i do want to thank you especially for that. thank you, if the second panel would come forward? mr. silvers has to leave. it's nothing personal, but has to be somewhere else. he's not necessarily absent. .. .. >> will come. thank you for being here. thank you for working through

these thorny and complicated issues. i am pleased to welcome our pal, matthew anderson, managing director. richard parkus, from morgan stanley research. .nd jamie woodwell thank you for coming. your complete written statement will be entered into the record. we begin with mr. anders said. >> thank you for the opportunity to discuss commercial real estate and bank stability. i will discuss real estate values declines and the resulting mortgage maturities and some aspects of our outlook for the economy. i should add the views expressed today are my own and not necessarily that of my employer.

an important feature is the dramatic decline of property values. commercial property values have fallen by approximately 42%. that is larger than the decline in the 1990's when commercial real estate value fell by nearly 1/3. the rising volume has put pressure on the commercial real estate debt market and will continue to do so for the next several years. it has surpassed $300 billion in 2009. the commercial real estate debt maturities will climb to approximately 3 $25 billion a year. rising volume has resulted in a large amount of maturing loans that are underwater. as much as half of the loans are currently under water and that torture $51 billion is under

water by 20% or more. as of the first quarter of 2007, more than 2700 banks and 30% of total bank account had a concentration. the greatest countries were among banks up to $10 billion in assets or a 56% of banks in those groups cre concentration. the number has fallen since 2007. just under 1300 banks and thrifts had a cre decline from the first quarter of 2007. part of this reduction is the result of outstanding debt. $300 billion of cre has been trimmed over the past two years. banks there received funds from tarps -- with tabulating

concentration figures for banks and thrifts to received investments including banks that it repaid the funds with the result that's 32% of the recipients compared with 50% of recipients. delinquency rates have been declining. early estimates of 2010 indicates rates and commercial mortgage -- we maintain a watch list of banks that appear to be at elevated risk of failure. this was proven -- non- performing real estate loans have been the largest problem loan type through banks on this watch list.

non-performing commercial real estate loans of the main problem loan type. conditions are improving, albeit slowly. the commercial real estate market, net operating income has been reduced by 50% or more. liquidity has been returning. this is been noted where new issuances occurred in 2010. the parent company expects this trend to continue with new issuance during 2011. we believe the recovery will be a ridiculous translate into increased demand. delinquency rates will increase. this process looks likely to last several more quarters. we're concerned about the volume of underwater mortgages that will mature over the next several years. continued demand for refinancing

for loans will constrain inflation-adjusted growth in the commercial mortgage market over the next decade. we believe growth will more closely resemble the 1990's went annual growth was 0.8% rather than 9.4%. i thank you and the other members of the panel. this constitutes my formal testimony. >> thank you. >> my name is richard parkus. i am chair of the research committee of the finance council. i would like to thank the panel for giving me the opportunity to discuss the current state of commercial real estate and the potential impact on banks. i would like to emphasize the opinions i share today are those

of my own. the question of whether commercial real estate will be the next shoe to drop is often heard. this shoe dropped to six years ago. commercial real estate has gone through the most severe downturn since the early 1990's. the downturn has been even more severe in the early 1990's. the vacancy rates have soared to greater heights. the drop in property prices has been much larger than during the previous episode. with respect to commercial real estate loans, most analysts expect the loss rates for cmbs originated during the bubble years of 2005 through 2008 will exceed the 9% to 10% losses experienced during the 1990's, possibly by as much as 4% or 5%. the credit crisis had a severe

impact on commercial real estate markets. financing for large, high- quality properties, so-called trophy properties virtually disappeared. the bill believe of financing was set -- the availability of financing never completely dried up. some regional and community banks continue to lend, albeit at reduced levels. tarp brought calm. the flow of capital return quickly. the trickle of new capital has since grown into a flood. financing markets for a trophy assets has fully recovered today. financing is widely available and that favorable rates. the story is not as positive in the financing markets for smaller properties. the market remains highly dislocated and has seen little improvement since the depth of

the crisis. the vast amount of capital that has targeted the trophy property segment has not made its way into the market for smaller properties. in some summary, -- this is reflected in the large difference in property price appreciation between the two segments. trophy property prices declined 39% between the 2007 market peak and the 2009 market trough, but has increased 70% since that trough. for the market as a whole, prices were down 44%, peak to trough, and have been effectively been unchanged since

that time. improve the availability of financing is a critical step in the price recovery process. one of the main sources of financing is banks, both regional and committee, many of which continue to struggle with loan portfolios. taking steps to improve the availability of financing for small properties would undoubtedly improve the availability of these banks to work through their problem loan books. core commercial real estate loans and bank portfolios art exhibit the legacy rates in the 5.5% range. at least part of the reason relates to the fact that a significant portion of bank loans are floating rate. as short-term interest rates plunge, required monthly mortgage payments decline by as much as 60% to 70% or more.

we believe the delinquency rates on banks and commercial real estate loans would be far higher, comparable to those of fixed rate loans in cmbs, which did not receive the benefit of debt payment relief. cuts both ways. this could have negative impacts on the performance of floating rate loans. and bank portfolios. higher interest rates would require mortgage payments. they could lead to declining property prices, exacerbate the already significant majority of maturing debt problem. without question, the biggest uncertainty facing commercial real estate debt markets it is the near term maturing debt. approximately $1 trillion will mature through the end of 2013.

$375 billion of construction loans in bank portfolios that matures over the st. period brings the total to almost $ 1.4 trillion. many maturing loans are receiving maturity extensions. we speculate the same is true in banks. simply extending problem loans does not represent a comprehensive solution to the problem as a whole. maturity extensions will help some borrowers. many are too far under water to be saved by this approach. a critical ingredient for managing smoothly through the mountain of commercial real estate debt maturity that lie ahead is a well functioning financing market. this is important for smaller properties, since they make up most of the maturities. the revitalized cmbs market has

the potential to play a key role in helping to improve the availability of financing, particularly to smaller properties. enough to reduce the degree of stress as we work our way through this deleveraging process. i think you for the opportunity to share my views and i would be happy to enter any questions you might have. >> to live. -- thank you. >> in my testimony, i like to cover three general areas. the first is to correct some myths. the second is to highlight current conditions and trends. the third is to note some key factors that will affect commercial real estate market going forward.

commercial real estate -- went industry professionals speak about this, they are speaking about office buildings, apartment buildings, shopping malls, warehouses, and other properties that have space in exchange for rental payments. this is distinct from two other markets. owner-occupied commercial real estate and construction loans. owner occupied commercial real state is closely tied. these distinctions are a key reason for some of the confusion about commercial real estate and help commercial mortgages have been forming in recent quarters. i think it is important to close clarify a few myths. the first is that banks are being weighed down.

the second is there has been a wave of long maturities threatening the system. bank and thrift to legacy rates for commercial mortgages remain lower than the average for the overall place of business. commercial and multifamily mortgages continue to have the lowest charge off rates of any major loan type. since 2006, banks and thrifts charge-offs $127 billion of credit-card loans, $70 billion in industrial loans. $53 billion in other loans to individuals. but just $27 billion of commercial and multi-family mortgages. there has been a wave of commercial loan maturities weighing on the market. on monday, the third annual study will be released detailing $1.4 trillion held by

non-bank lenders. the studies have shown that with a typical loan term of 10 years, most investor groups are spread over a relatively long period. this is in direct contrast to other forms of credit such as credit-card debt. commercial paper with the entire market matures every 80 days or less. we see the influence of the broader economy. the economy began to show modest growth during the third quarter. there was little new space coming on line. the impact has been marginal. property sales have picked up. they have not been high enough to keep up the mortgage -- the most significant factor in the performance of commercial real estate markets will be the performance of the broader

economy. vacancy rates rose as jobs were lost, consumers pulled back in spending. economic growth is needed to reverse this trend. commercial real estate finance markets will be driven by property incomes, and values, and interest rates and where the markets are when loans come due. loans will mature and rollover. to the degree they do not, the existing equity and as a last resort, mortgages will be resized to 50 capital stock. the great recession has strained every part of the u.s. economy. long leases and borrowing terms has helped moderate the recession's impact. thank you for the opportunity to discuss this with you today. >> can -- i like to start -- my

first question to all three of you has -- as the commercial real estate market hit bottom? >> i think so. the value -- price indicators would indicate that we have hit bottom for roughly a year. as mr. parkus mentioned, for prices haveeplaces, increased. we have not seen much in the way of strong price growth, and these for the broader market. >> mr. parkus. >> i also do believe that the commercial real estate market, in terms of fundamentals, we have to be careful what we're talking here about.

in terms of the rents and vacancies, those dramatic declines that would give seen in the performance of the actual properties, i believe is approaching a bottom, and we will probably be at the bottom sometime in 2011 or 2012 for most property sectors. so yes, i do believe that that has -- we're at the bottom. the bigger question is, how long to we move along the bottom, as mr. anderson was saying. in terms of price improvements, we have seen dramatic improvements for a relatively small proportion of the commercial real estate universe, which focuses really untruth the assets and higher-quality institutional quality assets. and middle of improvement for smaller assets relatively. >> echoing some comments that

were made, there are many aspects to the commercia real estate market. you can look at a whole range of different things. they move in relation to one another. prices probably are the leading indicator. they bore one of the leading indicators of the decline. now they are probably one of the leading indicators of a return. we have seen greater strength in the last quarter. i think is interesting to look at the different types of markets for a primary market with more institutional investors is probably more driven by investor yields than what competitive investor yields are, where the tertiary markets are probably more driven by the fundamental economics of what is happening in that market, the job growth, and how those are supporting individual properties. >> back to your question, how along theit bump

bottom? >> our best estimate is that it will take several years for individual properties, the cash flow, the net income to begin to improve substantially. we think that a vacancy rates will begin to come down gradually probably sometime in late 2011 or 2012. but those improvements will tend to be offset by the sort of delayed or lagged impact of declining rents. declining rents do not flow through into property revenues until space changes. as space changes, it will change those rents in the properties even as rents are rising, begin to rise, space will be rolling in many cases to lower and lower rents. so that will drive the recovery

out several years, we believe. property level improvements are probably late 2012 or maybe even 2013 phenomenon. i should say robust, a very significant improvements, which we do believe will also become. >> mr. anderson. >> i would generally agree. i think you have looked sector by sector. in the multifamily sector, there is some improvement. the lodging sector has shown some improvement, as well. lodging tends to be volatile and highly correlated with economy. with an improving economy, the lodging sector is an early beneficiary. -- office jobs are off almost 2 million jobs from the peak in 2007. it will take quite a while to

build those jobs back up again. i think we're looking at a multi-year impact in the office market. >> echoing that last point, i think that sector is important. but the different types of commercial properties, you could think of it hotel having a nightly these. self storage haven't a monthly lease. the more muted the not impact your hotels and multifamily is seeing positive impact. >> thank you. >> following up on that, it does not seem like any of you see a

double dip in the next few years. >> that is not a big feature of our outlook. it is possible. and external events can drive the economy back into recession, but it is not a major part of our outlook. >> i do not see anything like that. it would have to be driven, again, by some extraordinary surprised which is economy-wide. >> the market is being driven very much now by the economy. where the economy goes, so well -- so will the return of commercial real estate. >> and our rights by would definitely have an image -- an outright spike would have a definite impact on real-estate.

the low interest rates have definitely benefited borrowers and lenders from the standpoint of avoiding some of the distress that could crop up in that segment, and also the broader commercial mortgage market. i think for banks, about half is floating rate, half is fixed rate. those are probably pretty good figures. a surge in interest rates could have an negative impact on borrowers ability to pay. >> i agree with mr. anderson. i think that rising interest rates do pose a non-trivial threat to commercial real estate, especially if the rate increases are significant. it also depends on what drives the interest-rate increases. someone on the previous panel

made the very good point that if rate increases largely reflect a buoyant economic condition, where the fed is trying to rein in surging economic activity, that would be one scenario. that type of rising interest rate would be less problematic. on the other hand, today there is a lot of concern about future inflation, through commodity price inflation. that fear can get embedded in interest rates as well, as it appears to be in long-term interest rates already. it really depends on whether the interest rates are at the short end or the long and are rising, and what the source of the push up board is. >> there is enough. >> -- fair enough. >> if you think of the different

cohorts of loans, loans that were made in 2001-2002 that might be coming due and now, they were made with relatively higher interest rates then we are experiencing now, so you have a bit of a cushion. as you get to 2004, the interest rates working -- interest rates were much lower, so they is will be coming due now and higher interest rates could have more of an impact on them. >> it sounds like you anticipate a slow recovery of the market over the next few years. may i assume from that that you do not see the basis or the need for aid targets -- for a tarp 2?

>> i do not know about the out right knee. it would certainly have an impact. -- outright need. it would certainly have an impact. it would help clear the market of troubled debt that much more rapidly, but it would also have a cost and impact. there would be a significant increase in the rate of bank closures, whereas what we have been seeing is a high rate but, really, a process of working through problem banks. it would have an impact on the market. you'd have a sharp drop in prices, and it would come at a great cost. what we had in the early 1990's was a market that cleared, and then rapid growth after that.

our outlook is for pretty much more of the same of what we have been experiencing for the past couple of years, just stretched out over a long period. >> during my opening remarks i referenced multi-family housing as a category of commercial real-estate. properties might deteriorated as rental income is transferred from maintenance to debt service. renters could possibly lose their homes. how do you see the impact on multi-family housing? >> for us, we focus on bank loan performance very closely. simply put, the delinquency rates on bank multi-family loans have been highly correlated.

>> if you look at what has been happening with the homeownership rate, every percentage point drop in homeownership rate means essentially a 3% increase in demand for rental housing. with the drop in home ownership, we have seen a large surge in demand for rental housing. a lot of that is for single family rental housing, but there is a fair amount going into the apartment sector as well. notwithstanding the fact that apartments do have those annual leases that turned over the course of the recession, the multi-family sector, the apartment sector, has been among the better performing commercial real-estate sectors in terms of fundamentals. that has rolled over to

generally good performance in many of the different investor groups that lend money for multi-family mortgages. the one exception there is in the cmbs market, multi-family mortgages do have a delinquency rate that is higher. >> do we face a shortfall in available rental properties? >> a lot of folks have studied that. we have looked at some of those numbers as well. it does appear that with the vacancy rates, there's still a relatively high levels. with that demand, those vacancy rates still remain high. we will see once we burn through much of the demand is there. >> are there ways that bankers and borrowers are working together with local and state financing authorities to ensure that tenant living conditions are not negatively impacted by

the commercial real-estate crisis? >> i guess i would just put up there that the servicer and the lenders themselves of and have some of the greatest stake in making sure the property maintains its ongoing operations and value, so they are working very closely in those situations to keep those properties operating well. >> are there any unique issues that should be highlighted distinguishing multi-family from other cerere's? >> our outlook for multi-family is dramatically better than for other sectors in the near term. as some of my colleagues have mentioned here, the restricted state of credit for the single- family housing sector has redirected much of the new family formation process to

multi-family, and we have seen dramatic improvements in vacancy rates, dramatic improvements in rents over just the last three- six months. we think that will continue. the medium term demographics look very good. in terms of the very stressed operating environment that we have just come through and the impact on residents in these properties, i would also very much agree that the absolute most important objective of special servicers is to make sure that the properties do not deteriorate to the extent that they have any control over that. and they do, generally. keeping enough cash flow to keep up maintenance and other

property expenditures is very, very high, otherwise the value of the properties deteriorated. >> years servicers of commercial rs ofages are -- your server i commercial mortgages are better our servers of' servic residential mortgages? >> and did not say that. >> the want to look and what happened over the early part of the decade. iit has often been characterized that there was a bubble in the commercial real- estate market. that is not a particularly useful concept. recently, an economist presented

data that suggested the relative to 2000, investment in commercial real-estate actually fell in real terms. resources were flowing into residential markets, dragging the price of land, the price of labor and the price of input. would you characterize it as a bubble? was a reflective of what was going on in the housing market, or was it simply over- optimistic investors in the real-estate? >> it is a great question, and i think it is really important to understand what the market has been going through. it is one thing that we cinclude in our written

testimony. at real estate prices as compared to the dow jones industrial average. there are parallels. absolutely, construction costs were high during that time and rising. when one looked at property performance, it was very strong. mortgage performance was very strong in that preceding time. i think it did lead to a lot of optimism that people wish they could rewind a little bit right now. >> i would say that there was a bubble. i would say -- i cannot define a bubble. i cannot do it here. but i would say that what we saw in the early part of this decade -- and let's not forget.

commercial real estate went through a mini-downturn in 2001- 2002, and really did not come out of that until late 2003- 2004. because of that, we saw relatively little over-building this time around. over-building was beginning to show its ugly face in 2006-2007, but was cut off very quickly in 2008. we owe the previous downturn a gesture of thanks for keeping the over-building away this time. what we did have coming out of the last downturn was extraordinarily low interest rates, as we have right now. extraordinarily low interest rates drove many investors to demand riskier and riskier products. we also had a tremendous

increase in the size of the pools of so-called "hot money" in the international finance market, seeking yields wherever. all of those conditions came together to create bubble-like conditions, not only in commercial real estate, but across the spectrum in terms of leveraged loans, in terms of all credit products. in terms of corporate bonds, we saw a loosening of lending standards driven by a loosening of what investors would accept. the demand for yield was dramatic and was driving -- really drove the decline in lending standards. in normal conditions, investors do not put up with that. in those kinds of conditions with extraordinarily low interest rates, investors were amenable to almost anything.

>> i would add quite a few comments. i think there was a bubble. in terms of the definition of a bubble, maybe one definition would be a rapid rise that is really unsustainable. now, whether you would know it was unsustainable at the time may be something else, but certainly one feature of the price increase that occurred during that time was that it was almost all based on pricing as opposed to income. the way real estate prices are generally thought of is in terms of an income stream that is capitalized. the capitalization rate came way down during that time, and that drove all of the increase. net operating income grew a little bit, but not that much. it was all from declining capitalization rates. how did the cap rates come down? well, part of it was the

availability of financing. a very liquid debt market very much contributed to declining cap rates. if you had to pay all cash for the property, you would have a very different standard for what sort of price you would pay. whereas, if you could borrow ever greater amounts, which borrowers could heading into the bedroom, you can pay ever higher prices -- heading into the boom, you can pay ever higher prices and still generate a return. good cash flow performance helped keep delinquency rates very low. it appeared from a lender's standpoint to be a very safe, low risk area to be landing in. -- lending in. i think those factors really

played together. i remember vividly in 2006 seeing a presentation, a very credible argument for why cap rates could be 5% or even lower and that was unsustainable. i went in as a disk beleaguer and came out, not exactly -- as a disc believer -- disbeliever, and came out, not exactly being a believer, but believing there were credible arguments as to why the pricing could remain where it was sad. >> thank you. >> i would like you to comment on when you expect to see the majority of losses from defaults. >> we do not have any models that would predict that. i do think, based on the loan maturities survey that we are looking at, as folks have discussed, there is sort of the income perspective on thing and

then the maturity perspective. which will be driving those? different investor groups have very different maturity profiles, so that if there is a maturity issue facing mortgages, a different investor groups will see them at different times. instance, have int a 40-year maturity. credit companies and banks have a short-term period to the degree one is focused on maturity, one would look at those schedules. to the degree was focused on income-driven, then we are back to the discussions of different property types having very different situations where, for instance, hotel, multi-family, those are short-term lease

terms. they have probably seen the bulk of the hit to their noi, whereas the longer-leased properties were not as dramatically hit by the downturn in terms of their bottom line, but likewise will not see as quick of a rebound. >> i think it depends on the location or the investor base. mbs, we are beginning to see losses ramp up very quickly now. it depends on the extent to which problem loans are pushed out and extended, and how long the process lasts. there will be a combination of loan extensions and foreclosure and liquidation. losses are already ramping up very quickly now. we expect losses to remain high

for this year and through next year. the difference is that the sources of losses in the near term are from term defaults, what we refer to as term defaults, where properties simply cannot make the mortgage payments and are foreclosed and liquidated. sometime in 2012-2013, that will come more from maturity-related defaults. on the bank side, it really is a question about, i believe, when banks seriously begin to deal with the problem loan portfolios. >> when do think that will be? >> i think within a couple of years. i think the regulators we heard from today are right. i think as soon as individual banks have the financial wherewithal to deal with these problems, they're being forced to deal with them, but it will

also be dragged out because many banks do not have the wherewithal to date. >> actually, we do model that for banks to try to estimate what the ultimate losses will be for banks and how far along they are through that process. banks in aggregate, including large and small banks, are through 50%-60% of the defaulted commercial real estate loans. we are past the halfway point, but there is still quite a bit more to come, we think. the earlier panel noted that banks have been provisioning less over the last few quarters. you can kind of take that two different ways. you can take it as a glass half full interpretation, that banks see the light at the end of the

tunnel and feel less of a need to add to loss allowances. the converse of that would be that, i think that there is an 10 intense pressure to maintain capital. -- an intense pressure to maintain capital. there is certainly an incentive to work through the problems, but banks have been doing it for the last two-three years, and given that they are past the halfway point, i think they will be added for another couple of years probably. -- at it for another couple of years, probably. >> do you think it would be critical that congress provide more money to bailout financial institutions due to their commercial real-estate loans? >> that gets to an area really

outside of my domain. i guess i do not feel that i should be speaking to a question about really addressing how to deal with banks. my expertise is in commercial real estate. if i understand your question. >> fair enough. >> i do not think i have the adequate knowledge to address that adequately. >> my question is, can these banks work through a commercial real-estate problems by themselves, or do they need assistance? small banks and large banks both? it sounds like, given a few years, things will turn out ok. it is going to be rocky for a

while, but it is going to turn out ok. that would lead me to believe that there is really not a need for an rtc, tarp 2, or something along those lines. >> i think i've understand what you're getting at. an rtc is traditionally for banks in receivership. does it make sense for the fdic and regulators to consider an rtc solution for the large number of loans that they are taking in from failed banks? they should certainly consider it. it is another form of securitization, and quite frankly, that is what gave rise market in the first place, in the early 1990's.

on the other hand, you have to look at the cost benefit analysis. how much can they get by liquidating loans in the way they are currently doing? it is difficult for me to make that cost-benefit analysis. i would certainly think that it is a potential outlet. whether or not it is more cost- effective than the current disposal methods, i do not know. >> ok. help me understand, since all three of you think the market will turn around in the next few years, taking the approach of simply extending loans today at favorable rates. we have low interest rates. rowling those on a short-term basis versus dave -- rolling those on a short-term basis versus the other approach?

in one sense, i think you have to look at it alone by loan, bar or by a borrower, a property by property. -- bar work but are aware, property by property -- borrower by borrower, property by property. if lenders are of the general view that markets are gradually improving, then at least in cases where they think the borrower will get right side up again and be able to ultimately keep current on payments and ultimately repay the loan, that is a sound strategy, as long as it works out. in cases where the bank does not really think that is too likely, it would not really be appropriate, especially if, for whatever reason, the value

recovered a year or two or three from now might be lower than it would be right now. then certainly it makes more sense to put the pressure on now and try to deal with that problem sooner. in terms of modifications and charge offs, that has to do with whether the bank, after their analysis, and it seems that to be a better income them outright foreclosure. -- a better outcome than outright for closure. the borrower does have to be current in order to even qualify for that. >> and there could be some incentive to do that, not so much because that loan in two or three years is going to be in the money, but that the

institution itself may be stronger in two or three years, able to observe a loss in two or three years. >> i basically agree with that. that if you have a borrower with a loan in the market, in order to refinance, the market has a maximum ltb. that makes sense as long as you believe the borrower has good intentions, as long as the property is likely to improve as opposed to deteriorated. there are many cases where we think extensions make a lot of sense, but there are many cases where extensions clearly do not make a lot of sense. there are many loans out there that are not 85 ltb, they are

130 ltb. these loans will not be a viable in the future under any scenario. that is what happens when you have a 40%-50% price decline, and the original ltb was not 70, but 90 or 95. in those situations, we do not think that is a helpful approach. >> thank you. i find it interesting, and hopefully constructive, to make some comparisons between the commercial real-estate prices and the residential mortgage prices. when you hear about the factors that contributed to investors seeking higher yields, a weak

underwriting, low equity, too much leverage, too much focus on collateral, lots of similarity. until you get down to the comparison that on the residential side, a high number of borrowers were less sophisticated and did not understand what they were getting into. brokers took advantage of those borrowers. that they do not see on the commercial real-estate side. we have some of the most sophisticated developers in the country. can you speak to this issue? are there lessons learned, or making comparisons or differences? >> a lot say that for the most part on the commercial real- estate side -- i would say that for the most part on the commercial real estate site, certainly what we see, we deal with borrowers, for the most part that are fairly sophisticated. one of the huge differences, i

think, between residential and commercial, is the degree of fraud that was out there. there was a lot of a pay city in the residential side, and there was up -- a lot of opacity in the residential side, and there was a lot of outright fraud. in the commercial real-estate side, there was not much fraud. you might be able to find a couple of questionable loans, but we are not here because investors did not understand the nature of the loans that were being made. i think we are all guilty in the sense that very bad loans that clearly should not have been made were made. >> was the same euphoria applicable, the feeling that prices would always go up?

>> yes. i think the idea that rising prices just validates -- the idea that prices will always rise just gets built in to a mentality, and when you have, as an investor, you need to reach a certain debt hurdles. you're willing to cut corners. you are willing to believe that, well, maybe this will perform. maybe this clearly inadequate loan -- and then, maybe the next time, maybe this even worse quality loan will perform. you get swept away along those lines. >> you see this from both the commercial and residential side. >> i might draw a distinction between the reasons for purchasing a home, and the reasons for investing in a commercial property. someone purchasing an office

building or a shopping center is looking at that as an investment, as something that is both going to drop in income and, essentially, get dividends -- draw in income, and essentially, get dividends. the heightened expectations versus the income of a property can lead to prices exceeding the growth of income, which is something that we saw during 2005-2007 period. but i think we need to realize they're a very different motivations between those purchasing houses and those purchasing real-estate. >> i would agree. there was not the subprime element in the commercial real- estate market. as you pointed out, they're generally sophisticated borrowers that understand the terms of what they're agreeing to.

>> so sophisticated it a good vantage of the system? what's the might of been -- so sophisticated that they took advantage of the system? >> there might have been a little bit of that going on. the irony is that ever higher prices -- the sense of risk was diminished. and yet, that was when the risk was greater. >> thank you. >> a number of you have made distinctions between sectors of the commercial real-estate market in your comments. unlike to -- i would like to explore that a little bit more.

what are some of the differences that are producing these different performances? >> i think the big difference is in the price performance. we're seeing trophy properties and institutional quality properties appreciate at a much more significant rate and smaller properties not. i think that is largely the result of institutional investors. when institutional investors come in, they look for higher- quality properties. there has been a tremendous interest from institutional investors all over the world in high-quality u.s. commercial real estate properties. smaller properties are typically outside of their purview. they do not invest in small, multifamily, for the most part, small, multifamily properties.

they invest in large office properties in gateway cities. my point was that there was a very significant bifurcation going on between the haves, the very best, and kind of the have nots, which was a very large portion of the commercial real- estate sector. >> listening to your comment, it seems like you indicated that the differences were reflected in the fact that the trophy properties were seeing a greater appreciation in price. there is a reason of why they had an easier time getting financing. >> they had an easier time getting financing because there is an intrinsically greater demand from those type -- for those types of assets. if you have an asset for which there is a lot of interest,

lenders will be very interested as well. >> to pick up on the demand for trophy properties argument, i think that is true. what you tend to see in a market downturn with lower rents is occupants or occupiers of space being able to move up the quality of space at roughly the same rent. they may move from a peak- quality space in the office sector -- a b-quality space in the office sector to an a- quality space with little change in rent. what happens then is that the b-quality spaces experience

greater vacancy. >> you focus on commercial development and construction. that seems to be the difference between your view and some of the other views we have heard. can you expand on that a little? >> sure. it seems like everyone is peeling off the construction activity that was driving a lot of the numbers we have seen in that broader category. in terms of the distinction between primary, secondary, tertiary markets, a think what you have there is, in primary markets, you have a $100 million investment, in a tertiary market, $500,000. large, institutional investors who are drawn to those hundred million dollar investments -- it would take a whole lot of

tertiary market investments to get to one of those major market investments. there is a natural break with more local investors playing in the smaller secondary and tertiary markets. larger, more in institutional players are in the primary markets. the credit crunch probably had more of an impact on those large, international, institutional investors, and then then the recession had more of an impact on date tertiary investors. slightly different forces impacted different investors. >> a lot like to emphasize the demand from lenders. -- i would like to emphasize the demand from lenders. the ultimate lenders, in many cases, are not the banks, but investors in cmbs.

those investors have a strong preference for high-quality assets, when you can get them. why would lending focus on trophy assets vs smaller assets? i think -- and large banks as well. >> that concludes our meeting. i want to thank you for being here today, for your excellent testimony and dealing with our questions. i also want to take a moment to thank a member of our professional staff. we of had 27 hearings, and everyone of them has been organized by patrick mccready. i want to thank you for your good work. this is not our last hearing. until the next time, which will be our last hearing, this hearing is adjourned. [captioning performed by national captioning institute] >> "washington journal"ional

continues. host: let me introduce our final guest, stephen rose, a georgetown university, senior economist for the center on education and the work force and we are pleased to have them back at the table. i want to read the details of the ap story on the unemployment

rate which is hard to interpret i want to see if you helped us understand it. job growth remains the weakest spot as other economic indicators point to recovery strengthening.

what does that all mean to you? guest: first of all, there are two separate surveys. the two main numbers come from different surveys. one as a survey of employers, and that is the 36,000 number. normally we consider that a stronger number for the total because it is kind of like administrative survey and employers obviously know how many are on their payroll. the unemployment number comes from a survey of people, the

census population survey. that is only about 180,000 people. we ask individuals are they looking and we do a lot of follow-up questions on that. basically what you have is an unemployment survey setting 36 and another saying 500,000. these are monthly variations and we shouldn't get too concerned about necessarily the low numbers and we should be looking at the multi-month trend. the multi-month trend, though, is still low on employment gains. let us just _ that. if we don't start creating over 100, 200, even over 300,000 jobs a month, the unemployment rate will be high for a long time. that is the question that i will be addressing over the course of today's discussion. is it possible by april we could be seeing 300,000 or more a

month? i would argue lukewarm. we will see what happens next month. the unemployment rate going to ninth -- going to 9% was pretty dramatic. i would not be surprised to see it rise the next couple of months. these are statistical issues. these are not precise numbers. even employer surveys, who we survey changes because of small companies that are forming and falling apart. none of the numbers are rock- solid. host: where is the fulcrum as to where the economy is right now question of guest: what we know is the recession still -- recession set up by a financial crisis takes longer to get back on track. >> are we getting back on track? guest: at this moment the indicators are positive.

one of the more positive indicators is companies have $2 trillion in their coffers in cash. if confidence were to be regained, it would be surprising how fast we could start to have employment go up. it has been a dicey thing. companies have been staying on the sideline. it is like, who goes first? demand for somebody else's product -- they can expand, which creates demand for my product. it is called a virtuous cycle. as the economy grows, it is just wonderful to watch. we just don't know when it will start. for instance, if you go back to the last time we had 10% unemployment, which was in 1983, they were predicting that was going to stay for a year or two because they did not expect a lot of job growth but then all of a sudden the economy started to grow and employment growth, which would be the equivalent of 400,000 jobs a month in the

middle of 1983. host: one more issue on the table. i really want people to get to your calls. we will put another line on the screen because we have a line just for job-seekers. those who have been looking and have been unsuccessful. tell us your concerns or your observations. we invited you in because in " the washington post" -- lots of jobs but fewer workers with skills to fit them. what do you see happening? guest: i think that is a bit of an exaggeration. employment is always -- there are rough spots and there are mismatches, as to call them, of skills versus seekers and everyone likes to believe that the stories about when walmart announces they will have a 500 jobs, and line of 5000 people waiting for them. but that does not always happen that way. and when it doesn't happen that way -- that is, you have a

situation where there is a large number of unplayed -- unemployed and seemingly jobs better not filled it becomes news because it is unusable. why can't these be built? the best estimates i have seen -- a friend of mine at northeastern did a study for the federal reserve board. he argued the bass -- that the responsibility of mitch match of the unemployment rate was about a percent and have or two -- 2%. about 20% of the unemployed don't have the right skills to get the jobs. but most jobs, there are people looking. this is a recession. and the long term, i would argue we obviously need to upgrade the skills of the labor force. but i think that most of the unemployment was due to the recession rather than a mismatch of skills.

host: stephen rose, sr. prof. -- he has written a book "rebound: why america will emerge stronger from the financial crisis." we are talking about jobs and the economy. lagrange, ky. good morning to my, who is a job seeker. caller: i think a lot of these corporations are sitting on the trillions of dollars until they get the right politicians. if we start taxing on this money until the start investing maybe we will get jobs. that is my comment. thank you very much. have a nice day. host: tax policy and job creation. guest: tax policy is pretty neutral to job creation. i did not think we will need to tax them anymore. corporate tax reform is on the agenda. the worst of both worlds, high marginal rate but lots of loopholes, and that may change

in this congress, and that would be a good thing that i think, again, it is a business cycle of fact. our taxes, compared to our competitors in europe, are lower, so i really did not see it as a major effect. host: milwaukee, nancy, independent line. caller: has that ever been a survey done on older workers, say, over 45. the ones who did not grow up with computers, who are trying to compete with the younger workers. it is impossible. i am 50. i have friends over 50 and it is almost impossible for us to find work anymore besides pushing carts at wal-mart and there are not that many cards anymore. host: are you looking for a job right now? >> yes, i am. i found a job and fired after two months because i was not fast enough. i am at a loss. host: what job had you been working at, the major job, that

you lost? caller: ne customer service type of job. there are lots there but the older workers are getting laid off, they are getting replaced by the younger workers, and what are we going to do? host: are older workers having a harder time? caller: 100% true. this is a weakness of when you have the deep recessions and restructuring, companies -- all but workers tended be more expensive. as the caller said, sometimes are not as familiar with the newest technology. when you are in the family and have a computer problem, it will be the 14-year-old that will help you rather than the mother or father. there are many studies and it is clearly confirmed that when somebody over 50 gets laid off, it is much harder to get re-

employed. this is just a weakness we have -- weakness. maybe we need safety net programs and more special programs for older workers. host: phenix city, alabama. this is charles. republican minority caller: good morning, mr. rose. host: yes sir, we can hear you. caller: i said good morning, mr. rose. guest: good morning. caller: i have a question and nobody seems to want to touch it. if we go here and track back of loss -- this country basically was billed as a blue-collar country. the loss of blue caller -- blue- collar jobs of was a result of nafta and wto. if this thing was reversed, jobs would come back. put tariffs on these products coming in, revenue comes in. why does everyone refused to acknowledge this? these job exits have been going

on since 1994, which was mr. clinton and his democratic party. i will rate -- wait for your answer. guest: free-trade hat -- free trade has more support among republicans than democrats. nafta certainly was passed under the clinton administration but it acted with a majority of republican votes. that said, after nafta passed, one should remember ross perot ran an 1992 on the great sucking sound that would happen if nafta passed. i was with the clinton administration at the time at the department of labor and starting in 1994 -- again, it took time. when clinton first came on and the first 18 months it was caught the jobless recovery but once it started to take off there was remarkable job growth -- 21 million net new jobs created. by the end of 1999, the highest unemployment rate of the population that we ever had in the history of the country. certainly, nafta in the short run can't be said to have caused

job loss. the terms of trade -- it is easy to look at and say we could have done that, and why couldn't -- stop that and produce it at home. by and large, what happened is productivity advances. if we look at coal production or steel production, it can be measured quite easily. millions of metric tons. we actually produce the same amount of coal and steel today as we did in 1960. we do it with one quarter of the labor force. in fact, world wide, manufacturing employment as a share of unemployment is down significantly and that every country. this is what productivity does. it frees up what is required in the past, workers are needed to produce and allows us to go and other things. so, while i think we need to clearly negotiate trade agreements with labor

conditions and we have to be wary of situations like the chinese artificially keeping their currency very low, i think this is a small effect. the notion we can grow our way back on the basis of manufacturing is unfortunately i think a myth. host: this is a tweet -- guest: home foreclosures is indeed a negative factor. one of the reasons it is taking so long for us to get back on our feet. in a recession, let's say in the 1950's and 1960's, a lot of people said they were really driven by housing and auto, the drivers of economic growth. one of the things the u.s. economy is good at is reacting quickly to things. therefore, when the housing market was strong, we really expanded housing production. unfortunately, when you expand

housing production and then the housing market craters, what you are left with is a lot of inventory. it will take a while before we can clear the inventory and start getting construction going again. foreclosures, obviously, is a drag on christ -- prices, puts more units on the market. this is one of the reasons why it is taking so long for this recovery to get off and start going strong. host: talking about jobs and the economy with a doctor stephen rose from georgetown university, nationally recognized labor economist and his later -- latest book is "rebound." georgia. jim is a republican. caller: i really wanted to talk to senator bingaman -- guest: i will do my best. caller: my company went out of business two years ago. employed nine people. the federal government has done absolutely nothing to help the small businessman stay in

business. host: what kind of company did you have? caller: grappling business -- over 60 years. host: why did it go out of business? caller: pricing as much as everything -- oil, hangers, anything you bought was doubling in price in the last two or three years. it was just a losing proposition. my business is not the only one. there have been a half a dyfed -- doesn't cleaners that closed up. host: and hit in 2008 by people cutting back on dry cleaning in a bad economy. caller: you are right. host: you said you want more federal writ -- support. what could the federal government have done? caller: could put up small business loans to the people who wanted to stay in business but they have not done that much.

the obama administration and the democrats have cut more jobs than we can shake a stick at. they are in contempt on oil drilling -- and how many jobs that would produce, i don't know. guest: one of the virtues of our economy is flexibility. on for -- fortunately it has an upside. when market forces change, you can go out of business. when an economy is working well, about a million jobs each month are being created and slightly less than a million are being let go. so we have a vibrant, churning economy. both democrats and republicans are committed to small businesses. there is only so much you can do. the sba is funded and there are

loans available, but obviously when you apply for these loans, they will be looking at the market and how viable these things are. i know politicians are committed to this. and again, this is an effect of the recession and hopefully we will turn the corner soon. host: for stephen rose, brooklyn, a democrat. caller: to may, the real number of unemployed is closer to 30 million if you count those off the rolls and not being counted. taking a couple of years to bring back jobs. i want to know how dr. rose feels about unemployment expenses particularly for the 99ers. guest: this has been an important issue for the administration and pushed hard to get extensions passed and passed again. surveys asked a lot of detailed questions. as the caller notes, there are various ways to measure

unemployment. other categories, change if -- to change it closer to 17% is involuntary part-time, people will want to work full time but can only find part-time jobs. that is the main number. then another number call discouraged workers. people who say they are not looking but have given up because they just don't think there are jobs out there. the reason why we know these numbers is because we ask a lot of detailed questions. over the years, the census bureau has really tried to tease out this issue. they have produced for many years since unemployment rates, including various definitions to address this issue so we are fully aware of this. host: the next question for stephen rose comes from -- sorry, let us move on to the next one. tennessee. this is dave. republican line. you are on, david. caller: good morning.

i own a small business, and to make, at least what i am seeing, is the financial underpinnings of the economy are good. consumer debt paid off and massive quantities. we have divided government, which typically is helpful. but the overreach of the federal government in the last two years and the tax implications have been so profound that what i am saying is it is a psychological thing but the american public. they are absolutely scared to death of of what is going on in this economy. the weirdest thing is if obamacare was repealed, i think it would be a huge stimulus to the economy. not a tax cut, just a repeal of an existing federal mandate. host: what kind of business do you have and how many employees? caller: 9 employees, and the

fireside and gas grill business. guest: this is a very political issue. by and large, economists don't find that doing away with obamacare would be a big positive jolt to the economy. first of all, very few of the provisions were put in effect and the notion that somehow or another people making decisions about what will happen at 18 months from now is something most of us did not think what is happening. in terms of taxes, obama under the administration, taxes are lower than when obama came in. it is a little hard to say he has taxed the recovery away. this is a recession brought by a deep financial crisis set up by a series of blunders by wall street. let us be clear that was initiated this. a lot of people took part. the people who bought homes in which -- how can i afford this?

gee, if you have to say how can i afford this, you probably can't. there were appraisers, people trying to get the fast buck. everybody thought it was going to continue -- based on a house of cards. wall street started off. the only industry that could really bring the economy down the way it did, because it is the center of every other industry. every other industry makes its plans and the basis of using loan funds for interim projects, to deal with costs over a long time. would not have as much of their own money at stake if they could use lines of credit. we are in the midst of a financial crisis. everything looks buyer now. things seemed to be turning around. we are at a turning point. not where we want to be, not

economically strong. a lot of people are hurting and we will see what happens in the future. host: michigan pettitte rebecca -- michigan, rebecca. job seekers. caller: i am calling for my husband because he refuses to discuss it any more. do you hear me? [laughter] i am sorry. i wanted to make something real clear. they always cut me off before i can finish. my husband is not laying around on the couch doing nothing. he is depressed, yes. he has been on those bills, you know, on a lot of pills since he got laid off all but now we cannot afford to pay for them anymore. he worked for 29 years at a foundry and was laid off and for

the first year he applied everywhere -- everywhere but grocery stores, wal-mart, ok? he was making $29 an hour. but he never even got a callback for 19 months. and he had four call backs that month -- got in, he was one of four -- chosen and did not get the job. the first job he was offered, he took. he is now working at a gas station for minimum-wage. and to tell you the truth, he loves it, as far as being able to get out and have a job. but it is not enough to pay our bills and we don't have insurance anymore. we have bills -- he has shots he

needs for ms that are $1,000 a month that he has not taken and he is getting wobbly and it will get worse. one more thing -- is 56. host: what is the moral of this story or the question you want people to understand based on what you experience? caller: what i want them to experience is -- here is a man who has given his whole life to a company and all of the sudden, they just throw them away and he can't get a job anywhere else because of his age. everyone -- this man, too -- i am not criticizing you. but we have had so many people, the show saying, that is right. over 50, it is kind of tough. and that is the end of it. aboutn't you do something

it? guest: obviously your husband is one of the casualties of the winds of economic change. it sometimes happens even when there is a strong economy. obviously it happens much more when there is a weak economy. the only kind of programs for people like your husband are really based on western european models of a very strong safety net. they have higher taxes but they replace up to 80% of prior earnings and retrain 50 year olds for a long time. i notice you are from a republican line. what would help your husband is for us to be more light europe. that is not on the agenda in the united states and something the republicans have no interest for voting for. host: we are out of time. it would begin as may be imminent -- a minute.

guest: economies are funny things. when they are working, everyone is making their individual decisions. and all of these individual decisions lead to strong growth and income. when they are knocked off their moorings, as in the financial crisis, it is hard to get back. once the virtual cycle starts -- and i don't know when it will start. it could start as early as this spring and then we will be seeing strong growth this year. it could start next year. it may be very anemic growth this year but the consensus view overwhelmingly among economists is that it will start in the

>> okay. well, let's get started. it's terrific panelists are all here right on time. and i appreciate that. so as i said earlier, this panel is entitled broadband policy, what's next after the net neutrality decision? just a minute, i'm going to introduce our distinguished panelists, but since blair levin is on this panel, i think i'm going to begin by reading

something from the stifled nick las advisory letter. am i pronouncing that right? >> i haven't been there for so long. >> it's steefl nicolas. >> i called it myself blair's newsletter when i thought about it. it was easier to pronounce blair than it was steefl nicolas. that's what i did. i understand blair is no longer there as i'll make clear shortly. i want to read from, actually maybe the most recent advisory that i received, because i think it will help set up this panel today. "looking ahead to the coming year in telcom media and

regulation, we see 2011 as less volatile than 2010, especially at the federal communications commission. the drama surroundings the unveiling of the national broadband plan, the title to reclassification, and net neutrality battles and the midterm election results will be tough to repeat, but the seeds of significant issues have been planted including on net neutrality and comcast, nbcu enforcement. we should expect the unexpected with more new merger activity. the fcc will basically pick up where it left off before entering the abyss of reclassification, and the intrii intricasey of the review." now, i think when i saw that in

large part, that rang true in terms of what i thought we would be talking about today. now, i'm sure we're going to actually have some discussion of net neutrality for certain, which i want, but i also think we'll be focusing in this post-fcc decision world on some of the issues that now come to the fore. now, i just want to read a short excerpt from a blog that i published earlier this week as i was thinking about the conference and where things stand in the aftermath of the net neutrality and the comcast merger opinion those opinions and orders.

i said "faced with a choice, the agency continues to choose to regulate communications information service providers under broad, ill defined standards rather than opting to rely on the discipline of the competitive marketplace to protect consumers. continually invoking language at the heart of the analog era regulatory paradigm, public interests, reasonable, quote fairness, quote nondiscrimination, the commission clings tenaciously to the exercise of regulatory power, acting under the guise of, quote, reasonableness and quote the public interest and so forth, it exercises this regulatory power in the name of ensuring fair competition, or leveling the playing field. all the while picking marketplace winners and losers and all the while disclaiming it

is doing any such thing." now, i went on to say later in that blog, the same blog, that "in my view, there are distinctly free market oriented solutions that should be brought to bear in these policy issues, but i recognize there are other different views as well." today, i'm sure we're going to hear a range of those views which is what i want to hear, so let's go ahead and get it going. now, i'm just going to introduce, again you have your brochure. it has everything that you would want to know about the panelists, maybe a bit more in their bios, so what i'm going to do is give you their current titles for our c-span audience and maybe just perhaps another

sentence or two. i'm going to introduce them in the order that i'm going to ask them to speak. they've been asked to speak for no more than six minutes so we'll have time for q and a, so have in mind your questions as they go along. and i'm going to enforce that as they know. the only exception to the alphabetical order rule is blair levin, who as commissioner baker noted was executive director of the national broadband plan, i'm going to have him speak last after he hears what the other -- so he can hear what the other panelists have to say. our first speaker this morning is going to be jonathan baker. jonathan is chief economist at the fcc. he's also a professor of law at the american university,

washington college of law where he teaches courses primarily in the areas of antitrust and economic regulation. next will be jeffrey campbell. jeff is senior director technology and trade policy. let me make sure i get that right. senior director technology and trade policy and government affairs at cisco. he's responsible for developing and implementing it's worldwide public policy agenda on telecommunications and technology issues. following jeff will be james cicconi. jim is senior executive vice president external and legislative affairs at at&t. jim is responsible for at&t's public policy organization and

he served in this capacity since november 2005. so i'm going to skip over blair for a moment, and next we'll hear from joe waz. joe, as all of you know, is senior vice president of external affairs in public policy counsel at comcast. joe has primary responsibility for the public policy activities of comcast, including working with the government -- excuse me, the corporations, federal government affairs, law state, local government relations and public relations professionals. some of you might not know that earlier in his career, joe was a member of nader's raiders when he worked for ralph nader. joe, it's not often you're on a

panel that we proceed alphabetically and someone follows you, but that's the case today. i'm fortunate again to have christopher yoo, who, by the way, is a member of the free state foundation's board of academic advisers. aside from that, perhaps more importantly than that, in his view, his professor of law and communications at the university of pennsylvania law school, where he's also director of the center for technology, innovation and competition, and then finally, we have blair levin. blair is presently a communications and society fellow at the aspen institute and need i repeat, once more, that blair is -- was the executive director at the

commission leading that team of hundreds that developed the national broadband plan. you may have noticed blair is also going to be on the next panel. that means he's getting paid double for doing this today, but i should hasten to add that two times zero is still zero. okay. so with that, we're going to get started, and we'll hear first from jonathan baker. >> thank you, randy, and good morning. i am speaking for myself this morning and not necessarily for the federal communications commission or any commissioner. and i'd like to talk about merger review at the fcc because a merger proceeding can be a vehicle for implementing broadband policy which is what

our panel is about. i would like to use the recent comcast-nbc universal transaction as an example to address some of the concerns i've heard raised about the way the fcc approaches mergers. to remind you first about the transaction itself, comcast is the nation's largest cable operator and internet service provider and it has an interest in a number of cable networks including regional sports networks. nbc universal owns broadcast networks and cable networks and a film studio. the transaction was technically a programming joint venture. it was reviewed by two agencies, the federal communications commission and the justice department, and was allowed to proceed by both with conditions. at both agencies, the major competition concern was the risk that comcast would exploit its control of more programming to harm competing video programming

distributors, including nascent online rivals and create market power for its cable systems. i've heard people question about concur enforcement by the way fcc reviews communications mergers currently with an antitrust agency, either the justice department as in the comcast-nbc-universal matter. i've worked at all three of those agencies over the course of my career and i can talk about the benefits of multiple agency review from that experience. the economists at the fcc think about economics the same way as the economists at the antitrust agencies, but the fcc may look at competition issues in a merger differently from an antitrust enforcer for other reasons. one reason is their complementary expertise. they major in competitive analysis, the fcc majors in

communications policy. the fcc can take a longer view in evaluating potential competition particularly. working together as the fcc and the justice department did in reviewing the comcast-nbc-universal transaction makes both agencies more effective. we conducted what was probably the most coordinated communications review ever in between agencies without imposing greater costs on the parties or delaying the process. some critics of concur enforcement point to antitrust review as the gold standard for competition enforcement. if that's the test, it's hard to complain about the competition conditions in the fcc's-comcast universal order because there's little difference between them and the conditions worked out by the justice department. i also heard concerns about the conditions that the fcc imposed to ensure that mergers promote the public interest.

let me explain why the competition conditions were necessary in the come taft-nbc-universal case. this transaction was primarily vertical between a video distributor and a major programming supplier. some people say that if a transaction is primarily vertical, there can't be a competition problem, so competition enforcers should wave it through. this idea is jobbing on two counts. most importantly, the premise of the theory, the idea that vertical trances are incompetitive is incorrect. the antitrust enforcement agencies have recognized that vertical mergers can harm competition by ex clues or horizontal coordination. these possibilities are discussed in the merger guidelines issued by the justice department more than a quarter century ago during the reagan administration that are still in force. if a transaction is primarily vertical and those aspects are ignored, it can still create

competition problems. the comcast transaction is a case in point because it wasn't a cable operator acquiring a program supplier, it acquired programming from both firms. the fcc was concerned that this horizontal aspect could lead to higher programming prices. some people have questioned why the open internet conditions at the fcc imposed are related to the transaction. those conditions address a specific competitive problem. comcast's ability and incentive to exclude unaffiliated internet, video programming in an online world in order to benefit affiliated programming. exclusionary conduct like this is routinely analyzed in the antitrust review and it was identified in the fcc's open internet order as a justification for those rules. not surprisingly, the justice department, the agency that's the competition policy specialist had the same concerns and adopted the same remedy.

finally, i'd like to address the concern that the fcc's condition prevent merging firms from obtaining efficiencies. that is false with respect to the universal transaction. in formulating conditions, the fcc worked with comcast not to weaken the conditions but to avoid unnecessarily comcast's business objectives. after the order was issued, cohen stated publicly, i don't think any of the conditions is particularly restrictive. i take that to mean he thinks the order addresses the fcc's concerns without making it difficult for comcast to act consistent with the public interest. now, the fcc takes seriously its obligation to assure mergers promote the public interest. in the comcast-nbc-universal order, the commission concluded that the conditions it adopted would mitigate harms to competition, promote broadband

adoption among underserved communities, enhanced broadband access to schools and libraries. no responsible agency can simply assume that every communications merger proposed in the free market is beneficial as some critics seem to want the fcc to do. instead the fcc evaluates the effects on competition and imposes conditions as needed to ensure that communications industry mergers serve the public. thank you. [ applause ] >> thank you very much, john. i noticed you used the word early in your talk nascent, i think, particularly in the context of the comcast merger review, you know, at some point, it struck me how often that word began to be used, usually in the

context of the online video market. i forget, the fanascent online video market. i think it overtook echo system, it was a close race, but it may have overtaken echo system as the word for the telecom world this year. >> jeff, you're next. >> it's nice that at least the commission we won't be talking about that net neutrality issue for a little while here and may be can start focusing on the national broadband plan. i would open by looking at an observation made by a wise man seating two seats to my left here when i came to talk to him once on the national broadband plan, he observed probably very accurately, that, you know, here you are coming in to see me, and you know, you love 90% of what's going to be in the national broadband plan and you hate 10% of it and you're here to beat me

up about the 10% you don't like. it was true then and unfortunately, blair, since this is the free state foundation conference where we are concerned about overregulation by the government, i'm going to focus again on the 10% a little you bit here today. in particular, i wanted to focus on the commission's proposal to significantly change the structure of the set top box market through creating a system that they are calling the all vid device. this is meant to be a replacement for the current cable card system which the commission has put into place some time ago in order to encourage the retail availability of set top boxes and other such devices. in the five minutes that i have left, i'm going to try and address quickly what i think are sort of the four fallacies that are underpinning this policy that the commission is moving

forward. the first fallacy is that there is not sufficient competition in the set top box market. i think this fallacy is largely predicated on the fact that there isn't a lot of retail sales of set tops today because consumers haven't chosen to go through the retail market, but the reality for actual competition among the box makers is that competition has flourished because of the implementation of the cable card system. you only need to go and look at the series of waivers that all the manufacturers ask the commission to do for dta devices that the commission did grant wisely. and you can see that there are a large number of companies that are engaged in producing set top boxes in the country today, including significant producers from japan, korea and china as well as some domestic manufacturers as well, and if you look at the average selling prices of set top boxes over the past few years, you'll see that

it is on a continuing glide path downward which is another indication of a fairly competitive box market. you know, we're seeing the major cable providers are getting boxes from multiple suppliers in a marketplace. so the second fallacy that the commission is relying on and pushes its all vid proposal is that consumers should purchase set top boxes. this is an affirmative good and this is something we should have. i think there's a couple of things that are missing in the analysis here. the first is that there are major benefits to leasing boxes in this kind of world. the first is it requires no outlay of money at the beginning. you don't have to go buy a $500 tvo. the second is your protected in your investment in the event that happened to me last

december, my noncisco set top box crapped out in the middle of the football season, i called comcast, joe, and i had a new box and it cost me nothing. that was great. it was probably warranted by the other manufacturer, so it probably didn't cost joe either, but the point is that i didn't have to go out and buy, it was clearly beyond a consumer warranty period and i didn't have to go buy a new one. the other thing is when you change services, when you want to upgrade to a better service or new service, you don't have to throw -- buy a $300 box, throw it away and buy a $400 new box. instead, comcast will swap out for me. i may pay more on the lease for a better box, but i'm not stuck with the past purchase that goes with me. to look at this a little more clearly, if you look at the cell phone market, which is the market that the commission kept

pointing to, look at the cell phone market full of innovation and the set top market doesn't have it. even the cell phone industry doesn't operate on a purchased model. you go and buy your cell phone, but you're really not paying the cell phone, you're half buying and and half leasing it. you're getting a contract with it. it's a perfectly good way of doing this. consumers are not interested in the huge outlay of the high costs of the equipment right up front and are interested in paying for it more over time. the third fallacy is the fact that there's not enough innovation in the set top market. looking at an industry where it wasn't that long ago we had 60 channels of analog tv coming at us and where we are today with digital, with hd, with dvrs, and more recently, when we look at some of the offerings that are coming out like tv anywhere and

xfinity and fios, we're seeing a lot of innovation happen. last month cisco announced a newark tur that we're providing in the space that will allow all video sources to be operated through a service that is both cloud based and transport based that would completely open up this market and eventually onvyiate the need for having set top boxes and running it through soft clients and software. i hope the commission is looking at these changes that have been occurring even recently you in this area as they go forward on this proceeding. the last fallacy is i think the biggest one, is the commission has chosen a hardware solution for this problem. they created a device, an all vid box that every multi channel

provider is going to have to provide that is going to be limited functionality and do certain things. the problem with the solution is that it's a hardware solution in a world that's about to become a software world. we're going to force these hardware boxes in perpetuity at least for ten years which is perpetuity in the commission's world, in order to create the market structure that we think is best at a time when we're really moving to soft clients, where you're going to be able to run your video programming from your ipad or pc or on your mobile phone through soft clients and soft solutions that will be open and competitive. so i think that if you you look at the realities of the marketplace versus even where we were two years ago -- year and a half ago, two years ago, when the commission started looking at this, there are drastic changes that have occurred. hopefully the commission is keeping up with the

technological changes and is going to adopt a more market based solution that is going to allow for greater innovation with more consumer choice. >> thank you very much, jeff. it will be interesting to see whether blair, now that he's over at the aspen institute, whether perhaps you persuaded him about those last -- that 10%. let me just say two quick things. i mentioned the audience that we want to have questions from them which of course we're going to have, but i want to invite the panelist, please, i want them to react when we go through these initial presentations to their fellow panelists if they have reactions, so keep that in mind. then the other thing i wanted to remind you of, we have a hash tag for twitter for the conference that's on the back of your brochure, fsf-fef 4

conference. if you decide you want to tweet about something that's going on. with that, jim. >> thank you, randy. really pleased to be invited here today. in fact, i can't tell you how pleased. for five years i've been waiting to be invited to be on a panel that is entitled what comes after net neutrality. actually, i think we can all agree that the net neutrality debate which has consumed most of the last two years has been both exhaustive and also exhausting. it's really sucked all the oxygen out of the room. it's a shame in many ways because it's been focused on a hypothetical problem and we have real problems out there. you know, i think with net neutrality behind us now, i think it does give us an opportunity to deal with some of these real problems.

blair pointed a number of them out in the national broadband plan, one from spectrum. i know you're going to be dealing with that in the subsequent panel. i think the other one, even though it makes many of our eyes glaze over is the challenge of reforming universal service and intercarrier compensation services that underpin much of our communication system in this country today. in fact, i think the national broadband plan itself challenges us to fundamentally change the way we think about regulation and universal service in this country. reforming usf and intercarrier comp is going to be extremely difficult. i think everybody understands that, but the plan itself made clear that what many people have been saying for a long time is very true. if we're going to get serious about 100% broadband in this country, if we truly believe that broadband is going to be the economic driver that takes us through the 21st century and beyond which i happen to believe, then we have to reform

those policies that currently are in the way of achieving this goal of 100% broadband. in order to succeed in this journey, i think there needs to be jeemt on where exactly we're going and what the goal of 100% broadband entails. i look out there and see a world where, if we're successful, everybody in america who wants one, will have a broadband connection. voice and video will be one of many applications simply ride on a broadband pipe. in fact, that's true of many americans today. you know, if we're serious about this goal, it will be true of everyone. we should be funding most efficient technology to do this if we're going to have a universal service system devoted to broadband. we have to make certain that we're careful and rational with consumer and taxpayer dollars there, as commissioner baker and randy pointed out, that factor, a contribution factor goes in

everybody's bill is up to 15.5%. we should only be funding areas where there's been a market failure. and broadband can't be deployed with private investment alone. specifically, we should not be using public dollars to compete with a company or a technology that is deploying adequate broadband without public funds. we can't afford to support two networks. if we want to support broadband, we must be willing to let the public switch telephone network go away. that means removing the regulatory barriers that are today designed to prevent that very thing from occurring. i'm talking about things like carrier of last resort regulation, cost of service and local voice regulation. broadband today is an interstate information service. we all know that. it's not regulated by 50 state commissions and it has to remain that way. we have to confront the questions in that statement. i don't think any of this is

controversial to the participants who have engaged in this debate for the past ten years. each of these concepts have been put forth in the national broadband plan released by the fcc last year. great work that blair spearheaded. it's going to require robust conversation. if the fcc doesn't do that in its meeting next week, i fear it's a lost opportunity. if we have disagreement on these points like whether the states will have regulatory authority over broadband in the future, then i think we need to have that discussion sooner rather than later. let's be clear. this transition is already occurring. three weeks ago the fcc released its local competition report for 2009. that data is already a year old. it showed that between 2000 and 2009, incumbent switched access lines shrunk from 181 million to 107 million, that's a 40%

reduction. the real shocker is over the past two years, that reduction has excel rated to over 9% on an annualized basis. if the decline last year in 2010 remained constant with the prior two year, we're already below 100 million legacy access lines in this country. on top of that, a recent poll showed that around 27% of americans have cut the cordon tierl, dropping wired phones and going to wireless only. that's a fact that the fcc's wireless bureau stubbornly refuses to take into account when they're regulating wire line companies. while end user revenues associated with those lines is disappearing, the cost of maintaining those lines, the legacy billing and provisioning systems around those lines doesn't go away when the customer goes away. ant kuwaited regulations require that we continue to incur these costs, continue to maintain these lines, whether people are

using them or not or in fact whether they'll ever use them or not. when we get down to it 50 or 60 million access lines, i suspect, in fact i posit that we won't be able to afford to support the pstn any longer, let alone the public switch network and an emerging broadband infrastructure. the time to act is now. we must have the coverage and foresight to clearly define our objectives in the end state we envision. only if we do that can we then move to the next set of much harder choices that will need to be made. i feel the frc can start that process next week. we don't know where you're going, it's awfully hard to get there. >> thank you very much, jim. next we're going to hear from joe. you may recall that we had one of those high wind warnings a couple weeks ago.

we have had several here in washington due to the -- some of them due to the storms, but the one a couple weeks ago, it was the day that the comcast-nbcu merger was approved by the commission. it was later determined that that was just joe exhale iing un philadelphia. so that's why that one was shorter lived. joe, the floor is yours? >> thanks, randy. i think i'm going to let that exhalation be my comment on the whole transaction today. we're delighted to be done. we're delighted to have it closed. we're delighted to be moving forward and creating a company that we're extremely proud of that we really do think is going to accelerate the anytime anywhere digital future that americans are looking for. in a competitive and innovative marketplace. as to the trance, i'm going to watch the shuttle clock fly over my head back and forth.

as for me, i'm glad that we're moving forward. what i would like to do today is take a bit of a step back from the immediate policy issues and talk about the policy process. the fact that, if there's anything we're learning along the way, it's that we really don't have the right statutes, the right laws, the right institutions and processes for an internet age. we have statutes that were written when -- for technologies that came into the market when our parents or as i look around this room, in some cases our grandparents were children. we have agency jurisdictions that fail to account for the fundamental different interactions among players in a layered internet. we don't think consistently about what openness means when we're talking about networks or applications or operating systems. we don't think consistently about privacy concerns as they cut across these various categories and various players and the internet echo system. we have processes and procedures that depend too much on predescriptive rules and the

adversarial process. we don't defer to the other systems. jim just told us. wooil i' while i'll be talking about these issues, i wanted to take a couple minutes to talk about how we can improve the legal and institutional context in which these issues get framed and addressed. it's time for more experimentation to break us out of the old paradigms. let me make my point for two issues, broadband adoption, which is the center piece of the broadband plan that blair led and internet openness. on broadband adoption, as jim indicated, we're trying to find our way out of a failed inefficient system to promote universal service and we need to

address not just rural issues but also the urban poor. some would have us bloat and patch the existing subsidy system. we do need to approach this. our company is about to try to approach with regard to low income populations something called the comcast broadband opportunity program or cbop which is a fairly catchy acronym. >> who told you that, joe? >> my son. >> our nbcu transaction, in it we said that the goal was to accelerate the anytime anywhere digital future. as we spoke to the fcc about the trance, we were reminded that the future is not necessarily within everyone's reach, so we took on the responsibilities of devicing a plan to expand broadband adoption and we call it cbop. there's three parts.

the focus community is households in which a child eligible for for a free lunch under the national student lunch program resides. and we're taking a three pronged approach to promoting adoption in those households by aoffering a reduced price broadband connection for 9.95 a month, by offering equipment for $150 or less. we're looking for good equipment that family want to use in that price point and to promote digital literacy. what we really learn is just talking about price is not enough when you're talking about broadband adoption. price of broadband is a barrier for perhaps 7% of the u.s. population. 35% of americans aren't connected but 15% of those say the cost of a broadband subscription is the main barrier to adoption, that gets you down to somewhere in the 6-7% range

saying cost alone is a barrier. what research shows is there are multiple barriers to adoption. blair's report refers to this. a lot of research john horrigan has done. lack of digital relevance and cost of equipment. we said let's come up with a plan to tax as many of these barriers as we can. we think the program we're developing and we'll implement for the first time will become an important new test ground. it will lead to new strategies than merely arguing about the price of broadband or the subsidy dollarship from carrier a to carrier b. we've received calls from other isps saying we would like to know more about it and may want to build on it. we hope the technology community as well will step up and do

their part to make this work. in this program, we hope we might have the seeds of a new cost effective approach to broadband adoption one that was developed in a policy conversation rather than a government mandate which i think is an important point. let me turn briefly now to an open internet policy. after many years of political and legal wrangling, we have fcc rules on the books. how long they remain there will be up to the courts. my company said the rules do reflect the way we run our business. we're prepared to abide by them and we committed to do that in the fcc transaction review. how these rules get implemented will matter. that brings us to a process point. if internet openness issues and network management issues are to be determined exclusively through the filing of complaintses with the fcc and through the adversarial process, i'm concerned the lengthy, all encompassing politically ugly process behind the adoption of the rules will be extended for years to come with further

diversion of attention and resources from key national goals from the national broadband plan. we need better approaches. we need institutions that are as modern and innovative as the internet itself. i'm pleased to be involved with such an institution, something called the broadband internet technology group or b tag. i'm not sure if it's as catchy. let me try to summarize what this thing is. during our bid dispute three years ago now, we learned about something that our engineers knew well but our policy team did not know as well, that the internet community today has incredibly successful consensus based mechanisms for related issues. the internet engineering task force, if you're not familiar with it on wick paidia, is one of these mechanisms, it brings together thousands of engineers from all over the globe several times a year and lets anyone tee up questions for discussion. the give and take is invaluable.

we've played a major role there over the years. it was through the ietf that we pest tested the propositions behind the fair share network administration. what is braet great is the engineers succeed in leaving their doing mattic biases at the door. coming out of round tables a couple years ago, a cross section of players from all elements of the internet community developed a program to dom esty indicate the ietf creating an analogious organization at home. we have daryl hatfield to serve as our leader. the same kind of fact based engineer driven consensus driven that the ietf has with expedited time lines. b tag's technical working group

will meet for the first time next month with a terrific group, equipment providers and public knowledge and center of democracy technology are all participants. i hope we'll soon have proof that this kind of work can work to bring more clarity to issues. i was at a meeting -- >> joe, one minute frks we could. >> i'll wrap it up. i was at a meeting last year when an administration official, not one who used to run silicon flat irons by the way, referred to ietf as a near miraculous institution. we hope to replicate that near miraculous institution and we hope that policy makers will watch us carefully. to supple it up, as we rethink our statutory and institutional frameworks we have to be open to more experimentation and innovation as these two examples suggest. those are the characteristics,

experimentation and innovation that made the internet amazing. i think they can help to make better public policy too. thanks. >> thank you, joe. next we're going to turn to professor yoo, also from the city of brotherly love. chris? >> thank you very much. i don't mind going at the end, because it is the reality of alphabetical order, it's what i'm used to living with. it allows me to make a small point which i sometimes make which is there is -- despite whatever you try, there is no such thing as a neutral principle. there are systemic biases in everything you pick. you will naturally pick alphabetical order if you choose to try to avoid offending anyone. i guarantee you there is a consistent bias inherent in that that can be predicted. i say that as a riff, but things like first in, first out, all the different routing schemes that we perceive as being neutral actually have

understandable predictable biases against certain types of applications, the speed at which they start, how long they run. one of the parts of the research i'm doing is studying that, something that engineers understand very well, that have percolated very little into policy debates as they exist today. going on to the topic of today, as jim liked the idea we're talking about network neutrality, that comes after network neutrality, i'm here to discuss what comes after network neutrality is unfortunately a little bit more network neutrality. we have two major issues brewing. the first is a fight over jurisdiction and the other is a fight over enforcement. i would like to talk briefly about each one. jurisdiction, the big fight will happen in the courts. the d.c. circuit has ruled that it's not necessarily going to happen there because the comcast decision came down -- was issued by the d.c. circuit. they'll have a mechanism for

deciding which venue will be resolved and address that issue. the interesting question is on the substance than on the venue as commissioner baker said. what's interesting is different people will have different opinions when they read the order. my own take on it is the fcc discussion of jurisdiction does not sound confident. in fact, they cite a large number of provisions that they potentially support their position. someone once told me, i you used to work in a company and i had someone come in and said i have four great ideas for you. my boss said what you are really saying is you don't have a single good idea and you have a bunch of krd ideas. section 06, title 47 of the u.s. code, it's been stated by commissioner baker and mcdowell in their dissenting opinions, it is intended to be a did he

regulating provision. they believe it will be hard to turn that into a instituting regulation. that will be up to the courts. the final venue here will be congress. as i said last year in the conference, i think we can take a great less frn the history of the cable industry, which is the last time we got a new major technology, tried to shoe horn it to the existing categories given to us by the communications act of 1934. all of you know the history. we tried to use ancillary jurisdiction. we had a series of supreme court decisions saying the fcc can do it, can't do it, congress finally decided we need a regulatory regime that instead of being determined by how a series of categories designed for a different technology, many decades ago accidentally fall in a particular technology, we need to think about how we should regulate this. congress eventually stepped in about '84 and gave us a

framework. i think that's a useful model. i think it will lead to better results. what's interesting is how complicated that has become. i think we have missed a tremendous opportunity about a year ago for a congressional solution. since that time -- that point, house democrats had weighed in against the network neutrality proposal about 70 some had written a letter to the commission, to the chairman. a bunch of state representatives overwhelmingly democratic had opposed it. there seemed to be room for nonpartisan discussion. mayors came in. right now, we have had a very different election. we have a tea party contingent of the republican party which is made opposing network neutrality a major part of their agenda. and in the winds of this, we have a president who's now stated p aaring back regulations a goal across the board. the problem is giving his commitments in the

administration, i don't expect that commitment to extend to network neutrality. i'm not optimistic about a short term solution based on the waxman proposal which was widely received, but was considered a useful starting point was basically a nonstarter partly because of the timing of the elections but also because of how the politics have changed. the second part of this is enforcement. actually, the order attempts to provide guidance, but it actually is very ambiguous in a lot of different ways. for example, the content industry was probably heightened in the initial proposal, they said part of the management would be cushing illegal piracy of content. the order did something very strange. it took that language out of the specific definition of reasonable network management but qualified it by saying but nothing in this order changes

the copyright laws and stand in the way of someone who wants to curb illegal piracy. everybody is left scratching their heads. reasonable network management is you can't block access to legal content. we're left trying to figure out, they didn't remove it from the definition for no reason, but we're left with ambiguous clues about what you can do. there's wonderful ambiguities about whether they say there's a real harm. they use the term proph ylactic. they talk about who bears the burden of proof. i favor a case by case approach. the burden of prove lays on the complaintant. they make -- they start off saying the burden of proof sits on the complainant, but if they make a prima facie showing, the

burden shifts to the broadband access provider to show their actions are reasonable, which is a very different thing than saying the plaintiff bears the burden of proof throughout the proceeding. why is that a problem? ambiguous practices about which we have no data which means new practices are often going to run directly afoul, because once the prima facie showing has been made and the burden shifts, the broadband provider is going to try to prove something in which no data exists. the idea of protecting innovation are very influential. i'll give you two examples that are happening right now. as most people probably know, there is a dispute going on between comcast and level three. comcast and level three cdn, content distribution network had a peering network. level thee is the primary distribution network for netflix. the economics changed. comcast attempted to shift from

a peering arrangement to a transit arrangement. there was claimed foul as the network neutrality violation. i do not know any of the private details. many people say how do i know? what do i know? estimates suggest that netflix is 20% of all network traffic. it's a large provider. some estimates suggest that the change of adoption of netflix will increase the flows going through level three cdns by five times. i don't know the details of the agreement. any peering agreement that i know of, one side of the flow increases by five times the underlying, it's no longer a piering agreement and it's likely to change. it doesn't top the ambiguity and the enforcement mechanisms for people raising concerns. a number of voices raised concerns. it causes a tremendous drag in what's going to change in the relationships. the second thing that's in the news right now is metro pcs.

one of the struggling -- not one of the big four largest wireless providers, they're attempting to scale up. they missed 3g and move from 1g to lte. they have a system where they used on their 1g system, they were able to put youtube because of consumer demand by changing flash into a different protocol called rtsp. they're willing to do that tony provider that provides their content in flash, right now, you cannot get all video content on their network because of the way the limitations of the 1g network. they carry that to the 4g platform because they have all these problems with dual function phones because basically they're not completely built out in 4g, sometimes you're in a 1g cell or 4g cell. they have a huge problem. they don't want you clipping out of service based on what city you're in and you have to keep track of all that. this is something that's a natural technical fix for a

wireless carrier that has very limit eed bandwidth. they stand ready to do this with other people providing in terms of flash. the question is do they have to support other video encoding systems, side flash, it's hanging over them and caused a tremendous problem. it's one of the reasons they are challenging this. >> christopher take about another minute. i have to have you wrap up. >> these are the questions. i mean, we have these questions about how these things are going to be enforced. in fact the one thing that bothers me most about the order is the notion about -- there's a threat in there about hostility towards practices that will let broadband access providers generate more revenue. the reality is, i think jim is correct that one of the down sides of the network neutrality debate has distracted us from the broadband plan. the filings from the state reps make it clear there's a deep linkage between the two. i'll throw a couple facts at

you. the lowest, most conservative estimate for building out 100 million megabytes is $350 billion. that was government funding. i know of no proposals on that scale, the smaller ones, on that scale, there's going to have to be some form of revenue enhancement. i'm worried about the language of the order standing in the way of that. to me the wonderful example of this is the difference between fios. one used a heavily managed solution, one used a big pipe solution. price tag difference, $24 billion versus $7 billion. that's a technical choice, economic choice which they're finding out in the marketplace. wall street has been on both sides of that fight. what i would suggest is in fact, yes, buildout is the most important thing, but there is an effect of how we implement the open internet rules that will have a direct effect on which

practices we can use to make that buildout which will have a direct impact on the cost, whice cost, which will have a direct impact on the extent of whether it is successful. >> thank you very much, christopher. i made a note here on my piece of paper that next year you're going to go first. it is going to be a nonneutral decision that i've made. okay. next we're going to turn to blair. i'm going to hold him to the same time limit. i just want to say, with respect to blair, jeff said, i think that you agreed with about 90% of the content of the broadband plan, just disagreed with about 10% of that. and that made me think of my relationship with blair when honestly i don't think i, you know, approach agreeing with him 90% of the time, but i do agree with him -- i do agree with him on many things. we have known each other for a

very long time. and i've always appreciated having him come to free state foundation events and i think we're good examples, blair, of, you know, what they talk about a lot in washington these days where you don't agree on everything. but nevertheless can talk about these things in a way that hopefully is useful to people. so with that, proceed. >> does anyone in this room think it is a good idea to ever have the government use its power to assess consumers to subsidize a private company and assure that company's permanent profitability? anybody want to raise their hand? okay. that's what we do today. we spend billions and billions and billions of dollars doing that. it is called rate of return regulation. and the result of that means that in some parts of rural america we collectively pay the price of creating a maserati for

which that private company offers a mercedes, which because of the subsidy they can do it -- offer it at a price of a chevy. that's what we do for about half of rural america. the other half of rural america we say, walk. okay? it is really dumb. it is really stupid. we have been doing it for years. it is wasteful. most of you have been conservatives and will find this to be offensive. i also find it as a liberal democrat i find it offensive there are millions of people who can't afford broadband who are paying so that bill gates in his second home can get that subsidy. i find that offensive. so i spent a lot of the last fall going to various meetings of rural phone companies. i owe it to them and the team that i work with to explain what we did and why we said that's a bad idea, we ought to change it. there is obviously a lot of transitional issues. we ought to change it. i'm sitting there and i'm listening to them come back at

me with basically arguments like we need the money, we need more money, we should tax google. if anybody anywhere has 100 megabits per second, we deserve the same thing and you should subsidize it for us. as i'm sitting there, i'm thinking where the heck is rob mcdowell. rob mcdowell writes wonderful pieces on net neutrality and other places in "the wall street journal," free markets, we have to get rid of these rules, we have to understand economics and all this. and i'm sure he will come here today standing behind -- from the banner talking about free markets and, sure, like every other fcc commissioner will talk about the bloated and wasteful universal service fund but he's never to my knowledge said we need to get rid of rate of return regulation. now, i don't know what you would call rate of return regulation. you cannot call it capitalism. i'm not saying it is socialism. though i would say that certainly carl marx would agree with rob mcdowell's acquiescence

in the passage of billions and billions of dollars on rate of return regulation. and probably, well, i'm certain it is true that under stalin and russia telephone system was built under rate of return regulation, and also interesting to note that rate of return regulation really gained prominence during the woodrow wilson administration. you guys obviously don't listen to glenn beck enough. but my point is we need a principled conservative to point out. it should not be my job. that's not really my job. i'm willing, by the way, i go to liberal think tanks, i'm doing one on monday and they'll say things like we should send $300 billion and i'll point out to them that's not really progressive at all since it will come on the backs of people and cause rates to go up by 30 bucks a month. the other day, a reporter, lovely guy, very, very concerned about this, wrote me and said i've done a lot of studies and discovered poor people pay a higher percentage of their income for broadband. that's outrageous. i said, well, they also pay a

higher percentage of their income for, i don't know, energy, food, water, everything. i will take on the burden of talking to my progressive friends to try to have a rational debate. but i really would like it if i could get a little backup here. if rob mcdowell would finally become a principled conservative and say, unequivocally, i think rate of return regulation, again, we can argue about the transition out, we need to end it and we need to end it in a foreseeable future, along a clear path. yes, i am stating it. i would like to ask you, randy, to ask rob two questions. number one, does he think it is appropriate to ever have the government use its power to assess to guarantee the permanent profitability of a private company? and secondly, if you would please be so kind as to ask him, is there a limit to how much we should spend per year to subsidize a line. we don't have that limit today, it is certainly something that i believe we should have.

now, let me just close, i'm going to be quicker than everyone else, close by saying that we identified lots of gaps for our country in the broadband plan. three are very effective by universal service, the unserved, the adoption gap and institutional gap, which i think becomes more and more important over time, public institutions lacking in sufficient speeds which are very different than what you would want for residential. in looking at all of that, i think it is important to remember the wisdom. by the way, a bonus question if you wouldn't mind asking rob, what did the kansas-nebraska petition which the commission passed giving more regulatory authority to the states, what broadband gap was that designed to help us solve? >> i thought initially you were going to ask about the kansas-nebraska law of 1854 and i was really -- >> if you give me a couple of extra minutes, i'll work it in.

i am mystified by that, like, why they were doing that. i'm just saying it was an odd kind of movement. but you can ask him that. here's the thing. peter drugger, the great business visionary said the danger in times is not the turbulence, it is to act with yesterday's logic. and the problem we have is that we are constantly acting with yesterday's logic as to all kinds of things. and joe talked about it. but let me just close by saying i really agree with jim cicconi. i think we did a pretty good job of identifying the end point that we have to -- have to achieve, which is fundamentally about 100% broadband everywhere in the country, having everyone on it, and then working backwards from there to what do we need to do to change that? in some ways i wish we had been stronger in articulating that vision. but i couldn't agree more that that's really the job of this

commission, articulate that vision, be very clear about it, work backwards, have a plan. you will, of course, course correct. let me just say quickly that my favorite line -- >> quickly. >> -- in the plan is the opening line of chapter 17 on implementation, this plan is in beta and always will be. you have to adjust facts as they change. but the important thing is set that vision, be clear about it, and start in a far, faster and more passionate way to get to that broadband future. thank you. >> blair, thank you very much. if blair thinks that he's going to get paid more by now giving me questions to ask commissioner mcdowell, he's probably -- he's probably wrong about that. but, you know, i do appreciate him plugging the lunch. i'm not sure whether you linked commissioner mcdowell to stalin, but i think you did. i think you did. so i may have to -- i may have to ask him about that or get you to do it. but actually this gives me an

opportunity to say quickly, a lot of you have come in since i did the initial welcome this morning. we were concerned about getting everyone into the first amendment room with all of the registrants that we had and for some of you out there who are my good friends, possibly may have even discouraged you from eating as opposed to just standing up, but we have alleviated all of that. we're now going to be in the ballroom and that works better as well for c-span. so there is no -- absolutely no problem. i want all of you to come for lunch and, you know, i don't know whether i'm actually going to -- myself, link commissioner mcdowell to stalin personally, but i guarantee you we're going to have really a good conversation. it is going to be interesting and enjoyable. blair was actually the first --

when we did the first annual conference, he was the first person that i interviewed. i think he can vouch that we had -- we had a good conversation then and fun and it is going to be -- >> talked a lot about stalin. >> i don't remember, but anyway it was good. we're going to have a good one today. so now with that, what i want to do is open it up for questions and we have got -- questions from the audience and then we can have questions among the panelists as well. and so you can line up at the mikes. i think what i'll do, just because i promised the panel, if anyone on the panel, after hearing the remarks of the others, john or anyone else, if you want to ask a question of your panelist or if you want to

react to something, i'll let you do that first and then we'll intersperse those matters with questions from the floor. anyone want to say anything? okay. let's go right to questions from the floor. if you'll please identify yourself by name and the organization that you're with, and, remember, we want to have questions more than statements here. >> no problem. i have a question for you. hi, eliza with politico. for those of us not as expert on these issues, could you just briefly lay out in layman's terms what rate of regulation is. >> it means if a company spends money on various capital expenditures, gives the bill to the government, says please give me my money back plus a rate of return, which i believe if i recall correctly is 11 1/4. i read a recent report that said

jim's company -- it costs the capital about 8%. so we're paying a lot of -- let's put it this way, if anybody would offer me a guaranteed 11 1/2 -- i would put all my money there right away. >> just to juxtapose numbers and, by the way, almost everything blair said, that's within that totally within the 60% or whatever that i agree with him on. but keep in mind that the universal service tax that results from all of those things that he was talking about, understand legally it is not a tax, but the effect of it is, is i think now 15% or close there to. i think john had a comment. >> a quick academic qualification about rate of return regulation. of course wasteful subsidies are something we all want to oppose, that's essentially what blair is saying and i'm not trying to

quarrel with that. as a matter of history, the point of rate of return regulation isn't to subsidize, you know, high cost activities. the reason that it was introduced historically is we had phone companies, electricity companies, water companies that we thought were natural monopolies and would only have one firm because of the high fixed costs and very low incremental costs of production. and if another firm tried to enter, the first firm would try to undercut it and force it out and we would be left with one firm that could charge very high prices to consumers but with freedom from competition. one can imagine a variety of solutions to that, government ownership or the like with u.s. historically chose is to allow private firms to own natural monopolies but protect consumers and assure enough return for

investment by just capping the rates. and so national monopoly regulation was the solution, i'm sorry, rate of return regulation was a solution to the natural monopoly problem. over time we have learned to try and -- to tweak this. we have introduced price caps as a way of improving on the way natural monopoly regulations historically run. but the basic idea of it was to protect consumers in settings where there would be one firm that would charge a high price, not to subsidize inefficient companies which is -- which is blair's concern here. >> my real concern, look, i, of course, was kidding about stalin, just to be clear as well as woodrow wilson and i hold nothing personally against rob. well, not exactly, he went to duke, i really hold that against him. >> we'll get into that later. >> but the point is, that is an historical answer. we cannot act with yesterday's logic. we have a completely different situation there. none of the companies, i want to

be clear, they're good people, they're trying to do a job for their communities, i don't object to that. but we have a system, which, like i said, makes us pay for a maserati, we get the mercedes, they subsidize it for the cost of a chevy, we're subsidizing it and the rest of rural america has to walk. that's stupid. we got to change it. >> okay. >> blair, his point is that the world is different, the natural monopoly world and the core cutting world doesn't exist anymore. the problem is the old justifications that have been put together with rate averaging and other institutions that are going to be the drag, and that if we make a change, there will be winners and losers. the problem is getting all of that sorted out and it has become a political coalition among the losers because someone's rates are going to go up who are getting subsidized by a cross subsidy aside from the direct subsidy. >> a question from the floor. go ahead, please. >> john with tech net and i worked with the national broadband plan with blair. i have a question that i think ties together two sentiments

expressed in the morning, one by joe waz and one by commissioner baker. and they seem to be talking effectively about institutional failure and not market failure and joe talking about a need for the reform, regulatory processes and commissioner baker even seemingly in favor of planning. i'm wondering if anybody on the panel has ideas on what changes to the institutional apparatus are needed to have more effective policy. >> i will make one quick comment at the risk of disagreeing with joe. there is a tendency to romanticize other institutions. those of us in the room mostly know the fcc. there is a big spate of writing among some fcc scholars that look at the patent office and think that would be great, let's become more like the patent offices and they're saying, what, are you nuts. and the patent office is saying that fcc is a great institution,

why don't we make the patent office more like the fcc. if you talk to engineers, which it is has been very consensus driven, but as the community has changed, people think it is very dysfunctional. it is as phied, consensus doesn't work when there is so much hetergeneity. there is no magic design or we would have found it a long time ago. we have this unruly workable sort of muddling through approach about trying to play off different institutional strengths against each other. >> all right, jim had a comment. >> yeah. in practical terms, i think it is asking a lot to ask any bureaucratic entity to reform itself or to reconsider, you know, the core fundamentals of its existence. i mean, institutions just don't do that. that's why the congress actually, you know, has responsibility here. it created the agency. it wrote the law s under which t

operates. if there is going to be a fundamental re-examination of the mission and the role of the fcc going forward, it has to come from the congress. and i can give you two quick examples. one of them with respect to jonathan goes to merger review. i certainly understand his defense of the way the commission goes about this today. i think the fundamental question is why the telecommunications industry almost uniquely has to go through two merger reviews to consummate a transaction. you know, in virtually every other industry in america, if you pass the antitrust review, which is in essence a competition review, then you can go ahead and close that transaction. so why we have this extra bar of an fcc approval, which fundamentally stifles economic activity is a question the congress ought to be asking. i think another played itself out recently in the city of

phoenix. qwest applied rightly for relief of regulatory obligations there on the basis that the markets essentially is competitive now. they have lost about a quarter of lines to wireless only, as almost all of us have and they have lost about half of what remains to the cable company in terms of voice service. and the wire line bureau in examining their forbearance petition essentially declined to consider wireless substitution, which honestly is truly unfathomable and ignores all logic. it is acting as if the only competition possible is a wire line to wire line and then in its decision, it essentially said qwest is going to remain highly regulated in the phoenix market and the cable companies that compete against them are not going to be regulated at all and we're going to ignore the

fact that customers of both are free to drop wire line entirely and use wireless. this makes no sense. we can't expect the wire line bureau itself to reach a conclusion that in essence raises questions about its own relevance going forward. this is something that the congress has to do, i think, or at least the five commissioners that govern the agency. >> thank you, jim. now we just have time for one more question and then we're going to have to end the session. but, you know, it is fair to say i do have now several more questions for commissioner mcdowell that probably were better than the ones that i had originally thought of myself. this has been useful. steve, it is just a question, we're going to do it very quickly because i promised our moderator that we're going to get the next panel up and running on time as well. >> steve, efras communications. i want to wrap up a few things

with a simple question. do you think the commission can be adult enough, even in a small way to look at a piece of its rules and say, you know, that doesn't make any sense anymore. congress, you ought to change this? jonathan gave a great demonstration of that, i think, when he said, well, we looked at it and they looked at it, we came to the same conclusions they did, we came to the same rules that they did, except we had 500 pages instead of 200 pages and two sets of lawyers instead of one set of lawyers. so when is it that the commission becomes adult enough as jeff pointed out with regard to the allvid proceeding where you have rules from 15 years ago, we all know the world has changed, blair says you've got to adjust to change, instead of going on with more rules, does anybody think the commission could be adult enough to just go back to congress and say, that one little provision on regulating or creating electronics we should get rid of? >> what we're going to do is i can let everyone respond, but

only if you do it really quickly and then we have the panel on spectrum. so very quickly, if you would like to respond, you can. >> look, i think they can be responsible enough to do those things. i think a lot of the statutes that we're talking about here give the commission flexibility in many areas. and so, you know, in the past, the commission has certainly acted flexibly with statutory requirements based upon the markets they're in. it is a dual responsibility here. and in the case of the set top boxing, they're living under a statute from 1996 when we had analog cable. and so there is a responsibility in the congress to recognize some of these old statutes shouldn't just be left on the shelf, they should get rid of them or update them properly. >> i think in the instance of this particular statute there is actually -- i'm not sure if you mentioned this -- there is built into the statute a sunset provision, i think, which would actually -- that's pretty

unusual, of course, in these types of statutes. i assume it was put there so the commission could make a decision itself that times have changed. okay. jim. >> of course i can be adult enough. i think it is just a matter of will. i think the president of the united states is actually giving them the perfect charge to go ahead and do that. with his executive order. you know, they recently received a letter from the u.s. chamber of commerce calling on them to voluntarily do the same thing that president obama has ordered every other government agency to do. and they ought to do that. >> okay. john, want to make a remark? >> a brief comment. the commission has, in the past, exercised its authority to forebear from regulation when it is not appropriate. so the commission has a good record of doing just what you say, of deciding where regulation is appropriate and exercising it and thinking hard about where not to regulate.

i see no reason why the commission won't continue to do that going forward. >> okay. just time for one more. joe, did you want to say something? this will wrap it up. >> sure. the fcc is under a biannual review obligation which they kicked off for communication -- for telecommunications. i think they're under a quadrennial review for media and broadcast rules. they have to get the notion it is a perennial review, something that should be ongoing and the agency should be open to it. probably no better time than now to show that they're committed to it. as bill canard was when he undertook the top to bottom review. >> okay, well, i'm sure the audience agrees with me that this was an absolutely terrific panel. i hope they'll join me in thanking you for that. now, i'm going to ask the next panel to immediately come up and assemble and we're going to get started and then at 12:30, we're

going to move to the lunch session. okay, so we're going to get started. thank you for coming today. we're going to be talking about spectrum reform on this panel. which if you listen to the fcc and congress is really one of the top issues that they're going to be focusing on this year. so we have a great panel today who are going to be focusing on what are some of the new things that are going to be happening, both at the fcc and congress, and really what are some of the policies that the u.s. should adopt as we're looking at this very valuable yet somewhat scarce resource. on the panel today, i am going

to introduce -- you have bios in your book so i'm not going to belabor this, in alphabet cal order, but not the order they're seated, larry atlas, senior adviser for the national telecommunications and information administration. we have kathy brown who is the senior vice president of public policy development and corporate responsibility at verizon. we have david honig who is the president and executive director of the minority media and telecommunications council. we have blair leavin who needs o introduction. you have paul de sa, the chief of the office of strategic planning and policy analysis for the fcc. and we have thomas sugrue from t-mobile. all members will give a short presentation and we'll answer this up for questions from the audience very quickly. so if you want to start. do you want to actually stay seated. it will be faster. >> okay.

there we go. i want to just bring you up to date what the administration's doing on the spectrum front. there has been a lot of activity over the last six months. and the demand for american spectrum resources is increasing at rapid rates and the amount of information flowing over some wireless networks is growing at over 250% a year and there has not been a corresponding increase in supply. to expand america's available spectrum resources, the administration has to use existing spectrum more efficiently, we need to free up more spectrum for new uses and thus provide the private sector with insentives to transfer spectrum from higher uses to more current ones. in june, president obama committed to make available 500 megahertz over the next ten year for wireled broadband, the initiative would double the amount of commercial spectrum available over the next decade

will spur investment, economic growth and job creation while supporting the growing demand both by consumers and businesses for wireless broadband services. to make this happen, the president directed the secretary of congress working through ntia to produce a ten-year plan and timetable for making the 500 megahertz of spectrum available and at the same time protecting vital government missions that rely on spectrum use. three months after the president's order we had ntia issued a ten-year plan and timetable. that report developed with input from other federal agencies and the fcc identified over 2200 megahertz of spectrum for evaluation set out a process for evaluating the candidate bands and the steps necessary to make the selected spectrum available for broadband use. at the same time, we issued a second report which was a fast track review that we undertook to identify some spectrum reallocation opportunities