>> will you say that fha has the capacity to absorb the multi-family -- >> i think fha does an excellent job in a lot of things but they would have to do more in this area if they were going to provide the role, a substantial role we think is important. so they would have to take on some of the work that fannie and

freddie have been doing in multifamily. >> if -- of all of the programs, to reduce the government's role, how can we begin to withdraw government support from homeownership without placing too much stress on our financial system? >> you would have to move very, very carefully. we have started to move but we are doing so carefully because again we cannot afford to take too much risk that we jeopardize the system. as we all know, unemployment rates are very high, and just millions of homeowners who are still at risk of foreclosure. you have house prices that are under stress. again, a huge amount of damage, we have to be careful as we go forward. >> mr. secretary, the administration has proposed to let the larger conforming gses

limits expire in just the next six months eric in regions like new york city where the average home costs routinely exceeds the lower limits of the threshold, can private sector lenders continue lending without vital liquidity from fannie and freddie? >> important question. you can't be sure but in my judgment, at this stage based on what we know it is reasonable to expect the market to be able to absorb the impact of that. i'll give you an example. i think it's true in 2010 only 5% of the mortgages issued in that context were within that temporarily raised conforming limit threshold. so it's a relatively small share of the market. the market is coming back in that area. can't be certain but i think based on what we now know we think the market will be likely to absorb that. >> and if that doesn't happen? >> congress would have to legislate action to prevent those limits from falling.

software to watch carefully. again, one reason why we do so careful not to lock in a path for phasing out the government role is there's no certainty and we have to be careful against not to do damage to the recove recovery. >> thank you, mr. chairman. >> thank you, mr. chairman. secretary geithner come in my opening statement i asked you, or said that we have been looking at option one, since that's what taxpayers want. 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 will work with you but again i would be careful not to be too enthusiastic about that option because you want to recognize that the consequences

of that would be, could be more concentration in the mortgage markets, less level playing field for community banks, and in a crisis you might, in the end your only option is the model in the faq with a taxpayer may be more exposed to losses. although it seems like a more private option, that risk will be in the banking system and what that means is there'll be a a general guarantee their the taxpayer doesn't get paid for so there's risk in that option. that's what you have to look at them a little more carefully, and i would caution it. even if you want a market that is more private than public. >> i think it's a starting point but i think you have, when you're talking about the fha, there has to be work at the same time with the fha to make sure that all of the, 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 we get the private sector in there. but there seems to be in a contradiction between the regulators and hide as far as this is going to work because -- did ministration seems to be saying we reduce the role of fha, but the regulators, it seems to me q. r. m. that will limit the opportunity for power from especially the first time borrowers. and things like having a 20% down payment is only going to cause some problems. >> you make two points which are important. one is you want fannie and freddie and fha to move together as they try to phase out the governments role.

that's important and we are committed to that. again, you don't want one moving and not the other moving. but you're right, as you designed these new rules of the game for risk retention for the private market, you also don't want to create a situation where you increase the incidence for the government to take on that role. i think we can achieve that balance. i think if you look for in the private market, i think we should return as an objective return to a system where homeowners borrow less against the value of the house and have to put a higher down payment. that's a very important protection. it's not the only thing you need to look carefully at. it's not the only determinative of loss rates, but it hardly leaves the country in a better position if there's a bigger cushion of equity in people's homes. it's the most viable financial assets. people need to be able to move if they change jobs. it could be damaging to other people in the community, and so

i think for the broader market we want to move to a situation where people put more equity down in their homes. >> i ran into former treasury secretary paulson a couple weeks ago, and he mentioned gses and you've got to fix this, and what about being a public utility. i don't think that that was too popular, but that's another thing. did you ever consider that? >> there are variances of option three. again, i would say the following things are true, if the government is going to provide a guarantee to fha or long side of fha, you wanted to be explicit. you want the government to charge for the risk of loss. you want there to be private capital and other public public capital so that it is ahead of

the taxpayer. and you want ultimate the taxpayer to have less lives risk of loss. what you don't want to do is have a system where there is this implicit guarantee or guarantee that is not appropriate price. those are things we have to avoid. but when people say the word utility again come you can have options, versions of option three which could have that characteristic. you could avoid that characteristic, depends on how you do it. >> thank you. i yield back. >> thank you. mr. won't. >> thank you, mr. chairman. mr. secretary, i guess i've accepted the notion without arguing that private sectors going to be a lot more involved in providing mortgage financing and homeownership for upper income people. and it seems to me that both options, all three options, one,

two, and three, are redirected at how you structure that. what troubles me in this, what, 28, 29, 31 pages, is that it doesn't seem to be much attention to how low income people affect homeownership. a lot more attention with all due respect to her line of questioning, as to how they would become renters. but as i found it, i found one says in the whole report that holds out the hope for low, moderate income people to be homeowners. that sends his own age 21. it says that 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 access the risk or cost. nothing else on this report that i can find addresses low income people having homeownership. so the question is, how 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 a three options. i mean, you know, or just, let's be transparent that low income people are going to become renters in this country, there will not be any homeownership at the low income level.

so we think that's very important under any of those options. >> i didn't see that in any other description. >> in any option, our view is fha has to have the ability should have the ability, congress has to decide whether it will, have the ability to provide with a very modest down payment the ability to a low or moderate income families to borrow to finance a house. that's very important and very good case for the. so when we say that we have to do a better job of rental,

multifamily, we don't mean at the expense of that critical role. in addition to that as you said, a very important policy question about how much equity, how much down should you be required, how much money should you be required to put down for an fha guaranteed mortgage? right now the guarantee about 97% of the value of the house. there's people who argue that even for the 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 jobs or if there's a crisis they have cushion there for settings. that's why we have proposed that there be a targeted program funded by the government to provide down payment assistance to people who wrote me that a system. and it's that domination of proposals that are the center. so thank you for asking, getting a chance to clarify. >> i'm glad you clarified because i for the life of me

couldn't find any of that in these 31 pages. while i know if you're walking a very very delicate line here, of not trying to educate -- agitate my colleagues on this committee come if we're going to be come if are going to have an honest discussion about this, i think we've got to put those things on the table and be explicit about them. and we can't finesse them or hide them or pretend that this -- 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 homeownership and poor people will have -- and rich people make money on apartment rentals, but we will be a renter nation

for low income people. i yield back. >> i agree with that. again, let's just to be fair, we did not do a good job in helping low income americans get access to sustainable housing finance options. we left them with a system where it was easy for them to be taken advantage of, and they had none of the basic protections we think people need to be able to operate safely in a very complex business. and so, we did not struggle in our current system. a lot of the support the government provided with too much more fortunate americans. so we got to get that ballot better. we want of a balanced system that works for homeownership and it balances its support for affordable option. right now about two-thirds of americans own their home. about a third rent. but we put much more financial assistance to those who want to own their home that we do for

those who choose to rent. we got to get that balance a little better. >> thank you, mr. won't. i asked all the members to look at page 20 through 22 because i think including rental, affordable rental, because i think at least a quarter of our low income damn lies spent over half their income on rental income. and i do think there's been a failure in that regard and fha, whether have the capacity, i think that would be a goal of any reform to focus on the low income. in both rental -- >> i'm glad to the chairman said a. i have heard that much from our side of the aisle, mr. chairman. i appreciate that. >> i acknowledge it needs to be a part of this. you know, i think as administration says, 32, only

about 32 out of 100 low income families can afford homeownership. so you have to consider, as chairman frank said, affordable rental income. i can tell you i think it will be part of our administration. mr. neugebauer? >> thank you, mr. chairman. mr. secretary, thank you again for coming. this is a very important discussion. you know, i'm a little confused. i was kind of excited when i saw your report come out where you embraced -- maybe it wasn't your number one but it was your first recommendation, private market solution. and i hear you say, we need to phase out freddie and fannie and we need to do that, we could do that with raising the risk premium so that the marketplace can create space in there. you lower the conforming loan limits, you create more space in

there. so along those lines, would option two or three, you've got to create something before you start that process. where as, well, it says under option two, the government also have to develop a backstop mechanism. number three, there's an explicit guarantee of catastrophic risk. so you've got to go establish some other mechanism in the system were as an option number one, basically you're just green space for a market that has been there before and many of us think can bring back. so to me that delays moving down that road. >> let the clarify that. where the authority to where the authority, beating the fha fha, the authority to gradually phase down the role of the government. while we work with the congress

to figure out which mix of options we want for the future. you don't need to lay that process and the like in the ultimate design of what's going to replace fannie and freddie. you don't need to delay that. you can move ahead. the pace at which you can phase them out are really these basic questions about the gradual process to repair the housing market, and our success in clarifying the rules of the games of private capital will come in. that's what will determine the pace spee-2 but, mr. secretary, if you're going to send a very mixed signal to the sector then, hey, we're ratcheting down, put in a special private sector. and by the way, why we're doing that we're going to set these new mechanisms, i think the private markets as i think we'll just wait until you get the new system set up. so i think that is a road that you go down. i think one of the things that the market needs now, i've talked to a number of people all the way through that chain is they need certainty. and so i think as you start down

that road, you have to make that commitment. i think one of the things i would ask you, in order to create that certainty, is do we need a definitive date for the switch is turned over because, at some point time you have to say it, at this point on the taxpayers are not guaranteeing these -- >> i understand the risk you're saying. 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, congress doesn't legislate, then we are left with authority under what's called hera, that in many ways would re-create fannie and freddie at the end of the process, slightly different form. many of the risk in that context. we don't think that would be prudent, so you're right to say you want to provide as much clarity about the endgame as possible, as quickly as possible.

but to do tha that in a sensibly does require legislation. so it's a good reason to try to move. that's why we said, why i suggested 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 that six plate is the aggregation, being able to bring mortgages in and provide securitization. what about the idea of somewhat time just letting them as part of this wind down, continue the aggregation function but at some time limiting the guaranteeing and let them continue to act as aggregators, and sell the securities in, to the private market? >> there's something to that, and you can envision that being part of any long-term solution. there's a lot of talent at this institutions and there's a lot of very valuable systems that make that process work better. there's a lot of economic value in those systems, and so you're right to say that depend on where congress goes with this,

you might want to find a way to preserve was still very valuable in both the people and those systems. >> is one of the ways, in other words, the portfolio that fannie and freddie have, they're supposed to be reducing those. what we understand is that's kind of a tricky situation, they're selling off, rolling off what they are bringing loans out of some of the securitizations, securities. and bringing those in and reworking those by repurchasing them. is there merit into letting freddie and fannie sell off some of their portfolio in a nonguaranteed portion? because what i worry about is we got the interest-rate risk. so obviously when they sell the securities, the interest-rate risk goes on. but if they sell them with a guarantee that basically, the risk is still there. and i'm looking for ways to minimize the taxpayers exposure here. >> i agree with you, you're right at the beginning, by

gradually winding down, they're still alternative to doing it. they are still issuing guarantees so that is some risk of exposure to the taxpayer. but we see no alternative. he can't flip a switch today and have the private market coming and takeover 90% of the market. it's not realistic as you know. there's no real option except for them to be still issuing guarantees, but more conservatively underwritten, more expensive overtime to the transition process. you're right that they retain portfolio includes a lot of their guaranteed mortgages. as they sell those to the market there are still guarantees. i just don't see a better way -- i don't see a way to solve that basic problem. we are living without. that's the price of the mistakes of the past. our job is to make sure again, we wind down and wave when we reduce the risk to the taxpayer overtime. and i think we're doing a very good job of bringing down those losses, those estimates carefully over time. but we will stay at it and it

depends a lot on the quality of the judgment that the fha makes. >> thank you. >> thank you, mr. chairman. thank you, mr. secretary. you stated that the gse loan limit is going to be lowered for elevated level of 729,000, 625, 500, starting in october of the current year. in my district, which is in new york city and long island, the median home price is about $500,000. that doesn't mean that a person having a home the cost of $600,000 is living in some extravagant home. home prices are based on a number of things, the cost of the actual construction and the location and cost of living. so that same $600,000 house in

my district, which would be a very modest house, would cost under $300,000 in a lot of other places in the country. so these are not necessary people that are living extravagantly. this is going to affect my constituents tremendously. and they are going to be among the first to feel the effects of the larger role of the private mortgage market. what can people like that who are my constituents, other people in other parts of the country expect in terms of credit availability and interest rates, even the fact that private capital has been largely absent over the past few years and that the gses have been a participant in over 90% of the loan origination. and in your view, is the private

market ready to come back, and do they actually want to play a role, or hesitant to lend at least a what most people today consider reasonable rates? >> very important question, and the way the law of the land is right now with that action of the congress those limits do come down. but they still preserve the capacity for -- they will still be higher in parts of the country where home values are much higher than they will in other parts of the country. >> you're talking about the rates? >> when the conforming limit, are they bashing if you allow to come down in october, they still are differentiated to reflect is very different actors driving home values. i think the private market now is not, you know -- >> you're saying that there would be a regional cost-of-living adjustment? >> there is a differentiated

standard of skill. the way the law is right now. i think that's very important to reserve. again, for this process, transition process were going through, we need to have are differentiated loans to reflect very different factors that affect homebuyers across the country. that's very important that's where the private market isn't coming back up for the private value mortgages, and i was not that much you. a very slow, gradual process. one of the reasons why we want to proceed more carefully is because you want to be careful to again, jeopardize, the recovery, jeopardize the prospect for growth and repair the housing market. >> is there a rate or a skill that is available to? >> i don't have it within. i would be happy to share it with you. >> thank you very much. >> mr. miller. >> thank you. mr. secretary, good to have your today. we tend to be focusing very specifically on freddie and fannie and yet when you look at

the housing downturn, it's been global. but the problem i have is i don't think we're looking at the problem in the marketplace. we keep talking about freddie and fannie's default and the failures they've had in the money they have lost. as i see it, the gses, fannie's series the label owns about 4%. that's not a good number. freddie is about 3.1%. that's not a good number. subprime arms delinquent that are not agency loans, 38.7%. subprime loans delinquent, not agency, boy 6.5%. even in your prime loans private sector loans is doing what is 5.4%. there's a problem here. now, we are shining a light on freddie and fannie, but we're not saying there's something sirsi structurally wrong with the entire market. now, looking at all the numbers i've seen, you keep talking

about your affordable housing goals. freddie and fannie and 98102000 basically try to compete with the private sector, became very lenient with their underwriting standards. to raise their% of the market place, it was like a race to the bottom. yet, if you look today they're outperforming the marketplace. they're basically performing their goal, providing liquidity in a stressed marketplace. fha, va, freddie and fannie, 92% of the market. we're not addressing the problem. the loans are making today through freddie and fannie are performing very well, yet the loans that are performed the best, high-cost areas, you wanted to completely eliminate. let's eliminate the high cost areas that people are likely to perform and take that sector. my concern is, we're saying we're going to bring the private sector dollars into the marketplace. where were they in 2005, 2006?

if you led countrywide selling junk to the marketplace, the only level of security she had with the gses. all those mortgage-backed securities in the private sector are worthless in many cases. so we're not addressing this is problem of the housing industry. we're saying we'll get the government out. but another problem i have is when the t.a.r.p. funds were issued to the private sector you charged 5%. you're charging freddie and fannie 10% or are they paying it? >> well, as you know, in a sense -- >> why do we charge them double if we are trying to not create more of a problem, and we're charging anybody else? now, we are not paying 10% for money, the treasury. you sell not come you are paying very little. yet you are saying freddie and fannie especially distressed today so let's charge of 10% on the money we forward to them. how much sense does that make? >> if it makes you feel better, the taxpayer is spending that.

>> what you are going to get the money back from them? >> no, as i said we're not going to recover fully the amount of investment. it's not possible. that it's going to be substantially lower than anybody really -- >> what you think it will be? >> welcome in the budget we estimated somewhere around $75 million, but that doesn't take account of the fact that we're going to raise the guarantee these graduate over a time. so less than that. >> it's a lot of money. if freddie and fannie had not been there in 2007, 2008, 2009, 2010, what kind of idiot do you think the housing values would have in this country where there's nobody to make the loans? you can't come in the private sector was there because they are not. >> i don't think we disagree as much as you think. >> you are talking trillions of dollars spent it would have been much, much more devastating. >> if you have 65 at 1% of all

taxpayers in this country own a home, and we allow the values of them to go down i trillions of dollars -- >> i agree with you completely. >> who is getting hurt worst? >> i agree with you. as you examine the future options, be careful to make sure you preserve some capacity for the government your to protect, to protect the economy. the victims of the kind of crisis we have. >> you have to have the numbers. ..

nursemaid it possible for that to happen. >> your time is expired. mr. chairman, thank you. >> 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 with housing prices declining lenders lost money when they made good loans because if you make 100 new loans at least some of them you

have a divorce or someone loses his job or someone is going to die, you have a health crisis and in the old days that would happen and they would sell the house at a profit. now anybody investing in good loans, people that really documented their incomes still lost money. to what extent are fannie and freddie's losses due to their sub prime and all day lending which was a small part of their overall portfolio and how much of their losses is due to losses on prime loans where you just had an unexpected level of defaults and yesterday's profitable sales are today's short sales. >> most of the book is prime, most of the losses are prime. they lost a substantial amount of money in what they did.

>> and yet the most pristine and conservative bankers started a bank in late 2008 for the purpose of making the most prime of loans i am sure they lost money on the loans they made in 2008/2009. >> when unemployment goes from 5% to 10% people lose their jobs and you see a big increase in default rates. the issue before us a short term is the conforming loan limit. los angeles it is easy to get a $20 million loan to buy a home because if you're buying a home in malibu you either know your banker or you are the banker but it is almost impossible to get a loaner in the $8,000 range. what could happen to this economy if we precipitously

allow that 729, 750 that applause to ten major metropolitan areas, what happens if that were too precipitously dropped? what is the effect on housing prices in los angeles? >> it is very careful as you look at what to do with conforming limits with a guarantee fees, with underwriting standards that we not magnify the pressures on a very delicate market. the failures we produced, that this government reduced were bipartisan failures. you have to be careful as we try to fix what is broken we don't make this crisis worse for people. that is the responsibility everybody shares. we have to be careful as we do it but i do believe that it would be prudent, for congress

to let those limits fall modestly as they are scheduled to. >> 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 which is due in many areas including the second largest metropolitan area. i point of the failures of fannie and freddie are bipartisan but they are unicameral. the house of representatives passed a bill that carried through this committee under republican leadership of the former chairman oxley explained would have prevented this crisis and it was on the other side of the capital where others blocked it. finally, if we go bad bank/good

bank and profits the long to someone else rather than those profits being used to pay what we hope is less than $75 billion in losses doesn't it make sense to make sure not only that future operations are profitable but those profits are used to repay the taxpayer? >> i agree. i have seen a good bank/bad bank version that achieved the objective of minimizing losses. >> mr. secretary, you talked about a continued wind down in fannie and freddie at rate of 10% annually. some of that is wind down. some of that will be selling into the marketplace which we discussed before. what has been done in that regard and does this mean we are going to be selling off 10% of fannie and freddie in the marketplace in the balance of this year? >> i can't tell you precisely

the mix between the natural run off and an actual sale but i can say that based on the experience so far, the market has been able to absorb the wind down on that pace but happy to provide more detail to you on that. you can't be certain how the market is involved in the future but it is reasonable and prudent to adhere to that. >> you expect interest rates where they are. some could be sold off as profit. >> i want to be careful. i could say for the treasury portfolio that would be the case. >> all right. i suspect you know that in terms of the three options of where we go in the future there is nothing here. on either side of the aisle. i will confess i am the public utility model type of guy. sounds like you don't like that term. so it falls within options 3 and

your set of options. let's talk about something rather is a federal reinsurance that is available to multiple entities that is as you suggested explicit and limited as opposed to the fannie and freddie mcgregor guarantee was implicit and unlimited. what is your reaction to that sort of model? >> it has a lot of merit. has a lot of merit but you want to be careful to meet those tests. i want to emphasize something that was suggested earlier which was if you have the government provide a guarantee through fha or some hybrid mechanism you describe, need to make sure that it is price to cover risk of loss and. the taxpayer is substantially -- behind a bunch of private capital in that context. not ahead of it. you want to make sure you leave politics out of the setting of those. that is very important. you can create a system that

will be vulnerable to your successors and lobbyists and other stakeholders trying to put pressure to underprice those guarantees in the future. >> i couldn't agree more on those points. if we don't do something like that. if we have less involvement, my concern is the housing market is such a huge portion of the economy as we witnessed in 2008, if left without some stability provided by the government you have this to that banks which they often do, they get excited and of a sudden they want to loan everybody money for a house and suddenly they don't want to loan anybody for a house and this happens in other sectors of the economy but it affects those segments. makes them very volatile but doesn't have that huge an effect on the overall economy. the housing market is so big if we subjected to those i am

afraid we will have significant additional volatility in the overall economy. >> there is the risk that you stayed very well and that is why i want to emphasize over and over again when you look at alternative models, they have a private character. most of those systems involve banks holding all that risk. the history of the financial crisis in the history of banks and real-estate together and the government ultimately is there. is just behind the banks with its implicit support that they don't charge for. the difficult challenge is to make sure you have a system where you have more conservative standards for underwriting. homeowners put more equity in their homes. banks put more capital against risk. >> one final question here. you talked about we may have

higher downs and higher costs for mortgages for moderate-income people. how can we reconcile that with rentals aside the low income people saying we are going to have modest and perhaps no more. how can we tell moderate income people it is started to buy a house and lower-income people will be easier? >> excellent question. that is the judgment congress has to make a. my own view is there is a good public policy case for the government providing some assistance for moderate-income americans to some -- to for that first house. of want to preserve that the girl carefully designing any system going forward. that is consistent with returning our system to a system where the private market plays a major role in housing finance and if we get federal oversight that our capital requirements that are underwriting standards

they're more stable. >> thank you, mr. secretary. this is very interesting. we are mixing apples and oranges and talking low and moderate income housing. the truth is we have been talking about hud or tax credits or the other things going to low or moderate income housing. option 1 or 2 or three, can i get a salad instead of a soup? it is hard for anybody to follow. i don't think we could afford that. for me i look at housing, we come to the table, i live in my first and only under occupied two family home. i don't know if anybody else in this panel or this room lives in their own two family home. i couldn't afford a single-family home. my children went to college on the basis of real mortgaging that home. if i didn't have that home my kids could not have gone to college. even with that they came out

with significant loans. i really want to get to the bottom line. when we're done i would like to know the administration's goals, when anybody i know wanted to get a mortgage they don't care, they don't even know fannie mae or f h a. they just want to know how much, what will it cost and will you give it to me. for me clippers unlike come from like most people in the top row a very expensive market. most people in my district probably would never qualify for of fannie low because houses too expensive even with the new numbers. a lot of young people in this room today, many of whom do not own a home. if i were them i would be saying when is my turn? if a young couple, two good jobs, good education making $100,000 together, paying rent, probably paying stood alone of people paying one or two on 0

loans off, trying to put something aside for everything else. what do you think is a fair amount to ask them for in moderately sized home? the number changes. moderate priced, in my district is a castle in some other places but a moderately priced home, what do you expect them to pay? they expect 20% down? they expect 7% or 8%? how are they ever going to be able to get this together and how will they ever hope to afford to send their children to college? >> excellent question. let me say again it is important to make sure that the fha which is hud, still has the capacity to provide mortgages at reasonable cost to people that cannot afford to put a lot of money down on their house. >> i want to be clear. i am not talking at the moment about people who have a low education. i am talking to people in this

room. auld one dino who are very well-educated and very intelligent making decent incomes and have a reasonably decent future. as they live their daily lives, will be almost impossible for them to put us on top of rent and student loans 60,000 or $80,000 for a down payment and qualify especially the young women who say i want to have a family some day. how are they going to do that if we don't address the long-term goal, how much are they going to pay? what is that gold? >> we want to preserve part of this. you will go to a bank and get an fha guaranty mortgage and put down a very small fraction to buy your house. that is important to maintain for people of low and moderate income. where congress the 5 those lines is a choice for congress to make. for the rest of the american people we want a system where the private market provides that stance and we think it is

possible. >> i am talking about the vast majority of the american market. not the low end. all the young people i know are very intelligent people. they have a great future. they are not the low end of the social and economic scale. they will have a great future. >> i said low and moderate but in a fundamental choice is the way to ask the question. is it fair to ask all americans to put their money at risk to subsidize housing for more fortunate americans? where you draw the line, it will still be unfair. >> for me and we all have to ask that question, i am not interested in pulling up the ladder because i got lucky enough to get my house. i have children. i want them to afford a home sunday in a reasonable neighborhood. everybody else in this room,

those are questions we have to ask ourselves and questions the administration has to ask. and to go through, in the final analysis it is how much to ask for them, more than this white paper. >> thank you, mr. secretary, make your case. still trying to get my hands wrapped around the comment you made that we just need tools to protect the innocent. with all respect when you have a policy of too big to fail you have a policy of too small to succeed. that is the state of represent. no mexico. when the regulators, and with prime corrective actions and it is very punitive on the small

banks. you indicate on page 3 that you are worried about sufficient capital. when it was agreed to in 2003 or 2004 we allowed banks to determined by models the capital requirements. are the big banks still allowed to determine capital requirements? or is that something you have changed? the tools that you have -- >> i would never support a system printer turtle the capital against banks? >> am i incorrect? it allows similar models to declare their own capital requirements. >> it took so long to put in place it never applied in this context. baines have to hold more capital against risk and don't get to the side. >> but bottles 3 is not effect. [talking over each other] >> as long as it is not in

effect. what about the mark to market? back in the district in 2008, hotel owners dominated new mexico's small market below margins and they were being told to come up with a $7,000 new capital for $3 million facility because of the re-evaluation of the mark to market rule, is that protecting the innocent? >> you won't find the disagreeing with you. you want a system where you don't create this question of too big to fail. i believe large institutions need to be sold more capital against risk relative to small institutions. if that is your view -- >> catch it right there and you believe those institutions should hold more capital and institutions for complaining about institutionals complaining

about putting more reserves at the capital requirements and penalized for adjusting their earnings and in good times banks are prohibited from that and bad times for not putting it aside. where -- the innocents are wondering when you're going to worry about us. >> it is worse than you think. you are right that the accounting system we had in place made it harder for banks to put more reserves aside during the boom that would have been appropriate. >> if we did that to vote side of the problem, the estimates and the end of 2006, and some prime loans, corley $300 billion were held in fdic controlled banks. give them 75%, 75% were performing at that point which means the nonperforming and if

you took a 50% write-down on those, in the neighborhood of $38 billion at risk associated to the sub prime. and we have $12.3 trillion in assets in the main, 1.4 in equity, 1 $50 billion in earnings. the total exposure in the sub prime market appears to be in the $100 billion range and yet we took very dramatic actions that i question whether we took the right action after the fact. >> in terms of the reform legislation? >> in terms of the response.

i was sitting in congress -- >> overreacting? >> they appear to be at hawk. at lehman brothers we failed and two days after, two days before fannie and freddie we were sending -- >> this country came into this crisis without the tools, but to respond when they happen. that is one reason why the crisis was so deep and severe, and congress, at a particular stage of the crisis that should never happen again and one of the most important things the financial reform does is give the governor and better tools to wind down these institutions, just for that reason. you are right to say the tragic mistake this country made was to build a system where the

government couldn't come in and protect taxpayers's economy from the mistakes large institutions make. >> thank you for helping the committee with its work. hy want to look forward here. we could argue about what went. we wind down fannie and freddie as you suggest. as i look at options 3, there are more tools in that framework to influence the markets and provide some relief when necessary. government reinsurance would only apply to certain

mortgage-backed securities that comply with a very strict underwriting standards. that would offer a greater incentive to get the type of product we would approve of and that would be sound especially when looking at what happened in previous crises when you have standard and poor's and aaa on everything. if you have those requirements on underwriting. that would stabilize the market. as well, i think having the loss allocation placed on these private guarantors' also provides that first risk absorbers by the private sector instead of the government. i know there are some constituencies out there such as the banking industry, such as the housing industry, that want

to have as many products get reinsurance as possible. these private guarantors' will want to have the backstop as close as they could so that their losses are minimized where they were maximized. how do you deal with that issue where you have constituencies pushing against what they're trying to do and as we get out of this crisis and get more toward a period of normalcy, we don't have the robust oversight off of these private guarantor's and we may end up in the same place because of lack of oversight and the taxpayers at risk again. >> you got it exactly right. that is exactly the mix of advantages and risk, so that to

work, is important than the basic conditions, you have to have the capacity to set capital requirements and oversee those mortgage guarantor's. to make sure you have the freedom, independent politics, set very strict eligibility requirements for what would be eligible for guarantee. absolutely important to make sure that guarantee is priced on what is economically sensible estimate of future losses, independent political influence. one worries and we have been careful not to commit is to say that fundamentally when you like option 3 or option 2 or a mix of those things depends on whether congress is willing or able to design a system less vulnerable to political influence from people who would like to benefit from the subsidy for the government. >> the other thing i want to ask

is the definition of catastrophic would seem to be a dream that the government should step in to prevent. at that point of catastrophic loss. my guess is i know what we just went through with catastrophic. that much complies with in your definition but i also, in reading and through this and the president's proposal and the report of the administration it would appear that the other definition would be after the private guarantor is wiped out, is that -- does that trigger catastrophic? is the reinsurer beyond that? >> talking about variants of option 3? one way to do it is no exposure to taxpayer until the guarantor has failed. that is one way to design it to make sure the risk is the head of the taxpayer. you are right to say when you

set those lines, that is what is important beyond the economics of the arrangement. very hard to do. it is not beyond our capacity to design a network that works better than the system we have. i am more optimistic you can design something in that area that is not as vulnerable as the system we had for 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 indicate your objective is a healthier and more stable housing finance system with a broader goal of helping the economy to recover. part of stabilizing the economy is to in short there is adequate cattle in our financial institutions so that money is

available in construction and commercial purposes. you have indicated it is one of your goal and i assume it is part of the best goal for qe2. given that goal i want to call your attention to recent proposed legislation from the internal revenue service that could have a devastating effect on the capital in u.s. financial institutions. this rule proposed by the irs could lead to several hundred billion dollars leaving the united states to low tax just -- jurisdictions. it is 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 individuals to earn metrics. they have the insurance 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 made you are shaking your head yes that you do too. the proposed irs rules would force banks to hand over interest payment information to the irs. there would be no tax but the irs would in turn have this information to turn over to a forerunner's bonet country. this is a bad idea as proposed in 2001. wisely the administration and congress rejected. it was a bad idea then and it is a bad idea now and i look forward to working with you so that we can do that again this time around. between $200 billion and $400 billion from u.s. banks would apparently happen if this were put into place, would be devastating to our economy. furthermore it would raise safety and soundness issues for bankers. ..

>> again, do you think the housing market has bottomed out yet? >> it's very hard to know. you know, we have unemployment between 9 and 10%, and although the economy's growing and though you've had a big, big adjustment in house prices, housing is much more affordable now, i think by any judgment you still have a

lot of damage for the market to absorb over time. and that's going to take, that's going to take a fair amount more time. >> i think we all know that. just wondered about your personal opinion, yes or no, if you thought it had bottomed out. >> i'm a very careful person -- >> i won't be insensitive. i apologize for being impatient when the people i represent have been ripped off for billions of dollars. people have died over issue, over this economy, you know? i mean, it's really serious outside the beltway to real-life people. i'm not sure just as a comment i wanted to make that a larger down payment for fha is going to help anything. i know for over 30 years most people bought their first homes with 3% fha down payments, and they paid 'em back. there's a lot of zero down payment va loans paid back without problems, you know? be we never had a problem until congress got involved and invoked its will on fannie mae and freddie mac and on to the

impossible dream that everybody should have a home if they wanted it. whether or not they had a job, whether or not they had income, whether or not it was worth the loan amount. i think if we just get people back to doing their jobs, the 3% down payment is 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 esteemed opinions, they shouldn't been performing loans. the standard to determine a performing loan historically has been whether or not the loan is performing. can you give us any kind of help on the ground back in our o districts to take this arbitrary and capricious treatment of our, of our -- or to make the arbitrary and capricious treatment stop by some of these out-of-control bank regulators who are, apparently,

overreacting for their failures to do their job in the first place? >> well, if you gave me authority to do that, i might be able to do it, but it's their authority. i share your concern, and i know if you're talked to chairman bernanke and chairman bair and the head of the occ, 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 those judgment and they don't overdo it after, perhaps, being a little bit accommodating during the boom. i agree with those concerns, and i've passed them on as i'm sure you have. and -- >> thank you, thank you, mr. pose by. -- posey. mr. miller? >> thank you, mr. chairman. mr. secretary, in your prepared testimony you said that the administration's committed to a housing finance system in which the private market, private capital is the primary source of mortgage credit, and you said that would be subject to strong oversight, strong consumer and investor protections.

it's pretty clear that private capital has not come back many this market. there's been one issue of $236 million in the private label mortgage-backed securities market which is an asterisk compare today what it had been before. in response to questions by ms. waters, you elaborated some and said we needed for standardization in the market and better disclosure so investors know what they're buying which is what is -- which is consistent with what i've heard from investors. but, but they say that the first effort by the sec does not quite get there. sec 193 allows greater disclosure of due diligence, but is due diligence still by the issuer or third parties hired by th issuer, they want the ability to sample the pools to see what they're buying. and more important, they say it's got to be enforceable.

they actually have made more than one, more than one has made the comparison of this mortgage market to doing business in russia now and trying to sue an oligarch. there's a problem with rule of law and contractual rights are simply very difficult to enforce. will the administration proposal, would you support in the structural changes to the private market more disclosure including direct due diligence by investors allowing hem the opportunity to see -- them the opportunity to see themselves, not take anybody's word for it, what they're buying? servicing requirements so they know what happens if a mortgage goes into a default? and, third, that there be clear remedies. you know with, there have been stories in the last week or so about some of the bigger banks advising investor -- their shareholders they may face liability.

it's been kind of a peevish tone to it. their ankles are getting bitten by lawyers and by regulators, but that strikes me as fairly pacific rule of law. will the administration's proposal support those require -- support those things? >> absolutely share those object is and happy to talk to you about how best to achieve them, and any concern people have about these draft rules we'll look carefully at. i think you're right to emphasize for this to work better, risk of tension, you need better disclosure standards, you need servicer standards that can be enforced, and those are part of the solution. and i think until that happens, that's going to be hard to get private capital to come in. but happy to talk to you about how best to do that. >> the service requirer point, there have been story about private negotiations going on now between regulators and states' attorney generals and the various servicers.

as well as risk retention rules, what servicing requirements will be part of that. why is that not within your authority thousand? why do you need to agree? i mean, these are all subsidiaries of banks that are regulated by the occ. the occ does not have an appointed directer now. it's got a temporary directer that you could replace at any time. why is the occ not requiring better behavior by servicers? >> well, again, we are trying to take the authority that is in the financial reform legislation and apply that carefully in a way that will apply to all participants in the market whether they're banks or nonbanks and make sure that there's a consistent, clear set of rules of the game that investors can benefit from more generally, and we're trying to do that on a careful and integrated basis. it's taking a little more time than we with thought, but we can't, we can't -- we've got to be careful to get it right.

and i don't, i'm not sure how much longer it's going to take, but it's going to take a little longer than we initially expected. and we can't achieve those objectives just using the existing authority we have or the occ has itself. you have to have a broader -- so there's a level playing field across the market as a whole. but we're moving in the direction. it's just a question of getting the details right. >> i'm sorry. do you not have existing authority with dodd-frank? >> no, with dodd-frank we do. we're laying out the basic architecture through draft rule that is the market can comment on that would give the reforms you laid out more substance and traction. and, again, the way our system works, you know, we do have a lot of entities involved. we want hem to put out draft rules so people can comment, get feedback on 'em, get 'em right. >> thank you, mr. miller. mr. mute ce meyer -- lute ce meyer, five minutes. >> thank you, mr. chairman.

i haven't heard a lot with regard to home loan banks. and it's in your testimony and report. can you elaborate on what you feel their role would be? i i know there's been a few problems but generally not a lot of problems with them, and where you think we could go with that. >> there's a few examples we think deserve attention and reform. i'll mention those again although they're in the paper. these 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 in that context. some of them took on risk and didn't have capital to back that. that's something we should avoid in the future. we've also created a system where we allow large banks to be members of multiple home loan banks, and that's something we've got to take a look at again to make sure the system doesn't have too much risk. there are other things people have suggested, and we'll look at every credible idea. although you're right to say that the problems were not nearly as bad as we saw in the private market and in fannie and

freddie, there's some things we ought to take a careful look at. >> during the course of your putting together the report, did you look at other countries and other programs around the world and what the good points of those may have been, what worked other places and see if they were appropriate for us? could you elaborate just a little bit on that? >> we did. it's a very good question because if you look at the experience of other countries, a lot of countries did a lot better than we did in this crisis. but i think the biggest difference you 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 markets. it's true for corporate debt, it's also true for mortgage finance and consumer finance. in the our system -- in our system we have a better balance between credit provided by banks and credits provided by the broader markets, broader investment community both in terms of asset-backed security

like real estate, like mortgages, but also just corporate credit, and we want to try to preserve that type of balance. we think the system would be more stable in the future. in those systems and housing finance, as i said earlier, in countries where the goth does not provide -- government does not provide the kind of security we did, those governments generally guarantee their banks. they don't let their banks fail in a crisis. in that context as you saw in the crisis, the taxpayers still exposed a loss. the taxpayer isn't protect inside that way. so i wouldn't look to that model as particularly appealing example 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 allow pail your, and so in a sense you are still socializing losses and risk in that context too. >> okay. one of the comments you made a while ago was it's the obligation of the government to protect the economy.

can you tell me at what level do you believe that is -- where we need to go with that? >> you know, excellent question. and, of course, that's something people disagree on at the moment. again, the basic paradox of this challenge is if you build in protection against the extreme crisis, you might make the crisis more likely in the future. that's why governments get these things wrong over time, it's very hard to get that right. but, again, if you look at what happened in this crisis and what helped get us out of it, you have to have the ability in extreme to reduce the risk of collateral damage that can push the economy off to a deep recession that we with saw. that's very important to have that capacity, and i think we can do it in this a way that doesn't, again, magnify moral hazard or risk in the future. it's hard to do though. >> well, what you're saying, though, at some point the government's going to be the

backstop. >> but it should be in a much more limited way, and i think we can do it in this a way where it's much, much more limited, much less risk to the taxpayer. again, not to make it overly simple, but if you require banks to hold more capital against risk, homeowners to -- in general -- hold more equity in their homes, make sure that underwriting standards are more conservative in that broad context, then you will do a lot of good making sure system is more stable. that probably won't be enough, but that'll take you a long way too -- to it. you still may these the flexibility in an emergency to provide more protection. >> with that, i'll yield back my time. thank you, mr. chairman. >> thank you. relate me say this. the secretary has to leave in five minutes, so we'll have one more -- so mr. scott, unless you can stay a little later. the agreement you extended to 12-12:30. >> can i offer the following

commitment which is i'll be happy to respond in be writing, and i know -- >> what i would do, i would ask unanimous consent be the hearing that starts at 2:00, the secretary donovan hearing, that those members in the room on both sides who did not get a chance to get a question will go first at that hearing. hearing no objections, mr. scott's recognized. he'll be the last -- >> thank you very much. >> and i apologize to the other members. >> thank you very much, mr. chairman. and i'm glad i got squeezed in. [laughter] because, mr. secretary, i'm very worried. i'm very worried about unintended consequences here. and, granted, there's a lot wrong with fannie and freddie. we certainly need to reform this situation. but there is a role for government here, and i think we need to be very clear on this. and we're examining this issue

at a time of great volatility, of record, record numbers of people who are losing their homes large through no fault of their own, but because of our problem up here in washington. and i'm concerned about this rush to judgment here and the tendency to be throwing the baby out with the bath. we had fannie and from eddie -- 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 we're in. there's still problems facing minorities in the housing market that just the rush to bring in, say, get us out of the way, bring the private capital in and that solves the problem. that does not solve the problem of the pangs of color shock. many of these folks suffer

simply because they are african-american, because of the color of their skin. we've got other burgeoning problems on the income levels of individuals. now we've got another problem with many of our returning soldiers which is heartbreaking who are coming home after leaving here, going fighting on the battlefields of iraq and afghanistan, and they come back, and they're on the street. they're under the viaduct. now, no matter what with we do bringing private capital in and saying that's the answer is not the answer. so i i want to stress that treasury and this administration move with the very jaundiced eye on this and understand that in my review of your report probably the best option given the volatility of the situation we're in, given the sensitivity would be the look at -- 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 cree of certainty -- degree of certainty, and even members of the financial services community, the banks, the mortgage company, all of them realize that that private capital isn't coming in at any price. there is a need in our housing market for there to be some sort of federal government guarantee, some way to be able to come down in the these catastrophic situations, some way for us to be able to be there in the event of another financial crisis. and so i would like for you simply to respond and give us -- well, i'm not going to ask you which one you like, but do you not agree that given the difficulty of the situation

we're in, the vagarities of the different needs i mentioned in my remarks that there is a need to move more with from a position of option three than the other two? >> i agree with much of what you said, and you're very right to emphasize, as i tried to do, that we have to be very, very careful we don't do more damage as we try to get the system to a better place. and, you know, you could envision, in fact, a mix of those three options as being the best place to land this ultimately. but you've got to be very, very careful and, again, i would caught you, i think you know this better than anybody is that if banks and real estate company together are in favor of something that involves a guarantee, you've got to be kind of careful. and they'll always be in favor of something that offers a guarantee by the government in this case you've got to be very, very careful about that. but i think there are ways to design option three alongside a substantial rule by the fha that would be a very dramatic improvement in our current

system. the test is whether we can design a way that doesn't have the same kind of risk we ultimately saw in fannie and freddie. >> i meant the safeguards of that. but i want to yield ten seconds to my friend right quick. >> mr. secretary, quickly, the impact, if you will, of the fha refinance program, the nsp program and the emergency mortgage relief program, do you have any opinions, please? >> it would be -- i would say a, it would cause a huge amount of damage to a very fragile housing market and leave hundreds and hundreds of thousands, if not millions of americans without the chance to take advantage of a mortgage modification that would allow them to stay in the home they can afford. so i think it would cause a lot of damage, and i would recommend against itment -- it. >> thank you. >> i thank -- >> thank you very much, sir. >> that was the answer that you wantedsome. >> well, i got the question that i wanted.

[laughter] >> that concludes our hearing. let me say, secretary geithner, congressman posey posed a question to you, i think, which is immensely important, and he was referring to a draft proposal by the irs. the irs nonresident alien deposit rule which just 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 our banks in distressed areas in florida and texas and california and arizona. so it is a real problem. it's reg spgz 146097-09. so with that, the chair notes that some members may have additional questions for this witness which they may submit in writing. without objection, the hearing record will remain open for 30 days for members' written questions to secretary geithner and to place their responses in the record.

this hearing is adjourned. thank you, secretary geithner. [inaudible conversations] [inaudible conversations] [inaudible conversations]

>> last year, goodwin liu failed to win confirmation in the senate to the ninth circuit court. he was renominated by the president in the new congress. we'll have his confirmation hearing next on c-span2. and this morning the senate gavels pack in for a debate on

changes to the nation's patents laws. one unresolved issue is whether patents should be invented to -- awarded to the inventor first to file rather than first to invent. live coverage at 10 ian. eastern. >> a couple of live events to tell you about today on our companion network, c-span3. homeland security secretary janet napolitano testifies about her department's budget request at 9:30 a.m. eastern. and mexican president nebraska pay calderon is in washington for meetings with president obama and congressional leaders. he's speaking this afternoon at the woodrow wilson center. you can see that live on c-span3 at 4 p.m. eastern. mr. calderon's trip comes three weeks after alleged drug gunmen killed one u.s. agent in mexico and wounded another. >> ninth circuit court of

appeals nominee, goodwin liu, appeared before the judiciary committee for the second time. republican senators questioned the views expressed in his legal writings on international law and his judicial philosophy. president obama renominated goodwin liu to the ninth circuit earlier this year when the senate failed to vote on his nomination before the december recess. >> i would like to acknowledge some distinguished members of the house present in the audience, representative judy chu, the former secretary of transportation during the ford administration bill coleman, representative bobby scott and representative doris matsui. thank you for coming. we're delighted that you see fit i would like to take this opportunity to introduce the nominee for the ninth circuit. gotten a fair

shake. republican side, i regret to say that only one member has sat down with him. with him. my daughter is the presiding judge of the superior court in san francisco, and so i invited him to join i for a family to know him. and there was substantial legal discussion, and what i found was a very interesting and very talented young man. um, professor liu is the associate dean of the university of california bolt school of law. he is a highly regarded expert law and policy and a well regarded teacher of

law at the university of california. he is a proud husband and father. he is a scholar of formidable intellect who cares deeply about the law and takes great care in formulating his thoughts and ideas. and he is a person with an awiding commitment -- abiding commitment to public service. what also comes through in talking with professor liu is his deep appreciation for the opportunities our country affords. he is the son of taiwanese immigrants. his parents came to this country as part of a program that recruited primary care physicians to work in rural areas throughout america. he spent his childhood in augusta, georgia, clue wiston, florida, and sacramento, california. he attended public schools where far from having an easy time, he struggled first to read and,

later, to master the english vocabulary. he went on, however, to become co-valedictorian of rio americano high school in sacramento and to attend stanford university -- my alma mater -- where he graduated phi undergraduate student body. i only made vice president. [laughter] he was a rhodes scholar at oxford university, and he graduated from yale law school where he was an editor of the yale law journal. he served as a law clerk on the united states supreme court to justice ruth bader ginsburg and on the united states court of appeals to judge david patel. professor liu served as a legal and policy adviser in the department of education. he also has private practice experience at the prestigious law firm. and he is now a tenured

constitutional law professor and the associate dean of the bolt hall school of law. among other accolades he has received the university of california at berkeley's highest award for teaching. he has been a legal consultant to the san francisco unified school district, he is a recipient of the education law association's award for distinguished scholarship, he is an elected member of the american law institute, and he is on the board of trustees of stanford university. as a professor, he has written extensively. his work has been published in prestigious journals such as the stanford law review, the california law review and the iowa law review. there's no question that some of this written work is thought-provoking. as professor liu himself said at his last hearing, the job of law scholars when they write,

again in liu's own word and i quote: the role of a judge is to be an impartial, objective and neutral arbiter of specific cases and controversies that come before him or her and the way that process works is through absolute fidelity to the applicable precedents and the language of the laws, statutes, regulations that are at issue in the case, end quote. he clearly recognizes that these are very different roles. the question is, can he make the transition? and i have every confidence that he can. i was also -- i would also point out that the committee has previously confirmed republican appointees such as michael mcconnell for the tenth circuit, harvey wilkinson for the fourth circuit, frank and kimberly ann moore

on the federal circuit. moore and wilkinson were younger at their confirmation than liu is now. and had quite comparable experience. and michael mcconnell's writings were at least equally provocative, but from a nominees were be. it here. we had a nominee for the tenther circuit by the name ofñl< southwick. democrats were not going to voth for him.?(ñ- i was implored not to vote for him. trent lott came to me on the floor of the senate and said him? time. more than once. about them, and i

decided i was going to vote for him. and i did vote for him, and he is now sitting on the tenth circuit. as a matter of fact, i've received a letter from him not too long ago saying how much he well, since those days we've become very polarized, and it's a tragedy. break away party's person. and that would be a real tragedy for this committee. for those who would question ability to make his confirmation. and i'd like to call special attention to a letter submitted by ken starr. as many here will know, kenneth starr is currently the president of baylor university and has served in the past as a d.c.

general of the united states. republican presidents. here is what he and professor quote: we recognize that commentators on all sides will be drawn to debate the views that goodwin has expressed in judge takes an oath to uphold and defend the constitution. thus, in our view the traits that should weigh most heavily in the evaluation of an extraordinarily gifted nominee such as goodwin liu are professional integrity and the ability to discharge faithfully an abiding duty to uphold the law. wees those -- possesses those qualities to the highest degree, we are confident that he will serve on the court

of appeals not only fairly and confidently, but with great distinction. now, professor liu was a great asset to the fact faculty of the university of california, and i really believe he will be a superb judge on the ninth circuit. for those on this committee who don't know him that you will take the time to get to know him, sit down please, don't turn your backs on a brilliant young man. so now i'd like to ask the nominees to come forward, and we will begin the hearing.

>> oh, it's just goodwin liu for the first panel, and it's my understanding that you'd like to introduce your family. please proceed j. thank you so much -- >> thank you so much, senator feinstein. i do have some family members with me here today. let me begin with my parents who are seated to my right. my parents came all the way from sacramento, california, to be with me here again. seated behind me is my wife, and my wonderful wife ann who has made her a share of sacrifices to support me many this process. in the -- in this process. in her arms is our baby boy emmett who last time you'll remember, senator, he slept through the whole thing. hopefully we'll have the same luck today. [laughter] and then seated next the them is my daughter, violet, who turns 4 in a couple weeks. she said she likes coming to these hearings.

i said, good for you, violet. [laughter] so i apologize if there's some sort of, you know, back and forthing going on, but i think it's nap time for the kids. i'm also very fortunate that my wife's parents are also here, pamela and charles, right behind my right shoulder. they came all the way from orno, maine, where they've lived for over 40 years. and i'm also joined by a cousin of mine, sue, and another cousin who grew up in the chicago area. i'd also like to recognize and thank the many friends and former students that i have here today in the hearing room and, also, i want to give a special recognition and thanks for the members of congress who are here, judy chu, doris matsui, and i'm especially honored secretary bill coleman has joined us. i've thought a lot about bill in

this process, and he's been a steady guide and mentor to me, so i really appreciate his being here. affirm the oath? do you affirm that the testimony you are about the give before the committee will be the truth, the whole truth and nothing but the truth so help you god? >> i do. >> thank you very much. i want to ask you right off the bat about an issue that has caused considerable consternation among committee members. in 2006 you submitted testimony to this committee regarding the nomination of now-justice alito. in your testimony you criticized a series of his decisions, but the real concern has been with the lengthy hypothetical at the end of your comments. i'd like to give you another chance to explain this so that the members hear your response. >> certainly, senator. i'd be happy to address that, and thanks for the opportunity. as you can imagine, senator

feinstein, i've thought a lot about that testimony in this process, and i'd like to acknowledge to you today and to the members of this committee what i acknowledged last year in a written response to a question from senator kyl. and that is that i think the last paragraph of that testimony was not an appropriate way to describe justice alito as a person or his legal views. i think the language that i used was unduly harsh, it was provocative, and it was unnecessary because what it was was a summary in shorthand of a few cases from the legal analysis in the pages that preceded that paragraph. and it also seemed to suggest that justice alito endorsed certain government practices as a policy matter when, in fact, his view was only that those practices didn't violate the constitution. so i think that i should have, i should have omitted that paragraph and, quite prankly,

senator, i understand now much better than i did then that strong language like that is really not helpful in this process. if i had to do it over again, i would have deleted it, and i just hope, senator, that you and the other members of the committee can read that statement in the context of the other parts of my record and hope that the other parts of my record show that i'm a more measured and thoughtful person than that single statement in the isolation might suggest.ó >> thank you. some have criticized your theory of constitution alfie dellty for considering -- fidelity forvñ considering social understands along with the text, principle and precedent in interpreting the constitution. to me, those views are well within our constitutionalñy mainstream. i think, for example, if chief justice john marshall who famously said in the 1819 we must never forget that it's a constitution we are expounding, this provision is made in a

constitution, intended to endure for ages to come and, consequently, to be adopted -- excuse me, adapted to the various crises of human affairs. 1920 that the constitution must be considered in the light of our whole experience and not merely in so sandra day o'connor who wrote in her book "majesty of law," the bill of rights was drafted intentionally in broad-sweeping terms allowing meaning to be developed in response to the changing times and current problems. so can you explain to us your theory of constitutional fidelity and how it is similar or different from the points these justices were makingsome. >> yes, certainly, senator. let me answer your question by, first, making very clear that if i were fortunate enough to be confirmed in this process, it would not be my role to bring any particular theory of

constitutional interpretation to the job of an intermediate appellate judge. the duty of a circuit judge is to faithfully follow the supreme court's instructions on matters of constitutional interpretation, not any particular theory. and so that's exactly what i would do is i would apply the applicable precedents to the facts of each case. but to more directly address your questions about my writings, i'd say this: the notion of evolving norms is simply a reference to -- it's a way of describing how the supreme court has applied some of the text and principles of the constitution to specific cases and controversies. so in some instances the constitution's text is very clear. for example, article 3 says that you need two witnesses to convict someone of treason, not one, so that's pretty clear. but in other parts of the constitution it's not as precise. and so, for example, in 1961 the court confronted the question of

whether a telephone wiretap falls within the am bit of the fourth amendment's definition of unreasonable searches or seizures. and the court grapple led with this because up to that point a physical trespass had been necessary to make out a search under the fourth amendment. but the court in 1961 says we're going to abandon that requirement because there is now a societal expectation of privacy in telephone calls. and this was not just a matter of sort of recognizing new technology, it was a matter of recognizing the social norms that had grown up around using telephones. and so when the book makes reference to evolving norm, it is just a way of describing how references to practices like that get, how they inform the supreme court's elaboration of constitutional doctrine. >> thank you very much. senator grassley? >> yeah. professor liu, i'll take off from where the chairman just

left off. you said during your last hearing that, quote, whatever i may have written in the books and in the articles would have no bearing on my role as a judge, end of quote. i want to focus on that comment as it relates to the book you co-authored, "keeping faith with the constitution." as you say in the book itself, your entire purpose is to propose and defend the theory of constitutional interpretation. so it is a bit difficult for me to understand how you can now say that it would have no bearing on how you would rule as a judge. so my first question should be pairly easy, yes or no. today, do you still stand by your book, "keeping faith with the constitution"? >> senator, i do stand by that book as an expression of my views as a scholar, but i recognize at the same time that the role of a scholar is very different than the role of a judge.

and so were i confirm today the ninth circuit, i would be adopting the role of a judge which is not, as i was trying to express, not to follow any particular theory that i might have, but rather, i follow the instructions of the united states supreme court on matters of constitutional interpretation. >> are there any arguments in that book that today you would disavow? >> you know, senator, i haven't read through the book again. you know, scholars do consider and reconsider their views, but off the top of my head, i don't know of any. >> in the book "keeping pace with the constitution," you termed your judicial philosophy as the chairman just said, one of constitutional fidelity. that phrase sounds nice only until you learn what you mean by it, and in the interview you gave to the american constitution society about the book you explained in more detail your judicial philosophy. you said, quote: our basic thesis is that the

constitution -- that the way the constitution has endured is through an ongoing process of interpretation and where that interpretation has succeeded it is because of, not in spite of, fidelity to our written constitution. continuing the quote, and what we mean by fidelity is that the constitution should be interpreted in ways that adapt its principles and its text to the challenges and conditions of our society in every single generation, end of quote. it seems to me that all you are doing is taking a judicial philosophy that has been largely rejected by the american people and rebranding it into a new label. in your book you define a living institution this way, quote: on this approach the constitution is understood to grow and evolve over time as the conditions need and values of our society change, end of quote. so my question is, how is your

definition of a living constitution different from your theory of constitutional fidelity which you described as interpreting the constitution in ways that, quote, adapt it principles and it text to the challenges and conditions of our society in every single generation, end of quote? >> well, senator, what we tried to do in the book is, actually, to reject the notion of the living constitution insofar as that label has come to stand for the idea that the constitution itself can sort of grow and evolve and morph into whatever a judge might want it to say. and that is simply wrong. i mean, the constitution provide in article 5 the only process by which the text of the constitution can change, and we absolutely respect that. furthermore, i think the book fully respects the notion that the text of the constitution and the principles that it expresses are totally fixed and enduring. those things don't change either. the challenge, i think, for courts when they confront cases, new cases and new conditions is

how to apply sometimes broad principles to the specific facts of a case. and let me in terms of this notion of adapting, let me just offer one more example. last year the supreme court considered a case called city of ontario v. kwan about whether or not a public employee has a reasonable expectation of privacy of in text messages sent from a government-issued cell phone. and the court decided to decline that issue because it observed the dynamics of communication are changing. not just because we have new technology, but really because society's expectations of privacy with respect to the new technology have not fully settled. and so the court said that workplace norms are evolving and that it's not clear yet what kinds of expectations of privacy society is prepared to recognize as reasonable. and so this is just another example of how it is that you can call it involving norms, or you can just call it social conditions inform the court's

approach to the interpretation of certain constitutional provisions. >> my time's up. madam chairman, i'm going to have to be in and out today, but i intend to return to ask some more questions. >> okay. all right, fine. thank you. here's the early bird order. it's franken, lee, coons, coburn, blumenthal, sessions and cornyn. so, senator franken, you're up next. >> thank you, madam chair. um, mr. liu, i had the opportunity to speak to you in my office and read your writings, and i really believe you're one of the finest minds of your generation, and i hope that we as a nation can be lucky enough to have you as a judge and public servant. what i think is remarkable about your nomination is not its strength, but it's twersty of

support -- diversity of support. a lot of people mentioned ken starr's letter supporting your nomination, and i'll get to that in a moment. but the one that caught my eye was a lengthy blog post from a university of minnesota professor, richard painter. this guy is a great law professor, and he's no liberal. he worked to support the confirmations of john roberts and samuel alito and served as president george w. bush's chief ethics officer. and anyone who has any doubts about your nomination should, i think, read this article. so, madam chair? with your permission, madam chair? with your permission, i ask that article be entered into the record? [inaudible conversations] >> i'd ask that richard painter, professor richard painter of the

university of minnesota, his blog post today be entered into the record. >> so ordered. >> thank you. and let me just read one with little thing from it. liu's opponents have sought to demonize him as a radical extremist and worse. however, for anyone who's actually read liu's writings or watched his testimony, it's clear that the attacks -- filled with policemen caric cature and high boeschly -- reveal little about this exceptionally quaffed, measured and mainstream nominee. now, i want everyone to think about that. this is a guy who participated in samuel alito's and chief justice roberts' nomination. for the bush administration. and, please, i ask anyone who's considering voting against this nominee to read this blog post.

please. i ask my colleagues to do that. let's talk about the letter from kenneth starr and mr. amar. they write: what we wish to highlight beyond his obvious intellect is his openness to diverse viewpoints as well as his ability to follow the facts and the law to their logical conclusion, whatever its political balance may be. they cite two examples to support their conclusion, one having to do with proposition 8. with respect to that episode, they write. goodwin knows the difference between what the law is and what he might wish it to be, and he is fully capable and unafraid of discharging the duty to say what the law is. can you tell us about the events that led to kenneth starr and professor amar, what they're

referring to? >> certainly. certainly, senator, and thank you for the generous remarks. so as i understand it, the letter from president starr was referring to testimony that i gave before the state assembly and senate judiciary committees, the california state committees. what had happened in california was that the california supreme court had issued a ruling that had invalidated laws that restricted marriage to a man and woman. and thereafter, the voters of california enacted an initiative, proposition 8, which sought to constitutionalize and did constitutionalize marriage between a man and a woman as the sole definition of marriage in california. anticipating a legal challenge to that initiative under state law, the assembly and senate judiciary committees held a hearing in which they invited me

to testify as a neutral legal expert to assess the merits of the claims that many proponents of invalidating prop 8 were making, that it was an improper amendment of the constitution under the, under the procedures prescribed by the constitution. and i testified that the, the, that prop 8 should be upheld under the applicable precedents that were in existence at the time. i did also write that the supreme court, california supreme court might have some reasons for revisiting that precedent. but under the applicable precedent, it was a straightforward case. straightforward in the sense that prop 8 should be upheld, and this wasn't, i suppose, a popular position with some of the advocates. but it was, i think, a correct reading of the law, and the california supreme court ultimately agreed. >> thank you. and my time's up. thank you, madam chair. >> thank you very much, senator franken. senator lee, you're up next. >> thank you, and thank you, professor liu, for coming and

bringing your family to join us today. i'd like to start out by talking a little bit about the commerce clause. on page 732 of your book -- 72 of your book, you wrote as follows: the court has declared certain subjects off limits by attempting to draw a line between economic and non-economic activity, referring to the lopez and morrison cases -- a line that looks much like the old distinction between what directly effects commerce and what touches it only indirectly and its incoherence and inefficacy in advancing federalism values. if distinction drawn by the lopez and morrison cases and the standard established by those cases is ineffective and incoherent, is this something that you could and would employ as a judge? >> senator, as with all of the supreme court's precedents, absolutely. i mean, i would faithfully apply

that standard under the guidance and instruction of the supreme court. >> but what if it's incoherent? then what do you do? >> well, senator, i think the court actually grappled with that very issue in the subsequent case, the gonzales case, where they were opposed with a similar characterization issue as to whether or not marijuana grown in the use for medicinal purposes purely within local boundaries qualified as a kind of activity that could be reached under the commerce clause. and there i think the court made an accommodation. it said that though this is non-economic activity, it longs to a class of economic activity. and so i'm not sure exactly where that leaves us, but the rule that emerges from raich seems to be that non-economic activity that belongs to a class of economic activity is reachable under the commerce clause. and so i think that the only point of the book was to suggest that definitionally these

things, like all distinctions in the law when you press very hard on them, there are gray edges on the distinctions. but in the main i think these are workable in the role that i would be filling if i were confirmed. >> in the wake of gonzalez v. raich and setting aside for a moment the exceptions identified in lopez and morrison, can you identify limits on federal authority that exist outside of lopez and morrison? >> well, senator, it'd be difficult for me to present a hypothetical given that one never knows when an issue will actually be litigated. but let me try to answer your question by saying that my own understanding of this area is, begins with one basic supposition which is that the federal government is the government of limited power. the very enumeration of congress' powers in if article i presupposes that there is that limit and the tenth amendment to the constitution makes that

explicit. it says that all powers not delegate today the united states by the constitution nor prohibited to it by the states are reserved to the states respectively or to the people. and from madison to hamilton to the precedents of the court that followed, every one of these sources confirms that basic proposition. and so any judge that approached a commerce clause question would have to yield an answer to a problem that was consistent with that fundamental bed rock proposition of our or system. >> so getting back to your statement that the distinction between economic and non-economic as drawn in lopez and morrison is ineffective and inefficient, is there some other way that you could b have reached the same result in those cases without drawing the economic/non-economic distinction? either as to bear noncommercial gun possession or acts of violation at issue in morrison? is. >> well, i think, actually, the

opinions themselves provide some guide to that. as i recall, the lopez case was just simply did not indulge what it said was the sort of piling inference upon inpresence and implying the substantial effects test of the doctrine. so part of the -- one way to read lopez, i suppose, is to say that the court is simply unwilling to, you know, develop a chain of reasoning from mere possession of an article of commerce to be sure, but the mere possession itself is non-economic to the economic effects that were posited by the dissent. and that was simply too distant in the chain of, you know, of linkages to get to those substantial. >> in a 2008 stanford law review article you wrote, quote, the problem for courts is to determine at the moment of decision whether our collective values on a given issue have

converged to a degree that they can be persuasively crystallized and credibly absorbed into the legal doctrine. can you tell me how a judge discerns when, whether, to what extent a particular value has been persuasively crystallized so as to become part of our law? >> well, senator, i think that in some cens i think that -- in some sense i think what i wrote there is an unremarkable observation about the way the supreme court e elaborates doctrines. just to go back to the fourth amendment examples i was providing earlier to senator feinstein, what constitutes a reasonable expectation of privacy? well, the court undertakes, i think, an objective analysis. it doesn't ask what, you know, they themselves think is a reasonable expectation, they ask what society thinks. and i think that the cases are very clear that the inquiry is whether society has developed a legitimate or