department does in that regard. thank you. >> thank you, senator menendez. thank you to secretary steinberg for accommodating scheduled senators with meetings in the white house that we all seem to have shortly. .falling ..

[inaudible conversations] [inaudible conversations]

>> let me be as clear as i can be. without the significant spending cuts and changes in the way we spend the american people's money, there will be no increase in the debt limit. >> follow the debate as lawmakers continue to work on economic issues including government spending, taxes and the deficit, online at the c-span video library where you can search, watch, clip and share everything we've covered from 1987 through today. it's washington your way. >> earlier federal reserve chairman ben bernanke said failure to raise the debt limit by congress would hurt the u.s. economy and would lead to higher interest rates. he testified allah with fdic chair sheila bair about the implementation of the 2010 dodd-frank regulatory law. tim johnson of south dakota chairs the senate banking committee. this hearing is two hours.

th[inaudible conversations] [inaudible conversations][inaude >> i would like to call this hearing to order. today is a committee continues u

its oversight of the dodd-frank wall street reform consumer protection act, i welcome our prottions witnesses back to talk aboutome systemic risk and financial stability. last year when this committee sat out respond to the worstee t economic crisis in generations, addressing systemic risk and too big to fail with key tasks.il w any serious financial reform inn effort had to include an early to warning system that could detecc systemic risk before it could threaten, bring down the entiret country. equally important was creating r new eorderly liquidation process to prevent future bailouts and f perform -- for their own possible failure. in dodd-frank, we accomplishedhe these goals, but those changes

cannot just take place at the flip of a switch.th today, our witnesses will provide us with an update onrov their implementation of the provisions related to systemic risk and promoting financial stability when legislation wast signed into law. each of these agencies here isei part of the initial stability oversight council our fsoc, arer to be thef early warning watchdg for our financial system. it is important to note that the seeds of two voting members of the fsocse remain vacant. the director and the independent insurance member. we need to nominate and confirm those members as soon as as possible. any political game on nomineesim

to try to subvert critical reforms would be irresponsible and risk our nation's economic recovery. one of fsoc's early tasks is tos write rules for designating large risky non-bank financial institutions for enhancedthe supervision, the so-called shadow banking system was one of the key pieces that led to thett crisis. and while it is important to provide oversight of the shadow banking system, it is alsos also important that this designationn does not become a synonym for too big to fail.r the dodd-frank act and the too big to bailouts, by establishing liquidating authority, financial

firms without putting the financial system or taxpayers at risk. in fact, ranking member shelby rked worked closely with the andh chairman dodd to request an amendment that became the final text of this provision, and that fact, and i want to thank ranking member shelby for his work. while we will never be able tote anticipate every possible cause of a future crisis, we are much better equipped to deal with the next crisis if and when it occurs. we should never forget the fr magnitude of the costs of the financial crisis, especially the destruction of millions of jobsf and trillions of dollars of household wealth.wealth. up upon this finance reform, we mar want to use revisionist history, but americans have not forgotten that the recession was caused in part by excessive risk among esme of the largest initialsomeg

firms. with thef dodd-frank, we have created a new sound economic foundation that will protect against the entire economy and exclude the next financial firm, and on that it cannot back out. the effective title and well courtney implementation of these reforms is critical to our economic security. i want to remind my colleagues and the witnesses that as soon as we have a quorum present, we will move into executive session to report out six nominees. when finished with the nominees, we will return to our hearing. e given the time constraints con today, only the chairman and the ranking member will deliver opening statements.rankg member ranking member shelby? >> mr. chairman, to expedite

hearing i ask unanimous consent that my opening statement whichn is lengthy been a part of the record where we can get to the what is it. >> it will be. >> mr. chairman, i believe on you're right on the number but e you can recap.i b i elbelieve we just need one moe person to show up to have a quorum. [inaudible conversations] >> mr. wolin, please proceed.d. >> we have a quorum.

>> i have >> i moved that the committee inner into executive session to vote on pending nominations. we will consider the following nominations, mr. diamond to be a member of the board of governors of the federal reserve system, the honorable david s. cohen to. be undersecretary for terrorism and financial crimes come u.s. department of the treasury. mr. daniel to the assistant secretary for finance u.s. department of treasury. miss wanda, the first vice president of the expert and ahe bank of the united states, andtn the honorable john robert ulvaney to be a member of the e

board of directors for the export/import bank of the unite states. un at a time when our economy and financial markets are in fragile recovery recovery, it is vitally important that we do our job here in the senate to act on the president's nominees in a timely manner. i support the nominations and recommend a committee report unfavorably. to the full senate -- and that the senate as quickly as possible on their explanations. ranking member shelby and i have agreed to move the nominations for this closer, falling in mr. albini and block the advisable. we will then hold a roll call vote and mr. colin n. roll call vote. senator shelby, would you like to make a statement on the

nominees? >> sure. i just want to make a statement, mr. chairman, regarding dr. diamond. as they said many times, i don't believe dr. diamond is there a person for this job. he is of course a very accomplished academic and economist in his field, but i don't believe he has the appropriate background or experience that makes him the best person for the job at this point in our economic history. the feds responsibility cut across three broad areas and be monetary policy, supervising our financial system and responding to financial crises. he does not have experience in any of these areas and i believe he's an old-fashioned big government. he supported wheeling out the big gangster in the crisis. he supports additional stimulus. he supports the use of behavioral economics to help bureaucrats control choices americans make. when i come he's advocating creation of the gse model after fannie and freddie to subsidize

health care. i believe, mr. chairman, wearing nation of talented people. surely the president can find another nominee with the level of erie and to garner bipartisan support. i would hope he was chairman would encourage him to do this. with that -- >> are there any other members present to wish to be heard on the pending nominations. >> mr. chairman, i am going to support the nominations except for mr. colin. they supported mr. cho in the finance committee to move on because i thought it was an incredibly important position as the under-secretary of crimes and we need to position to be filled, but we also need to have a robust enforcement of our sanctions law. and to be very honest with you, i did not get a level of

satisfaction at the nominees. but in fact there is going to be that level of robust enforcement of the sanctions for. and the sanctions bond the coast where cnn forced or not in fours to the full capacity is ultimately a two-foot tiger and sends the wrong message to those countries like iran for which we ultimately want to make it very clear that their path to nuclear power and nuclear weapons is not accepted. and we have letters that are pending that have not been answered. and until i get a better sense of his answers and until i get a better sense of how vigorous mr. keohane is going to be in a critical position. and when i see information that would lead me to believe they're actionable items against

companies that in fact should be pursued under the sanctions and are not, maybe further political considerations, i get seriously concerned. so i'm going to cast a no vote today on mr. cohen and hope that both the letters being sent, senator curt and i have sent will be responded to, that i can get a clearer sense that there is going to be a vigorous enforcement of the law, that when there is clear actionable items that in fact we are going to take action and i hope to be in a position to be supportive of mr. cohen. right now at this point, i cannot. so why not nominee, i wish to be recorded as a no. >> senator curt? >> mr. chairman, i want to back up what senator menendez has is. i am also concerned that we sent a letter -- senator lieberman

and i sent a letter to secretary geithner about the lack of enforcement of the iran sanctions signed by the president into law last summer. we have a detailed classified annex, laying out the companies where we think actionable intelligence and policy administration to enforce the act. we also have now seen uncracked weedeater showing that gasoline deliveries to iran, which are the center point of the sanctions regime by the united states and u.n. against iran, gasoline deliveries between january and march have gone from 60,000 barrels per month to 200,000. and we know the identities of the company providing the petroleum in direct violation of u.s. law.

and so i also will be voting no on the cohen nomination because i am worried about the lack of enforced and of current u.s. law signed by president obama just last summer. >> are there any other cop vince? >> we will now hold the first vote -- a voice vote to report on block the nomination of mr. daniel tweezer to be assistant secretary for financing, used department of the treasury to be first vice president at mercer shot robert albini to be a member of the yours for the export import inc. of the united states. those in favor say aye ko. those opposed say no. aye appear to have it.

they are reported to the full senate. we will now have a roll call vote on the nomination of mercer david cohen to be undersecretary for terrorism and financial crimes, u.s. department of treasury. the clerk will call the roll. .. [roll call] [roll call] [roll call]

[roll call] >> the nomination past. >> the nomination is herebyomin ordered reported to the full senate. we will now vote on the we wi nomination of mr. peter diamond to be a member on the board of governors of the federal reserve system. the clerk will call the roll.

[roll call] [roll call] [roll call] [roll call] >> the vote is in favor the

nomination. >> hereby ordered reported to the full senate. the executive session is adjourned. i want to provide my colleagues the record will remain open the next seven days for anything you'd like to submit. our witnesses today have all been before this committee numerous times this year so i will keep the intersections

briefed. the executive secretary of the u.s. department of the treasury the honorable ben bernanke is currently serving as second term as chairman of the board of governors of the federal reserve system. the honorable sheila bair is the chairman of the federal department insurance corporation and recently announced she will be stepping down as the chairman of the fdic at the beginning of july when the current term expires i would like to think you for all the work you have done to serve the people of the united states. i will truly miss you come july and wish you well in any future endeavors that you pursue the honorable mary schapiro was the chairman of the u.s. securities and exchange commission. the honorable gary eve ensler is

the chairman of the committee future trading commission. mr. john walsh's the comptroller of the currency of the office of comptroller of the currency. i thank you all for being here. secretary, you may begin your testimony. >> thank you. jarman johnson, a ranking member shall be, members of the committee, i appreciate the opportunity to update you on the treasury department implementation of the dodd-frank act. although our economy and financial markets have made progress towards recovery, we cannot forget what the congress passed and the president signed the dodd-frank act last year. in the fall of 2008 we witnessed a financial crisis of a scale and severity not seen in decades. the crisis exposed from the entel failures in the financial system. our system favored short-term games over stability and growth. the system was weak and susceptible to crisis and the

system left taxpayers to save it in times of trouble. we had no choice but to build a better, stronger system enacting dodd-frank was the beginning of that process, and as we move forward with implementation from our efforts are guided by a broad principles. we are moving quickly but carefully. treasury and regulators are seeking public input and committed to getting the details right. we are conducting this process in the open bringing full transparency to implementation. we are consulting broadly making input on rulemaking publicly available and posting the details as the senior officials' meetings on line is that the american people can see who is at the table and an. wherever possible we are seeking to streamline and simplify government regulation. dodd-frank consolidates the structures and oversight responsibilities updating and rationalizing patchwork regulations, built up over decades. we are creating a more coordinated regulatory process. regulators are working together to close gaps and prevent

breakdowns in coordination and within the financial stability oversight council, looking across agencies and instilling joined accountability for the strength of the financial system. we are working to ensure a level playing fields, working hard internationally to develop similar remarks on the key issues we're global consistency is essentials such as liquidity, leverage, capital and otc derivatives. we are working hard to achieve a careful balance and protect the freedom for innovation that is absolutely necessary for growth. we are keeping the congress informed of our progress on a regular basis. treasury made significant progress in the short time since the dodd-frank act was enacted. in those months we have stood up the eslocker which is working to identify risks to u.s. financial stability and promote market discipline while developing procedures for deciding which non-bank financial institutions and financial markets utilities will be subject to heightened

provincial standards. we have made significant progress in creating the office of financial research which is working to improve the quality of financial data available to policy makers who knew and facilitate more robust sophisticated analysts of the financial system. dodd-frank creates and the treasury is stand up to the consumer financial protection bureau working to protect consumers making sure they have the information they need to understand the terms of financial products. treasury is also working to enhance ability to monitor the insurance sector through the federal insurance office. which for the first time provides the u.s. government dedicated expertise regarding the insurance industry. we have made significant progress in the ten months since the enactment. continuing to move forward is essential to the country's financial well-being. there is no response alternative because if we don't invest in reform now we run the unacceptable risk that we will pay dearly leader and we cannot

allow that. dodd-frank was enacted to make sure that our financial system is the world's strongest most dynamic and most productive. thank you, mr. chairman. >> thank you, chairman speed. chairman bernanke. >> chairman johnson, ranking member shall be and members of the committee, think of the opportunity to testify on the federal reserve board monitoring system at risk and promoting financial stability both as a member of the financial stability oversight council and under our own authority. the dodd-frank act created the fsoc to mitigate threats to the united states. during the existence the fsoc has established the organizational structure and process necessary to execute its duties to read the fsoc have completed studies on the limits on proprietary trading and investment in hedge fund private

equity funds by banking firms and so-called volcker rules. on the concentration limits, on the economic effect of the risk retention meet and economic consequences of systemic risk regulation the fsoc is currently seeking public comment on proposed rules that would establish a framework for identifying and non-bank financial firms and market utilities that could pose a threat to financial stability and therefore should be designated for more stringent oversight. importantly the fsoc has begun systematically monitoring risk to financial stability and is preparing its inaugural year annual report. in addition to the role on the fsoc the federal reserve has other significant financial stability responsibilities under the dodd-frank act including supervisory jurisdiction of which the companies and non-bank financial firms that were designated as systemically important by the council the act also requires other financial regulatory agencies to take a macroprovincial approached the supervision and regulation.

that is in supervising financial institutions and critical infrastructures we are expected to consider the risk to the overall financial stability in addition to the safety and soundness of individual firms. a major thrust in the dodd-frank act is addressing the two big to fail problem and mitigating the threat to financial stability posed buy systemically important financial firms. as required by the at the federal reserve is developing more stringent provincial standards for large banking organizations and non-bank financial firms designated by the fsob. these standards will include enhanced risk-based capital leverage requirements, liquidity requirements and single counter party credit limits. the standards will also require system and the important financial firms to adopt so-called living wills that would spell out how they can be resolved in an orderly manner during times of financial distress. the act also directs the federal reserve to conduct annual stress tests of large banking firms and

designated monk financial firms and publish a summary of the results. to meet the january 2012 implementation deadline for these enhanced standards, we anticipate putting out a package of proposed rules for comment this summer. our goal is to produce a well integrated set of rules that meaningfully reduces the probability of the failure of our largest and most complex financial firms that minimizes the loss of the financial system and the economy for such a firm should fail. the federal reserve is working with other u.s. regulatory agencies to implement dodd-frank reforms in additional areas, including the development of risk retention requirements for securitizations sponsors, requirements for the over-the-counter derivatives and incentive compensation rules and risk management standards for the counterparties and other financial markets utilities. the federal reserve has made significant organizational changes to better carry out its responsibility. even before the enactment of the dodd-frank act, we were

strengthening our supervision of the largest and most complex financial firms. we have created a centralized multi disciplinary body to oversee the supervision of the firm's. this committee uses horizontal or cross firm evaluations to monitor interconnectedness and common practices among firms that could lead to greater systemic risk. it also uses additional improved wanted of methods for evaluating the performance of the firms and risks that might pose and more efficiently employs the broad range of skills of the federal reserve staff to supplement supervision. we have established a similar body to help carry all our responsibility regarding the oversight of systemically important financial markets utilities. more recently we also created an office of financial stability policy research at the federal reserve board. this office coordinates our efforts to identify and analyze potential risks to the broad financial system and the economy. it also helps evaluate policy to promote promote financial stability and

serves as the board's liaison to the fsob to read as a complaint of those efforts under dodd-frank the federal reserve has been working for some time with other agencies and central banks around the world to decide and implement a stronger said of provincial requirements for internationally active banking firms. these efforts resulted in the agreements reached in the fall of 2010 when the major elements of the new basil iii provincial framework for globally active banks. the requirements that such banks hold more and better quality capital and more robust liquidity buffers should make the financial system more stable and reduce the likelihood of the future financial crises. we are working with the other u.s. banking agencies to incorporate agreements and to u.s. regulations. more remains to be done in the international level to strengthen the global financial system. the key tasks ahead for the committee and the financial stability board include

determining how to further increase the loss of the capacity of systemically important banking firms and strengthening resolution regimes to minimize adverse systemic effects from the failure of large complex banks. as we work with our international counterparts we are striving to keep international regulatory standards as consistent as possible to ensure both multinational firms are adequately supervised and to maintain a level international playing field. thank you. i would be pleased to take your questions. thank you, sherman bernanke. trenberth. sherman johnson, a ranking member shall be and members of the committee, the key for the opportunity to testify today on behalf of the fdic. the recent financial crisis has highlighted the critical importance of the financial stability to the functioning of our real economy. when the emergency measures taken in the crisis stabilize financial markets and help end the recession in its wake almost 14 million americans remain out

of work and the nation's face a number of serious economic challenges. consistent with historical precedent, a central cause of the crisis with excessive debt and leverage in the financial system. in the fall of 2008, many of the large intermediaries of the core of the financial system had to the capitol to maintain market confidence in their solvency and the period leading up to the crisis we sell excess leverage of financial institutions, securitization and real estate loans that made the entire system highly vulnerable to the declining home prices and a rise in the problem mortgages. the need for stronger bank capital requirements is being addressed through basil free and here in the u.s.. one of the most important -- excuse me one of the most powerful towards excess leverage institutional risk-taking before the crisis was the defacto policy of too big to fail. with the expectation of the

government backstop the largest financial companies are insulated from the normal discipline of the marketplace that applies to smaller banks and practically every other private company. the situation represents a dangerous form of state capitalism which the market expects the companies to receive generous government subsidies in the times of financial distress. and the result is likely more concentration and complexity in the financial system more risk-taking at the expense of the public and in due time another financial crisis. however the dodd-frank act provides the basis for a resolution framework designed to make it possible to result systemically important financial institutions without a bailout and without stopping at a systemic crisis. the in designated as a competitive advantage by an institution as too big to fail the heightened supervisory requirements placed in putting higher capital requirements and the need to maintain resolution plans seems to represent a powerful disincentive for large

institutions to seek the status. the the key consideration in designating the firm should be whether it can be resolved in the bankruptcy process without systemic impact, provided we have sufficient information to evaluate the results of devotee is likely that relatively few non-bank financial companies will ultimately be designated and subject to heightened supervisor requirement but we do need the information to make the determination. the liquidation of ortiz been called bailout mechanism by some and a fire sale by others. but neither is true. instead, it is, i believe a highly effective resolution free-market enhance his ability to provide continuity and minimize losses and financial institutionures.ugexcess luggagt extends beyond the purview of the financial regulators to a broad a range of economic policies that encourage the use of that opposed to equity and this is where i hope the members of the senate banking committee can play a leadership role promoting economic policies

including tax measures and fiscal reform that can reduce or eliminate incentives for excess leverage in our financial system and our economy. there are two additional risk management issues i feel should be high priorities for the financial stability oversight council under the mandate to identify and address the risks to financial stability. first mortgage servicing divisions remain a serious area of concern. although the fdic does not supervise the largest fund services over four years ago we began identifying and trying to address the problems using the authority at our disposal. problems in the mortgage servicing or another result of the misaligned incentives in the mortgage process for the fixed compensation provides few incentives to employment cost the labor-intensive service and techniques that are necessary to deal with high volumes of the problem loans. not only to the problems represent significant operational reputation will and litigation risks to the mortgage servicers which we insure the also holding back the recovery of the u.s. housing markets. the fsob needs to consider the

full range of exposure to the problem and the related impact on the industry and the real economy. we also believe the fsob needs to actively monitor interest rate risks with a full devotee of borrowers and financial institutions to set in volatile spikes in interest rates. borrowers and depository institutions may be subject to sudden increases in the cost when interest rates rise, and they will inevitably rise. this issue takes on particular urgency now in light of the current level of interest rates and rapid growth in the u.s. federal debt developing policies that clearly demonstrate the sustainability of the u.s. fiscal situation will be of utmost importance in maintaining the confidence and ensuring a smooth transition to higher interest rates in the coming years. thank you again for the opportunity to testify about these critically important issues and i would be pleased to answer your questions. >> thank you, chairman bair. because we need to leave shortly, i ask that the remaining witnesses testimony be

submitted for the record. we will now move directly to questions. senator shelby. >> mr. chairman, thank you for yielding. we are going down to the white house to meet with the president. i yield my time. estimate senator shall become think you very much. i'd appreciate that as well as all of your cooperation in this process and many other matters. thank you. mr. chairman, thank you very much for holding this hearing. i think it's a very important topic, and i appreciate your doing this with all the witnesses. i know how busy you are and i'm grateful you are here once again to answer our questions. i'd like to see a win if i could on the process by which the council will be designated in the nonfinancial, non-bank financial institutions and. i think this is an important issue and i confess up front i'm hoping this council capps the narrow neck rather than the broad net and i think it is literally important we have a

well-defined very objective process by which we make these designations. the notice of proposed rulemaking that cannot in january i would suggest lacked the specificity that we need to understand how this is going to unfold as i think everybody knows reseated the statute and it didn't provide the kind of guidance on how the statute would be applied. i did several of you, maybe all of you, have acknowledged in your testimony the intent to provide additional guidance and i appreciate that. but i feel very strongly that the form of that additional guidance takes needs to be a new proposed rule and that new proposal needs to have a comment period and that comment period needs to be at least 60 days because we haven't had the chance for anybody to evaluate how this is going to be applied. as i would appreciate if each of you would confirm that it is your intent to issue a new proposed rule and to provide such a comment period.

>> center, as the testimonies of indicated we will be issuing additional guidance that will be in the form of some public rulemaking, and we will be seeking a public comment a think the council has not yet landed on precisely what that rule will be stifled and with the length of the comment period will be, but we want to make sure that we get sufficient public input as we think we have already obviously given the opportunities for public input i think as we provide further clarification as to how this process will unfold we will want to make sure we provide adequate opportunity for people to react and provide. >> i would like to underscore their has been no opportunity to respond yet on how the statute will be applied. so under the presidents exec of

order call for all agencies as a general matter provide 60 days' that is a minimum that's necessary but i'm sorry i'm interrupting. >> senator, i think more details are necessary. i favor providing more information to the public and getting robust in put and comment. i should say while we can provide more information in terms of metrics and criteria i don't think that we can provide an exact formula that will apply mechanically without any application of judgment. but the we are going to have to look at a variety of issues which cannot always be put into numerical metric. that being said, i certainly agree with you that we should get all the input we can from the public on this process. >> we support going after the commented devotees filled metrics and the comment period is something we try to adhere to in our rulemakings, so i think

it's important to get a comment to provide more clarity and metrics. that said i agree with the german bernanke i think i don't think we can provide a complete guidelines. there needs to be an area for judgment and getting more detailed metrics. >> is it your view the form that should take would be a notice to proposed rulemaking? >> that's a good question, senator. i a understand there may be a legal issue with the ability to write rules with this kind of criteria versus guidance and i would defer to the treasury legal counsel on the format. we have the legal authority to do it as a rule i think the would be fine but i would be for you to the treasury on that. >> senator, i agree with nearly everything that's been said with german bernanke about the use of violence and the subject of factors with the exercise of

reasonable judgment but that said i think more transparency in the specificity about this process would be very valuable and i think robust comment period would inform the process greatly so very supportive of that. >> senator, just comforting chairman bernanke said is is metrics would be good to the metrics out to the public comment and we have generally 60 days. i think that's a good period of time with it is guidance or an actual if you delete your -- view on the guidance i think works very well. as long as we get the public in but -- input. >> it would be hard to think of something new to say. [laughter] but certainly going out again with greater detail and a greater clarity and seeking the views and pursuing a process of

review and comment i think is entirely appropriate. let me just strong the urge that we go with the noticed proposed rulemaking by the mechanism we do this and we have at least 60 days. i also like to stress i think we really have to have this as objective as possible. the implications for the firm being designated are huge as you know very well. it's really profound. and so it is perfectly reasonable for the firms to be able to expect to be able to anticipate whether or not they will be brought in bye virtue of these objective standards so i would strongly urge you to pursue that. if i have time for one quick additional question mr. chairman, thank you very much. i'd like to touch on specifically the question of mutual funds, and again i will say that by their very nature, their inherent characteristics i think is a general matter it is very unlikely that the mutual funds are systemically significant to the degree that would justify this is a

commission. understand certain issues surrounding money market funds that occurred during the crisis are very important but also know that the sec has taken steps to address these in the rules of last year and a new set of rules or regulations that are being contemplated now the deal with issues like liquidity and reserve, so my question is our money market funds under consideration for this designation and if so, why. mr. wolin? >> i think it is for me to be will answer that question the deputies of fsob have been putting together pachauri material and as we just confirm to you we are planning on putting out additional guidance for the public to comment and until we do that and get the responses from the public and until the principles have an opportunity to have these kind

of conversations i think it is hard to know what the right answer to that question is, and we will move forward obviously with the public input and that fsob has been providing to date. >> anybody else like to -- >> senator, i would say i think that the determination is an institution by an institution designation and not an entire sector, so under any circumstance i think we have to look at individual entities, and we held actually today's of, i'm sorry, one day of round tables this week exploring systemic risk issues implicated with respect to money market funds and how the investor and i think that would inform us that the sec as we go forward in making determinations about what further efforts we might make specifically with regard to the regulation money-market funds but also all fsob representatives were at that

roundtable and able to participate in a very robust direction with the mutual fund industry as well as with european and other regulators. we will be well informed when we get to the process of thinking about institution by institution designation in money market fund and mutual fund area. >> i see my time is expired something to mr. chairman. >> thank you, cementer toomey. >> -- senator toomey. >> chairman bernanke and chairman bair, title i had to our important cornerstones of the dodd-frank act. of the house republican proposal includes the repeal of title to and other legislation has been introduced in both houses to repeal the dodd-frank act. what do you think of the repeal effort?

should we go back to the system of regulation that existed before the financial crisis? >> mr. chairman, as i sit in my opening comment, i think it there is no alternative but to move forward with a dodd-frank statute as enacted. the idea that taxpayers continue to be on the hook in these moments of stress is one that is unacceptable, and i think the statute clearly puts an end to it and so we think that it's critical that in the kind of very as you discussed in your opening statement, orderly liquidation of 40, the resolution plans that need to be put forward to both the fed and the fdic that these are critical elements of making sure that we in the the two big to fail and that we make certain that the tax payers are not any longer on the hook. >> mr. chairman, it was clear, painfully clear in retrospect the regulatory system that was

existing during the crisis was insufficient. there's been a long and process about how to reform the regulation. i would reiterate what mr. wolin said about the importance of addressing too big to fail. chairman bair also mentioned this. the rate that the new legislation addresses this at a number of levels including enhanced oversight, tough capital liquidity requirements and getting rid of too big to fail would be a very important step. more generally, the philosophy of dodd-frank which is to encourage a systemic macroprovincial approach to regulation where broad systemic risks are taken into account as well as individual firm or market risks is ann portales debt and one that is being adopted globally as well as the united states. >> would be harmful to repeal

the there's a lot of work going on now that is moving towards ending too big to fail. the tools are there, the implementation capability is there and i wouldn't want that work to be diverted, and i think that we pealing and trying to reverse back to the process we know bankruptcy doesn't work. and so that will be an open invitation to the more bailouts if there is no alternative to that. so, we are working very hard to implement this authority to convince the market can and will be used. there is highly important and constructive improvements sponsored by senator dodd and senator shelby during the consideration. i think the vote was 95 in favor that put an additional safeguard like to call back the 40 so it is a very good provision that we are taking very seriously to implement and i hope we will be getting bipartisan support to continue that process. >> according to this chairman of

the fdic who testified before the committee on tuesday as well as others, the fear of the federal bank regulators to address a significant consumer protection issues contributed to the financial crisis secretary wolin and chairman bair, would you please discuss why we need in any consumer protection agency and how the new agency can identify and mitigate the systemic risks? >> mr. chairman, i think that it's very clear that failure of consumer protection are very much of the core of what caused the financial crisis we've just been through, and the federal government wasn't welcome quote to make sure that the consumer protection issues were well handled. the responsibility for the consumer protection was spread out across a wide range of

agencies in the federal government, so it is critical in our view to make sure that there is an agency that focuses very intensively on the consumer protection issues to make sure that the consumers have the information they need to make responsible choices to make sure that the kind of judgments in the individual and certainly the aggregate which helps to contribute so mightily to our financial stress are looked after. so the consumer protection -- the consumer financial bureau implementation team is off to i think a very strong start making sure they put together a set of rules coming efficient but nonetheless clear consumers can use to make sure they understand the implications of the judgments and make sure the rules are adhered to across the financial system among the banks and also among the the non-bank parts of the financial system which has heretofore not been

something that the federal government has had the authority to focus on. for the consumer protection with a very profound problem getting to the crisis we had the community bank yesterday a number of community banks on the advisory committee that our mortgage originators and in the years leading up to the crisis it is continued they lost significant market share to the unregulated third party mortgage originators that had nothing, not much in the way of consumer protection requirements, so they are i think these are good lenders and people who want to do the right thing for the customer and they are gaining market share again in this area. but, you know, as we get fther and further from the crisis a lot of us could start up again and i think we do need an agency to provide a good strong comments across the board. i think you will be good for consumers and will also be good for the more heavily regulated sectors and the good players in the industry trying to do the right thing.

that said, i think it's important for there to be the market approach to the consumer regulation and the focus is i think the current leadership indicated on have a simpler disclosure, better information to make their own decisions. that's really what we need and i think there will be very important value added for the consumer agency. >> senator brown. >> i have questions for the panel concerning, but i want to say a couple of things first, before any institution, and the institution subject to examination and rules for capital risk it must be designated and the council will soon be missing five full-time members and by sorry our colleagues are not here to hear this because i want to speak pretty bluntly about this the five that had to the fdic, the fha and the insurance representatives will undoubtedly make it harder to designate new companies of systemically important.

we need strong nominees who will not be afraid to take a bold steps to prevent a new financial crisis, but if qualified nominees for these important positions are blocked it will increase the likelihood we have another aig or lehman brothers and i urge everyone to remember what happened to the financial system of the economy three years ago and it's a serious business and shouldn't be so politicized the to block the nominee for nominee after nominee. and the panel agrees with that and i'm sorry my colleagues are not here to at least discuss this and think clearly through what actually can happen. my question for deputy secretary wolin u.s about the financial crisis in large part necessitated by the shadow banking complex initiated by the wall street firms that typically sell outside of the scope of regulation, the designation of the systemically important financial institutions as opposed to address this problem.

i want to agree with senator toomey's comments and questions to each of you the council proposed rule seems like reflection, not an aberration or a road map of what is systemically important. it's not clear to me, and i guess from the answers to his questions from you at what point a large hedge fund because systemically important it's impossibleto the regulated mean streak property-casualty insurers would be systemically important and my question mr. secretaries if you believe the mutual companies engaging in personal alliance of insurance, do you think they pose a threat to the financial stability of the economy should they be categorized as systemically important? >> thank you for that question. we are and it's a process that we are going to provide further elaboration. i think it is again premature for me to make judgments about who is in and who is out. it is a specific kind of

consideration as the chairman shapirmentioned, and i think we've done, the statute obviously lays out the factors that are relevant. the council will put out an additional guidance and clarification about how we think it out those various factors and i think the firms in the first instance will make a judgment about whether they think they are of sufficient size and interconnectedness' and so forth and until the process reaches a level of maturity until the members of the council have an opportunity to have conversations about how to think bout those criteria i am not in the position to rule any particular firm in or out. but i think firms can make judgments based on whether they have those kind of attributes or not based on the additional guidance that we give, and we will be getting affirms an opportunity to be heard on these questions. that's in the statute we have laid out in our own rulemakings

what process will be even before there's a proposal for the designation they will have an opportunity to come to the fsob and the out with a thing about the application of the factors to their particular circumstance. so there will be a long process in which the individual firms have a very substantial opportunity to be heard and their views to be considered before any designations are made. >> thank you. mr. chairman, i just want to say to chairman bair, thank you for your service the last half decade. you've served your country well and have been helpful to so many of us. thank you. >> senator benet. >> thank you, mr. chairman and very much for holding this hearing. thank you to all of you for what you try to do to implement. this bill so that we don't have the kind of systemic risk we face come to the front end of the crisis and i think the oversight of this committee is important and it's in that

spirit i want to ask secretary speed and bernanke whether or not in your analysis of what we are facing in the economy right now there's anything the would create more systemic risk to our economy than the united states congress failing to raise the debt ceiling in the united states. >> senator, if i might, i think it is absolutely unthinkable that we would not raise the debt ceiling in order to make good on obligations that congress and presidents in the past have made. secretary geithner has spoken many times publicly about the wide range of catastrophic implications to failing to raise the debt limit as necessary with respect to first of all those in this great national asset that we have and the full faith and credit of the united states has been considered sacred to the real implications with respect to funding and interest rates

that will affect not just the u.s. government i ron ackley which has its own set of fiscal the implications, but also individual -- >> let me stop you there. has its own to the fiscal implications in the sense that it would actually make our fiscal condition worse rather than better? >> it would reque us to spend more money to finance the deficit that's already built up on the interest rates go up and if your funding rates go up, so i think -- >> i interrupted you but where you're headed is the implications for by people living in places like colorado? >> every american whether they are borrowing a house or buy a car or pagen off their credit card bills will have to experience higher interest rates which will have real effects on their pocketbooks but i think more broadly the effects on welfare and so forth of people's balances and their mutual fund accounts would be put in jeopardy in ways that are

unthinkable, so the implications are enormous and is something that we think of as an enormous risk. we have city and we believe as has been the case in the past congress will increase the debt limit but it is also would like critical that that would happen, and that we would work for the broad set of the fiscal issues which are enormously important and once the president has been very clear need to be addressed but the we not hold the debt limit as hostage to those critically important discussions. >> mr. chairman? >> senator, first, let me say that this is in the context of the broad discussion of fiscal stability and fiscal discipline, and i fully support all the efforts of the congress and i know they are very difficult challenges to bring the long term fiscal situation into something closer to balance, so and no way do i disagree with those objectives. that being said using the debt limit as a bargaining chip is

quite risky. we don't know exactly what would happen if the debt limit was not approved. there are certainly significant operational problems, legal problems associated with making sure that debt is paid even if the debt is paid, there's the issue of market confidence and how the market wll respond to the risk of default or the fault on the non-debt obligations, so i think it is a risky approach not to raise the debt limit in a reasonable time. in the cost at minimum would be an increase in interest rates which would worsen the deficit and would hurt all of the bar was in the economy including mortgage borrowers and the like. the worst outcome would be one in which the financial system was again destabilized azzaoui

salles following lehman brothers for example, which of course would have extremely dire consequences for the u.s. economy. >> i share your concern about the fiscal conditions as well, and i believe we are going to be able to have a constructive conversation about it. one of thing i would like to say or ask you, secretary wolin in particular is the longer this goes on the debt ceiling, isn't there a risk that the markets will react even before the august date that secretary geithner has given to get this done or is there a risk? >> we haven't seen it today to but there isn't at risk if we get too close and the markets don't see a credible way through. >> thank you, mr. chairman. >> senator reid. >> thank you mr. chairman and ladies and gentlemen. chairman bair, let me join my colleagues in thinking you for your extraordinary service and i wish you well room.

your testimony reflects on one of the most pressing economic problems we have in the country and that is the housing crisis. we've taken extraordinary measures to assist the financial sector. we have taken very few effective measures to assist homeowners, 28% of homeowners in the united states are under water today. that is probably the biggest and my view drag on economic recovery that we face. yet the most recent attempt by the regulators to provide some clarity in my view is woefully inadequate. i wonder if you might comment on that and what we have to do to be as fair to homeowners as we have to the financial industry. >> i do think the regulatory orders are just one step and the examination focused on the issues didn't really get into broad issues of whether the loan

modification is evaluated and approved or denied. we have done some of our broad analysis of banks to service loans under the last year's agreement and have found not insignificant rights making the error rates and determination's but whether the borrower should qualify for the mortgage, so we think in the next phase to be looked the third party that the orders require a very important davie 100% of consumer complaints and 100% of modification denials because not insignificant numbers of the calculations based on the sample we've done with our last share requires. i think more broadly, we need to be thinking about simplifying the service process, modification process as well as the relocation process cost to the critical some borrowers are not going to make it. we've also been exploring ways to provide a relocation system

there's an incentive where there is not the possibility of the loan modification for the bar were because they simply don't have the income to make the restructuring. we think will save money because it is so backed up now and one of the reasons the housing is in clearing and can't recover until it clears. so the short sales and relocation assistance can shorten the time that it takes to get the back of the market and can mitigate losses which we see in our financial interest, so yes, they're needs to be much more aggressive action in terms of looking back for the borrowers that have been harmed for the streamlined process is and the major borrowers are appropriately dealt with and less litigation and restriction efforts occurred where they should. so that is a positive, but there's a lot more work to be done and dvorkin isn't going to clear until we get this fixed.

>> what you said i have to agree has been said repeatedly the last two years and all of you collectively as regulators have had a chance to make these things happen. and essentially what you chose to do is just kick the can down the road a bit further, let the banks appoint an independent evaluator to go in and look again. can i ask what is the definition of independence? would this be someone who's never done any business before? is this a division of a company that has big contracts and all these banks and will be independent in the sense that the rating agencies are independent? >> we are not the primary regulator of any servicer, so their representatives and the primary regulators might want to respond to that. we've is servicer who had a

problem to tell the bank the servicer for them needed to take some significant remedial steps, and so i think our view on that is the third party does need to be independent and their needs to be some validation process on independently by the regulators. >> for your participation there is no definition of independence >> as far as again i would defer to mr. bernanke and wolin if they want to share thoughts on that because they are the primary regulator of the >> they are the primary regulator of these servicers. but i agree with you, i think there are ans lot of professiont banking consultants out there that m may be independent in the sense that they don't work for thene bank, but they may havem other business with them or future business they would liked to do withs them. so i think it this is a huge is, and there needs to be some validation process. >> my time is -- let me ask you another question. you indicated that the loan modification process was not, was explicitly excluded from

this review, is that correct? is. >> this was, this review is focused on mortgage document processing. >> again, two years of struggling through this multiple times we've attempted to fix itm the problem is foreclosure modification together, not one or the other. and this, to me, is just a way of defining away the problem. and, frankly, it's very disappointing. my time's expired. if there's an opportunity againe i will raise this with theyou primary regulators. frankly, one of the reasons i raised it with you is i thinkac you've been very fort right andn the -- forthright and the fdic going back to 2007 has been very effective, and the other agencies have been more apolo jet than effective. first, chairman bernanke, have a couple of statements that were recently made by the speaker of the house, john boehner, and i would like to ask about them. the first is he said, quote, we

are calling for the end to the government spending binge that is crowding out private investment and threatening the availability of the capitol needed for job creation. now several economists reach you did the notion that given particularly now with our current slack in the economy and corporate america having lots of money and still being reluctant to invest for other reasons, so they disputed the notion that we are crowding out private investment with government spending. do you agree with speaker's statement that the government spending is at this time crowding out private investment? >> there is a lot of crowding out as you pointed out interest rates are quite low. there is a lot of excess resources available for the firm's that need to for civil high your additional workers obviously. that being said of course if we don't address the fiscal

trajectory that we are on we are going to be facing increasingly severe crowding out problems and perhaps financial stability problems in the future. >> but it's not occurring now? >> not to a substantial extent. i do think that if we had a long-term plan to produce our long term fiscal deficits it might help to lower interest rates and increased confidence today, but under the conventional definition of crowding out the credit markets and labor markets we are not seeing too much. >> second statement is the inverse of fact. speaker boehner said the recent stimulus spending binge hurt our economy and hampered private sector job creation in america. cbo own analysis seems to contradict the statement. do you agree with speaker boehner's statement that the stimulus spending hurt the economy and hampered private sector job creation in america?

>> i would distinguish between the short run and the long run -- >> we are talking about the stimulus. >> we have a long run problem to the extent that we are pushing our debt situation further and further into the red. we are taking greater risks. that being said, i have cited the cbo analysis in the past as being a reasonable analysis. >> do you disagree with speaker boehner's view that the stimulus we passed last year hurt our economy and particularly hampered private job creation? >> my best guess is the stimulus increased employment. >> thank you. i'm glad you disagree. [laughter] >> next question, this is also for you, this isn't the same type of question. [laughter] the fed along with overprint regulators and the cftc issued proposed rules relating to when

the counterparties and the derivative transactions are required to post margin that is put up cash as a security for their obligation as you know i've spoken to you about this shortly after the rules were announced and several members of the new york delegation sent you a letter on this. i'm concerned with the part of the proposal we all wore on the new york delegation that would apply only to the u.s. firms and would result in them facing competitive disadvantages, ivies of the international competitors here's the basic issue as reported last week in the financial times. if the chairman, in the sector were to do in interest-rate swap with the u.s. banks london norms it would have to cough up margin but if the german car maker did a slot in the british bank it wouldn't have to. that is the financial times summation of this. do you agree this might cause u.s. firms to be at a competitive disadvantage? >> yes, i do agree. in the transactions with u.s.

customers both foreign and domestic banks have the same rules. transactions with foreign customers we have put out margin and capital rules which have a good purpose which is increasing the safety of our financial system. currently, under the basel agreement capital rules will probably be in effect, similar capital rules will be in effect for foreign banks but at this point they have not yet done the margin. >> that leads to my last chairman with the indulgence >> what is the treasury doing, secretary wolin, to ensure that the european regulators about the same or very similar rules and would we go forward and enact the rules before they did if it could our firms, our u.s. firms at a disadvantage? because obviously i'd like to see american institutions to as much foreign business as possible it creates jobs in new york. >> we are working very hard with the europeans in brussels and

also individual european capitals to make sure we have as much as possible level playing field. we are making good progress on that but we have to stay vigilant. on the question of whether we would put forth rules i would defer to the chairman and the market regulators as to how they would move forward, but i think is of course important as we said repeatedly to have essentially level playing field so as not to disadvantage u.s. businesses. >> i assume you are urging the regulators to do just that right here. thank you, mr. chairman. >> senator merkley? >> thank you very much, mr. chair, and you all for your testimony. i was just downstairs in the gathering of the health committee in a hearing and was

rustling with the impact on the middle class of the last three years and essentially the hollowing out of the middle class in america, and i think there is a chart that captures much of the concern as it tries to show how middle class wages rose with productivity of the country over the 30 years following world war ii. but starting in roughly 1925, 1974 for the next 30 years enormous divergence of which middle class working wages, inflation adjusted and we had a tremendous increase in the productivity of the country, but families, working families did not share in that and raises the question of what kind of country do we want? do we want a country where families participate in the wealth of this nation where they are able to send their children to college and plan for their

retirement or own a home, department ownership society or one in which essentially fewer families are in the position to access those fundamental instrument related to the quality-of-life. and it's discouraging to see that half over this last 30 years. in some ways, many of the issues we dealt with in dodd-frank are related, and we have seen basically the doubling of the national debt under the bush administration and then a tripling of the debt as a result of the house of cards the was built in the mortgage deregulation by the bush administration. and now we are seeing their recommendations from the house that say okay let's dismantle what's left of the programs to provide support for families as a consequence of the debt even though the debt was created by strategies that were not designed to support the no class

to begin with. the entire picture troubles me. .. >> certainly related to the performance of the financial system as it affects families.mc they anticipate an additional wave of foreclosures, almost five million on the horizon.he p the construction industry which

effects almost every aspect ofi my state economy, and the rising cost of oil. have these been topics that have been wrestled with in the financial stability oversightd council, should they be, ande i'll just open up to whoever would care to comment. be opene? does anybody care to comment? >> senator, first you talk about a number of broad macro issues in a cute do justice to them, but i note the federal reserve and its pulitzer is trying to address unemployment, which is a major source of foreclosures as well as mortgage interest rates another fact is a fact in foreclosure crisis. we are addressing a do not respect. attempting to address for closure crisis directly, you know, there's an effort and so far only modest success. it's proving very difficult to

find solutions in many cases. in other cases, the process has not, you know, not the inadequate in the cases of banks of the party discussed here a bit to recent review of servicing part says. the federal reserve and the occ with this worth the fdic received as part of cents. issued cease-and-desist orders to try to stop that practices and try to require banks to go back and discover who was harmed in to help offset those problems where possible. going forward we expect to assess civil money penalties as well. but you are right that this remains a very, very difficult problem and some level, regulation of the problem, but some of us in academic problem and that needs to be addressed in terms of global and national

employment and economic conditions. >> anyone else care to comment on this? >> well, i thought i'd see the financial stability oversight council has not talked about some of these matters about the rising commodity prices as a council and at staff levels. i think the train for atkins a number of features that helps market regulators like the cftc for writer for the american public your weird high-priced veteran that is not what the congress were american public has asked it to be. but the train for i.t. this broader authority see the whole derivatives market swap stronger anti-manipulation of rudy, in our case, more summer to the fcc's, to actually ring in some of the foreign ports of trees and foreign exchanges and also to move forward with what i

think congress said with regard to limiting some of the size of the speculators positions in these marketplaces. so prepare proposals on all of these matters consistently with congressional intent and we look were to public comment trying to finalize the rules. >> senator chester. >> thank you jimmie johnson. once talk about debit interchange. of course mr. bernanke, we are hearing february. we talked about the serious risk that the durbin amendment would have on small community banks and credit unions because of the lack of ability to enforce the 10 billion under exemption. you've got more information since then. do you still deal with the information you've got that an exemption can work?

>> to be honest with you, we write gnostic. we're still not sure whether it will work. a number of the networks have expressed their interest willingness to maintain a tiered interchange fee system. but of course that is not required. there is no law which says we have to do that. the suggestion we got was that we should ask for even require networks to make public to put the interchange fees were they recharging. the e. some value in terms of transparency. there are market forces that would work against. >> you've been in the business for a long time and you're very intelligent guy. i know in the political process and i know you've probably been getting a lot of pressure from people at least one person on the senate. i'm talking about rural america but here. i'm talking the community banks and credit unions in a big rates

another nail in her coffin. it is really important -- i think it's really important. is it going to work? >> i can't say with certainty. there's good reason to be concerned about it. >> if it doesn't work, what's the impact from the rural market? >> well, it's going to affect revenues of smaller issues and could result in some smaller banks being less profitable or even failing. >> okay. thank you. when it seemed a prudent thing to do is to step back and get more information? wouldn't you agree the amendment was put in rather quickly? >> it was put in quickly but i think i have to defer to congress on what kind of information you want to get. we have done one review and we've got 11,000 comments. >> to jamaica decisions with that information?

>> can you make good decisions with little to no information? >> that's a problem. we've received 11,000 comments and done an enormous amount of sitting in the industry and so on. >> you've been able to read through those comments? >> that's why we wrote that we were going to be late but i will come up we are making progress. >> chairwoman bair, i went to thank you for your service. i very much appreciate all the work you've done. a senator brown said, you've been very good at what she'd done. same issue from your vantage point committee think it possible to send community banks with debit interchange? >> i think it is questionable. i think we have suggested that the fed perhaps could use authority to require the networks except here praising and our lawyers have different

subnet and i think i was called to the fed's role. so if you have reasonable authority to require that come it does become more problematic. and so i do think this is going to reduce revenue but smaller banks and they will have to invest that two customers in terms of higher fees, per merely for transaction accounts. it's going to happen. as a direct result? you need to determine not, but i think it will happen. >> was there any impact on their safety and soundness? >> our initial houses we don't think that will happen, but clearly we trust them and there are still other challenges confronted in the banking and it's probably something they don't need to be dealing with right now. >> you talk to but you didn't know if this is what the impact

of congress would have. i trust that this would potentially and will certainly need higher fees and other areas for facilities. >> yes. >> okay, mr. welsh committee of anything you'd like to add to this issue? >> now, only that we provided a comment letter that did not address particularly this distinction. it dealt more with flexibility the fed has to sort of except the overall level that they set. we've been doing it for one it for one of outreach of outreach to community bankers and it certainly has been a key concern for them. >> the impact on community banks, d.c. very similar to the way -- how do you see a? >> well, i would say to the extent it works out as suggested camorra cuts into revenue for community banks, is one more stress on them.

>> do you think an exemption can be implemented? >> i haven't really studied the issue of whether that can work. >> thank you very much. >> senator warner. >> thank you, mr. chaiman. let me start by adding my comments to some of my other colleagues in thanking chairman bair for having extraordinary service and lots of hope personally to me and senator corker as we navigate through some of these issues. i hope mr. chairman, since her down to the field at this point, maybe we can get a second round of questions since i've got lots of things i'd love to raise. first of all, for deputy secretary neal himelfarb six, i continue to think the jury is out on whether the members hope

and aspiration of what the fsoc will be will be accomplished. i think it is a critically important early warning signal. one of the things that i think will make the fsoc a more informed entity will be the art of creation of the bar. i was wondering, do you have any thoughts of what would make it the nominee? >> we certainly hope soon. i expect the president will make a nomination for that important job soon. i want to assure you that in the meantime we are working with an awful lot of intensity and focus to stand up to ofr and make it the important addition to the landscape but it is beginning to be and will be.

we have made very good progress in hiring senior people. we're just now in the last few weeks brought on to burner, a very accomplished individual with lots of experience in markets and risk, with impeccable credentials to lead the standup affair. we have hired chief business officer to run the datacenter. chief operating officer and two other folks. they are together beginning to work together with the other members of the fsoc in evaluating risk, trying to work through the kinds of data issues that will be critical for the ofr to work through. >> i got a lot of questions. i appreciate that, but it's been 11 months. we need a nominee. i want to also three echo that senator to me and senator brown mentioned as well in terms of

the designation. we've got to give more clarity here. visitor the better. one of the notions i personally believe is if we give guidance to reaffirm and parnevik was a safe harbor and take actions to ensure they are not designated, that would benefit the system. that means in effect will the limiting risk exposures so they don't get this designation. again, that helps us move along in this process. i concur with chairman bernanke's comments that this cannot be with dollars and cents. the sooner we can move this forward, the better. and the notion of some sense of a safe harbor, whether it's

insurance funds, money market funds is helpful. i would put one other caveat here from some of our financial institutions to repeatedly with cobb and appeal. perhaps share jobs overseas. towards the formation of dodd-frank when they said please, please don't give firm guidelines and legislation. leave it to the regulators. and now they're coming back and saying my gosh, regulators have got so much to do. hopefully this in the audience who visited my office when they were saying please don't legislate specifics, that you recall the system of which you asked for. i would also urge because i know one of my colleagues asked the

point that some of this chipping away at for it is my sense there is an enormous not complete agreement with what we've done but across the e.u., around the world, there could be that first. any effort to try to retract that would be potentially devastating to international implementation and i want to do -- i know my time is gone, the chairman bernanke, one of the things we think about what the g20 and my fear is the crisis gets further away from the financial legislation issue falls down the level a little bit, how do we be sure that we really get their? how do we be sure is be sure cpk in the e.u. and the billing options rather than some resolution activities that we keep this international

implementation and international perhaps slightly different roles, but at least a unified approach on track? >> well, that's a major priority of the whole process and i think on the whole it's gone pretty well. people have joined in in good faith to try to create a level playing field. so while there are some international differences, at this point i don't see very many. senator schumer talked about some aspects of margin requirements and things of that sort. but herbig in general, i don't see many irresolvable differences at this point. moreover, a very important part of this is ensuring that roles are both implemented in a consistent way across countries and enforced across countries. part of what the basel committee and financial stability board

are trying to set up frameworks for looking into those things as well as paper rolls. >> my time is expired, but i'll say run for second round. do you or chairman barrett want to comment on resolutions for example with the uk's bail in? >> well, there's been a lot of work. the defense as a neither shows for large financial entities. no one is trying to be the bankruptcy process. it is just not suited for it. it's used as much as i can, but for some instant not suited. i think the g20 over the year ago we cochaired to cross resolution and played a leading role in devising, so there's really progress moving forward. i think there's another tool in the tool kit. i think dale and as one toolkit is a good thing. they are not suggesting that can replace resolution regimes.

you'll always need the backs that they feel. also bailey and busy resolution and i would like to bring some of the unsecured debt into an institution has a lot of problems and is one of the structures to my pursuant to resolution planning. so there's a tremendous amount already with the u.k. china has a number and also the e.u. is moving forward with development to special resolution regimes. so i think there's tremendous progress and i hope we can forgive and train and continued political support for it. >> at the suggestion of senator reid, we will produce eight with a brief second round. for other panelists, currently there are several vacancies at the financial services regulatory agencies.

this summer there will be several. i am increasingly assigned of the comments by some of my colleagues that any and every man and he will be brought to. not having done individuals in the place of the agencies will continue to implement soon to be dead to handle in the economic recovery. what do you believe is the impact of these legacies? >> mr. chairman, these are important roles in it's important to fill them. the president will be making nominations on these open positions. those that he hasn't made nominations for her. i think it is of course important to have leaders in the seats. having said that, the work of the various agencies goes on in the fsoc has been off to a very

strong start and has been very effective in its early days and will continue to be so, but that is not to suggest it is important to get folks in these areas jobs. >> chairman bernanke. >> why do you think the agencies or to another, leadership to set direction and tone and i think it's important to have highly qualified people at the heads of these agencies. that being said, the senate has to do its duty of advice and consent in ensuring these are qualified people. but i hope there will not be unnecessary delays and politically motivated blockages that prevent those qualified people from undertaking their duties. >> chairman bair. >> i think this is very

important. after i depart on july 8, our ots will be gone july 21. we could rapidly go from five to three directors quickly and actually down to two because one of our internal directors right now is on hold status as other opportunities. i think this is very important and i think having the next term is important. it's important for the senate to have their say and will process the president to have his prerogatives as is constitutionally charged with nominations and appointments. so i do think if members want independent thought in an agency, it's important for that senate confirmation. all the tough decisions i made if there is an acting capacity, it would've been very inhibiting to me, so i hope the process can move forward.

>> chairman schapiro. >> i think with the five-member commission is important to have a way to intend a full complement of commissioners. it's particularly true right now given the huge volume of work both with respect to law enforcement and that duties the most particular respect for the rule writing responsibilities we have taken on under dodd-frank. we had no vacancies at the moment although we have one commissioner explaining of the year ago it has been holding over that position. >> chairman gensler. >> where 5% position and have sides are equal and fairly engage commissioners, but we do have a term that comes up after serving two terms will be open in june and yesterday the president did announce that he's forwarding a nomination to the senate so i was glad to see that. i look forward to maintaining.

i think it will always have five commissioners there we engage. >> comptroller walsh. >> as the one acting agency had here at the table, i guess i would add the thought that secretary gates are invited me to do this job and certainly encourage me to do the job as if it was my job. but the fact is i have said repeatedly that i do it's very important for independent supervisory agencies to have nominated and confirmed heads in place for the perception of independence and they think it's obviously the right way to proceed since that is the structure that exists. so why would join others in support of that. >> senator merkley, do you have any questions? >> first i want to join my colleagues in thanking you,

chairman himelfarb bair. i wish you well and the next chapter of your life and will continue to ensure many of us look to your advice. one of the things i wanted to pursue in deputy secretary wolin, it's appropriate to ask you about this and that is if we turn the clock back a year and a half, there was another continues to be a real challenge in terms of lending capacity at a lot of work community banks. in wrestling with this and talking to many, many experts and stakeholders, we produced a planned called small business lending fund, which was to essentially counter the irrational fear that follows irrational exuberance.

how's that we fear related to capitalizing community banks? that capitalization is leveraged provided to 300 billion community bank lending. that was some game that was amended into small-business jobs bill in a bipartisan fashion. everything's coming coming to me now that are applying and saying there is no sign of the treasury is ever going to respond to applications. it just seems like the process is absolutely frozen. what's wrong and how is treasury going to fix it? this is an important issue to bring our economy back on track. >> thank you, senator for that question. it is a critical element to getting a credit flowing against small businesses. we supported very strongly and are spending a lot of a lot of energy implementing.

we have received lots and lots of applications. you can expect will start making announcements of investments very quickly in response to this applications. >> that's great news and they thank you. i want to have the same stream of folks asking me what's going on. second question i wanted to ask and i may turn to share schapiro is to follow the flash crash from a year ago. the fcc of the league has had to address greater audit trail for about 20 years the flash can't put an exclamation point on the need to both develop a real-time audit trail can look at other issues related to preferential treatment for high-volume and high-speed trading. maybe you can update us on where the fcc process is in your

personal perspectives on how important is this in terms of the confidence of small investors and others. >> i would be happy to. let me start with the last part 1. it's absolutely essential that we as a market structure that's resilient and capable and perceived by all market participants to be fair -- i mean, is fair. on may 6 we quickly made a number of changes in the market structure to deal specifically with the extraordinary volatility we saw on that day. so we instituted single stock breaks out the prices stop was for than 10% in a five-minute period, just time to catch their breath and come back into the marketplace. we also eliminated the rules that were permitted of the executions 1 cent a hundred thousand dollars on that day. the exchange clarified the rules on the road for when they would

break trades are clearly erroneous or not valid trades in the marketplace. about 20 27,000 trees were broken that day. and get access to the markets of customers and broker-dealers must go through and must not directly into the marketplace. important things had been done. our next type respect was to move to an up-and-down proposal will be proffered by exchanges that would limit the ability to put into the marketplace in order that was out of a reasonably tart range of the current trading and that will be important as well. we have broader issues are very focused on. many are in our concept relief for 14 months ago, 15 months ago focus on high frequency trading and used by all the rhythmic traders. we are moving forward with that in pieces and hopefully will begin to take action in the area. the most important pieces of the

audit trail and a large treasure reporting system that was specifically proposed by the agency era go for almost a year ago and it's my hope those will come back for final approval in the next couple of months. they're absolutely essential to our ability to reconstruct trading after an event full day like may 6, but also for us to determine whether people are manipulating markets or taking advantage of other market anticipates in any way. the consolidated audit trail will bring together data from the many trading venues that exist in the u.s. market is really critical regulatory tool that simply hasn't been done and we're going to move ahead and try to get it done in the next couple of months. >> or appreciate. but it remains something you're hard at work on. >> absolutely committed to it. >> chairman warner. >> to pick up for mr. merkley left off.

i still have some concerns that can you keep up with the technological challenges, co-location techniques, some of the technology aspects one of the things i find curious is some colleagues on the other side of attacked the consumer bureau because of its ability to have a funding source. i think we ought to try to get the bill in place wanted to make sure the prudential supervisors or at least parity vis-à-vis the new consumer entity in its curious one of the ways to do that, particularly the fcc would make sure they have adequate funding so they could upgrade technologies to win the deal with flash crash technology challenges, when thinking about

perhaps voting on a new challenge to the fcc in terms of reported back as major publicly traded companies are subject to cyberattacks, which deeply buried challenges. if we maintain the parity to keep the supervisors appear that role, they've got to have resources to do it. that brings they now to one of the areas that i want to ask both chairman shapiro and chairman concern. we're seeing, as they relate to this process on some of the swap execution challenges. difference between sec's approach that chairman gensler hives. let's get five votes. i'm not sure where they should all play out, but i'm anxious to see how we between the two entities have the reconciliation whether at some point this is where we will ultimately be

bumped up to a fsoc -- i recognize your different markets, but some type of clarity to what was ultimately end up at the fsoc. >> let me begin in an alternate to garrett. it probably shouldn't be surprised we have some different approaches. some of those are results of having different statutory foundations, but also because there's differences in progress based on liquidity and how they trade and that argues in some instances a different regulatory approach. i will say we are working together extremely close to you. or so the proposing stage while these rules. we've added the cross, so with the cftc took a different approach. we asked questions whether that was better or whether the sec

approach is better or an entirely different way to go. we continue to review each other's comments so we have a good understanding and continued to meet with industry and other interested parties to talk about what is the approach for for filling the statutory mandate to bring this product under regulatory shame in a way that's a fact that of investment have institutions to different sets of regulations where that would be silly and unnecessarily costly. for a very focused on all of these issues and our staff continue to do really fabulous for together to try to narrow the differences. i expect as we get to the stage where we adopt rules, you will see differences continued. >> if i could just come back to one core piece. transparency is a key part of how markets work is. i truly believe competitive and transparent markets are what

helps the american public and lowers systemic risk of a future crisis in terms of our working relationship, it's remarkably close in a dozen or 15 joint work roundtables and sharing the comment letters as chairman schapiro said. more particularly on the swap execution facility rule, one of the challenges we have is that the future's regime, the regime were trading features as mandated in the 1930s, that i was on the central exchange, 100% has to be transparent and out there for the public to see. that's a good thing i think for the american public. the security laws are different. there were guests and we started between securities and futures. as we come up with rules or swaps like interest rate swaps, we have to be mindful they are not so far after the futures market that we start to undermine even her futures markets that work very well in

this country even to the crisis. so were focused not just on the gap between security-based sauce and slots, but also focused on a recreation is something that undermines the futures markets when we do this while waiting for something called swap execution facilities. >> i have an indirect result of a proposed nonexchange treating swap. if we have to have a a threshold in terms of pushing it and peered >> senator warner, this only relates to something that is cleared -- it has to be cleared. has to be made available for training and thirdly it cannot be a block. the way both of us looked at this rule is this is for the five or $10 million interest rate swap, not the tune of 50 million or 500 million interest rate swap. if not for the bilateral swaps or swaps to corporate america as opposed to the nonfinancial corporate america.

financial entity to financial and indian transaction is cleared made available for treating and is not a block. >> to us questions very briefly and i appreciate the chairman granting me this. we clearly need to move these transactions into clearing houses and i just raised the question, a critique we want to have an open access to not just create such a limited amendment or clearinghouse, but i do have some questions whether the $50 million b. is. i sure want to make sure the base requirement for any clearinghouse is proof of true capital and we get that right. i think trend of robust competition is good, but we've

got to make sure they really have the ability to get the counterparty assurance. >> this is important to assure robust competition among steelers. what happened is it's a very close, concentrated groups of dealers. in the future is wrote an securities road, very many members of clearing houses and that's allowed. their 60 to 70 members of the chicago mercantile clearinghouse for instance. it is swaps road is closed and i think they're high in arbitrary limits for judges have $5 billion of capital than $1 trillion swap book and i wasn't part-time to keep a barrier to entry frankly. i think congress address that they seen the clearinghouse has open access. we could put a rollup for a proposal to hear from the public, but it's also for pension funds and asset managers to have more choices as to who is going to be their clearing, who is going to represent them on the buy side? i think this is actually a rule

that hopes pension funds, asset managers of america, financial entities who are not swap dealers have access to this clear he cannot be constrained and have to go through a handful of big wall street firms. >> finally again, secretary himelfarb six, sounds like the ftc and the cftc are working well together. but at some point it is this members hope that so we wouldn't have this patchwork and pilot approach in duplicated sets of regulations, the fsoc was hopefully the place that would help resolve these issues and at some point there needs to be that umpire. i hope secretary geithner will realize not just in this particular case, but in a series of others. i think the indulgence of the chair. >> well, senator warner, as you heard from the chairman they are still early in the process and

we will move forward. i think while respecting the independence of regulators commodities for the fsoc has a responsibility to look at things that has important implications and try to bring to bear consistency across the system where those issues are relevant. that is something we've been focused on. there's also from treasury's perspective and need to worry about international dimensions are not only to read consistency where we can with the united states but it can latch up to offer in the g20 and beyond again for the level playing field that we think are important. >> today's hearing has been very helpful with given us all understanding of important provisions and the dodd-frank act to promote financial stability in our nation's economy going forward. we cannot afford to go back to the old financial system that

has jobs and cost chileans of dollars. the creation of the fsoc and other new tools to archive your regulators to monitor systemic risks and feeling financial institutions are just many weaknesses in the old system. this will help the regulators better manage virtue crisis. thanks again to my colleagues and our panelists for being here today. this hearing is adjourned. [inaudible conversations] ..

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[inaudible conversations] [inaudible conversations] >> what choices do they make? do they become terrorists to kill?

>> next here on c-span2, the u.s. navy chief of operations gary roughead delivers remarks on unmanned naval technologies. this is part of the 21st century defense initiative at the brookings institution in washington. it should get underway shortly. want to let you know that coming up today at noon we will hear the social security and medicare trustee report are releasing their annual report today, fiscal condition of both federal programs. we will have that life for you as well as you on c-span2 coming up at noon.

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[inaudible conversations] >> you're at the brookings institution in washington, waiting different u.s. navy chief of operations gary roughead. admiral roughead will talk about unmanned naval technologies, it should get underway shortly. coming up today on c-span networks, newt gingrich we just announce for president on wednesday will be spacing at the georgia republican party convention in macon, georgia, and we will have that life you tonight at 7:15 eastern. we will follow that with your phone calls and re- action. ron paul also announced for president today. he is in new hampshire at a rally and we're covering that and have some of that video later on in our program. on the program schedule on the c-span network. there's word today from both politico and from "the associated press" that herb kohl, wisconsin senator, will

retire in 2012. senator kohl becomes the ninth senator and six democrat to retire ahead of cycle with the parties forced to defend 23 seats in the upper chamber. the word of the herb kohl retirement is supposed to come down today. we will let you know when that is announced. [inaudible conversations] [inaudible conversations] [inaudible conversations]

>> hello. i'm peter senior, director the 21st century defense initiative here at brookings. it's my pleasure to welcome you all to take to the 21st century defense initiative. with the changing forces that are acting upon age-old phenomena of war. these forces range from changing technologies to new actors in war, to change expectations we are placing on our borders to changing doctors and you training team, even budget changes. a little over a year ago we were honored to be joined by this gentleman who sat before us a vision of how he saw some of the key issues, policy and questions that surround an important aspect in the discussion of what's changing in this realm of or. the introduction of unmanned systems. he discussed the u.s. navy's growing use of new technologies

and its development, integration of unmanned systems in the current and future navy force structure, especially on information dominance i. he also addressed major operational challenges and benefits from the new and rapidly evolving technologies, and he spoke to the doctrinal, legal and ethical questions that are starting to come out from all of this. it was a very fascinating discussion, and what's interesting is that through the power of new technology, that discussion has in a sense become a living entity, spreading both geographically but also chronologically. that a year and a half later we continue to get questions and contacts from folks about that talk from everything from navy lieutenants on chips, thousands of miles away, the students at the naval war college, two journals here in d.c. but one of the challenges of technology, and i would argue the wider policy world today, is the incredibly fast pace of

change. so for instance, in the short time since that discussion we've seen technologies that were, for example, you could describe as the dream stage, now start to take flight. an example, we got several programs vying for the navy you class program for a carrier deck and man system. or as another illustration, the fire scout and the time since we had this discussion in navy's unmanned helicopter went from doing sea trials on combat ships to just a couple easier to point out to afghanistan in support of coalition forces there. so in essence what we are seeing is new possibilities but also new challenges that come out of not just the advance of this technology, but also by putting this technology in a wider set of hands for uses. and this will only continue. as an illustration, last week i was involved in a wargame which was set in the year 2025, which

is the year a lot of are playing scenarios and documents head towards. one of the things i'd remind the team that was planning in terms of what the red and blue teams might have at their disposal was the fact that in the year 2025 the 18 year old sailor didn't have space, would have been born in 2007, the very same year it was born. the 18 year-old in 2025 will have a very different sense of technology as well as a very different set of technologies at their hands than the 18-year-olds today. which already is tough enough for us to wrap our heads around. so it's lucky for all of us that we're able to do something that is all too rare in washington, which is to pull back, to reassess, to re-examine where matters stand and where they're headed. and to take a much-needed second look at a rapidly changing issue. we are even more lucky today to have admiral gary roughead, 20 the chief of naval operations,

rejoin us for that reason. not going to be originally set us on this journey, but he brings to this discussion a wealth of operational and command experience to the nation's service, including being the only one of two officers ever took command of the fleet both the atlantic and pacific. he has a well-deserved reputation as a thinking leader dedicated to mentoring the next generation of leaders, including having served as commandant of u.s. naval academy from which he briefly graduated. and, finally, he brings a unique experience experience to the challenges of dealing and integrating with new technologies into the realm of national security at war, including being the first officer to command both classes of ships. admiral, it's an honor for us to have you join us today. >> thank you very much. [applause] >> well, i really do appreciate the opportunity to come back and

visit and talk. i apologize for my tardiness. if i said i was in a budget meeting, i know everyone would believe me. if i said that. that it is true. it is good to be here. the last time we were in the middle of the qdr for 2010. we were putting together the budget for 2011, and it seems as if only yesterday i was here, but if you think in the intervening time, not only did we wrap 11, we wrapped 12 and now we're into 13. so time does fly when you're having a good time. and i think that the other thing that has changed, even though we can see on the horizon, and we could sense it and we're beginning to get the first buffets, if you will, of what

each sure to be a very interesting and, indeed, a challenging budget environment. that was the environment as we came together the last time, and i talked. and all that really is now starting to come to pass. at the time that i was here, we have just stepped off on, on really changing and recasting of the navy was approaching what i called the world of information. the advancing of information as the focal point where we wanted to bring our combat capabilities or operational capability into focus in a different way than we had in the past. because it was clear to me that we had moved beyond what i call the primacy of the platforms,

the airplane, submarine, and the ship, and how we focus our budgetary thinking, how we thought about our operations. and, indeed, how even organize ourselves as we made fundamental and significant decisions from navy. we were at the beginning of that. and i'm very pleased to say that we have stayed the course, not only have we stay the course, but i have seen exactly what i had hoped to see, and the benefits that were to be derived from that change in direction. since that time we changed our staff structure and moved into the directorate for information dominance by bringing together the director for intelligence and the director for command and control. that has worked out

extraordinarily well for us. we have not gone through two budget cycles, going into the third, with that construct. first was rather formative. 12, i could really see the difference in how we thought about things, how we make decisions, and what those decisions produced. not only has the clock gone by quickly, but the officer that i had been waiting to move into that position for a couple of years as i thought about where i wanted to go has now completed his tour. he has done it brilliantly, and vice applejack dorsett who was a plant owner as the term we use in the navy, as the first director of information dominance is going to pass the baton to his successor, this summer. but i cannot say enough about

what jack has done to really put that organization in place. and he will be relieved by kendall card who has been his trusty right hand and truly workforce throughout this entire effort. so i am very please and don't judge a little bit more about some of the benefits on that. at the same time we also move forward and we reactivated the u.s. 10th fleet. a fleet of that first came into being in world war ii to get after the threat of the u-boat in the atlantic. it didn't have any forces, so to speak up. it was taking on a new form of warfare in the way that germany was using the u-boat, and the 10th fleet was able in a short period of time to overcome that threat. vice admiral barry mccullough has accelerated 10th fleet faster that i had hoped in my

wildest dreams. and, in fact, he and i just had another session this morning as he continues to refine that. we have made some additional changes. he now is the only never fleet commander of the navy that is budget authority, and we have also put in the rest of our network warfare structure in underneath him so that we can gain more inefficiencies and greater effectiveness as we go forward. and then, of course, i think one of the keys to it all is the creation of the information dominance core. when we brought all of the various specialties together and have begun to operate them as core to leave them as a core and manage them as a corporate its 45,000 people in the navy when you do that. and we are beginning to see that we have been running long enough to where we are now cross

detailing. so you may have a cryptologist commanding a unit that one time would've been commanded by an intelligence officer or vice versa, and we're seeing that cross politician and a better awareness of the total information dynamic taking place. it's also in that into six organization that we put our unmanned systems, and even some of our main systems, again, to better manage that portfolio as an information domain as opposed to things that are done on ships sufferings and airplanes, and that in the course of the noble routine you can maybe integrate them together. so, there's no question that what we've been able to achieve and where we are now would not have been possible without better structuring ourselves, approaching had this information dominance concept comprehensively, and then

integrating into that the approaches that we have with anti-access area denial capabilities. at the time we started down this path, air sea battle as a concept have not been really fleshed out. but it really is and how we organize ourselves that when we got together with the air force and the marine corps to do their sea battle, it was a natural fit in how we organize ourselves, how we were able to look at anti-access area denial because in the world we live in today, most of that is going to be in the information domain. in one form or another. so again, that has allowed us to move ahead. it has not been without challenge. in fact, peter may recall that i used a favorite machiavellian

quote of mine as i was talking about where we were going, that nothing is more difficult to take in hand more perilous to conduct or more uncertain of its success and to take the lead and the introduction of a new order of things. that's just the nature of the beast. but i would also say that as i look at where we are today, we have been able to move through that. that's not to say that there's still not areas where we have to do some additional work to better synchronize activity. but i also believe that we are at a time, to quote machiavellian again, the tardiness often robs us of opportunity. because i do believe that we are in a period of budgetary time where it's going to be important to move quickly, to solidify the gains that we've made, and to make good decisions about the path that we want to be on in the future. i think that innovation in the

navy is something that we are proud of. we have seen it. transform naval warfare in the past the fact that we are celebrating hundred years of naval aviation is one milestone of that innovation. but i also go back in time and think that it was kind of a mix back then as well. i look back with envy on the first stirrings of the idea, and then from that idea of flying an airplane off of the ship, that we had in three months actually procured the airport. i wish our procurement process works that could today to be able to do. but again you hit this inertia, and six years later there were only 38 aviators. and so, again, very slow, slow

climb out. but then when world war i came along, that's when you begin to see things move. and so, i think that's one case of naval innovation. the other i would submit is nuclear power, that totally transformed where we can be as a navy, where we can be persistent and, indeed, where we can exercise the ultimate stealth. and i think the initiatives we're talking about today in information dominance and then unmanned systems will fall into that category when we look back on this period of time. the process that we've gone through as we have looked at putting our budget together in 12, not only has it served to capitalize on what we are doing in information dominance, but the other driving factor that we in the navy have focused on is

getting our arms around total ownership costs, because i think in the types of systems that we're acquiring today, if we're not thinking about that total ownership costs, that includes manpower as well, we could be delivering a force that is unaffordable. so, we have looked very, very hard at that as we've made our investment decisions. notches in the information dominance area, but across the board as well. i'm also pleased that in the 12 budget, and in what we've been setting up over the last couple of years is really to create some stability, some uniformity in how we are going forward. and if you look at the navy's force structure, let's just remove the information dominance keys that i've talked about, i'm very pleased that in all of the platform areas, which i said are now no longer, you know, the

dominant drivers that perhaps they used to be, in the submarine community, for example, this year we moved to building to virginia class submarines and a year, and we are now into the design of the replacement for the ballistic missile submarine, the ohio class that i consider to be the most survivable leg of the triad. and our surface fleet right before christmas, getting the approval to go forward with a by of combat ships. that ship is going to be very well suited to the environment that i think will be operating in the future. restarting that ddg 51 line. building the joint high speed vessel, and some of you may have seen where we have now incorporated with the are where taken all the joint high speed vessels that have been in the army, they are now, all will be

in the navy and operated by the navy. we continue to build the lh a, and the lpd 17 to address the needs of the marine corps because i think that entities capability, the ability to be offshore is going to increase import in the years ahead where sovereignty concerns are going to weigh so heavily on countries as they deal with different situations. but i think any aviation area is where we are essentially renewing ourselves. joint strike fighter, in the case of the navy, proceeding on with that and airplanes are not too far from your undergoing tests at patuxent river. we have continued to procure the super hornet, which is going to be able to bridge us into the

jsf quite nicely. we have and test the g8, maritime patrol aircraft that is the replacement for the piii. that testing is going very well. we have in our squadron in norfolk, the advanced hawkeye, which really enhances the battle space awareness and, when coupled with other systems that we have in the navy, really gives us a reach and an awareness the likes of which we have never had before. i might also point out that the e2 d. does not reside in the aviation portfolio. but rather resides in our information dominance portfolio. two new helicopter series that we have, the r&l sea or a, one of the most advanced anti-service and anti-something helicopters on the planet. but i'm also very pleased with

what we've been able to do with unmanned come as peter alluded to, in a very short period of time. we had a trial deployment of fire scout, the vertical takeoff uae. there were some exciting moments on the deployment to be sure. but as i tell everybody, think i've come to find out about uavs is that they do exactly as what they are told to do. unlike most naval aviators. [laughter] >> so all you have to do is make sure you have the code right and you know exactly what it's going to do. no offense to my good friends wearing wings. but since that time we have pressed uav out again on another deployment on one of our frigates in support of special operations forces in the middle east, announcing hours and missions at a very steady rate, very reliable rate.

and has also been mentioned, because of the capability of that aircraft, we have deployed some of them into afghanistan to support ground troops. and as we put this unmanned enterprise together, the direction that i gave to my people is, it has to be flexible. it has to be movable, it has to be agile. and we're not going to be constrained by saying it's a naval capability, it will operate on naval ships. we want to be flexible. if someone says i need a uav detachment, you pick it, we will provide that. and it may be on a ship. it may be a chore, or it may be on some platform off the coast of some country, which i think gives tremendous potential for maritime awareness. we continue to fly the

demonstrator, broad area maritime surveillance system in the middle east. it is worth it's weight in gold. we deployed the first demonstrator there a couple of years ago for a proof of concept. we're wondering where it is because it's not come back. but i think that's the value of it. and we are continuing that program in our budget, because i think that's going to give us along the well that we need. i was extraordinarily pleased with the flights of the x. 47 be, the carrier version of our uav. it's a flying wing. some of you may have seen the clip. flights went very well. the airplane performs very well. the landing was dead on, which in carrier aviation is

critically important because you don't have a lot of real estate to work with. and we remain committed to getting a squadron of u-class aboard april aircraft carrier by 2018 and we will press to do that. so could focus there. the control system for the u-class is in aching air, and in a hornet circuit so that we can continue to refine the process. and what for us is a bit more challenging on how to violate that for most, because the extraordinarily dense electromagnetic environment around our ships at sea. and so, that's a capability and that is a feature of our unmanned systems that would pay a great deal of attention to. but i would also say that, you know, the naval aviation i think is a pretty exciting place. in fact, if you're a young

sailor our officer coming into naval aviation today, you are looking at an entirely new fleet. .. in the session that i had here a couple of years ago, and in different venues where i have had the opportunity to speak about unmanned systems, i've challenged the technical community, the research

community, the academic community to give us power. and unmanned, underwater systems, safe, shipboard, long duration power is the coin of the realm. i've been extraordinarily pleased with the response that we've received and some of the durations that we're now beginning to see in that technology. i'm also pleased with some of the tests that we have run with networked unmanned, underwater systems that i think will have the potential, if we do right, of changing the underwater domain. so, the fact that we, when we talk unmanned, we tend toe look up in the sky. i look underwater because that is an area where you can truly change naval warfare. i would just say that some of the challenges that i think we face and i talked

about, you know, tardiness and how that could rob us of opportunity. the need to compress the cycle, compress the timeline of being able to take concepts, to being able to take test vehicles and get them out there, that compression is going to become increasingly important. i've worked over the last couple of years to make sure that we're not injecting more time in the process than we have to particularly as you take it through what i think in many instances are lengthy developmental and operational test and evaluation processes. i think we have to be able to do that. we have to have a very serious discussion as we are in the navy about what the bandwidth requirements are, what are the network requirements and as new

systems come on, it's great we're designing a new system that can do x, y, or z, but if you're relying on existing networks to do that, existing data links, they're pretty well-saturated particularly when you're dealing with the maritime environment where our pipes going on and off ships are somewhat a bit more restricted than what you may find in terrestrial applications. so taking a good hard look at that. taking a look at the architectures that we want to have in place. also examining in the navy how we would be introducing these into our fleet. and we have not elected to develop separate organizations that will deal with our unmanned systems, particularly on the aviation side. the original plan as these were first envisioned was to

be able to put separate squadrons together of a vtuav or a u-class or a, or the bams for example. i can't afford the overhead and i think the overhead is excessive when we do that and so you will see in the navy dtuavs becoming part of helicopter squardrons. bams becoming part of the ph squardrons where we will be operating them in an integrated way. and to think of the battle space not as unmanned mission or manned mission but how do you bring the two together. i think the other thing that will be important as we go forward and this is sometimes more challenging than it may appear on the surface, is how can we fail well? how can we realize that we're riding something that is not paying off for us, divest of it, and get out of it cleanly?

and move onto something else without penalty. and the system in which we work, i think those who have worked in the system know that can be one of the hardest things to do in washington. to admit that something isn't working. that the money that was invested was invested with due diligence but that the technical leap we were trying to make didn't deliver and therefore we move forward, no harm, no foul. let's get on with it and do something else. i think if we want to be truly innovative, we have to get beyond the impediment that keeps us from being able to do it. some of the other work that we are doing, particularly with a group that i have chartered up in, at our war college in newport that works for me, the strategic studies group, a group that reconstitutes every year about a dozen or so bright

navy captains and have an air force colonel, marine colonel and a coast guard captain on there, is to, look at different things that are of interest to me. i personally write the tasking letter which consists of less than a page to them. it is their work delivered on our unmanned focus. their work that delivered on the creation of n26 and 10th fleet and information dominance corps. last week year they did work on energy. this year they're working on a new computing environment for the navy because i was struck when i pulled my droid out of my pocket and i look at the big computer i have sitting on my desk i can extract more and do more with that little thing i hold in my hand. so what i've chartered them to do is talk to me about how we can rethink, how we move information and how

we're able to tap into information in a very, very secure way. i won't go into the busyness of the navy today because what i had been talking about is the future. the but, but suffice it to say that we have been rather busy and i think that what we have also done in the last couple of months is reaffirm the strategy that we issued with the coast guard and the marine corps about 3 1/2 years ago. i always get the question, you know, is the strategy going to be rewritten? are you going to rewrite the strategy? if you recall, the strategy calls for six capabilities that we want to be able to field. we want to be global. we want to be a deterrent force both with our nuclear deterrent but also with our conventional force structure. exercise sea control.

project power, conduct maritime security and provide humanitarian assistance, disaster response. coincidentally, someone at a venue not unlike this asked me that question, when are you going to rewrite the strategy? that question happened to be asked when i knew what we were going to do in libya but it had not been out in the public yet. so i thought about that question and i said, let's see, deterrent forces on patrol as it has been for decades. two aircraft carriers are sitting in the north arabian sea as we see changes sweeping across the middle east. not a bad conventional deterrent force that's down there knew what we were going to be doing in libya. projecting power, controlling the sea and access to the ports there. sea control. go a little farther to the east, we were conducting counter piracy operations off the coast of somalia with a strange group of countries to include china and russia and india and

every once in a while iran comes down and spends a little bit of time there. that is maritime security. and then at the same time we had the ronald reagan strike group that was en route to a combat deployment in centcom pulled off within one day's notice and provided humanitarian assistance into japan. and so if we question the relevance of, the strategy, the capabilities that we continue to see employed around the world that one snapshot in time kind of captured it all. the question for us now is, how do we advance the capabilitiesw do we anticipate e future? how do we properly develop the human capital that will operate these new systems? and then how do we control the total ownership costs? and that's where i spend a lot of time thinking. so with that, i will stop. i have spoken far too long.

hopefully it primed the pump a bit and i look forward to your questions. [applause] >> why don't you join me here, okay? i'm going to abuse the moderator by asking the first question. so you quoted perhaps the greatest italian philosopher machiavelli. i'm going to counter with the greatest american philosopher, mark twain. and he said -- >> by the way i have him loaded on my droid. >> he said that history doesn't repeat itself but it rhymes. and i particularly appreciated the way you referenced certain parallels you saw in terms of technologies that had

previously transformed naval warfare such as the plane, such as nuclear power. i wanted to maybe press to you dig a little bit deeper for us in terms of your views on two questions. one is, where in the history of, say those parallel technologies and experiences do you think we might be today? and then the second is, what are the lessons that you draw from those experiences both in terms of maybe positive choices they made back then or false pathways they went down into? what are the lessons that you draw out of this other than perhaps i was thinking we need to find the great, great-grandson of that navy contract officer back in 1911 who figured out how to get a new plane out there in three months. that is one lesson we can draw. but what are the larger ones? >> i think when you ask the question where do i think we are, if i could go to naval

aviation, i would say that we're probably in 1938, 1937. we have the concepts. we have the tools, if you will but the leaders in 1938 probably didn't envision midway. which was really the, in my mind the real advent of carrier aviation, not just on the part of the united states navy but also on the part of the japanese imperial navy. and so i think that we have the things we need but how it all comes together and how you use it in conflict

really didn't come to pass until then. so i think we are moving down that path. i believe we're putting some structures in place. we're developing the skills. we're now starting to, excuse me, beginning to develop the numbers of people who are truly becoming quite expert in that. and as i go around and i visit our young operators in the information dominance area, they're pretty good. but how does it all synchronize? i think we're kind of on the edge of jumping into that. i would then like to go to the nuclear power analogy and i think at that's one of the greatest stories of perseverance and bringing new technology, quite frankly, very disruptive technology, into an

organization that ultimately transformed naval warfare. what i would like to be able to take away from that is the discipline with which we did then and continue to operate that, that capability because i do believe that even though we want in the world of information, to allow the innovation to flow because of the security issues, that same type of discipline and process. and as we train very high-end operators, what are the expectations, what are the standards, what are the steps that we take those people through. so, kind of blended the answer there a little bit but i think those are some of the things that we really need to think about. because kind of touching back on the security piece, you know, we've looked long and hard for example, how do you use information, some of

the new mediums and applications and, and you immediately, you immediately are drawn into the security dimension. so how do you balance the benefit and the security? what are the protocols you use and i think that being somewhat risk-averse we tend to default very hard onto the security side and i think that can stifle the usage. we in the navy have gone through that debate. we have become quite avid advocates for the use of social media and how we move things around. and, so i think it's, you know, that's an area where we have got to get the protocols, the security, the standards right but not lose sight of it. just as a current example. when i got up the last few days, i've been getting up

in the morning and i get great reports from people in the field about we did this. this is the stas tus. i've been watching the water coming down the mississippi. why do i watch that? we have a base last year that does all of our personal activity that flooded out. shut the navy personnel system down. getting great reports from the commanders but i go on mill linkton he is facebook page and i can find out exactly what is going on and what people are doing about it and how they feel about it and the level of anxiety that exists. i can't pull that from a normal report. so how do we want to use that sort of, you know, idea or technology? so, it is pretty exciting actually. >> great, thank you. so we have lots of questions. what i'd like to ask is, wait for the mike. please introduce yourself

and all questions end with a question mark. so why not up front there. >> dane fulgum, aviation week. there is a lot of concern whether the technology you're investing in during the libyan operation during the cyber operations. were there enough cyber and electronic attack used there to validate your need for that against what many considered a really third-rate power? >> yeah. let me just touch on the electronic attack first if i could. i'm going to fog the cyber business a little bit because of, not wanting to get into areas that i shouldn't but electronic attack. i would submit that a story of the value of electronic

attack but also the agility of it. my view is when you, when you talk about a third-rate power i don't consider our avery eightores flying into an air defense system of a third-rate power any less critical than going into an air defense system of a high-end power. i think it has to be taken very seriously because of the proliferation of systems that we see around the world. so my sense is you're always going to have to go in and effect that system electronically before you do anything kineticly to it. as you know, we in the last couple of years have been directed and we are very much wanted the mission to take up the broader electronic attack mission

and that led to the additional procurement of the growlers that the navy has. the grueler squadron, first grauler deployment squadron into iraq they recovered from a mission in iraq. 47 hours they launched into a combat mission into in libya from a airbase in italy. that is pretty extraordinary as far as capability to do that. it would have been better not to move that squadron that is why we're investing in growler. i think electronic attack will become increasingly important. it figures prominently into our information dominance portfolios not just in electronic attack that's carried on board our airplanes but also the electronic suites we're continuing to advance on our surface ships and our

submarines. i do in the cyber side i do believe that whether it's a submarine or a ship or an airplane but particularly a submarine i think can be an extraordinary system this which -- in which to participate in cyber operations particularly the way that we tend to rely more and more on mobile capability. so i think that, you know, those are areas that we have focused on, that we're putting significant investment into and it's a major part of what we're doing. >> so is the answer then yes you did use those capabilities in libya and yes they did prove themselves valuable and -- >> yes. >> okay, right there. >> retired navy officer and consultant on chinese security affairs. admiral, you will, you mentioned machiavelli so

often you will be associated with it. but you said tardiness robs of opportunity yet you seem to be satisfied with 2018 for the board carriers. i kind of associate maybe incorrectly, some urgency with ucas, with the chinese asbm, antiship ballistic missile. is that the best we can do and is that the best we should stick with and do you make that association? >> i think if i have any of my staff in here when there's an ioc beyond 2013, they know i become pretty irate over that but, no, you by think that what we're doing is is, particularly moving on to ucas, u-class, i think that if, if we can deploy a squadron of u-class on board an aircraft carrier in the next seven years,

given where we are today, given the environment in which we'll, the, as i said the electromagnetic environment of the carrier, the nature of everything else that's still going on the aircraft carrier, where we are with ucas, where we want to get to u-class the fact we're stipulating we want a squadron on board, that's pretty rapid. i'm not saying i'm satisfied with it but, but that type of technology and the application of that technology is, that's at a pretty good clip. at the same time continuing to invest in the types of capabilities that we are with the jsf, the additional superhornets and keeping all those investments balanced, i'm satisfied with that. but if someone were to come

in and say, hey, i will give it to you in 2016 at the same price, i will take them up on it. >> give some folks a little further in the back. >> bob finkelstein, robotic technology. a couple decades ago there was the concept of the arsenal ship, combat vessel that would be unmanned or largely umanned and heavily weaponed. since then the technology is advanced considerably. so is there any interest in revisiting the concept to take another look at it? >> i would say that what you saw employed in libya is not a bad arsenal ship. it was the ssgn. happened to be in the mediterranean at the time and was able to, you know, send quite a few missiles in toward libya but to the

point of a surface ship that would be an arsenal ship, no. again, i think we have to look at all of the capabilities that we have in place and, and the nature of the developmental costs that we're dealing with. the fact that we can now integrate our systems in such that i think the future is going to be, it is going to be very realistic for one ship to be shooting off of somebody else's information and so i think we'll see the type of concept arsenal ship was envisioned to have but at the present time taking a blank sheet of paper, designing an arsenal ship, not on, not in my plan right now. >> i want to push a little bit further not on the

arsenal ship side but on the idea as you noted we're getting to the ability to shoot off of someone else's knowledge. one of the keys within air-sea battle doctrine is not just that kind of exchange of information in terms of targeting but inverse in terms of vulnerability, depending on someone else to guard your systems particularly such as in air defense or the like. and to go back to the prior question against ballistic missiles. are you satisfied right now with where we're at in the exchange of information, not just within the maritime environment but perhaps cross-services within that air-sea battle doctrine sort of vision? >> yeah. i think the air-sea battle process and integration was really quite remarkable. the openness of that the services had, navy and

marine corps are pretty open because we're all working off the same, you know, the same budget but, in the case of the air force and the navy, our teams were integrated. we opened programs to one another that never have been open to one another before. and so the ability to go forward together and look at where there is a gap, where is there redundancy, where do you want redundancy? where do you think you have to have increased capacity? all of that has been very, very openly vetted and i believe we've been able to make some, you know, far better decisions than we would have in we had stayed the, on the old path. so i was pleased with that. >> okay. right there.

>> john harper with the dsi. have you seen the evidence that the chinese are working on uavs and are you concerned about the potential of that happening? >> yeah. there's no question in my mind that china as well as many other countries are working on uavs. i think that they have kind of captured the imagination and, you know, not only are the countries that have the more tech lodge cali advanced -- technologically ad vansed militaries are working on them but you can go buy them if you want to. so i think uavs are here to stay and be advanced. i would also submit that, and i touched on it earlier, the key will not only be to getted good vehicle but how do you move the information, how do you sense the information and then how does that information find

its way into the operational decision-making or into the kinetic result that you're seeking? so having, you know, the thing that i look at is, the fact somebody has a uav is interesting. how is it being used? how is it being networked? and then what are the, you know, what are the capabilities? but it's one thing to have it. it's another thing to use it effectively. so that's where my interest goes is, as soon as i get a sense somebody has a uav i try to dig in deeper and see, how is it being used and quite frankly, what are the potential vulnerabilities of it? because that's, that's part of the game as well. i think we tend to take a lot of weapons developments and think in terms of, you know, it exists. therefore i'm at a disadvantage as opposed to, it exists, therefore how do i seek an advantage. i think that is part of how

we have to look at naval warfare, indeed all warfare particularly in the information world. there are a lot of benefits to be gained but there are also vulnerabilities almost at every turn. >> as a writer i can't resist. there are 44 other nations besides the united states are building, buying and using military robotics. so the historic parallel you laid out for naval aviation, in many ways another part of that parallel is the wrestling everyone is going through to figure out what's the best doctrine for utilizing them? i think we've got time for one more question. right there in the, right there. actually, we need to give an air force guy a chance. driver? >> colonel farrington with the office of naval med assessment. you walked us through a couple transformations as far as the navy gone through, aviation and nuclear