. it is time to do that now. not only economically, but also with relations to other countries, especially in the third world. that is my comments for today. and i feel that the president really needs to make a real stand on that. host: there are a number of other even its related to nuclear security coming up very soon. monday and tuesday the president is hosting a 47-nation summit in washington, d.c., on nuclear security and next month

the united nations conference on nuclear nonproliferation treaty, npt, referred to by the leaders. "the wall street journal" not very supportive on this. mr. obama has been arguing the merits --

that is open "the wall street journal" opinion this morning. >> host: that's "the wall street journal" opinion to this story. we would like to hear you. courses christi texas. good morning, sir. >> caller: good morning. i have a comet, kind of a general comment. first of all i think it's nice that they are trying again to have workable treaty, but, you know, when obama first took office the people talk about his vision for nuclear-free world. and, you know, as far as divisions go i think anybody who grew up during the cold war had visions for nuclear-free world. d i rea think he is kidding himself if he thinks everybody is going to disarm. >> we live is to take you back now to the financial crisis inquiry commission. hearing today from the current and former comptroller of the

truancy. live coverage. >> of regulation for banks and some shadow banking institutions. and i want to ask you about that. in your view, has the growth of lighter regulated shadow banks in the shadow banking system created competitive pressures on traditional banking institutions? >> absolutely. i think in the mortgage crisis with the particular example of this, when you had dramatic increase in mortgages that could be securitized and never touch a regulated institution, you had a big growth in that part of the market. and the standards that were going on in that kind of market began to influence the standards that are regulated lenders were doing. and that was also true, and my

dad, even things like leveraged lending market, where we were sitting a disconnect between the standards that bank, we would hold to if they were holding the loans on the books and the ones they were selling for distribution to third parties. and that is a precisely why when i came back to the notion of a underwriting standards is critical that you can't just apply them to the regulated side. you have to do it across the board. >> it also raises a question, i think, of whether or not this has put a pressure on the banking regulators to permit the banking institutions they supervise when it engaged in a greater range of activities. and we have been told through testimony that, in fact, the

semi-repeal of glass-steagall by the gramm-leach-bliley act didn't really change that much, because there have been a lot of big range of activities that banking institutions were permitted to engage in. and i wondered if this competition from the unregulated, or under regulated, shadow banking system had had some, played some role in that kind of erosion of the separation between investment banks and banks? >> i don't think so much. i mean, i think over the years, let me put it this way, i think that over the years as markets change in the kinds of ways that institutions provided credit in a mediation services, change and move more towards standardization in many ways,

began to mean that financial intervention could be done by investment banking with clients that previously could only be done by commercial banks. so the pigeonhole roles began to change as a market mechanism, as you said just. and then in order for banks, banking organizations to compete in credit delivery services, they did need to have a greater ability to be in the securities business. and i think that was a market pressure, a real market pressure, that over time caused legal interpretations and changes to standards and piecemeal a dungeon by congress. and, finally, was more of a ratification as mr. hawke said. the full separation -- full ability to upload it between commercial banking and investment banks was adopted. i think it was response to changes in the marketplace. >> well, we as a commission will

be looking more deeply into the role of the shadow banking system and the impact it has had on banking regulation. and also the role it played, if any, in the financial crisis. and i hope that we will be able to, you know, have more interaction with occ on that. as we go forward. it's occurred to me that, for example, the growth of money market funds must have impacted significantly on commercial banks deposits -- >> absolutely. you're absolutely right that there are number of places that things have come up that put pressure on the regulated sector that there has been a response over the years. i think one of the interesting things, wouldn't call them shadow banks but investment banks were certainly regulated quite differently at a consolidated level than commercial banking organizations were. and i think that could prove to

be a problem in a crisis that led -- they were much more highly leveraged that the problems really started outside in that part of this year and they have more problems being with confidence issues. and the result of the crisis is of course the independent investment banking industry in did, and they either were failed, taken over, or became bank holding companies. so now they're more inside that same subject to more level part of regulation. but the differences were more of an issue with leading up to the crisis than they are now. >> except i think you have indicated that there is still some silane with the broker-dealers, and i assume the fcm's as well being primarily supervise and regulated by the sec. >> i think that still isn't issue, but the holding as opposed to the functional level. >> do you think there should be a move toward more consolidated

standards for regulating the entire structure of the financial institutions? >> i think you need consolidated supervision of any systemically significant financial institution. i think that's at the heart of the lessons we learned from the crisis. certainly is at the heart of the administration's proposal, which i support. >> let me ask in another area. we have heard a lot about the issue of regulatory arbitrage between banking supervisors, the occ, the ots, the fed, the state, banking regulators. since as i understand it, banks have the ability to change their charters, and also occ, among

others, depends on the banking -- the fees paid by your banks in order to fund your operations. and i wondered whether there's any validity to this concern, and i wanted to ask you whether, in your experience, such regulatory arbitrage actually occurs. for example, have you felt pressure to change standards or to permit activities because another banking supervisor is doing that? >> the answer is no. i have not felt such pressure. i do think on occasion there have been circumstances where institutions have flipped charters, change of charters in ways that i don't think are

appropriate. i think it's one of the reasons, and this is something i strongly supported, that the banking regulators got together and adopted a document that said you couldn't avoid a supervisor action by switching regulators. we had something like that. franklin delano of them where they left the national banking system to go to the state banking system far more than coming the other way. but in terms of that being a systemic problem, it certainly was not, have not been, and i have not felt any pressure at all to change as a result. of that kind of pressure. >> do you think there is a need to address the issue further beyond, you know, your suggestion? >> i testified on regular consolidation before. you know, it's fond of quoting jerry hawke of the subject where

something that no one would design and there is but it works okay in practice. i don't think it was the root cause of a bunch of problems but on the other hand, could we use some regular consolidation, would it be a better system? i think the answer is yes. but i don't think it's critical that you go to one regulator to address that issue, either as a matter of supervisor efficiency or to avoid the kinds of inappropriate charter arbitrage that you're talking about. there is some talk about doing that, not some talk. there are some proposals to do some consolidations that are in both the house passed the bill in the senate banking version. i think making progress in that area is appropriate. >> could i just add one point on the question of regulatory arbitrage? as the comptroller says, thanks to back and forth all the time, i always gave the mandate to our

examiners that they should, they should be as vigorous as they needed to be to make sure that their banks are operating in a safe and sound manner. without regard to the possibility that the bank might decide to convert to another charter. the occ has adequate resources to fund its operations without having to worry about individual banks. i should say that one of the aspects of this dynamic is the state chartered banks have a very significant subsidy from the fdic and the federal reserve with respect to their examination costs. because all of the costs of their federal regulation are absorbed by those agencies. so they pay on average about half of what the national banks pay. so national banks have a

particular small banks have an incentive to move to a state chartered to take the benefit of that subsidy. >> thank you very much. >> mr. thomas. >> we talked about your brief involvement with the fannie mae and freddie mac and i don't think we squared the circle. but we just got into it with that discussion wind mr. wallison was talking to you about any potential pressure sliding, coming from either democrat or republican administration since both of you saddled your answer clear he was no. i would ask you if there was any of that coming from congress, accept, i want to put this on the record, as far as fannie mae and freddie mac, congress would have no worry because their oversight structure is funded

through the appropriations process. and if they don't feel a degree of responsiveness to have a direct course of action. you clearly do not, as you indicated, mr. hawke, because you get from the funds of those that you oversee. as a structure, as a degree of independence in terms of decision-making, it's got to be to a certain extent, isn't it, from the way in which you are funded versus a fail in fannie mae and freddie mac living or dying, based upon congress' willingness to offer appropriate funds. did you feel that when you had that temporary oversight work with fannie and freddie? or do you have any comment on that? because i would like a little preview if you have any.

>> really, i don't have any. i did have any experience with that aspect of it. >> well, just let me ask if you had your druthers, would you rather have it come out of appropriate funds? >> what my son refers to it is an iq test. and i feel that i will pass. yes -- >> actually it's called a pain test. [laughter] >> there is a long history and the regulars were once partly appropriate more and somewhere. and the federal reserve never was. and it was historically a very important piece of our ability to have and hire, have the necessary resources and hire the people we need to have the budget its ability to maintain our independence with respect to this very highly regulated industry. and even in those days, it has always been the case, to a state bank recovers and has forever that you are funded with a fee to its do what through the

appropriations process. but i believe is a very important part of our independence cannot only be funded through those fees, but not good to the congressional appropriations. >> and then your only down to the criticism or accusation that mr. hawke addressed on the revolving door that you are the lackeys of the ones who pay your fees. and that probably rather buy that argument than deal with the appropriation process. >> i think that's right. if you look at the record, it's just not that many people -- there are some, but we have ethics rules and we're very careful about, and that's how we deal with. >> arm's-length is all you need to do. thank you, mr. chairman. >> great. so i have a few questions about your oversight of citi, and then i had a couple of policy questions. the first is, i think one very -- before you start that. >> i didn't see mr. wallison. i'm sorry. i don't always look to my right.

mr. wallison.

bring enforcement actions or counseled an institution about predatory lending. so we can get some sense of how much of this is really going on. >> there is a definitional question of cord that there is no single definition of predatory lending. but we took as mr. hawkins speak it is even better than i because a bunch of the early guidance and actions that we took were during his tenure as comptroller. but we made very clear that predatory lending, when it was in the mortgage space or credit card space was not something we would tolerate.

things like loans flipping, equity stripping, types of mortgage, if the really abusive practices were things we crack down on. we took some enforcement actions in the area when it was necessary, but honestly, those practices never really took root in the national banking system. we had more questionable practices in the subprime credit cards space, and we did have to take a series of enforcement actions with respect to monoline subprime credit card lenders, to the point where we basically ran them out of the national banking system. and i do think it's important, however, that there is a distinction between predatory lending and other kinds of subprime lending. and i think, unfortunately, sometimes in particular as a result of the crisis, people tend to think of all subprime been as bad in predatory. and that is not the case. you can also have very poorly underwritten subprime loans that are not predatory. and i think that, in fact, was the heart of the losses that we

saw. there are consumer protection problems in some of those as well. there's an important distinction. we can get to you for the record the number of enforcement actions we took for unfair and destructive practices, and provide the guidance that we have provided. >> and also more than simply the number of enforcement actions. >> correct. >> rather the council you have done with banks a we can a sense of how her face of it is in this large system that to regulate. >> absolutely. >> thank you. >> can i just add to that? i believe the commission has document dated a good one, 2003, which was a statement that we put out on predatory lending where we try to define it. and we said in that that the occ did not have reason to believe that national banks or their operating subsidiaries were generally engage in predatory lending practices. and we had requested host of consumer groups and from state law enforcement people that they

inform us of any such examples. and we really got nothing. having said that, predatory lending exists. on tours that i've taken in suburban neighborhoods in chicago, for example, we have seen evidence of it. and it comes back to a point that i have made several times about the way loans are underwritten to the essence of predatory lending is making a loan without regard to the borrower's ability to repay. with the lines being placed on the body of the equity in the property. it is the predatory lenders are really interested in stripping equity that people have built up in their homes, and that's why there is a much higher degree of foreclosures with respect to true predatory lending, than other types of lending. and that's the reason why we have emphasized on so many

occasions the importance of underwriting practices that look at a borrower's ability through their regular resources, to handle the interest and principal payments on loans without regard to the collateral. it's that very fundamental principle of loan underwriting is observed, it's a cure for a lot of the bad things that we have seen. >> good, they get. >> mr. georgiou, do you have a quick questions do? just a quick follow-up on that point. mr. hawke, you testified about your guidance that you issued in 2003 in this regard, regarding predatory lending. that they out not to originate predatory loans but the occ never issued any guidance saying national banks should make loans to firms to facilitate predatory lending. i mean, and i guess i would really direct the question in part to mr. dugan. on page 10 of your testimony you

noted the 33 billion in the short term loans provided by national banks of subprime letters in 2006, called warehouse financing was a small part of all the warehouse financing. but isn't there a question about whether you ought to have issued guidance with regard to that warehousing? in other words, they may not have originated the predatory lending themselves but they facilitate the origination of the red tory loans by providing financing to entities that many people regard as having engaged in predatory lending? >> we did, commissioner, on the same day that we put out that other gdance that we put out a statement on avoiding predatory abusive lending practices and brokered and purchased loans. and we did a dress there at the need for banks national banks, to use diligence when they make a purchase loans that are originate through mortgage brokers or other intermediaries.

>> but make or purchase loans, but what if they didn't -- what if they just facilitated -- they didn't make it themselves or even purchase them, but they permitted them to be made by providing extensive warehouse financing. >> and i think on that point, this is a difficult area. i will acknowledge this. because you don't control the lending of a lender that you lend to, and you banking practices. and some people are legitimate subprime lenders, and others are not. and it is hard to issue something that says that banks can't make loans to other businesses unless they all abide by the same practices that are required by the banking laws. we have never viewed the scope of our things is going quite that far. >> understood. okay. thank you. if you want, if there's a thing you want to supplement.

>> as i know democrats money, still a quite small percentage of the overall industry that were funded by national bank warehouse loaned. >> all right. let me see if i can run to these quickly with your help. based on your experience, big picture, citigroup, the institutional too big to regulate? >> no. i don't think that. i think that the issue is not so much size as well as the complexity is and what they are doing event risk managemen challenges. and i don't think they're too big to regulate. >> any since? >> i agree. we had 45 full-time onside examiners at the citi come and the fed had another dozen or so. and i think they were involved in virtually every aspect of the banks business. >> what about the issue of a century leakage other business lines to non-bank entities?

where they were very substantial losses. is it something that could be addressed in is that what you're saying? >> i think we had to issues that got identified in the crisis and we need to address them. we can address them through better coordination with the other regulators than with the consolidated regulator. >> second question is, internal risk management, is it a second line of defense or first line of defense? there's actually an interesting -- it caught my eye because of the wording. there was an occ staff the member one of the employees, bruce johnson, who wrote who was on the citi, i don't know if he was the examiner in the chief examiner. >> no, not the examiner. >> he did a memo, and it was, one of his concerns was called relatively in the boiling frog theory. i explained i was concerned that management committees such as. ♪ (singing) which is will revert to earlier in the day, the committee within citigroup that approved new products which arepes to produco

condition, much like what is happening this evening in the 1980s that i find that occasionally seeing the most extreme deals to david bush know who is here, chief risk officer, and randy farmer who is a good practice and help them occasionally dipped their fingers in the pot to ensure the water was not kidding too hot. i guess i would as you can what's your assessment of internal risk management at citi? >> well, as i said earlier, it was something where i believe, we believed before the crisis that they were smart, that they generally understood the risks they had, that when we did identify problems, they did respond to those problems. and sometimes we did identify some significant problems. but it wasn't until the crisis, and we saw more pressure put on the system that it revealed other problems that were more significant as we saw them. in particular, the closeness

between the risk management and the light of this is. >> and the lines of business. >> on that point, this may be an unfair characterization. with a better at selling risk management than performing it? >> i can't speak to the. and as i said, -- >> it was your impression they were doing a good job. that was based upon your independent examination. >> yes. at the time that they would respond to things that we were bringing to their attention, they had a bunch of issues that they had a number of things that happened to them that they had to respond to problems. they were under document in ways that other institutions work and we had to keep working to those with them, more so than with other institutions. >> actually apropos that. the occ had actually issued some warnings to say with respect to complex product. in the course of the run up, you know, you have noted i think in january of '05 earnings and

profitability growth were taking precedent over risk management and internal controls. you had warned that, you know, i think you have been concerned about the banks ability to perform future business. i think i would ask you, let me tell onto this, i would ask you, do you think you did, you i did buy some problems i noticed early on about intro controls and their growth. on reflection, and this builds on something i think ms. murren and i were talking about, you know it is a conversation we had about whether your examinations really were like audits where there was a situation followed to measure all of those things you identify that you state on to make sure they were correct. you think, it looks as though you spotted some problems, maybe you didn't quite understand the depth of what they might become, but do you feel you did an adequate job of following up? or upon reflection do you feel like there should have been more deliberate and consistent follow-up on some of your findings in a five? . .

about two failed institutions, first national bank in nevada, with the inspector general is easy to look back said, i guess the problems were spotted early on and there was in formal

enforcement action. there hasn't been an ig report with citigroup and are you convinced you did everything you could to make sure these problems didn't metastasize? >> i never say that given all we have with the benefit of hindsight. there are things definitely that we should have leaned harder on then that our reporting around the whole area of contention problems to the banking institution. i certainly am not going to say we were perfect. i think the thing you pointed out, the report is different, smaller institution, a different kind of thought. we addressed that separately and have to take these on their own cases. i will say that this institution as i mentioned earlier because it came, put together over a time investing craddock way -- >> meeting citigroup? there was a set of acquisitions. >> yes and have a large

investment bank with a powerful impact on the culture that was not a traditional commercial banking culture and that was something that we continually have to be different. >> i thank you answered my next question which is was the investment bank culture predominating this? >> i would say the answer is, yes. >> okay, a couple more questions. the ots of leakage barbara josh, how big a issue. for example, didn't countrywide go from ots to occ? >> you have to ask -- it was in the wake of our non-traditional mortgage guidance that we were spearheading that was not long after that are in the context that they flipped their charter. the institutions said that they were changing their jobs and didn't want to be diversified

institution, wanted to concentrate on mortgages and the ots had more expectations. >> you have colleagues but is a significant issue with real potential risk? >> number one, i think most of the regulatory proposals now have a ots that would end that kind of thought and number two, i think the significant issue that we took about people leaving because of regulatory actions also help to address that so i don't think it's a significant risk. >> okay, i took it from your earlier remarks, there should have been national standards on subprime high cost risky loans. >> yes. >> i take it to believe the federal reserve must have had a more comprehensive rules. >> it would have made a difference. >> mr. hawke, do you agree? >> yes. >> trying to go quickly, i want to talk about pre-emption because we haven't touched this

today and i want to because i think it's worth touching. in our first hearing attorney-general madison of illinois testified before us and i thank you know it's no secret that states over the country didn't agree with your decision to preempt an atlas is state official in california and while i wasn't directly involved i followed closely the legislative efforts in california. now, you state that national banks and their subsidiaries both regulated by the occ made only 10% of subprime loans made in 2006, with been defined in with scores of 620 or below with people, at different places so depending where you cut its it could be somewhat higher. >> i want to be clear on this. when we had the interview we talked about this and we went back and i wanted to make sure we were clear exactly how we got to the number before and how we

got to it now -- that's not the definition. we could use that but that's not the definition. >> it is not? >> no. >> thank you, is in a short definition. >> yes in the databases the premier database that is, production corporation i believe or loan production at something, is for loan performance data. accommodation of that with our supervisory mortgage metrics that we collected information on an all spell out exactly, basically is what lenders identified as prime and subprime. >> self identification. we will look at that data but i want to point out, in the big picture here is when oeáátját ae you and i want to put on the table that you tie the hands of the state and sat on your hands

so attorney general magic and said that if you have this issue of warehouse linmç in one and it's not directly related to pre-emption, by national banks were facilitators and extended warehouse licenses 21 of the 25 biggest subprime lenders but in terms of the data provided by mrs. mad again from the national consumer law center that when you add up national banks and thrift because you have to look at pre-emption not just with national bank but national press and is operating subsidiaries, their data shows that in 200631% of the subprime, 41.1% from a 51% of the pay option arms and interest on the adjustable-rate loans were made by national banks and press and their subsidiaries so not inconsequential. critics also point out that she only brought 13 consumer related

enforcement actions from 2002 and 2006 and only one of those involved subprime mortgage lending. two of the largest subprime lenders were national banks, countrywide, and national city which did its work through first franklin. i want to put that on the table and out like perhaps both of you actually much of this happen under mr. hock. >> let me go first. in terms of those numbers,. >> i want to address this issue. let me just say this, in the and i also like you to tell me why you think that the public interests because i know you are in balance, why it was better served even if it was 10%, 20 or 30%, was the public interest best served by handcuffing state actions which would have been supplementals to enforcement actions to the federal government. >> mr. chairman, could we get a brief overview of the point

you're making but i'd like to have you take time and put in writing so we have a better understanding of and as we go forward it. >> i'd be happy. as a matter of fact, that's my last question unless you have five more. >> we did put it in writing and it's in the appendix. >> i would like you to address it here republic record in. >> i need to supplement and serving well. >> this was done under your when you were comptroller, mr. hock? >> and has been done by all. >> you have responsibilities. >> on the numbers there are different numbers that came out and we wanted to address this is because we believe the numbers we cited are the best, most accurate and most rigorous. so the appendix we attach to the testimony explains and great detail exactly how we got our members and why they're different from others including the numbers you cited in the

testimony so it's in there and i'd be happy to respond further if you have questions. let's see, the second question was? >> one is about the numbers but the second and biggest question was is in the public interest and why and going back to whether the numbers -- whether it was 10 or 20 or 30 or 40? >> we have an appendix in here on why we believe that preemption and uniform national standards is a good thing and has been a good thing in place since the presidency of abraham lincoln. it's how national banks operate in the banking business, there's a great value being able to have a common set of standards that apply regardless of the state in which to operate so that you don't have 50 different sets of rules, 50 different sets of disclosures, 50 different types of and horsemen actions brought on different kinds of standards.

we believe that produces more efficient products and services delivered to people and it's important to, of course, you have to have high consumer standards and consumer protection standards and we understand that. i think one of the things the new legislation put some place which i support which is two have a stronger federal agency to write consumer protection rules that apply across the board but the point is two have a set of uniform national standards has always been something new as a benefit to the delivery of financial services and products to consumers. that's .1. >> can i ask you, and maybe you can address, was the standard -- of actively practice wasn't high enough on reflection? in terms of the products offered. >> at was a the answer is, yes,. in some particular areas that could have been higher but generally speaking i think the answer is, yes,. there are places where we needed

higher standards to apply across the board in let's call it a credit card rules for example where we didn't have that authority,. >> even with the fault rates 86% of the market average is don hi, it's not that torrential. >> well, when i is say we're going to the worst housing recession. >> relative and i thank you said was the de gaulle greater national banks was not prime loans between 05 and 27 -- 86 percent of the market average. >> what i am saying there is not saying all the underwriting was good, i said that at the outset and are things that were stronger but it's also difficult to trace the differences in the rules between the different persons and how much that accounted for. but the other thing i would say is i don't accept the proposition that the states should spend all their time and trying to bring enforcement

actions under state law against national banks were you have this huge shadow banking system that's not touched by federal regulation for you have the biggest problem in the states are not addressing that issue adequately and that's where those resources should be directed to the shad of thinking system unregulated people. and people say you can't have too many cops on the beat and my answer is, yes, you can if you don't have adequate number of cops total. we have people who can monitor the national banking system and should be held accountable but the parts where we have problems with the states, we haven't been cut the state's ability to go after and deal with problems in the state regulated state institutions that issue mortgages and i think there are more attention paid to that level of compliance to not just national banks but state banks also utterly regulated we would have a better across the board

system. >> teeone two,? >> i certainly do mr. chairman. first of all,, i think it has to be appreciated that preemption is not something we invented or discretionary with the occ. it's constitutional doctrine has been lot of the land since 1819 and basically states a simple principle that the states do not have the constitutional authority to regulate or interfere with activities that congress has empowered federally created entities to exercise. that has been a doctrine and carried it throughout our history and i think i am sure i'm right with every pre-emption issue that's come opera in my knowledge that has been subject to court review, the courts have upheld the principle. congress can change that if it sees fit and subject them to state law, but it hasn't then i

believe it's our obligation having taken a note to defend the constitution to enforce the constitutional principle of pre-emption. second, i think it's very misleading to look at formal enforcement action as the measure of london agency's record is in dealing with consumer issues. the controllers testimony lists a number of a formal enforcement actions, but that's the extreme. when a matter gets to a formal enforcement action that reflects a fairly serious conduct. an enormous number of problems consumer complaints are handled every day in the bank examination process. every time the examiners go to a bank of a mine in violation of consumer laws they cite the bank board and of the bank doesn't fix it the regulators come in

with an enforcement action. beside that the occ has what i consider a world-class ombudsmen operation that fields literally tens of thousands of communications from consumers every year and the ombudsman feeds bad back through examiners into the banks and if there is merit to the complaints that consumers have raised we get fixes. we get fixes without a lot of formal action. the mixes get put in place generally it with very little of normality -- poor malady or other kinds of controversy. if a bank's resists and wants to write about it then we go right and the results as a formal enforcement action. >> in the interests of my real commissioners time, there's one question i will pose to both of you to be answered in writing. i want you to reflect on this.

so here's what struck me about this -- i understand and do not dismiss, i appreciate the quality of your answers on this issue and certainly the importance of the constitution. when you see 26 states actively trying to deal with this because they saw and on the ground problem, there is a article you may or may not have seen from the columbia journalism review about whether the press of the coming financial crisis. the reason i mention is there's a piece of the article the talks about how much press coverage there was from 2,000 in 2003 actually trying to fight deceptive and unfair lending across the country, the boiler rooms, aggressive lending -- i guess i would in a question probably pose to both of you given the ground reality that you have state officials all over the country concerned about the level of under deceptive

lending, and when to ask you both to consider what might have been deficient therefore in national and forssmann that would have led them to believe it was such a matter of paramount concern. >> i should say mr. chairman that we asked law enforcement officials on many occasions to refer to us any evidence they have or any incidents of national banks involved in content of the sort described and began zero. we ask consumer groups with the same thing. we actually asked the state attorneys general to enter into a memorandum of understanding with us where we could share information and cross pollinate on enforcement actions. until very recently with mr. dugan they refuse to do that so we did not have evidence of an infamous states or consumer groups that national banks -- >> i don't want to cut your

response, but it in writing we could get that. >> that will be in the record in. >> mr. thomas. >> we definitely want want, written in terms of the context you written mr. hawke, because everybody was involved after the pact. i would like a real time line in terms of who, when, and how appear in. >> that would be helpful. >> any other commissioners? the hearing we will adjourn today and that we will be here at 9:00 a.m.. just to tell commissioners, we will be out of here without fail tomorrow at 3:00 o'clock because the travel schedules of several commissioners, so we will be done prior to 3:00 o'clock tomorrow. 9:00 a.m. in this room. thank you very much for your time and answers to our questions. >> thank you. [inaudible conversations]

[inaudible conversations] the commission will hear from two former directors of the federal housing finance agency which regulates fannie mae and freddie mac and the 12 federal

home loan banks. live coverage friday at 9:00 a.m. eastern on c-span2. later today its booktv, first markell. >> and john holliman, authors of game change, their account of the 2008 presidential campaign.

what in the world is more ridiculous run out of american politics. >> the past year using clips from various media outlets including c-span the burger brothers have become a viral hit makers with auto tune in the news. we will talk to them sunday night on c-span q and a.

now a form on the intelligence committee with former cia director michael hayden, karma: security adviser fred townsend, and california congresswoman jane harman. the homeland security subcommittee on intelligence. another panel follows with former national intelligence director mike mcconnell and former cia deputy director john mclaughlin. from a conference hosted by the bipartisan policy this is two hours and 10 minutes.

>> i'm director for congressman hamilton and government kanan prepared this group. and i will briefly introduce walter pincus and then turn the panel over to him. each participant will get a five to seven minutes opening statement and then mr. pincus will lead discussion and an open up to keep an a. walter reports on the intelligence community for the washington post -- it. he first came to the paper in 1966 after serving in the army, counterintelligence corps and doing a stint at the washington star. his articles were among those in the post's 9/11 package that was awarded the 2002 pulitzer prize for national reporting among many honors, george polk award for exposing the neutron warhead. he's been in news consultant for nbc and cbs and won an emmy in 1981 for running television documentary is covered

intelligence and national security issues for years and widely held to be the dean of the community press corps. please join me in welcoming walter pincus. [applause] >> thank you very much. i'm going to put this microphone down my throat. it is good to hear that kind introduction which is short and that is better. it's an interesting subject and we have an illustrious panel to talk about the first part which is are we safer blacks on my right is congresswoman jane harman. should i say, i met her 40 years ago. >> i was five. [laughter] >> and who was a longtime member

of the house intelligence committee and is one of the four authors of this legislation. general michael hayden, former cia director but also is here at the beginning as a deputy director of national intelligence and has the use of it. fred townsend was in the white house when the bill was being considered and when it was passed and as somebody who has spent time in injustice and at the white house, brings another view to this. i think what we will do is have a panel coming each member give about a five or seven minute overview. i will then ask a couple of questions and then we will proceed from there with questions from the floor. so, congresswoman harman.

>> well, thank you walter. good morning everyone. the bipartisan policy center is living up to its name. i've read in about 200 of my nearest and dearest friends in this audience and you are definitely bipartisan, both in parties and i assume all of you certainly including all of us on the panel are committed to making intelligence work better. my answer to the question by the way walter is, yes, we are safer. in in the last five years and i would say part of the reason is that we were able to do intelligence reform. i would not call it a paradox as patrick neary desk. i would call it a fact because we were able to legislate not perfectly been adequately. let me also salute the bipartisan team in front of me. governor tom kean and congressman lee hamilton. they separately and together

embody to me what elected officials should be like. they're both former elected officials would show there are a lot smarter than i am. they did voluntarily, but they work together to bring real quality two our policy-making and real focus to the completely different challenges of the post 9/11 world and each of them is really a lovely human being in addition. i just think we should all, i'm asking you all to salute their leadership. [applause] so okay, walter said that i was one of the the so-called big and four. i don't think have that big. but fran and i are thinking we need to be. one of the big four who helped write the final version of

intelligence reform five years ago. another of the big four is susan collins, the other two are joe lieberman and pete hoekstra but i have always said that the two females on the panel in the grip, of course, did 90 percent of the work. [laughter] that is why the product is as good as it is. so let me make a few points. early this morning after i read my newspaper i want you all to no actually read it printing newspapers and clipped out walter's article today. i don't know how many still do this but i wanted to show solidarity with the washington post and the rest of you who write for those financially viable products that we all love and needed. any rate in reading my newspaper was reading about the attacks on our consulates so i e-mail's my friend in paterson, our fabulous ambassador to pakistan and said so glad to hear your safe.

remember our visit to the shower, we went together wanly a few months ago and i'm pleased that a whole embassy and our consulates general who also happens to be a woman are safe. .. >> who is a dual citizen, u.s.

yemeni who was at the mosque in san diego to remind you when two of the hijackers we couldn't find ended up in san diego. isn't it a paradox, the guy that we should have found before the 2001, ends up in yemen, where he is at large, but very much in the sights with the yemenese with us helping them. he was not only an advisor to the fort hood shooter and the nigerian christmas bomber blow up a plane over detroit, this has been in the press called for attacks against the united states. so, again, our intelligence women and men in a combination of agencies are hard on the case and i predict that they will be

successful. so those are just two examples of events since 2004 that i think are keeping us safer. let me just make a pitch for why i think intelligence reform was necessary and why i think our product under the circumstances was a pretty good product. we were operating before 9/11 in a 1940 -- on a 1947 business model. everyone remembers that the cia and our intelligence structure was part of the national security act of 1947. it was designed to keep us safe during a bipolar -- in a bipolar world. and it worked pretty well a few glitches. but it worked pretty well. then the wall came down in 1989 and it took us 15 years to upgrade it or change it.

during those 15 years and even a few years prior, the world totally changed. i would argue we didn't have the tools, the best intelligence tools against that world. and the example is our very flawed intelligence leading up to our decision to go into iraq. i think that the reform which was modeled after goldwater-nichols, you know know that, our idea was to set up and was designed well. the early draft were better. the original bill was introduced by the democrats on the house intelligence committee, i was then the ranking member. but it had to change in order to get through congress. it was based on recommendations of the joint commission on intelligence which was a bipartisan, bicameral effort that congress made. probably the last we had made

after 9/11. but it was also based on recommendation of the 9/11 commission, which came after us. the joint command structure was supposed to be a flexible, nimble coordinator across these agencies. coordinator is not a strong enough word. in talking, he used the word orchestra conductor. i think that was closer to what we intended. we had to make compromises. you will all remember the opposition of then secretary of defense rumsfeld. i'm sure steve is going to explain that to us in a few minutes. but also of the chairman of the house armed services committee, duncan hunter. so we had to make compromises in order to get the bill through. i want to make courages who inspite of that joined and was very hellful in courageous as we struck the final compromises.

in the five years, we've had three dnis, i'm looking at one right in front of me. mike mcconnell, lovely man. tried very hard to implement the law. i would say we still have a work in progress. it's 50% law, and 50% leadership. let me just conclude with this. after the christmas bombing, the failed christmas bombing attempt, i think we all understand that probably the best fix we could have is sustained leadership at the top. i'm not accusing anybody here, certainly none of my buddies who have worked in high positions, a failure of leadership. i am staying that sustained leadership at the top is what is going to be make an excellent work force which you and some of you have visited around the world get the job done. we now have the ability to leverage the straints of 16 agencies, our intelligence products are much better, i'm

very excited to read the iran nie when it comes out. i'm sure it will be very, very good. i've talked to come people who are working on it. but i think we have ability to leverage and we are now capable, great example is the revised screening procedures that the department of homeland security came up with last week that our intelligence-based rather than name-based. we're not capable of taking a look at things based on the information we get from the tip of the sphere, which is intelligence. debt he close by wishing everyone in endeavor well and saying to everyone in the audience that your sustained leadership has helped us get to that point. our country is safer. we've had a lot of success stories recently. and i think our future will depend on not letting down that focus. thank you.

[applause] >> general hayden. >> thank you, walter. just a couple of quick comments on the title for the panel, are we safer? yes, we are. and the dni, the creation of the dni shares some of the credit for making us safer. i would argue that the national counterterrorism center is almost a success story in what it has done to change how we defend the united states. david mentioned a few other things like information sharing, joint duty, these are are all happening kind of below the surface of the water which is much more prominent, mission managers, the kinds of process changes who's output, who's outcomes you see only after the course of a year have been put in motion by the creation of the dni. that does make us safer. i've got an additional one that

i want to share with you. i think i have a view on it because of the jobs that i have held. and i don't think it was a direct product of the legislation, but it clearly was a by-product. and that was this, the creation of the dni freed up the director of the central intelligence agency to spend every waking and sometimes not so wakeful moment running cia. my first encounter with director panetta during the position, hi a three by five that was half fun of points i wanted to make to leon. the first thing i said to him was, i don't know if you realize this yet, but you are -- you will be america's combatant commander in the global war on terrorism. i cannot imagine doing that job, filling that function.

if hi to do what -- if i had to do what mike mcconnell had to do. i had a four-hour jump in terms of turning to my task at hand because the dni existed. now, i don't know how that sustains itself after we get through the current war on terrorism. i suspect it will. i will go, i will travel to stations around the world after i became director and there was still when the whole question of the dni was at least a jump ball. with most of the cia population. and my wife jenne and i, took questions and invariably within the first three questions, what about the dni thing? the answer i would give is the one i just gave you. that it freed up -- i would be the first occupy of my suite to be able to spend my day being the director of cia.

i think that really mattering. i'd also suggest that this is hard, as david pointed out, and both david and the congresswoman have commented on personalities matter. if something needs to be grooved here, don't -- improved here, don't jump to the legislative fix. this may depend a lot more on personalities than the careful structuring of the law. if you accept that premise, let me suggest to you some thing that is we could have done better. the dni has a really tough job. senior intelligence, principal intelligence of the president and the smooth functioning of a very large american intelligence community. he really depends on his deputy. i don't mean to be self-referential here, i was a principal deputy for about a year. if you look at the history of the dni, the position of the principal deputy has been vacant almost as long as as it has been filled. that's not trivial.

that's actually a big deal. a second item that deals with personalities. the legislation says that the dni will nominate to the president the director of cia. that is the most important relationship in the american intelligence community. if you get that right, a lot of other things just happen naturally. in order to make it right, the law says the dni will nominate. we've had three dnis, three dcias since the law was passed. the law was passed about 60 -- became effective -- we've had a dni for about 62 months. in that 62 month period, the period of time in which a sitting dcia have been nominated to the president by a sitting dni is 7 months. okay? that relationship has to be built in the closest, most personal exchange of lawties

that can imagine. it's not impossible when one or the other is merely delivered by the system. but it's a lot easier when the dni gets to shape that choice. one final point, i guess the cautionary to we don't misdiabetes the problem. i think as much press as the dni, dcia relationship has gotten, it isn't the most critical. it is the relationship of the dni to the big four collection agencies in the department of defense. i've been the head of one of those agencies, i was the director of dsa, there was a beautiful personality. they are national, but also combat support agencies, okay? my sense was one of this perhaps implied purposes of the law was to make sure that their national identities and their role in fulfilling these national

functions were producted. so they did not become consumed by the combat support function. congresswoman is nodding. i think i have that right. that is unavoidable. we are a nation at war. not everyone is at war, but d.o.d. and the american intelligence community is at war. we've been at war for eight years. and the defense personnel that are truly national and gradually more dominant, that's not a bad thing. that's a good thing. you would want it that way not in harm's way. it is consistent with the overall trajectory that the act was designed to set in motion and to be aware of that as we

kind of give a grade with regard to how well we are doing or not doing. thank you. [applause] >> thank you, walter. let me -- i'm going to make a couple of comments. i by and large had the privilege of working with david when i was in the white house and government. and i think he's pretty well framed it for our discussion. i would say, because nctc has come up as twice now. i agree that it is an unqualified success. but we need to be careful about how much we attribute that to intelligence reform. the predecessor was terrorist integration center which was stood up immediately in the aftermath 9/11. and it was in motion before intelligence reform. that's not to take away what i think is credit to intelligence reform. i think walter's article this morning has it right.

there have been a doubling of the budget of the intelligence community in the last eight years. let's not underestimate the impact that's had in term was strengthening our human intelligence capability and our analysis capability. but intelligence reform was really important and congresswoman harman and i have had many conversations about the importance of information sharing. that was a tremendous driver. i have said it before, i'll say it again, the nation understood that there was an intelligence failure in 9/11. they nation understood that part of that was we didn't share the information that we had collected. the nation chose to fore give its government for that failure. but it had a right to expect it not to make the same mistake again. information sharing is important. it's part of what we've seen in temples of the frustration in the aftermath of the christmas dave tempt. we can't -- that is the

important part of the dni's mission is tending the knitting of ensuring that this community which is 16 separate agencies does have the procedures and the process in place that allows them to leverage what is tremendous valuable capability to the nation in terms of keeping it safe. so i do think we're safer. i think intelligence reform is a part of that in addition to the budget increases. it should be a work in progress. we shouldn't think it'll be a work in progress until the policy and national security understand that is a business that will be a constant work in motion to adapt threats we have not considered can come at us. one of the things that struck me, whether it's the 9/11 commission or the wmd commission

legislation or the legislation, all of those i had some responsibility for the review of, the recommendation that went to the president and the imprime implementation. i didn't think i'd ever quote general, he asked me what the responsibility was, i said coordinator. when he said when you have a coordinator, it starts out to make a horse, because they lack authority, they end up with a camel. there's something to that. i quote him because i think that's some of people's frustration with the dni. one the things we've not talked about. you think steve talked about this in his hand. i'm happy to see if people had that concentration. it was not just the hiring and hiring. that one could be accommodated. whether or not the dni had budget authority was a

tremendous internal battle in the executive branch and congress and it mattered. it mattered because absent budget authority, the relationship with the president, the proximity to the president, the relationship and support, the relationship with other cabinet members became a far greater importance because it didn't have the actual authority to impose it. of course, how you spend your money is what your priorities are. we have to be clear and honest about whether or not we are frustrated over the intelligence reform legislation has unfolded. it has been affected by whether or not the dni had budget authority. let me say having said that, i tend to agree that just because there maybe a gap or lack of directive authority, the first answer ought to be a legislative fix. i think we can do more and more

effectively. i do think that you need top understand though what the roll of the dni is and what power he or she, some day will wield. let me say -- the last point i'd like to make, david talked about many of the really important functions for which -- as did general hayden, the former president viewed adds the drivers. freeing up the cia director's time, but not losing what i call the enterprise management at the community which in a post 9/11 world, the enterprise management got less attention as you would expect and want it to be. so somebody needed to spend their every day, all day worrying about the enterprise management. that said, if the dni spent the majority of his time and the enterprise manager that's recruiting, training, trade craft, acquisition, procurement,

that sort of thing, you probably wouldn't be able to name him and you probably wouldn't care. what you hear about, the struggle that we read about publicly is the struggle over is the dni -- what is the dni's role vis-a-vis the cia director when you are talking abouting lateral foreign intelligence relationships. we have some colleagues here in the obviously, i will tell you they say privately, it is incredibly dysfunctional and who to deal with. they understand the cia is operational. but if dni's role is going to be the enterprise manager, then there is -- does he need to travel overseas and interact with foreign intelligence service heads. doesn't that create an inherent confusion. these are real questions. i think as we see debates unfold

publicly, this is where congresswoman said it's 50% lanated relationship. this is where leadership coming in. the president must be clear on what it is he wants his dni to do, what role he wants him to fulfill, and how we expect them to execute it. the dna will define the roles. there will be conflict. i guess that leaves things for walter to write about, but perhaps not in the best interest the community. with that i'll stop. >> there is always something to write about. let me ask a question because we talk abstractly. and i get complaints all over that i hang on to little facts. one thing that hasn't been mentioned directly, you know, i think it's a question that i

want to pose to the panel. the secretary of defense is really the 800 pound gorilla in intelligence. i mean that's just a fact. how successful would the dni program be today if robert gates were not the secretary of defense? >> well, since walter looked at me, i'll try that. and then i'll be corrected by my able friend. i think having bob gates as secretary of defense is a wonderful thing. period. but i also thing because he was the dci in another life and has a strong background in intelligence, it is a very helpful thing. the essential compromise in the law is that we exempted technical intelligence from the coverage of the dni.

we took out intelligence for the war fighter. that was something that was an imperative to get -- we never got don rumsfeld's approval here to get him to stand back a bit. and duncan hunter too. i'm quite sure duncan hunter quoted against the final law. i don't recall. that was the compromise we made. looking back on it, i'm okay with that. because i do agree -- i think it was mike who said it. that there is a difference set of needs for the tactical war fighter than strategic intelligence. so i think that having bob gates in that role now means that there is more running room to get the concept right. and i think see improvement overs years and how it works. fran is right left undefined,

there will be conflict between the dni and cia and maybe others. but it's not left undefined. i think we are improving the definition of roles. we had a few dust ups to get there. but boys will be boys. now we are doing better. so my answer to you, a.er, is the country is -- should be grateful that we have bob gates in the role and that the fact that he's in this role and sees himself as a bridge to making the function work better is helping us fill out what was an incomplete picture of the role. >> that's all true, deck tear gates is secretary of defense. to have the meeting with dni and me to give up dod equities. the success story, that is one

part of goldwater-nichols seems to work about the same way inside little intelligence community. expect we're not a one cabinet department. we're many. whoo gets to be the waiver authority for the joint duty requirement? authority. secretary of defense. all right? who gets to be the waiver authority for the central intelligence authority? not mike hayden, the dni. that is a disequilibrium in trying to create a community, okay? so i agree, it's as good as it's going to get with secretary gates there, but there are unarguable equity that is dod will argue for even if you had st. francis asisi on the chair. >> i don't think we should invoke the catholic church right

now. >> to put this in order, the dci cannot do the order, he's out there fighting on the war on a more tactical basis. on page two, there was a sense that referred to the subplot that said the new dni isn't going to walk across the lines of the officials that own or more elegant lake language, but that's the point. the original draft which cia supported stockily was in that carrying out his responsibility under his order or under the law, the dni should be be presumed not to be and then walking across the prerogative of cabinet level officials. that dog to put it mildly did not hunt anywhere else at the conference table in the situation room. because everyone else at that table was a cabinet official. and in the final version, that language became in care carrying

out his responsibilities under this executive order and under the law that dni will not -- rather than shall be presumed not to. that's moving heaven and earth. >> right. >> until we -- we may not need quite the spark language of shall we presume not to. until we see ourself as a collective institution more in that direction, the dni's sack is going to be a few bricks shy of a load in order to do everything we expect. >> the only thing i would add. i agree of what's been said, no to embarrass mike mcconnell, i will tell you it's as important to secretary gates and his experience to the success of the dni gledges reform effort, so to who is the dni? because it requires as we saw in mike's relationship with secretary gates, somebody who

knows how to build that relationship of trust. i mean there really is. because to be feared of secretary rumsfeld, he was responsible for fighting a war in two theaters. and rightly was a veracious bureaucratic fighter for our sons and daughters. as you would expect him to be. you have to be careful about where you sit, where you stand, and what your responsibilities are. yes, it's important to separate that secretary good faiths is -- secretary gates is there. also it's important the capability of the dni. >> let me raise one other set of unsaid things so far. one is their purposes of creating a dni was to give somebody authority over intelligence, not just abroad but at home. nobody this morning has ever mentioned the fbi.

the fbi which is spent, i don't even know the number of hundreds of millions of dollars can't make their own computer system work. and it was found they didn't even have an e-mail system at 9/11. why is it that the fbi is never mentioned when you talk about the dni, the fbi director goes to the white house every morning and then goes back and runs the fbi and nobody talks about it. there have been major changes in the fbi eternally as there were major changes in the cia and the justice department after 9/11 before the act. but how many authority and how much interest does the dni pay to the fbi which is the one agency in this county that has standing in the congress and the

country at large and can't be touched? >> well, i didn't mention the fbi today. but the fbi is certainly an agency along with the department of homeland security that i think about as a regular basis as my focus as chair of the intelligence subcommittee is on information sharing domestically and how are we doing? making sure our law enforcement community way beyond 40,000 fbi agents has the information to know what to look for and to know what to do. certainly it is true walter, and i don't know that you would agree with this, more people are at risk here from a terror attack, there are americans are at risk than in our embassies abroad or war theaters abroad. so it is the critical the concept affect our communities.

not just the washington and new york which were hit before but all of our communities. so the fbi does play a critical role. i actually think the fbi has ramped up its exact considerably since 9/11. again, it's not perfect. the biggest meltdown in terms of not unraveling the plot leading up to 9/11 was within the fbi. part a didn't talk to part b. there was the big issue about the wall. which was a fiction. but nonetheless, there is no more wall. that's the good thing. that's the second wall that came down, i guess. i think the intelligence function of the fbi has been ramped up considerably. there's a culture clash in that agency in terms of intelligence collection and law enforcement. but it's better. and the joint terrorism task forces, the jttf that are around the country are helping our local so-called fusion centers pull pull -- connect the dots before bad stuff happens. you know, a perfect example, of

course it would be in my hometown is about the torence police department. they noticed there was a string of gas station that must have been intended to fund something. they discovered low and behold, weapons, cashes, and plans to attack military recruiting centers, synagogues, and lax. they were dieted on terrorism-related charges, tried in article 3, federal criminal courts and are convicted and behind bars nor a long period of time. a terror cell was discovered by the police department such connected into the jtts and fbi took the ball across the finish line. i think the fbi is better.

i think there is still an issue whether we need a domestic -- i think my answer is still no. whether we need a domestic intelligence agency modeled after the british agency. but i think the fbi pictured with the nctc paired with local fusion centers, is doing the job better. let me mention one thing i omitted, an unfinished or unfulfilled piece of the intelligence reform act is formation of a privacy and civil liberties board. which i know tom and lee and many of us think is essential. the bush administration nominated soaks to the confirmable positions. they were confirmed and began to act. a number of us on a bipartisan

basis have been mazing the issue. i think it is important, especially as we ramp up domestic intelligence collection activities which we must do. we have a homegrown terror problem in the country. not only for muslim groups, thank the michigan militia recently, but as we ramp them up, we have an independent watchdog and security and liberty are not a zero sum game. i think that's a gap. i think we still over classify, and i think we have a leaks problem. with those gaps, i think the fbi is growing into a bigger and more appropriate role. >> walter, you raise a very good point. you could make the argument that the most major muscle movement inside the legislation wasn't sharing. they need to be better. the major muscle movement was

the linkage. that's a big deal. it is cultural for americans. david was right when he said that could never be done by dci. simply because of the history of the agency and frankly his role of running a foreign intelligence agency. it could only be done by the dni. so i make the case, this is the really big one inside the legislation. and i also make the case that it requires sustained energy on the part of our concern in order to make it work, because it is a historical and cultural for us. i would refer you special specifically to the new attorney general guidelines. and the cia intelligence part, it was the spaces between cases. more technically, it was allowing investigations and the gathering of intelligence and information without a criminal predicate. left on its own without energy

from the top. here's it's probably not from the top of liberty crossing. here's from the top of the justice department. without sustained energy on the part of the attorney general that is so inconsistent with past practices that that will not get the attraction that the legislation wanted it to have and so this is one that the ag really has to take on. and it remains to be scene whether or not he'll have the focus on it. >> yeah, when i was -- my -- i was at the justice department during the clinton administration where i was council, which is really -- there's not an system attorney general. that's really where this rubber meets this road in terms of what's the appropriate fbi role as a member of the intelligence community? we have to remember they have their own history, very much a part of the pipe church hearings there was an investigation

called cointel pro many of you are particular with this. the role of the gathering of domestic intelligence looming large in their thinking. they want clear guidance. the attorney generals guidelines go a long way to that. we have to remember, the fbi is a different member of the intelligence doesn't because of its law enforcement and because it reports to the general. fbi agents will remind you, they take the oath to support and defend the constitution, not a particular policy or administration. and as we heard in david's remarks, it's true to say the intelligence community has a appropriate role in terms of as a tool of the particular administration, each administration's foreign policy. and that's different. in the fbi is very conscious not to get pulled to that side of that scale. that's not the appropriate role

that we believe we should play either by law or policy. so it is -- it has been a growth over time about what's the appropriate role, what's the appropriate capability they should have. i'm glad congressman mentioned. it was -- you could hardly have imagined a more bipartisan group when it was convened in the prior administration. i don't have any doubt that that'll be the same intention. but it's important that it get up and running, especially as we see and hear more about domestic threats and we push very hard for our domestic agencies both dhs and fbi to be aggressive. they need that kind of guidance that they can get from the bipartisan board. >> let me do one quick final one. that is the director of national complex is the chief advisor. is he or she could be, the chief

spokesman for the intelligence community? i remember when the bill was being discussed up on the hill, one the issues was that congress is looking finely for somebody to blame when there is something going wrong. they wanted one person to blame. if you all remember the december 25 bombing, it was john brennan who stood up and, in effect, took the blame. who is the spokesman for the intelligence community? >> you first? >> yeah, why don't you go first. >> yeah. >> i think it should be the dni. a couple of reasons. number one, he's welcome positioned, he's the one with the god's eye view so so peek of the parts of the community. number one two, just on a human

basis, the rest of the community can't be looking at liberty crossing as a place to ask. liberty crossing has to be the place where things happen that help the rest of the community. i will be very candid, there were a couple of times mike mcconnell went out in harm's way when he could have sent the note and let me handle it. we were very, very grateful for that. on the immediate case that you raised, several people have commented on that personal relationship with the president being very important to perhaps robust up some short falls. the fact that the director blair was not nearly as visible as john was in something that 100,000 people. that was not a good thing.

he needs to be and be seen as the primary legitimate spokesman for what goes well inside the intelligence community. >> i agree with director hayden. i think -- look, i always used to joke. many of you have heard me say it if there is -- when i had been at the white house and john's job if there has been an attack, i was the easiest and quickest person to fire and hold accountable while you did the scrub. but i do think in terms of the intelligence community, i have do think that the dni and it has a whole host of -- he's with the president every morning in the presidential daily belief. he has a view and to -- what if we learn anything from what we know now about the december 25th attempted attack, there isn't a single point of failure when there's a failure, there are multiple points.

who's in the best position to assess where the points are and the relative importance of any one of those points and that's the dni. so i agree with you. i don't think that you want somebody at the white house to play that role. and i do think that the appropriate role there because of his access to the information that's necessary to make the judgments is the dni. >> well, i'm glad i'm last this time. i don't think certainly one of the big four we thought about who was the spokesman. on that score, i agree. the dni is accountable and commendable for the successes and accountable for the failures. and it is true that there are tens of thousands of folks, i thought that was still a classified number. but what do i know, i work in congress. i'm therefore underinformed. but that that person needs to be a cheerleader for the

exceptional women and men who work for the dni. let me sarossingly and i think we all agree that those folks are amazing and they are out there in harm ice way -- harm's way right now. many sometimes they don't know what their families do in the days and nights out there. some of them when they are sadly killed in the line of fire, it will still not be disclosed. they will be the nameless star if they are assets of the cia. they might be in other roles. but at any rate, i see the dni as the person we intended to be accountable. in terms of the spokesman, i'm not sure who that should be. i think that could be a personal decision for any president. in terms of the homeland, again where more americans are at risk, i kind of see that role, and at least i've urged that on her as being played by the homeland department secretary. one of my early councils to

january et napolitano, she should convert herself into the coop of pretecting the country. every coop, every time you saw them coming, you knew he knew more about cigarettes than anybody else. i think that a role that should be played by our homeland security secretary. again, accountability is different from being spokesperson. >> now, questions from the floor? yeah? >> hi, jim. i'd like to ask about fbi agents having leads to the constitution and suggesting that intelligence officers don't take that same oath. >> that's not what i said. >> no, i think it is what you

said. it may not be what you meant. i would like to get that clarification. but the point goes to a different one which is the politicalization of intelligence and what's going on there. you made the point that intelligence communities is getting drawn in to the politics or the politics or policies of the administration and suggesting that's something that happens on the foreign intelligence side, it doesn't happen on the domestic side. i'd like you to talk more about that to clarify your remarks about who and what's and where's the allegiance to the constitution? >> absolutely. i'm happy to do that. because i think a greater misunderstanding you could have had. there's no question that both both fbi and cia agents uphold the constitution of the united states. the rules under the rubric are different. for a whole host of legal and policy reasons.

and there have been great concerns by privacy about the role the fbi can and should play in terms of the collection of the intelligence here inside the united states. there's a whole -- there's more than 100 lawyers in the justice department that devote 24/7 to making sure that the fbi executes their authorities and responsibilities appropriately. now i was -- it's interesting that you say that i -- my comments were about the politicalization of the intelligence community. because that's not what it was about. i don't think there's anybody i worked with who would advocate or count the politicalization of intelligence. that's different which is inappropriate. what i was referencing is it is a perfect -- there's no question because the president can and does, republican or democrat,

the intelligence community to support their foreign policy objectives. that's not politicalization, that is a stated use of the president's covert action authority. and so this is a difference. that is a line that can't and mustn't be blurred. there's been much talk and much debate about it. i think general hayden can also speak to this. there is a difference. there is a legitimate use in the terms of the foreign policy, use of the intelligence capability to understand the intentions of your enemies and understand the intentions of the united states. all of that is appropriate to support the foreign policy objective and is not politicalization. >> you said being true to the facts and preserving your ah

toni, that's the challenge for all intelligence. >> yes. >> i think it's an important question. i'm glad you asked it. when bob gates left as dci, he gave a speech to the work force at langley and quoted these words and the truth shall set you free. and i think the role of our intelligence agencyies plural is to speak to power. intelligence is a set of predictions, it's not science either. based on the best facts and other information about human behavior you can gather. but it is corrupted and respondented to be what one things the policymakers wants to hear or distorted or cherry picked, i think it will

inevitable lead to bad policy. good intelligence doesn't guarantee. but bad intelligence tends to put us on a slope towards bad policy. >> hi, i'm with families of september 11. >> good to see you. >> my question is about oversight of the dni from congress. i'm going to assume that no one on the panel is going to say we shouldn't have oversight reform. my question is how are we going to have oversight reform? >> well, first, mike is ducking. he's now under the table. does everybody know who carrie lamac is? she was one of the most outspoken members of the 9/11 family, i called them the wind beneath our wing, i see tom and lee and everybody nodding. it's a huge credit that you never quit.

it would have been easy. it wasn't as bad as health care. but it was up there in terms after big project to accomplish. oversight, well, no one has missed it. congressional oversight in my view is still challenging. but i think it has impressed since we have passed the legislation and i think there is cooperation big time cooperation and the members of the house and senate. i no longer serve on the intelligence committee. but i think the effort is under way to do better oversight. the other thing, we don't get as high of a mark with homeland security oversite. one of the moment that has not be fulfilled in addition to the

handing up the privacy and the civil liberties is that we consolidate and reorganization the way congress functions. congress still has whatever it is 88 committees and subcommittees that do oversight. that's an embarrassment. we are really not doing much to change the situation. that make it is extremely hard. not just for the homeland secretary who has to testify, you know, five days a week. but it make it is very hard for us to doesquive outsight. keep at it -- to do effective oversight. keep at it, carrie. if we keep it, it's because of you and the families reminding us. >> yes, that's important. we are secret espionage inside of an open society. the society demanding more transparency from every aspect of that society. we can't brief 300 million

countryman what it was we're doing. we have to do it through the vehicle of the congress. so this does have to work. and people on this side of the ball, on the executive branch are almost as separate has people from the article one in termed of trying to make it work. all of that said, wonderful relations with the people who are up there. nobody gets a bridge built back home because they are on the intel committee. this is truly a labor of love. all of that said, we haven't had an intelligence authorization bill for five years. and the intelligence perform aspect of the 9/11 commission report is the only element of the report that remains unacted upon. >> let's go over there. >> pat, odni, one the

difficulties in understanding how odni is doing is the model you use to measure it. take the dci, you get one result, if you take the rejected secretary of intelligence model, you have a different result. congressman harman, you mentioned the legislative intent and goldwater-nicholed, and general hayden, you mentioned the combat talent hand. would anybody care to take that a step forward is it one for the dni to emulate and if so, what authority should the dni take to make it more real? >> yeah. okay. >> they are -- there are difficulties transferring goldwater-nichols as a model.

you have no authority and number two, this is missed by a lot. but it's really important. the department of defense is divided between two types, combatant and military departments p these guys train, organization, and these guys operate. okay? train, organization, equip, provide operate. the intelligence community is not organizized that way. nsa, cia, nga, et cetera, train organization, equip, provide and operate their own forces. the only thing that seems to transfer is title four. which is the personnel model. which i think that transforms nicely. the rest of it doesn't. we can't simply grab it and throw it over here and expect it to work. one thought has come to my mind. it's not quite an answer to your question. but it's related. that's the chairman and joint staff and so on. i've thought a at lot the relationship between the dni and

the dcia. i think that's the past failed relationship for the entire community. cia, as david said, there are six big agencies that you are threat about. cia is a big different. not just by history, but by the kind of organization that it is. that relationship is critical. i'm looking for a model in american history that suggest how that might be so we don't have to create it out of cloth. i'm thinking many elements of the chairman relationship might relate to the dni, dcia relationship. there's no question that mike mullen works for bob gates. okay? that said, mike mullen has some inherit authority and things that we can do because he is chairman of the joint chiefs of staff. it's very rough. it probably breaks down at some point. but i think that might actually by transferable. but goldwater-nick holes is

not. -- goldwater-nichols is not. >> we considered a number. 22 agencies put together in the new form has proof to cause a number of digestion problems. those of us considering what to do wanted something much schismer. and we used models that had been suggested by as i mention, the joint commission and the 9/11 commission and others. this seemed to be sort of kind of right. obviously mike's experience in the military gives him a certain advance that i don't have. in understanding how goldwater-nichols worked there. i continue to believe that the joint command idea, the orchestra conductor idea was a simpler way to leverage the

straints of a number of agencies. it's not just the cia-dni relationship. we were very mindful and i am mindful since my district makes most of this from our office that hopefully will never be able to be produced anyone else on the planet. but leveraging those assets that so everybody wins. not just an agency has ownership over them and can use it for that agency's agenda of it is a big piece of what we had in mind. i think on balance our concept is fine. 50% law, 50% leadership. i would hope going forward that it would be implemented by the dni and future that is to not

business a big pure carrot si that competes with the pieces of the of the -- which competes with what the responsibilities of the dni are, but to have something lean and nibble. we had thought the dms staff would be adequate. obviously that hasn't been adequate. not to build big new buildings, but sit as orchestra conductor, waiverring the baton across a simpleny in which many instruments play, hopefully usual -- using the same score and making real music. >> you know, the only thing i would add, i was reminded by your question and the discussion about the model between the chairman and the argument that came up in the policy debate. i have the chance to ask him. he made the point we were

talking about in this structure having the cia who had its own operational authorities reporting to an individual on the dni who did not have operational authority. how are we going to square that? it was going to cause real -- when you look at the chairman, he's reporting to somebody who has a consistent and larger set of authorities. so it kind of makes logical sense this was going to be a challenge. and i think part of what you're hearing in the discussion of your question is we cannot to grapple with that. because it's the only direct report and cia doesn't have a parallel line to somebody who has operational authorities lake everybody else does. i do think that's caused some of the friction. >> hi, matt cover with cnn

news. you said they are underinformed and the roll of intelligence was to speak news to power. i was struck almost a year ago that speaker pelosi said cia misled in her words, all the time. i wanted to see, is that true, is it still ongoing, and three, what can be tone to remedy that as we talk about intel reform? :

i did not understand that that program did not strictly follow at isi. in have another conversation summerhouse but i didn't understand that during the briefings on the program but i called mike to urge you come over immediately and congress was in session to bring all the members of the intelligence committee on the program which i think -- thought would be helpful. that did not happen that they although it was willing to do its. >> i was enroute. >> usn around and call back so he could and to its but eventually did happen and i think the brains of our people

is better but that still leaves something that peter hoekstra has said here and that is that we play those of us on the intelligence committee but all the questions appear if you don't ask the right question you don't get the right information and so my version of this and am speaking for myself is the intelligence committees which her leadership appointed committees should be given on information where independent branch of government, we should keep what is classified classified, that's something i assiduously tried to do and should not be over classification but certain vans and certain secrets, relating to sources and methods should not be in newspapers, walter, or even repeal to congress outside of strict classified and finance. so i think we're doing better and i think it's crucial that that relationship work well

because in the and what are we trying to achieve a? we are trying to get to an environment where we now know the plans and intentions of our enemies and advance where put the best people and the bus structures and the best technology against the harvest targets. those targets are hard and are you all in. unless we are able to do that and be nimble as we have been recently in terms of how we will screen passengers trying to enter this country one of these days the bad guys are going to score again. >> i need to comment on that. with elements of mess since how big a group of, but that caveat aside, the overwhelming instinct of the intelligence agencies is to bring with a hail from a brief them broadly and brief them deeply. to bring an airman's metaphor i spend most of my life and air force, if you want them to crash it back to put them on the manifest.

[laughter] there are no upside's to trying to hide the ball. that said, i was president obama dca for weeks and in that 21 days i have the same conversation i had with his predecessor about a sensitive matter and whether or not i should bring it to the hill and i was pushing one way and his nsc and staff for pushing the other. i will admit that president obama has planned to veto the current intelligence authorization bill if it's still contains language and takes out of his control who on the hill is brief. this is an so much about intelligence, well it is, but is really about article one an article to in the intelligence agencies and cia when they do covert action is operating on the outer limits of executive

profit. i blame this on on jimmy madison. >> i think on that note to or not going to solve that problem and believe open some more questions for the next panel which can takeare of the ones we have left open. thanks very much. [applause] >> ts to our panel. we are going to have a very brief break, just enough time to put the new panel up and start immediately so stay tuned for adjustment. [inaudible conversations] [inaudible conversations]

>> thanks everybody. things are much to our first panel appear in. we are ready to begin the second panel. it's my pleasure to introduce john gannon. it's my pleasure to introduce john gannon, the vice president for global analysis and the eighth symptoms with a long history in the intelligence community including servicing in most and local positions at cia, including deputy director for intelligence, chairman of the national intelligence council and assistant director for central intelligence were analysis and production. john also serve as staff

director for the slides committee on homeland security and house of representatives and also a member of the bipartisan policy center's national security prepared this group. please join me in welcoming john gannon. thank you. [applause] >> thank you, michael, very much. it's an honor to be here and at what turned quickly to our panel. we have mike mcconnell who is second dni, stephen cambone, the worst u.s. behind for intelligence, and john mclaughlin on only the cia but also a turbulent time in the acting d.c. i. all of these gentleman with whom has been my privilege to work in my career where very active in the leadership and i think reform efforts in the intelligence community prior two 9/11. and they were really engaged in

the post 9/11 time improving our intelligence capabilities and also we are very much engaged in discussions with the congress and with the population in general about intelligence reform after 9/11 so i'd like to begin this panel that is not about all the problems we've talked about but we are solutions. [laughter] we are going to look at the future and you are going to go away near ashton. and like to leave as much time for questions i'll ask each panel member to keep in advertisements and but let me turn, first of all, to former director of national intelligence mike mcconnell. >> thank you very much. since of your solutions let me start by saying nothing is too hard as long as you don't have to do the work. we can pontificate based on our experience. i've been in this business for 40 years. i've been a professional of the

analytical level and served in a variety of capacities and i'm passionate about getting it right and i'm probably the biggest cheerleader of the u.s. intelligence community. is the one organization and i'm here to tell you from firsthand experience as a member and having the privilege of leaving at one time it's the best in the world, passed in the history of the world. that said, we can always be better and i'm going to give a promise on why i think it can be better. my model is goldwater nichols, it's been mentioned a couple times for those who may not be familiar -- the permanente lands created after world war ii by the national security act of 1947 amended, we debated it and thought about it for years. i was a product of that environment. i service in the u.s. navy as a youngster, if i had taken a two work outside the navy i would have been they'll select for the next consideration. that was the way that the process was discipline. i was there for the debates over

goldwater nichols, every service chief, every service secretary testified under oath you pass this bill it will ruin the united states the problem of defense. it was passed in 1986 signed by president reagan and we have a dustup called desert shield desert storm. every service chief and every service secretary said it goldwater nichols is the best thing that's ever happened to the u.s. military. it was a radical transformation. now, here's my promise. a bureaucracy once established, in the bureaucracy yupik, government, business, a bureaucracy group of people once established will vie to maintain itself to the point every defining reality in his own self-interest. that's true of any bureaucracy. without interests of oversight to come in times of oversight or forces beyond the control of the

bureaucracy, the bureaucracy will refuse to change. now that's my promise. some might agree and others might take issue with that, that's just an observation of an older gentleman always been observing for a long time and i use my knee the -- maybe that i'm on that as my model, virtually every chain in the navy was forced from the outside with a long history. we don't have time to discuss a. i would like to answer questions if you want to follow up on that issue. what is the mission of the community? collect and analyze information beyond all possible competitors. collect and analyze information to know beyond and better than of possible competitors first responsibility is to speak truth to power. it's your job and independence of the constitution to let the facts speak for themselves, not to twist the facts to fit policy

objective but let the facts speak for themselves. i think the closest analyses for that in this country is the director of fbi and the chairman of all federal reserve. there is elected, they have a tenure, their responsibility whether speaking to progress, executive branch whatever, they must think the attacks as they know them. this town reacts to four things: only four things i configure and maybe some others but before on my list -- crisis, we have a crisis will have action. what did you know and when did you know it's so we will act in prices. the second is balance. we don't control balance. that get the attention of this town and things will change. in the third is money. doesn't always did things i change we need when there's money generated its attention and people start to pay attention to. the fourth thing is the law. that's the thing we control.

i believe we need to update i are pt to get right. today in the long leaves us in a position where it's entirely from entirely personality dependent. now my good friend mike spoke earlier, i don't know if he is still here, mike is a true intelligence professional. the intelligence professional from early days in the air force as i was a professional in the early days in the navy. he serves as director of an essay, we understood this community. what does it take to be successful and we had a deal. he said the best thing about george job is less me to my job. and i said i'd understand that and the best thing about my job as i can try to make community better and he said i'd work with you on that and we worked really hard. there are some things we couldn't agree to because of the season you're occupying. there was some credit to things that were achieved.

revision of executive order 12333. it took a full year with local support of the president, the whole support of the secretary of defense and it was a battle on every paragraph. because the law doesn't spell out the authorities. some idea is we need to revisit that law, we need to establish it on the principles of goldwater nichols, and there are three important words in the english language that matter in a bureaucratic context: those three words are authority, direction and control. and if the dni is given a party, direction and control this committee will sort itself out and people will get missions and often do good things like the army, navy, marine corps did their mission and raised fighting forces to the combatant commanders for operations. finally i would say is and this

was mentioned earlier on the panel, we are a community conducting espionage against foreign interests. we can't play out our activities in the public. we are compelled to protect sources and methods and do not protect sources and methods we will have a lives lost and we know blues and the capabilities of very sensitive and expensive systems we use to collect information. we also can't allow our output speaking truth to power to be the political fodder for the policy debate. so getting this right is important to war in the country. the big question is and i prepared as a professional looking at this 40 years to make a point that we need a tenure at the and i and many department of intelligence. i've been thinking about that

long and hard and on the drive down here this morning and was unsure of how i was going to come down and i'm there. a tenured dni, and a department of intelligence. if we don't do it that way we're going to continue to argue about these issues and it will be personality dependence and my great fortune i had bob gates in dod and i came in as director of cia and keith alexander as director of nsa and so on. we are able to work it out because we all wanted to work out, but it leaves to the personality of those players and it can become very dysfunctional it those personalities do not match. >> before i turn to general mclaughlin, i was amiss in welcoming our current dni and mr. blair and we look for to your comments. >> and mike mccaul comments i

reminded when we are all debating this in 2004 and the situation room in congress, i along with many other people knightley mike he'd been at the time argued that this person and the president was going to create dni needed to be wary substantially empowered. i think we lost that argument for reasons that may be understandable thinking back to gene harman is comments here. but i do recall that in the middle of that debate the senior senator called me from the cloakroom and said, john, i'm still searching for the answer to my position as we debate this that you raised during your testimony and my question was a simple one. was, who will really be in charge and will you hold responsible when something goes on blacks in seem to be a vital question.

so i think today as we try and talk about the future and try and make recommendations here we keep finding ourselves wrenched back to the past all of those reasons. so as i think about the town just to the point of our panel, the challenges for the dni going forward, i would say they fall into two categories. the worst seems simple but actually isn't. that is two continue establishing the legitimacy and active as of this off us basically to continue inventing the dni. agencies, people in them continue to question the attractiveness and legitimacy of the dni and they do with in not the permanent -- personally but the office. they do it in a couple of ways. they do it directly sometimes when you circulate among the agencies and a duet in directly by that classic bureaucratic technique that we call

slow-growing. that's exactly what might mcconnell was talking about when he said it took a year to get what amounted to an important but essentially modest revision of 12333, the bible of the intelligence community. now, we shouldn't be surprised by this. a little history is an order -- this is normal. when the cia was established in 1947 it took a number of years before and had established itself it was vigorously opposed by the military, by the fbi, and by the state department. so it was not until nearly fifties and the cia began to take the kind of shape that we came to know during the cold war. so this long struggle to establish the dni is not all that surprising. but i would say the dni's job a somewhat harder than it was for an early dci directors and joe

intelligence to establish legitimacy and effectiveness of that office. and as a harder because there is as everyone here has noted in this i think admiral mcconnell just made clear, there is this gap between the responsibilities of the office and the awareness of the office. now, put yourself in the role of the dni. you are the dni and you look into her book every day, look at your cards for your business card, and it could fit on your business card in would say that you are the president's principal adviser and the principal adviser to the national security council and the homeland security council on intelligence matters related to the national security. that's literally what the law says. if that's on your business card, actually it would not affect, you are going to feel

responsible for just about everything that happens in the intelligence world. i don't know how you cannot. so that gap is i think it important to involve us to keep in mind. so while orloff creed this individual from the burden of running a large complex agency for which mike hayden was thankful. it also into and so took away one of the sources of the power in that the director of central intelligence had which was his role running in large complex agency. one that was more organically looked to the rest of the intelligence community than any other agency. that was a source of power so at the dni's power has to come from some other direction and source. there is some opportunity around today, the christmas bombing attempt for example, that brand

diluted to is an enormous opportunity for the dni in terms of what needs to be done in its aftermath. why cripes think about it, i think and i may be wrong but i think that this is the closest call we have had in the homeland since the dni office was created. and when you think about the complexity of that event and the gift that is in many respects by virtue of a meeting in a completely formed terrorist operation that didn't work, think about the complexity of it and the involvement and the white attached definitions in the intelligence committee, only the dni by law can take the steps required in its aftermath to tune up the performance of the community. it's important to remember, the cia director can do that anymore and it's interesting if you think back to that time one thing that struck me at that

event no offense to the media here, if you watched the qualls of the bottom of the cable news channels for the paris to or three days was all about the cia had failed. after two or three days you started to see some other initials' appear. people came to realize there was a dni, there is an and ctc, these are a thing fairly obscure initials to most people in the media until they thought about it for a while. so there's an opportunity here for the dni to be demonstrating that this is, he's the only person who can tackle all of the things in all. well, you can bring mcnerney into line with responsibilities, all the means we talked about today. personal relationships, presidential embrace, more legislative octane, and i review would endorse what admiral mcconnell said on that score. but maybe the most of the runway to close this gap is to

achieving things out of the dni office no single agency can achieve. what are they? let me just list all i very quickly and then i'll wrap up. starting with a very big ideas and move to some very narrow ones that are nonetheless important. first, rethink our collection paradigm. no one else can do this. we have a collection paradigm that is rooted in the marriage of classic espionage and technology developed in the 1960's involving basically spy craft from imagery, communications intercepts, and some other arcane methods of collecting intelligence. it's probably -- the adversary understands as well. it's probably time to ask the paradigm shift question which is what is it we cannot do today which if we could do it would revolutionize our business the way technology did in the 1960's?

that can't be done by any one agency. second, several panelists have alluded to this when the issue camp and to be the spokesman for the community, only a dni qinsheng the environment in which intelligence operatives. people talk about intelligence as though it exists in hermetically sealed box. how often do hear the phrase it's all about intelligence? well, frankly it's not all about intelligence there are a lot of other things that bear on our performance to national security and that bear on the performance of the committee itself. there are four major constituencies. the congress, the public, the media and the customers. and they all have to be in some sort of alignment or at least in some comprehension if not agreement about what this incredibly arcane business is

about. if not, something will be dysfunctional. t -- dni can deal with that. third, a result he problems nordhaus can resolve. the committee has not yet have despite a lot of progress and a david chen talked about this, does not yet have an i.t. architecture information technology architecture. at that permits intelligence officers to deal with enormous volume, expanding every day of information within a thing like efficiency that you deal with that, sitting in front of your computer. it's better but any dni who takes you to that level of performance and will revolutionize the business beyond anything that's been done since the committee came into being 63 years ago. the form teams. number four, a form teams of people throughout the committee to give up on the issues today that are all multi disciplinary cross discipline that no one

agency can deal with. again, one needs authority. finally all sorts of issues that need to be resolved on behalf of the whole community, one that comes to mind is the difficulty of dealing with as foreign and domestic concerns and data merge in the era dealing with terrorism, the whole question of how you deal with u.s. persons data is very complicated. legally policy wise from a civil liberties wise, no one agency can touch that. someone else has to do it. so those are some of the things that are the future challenges for dni but that takes us as i close to what i would call the catch-22 question. those things need to be done. but does the dni have the authority to do them with a

process that is less than a trip to the dentist blacks i think not yet. >> stephen. >> thank-you and it's a pleasure to be here and is good to see a lot of old friends i haven't had time to see or rather they been more buzzy than me i think of the last two years so it's good to see summoning of this. unlike most of the other panelists i am not a career intelligence officer. i did not grow up in the intelligence environment. ultimately as a policymaker who had to rely on the intelligence community and its various agencies and actors for information that was my own were performance of my task, which over the course of my time at the pentagon with various jobs i

was in, it boiled down to providing to the secretary of defense cabinet officer and vice about in the execution of his responsibilities and obligations both as the secretary of defense and as a principal of staff assistant to the president of united states so i come at this issue as somewhat differently than the others and the account for more of the san the specifics because there's little less said about some of the additional capability that the dni as currently constructed it might use only have in the way of additional capability. but i always think is helpful and i'm not sure who made the point about expectations this morning, it might have been david, to come back and set expect