today's hearing is entitled credit default swaps debt potential implications. there are really a number of roads our discussion could go down given that very long title. now, there have been some suggestions that cds is to blame the problem greece has been found. has not been supported any evidence to support that claim. a good argument that rather than causing the greek debt crisis that cds alerted to the investors by some in the mark place and to help provide greater transparency about the state of greek's fiscal affairs before the country's conditions even got worse. ...

basically exacerbate the debt crisis. another issue is the parallel between greece financial conditions and that in the united states. during the discussion or financial regulatory reform there's been talk about systemic risk in so-called too big to fail institutions but the ultimate too big to fail and to t it is the united states government and the most obvious systemic risk is one proposed by our ever-increasing federal budget deficit in the accumulated debt in this country you have to ask what will it take for policyholders to get serious about cutting this

unsustainable spending in washington. just as last week's chairman bernanke stated, the federal budget appears set to remain on an unsustainable path, moreover s debt and debt grows so will be associated interest payments and obligation that in turn further increases deficits. unfortunately he said we cannot grow our way out of this problem. in but despite these warnings which can't get a democratic colleagues in the house to propose a budget let alone one that will begin to put us on sustainable path to fiscal health. what makes our current situation even worse, large as our official national debt currently is it's not even truly stating what the real problem and magnitude is. like greece and many finnish solicitations that become easy targets for policymakers, the u.s. government is engaging in off-balance sheet accounting that hides the enormity of our

problem. the obligations of fannie and freddie the housing giants that are by far the largest of the taxpayer bailouts are not accounted for in our budget. some of you heard of the verbal gymnastics for example, that secretary had to go through this committee as trying to explain how the government fully intends to san design -- behind these but the same time obligations shouldn't be considered foreign debt -- sovereign debt. that would put it on the balance sheet and to me this isn't a partisan issue without being transparent. the record shows i have 52 co-sponsors of the bell and unfortunately there's only one solitary democrat who joined in the effort so far. but i remain optimistic that others will sign-on. finally for the people in greece finding out the fiscal health of one's nation when push comes to shove a can greatly impact the standard of living of the people, i know everyone in this congress wants to leave our children and grandchildren with

a country better shape than we inherited but to do that we can't keep kicking the can down the road on tough decisions and we shouldn't be solely blaming credit rating agencies some of which have been suggested to the u.s. triple a rating could be in peril for the problem spot on by policymakers you need to come to terms with precarious fiscal conditions and so do something now is too late. with that i yield back. >> the gentleman from massachusetts is recognized. >> thank you mr. chairman. thank you for holding this hearing today and the ranking member. the relationship between the government and debt to and complex derivatives is one that i'm particularly interested in since the financial crisis began. i think we have opportunity today to learn some valuable lessons from the way goldman sachs and others conducted themselves during greece's

current situation and the role complex derivatives and concealing and this guy is saying sovereign debt and a very opaque market, one that needs to be closely examined. as my colleague from california knows better than most, credit the fall swaps and other instruments for use manage public money. i believe these instruments to be dangerous and in some cases 100 -- ton regulation be used in managing pension funds, public bonds, monies for municipalities or other type of public money unless the underwriter and the marketers and the traders agreed to assume a direct fiduciary responsibility. i have heard in the defense of these instruments that credit devolve swaps can be used to hedge certain risks but i think what we've learned from this crisis what we thought was hedged was really just a complex instrument that was very poorly understood. while it's certainly a huge step

forward, and not completely convinced the derivatives title included in the regulatory reform bill h.r. 4173 the wall street reform protection act goes far enough. to protect public funds from -- and municipalities and pensions from manipulative in the future. in addition to greece cities and towns across the country are struggling with the ramifications of complex derivatives and a look fourth of the witness's testimony to examine for these issues and i think them for their willingness to come before this committee and help with our work. i yield back, thank you mr. chairman. >> thank you very much. now we will hear from mr. baucus from alabama. >> thank you mr. chairman for convening this morning's hearing and i think the witnesses for your attendance. the ongoing great debt crisis walt tragic is the result of decades of the reckless spending and that's something we are quite familiar with in the united states. without real spending cuts and

tse reform of the bailout's will not stop, the housing market will not find its footing in the american economy will recover. so for the response has been to pledge unlimited bailout aid and, in fact, the tse that has already cost taxpayers more than $127 billion and puts them a risk for another 5 trillion guarantees. the events of 2008 demonstrated there is a need for legislation to address shortcomings in the regulation of derivatives by demonizing credit defaults swaps is not the answer. used responsibly derivatives are critical tool for managing risk including the risk of sovereign debt default. of thousands of u.s. companies use derivatives to hedge against adverse events the risk inherent in their business. with the current sovereign debt crisis, and many european nations, while its instructive

about the growth and impact that sovereign cds can have on the capital markets, congress should not unnecessarily impair the important benefits to credit defaults -- credit derivatives can provide and all of us agree derivative markets in more transparency in disclosure. we recognize the federal reserve discount was not intended as source of funds for banks to speculate with derivatives for their own account. however restrictions on credit defaults swap contracts limit the ability of investors to appropriately calculate risk as cds breads are often more accurate reflection of credit risk than credit-rating. though -- we have found the credit rating agencies have not always been reliable measures on creditworthiness. that being the case, investors should not have alternative and

effective it risk-management tools such as credit defaults swaps arbitrarily removed from the risk-management arsenal. other growth of the cds market is a remark that mark the solutions are capable of supplying information that investors need to make informed decisions. arbitrary bands of certain derivative products would only force derivative dealers out of the marketplace and off on increased non mitigated systemic risk. let me close by saying in the republic the great philosopher plato stated we can easily forgive a child who is afraid of the dark, the real tragedy of life is when men are afraid of the light. mr. chairman, when will the administration's see the light and realize we can no longer hide the gst debt and the shadows and continue down our current path of fiscal irresponsibility analyst change course after remarkable since parents disown greek tragedy. thank you and i yield back the balance of my time.

>> thank you very much mr. baucus and now here from the gentle lady from new york. >> thank you mr. chairman for a hole in this hearing and welcome to the witnesses. this is truly a had a club -- critical here because of the international conditions concerning sovereign debt but also because of what we're working on in congress. financial regulatory reform will mean significant changes to the overall functioning of the derivative market. we are shining a light on over-the-counter derivatives, financial instruments that have been at the heart of debate of economic and financial news at home and abroad since the global economic crisis began. this complicated financial instruments can be used for hedging or ensuring to be against risk which is good but the lack of transparency in their use together with the lack of regulation of the markets can combine to give them the

potential to catalyze economic havoc. warren buffett has called derivatives and i quote, financial weapons of mass destruction. many have argued that these instruments or responsible when the economic crisis in the united states. our goal today is two better understand derivatives so we can ensure that they do more good than harm in today's global economy. we experienced in the impact of unregulated derivatives and how they are still recovering from a. aig was unable to pay out on insurance on residential backed mortgage securities and the effects on counterparties was massive. this broader country to the brink of collapse and a lack of transparency was a major factor. we are now watching the risk of derivatives play out when it comes to sovereign debt to. as this chart on the left shows, the net national amount of cds

from greek debt which represents the bed on greeks ability to pay as well over 8 billion. which is quite large compared to the 300 billion of outstanding debt increase. in contrast the cds on u.s. debt which is in the trillions is only one-quarter of the size. today there are 1.2 trillion outstanding cds, sovereign credit defaults swaps make assisting% of 200 billion of that total, and european union cds represents two-thirds 131 billion of all sovereign it cds. greek cds make up 6.2% or 8.3 billion of all european sovereign cds. the use of derivatives on sovereign debt has exploded over the last decade in. two different types of derivatives have been used by countries looking to gain entry to the european union, they were used in some instances to

improve the appearance of their debt to gdp ratio. currency swaps, infusion of cash based on the outstanding debt in different currencies that fluctuate, the cash infusion is really just a loan to pay current expenses as paid back over time with other resources. credit defaults swaps can be used as a form of insurance on sovereign debt but also act as instruments that just allow debt to be placed that a country will the fault on its debt obligation. while the use of over-the-counter derivatives has exploded, regulation of these instruments remain nonexistent. and there is a need for regulation and transparency. this market has been almost completely unregulated. because most of the deals are between counterparties and there's no reporting requirements. this transaction also don't have to be cleared by independent

third party or traded on national exchange. for these reasons, investors are largely uninformed about the extent of financial entities, exposed to risk and about the cds that have taken out on any acid back securities. regulatory reform will bring needed transparency into the markets and protect investors from exposure to an undisclosed and in excess of over leveraging and investors can still make bets but they will have a better idea of the real hobson. the greek debt crisis is just a single example of the use of complex derivatives but this hits as close to home as new york. in and greece investors must now pay 711 dandridge thousand dollars to ensure 10 million in greek government bonds. this is up from 250,000 and the beginning of the year, almost threefold. concern has also been expressed

at the state level about cds on state debt specifically california. how do we regulate and the question is how to regulate over-the-counter derivatives such as sovereign debt, cds so they can be used for legitimate purposes without spreading financial contamination to other countries and other financial institutions. thank you mr. chairman and ask permission to put all of my statement in the record, my time is expired, they give. >> without objections the order. and al here from the gentleman from texas, mr. hensarling our performance. >> thank you mr. chairman. certainly thank you for calling this hearing impaired the one look at the title of the hearing, breaded dewfall swaps, the first part and greek debt crisis at the end, i think it would be approved congress to spend a lot more time focusing on the debt crisis and credit

defaults swaps. somehow filled to some extent that as i listen to some of the opening statements there's an element of let's shoot the messenger. the credit defaults what market. let's to some extent say that they have exacerbated the greek debt crisis. the lesson here for us and i might add i simplify the, the ranking member, the market acted more efficiently than the rating agencies and theoretically be greece had a deficit to gdp ratio and debt to gdp ratio that didn't qualify under e.u. standards and yet they were still allowed to remain in and -- member of the e.u.. so the early warning signals in many cases actually came from

the credit defaults what market so i think we would be very low -- we need to be very cautious on how we approach with any type of new regulatory scheme that might harm of the ability essentially this early warning system. and is serving as an early-warning system to the united states of america. as we know, i believe greece is having to restate their deficit to gdp ratio up to about 12%, but right now we have a deficit to gdp ratio of 10%. we know also at the end her of the president's tenure budget window according to estimates by the congressional budget office and the general accountability office, we are looking at a debt to gdp ratio of 90%. all economists will tell you that's when the neagle enters the read some.

press reports indicated that members, chancellor miracle party in germany, they call upon greece to sell its sovereign territories. in order to deal with its debt crisis. sell sovereign territory. i hope and pray the united states is not on the path to becoming greece without the aegean sea and the parthenon, but there are lessons to be learned here for us. there also press reports that indicated that when argentina comment monday defaulted on their debt -- i don't believe the united states would ever default on our debt, but when argentina defaulted on its debt seven or eight years ago creditors actually tried to put a lien on their navy. their naval vessels. and here we are probably facing

the most predictable crisis in the history of america and yet almost each and every day this congress makes it worse. we talk about accounting being opaque, again to amplify comments of the ranking member, how can we have our secretary treasury come here and say the death of the gsc is not that but we're going. >> every dollar and some how can we know one of the causes of the financial crisis was essentially these off-balance sheet vehicles one minute we have also engaged in the worst and there's 127 billion reasons why the gse's ought to be reformed and yet to the bill that's going to congress now the stone cold silent on the root cause of the problem. these are two lessons we ought to be learning from greece. thank you mr. chairman and i yield back my time.

>> thank you very much. now we will hear from the final presenter for three minutes. >> thank you mr. chairman and dickey panelists for being here today. i think -- i look forward to hearing your testimony today to find out what lessons you would have us learn. i think that the country, our country has learned the lessons of tax cuts for the wealthiest and prosecute two wars and then absolutely stand by and do nothing while major financial institutions like lehman brothers go by the wayside under the bush approach and the republican approach, a financial disaster. we saw that financial disaster in the fall of 2008. this country can afford to go that a persian a logger in on glad that democrats are now in

control to try to pick up the pieces after the mess that was left by the republicans administration and the republican congress. my friends on the republican side of the aisle, they love to talk about fannie mae and freddie mac and they should, they should have been reformed earlier. i like to remind them of what their former chairman of this committee, mr. oxley, had to say when he and mr. frank tried to do reform of fannie mae and freddie mac. mr. oxley is quoted in the article from the financial times dated september 9th, 2008: mr. ostler fumes about the criticism of his house colleagues, all the hand-wringing and bedwetting is going on without remembering how the house stepped up on this he said. what did we get from the white house? began a one finger salute. this is the kind of situation

where your testimony today is going to be helpful in deciding how much regulation relating to go on with these kinds of derivatives bets. how often they need to be cleared, how often -- how much margin is to be put down, and what's the effect on the nation's like greece won its debt becomes overwhelming. in this country is taking steps to get people back to work and rein in the debt and institute uniform and concern regulation of financial markets on like a the prior administration and we hope that your testimony today will provide us with further insight. with that mr. chairman i yield back. >> thank you very much. now the gentleman from mr. -- indiana. >> thank you mr. chairman. the american people have lost confidence in cbs, cbo's, synthetic cbo's, and their aftermath.

it lost confidence in the words and in the trustworthiness of the institutions creating these instruments and whether there's really any purpose behind these instruments. other than gambling and other than opportunities to try to take advantage of someone else or some other organization or some other country. transparency and trustworthiness are needed. they are a big part of the effort being made by this committee and a look for to this hearing. thank you mr. chairman. >> thank you very much. now we will hear from our first panel, mr. robert johnson, director of the global finance institute. mr. johnson. >> good morning. mr. chairman, ranking member garrett, members of the committee, thank you for the opportunity to address the issues related to credit

defaults swaps and government debt. as congress considers legislation on financial reform i applaud your efforts to explore the implications of financial practices, financial innovation and particularly the practice in the areas of derivative securities. is my view that the explosive growth of derivatives and the majority of those market systems is at the core of the financial crisis we have moving ford and i've stated elsewhere in continue to believe that the over-the-counter derivatives market is the san andreas fault of our financial system. the interconnection of balance sheets and the so-called too big to fail firms and the derivatives are a cocktail that may force taxpayers to drink from disaster again in the future. repair the system to reduce complexity and obeys the analog the markets to function better when adversely shocked. as they were by the housing price downturn and as they will surely be shocked again.

strong transparent markets are well fortified with capital buffers, supervise examines early in their means to help us reach our social goals. markets systems that are structured according to profit imperatives of the few concentrated firms that are supported by the backing of taxpayers are very dangerous to the financial health of our nation. the structural designs that encourage private appetite for risk that exceed social benefits of that risk-taking on healthy. markets aren't public good in their structure to obtain and make integrity despite the formidable pressures than individuals in particular big biggest -- big business and to retract that for their private benefit well-being on mindful of the harm they could impose on society. today our concern is with the impact of the cds derivatives market on government debt. i want to emphasize the history of government debt growth. as many of you commented, across

many nations and many times suggests that more and financial crisis are the greatest causes of extreme and rapid increase of public indebtedness. some analysts to the quote washington estimated the financial crisis of 2008 resulted in doubling of u.s. debt to gdp ratio and there for the concerns about our public finances must be concerned about financial reform. one cannot credibly claim to be a deficit hawk unless one is also financial reform hawk. credit defaults what markets have grown tremendously in recent years. they played a larger role in the financial crisis after the failure of lehman brothers particularly with the ig bailout. aig provided barack's capital and broad protection for the financial firms and evaporated and the crisis picked up by the taxpayer. at times innovation is worshiped as a got a progress and even when we don't have the ability to measure the value of that innovation.

it's an article of faith but does not appear to be the case of financial innovation inspires are facing a longer. of faith in the financial practices and wisdom of unfettered markets has been shattered. at the same time faith and regulators to permit action in the aftermath is also absent and experts and financial theory like rabbit -- credibility to their inattention to the risks associated with innovation. praying at the altar liquidity and innovation rings hollow without clear knowledge of the damage the image of market structures inflict on society. the market for credit defaults swaps attempted to band instrument altogether and it's clear in light of recent revelations about financial practice and tremendous social losses that can be caused that are profound shift to sentiment has taken place. at the same time i'd argue that there's a sound logic that underpins construction of these instruments that iceland and transfer credit risk to wear is more stable. properly structured transparency

cds markets that are well-capitalized and regulated could and should be two our well-being. these controversial times it's important to keep in mind that markets are useful tool but a tool that must be management -- managed and administered when constructing a balance between the social costs and benefits of market for credit insurance. theories that depend on the vision of a high quality of information is the main time hypothesis may not always been a good guide to behavior of credit defaults instruments. this dinner fundamental theory of pricing operates from the premise that market knows what the probability of the fault is after discovery and reflects that knowledge. attempt to buy credit default risk increase the price with a supply when they know the price is too high. price represents the truth and deviations from the truth. in the ultimate -- the alternate visions of market filled with uncertainty and in perfect

information. and as prospective buyers with large amounts to see as transmit a market signal that inspires others to believe that they know something that risk is risky. during inference from price market they sell bonds and stock believing it is greater and the higher funding costs depresses earnings invalidates that greater risk. the causation runs price to fundamental outcome. examples of market manipulation contained in the appendix suggest there is cause for concern regarding credit defaults swaps. issues related to incentives for restructuring companies and countries potentially are also complicated by the presence of credit protection and incentives. ..

>> we'll give you a little leeway because we are interested in what you're saying. we appreciate your testimony. we'll now hear from mr. robert pickel. executive vice chairman international stocks derivatives incorporated. you must be an important man this week, mr. pickel. >> i'd like to think so.

thank you, mr. chairman. ranking member garrett and members for the committee. thank you again for the opportunity to testify on this committee. i testified before on one other occasion before this committee. and i look forward to talking about credit default swaps and government debt. i submitted my statement for the record so let me summarize some of the key points that i raised in that. i'll talk a little bit about the varied purposes and motivations for parties who utilize credit default swaps. i'll talk about the important information and signaling function they can provide. i'll briefly highlight the many industry efforts that are going on as it relates to credit default swaps but also derivatives generally in the areas of systemic risk. transparency. and infrastructure. and then i'll talk a little bit about manipulation focusing on the unique nature of these products and why that nature, in fact, provides significant protections against the ability to manipulate through credit default swaps. the classic use of a credit default swap is to hedge credit

risk that a company might have typically a bank who has lent money or a company who owns the bonds of an institution. that's the traditional hedging purpose of a credit default swap buying protection. but there's more protection for using credit default swaps beyond that traditional hedging function. investors in the debt or equity of companies in a specific company may use sovereign cds as a proxy head against potential shocks of the economy in that jurisdiction. investors with real estate or other corporate holdings or other investments in a country may similarly use sovereign cds to protect their investments in those countries. portfolio managers may use sovereign cds to hedge against liquidity on cds. large banks who do not with highly rated sovereign post collateral or receive collateral from those sovereigns may use cds for some limit of credit protection against that uncollateralized exposure. and then, of course, anyone who

sells protection to anyone who is buying protection by definition is taking on credit risk and, therefore, may wish to use credit default swaps to hedge some of the exposure that it has. even banking supervisors and central banks can use the price signals provided by the cds market to assess default risks in their system. so there are many different purposes for utilizing credit default swaps. they do provide as i think has been alluded to by a number of opening statements important information to the marketplace. information that 5 or 10 years ago did not exist. we're not suggesting that credit default swaps information should replace the other information that exists out there. whether that would be credit rating agencies and investors own due diligence but we think with additional information and, in fact, we know speaking with treasurers of companies that they are watching their credit default swaps spreads as closely as they watch their stock price. it's a regular assessment by the marketplace of how the company is doing. so more information is certainly better information. and i think finance ministers of

companies can utilize the credit default swaps to get an assessment of the marketplace assessment of the running of their economy. we have as an industry undertaken a phone number of different initiatives related to credit default swaps and derivatives generally. we have focused on reducing systemic risk and the interconnectedness risk that we saw in 2008. that's primarily through establishing central counter-parties, clearing houses and utilizing a process of compression to reduce the outstanding number of obligations outstanding. we've also increased transparency by establishing trade repositories and the information that is on the chart over here is drawn from that trade information warehouse that has been established and up and running for the last three or four years sponsored by the depository trust clearing corporation. so that information readily available and is extensively used as parties look at the exposure that is outstanding on any particular company or country. then finally i wanted to just briefly respond to suggestions

about manipulation through credit default swaps. and to look at this we need to understand the fundamental nature of these products. this bilateral transaction. it is two parties entering into this transaction. anyone who's going short in a transaction implicitly by definition another party is going long taking the selling the protection. so that is a natural tension that exists in the bilateral relationship. and it's very hard in a series of bilateral relationships, bilateral contracts to have the type of manipulative effect that has been suggested for credit default swaps. and the fact of the matter is there are other mitigating factors related to potential allegations of malip nation. the amount outstanding of credit default swaps as it relate to sovereign debt is very small certainly in the greece situation as well and in other situations. also the majority of the sovereign cds situations are --

hedging economic risk. and they may moderate downward pressure on troubled countries because if the cds market did not exist the only alternative would be to sell the bonds or not take on the debt exposure to begin with. so those are the main points that i've raised in my testimony and i look forward to the questions of the committee. thank you, mr. chairman. >> thank you very much, mr. pickel. i will now hear from mr. duffy, the grad business school university. mr. duffy? >> thank you, chairman kanjorski and ranking member garrett. as several committee members have mentioned in their opening remarks, concerns that speculation and credit default swaps has been responsible for raising the borrowing costs of greece, california, and other government borrowers. my written testimony contains empirical evidence, charts and statistical evidence with the

professor of boston college showing that there's no evidence that speculators have been responsible for raising these borrowing costs. first as has been mentioned by mr. johnson and mr. pickel, the amounts of credit default swaps that have been used to either hedge or speculate against greece is relatively small compared to the amount of greek bonds outstanding. it's under 3 or so percent. similarly, the amount of credit default swaps on california is under 2%. of the amount of debt outstanding. secondly, there's no evidence of large swings in the amount of protection that's been charts in my testimony of credit protection is rather small. and thirdly, changes in the amount of credit default swap written on these government borrowers and other weaker european sovereign borrowers

is -- these are not related to the credit default swap rates demanded by investors in this market. in other words, this sort of speculation, if it's speculation or hedging is not related to changes in greek borrowing costs or the borrowing costs of these other sovereigns or california. and thirdly, as several of you -- and mr. can jorri others have mentioned it has been revealed about the true indebtedness of greece. and as that information has come into the market, we have learned that greece is likely to be unable to pay back its debt on its own. and it's this fact that has raised its borrowing costs. it's quite hard to imagine how speculation by credit default swaps investors has caused greece to borrow more than it can pay back.g1ó

i would like to say the external support that's been provided to greece does not, however, imply that greece will default. it's gone to 10% in the last few days. indicating a significant chance of default. the debt crisis faced by greece has profound implications for other euros countries. they issue debt in a common currency. if one of them is able to pay its own debt, other euros-owned countries have an incentive to come to the rescue and protect the stability of the euro on which they commonly depend. in the long run, however, there can be an erosion of the incentives of fiscally stronger

euros-owned countries to support countries. each time a euro zone country borrow more -- it's weakened this is important to the interest of the understand because the stability of the euro contributes to global economic growth and stability. regulations that severely restrict speculation and credit default swaps markets could have the unintended consequences of reducing market liquidity which raises trading execution costs for investors who are not speculating. and of lowering the quality of information provided by credit default swaps rates regarding the credit qualities of these issuers. regulations that severely restrict speculation in credit default swaps markets could increase sovereign borrowing costs somewhat. in any case speculation could continue via short sell of bonds to the extent the bond market is liquid. proposed reforms of the over-the-counter markets for credit default swaps and other

over-the-counter derivatives will improve the safety and soundness of these markets. data repositories will eventually give regulators the opportunity to police those who would manipulatejr these market or would take positions whose risks are too large with respect to the capital backing them. central clearing if done effectively will also bring needed stability to this market, transactions price reporting will add additional transparency and improve market efficiency. thank you for the opportunity to present my views. >> thank you very much, mr. duffie. and now we'll hear from mr. anthony v. sanders, distinguished professor of real estate finance, george mason university. mr. sanders? >> mr. chairman, and distinguished members of the committee, on november 5th, 2009, a story was published greek debt reached 123% of gdp in 2010.

everyone around the globe is aware of the greek debt fiasco has led to the meltdown of the european economy. at only 120% of gdp.h+t things became more critical when greece discovered it overlooked $40 billion more of debt. markets do not like surprises. these stories about the greek economy begged the following question. was the cause of the fiscal collapse of greece perpetrated by credit default swaps or was it out of control spending and borrowing by the greek government that led to greece being broke. credit default swaps played two important roles in the market for credit. first they facilitate liquidity by allowing investors to hedge against negative outcomes, for example, defaults. and second, cds provide vital information to other market participants about the risk of a particular investment. this price or spread conveys information to potential investors, communicating the level of risk involved and the investment and helping them to make a more informed and prudent investment decision.

restricting either of these roles makes credit less widely available and markets less transparent. cds is the current villain du jour.w greek crisis as a re again of massive government spending and debt issuance to fund the spending. in fact, cds and greek sovereign debt actually served a positive role. world that greece is, in fact, in a death spiral from credit. essentially it allows investors to hedge their positions of debt and investor may hold greek sovereign debt long may want to partially fully ensure against the default of debt. by limiting or abolishing cds you decrease liquidity for investors which is a terrible idea but you actually decrease sovereign debt. as can be seen in exhibit 1 in my report, cds spreads started widening in october and november

of 2009. by december cds spreads widened even more directly. that's when the 120% gdp story came out. now, consider further the greek surprise when on april 2nd, 2010, a story revealed that greece had another $40 billion of unknown debt and cds widins. -- widens for a country in trouble a discovery of $40 billion came as a rude surprise. i also show that in my exhibits how devastating this is. so focusing on the instrument as the cause of the problem, in this case cds misses the real culprit. with greece's cds reacted to the behavior of the debt just as in the housing crisis, cds has been blamed for exacerbating the crisis but really it was the behavior of the underlying asset housing prices and mortgages that was the issue. if you're looking for -- to place blame, don't blame the

interest, blame the behavior of the underlying asset. greece hit its debt and markets found out and reacted appropriately. this is a lesson we learned well for the u.s. our own sovereign debt has a greek surprise component too. it is called gse and agency debt. as secretary geithner tried to emphasize in recent house hearings that i was involved in, the federal government support to fannie and freddie does not change the legal status. in addition he said the corporate dead of the gses is not the same as u.s. treasury debt. secretary geithner went on to say he wanted to eliminate this ambiguity. i completely agree with secretary geithner. but to end that ambiguity we need to at least recognize the gse corporate debt on the federal budget along with projected guaranteed book losses. an argument can be made against requiring that the guarantee books be brought on balance sheet and an argument can be made to bring them on balance sheet. as i mentioned before, the cbo

said these losses will be 400 billion over 10 years which could be higher on future economic conditions interest rates and tax rates. these guarantees are supported by cash flows from borrowers. so it's less critical to bring them on the federal balance sheets although the losses that are expected should be recognized. lastly i would err on the fiscal conservatism by raising the projected guarantee charges for $400 billion to a higher number. based on stress tests on the cbo and the same way fannie and freddie run stress tests. we have the results and we should prepare for the possibility of a double-dip in housing prices and a few of the recessions that is going to drive that recessions. thank you very much for my thoughts today. >> and finally we'll hear from mr. joseph r. mason, louisiana bankers association, professor of banking at the louisiana state university. mr. mason?v

>> thank you, chairman kanjorski and ranking member thank you for allowing me to talk on this popular up to. while monetary and fiscal policies of countries worldwide have been successful in a worst case scenario in the great depression the combination of rising fiscal deficits and continued monetary policy accommodation has raised concerns about the sustainability of public finances and fears of inflation. as a result, the recent uproar about greece's fiscal woes and possible debt default are viewed as many as many as a canary in the coal mine. it's hard to argue that greece is not blamed for its difficulties. as of 2009, greece had the highest fiscal accounting balance as a percent of the gdp in all the euro countries in britain. and it's projected 2009/2010 and 2011 balances were second only to ireland. with a long history of fiscal

stress and four previous defaults in modern history, investors are right to be suspicious. as of this time spain, italy are being pressured for good reasons not mere contagion. defaults are nothing new even for sovereign nations and municipalities. there's a history of defaults. the definitive guide of the u.s. state and municipal defaults show even in the deposition states with serious default problems took on far more debt in the decade than states that had no defaults. hence, even historically, default is not a threat without a substantial debt load. more recently, the five year transition rate for aaa rated local and municipal debt in the period 1975 to 2009 was 27.4% with 10.9% of that resulting from ratings that were withdrawn and 16.4% resulting from ratings

that were downgraded. s & p reports that the sovereign speculative grade rated 15-year default rate over the same period of time was 29.66%. the point is, sovereign defaults happen. a real problem in the sovereign cds nation whether that concentration is a center counter-partly or a small group of market participants, the risk remains. recently the imf has opined that the magnitude of risk to be assumed at the proposed ccp on behalf of unmargined market to market participants is on the order of magnitude in the neighborhood of some $200 billion. and is rising daily with further exemptions. that estimate should not be dismissed or the amount will surely precipitate a future crisis. some have pointed to cds as creating problems for sovereign debt financing. it's hard, however, to see the case. while cd provide transparency by aggregating market views of the

probability of default and recovery, cds in and of themselves do not create additional volatility to those views. the view of cds is creating volatility comes from observations that cds spreads can widen quickly before a credit event reflecting demand from cds protection buyers. some of the fear arises because cds markets may be dominated by fast-moving hedge funds while cash bond markets are dominated by buy and hold real money investors. while it can seem that the signals from the two markets may be at odds during the stress, the divergence has been shown by some institutional and value distinctions between cds and the underlying debt contracts. cds due contribute greater information on markets than credit ratings. but no degree of rating agency not even greater than the pslra that would make them responsible for goldman sachs alleged fraud will change that relationship. overall the danger a cds buyer

may deliberately trigger a risk has not been shown. those borrowers are known to be struggling financially anyway. in sum, therefore, i'm not convinced that sovereign cds deserves its current negative press and fear that a ban or restriction on trading could easily backfire. bans on trading activity tend larnlly to reduce liquidity forcing a revision to a world where sudden and unhedgeable price jumps when underlying fundamentally priced in an illiquid market. that is when someone finally trades. sovereign cds provides an efficient way to trade and to hedge credit exposures the government and a continuous way for governments to pull their fiscal decisions in the marketplace. if governments do not like that transparency, it seems they protest too many. thank you. >> thank you very much, mr. mason.

would have move to the questions and i'll take the first five minutes and the conclusion of my five minutes i will ask mr. maloney to take the chair. i'm not sure what i'm supposed to gather from the testimony of all five witnesses other than cds is not the only problem but some of the problem. we haven't done a post-mortem what constitutes the problems in how it can be solved? is that reasonable? the reason, i asked you that, over the last three or four weeks when the greece problem was brought to our attention, it started a need for $45 billion underwriting or infusion from the euro union.

and now it's up to $120 billion and climbing. and somebody today stated that there's no way that they can work a rescue here without a restructuring. i sort of like that opinion if any of you have, is that a correct or a likely conclusion? >> mr. chairman, can i address that? >> surely. >> you're correct. the estimates of how much will have to be loaned to greece have gone up -- tripled in the last few days. and again relying on the cds markets as we have said, there seems to be a perception of greek sovereign debt has a significant probability of defaulting anyway. one of the reasons for that is that this is -- these monies coming from the imf and the euro-owned countries are not donations they have to be paid back. they will increase greece's indebtedness although the terms of the loans is generous.

and the issue that some of these loans to greece in external support may actually come in ahead of greek sovereign debt in terms of who get paid first. and that actually causes concerns to some greek sovereign debt holders if the imf gets paid before them maybe there won't be enough left over for them. in summary, i think it's not at all clear that greece will avoid a restructuring of its debt or an outright default. and only time will tell. >> mr. kanjorski, i would agree completely with my esteemed colleague mr. duffie. but it's just not greece. it's also portugal. spain is about to blow up. ireland, iceland, great britain is on the brink, too. so we're talking about a substantial amount of -- some of those are non-euro countries.

but that europe in general is having a severe meltdown due to again excessive spending. and it's biting them really hard right now. >> what's the potential -- i mean, obviously we don't have jurisdiction to intrude to the euro or the european union. but i'm dealing on financial matters on a regular basis now because we're trying to do our regulatory reform consistently with the e.u. and the united states being on equal footing. this is rather shocking that suddenly someone can discover $75 billion of new debt that was really unrealized just three or four weeks ago. and it is true when you talk about spain, portugal, italy and in ireland, if you throw them all in, the one commonality they seem to have is that they violated the rule for entry in

the euro union and that is -- they were all over 60% in debt as opposed to the other countries that were far more stable and were in the union originally. i guess it proves that whoever set that formula up knew what they were thinking or talking about. but like anything that can be contagious -- and we saw that recently in the credit crisis in when t started to tumble, suddenly what our assets become valueless or almost valueless and that probably is happening to some extent in these countries. how do we put a stop gap in there? and how do we prevent that constant rolling motion that that would take everything down eventually the entire european union? is there some thinking on that and maybe somebody who wants to

grab and run with it. >> if i may, one substantial element that was left out of the european union construct was a way to address individual country difficulties through some type of central bank action. in fact, that's why we designed the u.s. federal reserve system as a system of central banks able to address regional needs even if the entire nation did not need a stimulus. that is a fundamental flaw. and that is what places the risk of being unable to address greece, italy, spain. while leaving, for instance, germany and france relatively untouched. but you are exactly correct. that the e.u. entry rules gave -- set the stage for off-balance sheet finance. by arbitraging this rule, by keeping funding off-balance sheet they could stay within the

debt limits at least based upon the formula but not in any real economic way. and that's a very, very important lesson that i want to point out here that happened in the u.s. with securitization and commercial banks. and i really would like to stress to the committee to see how that application is very robust to a number of different rules, even some rules that may be considered today in financial reform. >> thank you very much. yes, mr. duffie? >> the rule of thumb is to do too much rather than too late. in other words, to get the head of the curve and do something so profound and restructuring that you essentially -- what you might call stop all of the emotion that leads to contagion in its tracks. you stop people from drawing inference about propagation. what's particularly difficult about this situation once it's

taken place and professor duffie mentioned this is the free rider problem. which is at this point greece knows that it's not just its own fate that in it's hand. greece could take italy, portugal and the whole e.u. structure down with it and there's incentives in bargaining down reflect more than their own faith. they think they have more leverage than if it was just an isolated country. so at some level doing something that would -- how would i say not call greece's bluff but would acknowledge that they're going to perceive those side effects requires a bigger offering from the other side of the table. right now germany doesn't want to offer that. and they have a tradition and concern about inflation in their past and they don't want to do that right in front of an election when their population is not necessarily that fond of the euro anyway. ...

are watching the current discussions closely to see what the nature of the support from the imf might be because it could, in fact, be those that might trigger a credit event under the contract because countries don't go bankrupt have

the ability to tax but they may miss a payment and that would trigger a settlement of. >> will now recognize the des moines from a jersey -- new jersey and request -- >> thank you to the witnesses and i guess my opening thoughts and comments were that this committee and title credit default swap and government debt could involve a bunch of different areas. and for the first take away from this from the chairman and mr. johnson opening testimony and everybody else right down the road is that cds were not to the underlying cause of the problem in greece ran now. so they can say what should we learn from this experience. mr. johnson, in your testimony

you conclude the great crisis and sovereign debt is not fundamentally caused by cds but caused by profile spending of tax revenue and dynamic of debt accumulation fundamentally unsustainable. i mentioned in my remarks would chairman bernanke said that in this country we are going to be able to grow our way out which is some people suggest how to solve the problem so i'd be curious from your take on our problem in this country. in order to avoid the situation that greece falun in, it isn't like a lot of the experts that testified in the budget committee hearings the fundamental area to address is the entitlement spending in this country and somehow we have to rain that in and as our greek problem as you will? >> you are calling me back to the days when i was a staffer on the republican senate budget committee so i'll have to dust off those memories.

what i would say is that there were many tools that reflect social priorities and that the united states after this financial crisis definitely if we had a recurrence would be preaching what congressman hensarling talked about the red zone which can ruboff as the debt to gdp ratio approaching 90 percent. i do think that structural reforms have to be made. whether those structural reforms take the form of further health care legislation that reduces the price of care or whether it involves entitlement reform in terms of the extent or quality of care, whether it involves taxation or rather involves the military budget, any of those things logically fit into what you call a venue of theoretical

trade off that one could invoke and is really a question of social preferences as to how you get there. i do believe that we do face that challenge. we have to define those preferences. >> then turning to mr. duffie, i noted your one comment and then there was a pregnant cause i don't know if it was intended or not saying that speculation did not force excessive borrowing -- spending and then borrowing. any other comment to falling on that -- falling that pregnant klaus? >> add like to address whether speculation has any benefit at all and one of the ones mentioned by all of the palace i believe witches it provides an early-warning system to the market and i think that is helpful in this case causing people to dig in to the true financial condition of greece as

suggested. another speculation is when someone needs to lay off the risk they need someone to take on and speculators will usually do that in return for expected profit. if we didn't allow them to participate in the market it would be harder for investors to exit the position or hedged their positions. i would encourage regulators generally not to clamp down on speculation but to clamp down manipulation which is different aspect. >> one last question, my time is up. they looted to the fact that a lot happening in greece, the triggering was the $40 billion and i have legislation to say oliver information in this country is clear and transparent and to say that as far as our debt should be apparent to the public. i would think it's apparent but the clear what is to put on the budget. is there any reason why that wouldn't be legitimate avenue for congress to go down and say all of our gse's data whether sovereign or the treasury of

secretary says should be transparent on the budget? >> that's correct and i think the supreme court said that exactly what is needed is much transparency as possible. >> anybody disagree? >> i agree completely and it should be brought on because we do want to avoid another greek surprise and if you leave it off this just begs for another surprise on the market. >> mr. mason? >> i also agree we need to be clear about our own off-balance sheet exposures so to speak but we need to pay attention to the resolution of consumer problems in today's marketplace in terms of when we talked about in restructuring in the greek context. you think about restructuring for today's consumers, by offering the modification it there for taking a loss on the secured debt wally the unsecured of the consumer in tact we

actually violated an absolute priority rule and the restructuring of the consumer and with as confused and shock the markets. in a restructuring we do need to be very careful to communicate directly to previous investors what they're liable to get even after loans from the outside come into. >> to understand, that means all the work we do as far as restructuring on the secured debt which is mortgages and the programs we have to be careful of the implications what that does as far as unsecured debt going forward with their lenders want to engage in activity. >> we've seen that directly by modifying first lien mortgages and, of course, the second lien holder was able to avoid a loss for the would have otherwise according to the rules taken a loss. it's been confused. >> thank you, i appreciated it. >> thank you, the chair recognizes yourself for five minutes.

the first time cds came to national spotlight attention was during the aig crisis and i would like to ask the palace starting with mr. johnson going down if any one of like to comment, what would have been necessary to avoid the aig bailout in terms of cds reform? >> you like me to start? >> and then mr. pickel and mr. duffie if you'd like to comment. >> there are a couple of things that come to mind, first of which is the way in which a premium income is booked by those that road to cds during that time, to book it as income and not have set aside or loss provisioning whereby they build a war chest orchid tuesday fund in the event that they had to pay out. i want to be careful about that.

cds is an unusual contract and not as if there's a stream of payments when the event is triggered the ensure just assumes a stream of payments. you actually have to deliver the losses for outstanding bond and go from collecting the premium which is a flow here to having a huge liquidity demand on you as a writer. obviously when we had a giant storm like that it's not clear to that even a well provisioned system would have withstood that shock. in the second dimension i think is the systemic risk regulator needs to understand the distribution of exposures ex ante and they need to have a very clear sense of that pattern of exposures because when they are called upon to resolve an impaired institution, they may be triggering an event that's not necessarily emanating from the balance sheet of that

institution. if one bank fails, to others may have transferred risk on the cds on the failing bank and unless there's a unified awareness of that exposure map by taking action putting the failing bank into receivership, you may drag some needles in the fall with you and me to contagion. understanding those consequences will make it easier for the resolution authorities so that information system is important. >> that i think it's important to understand the differences in the nature of transaction done by aig and the transactions focus of this hearing, a sovereign and corporate cds. the credit default swap were written on supercede and charges which had exposure to underlying real estate risk and those were, there's this discussion about naked credit defaults swaps for the had the underlying risk in the people that bought the

protection from aig had the underlying risk so even if you ought to man and make it credit default swap -- it is also a function of the fact that aig individuals involved in the transactions didn't have a full understanding of the nature of the risk. they were looking at the potential to have to pay out and didn't take into account the mark to market risk they had. , touted by reliance on aaa ratings and refusing to provide collateral has a very important tool in the otc business widely used to provide not just credit protection but provides indications through exposure you have on your underlying position that you can adjust to. the compound that by agreeing to downgrade position so at the worst time when the lost their aaa rating to have to come up with massive amounts of collateral because of the mark to market exposures so you have to have information that mr. johnson refers to in that situation but greater utilization of collateral would

be helpful. >> anyone else like to comment? mr. duffie and mr. mason then my time is up. >> briefly there are four measures in the legislation ditcher committee which has proposed to reform and the financial system that addresses this. first of all, the supervision of by the federal reserve would include a form like aig and hopefully would do a much better job than they presented at the time. a second lane the legislation proposes a new message for resolution assistant lee important financial institutions that would allow aig to be taken apart without collateral damage. thirdly did repositories in the new derivatives legislation and that provides regulators with opportunity to see how much credit the fall swabs aig would have held and finally as mr. pickel said the legislation would require financial

collateral and improve the situation. >> mr. mason, then my time is up. >> thank you, i'd like to emphasize mr. johnson's remark about information but take a slightly different direction. the information we need to understand aig exposure was there. we just needed to think to ask them. then after my own experience in the bank regulatory agencies, it has been amazing to me that bank regulators would not ask outside of banks for additional market information or even information about bank exposure is whether cds or off-balance sheet securitized entities. to me that's the important element that can be solved fairly simply and financial reform. instead financial reform as currently drafted one is asking for the entire trading but the very system of import

institution which is information overload and the attorney knows if you want to fight off an attack either withhold information or give them too much to digest. that would be far too much to digest and i think the best starting point is to allow bank regulators and other federal regulators access to information sources, and on wall street that they can't afford right now. sometimes even because they're not qualified institutional buyer cannot even legally access. that would give the greatest thing for the box so to speak of the legislation. thank you. >> thank you. >> thank you, first one to say that your testimony which arrived yesterday afternoon at our staff recess, they refer that to us not always but recommend that we read it or not, and we then are finished a series with them?

>> well, the rotation is what it is when you don't have days off. it just falls in line. >> sure. >> you know, every five days. you do get the opportunity to be familiar with one another. you know right off the bat who the guys who are hot against you, who is pitching well, who is swing the bat well. but the other team knows that, too. so it's a challenge. you do your homework. you prepare your guys as best you possibly can. you try to put guys in the right situations. and then it comes up to implementing that, you know, out on the field in between the lines. so, you know, it's a new series. we are playing at home. it's friday night. hernandez is going. hernandez pitched okay the last time out. he competes. his fastball was very good. he got by with it. i'm sure the red sox will come in here tonight looking to hit that fastball and hernandez has got to be up for the challenge. lackey pitched against us, you know, when we were there. he has a good cutter, a good

slider. everybody knows what he is all about. he knows how to compete. you have to get him early. don't let him off the hook. so we got to be ready to play and see if we can put four or five crooked numbers on the board early. >> dave, what about hernandez's future? what does he need to do to get better? he has an outstanding arm, can get that fastball up there, a lot of hop on it. >> i think all young pitchers, it starts with command and location of your fastball. when you can command and locate your fastball, you got half the battle licked right there. david has a tremendous arm. he is a horse. doesn't get tired. he has to brush up on that and continue to show improvement on his secondary pitches. major league hitters, you can throw at 95. if you don't throw at it, and burnett threw at it last night, you allow them to get extension and they are going to hit it.

so learn dez, you though, he has a bright future. he just continues, needs to continue to go out there and pitch. make quality pitches when he needs to and go from there with it. >> dave, what's the latest, and i don't know how soon he will be here, but he had a scoreless inning in aawith cogy. how soon do you expect him here in baltimore how will he be used. fans are talking about will we see him at the back end of the bullpen. are you going game by game when when you see from players? >> first of all, he has to get here. then we will slot him in an area where we think it's best. what we did with bow e, he got started. he will go on saturday and pitch-out of the power play at norfolk, then he will pitch-out of the bullpen again on monday. then we will see where he is at. when he comes here, he will be somewhere altbach end of the game. your tell you where it will be.

he will pitch late in the game. i think he has dedeposition. he is a strike thrower. in order to preserve what he has, i think he's a one-inning guy, and he'll be fun to have because he will bring some excitement. i know he will bring some energy to the club. it will be fun to have him. i am looking forward to watching his progress. >> scott and jeremy with oriole manager dave trembley. what are the reports on brad berg sown. >> he is the guy, we haven't announced it yet, more than like le we need a starter tomorrow and i think bergesen is the guy that's going to fill in there. he went down to triple-a. he got his confidence back. he found his sinker. he threw a lot of golf balls in the last time he pitched. he think you will see a much improved bergesen when he pitches tomorrow night. and get him on track and just get him to relax and trust his stuff. and be the brad bergesen that

we know he can be. >> david, a season that is kind of been tough on all you guys. how about a breath of fresh air when ryan hughes shows up, gets some big hits for you at fenway and helps you win some games to see a guy that's waited a long time to get to the show step up and do what he has done. >> that says a lot about perserveres. and ryan hughes has certainly gone through that, done that. same guy that i saw in big league camp. i think he can hit. he is not intimidated. very good poise. very good composure. good low ball hitter. can use the whole field. has gotten some awful big hits. seems to know the strike zone for a guy who has never been here. he will go the second time around. so we will see the adjustments that the pitchers make on him. and likewise, he will have to make some adjustments. but he was our hottest hitter in the system. came up here when we needed the shot in the arm offensively. he will be back in the lineup

tonight. he will dh. hopefully he will be in a situation where there are some guys on and he will get some hits for us. what has been your thoughts on simmen. we have a little dicey there. and your thought process on how long or if you know mike gonzalez will be back and what's going to happen at the back end. >> we are going to have so see what gonzalez does. he will start a throwing program next week. has just been doing some rehab work to strengthen his shoulder down in florida. so he is a ways away. i am sure it will be another two or three weeks before he is game ready. he will probably have to go out on a rehab. that's to answer the first part of your question. alfredo simon is the guy that everybody should be pulling for. i mean, less than a year ago this guy is getting tommy john surgery. i saw him the last week of the season last year when we were in tampa and the guy told me he was going to be ready the first

day of spring training and he whacked his butt off. open was ready. because of needs, he was a starting picture in trip al a. then they moved him to the bullpen e wants to pitch. he wants to do whatever he can to help the team and help himself. he came in the other night, never beenna safe situation before at the major league level and was throwing 97 miles an hour. i think you have to be careful and guarded with him because he has never done it before and because he has come off that surgery. if there isn't the bad hop, it's a clean inning, three outs, he probably gets out of the inning with less than 20 pitches. he got extended a little bit. but you will see him in the ninth inning when we have save situation. more times than not i will give him the ball. >> tilman struggles a little bit and then all of a sudden he is throwing a no-hitter. i am sure you took notice of that. >> that's always nice to see. you are pulling for those guys

who are so highly thought of. they have a choice. no one is going to feel sorry for you. you have to work on things you need to work on in order to get better. tilman has a great arm and a bright future. i am sure it was a thrill of a lifetime to throw a nine-inning no-hitter. we will keep track of him and hope he continues to get better and eventually he will be up here. >> how many of those have you seen in your lifetime in baseball? >> i have seen some no hitters. i have taken guys out because they have had no hitters because of pitch counts in the major leagues. but there was a pitch count and you had to add here to it. >> that's a popular trip, isn't it? you know, guys understand. the big picture. >> i mean for the fans. >> oh, well, yeah. believe me, i can relate to that. i've seen some. i saw buchholz do it against us in fenway. there is a lot of electricity

when it's on your side. i can only imagine what the dugout was like the other night for tilman. i would certainly like to be a part of something like that happening for us. >> one of those and about twelve runs, right? that would go a long way. there is no -- that would be no substitute for putting some crooked numbers on that board every inning and going out there and being able to relax and letting the guys play, you know. just open it up a little bit. eventually he is going to come. i talked to kevin kennedy on xm. when he managed the dodgers in '96 they started out 6-19. the dodgers are scuffling. it's terrible what we are going through. sooner or later we will start scoring some runs. have a good weekend. thanks for your time. >> thanks. >> oriole manager dave

trembley.

>> ryan burr back with you. day two for tiger woods. shot a two over 74 yesterday. cut line at about a plus one. so tiger will need to go about minus one on the day to make the cut. here he is on the par three sixth. he'd bogey the hole and move to pus three. tiger putting for birdie on eight. bottom of the cup. back to a plus two after nine. tiger needs a big back nine. let's get to phil mickelson now. second shot on the par five 15th. and lefty snuggles it up six feet for the pin. his eagle, he finished with a four under 68. he's six under for the tournament. billy mayfair turning back the clock. he's at eight under. billy mayfair getting it done in a big-time way, chipping in off the green does may fair. he's at eight under par. back to tiger now. on the front nine, once again tiger would have to go minus one

on the back nine. tiger out of the bunker, not good. boeingied the whole. moves to a plus three. tiger now on the par four 11th. tee shot. off a tree, into the bunker. bogeys the hole. tiger moves to a plus four. that's the 12th hole. tiger miss the putt to go to a plus five. second shot of the par four and this would be the end. this would be the end for tiger woods and his hope of making the cut. chips on to the green off the green and into the water. double-bogey. make it a plus seven for tiger woods. insult to injury, another double-bogey. plus seven on the day. 79 plus nine for the tournament through two rounds and tiger woods misses the cut and does it badly. 17 back of billy mayfair.

tiger woods disgraced with his worst round as a professional, a worst two-day total in his career. not good for tiger woods. his second event back, tiger woods miss the cut for just the sixth time in his career. we showed you the back nine. here it is on the scorecard. bogey, bogey, bogey, par, double, double, par, par, par, a 43 on the way out. a 79 for a total. tiger woods miss the cut in his second event of the 2010 season. still to come, bob harig was there. he witnessed tiger's meltdown. we will talk with him live in a few minutes. - at subway... - there's something... - for everyone.

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here with. these nats are rolling. from spectacular throws to amazing grabs. >> the boys from d.c. are capping off great performances and staving off late ending rallies. >> that's the bottom line, some well-pitched, well played ball games. the nats get one big one back with all of the action on masn, to washington florida, a three game set, next.

it's a great day and great night for baseball. now nice it is to see that gentleman hanging around the batting cage, taking a couple of cuts and he's back in the lineup tonight. the all-star third baseman ryan zimmer man has missed six games because of the hamstring problem. the nationals still able to win the ball games without ryan being in the lineup. welcome to nats pre-game brought to you by the washington ford dealers. the nats after a day off flew down to south florida after taking two out of three from the chicago cubs. good pitching, good hitting, outstanding defense, pretty good recipe for success. >> big-time hitting.

a couple of home runs. johnny and desmond getting big out hits. adam kennedy goes deep on dempster to put the nats up 1- 0. his 69th home run. his career first since '08 and adam fast ball out away from him. 41st career home run versus chicago. 25th in wrigley field. now he has 320 career home runs which is 13th. you've got to go back quite some time to 2005. they were 11-11. they finished 81-81 and who knows what they're going to finish. they are on the right track. luis atilano in the minor leagues knocking around left

and right, six, seven years comes up to the big club and gets two starts and impressive starts. >> very impressive. started off throwing a lot of balls off plate in his last outing but in the end he was similar to what he did. 93 pitches in his first outing. 57 strikes. 91 pitches in the outing against the cubbies, 58 strikes. six complete innings. five hits, six hits respectively. just one walks, two walks and didn't strike out but five people total. walked five but really battled throughout the whole outing and then found it after that third inning throwing a lot of ground balls. he threw six fly ball outs. after that there were only three fly ball outs the entire game. >> when we said six solid innings against the cubs. anytime i go out there i'm going to battle as hard as i can.

>> that fifth inning. your reaction out of that inning was pretty emotional. >> especially in game situation. games close by one run and all that in. i was trying to make the pitch and get the out. >> luis atilano after winning that ball game against the cubs on wednesday afternoon. let's take you down to south florida. i hope the weather is beautiful and gorgeous. it looks to me like it is and debbie taylor is there and i know that scott olsen can't wait to take the trip to the mound against his former team. >> reporter: absolutely and when scott olsen, the former marlin comes to south florida you see him talking to stadium personnel, former teammates but it's going to be all business tonight. i caught up with him on wednesday before we left chicago to talk to him about his return here.

>> friday will be all about business. going into pitch. i'll make sure on saturday and sunday to see people there that i haven't been able to see. that will be fun. it will be a nice change from the things in the past. >> reporter: you're coming off of a nice outing against the dodgers. you were able to beat them. the only other team you haven't beaten is the marlins. what would that mean to you to be able to add them to your list of teams defeated? >> it would be just another victory. i don't think about anything like that. you just focus on every five days and going out there and contributing. if it were to happen, that's pretty interesting. interesting little fact but you're not pitching for that. >> reporter: what's the biggest thing that you need to do against the marlins? >> they're a good power-hitting team. you've got to keep them offbalance when they're ahead in the count. be able to mix in the offspeed stuff for strike and get ahead early and i think being ahead

in the counter early and down in the zone will be fine. >> reporter: are you feeling good about the state of the 2010 nationals now? >> we're playing okay. there are day where's we can't quite put it altogether there and are days that everything clicks and to be able to do that on a consistent basis is how you get to be the elite teams like philadelphia and new york. we're still working on that but we're far and away better than we were last year at this point and there's still a lot of room for improvement and we all see it and we're out here ready to work everyday. >> reporter: scott told me too he's feeling good vibe around this team and he told me it started way back in spring training and so i think this new looked nationals team is going in the right direction and a better vibe tonight with ryan zimmerman in the lineup. rodriquez, livan hernandez visiting their old stomping ground.

good stories to tell you about. johnny, back to you. >> scott should be happy. the ball game is 12-10. time for the keep your edge spotlight brought to you by just for men, mustache and beard. how about scott olsen against the dodgers. he went seven strong shutout innings. struck out eight and just as scott can give nationals the edge you can keep your edge with just for men mustache and beard. we'll talk more about the national starter tonight as the nats try to win their third consecutive in miami. scott olsen scott olsen

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at second straightout for olsen. second consecutive and there's a breaking ball for a strikeout. all right, quick inning. that's going to punch him out. fast ball in. zune doesn't like it. got him looking. >> and you are on nats pre-game poll question of the day, in 2002 the nats acquired scott olsen and outfielder josh willingham from the marlins bonifacio and two minor leaguers. what grade would you give that trade, (a), (b), (c), (d) or f. i'm going to let you go first. >> i'm saying a (b). >> i'm saying an (a). double-a, triple a, quadruple a. we have a guy that can pitch and will pitch effectively when

he's completely healthy and i think he's on that road. josh willingham has become our everyday left field year while emilio bonifacio is somewhere in the minor league and i don't know who the minor leaguers are we traded for. we have 2 of 25 on a major league roster. and those other two nowhere to be found. acquiring bonifacio from arizona to allow us to get two very solid players. >> how about this one. nolasco starts tonight? >> he can do it. he's got a good slider, a curve ball. a fast ball. won 15 games last year.

has an outstanding change-up. 400 strikeout for. >> if you look at the e.r.a. of nolasco at home it's way up there. .790. on the road it's .190. the big power hitters can pull the ball over that left field wall. it's not that different for fenway park where it gets deeper in centerfield. down left field rain, out about straight away left centerfield only about 360 there with a wall that's certainly reachable. >> we all have grades for the bull club at this point of the season, one month in. professor knight will give you his grades. remember, he was newton when he was in high school.

he had a great academic record. he'll give you the grades of the nationals when we come back right after this. anncr vo: with the new geico glovebox app... anncr vo: ...you can get help with a flat tire...

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welcome back. ryan zimmerman making his first start since april 21st while zimm got the hamstring healthy. he's the lead runner in doubles and rbis and game number 617 for ryan zimmerman. nigel morgan will be in centerfield. adam kennedy the second baseman will be second clean-up spot, livan rodriquez catching. roger bernardino will get the start in the right field and scott olsen on the mound and look at zimmerman's numbers against the marlins. .292 averaged last year five homers, 11 driven in. how about florida. hanley ramirez 2009 batting champion with a .342 average. he drove in 106 runs last year.

he's in over 300 the last three consecutive years. he's got a .360 batting average against the nationals since 2006. not quite over the 300 mark this year. cameron maybin will start off. chris coghlan the left fielder, 2009 rookie of the year. ramirez the champion bats third. jorge cantu at third. ronnie marineo will be capping. sanchez look at ramirez number .408, five home runs. he drove in 23 runs against washington. welcome back. that's extra pre-gamed. i'm johnny along with the silver fox raymond charles knight and time to take a look at your grades for the nationals compared to the fox's grades and let's start off with the starting pitchers. >> what kind of grade do you give them? >> i've given them a c and

and clippard's been solid and bruinm is going to get better. >> well capps and clippard, you can't give them a high enough rating. they are so nails, johnny. just looking at what they've done, capps is 10-10 for his save opportunities. 0.68. he's pitched 13 innings and punched out 15 while only walking five. clippered 054 unearned average.

strikeouts. how can you get better then those gums. they've kept us in blame and allowed to us win. walker and bruney and batiste have had averages in the 5 and that's what bring it's down. bergman was 15. he's out of here. mock started and struggled bullet you're looking at bruney, he's his trouble throwing strikes, batiste has had trouble throwing strikes. walker has not had any trouble throwing strikes. been able to punch people out left and right. those are power arms. they're going to get better. bruney riding himself the other night. they have to throw strikes. i think this is the strongest part of our baseball team. no question about it as long as caps capps and clippard continue to throw be i don't see any reason they can. you have walker and bruney sitting behind them and fernandez has only through 4/1/3 innings nominee. >> when you look at the

outfielders you give them a b minus is that because willingham has been solid in left field. morgan in centerfield but the right field has been by committee. >> it's all because of right field. because willingham is leading in rbis and home runs. he's leading the team in home base percentage. he's played a very good left

field. nyjer has not been outstanding

i think the infielders is our strength on the bull club and you're looking at pitching on defense and i think this is going to end up -- >> you've got a couple of more categories. the catchers, the defense. rodriquez heading for the hall of fame and willie yes always does something good, a hit or rbi. >> a minus i had to do that because nieves doesn't play enough and hitting .230. pudge 8 plus, plus, plus. he's done everything respectively and going down to the defense. i have to give the defense an

overall a. he's been looking at a d minus defense for so long i'm excited to see this defense. that des has been a big plus, plus, plus for this bull club. >> thank you, mr. ray. thank you so much and i hope your numbers may be agree with the fox. who knows. we will take a break and ray and i will talk about this guy. he's headed from harrisburg. that's in extra pre-game for verizon fios tv, america's top-rated internet, and phone guaranteed for 2 years. that's fios price protection, and it saves you hundreds of dollars. fios delivers the best channel lineup and the peace of mind that comes with paying the same low price every month. call 1.888.get.fios now to lock in $99.99 with a 2-year agreement. a price guaranteed for 2 years. we'll even include a free dvr for 6 months. call the verizon center for customers with disabilities at 800-974-6006 tty/v.

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