the judiciary committee on our periodic oversight proceedings and testified that it was the policy of the department of justice to handle the interrogation of suspects in terrorism cases on a case-by-case basis, and it is my view which i expressed at the time i questioned attorney general holder that that ought not to be the policy of the department of justice, that the policy of the department of justice ought to be not to give miranda warnings to people who are suspected of terrorism. the miranda warnings coming out of the decision handed down by the supreme court of the united states in 1966, and tirl well. i was in my first year -- and i recall it well. i was in my first year as district attorney of philadelphia at the time.

and it was quite a jolt to the criminal justice system, and my office prepared the details to have a card for the police officers by the end of the week because they interrogate a great many suspects. but the miranda warnings require the interrogator to advise an individual that he has a right to remain silent, that, secondly, that anything he says can and will be used against him. third, that he has a right to an attorney, and that if he wants to stop answering questions any time in the sequence, he can. when a suspect in a terrorism case is being questioned. there are issues which are much more important than the conviction of that individual. the really important thing is to gain information, find out who may be involved and gather intelligence to prevent future

acts of terrorism. i saw this in some detail during my tenure as chairman of the intelligence committee back in the 104th congress. and the recent apprehension of the pakistani who had the bomb positioned to blow up in times square and injure many people is illustrative. and the information that he gave without miranda warnings, and he was measure ran died, as i understand it -- measure ramirandized at some pom the reports, and linking coconspirators to the taliban in pakistan. it is not widely understood but the only consequence of not giving miranda warnings is that any statements made by the suspect may not be introduced in a trial, in a criminal trial in

a united states court. but in the case of the pakistani, as in the case of the christmas bomber, there was sufficient evidence to move ahead with the convictions. but even if that were not so, the value of getting intelligence information vastly outweighs the interests of convicting the individual in that specific case. and even in that case, there's the potential alternative of being tried by a military commission, where the miranda rules do not apply. so that it is my recommendation, a strong recommendation to the department of justice, as i had discussed it with attorney general holder, as i have communicated it to the f.b.i. director, bob mueller, that the policy be charged so that it is not -- policy be changed so that it is

not optional with the interrogator to make a decision on a case-by-case basis. because the interrogator may make a mistake and decide that this is a case where the miranda warnings out to be given. and that may stop the individual from providing information. some of the senators at our judiciary committee hearing were of the opinion that the chances of getting information were enhanced by giving the miranda warnings and i think that is not only counterintuitive, not what you would expect, but contrary to experience. that the likelihood of a person saying he won't talk if he's advised that he has a constitutional right not to and then advised that he has a right to counsel and then advised that he will have counsel provided if he doesn't have counsel of his own, and once counsel are in the case, their obligation is to protect the interests of thei their -- of their client.

and that decision more likely than not will be to remain silent so that the individual is not harmed with a potential criminal prosecution. so i think the policy of the department of justice ought to be to have an absolute rule, no miranda warnings in cases of a person suspected of terrorism. there has been some suggestion of legislation on this point. i think that raises constitutional issues of separation of power and what ought to be done is the policy ought to be established now by the department as an absolute rule not to give miranda warnings to those suspected of terrorism. i thank the chair and yield the floor. mr. reed: mr. president?

the presiding officer: the senator from rhode island. mr. reed: thank you very much, mr. president. i take the floor today to talk about an amendment which i have been working on with senator scott brown of massachusetts. i'm very fortunate to have senator brown's help, insight and advice because of his extensive experience not only as a public servant but as a member of the massachusetts national guard, as both a lawyer, as a company commander, as someone who served in various capacities within the guard, scott brown knows from firsthand experience that young troops particularly, men and women of our armed forces, can be exploited by unscrupulous business practices. and that it is essential when we create a consumer financial protection agency that there be a particular and explicit liaison for military issues. many of these young men and women are not in their hometow hometowns. they are in the context of today's operations, they're returning from duty in iraq and

afghanistan. they have not been spending a lot of money in afghanistan because there's not a lot to bierks and they come home and they want to buy a new car or they want to do something and they can be exploited, and that exploitation is particularly hard to bear when it's at the expense of a young person who is risking their life in the service of his country. so senator brown and i are working on a joint amendment which would create an office of military liaison within the consumer financial protection bureau. and the office would educate and power service members and their families to make better decisions. they would work closely with existing personnel in the department of defense and the particular services so that there is not only a place to go with a complaint but also proactive -- also a place to go with proactive information.

it would help respond to complaints by service members and their families and it would also coordinate efforts among federal and state agencies, and that i think is absolutely critical. you know, you have local insurance regulators, you have local attorney generals, you have the better business bureau, you have department of defense offices, you have all of these things, but often, particularly for a young soldier, where to go and get comprehensive one-stop help is hard to figure out. many times they'll approach an office and they'll be told, well, you've got a good case but we don't do that and they're sent. and given the time and the commitment that they have to devote to their service, this is another burden that they bear. and we hope we can reduce this burden. so senator brown and i are working to develop the details of this office. i think it's absolutely necessary. we have looked at and i've been looking at this problem for years now and communicating with the department of defense, secretary gates and others, and the department of treasury about

how do we protect better our servicemen and women. and we think this initiative will help us in that regard. the department of defense and the general accounting office have found that service members are particularly vulnerable to expensive and often abusive products. i will take off my senator exphat pout my old -- hat and put on my old company commander hat of a paratrooper company. they've got 18- and 19-year-old men and women. they receive an enlistment bonus of sometimes $20,000. they don't have a home. they've bought the most expensive stereo equipment they already can buy, and what they're looking for is something they can call their own and usually that's a big, expensive car or truck. and when they walk in the door, they. i think some of these men and women are aware of their

vulnerabilities. they're back from deployment and so they are vulnerable. they're also vulnerable not n another sense, not just with respect to -- in another sense, not just with respect to products but there are so many families now when one of the spouses is in the military and that other spouse is in the military and that other spouse is deployed overseas. so you have a member of the united states military with children, with a father or wife overseas, father or mother overseas, and they are struggling. and even with the pay they receive, at the end of the month, it's a tough go and they're looking for good deals, and there's too many people out there that are looking for people who are vulnerable to good deals. and that's the reality today in the military. it's a different military force in terms of operational tempo than i served in, where you were rather stabilized in one area for three years at least and then moved to another. now you have families where the

husband returns and three months later the wife deploys. that's a huge burden on the children but it creates the kind of uncertainty and turmoil where financial problems are much more likely to occur. and that is another factor of vulnerability and we have to recognize that. we also understand too that some of the more unscrupulous operators out there know that these soldiers are getting steady paychecks but they might not last all the way through the month. but there are good -- i don't want to be -- they're a good sort of subject for some of these ploys because they have a steady pay, you can go after them legally and try to attempt to do something, subject to the soldier and civil service relief act and all the other laws we try to protect them with. but this is a target population in some respect. i hesitate to say, but, unfortunately, i think it's true. now, the under secretary of defense, clifford stanley, who's been charged to be the champion

for quality of life, for protecting service families, have stated that recently the personal financial readiness of our troops and families equates to mission readiness. he reports that 72% of military financial counselors surveyed -- these are the individuals in d.o.d., all the services whose job to the talk to troops about their financial well-being -- 72% surveyed had counseled service members on auto lending abuses in the past six months. so this is not an isolated incident, one part of the country. this is across the country, across the department of defen defense, and that's a significant, significant situation. now, it's not just auto abuses. paydaday loans, for example. as i said, anybody who's working harnd around a military base kns that commend of the month, that

paycheck will be deposited into the checking act so that's a good bet to lend money to. but what they're lending money, sometimes a.p.r. is up to 800% or 900% that. is staggerin stag -- or 900%. that is staggering. but they're doing it, and they're doing it to young soldiers who have their heads, some of them, looking forward to a deployment, some of them not even gotten over the last deployment. and we have to be conscious of that. rent-to-own loans. this is where you go to the shop and you say, i'd like to rent a tv for 30 days because i'm deploying in 45 days and then you don't deploy so you keep it. and in some cases, you end up paying two to three times the retail price of the appliance. now, at least individuals have to be informed of those practices, know about it and we have to make sure they're getting that information. refund anticipation loans, these are the classic you're going to get your tax refund, and if you let us give you a loan right now, we'll -- we'll just take

that tax refund. but these turn out in some cases to be -- have a.p.r.'s reaching as high as 250%, as you borrow against your prospective tax refund. automobile title pawns. short-term loans are given to soldiers and, again, as a company commander, i never -- well, let me see, it was more common to see a soldier in debt than to see a soldier investing in, you know, bonds and -- and safe investments. it's just the nature of being 18 years old with your own money and lots of, you know, and the feeling that you've got to spend it. but automobile title pawns, short-term loans with very high interest rates to borrowers who give the lender title to their cars as collateral. again, the whole notion to some youngsters in the military about, you know, what's a title, what's collateral. when they're looking at $2,000 or $3,000 on the table, that's

all the detail. but when time comes to pay the loan, they don't and they lose their $25,000, $30,000 car or truck, then it's a reality. so we have to i think be conscious of this. now, all of this is compelling in the abstract but it becomes even more compelling when you listen to the stories of individual soldiers. three years ago, army specialist jennifer howard bought a car while she was stationed at fort riley, kansas. as it turns out, the dealership which arranged her financing charged her for features on the car that she never got, like a moon roof and alloy wheels. you could say to yourself, how could anyone be so gullible? if you are a young soldier who has just got back or just getting ready to go overseas and you're looking at a shiny car and then you look at a -- and you know you didn't order the alloy wheels and the moon roof, you're not going to take some

time checking the manifest to see what you got charged for. at least that has been my experience. and a dealer should know that, but apparently in this case, you know, they -- they charged her anyway. and as she said -- quote -- -- the dealership knows we're busy, we're tired. we don't take the time because we don't have a lot of time. it's get in and get out because we know what we have to do. if we get blank later, we'll deal with that." sergeant dionne trainer. she bought a car from a dealership that didn't actually own it. when she was repossessed, she was stuck with a $10,000 bill. "trying to do my job and the mission in iraq and then figure out what was going on at home, it was really stressful." she goes on to say -- "if there is some type of agency or group

out there to back you up, you know who to go to to complain to somebody if you're experiencing a problem." that's precisely what we want to do. we want to coordinate these activities through a military liaison at the consumer protection agency, financial protection agency. we want to do it because it's the right thing to do. we want to do it because if we can't protect those men and women who are protecting us, then we have to ask seriously whether we're doing our jobs. i know they're doing their jobs. and, mr. president, with that, i would yield the floor and -- excuse me. i see the senator from new mexico, senator bingaman. excuse me. i yield the floor. the presiding officer: th senator from new mexico. mr. bingaman: thank you, mr. president. i thank my colleague for yielding. mr. president, i understand that today is set aside just for debate on amendments and on the bill, and i certainly understand that and i accordingly will not call up my amendment today, but

i do want to talk about an amendment that i have filed. it's an amendment numbered 3892 so that i can put my colleagues on notice about this amendment and the importance of it. this amendment has a straightforward goal. it's to protect the existing legal structures that ensure that electricity and natural gas rates that consumers pay will continue to be just and reasonable and free from manipulation. i'm joined in this amendment by a strong bipartisan group of cosponsors, senators who, like me, have worked hard over the years to strengthen consumer protections in this area of electricity and natural gas, who -- who have worked cooperatively with me and others in the energy policy act of 2005 to close the so-called enron

loophole. i want to particularly express appreciation of senator murkowski who is ranking member on the energy committee that i am privileged to chair, senator reid of nevada who is cosponsoring the amendment, senator brownback, senator cantwell, senator cornyn, senator wyden and senator corker. all of these senators have cosponsored the amendment that we filed last night. i'm grateful for their support and the hard work of their staffs in developing the amendment. the bill currently before the senate has several important objectives. it improves accountability in the financial system. it provides much-needed protections for american consumers of financial services. it also expands the scope of the commodity futures trading commission's authority with respect to regulating commodity markets. i support all of these objectives. i'm very glad to see them

included in this bill. however, i believe a small but vital addition to the bill is needed to ensure that america's consumers of energy products are adequately protected, and that's the issue that the amendment that i'm discussing addresses. we need to be sure that both under existing law and under the expanded authority being given to the commodity futures trading commission in this bill, there is no compromise of the role that the federal energy regulatory commission is expected to perform and the role that our state public utility commissions are expected to perform to regulate rates and terms with respect to electricity and natural gas markets. without this amendment, the bill before us could inadvertently prevent those agencies from exercising their authority and

their responsibility to ensure just and reasonable rates for electricity and natural gas consumers. without this amendment, the federal regulatory commission's ability to exercise its antimanipulation authority could be called into question. these are enforcement tools to protect consumers, and congress granted them to the federal energy regulatory commission in 2005 as a direct response to enron's manipulation of markets in california and the west. the amendment offers a solution i believe is consistent with philosophy of consumer protection that underlies other parts of the bill. the effect is simple, the amendment preserves the authority of both ferc and the states to ensure that electricity and natural gas rates are just and reasonable. direct examination of prices is central to each of those agency's missions, and in ferc's

case, this authority is long-standing. it was established over 70 years ago. without this amendment, a critical check on energy prices may be lost, and that's true for two connected reasons. first, the commodity futures trading commission's so-called exclusive jurisdiction, which is in the commodity exchange act, could be interpreted to operate to prevent ferc and state public utility commissions from acting where their jurisdictions intersect the commodity futures trading commission's jurisdiction. second, the commodity futures trading commission's regulatory mission differs significantly from that of the federal energy regulatory commission and from that of state public utility commissions. one of the future commission's trading commission's mission is to protect participants and to

promote fair and orderly trading on those markets. it does not directly examine commodity prices in these markets. it does not consider the reasonableness of rates charged to consumers. while properly functioning futures markets are important, the commodity futures trading commission cannot and does not have authority or responsibility to provide protections that are provided by the federal energy regulatory commission and the state public utility commissions under their respective authorities. as i have said, i support the bill generally. i believe it is essential to ensuring that consumers are protected. however, both i and my cosponsors on this amendment strongly believe it's necessary to preserve existing consumer protections that may otherwise be lost. it's a simple, straightforward, tailored amendment that does not create loopholes in

jurisdiction. it does nothing to diminish the ability of the commodity futures trading commission to regulate commodity exchanges such as nimex or to require public disclosure of swaps or other authority that they have to regulate the mechanics of commodity markets, including those that trade in energy commodities. once again, i thank my cosponsors for their work on developing this amendment, and i urge my colleagues to support the amendment. at an appropriate time, i will -- i will seek to call that amendment up and have it voted on by the senate. mr. president, seeing no other senator seeking recognition, i suggest the absence of a quorum. the presiding officer: the clerk will call the roll. quorum call: mr. whitehouse:

mr. president? the presiding officer: the senator from rhode island. mr. whitehouse: mr. president, are we presently in quorum call? may i ask that the quorum call be terminated? the presiding officer: without objection. mr. whitehouse: thank you. mr. president, i wanted to speak on a couple of subjects here.

the first is to express my regret that the supplemental funding to help rhode island in the wake of its unprecedented historic flooding was stopped on the floor today by a republican objection. i would have hoped that when a true emergency happened in somebody's home state with a presidential disaster declaration and senators were working to remedy that, the traditional deference for emergency spending would be appropriate, but senator reid has been -- as the senior senator and a member of the appropriations committee the leader on this, and he and i

will continue working to get this done for rhode island. it is just, i think, regrettable that the conditions on the floor are such that emergency spending, while we have people still out of their homes, flood damage unprecedented in rhode island's history is not something that we could have simply agreed on. there are other floods in other states, and i would assume that similar rules will apply when they come forward. the second thing i want to mention, since i see the distinguished chairman of the banking committee here, is that i continue to hope for and argue for the amendment that i have proposed that will do something, i think, very helpful for something that bedevils constituents in every singl stae exorbitant, ridiculous interest rates. i think every day in the mail in every one of our states, people

are opening from the big credit card companies offerings, proposals that particularly when certain tricks or traps are triggered kick them into 30% or higher interest rates. it is not too long ago, in all of our lifetimes, that a solicitation like that would have been a matter to bring to the attention of the authorities in our states, because it would have been illegal under state law to charge that kind of reprehensible interest rate. and we as a congress never decided that we were going to overrule all those state laws, state laws that had existed since the founding of the republic. a tradition of interest rate regulation that in our culture goes back to the code of hamarabi, goes back to roman law. we never decided as a congress,

oh, we're not going to allow states to protect their consumers any longer, protect their citizens any longer against exorbitant, outrageous interest rates. it happened in a strange, backhanded, almost inadvertent way. it began with a statute in 1863 that said that a transaction was governed by law based on where it was located. in 1863, there was not a lot of interstate banking. and so there didn't need to be a lot of discussion about what located meant. but by 1978, interstate banking was a fairly common thing. and the question came to the supreme court what that word "located" in that civil war statute meant. and in a very unheralded decision at the time, a decision that didn't appear to be of any significant consequence, the united states supreme court said, well, if you've got a bank

located in one state and a consumer located in another state, the law's going to be the state of the bank. it had to be one or the other. they chose the state of the bank. the marquette decision, it was called, involved the presiding officer's state -- minnesota -- and the decision said, well, it's going to be the bank. so, didn't seem very controversial. why not? the problem was that the banking industry began to figure out that there was a loophole here. they began to figure out that if they could go to the states with the worst consumer protection laws in the country or if they could go to a friendly governor and say, hey, i'll make you a deal. you clear out your consumer protection laws, and we'll come

and we'll locate a big high-rise business full of call center people in your state. they could go, and from that state they could operate nationally. and because of this funny 1978 decision from an 1863 law, bit by bit all of the constitutional federalists states' rights protections where sovereign states have the right to protect their own citizens against outrageous and exorbitant interest rates became ineffectual. we never decided that as a congress. if we had had that debate, i will venture that it would have gone the other way. it would be preposterous for us as a congress to look out across america and say, okay, we're going to pass a law that says

that the worst state for consumer protection regulation is going to be the state that governs. obviously it would create a race to the bottom. obviously it would completely disenfranchise home states trying to protect their own states from states a country away that couldn't care less. a rhode island consumer being victimized is not the state of south dakota's problem. it just isn't. we would never have passed that law. it would have been an outrageous law to have passed. and yet because of this funny, quirky supreme court decision, that is the way the law in practice developed, because smart bank lawyers figured out this trick and have taken advantage of it. and it's not just consumers that are getting clobbered as a

result. it's also unfair to local banks. a rhode island bank is under rhode island interest rate laws but an out-of-state bank, a big credit card bank with subsidiaries, they can play by their own rules, by the worst rules in the country. a rhode island bank, a connecticut bank, a minnesota bank, they've got to play by local rules. it just isn't fair to local lenders to have this discrepan discrepancy. and because it's bad for consumers, because consumers all across this country are paying interest rates now that would have been illegal just two or three decades ago, because it is anticompetitive, because it allows the biggest banks to compete unfairly against local

community banks, main street banks disadvantaged against these big wall street monsters, because nobody in congress ever made a decision nor would we ever have made a decision that this was okay, it's time we closed this loophole. and i look forward to the chance when we return to have the chance to get a vote on that. i very much hope that it will be a bipartisan vote, because the principles that the republican party has espoused about local control, states' rights, protecting local institutions against big out-of-state national entities, federalism and our common interest across this floor in consumer protection all suggest that it's the kind of thing that really shouldn't divide us republican against democrat. this is closing a loophole that

never should have existed, that we never would have voted for if we'd had the chance to vote for it, and that has resulted in immense harm to the public of all of our states as a result of these exorbitant interest rates. as i said, the interest rate solicitation that is landing in minnesota today, that is landing in connecticut today, and that is landing in rhode island today would have been a matter to bring to the authorities but for this loophole. so the final thing that i want to talk about a little bit, i guess every member on the other side of the aisle has left town so there is no republican in washington, d.c. to come and object to the unanimous consents that i would like to offer for the stalled nominees. there are now over 100 names on

the executive calendar, which is the list of everybody who's pending here, awaiting confirmation by the senate. at a similar time in president bush's administration, the number was 20. those numbers do go up and down, as our republican friends have said, but just a few days ago, the number was over 80 and the number at the equivalent time in president bush's administration was eight. eight. there is a clear, systemic attack here on the obama administration's ability to staff its administration and, thus, govern, and what is enabling it is the fact that you don't have to have a reason to oppose a nominee. where don't you have to have a reason? you don't have to have a reason because you can do it secretly. nobody even knows that it's you opposing the nominee.

so if you want to have a systemic attack on presidents -- a president's ability to govern, what a good thing a secret hold is. it's always been around but it's been abused to a point where we need to be rid of it. we need to be rid of it. the right of a senator to hold a nominee should be protected but you should have to stand up and say that you are doing it. if you don't have a good enough reason to hold a nominee that you're willing to stand up and disclose it, than is, frankly -- then that is, frankly, not a legitimate hold. the secret holds have got to e end. and the situation that we're in right now, because there is a senate rule on point, is that the list of nominees has been

read through, great credit to senator mccaskill, who has read through the great bulk of these. 76 i think these been slew in the first round. -- been through in the first round. and we asked for unanimous consent on all of those nominees. we received objections. i received an objection on a nominee that i asked for from a senator who voted for that nominee in committee. he voted for the nominee in committee. he came to the floor and objected. the nominee had cleared the judiciary committee with zero opposition, and yet on the floor held and held and held anonymously, secretly. so under the senate rules, when you've asked that unanimous consent and you've had that objection, they've got six days to come clean on their hold. do you know how many republican senators followed that rule?

one did. one did. senator coburn of oklahoma disclosed that he had been holding six or seven appointees. that still leaves a hundred on the floor right now on the executive calendar. and we began earlier this morning calling them up to see if those holds were still there. because after six days, you're either supposed to have disclosed it or relinquished. and sure enough, we kept on getting an objection and objection and objection. so only two things can be true. either they are just flagrantly violating the rule. what are you going to do? there's no enforcement mechanism built into the rule. they're just saying, make us follow the rule. you can't make us so we're not going to follow it. we know it's a rule, we voted for it, it passed with enormous bipartisan support. it is a rule of the senate but

we just choose not to follow it because we get too much advantage out of secret holds. senate rules don't really apply to us unless you can make us follow them. that is a sad place for the senate to be if that's where we are on this. but there are only two alternatives. the other one is that they still have holds on these but it's not a hold by the same senator who had the hold when the unanimous consent was asked and, therefore, he has under the rule relinquished his hold. but what he's done is gone and found another senator and gotten that other senator to take up the hold for him. that's been called a couple of things on the floor. it's been called the, you know, hold switcheroo. for those of white house are prosecutors, it looks a lot -- for those of us who are

prosecutors, it looks a lot like money laundering. it's hold laundering. the person who's got the hold has got someone else to aid and abet to process the violation and violate the rawlz by taking on a hold -- rules by taking on a hold an for them and allowing them to donnelly th -- to dodge. you know, that's not a great way of doing business either. so unless we have a direct and out -- so either we have a direct and outright violation of the senate rules, massive violation of the senate rules, or a scheme to hold launder, to get people to aid you and abet you in your secret hold and dodge the rule that way. neither is a great situation. so we need to fix the rules so this cannot continue, but it is a sad reflection on the use of the secret hold that we are in a circumstance now where the only two possible sets of facts are

those two. it just plain isn't right. if you're here as a senator, you should follow the rules of the senate. and if you're not prepared to do that, find something else to do. there are plenty of people who would love to serve here. and to find another senator to put a sham hold in to protect your hold so that you can dodge this rule is, frankly, unscrupulous. that is something that if you could figure out who it was and you could get them in front of a jury and make that case, oh, b boy. but we don't have the enforcement mechanism. so we have to continue. but let me tell you who i was going to be asking for. there are two judges for the fourth circuit, albert diaz and james wynn.

they're a republican and democrat. they're paired for appointment. they cleared the judiciary committee with only one opposing vote. one was unanimous and the other was everybody but one -- but one. they have been on the calendar now for weeks, and i would like to ask unanimous consent -- i'm informed that because there are no republicans, senate republicans in washington, i'm unable to do that right now, but they have been on the calendar for many weeks and there is no reason for them not to be confirmed. the following judges, judicial candidates for -- nominees for judgeship are also pending. john e. deguilio, audrey

goldstein fleissig to be district judge in missouri. lucy haeran koh for california. tanya walton pratt to be united states district judge for the southern district of indiana. jane e.magnus-stinson for indiana. brian anthony jackson to be judge for the middle district of louisiana. elizabeth erny foote for the western district of louisiana. mark a. goldsmith to be united states district judge for the eastern district of michigan. marc t. treadwell to be united states district judge for the middle district of georgia. josephine staton tucker to be united states district judge for the central district of california. gary scott finerman for the more than district of illinois. and sharon johnson coleman to be united states district judge for the northern district of illinois. all waiting on the calendar, all

pending, all cleared with either unanimous or very strong votes out of the judiciary committee, all blocked, i believe all supported by republican senators from the home states, and these are all district judges. this is a judge who sits in a local district within a state. these are not people who are setting national policy. these are people who are handling local trials, local motion practice, local federal court litigation. if you have the support of your two home senators and if you have cleared the judiciary committee, that ought to be pretty simple. that ought to be pretty simple. but they are being held and they are being held for a reason. they are being held because if the republicans can force the democrats to burn floor time on this, it takes floor time away

from the work that we need to do to rebuild our economy. it takes floor time away from the work that we need to do to clean up wall street. it takes floor time away from the bills we need to pass to fund our troops overseas. it takes floor time away from our ability to do the work of governing. it is obstruction, pure and simple, and because there is only so many hours in a day, there are only so many days in a week, only so many weeks in a month, it's a zero sum game. you take time and make us spend it on these judges, it's time we can't spend on the floor working on the necessary legislation we have to get through. that's why you see these strange votes where you have cloture demanded and all that floor procedure, and when the vote is finally taken, we have had a 98-0, we have had 100-0.

why go through all that trouble when you end up with a vote of 98-0 or 100-0? it's because there is an ulterior motive. it is to burn the floor time of the senate and to give the leader less and less and less time to accomplish the things that we need to accomplish. so i can go through many, many other names, but i will not do that now. i will await the return of a republican member of the senate to washington so that somebody can be on the floor to either object or not object to these nominees. i would hope that at this point we will find that they don't object. that would be consistent with the rule. if they have been on the calendar this long, if they have had their unanimous consent objected to, if the six days have run and if nobody has come

up and said actually, i have got a hold on that person, then unanimous consent ought to pass. under the rule, a unanimous consent ought to pass. and if it doesn't, it's a sign that they are either flat violating the rule or that they have done this hold laundering scheme with a colleague to dodge out from under the rule. i think neither is creditable and we need to work our way through this process. so on the next occasion, i will be doing that. i thank the presiding officer for his courtesy and for his time, and i yield the floor. i would suggest the absence of a quorum. the presiding officer: the clerk will call the roll. quorum call:

mr. whitehouse: mr. president? the presiding officer: the senator from rhode island. mr. whitehouse: may i ask that the pending quorum call be lifted? the presiding officer: without objection. mr. whitehouse: i ask unanimous consent that the senate proceed to a period of morning business with senators permitted to speak for up to ten minutes each. the presiding officer: without objection. mr. whitehouse: may i ask unanimous consent that the senate proceed to the immediate consideration of calendar number 195, h.r. 3619? the presiding officer: the clerk will report.

the clerk: calendar numbered 195, h.r. 3619, an act to authorize appropriations for the coast guard for fiscal year 2010, and for other purposes. the presiding officer: without objection, the senate will proceed to the measure. mr. whitehouse: i ask unanimous consent that the cantwell substitute amendment which is at the desk be considered and agreed to, the bill as amended be read a third time, and that the budget pay-go letter which is at the desk be inserted in the record, the bill as amended be passed, the motion to reconsider be laid upon the table, the reed-whitehouse-rockefeller colloquy be inserted in the record as if read, along with any other statements without further intervening action or debate. the presiding officer: without objection, so ordered. mr. whitehouse: i ask unanimous consent that the foreign relations committee be discharged from further consideration and the senate now proceed to senate resolution

480. the presiding officer: the clerk ll report. the clerk: s. res. 480, condemning the continuing detention of burmese democracy leader and so forth. the presiding officer: wiout objection, the committee is discharged and the senate will proceed to the measure. mr. whitehouse: i ask unanimous consent that the amendment at the desk be agreed to, the resolution as amended be agreed to, the preamble be agreed to, and the motion to reconsider be laid upon the table. the presiding officer: without objection, so ordered. mr. whitehouse: i ask unanimous consent that the senate proceed to the immediate consideration of h. con. res. 247, which was received from the house and is at the desk. the presiding officer: the clerk will report. the clerk: h. con. res. 247, authorizing the use of the capitol grounds for the greater washington soapbox derby. the presiding officer: without objection, the senate will proceed to the measure.

mr. whitehouse: i ask unanimous consent that the concurrent resolution be agreed to, the motion to reconsider be laid upon the table with no intervening action or debate, and any statements related to the measure be placed in the record at the appropriate place as if read. the presiding officer: without objection, so ordered. mr. whitehouse: i ask unanimous consent that the senate proceed to the immediate consideration of house concurrent resolution 263 which was received from the house and is at the desk. the presiding officer: the clerk will report. the clerk: h. con. res. 263, authorizing the use of the capitol grounds for the district of columbia special olympics law enforcement torch run. the presiding officer: without objection, the senate will proceed to the measure. mr. whitehouse: i ask unanimous consent that the concurrent resolution be agreed to, the motion to reconsider be laid upon the table without intervening action or debate, any statements relating to the resolution be placed in the record at the appropriate place as if read.

the presiding officer: without objection, so ordered. mr. whitehouse: i now ask unanimous consent that the judiciary committee be discharged from further consideration of senate resolution 503 and the senate proceed to its immediate consideration. the presiding officer: the clerk will report. the clerk: s. res. 503, designating endangered species day. the presiding officer: without objection, the committee is discharged. and the senate will proceed to the measure. mr. whitehouse: i ask unanimous consent that the resolution be agreed to, the preamble be agreed to, the motions to reconsider be laid on the table, with no intervening action or debate, and any statements related to the resolution be placed in the record at the appropriate place as if read. the presiding officer: without objection, so ordered. mr. whitehouse: mr. president, i ask unanimous consent that the senate now proceed to the en bloc consideration of the following senate resolutions:

senate resolution 515, senate resolution 516, senate resolution 517, and senate resolution 518. the presiding officer: without objection, the senate will proceed to the measures en bloc. mr. whitehouse: mr. president, i ask unanimous consent that the resolutions be agreed to, the preamble be agreed toes, and the motion to reconsider be laid on the table en bloc and that any statements be printed in the record at the appropriate place. the presiding officer: without objection. mr. whitehouse: i ask unanimous consent that the senate proceed to the immediate consideration of s. 3333 introduced earl yerl today. the presiding officer: the clerk will report. the clerk: s. 3333, a bill to extend the starttory license for secondary transmissions under title 17, united states code and for other purposes.

the presiding officer: without objection, the senate will proceed to the measure. mr. whitehouse: i ask unanimous consent that the bill be read a third time, that the budget paygo statement which is at the desk be inserted in the record, that the bill be passed and the motion to reconsider be laid on the table. any statements relating to the measure appear at the appropriate place in the record as if read. the presiding officer: without objection, so ordered. mr. whitehouse: mr. president, i ask unanimous consent that the senate proceed to executive session to consider calendar numbers 849 to and including 879, and any nominations on the secretary's desk in the air force, army, marine corps, and navy, that the nominations be confirmed en bloc and the motions to reconsider be laid on the table en bloc, that no further motions be in order, that any statements relating to the nominations appear at the appropriate place in the record

as if read, that the president be immediately notified of the senate's action, and the senate then resume legislative session. the presiding officer: without objection, so ordered. mr. whitehouse: mr. president, i ask unanimous consent that when the senate completes its business today, it adjourn until 2:00 p.m. monday, may 10, that following the prayer and pledge, the journal of proceedings be approved to date, the morning hour be deemed expired, the time twor the two leaders be reserved for their use later in the day, and the senate proceed it a period of morning business until 3:00 p.m. with senators permitted to speak therein for 120u7 minutes each, and that following morning business, the senate resume consideration of s. 3217, wall street reform. the presiding officer: without objection, so ordered. mr. whitehouse: mr. president, i can announce that there will

be no roll call votes during monday's session of the senate. if there's no further business to come before the senate, i ask that it adjourn under the previous order. the presiding officer: the senate stands adjourned until 2:00 p.m. monday, may 10.

>> vice president joe biden address members of the european parliament yesterday in brussels. he spoke about the importance of transatlantic relations and called on europe to work with the united states to prevent iran from acquiring nuclear weapons. he urged lawmakers to pass the terrorist finance racket programs which allows the u.s.

to access bank data in your. his remarks are about 35 minutes. ♪ ♪ ♪

♪ [applause] >> dear vice president, excellencies, dear colleagues, dear friends. it is a great privilege for me to welcome mr. joseph biden, the 47th vice president of the united states. [applause]

>> the vice president biden has been a key figure in american politics, and friends for many years. he was first elected to the u.s. senate in 1972, serving as one of the youngest senators in his country's history. he was reelected six times before becoming vice president of the united states. states, november 2008. as former chairman, he is known to speak his mind. sometimes to defend causes which are far from popular at the

time. his opinion he does not follow, so it is a reason your speech today, mr. vice president, is so important. so crucial for all of us. and let me thank you once again for very warm invitation and very constructive conversations in washington. dear colleagues, in today's, europe and america can and should work together in partnership for global stability and enlightened venues. we believe it. vice president biden, to the european union today to demonstrate this. we are equal partners, the

united states and the european union. we cannot find lasting solutions to many challenges we face, energy, the current crisis. still hitting all of us. are promoting human rights, defending free trade and include local governments. 25 years ago, almost to the day, president ronald reagan addressed this parliament on the eighth of may, 1982 -- 1985. this was the last and so far the only time that a u.s. president has spoken to the democratically elected representatives of europe. your presence in this chamber today, mr. vice president, is a signal of the renewal of that dialogue at the high level between our two countries.

it is in europe we have a new treaty, so important for the union, giving us in the european parliament, the possibly to act and for all european union so important. in america, after one year under president obama's leadership, there is new hope for the world. the timing of your address, mr. vice president, could not be better. mr. vicmr. vice president bidens great to welcome you here to europeans parliament. the floor is yours. [applause]

>> mr. president, thank you for that welcome. it was a delight to have you in washington and at the white house. and it is a great honor. and i might add, a privilege to be able to address such an esteemed body. i served in a parliament that only a 435 members of total. this is even a greater honor. when president reagan, i remember president reagan's speech here in 1985. and to quote an irish ball, william buckley gates, speaking of his ireland in a post called easter sunday 1916, he said all has changed, changed utterly, a terrible beauty has been born. much has changed since 1985.

much has changed. and a terrible beauty has been born. as you already know, ladies and gentlemen, not only am i pleased to be back here in brussels for the second time as the vice president, as you probably know, some american politicians and american journalists refer to washington, d.c., as the capital of the free world. but it seems to me that in this great city, which boasts 1000 years of history, and which serves as the capital of belgium, the home of your opinion and the headquarters for nader, this city has its own legitimate claim to that title. as a lawmaker for more than 36 years in our parliament, i feel particularly honor to address the european parliament. president obama and i were the

first running mates in the last 50 years in america to make it to the white house from our legislative bodies. so we both come to our executive jobs with a deep appreciation for the work you do here, and the passion of european democracy. together, together with my former colleagues in the united states congress, you and i represent more than 800 million people. stop and think about that for a moment. to elected bodies to shape the loss for almost one-eighth of the planets population. that's truly remarkable. and now, under the lisbon treaty, you have taken on more powers and a broader responsibility that comes with the increased influence. and we welcome it. we welcome that because we, the united states, need strong

allies, strong allies and alliances, to help us tackle the problems of the 21st century. many of which are the same, but so many are different. than the last century. let me state it as plain as i can. the obama-biden administration has no doubt about the need for and strongly supports of vibrant european union. we believe is absolutely essential to american prosperity and long-term security. so have no doubt about that. when i chaired the united states senate foreign relations committee for all those years, i had the opportunity to meet many european lawmakers from the national legislative body. including some of you who are in this room today. so i appreciate, after all those years, i appreciate what a consequential step it has been

to build the only multinational parliament and the world, elected by universal suffrage. so much has changed, and i am pleased that through the trans-atlantic legislators dialogue, you are building a strong relationship with the united states congress. and i hope that the office to open in washington last month is going to enhance those ties. folks, 65 years ago this week, less than 200 kilometers south of here, nazi leaders signed an unconditional surrender that brought an end to the second world war in europe. the next day, celebrations erupted in times square and piccadilly circus, cheering crowds danced along the shores of lake and the town squares throughout the outlined world. and here in brussels, a thanksgiving service, had a thanksgiving service. churchgoers sang the national

anthems of britain, belgium, and the united states. on that joyous day, may 8, 1945, this continent lay in ruins. ravaged twice by total wars in less than 30 years. at that moment of peaceful united europe, the european parliament must have seemed like a fantasy to anyone online. and yet, through the will of your fellow citizens and statesmen like john henry spock, for whom this great hall is named, and robert shuman and jonbenet and the visions that gave birth to apartment and earned him the presidential medal of freedom from president lyndon johnson, here we are, a symbol in this hall. here you are. what began as a simple pact

among a half a dozen nations to create a common market for coal and steel, grew into an economic and political powerhouse. a community dedicated to free thought, free movement and free enterprise, a europe that once a story has called not so much a place, but an idea. and i am here to reaffirm the president obama and i believe in this idea, and in a better world and a better europe it has already helped to bring about. a europe for all member states benefit by negotiating trade agreements in fighting environmental degradation with one unified voice. a europe that bolsters the cultural and political values that my country shares with all of you. a europe that is whole, a europe that is free, and a europe that is at peace. [applause]

>> as president obama and set in prague a little more than a year ago, a strong europe makes a stronger partner for the united states. and we need strong partners. that is why we will do everything we can to support this great endeavor of yours. because the past 65 years have shown that when the americans and europeans devote their energies to common purpose, there's almost nothing we are unable to accomplish. together through the marshall plan we rebuild europe and made perhaps the greatest investment in human history. together, we built the world's most enduring security alliance, nato, and the military and political force that tied american and europe together and brought us even closer in the ensuing decades. together, we established the greatest commercial relationship in the world's history,

comprising about 40% of global trade in helping usher in an era of unprecedented prosperity and technological innovation. and together, we have provided relief and hope for those suffering humanitarian catastrophes in more places than i can mention. from the western balkans to the congo to her ongoing work in haiti today. to those skeptics who, in spite of all these accomplishments, continue to question the state of transatlantic relationships or my country's attitude toward a united europe, my answer is this. even if the united states and the nation's all of you represent were not united by shared values and common heritage of many millions of our citizens, myself included, our global interests alone would bind us together. the relationship between my country and europe is, today as strong and as important as all

of us, to all of us as it has ever been. this entry has unleashed new challenges, no less dangerous than those that came before and the choice entry, and together, together we are taking them on one by one. they are difficult. there will be disagreement, but we are taking them on jointly. climate change, one of the greatest threats are climate faces. the united states and europe are working to ensure all countries, and especially the major economies, are contributing to a global solution. we all look, we all look to and we did take a major step forward in copenhagen. now have to carry out those emissions cuts, the financing and the transparency called for in that a court. we must help the most global nations from the arctic north to the pacific islands, that are the harbingers of this looming crisis.

across the troubled landscape of afghanistan and pakistan, we are working together to disrupt, this man and defeat al qaeda and the taliban fighters, and, and to train an afghan army and police force so that their government can eventually protect its own people and not be a threat to its neighbors. in order to build afghanistan's governing capacity, the united states and the european union and its member nations are deploying significant financial resources and civilian resources as well. while sustaining these important missions has not always been popular, you all know, as i do, it's required. as leaders, we have an obligation to make the case to our populations that this is necessary for our collective security. although believe me, as a politician who estimate for office for the last 38 years, i understand, it is not easy. i assure you, it is no more popular in my country than it is

in any one of yours. that is also why the united states and europe are standing side-by-side, to prevent iran from acquiring nuclear weapons, a development that would endanger the citizens and minutes its neighbors, including some of our closest allies. together, together, we embarked on an unprecedented path of engagement with the iranian leaders. [applause] >> and, ladies and gentlemen, -- [applause] >> despite what some skeptics thought, the president meant what he said, that we'll reach out our hand to any party that will unclench their fist. at the outset of this administration, president obama stated that we are prepared to deal with iran on the basis of mutual interest and mutual respect. with our allies, we have made clear to iran's leaders have they can begin to rebuild confidence within the international community,

including by granting access to their previously undeclared enrichment facilities, and exchanging low-enriched uranium for fuel to power a research reactor. but as the world has not watched and seen, iranian leaders spurned our collective good faith efforts and continue to take actions that threaten regional stability. let me state it flatly. iran's nuclear program violates its obligations under the nuclear nonproliferation treaty, and risks sparking a nuclear arms race in the middle east. wouldn't it be ironic, wouldn't it be ironic as the iron curtain fell and the mutual threat of mutual assured destruction diminished among the superpowe superpowers, that a new arms race would emerge in some of the

most unstable parts of the world. that would be an irony that our children and our grandchildren and our great grandchildren would not forgive us, in my view, for allowing to come to pass. in addition the iranian leadership support terrorist organizations and that support continues unabated. and it continues unconscionably to persecute those of its citizens to peacefully take to the streets in a quest for justice, a but trail of the duty of all governments. in terms of what they owe their citizens. they ran faces a stark choice, abide by international rules and read join the committee of responsible nations, which we hope for, or face further consequences in increasing isolation. in the face of the threat iran poses, we are committed to the security of our our lives. that is why we deployed the

missile defense program to deter defend against missile attacks on this continent, on this continent. [applause] >> ladies and gentlemen, -- [applause] -- were also working together inside data to prepare for to arrange future security tips including energy security and cybersecurity. and we continue to support closed security cooperation between nato and that you. last year the united states and europe acted quickly and decisively won the world was reeling from a financial crisis more dire than any since the great depression. and in doing so, collectively we help prevent what people were predicting, a total collapse of the world economy. and today president obama and i are closely following the economic and financial crisis in greece and the european union's efforts to deal with it.

we welcome the support package that europe is considering in conjunction with the international monetary fund. and we will be supported both directly and through the imf of your efforts, as you rescue greece. these examples and many others i could have mentioned show why europe continues not just to be america's largest trading partner, but our most important ally. ladies and gentlemen, our predecessors came together more than six decades ago this week to begin to build institutions to ensure that the toy for centrist darkest chapters would not be repeated in the remainder of that center or the 20%. those institutions, this institution have been a great success. but now we have to set our sights on the challenges of this new century i reference in the beginning, the world has changed. it has changed utterly, a terrible beauty has been born here perhaps the most complex

threat we face today is that pose to our own citizens by nonstate actors and the violent extremists. particularly if, god forbid, those violent extremists were able to get their hands on in the weapons of mass destruction. the scourge has no respect for borders. none. no single nation, no matter how strong or how wealthy, how organize or capable, can meet this threat alone. it can only be successfully contained if we make common cause. and that's precisely what we must do. the new powers granted this pardon in the lisbon treaty gave you a greater role in that struggle and a greater imperative to govern responsibly. the u.s. government and this parliament have struggled over how best to protect citizens

without yielding the foundational right on which all of our societies are built. i am absolutely confident downtown confident that we must and can both protect our citizens and preserve our liberties. since taking office last year, president obama and i have been guided by our constitutions to seek a more perfect union. toward that end, one of our first official actions was to end the interrogation practices that produced the results and that where we could not in good conscience continue. [applause] >> we ordered the closure of the detention center at guantánamo bay which had become a symbol of injustice and a rallying cry for terrorist. and we appreciate -- [applause]

>> and we appreciate the support, ethical as it has been for you today, so many of you, have provided in this effort. we did these things because, like you, president obama and i reject the false choice between safety and our ideals. we believe that upholding our principal only makes us stronger, and that compromising them than actually undermines our effort and the broader struggle against violent extremism. for what is their purpose? their purpose is to change what we value. change how we conduct ourselves. eight days after the september 11 attack, i told a group of thousands of university students in my country that they cannot allow tragedy of 9/11 to end our way of life, because that's exactly what the terrorists saw.

i also told them america cannot prevail in the struggle by acting alone. those words have not only -- not only fit the tenor of that time, but i think they have proven to be true. and they are no less true today. i don't need to tell this audience about europe's proud tradition of protecting citizens some government invasion of the privacy. a commitment grounded in respect for the inherent dignity of all people. we call them in able right. we wrote them into our constitution. and america's commitment to privacy is also profound. is as profound as yours. our constitutions for the minute protected individuals against unreasonable search and seizures. i the state. which is one of our most famous -- which one of our most famous jurists once dubbed, quote, the

right to be left alone. a separate court of the united states has made clear that privacy is a constitutionally protected and fundamental right. and like the e.u., the supreme court has characterized this right as a matter of personal dignity. on a personal level, i have, for 36 years in my career, defended privacy rights. in the united states senate, every year organizations that rate those most committed to civil liberties, and every year i, and later president obama, are characterized as one of those four people picked. the reason i bothered to tell you this is not about me, but about the commitment of our administration, the individual rights. to change now would make a wide

of everything i said i stood for. in my country. for the past 37 years. when i let the senate judiciary committee which is responsible for confirming the presence of judicial nominees, as i said i was consistently ranks among the staunchest advocates of civil liberties, and i made it a priority to determine perspective judges use on privacy before deciding whether or not they could go on the court. president obama and i also believe that government primary and most fundamental, most solemn duty is to protect its citizens, the citizens it serves. as well as the rights they hold. president obama has said that keeping our country safe is the first thing he thinks about when he wakes up in the morning, and the last thing he thinks about before he goes to bed at night. i suspect that's how every world leader looks at their role.

indeed, no less than privacy, physical safety is also and inalienable right. physical safety is also an inalienable right. and a government that advocates is due to ensure the safety of its citizens violates their rights no less than a government that silences dissidents or imprisoned criminals without trial. and so, folks, even as we gather here today, our enemies are employed every tool they can muster to conduct new and devastating attacks like the ones that struck new york, london, madrid and many other places around the globe. to stop them, we must use every legitimate tool available. law enforcement, military investment intelligent. that is consistent with our principles, our laws and abide. we are fighting on many fronts from the brave men and women serving abroad in our

militaries, to the patient and tired as law enforcement investigating complex and suspicious financial networks. just this week our customs and border protection, using passenger information data, apprehended a suspect in the attempted bombing of new york's time square. as he sought to flee the country. it is by that we maintain every capacity we have under the law to stop such attacks are in for that reason we believe that the terrorist finance tracking program is essential to our security as well as it is presented for me to say that it has provided critical leads to counterterrorism investigations on both sides of the atlantic and disrupting plots and ultimately saving lives. it is built -- it is built in redundancy that is your personal information is respected and used only for counterterrorism purposes. but i don't blame you for questioning it. we understand your concerns.

as a consequence we are working together to address them. and i'm absolutely confident that we can succeed to both use the tools and guarantee privacy. it's important that we do so and it's important we do so as quickly as possible. as a former united states senator, i also know how hard it can be to make the hard choices required by the global challenges while staying true to local values. all of you are going through that every time you vote in this parliament, i suspect. the longer we are without an agreement on the terrorist financing tracking program, the great writ the risk of a terrorist attack that could have been prevented. as leaders we shared responsibility do everything we can within the law to protect the 800 million people we collectively serve. we disagreed before, we will surely disagree again. but i'm equally convinced that the united states and europe can meet the challenges of the

21st century as we did in the 20th century, if we talk and listen to one another. if we're honest with one another. [applause] >> ladies and gentlemen, courage, winston churchill taught us, is what it takes to stand up and to speak. courage is also what it takes to sit down and listen. this afternoon i had done all the speaking, be assured that i and my government, my president, that we are back in the business of listening, listening to our allies. ladies and gentlemen, it's no accident that europe was my first overseas destination as vice president come and also the president. it is no accident that we've already returned several times since then. the united states needs a europe. and i respectfully submit europe

needs the united states. we need each other more now than we have than ever. [applause] >> so i view this week's anniversary as providing a welcome opportunity to reaffirm the bond our peoples forged long ago in the fires of adversity. now, as then, in the pursuit of ideals and the search of partners, europeans and americans look to each other before they look to anyone else. now is then. we are honored and grateful to be by your side and the struggles yet to come. so again i am here to state unequivocally, president obama and joe biden strongly support a united, a free, and open your.

we strongly support what you are about here. we wish you godspeed, and may god bless you all, and may god protect all of our troops. thank you very, very much. [applause] >> thank you. [applause] [applause] [applause] >> thank you very much, mr. vice president. it was a great message for

future cooperation. our future talks. as you said, listen and talk to each other, very important. as i would like to thank you for repeating the same, the most important was last week. europe needs america. we remember 20th century. first world war, second world war, we were fighting side to side, having victory together, democracy. and you added as today, america needs your. we will remember that. it is a good beginning of our partnership and cooperation. thanks very much once again, mr. vice president. [applause]

[inaudible conversations] [inaudible conversations]

>> as the u.s. senate debated the financial regulations built this way, off the floor the financial crisis inquiry commission continued its look back at the 2008 economic collapse. henry paulson was treasury secretary at the time the crisis hit. testified before the commission yesterday, mr. paulson said the regular choices did he confront from 2006 through 2009 was archaic and outmoded. this is over two hours. >> welcome to the second day of hearings. as the members know and the public know who has been watching us, we have been exploring shadow banking system in this country and its effect on the financial and economic crisis which has gripped this nation. we have been focusing on the growth and development of the system and the risk posed by it.

as we have said before, whether significant interest obviously, in what was done to rescue very financial institutions in the midst of the financial crisis, a charge of this commission is to examine the causes of the crisis and to explore how risks to this system developed in the first place, what could have been done, what should it been done to prevent those risks from the coming into being. we have a full day of hearing again today. we are joined first of all this morning by former secretary of the treasury, henry paulson. and really with no further ado, we will begin this hearing unless mr. vice chairman, you would like to make a dashing opening mark also. >> i would just like to say yesterday was useful. today has a real opportunity to be useful. i cannot recall in my four decades and which we have two

witnesses, both of whom were former secretaries of the treasury. one had a background on wall street in one of the major firms. and the other secretary having a position in the federal reserve in new york, so that we get a full understanding base our ability to ask questions, both sides of the street from two different perspectives over a period of time which is obviously as we now know in retrospect very significant in the history of the united states. so i look forward to the test when. thank you, mr. chairman. >> thank you, mr. vice chairman. and as the vice chairman indicated we will start today hearing from former secretary paulson. we will then hear from secretary of treasury mr. geithner. and it will have a panel later in the afternoon with participants in the shadow

banking system from ge capital, pimco, to state street bank. with no further ado, mr. paulson, thank you for being here this morning. i would like to ask you to stand for what is a customary oath of office that we administered to everyone who appears before us. if you would please raise your right hand as i administer the oath. do you saw me swear or affirm under penalty or perjury that the testimony you're about to provide the commission will be the truth, the whole truth, and nothing but the truth, to the best of your knowledge? >> i do expect thank you very much. mr. paulson, we have received your written testimony and we appreciate it very much. and we would like to ask you now, we like to give you the opportunity ever like to obviously here an oral presentation by you without consideration of the time to keep that presentation to know more than 10 minutes. i know you're familiar with testify at the on the hills you probably know there's a light on the box that goes to yellow with one minute, to read when time is

up. and if you make sure your mic is on, you may commence. >> chairman angelides, vice chairman thomas and members of the commission, thank you for the opportunity to testify today. i served as secretary of the treasury during the recent financial crisis. i am proud of the work we in government did to save our nation's financial system from collapsing in chaos, and our economy from disaster. even so, the crisis caused human sufferings that simply cannot be measured. the american people deserve and policy makers will benefit from an understanding of the broad and diverse causes of the crisis. the job of providing that explanation falls to this commission, and it is an awesome responsibility. many mistakes were made by all market purchase of us, including financial institutions, investors, regulators and the

rating agencies, as well as by policy makers. most of these are well understood and importantly, policy makers are currently addressing some major regulatory structuring authority issues that allow the pre-2007 regulatory structure and authority issues -- excuse me, they're currently addressing these revelatory structures that is allowed the pre-2007 excesses in our system or made it difficult to address the crisis. nevertheless, a number of the route crosses are not being addressed and remain sources of dangers to our country. i fully support your important mission, and i hope that my testimony today can assist it. the roots of the financial crisis traced back to several factors, including housing policy, the global capital flows, overleveraged financial institutions, for consumer protection, and an archaic and

outmoded financial system among many other causes. underlined the crosses was a housing bubble, and it is clear several policy decisions shape of the home mortgage market. excesses in that market eventually lead to a significant decline in home prices and a surge of loan defaults which caused tremendous losses in the financial system, triggered a contraction of credit and put many americans quite literally out on the street. these excesses were driven in large part by housing policy. from 1994 to 2006, homeownership soar from an already spectacular 64% in u.s. households, to a staggering 69% due to the combined weight of a number of government policies and programs. fannie mae and freddie mac, the government-sponsored enterprises comprise a sense of part of the u.s. housing policy. the gses operated under an inherently flawed model of private profit backed by public supporters.

which encouraged risky revenue seeking and ultimately led to significant taxpayer losses. the united states has always encouraged homeownership, and rightfully so. homeownership builds well, stabilizes neighborhoods, creates jobs and promotes economic growth. but it must be pursued responsibly. the right person must be matched to the right house, and consequently the right home loan. and in the years before the crisis, we lost that discipline. the overstimulation of the housing market because by government policy was exacerbated by other problems of that market. subprime mortgages went from accounting for 5% of total mortgages in 1994 to 20% by 2006. consumer protection, including state regulation of mortgage origination, was spotty, inconsistent and in some cases nonexistent. speculation and rising home prices lead to increasingly risky loans, including far too

many home loans made with no money down. securitization separate originated from the risk of the products they originated. mortgage fraud increase in predatory lenders and unscrupulous brokers pushed increasingly complex mortgages onto unsuspecting borrowers. the result was a housing bubble that eventually burst and a far more spectacular fashion than most previous bubbles. global forces also played a significant role in causing the crisis. imbalance is in the world's economies lead to massive and be stabilizing cross-border capital flows. while other nations save, american spin. consumption in this country is the norm spurred on by low interest rates aided by capital flows from countries notably china and japan, which have high savings and loan shares of domestic consumption. and further encouraged by u.s. tax laws that discourage savings. we are living beyond our means

on borrowed money and borrowed time. consumers, businesses and financial institutions all over extended and overleveraged themselves with inevitably disastrous results, while our federal and state governments continue to borrow heavily, jeopardizing their long-term fiscal flexibility. our financial institutions including commercial and investment banks with notable examples of this overleveraging that in general, these institutions did not maintain sufficient high quality capital which left him unable to absorb the significant losses they incurred as the housing bubble bursts. many of them did not understand their liquidity position fully. they have insufficient cash and cash equal the lens, and instead relied overly on short-term funding sources that ran dry as the credit market contracted. these leverage problems were further exacerbated by a lack of transparency which caused

problems in subprime to affect other classes of assets. like a tainted food scare, a relatively small batch of deadly products securitized subprime mortgages, led to fear and panic in the markets for many mortgage securitizations driving down the price of assets, which triggered huge bosses and severe liquidity problems. derivative contracts, including excessively complex financial products, exacerbated the problem. thesthese instruments embedded leverage in institutions balance sheets, along with risks which were so obscure that it times they were not fully understood by investors, creditors, rating agencies, regulators, or the management themselves. very importantly and number of financial institutions had boldly and adequate risk management and liquidity management practices that about these problems to grow and intensify in a number of places lead to failure of the institution. compounding the problems in

these financial institutions was a financial predatory system that was archaic and outmoded. are regulatory framework was built in a different time for a different system and it has not kept pace with the rapid changes in the financial industry. i noted during my time at treasury be in our ms. capps in this authority duplication of responsibility and unhealthy jurisdictional competition. no single regulator had responsibility for overseeing the stability of the system. the result was the regulars were often unable to supervise the firms adequately. they did not see the impending systemic problems that progress towards the crisis, and they didn't have the tools to contain all the harms that unfolded as institutions begin to collapse. in march of 2008, this led me to recommend a blueprint for the major reform of our financial regulatory system after a year-long comprehensive review. i will turn now to the specific

topics of today's hearing, the shadow banking system. i term that refers to the large capital and credit markets outside the traditional banking system that provide credit for municipal governments, corporations and individuals for short, intermediate and long-term funding needs. before the crisis, these market satisfied at least half of the consumer and business credit needs, and one of the hallmarks that were advanced and highly developed capital markets. they have greatly benefited our nation, spur growth and prosperity at all levels of our economy, they have enabled more people to receive higher education, more people to purchase homes, more people to start new businesses, and more people to plan effectively for their children's future. they have increased consumer choice, seeing their job creation and allowed our system to found in other capital markets. but like all activities in the financial sector, these markets were fueled by the global

excesses and regulatory flaws i've already discussed. when the crisis hit, the stresses placed on these markets expose many of these laws and these laws in turn extended and exacerbated some of the effects of the crisis. these problems must be addressed that our financial system cannot move forward without fortifying the weak parts of its infrastructure. in my written testimony, i have addressed some specific areas of concern him and my suggestions for reform. my list is not exhaustive and there are certainly other problem areas in need of scrutiny. in addressing these problems, however, we must make sure we retain the benefits of the underlying financial innovatio innovations. in our haste to deal with the flaws in the non-bank financial system, we should not move ourselves back to a system of consolidated monolithic commercial banks. i am confident that a thoughtful process can achieve this. thank you and i will be pleased to answer any questions.

>> thank you very much, mr. secretary. we will now commence the questioning by members, and we will start with me and then the vice chair, and in the bows of the members. and i might just be one thing. i noted yesterday, and that is commissioner born and commissioner holtz-eakin has served as lead to measures for this series of hearings and have done an excellent job. i want to note that. mr. secretary, i have a number of questions for you. what i would like to really focus on the run up to the crisis. there's been, as i said in my opening remarks, and not a fascination with the ballot, how the financial system will stabilize, but for me, and i suspect some of the commissioners, the real question is how do we come to the point where the only options were either a loud the financial system to collapse, or to commit choice of dollars of taxpayer dollars. weblike to do to start the this point is to ask you a couple of questions, with respect to your role at goldman before you

became treasury secretary and move as you will as treasury secretary. during the time you were the ceo of goldman from january 12004, through june 1, 2006, goldman issued 19 synthetic subprime cdos, totaling about $8.4 billion. let me first ask you, this goes to shadow banking system, and it goes to the system as a whole. what's your sense, if any, -- what's your sense of the value, if any, of synthetic cdos in our financial system? do they provide any real capital or benefit to the system, or are they merely a device for betting in terms of results on the system? are the best or are they actually devices that provide capital liquidity and benefit to the real economy? >> mr. chairman, a number of times i have said that i believe

that we had excessive complexi complexity. and financial products. and that as i think about it, it's very hard to regulate against innovation. i think one of the things i have recommended for a number of years now is that when we look at some of these complex derivative products, some of these products that regulators makes sure that we have real substantial capital charges against these products. now, in terms of the deals you are talking about, i don't remember the particulars of those, of those particular products. >> do you think they provide --

just the core issue. do you believe they provide real benefit to the financial system and to the economy, the real economy as a whole or are they just side bets that -- >> i would say this. to get that market making, because i think of been a lot of discussion about the market making, and one of the things i saw, and again, i haven't been in -- haven't been in the business for four years, but one of the things i saw was that clients increasingly were asking goldman sachs and other banks to provide capital and to help them manage risk. and there are just many examples of that. and, you know, that business i think is a very legitimate business, a very beneficial business. and it needs to be done with a

very high standards, great integrity, and in a way in which you are working for your clients interest. and i was, you know, thinking this morning, about this hearing, and thinking of all of the situations where a client, you know, a major sovereign nation that was what about the prices of oil rising, would come to an investment bank and look for a way of protecting themselves against risk, or airlines that was worried about, you know, the prices, the oil prices going up, the sovereign nation would be more concerned about the oil prices going down. so there are many situations where customers want their investment banks to help them manage risk. and i think that's a very legitimate function. . .

needed to take a short position which is part of the offering process to make sure there's a stable market. there are -- in the house and there's no reason that someone

who wants to put in a cage in terms of protecting themselves against housing prices going one way or another should be able to do so, to me that's a very important function of a market maker so what we want to do is separate the function and the market making function which needs to be done with high standards, not only in terms of compliance of laws by doing in a way which inspires and keeps quiet trust and separate that from activity that is not done properly. investment banks were banks can make mistakes, commit fraud in a whole variety of areas, but let's focus on the legitimate role of that market making plays

in the capital market. >> the meet as quickly because i want to get to the meat of this to the run-up of the crisis and ask you since you raised the standards of conduct, not so much as a market maker but obviously i'm not going to refer to a specific case lodged against goldman, but do think it's appropriate when an entity is underwriting a security that would contemporaneously bad against on issuance, is that appropriate? >> i would simply say that's -- at any transaction and that is done in the marketplace has got to be done with high standards, fair dealing and making a appropriate disclosures. now in terms of what you say betting against or shorting, as i said i can think of when i was in the business and we sold

securities in the public market, he sold securities as part of an underwriting process, this and the kids had a short position. in is that betting against that? it was legitimate function done to make sure there's a stable market. frankly one of these market-making transactions for many of them, the kind of the customer expects the bank to take the other side of the trade and help them manage risk commit capital. >> complete disclosure in your mind is what you think is -- >> a proper disclosure. >> let's move on, i want to ask about this. treasury secretary, obviously you know what the treasury department, website is responsible for ensuring the financial security of united states in your head of the working group on financial markets and did bring forth the blueprint plan. but one of the things and try to

get to is what did and we now? looking forward to the risk of future crises we can have organizational structures but are we going to be able to pick up on the warning signs. you know in your book the august 17th meeting a couple months after your appointed breyer indicated in that meeting at camp david that my number one concern was the likelihood of financial crisis and i was convinced we were due for another disruption. sitting in that position having come from wall street, by the end of 2006 a leverage ratio is at bear stearns, hit 32 -- one, goldman 31 -- one, lehman brothers 34 -- one, not counting for balance sheet management. in the spring of 07 which is later than that day when at camp david, the ratio of level three

assets, illiquid assets that are hard to prize because there's no discernible market price at bear stearns to assisting 9% of tangible common equity, a lehman to 43, goldman 200, morgan stanley 266. the investment bank's not necessarily make have been growing like weeds and coleman 26 percent a year, morgan stanley 15%, merrill lynch 18%, and as you point out in your testimony there are warning signs that abounded. states all over the country trying to fight in 2000 before your treasury secretary deceptive and unfair lending, pre-empted by the occ. 2004 the fbi warns about epidemic of mortgage fraud. i held this up yesterday, the economist has an article cover called housing prices after the fall, which is in 2005, the lead

story says the day of reckoning is close ratan and not going to be pretty. how the current boom could decide the course of the world economy over the next few years. housing prices moving up in 2003 at 11%. 2004, 15%, 2005, 15 percent and you know subprime lending has exploded to be 20 percent of the market and by 2006 mortgage debt between 2000 and 2006 has doubled in this country. we borrowed more and then six years in mortgage debt than the whole 225 years in this country's history. there's knowledge of the opaque nature of derivatives, there's knowledge of the instruments in the market so here's my fundamental question: what didn't you and other policymakers know when you came to office my question is what was the missing information that would have allowed both policymakers and corporate leaders to mitigate risk?

>> well, mr. chairman, i think with all due respect, i began immediately to work to mitigate risk. within the confines of the fact that treasury secretary has no direct responsibility for regulating entities where markets but as you noted i saw immediately the huge gaping holes in the regulatory system so i took several actions immediately. regulate quarterly meetings of the working groups so regulators could begin sharing information figuring out how to work the gaps. there was work done there right away looking at the margin requirements and the amount of credit between regulated entities and hedge funds, i can come back to that later. secondly, i immediately started

working with congress to complete regulatory reform legislation for fannie and freddie which had been stalled by politics for years. and then i commenced this review, regulatory review and then came the blueprint, pressing market participants to strengthen infrastructure in areas like otc derivatives and areas like that. and then ultimately we came out with the blueprint so i think we were on it. on now, in terms of the excesses' you talked about, they are there and you couldn't push a button and have them go away. >> was the toothpaste out of the two by the time you're right?

two-point to a phrase that was used years ago. >> most of the toothpaste was out of the tube and there really wasn't the proper regulatory apparatus to deal with it. >> but my essential question i &, you got to the second but by the time you arrived is the information that you need an essentially financial industry leaders on the table by 2006 because we've heard a lot in these hearings about we are shocked, we're surprised, the tsunami, but even when a tsunami comes to have warnings ahead of time. >> let me tell you what was unclear to me and i don't think it was clear to very many people of any when i arrived and that was the scale and degree of the

problem. for instance, referring to the book, to go for the president said to me what will cause the prices? i said i wish i knew, it will be obvious after the fact and no one predicted the russian crisis. we could see some of the problems for instance in subprime and housing, but no one at least that i was talking to predicted this massive decline in housing prices throughout the united states and when i've asked myself why wouldn't people have predicted that, why wouldn't experts have predicted, i think it was because we were all looking for the paradigm that we had in this country since world war ii were

residential housing crisis essentially got up, mortgages for safe investments, so the economic models didn't project the kind of a wholesale significant decline in housing prices. so that was i think, -- >> that was the things didn't predict but having said that if we have seen that, i'm not sure what we could have done differently. >> with respect to by the time all the write-downs are happening in places like citigroup, the prices have fallen 5% and have fallen 2% in the early '90s but i see your point. would this be a fair characterization that people louis storm was coming, people concerned the levees were weak and haven't been tested, and is it fair to say there wasn't a plan in place to deal with the

crisis that was inevitable? >> there wasn't a plan in place when i arrived. i think we put in plan in place because the only plan on know i put in place was to get the regulators together. and was taking a different approach to the president's working group and with regular meetings where we started working immediately on the issues and how to respond. to get working on -- i believe to this day then the most effective saying anyone has done either the time i was there or since i've laughed to deal with housing has been the actions taken with fannie and freddie. that's been the most effective to stem -- stem the decline in home prices and started working

on that right away. >> i'm going to stop. when i close up before you leave i have very specific questions about fannie and freddie, but i want to stop now to get two other commissioners. thank you mr. secretary. mr. tom. >> thank you. that presented a whole bunch of questions that i hadn't planned on in terms of that discussion. but i do want to start all so with you mr. secretary at goldman for not any specific recollection of product. one of the things i'm trying to better understand since i don't have any familiarity with the relationships in these institutions on wall street, if

you asked me about congress i could tell you a whole lot about things people don't normally appreciate resulting in decisions, especially small groups and dynamic relationships the old business of who gets what, when and how accommodations which are fundamental to any democracy in terms of quid pro quo and other structures that make the system work. when i don't understand it is the relationship between institutions especially in the so-called shadow banking area because to meet its remarkable that there existed this healthy and growing structure m. based upon very short term financing

overnight. a number of institutions doing that. so you were sharing the grazing in the past year -- pasture and have yet in terms of goldman in terms of goldman and other ceo's he would take opposite sides in terms of market making. that was within the institution. i'm trying to understand a relationship between institutions, not so much in an institution because clearly if you're the largest you can be on both sides and play various roles by virtue of your size but if your smaller he may have to be more dependent on others sell its this business of to what extent was there a symbiotic relationship with other firms notwithstanding the fact your competitor or wasn't predatory and that's one of the reason the

smaller ones went first because going back to the congressional example, i could be fundamentally opposed to someone on one day on an issue. that issues depends -- dispensed with and the next day wind up on the same side in. would you tell folks when they first come you can be opposed to somebody but if you are a locked in opposition to that individual you'll miss opportunities to actually advance some of the things you're interested in. from your perspective, what was the culture predominantly? and had to be to a degree symbiotic, didn't it? >> i think mr. vice chairman which you were getting at we talk about infrastructure and secured lending, was the repo market in secured lending. let me talk a little about that because it might help.

that many financial institutions, not just traditional investment banks, had to rely on wholesale funding for a big part of their funding and wasn't all deposits. so you have a secured lending or repo market that grows up which is a very healthy thing because he wouldn't want everyone to rely only on the banks for wholesale funding so repo is secured lending and the lender at least partly is protected during bankruptcy because their collateral is protected. i think the way you need to think about this and there's a market where two parties can deal with each other. there are many sophisticated institutions, some sophisticated and less so, that want to invest money. some are pension funds, money market funds, governments. they want to invest money in a

safer way to do it, and enter into secured lending arrangement with a wall street firm. they can do that directly or through a custodian administer it and handle the chlorals or try party repo and that's the way it was dawn. what happened and the answer to your question was this group very quickly and with no singular leader having a purvey of it, no one looking being able to get information on the whole thing so group topsy-turvy, there was a system that didn't keep up, infrastructure didn't keep up with procedures, and participants got sloppy in their credit decisions. so it's one thing and, money market fund and lending to a bank and taking treasurys as collateral. and i'm taking mortgage securities and asking for no

margin that this topic and a provision. so now what happens is this has grown up and our excesses' and i would say to the chairman of this was something that i was not aware of to the extent of the issue. i see it through one little thing it goldman sachs so this big market had grown up and no regulator looked at it. so now on the crisis comes and investors are afraid, there were a number of concerns about bear stearns. they lose confidence. when you say it's predatory if someone is afraid and they are afraid about their own and institutions and surviving and then they pull money out and/or they don't roll over their secured lending. why? because there are certain cash

investors that don't know what to do as collateral if they've got it, just looking at the underlying credit. so again, this was a shadow market that is a very valuable market and will continue to be but needs to be fixed. it just plans to me -- airplane used to be fixed made by regulatory system, sloppy practices by practitioners and then the biggest sloppy practice of all where the banks and investment banks if they didn't maintain liquidity cushions. everybody talks about capital, but to be the biggest lesson i learned out of all the crisis was the lack of focus by so many market participants and by regulators. the importance of liquidity into

cannot place the huge reliance on any short-term overnight market if you don't ask yourself what am i going to do if the market doesn't function as normal, how much of a cushion july have? >> wouldn't every one of those go to bed that night not only worry about themselves but others because they depend upon the short-term -- >> they didn't worry until they did. is hard to explain this, but -- >> i don't think it's hard effuse other examples. for example, obviously bear stearns thought there were liquid until they tried to put up the assets, the only ones they felt comfortable or others felt comfortable or treasury, but the idea and economic model in terms of mortgages one commented anyone look at how much what a mortgage was changed

between the '50s, '60s, '70s and '80s to now? there is significant erosion in any comfort level on how markets could last given the rule. let me give a quick example. i represented a big area where folks would run in the spring when there was enough grass in the desert cheap. we began to see a fairly high loss of desert tortoises soul of the blm and wanted to run an experiment. they wanted to put styrofoam tortoises out in the desert when the sheep were running on the grass to see what kind of an interaction there was the. so i told them that the sheep man who would be ready to put their styrofoam sheep out in the desert when the blm was rented to put styrofoam tauruses. because you didn't get a decent understanding relationship.

when you rely and want to talk about rating agency it in a minute, someone giving a aaa rating to a package which fundamentally was so different than earlier packages and you rely on that aaa rating at some point doesn't somebody look at the underlying problem? what happened frankly in the desert was the crows as population and crushed on the desert the gross followed and inflict some over in the morning and have it in a warm meal in the evening until and unless you control the crows you never solve the problem. here the crow flipping it over, everyone argues that we didn't have a model that could tell us what was happening. i just don't understand given the level at which people were operating which brings me to the question of when you became secretary of the treasury, looking at it from not turn your perspective but the broader scope, the were you shocked at

the amount of weight place in the portfolios on these risky mortgage packages? were you surprised? >> i will tell you what was a surprise to me which is related to your question and that as you said there was a rating, but a number of the firm's -- i in my testimony in a number of people talk about the importance that those who underwrites securitization have some skin in the game and hold some of the securities underwriting. that's important, but where the big problems weren't of were a number of institutions, two or three institutions that not only have skin in the game, they have half their body in the game because they had huge positions of these outsized positions that

were overweighted. so even if they are rated aaa, one of the lessons of this which gets to your point is it's very hard for experts, and the experts to know anything with certainty. people could have been predicting this crisis for years and i could have predicted that it had lost money, would want -- it is foolhardy to tie up a lot of it and the institutions' balance sheet, in a particular security matter how high the rating unless its u.s. government security. >> is that what happened? tied so much up in the mortgage market? what i'm trying to figure out is how could the weight of why the

securities that were created, supported by the mortgage market to hold down the commercial paper market, repo market, securities market -- wasn't that big? >> that's different. >> i understand -- >> several institutions held too much paper but your point would happen the way to think about this week, but i think this is quite critical, the subprime by itself was a relatively small part of the u.s. capital markets and economy and the problem was much bigger. there are excesses as we talked about in housing and across the markets more broadly so used an analogy of the desert and i will give one that's used a lot -- there's a lot of dry tinder out there. the dry as tender was subprime,

or the fire started, but there was a lot of other accesses -- accesses. that's really what happened. there were a whole lot of things coming together to create this crisis. >> in terms of the rating agencies, we have legislation now for both the house and senate. are you familiar and of without legislation to have any opinion as to whether it's useful directed at an effective in dealing with rating agencies? >> i would say in terms of the rating agency piece of this, i agree when one part of the legislation which i think it's controversial to certain people, would i think no matter how the rating agencies are regulated and we need more regulation and need more disclosure and around

the rating agencies, i do not like the fact that we have several rating agencies that are enshrined one in our securities laws, regulatory manuals and so on, we -- the ratings are referred to. so i think that's just a crutch and a dangerous crutch and i think too many investors becoming too many banks relied overly on rating. i'm all for the rating agencies. i think they should be independent and should give their advice and just like the equity research houses do and i think investors should look at those as one tool, but i do not like the fact and i support the legislation that would take a reference to credit ratings on our securities laws. >> the senate would create an

office within the sec to have rules and practices. >> i think that's probably good enough. >> house creates seven member advisory board for credit rating agencies. >> i haven't really thought about it. >> it's safe, isn't it? unanimous. >> both bills will require in measure certification that due diligence has been done by someone. .. would like and the

>> i have thought this was in terms of shadow banking -- >> you gave an overview at the beginning of your test damone. >> i had written about it quite a bit in my book and so i do think the rating agencies made plenty of mistakes. i think they fell into the same

paradigm that so much of the rest of the world to. they used economic models that didn't perceive what would it have been. >> that everybody has used that as an excuse in terms of not knowing the true value of what they held. >> so, clearly the rating agencies come in terms of, and i made a number of strong recommendation actually even before bear stearns went down with the president's working group about the kind of disclosures you need for the rating agencies in the kind of processes they need to run. and the regulatory oversight. i was trying to get something more fundamental than that, which is i don't want to see a situation ever again for a whole lot of sophisticated people can just turn and say it's not my fault. it was the rating agencies. i want -- i want investors and big tanks and regulators to be

forced to use rating is one tool, but to some of their own work and do some thinking for themselves. >> thank you, mr. secretary. and can i ask you -- would you be willing to respond in writing to me the question to mission might have as we go forward. it is frankly we're learning as we go. you might guess, hope you'll know right now my staff consists of one assistant. i no longer have -- but i will respond. >> will try to write questions that can be answered by one assistant. thank you. >> thank you. ms. bourne. >> thank you rematch, cherry angelita and i want to express my thanks to you, mr. secretary, for being willing to meet with us and help us in our investigation. the first area that i wanted to ask you about is over-the-counter derivatives.

i fully agree with you that the derivatives are extremely important instruments in managing and hedging risk and play an invaluable role in that respect. nonetheless, the over-the-counter derivatives market had grown to more than $680 trillion in notional amount by the time of the crisis in the summer of 2008. and it was virtually exempt from federal regulation and oversight to cut that's a statute passed in 2000, the commodity futures modernization act, which is eliminated the jurisdiction of the federal agencies over the

market. i wanted to ask you whether in your view this regulatory gap played any role. you said in your testimony, derivative contracts, including excessively complex financial products exacerbated the problem during the financial crisis. and i wondered if you would elaborate on that testimony. >> first of all, i think your point is well taken. and in the chapter that chairman referred to in my boat, when we had the first conversation with the president about the potential of the credit crisis. in a topic i talked about then was over-the-counter derivatives and how quickly this had grown, citing the same numbers you cited and i just talked about it being outside of the regulatory purview. and we didn't even have come at the time, the right protocols

for how it would function in a crisis. implementing agreements and they were big backlogs of it on booktrade. so there's a lot of work being done by the fed at that time and i was very supportive in terms of pushing the industry. now, i think that these -- first of all, these products, they didn't create the crisis, but they magnified it in the exacerbated it. and i think not only in the way, which has been the embattled lot, in terms of interconnectivity, but just in terms of masking the risk that they were so opaque and complex and difficult to understand. i is certain regulators when i arrived saying that the system wasn't that live reached. because they were looking at just the debt as opposed to what was embedded in those products. those products are hard to

understand. and so, that is why i so strongly believe that you went to press standardization is in all of our interest. and so, the way i think you get toward simplicity -- complexity just in general i think is our enemy. it's hard to regulate against complexity and innovation. so i think the way you do this is you press everything that standardized onto an exchange. and the over-the-counter you put through a greenhouse and you've got great over house and you put the capital houses. see a complexity that will move towards greater standardization. and i think that's really the right way to deal with it. and i think you're right on in terms of seeing that of a concern.

but it's not those people that would say is the fundamental cause i think are wrong. it's not. it's just something that needs to be fixed and i'm hopeful that it looks like some of the legislation is on the way to fix it. >> with respect to the remaining over-the-counter market, assuming regulation are applied that would put standardized contracts onto an exchange, would you advocate more transparency for that market? >> yes, yes. in this, that would solve so much. and, e-mail, as you well know, regulators said the idea industry participants didn't know it was taking general motors is an example. everyone knew how many general motors bonds outstanding. nobody had any idea how many credit default swap contracts out there and general motors. >> or who held them or what the exposure was.

>> absolutely. and so, to me, i think fortunately this is now understood by just about everyone. >> let me ask you about the political influence and power of the financial services fact your industry leading up to the crisis. there some report that indicate that the financial sector may have spent as much as $5 billion in lobbying expenses, federal lobbying at answers and campaign contributions in the decade leading up to the crisis. and that in 2007, there were almost 3000 registered lobbyist in washington who had been hired

by the financial sector. i wonder whether some of the regulatory gaps and weaknesses we saw may have been in part at least attributed to this effort to influence federal policy. >> you know, it's interesting, i can't comment as to how it impacted congress. i do know that it is very, very difficult to get anything that's fundamental controversial, difficult time and congress without a crisis. but there are a lot of jurisdictional issues. this is complex stuff. and what i thought in terms of regulators, i just love regulators seriously working to try to gather the information. and it was just -- if a man from mars if i arrived and had to ask

into a man from mars as to how this -- and i see laughing because you know how this is regulated and white ots regulated use institution and ocd's and why there wasn't any regulator that had access to all the information in the shadow plinking market that could've never explained that. and so, i have no doubt that lobbying has an impact, but there you got to talk to some other members of the panel that are closer to the political process and im. >> well clearly, there were regulatory gaps or weaknesses in terms of the oversight of the shadow banking areas, don't you agree? >> yes. >> and did you think that the effort right the sec to create a

consolidated supervised entity program for the investment bank holding companies was a step in the right direction? >> you know, i'll tell you at the time, when i was on wall street, i did. and i thought that the people we worked with at the sec were the highest-quality. and when i was in government and working with them, i thought there was just some very, very strong professionals they are and working very hard and very diligently. so i look at it from that than i just simply say, if i get up to 100,000 feet and look at it, i just say we all made mistakes. you know, when you look at the regulatory mistakes over a period of time and clearly from

the bankers and investors in on the different participants. but i never doubted for a minute that competence and professionalism of the regulators at the sec who are just in a very short time -- remember this program for the consolidated regulatory program had just recently volts. and then we had this not me. >> do you think that going forward it's important to try to eliminate regulatory gaps like those for the shadow banking? >> well, here's what i think going forward. i think that these are complex financial institutions, they need to have sorted the uniformity of approach and having tough, consistent

regulation without someone being able to find nixon crannies. and then in terms of the shadow banking, there needs to be -- that's a big reason why he recommended the risk regulator concept was somebody needs the authority and the ability to get -- gather all the information necessary so you can look at these big systemic issues. and i do think that a systemic risk regulator, it had that been in place, would've had more authority to deal with over-the-counter derivatives much earlier or would have had the purview and the authority to do with the repo market. >> or with institutions like aig. >> absolutely. >> which was not really overseen effectively. >> absolutely and at the holding company. and i was an example of an institution that was able to

arbitrage and sort of build itself up by playing the gaps in the system rather than itself. >> well, one of the questions that i have and would be interested in your observations on this, you know, obviously there were problems in supervision, even with encoding bank holding companies in terms of his cetaceans. and today some of those holding companies are even bigger than they were in 2008 a cause of consolidations, because witnesses have carnatic gone out of business. are these capable of effective supervision by government regulators? indeed, are they capable of effective internal management, probably your experience at

goldman sachs could inform that issue. >> well, i would say this to you, that i think that the level of concentration, where we have 10 big institutions with 60% of the financial asset, you know, there's -- this is a dangerous risk. now, i believe these institutions are necessary. they perform a valuable role. so the way i get is your question is this, i say first of all, i know we can have better regulation. absolutely more better, consistent reader capital requirements, bigger liquidity requirements. but then i come to the conclusion that regulation will never be perfect. unless you hypothesize that these institutions wanted to blow themselves up, it's hard to

believe that the regulators are always going to be able to find the problems they can't find themselves. and so there will be, there will continue to be failures. there have been sent the beginning of the time, since that time we've had beginning of capital markets. institutions have failed. we've had financial crises. that is why believe in addition to strengthening the regulatory system, you need these resolution authorities so that the government has the authority, that when a big institution fails, two-step and outside of the bankruptcy process and wind it down and wind it down in a way in which are not saving and propping it up in their current worm. the expectation has got to be that there liquidated. and i know that's complicated, but you can train regulators to do that. and that's when such a big proponent of this will concept, you know, that these big institutions work with the regulators to create a roadmap

for their liquidation if they do fail. so again, you know, you'll never get perfect regulation, but i just don't think the american people are ever going to again want to see the taxpayer comment and bail out or see these institutions. so when they fail, we need a way of liquidating them and liquidating them in a way in which they don't hurt the american people and take the system down. and that to me, so your rights, with regulation we should strive to make it as good and as effective as we can do to get the regulators the tools they need and the information they need though they'll be right more, more often. it then, there will be failures we have to figure out how to deal with them so it doesn't hurt anyone else. >> may i have another two minutes? i just wanted to follow up with

you on a specific example. for example, goldman sachs. you are very familiar with what goldman sachs is like, with wet running it involves. do you think from your experience as the head of a big institution like goldman sachs, that it is capable of an orderly wind down in case it did into financial problems? >> i think that any institution can be wound down. it's complicated over a period of time. you can't immediately -- you know in the middle of a crisis, there is no institution, no matter what their capital says, if you have two liquidate it right away, there's no institution i think the assets will be worth more than the liabilities. and again, my view is that with

any institution there's got to be away that if they fail, that you know and the expectation is there's not going to be propped up under current form, that they'll be broken up, though be changed in some way, though be liquidated in a way. and so, i believe they can be done. >> thank you. >> vester holz egan. >> thank you. thank you for joining us today. i want to go back this observation stay that had question for the inevitable and ask you, does this mean if there had not been a housing market crisis deter something else would have? >> when i said in a bootable, what i said in the book was that our history in this country has been and in modern times is

every six, eight, 10 years, there's been some crisis. we could go starting with the snl crisis and i could just take you through the 94, 98 with long-term capital we had russia -- russia and asia. so we've had these. and so, what i saw was access building in the system. now, i could have said the same thing in 2004 or five and i wouldn't than wrong in terms of the timing. but ultimately, you were going to have these. and what i saw and i didn't

realize how true it was, was i said to people the difficulty are the interesting thing about the next crisis is we are going to be seen how these complex instruments and some of these private pools of capital's and markets away from the traditional financial institutions perform for the first time under stress. because there had been a lot of change. and so, we saw a lot of this performed under stress. so yeah, i think it's inevitable and i think insurers were sitting here today that the next crisis is inevitable. i don't do gets going to happen right away, but there will be -- there will be stresses and problems in the capital market, you know, sometime in the future, probably in our lifetime. and so, the key thing is how to

have these relatively small manageable events. they'll never be small advance to those right in the middle dealing with them. they're small mitchell events to the rest of us in the broader economy. >> the signature of this crisis that we sadly have to report on, is the housing market to you a decree with? in your testimony said there were several policy deficiencies shaped the home mortgage market. what would be the list of policy decision. >> well, i think what she would need to look at, would just be to look at the weight of the whole series of decisions we made. you know, the various programs for housing. it's not just standing and friday, but it assayed fha, various hud programs. i even say take something like that million-dollar mortgage

deductible. is that fair relative to renters are forgetting about fairness, that i think you have the subtotal of so many things pushed housing way up. i would travel around the world when i was in the capital markets and other nations would look at us and although we had homeownership above 60%. you know, we got it up to 69%. so i just think you need to look at those policies as fundamental causes of the root causes of the crisis. >> and on that list would be the gses? in your book, you also said that shortly after you arrived at the treasury, he received a briefing about the gses and the code is that they were a disaster waiting to happen. and then i sat interview, you said the business model is

fundamentally flawed. can you just tell us exactly what the flaws were in the gse business abdul and why they were waiting to happen? >> i'm sure you can predict this disaster happened the way it did here at so i'll tell you that. that was a phrase, you know, that i used without -- that turned out to be prophetic. but i didn't see it quite as clearly as it came about. in terms of the structure, that first of all there with ambiguities. okay, there was the implicit government charter and then private capital and private profits and the shareholders and the compensation models. so there was a contradiction there. and secondly, and this is a situation where congress

presumed to be the regulator. they do find capital. you know, legislatively defined capital. not only to the level of capital, but what could count as capital. and some things that i considered bs capital, intangibles were defined as capital. and so, the regulator was set up to be weak, not saying anything negative about the people who hold that job, but they were not given the authorities that a normal regulators have been, a safety of some regulator to make judgments of our capital. and then, the elephant had clearly gotten too big for the time. the thing is just grew and grew and grew. and so, when you look at all of it -- you drop these numbers to even comprehend, but you have $5.4 trillion when you look at the security insured, the debt paid issue. and so, the danger when you look

at the capital markets, you know, the danger they propose are sort of unimaginable. we can talk about the failure of any one is to duchenne, but the danger posed by lack of competence of the ability of these entities to repay their debt was much greater than this. so these were big. and then i think a part in the book you alluded to really had to do with their portfolios. this was a big topic of debate because they would not only guarantee or insured mortgage pools, they then would take their low funding and by and these mortgages hold them. and they said that this was necessary for their mission to support their market. but people explain to me, two thirds of their earnings were coming from that. and their boards have a

fiduciary to their shareholders. we could talk about the public mission. we could testify up on the hill about meeting their housing goals, but they had public shareholders and that's what the duty was, was to grow their profits. so as i look at that come i never so much blame the people that ran those organizations as those that designed the plane we asked them to wait before they flew it into the side of the mountain. so it was just not -- it was a long structure. >> so, one of the things we heard yesterday was that during the early part of march, bear stearns came under duress agency securities were no longer accepted as collateral in the open repo market. and again, if you look at spreads during that period, there spiking up and showing clear signs of market distress.

so i want you to walk me through the thinking man during a period when fannie and freddie were actually permitted to drop the limits on their portfolios and moved the capital surcharge at a time when the market is saying even with a capital surcharge that they are very safe. >> it's exactly the opposite of what you said. i have had my staff work with on to get them to raise capital, to increase their capital. and so as a result of what we did, danny went out and raised $7 billion of capital, so there was an increase in capital. it turns out they didn't. they didn't meet their commitment. the two-step that, that sort of the specific question you asked. but to get back more broadly, when it happened is this, they have the credit crisis came in

did 2007. and then most of the damage had been done by that point the cause, you know, after that time, mortgage lending virtually grew to a stop from ready and creamy. there was all kind of evidence of really very responsible borrowers that wanted to buy homes and had the economic wherewithal that were having trouble getting mortgage market. so now fannie and friday are essentially the only game in town. and so, i believe the problem was already failed the securities in their portfolios, they had guaranteed what they

had guaranteed before the housing bubble had roped in or burst. so what we were doing in march of 2008, at the time when we took the action we stuck with der stearns, we also were trying to increase confidence in these organizations and increase their capital. so again i was pressing any institutions to raise capital. i was talking to many ceos of institutions and saint i've never seen the ceo of a financial institution loses job by having too much capital. raise capital when you can raise capital. repressed them, as i said, danny raised -- that's up to the commitment, freddie did it. >> i got from the treasury yesterday. if you run the clock forward then, knowing what she know about their financial condition,

i believe you said something to the effect of the fannie mae, freddie mac give you a bazooka that she would never have to use and then shortly your coming used it. >> i never said never. what i said was when i got this authority, i said there was -- i was asking for unlimited authority. it sounded bad politically to say of limited, so i set unspecified. i want to have the maximum amount of authority. and i said to the extent we have the more authority we have, and i will increase the likelihood will have to use it. and what happened was that the any and freddie, we went to regulator. we didn't have the authority for the people to get in and look at

it. so it wasn't until we actually got in, okay and got the authority, so i was working very hard to get the emergency legislation from congress. or get legislation from congress, reform legislation. and then confidence went in these entities. as i said, it was sort of an unimaginable risk. so we went and got this emergency authority. and then once we got it, i was able to -- we had goldman, we had morgan stanley working with treasury as our advisor. we had the occ, we had the fed working with fha to go when and look at these entities. and it was only then we were able to get our arms around sort of the scope of the magnitude of the capital problem.

and then the fact we had these authorities for the first time, we could address the problem, we could do something about it. we have the authority to put in capital and to put into conservative shed. so that's sort of the story there. >> i don't have much time, but us wanted to go back and talk about the bear stearns episode itself. i wanted to get your views on whether bear could've been allowed to bail. >> weatherwise? >> to be allowed to fail. and we heard yesterday fairly convincing testimony that the purchase of bayer set the expectation that other institutions would get help and that when women went down, we did not get help, that was a great shock to the market. i was wondering if you would give us your views particularly about setting a precedent, having seen the intervention with fannie and freddie how you went about doing that with bear.

>> give the chairman five additional minutes. >> okay, i would like to answer the question because in terms of convincing testimony coming you will never hear testimony from anyone who is close to the markets in my judgment. >> we're giving you time to answer, so go. >> here's what i would say. first of all, let's look at the time in this because there was for acute in march and we got the emergency legislation of the cne and freddie in july and they were put in conservatorship in september. i believe that if bear had not then rescued and it had failed, the melt down that we begin to see after lehman had gone would have started months earlier and

we would've really been in the suit because it would have started now that i look at it with hindsight before fannie and freddie were stabilized. could you just imagine the mess we would've had that if bear had gone, their hundreds, maybe thousands of counterparties that i would've grabbed their collateral when they started trying to sell their corrado, drive down prices, create even bigger losses, there was huge. about the investment banking model at that time because of the lack of said oversight and access and so on. and i think you would've seen other seen other investment banks go very quickly. now does that make that argument are missing to me one fundamental fact, that as the chairman said, using the expression once, the toothpaste out of the tube, once the crisis

has been going on for seven months, the system is very, very fragile. you didn't see excessive risk-taking. you didn't see speculation. as a matter of fact, there is a lot of what it loans that were being made. investors are even afraid to buy student loan securitizations with the government was provided. sovereign wealth funds and other foreign buyers would come into morgan stanley, citigroup, merrill lynch cut all lost a lot of money. people were scared. so pleasantly people said, they belt out bear, now we can go in that lehman be public. the losses that lehman had in that others had were in positions that were already on their balance sheet, that were a

liquid positions that just had to be marked down as the economy turned down and as home prices job. so again, you know, i think you would have had a hard time finding any buyer for any institution if the government -- again, if they bear had failed. >> one last question. he talks about the investment model being troubled. we heard yesterday from the sec is that investment banks have voluntary brought themselves to a capital standard, have liquidity requirements in excess of those required are marshall banks. that, by the standards of regulation, they were fine. and so my question specifically is, is there a real difference

in the performance of commercial versus other entities during the crisis? >> i may have a bit of advice given where it came from, but it will play this analytically that i think people from the leverage ratios. and if you haven't adjusted for accounting deficits, the fact that investment banks have the discipline of market securities to market, that i think that they released as well-capitalized does the commercial banks. i believe that the issues that i think this was a confidence issue. i think that it started good acting to read a couple of investment banks and bear and in lehman brothers that had big exposure to our housing market

and bear in particular was as diversified as some of the others. and it really comes down liquidity management and liquidity cushions. and i think we saw the same lack of liquidity management. you know, i thought across the board with banks and investment banks. but so, my comment didn't get to the relative strength or weakness. it really got to a concern and a lack of confidence. and when the market loses confidence in the entity, in the middle of a crisis it's very hard for them to continue to exist. >> thank you, mr. secretary. >> i'm going to take a couple minutes of my time. i want to follow up on the issues mr. holtz-eakin based. and our laughter and when we had fannie mae and from arrest, the vice-chairman of vice chairman it described a timeline which we now verified and i'd like to enter it into the record as well

as the underlying documents. and they get to what's happening in that late february, early march timeframe, not about what you might call the bear weekend. let me see if i can't describe this very quickly. there is awfully concerns about the meltdown of the private mortgage. you have expressed some pretty darn big concerns about fannie. he said also transport were the only game in town, but it looks like what's happening here is the portfolio cuts are going to be lifted. i think that happens february 28 so fannie and freddie will keep spinning out into a market with big headwinds. in the deal i think that you and your team are holtz-eakin broke her -- at about thoughts and accurate characterization, but certainly involved in, involves them continuing to lend and, having their capital surcharge

release some by 10% on the promise to raise more capital. is that a fair assessment? >> well, i would say this. it was a -- they made a commitment to raise more capital. and fannie raised -- freddie didn't live up to that commitment. and so, there was not more capital raised and there was a deal which the regulator and the gsc's, working with my staff brokered was a live team, the capital surcharge to raise capital and i just can't say strongly enough that was to raise capital. the other thing i will say, when you're saying monday meant to headwinds, i think just the opposite. i think what you will find is

that the markets had -- everyone -- the markets decline dramatically in housing prices and they were continuing to decline. so everyone was aware of the issue. and so the losses they had to be spam from -- i think you're going to find didn't stop him from going ahead and doing risky things in here. it had to do with what was going on in the housing market and what had gone on in all of the loans that they guaranteed before that input on their balance sheet. >> and i think we're going to have to look at this, but here's what i wanted to get to the nub of his which it's clear there's deep concerns. lockhart, there's a e-mail at which mr. steele writes to mr. mudd, quote lockhart needs to eliminate the rhetoric.

it's interesting also he says i was going down very hard by phil dudley who worked for mr. geithner to earn substantially to guarantee. i do not like this and it's not been part of my conversation with anyone else that did a very significant move to double the size of u.s. debt in one fail swoop. in the day or two before the transaction it done, lockhart objects within this idea strikes me as perverse as i assumed it would seem perverse to the market to the regulator would agree to about a regulator you to increase its high mortgage credit risk, mortgage credit risk leverage without any new capital. now, i understand that part of this was to raise more capital. but here's my central question. you have deep doubts and holtz-eakin get a sense of how you saw the markets in march. blair had just been cordoned quote acquired that there was a rex who involved because the feds were involved. at this point, in a sense,

you're striking a deal that allows them to stay in the market. due to concerns about solvency. interview at that point the look were knowing the business of a bailout. does the bills are in march would you generally believe things are going to write themselves? >> neither one. didn't believe things are going to write themselves and the bailout didn't start in march. this i just cannot see it clearer or more definitively, this was about getting them to raise capital. that's what this was about. and guess what, a day. okay, cne raced $7 billion in capital. freddy committed to raise capital and later their employer said well, we need to wait until the second quarter numbers are out. and by the time the second quarter numbers of how we've gone and gotten the emergency legislation. but this was solely about raising capital because what we were dealing with, we were dealing with a situation where

the markets were on edge. they were the only game in town and this is not unique to them. we were pressing financial and to touche and to raise capital. and to me, it was an unimaginable risk that these things posed. i had no idea that we would need to go at that time to congress and get these authorities. and i had no idea that we could have gotten those authorities because remember, i had been congress, danny and freddie were political foot like you wouldn't believe. i am reformed stymied for years that we were working to try to get the kinds of authorities we needed. and so, i had no idea that we were going to need to get the authorities, get the authorities they got, which let us get into the real experts to get their arms around the problem and then

get the tools we needed to address the problem. so working with the limited tools we have, without being the regulator for fannie or freddie, we press them to raise capital and i think that was the right thing. i think it was a sign of confidence when they announced it and then when they went and fannie raised capital. >> you know, at some point, i think given what you're one staff person, i like to follow up a little on this, i think there's a bigger objective here, which is also trying to understand as markets are wobbling, this kind of dichotomy you think you faced and the really move on to other members between trying to stabilize the market versus also acknowledging publicly that state in which they're in. >> let me do this. >> obviously, i'll just simply say this, what you need to

recognize and i'll say this and i'll answer it in writing and answer at the same way, that treasury is not the regulator. we didn't have the authority, we didn't have the people, we didn't have the capacity to really get in there, okay? so what we were doing was pressing them to raise capital. it was only when the markets lost confidence that we needed to get these authorities, that we have the tools to get in there and get our arms around the problem. >> all right, thank you. >> thank you, mr. chairman. thank you, mr. secretary. i would like to ask three questions that relate to lessons learned, as you say, this is not going to be the final financial crisis that the country is going

to have. one of those relates to a continuation of the bears turned story. and that is, when you face the issue of lehman brothers, you were in addition to dealing with laymen, you are establishing a principle, which was that bear was not a precedent for all future similar circumstances that you are not going to rally the federal government to the salvation of every institution. what were the factors that caused you to make the case-by-case decision that the man was not worthy of a federal assist the transition? >> thank you for asking that question because spite the fact i've written a book and answered this hundreds of times, people tend to still not in despite the

fact that we had ben bernanke and tim geithner say the same things, people still question us on this a lot because it's hard to understand. but the fact is, that bare faced a liquidity and a capital problem and we were very fortunate to have a buyer in jp morgan to come in and saw the p. and d. able to guarantee bear's trading the extreme that dependency of the bearhug. and we learned better that the government eliminated our authorities where we couldn't, not have the authority to guarantee an investment bank's liability is worse to putting capital. and we didn't have resolution authority. after that and made a number of speeches were attacked about the

need for this. lehman came along. we unfortunately were able to get any bank to play the role of lehman that jpmorgan played on bear. so we tried very hard to do that and we were left frankly powerless. and so, we prepared for the commie know, for further bankruptcy. so this was not something we did intentionally. and it was just -- we just had a flawed regulatory system and powers. >> the second area is conditionality of funds to financial institutions through t.a.r.p. or other bailout

practices. in contrast to what seems to be the perception that the u.s., whether there were relatively few requirements in the united kingdom, for instance the royal bank scotland was required to accept certain additions to what it's funding practices would be, limitations on dividends and compensations. why were there not similar conditions attached to the bailout of new financial of the two shins? >> this is a totally different program. we did not want to be dealing with institutions as they fairly failed, as they did in the u.k. we diagnosed the problem of being a big capital shortfall in the bank in fact her. and so, we designed a program

that would be a track if two healthy banks, so that they would want to come in and voluntarily participate. and we put in preferred, which was passive, what you wanted it to look or be like a nationalization and designs of the government would get the money back because the senior took it. and so, that was the whole purpose of the program. and you know, interestingly enough, i was hopeful when we announced that they would get a couple thousand banks that would dissipate, two were 3000. but right after we announced it, we had critics start saying, you've got to force them to live. you didn't say how much or how much the government to do. you have to control their compensation understandably. and then understandably a member of the bank said wow i'm not sure we like to steal.

and so we had a good number of tanks apply for t.a.r.p., get accepted and then pull back. and we had about 700, not quite, take the money. and it was interesting because it prevented the collapse of the governments going to get the money back with a profit. but i think if it hadn't been stigmatized by all those that wanted to put the various controls on it, that we would've had two or 3000 banks that would've cut the money for three to five years and i would've done far more than anything was programmed to get the economy going again. but you know, again, i think some of those who say the program didn't work because there wasn't enough funding, were those people that stigmatized it aired so again, we were trying to deal with healthy banks, voluntarily come in so we were trying to nationalize banks like the british government have done and

we were tired of dealing with them when they failed. >> there is a public perception that one of the justifications of this was to stimulate the economy by making credit available. and there was disappointment when there were perceptions that that wasn't happening. >> you're right. you're absolutely right. and of course, that was the whole reason and i didn't make this point, i should have. the whole reason for designing the program with many banks would take it and i would be to finding. that was the whole purpose. but in a funny way, as soon as we announced it, people were saying they can land. where landed more? of course, now if your bank, you really want this deal. and how his big brother going to help you step in and tell you

how to make these funding decisions. and so i think what happened was that some banks were reticent to take the capital. not to did that help with one thing, but it could've been much more effective. >> is what you're saying that that things didn't want to take the capital, which would put them in a position to be more effect did contribute and do what they felt would be under external pressure to do that. >> that's right. i think a number of banks did, suite number 700 banks taken. but i think even those banks rush to pay it back. because the extent to which they were stigmatized. and so i think banks are understandably concerned. so you have this paradox. people wanted them to landmark,

but by clamoring for somehow other for there to be a tough. i was never quite sure of how people, you know, how much people wanted the banks to lend, more than they have lent in the middle of the crisis. or how much lending, what was the right of one house is the government going to determine that. clearly this was about finding and getting the banks the capital they need it so they could land. >> can i have two minutes? the third question relates to a topic you have alluded to and that is the role of congress. and he said congress had barriers such as it tendency to wait until the crisis had occurred before at team and some of the jurisdictional restraints on dealing comprehensively with problems. from your experience in the

executive ranch, trying to influence congress to be more product is and to be more comprehensive in its response, do you have any recommendations of what the executive branch could do to facilitate congress being a more effective partner or what congress ought to do within it own domain to. >> twice i needed to go to congress with extraordinary request. and twice they reacted before disaster struck, okay. and democrats and republicans -- i don't have any. i like a lot of people, i don't like artisanship.

but i saw people on both sides of the aisle come together. they think in terms of how to solve the issue immediately you can get some experts appear that are more quick than i am to deal with it. >> thank you, mr. chairman. >> thank you, senator graham. >> thank you, mr. secretary. it's good of you to be here. i appreciated very much, we all do. i like to follow up on some of my questions that my colleague douglas holtz-eakin had on their strengths. because to me this was one of the most consequential decisions that has ever been made by our government. i think there's a substantial argument that it gave rise to moral hazard that maybelline and clap much more significantly than i would have if it had occurred at all. and i want to point out, for example, that once bear stearns was rest you'd, it certainly

encouraged women to to keep its price somewhat higher than it might otherwise have been in dealing with potential acquirers. because on the other side, lehman had another expectation that it might also be less good. and i think the chairman of lehman indicated that in some of the testimony to congress in the past. in addition, creditors of lehman such as the reserve fund has customers difficulty would probably have rid themselves of the commercial paper that they were holding, and i wouldn't immediately have lost value if lehman had actually been allowed to fail. and so, when we minted did fail, they were stuck with that particular money market refund, reserve fund actually broke the buck and there was a run on money market funds.

.. of the company and so the first question i can ask you is whether you were aware that there was, in fact, insolvent

company. i anderson and there was a liquidity problem but were you aware you are dealing with when you got bear to be rescued you're dealing with a solvent company? >> i think that is almost a ridiculous statement. we were told on thursday night that bear was going to file for bankruptcy friday morning if we didn't act, so how does a solvent company filed for bankruptcy? you know, when institutions, financial institutions died they die quickly, it's a liquidity crisis. they died because it worked with confidence. when they died i don't care what someone has on their books, okay, assets are not worth more than liabilities summit no mistake about it. we were told the jig is up,

we're filing for bankruptcy to morning ended, you know what, at the time we almost found out with your hypostasis right because it jpmorgan had emerged there was nothing going to be done here. that's your first question. >> now i would say that companies can well for bankruptcy even when there solvent. if they are illiquid because one of the definitions of a bankruptcy is you can't pay the obligations when due, is simply being legally solvent. >> this is a financial institution. >> yes but let's not get into that. i just want to be sure that we are talking about possibility want that we can rescue firms that are, in fact, solvent. now, the officials of the officers of bear stearns we talk

to ensure macaques although not speaking as chairman of the sec. both said they did not think that bear stearns was too big to fail and that if it had failed and it would have caused, they didn't believe it would have caused the kind of disruption that we normally consider as necessary to rescue institution that is too big to fail. why did you think that there was too big to fail? >> first of all,, would i don't take moral hazard lightly one-woman. if this had happened and at a time this occurred at a time when a credit crisis had been underway for several months and the system was very fragile wood. throughout the system. secondly we didn't have the tools as they said to wind them

down outside of the bankruptcy process. one of so what i saw it in the marketplace was in a market gripped with fear will and that a parent was not the cause -- there was a symptom would of the fear and panic in the market and this broader problem of liquidity so as i said to i believe there were others i could have sold an end lead to bigger losses and bigger write-downs. as or is your comment about the reserve fund holding lehman paper, one if there had gone

down and not the result of a fund would have held and neither would any of fun or many of them went so you would have a triggering quicker. you would have had lehman going and i think almost immediately if bear had gone and the process would have started earlier. >> if that's true then how could you not have rescued in lehman under the circumstances because what you are saying is that you have an implied that you were going to rescue everybody else with the same reason with fear in the market. >> about -- we look dead every one of these circumstances but we try hard to come up with a solution for lehman. very hard. again, if there had been a buyer for lehman like there was for bear, we would have done the same thing. >> let me just turn the questioning to one other point

if i ask you a question on a different subject. use said that subprime mortgages were relatively small part of the problem who although they were triggering element i think in your view of this. >> right. >> are you aware of what that there are views that the number of subprime and mortgages in the market is much larger than the 20% use cited, as much as half of all the mortgages by 2008 when, as much as half of all mortgages were subprime one and thus were ready to fail when the bubble we were experiencing began to flatten out. if you had known -- thank you, if you had known that at the time, what your view about what was likely to happen where the importance of subprime mortgages

have been different? >> i'm not sure. first of all, i don't know that, but i think the big question and i think what you and i agree is that housing policy in and housing was a big issue here that we dealt with. as i looked at the problem there are a excesses' throughout the market, but it was housing policy and mortgages were generally. okay, so i'm not as focused on i think subprime was obviously the most egregious excess that took place and i have no doubt. people use this equal example or mad cow disease that first came to in treasury and use it in the book. i do think that is a good example because there was so much uncertainty about batboy.

infected so many other securitization and the way investors are concerned so it was a big concern but i am not sure that would have made a big difference. >> let me tell you why i think it's significant to think about in these terms and that's we have had questions here today and yesterday. that is that both regulated banks which are heavily regulated as you know and investment banks failed in roughly the same circumstances. there were runs an effect on both confidence with a loss in both and so the question really is, if there were circumstances that were so severe coming out of some event will which seems unprecedented at least in the last 70 years, wasn't it a

significant impact -- fact that there was no way our regulatory system could have prevented the war did prevent blossom of up not only among investment banks as we've talked about but also among regulated real banks? >> i take your point. of the fact is this event the, what it is hard i think to go back in history and find any event we that was more extraordinary one in terms of the extent of the crisis, the magnitude of some of the things that were witness to your.

will so i think your thesis has got a lot of truth to it in terms of housing. >> thank you. >> mr. giorgio. >> thank you mr. chairman and thank you secretary paulson front-running is here today. i want to tune into a portion of your testimony of which i agree with and i would like to highlight if i could. on page four of your testimony of securitization you say because securitization and separated mortgage originators and under orders from holding the rest of the loans they originated in enabled subprime lenders to stop focusing on the creditworthiness of the loans they made and instead focus solely on their ability to sell those upstream to underwriters. underwriters intern relaxed their underwriting criteria of a liability to sell the securities into a booming market. you go on to say they are incredibly requirement better

disclosure necessary and underwriters an average interest should be required to retain some portion of what they sell. requiring them to keep some skin in the game will properly align their incentives with those of investors to end up holding the bulk of the rest. then you go on to say these changes will provide securitization market with powerful incentives to focus on creditworthiness will and lead to more responsible lending practices. then yesterday we heard from the chairman cox in his written statement he said to the effect if honest lending practices have been followed much of this crisis would not have occurred and nearly complete collapse of lending standards by banks and other mortgage a rich knitters led to the creation of so much with us or near worthless mortgage paper that as of september 2008 banks have reported over one-half trillion dollars in losses on u.s. subprime mortgages and related exposure. one-half trillion dollars --

$500 billion -- 500,000 dollars which was an extraordinary amount of money in light of the capitalization of a lot of institutions that had to write down this paper will with. yesterday and when james kane and alan schwartz the last two ceos of the bears stearns testified i asked them wrong when they thought of the idea of requiring investment banks to take some other fees in the actual securities that trade and whether that might enhance the diligence and align the interests of investors were more closely with those of the underwriters. of course, they both said that sound like a great idea but mr. kane said they're not going to like it. about the investment bankers. would -- i want to hearken back to your successor at goldman who asked a similar question back of her first hearing in january and

he said, well, we could take the securities but we would hedge them. essentially not effectively have the exposure to it and, of course, i said the whole idea would be for you to be long on it so in your underwriting obligations representing to investors in these should be sound investments he would actually be side by side with them in the long run. we love so all of which two leave me to a question which i think there's more on your experience at goldman sachs and on the street generally with then at the treasury secretary. how could such a notion be supplemented in light of the different responsibilities that investment banks have in at least three of their roles? one is as an underwriter in which they undertake to have of a fiduciary duty to investors and represent the security is

there are selling not just the right to sell but actually represent and perform as represented. two, as a market maker which is essentially what mr. blank fine was suggesting which is that people ask for positions long and offer their clients opportunity to invest long or short or hedged their positions in various respects. really third, as proprietary traders investing for own account. the reason i say that and i would like your thoughts in this regard is if people were required and what you although securities, how to enforce them holding them and staying long on them not hedging them, and is that realistic in light of the differential obligations of these investment banks? >> that's a very good question and a lot have recommended when i recommended. the recommendation is short of long on policy and short on how

you implemented. one i will tell you, i think it's difficult to implement with the reasons he suggested. i think your question has got what you need to think about it because i think a market making function is not really what we're talking about here. what if the bank is in the marketplace one and has declined that wants to sell or wants the banks that can help manage risk that's one situation. so it's really as an underwriter and i don't know that i even have a problem and i probably need to think about this more, but even as an underwriter putting a hedge on again a hedge

if it is to structure probably you can have a head against for instance mortgage market overall with it, but this particular security you're going to perform better, right? >> correct. >> because you have done such good due diligence and. so i think the only caveat i would say is you want to have skin in the game and made this comment earlier but you don't want to have too much because actually these firms some got into it the most problems were those that kept extraordinary amount of the paper they had underwritten which was what rated aaa, holding so much of the balance sheet that they almost failed because of it. >> that is what john mack. i asked whether they ought to eat their own cooking and he said we choked on our own cooking one, and he got stuck

with those securities on their books. that wasn't his intention. it was to originate and distribute them but he wasn't able to sell them all. >> that's right. that institution and two others choked on our own cooking and so what we're talking about here, not something different from risk-management. i don't think we ever want to ask financials editions to do things that aren't going to involve food and risk management, with but there's got to be a way that as you underwrite separate from the -- there is some piece of what you have underwritten and that you continue to have to live west and own. >> right to live with me be as long as securities intended to produce. maybe the bonuses that were paid to the people view did the deal

and were responsible for the diligence ought to be paid in part of the securities they created. one of the thoughts as many people that suggested here is the fact that underwriters were paid exclusively in cash. the credit rating agencies were paid exclusively in cash, mortgage brokers paid in cash when the issue was sold and didn't have any -- and didn't retain risk for the failure to perform as projected and was a problem. i'm sorry, could i have a couple minutes? >> absolutely. >> yes, sir. >> i would think the formulaic compensation just in general will want is a problem. particularly paying in cash makes its much greater. >> not paying in cash.

>> i am saying formulate compensation paying in cash is another problem because again i strongly believe that when looking at compensation is very important for there to be a long tail on the compensation so as you said a those that underwrite the securities, however it's done an important part of their compensation should be how well they do their job or how well they do their job and got to be the quality of their job, not just short-term profit. >> right and it also has a beneficial impact of a line in their interest with the investors to purchase it and avoiding an untoward and with some being on the opposite side. i wonder if i can ask in the last few seconds i have here to reflect little upon what this question and maybe you could respond in writing if you come

up with any thoughts from your longtime experience on the street as to how this might work because this is an element i think that many people are looking for a solution to that could improve diligence and improve the quality of the paper sold which could avoid the problem going forward in the future. >> like so many things, easier to discuss then to employment. i will give it some more thought. >> thank you so much mr. secretary and thank you for your assistance. >> we will keep that busy from now until december. absolutely, you can have a minute. >> i will give myself a minute out of my own 10. there are some of us on this commission that are committed non economists and so there's a jargon that is used. which we sometimes have to translate.

>> i will join in that, i am an admitted not economist. >> and also ended minute non attorney so there's a whole lot of things with, would but try to understand in terms of the banking system and the point that mr. walsh and makes clearly about the subprime with oranges, the flawed mortgage packages to, i think most people would understand interconnectedness, ie you've got five men from the mountain, one false and it pulls the other with him. but contagion is a common shock and their terms being used a little more familiar, a little more difficult. when you use the e. coli example, my argument is coming from in the arab culture background and other stuff that if you told me that spinach -- packaged spinach which was a

case had e. coli if you go lettuce you don't have to worry about it because it is the spinach. and then, in shock would be that everybody had it. so where you place the mortgage package? did everybody have them and apple everyone down and then all the other assets became devalued? >> here's what happened and i will try to explain this one in simple terms. woodbine. >> i can usually handle the terms defined in. >> but this will be -- you can handle very complex terms. anybody who has written tax code knows. but what had happened was there were these very complicated securities or hard to understand people moderating.

in and they knew there were problems in subprime and so once the problems occurred, then there was anything that looked like securitization work in the mortgage area complexity caused people to pull back because they said and it wasn't a matter pricing, and that's why the e. coli thing, if there is a big concern about be somewhere and mcdonald's will use to buy so many members, more people wouldn't buy it. if they were scared. >> but what about the play for example? if there stearns cut say we weren't very big in subprime, the word ping in alt a. >> so people then send investors became concerned when there was a low likelihood and then what happened it is when one asset

class becomes a liquid, no one can sell it. then happens people all run to sell another asset class and so they go to sell mortgages that are saleable and pretty soon those become illiquid because everybody's trying to sell them. everyone is sitting around the same risk control table trying to sell the same thing in on the buyers are in the hospital. >> is contagion? >> because illiquidity, you try to sell something that becomes a liquid because the fear can't be sold so then securities that shouldn't be related, not supposed to be correlated to become correlated because there with everyone else tries to sell. >> bear stearns at the said -- that the and said it all like to deal with were treasury's? >> i would simply say that counterparties in the repo market lost confidence in bear

stearns and there are unable to borrow against certain securities. >> notwithstanding the lack of others had the same? >> there were others in new end of this was a loss of confidence. others were experiencing similar problems but not nearly to the same extent. this was focused on bear stearns. let me also say to you, lending practices were a very, but sloppy one in borrowing practices. it's very much one thing if i want to repel a treasury. if i am recalling a mortgage security in your giving me 100 percent of the value lending on that not asking for a hair cut that's lobby -- sloppy. what happened was there was an assumption you can keep borrowing wine at full value on these securities when they were dropping in value.

>> i will have to ask my colleague with an edmonton economist it was sloppy it is a term? with. >> mr. hennessy. >> thank you mr. chairman. when one i like to ask you to do is focus on three specific firm failures. i guess for if we package ready and fannie to gather. we were talking about why those firms failed, but what i'd like to ask is for you to explain rethinking about scenarios that you fear might happen if they were not bailout or rescued, what ever term? , fannie and freddie and aig because as i understand it the scenarios become a really bad scenarios that might have happened of the firms have failed for someone different in particular thinking about counterparties. with speetwo its sound and what you're describing was if bear was the slowest.

will that the next lowest might fall prey to the lions. for as there were other scenarios as i understood it for what happened to the system if fannie and freddie failed when aig failed. so you could compare and contrast noir -- >> one thing i have to be careful here because doing what i knew today in terms of what i do now, okay. so with bear stearns what i knew then i knew enough to know that the system was very fragile and there were so many unknowns in terms of the counterparties. that this was a very dangerous risk to take an imprudent risk to take to have them go down in. quote what i know today is that

what was waiting for us in terms of fannie and freddie which i didn't know then and what was severely overall situation was, but there's no doubt that in the bear was the kind of firm that i believe would go down like a directional or whatever author during a more normal market as opposed to one where there was huge stress and fertility and what i saw beneath the surface throughout institutions in europe and in the u.s. feared it caused me concern. you mentioned fannie and freddie, that's a different magnitude that post an unimaginable risk to me. if there had been a loss of confidence and didn't have the

ability to pay back their securities, there were 3.7 trillion held in the usn 1.7 outside the u.s.. they just sort of flow to the financial markets almost like water, liquid securities and not considered to be, so that if there had been this -- a big disruption no one would have confidence to deal with this. >> what you're describing i think two different things. .. will

>> why would any institution bsafe? it was -- and then, you know, when you talk about lehman, i will say to you -- >> actually it was aig. >> aig, was an order of magnitude bigger than obviously lehman or bear. it was one we knew the least about, because there was no one regulator that had, you know, a clear mind of site.

so we knew the least about it. we knew that it was, it was huge in terms of the size and the interconnectedness, and the credit default swaps and all the counterparties. it's a real example of rating. you know, i have, you know, the danger of aaa rating were -- and again, liquidity. many people added into contracts with them without getting market because they were aaa. if they entered into contracts were they would have to post collateral if there was a downgrade, you know, without saying how to we make sure we have the liquidity to do with a downgraded. and then of course you had, you touched so many individuals, because they had these, you know, they guaranteed through there, get contracts and others,

retirement plans for teachers and health care workers and others, so you tens of millions of americans there. the insurance, so it was, it was, it again was, you know, it's like lehman, you know, squared or whatever. >> yesterday, different topic, yesterday in sicily from the bear executives we heard nonspecific hypotheses that there was someone who is strategically in the panic. that there were actors out there who were actively trying to bring bear down to make money. you hit this crop up a lot, but you never anyone actually name names and say here's why i think was behaving strategically. i'm not going to ask you to name names, but do you think there

were participants out there who are trying to bring down bear or any of these other organizations? >> i do. i -- first of all, i don't ever, don't think this is the fundamental cause. where there's smoke, there's fire, number one. and it was about a loss of confidence. i believe in shortselling is essential for the discovery process. but i don't use the word collusive because that's got a legal connotation, but i would say that when you see serial attacks, okay, not just sort of an individual overall, but a serial attacks. and it was the easiest trade to short the stock, and then bet on a credit default swaps to widen and do that. and to see ago sort of like from

wolfpack trying to pull down the week dear. so i'm not saying there was behavior that was illegal. that was something that i wanted and i'm sure they were, the sec, to investigate. i'm sure they found something that was illegally collusive or manipulative, they would have acted. or they will act. but i do think that, like so many things, we had rules that were there to the serve us well in normal times, but when i had extraordinary times like this, we need to take some extraordinary actions with regard to shortselling. and i still think those that are seat thinking in a circuit breakers or ways of addressing, you know, shortselling during times of crisis or when a stock moves too far, our important things to do. and i do think, it sure looked

to me like some kind of coordinating action. >> thank you. >> thank you, mr. hennessey. ms. murren? >> thank you. thank you, mr. secretary, for spinning so much time talking to us about these important issues that i'd like to talk to you actually about a fundamental assumption that people seem to have, and i would like to challenge and get your response to it. people often say financial innovation is a great thing, it's important, it's necessary and it serves an important purpose. but when i think about innovation i think about cancer research, technology. and it seems to me that when you look at financial innovation over the last, let's say, decade, cdos come all of these really seem to have led to a common lack of understanding about the instruments themselves, both on the selling side of it, on the buying side of it. it could extend all the way down to mortgage products that have become increasingly complex.

and yet they don't seem to protect the people that would use these kinds of innovations to protect themselves against a natural business exposure. they do not seem to have strengthened the u.s. economy and help the real economy to default, but really what it is served to do is to enrich all of the intermediaries throughout this process. and too great a live unpredictability and a lot of volatility which leads as to where we are today. so i guess with that, do you really believe that financial innovation beyond a certain point is a positive thing? >> no. i don't. but here is a problem, and we really get to the problem we're talking about earlier, is how to deal with this. because there's no doubt in my mind that a lot of innovation has been good. i mean, the fact that we have strong markets, efficient

markets, away from, you know, the banks that i think the concept of securitization is a good one. and if used properly it's a great. i think the repo markets are, but we have had excessive innovation and complexity. and i think particularly, i think excessive complexity as a problem in a lot of places, even with tech companies bring out new products. you just learn, you can only, you're just don't have mistakes, the more complex something is. and, of course, with the kinds of complexity we have with these financial products it is a real problem. and so again, the only way i can think to practically deal with it, because i think it is very difficult to write a rule that says you need to do this and you can't do that and have the government, so i just think for

these, that regulators should be pushing towards standardization. and i think the right way to deal with it is with capital charges, and big capital charg charges. and transparency. just pushing towards fighting towards transparency disclosure and capital, and penalize complexity with capital charges. >> thank you. i'd like to follow up on that issue of transparency, in particular looking at the conversation we were just having of indirectly about hedge funds. and their behaviors within the market. and one of the salient moment for bear stearns was when their hedge fund operations declared that they had, that they were insolvent, i guess. when you think about the activities of hedge funds are running a crisis, there was a fair degree of lack of transparency in that regard. do you think these are entities that should be included in what you just described, which is the

regime that more adequate discloses, not only the positions, but also perhaps the motivations that the various players within the market? >> it's very interesting, because we focus on hedge funds currently on the president working group. and one of the first things we did was to audit the relationships between the prime brokers and the big banks, you know, and the hedge funds. and make sure that the regulated institutions had plenty of capital and plenty of margin. and as it turns out, this wasn't where the problem occurred. i think that what was good because it didn't have a problem, but the problems right under our nose as a regulated entity's. and, you know, we weren't focused on the sense and conduits, you know, we'll focus on hedge funds. but by having said that, i recommended that in a bold print we put out that hedge funds that

were big and complex enough to be, to be systemically important be chartered. okay, and have that regulation. and i am all for that. and so i do think that's important. >> thank you. one final question. one of the things that's striking to me and talking to everyone that went on to so far is there really hasn't been anyone yet who has admitted that they made mistakes in this whole thing, that they would do differently. i know that you said that from 10,000 or from 100,000 feet that everybody makes mistakes. i'm wondering if you would like to be the first to tell us what mistakes you might have made in the course of the crisis? >> i would say there's a good number of mistakes. because, you know, and i think my mistakes were primarily communications mistakes. and i hardly know where to begin on that because, you know, let's start with the tar. when we set the three-page

outline to congress, we should've had a press conference and should have said, this is not take it or leave it. this is not complete. this is the starting point for negotiations. i was never able to explain to the american people in a way in which they understood it, why these rescues were, for them and for their benefit, not for wall street. never, ever to make that connection. and the rescues today remain very, very, very unpopular. i think that the things that are generally pointed out as mistakes that we made our in most cases are situations like lehman brothers what we didn't have the authorities, okay? and, you know, again, looking at it for 1000 feet i think the

major decisions we made, and i think with 20/20 hindsight is easier to say this, working with improper tools and authorities were the right ones, okay? and i look back on those and i think they were the right ones. but along the way there were, there were plenty of mistakes made by everyone. and, you know, i sure wish i communicate better a lot of the time. >> when you look around at the other people that were involved in this, could you give us maybe the top two or three mistakes that you saw made that might have made a difference in all this? >> i think, understanding of liquidity, i just can't say that over enough. it is so easy to look at capital. capital is a number and it is, you know, whether 8% or 10%, and look at that in relation to the overall balance sheet. and so when you find a bank

taking up prime brokerage account and taking those securities and using them to finance itself overnight, but then making a 30 day or 60 day loan to the prime brokers so the prime program that takes the securities out, you can't financial so overnight but you've still got the 30 day loan to them. i wonder how people do those things. and so i think, i think those, i think liquidity and understanding liquidity. and then other than that, i really believe, despite, you know, we can just talk about all the mistakes the bankers made, all the mistakes waiting agencies made. but i think this committee, if you don't get to the root causes of these, we will be sitting down with another committee in a number of years and it will be worse because there will be those mistakes almost different market participants make the

waste will still have the root cause, which is we better change our housing policy, we better restructure and really scaled-back and shrink the mission of fannie and freddie, at a minimum. we better do some things with our tax policy and do something to encourage savings and the united states. and discouraged over borrowing. so again, that would be my 2 cents worth. >> thank you. >> mr. secretary, think. is what tactical matter. i'm sorry, two minutes, and i've a very quick close. >> i just want to follow up on some of that was very important that life chairman thomas talked about, issue of common shock and liquidity. it seems to me the significant fact is that because of the big losses on subprime and alt-a loans, as you probably know, the mortgage-backed securities market came to a halt basically

in 2007. that is, good buy or sell mortgage-backed securities, cdos and so forth. but basically mortgage-backed security. and his men, it seems to me, that financial institutions couldn't sell a substantial portion of their assets and they became largely illiquid. and exactly how to write down some of their assets because of the rules for accounting at the time. so for that reason these institutions look like they were unstable, or perhaps insulted. they were serving illiquid, and then it's very important, as you pointed out. so the regulation of banks and investment banks simply couldn't cope with that. this is the disappearance of a major asset class, just was no longer there. there was no market for it anymore. and i would like to have your reaction to that as a person whose line with market. >> there is no doubt there was real liquidity problems, huge

liquidity problems, and that makes it hard to value assets. and i know your view on mark to market accounting, and another in number of thoughtful people that blame mark to market accounting. fair value accounting. i'm not one of them. in other words, i believe the problems would have been worse without it. i believe if more financial institutions had mark-to-market accounting the excesses would have built up to the point that they built the. it would have been more apparent. and i frankly don't know how you run an institution if you don't have the discipline of having to mark these assets and put a real value on them, rather than a historical value on them. continually. so again, i'm a proponent, and i think, and i had people during the crisis a i have an idea, let's just a mark to market accounting and the problem go

away. and, of course, that really would have scared investors. investors wanted more visibility and transparency. but again, i understand your view and i spent a lot of time talking about this without the people, and there's no doubt that during the crisis mark to market accounting accentuate some of the issues. >> i shouldn't have mentioned mark to market accounting. i just want to click by that i was talking simply about the lack of liquidity that came from the fact, and so couldn't abide the assets a more. >> absolutely. >> there were no market in the assets. >> there was not a markert or at least a market they want to accept. >> mr. holt eakin? >> very quickly just want to dig down in the weeds on to failures and to get your feeling on what happened that one is the over market report market failed dramatically and we've talked about that. but something that also failed was the traditional role of the commercial banks as a conduit to the investment banks. in particular, bear stearns went

to j.p. morgan who knew them, knew their collateral, and was unable in the crisis to have that loan take place. and this is related to remarks made yesterday by the officers of bear stearns is said that one of the things that went on in the past is when things get bad, the investment banks go to the commercial banks who have the lasso and that mechanism was available to ameliorate difficulties. what went wrong in this crisis that that didn't happen? >> i think you need to expect any crisis if it is a fair enough that an institution is going to do what it takes to preserve itself and not over expose themselves to credit risk. and i think tim geithner do you will be talking to later will

probably tell you a lot more than i can about the tri- party repo market, but remember how that works. you've got a custodian banks, and then after -- there's a big time during the day when they, for almost convenience for the ones that have the collateral or during a crisis, of course they are the ones that had all of, they own the risk. that was an uncomfortable spot for them to be in and it was an uncomfortable spot for any particular institution was on the other side to being so dependent on what one or another institution. but i don't -- i can't comment beyond that just to be saying that it is very difficult at a time when everyone is worried about markets and to ask, to ask

institutions to extend our line of credit when the conference goes and a run is started. >> thank you. >> just one technical matter. are gone i reference when i began the questioning to some documents provided to us by goldman with respect to cdos that i'd like to enter two pages from goldman sachs, one from the senate subcommittee on investigations, and a page compound by our own staff from other goldman documents, just for clarity. just enclose a laser me very quickly, mr. secretary, because it's been knowing at me. when paul revere saw the lantern, one if by land, two if by sea, jumped on his horse and set the british are coming. i referred earlier to this to kind of a dilemma you may have faced. here's my question. why is it in 2007 that no one from the public and financial industry leadership stand up like power. and warned about the coming crisis?

>> in 2007 why no one -- i think a lot of people saw excesses, but remember, we have had benign markets for some time, and why is it that, you know, almost any bubble becomes obvious after the fact, and yet they all have certain things in common when you look at them. they all have, you know, they usually benign markets. there's almost always excessive risk-taking, too much debt and not a lot of transparency.

but here i think that many people knew there were excesses, and i think there was, there were very few of us, i certainly didn't, saw something at the magnitude we saw. it's pretty hard to predict a 100 year storm. >> even as late as 2007? you were -- you were worried, we were not shaking the markets do? i would say in 2000 -- late 2007, i think we knew the markets were fragile. but in late 2007, i think that i, and i've said this a number of times before, i think i was as concerned as anyone around me, and i underestimated, in late 2007 and in early 2008, i

underestimated -- i knew there was a problem. i underestimated the magnitude and the scale of what we were dealing with. it was just so big. really, almost every step of the way. now i look back as if i'd been -- i'm not sure what it would've done differently with the powers, but this was -- as i think back on today it's even hard to imagine what we're going through. it keeps me -- i don't like to think about. >> thank you. i know the vice chair would like to make a, but i'm going to let him close. i want to thank you for coming today. we probably could ask of many more hours of questions, but we're going to take 15 minutes for lunch after the vice chair makes his closing remarks. thank you, mr. secretary. >> i think some of the palm might've been that you are flying at 100,000 feet. edwards air force base was in my district. when pilots got into the exiting and for about 60,000 feet they

got after not winning. so i would suggest you about 50,000 you could got a little better picture of what was going on. >> good point spectacularly much for coming. we really, really appreciate the ability to cross sections with one person and trying to get a better understanding of what happened. both government and the private sector. thank you. >> thank you. we will take a 15 minute recess, commission members. so we have to move fast. [inaudible conversations] [inaudible conversations] >> the government did not move quickly and forcefully enough to contain the 2000 a financial collapse.

he also cited the lack of authority for regulators as a fundamental cause of the crisis. >> welcome, mr. secretary. thank you for joining us today. and we appreciate you joining us midway into days of hearings about the shadow banking system. let us start as we do with all witnesses, and i'm going to ask if you would stand to be sworn for the oath. if you would please stand and raise your right hand. do you solemnly swear or affirm under penalty of perjury that the testimony you're about to provide the commission will be the truth, the whole truth and nothing but the truth, to the best of your knowledge? >> i do. >> good. i know you've been to the hill a few times and, you know, the microphones and lightning, but in this instance we appreciate having received your written testimony, and we would like to afford you the opportunity, and we would like the benefit of an oral presentation by you this

morning at one minute video light will go on, and to go and when time is up, the red light, would like to ask you to give us a presentation of up to 10 minutes, and they will move to commission a question. thank you so much. >> thank you, mr. chairman. mr. vice chairman and members of the commission thanks for the chance to have me up here today. you're engaged in a very important job of sifting through the wreckage of this crisis so we can better understand what caused it and how to prevent a recurrence. i welcome the chance to be part of that effort. the senate took a very important step yesterday in passing with overwhelming bipartisan support reforms to prevent future financial bailouts. this is a necessary but not sufficient step to make our financial system more stable. as the debate now she is to the of consumer protection oversight derivatives market and other issues, the votes ahead are very important. within the context of this hearing a want to emphasize that

a central tragic lesson of this crisis. we can agree a more stable financial system by carving out certain types of financial institutions or activities from these reforms. if we do, we'll only make the system less stable. if we do, we will only allow, once again, firms in the business of providing credit to escape the necessary protections we need for consumers and businesses against predation, abuse and excessive risk. we have to create a strong set of rules that no institution can't escape. in the aftermath of the great depression and the united states put in place brought protections over the financial system that laid the foundation for a more stable banking industry for several decades. but over time, this financial system outgrew those protections. overtime the constraints imposed by banking regulations encouraged activity to move away from the banking sector in search of weaker regulation and the promise of higher returns.

and over time, a large parallel banking system took root outside of the regular framework that was established for banks. in this parallel system, a diverse group of financial institutions were allowed to engage in the business of banking, providing financial services to individuals and companies, without being regulated as banks. at its the this financial system finance about $8 trillion in assets becoming almost as large as the traditional banking system. and much of that system used substantial leverage with relatively thin cushions against the possibility of loss. this parallel financial system operate with much weaker protections proved exceptionally vulnerable to a loss of confidence as the crisis intensified, investors began to pull back and demand more collateral, forcing institutions in this parallel to sell assets to meet those demands for cash, pushing the price of financial

assets down, leading to a vicious cycle of panic. that run, it was a classic run on our financial system, brought us to the brink of collapse. and our economy faces the risk, a credible risk of entering a second great depression. now, many people call this parable says in a shadow banking system, but it was not hidden away. and operate in broad daylight, financed by institutional investors with no history, a system with no history or reasonable expectation of government support in the crisis. instead in many ways this parallel system was a pure failure of market discipline. so why did the protections put in place following the great depression not protect us against the growth of risk in this parallel system? first what helped make the growth in the system possible was we entered a long period of growth of economic and financial stability during which borrowers and investors took on more and more risk. trillions of dollars of

financial decisions were made in the u.s. and around the world on the expectation that house prices would never fall, that future recessions would be short and shallow, that system of financial crises in developed markets were a thing of the past, and that the world economy would continue to grow unabated. those judgments proved tragically optimistic. and ultimately the protections put in place around the traditional banking system did not provide sufficient shock absorbers to withstand a deep recession and a substantial fall in real estate values. but part of the cause lies in our balkanized fragmented regulatory system. design in a different era that lagged far behind changes in the financial markets. the government system of financial oversight was simply not designed to constrain risk-taking in his parallel financial system. credentialed regulations were limited to banks. the federal reserve had no legal authority to set and enforce capital requirements on major

institutions that operated essentially banking businesses outside of bank holding companies. the fed also had no legal authority over investment banks, diversify institutions like aig or hundreds of non-bank finance companies. the as easy as had no legal authority to enforce capital requirements on a consolidated basis across the full range of activities of investment banks. and more broadly, and this is critical, no regulated or supervisor had the core mission of looking across the financial system and taking action to prevent the diversion of activity away from the protections regulations were designed to provide. the result was a system that applied safety and soundness regulation, only to banks were unable to protect the safety and stability of the broader financial system. now addressing these does is an essential part of the comprehensive reforms now being considered by congress. these reforms would require the

enforcement of tough constraints on leverage and risk-taking across the major institutions that played a critical part in causing this crisis. financial institutions will know about ruby able to escape these limits. large and complex global financial institutions will be forced to operate with higher capital and more stable funding reflecting the greater risk that they posed to the economy as a whole. these reforms will bring derivatives market out of the dark. they will provide transparency and disclosure and comprehensive oversight over all derivatives markets and i'll produce a glance in those markets. and we will bring standardized derivatives into the center clean houses and training facilities, reducing the risk that the derivatives market could again threatened the system. these reforms will provide more stability in funding markets am a to make them less gullible to fun and make report our kids more resilient. these affordable health i can and requirements, reducing

opportunities for evasion and getting investors better tools for assessing risk. they will address conflict and rating agencies and reduce the vulnerability of the system to future mistakes in credit rating, in credit ratings and they will provide a carefully designed type of bankruptcy process for large financial institutions so that we can break them up with no risk of loss to the taxpayer and less risk of damage to the economy as a whole. now i know when people look back at this crisis, when they look at the excessive risk that were taken by large institutions, there is a natural inclination to want to move those risky activities elsewhere. to create stability some argue, we should simply separate banks from risk. but in important ways of driving risk-taking into areas with less regulation, that's exactly what caused this crisis. the fundamental lesson of the parallel financial system is that we cannot make the economy safe like taking functions that are central to the business of banking, functions that are

necessary to help raise capital for businesses, help businesses had risk and move them outside of the banks, outside the reach of strong regulation. mr. chairman, let me close by thanking the commission for your important work and drawing public attention to what i think is one of the key factors in this crisis, and one of the most important objectives of financial reform. thank you very much. >> thank you, secretary geithner. we will now begin the questioning. let me start with just a few questions, and as i said to you, former secretary paulson today, at least in my instance, while there has been a lot of fascination jenin with the bailout and have the financial system stabilize, i think the questions i want to focus on today is how do we come to the point where it seems like the only two options were either allow collapse of the financial system or to commit very, very substantial trillions of dollars of taxpayer money to save it. and i do want to talk to you in your role as president of the federal reserve board of new

york, recognizing that you had direct supervisorial responsibility over a bank holding, but beyond that in many respects you were the eyes and tears of the federal reserve on wall street. you are in constant contact with primary just a keyboard that didn't have linkages to the financial community and that you have played a special role in monitoring system at risk and effective undertaken some efforts with respect to cleaning up the backlog in trade conversation in the otc derivatives market. so one of the things i noted in preparing over the last month for our look at the shadow banking system is that in the period of 2004-2005-2006, you actually made a number of speeches about risks that were extant on derivatives and contagion shadow banking, i will notice you make two different speeches on the same day, may 19. it must've been a busy day talking about risk, about concentration risk posed by cdos and credited derivatives

and about leverage in the system. and it seems to me you were in a place where you had extraordinary -- you an extra access to information, not just market they could data, but info on the repo market. so this is a pretty fundamental question that i have, as we look forward to trying to assess the impact. what didn't you know? and, you know, this doesn't need to be ad hominem, but what did you and other key policy makers not know and not have before you do understand the magnitude of what might hit us the? [inaudible] >> microphones because let me start by saying i had spent the previous 15 years in public service in dealing with a series of incredibly damaging emerging-market financial crises, and the financial crisis in japan. so i went to the new york fed, i had been blessed or scarred by the experience of watching

countries manage and mismanaged the debug of risk and systems. and how to clean up and contain the damage in the aftermath. and when it went to the new york fed, early in the process, beginning in 2004, we began a series of very important initiatives to try to contain, die back, reduce the growing risk we saw in the system, and improve the odds that if conditions change we face a shock him recession that the system would be stronger and a stronger position to withstand the shock. let me briefly mention of the three most important things we did in that context. the first was to bring a series of experts in market and risk management led by jerry to do a comprehensive examination of the state of risk management practice in managing exactly the things that been the subject of this crisis, risk and derivatives, exposure to hedge funds, complex financial products and how liquidity is manage. and using a model of a process

pretty much what you are doing which is a sort of a postmortem process after the failure of long-term capital management. we brought that group together at my initiative, and asked them to do a comprehensive valuation and to provide recommendations. and we took those recommendations and we asked the major firms in the world to undertake an assessment of how they were doing against those recommendations. second very important thing we did is to bring financial supervisors of all the major global firms, the sec, the british fsa, their counterparts in france and germany and switzerland in particular, together, to conduct a series what we call horizontal reviews, to try to assess limitations and risk management and try to encourage people to fix those problems in risk management early. and those were targeted on very much like what a thing of begin with, whisk and derivatives in lending to hedge funds, in

management of liquidity, and conducting stress testing. and those efforts were designed to assess what was best practice, whether or gas, and tried to bring all those together around the world to encourage, beginning at that point in greater of 2005, 2006, 2007 to try to get the firms to dial back the risk of taking that and finally to mention the one thing you mentioned, we begin a single effort to start to clean up the derivatives market, force more standardization, automation, those were fundamental changes that have paved the way now to what we hope to achieve in these forms to bring this out of the dark on to clean house as we can manage the risk better. now, as you know, those efforts were in the end fundamentally inadequate. they did not do enough soon enough. they did not coming up with force and try to pick, get a reasoned that would like to discuss in part because we are are operating within a set of

existing capital requirements but did not adequately capture the risk that the system had to the possibly of a deep recession. so i think to answer question about what do we not know, what we did not know was the degree to which the system was relied on ratings. ratings that did not capture what the fall in house raids would you across the system. we did not know the extent to which this parallel financial system had dealt up leverage and exposure when it came crashing down would threaten the stability of the rest of the system. we did not know how vulnerable the money markets were, how unstable the basic funding structure was, and i could go on. >> so overrun by events, inadequate political infrastructure to make the changes necessary, under

calibrating the it extraordinary -- i mean, the size of the ways? >> absolutely i think that, you, since were coming out of a period where, as i said in my remarks, we have is to fund the characteristics of the system. one is laundry that seems relatively calm. so even with all the financial shocks from ltc m. sense, the system had gotten through them without catastrophic damage. that created a sense of, false sense of complacency. about how resilient the system was. you had this enormous growth in leverage and run risk, liquidity risk and a large parallel financial system, those were related. and it was, people could not assess because they had no experience what a shock this large would do what would happen when you had a run on that system. but you're exactly right that the oversight system as i said in my remarks did not give, did

not establish a set of classic constraints on leverage that all financial systems require on what came to be a large part of the american financial system. and people tried with the duct tape and string, like the f. tc did in their regime, to take the authority to make the best of and try to get to a point where they were trying to put in place better risk and straight but that effort came too late that it was too weak and was not grounded in law and it was fundamentally inadequate. >> so let me ask you this, and that is, given your spoken on this and you actually identified what you saw were levels of risk and some might say levels of irresponsibility. so you saw those two trains of risk and a responsibility, you know, going towards each other, towards collision. do you believe that you are others in leadership sounded the alarm early enough and loud enough to? >> oh, mr. chairman, i see this always. and josé again, absolutely we

could have done more. absolutely. and people ask is this inevitable. where we really fundamentally powerful to prevent this. i do not believe that. i do not believe we were powerless. i'm, with the benefit of hindsight, i would say that if the government of the united states had moved more quickly to put in place better design constraint and risk-taking that captures where there is risk in the system, then this would've been less severe. and if the government had moved more quickly to contain the damage i think the crisis would've been less severe as well. >> let me talk about that. in the last two days i've cited a number of market worries that i won't repeat today from the dramatic expansion of mortgage debt in this country to the explosion of subprime lending, the efforts of states that were preempted by the always easy to fight their and deceptive lending, and just look him as a person arrested investment just on the ground, sea 12, 15%

annual increase in home prices. a lot of websites out there. simply one of the things you've identified is lack of structural ability to move on these problems. but do you also think, i want to ask is that i thought about as we've gone through a set of theories, do you also think that the system doesn't have enough iconoclast in it, that the decision-making process is unduly controlled essentially by people who are of the financial system and close to it and unable to step away from it in a way you need for true risk assessment? and i think is very ancient of this all the way from people may be on wall street who can see what's happening in bakersfield and sacramento on the ground to families, to people just don't have enough distance to make a critical analysis that you would want and expect. >> i think it's a very good question. and i try always, i post on this in my jobs and i definitely guided in the new york fed to make sure that we brought

together people and advisory committees we established that represent a great diversity of using these things from the academic community, from the broader business community. and we had, and we put in place a series of advisory committees that try to capture that diversity of interest and perspectives. because i think it's so important. and i think that it's very important for policymakers to make sure that they force themselves to be exposed to a wide diversity of views. fundamentally i don't think that was the public i think the problem was that you did not have centralized accountability batched with authority anywhere in the government to look across the system, try to get by where we have a problem, and have the capacity to go in and act preemptively to try to put in place measures that might mitigate those risks. our system was fundamentally

silent and vulcanized pic you have people calling over parts of the system. and parts of it that are very risky with nobody looking at it, nobody responsible, nobody in charge. and that was a tragic failure for the country as a whole. it was an avoidable failure, i believe. it easy to say that in hindsight, but it was true as you said at the time, that anybody who's operating in that world could see that you were seeing classic signs of an active prize, but above all, that could prove very catastrophic. and the way i used to say, mr. chairman, was that we had this huge wave of changes in finance, capacity to hedge, other things that help disperse risk that look like they produce a more stable system. they look like they've reduced the problem of a major financial crisis, but they also, and this was a center to what happened, they also meant that if we're to face a major financial crisis, it could be much more damaging

and much harder to manage because those likely to take place then start as it did in this parallel system where there was much more leverage and liquidity risk, driven as market complicated dramatically, and you did not have in place tools there to try to contain the damage are here. and that's really the story of the crisis. >> many others quote unquote signals i was talking or just not market it but look at leverage rations, liquidity risk in those firms that were evident. now, two very quick specific questions, because i want to move onto other commissioners about point in time. one of the things i think were trying to do is try to measure what people saw at different points. so very quickly, and i raised this with secretary paulson on march 16. there was some engagement as you know, between the secretary and fannie, freddie, ofheo, i think fairly to keep him in the marketplace as a private market

as totally withdrawn. the only reason i mentioned it is there's a reference, and i don't expect you to know this e-mail, but i'm looking for the bigger picture here, bob steele who was involved in these negotiations a century to keep freddie indicate that i think that the secretary paulson would phrase it. says i was leaned on very hard by bill dudley, to guarantee i do not like that. not have been part of my conversation but i do that that as a significant move way above my pay grade to double the size of u.s. debt. i think what i'm trying to in march that we can, were you worried about what something of a magnitude that ultimately happen in september happening in march speak was absolutely. i think we all were. i'm sure secretary paulson was. at that time, as bear stearns fell off the cliff, we were deeply worried about what that we do to the broader stability of the financial system, and we knew at that point that fannie and freddie, like many other

parts of the financial system, based very substantial losses on there, tickling retain their portfolio. and we work very hard to encourage the relevant authorities to encourage those firms to go out and raise a lot of capital. as we were doing in other parts of the system, it seemed that straightforward sensible thing. and that was important because, as we saw fundamentally, short capital going to a storm like this is catastrophic and they were short capital. and the problem with these crisis is people tend to wait. if they wait too long it looks week. the price seems expensive. they are shareholders, so basic classic pattern that was magnified dramatically on untamable corporate structure than internet. and we were as many people did work very hard to encourage people to encourage them to

raise capital specters yes, sir. , were you for harding to guarantee at that point? >> i often use the argument that you need to make it more credible to the world that they'll have the financial resources to meet their commitments. you can do that lots of different ways. one is by making sure they raise more capital. the other is to strengthen what was an implicit commitment at that point to the government to stand behind them. and ultimately of course that was both were necessary, and i was fully supportive of the judgment of the need to take that step. >> final question for you, and this again goes to depth. later today will have a panel of ge capital, pimco, state street participants, and shadow banking system but also the repo market. now it appears in documents that we have that ge was able to keep it's going with its issuance of commercial paper throughout this crisis, even though of course the general spread over libor increase for all participants. but at some level a disruption

in the credit capacity of ge speaks and about the depth of what we have seen. so i september 29 and 30th, you had six telephone conversations with mister allen just within the context that you probably didn't get any sleep these days, but the 27, 28 was the day that goldman and morgan stanley became bank holding companies that we can. on monday the 29th, that's the day the dow dropped seven of choice of an points. was he speaking to you about concerns about disruption and their ability to issue commercial paper? >> you have seen me describe. after that famous mutual fund money market fund bro about in the wake of limits by the community brought this on a money market fund or the risk of that. and that a broad-based run on commercial paper market. and so you face the prospect of some of the largest companies in the world in the united states

losing the capacity to fund access those commercial paper market. so we were involved at that time in deciding what ultimately came the commercial paper which is a backstop for the commercial paper markets, to complement the temporary guarantee for money market funds. so i was involved in a whole range of efforts to help design that facility. and i was exposed, had conversations with people across the financial markets would depend on commercial paper markets who were trying to make sure we were a wearable is happening and how perilous it was. you did need a focal to tell you that. all you do is look at the price of that stuff and how hard it was. it was a development that was self evident and obvious to all of us at the time. >> was he not answer specifically about that i talk to you about that? >> i have gone back and try to refresh my memory. but what i am sure they were to

make sure we were all aware of how perilous they thought, even a company that strong, how perilous those markets were at that time. but as i said, that was self evident. it was obvious, it's because and you could see him looking in your screen. >> i don't expect you to carry your daily planner with you, but if you check on that because i think we're trying to get a measure of the intensity and track concerns by different market participants. september 29 and 30th, 6 conversation. thank you. that's all my questions at this point. mr. vice chairman? >> thing, mr. chairman. mr. secretary, i do really appreciate one, you willingness to come before us but to, the manager does the. i'm very sensitive to the structure and protocol having been around a long time. but our ability to talk to secretary paulson and the value of his having been on wall

street in the private sector, and then become secretary of treasury, followed by your presence which had you at the federal reserve just prior to coming to the secretary of the treasury. inode also both of you went to dartmouth. i don't know what that means with always harbored guard -- harvard guys around, but i appreciate that. it gives us an opportunity to ask questions which bridge that 2002-2322009 window in a way that i don't think we've ever been able to do that. so what i ask you this question, especially based upon your comments about what you did at the new york fed in bringing together experts for the state of risk management and then running a global confab with the same subject matters. and most people can't see this,

and this is the only one i have available right now, but basically it's the assets of selected financial sectors. and it shows the blue obviously aren't a deposit of the old fashioned banks. and then this is the shadow banking above it. and it is a federal reserve board of funds slow release. so it was around and people were a were of that. and when you run the numbers, and this is all 2008, you have this commercial bank that about 7.3 trillion, the so-called shadow bank somewhere between 7.1, 7.3. so a 50/50 split right there. when you look at the residential mortgage-backed securities, 2008, about 6.7 trillion. and then you've got over you've got over-the-counter derivatives same timeframe about 2008 of gross market guy you

20 trillion, lee, 684 trillion. and we all know about the runs on the day in the liquidity problem. didn't anybody talk about the topic of the aspects that somehow the woodwork to keep conventional banks, and because of those restraints they developed other approaches, but clearly it was the same thing almost all over again except much more difficult to precede because of the mightiness and the ratings and the rest, that never came up as the subject matter either with experts sat around and talked about we're kind of concern about the weight shift into an area that could have liquidity problems that could be subjected to a run like we had in the '30s, and the global folk didn't talk about it either?

i just don't get it and they need to understand. now, what will we have heard from a lot of the people, players in the market was that nobody had a model that in the majority sense, people have said that never thought housing prices were going to go down, i think the correct answer is no doubt they're going to go down that far. and even given that, you have areas in the government that talk about disasters that no one likes to think about because somebody has got to think about disasters that no one thinks about. i would think that the new york fed might be involved in that. looking at those markets, the monitoring job. may not have a direct power position, but you are the best person, in my opinion, to ask him that '03 to a late period, what happens to? let me start by saying financial crises are caught by a blaze of people to think about the and

thinkable. and to say that seems kind of unlikely so when i'm going to worry about the. and that is the fundamental mistake that underpins most financial crises. and our system was, that mistake was pervasive across the system. but -- >> total? >> complete. whichever phrase you want to use. >> even the watchers watching, apparently thought the same thing. >> i wouldn't say that. initiatives that i described that we as the new york fed were engaging, we didn't call it, we didn't really talk as back in 2004, 2005 the shadow banking system. but we were deeply focus on exactly this risk. you know, when i first came into the job i said let's look at the system today. it's true, we have these major banks, but what about the investment banks, who is watching them? what about aig?