freddie and increased their capital requirements. to put fannie and freddie in receivership was also adopted. we required internal controls rap risk management and reviving and approving new products. the committee voted 19-2 on a very strong bipartisan basis in the summer of 2008, and overwhelmingly on the floor of this body supported it by a vote of 72-13. when i hear the comments that nothing's been done about fannie and freddie, well, mike oxley tried and it failed. i cannot repeat on the floor of the chamber the words that mike oxley used to describe the minority's handling of reforms when he was accused of later not having an effective reform package. the republican chairman of that committee had very strong language, mr. president, to describe the failure of our

republican friends to pick up his efforts, his bipartisan efforts, in 2005 as i say in 2008, by a vote of 72-13, this body adopted -- the committee's recommendations adoption to put strong regulations over fannie and freddie as well. as a backdrop here and i may be the first to recognize that more needs to be done in terms of coming up with a whole new financing structure for the housing market. there's no doubt about that. but as my colleague from new hampshire has pointed out and where it wasn't the whole refo reform -- why wasn't the whole reform package included in this 1,400-page bill, because you probably would have doubled the size of this legislation, and as he described it as being far too complex at this juncture to include those kind of reforms in this bill. that's not to suggest they don't need to be done but it will take a separate undertaking, it seems to me, and most who have looked at it, to decide what is that

alternative idea. and so when we have the mccain amendment, as we did with the ensign amendment the other need -- and i would urge my colleagues to vote against them -- all they do is get rid of it, fannie and freddie. there's no alternative idea he here. the mccain amendment says in 24 months, you've got to get rid of fannie and freddie. well, that's a nice idea, but what are the implications of that if we get rid of it? 97% of all mortgages today are backed unby fannie and freddie in this country. now, you wan, if you want to set rates go up -- the only entity that's purchasing these mortgages today is fannie and freddie, by and large. if you get rid of them, who's going to purchase them? and if they're not purchased, what happens to interest rates and home values? so if you think the market took a plunge last thursday, adopt the mccain amendment. it's a reckless amendment, mr. president. there's no alternative whatsoever. to be included in that proposal at all as a suggestion. let me just identify the three major problems with it, aside

from the fact that it just doesn't offer any alternative whatsoever to how we end up with a financing mechanism for housing in this country. and remember today, we're the only nation on the face of the planet, mr. president, that provides a 30-year fixed-rate mortgage for homeowners. it's the reason why we've had a relatively high percentage of our population in homeownership. it also is the single largest wealth creator for most families is homeownership. not to mention the value it is to a family, a neighborhood, a community where people have an equity interest that can accrue equity over time, contributing to long-term security, financial security, retirement security, has made a difference in how middle-income families have been able to afford a higher education for their children. all of these benefits accrue. no other nation on the earth provides that kind of stability and long-term security than we have in the housing market. and it doesn't happen miraculously. it happens because we've had a financing mechanism that has

provided for that kind of assurance and relatively low, low cost. so today when you look at an amendment here which severs all federal involvement with these mortgage securitization government-sponsored enterprises within 24 months, that's the mccain amendment. now, before people jump on this idea of what a great idea it is, consider the implications and then be prepared to explain them when they happen. so there's no reform here. it just gets rid of something without replacing it with anything except somehow the private market's going to pick up. there is no private market for this today. and we need an alternative idea. some have mentioned a public utility concept. others have mentioned various other ideas, mr. president, all of which we've listened to but, frankly, there's a lot of debate about what that alternative ought to be. and so the idea that i was going to draft a bill here that was also going to take into all of these other ideas on a completely new financing mechanism for housing, frankly, as the senator from new hampshire said, was far too complex. given all the other challenges

we're facing with this legislation to try and deal with too big to fail, consumer protection, finally getting some clarity and regulation over exotic instruments, providing some long-term radar system in the sense as we describe it to identify problems as they emerge, whether they be in greece or someplace else, to mention all of the other provisions of this bill dealing with underwriting standards, capital requirements, leverage, all the rest is in this 1,400 pages, not to mention the bill passed out of the agriculture committee, which adds, of course, a whole another title 7 to the bill. so when you consider what's on here, i just hope my colleagues will be careful before they jump on what is a politically charged issue and understand what the implications may be. if it's -- if it's adopted. the mccain amendment, as i said, is wrebltion, it' recklesy thought out, it poses significant risk to the housing markets that have only recently begun to stabilize, by the way, mr. president. we're seeing just in the last few weeks that finally prices are beginning to move up in the

housing area, new sales are occurring, things are beginning to move in the right direction. and you can say a lot of things, but if you don't have stability in the housing market, this recovery will not occur. it is a critical, critical component of recovery. and to pull out underneath -- the rug from underneath this particular effort right now would be a major, major blow to our economy and i think set us back on our heels at the worst possible moment for that to occur. as i said earlier, major reforms to the housing financing system are clearly necessary. i'll be the first to acknowledge that. all should. and as we can't go back to the system of the past and the status quo on. g.s.e. under -- on the g.s.e. under federal conservatorship, which they are, by the way, fannie and freddie are under conservatorship under our 2008 legislation here, is untenable, you can't continue that and we need to replace it. but, mr. president, such changes must be thoughtful and be

deliberate. in the near term, we must ensure that changes affecting the federal role in fannie mae and freddie mac do not jeopardize the fragile economic recovery. and over the long term, we must be careful in structuring the housing financing system in a way that guarantees continued mortgage liquidity with minimal economic disruptions. the mccain amendment falls short in several respects. first of all, mr. president, it poses significant risks to our economic recovery. some 95%, 97% of mortgage originations are currently backed by the federal governme government. 95% to 97%. a have a majority of this coming through fannie and freddie. the mccain -- a vast majority of this coming through fannie and freddie. the mccain amendment would cause significant uncertainty in fannie and fredy and mortgage credit that we have -- fannie and freddie and mortgage credit that we have at this point. this offers no other alternative sources of liquidity.

such a precipitous drop in mortgage liquidity could severely threaten the prospects of this fragile recovery we're presently feeling. secondly, the mccain amendment fails to ensure sufficient mortgage credit will be available in the future. private securitization of the g.s.e.'s account for, as i said, some $9 trillion of the $14 trillion in total outstanding mortgages in the united states today. with the future of private securitization highly uncertai uncertain -- in fact, that's a mild statement, given the present economic circumstances -- policy-makers are seeking to reform the housing financing system, they must ensure that the system of the future will provide sufficient liquidity to meet the mortgage needs of all americans. the mccain amendment would eliminate existing sources of mortgage liquidity while remaining silent on the more difficult question of how to replace them. so you may not like what you got here but you remace it with nothing -- replace it with nothing and then what are the

alternatives that go on in the housing market? and thirdly, mr. president, the mccain amendment neglects to replace the public purposes served by g.s.e.'s. the g.s.e.'s were poorly run but they clearly served a number of public purposes, such as making the 30-year fixed-rate mortgage broadly available for american home buyers. this does not go to the question of the underwriting standards. that was a disaster in unregulated brokers and mortgage companies. but putting aside that question, which we address -- and there are other ideas on how to further address the underwriting requirements -- the idea that the average family in this country could purchase and have a chance to get in that starter home, to put them on the pathway to homeownership, what that means to families, what it's meant to our country to make that available, not just to the affluent and the well-heeled but to families even at the lower end of the economic spectrum that would have that kind of a job that could provide that kind of income to support a mortgage. what it means to be able to say to your family, we own our home

here, this is where we live, we have a vested interest in our community and our neighborhoods. you can talk to anyone about social policy and home equity interest in a neighborhood change a neighborhood. they make a difference. and so when you start stripping away here, pull out the rug from underneath the financing scheme for doing this today, the mechanism for doing it then and you undermine the very ability to have that long-term, stable mortgage that a family can count on watching their equity grow under normal circumstances makes such a difference. it's why this economic disaster we've been through over the last couple of years is so harmful. i quoted earlier today, mr. president, that there are 4 million homes today in this country that are underwater. 4 million of them underwater. 250,000 homes in the first three months of this year have been seized because of the economic conditions we're in. but housing is critical. it's where this crisis began, because of the shoddy

underwriting requirements that are out there luring people into subprime mortgages. and, by the way, that's the alternative. when you strip away the financing mechanism we have today, what you're left with is subprime lending. that's what goes on, luring people into those circumstances. so, mr. president, you're entitled to your own opinion but not your own facts in these debates, and the fact is there was an effort in 2005, led by a republican chairman of the housing committee in the house, and he has some very choice words for those who would suggest that that effort wasn't real to make a change here. and i regret deeply that mike oxley didn't prevail here and his ideas in the senate. he passed it in the house, but it was squashed over here. and then in 2008, as i said, by a vote of 19-2, and 72-13 on the floor of this chamber, we did pass legislation that provided for comprehensive overhaul of the regulation of fannie and freddie. and those differences made i think a substantial change but

yet far more needs to be done. i acknowledge that, clearly. but let us not in the face of that acknowledgment straip way in this bill -- strip away in this bill within 24 months the ability without replacing it with anything putting our economic recovery at great risk. and i predict to you as certain as i am standing here, if the mccain amendment were to pass, that is the outcome. count on it. in my view. so i urge my colleagues, despite, i know, the political mantra associated with all of this, to please, we're in a very delicate time. it's very important we use our heads and carefully deliberate on how we're moving. by a vote of 59-35, we rejected the ensign amendment last week. it was the right outcome, the right outcome. and if we reverse that vote tomorrow or the next day, whenever the mccain amendment comes up, and we'll have a side-by-side, by the way, amendment, mr. president, to explain what the committee is further doing, what needs to be done to get us on the right track so people can be

supportive of some alternative ideas here, then i think we will set ourselves back. and in light of what's happened in europe over the weekend and still may unfold here, right now we don't need to be sending messages to the markets without any alternative ideas in place as to how to -- how to come up with a housing finance system that is worthy of the very people who count on that ability to have that fixed-rate mortgage to which their family prosper and to grow and to become stable, as this has over the years. so, mr. president, i -- i know that others want to be heard on probably other matters, but this is a very important issue, and my hope is my colleagues will pay careful attention to this and not succumb to the temporary temptations to fall because there's some groups out there that have never liked this anyway, they've never liked the idea of this program. and clearly, as i say, reforms are needed. with that, mr. president, i yield the floor. mr. merkley: mr. president?

the presiding officer: the senator from oregon. mr. merkley: mr. president, i rise today to address the volcker amendment, which i'm pleased to be able to cosponse we are my colleague and friend who is sitting in the chair as presiding over the senate. so thank you, senator levin, for the work that you have done on this and for the outstanding job you have done shining a light on the need for financial reforms through your permanent subcommittee on investigations. i also would like to thank senator dodd for shepherding this important financial reform and bringing such a significant and solid bill to the floor of the senate, and i thank him for working with civil of us in working to strengthen -- several of us in working to strengthen the approach proposed in the volcker amendment. and so i look forward having the chance to present that on the floor and appreciate very much your support. you know, the goal of our financial system is to efficiently aggregate and

allocate capital. now, that is sometimes done through banks that make loans and that is sometimes done through pools of investors who put their money together and ask managers to find the highest return. but these two functions of lending and high-risk investing, although both critical to the capital system of aggregating and allocating our dollars, are, in fact, very, very different, and this volcker amendment is all about creating the right balance between thes these two o that they work collectively to make a more efficient, stronger financial system rather than work at odds with each other. this bill really has three components. the first is to get high-risk investing or high-risk trading out of our banks that families and small businesses depend on.

the second is to establish higher capital requirements for high-risk investing or hedge funds, and the third is to eliminate conflicts of interest, conflicts of interest that have proceeded to undermine the integrity of our securities system. i want to try to give just kind of an analogy so that we can all get our hands around these functions, and that is to try to imagine that you are collecting fireworks. well, fireworks are a wonderful thing and you might want to have them for the fourth of july or for new year's, but you don't store them in your living room because if they were to accidentally go off, you would burn down your house. well, the fireworks in this example is your high-risk investing, and your living room represents the lending depository banks that power up our economy by majority their

loans in their community to our businesses and our families. now, to continue that analogy, you would want those fireworks stored not only not in your living room, but not in any of the bedrooms of your house or in any of the other rooms. you would want them stored out in your shed. in this case, outside the bank holding company. so that if the high-risk investments do explode or go down, that you don't burn down your house. well, that leads us to the second part of the volcker amendment which is to say while you're storing them in your shed, you should make the shed more fire resistant. maybe that means put nag springer almost or some -- sprinkler system or some other system. but the third part is to say that those who design and sell the fireworks should not simultaneously be developing and designing fuses designed to fail and then taking bets that the fireworks will go off prematurely. this is a conflict of interest issue that recent hearings have

shined such a bright light on. so turning then to this high-risk trading and the challenges it presented 0 our financial system, what i'm putting up right now is a chart that shows the impact of high-risk trading on the meltdown that occurred in 2008 and 2009. we have lehman brothers, lost $30 billion in trading. merrill lynch lost $20 billion in trading. morgan stanley over $10 billion. j.p. morgan chase, over $10 billion. goldman sachs over $4 billion. bank of america, over $7 billion. high-risk trading primarily on mortgage securities and derivatives of those securities blew a hole through almost every major wall street financial

investment institution. now, i don't think anyone should in light of these facts be able to say that high-risk investing has nothing to do with the current crisis. it has pretty much everything to do, and it's why the government stepped in to provide financial relief to these firms in the terms of a huge amount of money. lehman brothers went down because we didn't step in to assist them. merrill lynch gained funds, basically was saved by being purchased by bank of america, which had a tremendous bailout. that is, $45 billion. morgan stanley got $10 billion in tarp funds. j.p. morgan chase, $25 billion. goldman sachs, $10 billion, and of course the list goes on. so this high-risk investing does not belong in our lending depository institutions. a bank that has access to the discount window of the fed, a bank that has access to insured

deposits, deposits insured by uncle sam, that bank should not be diverting those funds into the temptation of high-risk investing, and similarly they should not be proceeding to allow the high-risk investing to blow up the lending side of a financial organization. you know, the risk of an investment house going down is certainly higher during a recession, and it's very high in a severe recession. that is just the time that you need banks to be able to continue lending, to not let lending seize up. i can tell you back home in oregon, business after business comes forward and says, you know, our credit line was cut in half or we went to refinance a commercial loan and the bank said we won't do it because the value has dropped or we can't make any more loans in that sector, or perhaps we can't make any more loans at all because we

have reached our leverage limits. lending seized up in america, and it is a key factor in prolonging this recession. so these are the reasons that if you want to have high-risk investing with the money from pools of investors, that is an important part of capital allocation, but do it at a safe distance from the lending depository function. the second piece of this -- and back to my analogy, this is about making -- when you put the high-risk investing in the woodshed, that you also make the woodshed more resieveient. that is by enabling the regulators to say that as an investment house becomes more systemically significant, that those regulators can raise or will raise the capital requirements necessary so that e leverage decreases as the firms become larger. this greatly reduces the chance that investment house will go

down during the recession or go down because of bad loans because they are putting up more capital against those investments. and then i want to come to the third part, the conflict of interest provisions, and they will also be addressed at a greater length by my colleague -- by the way, mr. president, i ask that senator levin be allowed to follow directly behind me. i ask unanimous consent that senator levin be allowed to do that. the presiding officer: without objection, so ordered. thank you. mr. merkley: thank you. so he will elaborate on these provisions, but i want to put up my third chart here because the hearings that my colleague had focused attention on a real challenge, and through those hearings, some have observed that goldman sachs had become an iconic image of banks with conflicts of interest. now, let me try to address again that conflict of interest. if you are selling fireworks, you shouldn't be in the business

of designing bad fuses to put on those fireworks and then betting that the fireworks will go off accidentally. or as another person has put it, if you were selling cars, you shouldn't sell cars without brakes and be taking out insurance on the owners. that fundamentally undermines the integrity of the market, whether it's the fireworks market or car market, but of course those are analogies for our financial market. and integrity is so important. international capital flows to systems with integrity. it was after the great depression that we established reforms on wall street that led to decades in which the international community saw the american markets as the best organized, best policed safe place, no scams or minimal scams that they could put their money, and we want wall street to continue to be able to attract and aggregate and allocate that capital. so that is an essential

function. i want to note that this sense -- this group of three commonsense reforms -- i will have you put back up that first chart -- going back to these three pieces here, get the high-risk trading out of the banks, increase the capital requirements for investment firms that become systemically significant and ending the conflicts of interest of securities, these commonsense reforms have a lot of support. i want to thank, -- in addition to senator levin, i want to thank 15 cosponsors who have jumped in to join this effort. senator brown, senator kaufman, senator shaheen, senator feinstein, senator burr, senator begich, senator mark udall, senator mikulski, senator sanders, and senator tom udall. and i encourage my colleagues on both sides of the aisle to

consider jumping in to support these commonsense reforms. and i want to note also that the supporters for this amendment include paul volcker, include john reid, the former chair and c.e.o. of citibank. they include the independent community bankers of america who recognize that community banks do better if the wall street system has integrity in allocating capital. the main street alliance of small businesses supports this amendment. the afl-cio supports it. americans for financial reform. and a dozen other organizations. i also want to note that a group has solicited support online, and here i have 25,000 individuals from across the country, all 50 states who sent this petition to the senate. and this is a progressive change campaign committee, and these 25,000 citizens say the big wall

street banks gambled away our money on a reckless housing bubble and then insisted we spend more money bailing them out. we need you to support the merkley-levin proposal to end this risky gambling and other conflicts of interest. so, mr. president, i want to conclude by saying that we have a responsibility technology this great recession that we're in now to redesign the rules of the road for wall street, to increase the integrity, to increase the transparency, to decrease the conflicts of interest, and to make it work in the most efficient possible way.

quorum call:

quorum call:

mr. dodd: madam president? the presiding officer: the senator from connecticut. mr. dodd: madam president, i ask unanimous consent that on tuesday, may 11, after any leader time, the senate resume consideration -- the presiding officer: the controller is in progress, senator. mr. dodd: madam president, i ask that the quorum call be dispensed with. the presiding officer: without objection. mr. dodd: madam president, i ask unanimous consent that on tuesday, may 11, the senate resume srgs of s. 3217 and debate concurrently the pending sanders amendment numbered 3738 and the vitter amendment 3760. that prior to a vote in relation to each amendment, there be a total debate limit of 80 minutes, with 20 minutes each under the control of senators sanders, vitter, shelby, and dodd or their designees.

that upon the use or yielding back of all time, the senate proceed to a vote in relation to the sanders amendment, followed by a vote in relation to the vitter amendment, with no amendment in order to either amendment. the presiding officer: without objection. mr. dodd: madam president, i ask unanimous consent that the senate proceed to a period of morning business with senators permitted to speak for up to ten minutes. the presiding officer: without objection. mr. dodd: madam president that . 29 be dischge the committee on foreign relations an be referred to the committee on finance. the presiding officer: without objection, so ordered. mr. dodd: madam president, i ask unanimous consent the senate proceed to the immediate consideration of s. res. 520 which was submitted earlier today. the presiding officer: the clerk will report. the clerk: senate resolution 520, honoring the 100th anniversary of the establishment of glacier national park. the presiding officer: without objection, the senate will proceed to the measure. mr. dodd: madam president, i ask unanimous consent that the resolution be agreed to, the preamble be be agreed to, the

motions to reconsider be laid upon the table, all without any intervening action or debate and that any statements related to the resolution be printed in the record at the appropriate place as if read. the presiding officer: without objection, so ordered. mr. dodd: madam president, i ask unanimous consent that the appointment at the desk appear separately in the record as if made by the chair. the presiding officer: without objection. mr. dodd: madam president, i ask unanimous consent that when the senate completes its business today, it adjourn until 10:00 a.m. tuesday, may 11. that following the prayer and pledge, the journal of proceedings be approved to date, the morning hour be deemed expired, the time for the two leaders reserved for their use later in the day, the senate resume consideration of s. 3217, wall street reform, as provided for under the previous order, and finally i ask that the senate recess from 12:30 until 2:15 p.m. to allow for the weekly caucus luncheons. the presiding officer: without objection. mr. dodd: madam president, senators should expect two roll call votes to begin at approximately 11:30 a.m. tomorrow. the votes will be in relation to the sanders and vitter

amendments to the wall street reform bill. if there is no further business to come before the senate, i ask that it adjourn under the previous order. the presiding officer: the senate is adjourned until 10:00 a.m. tomorrow morning. adjourn: podium, deputy

secretary of state james steinberg. >> so many familiar faces, it is a pleasure to be back. one feels like they can never quite run away. you especially feel that because i have the pleasure of having so many of my former and current colleagues, now in government, including the former leader here. it is nice to see the former administration officials. i am particularly grateful to talk about the issues that you raised, ken. your observations are quite

right. the change in our relationship has been the centrality of these groups and answering the questions that you post, are essential to understanding where we are and where we can go in the bilateral relationship which has enormous consequences, not only for the u.s. and china, but also given the central role that both of our country's play in being part of the problem and solution of some many of these issues, like the economy, climate. i also want to express appreciation for my good friend richard busch. i am glad to see that things remain in good hands here. i think it is important to begin the discussion of our collaboration on global issues by reiterating cover basic approach under which president

obama has led our engagement with china. we welcome a china that is strong, prosperous, and a successful member of the international community. now is the time for our nation to join hands and to commit to creating a prosperous future for our children. a four-positive looking commitment that understands that we have to look at our relationship and a broader context. this goes to the point that secretary clinton gave last year, which is, given the nature of the challenges that we face, the changing global agenda, we face a world where collective actions are coming in and no effort by any country on its own can be the only solution.

for us, the great challenge is to build the structures of operation, which include building on a multilateral basis institutions and mechanisms for the 21st century, but also to have bilateral relationships with key players, beginning with our traditional allies. but also, to emerging tower -- powers such as india, turkey, south africa. all of which places chemical to the global challenges of our time. i think the press tends to focus on the day to day up and down to of our bilateral relationship with china, from time to time, claims near or virtual crises in the relationship. i think it is fair to say if you look back over the last 18 months, it has been a very strong and productive time in u.s.-china relations, and

demonstrates that the two countries are able to work together to deal with these big structural challenges. that is not to say that everything is always smooth sailing. any of us who have dealt with china relations would never expect this to be without its difficulties, but i think that where we have difficulties, we can work through them. where there are differences, particularly among means, that we can work through them through dialogue by building trust and finding common ground by recognizing, on most of these big issues, core interests is common between our two countries, and while we may have differences on the best way to achieve them, that strong conviction about the common goal gives a framework in which to work through these differences. i will talk through a number of those issues in just a moment.

i think if you look at our strategy, going forward, it has been to build a strong and comprehensive relationship that deals with a full range of issues. we do not have the luxury of narrowing it down to a handful, but also looking at a broader range of issues which gives us context to solve individual issues that we face. i think it is particularly timely to look at this cooperation. in our administration, and i'm confident that our counterparts in china, are focused on working on a second to do the dialogue which will take place in beijing in a few weeks. when we think about some of the areas of cooperation, on her first trip to china, which is now a year and half ago, secretary clinton highlighted

three areas which she anticipated at the outside of her time as secretary of state, would be areas where there would be great opportunity for increased collaboration. the first was international and regional security issues. especially iran and north korea. energy and climate. the third one to response to the substantial global economic crisis, and the building aon ale proved to be the core issues of our relationship. i think we can see we have made important progress on all three of those. that is what i will spend the remainder of my time talking about. security issues, something that we are focused on -- i think you can see there are a number of areas where we have made to the in progress. beginning with global security challenges like counterterrorism, counter piracy, the attempt to build a more sustained military to

military relationship, and most importantly, dealing with iran and north korea. if you look at issues like counter piracy, for example, the deed the engagement in china for supporting global efforts to deal with this demonstrates the degree to which china increasingly sees its part as having to do its share and be part of the global solution, learning to work effectively with other nations to deal with a common challenge. i think this is a welcome the element. as we understand this as a common thread, to commerce and safe shipping, the fact that we have so many countries working together that have not historical done so, it is a strong example of how china can play an important country carry

role. on the military to military front, we have progress, although it is not as sustained as we would like. we believe military to military cooperation the there. it is important to maintain the dialogue between our military. upon iran, -- on iran, the strategy that the obama administration has had, which is to reach out to iran and demonstrate our willingness and to seek a diplomatic solution to cover differences, particularly on the nuclear question, has proven successful in not inducing iran to agree to the steps we think it needs to take, that at least we are serious about demonstrating looking for diplomatic situations. putting the onus on iran to make

their updates. we are also seeking cooperation in sending a message to iran that its actions are not supported by the international community and needs to work effectively with us or will subject themselves to significant new costs. we saw that last fall in the important decisions taken by the iaea board of governors. now as we move forward in the security council, following up on the p5 +1 process. while we have not fully digested our systems to precisely the action of the security council should take, we have seen meetings and that a growing list -- willingness of our partners of their recognition that the time has come to take

submitted in action. it is clear from their statements and engagement that china understands, and iran seeking nuclear weapons is not in its interest. there is a need for a clear international message to go along with that. we are working hard to reach common ground in the security council to send that message to iran. diplomacy remains open. we believe that is the best way forward.

i think that has paid off a very substantially that we interpret with other members of the security council and the response to north korea's missile count last year and its announced nuclear test last year. that led to a swift and unprecedented degree of -- in a large the security council to move forward on new sanctions which we believe are having a significant impact. we face a very challenging situation and it really underscores the precariousness of the situation on the korean peninsula. i think we all recognize we need a thorough and complete investigation. we are determined to pursue this thoroughly and to follow the

facts where they may. s. this will have an impact on how we proceed in dealing with the challenge of north korea and its actions and not only on the nuclear front and other provocative measures they take in go how we perceive will depend on clarity go career and must live up to its obligations on the nuclear weapons program, of fighting with the u.n. security council resolutions, and will end its belligerent behavior towards its neighbors. from this process, i say china has played an important constructive role through the six party talks and in engagements bilaterally and in new york. we are engaged in an intense discussion with all parties in the region including china with how to deal with this latest incident. we very much hope that during this recent visit with kim douville kim jbng il to make

clear-- kim jong il that we made clear. that is the first basket on security. the second identified was on clean energy and climate. i do not think i need to tell this audience or any and why is that the u.s. and china have a significant role to play in dealing with the challenge of energy and climate change we are the two largest energy consumers, greenhouse gas in matters, and there is no imaginable solution for dealing with the problems of dealing with greenhouse gases without significant engagement and contribution by both the united states and china. it is now up to us to be the vanguard's, as it were, to a salary to transition to a low carbon economy if we have any hope to meet the objectives for

limiting greenhouse gases in the atmosphere and the risk of increased global temperatures. i think the evidence here suggests, and i know the people here at brookings are looking at this, but we are seeing a real change in the way the chinese approach this question from its historical position which suggests that it either was a problem but if it was it was someone else's problem and therefore not irresponsibility for china. it was something that could perhaps impede their economic development. we have seen in china's national plan and its actions in copenhagen that we are beginning to see china undress when we think are the key challenges which is to see them reduce

their emissions as they go forward with economic development and put themselves on a long-term path to meet the global needs for what climate science has told us is a sustainable level of greenhouse gas emissions with lower concentrations in the atmosphere. all this can judge the extent to which the kinds of the to ms. china is making on its own national level which is -- to which kind of emissions china is making. i think we saw in the final outcome in copenhagen a clear recommendation of china taking positive steps on each of those elements. we have heard a lot about those negotiations for those involved in kyoto.

and should come as no surprise like any fine meals, the test is not how it looks while being made but how it looks coming out of the oven vigo -- out of the oven. with some significance steps forward in copenhagen. all major economies, including china, or making commitments to carbon emissions and to report on mitigation efforts which is critical to give a recognition. we all need to work together with balance commitments by all major economies. that international engagement has been complemented by our bilateral work on energy and climate. we signed a memorandum of understanding to work and clean energy and environment at the last to teach again economic dialogue when the president visited beijing last year.

we have new clean energy research centers, electric vehicle incentives, and renewed partnerships. we agreed on public-private energy programs and clean coal development. these will have benefits to both countries and our private sector partners who are part of these efforts in go by we have in a substantial way to go forward and we have things we need to do at home, we are very much committed coming the president -- we are very much committed, the president is moving forward and committed to move legislation forward in the united states. we understand we need to do our part, but this is something we can do hand in hand with china to make a clean and predictable environment. the third topic that the secretary identified in her initial remarks was the challenge of the economic crisis and global growth.

i think here you said the potential the partnership between the united states and china. this is not a g-2. however important our two countries are, we need the cooperation of all of the systemic international players. the prospects for dealing, both with the short-term challenges in the crisis as well as the long-term challenge of sustainable global economic growth, they simply cannot meet. both countries did step up and do their part. china was a clear player in the financial crisis. this was the occasion of the president's first meeting with president hu was in london for the g-20 meeting. now we needed to turn to the elements that will make the best recovery sustainable over the

long term. there requires china to recognize the shift to more consumption in a service based economy. that is in china's interest as well as the interest of the global economy. and the greasy some signs that the chinese leadership understands that in sight. -- i think we see some signs that the chinese leadership understands me to resolve long term debt. that connects to the question of domestic consumption in china and other emerging economies as we try to sustain more balanced economic growth. one importance is the china moving to a market-based exchange rate. i think this is a principle that have embraced and has been reiterated by prime -- by president hu. it is not done as a favor to anyone country but it is a part

of china's national interest. their economic leaders recognize this needs to be done that recognizes that these are changes that take place over time but we need to move in the right direction if we want to give the global markets confidence that we are going in the right direction. moving towards a market based exchange rate is a win-win. all economies will be stronger. there will be a more sustained basis for china's on economic industries if we have balanced growth. at the same time, we recognize that countries like china and other emergency emerging economies play a role in this economy and we need their significant participation. we have seen the role of the emerging economies and the evolution of the g-20. china has the third largest share of voting in the world

banks. we support giving them a larger role in the imf. all these issues are very much on our agenda. the all demonstrate a lot of the key global issues that there have that -- that there has been progress. we have a vision of where we want to go. even if you do not entirely agree on the means. this underscores the importance of the strategic and economic dialogue building on our very successful first meeting here in washington and in this upcoming meeting we will have even more leadership participation than we had here in washington with 15 cabinet members and agency heads traveling to beijing. we use this meeting both to deal with long-term challenges and an action forcing event to help us

move forward on some issues to crystallize the intention and get things sticking out of the bureaucratic level to the leadership decision level. it is a great opportunity to sustain the dialogue between policy makers in both governments, for them to understand our thinking and vice versa. the ability to do this across such a set of issues that intersect between the strategic, political, economic, environmental sectors. we think in a more systematic and integrated way. this set out an opportunity of us to give long-term priorities for engagement but also to have concrete tasks. as with last year, they will have two tracks, the economic track that will be focusing on economic growth including the

importance of sustaining employment here in the united states, building and strengthening exports, and thus the opportunities for american firms as well as to encourage china to move forward to contribute to global economic rebalancing. on the strategic track, there are three pillars. the first is counterterrorism, military ties, the second is the security issues in addition to the two i talked about, and ron and north korea northiran and north -- iran and north korea. we're working together on common objectives. the third is working together for multilateral institutions on things like climate change, pandemic disease. needless to say, every one of these dialogues will raise

issues and concerns and we will have an opportunity, as always do, to make issues important to the united states such as the need to protect intellectual property, religious freedom, concerns a lot aspects of the military modernization in china, as well as the issue of the overall economic balance and exchange rates. we will undoubtedly be discussed these core issues like peace and security in taiwan and the need for china to have a deeper engagement with the dalai lama within the framework of the one china policy. on the economic and trade fronts, we will discuss concerns about aspects of chinese policies which we think have protectionist case -- castes. this could undermine market

basket -- access to key sectors. this is an opportunity in formal and informal sessions for us to have a sustained dialogue, exchange views in a friendly but forceful way about each side's perspective which allows us to move forward and deal with these issues in a strategic way on a whole, the balance is -- in a strategic way. on a hold the balance is there. i think the answers to most of the questions is that we are heading in a positive direction. the nature of these problems are such that our interests are shared in terms of the fact that we sink or swim together on issues ranging from global economic growth, heah, terrorism, proliferation, protecting sea lanes, and other allies -- and other challenges in our common interest.

we need to maturity continue support for china's growing role in the growing political structure. china's growth is a positive contribution to the security and economic growth of the world and its growth and prosperity to not come of the expense of others. i think that is a challenge that can be met. and is one we are committed to try and work with china to achieve. we're looking forward to this sustained engagement. we will be in beijing in two weeks' time. i look forward to your questions. [applause] >> the floor is open to questions. please identify yourself and given the number of people who will want to ask questions. we have less than 30 minutes. make it a question and not an extended comment, please.

we have some microphones. can get the sucker please fax -- can we get this up here, please? >> i am with taiwan. talking about the tie 1 straight, how do you see the president's recent remarks that in an interview with cnn he says, "we will never ask the united states to fight with taiwan." are you encouraged by his determination to defend tie one on its own strength or are you relieved that the united states will never be dragged into a potentially bloody war? for you concerned that they may be distancing taiwan from the united states? thank you sir. thank you, sir. >> we are quite encouraged by the direction of relations between taiwan and the people's republic of china.

we believe a strategy of engagement and looking for a resolution is important to the common future. this is something that, in the end, we have always believed that this is something best resolved through dialogue. we have encouraged beijing to make clear to respond to these through the leadership to find common ground and build trust across the straits. that provides a foundation for the two sides to deal with each other. this is a situation where conflict is in no one's interest. it is not useful to speculate what would happen in the event that conflict comes about. the goal is to avoid it. we need to look for a peaceful resolution of differences that takes into account the wishes of both parties.

>> you mentioned sea lane security. with respect to maritime corp., it seems to me there is a window of things like humanitarian relief exercises with the chinese, anti-piracy, and that folds into energy security. that me ask a question that i posed with respect to the global climate change issue in the first panel. the chinese have increasing interest in building trust and confidence or rather in demonstrating they are pretty confident? >> is -- as i alluded to, one of the great challenges we face is how do we understand and how do we intend to turn a proxy growing military power?

we understand -- how do we understand china's growing military power? because china's approach lacks the transparency women like, we do have questions about long- term intentions. that is why we want to strengthen the opportunity for military to military dialogue so we have a better idea of what is driving their decisions over military modernization in terms of equipment, doctrine, and other operations. we want the assurance that what they're seeking to achieve is in line with the broader economic interests of others. to the extent that china has a greater maritime capacity to contribute for humanitarian efforts is welcome.

because there are other aspects of their modernization program that are less clear, which would like to get the clarity about what their goals and intentions are to build the kind of trust betweenur military's and leaders. we want to understand what that is about. who want to persuade the chinese of the world we live in requires more competition -- and more cooperation not competition. this is a situation where we have learned from experience that the risks associated with those competitions are severe and no one wins the long term. that is why a dialogue is so critical. we'll try to persuade them to try and insulate that dialogue on subsequent issues so we do not use the opportunity to

discuss areas where we have concerns as well as wary -- we have common interests. miss >> great talker. -- >> great talk. on the recently completed north korean meeting, are you getting a sense that the chinese are getting closer seeing the u.s. argument that north korea as it is a is a strategic threat to china or are they still trying to keep it going? in that regard, as that incident has shown, regardless of who is at fault, it seems to have started a more considered discussion about the level of u.s.-south korean intelligence sharing and all of that sort of thing. do you think it is correct to be

thinking about enhanced u.s. relationship with south korea in the military and strategic sphere of leveraging that on chinese progress and to see our point of view on north korea or is that -- and i mixing apples and oranges? thank you. >> let me begin with a few general observations. first, i will let the chinese speak for themselves in terms of their own opinion on the matter. i am sure the bill have their own opinions. there is a strong understanding that stability in the region is in the interest of all of the neighbors. aspects of north korea's behavior, particularly their nuclear activities, is a threat to that stability. we have a common interest that binds these talks together to address that as well as other

risks of instability coming out of north korea. they're talking about that in twos, threes, force in the region. -- fours in the region. no one can feel at ease about what is going on in north korea. it enhances the common security of all of north korea's nabors. in terms of our engagement with south korea, it is hard to imagine a much more enhanced fasten the than the unique relationship we have with south korea on a political and a security level. the combined command is a unique example of the two militaries that are deeply entwined. we work together in a remarkably united way as two militaries to

address those challenges. with the many specific adjustments is something we will take a look at. go in the terms of the need to get closer, it is hard to imagine -- and that extends to operational, but on the political level, the level of cooperation and consultation between the united states and south korea is unprecedented in my experience. my experience goes back a ways. i am encouraged and heartens by the degree of we are working so closely together. the korean peninsula but the strong contribution of theing cycle's making efforts in o afghanistan, its global commitment and policy and others. bilatea remarkably strong and important bilateral relationshi. and that is why we worked so closely together on the. investigation on the cheonan. it's why we are consultingonsult

closely on all aspects of the tilaboraes of the peninsula in conflict as we move forward.m >> the associated press. you seem to be willing in your speech to link the incident toe the future of the nuclear talksy is there any other guidance you prn live on what else the u.s. is prepared to do it as appears it will happen there is some the kind of linked to north korea? >> i'm going to resist all of those ifs and the question. we've made no conclusions. we are condemning the investigation. will we will do this thoroughly and in close cooperation not justco. with south korea but this is actually a multinational effort with others involved in this and this is not -- it's beenased and important this is broad based i do30 objective assessment and i don't speculate on how this iautrinot because we don't know yet and whether or not the fact

will lead us but at the same ti, time we will follow the fact where they go and draw thes frot conclusions from the facts but i do mean to say that we can't be be indif in different to this event.eep it is a deep tragedy for south korea either south korea and a full explanation as possible as to what caused and we will workt with them to do that and untilcy nk have priority about this i ti think it's important to be c careful about how we move for forward leaving open any of thet possibilities judging by the possibilities in this investigation are but i think right now is the time to be prui prudent in terms of actions going forward and we've of encouraged all sides to begoingw proven on every respect until we know what the results of the investigations are. >> i was smiling as jim was answering and recalling back my> joining of the national security council sitting down with me and explaining to me that as ans an

academic i would like to deal with hypothetical questions as t member of the administration never answer, and ever and ever answer a hypothetical question from a member of the media.f th. [laughter] >> john you just announced lasto ucnth they wanted to supply to n the nuclear reactors to pakistan under the agreement which ismena thebably not grandfathered by the entry. but do you look at it and what are the conversations you have with the chinese? >> i think as you suggested from the question i think the question is what is the status of this ass istance and fit into understandings with the iaea and this is something still under discussion among all of usssion obviously it's important from the perspective all countries live up to their commitment. com

mias you saytmen the chineseis grandfathered, this is something we haven't reached a final conclusion on but it's carefully. we are working scrupulously on the nonproliferation and engagee on the question whether this is the understanding is that the iaea. uni >> i just hope you could explaid a bit on the comments of the secure a dialog. you noted that there was increasingly figures in the that dialogue and that the dialogue has been constructed. dialoe was objher the bible was common objectives or interests and in fact just expand and dig a

little deeper the investment or ommmercial activity consistent c with u.s. objectives in of afghanistan or is it inits effi sufficient with the coordination on the security of effects.e had >> we had an intense on thconversation on these issues. we've had several conversations both in beijing and elsewhere.vl the chinese participated inngs g thinkgs involving afghanistan and i think our objectives are close to afghanistan. we all i think that we all seek a stable afghanistan that has increasing government responsive to its peoplegoveponsible t andn particularly are concerned that it does not harbor violentunited extremists and that the afghanistan's neighbors in the international community as a whole. so i think that the basiceighbos framework within the way we approach these things does havet

its share of interests. we welcome chinese economict in investment in afghanistan creating jobs and economic opportunity is part of an econoo terrnative strategy. creating a stable pakistan, creating alternatives tot production of narcotics and other sources of income for the afghan people so investment isav important and is transparent and is generally accepted in the international community to the l extent it involves assistance we welcome that and it's somethingd we've had a dialogue with the chinese about but it's in the policy report.with rpect to with respect to pakistan rethinl china can play an important role. it has been strengthening the capacity of the government toero meet the needs of the people and provide an alternative to h them extremism in the pakistani state as well as the rest of us, so i fink in the main interest pakisn objectives they are never neentical in any case but it's important those that have a big

stake in the nonthreatening work afghanistan work together encouraged by china going on to be part ofwi their effort. >> [inaudible] [laughter] >> mr. secure, gary mitchell "the mittal report." earlier earlier today we have a vault full panel talking about clean energy environment, etc. and there was an interesting sort os fact that came out of that about what happened at the tail end of the conversation between president obama and his chines's counterpart in copenhagen that reflected what i think it's faia sign to say is a sifignificant difference within the china policy elite on questions clima. ds lead to queen energy and climate which leads me to ask a

question that has three component parts together. one is are you seeing that kind of dissension on the otheronentu components that you identified and secateurs clinton's speech, security and global financial crisis. have you seen that kind of division were dissention of what might describe it? second, is it growing or static and third, to the extent that ie could be done is there a way to characterize what the nature ofi are li in thfferences of opinion in china are like in the way it that wwoould be easier to do in this country to talk about righu versus left and the tea party etc.? >> i don't know whether there is a chinese equivalency.,

[inaudible] they have different sectors of society different sectors arebya impacted to a different degree. e cost climate change and disruption the cost of o adapt adaptation and cost of sectors litigation fell in different confis. i'm confdeident there ntis as ly debate in china among the vus stakeholders about these issues and the united states but the leadership to provideing overarching framework to figurek out where the national interest sies and i think one of the positive signs we have seen is that there seems to be growingn recognition that the leadership in china that when we put it altogether, china's future depends on china taking significant measures to address the challenge. the observations why it is in china's interest and lots of internal political reasons why

the chinese leadership is moving intical that direction and to extricate their thoughts on this but i think it is significant that as they think about the the kind of contending voices andhia perspectives with in china that there seems to be the growing need tt recognize china needs to get out in front of this. it is in china's interest to adr up inest the future in the ecoy that will reflect with its inevitable transition to the economy. i'm confident of that and thinks the chinese leadershipbenefi recognizes they could benefitt from being part of the solutionf rather than part of the problemr i think it's important remember on these issues the effort to deal with a carbon emissions isd deeply tied up with more localized the environmental damage than china which also gives gives the chinese strong incentive talking about theck carbon and talking aboutates, lo particulars and lots off other aspects of the cost just as in e

our country the leading edge wan more localized.ey come they come together and get some strong consistency to the economic well-being increasingly people are tired [inaudible] cities converge.ere also recognitionis a r there's t to the china has not helping tok contribute to the solution and t that was an important part of what took place in copenhagenn and a recognition of china to be viewed in the public just as weu were ifst we don't take our are,onsibility. so i think what we are seeing ie that it seems to be willing touh move forward not as much as somt but at least in the right t direction on these issues. >> scott with insight u.s.-chint

trade. at the end of president obama's visit to china last year part of the communique the was commitment by both sides to accelerate the investment treaty talks and since that time theen united states has been engaged i inew the review of its treaty model and the report was to come out at the end of last year and dou're still working on it to give us a status report if there is likely to be furtherthere ber exploration of the talks with china stock at a technical level. oare >> we are still working on it. l [laughter] >> how about in terms of the talks of the innovation with the chinese you mentioned you would speak up about? >> this is obviously of concerno we think that this is a huge impact on the united states and inr investment with china. we think in the long term it is counterproductive to china's own interest but history shows this of protectionism are these kind of tools tend to be sold th

countries not only china so wef. think the chinese interest would benefit from a free and open plea field that allows global funds to come to compete on the even basis and clearly we woulde ch like to see china expand that into the field and i think isect will leave it to secretary geithner to elaborate if he gett into the discussions on beijing thed beink that china understand our concerns and hope responsible becauseterm, we think in the long term the system of china will want to belong to this one that promotet nae true level playing field in china that is both investment t. china by firms from around the world. >> mr. secure, scott herald of t the rand corporation. thank you for the remarks andin

service to the country.cros in interviews in beijing thein last two weeks as well as shanghai the subject came up quite frequently. alway it was highly praised and almos alalways immediatelymo followedy we need this from our side, the chinese side as an opening for the top leaders to give the rooi tr policy, innovation and relationships to be built at the working level, however, the follow-up would go we would then act like a secondary track, 1.5 for a track to where the workink level officials can talk with your working level officials to build the kind of ideas that cao uph up into the space that's been opened up without wanting to put you on the spot i wonder. if this is something the u.s. side will come, has thought about or would be open to if the chinese -- if we were to propose it to them. >> i would say first we would welcome it, and we kind of think we are doing some of that. a i wouldn't call it track .5. work that takes place between the high level plans but we alla

recognize that for these things to be effective we have to do wn the work in between the sessions and i know many of my colleaguee working on these issues woulduel say that is what they are engaging. i think we certainly -- i know that at least one of the meetings between the secretaryey and the council we talk about the need to strengthen thesehese ongoing so they're not just episodic engagements but they da produce so i inthink it's we clearg we feel if there's welce the oppoey could do more and welcome the opportunity to o engage onn the basis. >> this has to be the last question >> thank you. >>naudible] try touth korean newspaper. you used the term if. once the final investigationthet

reports by the korean government lina cae finalized, can the schedule of 2012 be rearranged in your opinion?>> >> the only thing i want to say seethat issue is that i don't see the linkage between the two issues. have k that we have had a long discussion and we will continuen to have the discussion about ths command relationships on the korean peninsula but i would noe see that whatever decisions are influenced by this particular incident. however it comes out. i think that's something we want to make sure whenever command relations we have some of the tk interest in the two countries as the stability on the korean peninsula. >> jim, thank you very much for coming over and getting this masterful overview. [applause] >> now we look at the current economic situation.

it this portion is 24 minutes.m. >> host: now we want to turn we our attention to the financialrb regulation bill and take a stepi back to look at the history of the financial regulation. our guest is here to talk about love glass ceiling we heard about as the debate plays outis about financial regulation. the act of 1933 what did it say? >> guest: it basically said commercial banks had to get out of the investment bank and bcurities firms could not beses involved in the banking essen business, so it created a wall ofsepara separation between coms banking and the securities - broker dealers. and this was after the decade in which the banks had become heavily involved in the involv n securities business and theyhe hadn't been involved had historically. but during the 1920's using some innovations, one might say,mighy loopholes, others might say, the banks became heavily involved in

the securities business andthers senator glass and other members to pass the bill in 1933 felt the bank's involvement in thebas securities business helped create thishelped tremendous bod bust cycle that happened during the 1920's and led to the great depression. there's been a lot of scholarly debate about the extent to whic that was part of the depression. i personally think it was part of what led to the depression. >> host: if the glass-steagall was put back into place, glass-steagall law put back int- place, would that mean for today's industry? back iit apply? >> guest: it would be quite anto drastic change in the sense tha- he would basically have to break all of the largest financialtha institutions. jpmorgan chase, bank of america, citigroup, wells fargo, goldman sachs, morgan stanley, all of those would have to be broken ue into as the old jpmorgan into the jpmorgan bank over here andf morgan stanley securities overve here so each of these firms

would have to choose either to be a banking firm or to be a thd securities firm and to divest the part they didn't want to keep. ai >> host: what about like aany aig, that's also an insuranceul- company that does securities, investmente securities? would glass-steagall a plightig? gst: >> guest: aig not so strongly. they do have a so-called thrift institutions arguably they might have to get woul rid of the thr, which is a savings and loan, not a huge part of the business. but certainly i think the question raised is an important one, which is the financial service is very much converged and consolidated ande last 10 to stnglomerate it over the la ten, 20 years and so certainly to only look at the large banks and large securities firms and heook at the large insurance t firms would have major involvement in either securities i banking would be anwould be n incomplete look. there's one other thing that senator blanche lincoln's proposal has brought up, which is one thing that didn't exist

in the 1920's that does exis now is banks for the last 30 years or so have engaged in but are called derivatives activities, financial and credit derivatives and one could in the shorthand way say that financial derivatives are in essentially become essentially synthetic.. to could use a financial derivative to create a copy ofe whatever securityli you like and wedit derivatives are in many ways synthetic. to create a credit derivatives like a credit swap that look somewhat like insurance on a bond or other insurance, so itw would certainly not in my view be workable to say let'slet' separate banks and securities firms and not look at the derivatives being done within. banks because one reason that glass-steagall broke down and that we eventually ended up with the gramm-leach-bliley of 90 negative the derivatives activities of banks allowed than in many ways to copy what bothre securities firms were doing and what the insurance companies

eree doing even though theyre dw not officially in eitherin eit business making synthetic products much the same. >> host: back in 1933 when glass-steagall was implemented, what did securities, investment and securities look like 1990' compared to today? this curiti >> guest: these would beay? classics stocks and bondsest: te essentially. so the typical common stock preferred stock, different types of bonds, what we would call classic securities, they were also were called investment trusts which looked a lot like d mutual funds. lt you didn't have these very exotic derivatives or exoticrod. products we have today. >> host: so they were not lending moneyurning for mortgages anddle then turning around and investing in a bundle ofest: ths mortgages? >> guest: there was some of that. mi's interesting. moreri there was a primitive form ofhee asset backed securities, and there was some of this blending

and packaging that went on. another thing that went on inouo veryarmfulhat turned out to be very harmful was they went all around the world particularly ia south america andme eastern eure countrt of the companies to the country's developing at that time, and they originated a lott of bonds both to governments and industries and denneyth package essentially packaged those bondt and sold thehem to investors boh in the united states and around subprirld and those were the sort of supply and security the source of prime bonds, all of the foreign securities many of which defaulted in the earlythem 1930's and afflicted great loss on the investors. >> host: did glass-steagallste get at too big to fail? >> guest: i think it did in an indirect way. nguy were focused mainly o saying we don't want commerciall banks in the speculative activities and they particularlc didn't wanttivity commercial bao be able to use their deposits to fund speculative loans, whichanl were often an adjunct to issue specter but if.want b

uritielso didn't want banks to be marketing speculative w securities to depositors whounsn were thought to be unsophisticated not able to figure out whatfigure of w was d investment or bad investment. but by separating the two industries, in a sense you presented the kind of consultation we have seen over the last 20 years where we havee enormous john and financial conglomerates that span all three sectors, banking securities and insurance. essentially glass-steagall andg- the leader bank holding company act prevented the creation of the giant financial conglomerate so indirectly it did have aneffe affect on too big to fail. we e we certainly end up with large l banks eventually but now we have sort of i think i would say too big to fail on steroids becausee it's not just large banks that we have large financialrate conglomerate. host: >> host: did glass-steagall address what some are saying is the missing component of the senate -- legislation that is

requiring banks to have s sufficient amount of capital on their books in case an investment goes bad? >> guest: there was the early steps taken. i think in those days capitalte regulation was not nearly asthea well understood and not nearlyd as sophisticated. there were early steps taken to try to improve the capitol. to ite thing that happened with glass-steagall is it was such a, wrenching even so many banks failed, thousands and thousands of banks failed and eventuallyel the government had to come in with a reconstruction finance corporation and essentially in they ways pop-up the banks that survived. the bankers that survived thatmt aveod tended toen be very risk adverse for a long time afterwards and was really when thegeneration that went through the great depression when they were tired and that recollectioo was lost the banks began to become much more risky again.

going out of the 1970's and 80's. >> host: our guest is arthur wilmarth, jr., professor of george washington university law school and writes about this and teaches about glass-steagall, 1933 act. we are talking about that and its impact on this 2010 economy. steaglappened in 1999 to the glass-steagall act? >> guest: okay, so glass-steagall had been under pressure really for the last 15 or 20 years preceding 1999. the regulators in court to opens up a series of loopholes one might say or they found a series of gaps in glass-steagall that were progressively opened. as i mentioned banks were getting more and more involved in financial derivatives which in many ways were synthetic securities although they were not recognized as being so by the regulators but everyone in the market knew they were. and so the boundaries between the banking and securities and insurance were breaking down through a process that you coule

say regulatory and judicial innovation, erosion and in 1999t finally the very large banks, large securities firms which byb then had decidede they are not going to be to keep them out of the business we might as well through thed pushed bill, the gramm-leach-bliley act, which essentially took on the major glass-steagall walls and said okay under this eential umbrella of the financial holding company you can have a , bank, securities firms andk and insurance company under theranc ownership.y al the theory was while we have tte these so-called corporate fire e walls or silos between the bank, securities firms and insurance companies of the problems are not supposed to spread from one to the other but many of us whot were not fans of ot gramm-leach-bliley thought the notion of the silos or separation wasn't going to bes s workable even as theforward organizationsan went forward and sressed their business plan which was certainly a crossa

selling, cross subsidization and certainly when the crisis came i certainly argued in the articley shortly after gramm-leach-bliley that if one of these institutions got into trouble it was unimaginable that the regulation would step in and say okay we are going to save t citibank hebut let the securitie and insurance affiliates of-- ae sitigroup go down the tube. so i think all of us felt, many of us felt that wasn't workable that these institutions were integrated wholes and they weren seen in the market as being the one institution. ing on so, effectively we took the safety net, deposit insurance, the lender of last resort for in the fed and other federal support which used to be focused in the banks and now we were u spreading the safety net are nod the entire financial servicee industry.try. >> host: the corporation at e, banks the thetim time were arguing it was a matter of competition. that outside of this country w other corporations were allowed to be involved in both types of

business. outsidthis >> guest: es, that's certainly -- your note was a classicexa example. the german banks, french banks,h swiss banks were so-called they alledrsal banks that could do all three types of functions and bank the united kingdom was deregulating the industry so there was an argument about foreign competition. it's interesting, of course one ow what would haveent bupened absent gramm-leach-bliley but when it wrote the article i said it's interesting that effectively the ba. commercial banks and res were ply the securities firms were preeminent in the world. the goldman sachs of the world were the pre-eminence securitiee we b of the world.nt they were beating the europeansg they were on getting beaten by the europeans so i never bought. the argument but it's one that congress found t influential. >> host: turning to the calls. arcadia florida. phone richard of t che independent li, you are on the air. y ahead., >> caller: yes. >> host: good morning, richard. ofhat

>> caller: i perception of what happened with the financia was that thereto was too much government i involvement, talkig about freddie mac and fannie maf and with fred dee dee k-fed de gispert cheap money to organizations and allowed to go on for way too long. in fact greenspan said that, and then the acts that come out of congress, the communityact reinvestment act, and thene they're risky deals were made then fannie mae and freddie mac. bottom-up taxpayers, they would eventually be dumped on the taxpayer. and when i was watching it congressional hearings theyhe confirmed it and the economists said this was more criminal than anything else.tly what they knew what was going ton. happen. they said as many mortgages become mortgages the iraq to

them up with ones who had risky ykedit ratings and then theyri sold them as securities knowingm eventuallyas s they would -- pee souldn't buy them and the systea collapsed and it was dumped into the taxpayer's lap. >> host: mr. wilmarth. >> guest: certainly there is a strong federal policy in favor of increasing homeownership. fannie and freddie were a part of that process to try to make home credit more available. que also had in the last ten years wall street got into this game in a big way.cularlyin it used to be fannie and freddio the so-called mortgage backed securities.reet came wall street came in very aggressively as competitors particularly on the subprimal and so-called option arm sort of the marginal products and unfortunately for fannie and

freddie to try to retain their market share they definitelynnid tried to compete and take some of this marketer which theyis mr certainly should not have done.d they didn't have the capitol to take anything other than pure plain vanilla 30 year fixed mortgages once they got into the more risky mortgages they werel. doomed to essentially. but certainly this policy in favor of pumping upor homeownership i think was part of the store. another part of the story was we had a very substantial economic problem at the beginning of thig decade with the telecom boom which was basically brought to you by many of the same players who pushed all of the ipos of he ttelecom companies and win the bubble burst it took down ti lbout $8 trillion of stock wil market with it. many people think that the fed under chairman greenspan deliberately pumped up the housing market as a way of offsetting the loss in the stock warket. but as you say tyhe problem was

they pumped up the housing market far beyondany rational ra level so they created another b. atbble which wind at first it was in attract far more devastating. chris choate week from one of the viewers.ho glass-steagall a suite of laws in the economy. should we consider bringing back all of them? is re do youfe know -- referring to? >> guest: he is probably referring to the securities acts of 33 and securities act of 44. 19tainly i think i would say what we need to have or two things.o one as we need to have a senseas that our financial markets are markets of integrity, that they are not markets where sens sophisticated people get taken advantage of and another part of the story is i think unfortunately the sec didn't dok its job either and that many things happened in thearketshati securities markets that i think would not have happened in thes, 60's, 70's and 80's when the sec was a stronger pro enforcement

agency that it became. that's part of the street. the other part going back to thk irst call we have essentially subsidized beast giant financiah institutions. delibe they've taken deliberate advantage of thean safety net ae again one reason i actuallysuppt support senator lincoln's proposal is i cannot imagine why we were doing synthetic securities and synthetic instruments inside banks here. if you're going to allow them t. be done the need to be done out of the bank in a separatebe done affiliate where at least there is some question about all of those contracts going to be protected if the bank goes into difficulty. right now the fdic is on the hook for those contracts. >> host: the argument against that is that if you separate derivatives trading from these banks they go into an area that's not regulated any more. >> guest: yes, you are right

in saying it would be wrong to say we are going to push the derivatives into unregulated institutions. so my view would be within these diversified financial holdingdei company's derivatives activity should be done in the thoker-dealer subsidiary but that should beey regulated tigh. by the sec and there should beon systemic risks resolution t tgulation and windup of 40 for the whole hoping to become a holding company. unreguted buo push into the holding company isn't going to regulate but it's not directly e iting of the most intensewher federal safety net where you can an collect deposits at the quarter of 1% and lose them. >> host: jpmorgan chase ceo, jamie dimond, has said if this were to go through separate in derivatives from derivatives investment trading from banks that would cost some of thebill? firm's how much? billions? >> guest: i've seen an estimate -- again to be clear amm not saying jpmorgan can't do

withinat this. i'm singing the cannot do durhao evidence with an jpmorgan bank. if they want to do it within tha securitieste, th affiliate's fi. i've seen estimates it would take 100 billion of additional billion capital probably to support the. derivatives activities within the holding companies opposed to the bank but my question is who among us thinks the banks havets to much capital? that is a sign of how themuch te capitol short they were and safy writing the federal safety net. if the markets are saying lookee we would require $100 billion more of capital you were on doing this activity in the bankt then that is a market determination this shouldn't be done in the bank otherwise it is beinbag done on the tax payers, not the banks that should be raising the capitol so i realiza they would be an adjustment tha to me it isbeen a signal we thar that allowing the institutionsg h ofthe far too muc advantage of the safety net. yes, it would be a majorav transition but i think to avoid another bubble and bust cycle wa

have to get more true markethos: discipline and play. >> host: let's go to iowa. and mackall the republican line. good morning. >> caller: good morning. l yes, i wonder how long it's the going to be for the interest rates turnout. i see a lot of older peoplees ad standing in food now lines now that i've never seen before and theyr are losing their houses. how long is this going to last? >> host: and answer? >> guest: i wish i did. i think that this morning's headlines about europe putting 1 trillion dollars of support behind the government's so that you want a cascading domino of sovereign default this is another indication of how serious this financial crisis is. thi is serious id some people have come to the conclusionth we are alrer through. are not through.tw we went through two or threed cd decades but i would call debt mania. enormous amounts of debt bothdet privately and publicly that weay didn't have the evin levy to pas

back largest the united states but i other countries and so i e think this is time for what was a cold hard realism and is going to take a lot of hard work and for wall street to think it can go back to the way that it was . think is sadly mistaken. i but we aren seeing in europe is an indication that we are most demoatic linugh the crisis. >> host: georgia, darryl thee. democratic line, your next. t >> caller: yes, the professor is right on this whole thing in the banking system and the sec. my question is to parts and i will make it quick. first of all did he know or hasm he known of a person who in th's 1990's was in charge of thedirer commodities a huge director oftk the commodity futures and she had talked about the black box derivatives. retedsue is that it's not how and when but derivatives shouldr be regulated but the derivatives should never exist.

we should produce things instead of ideas and thoughts on this piece of mortgage-backed security versus this piece. sen. derivatives make no sense. there are estimates over 50 trillion backed by very little. if you could talk to that i would appreciate it. thanks. >> the listener is correct but proxy war in the chair of the cftc at the time wanted to regulate derivatives very aggressively and said how dangerous they were and unfortunately, she was essentially over written by then secretary summers and thennd chr chairman greenspan and the sederal reserve. thi she is one of the heroes of thie particular story because i think had she been listened to the ha. derivatives wouldn't of gotten to the size they had.a i think durham evidence can plad a useful with their used correctly.

i think they can be used for hedging appropriately to protect against interest-rate fluctuations currency fluctuations, commodity to watct patients but hedging means you are not taking undue risks. they have to be properly capitalized and have propern margin. eet has been fighting hard the notion of trying to push derivatives or on to the sy itearinghouses and exchanges so they are transparent.ve tak people know what positions the companies have taken and they have to be proper margins and ma proper capital.s intere it's interesting the currentairf chairman of the commodities futures trading commission, garn the evefr ensler brooks lee bourn event now said very firmly she was right and he's fighting very hard to get a much firmer grip on derivatives and i hope he succeeds. robert aron t >> host: next will call cincinnati. inert on thehe .ependent line. >> caller: it's amazing how an informed the guests are saying

there's too much government. we have to have r. dee pachauri oversight on these things and mf can you tell me how much the company's future act deregulated and what pushed through there ts and then went over to make millions? could you tell me what part that devativen this? ..guest: this said she would not step in and regulate derivatives. the next year, senator gramm pushed this commodities futures modernization act through in 2000. president clinton signed it. that's the most derivatives out of regulation almost completely. -- that took most derivatives out of regulation. out of regulation.