five-year freeze in the non-defense discretionary spending that will bring that portion of our budget to its lowest level of spending as a portion of the overall gdp of any president since dwight eisenhower was in office. >> c2 >> and again, i would say it reflect his priorities. i'm not in to negotiate line items in the budget, but i will say that it reflects his priorities and i will leave it at that. that's it. thanks guys.

treasury secretary timothy geithner is calling on the concourse to phase out the

government's control of homeland companies fannie mae and freddie mac. the administration's plan calls for a sharp reduction in the government's role in the housing market. this hearing is a little more than two and a half hours. >> this hearing will come to order. in the interest of time, i will recognize three members -- triet the members for opening statements in the majority come and without objections, all members written statements will be made it part of the record. first, the gentleman from new jersey is recognized for four minutes. >> thank you mr. chairman. -- before mr. secretary and i want to thank you for your report entitled america's housing market. i read it thoroughly and while it might be a little light on some specifics in some areas and

without a single concrete position on a way for word i believe it does come to a number of conclusions the will be very helpful for members to grasp as we move forward with the state. the first conclusion is that the federal government housing policy did play a significant leading role in the financial crisis of 2008 and the ongoing bailout of fannie and freddie is over $150 billion counting and in that dwarfs all other bailouts that occurred during the crisis. the second conclusion is that specific entities, fannie and freddie mac must be terminated and should never come back to life. and this is important for everyone from the members to industry community groups and taxpayers to understand that point. i agree with the administration these entities must be put on a path to a resolution and i will work closely with the administration to see that that is accomplished. the report is a purely private mortgage finance market is very

serious and an achievable goal. many supporters of the status quo preach doom and gloom for the u.s. housing market without a government guarantee. they would have us believe that any discussion of a purely private mortgage finance market is completely without merit and return the housing market to its depression status. the administration plan ends this argument once and for all that no one seriousness they believe will ever return to the 1930's so i applaud the the patrician for taking this rhetoric of the table senators a consensus on these issues we need to decide which steps next to take. here i also see a number of areas to agreement between the administration and myself the first is a gradual increase of the guaranty fees. this is an important component of bringing more accurate pricing into the market. but any increase must correspond with an increase and fha premiums in order to not push

greater risk over there. so again i look forward to working closely with the treasury and specific legislation we may need to accomplish the goal. the next area of agreement is to the gse is currently the $1.5 trillion the portfolios pose a significant risk to the american taxpayers and don't serve any real purpose anymore. i believe the portfolios can be wound down at a fast pace without jeopardize the fragile the housing market so i look forward also to discussing this with the secretary in greater detail and how to best shape that legislation to achieve that goal. the third area of agreement is on the treasury support for the higher downpayment premiums. now i don't believe that all payments are the only factor that should be used for ecology but i'm pleased to see the we both recognize as a fact that they play an important role in the underwriting process. forthcoming in agreement on reducing the conforming loan of limits. to be able to afford $729,000, a

couple must make an average of $250,000. now this is the same level some in the administration and some of my colleagues on the other side of the ogle described to being someone who is rich making that much money. so i'm glad the administration finally decided the government should basically be out of the business of subsidizing those people who are rich in order to buy a house. finally, an area that we have strong agreement on is the need to create a covered bond market in the u.s.. i agree that isn't a cure all for the system but the covered bond market could provide significant liquidity benefits and help bring private capital back into the mortgage market. so, as the ranking member frank so eloquently stated repeatedly during the former administration's tenure when that was the case, i do find it a little bit odd i'm here now this morning defending the current administration and their proposals on so many fronts from their own party, but i do believe that it's an opportunity for us not to try to reach a

broad based consensus on all of these issues. finally, one final point of agreement that i failed to mention of, but that is probably the most important in that we must never, never put the american tax payer on the hook again for the phillies in a private mortgage market. with that, think you mr. secretary. >> this time i recognize a ranking member frank for four minutes. -- before, mr. chairman. i am struck at what a difference an election makes. i agree we should be moving forward, and i interested that we do have these areas of incentives, but i do have to know to be connote a great disappearance, perhaps the inspector general can track it down. the year-ago my colleagues on the other side know exactly what they wanted to do with regard to fannie mae and freddie mac. a bill was introduced about the year-ago in march, 2010.

we heard constant criticism from people on the other side of the legislation that we adopt on the financial reform didn't cover fannie mae and freddie mac. we had legislation adopted in 2007 and in 2008 put them in the conservatorship that of the losses have been largely stemmed and someone that were different and they were before and that had bought some time that was a position which last year when they were in the minority was objected when the other side and by the gentleman from texas and they were told that would be included in the financial reform at the conference report committee meetings that bill was offered and the bill was ready last year. what i guess is we had this question when did the president know and when did he know it? my question was why does the

minority know something last year the they don't know this year? the last year what to do. there were critical for not doing it. they talked about the urgency. lo and behold, being a majority has apparently induced a form of legislative forgetfulness. they say the power corrupts, apparently in this case it hasn't crafted, it has taken away members of knowledge and again i don't understand why the committee is not now dealing with, we had our second hearing i believe on the gse, and that built the verso insisted on passing last year and so critical of us for not passing seems to have faded away, and it is no longer there. i & a that position. my own view is there was a more complicated subject in the bill that because we had put this -- the two entities into conservatorship by legislation which we adopted in 2007 and 2008 but the urgency was gone in

in the sense that the losses had been stemmed that fini may and freddie mac are operating in have been since the were put into conservatorship in a bipartisan effort in 2008, and in a very different manner. and that this year is the year in which we should begin looking. i did say that time that it had been my intention to follow a bill to get us started when the control of the house changes. it seems to me the reasonable thing to do is to give the -- acknowledged the fact the majority was in control. but again, i have this question where is the bill? it was all ready to go off last year. last year there was this insistence on passing something in the criticism that wasn't passed. today we have a very reasonable attitude to work with the administration. i think the explanation is this is a harder issue to deal with the and the minorities thought when they were the minority. i think it is also the case they don't have to vote for the bill they were pushing last year and it's one thing when you were in the majority and have to get something done and it's another when you're in the minority, but

i would say this, the urgency does appear to have helped a little bit because people who are now in control since early november knew that they were in control have decided not to go forward with the bill we had last year which they were so insisted should be passed and apparently they are now awaiting the administration. i fought very hard to think of another issue on which this particular group of republicans has a weighted the leadership of the obama administration coming and i haven't thought of one yet but maybe this is the beginning of a trend. thank you, mr. chairman. >> thank you. you're recognized for two minutes. >> thank you mr. chairman. welcome, secretary geithner. thank you for joining us this morning. page two of your written testimony says, and i quote, the administration and congress have the responsibility to look forward, reconsider the role of government has played and work together to build a stronger more balanced system of housing

finance and i couldn't agree with you more. as for where we should start it's very clear that its report to congress the administration only lead out options for reform but has chosen to avoid a very tough decision for setting a single course of action. having reviewed the administration's report to congress it is clear to me that option one most closely resembles the kind of plan that the taxpayers expect from us and i ask that today you work with our committee to not only established a clear framework, but put in motion reforms that facilitate private sector reentry, eliminate the taxpayers risk and should generate a fiber and finance housing system that serves credit for the americans. for many years, its seemed like republicans on this committee have pressed to reform fannie mae, freddie mac and the fha. so it is my hope that today you

can confirm your commitment to work with us. housing is one of the most important cornerstones of our economy, and we have to get it right. so with that, i would yield back the balance of my time. >> thank you. you still have 33 seconds left and i will claim that time. i do want to say that the former chairman frank who was the leading advocate for fannie and freddie just gave us a history lesson. but in 2003, he said that neither of these gse is was in crisis and they did not need more regulations. two years later, he said the ought to be pushed to make more affordable loans, on econ subprimal loans, not less. so, that part of the history lesson was missing and our time is expired. >> two minutes, mr. chairman? >> i will take two of my remaining minute. spec two additional minutes. >> we heard a serious distortion that in fact, yes, in 2003i

didn't think fannie and freddie needed reform. you want to be into history? and to those of five, the chairman joined, then chairman oxley passing the bill to reform fannie mae and freddie mac which was wholly insufficient. and then field because the senate republicans predicted the house republican bill. in 2007, when the democrats and the majority, we did pass the bill with mr. wallace, the republican's lead witness on this set was a very good bill, and it led them to being put into conservatorship. i would then go back to the gentleman from illinois who said that he's been pressing for reform. his, the republicans press for reform when they are unable to achieve it but when they are able to they don't press for it. we have to get these in phase. they were in power from 95 to 2006 and passed the bill in the house, which mr. wilson and the president of the united states. last year when they were in the minority they pushed hard for the bill which they told us the answer and this year it's disappeared and they are now waiting for the administration,

and the gentleman from illinois said the administration has avoided making the tough choices. in that, the administration of that is the case resembles the republicans who aren't making the tough choices either. he said they are ready to reform. what's stopping them? the fact is that in november it became clear the republicans had control of the house and i'm still waiting for the bill. we have a bill last year. i guess what happened to that bill? what was discovered in it? why is that not being put forward? the fact is that in 2003i underestimated the true form i was wrong. by 2007 we adopted the bill that resulted at the bush administration request and being put into conservatorship and that is why we now have the time which the republicans to clich and jeff not appear in the majority to deal with. and i yield back. >> we have two minutes left on our side. i will claim that time in opposition. our bill -- >> you're no longer in opposition. you're going to get used to

that. >> that's correct. in opposition to what you just said. [laughter] when the chairman oxley and i and others pushed for the strong growth regulator for fannie and freddie because we felt that it was a captive regulator, then chairman frank opposed that bill and voted against it and actually said that freddie had an accounting problem of the people responsible had been dismissed. as we found out, it was slightly more than that and they continue to have a problem. i yield remaining time. >> thank you, mr. chairman. you know, i think over two years ago the members of congress were asked to prop up fannie and freddie. we were told we would never have to advance any money that we were just going to overwhelm the market's. well, they're goes that plan and one of the things that was articulated at that time is and

the question i asked what would be the exit strategy? and the answer again was we don't need an exit strategy because we will never advance in these moneys. but here we are over two years later and billions of more mortgages have been originated by these entities which means billions more of contingent liabilities for the american tax payers. i appreciate the secretary's report and i wish they would have taken a little bit stronger leadership on the recommendation rather than the alternatives but hopefully we can get into more details about that today. but i think it's important to understand that it's time to get the american taxpayers off the hook. the tide of making their own payments and being responsible for other people's mortgages as well. the time to start is not leader. the time to start is now because as i said, today, while we have this hearing, millions more mortgages will be a originated, and millions more have commitments that will be outstanding which will put the taxpayers on the hook.

an important part of the solution is getting the private mortgage market back operating again. we need to take steps to make sure that happens so that ultimately the goal here is the chairman of the subcommittee said to never, never, ever have the taxpayers on the hook for the mortgages again in this country. thank you. >> i yield 15 seconds to respect the bill the chairman post about voting for what mr. oxley is the one the senate rejected and the president said was too weak. the argument he gave about we are going to overwhelm it with money, yes, that was an accurate quote from secretary paulson under the bush administration, and he was doing that to a bill for which mr. neugebauer voted after the amendment that somewhat weakened in mr. paulson's viewed went to any we and i ask my remaining time go to mr. scott. >> mr. space? >> thank you very much, mr. chairman. welcome, mr. secretary, and i wanted to just make a couple of points on the options that were

presented in the obama administration's report. for one, it says that option one particularly on the privatization -- i would like to know if you're concerned about whether or not private capital can meet the needs of the housing market with any kind of sufficient liquidity. it seems to me to be unclear whether or not there is enough private capital willing to fund such a system. because under this option, the report is running on the assumption that of the government support for the housing market is eventually removed, that the private money will replace. that's what we hear from our friends on the other side. however, if there is no guarantee this will happen, how can this option be flyable? isn't there a risk that the amount of private funding for the mortgage market will be substantially lower than the demand for mortgage loans? and the other option in the

report proposed in the report calls for a government auction price away from the market rate that can begin to land mortgages in the time of crisis where the private capital disappears. if this backstop is implemented, doesn't it resemble the sort of bailout in the sense that it will protect private market agents without asking for any financial support from them in return. finally, the report states that the federal support for the housing market must acknowledge that not all americans should be homeowners and any future system must also include support for the rental housing sector. however, the plan does not identify a specific proposal for dealing with the gses multi family programs. so what does the treasury plan to do in terms of reforming the

existing gses multi family programs? thank you very much, mr. chairman. >> thank you, mr. scott. at this time, let me say without objection all members written statements will be included in the record. secretary geithner has to leave the committee at 12:30, and that's a hard stop, so we are going to enforce the five minute rule on all members, so just be aware of that. at this time, secretary geithner, you're recognized for your opening statement, and without objection, your into your written statement will be made a part of the record and you are recognized for a five minute summary of your freedom written remarks. >> ranking member frank and members of the committee, two weeks ago the leader of our proposals for reforming the housing finance system.

the written testimony submitted summarizes the report. i'm going to talk about the proposal for the reform but before i do t hat i want to emphasize what i think everybody in the room knows which is the housing market of the united states is still in a very difficult state. the damage caused by the crisis is still deep and very broad. millions of americans are still what risk of losing their homes. housing demand is still weak to absorb the excess supply particularly with unemployment so high. and even with of the economy growing again, it's going to take a long time for us to repair the damage caused by the crisis. the administration working with the tools the congress gave taking a range of steps to stabilize the market and reduce avoidable foreclosures, not all foreclosures, but avoidable foreclosures and these programs have helped catalyze millions of

loan modifications, refinancing and keeping the mortgage loan and they were successful in preventing much, much greater damage at much greater cost to a larger fraction of american families. over the next ten years, our estimates on conservative assumptions so the total cost of the tax payer of our support for fannie and freddie will be well below $100 million. the contest and a dart about $75 billion but that doesn't take into account our proposal to the gradual rate for the guarantee fees. so, if we were to implement this plan, we expect the ultimate cost the taxpayer to be lower. the process of reform will take years as i said and as we debate the options we have to be very careful that our actions reform the market do not jeopardize either the housing market itself or the broad economic recovery now under way.

the proposal aims to achieve three key objectives on the reasonable time line. first, we want to wind down fannie and freddie and help bring private capital back into the mortgage market. as you know in the wake of the crisis the private capital fled the market and hasn't returned leaving the government not to guarantee more than nine out of ten new mortgages. that assistance was essential and stabilizing the market and giving americans continued access to the mortgage credit but it's not a long-term solution and we believe under normal conditions under reform market the private-sector stronger oversight, better standards of protection for consumers and investors should be the primary source of mortgage credit and the primary responsibility for this open the losses. the report recommends a combination of policy levers to wind down fannie and freddie such as increasing guaranty fees, reducing the conforming loan limits, gradually taking underwriting standards, and of course, we are committed to support the continued wide on of the fannie and freddie investment portfolio.

these actions will help shrink the government footprint and housing finance market and help bring private capital back. we are not going to the private capital to come back into the market unless we fix the very substantial fundamental flaw that exist in america as a whole. so the second piece of the reform proposals are to put in place reforms the will help provide a better market for private capital and that means giving consumers the ability to make better decisions about mortgages, protecting them from unfair predatory deceptive practices and it means requiring participants in the securitization process to retain risks, to improve access to information and improved accountability and transparency through the securitization process. it means requiring banks to hold more capital against the mortgage risks, the mortgages they hold, and that's important to make sure that banks are in the position to better withstand the losses that can come from future recessions. it means addressing the chronic

problems we still face in the servicing of the foreclosure process by setting up national servicing standards and improving the the incentives for the participants in that market. our objective is to more effectively target the government support for access to low and moderate income americans to sustainable mortgage finance and to the rental housing options. we think it's important that the government continue to help americans get access to housing that they can afford. this doesn't mean however that the goal can be for all americans to become homeowners. we want all americans that have the financial capacity, the designer to own a home to be able to take this step, but at the same time, we need to provide a broad range of affordable options your good schools and good jobs for the 100 million americans who print today. what do they do so by choice or by financial necessity. with those objections in mind, we need to begin the process working with you to decide on the long term solutions to

replace fannie and freddie. this requires a thoughtful careful discussion with conagra's and all the stakeholders about what the appropriate role of government is over the longer term. now we've put forth three broad choices. we do reject two of them, the considered and suggest congress not in receipt for what you might call the full liquidation privatization option, but we also suggest the congress not increase what you might call the full national option many has proposed. such options we propose lie in the middle of those more stark choices. each of the options we propose would produce a market with a private sector plays the dominant role in providing the mortgage credit and bears the dominant burden for losses. but each is different advantages and disadvantages and those need to be carefully considered. in the first option but the overwhelming majority mortgage will be financed by lenders and investors and wouldn't benefit from the government guarantee. we will let the current roll to the fha's current job of

providing targeted support for affordable housing and more affordable mortgage credit. and the second option the government targeted assistance for the fha would be complemented by a government backstop available only in crisis designed to promote stability and access to mortgage credit only in crisis and a third option alongside the fha the government would provide a form of reinsurance for certain securities to be backed by high-quality mortgages. they would be guaranteed buy closely regulated carefully regulated private companies under strict capital standards and strict oversight and reinsured by the government. now in providing this narrow set of options and the criteria for evaluating we hope to encourage a careful discussion with the congress about the ultimate reform option and i think you'll recognize this will require trade-offs and difficult choices as i said each of the advantages and disadvantages and there is no easy solution. our challenge is to find the

balance between making sure the low to moderate income americans cannot access to credit and we have a more stable mortgage market the taxpayers are less exposed to risks and that we have the capacity in the future to do a better job of limiting the brought the damage to the economy that can come from financial crises like what we have seen in this crisis. each of the options require legislation and our judgment is we should work together to try to pass legislation within the next two years. if we can move more quickly than that we welcome the chance that we can't put this off indefinitely or we will leave the market with too much uncertainty and would make it harder to get private capital to replace the role the government is playing today. our hope is congress will work with us to find a consensus on a long-term solution to make sure we have the authority and the transition, the fha is the authority and the transition to make sure we implement a carefully designed transition program that phases out the

government role without damaging the process of repairing the housing market. we look forward to working with you on astrology by welcome the chance to answer any of the questions. .. >> could that begin today or tomorrow? is there any reason why at least

some of those could not begin even before legislation passes? >> well, in fact, we have already started and started to raise guarantee fees to change pricing and to change the basic standards that apply to their programs, but, yes, we can move quickly with those steps. the challenge is that we do it in a gradual way that doesn't hurt the housing market or the expansion underway. what we propose is the fha and the faha, sorry for the acronyms, but work together to work out a set of recommendations for a way to implement a gradual plan to improve pricing and strengthen underwriting standards to phase out the government's role. >> i think as you say crowding out the private markets, you

have to begin to do these things now. >> the american bankers this morning says that option three is fannie by another name, and also part of option two, you've got, you say here the federal government should reserve the right to backstop the mortgage and housing market during times of market stress. >> could, could. >> could. how do you define market stress? >> excellent question, and that's one of the risks in thinking about just a system where you only have the emergency capacity to comment in crisis. that's a hard thing to do because it takes time, hard to scale the programs up quickly, hard to design them carefully in a crisis, and, of course, it's a matter of judgment when market stress might require the government sort of stepping in, and as you've seen and you you want, you want the government to be reluctant to do that.

you don't want the market operating with the expectation that the government comes in too quickly or easily in the future even in the face of a recession. that's one of the many challenges of working in a capacity like that are those. >> if you are talking about falling housing prices as a reason to intervene in the market, you know, falling housing prices could actually be constructive in that they would make housing or homes more affordable, so i'm -- it almost, as long as you have that backstop, it's almost an inpolice sit government -- implicit government guarantee. am i wrong? >> it's not quite right to talk about the things of a purely private market and a market where the government in crisis or in normal times is guaranteeing mortgages. if you -- if you leave all these mortgages in the banking system,

like many countries do, the government is still there with an implicit commitment to to back the banking system. look at the model that canada and other european countries adopts, they leave mortgages with banks. the government provides a lot of support for banks. it's very reluck at that particular time in those country -- reluctant to let banks fail. the help is there, but banks don't have to pay for that support, but it's not as -- it's not quite the private market idea that many people seem to think, so it is not fair to say option three recreates fannie and freddie. i will not support that, even if this group of people in this room thought that was appealing, we would not support it. >> we would not like that. let me close by saying when you talk about the government in times of stress intervening, i almost think that is what we, and i've said for some time, the

american people don't like privatetizing the profits. in other words, in good times the financial industry, the lenders make money, and then in the bad times, you socialize the losses, and the american people have -- november was about ending that. the american people are tired of taking the loss. i think you would agree. >> yeah, you do not want to run a system in which the taxpayer is going to be on the hook when things go bad. that is not a system. now, to some extent, that will be inevitable in severe crisis because banks get in trouble in crisis, and governments expose a lot in economies. you want to avoid that bh you can. you're right to say it's hard to know what level of stress would motivate what level of assistance. that's a matter of judgment, but we don't want to leave the country in a situation where you face the recession like we did,

and you can't do anything to protect the innocent from the collateral damage. >> yeah, there will be market stress and apparently government guarantee, and we oppose that. >> mr. chairman, ranking member frank. >> the question is the majority to pass the power if they want, they don't need the permission. i want to come, must i appear too partisan of the defensive, but colleagues chose legislation opposed to the great or expwren sigh that they felt last year when they were insisting we pass the bill as part of financial reform. the point is this. we had illusion to the losses, but my understanding is that those losses overwhelmingly, almost entirely predate the conservativeship which secretary paulson asked this congress to give him, which we gave him, and

he then used in 2008. is it the case that, in fact, essentially sense the conservativeship, the agencies have not been incurring new losses? >> that, i think, is an an accurate view. the losses the taxpayers are exposed to is related to a sense of the loans made before the crisis. >> that means before the legislation initiated in 2007 that mr. wallace praised heavily and perpetuated in the conservativeship of 2008. we have been told recently there may be money recovered, that the losses may not be as -- the pre-2008 losses that go from the 90s into the 2000s, that they may be less than anticipated. is that accurate? >> yeah. the losses keep coming down. of course; the future is very uncertain, and it depends on how the economy does going forward, but the losses are coming down. as i said in the opening

remashes, in the -- remarks, in the budget, it is around $75 billion, but that does not take into account the fact we proposed to raise the guarantee fees carefully going forward so over states is the ultimate loss. >> i apologize. i had to step aside. let me cover another factorment one of the arguments we had is one of the people trying to help too many low income people. we have bipartisan by stressing too much home ownership to people and not enough opportunity. fannie and freddie dealt both with multifamily. my colleague from georgia referenced that and single family. as you look at the losses, were the losses equally distributed between the family activity or single activity or more than one over the other? >> i have to respond carefully in writing to you in that question, but my impression is that the losses are concentrated

in single family. >> that's my impression too. i disco think that's very important because as we tighten up in the single family area, i do not want -- i hope that will not lead, and this has been, yes, i'm quoting the past to be stronger about my support, i may not have been explicit, but i hope out of whatever proposal the administration comes forward and ultimately passes to the congress, there will be some effort to do what we do not home loan banks. the home loan banks since the great 80s have been empowered to make mortgage decisions based on business decisions and a fairly amount goes to affordable rental housing so you don't pollute the basic business decision. the other part is this, as we go forward in losses, there are two

factors that give us some reason for hope. namely, part of the problem was that mortgages were, i think, everybody agrees, improperly granted. people thought about the fault of the borrower and the lender and this or that, but mortgages were improm -- improperly granted. specific prohibitions on no-document mortgages or pick as you pay, ect. in the financial reform bill, and secondly, a requirement of risk retaliation unless you had the residential mortgage with a 20% down payment. is it the case that the reforms we've adopted in the market give us more flexibilities as we design the system going forward? >> they do. i think they are very important. i think any system working better in the future requires homeowners to hold more equity against their homes than they

borrow, and banks have to retain more risk, you you have to have more conservative underwriters. that is a lot already in place and coming into fruition. >> that's important to know, because we are look k at the bet -- looking at a better set of mortgages going forward as a safeguard. thank you. >> i would say we support the emphasis on rental multifamily. i think the government did a lot of things in the mortgage market, a lot bad di, some well, but too much of the support we provided went to home ownership opposed to rental, and too much went to relatively fortunate americans. >> and you are going to get us a beak down -- break down. thank you. >> thank you, mr. frank. our subcommittee chair is

recognized for five minutes. >> i thank the chair. to the ranking member, you know, it is hard to predict the future which i goes he's trying to do right now. he tried to do that back in 2003 as well when he said fannie and freddie do good work and are in the endangering the health of the country. they are secure and they are in no great danger. the same statements he's making now about how well run fannie and freddie are and how well the underwriting is of the loans they take in right now are in essence what he said back in 2003 about the loans we took on at that time, went a you -- and we all saw they didn't turn out well. the loans they are taking out now have not had the opportunity to season if you will, and that in reality you have to look at loans down the road to see what the loss rate ratios are going

to be. is that fair? >> true. if you look at the estimates people made of the future losses with the guarantees of the writings in the conservativeship, they make our, not just modest -- >> and i appreciate that, but, of course, those were exactly, you weren't here at the time, but they were the same arguments being made and the ranking member made at the time as well. look at the projections back in 2003, things didn't look so bad, but i'll close where i began. it's hard to predict the future. the ranking member didn't do a good job back in 2003, and we'll see whether they are good in this one. to your report, you know, one of the common arguments we hear from the people are the supporting the federal guarantee is if you don't have it, the cost for home owners is going to skyrocket with regard to home ownership in the country, and people will not be able to achieve the american dream. you have done your report and what have you, did you run any

qawn tative -- quantititive analysis to determine what the overall impact would be on the monthly payments for the consumer? >> we -- let me just start with a basic following observation is that under any of these options, the cost of a mortgage is going to be higher in the future. it has to be because the government -- >> what about the monthly cost, not just the mortgage. >> under the adoptions, there are going to be somewhat higher than they were before the crisis, and they need to be. that is the reality we face. we looked at a range of estimates of what the ultimate impact might be on the options of a cost of a mortgage, but very hard to judge until they are defined more clearly. you cannot know until you look precisely at what version of option one, two, or three, or

what mix of options you would do. you know they will be modestly higher, but different degrees of increase depending on the mix of the options you ultimately embrace. >> i appreciate that. i'll refer you to an economic analysis that was done. this was by a liberal economist, dean baker of the center of economic policy and research. in his report, it looks at a 30 year mortgage which is what we're looking at under a purely private market. what you're saying is true, a little bit higher cost. then he goes into a little deeper. what would the overall cost be to combine it with the price of $170,000 mortgage. he comes out and calculates that the monthly payment for the mortgage under a hybrid system is around $833. then he calculates a similar

mortgage under a purely private system has a higher cost is what you're saying, but the overall price of the house then, right, would be less expensive and the monthly payment is $8 more, just a little bit more under that scenario. next, however, factors in the monthly taxes to be paid on the house, and because the house now under the guarantees system would be more expensive, prices are high, the property taxes would be greater. he then finds the final calculation under the monthly payments under the private system $4 less than under the hybrid system. overall, you add that together, the higher mortgage price, loyer price of the house and lower property taxes, it comes at a difference of $4. even if the numbers are off a few dollars there, doesn't the fact that the numbers are so close to each other indicate then that a hybrid system really

doesn't outweigh the cost of a private system with all the inherit risks that go with it to the taxpayer at the end of the day? >> just like you just said, we have to be cautious about predicting the future. we can't make the judgments without knowing the precise details without knowing what the government's role is in the context. it's almost certain that the costs to the homeowner all in would be higher under option one and higher under option two than option three, but under all those options, it's going to be somewhat more expensive to borrow to finance a home than was true before the crisis. >> congresswoman waters? >> thank you very much, mr. chairman. secretary geithner, you have three options that have been presented, and i guess what

you're saying is any of these three would be acceptable to treasury. >> no, i wouldn't say that. >> tell me about option one. option one, as i understand it, complete privatization fha available to median income families only. that's similar to the republican plan, but the republicans don't want any fha. in this plan, if you're slightly above median income, likely there would be no 30-year fixed. you have higher down payments, higher interest rates, and adjustment rates short term loan would be the norm. what is your position on the 30 year fixed rate mortgage? >> i think under option one if i understand your question, a 30 year fix rate would be harder to goat than would be true under some of the other variants you could consider. >> but it would be acceptable to you if we adopted option one? >> no, i would not say that. i think the disadvantage of just

option one, just to be fair about it is that you would leave the government of the united states with a more limited set of tools to protect the economy and the sort of innocent victims in the face of the next severe recession, and that is a disadvantage of option one unless under option one you allow the fha in the crisis to dramatically expand what it does. if you do that, the taxpayer is more exposed to loss. the fha provides very high loan to value mortgages, very low down payment. >> i'm trying to understand this is not your choice. you are not saying that this could be as acceptable to you as any other option. >> i would say it has some disadvantages the other options do not have, and, again, carefully you look at all those disadvantages, and i again i

would caution people on this side of the aisle to say it's tempting to look at the fha only option and the government is limited in that context, but that is not necessarily the case because what it means is that all the risk is with banks. the government does provide support to banks. the guarantee is explicit. the government doesn't pay for it. the taxpayer is not better protect, and your only option in the crisis is have the fha scale up dramatically and the taxpayer is more at risk than with the other options. it looks like it's a more private solution, but it may not be in the end. >> let me just say, i want to get something into the record here. the financial crisis inquiry commission examined loan performance and found mortgages bought by fannie and freddie were more likely than privately purchased loans to require a down payment and less likely to default. for instance, gsc mortgages with

a down payment of at least 10% had a serious late rate of 5.7% in 2008 compared with the de rate of 7.1 -- 5.1%. do you agree with that? >> i think it's true that the underwriting standards in the private markets were worse then. >> okay. i'll continue. mortgages originated for private securitization defaulted higher than fannie and freddie securitization even when including all other factors. loans defaulted at more than six times the rate of those originated for fannie and freddie securitization, and i guess this is a study that was done entitled securitization and mortgage default, reputation vs. adverse selection, federal reserve bank of philadelphia, september 2000. are you familiar with that? >> i'm not, but the general

pattern is correct. the quality of underwriting standards in the market was on balance worse, less conservative and less careful than was true on the fannie and freddie guarantee book. >> you eluded to the exposure of the taxpayers under the systems as we know them now, and you have basically concluded that it would be better to have the private market rather than the government guarantee, and if this is true what i just read and you agree with, then how is that so? >> i feel differently as in right now, the government is doing 90% of new mortgages. that is unnecessary. it's necessary today, but it is not necessary in the future. it would not be desirable for us to preserve that system. you want to have a system where the private market plays the larger, the more dominant role, not the only role. >> but it's a risky role. >> not necessarily. >> your time is up. >> thank you very much.

>> thank you, mr. chairman, and good morning, mr. secretary. i would like to say for the record that as soon as he produces the gse bill that he promised in the last congress, i would be very happy to coordinate the timing of the introduction of my own bill and just note as a general practice, mr. chairman, i try to improve my bills before they are voted on instead of after. mr. secretary, in response to the lady from california, i wanted to be sure i heard what i thought i heard. i thought she asked you do you support the three options that were just presented, and i think i heard you say not necessarily, and if that is correct, we waited two years for this? did i i understand your answer correctly that you are not necessarily supportive of the three options you presented?

>> she asked if i presented option one. >> option one. >> and i said, i mean, i'll say this in response to any question, and this is very important for people to recognize. >> will you support option one? if you're not supportive of option one over option two or three, will you support option one? >> congressman, we played out three options for a reason because they each have advantages and disadvantages. >> are you willing to support each of them, yes or no. it's not a trick question, mr. secretary. it's just a yes or no question. >> remember, we are living by a crisis caused by a legacy of bipartisan failures designing the role of government in the financial system as a whole. >> mr. secretary, if you don't answer the question, i'd be happy to give you context, but it's a simple question. you're presenting three options. are you willing to support the three options. >> i'll say this without penalizing the gentleman. we want the secretary to have an

opportunity to respond to the question, and in fairnd, you know, we had a question last week that was just a yes or no answer, and it is sometimes hard to simply give a yes or no, but go back to the -- >> the reason i say this is because this is why we started with options. it depends a lot upon how congress designs them, and you could do a mix of these things better than individually. option one can have a substantial role for government in crisis that is worse than the other options. you can design option three in a way where the government has less loss in the crisis depends on how you do this. >> if i could, forgive me, there is a limited amount of time here. you're not necessarily supportive of any option depending upon how its written;

is that a fair assessment? >> it all depends upon the design of the specifics in each of it. that's why you can't know the effects of it. >> another question, mr. secretary. on page two you say it is, have the very important to wind them down in a careful and deliberative pace." you and the experts at treasury have had two full years to study the matter. what is the careful and deliberative pace? media reports seem to indicate that you have said five to seven years. i do not know if the media reports are correct, so what is a careful and deliberative pace? >> it's careful and deliberative pace, i said it will probably take somewhere in the range of five to seven years based on the judgment that you need to move carefully because by any measure the housing market in a state of substantial stress still, but, of course, that judgment about pace if you leave it to the

government will be designed by the fha and the faha. it's not my authority to design. it's their authority to design. >> mr. secretary, in speaks on options two and three, i'm still concerned about the ability of the government to accurately price for risk. acting fha director demarco before the committee in september said, "the presumption behind the need for a federal guarantee is either that the market cannot evaluate and price the tail risk of mortgage default at least at any price that most consider reasonable, or it cannot manage that amount of credit risk on its own, but we might ask whether there's a reason to believe that the government will do better." already we know the flood program is $19 billion in debt. the federal crop insurance is costing the federal government $40 billion.

pbgc reported a deficit of $23 billion at the end of fy 2010. they believe they could face losses up to $128 billion, and we know that recently there's been pressure on the depository insurance fund of the fdic. we should we have confidence that government can accurately assays the risk on options two or three. >> i understand. that's a great question and why you have to be careful on embracing any of the three options. if you have a guarantee from any interference from the congress, and you want to keep it independent from politics as you can. one the reasons the government is terrible in programs is because you have suggested those judgments which are very difficult to access political

interference in the system. a few counterexamples so you don't lose hope completely in this context. if you look at the fdic guarantee program in the crisis, all the fed's program to prevent collapsing, the banks system, congress, all those investments, all that form of guarantee had risk in there were priced in a way that the government had a return. it's not impossible, difficult to do, but if there's a chance, you have to remove the judgment as much as you can from political influence. >> ms. maloney. >> thank you. first of all, i'd like to welcome the secretary and thank you for your leadership and your service. you helped-and-a-half gait us -- knave gait us through -- navigate us through one of the worst recessions of my lifetime and help us reform one of the worst financial systems in our generations. thank you for jr. service. for the report before us, i'd like to ask about in one of your

policy proposals, you note the importance of retaining access to any future secondary markets by lenders of all types and sizes, particularly the community banks, the credit unions, and could you elaborate on this issue and provide the committee with recommendations on how to ensure access in the future system. some people have written to me that they are concerned that it may concentrate the market and very, very few hands would create more problem in the future for our financial security of large institutions. >> an important question. you are right to say that there's a credible argument that if congress were to embrace something more like option two or three, that would leave the mortgage market, banking system too concentrated and create an unlevel playing field for

commune banks. that's one factor. we wanted a system where you have a better designed securitization market existing alongside banks and a banking system that is not materially more concentrated than the one we have today. the fact we have a system with 8,000 community banks and thrifts is a great strength of the system, and we want to make sure they play a very active role in the mortgage market going forward. >> but specifically, what would be the administration's proposal do to the ability of smaller lenders such as community banks to compete in the mortgage market and regional banks? currently now small lenders are able to participate in the mortgage marts by selling loans to fannie and freddie without going to a larger bank to accumulate enough loans to create a securitization pool, so how do you answer that challenge? >> well, that's one the reasons why option three is laid out the

way it is. that would preserve the capacity for community banks to have mortgages and sell them into a market. harder for us to do that in either of the two options, not impossible, but a little harder. >> okay. your policy proposals mentioned the development of a revenue-neutral funding source to provide resources for assisting extremely low income residence, and can you elaborate on what these recommendations involve, and how would you envision them functioning? we have to work with congress on that. >> where the government provides support to help low and moderate income americans afford housing, we want the support to be transparent and on budget, carefully designed. we think it's appropriate for the government to find a financial means to provide support for homeowners through down payment assistance that

need it, and for better options in the multifamily rental area. now, there are a variety of different ways you can do that to raise revenues. that's something to work with congress on. there's examples out there that work reasonably well, other countries tried them, and others we have to talk with you on. >> as you testified to ms. waters' question, the performance of fannie and freddie during this crisis has been good. they have had few losses, but during the crisis, many private investors have fled the housing market because of weaknesses in the private cmbs market and fannie and freddie share, actually, they've been expanding and helping us get through this crisis, and what guarantee do we have that the private sector will step in and provide the same support to expand housing

opportunities here in our country, and could you elaborate on that challenge? >> no guarantee. for it to happen, you have to do two things. one is gradually phase out the government's role, and make sure you have a clearer set of rules in place for the game for the private market. investors won't come back in unless they know there's clarity on what type of standards revile and what procedures apply, what level of transparency will thereby so investors can see into the risk and mortgage pools. all that has to happen. the financial reform bill lays the framework for that to happen, and the community lays out the rules. until the rules are defined in and place, the private market is not coming back in. >> thank you very much. my time has expired. >> mr. royce? >> thank you. secretary geithner, how are you? nice to see you. there was in 2008, the agreement

for the senior preferred stock purchase agreement that was worked out between your predecessor and the conservator at the time working on behalf of fannie and freddie, and my concern, you know, is that if you took a step that would violate that agreement, the original terms of it, it would deprive the treasury of obligated funds. it would unnecessarily dissolve the two institutions that i think were at the heart of the problems in the collapse of the housing bubble, and i think that there's an opportunity here to stay the course, but i read yesterday in the "wall street journal" that executives from fannie and freddie were trying to reduce the size of the

dividend that's paid back down to 5%, and i was going to ask you if you were aware of any conversations between fannie and freddie or their conservator and any treasury officials on that subject, and i was also going to ask you if the administration would support a reduction or elimination of the dividend payment because, you know, i frankly think that would be the wrong message to send. i say that because fannie and freddie had such a powerful lobby out here, and you and i have talked about that before. i know the fed felt the same way that they were leaning in and basically pushing policies that in many cases created sus stemmatic -- sis systemic risk and there was

the risk of carrying the weight here in congress. if they are now communicating again to change an agreement, and that at least was reported in the press, i would want to know, and i also want your reaction to it, secretary geithner. >> well, i'll tell you what we're going to do, but we have to work with the conservator of the fha in this context and that's the authority to oversee institutions. we're going to wind these institutions down and do everything we can to minimize the ultimate losses to the taxpayer. that guides our decision. we'll look at any discussion with the fhfa so any proposal designed to keep them in existence for the long term, we will resist. any proposal that carries the risk of increasing the ultimate loss to the taxpayer, we will resist. i think you're right to highlight the the risks that we

saw in a system where you had this combination of private equity holders able to benefit from guarantee. >> right. >> able to prevent effective regulation, and that's something we're not prepared to preserve for the future. >> i appreciate that. i will go to a second question i have, and that is as you look at the financial crisis we found ourselves in, you have recognized that there was excessive investment in the mortgage market which helped facilitate as i think you said speculation, 30% of the homes at one point where people speculated on homes, flipping homes. do you believe there was the perception by investors in addition to that that the housing market was too big to fail basically at the time?

>> i don't know. i think government policies encourage distorted investment decisions, encouraged too much investment in housing, and i think the market operated absolutely with the perception that fannie and freddie were too big to fail. the market as a whole, investors, credit rating agencies did not make the expectation that the housing market would fall ma maturely over time. that mistake went across the country. they didn't think housing prices would fall that much, and that mistake helped cause the crisis. >> it sounds from your testimony your preference would be basically to not have, you know, government interventions so that you don't -- or if you had a limited level of government supporting in good times, you'd be in a situation where there's a mechanism to expand and support the market in times of stress.

now, my concern about that is if you believe there was a perception that the government would prevent the housing market from a downturn prebubble, why take steps to compound that perception going forward because it does send that message again. >> there is that risk, of course. that's a reason why you have to be careful in defining a role for a government even in crisis. again, the risk is you create the exactly same type of problems that led to excess risk taking in the boom, but, again, just living with the scars of this crisis, look what we faced in the crisis. you have to have the capacity in extremist to protect the economy from broader damage caused by a catastrophic failure. it is the obligation of the government to do that. one of the reasons this crisis was so deep because we came into the crisis without the tools to protect the innocent in this context. whatever we do, we got to make sure we are prereceiverring ultimately a bet --

preserving a better set of tools to protect the innocent victims from the collateral damage. if you do that badly, you make future crisis more likely, and that is why this is so complicated. >> thank you, mr. chairman. welcome, secretary geithner. you discussed with mr. frank the fact that while fannie and fraud -- freddie lost millions with single backed mortgages, they turned a profit in their affordable multifamily portfolios. what lessons did we learn in terms of the multifamily port foal owes, and -- portfolios, and what will that tell us in reforming the housing system, and should this approach this type of financing differently? >> i think the most important thing is in any reform proposal,

we have to make sure we have a well-zined capacity for the government to help support multifamily housing and rental options. we have to do a better job of doing that in the past, and as you said, fabny and -- fannie and freddie gave us a model to do that prudently. that has to be assumed by the fha at least, but i think you're right to say there's a lot of examples of how to do that well and not so well. we're taking the best model available. >> you're from new york city, a multifamily preservation, transactions, and special needs housing are particularly important, so can you give us more detail on the type of role that the new housing finance system should play on this market? >> well, again, we have to respond in more detail in the coming weeks and months, but i want to say we're committed to, and it's important that the

congress provide a capacity for carefully designed, but significant support for multifamily. again, if you look back, too much of the support we provided went to single family ownership options and much of that support went to people who were relatively fortunate in the country. when the government provides support, we want the support to be more targeted to low and moderate income families and more of that support goes for rental, not just ownership. >> will you say that fha has the capacity to absorb the multifamily -- >> they do a lot of good things, but they have to do more in this area if they are providing the substantial role that we think is important. they would have to take on some of the work that fannie and freddie have been doing in multifamily. >> before the administration's proposal for reforming the housing system, i intended to greatly reduce the government's role in the housing finance. how can we begin to withdrawal

government support from homeownership without placing undo stress on our financial system? >> you have to move very, very carefully. we have started to move, but we are doing so carefully because we cannot afford to take too much risk with the fragile system. as we all know, unemployment rates are very high, and you have millions of homeowners still at risk of foreclosure. there's millions of communities where house prices are still under stress. again, the huge amount of damage to the innocent victim in this context, so we have to be careful going forward. >> mr. secretary, the administration has proposed to let the larger conforming gse's loan limit expire in just the next six months. in regions like new york city where the average home cost routinely exceeds the lower limit threshold, can private sector lenders continue lending

without vital libbedty from -- liquidity from fannie and freddie? >> important question, but you can't be sure. based on what we know, it is reasonable to expect the market to absorb the reduction of those limits. here's an example of why that's the case. i think it's true in 2010, only 5% of the mortgages issued in that context were within that temporarily raised conforming limit threshold. it's a small share of the market. the market is coming back in that area. you can't be certain, but i think based on what we now know, we think the market is likely to absorb that. they have prevent the limitings from father and mothering. we have to watch carefully. we've been careful not to -- there's no certainty in the con tension, we have --

context, went we have to be certain to do damage in the recovery. >> thank you. >> thank you, mr. chairman. secretary guide near, in my opening statement i asked you or said that we really have been looking at option one on this side of the aisle. it seems that's what taxpayers want. would you be -- would you work with our committee on option one to establish a clear framework, put in motion reforms that facilitate the private sector? >> of course we're work with you, but again, i would be careful not to be to enthusiastic about that option because you want to recognize that the consequences of that would be or could be more con sen duration in the mortgage market, less level playing field for community banks, and in a crisis, you might face the risk that in the end your only option is that model in the fha where the taxpayer is more exposed to

losses. though it seems like a more private option, that risk is in the banking system, and what that means is there's a general guarantee there that the taxpayer doesn't get paid for, and so there's risk in that option too. you have to look at them more carefully, and i caution you to be too enthusiastic of even that limited option. even if you want a option that's more private than public. >> i think it's a starting point, but i think when you're talking about the fha, they have -- there has to be work at the same time with the f hrk a to be sure all of the market goes right to fha, and so this probably would be an increase in the cost for fha as the premiums increase for fannie and freddie, and so that we get the private sector in there, but there seems to be then a contraction between

the -- contradiction between the regulators and hud as far as how is this going to work, or the administration seems to be saying we have to reduce the role of fha, but the regulators seems to be the restrictive qrm that limits the opportunity for borrowers, especially the first time borrowers, and things like having a 20% down payment is only going to cause some problems. >> well, two points that are important points. one you want fannie and freddie and fha to move together as they try to phase out the government's role. that's important, and we are committed to do that and committed to work together on that context. you don't want one moving and not the other and the business shifting to the other. as you design the new rules for the private market, you also don't want to create a situation

where you increase the incentives for the government to take on more of that role. you're right to emphasize that, and i think we can achieve that balance. if you look for it in the private market, we should return as an octoberive to a system -- objective to a system where homeowners borrow less than the value of their house and have a higher down payment. it's not the only thing to look carefully at and not the only determine to lost rates, but it leaves the country in a bigger position if there's a bigger cushion of equity in people's homes. it's their most valuable financial asset. people need to move when they change jobs. if they can't move because they don't have the cushion, it's damaging to the economy, people in their community, and so i think for the broader market, we want to move to a situation where people put more equity down on their homes. >> i ran into former treasury secretary paulson a couple of

weeks ago, and he mentioned gse's and said you got to fix this, and what about being a public utility, and i don't think that was too popular, but that's another thing. did you ever consider that as one? >> there are variants of options three which people describe having a public utility feature. again, if the -- i would say the following is true. if the government is going to provide a guarantee through fhsa or fha, you want it to be explicit. you want the government to be, to charge for the risk of loss. you want there to be private capital ahead of the public capital so that private payers are ahead of the taxpayer, and you want the taxpayer ultimately exposed to less risk of loss. you don't want a system where there's this implicit guarantee

or a guarantee not appropriately price the. those are things we have to avoid. when people say the word "utility," again, there's versions of option three that have that character. you can avoid it depends how you come to it. >> thank you. >> chairman watt. >> thank you. i guess i accepted the notion without arguing that private sector is going to be a lot more involved in providing mortgage financing and home ownership for upper income people and it seems to me that all three options, one, two, and three, are really directed at how you structure that. what troubles me in this 28, 29,

31 pages is that there doesn't seem to be much attention to how low income people, in fact, home ownership, a lot more attention with all do respect to the line of questioning to how they would become representer -- renters, but as i found it, i found one sentence in the whole report that holds out a hope for low, moderate income people to be homeowners. that sentence is on page 21. it says the administration would support down payment assistance and counseling to help qualified low and moderate income home buyers in a form that does not expose them or financial institutions to excessive risk

or cost. nothing else in this report that i can find addresses low income people having home ownership, so the question is how are you going to give, just give me some ideas about how you give content to that one sentence which is hedged at the end with the three options. i mean, you know, or just -- let's just be transparent that low income people are going to be renters in this country. there's not going to be any home ownership at the low income level. if that's where we are, i'd rather know it and have the administration say it up front. >> that is not the proposal. it's very -- thank you for letting me clarify this. under any of the options, we want to make sure that the f hrk

a is able to pray the very -- fha is able to play the very important roles that americans with low to moderate income can have the opportunity to get a government guaranteed mortgage with a very modest down payment, so we think that's important under any of those options. >> i didn't see that in any of the descriptions. >> it's central to the two choices. in any option, the fha has to have the ability or should have the ability, congress has to decide whether it will, has to decide with a very modest down payment the ability to a low and moderate income family to finance a house. that's important and a good case for that. when we say we have to do a better job of rental and multifamily, we don't mean at the expense of that critical role. in addition to that as you said, you know, there is an important public policy question about how much equity, how much down should be required to put down

for an fha guarantee the mortgage. right now, fha guarantees above 97% of the value of the house. people argue even for low and moderate income family, they are better off if they have to put somewhat larger fraction of their income down at the time they purchase their house. again, if they have to change job or there's a crisis, they have cushion for savings. that's why we propose that there's a targeted program funded by the government to provide down payment assistance to people who really need that stance, and it's that combination of proposals at the center of this reform proposal. thank you for letting me clarifying that. >> i'm glad you did, because for the life of me i didn't find that anywhere in the 31 pages, and, you know, while i know you're walking a very delicate line here of not trying to

agitate my colleagues on this committee, if we're going to be -- if we're going to have an honest discussion about this, i think we got to put those things on the table and be explicit about them, and we cant finesse them or hide them and pretend. that's got to be done as a part of this process, not as a separate step because if it's done as a separate step, it won't ever get done. rich people will have home ownership, and rich people make money on the apartment rentals, but we'll be a representer nation -- renter nation for low income people. >> i agree with you, and you're right to emphasize that. to be fair, we did not do a good job in helping low income americans get access to

sustainable housing options. we left them with a system where it's easy for them to be taken advantage of, and they had nonof the basic protections we think that people need to operate safely in a very complex business, so we did not serve them well in the current system, and a lot of the support the government provided went to much more fortunate americans, so we got to get that balance better, but right to emphasize as we do to try to have a balance of support for home ownership and a balance of support for affordable rental options. right now, two-thirds of the americans own their home. a third rent. we put much more financial assistance to those who want to own their home than we do for those who choose to rent, and we have to get that balance a little bit better. >> thank you, mr. watts. i also ask all the members to look at pages 20-22 because i

think including rental, affordable rental because i think at least a quarter of our low income families spend over half their income on rental income, and i do think there's been a failure in that regard, and fha whether they have the capacity, i think that would be a goal of any reform to focus on the low income in both rental and ownership. >> i'm glad to here the chairman say that. i haven't hearted -- heard much that of that from your side of the aisle. thank you, mr. chairman. >> it needs to be a part of the discussion. as the administration, 32, you know, only 32 out of 100 low income families can afford home ownership, so you have to consider as chairman frank said is affordable rental income too,

but i can tell you that i think it will be part of the institution. >> thank you, mr. chairman, secretary, thank you again for coming. this is a very important discussion. you know, i'm a little qon fused. -- confused. i was kind of exited when i -- excited when i saw your report come out and embracing the first recommendation that was more of a private market solution, and i hear you say, you know, we need to phase out fannie and freddie, and we can do that with raising the risk premium so that the marketplace creates space in there. you create more space in there, so along those lines, with option two or three, you got to go create something before you start that process.

.. the role of the government over the next several years while we work with congress to fix out what options we would for the future. you want me to leave that process until you login the ultimate design of what is going to replace. don't need to believe that. what determines that he said which he can face amount is with

the basic questions of the gradual process of repair of housing market and our success clarifying rules of the games of the private capital will come. this will determine the pace. >> but mr. secretary, if you are going to send a very mixed signals to the private sector if you say that we are ratcheting, we are going to create a special private-sector and by the way while we are doing that we are going to set up these new mechanisms i think the private market says you know, the we will wait until you get the new system set up and so i think that is a role that you go down and one of the things the mortgage market needs now because i've talked to a number of people of way through the chain is the need some certainty. so i think as you start down that road, you have to make that commitment and i think one of the things i would ask you in order to use, to create that certainty is do we need a

definitive date where the switch is turned over because at some point in time you have to say it, this point in time the taxpayers are not guaranteeing the mortgage. >> i understand the risk you're saying and to set it thoughtfully. that's one reason why you can't delay indefinitely legislation that would define the ultimate solution. it's important to recognize if we do nothing we don't legislate congress, congress doesn't legislate then we are left with a authority under the what's say here of that in many ways would recreate the end of the process many of the risks in the context and we don't think would be prudent so your right to say that we ought to provide such clarity about the end game as possible and as quickly as possible, but to do that in a sensible way does require legislation so it's a good reason to move that. that's why we said in our -- that's why i suggested this is something congress wants to do within the next two years. you don't want to wait three to

five years to do that. >> one of the primary functions fannie and freddie play is being able to bring the mortgages in and provide securitization. what about the idea of at least in some point in time letting them come as a part of the wind down as continue the aggregation function but at some point in time eliminate the guarantee and let them continue to act as acrid leaders and sell the securities into the private market. >> i do you can envision that being part of the long-term solution. there's a lot of talent in those institutions and there's a lot of very valuable systems that make the process work better. there's a lot of economic value in the systems and so you have the right to say that depending where congress goes with this you might want to find a way to preserve what's still a very valuable and with the people and the systems

>> one of the portfolio's fannie and freddie have they are supposed to be reducing those. what we understand is that this kind of a tricky situation they are selling off, rolling off some of those but actually they are bringing the loans out of some of the securitizations securities and bringing those in and working those by repurchasing them. is there a merit into letting them sell off some of their portfolios in and on guaranteed portion? because what i worry about is if we've got the interest-rate risk so obviously when they sell those securities, the interest-rate risk goes on the face of them with a guarantee than basically the risk is still there and i am looking for ways to minimize the taxpayer exposure here. >> i agree with you that your right as you sit in the beginning that i gradually winding there will down and there is no alternative to doing that, they're still issuing guarantees and so there is some risk of exposure to the taxpayers process but we just see no alternative to that. you can't flip the switch today

and have the private market come over and take over 90% of the market. it's not realistic as you know. there's no option except for them to be still issuing guarantees but more conservatively underwritten more expensive overtime to the transition process. you're right to doherty portfolio and was a lot of the guaranteed mortgages, so if they sell those into the market they're still guaranteed and that. i just don't see a better way to solve the basic problem. we are living with that. that is the price of the mistakes of the path and our job is to make sure that again we find them down and we we've reduced the risk of the taxpayers ultimately over time and we are doing a very good job at bringing down those losses, those estimates carefully over time but we are going to stay at it and it depends a lot on the quality of the judgment the fha makes. >> mr. ackerman? >> thank you, mr. secretary. you've stated that the gse loan

when it is going to be lowered from its current elevated levels of 729,000 to 625500 starting in october of the current year. in my district, which is in new york city and long island, the medium home price is about $500,000. that doesn't mean that a person having a home that costs them $600,000 is living in some extravagant home. home prices are based on a number of things, the actual construction and the low location and cost of living so the same $600,000 house in my district, which would be a fairly modest house would cost under $300,000 a lot of other places in the country so these

aren't necessarily people that are living extravagantly. this is going to affect my constituent tremendously, and they're going to be among the first to feel the effects of the larger role of the private mortgage market. what can people like that or my constituency of the people in other parts of the country expect in terms of credit availability and interest rates given the fact that private capital has been largely absent over the past few years have been a participant in over 90% of the loan of origination is the private market ready to come back and do they actually want to play a role or will the trend the past few years make them hesitant to lend or at least

what most people today consider reasonable rates? >> very important question. the way that the law of the land is written without action by the congress, those limits do come down but they still preserve the capacity for the differentiation so they will still be higher in parts of the country were the home values are much higher than they will and other parts of the country. >> talking about the rate? >> when the limits, if they are allowed to reverse and come down in october with that action by the congress that's what happens, they still are differentiated to reflect the different factors driving the holmdel use and i think that the private market now is not coming you know, it's not -- >> you are seeing that there would be a cost-of-living adjustment and there is a standard in the weight the law is written now and that is important to preserve. for this transition process we are going through, you need to have more differentiated limits

to reflect the different factors that affect on values across the country. that's important. you asked if the private market is coming back to it for the high value mortgages and i would say not that much yet. it's a very slow and gradual process, and one of the reasons we want to proceed so carefully is because we want to be careful not to, again, jeopardize the recovery, jeopardize the prospects for growth and the housing market. >> is very great scale that's available? >> there is. i don't have it with me but i would be happy to share with you. >> thank you very much. thank you, mr. ackerman. mr. miller? >> thank you. it's good to have you today. we tend to be focusing very specifically on friday and fanny, yet when you look at housing downturn it's been global. the problem i have is i don't think we are looking at the problem in the marketplace and we keep talking about fri and

fanny's de falcon ifill years they've had and the money they've lost. as i see it, the gses, fannie seriously delinquent loans are about 4.2%. that is not a good number. fri is about 3.1%. that's not a good number. subprimal arms dillinger when that are not agency loans, 38.7%. subprimal loans are delinquent, agencies, 26.5%. even in your prime loans, private-sector loans are delinquent as 5.4%. there's a problem here. we are shining light on friday and fannie but we are not sitting there is something seriously structurally were wrong with the market. looking at the numbers i see we keep talking about the affordable housing goals. pretty and fanny and 98 and 2,000 basically started to compete with the private sector. it began very lenient in their underwriting standards to reduce

the percentage of the marketplace to get it was like a race to the bottom. yet, if you look today they are outperforming the market place and they're basically performing their goal, providing liquidity in this trust marketplace fannie and freddie and the percentage of the market. we are not addressing the problem. the loans your meeting today to fannie and freddie are performing very well. yet the loans performing the best in the high cost areas you're wanting to completely eliminate. so let's eliminate the high cost areas with people like they are able to perform and just to that sector. my concern is we are saying we want to bring the private sector dollars into the marketplace. where were they at in 2005 and 2006? if we had country wide selling junk to the marketplace, the only son booktv to securities you have to have any good of the she is east, the mortgage-backed securities the private sector are worthless in many cases. we are not addressing the

serious problems in housing industry. we are saying we are going to get the government out. but another problem i have is when the t.a.r.p. funds were issued to the private-sector you charge 5%. you're charging fretty and fannie 10%. are they paying it? >> welcome as you know, in a sense -- >> why are we charging double if we are trying to not create or of a problem than we are charging anybody else now? we are not paying 10% from any of the treasury. when you sell notes you're paying very little, yet you're saying freddie and fanny is seriously distressed today so the charge 10% before. how much sense does that make? >> if it makes you feel better the taxpayers are saying that. >> you're going to get the money back from them. >> we are not going to recover fully. it is not possible, but it's going to be substantially lower

than anybody. >> what you think it will be? >> in the budget we estimated somewhere around $75 billion, but that doesn't take account of the fact we are going to raise the guaranteed gradually over time. it will still be less than that. >> if ruffini hadn't been there in 2007, to the senate, 2009, 2010, what kind of a hit do you think the housing values would have in this country when there is nobody to make the loans? because you can't tell me the private sector is better because it's not. >> i don't think we are disagreeing as much as you think. what has been much more devastating. >> if you have 6% of all of the taxpayers in this country own home and we allow the values to go down by trillions of dollars. >> i agree with you completely. >> who is getting hurt worse? >> as you examine the future

options be careful to make sure that you preserve some capacity for the government. >> to protect the victims from the kind of crisis. >> you have to have the numbers. >> why don't you go back and tell us what your they started to make the loans and how your propensity of default rates and why that occurred. islamic of a fannie and freddie, the ratcheted up in 90, 99 and specifically 2000 to completely ratchet down their underwriting standards. they went up in different directions. this did not have to occur. it was preventable. >> i agree with you before we make a huge mistake would you give us the data that says why they went wrong and when and where so we can analyze the problems rather than throwing the baby out with the bathwater because fannie lost money in that 85. freddie never lost a dime in the history until recently. let's go and find out why they

lost money rather than say the bad guy when the outperforming the rest of the marketplace. i would love to have an hour to talk to you. >> they made a lot of mistakes and hold capital against the losses and congress made it possible for that to happen. sinecure time is expired. mr. chairman? >> i would like to build on mr. miller's questioning. there is this view that lenders lost money because they made bad loans. that was true at the beginning. but then with housing prices declining, lenders lost money when they made good loans because to make 100 good loans, at least some of them you're going to have a divorce, you are going to have someone who loses his job, someone's been to die, you're going to have a health crisis. and in the end of the days in 2007 that what happened in the typical amount of times, and they would sell the house of the

profits. now anybody that invested in good loans, people there really documented their incomes still lost money. i don't know to what extent are feeney and freddie's losses due to their subprimal alt-a lending which was a small part of the overall portfolio, and how much of the losses is to to losses on prime loans where you just had an unexpected love of default, and yesterday's profitable sales, today's short sale. >> i would be happy to give members in more detail but since the book is primed most of the losses on the prime. >> and if the most pristine and conservative banker started the bank in late 2008 for the purpose of making the most prime

of loans and sure they lost money on the loans they made in 2008, 2,009. >> when unemployment goes from five to ten people lose their jobs in that huge income and you will see a big increase in the default rates. >> in the issue before short-term is the conforming loan limit in los angeles it's easy to get a 20 million-dollar loan to buy a home in malibu, because if you're walking home in malibu, you either know your banker or you are the banker, but it's almost impossible to get a loan in the 800,000-dollar range. what could happen to this economy if we precipitously allow the 729, 750 that applies to roughly five major metropolitan area including garrey's and mine, what happens

if that were too precipitously dropped? what is the effect on housing prices in los angeles and new york mets with a guarantee fees with underwriting standards that we not magnify the pressures on the market. again, the failure wheat produced, that this government produced were, just to be fair they were bipartisan bill years and you have to be careful as we try to fix this while it's broken, we don't make this crisis worse for people and i think that's a responsibility everybody shares so we have to be careful as we did it. but i do believe that it would be prudent based on what we now know today for the congress to let the conforming limits fall modestly as they are scheduled to do at the end of this year. >> speaking for those who are trying to buy and sell homes in los angeles i don't know if you

create a double-dip recession nationwide, the you certainly do in many areas including the second largest metropolitan area. i would point out that the failures of freddy and fannie aren't bipartisan the our unai to -- unicameral. the house passed a bill that was, you know, through this committee under republican leadership that the former chairman oxley explains would have prevented this crisis, and it was over on the other side of the capitol where others blocked at. finally, if we go back to become better think new bank, then the new gse profits belong to someone else rather than the profits being used to pay what we hope is less than $75 billion of losses. doesn't it make sense to make sure not only that futures

operations are profitable but that those profits are used to repay the tax payer. >> i agree, and i don't think -- i haven't seen a good and bad bank version that would achieve the objective of minimizing risk for the taxpayer losses. >> thank you. >> thank you. >> thank you, mr. chairman and mr. psychiatry. mr. secretary, in your comments you talked with the wind, freddie and fannie investment portfolios are rated no less than 10% annually. some of that is winding down in some of that, however, will be selling into the marketplace which we discussed before. what has been done in that regard this far, and it does it mean that we are going to be selling off 10% of fannie and freddie marketplace in the balance of this year. >> i can't tell you precisely the mix between the natural run off and will be an actual sale, but i can taste on the experience so far, the markets have been able to observe the wind down on that pace, but happy to provide more details to

you on that. and you can't be certain how the market will evolve in the future but it is reasonable and prudent to adhere to that path. >> and you do expect to be selling interest rates where they are some of it can be sold off as a profit. >> i want to be careful how i see that. i can say for the treasury portfolio would be the case. >> okay. >> i suspect you know this, but in terms of the three options of where we go in the future there's not in the committee on either side of the aisle, so i will confess that i am a public utility model type and you sound like you don't particularly like that term so i guess it falls to the option three in your set of options. let's call it instead something where there is a guarantee or federal reinsurance that is available to multiple entities that is as you express limited

where the model was guaranteed implicit and unlimited. what is your reaction to that some of modeling for? >> -- i think it has a lot of merit but again you want to be careful to designed we meet those tests and a little -- mr. henson mentioned earlier you're going to have a hybrid mechanism like to describe what you need to make sure is it is the press to cover the risk of loss to the clause, the taxpayer is behind a bunch of private capital in the context, not i had it, and we want to make sure that we leave politics out of the setting of the basic fees. that's important and for the system that's going to be vulnerable to your successors. and the lobbyists and the stakeholders trying to put pressure to underprice the guarantees in the future. second i couldn't agree more on

those points. if we don't do something like that, if we do something that has less involvement, my concern the housing market is such a huge portion of the economy as we witnessed in 2008. if left without some stability to provide the government will have banks which they often do in other come they don't excited and they want to let everybody in the world money for a house, and after the losses all of a sudden they don't want to know anybody for a house and this happens in other segments of the economy and in effect those segments making a very volatile, but it doesn't have that huge an effect on the overall economy and the housing market is so big and if we subject to those visitors i'm afraid that we will have some significant additional in the economy, you will agree? >> getting there is that risk and you stated very well and that is why i want to emphasize over and over again that would you look at alternative models

and people have a private character, purely private character to. most the system involve banks holding of that risk and as you know the history of the financial crisis is largely a history of banks and real-estate together and the government ultimately is there. it's behind the banks with this implicit support that they don't charge for the taxpayer exposed to losses, so the difficult challenges to make sure you have a system where you have more conservative standards for underwriting, homeowners hold more equity and banks hold more capital against risk. the control is limited. >> with me sneak in one final question here. to talk about we may have higher down the will require high gear down and there may be higher cost to the mortgages for the moderate income people consider. how can we reconcile that with also taking sides the low-income people than saying no we are going to have the modest down

and perhaps no more increase. how can we tell the modern income it's going to be high year to buy a house and a low income -- >> excellent question again. my own view is that there is a good public policy case for the government providing some assistance for the low and moderate income americans so they can afford that first house. i want to try to preserve, carefully designed in any system moving forward, but that objective is consistent with returning our system to a system where the private market place the major role in housing finance. and if we get better oversight, better capital requirements that are underwriting standards we will have a more stable system. >> thank you. -- before mr. chairman, mr. secretary. mr. secretary, this is all very interesting and i think we're missing a lot of apples and oranges and we are talking low to moderate income housing. the truth is we are not even talking to the of the reason

about hud or tax credit for whatever, all of the things that go into the low and moderate-income housing and i have to tell you, option one, option two, option three - mccaskill can i get a salad instead of soup. it's hard for anybody to follow. >> would you like the south and the suit? >> i would love to if i could but i don't think we can afford that. for me, i look at housing as we all do. we come to the table and -- i lived in my first and only owner occupied two-family home. i don't know if there's anybody else on the panel or in the room who lives in their own to family home. i bought it because i couldn't afford a single-family home. my children went to college on the basis of free mortgaging that home. if i didn't have that home, my kids could not have gone to college. and even with that, they came out with significant loans. so for me, i really want to get to the bottom line. when we are done, i would like to know the administration's cool on the numbers. when anybody i know what to get a mortgage they don't care what

comes from, they probably don't even know fannie mae, fha, private, they just want to know how much, what's it going to cost me and will you give it to me? for me i come from the markets like most of the people in the top row like come from a very expensive market. most of the people in my district would never sell them qualified for a loan. they just don't because the houses are expensive even with the new numbers, some but not many. but we have a lot of young people in this room today. we might be saying what is my turn. if a young couple, to good jobs, good education, making 100 grand together, paying rent, probably paying student loans of, taking one or two although loans, trying to put something aside for everything else would you think is a fair amount to ask for a moderately priced home? again that never changes. mr. ackerman is right and mr. miller is right, moderately

priced home in my district is a task in some of the other place is for the numbers, but a moderately priced home what do you expect them to pay? you expect them to pay 20% down? expect them to pay seven, eight, 10%? how are they ever going to be to get this together and help are the ever going to afford to send their children to college? >> excellent question, and let me just say again we think it is very important to make sure that the fha, which is tied, still has the capacity to provide mortgages at reasonable cost to people that cannot afford to put a lot of money down in their house. >> i'm not talking at the moment about people who have a lower education or limited -- and talking about people in this room. people making decent incomes and have probably a reasonably decent future. but as they are living their daily lives it will be almost impossible for them to put aside

until the friend and student loans, 60, 70, $80,000 for a down payment and then qualify, especially for young women who say maybe i want to have a family someday, how are they going to be able to do that if they don't address the long-term goals how much are they going to pay? what is that goal? >> in the system today we want to preserve part of this. to have to get an fha guaranteed mortgage and have to put down a very small fraction of the value of your house and that is appropriate to maintain people who have low and moderate income. where congress defines the lines for the congress to make for the rest of the american people we want to have a system where the private market provides that finance and we think that is possible -- >> by the time talking about the vast majority of the american market. i'm not talking about the lower end. maybe i'm wrong but all of the young people and in this room are very intelligent people. they are going to have a great future. they are not the low end of the

socio-economic scale. they are going to have a great future. how are they going to get in? >> i set low and moderate, but this is the fundamental choice and you are right to raise it. the way to ask the question is is it fair to ask all americans to help subsidize access to housing for more fortunate america and where the line is you're right when you put it to lower it will still be unfair and for me and i guess we'll have to ask yourself that question. i got lucky enough to get my house. i have children. i want them to be able to afford a home someday come reasonable home in a reasonable neighborhoods a covered in this room. i think and i have to agree with you those are the questions we have to ask ourselves. it's also the question the administration has to ask and as we go forward the lie appreciated the exercise we have to go through in the final analysis it is about how much and how much we are going to ask

for them and this administration has to do more than this paper to help us answer that question. thank you, mr. chairman. >> thank you, mr. secretary for being here. >> i still try to wrap my hands around the tool to protect the innocent with respect when you have a policy of too big to fail then you have a policy of too small to succeed that is the state i represent, new mexico. so when you spend money for all of the collection to the collective action of the big banks of the small banks still have to comply with the corrective action and it's very punitive on the small banks. you indicate page three that you're worried about sufficient capital. now when basl was agreed to in 2003 or 2004 we allowed the big

banks to determine by models the capitol requirements are the big banks still allowed to determine the capitol requirements under basl ii order is that something you change? is that one of the tools that you have -- >> i want to make clear i would never support a system where you allow banks to choose how much capital they hold against risk. >> am i incorrect that it basically allows them separate models and to declare their own capital requirements? >> because basl ii took so long to put in place it never got into context. under basl iii the have to hold capital against risk and the don't get to decide. >> but basl isn't in effect yet. as long as it's not in effect. what about the -- what about the mark to market? when i was back in the district in 2008, i had the homeowners who dominated the small-market kind of low margins and they

were being told they have to come up with 750,000 new for two or 3 million note facility because of the re-evaluation of the mark to market rules so is that sort of protecting the innocent when -- >> you aren't going to find a disagreeing with you that we want a system you don't create the perception of to be to fail. i believe very strongly that large institutions need to be forced to hold more capital against risk would be relative to the small institutions. so, if that's your view -- >> you believe that those institutions should hold more capital, and yet the institutions were complaining about the trust, the institutions complained when i was trying to put more reserves as the capitol requirements than they were penalized for adjusting their earnings and so in good times they put the capitol side and bad times for

not putting the capitol side. so where is all this stuff? the ennis and now there are wondering how are they going to worry about us? >> i'm tempted to say it is worse than you think. you're right to say the system we have in place made it harder for the banks to put more reserves aside during the boom against the loss than would have been appropriate. i agree about that. >> if we scoot over to the problems the estimates at the end of 2006 we have 1.24 trillion in some prime loans only 300 billion of those, .3 were held in the fdic controlled banks. if you give them 75%, 75% of those were performing at that time which means a 75 billion non-performing and if you took a 50% write-down on those, you get somewhere in the neighborhood of $58 billion associated to the subprimal and then if you take another 25% of all of the performance write them down to

get another 56 to to get millions we get about 150 billion of exposure, and we have 12.3 total, 12.3 trillion at that .1.4 equity and 15 billion earnings so the exposure in the supply market appears to be in the 100 billion-dollar range and yet we took a very dramatic actions to that i question whether or not we took the right action. >> in terms of the reform legislation or in terms of the actions? >> in terms of the responses, the responses i was sitting here in congress at that term the epitome of hot. the government overreacted? the appeared to be ad hoc. >> two days after we support aig

and two days before the any and freddie we were sending -- >> i would say that this country came into this crisis without the tool not just to prevent the crisis safely but to respond when the crisis happen and that's one reason why the crisis was so deep into the year and one reason why the congress had to legislate in a panic that particular stages of the crisis that should never happen again and one of the most important things financial reform legislation does is give the government better tools in an emergency to wind down these institutions without the taxpayer exposed to the laws. it's just for that reason, but you're right to say the tragic mistake this country made was to build a system where the government could not come in and protect taxpayers to protect the economy from them mistakes the large institutions make. >> thank you, mr. chairman. >> thank you, mr. chairman and mr. secretary for helping the

committee with its work. i want to look for work here. i know we could argue about who did what and when, but i think it's important here that we try to figure out a way to, you know, to wind down fannie and freddie as you've suggested. and i think, you know, on your point, there are, as i look at option three there are more tools if you will within that framework to influence the markets and to provide some relief when necessary. i have, you know, i have the idea that this government reinsurance would only apply to certain securities that comply with a very strict underwriting standards. i think that could offer a great incentive to getting the type of product we would approve of and i would be sound especially in

looking at what happened in the previous crisis when we had -- i'm sorry, we had moody's triple sample everything. if you have those type of requirement on the underwriting, i think that could stabilize the market. as well, i think that having the loss allocation paced the copley's on these private guarantors' times observed by the private sector instead of the government and i like those ideas. however, having been here a few years there are some constituencies out there such as the banking industry, such as the housing industry that would want to have as many products comply and get reinsurance if possible, and the private guarantors' would also want to have the backstop and as close as they could so that their

losses were minimized and the public losses were probably maximize. how do you deal with that issue where you've got these constituencies pushing against what you're trying to do, and my fear is that as we get out of this crisis and we get more towards a period of normalcy that we don't have the robust oversight on the private guarantors' and we may end up back in the same place because the lack of oversight and the tax payer in so that risk again. >> i think that you figured it out, you've got it exactly right. i think that is exactly the mix of it packages and risks in designing the very at option. so for the option three to work it's very important to make sure -- you have to have these basic conditions. absolutely, you have to have the capacity to make sure you set the capitol requirements and oversee the stacks of mortgage guarantors'. that is the absolutely necessary

condition. of the plan necessary to make sure you have the freedom independent politics to set the strict eligibility requirements for what would be eligible for the guarantee. absolutely important to make sure that guaranty is priced on what is economically sensible estimate of the potential future losses independent of political influence and one reason why we've been careful not to come it is to say that fundamentally whether you like option three or option to option one organics of those things it depends on whether the congress is willing or able to design a system that is less formidable to the political influence from people like to benefit from the subsidy from the government. >> mr. secretary, the other thing i wanted to ask you about is the definition of the catastrophic. we seem to be agreeing that the government should step in to prevent -- at that point of catastrophic loss i guess, and

mauney guests is i know what we just went through was catastrophic, so i know that much complies, comes within your defection. but also in reading this in the president's proposal and report the administration, it would appear that the other definition would be after the private guarantor is wiped out. is that -- does that trigger catastrophic or is there a reinsurer beyond that? >> you're talking about the gerient option three? one way to do is to say you have no exposure to the taxpayer until the guarantor has failed so to make sure there's enough risk ahead of the taxpayer and to our right to say that where you set the lines is what is important to the economics of arrangement, very hard to do, but it's not -- it's not beyond our capacity.

it works dramatically better than the system we had. i'm actually more optimistic you can design something in that area that is not nearly as vulnerable as the system we had with of the gses and the types of failures we saw. >> thank you, mr. chairman. >> thank you, mr. chairman. thank you for being here today, mr. secretary. in your testimony you indicated that your objective is a healthier more stable housing finance system with a broader goal of helping our economy recover. a part of stabilizing our economies to ensure there is adequate capital and our financial institutions so that money is available from lending, housing, construction and commercial purposes. you indicated it's one of your goals, and word of the fed's goals. given that goal i want to call your attention to a recent

proposed legislation from the internal revenue service that could have a devastating effect on the capitol in the u.s. financial the institutions. this rule proposed by the irs could lead to several hundred billion dollars, leaving the the united states and fleeing to the low-tech stressed actions. it's my understanding that for the past 90 years, our national policy has been to encourage foreigners to put their money in our banks. that money goes to work in the united states economy in exchange for those interests and they have the assurance that their money is safe and sound. they also have the assurance that corrupt governments don't have access to that information. i think that is a win-win situation and you're shaking your head yes minnick one. i.t. to too. spinnaker would force banks to hand over interest payment information to the irs.

there would still be no tax on the interest earned but the irs would in turn have this information to turn over to a foreigner's own country. this is a bad idea when it was first proposed in 2001. and by the administration and congress rejected it. it was a bad idea and a bad idea now and i look forward to working with you so we can maybe do that again this time around. $20,400,000,000,000 from u.s. banks has apparently it would happen if the regulations were put into place would be devastating to the economy i think. for the mark, it would raise the safety and soundness issues for the bankers and would have significant deposits from the non-residents affect those. do you agree that this is a bad idea and that it's come at that

time? >> congressman, i'm not completely sure i know which draft regulation you're referring to. i think i do. and if i'm right, i don't think it has the risk that you are suggesting that i would be happy to spend some time and talk with you about it and see if we can find a way to address your concerns. >> i would greatly appreciate that because it and we are going to need your support here. do you think the housing market has bottomed out yet? >> it's very hard to know. we have unemployment between nine to 10%. although the economy is growing, and though you've had a big, big adjustment in house prices and housing is much more affordable now. i think by any judgment, you still have a lot of damage to the market to absorber overtime and that is going to take your not more time. >> i think we all know that. just wondered about your personal opinion, yes or no if

you thought that it bottomed out. >> i'm a three culberson -- >> i'm not being insensitive and by polis for being insensitive sometimes and impatient when the people life represented have been ripped off billions of dollars and people have died over this issue in this economy. i mean, it's really serious outside the beltway to realize people. i'm not sure, just as a comment i want to make, that a large downpayment for the fha is going to help anything. i know that for over 30 years most people bought their first homes that 3% down payments, and they paid them back. there's a lot of cero down payment for those problems. we never had a problem until the congress got involved and invoked its will on fannie mae and freddie mac's and under the impossible dream that everybody should have a home if they want it whether or not have a job or have the income, whether or not it is worth the loan amount. i think that if we just get people back to doing their jobs

in the 3% down payment it's going to work out just fine for this country. and you and i talked before about regulators who were taking performing loans and classifying them as nonperforming loans because in their esteem opinions the shouldn't have been performing loans. the standard to determine if performing athlone historic we has been with or not the lowest performing. can you give any kind of help on the ground back in our districts to take this arbitrary and capricious treatment or to the arbitrary and capricious treatment stopped by some of these out of control bank regulators who are apparently overreacting for their failure to do their job in the first place? >> well, if you give me authority of my people to do it but that's their authority. i share your concern coming and

i know that if you talked to german bernanke and chairman there they are worried about this problem, too, and they are working to try to make sure their examiners bring a careful and balanced approach to the judgment and they don't overdo it after perhaps being accommodating in the boom, and i agree with that concern and i've passed the concerns down every time i hear them as an sure if you have, and -- >> thank you. >> mr. miller. >> thank you mr. chairman. mr. secretary, in your prepared testimony he said the administration is committed to housing finance system in which the private market, private capital is the primary source of mortgage credit and use it would be subject to strong oversight and consumer and industrial protections. it's pretty clear that private capital hasn't come back into the market and there's been one issue of $236 million in the private label and mortgage-backed securities

markets which is an asterisk to what it had been before. in response to questions of ms. waters, ev lubber read the summit and said that we need more standardization in the market and better disclosure so the investors know what they are buying which is consistent with what i've heard from investors. but they say the first effort by the sec doesn't quite get there. the sec won 93 allows greater disclosure of due diligence but its due diligence by the issuer of the reporting hired by the issuer to do their own due diligence. it is a sample of the pool to see what they're buying and more important d.c. test the more enforceable the have made more than one as a comparison of this mortgage market to doing business in russia now and

trying to sue and all the dark. there's a problem with the rule will fall and contractual rights are simply very difficult to enforce. will the administration proposal would to support in the structural changes to the private market disclosure including the direct due diligence by investors allowing them the opportunity to see themselves cannot take anybody's word for it, but they are buying servicing requirements so they know what happens if the mortgage goes into a default and third, that there would be remedies. you know, they're have been stories in the last week or so about some of the bigger banks advising investors, their shareholders the may face liability this kind of a peevish tone, the ingalls are getting the ten by lawyers and regulators that strikes me as fairly basic law.

will the administration's proposal support those things? >> absolutely sure the subject is a happy to talk about how to achieve those objectives and any concerns people have about the market and the rules we will look carefully at. you are right to emphasize that for this to work better seek their reading on the capitol rules and things like that, better disclosure standards, you need servicer standards that can be enforced, and those are part of the solution and i think until that happens it's going to be harder. but happy to talk to you about that. >> the service requirement point there has also been stories about private negotiations going on now between regulators and attorney general's and the various servicers as well as risk retention rules, the requirements will be part of that. why is that not within your

authority now? why do you need that? these are all subsidiaries of banks regulated by the sec. they do not have been appointed director now, a temporary director you could replace at any time. why is the sec not requiring better behavior servicers? >> welcome again, we are trying to take the authority in the financial reform legislation and applied it carefully in a way that will apply to all participants in the market with their banks or nonbanks and make sure there's a consistent clear set of rules in the game that investors can then to benefit from more generally and we are trying to do that on a careful basis to say more time than we thought, but we have to be careful to get it right and i am not sure how much longer it's going to take that it's going to take longer than we initially expected and we can't achieve those objectives just using the existing authority we have where

the hold itself, the have to have a broader level playing field across the market as a whole but we are moving in the same direction and i appreciate object if you leave out it's just the question of getting the details right. >> i'm sorry, do you not have the authority -- >> with dodd-frank we do. but we are leaving out the basic architecture through draft rules the market can comment on that would give the comprehensive reform you leave out more substance and traction. the way that the system works is we do have a lot entities involved the devotees of this we want them to work together and put out a draft rules so people can, and get feedback on them and get them right. >> thank you mr. miller. >> thank you, mr. chairman. secretary geithner, this morning -- i haven't heard a lot with regard to the federal home loan banks and it is in your testimony and it's in the report. can you elaborate just a little bit on where you feel the role would be?

i know there's been a few problems but generally not a lot of problems with them and where you think we can go with that? >> there's a few examples he pointed out in the current system that it deserves attention and reform and i will mention those again although they are in the paper. the entities were allowed like fannie and freddie to accumulate investment portfolio which we don't think is necessary and they took on a lot of risk and they didn't -- some of them to congress and didn't have capital to back that and that is something we should avoid in the future to be created a system where we allow large banks to be members of multiple home loan banks and that's something we have to look at it again and again to make sure the system doesn't have too much risk. there are other things people have suggested and we will look at every credible idea and you are right to say that the problems were not nearly as that as we saw from the private market and fannie and freddie there are things we have to take a careful look at. >> during the course of your putting together the report, did you look at other countries and other programs are not the world

and what the point of those may have been, what worked other places if they were appropriate for us or can you elaborate on that? >> we did a careful look and that is a very good question because if you look at the experience of other countries, a lot of countries did better than we did in this crisis, but i think the biggest difference to can point to is in most of those systems, banks are the overwhelmingly dominant source of credit and there is not nearly as large a role for the securities market. it's true for corporate debt and for the mortgage finance and consumer finance. in our system, we have a better balance between credit provided by banks and credit provided by the broad market, brought investor communities both in terms of asset backed securities like real estate mortgages and also just direct corporate credit and we want to try to preserve the kind of balance. using the system would be more stable in the future if you have that balance. in the systems and housing

finance as i said earlier several times, in the countries where the government doesn't provide the kind of guarantee that we did from fannie and freddie, the banks hold the overwhelming risk, but those governments generally given to the banks. they don't let the banks feel on a crisis and that context as you saw in the crisis is still the expose the loss and it's just that the guarantee is an explicit taxpayer protected in that way. so i wouldn't look to that model has a particularly appealing a sample of a more private system. as you know in many of those countries the banks are much more close to the government, the governments don't let them fail, they don't allow failures of any sense you are still socializing losses and risk in that context. >> okay. >> one of the comments he made a while ago is it is an obligation of the government to protect the economy. can you tell me at what level you believe this -- where we need to go with that? >> excellent question and some people disagree on at the moment, and again, the basic

paradox of the challenge is if you build them protection against the extreme crisis, you might meet the crisis are likely in the future. that's what the governments get these things wrong overtime and it's hard to get that right. but if you look at what happened in this crisis and what helped us to get out of that, you have to have the ability to reduce the risk of the collateral damage that can push the economy off into the kind of deep recession we saw. that's important to have that kind of capacity and i think we can do it in a way that doesn't come again, magnify the moral hazard in the future of the tax payers but it's hard to do though. >> when you are saying though is that at some point the government is quick to be the backstop? and in a much more limited way i think we can do it in a way that is much less of a risk to the taxpayers. and not to make it overly

simple, but if you require banks to hold more capital against risk, if you require homeowners to in general put more equity in their homes, is to make sure that the underwriting standards are more conservative in the broad context, then you will do a lot of good in making sure the system is more stable even in a deep recession. that probably won't be enough that will take you long way to it. you still may need the flexibility and emergency to coming in and provide the protection. >> with that i will yield that my time. >> let me say this. the secretary has to leave in five minutes, so we will have one more. mr. scott will be the last unless you can stay an additional few minutes, and i think the agreement you extended from 12th to 12th doherty is part of the negotiations. >> to my all so offer the final commitment? if i know you have a subsequent -- >> i would ask unanimous consent if the hearing starts at 2:00

secretary donovan that those members in the room on both sides that did not get a chance to get the question will go first. hearing note ejections, mr. scott is recognized and he will be the last. >> thank you very much, mr. chair, and i'm glad i got squeezed in because mr. secretary, jury worried. i'm very worried about unintended consequences here. and granted there is a lot wrong with fannie and freddie, we certainly need to reform the situation. but there is a role for government here and i think we need to be very clear on this and we are examining this issue in a time of great volatility of record numbers of people who are losing their homes largely through no fault of their own,

but because of our problem up here in washington. and i am concerned about this rush to judgment and the tendency to be throwing the baby out with the bath. we had fannie and freddie for a very serious purpose, and granted there are some problems with them but they provided a very useful tool to put us in the position where we are in. there are still problems facing minorities in the housing market that just the rush to bring an the private capital and that solved the problem, that doesn't solve the problems of the pain of color shot. many of the people suffer simply because you're african-american, because of the color of their skin. we've got other burgeoning problems on the income levels of individuals. now we have got another problem with many of our returning

soldiers, which is heartbreaking, who are coming home after leaving here, going, fighting on the battlefield of iraq and afghanistan, and they come back and they are on the street. they are on the divide dhaka. no matter what we do, bring the private capital in and that's the answer is not the answer. so, i want to stress the treasury and this administration moved with the very jaundiced eye on this and in my review of your report, probably the best option given the volatility of the situation we are in, given the sensitivity, would be to look at option three as a base for which we can work. i think it has the attributes in

here. it has a degree of certainty. and even members of the financial services community, the banks, the mortgage companies, all of them realize that private capital isn't coming in at any price. .. of the different needs that i mentioned in my remarks, that there is a need to move more

from a position of option three than the other two? >> i agree with much of what she said. you're right to emphasize, as i try to do, we have to be careful we don't do more damage is to get systems in a better place. you know, you could imagine the next of the three options, which is a play place to live if ultimately. you have to be careful. i would caution, as you know better than anybody, it hangs get-together in favor something that involved a guarantee can expect to be careful. you've got to be very, very careful about that. as i said many times, i think there are ways to design option by the fha so if you occurrence in our system that has the same kind of risk we feel. >> i meant to say cards.

>> mr. secretary, quickly, the impact if he will terminate and they program, the fha refinance program, the nsa program and the emergency relief program that you have any opinions? >> it would be, i say, it would cause a huge amount of damage to a very fragile housing market and made hundreds of hundreds of thousands if not millions of americans without the chance to take advantage of a mortgage modification that allows them to stay at home they can afford. it would cause lot of damage and i would recommend against it. >> thank you very much, mr. chairman. >> that concludes our hearing. i may say, secretary geithner, congressman posey posed a question to you, which i think it's immensely important.

he was referring to a draft proposal by the irs. the irs nonresident alien deposit will, which doesn't seem to go away. but i think as he stated, it could cause hundreds of billions of dollars to exit our banks, particularly banks in distressed areas in florida and texas and california and arizona. it is a real problem. it's rank 141697 -- 09. they may submit questions or branding. without objection handler made up for 30 days to submit questions to secretary geithner and place their responses in the record. this hearing is adjourned. thank you, secretary geithner. [inaudible conversations]

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>> there's a new way to get a concise review of the events. it's watching today on c-span radio. every weekday will take at a capitol hill, the white house in any way news is happening. while the top of the experts, politicians and journalists as he put the events in perspective. the stories that matter to you the most every week day 5:00 to 7:00 eastern on c-span radio. you can listen the washington baltimore area and nationwide on xm satellite radio 132 or go online to c-span.org. it's also available as an iphone app and you can download the program every evening at the cease and podcast. >> defense secretary robert gates and joint chiefs of staff

chairman admiral mike mullen on the u.s. response to violence in libya. this is a half-hour. [inaudible conversations] [inaudible conversations] >> good afternoon. i have several personnel announcements to make and then admiral mullen will provide a report on the middle east. today i'm announcing i recommend three officers to the president for senior leadership positions. i will recommend vice admiral william mcraven who had joint operations command for promotion to a fourth star and nomination to take charge of u.s. special operations command.

he will replace admiral eric olsen who will retire at the completion of his tenure is so calm. i will recommend general james thurman, currently commander of army forces command to be the next commander of the united states versus korea, replacing general skip sharpe who will retire at the end of his tour. finally, i'm recommending vice admiral joe kernan, my sister proposed u.s. southern command replacing lieutenant general ken keen. we'll possibly recognize admiral olson, general sharpe and general keen in a decade the public a disservice of an appropriate time. three officers i'm recommending today to be the successors of the right mix of military acumen, strategic vision and diplomatic and interagency skills that these posts will require. admiral mcraven seal team three

in europe has led a jsoc team that has and effectively taken the fight to america's most dangerous and vicious enemy. general thurman runs though organization with responsibility for oversight and incoming training and equipping of 700,000 soldiers in the continental united states. general thurman has significant experience in combat theaters including services and division commander in iraq. and joe kernan turns to south aomori commanded the fleet navy seal to be the number three. i'd like to thank joe for his dedicated service to the past two years in my office. his advice informative background special operations warrior has been invaluable and he will be sorely missed. joe successors or military sister will be lieutenant general john kelley who currently leads marine forces reserve than previously commanded the first marine expeditionary force in and bar

province in iraq. i look forward to is coming on board later this month. before taking questions and turning it over to admiral mullen, i'd like to note the passing of our pro frank buckles come the last living american american veteran from world war i. i had the honor of meeting mr. buckles three years ago at an event here at the pentagon, honoring the world war i generation. as i said then, we'll always be grateful for what these veterans did for their country and in mr. buckles case, we're all glad he had the longevity that he had on this earth. admiral. >> thank you: mr. secretary. let me start by saying i fully concur with the cedar litter recommendations you've made. i know each of these officers very well and i've worked in lead insight in this very difficult times. each of them will perform their new duty with energy and innovation with which they have served their entire careers.

all are great leaders in their own rights and all of them are ready for the challenges you've proposed they now take on. the chief and i look forward to working with them and will give our full support should the president to nominate them and set the senate see fit to confirm them. if i make him i would like to make mention of my trip last week to the arabian gulf region. long planned come the certain character in the face of popular unrest in revolt against north africa in the arab world. seven countries in seven days later, i can tell you this. the pace of change in course of events are moving literally get this be to twitter. when i took off from andrews last friday, protests and bahrain were turning bloody. uprisings in libya were merely percolate and in demonstrations in yemen were fragmented and disorganized. the program about in our brain is nonviolent activism.

gadhafi is reaching a war in his own people and opposition groups in and around osama are coalescing, setting up camp and vowing to fight out. it was quite on thursday when i was there appear by the time i landed back in andrews county antigovernment protests in the northern town of zohar had turned violent and two people have been killed. never have i seen so much happening so quickly and so many different places that one. the people there were glad to see me. they so want a strong partnership with the united states and with u.s. armed forces specifically. i believe it is absolutely vital that we look for ways where and when we can to foster those relationships. i recognize this won't always be possible. the preliminary steps are taken to begin dialogue in libya have rightly been halted. also in the region we the region we find that military partnerships, long-standing inverted professionalism offer a means of communication and even clarity of mason certain times

but other forms of interaction may not yield. that's another reason i did not alter my plans to make this trip quite frankly. i thought was important to go and listen. i wanted to team their perspectives on what is happening in your directly from them on what plans, if any, they were making. as you might expect, no two countries leaders come and military civilian approach in this crisis in quite the same way. each is guided by his own sense of urgency in domestic politics. all of them understand the seriousness of the passions driving these protests and all of them are concerned about the broader regional implications. i ran loomed large. while i do not share the same word others harbor about iran's rule in fomenting the unrest, we are seeing no indication of credible influence from tehran in that regard. did you agree the regime needs to take advantage of it for their own purposes. a message therefore was one of

reassurance. u.s. military will not lighten our load. we will not go our focus on the security commitments we have made war on preserving our ability to tour the actions of any hostile state in the region. iran is the real loser they are, whether they want to admit it or not. they've had no hand in the change in the region except the one they have used to slap that their own people. violence only begets more violence, were peaceful protests and government restraint can lead to meaningful dialogue in progress and a commitment to change as we sing in egypt, bahrain and tunisia. thank you. >> secretary, admiral mullen just mentioned in libya bull-market obvious waging war on his own people. what is his u.s. military intervention is realistic in what specific kind of options or you can do during. could you describe for example the possibility of the no-fly

zone or trouble for us this? >> well, first of all, i have direct did several navy ships. uss kearsarge and the ponce will be entering the mediterranean shortly and will provide us a capability for both emergency evacuations and also for humanitarian relief. about 1400 marines from the kearsarge are serving in afghanistan and the uighurs ending about 400 marines from the u.s. that will be in support of the kearsarge commission. so those are the actions that we have taken at point. we're obviously looking at a lot of options and can change in these. no decisions have been made on any of their actions. i would note the u.n. security

council resolution provides no authorization for the use of armed force. there is no unanimity within nato for the use of armed force and the kinds of options that have been talked about in the brass and elsewhere also have their own consequent is in second and third order effects that need to be considered very carefully. our job is to give the president the broadest possible decisions based in the options and to go into the things that were inching about, the options for providing i think have the potential to narrow his decisions based and i have no intention of doing that. i don't know if you want to add to that. >> what are those second and third order consequences you are talking about as a result of any possible u.s. military intervention? i could also to the admiral,

this morning on capitol hill, centcom commander general mattis said enforcing a no-fly zone would involve u.s. military operations in taking out air defense systems before the fly zones could be enforced. is that the case of the u.s. military to have to actually launch airstrikes before those no-fly zones can be effectively enforced. >> first of all, all of the options beyond the humanitarian assistance and evacuation are complex and there is a second and a second-order consequences. i think derive from the fact they are complex. and for example, if we move additional assets, what are the consequences of that for afghanistan, for the persian gulf? and what other allies are prepared to work with us and

some of these things? i think those are some of the effects we have to think about. we also have to think about, frankly, the use of the u.s. military in another country in the middle east. so i think were sensitive about all of these things, but we will provide the president of the full range of options. >> and with respect to the no-fly zone specifically, it is an extraordinarily complex operation to set up. it has been done historically. we did it in iraq for many years, north and south and certainly if we were to set it up, if that were something that was decided to do, we'd have to work our way through doing it in a safe manner and certainly not put ourselves in jeopardy in doing that and that gets to what general mattis said about obviously putting us in a position that it could actually

harm, you know, take those aviation assets that it here. but again, at this point, there's an awful lot of people talking about this. there has been i think increasing, i guess, a desire to understand it specifically. but there are many, many things, as the secretary said, they were looking up for contingencies and absolutely no decisions made with respect to that. i wouldn't speculate on that at all. >> given some of those complex things you have to do to even set up a no-fly zone, to educate the u.n. security council to go on with that? admin would be pretty unlikely that russia and china would go along the no-fly zone. it seems like there's a lot of talk about it, but it would be pretty unlikely.

would you talk about a few of the steps just to set up a no-fly zone? >> as the secretary talked about earlier, in terms of the u.n. specifically -- >> were you talking about a no-fly zone when the u.n. security council and nato has no unanimity for armed force? >> i'm talking about the full range of any kind of military davidian with respect to libyans. there is no authorization for the use of force and that u.n. security council resolution. presumably. >> could you talk about -- there's a lot of stock pile of mustard gas but he doesn't have a way to deploy it. what are the possibilities and fears there that he could do with it? >> well, first of all we are keeping an eye on it. and our information is that the security around those things is

an increased and i think i just leave it as we are keeping an eye on it and i think it is not an immediate concern for us. >> you seen the evidence he acquired on his own people from the air? the reports of it, but does he have independent confirmation? >> we've seen the reports come up with no confirmation. >> no confirmation whatsoever. >> is your assessment of the situation on the ground, can the rebels take tripoli? are thousands dying? >> well, i think the honest answer, david, we don't know enough respect in terms of the number of casualties in terms of the potential capability of the opposition in the same realm of

speculation is pretty much everybody else. i haven't seen anything that would give us a better read on the number of rebels that have been killed and you have. and i think it remains to be seen how ugly military leaders who have defect did from gadhafi forces can organize the opposition in the country. and we're watching unfold as you are. >> do you know if any request from leaders or airstrikes tomato? have you heard of any of that? >> now. >> to talk about jem and the return of the cleric in the wake of the anti-american comments from the president? i mean, how concerned are you about his call for the islamic state in yemen? how concerned are you about what's floating in yemen right

now? >> i haven't seen the press reports about the return of cleric. so i'm not in a position to respond to that. we are watching the situation in yemen very close to it it is a matter of concern. you know more than i do. >> thursday in an area that we have been focused on for a long time and concerned about, essentially the fertile ground for terrorist who have both been emboldened and they've gotten al qaeda specifically much more potent and certainly as the insurgency continues they are, were very focused on not. i guess almost as each piece continues to unfold, were just watching it very carefully. whether this guy will have an impact that some think, i just don't know.

>> how can someone who is very supportive of the united states until now? you said it was washington and israel who are commenting on resolution in the middle east. >> we've actually been in meetings. >> mr. secretary nonthermal and, based on what she's seen today, do you have any reason to think that sub 10 will be prepared to leave voluntarily or do you think some form, whether it is rebels, ultimately if u.n. sanctions, western intubation, whether some forceful person not of power. >> i can say sometimes you have to listen to what people say. and he's saying he is not leaving. >> fair, the air force issues take our contracts last week and i'm curious from your good if

you've heard anything from the vendors about whether they'll be a lot to move or if there will be another potential difficulty. >> i've not heard anything. i believe that both of the offers were briefed yesterday, monday. we think that this was a very transparent forthright process. companies obviously have the opportunities under the law to protest, but i think the view in this building is that there are no grounds for a valid protest. >> admiral mullen, if i could ask a big picture question about what's going on in the middle east. we've had relatively peaceful revolutions by people want democracy, less optimistic pictures in libya and iran were

things have gotten more violent. over the long term, what are the risks and potential rewards for u.s. strategic interests in the region? what do you see long-term evolving for the u.s. as a result of all these changes if you could speak a little bit about that. >> i would have to say i'm an optimist about these changes. i think first of all the revolutions in tunisia and didn't you just and protests elsewhere that are leading to reforms in a number of governments i think are an extraordinary step back for al qaeda. it basically gives the lie to outrageous claim that the only way to get rid of authoritarian governments is to extremist violence and the people of several countries in the region are proving this not to be the

case. i also think that it is in some respects now and perhaps even more so in the future a major setback for a man because the contrast between the behavior of the military's and tunisia and each of them except for a brief period of violence in iranian, contrasts vividly with the savagery pression that the every man's have undertaken against anybody dares to demonstrate in their countries. now, all of this clearly has to play out and it can take months and probably years before the situation stabilized and we know if we have durable democratic governments in some of these countries, but a process of