finance companies that have built up, not as banks and by doing basic banking? so that basic concern about the vulnerability of the financial system, the systemic risk in those institutions, was central to the efforts that i described that we initiated. now, you're right to say those are outside of our -- anyway, outside of our formal legal authority and outside our mandate in some sense, but we knew they made the core of the system will we were responsible for more risky and we knew we were in the cost position where in effect we were the only fire station in town you could turn to when things fell apart for liquidity. but we had no capacity to constrain risks outside that regulated core. but when none of us anticipated, i think, was, actually did not, did not understand fully was what produced that parallel, how global it was the runs, how you

could've had a system where these before, they're operating in public markets issuing publicly berated debt under the disclosure laws of the united states funded by institutional investors. that market discipline and all the checks and balances we rely on the area would have proved so inadequate to contain leverage are there. . .

partly because we have this long history about stability so it wasn't in the memory. that left the whole system more vulnerable to the collapse. >> given those areas you did have responsibility for the old-fashioned commercial banks, bait of america, citibank, the one thing that strikes most people when they talk about that they're really upset about what happened in the residential mortgage area because it to a fax them directly. what scares them more was the fact that they run no fire walls anywhere and that what started in an area that you could say was a regulated by definition a shadow banking and the rest of it but it also affected the

structure that was designed after the initial failure not to fail again. >> exactly. >> y? >> i got, right. >> how come we didn't get right? >> we came in another tragic failure of the crisis, we design a system with deposit insurance run banks, access to letter of last resort, a basic protection to prevent fire caused by the failure of a single bank to jeopardize the stability of banks. that system long tested over time comes with moral hazard risk. not perfect. the ethanol crisis being a good example but this had no protections, no fire breaks or firewalls. the executive branch of the united states, largest financial system and the planet, came into the crisis with the president having only emergency authority

limited to the active at closing banks which are largely panic increasing, not panic containing. so you are right, we didn't have the tools to prevent the fire from breaking and affecting the system and these were proposals that congress and in the subdivisions of rehearing are designed to provide those tools and make sure that large places like aig, you could put them out of their misery safely and prevent the fire from jumping the firebreak. >> one last question which again is in terms of how many people have used it as an answer, in terms of the assets they held a potential liquidity especially in the shadow banking area. they were triple-a-rated. at what point when you look at the kind of residential mortgage

product that was funneled, everybody knew people that you never thought could get in the house had gone in a how so something happen to the old 20% down and all the other argument and give some comfort. why would anyone think a package of of a the 08 stuff would have the same aaa rating as a package of the 20011990 rating? was it because they wanted to believe it did? how could anybody think that especially this group of experts and others? >> when things are going well and people make money they tend to think they're smart, not lucky end is just validating wisdom. >> i have to tell you that when things are going well and people are making money no one thinks about making the amount of money that was being made. >> i completely agree and it reinforced again the basic collective sentiment that we had

somehow produced its prickly stable system and into shock and things could go bad and you're right in many ways what happened to compensation and other incentive structures with that illusion. >> thank you. somewhere i remember reading about pride going before all. thank you very much mr. secretary. >> mrs. bourne. >> thank you very much and thank you mr. secretary for being willing to join us and help us in our investigation. your testimony i think demonstrates how and there were regulatory weaknesses, regulatory gaps that tied the hands of the regulators and financial supervisors during the crisis. i take it you feel that lack of

regulatory powers in some areas was an important aspect of the problem. >> absolutely. some of my written testimony the crisis is literally the example of authority not used early enough and forcefully enough but in the subject of the hearing and this is true foreshadow banking and derivatives markets generally i would say the oversight failure was a gap. the vast gulf and accountability and legal authority that prevented people even have perfect foresight from acting preemptively to contain the risks. >> let me ask you briefly first about the over-the-counter derivatives market an enormous unregulated market as of the time of the crisis were there were tens of thousands of contracts out there creating counterparties credit risk and

virtually no transparency. you said in your testimony these markets have proved to be a major force of uncertainty and risk during periods of financial disruption. do you feel that the lack of regulation, lack of transparency , the enormous size of the market played a role in exacerbating the financial crisis? >> i do. i would emphasize to things -- the hearst and this is fundamental, you have a very large institutions writing hundreds of billions of commitments in derivatives without capital. >> him up and this is true for aig any industry of companies and many other and financial institutions. fundamentally what happened was when i had to meet the commitments they didn't have resources to do it and that

brought them to the edge of a collapse. the other problem was in this world of millions of a bilateral contracts it was like spaghetti, cooked spaghetti together and when the crisis hit and had to untangle those and figure out what was my exposure to default risk across the system and, it was very hard for people to know. they reacted as people do in facing fierce and decided i'm going to a strong pull back from rest where ever i can. that in a crisis in the panic tends to amplify the crisis of the inability that those tens of thousands of millions of contracts provided for people to assess quickly what exposure was to risk of default by a major institution was substantial factor exacerbating the panic and in the crisis harder to manage and a pet -- the paradoxes those were designed to help people head of risk.

that gave people the capacity to hedge risk in gave them much more risk of exposure to packs when things fell apart. >> so not only -- i believe they are very useful instruments and essential to managing rest but they also magnify risk greatly in this disruption. >> i agree with pat. >> is that why the the administration is imposing regulatory oversight over the market? >> absolutely. these markets in grew up dramatically in the decade. you know this well. the risks were apparent to many earlier but grew dramatically over that time and it was fundamentally -- people were doing this thing by spreadsheet and fax. people didn't have electronically a sensible records of their exposure was.

there were huge backlogs not captured by risk management system so when i came to the new york fed and we tried to clean that up and produce it, it put us in a position where we couldn't propose reforms that would bring the standardize market onto clearinghouses and make sure that the cleared stuff would be graded on an trading platforms. the reforms also -- and give people the authority to make sure that major institutions writing these commitments are forced against it and margins are conservative and the sec has the tools to better police fraud and manipulation to deter fraud and manipulation earlier. those of the reforms working to the congress and there are a very strong package of reforms. >> you've essentially indicated that the lack of regulation or the lower level of regulation in

shadow banking made the shadow banking sector more vulnerable to the financial problems that we experienced in 2007 and 2008. i wanted to ask about kind of a the upside and of the quote which is whether the growth and competition of the shadow banking system impacted and acetylene war at all on banking regulation because of this was a less regulated system. i think the banks did suffer competitively with various acts backs of the shadow banking system. they lost deposits to the money-market fund.

the lost potential commercial loans to commercial paper and repo. in -- i can imagine that commercial banks having felt the this competitive pressure would have wanted to be able to engage in broader activities and with less constraints from banking regulators. we have been told during our investigations that by the time the glass stiegel was altered by this and there was not a great deal of separation in the pact between the activities commercial banks could engaged in an investment bank's. so i wanted to ask you whether

as a banking regulator you saw pressures to soften constraints on the commercial banking sector because of the growth of shadegg banking. >> i did not feel those constraints, but what you describe was central to everything happening in you gave examples but let me provide a few more. we created a system that allowed institutions to enact to use their regulator. the best examples of that were banks and chose to become the refs pick countrywide being the best example. a lot of people thought regulator competition was a virtue and produce better regulation but if you allow people to move risk to where they are operating leverage to the system and that is a catastrophic choice so you saw it donnellan across banking regulators and, in fact,

countrywide is an example where there were labeled -- able to evade the tougher restrictions of a fed regime and to softer regimes to restrictions of of t.s. regime. that's a good example. overwhelmingly you saw people pressured banks and every pressure default was brought down. what happened in mortgage underwriting is an example. i think it's true in the early part of that decade really probably up to 2004 most mortgages were still underwritten by banks and thrifts. but over time, of course, most mortgages migrated to other parts of the system outside the bank system and for the same basic reason. so the mistake is to permit that on a scale that can threaten the system and with the reforms do which is important is recognize the basic principle that if you are doing banking we regulate u.s. banks so we can better protect the system.

it doesn't mean everybody has to be the same in financial structure but the leverage requirements they operate with on funding should be economically similar so we produce level of stability that's more tolerable for the country. >> when you were at the federal reserve bank of new york, you and your staff had of the role of overseeing some of the biggest bank will companies in the world. and those are also institutions that suffered adversely during the financial crisis that we have experienced. i wonder if you would comment on the ability of supervisors to effectively oversee institutions that are that large and complex and whether you felt that you

and your staff really have the capabilities to do the kind of job you would have wanted to do. >> i believe we did in. and i think that we had examples where it was well and that some of fundamentally inadequate. it was made more difficult by operating in a system where the checks and balances we rely on which our internal controls good audit controls and the firms and risk-management systems looking across the entity and capture those risks and bring together, those things are fundamentally weak and inadequate and we were somewhat vulnerable that under functional supervisors we relied to supervise for safety and soundness in the underlying bank or in the case of the sec the

broker-dealer and these firms operated across the world able to push brisk and to other jurisdictions like in many cases in the uk making harder to capture and we were vulnerable to that system as a whole. of course, as we have learned the capital requirements and the accounting requirements and disclosure requirements did not do a good enough job of giving us a good picture of what capital was relative to the desk. and that is why the big lesson i take from this among the many lessons is to make sure that we force the system to run with more conservative leverage because i don't believe you can design a system that depends on community of regulators always being a wise and tough and smart and have foresight to come in

preemptively preempt pockets of bubbles in leveraging. people will do their best. but they will be imperfect and the best defense of fun -- against the potential problem is force the system to run with shock absorbers with cash available to losses across the system and that's the lesson we're trying to bring about with these reforms on not just institutions have less leverage with the markets like repo war secured funding markets its cetera derivatives markets come together also run with much more conservative cushions against the uncertain and the likelihood of possibility that the next shock could be beyond our imagination and experience and be damaging. that's the central lesson i tried to take from the crisis. >> what about the need for a systemic view which is very hard

for any of our existing regulators to have because of their silos jurisdiction? >> i think that's very important, there are two ways to do it conceptually. one is to take the regulatory responsibility, put them in one place like maybe in britain in some ways and have a single point of accountability for measuring and managing the basic risks. i don't think that's system works and don't think it's feasible prevent we're proposing a different model which is to create a council which would bring those entities together with their functional specialization for market integrity or resolution like the fdic for safety and soundness of the payments system etc. and put in a place where they have to sit around a table with secretary of the treasury who because with the custodians of the taxpayers' money and responsible for the financial security of the country have to

be in a position to be accountable to the congress for making sure that complement of regulators is running the system sufficiently conservatively without big gaps and not lagging way behind the markets. that's not going to force a perfect foresight but offers a better chance of forcing some need to be accountable looking across the system and making sure we don't create again huge gaps for evasion and arbitraged where the rules flag way behind risk in the way they did in this case. >> two minutes. >> let me ask you one last thing. there became prevalent in you, and economists, a view among some regulators during the last 10 or 20 years that financial markets were essentially

self-regulatory. and geren and supervision, government regulation of markets was either unnecessary or actually counterproductive. do you think that played a role in the regulatory the weaknesses and the regulatory gaps that you have described in your testimony? >> it's hard to know. i find it hard to imagine that anybody who lives in the financial systems believes fundamentally they are self regulating because of the history of financial systems is a history of recurring crises, some devastating like this one and some more mild but zero is consequential. we learned those lessons painfully of course, but i think the lesson of behavior and experience and history is that if you allow institutions to take deposits that can be

withdrawn on demand and make loans, that can't be called on demand, then you create a risk of runs and if you allow them to run with the leverage that consequential to the economy as a whole so we build up a set of protections not just to counteract the moral hazard caused by a perception that these are important and consequential but to ensure he protected economy from things getting out of whack. our system like any country has among its strengths the lot of people with diverse perspectives making the decisions in congress and regulatory community. the real problem was that that long stability time allowed to call the is to prevail. some could say that proves that all these innovations reduce risk. that they prove that the markets work well, that capital requirements are strong and that long time when the risk seemed two permanently reduced allow

people to not confront i think what we're fundamentally are vulnerable in so that's the way i would try to answer that question. >> thank you. >> thank you mr. chairman and mr. secretary for coming today. one of the things delightful about your testimony is you are clear about what you think and don't think went on and has not been a typical performance at the table so thank you. then we ask you a few questions about that. one thing you said it is a root cause of the crisis is an even regulation or absence of regulation. yesterday we learned under the clc program the sec felt all of the five major investment banks have adequate capital and that the standards, have the 10% capital the fed would require an more than adequate liquidity if they'd gone above the standards

the fed imposed on bank company's. what difference is having a been a legal requirement make given there were in compliance with the standards? >> i'm going to answer that fearfully because i wasn't the supervisor. >> i know. >> but it's fair to say is necessary to have legal regulatory authority and since there in compliance with the regulations what this making illegal do? >> it would be hard to justify judgment those were operating with the level of leverage and insufficiently conservative funding structure that made them equivalent certainly three of them equivalent in terms of stability to those firms operating and that the constraints of a leverage ratio and a broader bank supervisory regime. i would not agree with that judgment and i am limited by the fact i don't know what happened after the storm enveloped any of them and have no direct knowledge before that but it's

fair to say look that inappropriate economic way they were allowed to run with more leverage and much more exposure to run a risk than was true for a classic bank subject to leverage ratio and other requirements that came. >> that leads to my second question which is the assertion that this was a more fragile structure. in the aftermath and appears regulated banks and commercial banks that the shadow fell the comparable rate. >> we know the banking systems are fundamentally fragile and most are class of the failures of traditional banking. banks lending too much or too long without the compensated risk is cetera and this crisis shows both examples. the budgeted begins and was much more severe in my view in this banking system and i think the

crisis would have been much easier to manage if it was a classic painting crisis which are slower moving by design because liquidity risk is mark contained but i think you're right to sit on both the size of traditional banking and in parts of the shadows system use of people taking too much risks against the possibility they thought of a deep recession coming deep fall in real-estate values. i think you're right and as i said in my remarks i believe that the leverage constrains in capital requirements put in place in traditional banking system or a conservative enough and they weren't in two respects -- they didn't give enough weight to possibility of have a huge shock like this and also didn't have the exposure that banks had to the pressures i would come when that banking system didn't collapse the partially collapsed. those were a failure in design

of capital requirements around traditional banks as well. >> point of clarification, which you agreed you don't want to call it -- there's a set of activities located in traditional banking and seen by the regulators that were simply the activities same as in the shadow banking system. the hedge funds. >> i think that's fair to say. if you want to try to say what's the one cause that was common -- >> i would love to hear that because i haven't disagreed so far, what do you believe started the crisis? which causes of the most important? >> i was going to say that if you look at a single lavish that underpinned the risk management tel years and the ratings failures etc. was the failure to anticipate the possibility of the housing prices falling as much as they did it and what of attacks on stability as a whole. that failure is the same bill

year that caused millions of families to borrow more than the value of their home and likely worse as people lend more against value of their homes and probably prudent and general. that would be one. but was not a cause of the crisis?ç >> yes. >> people have put forward in, do think they should be crossed off our list? >> why don't you give your candidate and i will respond. i will give global capital flows. i believe a long time of very low real interest rates around the world the obsolete and should it to the crisis and created enormous forceç of mony looking for return i would say was a factor. this is a deeper conversation, of course but there are people who believe at the root of everything was unifying moral hazard risk which as i said is more complicated. i don't believe the existence of the fire station causes

financial crises so i wouldn't put that on the list but you probably should test me on the others. .. but it's not a council with a full mandate won't necessarily make sure people use that without effect or do you think it's important different in the

the way forms are designed now, there really is the next with that mandate with an ability to in effect deter weakening of let's say credential safety requirements and to recommend they be higher. and the existing much more formal structure that is the president burkert doesn't, that mandate without response ability, so i think that would help. it again, and from what i said i don't think too many of these prevent financial crisis. i don't think committees solve financial crises. it on the other hand, you do need to invest people with the direct responsibility. you want people to wake up every day with a sense of obligation, not just to look across the system where risk fire, but given some authority to act in that case. and we did not establish in the executive reach of the united states that set of -- that obligation or that capacity for loveridge. >> i want to go back now to your time as president of the new

york fed entering that. the board of governors came to the conclusion of the risks in subprime housing could be contained and indeed made a statement. did you agree with that? >> i never made that statement. i was not part of making it. >> did you agree with it? >> i would not have said it that way. i believe i try to say that i think we face growing risks across this financial system of exposure to a very dramatic crisis. and part of it of course was happening in real estate markets. it was not principally because it was happening in subprime. it was a much phenomenon but produced this mix of leverage across the system. so i tried to cast it when i talked about it as facing significant risk, but risk from a much broader and i think more dangerous constellation of

forces than simply what was happening in subprime. >> and what would be on that list is not constellation? >> again, you had people taking huge leverage brats on the possibility in a world that is not house price falling sharply or growth falling off the cliff. that was the unifying mistake that so many people of risk management and masters make. >> were you surprised by the concentration of mortgage exposures on the balance sheet of, for example, the regulated banks? >> no. i think that coming in now, thanks for many. banks always hold exposure to real estate risk is missing acrostic injury. distorted community banks across the country is commercial real estate relative to capital present no surprise in that. what was surprising was that a

huge part of a risk was held in the financing vehicles that came with very high rating in the instructions with very high ratings. as i said, there's a failed plot in the capital requirements was that they were not designed -- they were designed in a way that made the system much more vulnerable to those failures and did not protect against those failures. so people everywhere took false comfort from the fact that a huge amount of these exposures to real estate risk wherein securities that were rated aaa. >> and were you surprised by the large amounts of hedging that was done through aig and other monoline insurers to the cds? >> of course i was like up to my eyeballs in the growth in the cds market and what that meant for the system. we had no window in, no capacity to access who had written huge commitments to capital because as you know the things we could

see were only what we could regulate. and as i said, those metrics we used were flawed. though we were not able to see where you have those huge pockets of risk and institutions outside the banking system that wrote those huge commitments and derivatives. >> when you pass to mr. corrigan to assess risk-management and develop best practices, sent them off to the financial committee, how did they do? you never said. >> well, the institutions did not do well. other recommendations i think even if you look at retrospect were quite good. and what we did not and as i said i think the lesson i take from this is that we did not have sufficient traction to use those recommendations to induce enough behaviors earlier,

virtually because we were still operating within the existing capital requirements. and i don't think -- the only way i can think of preventing that from happening in the future again is to make the simple chemical requirements in the ratio and the other one conservative enough so you can rely on them, not rely on all these other things you try to do. remember, all these firms when you look at their stated ratios, and they give some comfort, that they hold a fair amount of capital against their risks. i was false comfort. a simple lifemate interest is to say you've got to run the system with more conservative shock absorbers. >> i mean, i'm a complete turn currents in the end you need more capital. i do want to look like i'm contesting that. i was just trying to get a sense for given what the perceived best practice might be, what your assessment of their actual practice was and whether they improved it in response to this.

>> i think some did improve. you look at the corrigan report, counter policy group to report, excellent title. and you compare it against this thing we organized called the senior supervisors group, which is a report in actual practice across those firms that i think was published in the fall of 08, seven, not sure. and you can see in their a pretty stark comparison and criticism of the state of actual part is. and i think we had a significant effect in changing practice, but obviously not enough here those efforts were inadequate. >> before i run out of time, tumor questions. number one, you said in your opening statement that among the things that cause the crisis, with the government not quickly unshared moving quickly enough. when should it has moved in what

should it have done? >> again, i'm making things more simple than they obviously could be, but to say that starkly, and with the did not move early enough, effectively enough to attain the emerging risk preemptively and when things started to fall apart, and i think this is true for governments around the world, did not move quickly enough and forcefully enough to try to contain the damage. i think that the federal reserve was exceptionally aggressive, took a huge amount of criticism, did things we hadn't contemplated every before which the congress gave us. but in the end you can't solve the financial crisis with tools that are about liquidity. they require ultimately, as we saw, the full financial force of the government in terms of fiscal policy to support demand and ultimately capital in the

system and broad-based currencies to contain panics. and i believe is that it been deployed more quickly and many of us of course were strong advocate of early action. i think this would've been a less damaging crisis. >> ideal gentleman to additional minutes. >> in particular, one thing pointed out was a lender of last resort. many of these -- a question that immediately comes up vanish of the fed have moved more quickly to provide discount window access to people outside bank holding companies good and as you know, there's lots of interest in the decision-making that went into that. i about to hear your views. >> we were extraordinarily relied didn't, i think appropriately relocked and to take that exceptional step. had not been taken since the great depression again to provide our traditional blending facilities against collateral to have the two gents we were not supervising and regulating because anyone doing that, you would be creating enormous moral hazard risk for the future and

we were appropriately reluctant to take a step until we believed in reaching to believe believe of course that that fateful week in march that the system was at the edge of collapse. now those facilities, of course, are not designed to protect original persons are failures. they're designed to protect the system from broad-based runs resulted institutions from becoming a liquid and they can only achieve so much as you've seen. so we were very reluctant until we were at the point where we thought there was a substantial possibility of collapse. and at that point it was absolutely necessary essential that we do it and i believe we did at the right time. >> thank you. thank you, mr. chairman. >> the former chairman of bear stearns yesterday said she did a 45 minutes too late. if you could do it in our

earlier, do you think in result would've been significantly different for ultimately no different? >> i don't. and i've had the chance to testify on this before. again, and i think a history is a basic point. these facilities allow us to lend against collateral. not completely prevent columbia to limit the severity of the liquidity run crayfish. they cannot prevent -- they can't protect a firm that can't commit its investors. it is a franchise that can them enough money to cover their risk and has enough capital to cover their risks. >> unless your pockets are deep enough. >> and we were not prepared -- we were not prepared to land into a run on in the touche and that had lost the capacity to convince people is viable. that would've been irresponsible as an act. >> thank you.

>> senator graham. i know [inaudible] >> i'd like to put our crisis into a broader days. i have seen some foreign ministers of finance and others, who has been at least subtly critical that we may be moving too rapidly and therefore not properly integrating our reforms with what will have been on a broader multinational basis. could you comment as to where do we -- is this crisis -- if you do a diagnosis, would that result in a sufficiently similar determination of causation to them late to essentially similar

prescriptions being written for a variety of countries? >> senator, let me just say two things in response. there are a lot of people who made the argument a year ago that we should wait until this crisis was definitively passed. we undertook a much longer reflection of how to fix it before began the can process of broader reform. and we made the different choice. we decided and we do this with countries around the world that we are better able to get consensus quickly on a stronger set of reforms of iraqi and when we were deeply aware of the scars of the crisis in the damage. the memory had faded and i think we know what we need to know about the core choices involved in reforming the system. we've done this and close cooperation in parallel with other economies pierced as early as april last year would really not our initial set of

proposals, we also negotiated with the g20 and within a financial stability void a complementary set of proposals we hope to be enacted globally. and they are core elements of our reform had to be effective have to be done multilaterally. the best example of that is capital requirements globally. and where the process of new capital accord to limit average and risk-taking. but there's some things that a problem is unique to our market. that have to be done a little differently. our responsibility of course has to make sure we're fixing those things, too. the world i believe generally were very much like to see the united states act to fix the things we saw in our country and are depending on us to do it. and i've never heard any of them suggest u.s. that we should slow the pace of reform down. they want to make sure we are doing the in ways that globally would be not too punitive on

them. and there's a lack of concern outside the united states at some of the proposals we've been dividing on capital are going to be a big burden for other countries in that the source of some tension as it should be, but it's a sign that i think you should view as a sign of health that were being ambitious and that were trying to achieve. >> if i could pick up on that issue of capital, i was surprised to learn that under the basel, i believe it's possible to that the value of securitized mortgages is higher for purposes of capital purposes in the underlying mortgages themselves. is that correct statement? >> i do not know whether that exact point is correct. i would say it this way, one thing that is important to note is the basel ii was not in effect for u.s. banks here it is still not in effect for u.s. banks and it was essentially irrelevant to the cause of the

crisis. all u.s. firms were operating under basel i design back in 1990 with a set of leverage requirement. and those that have risk wages do not too a good job of capturing and more involved in a very important process in the united states to try to change those to make them better reflect risk. >> welcome the sort of anticipated my question. if that statement that i made, maybe i have the wrong acyl is correct. did this indicate that the international financial community was falling back down to the same mistake that we made, which was to put unwarranted value behind a certain set of instruments, largely because they had a high

credit rating without any requirement that there be some greater due diligence as to just what was the composition of those structured instruments. >> absolutely. and the system was riddled with that basic vulnerability, which it was too dependent on ratings that were too vulnerable to mistakes and firms as a result held it less capital than they should does. >> and do you believe that the international financial community is moving to correct those errors? >> absolutely. the way our system works as we do not turn us over to the international community to solve for us. what we do as we figure out what makes sense to the united states and that we try to build consensus internationally to pull that confesses to other levels. do we preserve the authority here to be more conservative when you do it differently. you point out one example of a set of basic in that system, but

we were fortunate in many ways because he did have a crew leverage in place for bank holding companies. many countries did not. and as a result, our firms and they were forced to run with more capital. they have less leverage, less probable crisis true for many other countries. as many people pointed out, our banks, although they look large, because were a large country were not much smaller than the share of our economy which was true for the other major economies. so our banks around the peak even know what they are about one times gdp, the comparable numbers in switzerland, the people are most eight times gdp in the u.k. on the spy times gdp in carnival europe, two to three times gdp. so our banks are less coverage with much smaller other economy. apart to imagine because our crisis was persevere. we are in a much better position to withstand the shock and was true for many other countries. >> those leverage ratios that

you just cited, they are so extreme. does that indicate that a higher proportion of the financial business in a place like switzerland is run through traditional banks as opposed to what we are studying these two days, the shadow system? >> you're exactly right. the systems are we call universal banking models and they combine in one legal entity, the whole span of financial activities. and they're capital markets, their security markets are less important source of credit them in our country. and our country still roughly half of credit comes through institutions because banks and roughly half of credit comes through the security markets, both simple bond markets as well as the back security markets. >> i'm almost out of time. >> would you like a couple minutes? >> of a couple of additional minutes to ask a question. you talked about your efforts in new york and here to look over

the horizon in charge of a better idea of what is coming at us. to what degree will the reforms that you are advocating increase our capability to be more anticipatory and therefore provide goods rather than just react to? >> i think they will help. they will help a lot. of course ideally what you want is a system that's able to move more preemptively, that is more agile, that can stay closer to the frontier of innovation. we hope to produce that, but there's no guarantee be canned hat that's why fundamentally we you need to do your best to design a system that creates the possibility of achieving to prepare for the possibility he won't be perfect in every one of the system to have better cushions again the inevitable uncertainty we all live with because we won't know, with competence, where the next will come from. we just make sure it's less

damaging when it happened. >> thank you, sir. >> thank you. mr. wallison. >> thank you, mr. chairman. and thank you, mr. secretary for coming to spend sometime with us today. this has been very informative good i like to follow up on what my colleague, douglas holtz-eakin was talking about before. because these are very important questions and particularly the question of whether you, in which you are proposing for a reform, it's really attempting to solve the right problem because i think you'd agree that you don't want to solve the wrong problem. i'm one of the things we're in is trying to figure out what the problem really was. now, in the hearings retold so far, it seems fairly clear that it did not really matter whether you were a regulated bank or if

you were less regulated investment bank in terms of what happy and to that institution and the financial crisis. would you agree with that? >> no, i wouldn't agree with that. but think of it this way. so you have a world where you had to institutions. with a classic banks that take deposits and make love and you had banks do we call them banks for the minute -- for the moment, but they are funded very short, no deposit insurance. money can leave in an instant invariable to take a more leverage than banks. >> but their assets are different than banks? >> well -- >> bank assets tend to be long-term and investment bank and to have very short-term assets. easily sold in theory. >> a little less short than many people thought. or a substantial portion of their assets were quite a liquid in the crisis and they could not

tell them actually that quickly, which is a fundamental difference. and so the level of -- a man economist, but the level of maturity that for us to run in many of those other institutions was very, very large. i think in many ways this largest bank. but the difference is that when liquidity dries up and that parallel system, the assets were not liquid enough in a panic to be able to sell them and meet your demand for margin, et cetera, meet your demand for withdraws. and so that death can really crashing down. and that put enormous pressure on the risk. they were only with mistakes banks has always made over centuries. would've been a much more slow-moving crisis because liquidity would've been more stable because most of it was deposits funded. and it would've been a much easier crisis to manage. you would have been a serious recession, but it would've been an easier crisis to manage. i think it was different consequences. >> i think you with exactly the

point of string to get get to and thank you very much. and the point is, in 2007, as you recall, the mortgage-backed security market simply came to a halt, completely unprecedented event. and that meant that these investment banks that you are talking about here turned out to have an effect on turn assets when they were intended to be short-term assets. so the question really is, is the right question the investment banks or is that what caused the short-term assets, they thought they had, to become the long-term assets that made them look a little bit like regulated commercial banks? and so, i'm going to pose it to you the possibility that because the disk crash and the mortgage-backed securities market, that turned short-term assets into long-term assets, no

regulatory system could have survived this because we took about $2 trillion in assets that were on the bank of financial institutions, on the balance sheets of financial institutions all over the world, particularly in the united states, but all over the world heard and we made them illiquid, they couldn't be sold. isn't that a major effect that no regulatory system could have anticipated? and shouldn't we be thinking about what caused that to happen rather than simply imposing more regulation? >> well, i'm not quite sure where you're going with that, but i think that's an interesting question. i guess i would try still to look at it this way. if you're going to take on a lot of risk, whether short-term or long-term, whatever you think about your assets.

you know there's risk in those assets and you're going to fund them with money they can leave in a heartbeat. and you don't go much capital against the risk in that case then you're going to have a problem. and that i believe is a problem that is mitigated if you get capital regulation right over institutions that are in the businesses they can't our market where capital companies borrow. but i completely agree that the whole other thing, instead of the other things that have happened in our financial market, that made us more vulnerable to the abrupt loss of confidence in anybody holding a security backed by real estate in the united states. lots of things contributed to that, to animate or worse. and i'm not sure where you're going. >> all i'm saying is simply this and that is that we have an abrupt common shock to the entire system coming from the fact that a very large number

size of assets simply disappeared as salable assets on the balance sheets of banks and on the balance sheets of investment banks. and that changed the condition of those institutions very materially from a capital and from a liquidity standpoint. and i'd like your reaction to that. >> i guess that's right. what happens in any crisis is two propositions are tested good one is the proposition that the funding is stable. and you know, a lot of people made a lot of judgments on the expectation liquidity would be uninterrupted, never disappear, would always be there cheap and available. and the other assumption tested as you hold a bunch of assets and you think you know what she might loosen those assets if you have to sell them or hold them over time. and it usually takes those in the crisis and we both at the same time. they were somewhat related because they thought were least

you can assess what the risk was. >> what i'm saying is this isn't any crisis. this was a much larger crisis than anything we've experienced before. and i think the reason that we're talking about an asset size larger than anything we've ever experienced before, about $2 trillion in mortgage-backed securities and related securities scattered throughout the financial world and have suddenly become almost not worthless, but very difficult to accept into the most stressful situations. so isn't that a problem rather than whether we had sufficient regulation? >> no, i don't did so because again like almost every financial crisis sort of has real estate at the scene of the crime, doesn't really matter how fancy the products are. what to call them? they usually have real estate central to the crime and so nothing unique in that grade and

again, what we do is we protect ourselves from that risk by making sure that the institutions that are necessary to make markets to function, to make economies work old enough capital to cover the losses and are vulnerable to runs. and again, i don't think regulation can solve all problems. regulation will cause lots of damage. done poorly, it's damaging. regulation creates incentives for invasion, but l. which i think has to be the center of every diagnosis of the problem and the reforms. >> i had a little bit of additional time, so i will go on. >> three minutes from the vice -- the >> three minutes. here's the issue. you suggest that capital regulation would be a solution to this problem. but if were talking about a 70 year flood, that is we haven't had any like this is the depression, are you talking

about imposing so much in the way of capital requirement on our banking system, on our investment banking system, that they will no longer be able to offer reasonably priced credit to those who need it? >> no, but you're asking exactly the right question i believe. just a short story. when i first came to the new york fed and i was understanding the system which banks are operating, as my colleagues, i said how do we know what is enough capital? how do we choose what is enough capital? my colleagues uses the example you set and they say we think it's enough to cover a 30 year flood, but not a 100 year flood. governments make a choice about what level of insurance you run with against what probability of a flood. and i agree that we cannot or should not try to design the system and its failure impossible. it would cover any because that would impose excessive costs on businesses and they would not be

efficient for the country as a whole. what i can say with a lot of confidence that our requirements were too thin, too modest and it would be better for credit generally, better for the economy, better for the allocation of capital across time if those requirements were more conservative. i agree with you completely you should not design them to protect against all sorts of shocks that allows for failure. you just don't want the failure to be as damaging as it was in this crisis. >> one last question. you say in your prepared testimony that the financial system, i think i'm quoting here, outgrew the protections that were created in the protection. now, wouldn't it be fair to say that the system grew outside the banking system, not to avoid regulation so to speak, but because banks were in fact

unable to participate in the securities market, which was a very efficient market for financing business and financing consumers. this is the securitization market. banks were really effectively prevented from participating in that, in part because of glass-steagall and i'm not advocating glass-steagall certainly, but isn't that why we developed this shadow banking system that we want to call it that? >> the capital requirements of this paradoxical feature. they were strong enough to encourage a lot of that funding to shift outside to where there was no capital regulation, but they were not strong enough to protect the system window system came crashing down. but i don't think it's quite right in the sense, mr. wallison, that banks were allowed to help companies raise debt and equity. and they were allowed to

participate actively in these other secured funding markets for a credit card receivables, for automobile receivables, not just real estate backed, asset-backed peers who is able to fully participate in the system and a lot of them did of course in ways that let them in a panic he referred to come exposed to love. so i don't think i quite agree with that part of your question. >> that's all the time i have good but thank you very much. >> mr. giorgio. >> mr. secretary, you said something to the effect that all this started as a crash down pretty quickly. i guess i'd like to explore whether the stuff really deserve to crash down and was really created in such a way that anybody who was other than right in the center of it and not looking that it ought to have known that it had a strong possibility of crashing down. yesterday we had testimony from

former chairmen, sec chairman cox who said something to the effect that honest lending practices have been told, much of this crisis quiz and they would not have occurred. the nearly complete collapse of london theaters by banks and other originators that to the creationists a much worthless or near worthless mortgage paper that as of september 2008 banks have reported over one half trillion dollars in losses under u.s. subprime mortgages and related exposure. and the creation of those -- of those mortgages was exacerbated by then turning those residential mortgage-backed securities into collateralized debt obligations in a process that at the last hearing i like into something like medieval alchemy, where you took this low rated tranche, the triple be related tranche of the mortgage-backed security, 93% of the tranches were higher-rated. this was the bottom 5% of the

7%. there was 2% of equity below. and then you took that tranche, low rated from a whole bunch of mortgage-backed securities and created something called the collateralized debt obligation, somehow slicing and dicing knight and ending up with a security that had not only aaa, but 50% of it was aaa plus read it, which was super senior tranches, extensively. but of course, we now know that all of that was essentially thick dishes really. and when you last a very modest amount, when these mortgages began not to perform and a modest amount, 3%, 5%, you impacted all that triple be tranche of the new essentially rendered the ceos worst was. and it was exacerbated. and it is important to note it was exacerbated by the shadow banking system and a couple of ways.

we had another billion dollars were essentially ensured i aig by selling credit default insurance against it, which they were i. sport and they were essentially spreading their triple a rating like holy water over the ceos that didn't deserve to be rated in that way. and another 60 billion were sold to commercial conduit. so, you took the fundamentally flawed securitized out of an concentrated risk in a number of institutions, which ultimately we as taxpayers had to bail out aig, citigroup, which to $25 billion liquidity put on the cbo's come up their balance sheet, which is essentially a third of their capital, which nobody seemed to notice anything about. and i guess all of this goes to say that we needed to, it seems

to me, have people prepared to recognize that the emperor had no clothes, that there were -- that there who took been people who saw that the possibility of this collapse that these securities was much, much higher than anybody gave them credit for. i wondered if you could be to that, general. i agree with much of what you said. i think you're right that hsu had a germanic erosion and underwriting standards, so people were lending money against a very large fraction of the value of the house, inherently exposed to substantial risk of loss if you have the combination of crisis ball a lot and a lot of people lose their jobs. and that risk was pervasive across the system. >> date on even have to fall that much. >> they have to fall a little

bit. losses with his edict deeply into those particular charges of cbo's. think you're absolutely right with what you described. but i guess what i would emphasize what is it wasn't just the most complex structures. it was across the system. one example would be banks across the country that did lend too much against real estate as a whole. and it was -- >> and i held the mortgages themselves. >> they help some of him. >> i agree with you. it wasn't exclusively that, but it was significantly that. and i guess, part of what we've been discussing for the last few days is that a number of the parties who originated these mortgages called essentially had no consequence if they failed. not just the mortgages, but the

securities themselves. and i don't know that in this regulatory reform that's going on, how much there will be remedial, how much remedial measures will be made to address that question. and with the systemic risk council that your proposed or that people have proposed be able to identify this kind of problem in the future? >> and your right to say that these reforms will solve any of these problems definitively and we well felt for sure which ones they do an inadequate job of selling. but they do some very important things. they do fundamentally at some of the conflicts in great agencies that help contribute to the mistakes and ratings. they will enforce much more disclosure among not just about ratings or methodologies, but into these basic complex asset-backed security structures were investors have a better chance of looking deep into them and understanding the risk of exposure could do a force firms

to write these commitments to hold for capital against those commitments. >> and while some of the securities themselves. >> and to retain an economic interest or again, we are confident these things would be helpful. i think you could say they're necessary. but of course over time people will be their way around them. if you have another. we are great great incentives for people to take risks, they'll do it again. our job is to make sure that those mistakes when they have been are not as damaging to the system. >> and i guess the other thing really sad at the last year and that it would take your comment on is this capital arbitrage for institutions like city were putting things that are off-balance sheet or in two different elements, putting in their trading but that avoided people recognizing different regulatory entities, recognizing that there was ultimately a risk

in this particular instance of liquidity puts $225 billion, almost a third of their capital is one set of cd is failed. >> again, the system did not capture the economic exposure many firms tied to the funding of vehicles they use. i mean, the crisis began in july 2007 when a french bank said on the money market and closed the gate from withdraws because that fund had funded a bunch of risk in structured investment vehicles, these of balance of german banks that had bought a huge amount of u.s. subprime mortgage risk. so, in without frankly the knowledge of the fund or the bank in some basic sense. but you know, it happened across the system and either the accounting shame, the exposure regime, the capital regime did an adequate job of capturing those of exposure and that is a

fixable problem. it won't get fixed perfectly and you want to make sure it adapts over time better, but that is -- i think that is a problem that we can do a much better job of preventing in the future by again making sure that accounting conventions capture the exposures, disclosure is better, reading fuzzball marble to conflict capital provides bigger cushions against uncertainty laws. it won't solve all problems, but it's a good place to start. >> very good. thank you, very much. >> mr. secretary, very quickly what to make an observation picking up the comments of mr. wallison and mr. georgiou about the regulatory framework and one thing that struck me as i heard that discussion is so many people have come before us intact about how nothing could have been done to avert the crisis, but what the leave clear to me as i read more and more and hear more and more as there is a lot that should never have been done at the outset.

and when you were talking about, in this discussion, what kind of regulation of securities progress on capital. is it fair to say that we can't also forget to look at the point of origin of problems. in other words, there was a situation here. i'm not saying it was the whole of the problem, but the fact was the poisonous subprime loans were permitted to enter the system in the first place and an exotic financial instruments were created that helped carry that poison throughout the system. and so, and a look back and look forward has to look at the point of entry of the contamination, doesn't it? >> i agree. but again, i would just underscore -- this isn't in the character of saying it's much worse than anything. i would just emphasize that if you look at losses on prime mortgage loans, and conforming mortgages in this crisis, they are very high, too. well aside the expectations of mustard on this case because again house prices paid so far

and unemployment rose so much more than people had expected. and so, it was pervasive and i did not believe you could prevent all financial crises. i don't think you could try to run a system that tries to prevent failures, but the job of government is to make sure that you make those failures was damaging, that they don't cause so much collateral damage to the innocent. they don't have such that his traffic consequences for the economy. i think these reforms provided very good framework for fixing matches the direct cause of this crisis, but making us much less vulnerable the future. but crises will happen. again, apologies should do is make them a fudge damaging. >> the other observation i have is would you agree that they may have been exacerbated by the price run-up, which in part may have been fueled by the availability of no down payment, negative amortization, who flew up on projects to a whole set of

consumers who otherwise would've been able to enter that market. >> i do agree with that. >> one other small item, so i don't forget and this is in the way of cleanup. i earlier asked you about conversations that i want to expand just for a minute. we've touched deeply by the cpi fast heard them by the way, i assume you've had a lot of conversations with him because he was under board. i know that october 7, 2008, thousand 8, you enough to commercial paper program. october 27 come you begin buying commercial paper. i believe originally there some talk about that being only asset-backed and none of the cure. i don't know that was shifted -- >> restarted a facility called the asset-backed, some acronym, it was about asset-backed paper and then we put in place a broader commercial paperback sensibility. >> when i asked you about september 29 and 30 of other there was concern about being able to issue commercial paper by ge, i'd like to expand that

to conversations occur about being able to enter those programs because of the necessity of those programs to support their issuance for the market as a whole? >> again, to the best of my recollection, mr. chairman, those conversations like i had with a variety of people in the markets, both money market on an institutional investors and people who were playing on cp markets, they were about making sure we understand how broad they were and people a lot of ideas about how we should, as they always do, about how we should solve them. >> you were going to check. >> at your question with whether you about both the ability to a issue in that time period, you know, fear of their issuance and b., their participation in those programs. >> at again, my recollection is that absolutely they were about making sure we understood how broad the potential stress was

an likely heard from across the system, across the economy, encouraging us to do something about it. >> doublecheck and swing back. mr. hennessey. >> i'm a little concerned about one of the biggest challenges that we have here, two of the biggest challenges are the advantage of hindsight and the danger of selection of the bias. as we now know what happen when policymakers and supervisors did not know what was going to happen. and as you well know at any one point in time, you can find someone who is predicting him of sending outcome. and so we've had, you know, people point to specific predictors in the past and say why weren't those paid attention to. and with respect to senator graham, i want to use an analogy from his home state, i can tell you with certainty that devastating hurricanes will have florida. but that is different and

suggesting that i should know when a specific hurricane is going to hit miami. and even if i know that houses are being built that are too big on the shores of florida, that different than saying i should have known about this hurricane or as some have been suggesting that i knew that a particular situation was going to occur and that someone did nothing about it. and since you were running the new york fed, that argument would apply to you. and i don't buy the argument, but i want to ask you about it with respect to housing and then with respect to other housing problems translated into the financial year. i think it was generally known for years, if not decades, that u.s. policy subsidizes housing. i know a lot of my economist friends would say over subsidizes housing relative to other forms of capital investment. i know that i did not know until the fall of 2007 that there were

specific severe problems in an element of the housing finance market. can you comment on the argument that policymakers should have seen well before the summer or fall of 2007 those housing problems? do believe that the ballot argument? >> i basically agree with where you begin. and i would say -- i usually say exactly the same thing to you, which is be wary of the benefits of hindsight and be skeptical of the capacity for four say. i completely agree with that. so i can only tell you what i thought at the time, which is that i was very worried about the possibility that this whole set of forces you saw in the

long period of rising house prices, huge increase in leverage, growth in these risky funding structures, is very worried those risks would be substantial for the system and that we did not know what the possibility was of a big shock, where would come from, how it would have been, how damaging it would be. but i thought there was risk it would be quite damaging and harder to damage than previous financial crises for the reason i said before. but i'm not would not claim and having said that but i thought at the time or spent time. i spent a lot of time with people in these markets, of course, and i did not find people at the time who were particularly compelling about exactly putting these things together and seeing how exactly what was happening and no-doc loans, ninja loans, et cetera, was actually producing huge exposures that let aaa or super

senior, so that's a complicated answer to your question. in general i agree with you that the benefits of hindsight. but it gets important to come back to the simple risk in leverage that leverages hard to capture, but you could observe at that time that there was leverage in the system that made us vulnerable to a shock when it was going to happen. but nobody had the capacity to predict the timing nature of magnitude of the shot. and again, the lesson i would take from that is to say that the chinese system that recognizes that limitation. don't design a limitation that depends on people sitting in these jobs do you have been everybody else i can say we hope those people in washington seven preemptively for perfect wisdom in the future enterprise people of current too much. i think i would not be a good way to run a system. when a system that renaissance more skepticism about the capacity of individuals to act

preemptively. i think that's what these reforms try to do. >> thank you. the second part of that same sort of question and i could characterize it as, were you generally surprised by the bear event and that subsequent events. what i mean more specifically is, by the fall of 2007, everyone knew that there were severe goblins and subprime financing, but then taken not to specific failures of specific and two shams, some have been suggesting that you and others should have seen that was going to have been for some or even implying that people did say that was going to happen and didn't do something about it. >> as i try to explain, we did a lot of things starting in 2004, which were designed to make the system more resilient, reduce the risk that whatever happens it would be less damaging. and as i said, i think those stats -- i think they have the right object is. they were very effective in many

areas. think for example what happens to how little effect hedge fund pillars have on the system as a whole. a lot of examples of things that those results that were helpful to the system. but absolutely did not do enough soon enough to make the system strong enough to withstand that. but for us, in my view, this crisis started in the middle of 2007. and as you know, the fed moved very aggressively, doing things we've never done before, no roadmap we had of other countries to help to put some foam on the runway and sort of content at risk that would escalate can contaminate other to two shams, but ultimately of course you don't solve these problems is simply using liquidity. you have to solve them with more force. >> good. i want to praise you for the work that you did and have been doing on dealing with the

resolution issues having to do with credit derivatives. and i strongly support the arguments are making about in effect hardening the system so that even if all of the oversights and all of the supervision fails, that the system is more robust to withstand the shock. we heard from bayer, they said look we were profitable, we were solvent, just an irrational run occurred. after there was an emergency liquidity of the fed which as i understand it has been six higher. so let's imagine that another profitable solid firm faces an irrational run, isn't there the same risk, isn't the systemic not hard enough in that area were the same thing could happen? >> mr. chairman, yield the gentleman to additional minutes. >> i would not characterize what happened in that case is a run on the following is to to shame. but if we don't reform the

system, absolutely were still within that vulnerability today. you know, we're still living at the same system that produces crisis and without a feather productions preventative and better tools for crises will be living with the more vulnerable system because the actions were forced to take you out to moral hazard. and again, if you did nothing, did not pass reforms, the system would be less, more vulnerable, less stable than in the past. it absolutely, even followed firms are vulnerable to runs and a lot of institutions were very, very strong financially came under extraordinaire pressure because the world went into panic. and i think the best defense against that is to make sure that the entire system, firms and the funding markets, derivatives markets, et cetera are run with cushions against laws. that will make everything less fragile went under the makes mistakes, but also make sure

when things fall apart and people make mistakes you can put them out of their misery without the taxpayer been exposed to loss. and you can draw a fire break around them so that the fire doesn't jump to the rest of the system. they have the basic simple theories under reforms and i think those are receivable reforms. they won't be designed to prevent people from making mistakes, we just want to mistakes to be less damaging. >> so that's the resolution authority and then a whole set of requirements to reduce the probability that any one particular firm is in a situation where investors will lose confidence. we saw with what cobia and while newcomer even insured institutions can face runs. i present them that even if said the pending legislation becomes law, even a few of the resolution authority and those other things, you're still at a greater risk for one of these non-insured firms oven a rational liquidity run, just because that facility doesn't

exist. you could still have a firm that claims are believed that insolvent and profitable that there's an irrational run, running out of liquid. >> question you have to ask is is that desirable and will that produce more conservative jagr? you know, the absence of expectation, there's a safety net. of course it didn't work that way for large parts of the system coming into the crisis. so again, i think the lesson we try to take is to say there's a function called banking, which is about helping companies, how people to buy things and finance things they need. you want a system to be stable and crises otherwise economies can't function well and that requires this mix of constraints on risk taking and better firefighting for capacities when things fall apart. and you can't think the system stable at the set of protection protections only exists on fundamentally have the system. >> thank you.

ms. murren. >> thank you. thank you on mr. secretary for being here to talk to us about this. i like to follow up on a nuts and bolts questions that came up in our last hearings, which were on duty and we had the opportunity to question former chairman greenspan and in this instance, we were able to take a look at the 2005 operations review of the bank supervisor group of the federal reserve bank of new york and this one is dated may 92 main 27 of 2005 and emily to enter that into the record. this is an internal peer review of courts and it's conducted by examiners from other federal reserve banks. and it is my understanding that each reserve bank is reviewed every four years. and this particular report, there was commentary made that related to the citigroup team that was that the teams time and energy is absorbed by hot topic supervisory issues, which

include compliance, governance, information request and that that keeps the team from fully completing its continuous supervision object is. the result is that there is insufficient resources to conduct continuous supervision activities in a consistent manner and we recommend that management review this deficiency of staff across the lcb portfolio. and then there's also another report which is the same year, he think of the same topic which is titled a draft close, that report which also mentioned not having sufficient staff to sustain continuous supervision activities, which may result in late reaction to address merging risk areas. i'm curious about, when he let that come us, and you know recognizing the benefits of hindsight, do you agree with the findings of this report that there were insufficient resources allocated specifically to citigroup and also perhaps to other large, complex thinking organizations? >> here's how i think about this. again, colored a little bit by

hindsight. i was very concerned and looking at her mix of responsibilities and those bank holding companies about the burden imposed by a range of what you might call compliance obligations, consumer protection cra bank secrecy act. ..

responsibilities on a narrow range of safety and soundness requirements, and i still believe that is right and appropriate in part because again it helps make sure that these people are focused on a more simple mission which is safety and soundness, which as we discovered is so important to the system as a whole. >> i guess the question then what else -- had we had an opportunity to be a will to address that or have you? if you will also support operations review and this one is dated december of 09 there are still references here to the timeliness of the supervisory products being of concern and it is in fact a repeat finding from the 2005 operation review.

and further citations that relate to supervisory ratings not being updated on an ongoing basis to reflect the risk profile and to the condition of the financial regulation. do you feel like the responsiveness of the supervisors at the federal reserve bank of new york was swift enough to the circumstances? do you think they should have been more aggressive in their ratings and supervision and reporting aubuchon visiones citigroup? >> i believe that these are the most capable, most talented public services i have ever worked with. but i absolutely agree -- and i said many times i do not think we did he not announce an institution within the authority we had to help contain the risk that ultimately emerged in that institution. and i think a lot about what we could do different in that context and meaty part of it is about resources but i think it is a more fundamental problem which is i think the system again we are operating with a

set of rules that did not compel firms to will be enough capital against the risk they were taking and not capture them and that is why i believe it is so important in the reform process that we rely not so much on the discretion of supervisors to force more than the frame of the forces, try to get the rules better so the firms can live with a set of measurable objective rules and to warn of force with the rules that these capable people because of their preoccupations and burdens were insufficient leverage and traction. you don't want a system to rely on the terms to be more conservative in the rules required. you've got to make sure the rules adopted and force more conservatives and themselves. >> do you think that there should have been more examination of the off-balance sheet entities of citigroup specifically the underlying

assets? is their something you think would be beneficial as we go forward? >> absolutely. a fundamental reform and what has happened with the evolution capital already in the capitol. guinea to make sure that the ether, the balance sheet, with they're going to come off the balance sheet force people to capital against the risk and those exposures absolutely. a lot of progress in that area. one cautionary note though. those particular sets of risks themselves did not in the end prove that large in that particular case. it was a problem across the system and it made it much harder for people to understand what fundamentally might be the ultimate measure of losses in a lot of institutions that took too much risk to the real estate losses. >> thank you. i think i need to enter these reports i site into the record. do you need information on that? >> i noted the 2005 operations report and the 2009 operation

report, correct? >> can i quickly though we are going to keep you on schedule this is remarkable i want to press one last point. in our interviews with federal bank of new york staff we were told that they did not look at the credit quality of assets held by any of the citi's off-balance sheet and in the and as we invested what happened to a city to beat the citi is the of the reporting of $13 billion of primm exposure and as you know in kind of the -- i'm sure you are quite aware in a matter of weeks the resignation was revised upward of 55 billion they took the 25 back on the balance sheet even though they were not required as a liquidity. we could least say was material. the other thing pointed out is that the examiners at the feet occ complained about the revisions of gramm-leach-bliley saying it would prevented them from information as mom bank affiliate's and kept them blind

as of the asset quality problems that eventually can walk on its balance sheet. it sounds like to me there was a whole. the balance sheet entities vehicles, and no one is looking so they did pose a risk or certainly potential risk. >> absolutely in the didn't mean to claim otherwise. there was material in the sense of -- the system -- the system of a whole bunch of different regulators looking at pieces of the entity, the fed is supposed to be looking at the whole thing. accounting the regime, reading dependence, capital didn't catch all the rest come internal checks and balances that failed the risk, that system absolutely did not work. sprick by the way i said at the fcc told us they were aware -- they felt it seems to us at least my reading of the black hole of sorts. >> many ways the problem with whole is -- it looked like it was called aaa or super senior,

and people didn't say well how big a cushion of loss absorption is underpinning batt? and so that is why all of a sudden stuff that looked like it was risky because free had a lot. sprick and there were cbo's compiled out of the composites. i want to thank you all and let you close this up. thank you the image for the commissioners coming today. and the answers to the questions mr. vice chairman. >> mr. secure, we are going to be sending you a list of those mentioned and those that were not, and we really appreciate you helping us. but probably more fundamental than that, as one of the major architects of the financial regulatory reform that is currently being examined by congress, would you provide a 32nd or one minute pep talk to the commission as we are going forward attempting to find the causes of the financial crisis while you and others have already decided what it was? [laughter]

>> you are doing such a terrific job -- [laughter] of exposing the full range of fundamental causes that you are helping the cause of reform because we can match very closely the causes you exposed with the core of reforms the senate is now considering and you are giving a great energy and urgency. but don't stop now even if the senate enacts this in the next two weeks don't stop the exercise because that is just the first stage. we are still going to have to not just deal with the gics and having financial markets which are still going to have to design the sets of constraints on the capitol liquidity disclosure, etc.. we had a huge amount of work ahead of us and the process you are undertaking as well as the other bodies on the hill and internationally. when congress as we hope they will enact the reforms will be

the beginning of the process of reform and of the end and the work ahead of us will be so important to exercise but i'm not sure you quite wanted this, mr. thomas, but please encourage the leaders in the senate to act on reform. >> i try to explain to them the institution and the fact that the committees have jurisdictions which don't necessarily cover everything that needs to be done. and i hope that people notice there are deadlines that are created by the leadership in congress but the follow ships sometimes doesn't get their. >> i'm learning about myself, to back what we are close now. remember there will be an enormous amount of work we have to shape and will be enormously important. >> we have to quit talking about it as history. it's here still vulnerable body. we are living in the system

today the cause of the worst financial crisis since the great depression and it's worse than that because we had to do things no one should ever have to do to create the risk of moral hazard and if we don't act now to fix the problems, we will be vulnerable still to my compliments to where you are trying to do and keep at it, don't just stop because we have to build this -- >> thank you. we got out of that question and the answer unscathed and we will take the commissioners a 15 minute break and be well recommend at 2:35. actually 2:30. a 12 minute break. thanks very much, mr. secretary. [inaudible conversations]

in the event now looking at the primary health portion of the recently passed health care law and its impact. this discussion was part of any event hosted by the journal health affairs last week. >> [inaudible conversations] >> welcome back. i hope you have had a chance to warm up. now we are going to move into

our presentations on a practice profiles where we asked a number of different models or people representing a number of different models to speak about how they were going about some of the activities we've been talking about all day. care coordination, use of electronic health records, a team based approaches etc, medical,, formally or indirectly achieving the same kind of outcome is intended through a medical home. and we asked them particularly to discuss a number of the challenges they faced, whether it was payment, work force related issues, etc., and so you will be hearing some of those things enunciated as they discuss their experience of running these various different models. we are going to start with some remarks from suzanne edge mant.

the director of the johnson center for primary care innovation at massachusetts general hospital and will be joining us shortly here on the podium. she was the founding president of the institute and is the lecture in the department of medicine at massachusetts general hospital and also an associate in health policy at harvard medical school. she's a physician assistant and serves on a number of boards and national advisory committees including the foundation for informed medical decision making and the harvard institute for nursing leadership. then we will hear from richard baron, who as i also mentioned earlier was ever adviser on this series of practiced profiles and worked to help us select the practices we feature on the issue and i hope you'll take a gander at those because we are

obviously more concerted could be an issue represented a. richard is going to be here speaking on behalf of what his practice has been able to put the dream house and all i was also mentioned earlier some of you may have read on the new england journal of medicine piece of his colleagues last week that lead of some of the other issues that they faced. we asked him to focus in particular efforts to create the patient centered medical home within their practice so he will be speaking about that. richard is immediate chair of the board of internal medicine board of directors and also the abi foundation and was a supporter of this issue. richard has also been a member of the national committee for quality assurance standard comedy since 2005 s also on the board of the national quality forum. we will then hear from eric larson, executive director and senior investigator of the group health research institute, which

is an institute with and group health, health care system based in seattle washington. he is a general internist, leader in geriatrics researcher and is working hard to keep the institute on the cutting edge of health research. he served as the principal investigator at the nih project to expand capacity of the hmo research and work and has also launched research programs of the institute on health and obesity and a dalia rating of the medical home model of group health and his article, he and colleagues have written an article on the latest results from blood group health medical model and also featured in the issue is a report from the field where we ask the journalists to go out and talk to some of the physicians in group health and the address specifically some of the cultural issues involved in the transitioning to the medical home model and it's a very interesting read and i do urge you to read that as well if you have a chance to do that.

we will then hear from alice chen, the director of the adult medical center and director of the medical services and also co-director for the center of specialty access and quality at san francisco general hospital. she's also a system professor of medicine at the ucsf. she is to promote care for underserved communities and has been instrumental in the local the implementation and the national dissemination of the referral model that she will be speaking about to prove access and quality of specialty care. this project and another project featured in the issue are particularly important at making the point primary-care obviously doesn't operate in its own universe. it obviously has to have incentive interrelationships with specialty care and the referral project has developed a unique way of doing that and we

will look forward to her presentation. we will also hear from karen nelson, the ceo and medical director of the unite here medical center where she previously was the vice chair of medicine and consultant to the executive office of the medical center of brooklyn and helped expand its ambulatory networks and establish a community-based training program for the residents internal medicine. but we will be hearing from her about how the you might help center approached its activities around improving coordination of care etc. karen's primary research is to develop customized screen particles for new immigrants in particular and providing academic opportunities for the rear come emt health center physicians. she's also a board of directors and serves as the chair of the government's committee of the primary-care demint corporation and as on the board of housing works, which is an advocacy organization committed to ending the crisis of aids and

homelessness. and finally we will hear from raymond zastrow, president of both what mid and the corporate health services which is an entity that markets quadmed to other companies. as the president of quadmed he oversees the system of the medical staff of more than 200 employees serving more than 26,000 people at eight clinics. he was a physician for 25 years before he joined quadmed as the medical director in 2006 and previously was vice president of the medical affairs for the st. michael's hospital and medical order eckert informatics for the wheat and franciscan system. to cause of some comments first from susan edgman-levitan. >> thank you, susan. the first thing i want to say is i really want to thank susan

dentzer and sarah and gone and all of the other staff at health affairs that put together what i think is a terrific compendium of articles and information that hopefully will be very valuable to the whole health care universe in terms of where we need to go and what we need to do to create a very strong foundation and primary care. in terms of the framing remarks i want to make, one of the first things i want to comment on, is we have heard a lot already this morning about the importance of reforming the payment system and creating incentives that will allow our primary-care practitioners to deliver care the way that day and our patients want. i think that equally important to the payment reform is practice redesign. i don't think there is any amount of money that he can pay primary-care physician, p.a. or nurse practitioner that is when

to make the bumping down the stairs, that larry referred to enjoyable. and if we don't have practices that really allow the clinicians to go home and sleep at night and feel good about what they do no matter how much we pay them they are still not going to be interested in working in primary care. so i think that the examples you are going to hear about on the panel are incredibly important as potential blueprints for how we move forward. now, having said that, i felt that in reading the articles based on my own work at the center at the general there are certain things that keep me awake at night that i think we need to address and we touch upon some of them. you've heard a little bit about some of them this morning. but i want to call attention to them because in some respects i think they are the elephant in the room that could really have an impact on how successful we

are. one of the first ones is the issue of team work. i spent a lot of my time also working on patient safety issues where i see lots of team work training walls designed to improve teamwork and high risk areas and health care system. in my experience and the experience of many practices most of those models are not well designed for a primary care setting and i think we have a lot of research and a lot more work to do to help us figure out how we design effective teamwork training and models to support the primary care practices. another issue i worry a lot about as we are undergoing at least from my perspective the biggest transformation in my entire career as a p.a. in health care and we are expecting practices to do that but are the busiest, most underfunded of all of the practices and the health

care system and i don't think we are acknowledging the flout lack of training that our physicians and other staff in the practices have that will enable them to do it successfully. i see a tremendous amount of grief and grieving about the changes people are expected to bring about in their own practices. i think most of those trained as health care professionals are only comfortable doing what we are trained to do and we don't really train people in the health professions to be innovators, process improvement experts, culture change experts and these are all things i think are causing a tremendous amount distress in the practices. more so with our older physicians the nurse practitioners but i see it happening across the board and we are going to be thinking about how we are as kind and compassionate and the administrative leaders for the

transformations as we expect them to be with their patients. another area that i worry about a lot and there's a couple of examples in the articles and some of the story cited you will hear about on the panel but we haven't done a good job of engaging the patient is in the redesign work. people ask me all the time where is the patient and the patient medical home other than the person we few defeat could do things to and i think it is critical we engage patients both in the redesign of practices and how we deliver the care. there are wonderful and examples of that in the article especially the article about the pediatric practice. i also think the article with the chronic care program in durham north carolina where they went into the home of patients to look to see what kind of medical support and devices they need versus sending someone in and have tremendous cost savings

by really paying attention to the need of the patient directly rather than what we assume they need. those are important models we need to pay attention to. i also think this will be critical because now that health reform is under way i'm steeling myself for the firestorm of publicity about rationing and all of the other things we know are going to be terrifying to our patients if they don't understand what this model of care is going to do to help them get the care they need. i also was very heartened by the article you are going to hear about today, the use of the technology platform to improve the way we are managing referrals and the interactions between our specialists colleagues and primary care questions which i also think is a huge piece of this book which have to pay more attention to. one of the reasons that caught my attention is that i am very

committed to improving the way that we involve patience and decision making about their care and one of the challenges we face is it is difficult to introduce those kinds of conversations into the current wave that we deliver care. if you think about somebody coming in for cardiac procedure the minute you show up in the emergency room with any kind of chest pain nobody's going to slow down and say would you like to the get this program about whether you really need this or not? that isn't going to happen but we find it is challenging to even introduce shared decision making into primary care settings and i think that some of these exhibits get ideas about how we can begin to do that as part of these sophisticated and thoughtful processes. so those are some of the main things i wanted to share with you in the framing comments and because we have a big panel and its late in the day i would like

to leave it with two of my favorite quotations. the first one is from one of my favorite science-fiction authors, william gibson, who came up with the term quote koza cyberspace." and the quote is, quote put the future is here it is just unevenly distributed." [laughter] and if you will hear about some of the places where it is now and my other is a chinese proverb that was shared with me by my close friend, jennifer daily in boston, and the quote as those who say it cannot be done should stop interrupting the people doing it. with that, i will let you hear from our wonderful speakers. [applause] as the first after lunch speaker not named susan -- [laughter] -- i want to say how grateful i am to be here. it is a great privilege and what are the chances a small primary-care practice in

philadelphia would have a piece in the new england shore of medicine and this week be in the premiere of the policy journal? i shall indeed blessed this week. the new england journal piece describes the period in the practice before we had any additional resources associated with participating in a patient centered medical home and is meant to be an honest look at what is going on in the primary care practices about the country. the piece i'm going to talk about now and it is in health affairs is a description of some of the creativity is described when cash lubricates the creative process on the ballot head with respect to a funded initiative involving multiple payers. a sign going to describe the setting and a little bit about that initiative because i think there is an important lesson and talk about the problem we confronted in the way we try to

deal with that. we are a community-based product. i don't call it private practice but the people who we serve in the economic conditions under which we serve them community-based market risk. we are in the city of philadelphia. it is a racially and economically diverse population reflecting the community we are fortunate to live in. four out of the five doctors live with the walking distance of the office of the demographics of practice of their. i want to describe how this medical home pilot in pennsylvania came to be because bogot isn't entirely about payment, none of this would have happened if we didn't have the infrastructure to support this and the -- there was a joint interest on the part of commercial payers into the medical societies. at the time he was the chief medical officer at aetna and he had to go to a lot of meetings

people talk about patient center of medical homes, more of the meetings than patient centered medical homes. maybe we could build one. and they came up with a wafer six insurers to talk to each other. this is already a big problem because it is this an antitrust problem for insurers to talk about how they want to pay doctors. and the involvement of the governor's office of health care reform at the interest trying to improve the disease in pennsylvania created a entire base where they could of the conversation and the product of that for the 30 to practice is participating in the practice it means about 15% overall increase on the gross revenue received by the practice. it isn't a paper performance program one could ask the question what were we paying for before we were paying for performance. it is not a pmpm case