electronics show on capitol which one needs to approach the topic with a certain degree of hill. reality and humility which is that if you go to any halfway decent and any decent or halfway decent agency, if it's doing its job, it's not going to open its secrets to you so in the interest of truth and advertising, i think one should acknowledge that when we say that we are talking about inside the isi today perhaps there's few people who can take you inside the isi. it's a bit like the blind man and the elephant that greek analysts, perhaps some more than others will be able to put their hands on different parts of the animal and announce it a horse .. or a cam mel. -- camel. [laughter] i think an issue that constantly is raised that karen has addressed is whether the isi is

aton mouse or a rogue agency. the answer is, and i agree with her, is no. the reason for that is historically the isi was under the military, then it became responsible to the prime minister of pakistan which occurred during the prime minister's lead, and he created the first political wing of the isi. it focused interests from counterintelligence and external facing agency, the one that was used as a tool by government to keep track of political opponents and to ma nape lit -- manipulate political systems to take advantage of the government. both civilians and military rulers and the military rulers have had ruled the longest.

if you look at the two long stints, they have both civilian and military rulers have effectively in the isi as a tool for controlling domestic dissent and have used the intelligence capabilities of the agency in order to keep tabs on and in order to manipulate the system to their advantage including elections. however, if you look at the overall record of the agency, which is comparing its country intelligence operations and its external operations with its ain't to monitor and gauge -- ability to monitor and gauge what's happening inside the country, i come out in favor of effective organization in terms of penetrating neighboring countries effectively and gathering intelligence on native countries much more effectively

than discerning what's going on inside pakistan. a simple test that i apply to the isi historically, and this may be changing or may have >> i'm going to sit in a second. i'd like to introduce my changed, i have no idea. we can find out in the next long-term colleague and dear election to come, but if you friend, dr. walter andersen. look at the election results starting out in 1970 which was when i was preparing to go to the first time that the isi was pakistan in 2001, one of the key actively involved in trying to people at the state department manipulate an election and try and bring in a certain result and i'm deeply grateful to him, which was a divided parliament, and he is at the south asian it fails miserably in predicting studies program, and we'd also the right results, and after want to thank you and that's to that, almost every election the isi's preductions have been 180 anne and peter for their support degrees off target which means to middle east institute this is not their strength. programs that has made the lunch however, like many -- like a bad available to all of us, so walter, thank you for coach in a sporting league, moderating, and thank you for a sometimes you don't want to change your game, and so there superb panel for this decision. has been this persistent effort

at trying to spread as far and >> thank you, wendy. wide within the country as possible. now, interestingly, the isi does this is the first of what we expect to be several collaborative programs with the have in each the capitols, one institute and others, and as you who looks after what's happening can see from the turnout, this inside the province. is, you know, a topic obviously pakistan is a huge country. of high interest in this town. the population of 185 million. there is no way on earth that this program is the first of any agency including the isi collaborative programs between should be able to keep tabs, and us and the middle east institute, and it is about the to be able to control intelligence and services information close particularly in today's age with technology, institute, agency, which is the cell phones, sms, it's making it largest and most important impossible for this rule to agency in pakistan. from the beginning, the most exist in most of these senior post of the agency was countries. hailed by military officers, and there has been a perverse effect the agencies under the control of this relationship between the of the chief of army staff, and authoritarian rule and the isi any doubt of that was removed in whether it's civilian or military, and that is where the the summer of 2008 when prime

boundary is between the military and politics. it has made the isi in my view minister kayani announced it less effective over time because would be moved to the department instead of relying on the rule of interior, and the army that the best policy is -- protested. rule is policy neutral, they the isi has been among mass went to policymaking and policy advice of different rulers in scrutiny because of the groups pakistan. when that happens, it's in the links to the taliban that business of second guessing. attacked u.s. and nato troops in for instance, even in this afghanistan as well as troops country with the slam dunk that have been identified as terrorists like the ones in approach to the iraq invasion. charge with the attack in mumbai when intelligence tries to second guess what the political in 2008. the recent killing of the os bin leadership wants, that's when the mic -- laden by navy seals was close to mistakes are made and good intelligence on the ground level is ignored in favor of what one of their academies gave rise policies the leadership wants to see and demand so that's to unusually intense criticism something that has affected the of the isi because they didn't isi overtime. in terms of the current

find him in the several years he relationships, i would agree was resident in this place, or with what karen has said that perhaps they had even been primarily the isi today is under involved in enabling him to direct military control which remain. means its taking its the event without informing the instructions more from the chief of army staff and not even the chairman of the joint chiefs of staff, although it's a joint sis underscores the distrust services agency. they are not taking instructions between the u.s. and the from the prime minister. organization, but whatever the reason for that is quite questions there are about the isi's links to militant groups clearly the government in pakistan seated control over many aspects of policy through like the afghan-taliban and the military. it has failed to muster support others, the isi has a record of within its extremely fractured working closely with the u.s. to and weak coalition to be able to pursue the remanents of have a solid voice on relationships with india, al-qaeda, and its continued afghanistan, with the united cooperation will play an important role in the outcome of states on nuclear issues. afghanistan. we preceded this ground, and as questions, however, i'm sure the a result, the isi turns to panel is going to get into this, others for instructions. is whether pakistan has a the reason why he was elected as was said before, he didn't have

an intelligence background. deliberate policy towards it was primarily because he was afghanistan and by attention by the united states. that is, is it supporting the notion of spobility in a close friend of haqqani and afghanistan on one hand and continues to be close to him. he was a reluctant appointee to simultaneously supporting some militant groups that could then the post and reluck at that particular time to accept -- give pakistan's foreign policy reluctant to accept the position also. only he can clarify the agenda and in india. situation, but the fact he was now, we have problems the most from outside means there's now a -- perhaps the most knowledgeable people in washington talk about direct relationship tween the the topics today, and let me army chief and the head of the introduce the speaker here. isi. by all accounts. shuja nawaz, that i've known traditional approach presented a pam of three by the prime almost since the day he landed minister, and the prime minister in washington, and i've kept in made a choice from the panel or touch with him ever since. outside the panel which is what happened at the time when prime he was for many years with the international mop tear fund, and -- minister chose one completely monetary fund, and when there, he headed three divisions of his outside the orbit of the choices tenure. given to him by the military among many writings about chief at that time.

pakistan in the military, are three books, and proablg the an interesting illustration of best book on pakistan's the blurring distinctions military, "pakistan, its army, occurred recently after the and the wars within". osama bin laden raid, which was second speaker is arturo munoz the joint session of who is a senior political parliament. the same joint session where an scientist at the rand attempt was made to kabul cooperation, and prior to that together a single voice on how he was for 29 years in the cia to approach relationships as directer of operations and against terrorism, military, and directer of intelligence responsible for planning and the united states in the wake of implementing programs on counter the bin laden raid, and what was terrorism, counterinsurgency, fascinating about this was it and counternarcotics. was not the army chief or the the third speaker is karen deyoung, a senior chief closely involved with the defense of the country who were correspondent, works with the brought in to brief the joint session of parliament, but it was the head of the isi that was brought in, and what was also congress on foreign and news operations, and she wrote a fascinating was that for the fantastic piece in the post over first time in pakistan's history, director general of the the weekend regarding the isi actually publicly has activities or the ability of reported to offered his

insurgent groups to vacate bomb resignation, and it was not accepted. making facilities after they had now, whether this was staged or a reality, it is hard to been -- after the pakistani authorities discern, but the fact this happened was a first in had been informed of the facilities. pakistan's history. next year, i'll be heading the south asian program. most of you have come here to get answers to important the isi was traditionally seen questions regarding pakistan's as a back door for appointments except for the head of the isi. premier military organization, and i have a few myself, and let all the other people essentially me through them out now, and went there ending retirement, hopefully the speakers will and then they'd be sophisticated, and that was the answer them and we can get to end of it. well, again, now as the routine them in the questions and answers. what's the relationship of the and this perhaps fathers the fact that general haqqani was isi to the groups like the promoted to army chief after being director of isi, some of hakani network? the main reason is to gather the key core commanders in the information or november pakistani army today are held close to the isi. i should mention, again, on the support? second, if there are relations with the militant groups, at structural organization.

if you are confused, go on to what level are the isi links the internet and see many of the maintained, and to what extent do officers have with working authoritative pieces written by with jihadis is with loyal hi to my friends in india who seem to have every detail of the isi structured. the military as loyal loyalty in you just have to follow them year to year, get completely the cause? confused by how its structured. another question is whether well, i'm going to confuse you chief of army staff, haqqani and further. based on whatever i can find out, and i can't find out a lot because i never penetrate the resulted in any changeses in the isi. i believe there's six wings of mission of the organization, and the larger issue is whether the the uses, and -- isi needs to be reformed. isi and there's six major generals under the command of fourth is does the announcement in late 2008 of the termination the direct general, and when these major generals are either of the political cell in the isi at the end of their term or are mean that his ceasing to involve promoted. i referred to the promotions, itself in pakistan politics? the key core commanders, including the ones in lahor are fifth, maybe the hardest to answer because the generals of the isi which means classifications involved, what

is the likely nature of the it is now seen as a very relationship of the isi and the necessary professional step in cia, and are the present the progress of one's career tensions between the two organizations likely to within pakistan military, and it continue? i can almost give an answer to that right here. no longer has the stigma that [laughter] was once associated with it. we can start with karen karen, the isi was once seen as a dead end as your career. and if you can speak here at the now, i spoke about the effectiveness of the external podium . facing aspects of the isi. >> thank you, walter, and thank externally, it's due to the fact you, all, for coming. that there's no an nexus between i have to start with a disclaimer which i'm not an expert on the isi. counterterrorism and up surgeon my relationship with them is sigh -- what i would call transactional insurgency in pakistan. which is the word that the the isi and military pakistanis always use about in a intelligence reports directly to the army chief and that resides negative sense about their at the army headquarters, and relations with the united states, that the united states is interested in its specific i'm not sure they have the kind goals and what it wants, when it of coordination that would be wants it, but not anything long ideal. there's a very powerful mi

term. i say my relationship is with military intelligence presence, b there is often a crossing of them because i want to know when i want to know it like all wires between them, but what's worse is there's at least 19 journalists, and sometimes they other agencies inside pakistan and our own intelligence people that come under the civilian cooperate, and most of the time they don't, but i want to talk setup. these are different agencies just a little bit by way of including the federal introduction to the true experts investigative agency, and there's almost no coordination twine the military and the civil on this organization of current in terms of counterterrorism or events and where the isi fits in and what u.s. intelligence thinks about them. counterintelligence inside the country, and so they are it's important, i think, to make probably any number of stone a couple of initial points, and fights that exist which make the one is to acknowledge how much job of any and all of these we, we being the united states, agencies so much harder. don't know. i should say though that the isi i think the cia as walter is now entering the 21st indicated is constantly frustrated with isi, has really century, has become extremely conscious of media involvement very little knowledge about how it operates, and where it's pressure points are. and relationships with the media and think tanks and reaching out there's certain things they and trying to arrange it, and believe about the isi, but little things they actually this could be a good thing, but

know. to understand this, i would ask it can enhance the sense of you to consider a reverse situation. controlling the meet ya, and sometime -- if pakistan wanted information media, and sometimes my feeling is that the isi may think out of the united states had foreign media come under the sent a level of intelligence same briefings and control that operatives and drones and some pakistan's media are overhead surveillance to this susceptible to at home. country in order to find out what they wanted to know, this creates a difficulty in a way that the isi or the country reporting back home on the as a whole and its leadership organization to the cia, who was deals with media inside of who, who was giving the orders, pakistan. it's a suspicion it's a member to what extent were they of the foreign media are too organizing crime in this active running around the country, politics, or anything country asking questions, then else, how accurate do you think they must be cia. of course, some recent cases, the information would be and how deeply would they be able to pen and there may be others that strait the intelligence -- will probably come to light as penetrate the intelligence organization here? the relationship deteriorates the second point is one that's sometimes lost in discussions of between the u.s. and pakistan, the cia because of the -- excuse is going to further strengthing me, the isi, because we tend to their pair know ya. compare it to the cia, and that is that it's not that the isi is there's also legal issues that deal with the fact over any

related to the military in pakistan. it is the military in pakistan. extended period of rule, the it is not an independent agency, legal pictures and constraints although as i'm sure among the that existed on the military and the isi in dealing with the points today, there's a belief that some people act population of pakistan have been independently. they are believed to be rogue removed so for instance, there is no reel authority or any agents, but i don't think that it's a rogue agency in that military organization or the isi to be able to arrest people. sense. they do not have constitutional cover for that. agents and officers are in the they are so routine because the military, as walter said, its military and the government were heads, are, in fact, military officers, who in the rest past all in one hand. did not come from intelligence it was the regime who epitomized backgrounds, but from active duty military backgrounds. they are not necessarily trained and warned the chief of army staff as well as the president of pakistan, so he didn't in intelligence. matter. it's a puzzle always for u.s. they were not going to complain, and that legacy is creating policymakers and for u.s. problems even today for pakistan intelligence to try to whether it is treatment of understand where the dividing line is between what's possibly rogue, what's not rogue, what is journalists, whether it's the killing of the journalists.

the objective of the pakistani when the public starts military versus the objective of complaining about it, it creates a new legal problem, and the intelligence. most recently, as was mentioned, question is when will the supreme court take some more we had the case of osama bin notice of something like this? when that happens, pakistan's laden, and the united states as already very fragile quality it tries continually to figure out who knew what in pakistan, will be further fractured, and they are focus fairly intently we don't know how badly. on the leadership of both the i'm going to stop here and military and the isi, and you hopefully answer some questions and we can provide more insights won't be surprised to learn that as a group, thank you. they sometimes listen in to their conversations, and they were particularly interested in [applause] how much surprise was expressed by general haqqani and the head of the isi when they learned of the os psalm ma bin laden operation. they did voice analysis to determine how surprise that >> i want to start my remarks reaction was. of course, they were surprised mentioning that isi when it was that osama bin laden was dead, first created was just military but the conclusion also was that

they were surprised to know he intelligence service like any was there. other in the world. clearly, somebody knew he was i read that an officer actually there. not only as was mentioned that played a key role in organizing it's a military town, but lots of isi installation. the isi in the beginning. isi in general is very involved the isi changed dramatically in domestic security. it watches people, watches diplomats, watches journalists, during the regime, and the event watches political figures. it watches foreigners, and it watches pakistanis. as many in this country says, it that was critical in changing the isi was actually the defies logic that nobody with the power to help maintain this american core action program in compound knew about it. the question is who knew and how afghanistan against the soviet high did it go within that union because isi became the key organization? a few weeks after bin laden's death, mark grossman, the intermediary, the key special representative for afghanistan and pakistan and the interlocker or the key mechanism cia director traveled to islam by which american aid reached the mujahedeen. the americans by and large

bad to talk to the civilian didn't give the assistance. i'll talk about weapons, money, leadership. they were given lots of complaints as u.s. officials so forth, directly to the always are about the u.s. level mujahedeen. of cooperation saying they did it through isi, so essentially that you americans are always tells us you know isi's role greatly increased. where these bad people are, but you never give us the proof of it, and you never tell us where its sized greatly increased, and you know they are, and so how do you expect us to find them, and they said that they were it's function greatly increased during that period, and not prepared to open a new level of solely because the action of the cooperation and intelligence soviet union, but i would say sharing with the pakistanis, and that's a major factor so among other things, they showed ironically as we contemplate them video surveillance taken by years later all the conflicts between ourselves and isi, you satellites of two ied factories know, it's important to keep in and one of them in a girl's mind that their origins are very school in the main city of north much mixed up with our foreign policy. you know, from their beginnings. there's a question that's been and one was run by an afghan

raised is the isi intelligence group based in pakistan, and another was run by people competitive with us or cooperative? well, i would say it's both in affiliated directly with al-qaeda. my mind because as we, you know, they gave paragraphs and information about various the whole world is asking how weapons, posts, and it was not could they not know about bin the first time they were given photographs. in a number of meetings over the years, the americans have said, look, you keep saying you can't laden in abbottabad? find haqqani. how is it possible isi didn't pakistanis too. they maintain that he spends know? most people conclude, well, they more than half his time in did know. pakistan, and the americans have most suggests they are not a lot of soldiers there, and why cooperationive, however, we can't they find him? should not suggest the fact that how do they expect the pakistanis to find him if they can't? on a number of occasions, americans have given him many other al-qaeda theaters and haqqani's photographs in what operatives were captured or they say are his headquarters killed in pakistan with isi's and another military operation, and yet, the pakistanis have not assistance. well, they have been providing done anything about it.

within days of this meeting that assistance, and one explanation they had in islamabad, further of this competitive versus a satellite surveillance shows the buildings being evacuated, and cooperative issue i thinkset by the time the pakistani military actually did go there some three weeks later, they jones or -- what's his name? found that the ied factories had been abandoned, so clearly somebody tipped them off, but, again, who? tallace addresses it. in 2001, when we pressured the haqqani? no, nobody thinks that. pakistanis to help us and they are proud of the isi whose participate in the war on terror, we did not insist that origins date from the founding of the pakistani state. as i said, it's in charge of they drop ties with the taliban at that time. certainly foreign intelligence, we were very much foe doesed -- but also to a great extent focused on al-qaeda, so isi domestic intelligence, coordinating the intelligence said, fine, we'll cooperate on functions of all three military services, the army, the-and-a-half vie, and the air al-qaeda, but they didn't say -- anything about the taliban or some of the other groups. it just wasn't brought up, and we didn't insist, so the isi navy, and the air force.

they conduct operations of people inside and outside the continued their relationship country and charged with with these groups while they protecting pakistan's interest as a regional power base in south asia, and that, i think, targeted al-qaeda in assisting is a subject that has led to a lot of the problems now. us. protecting pakistan as a regional power base meant many an impression i got during that things. it was meant that when the period was that there was also soviet union occupied something else to it beside what afghanistan right next door, i just said, and that other pakistan and the isi saw it in their interest to cooperate with issue was that the differing the united states and others in funding, training, and in threat perceptions of the pakistan's case, providing pakistani's regarding the threats that they face, i think facilities on the ground for the forces who were fighting the the isi considered some of these soviet occupiers. al-qaeda individuals as threats it means pakistan undertook a to them, to pakistan, and to the similar strategy with kashmir isi because they're not under with groups of militant fighters patrol, but they did not consider the taliban as a in that region to set off the threat, and if you look at all indian threat. as far as pakistan's concerned, the arrests that were done with both threats to its national security continue. as pakistan sees it, india the staps of the isi, a lot of

remains the major national them were in the settled areas, security threat. an afghanistan is a subset of you know, the cities, the urban the same threat, and so pakistan areas because i think that the isi considered these al-qaeda continues in varying degrees to leaders and al-qaeda operatives support those groups. as far as the united states is a threat in pakistan urban areas concerned, di banding and shutting down the groups is a to pakistan. no-brainer. it would make the tasks in however, they didn't consider afghanistan much easier, and to u.s. officials, the ongoing taliban guerrillas in the anonymity between the two makes mountains of the northern neither political or economic province as a threat, and by the sense for pakistan. the extremist groups themselves way, yes, the northwest frontier and their affiliates, however, now pose a threat to pakistan itself launching attacks killing of the country is high-level officials and a lot of pakistani civilians, but also has struck against the pakistani lashkar-e-taiba. military itself. if pakistan trusts neither the i'm familiar. this happened at a time when united states nor india for some some of these groups began to target the military and the reason enough to crack down hard on them. civilian populations by puts

to some extent if u.s. bombing in marketplaces, officials, and many experts employing up tribal jergas and believe, the pakistanis have actually lost control to some degree of the groups, and that's where we get back to the question whether their current attacking them directly and activities, maintaining ties attacks family of the with the haqqani networks and militaries. they did an attack at a mosque other groups who blow up which was attacking the families embassies, guest houses in kabul of the military. and try to attack president we'll recall that incident just a couple years ago. karzai are launched inside the this was an attack on muslims isi itself or are the ambitions praying in a mosque in the of rogue elements. considering the groups are not military sector so now the under the control of the isi, and assuming the pakistani militariments its own house in terrorists are tapping the military. i think the perception is better order, events like the changing as to, you know, what killing of bin laden make that is the terrorist threat to all the much harder. they owe its political and pakistan. let's ask about specifically the economic power to the perception that the country is under threat from the east and from the west, and that is the most isi role in the taliban. professional institution in the country. a lot of people have written embarrassments like these in recent months undermind that that taliban is a covert action

perception, and their favorite position within the pakistani of the isi. society and lead them to dig there's a lot of evidence to their heals in further, i think, support that thesis. with relations with the united states. thank you. [applause] if you readset jones, -- seth jones arguing that point that's very well-documented. basically, you know, that the >> thank you very much, walter and wendy for inviting me here, and, walter, for my taliban after the russian introduction. we first met in 1975 when i withdrawal, but i present moved to washington, so he didn't cover the time span so we contrary evidence because it is a wilderness of mirrors, you are both long time natives of know, it's really hard to say this city, and also important to with certainty anything, and in mention that i'm now agent at my conversations with former the atlantic town just down the taliban, they don't mention is road. i'm going to begin by is at all. acknowledging something that they talk about what they did to

karen deyoung already said in organize themselves. their world view of themselves is foreign minister, you know, he studied in pakistan, but it was not a madrassas financed by the saudi, it was just a madrassas funded by followers of a sect of his father who was killed by the communists. i don't remember the name, and he studied at the madrassas to become a maloui and didn't

understand why the americans considered calling him that. it's a higher level. it's like a college degree versus high school degree. i'm maloui. you can say it, but forevermore, he's what we call him. he describes the tieing of the turbine ceremony in the madrassas garage waiting, and this was -- graduating, and this was in pakistan, and then he returned to his hometown, and along the whole trajectory, this was the days of the civil war, you know, after the russians left, and there were roadblocks set up by militias and warlords, and they would steal from people on the

busses and cars, kidnap women and young boys. it was a disaster, a break down of society. it was warlordism and militias and criminal bands running amuck in a complete absence of law and order. when he returned, he was absolutely disgusted as to what happened to afghanistan during his absence, and then he heard about this group of islamist students, the taliban, that were forming, and he said i'm going to join them because we need to impose islamic law and order, and then he described how he sought out the taliban and joined them. he sought them out. they didn't recruit him because there was a need in afghanistan for something. now, in his whole story of the rise of the taliban, the isi is a big player. they are there, but they are not really important according to

him. now, he does describe how a lot of isi officers would wear turbines and black beards, well, beards, not necessarily black, but beards. [laughter] black turbines and beards, there we go. [laughter] they could be gray beards, even better. they were trying to pass themselves off, but everyone knew they were isi officers. sure, the isi tried to shape this movement, but the taliban themselves would dispute the -- at least the ones i know or talked to, that the wide widespread assumption in the academic literature that the taliban are isi cohort actions. all right, let's come to the present. now, in terms of current isi

support for the taliban, there's a lot of evidence on that. for example, jones says u.s. and nato officials uncovered several instances in which the isi provided evidence to taliban and other insurgents at the strategic levels. they tipped off taliban forces about the location and movement of afghan coalition forces which under minds several military operations. isi operatives were highly aggressive on collecting information on nato forces. isi members shared some of this information with the taliban. they also provided training and even list where.

they provided training, they provided intelligence. they provided strategic and operational advice to the taliban. nowadays, and the ultimate map festation of that -- manifestation came with a july 7, 2008 bombing over the indian embassy in kabul where the u.s. intelligence assessment concluded that isi agents that were involved in planning the attack which killed 54 people including the indian defense at leading president karzai to complain formally. now, the big issue is is this a rogue operation? that's really hard to say. i mean, some observers argue that these lower ranking isi officers wouldn't do what they do if they didn't have the approval of their superiors, and

it's kind of hard to imagine that the scope of the assistance to the taliban is the work of rogue isi agents that's not approved at the highest levels of their organization. now, the other issue that's debatable is to what degree does the isi answer to the army? people argue on different sides. some pakistanis, former army officers, they describe isi as a law into itself, that doesn't take its orders from the military, and they even gone so far as to say their put attacks on military personnel, and then i ask why did they do that? the answer is they want to promote instability. let me close my remarks by addressing the issue of why.

why does isi pursue this strategy, this dual strategy of cooperation and competition? i argue they still cooperate even now, and they also compete. why do they pursue that strategy ? a lot is written about the fear of encirclement by india and view the views of the islamic mill standpoints as proxy -- militants as proxies. there's been a lot written about that, and i think there's a lot to it. i think they are very concerned about indian activities and afghanistan, road building, funding two political parties and political figures. you know, india's covert action in afghanistan, the opening of

consulates, to borrow a phrase, nests of spies -- [laughter] so this is what they view is going on north of their border so it's kind of defensive their strategy. in their mind, they are not the bad guys, just protecting themselves or afghanistan by using these surrogates. now, there's been a lot written on that. i think that another almost not as much written about although it's certainly not unknown, but it's disappointment with the u.s. and lack much faith in our reliability. everybody tells you what happens when he lost interest in afghanistan and pakistan when the russians were driven out,

and so that's well known, but another, you know, episode not as well known, and, you know, i remember it well because, you know, i was involved during that period, and i witnessed this myself, but it happened in twaif, and everybody in the audience is thinking 2005, what happened in 2005? that should have disappointed anybody or promoted lack of faith in us. well, it was when nato was given command for operations in afghanistan, and, you know, there's a lot of afghans that said, you know, that's the beginning of the end, the americans are not going to stick it out. you know, the fact that the americans have placed nato as the head of the military effort formally, it just, it's the beginning of their withdrawal, and actually, i think they are

right, and we had our own political reasons for doing it, and we didn't view it that way, but i think the afghans and pakistanis perceived it that way, but that signaled lack of resolve on america's part to, you know, stick it out, to be in their for the long haul, and then, of course, that negative perception from 2005 has been tremendously exacerbated by the recent, you know, announcements and debates about how fast are we going to withdrawal? we have set a date, 2014, and now all the debates in the u.s. about how much, how fast, how soon can we stop financing the war, how fast can we pull out? well, all of this reverberates

back in pakistan and afghanistan, and i think this increases the thinking, hey, we're in this on our own, and it's useful for us to have relations with taliban commanders for our own security here after the americans leave so it's actually not that they, you know to be provocative, it's not so much that we're involved, it's that we're not involved. you know, that's why they take this -- the independence stance that they take. i know a lot of people would disagree with that, but it's just something to think about. let me end it with that. [applause] . .

an officer think that it's part of a cia agenda and the same way in which the isi deals with its own media and what does that say about the analytic capabilities? are there career officers or analysts' that own their trade crops and analytic skills and if there isn't is there a

discussion to tell the community to improve the capabilities and list capabilities? >> i think i did refer to this in my opening remarks. but there is a strong perception not just in who the isi but pakistan and the military in general there is an overarching plan by pakistan, and to which side in the military talks about this more or less is unclear. but i ran across this point of view that there is a master plan and it is often based on what people read on the internet and most often quoted a source for the discomfort of the pakistani side whether it is the isi or the military which is a much larger audience in pakistan than anywhere else in the world.

so when mckiernan publishes an analysis, they look at the events surrounding that analysis and say she must have been briefed by xy or z, and as i said, they tend to look at the domestic situation and try to see it being replicated in other countries whether it's india or the united states. as far as the analytical skills are concerned i think this is the weakest element because there is so much done at the isi particular the upper echelons and now that officers who go into the isi are looking for the next promotion. people are not coming in with a great deal of experience or an hour was this experience. they are straightforward soldiers, they see themselves as soldiers and want to go back to school during periods of the

lower ranks they tend to stay on longer. the majors perhaps and they may stay on because of age or service requirements and there now is an intelligence corps in pakistan so there's a career path in them for different intelligence operations inside the military and pakistan not necessarily the isi analysts, but they are so far down the totem pole that they are quite often meaningless and ignored by the military superior. >> can i just add to that when he was talking about the desire relatively recent to give the puerto pr presence and one of the most interesting days i had in pakistan was today's take into

the headquarters and given very flaxseed briefings on every aspect of the activities at least the foreign ones, not domestics, and one of the briefings on their view of what the americans fought, and it was fascinating because i was completely correct. it was they think we are obsessed with india because -- if they think we don't know about this, they think we are stupid about that. it was very well organized and spot on. they also have -- if they have a spokesperson for the foreign media who is extremely capable and comes over here sometimes and go south and speaks to people and comes in and speaks to us, so they are pretty sophisticated. >> could i just add one thing. she mentioned 2005 as the

watershed year and that is quite correct because at the end of 2005 in 2006 military intelligence headquarters did an analysis looking historical to the u.s. pakistan engagement and came to the conclusion that the u.s. is now ready to pull out and so they started preparing themselves for that a bunch relative. so that was an internal analysis. >> a question in the front and then we will go back here. i will introduce it she is with us here at our annual fellow. we have one every year from pakistan who teaches and next year we plan to have a more robust plan on pakistan. >> the question that you raised in your introduction you can answer as to questions basically. first, is it another question of academic nature, to any

intelligence agency in pakistan, india, afghani or anything not from the region. if some even from such agency or any who are no longer associated engage in support of terrorists or violence and the agency is not supporting them should be held as possible? number one. and the second question is for isi specific isi organizations which have been engaged in violence and terrorist acts as

they are not supporting them any more and these organizations still go ahead and engage in terrorist acts without the endorsement of the isi. should isi still be responsible thank you. >> who would like to start that? >> i would think that it's generally said that retired isi agents. i would think if they aren't involved in things the pakistani government has said officially then it does not support and are arguably violations of the law. if they don't want to be held responsible they would take some kind of action against them. and on the second question, if they no longer support those groups, i think that would

behoove them to take stronger actions against them and a great example where you have had the trials delayed for years now. you have ostensibly the leadership under house arrest, but in the view of pretty much everybody still controlling their organization and so it becomes a question of not necessarily holding them responsible but seeing them to take action against these people doing things they themselves set are contrary to the interests of pakistan and policy and many cases the relations of law. >> anyone else? >> i can add something to this. i feel what really complicates the situation, karen come is not that there's any dishonor or lack of desire to take action because the legal framework and procedural system in pakistan is so weak in endorsing terrorism that there isn't enough

political police forensic work that is done to support any of these cases. and so, we get caught in a very interesting paradoxical situation from the outside where we demand immediate action as if it were the system while supporting the democratic so why don't think pakistan were the rule all has to be followed, and if the rule all demands evidence along a certain part and that evidence is missing the judgment is overturned which is what has been happening. so they've resorted to putting people and remand for the sixth period and then extending it at some point. i think the clause goes back to the time president bush rf decided he wanted to make use of india and wanted to shut off the infiltration across the line of control. at that point, there was no plan

on how to demobilize, d what a nice comedy radicalize the groups. they just cut them loose and when they cut them loose, they lost the ability to be able to control them to a large extent. many of the former handlers ended up going over to the organizations but now work financially autonomous. the other resources of money. so they could operate effectively. >> we of one question i think the man in the blue shirt. could you -- i will come back to you we will go from side to side. introduce yourself and then ask a question. >> [inaudible]

[inaudible] >> do you want to take a stab at the first question? [laughter] >> there is a history, the cia is the one that called the action program and i guess the soviets. so, there was a long history of involvement -- >> and why they make it better. [laughter] >> what about the second part of

your question? what was the second part? >> what i hear from pakistanis during the audience may be vacant, and what pakistan is actually think but no, they don't say that india is going to take over pakistan and like reincorporate it. that's not what i hear. what i hear is in the ones to destabilize pakistan and keep it week so it can manipulate it better and that is why they are supporting the belushi insurgency. >> okay. question over here at the end and then we will come back over here. >> line with a consulting firm. >> speak a little louder. >> in the past two years there is a lot of talk of pakistan

becoming failed state and failed nation and having the i arsenal is the biggest headache for america what this atomic arsenal is going to happen to cause india in the wrong hands, what is the united states doing to ensure that this doesn't happen? >> i'm not sure that is a question directly about the isi. i'd prefer not to answer that question here. >> we can't hear you. can you speak louder into the microphone?

>> [inaudible] >> if isi is more under of the control of the regime than anybody else in pakistan, and the attention of this panel with a couple of misnomers, fallacies, when we talk about pakistan military, we are just using the long term actually who is calling the shots in pakistan, it's not military, they call them junior partners as you will. but they don't have any say. >> i think that he made that point.

>> another misnomer is that isi chief is not in full control of anything. if the army chief that calls the shots, the example appointed the isi chief as the chief of the staff of the court commanders' accepted him even musharraf was airborne, so isi is nothing. >> and what is your question? laughter can't do these come to the to -- [laughter] >> if you don't have one that's okay. >> i am an agent at al jazeera. my question is open for anyone to address. talking about the india issue in relation to the isi because he

stated that he doesn't believe the isi is a separate body from the military that it is included within the military. i would say doesn't really make our problem lot worse, because it basically says the position as the rule within the country and the conflict has been a state sanction will. for instance, dealing with the india issue and kind of what was addressed in the prior question, the fallacy of the india threat which if you ask any of the leading intellectuals within pakistan from the former chief air marshal of the pakistani air force, they all say that the idea of india as a threat has always been used as kind of a distraction by the military and the standing elite government within pakistan to destroy from may be creating a space society in itself. whenever a space society started

the agreement was reached in the 1970's he was executed. a2 happens over to mr. the can be reached and i would make the argument as far as the belushi insurgency that ayman obviously i can't say anything but there's been no proof to them and if india really wanted to destabilize pakistan, they would have been the one the start of all four of the war and i'm not felch and for them in any way or the cash have shut down the treaty which as far as i know has been working for the state. >> i think we can ask the question of the political culture of the isi made by extension, and in fact you did say something on that issue. you want to elaborate on his question? >> let me agree with what you said, which is the isi is not really separated from the policy of the foreign government and the isi reports at any point in history. whether it is a civilian prime

minister or the army chief the isi reflects natural policy. so why don't believe for a moment that it acts as a rogue agency. that addresses the question of the relationship between india and pakistan, and that is the relationship that is not being set by the isi. i think it reflects whatever policies the people, the government from the centers in pakistan want. on that score, i was in india and pakistan in march, and i do detect a change in direction. i think there is not an increasing realization on the part of people within the military at the upper echelons that india doesn't pose a major threat. the immediate threat is internal. and if only things could return to a sense of normalcy it would be better equipped to deal with the internal problems. now, what can the u.s. or india do? i think both countries can do a

lot. to strengthen that movement away from the old idea that perhaps india wanted to do and pakistan wanted to create a vessels days. i think that is the point that carlos was making fat white india want to take over pakistan? 185 million pingree muslims. [laughter] a lot of military training. it could be in an impossible situation. so it makes no sense. in fact, it makes much more sense from the point of view to have an open and friendly border with pakistan because it opens of the border to afghanistan and central asia, and then everybody wins for it's no longer this zero sum game. it's not just the isi. i think it is the old job that needs to shift the direction. >> on this side, the gentleman.

>> my question is about the raymond davis case. is there any evidence that the two people killed were with the isi? there is rumors about this? >> karen r. arturo, would you like to venture into that? >> i have seen conflicting reports. i don't know. >> i don't either. i have no idea. >> i will make it unanimous. i don't -- i've seen more speculation on both sides. the question here, who has got the microphone? >> my question is a simple and straightforward that bombay bombing case has been concluded in india and a related collection in chicago. why doesn't the intelligence community and the u.s.

government shut off the pressure in pakistan government? and the third segment of the case about the bombing, that might bring out more so that we may know something inside of the isi from that. >> i'm not sure what your -- you are asking who should be taking this out? what trial? >> [inaudible] >> [inaudible] >> who would like to say anything? >> i think, you know, it is all well and good to say on a range of issues why aren't the americans pressuring the pakistanis for? i think the americans pressure the pakistanis just about as much as the traffic will bear and more pressure, they don't have the leverage to exert more pressure and there is no reason

to believe they are going to get anything out of this if the pressure more. there's a lot of people in congress after the bin laden thing that set off with their heads but then i think the prevailing view is then what do we do? but there really aren't -- again, as shuja said, that court case is languishing for all kinds of reasons that have to do with the politicization of the judiciary, the complication of the law, and i think that if you know in the case in chicago, i think what he was convicted of was not the elements that had to do with the isi that were alleged.

>> if you have all officials on both sides who can concert quietly ahead of time here is what you need and what you should apply a us that would be an excellent article in the times of india a couple months ago on that issue. this is one of the side benefits of what improved relations could do. >> i think the united states, pakistan would like the united states to be more active in persuading india to be more amenable to normalization of relations. india has been very adamant that it's none of the united states business to be involved in that. and so, i think again, there is only so much pushing that can be done, and this is traditionally people in this country and various governments in this country think that all they have to do is yield u.s. might come and we are talking about sovereign countries that have their own have definite longstanding interests that don't necessarily coincide with

the interest of this country. >> can i just make two quick points on this? one is that you can't really persuaded country and particularly its military leaders to take actions as they perceive to be against the national interest. that's one. second, i mentioned the question of the theory that police work and forensics work on the pakistan side of. recently in connection with the mumbai case, a list was provided to pakistan by india and my indian friends tell me they create in paris that was discovered that a number of people on that list were in indian jails or had been recently released from indian jails and one of them was dead and these are the people provided analyst to pakistan alleging pakistan had got these people and should find them and returning them to india which means clearly there is a lack of

police work, solid police work on both sides to. >> let's go near the back. we have no one from the back this far. >> i am with the human rights activists. you noted that in the district in the province many people nationalist what do you think -- i know that the isi enrolled in this and maybe the jihadis system is like the jihadis industry in pakistan but they will take. >> i wish i had the evidence that you had to make a statement about the involvement of the isi. particularly in the district. i don't know anything about that

case. i'm afraid i can't comment about it. there is concern that has been expressed by the media and pakistan about the so-called disappearance in baluchistan and that is a cause for concern and that is the point i was referring to when i said that sometimes intelligence agencies get used to exercising power domestically that even when they do not have the legal authority that is a temptation at the operational level to exceed that and go into the constitutional activities, and i think the courts are now taking more of that and the media are critical in getting the civil society to put pressure on the government to change the behavior. >> we have five or ten minutes with a can keep your questions short and we have one on this side. i did you had your hand up.

and the microphone over here. quick question, please. >> so far they've been direct. >> [inaudible] >> on their own country given that we are the ones who supported the mujahideen who are like barons of the taliban and there was not much difference but is there a policy achieved after september 11th and we have come to view everything that we are not concerned about that these are the people that we helped with intervention and since we made this 300 turn against these people why should we expect that pakistan would change its policy in the

opposite direction because of the u.s. interest. we don't sponsor their budget why should they follow about their own country's interest? thanks. >> where is the question? [laughter] >> some how secure the interest and not pakistan interest. >> and shuja answered that it extends on their own national principles and he did as well. all countries to, we do and everyone else does a think is the quick answer. back over here and then to the green shirt. >> [inaudible] broadcast deer to the border region. from the discussion we have

established in pakistan isi continues its relationship and a link with militants belonging to afghanistan and taliban and other organizations. the question and the people living there and pasterns to or in the northwest pakistan, they think if you leave afghanistan at the mercy if of the pack as a military will united states get on its war and afghanistan? what is the future? and that is a large issue of relations in countries and i'm not so sure this is the place. an interesting question that i'm not so sure this is the forum for that. let's take another one. the man and a white.

>> somebody said countries work in their natural interest. in the case of pakistan, who determines what is pakistan's natural to become national or larger national interest? is this the army and isi generals? there's no system representatives of the people to determine the policy whether it is a terrorism policy or with respect to india or the united states afghanistan. the question is whether it is constitutional within the pakistanis for isi to determine the foreign policy and if it does not and what does it make isi or the army? and the pakistani people, if they are looking for people responsible for the state in

pakistan it has enemies within our site trying to destabilize the country. if this is the result of the foreign policy over the years, then who is responsible, who is in control, and who is constitutional? >> i think it is a question of decision making in sight who makes a decision with onset policy. who would like to answer that? >> if i can try one of the constitutional authority which exists in pakistan in the form of the civilian government and parliament refuses to take the responsibility and refuses to direct the military one way or the other than the military steps in and starts making those decisions. in the case of operations in the northwest frontier province, in 2008 as a joint resolution, and

at the end of that, he essentially the army chief was made april counsel, given the full authority to control civilian and military assets and fighting of the militancy and there's a ceding of territory. that is not stopped this day and even in the current joint session that i talked above to read when they go to the civilian authority and say talk about yourself and tell us what to do, they didn't come back with a plan of action. i think there is a great opportunity to go back to the civilian supremacy, to sustain it over a period of time so that the military becomes in the habit of accepting orders from the civilians and for that, you need to establish some knowledge and ability to lead some of the jury will then follow do. >> we've time for maybe two more questions at the end if we can

go on the subject from a long time so ambassador chamberlain and the person in the back. >> i will let you do some come investor chamberlain, too. now it's the middle east institute. skill mix before the rematch. i think there are two questions i would still like to see covered. he has been quite more critical than we have seen in the past of the military and the isi asking the isi to make transparent in his budget and he gave a very interesting speech a few days ago and which he offered to turn back some of american aid over to the common people to the civilians. i don't understand the story and i wonder if you can eliminate it

the second question, we talked of the isi's relationship with the press in the context of the international press and in the context of the domestic press it has been alleged that the isi contacts its favorite journalist outlets within the domestic press and is able to get its views and many times they are anti-american. is that true, and if it is true then why does the military and the isi what they see it in their interest to turn the public against the united states? >> would you like to start, that is very directly related. >> on the last question, yes, i think it is generally assumed certainly by people who work in pakistan and most foreign

journalists and readers of the pakistani press and watchers of the media feel like it's fairly obvious certain journalists. the message of the military and the isi. some would say that is the case in other countries, too but speaking just about pakistan, and a lot of that message is an anti-american message. i think the analysis keifer -- why their interest is that it allows them again it allows the military to present itself as the savior of the country, as the protector of sovereignty, the keeper of the interest for all good pakistanis half away

from encroachment. they deserve pakistan after they didn't need them anymore from the 80's. the americans are seen as a country that arms india and has great relations with india. they are seen as the country that wants to install a government in afghanistan that maybe is and difficult pakistan's interest but the sense is that it just the kind of political in a psychological chaos benefits the military because it allows them to present themselves as the stable institutions that's not rent sold pakistan the way so many

politicians have, but anyway. that's my interpretation of who could no. >> you asked about the back story and i think the general chianti would be able to give the backslid on that statement released which had a number of interesting sections including volition support farms delivered to pakistan and how much were delivered by the government of pakistan to the pakistan army committed is named a new story, it's a story that came out some years ago and even i had written about it when i first interviewed general chianti after he took over he told me $300 million out of that is 1.2 billion, and actually delivered to the military the

rest are being kept for budget support by the army. as to why he said what he does in that statement i think quite clearly as i said, the army is now conscious of the opinion. they are not leading from the front as much as we should. perhaps they are waiting for public opinion to form so that they can then act as was the case in a slot for instance the army was three swift in taking advantage of that support. they don't want to lose that support. this is the reason why they had that sentence that we don't want military aid we want pakistan as a whole and for the people of pakistan. so this is a political statement by the military at a time when the political system in pakistan is still needed and for the history of the country doesn't have a political party waiting in the wings.

there will be accommodations made within the system and this is the majority that will emerge in pakistan in the poverty over time. >> the last question. >> and all of your research does anyone have any idea how much budget they get off the record if you document does anyone have any estimate on how much money is appropriated to them. anybody know that? it's like asking what is the budget of the cia. [laughter] few people could answer that without any accuracy. it's the question to where organizations get their budget. i would like to think the speakers for an excellent presentation. [applause]

as i mentioned, we intend to have a focus in the fall in afghanistan and pakistan so i hope many of you can come to the presentations we have then. [inaudible conversations]

earlier this year the proposed merger between the new york stock exchange euronext and thus be eight moerse cos. there needs to be approved by stockholders and federal regulators. this hearing examines the merger's impact on competition in the securities, derivatives and options exchange markets. virginia republican ruslan bald goodlatte is the chairman of the house judiciary subcommittee on competition. >> [inaudible conversations] in alba conversations

and model conversations uronext [inaudible conversations >> good afternoon. the subcommittee will come toafn mittee i want to welcome to today's hearing on the competition and consolidation in financialhe markets the new york stock exchange deutsche boerse merger. of a special like to welcome ouw witnesses and thank you for joining today, and i am joined i today by my colleague from north carolina the distinguished ranking member of the m joinedoy subcommittee melvin watt, andcom the i fink we are expecting the ranking member of the full i expecting the ranking member of the full committee, mr. conyers of michigan.

in mid-february, the new york stock exchange, euro next and the deutsche boerse announced a merger that would give deutsche boerse 60% owner of the company that would own the new york stock exchange. the big board of the new york stock exchange would merge under rt umbrella of a foreign company with understandable apprehension. with would this merger harm competition, and america's role in the international financial system. the nasdaq and intercontinental exchange announced a competing offer on the morning of the hearing, we were not able to take testimony from the merging parties at that time. instead we proceeded with a panel of two distinguished experts in exchange markets. professor larry harris and professor mercer bored.

today we continue and complete our hearing taking testimony from representatives of nyse and deutsche boerse. this hearing provides an opportunity for the merging companies to respond to the issues and concerns that have been raised in the public discussion of this merger, and in the subcommittee's previous hearing. as discussed at our previous meeting there are horizontal elements to this merger in the american and european markets. deutsche boerse is a sub sit area of the international securities exchange, the largest shareholder in the left edge. the merger would come bin dorj bores's share of this fourth largest exchange with the largest securities exchange, the new york stock exchange. the committee must also ask whether it will threaten the robust competition in the securities and exchange market that has reduced trading costs over the past two decades. we must also consider the possibility that the combination of the two companies, american

equity options company will give the new company market power over the traders or options clearing corporation. the merger will combine the third and fourth largest equity options ex changes in america with deutsche boerse's international securities exchange. this hearing will examine whether the combinations threaten competition among american securities and options exchanges. the merger will also combine the two largest derivatives exchanges in europe, deutsche boerse's euronext and the new york stock exchange. this committee and the department of justice must take notice. and also consider the

efficiencies that the merging parties hope to gain from this merger, and how those efficiencies may enable them to compete more effectively. finally, the hearing will consider how the merger might affect the worrisome trend away from american companies offering their shares for public trading on america's stock exchanges. in the 1990s the united states averaged 530 initial public offerings per year. it fell to 126 per year. this hearing will explore whether the merger of the largest stock exchange by trade volume into a european company will affect competition in a way that speeds or slows these trends. the united states and new york city in particular has been at the center of international finance for over a century. how this merger affect america to compete successfully in global financial markets in the next century. the department of justice is currently reviewing this merger to address these very questions.

the department should conduct a thorough review based on sound economic legal principles and intervene if it determines that the merger will substantially lessen competition. congress has an oversight responsibility to ensure that the department of justice conducts its merger reviews in a thorough, fair and reasonably prompt fashion. i look forward to today's hearing, which raises fascinating and important questions about the future of vibrant and competitive financial markets in america, and it's now my pleasure to yield to the ranking member of the subcommittee, the gentleman from north carolina, mr. watt. >> thank you, mr. chairman. mr. chairman, on the eve of the first hearing in this proposed -- on this proposed merger, nasdaq and intercontinental exchange both publicly traded delaware corporations and announced a joint bid to acquire the new york stock exchange. because of that development,

charlie goodlat appropriate ly provided the witnesses who testified at that hearing. the proposed nasdaq merger, they concluded because the new york stock exchange and nasdaq are the only competitors in several businesses that are essential to the success of our equity markets, and the only providers of certain stock option services, con summation of that proposed merger would have effectively this rated competition in those areas. nasdaq and i.c.e. subsequently withdrew their bid. competition is a necessary and indispensable element of a vibrant and fair marketplace, one that fosters economic growth

and protects consumers. but as i noted in our last hearing, i do not believe that we should put our fingers on the scales to tip the balance in favor of -- or against a proposed merger. the department of justice quickly and aggressively responded to the proposed nasdaq bid to ensure that no anti-competitive effects were visited upon our markets. by all accounts, the department of justice and the european authority stands ready to aggressively evaluate whether the proposed merger of the new york stock exchange and deutsche boerse will create a monopoly in the derivatives market or result in any other antitrust violations. if so, i'm confident that the proposed merger will be stopped. i welcome the witnesses, and thank them for returning, and i

yield back. >> i thank the gentleman. and the chair now is pleased to recognize the ranking member of the full judiciary committee, the gentleman from michigan, mr. conyers. >> thanks, chairman goodlat, and ranking member watt. i agree with everything that you've said. now, we have experienced this question of mergers that create more difficulty than anything else. we've all heard of the too big to fail notion, and so we come

here this afternoon to listen to the leaders of two huge businesses to have them explain to us why we don't have to worry about too big to fail , as big s they are, they get bigger by coming together maybe. financial giants that were too big to fail pushed our nation to the brink of an economic meltdown that we're still not out of. a recession that is still ongoing, causing pain and suffering to millions of americans that didn't get a bailout, that didn't get t.a.r.p., that didn't receive a stimulus. and here's another problem.

the united states supreme court has not been particularly helpful with their citizens united decision last year in which they've given corporations a blank check to use their money in any way they want, as much of it, and without even revealing who gave it and who got it. and i'm worried about that. you didn't cause that. but, you know, you're going to be good citizens and go along with the federal courts. and i have no idea what you're going to do with the money, publicly or privately.

as corporations in this country become larger and more consolidated and global, their influence is disproportionately large in the elections that are the base of an american democracy. now, over the last 15 years, 5,400 bank mergers occurred, including the mega mergers. that's where you come in. where each buyer and seller had more than $10 billion in assets. because of these mergers, the percentage of banking assets and deposits held by the ten largest

banks more than doubled, rising to 55% and 45% respectively. so we come together this afternoon to consider another merger. as mel watt observed, the obama administration opposed the new york stock exchange merger. the assistant attorney general of antitrust in the department of justice, the proposed union as a potential monopoly that would lead to higher prices,

inferior service and less innovation. the justice department found that the acquisition would have removed incentives for competitive pricing, high quality of service and innovation in the listings, trading and data services that these exchange operators provide to the investing public. i have hopes that the current administration will continue to review critically these mega consolidations with the heightened scrutiny that they bring to this. may i have an additional minute, mr. chairman? >> without objection, i will recognize the gentleman for an additional minute. >> thank you. unfortunately, the proposal for

the deutsche boerse to acquire new york stock exchange still stands, which is why we're here today. my concern about this merger is the immense market capitalization that would result, i don't see any benefit for consumers, maybe some of you can suggest some to me. and the stifling effect it could have on innovation and transparency. a horizontal merger between new york stock exchange and the german company would obviously create the largest stock

derivative exchange in the world. resulting market capitalization, resulting from this merger, would easily exceed $25 billion. given the significant changes in the market, from paper traded on the exchange floor, to an international electronic transactions, our analysis of this merger must consider the impact, the transfer of financial instruments, and the effect of such a transfer would have on our nation's economy. since the chairman so giving me the evil eye, i -- >> a very patient eye. >> it is my choice to submit the rest of my statement. thank you. >> the chair appreciates that. without objection, all other

opening statements will be made a part of the record. and we'll now turn to our witnesses. and before i introduce our witnesses, as is the custom of this committee, i'd like to ask them to stand and be sworn. do you and each of you swear that the testimony you're about to give is the truth, the whole truth, and nothing but the truth so help you god? thank you. and please be seated. our first witness is larry liebowitz, chief operating officer of nyse euronext, the parent company of the new york stock exchange. mr. liebowitz has been with nyse for four years, in various roles. and before joining the nyse, he held executive positions at ubs and schwab. he has served on many committees, as well. our second witness testifying on

behalf of deutsche boerse group is gary katz, president and chief executive officer of the nge,rk s .. an american equity options exchange owned by deutsche boerse. mr. katz is also a member of eurex. his positions at the international securities and exchange and direct edge make mr. katz the executive most intimately familiar with deutsche boerse's current american operations. each witness has written statements, which will be entered into the record in their entirety. and i ask that each witness summarize his or her testimony in five minutes to help you stay within that time limit there is a timing light on your table. when it switches to yellow you will have one minute to complete your testimony. when it turns red, it signals that your time is up. and we'll start with mr. liebowitz. welcome.

>> good afternoon, chairman. members of the subcommittee. on behalf of our company and shareholders i would like to thank you for giving me the opportunity to testify today. for 219 years we've been one of the world's premier companies for trade, commerce and free markets. we're committed to maintaining the iconic stature and that's why i'm here today to talk about the future of our business. we at nyse appreciate the subcommittee's interest in our proposed merger with deutsche boerse. we're grateful for a chance to talk to you about it today and answer any questions you have. one we believe is critically important. we know what the new york stock exchange means to all of us as americans. for more than two centuries businesses have come to us to expand their businesses, create jobs and invest in new ideas. it's also a place where americans can invest in great american companies and retirements grow. the facade of the new york stock

exchange is one of the most recognized emblems of american capitalism. but reality the nyse today is not the nyse of the nostalgic yesteryear. in 2006 we were primarily focused on trading large u.s. cap stocks. in a short five years, it expanded in size, scope and geography. we faced significant increasing competition brought on by regulation changes in europe and the u.s. we've met these challenges through innovating, diversifying and globalizing, because otherwise we would have been doomed to be a charming but irrelevant acronym. we operate 13 venus in 6 countries derived, 49% of our revenues throughout the united states, and are a significant provider of sophisticated technology for clients.

our proposed merger is a reflection of how we must adapt and change to remain a fierce competitor that services their clients. in the u.s. alone, there are currently 13 stock exchanges in over 30-so-called dark pools. the u.s. competitive landscape is equally complex. with nine options venues vying for business. trading fees for both equities and options have fallen substantially over the last ten years while trading volumes have grown. our merger will not affect this competitive dynamic in any way. companies listing op the new york stock exchange represent $14.4 trillion in market capitalization. despite its historical position in the listings market, nyse itself has a market cap tamization of only $9 billion. prior to the merger announcement ranked sixth behind hong kong stock exchange and cne group.

also behind others such as brazil and the intercontinental exchanges. this reflects faster growing markets and exchanges protected by regulation are higher margin businesses but also means that the larger players are in a better position for future consolidation as markets develop further in other regions. with this merger we'll become a leader in the world de require tiff market which is important now as regulators around the world seek transparency and risk management. and a more consolidated infrastructure will make it easier for participants to trade across the markets, provide capital efficiencies for clients. this transaction will enhance the ability of our global listings venue. last year nyse ranked third in public offering proceeds. the other three of the top four exchanges were chinese. this will bolster our ability to compete in other international

markets. this will also allow us to continue our leadership in advocating for governance standards. we believe it will be a catalyst for innovation, combining index and technology businesses, clients will be able to connect to more markets globally in a more cost-efficient way. i want to spend one moment to talk about what will remain the same. we will continue to have one of our two headquarters in new york, we will continue in the ceo of the company based in new york. the management team will be evenly split between the two firms. we will continue to be a global company with a majority of the shareholder base in the united states. furthermore, the new york stock exchange trading floor, the physical building and the name on the facade will not change. finally, the combined company's u.s. markets will be continue to subject to full u.s. regulatory supervision as they are today. this transaction represents the future of ex changes because as i've described this is an intensely competitive business and the markets will globalize with or without us. some of the regulatory

obligations and transparencies will continue to grow in strength and influence as the world becomes ever more connected and interindependent. i'm happy to answer any questions you may have. >> thank you, mr. liebowitz. mr. katz, welcome. >> thank you, chairman goodlat, ranking member watt and members of the subcommittee. thank you for the opportunity to testify before you today on behalf of deutsche boerse group regarding the proposed merger when nyse euro next and deutsche boerse. i'd like to provide you first with some background about ise and how i came to represent deutsche boerse here today. i co-founded ise in 1997 along with ray terrell and two traders. we wanted to introduce competition to the u.s. options industry.

in founding ise, we embrace change and look to deliver a new model for options trading that would vastly alter the competitive landscape. following our launch, ise grew rapidly, in 2007 ise was acquired by eurex, the derivative deutsche boerse. as president and ceo of ise, i hold positions within the deutsche boerse governance structure as a member of the executive boards of eurex and urex clearing. my co-founder is a member of the supervisory board of deutsche boerse group. as an entrepreneur, there is always trepidation in giving up ownership of a business you have built from scratch. of course, i had those feelings when deutsche boerse acquired ise. however, i can assure you that ise's experience as part of deutsche boerse group has been overwhelmingly positive.

of importance to this subcommittee, ise continues to be a u.s. registered securities and exchange regulated by the securities commission just as we have been since our region legislation -- registration 11 years ago. the membership requirements of our exchange remain the same, only u.s. registered broker dealers are permitted to be ise members. implementing a strategy that allows your business to grow and improve its competitive position is the best job security any management team can provide their employees. that belief was proven true with ise, and this merger provides the same opportunity for the respective employee teams. the synergies that ise realized from our partnership with deutsche boerse only made us stronger. for example, ise and deutsche

boerse developed a new trading technology for ise's options exchange. it will position us better for the ever-more competitive u.s. options industry. given the broader focus, and diversity of nyse euro next, the benefits of the proposed combination are on a much larger scale. this merger will create an exchange group with a large domestic and international footprint, and will imle meant a strategy to allow our business to thrive. this will strengthen the competitive position of both new york and frankfurt as financial centers, to the benefit of the u.s., european and global capital markets. the scale and scope of the combination of deutsche boerse and nyse euronext will enable each individual exchange to draw upon the resources of the parent company. to deliver a more competitive offering to its customers.

for example, we expect to maintain three u.s. options exchanges within the new group structure, providing a targeted value proposition to all of our clients. in the options industry, this intense competitive dynamic has resulted in the highest level of customer service, the greatest transparency, and the lowest commissions in its history. this proposed combination creates a platform for continued growth, creates the world's premier global exchange group, and an iconic venue for capital raising and for the trading of equities and derivatives. most importantly, our customers will benefit from the global scale, product innovation, operational and capital efficiencies that our combination will deliver. simply put, the combination of deutsche boerse and nyse euronext offers a unique short and long-term set of benefits

for all of our constituencies, shareholders, employees, regulators, and most importantly, our customers, both the retail and institutional investors. thank you for the opportunity to testify before you today, and i'm happy to take your questions. >> thank you, mr. katz. and i'll begin the questions. first one directed to you, mr. liebowitz. the expert testimony at the previous hearing suggested that derivatives are a more profitable line much business for exchanges than securities, because derivative changes are less competitive. specifically, the firm that clears the derivatives also provides the exchange venue for trading those derivatives. do you agree that this so-called vertical silo model is the main reason the derivative exchanges make higher profits than securities, and if so, do derivative exchanges need to be made more competitive? >> i think it's a really good

question. i think this's really two reasons derivatives are more profitable. there are significant deficiencies in lower clearing costs from the vertical model. that drives better efficiency and profitability. second of all, i think that the derivatives -- the popularity of derivatives has grown far more than equities. it leads to more profits. i think that tend is due to continue for the foreseeable future. between those two factors, i think that's why it's more profitable. >> the number of u.s. stock listings has decreased by 40% since 1997. about 3,700 fewer companies trading on u.s. exchanges than at the late '90 peaks. ipos are down 70%, one in ten american companies that goes public now does so on a foreign exchange. last year alone, ten american companies went public abroad

compared with only two american companies that went public abroad in the entire decade of the 1990s. how will merging the new york stock exchange into a european entity affect these worrisome trends? >> sure. it's a great question. i think it concerns all of us as americans, as it should. first, i think to the d listings. i think many companies have d listed over the last ten years when you combine the international bubble and financial crisis. that led to a lot of companies that had either come out too soon when they weren't really viable companies, or companies that went through the crisis and couldn't weather it being d listed. new listings, american listings going abroad, i think there's one main driver there. they can't meet the listing standards in the united states. either they don't want to comply with the government standards we have or other aspects to come with listing on the new york stock exchange in the united states and opting for more lax standards in other places. that's something we obviously have to look at, the regulators

need to look at if we want to hold ourselves out to the highest standard. some companies don't want to follow that. we have to decide at some point what's the right balance. in addition, there have been some challenges in the united states over the last ten years it's been difficult for small companies going public. they've faced challenges getting ak stoes capital, faced challenges with other exchanges. the u.s. research settlement reached with the s.e.c. has made it hard for them to get analysts to cover stocks, if they're in the small and mid-cap stock range. that's problematic for those companies. they face a lot of challenges from beginning to going public, whereas some of those challenges aren't quite as hard as they get into foreign markets. the last reason is one we're just going to have to face. prada is thrown up as a big example of this. and understanding they're not a u.s. company. asia is having a huge surge in consumer demand.

a lot of their demand is in ash a, want to list in an asian exchange. and that's all part of us competing on a world stage where other places are starting to gain prominence that they didn't have in the past. our response to that just has to be to compete harder. >> mr. katz, in your testimony, you say that there was very little competition among the four floor-based equity options exchanges before you founded ise in 1997. you credited the ise launch with bringing competition to the u.s. options industry. should we be concerned that by merging ise into the same corporate family with nyses, arca and amex exchanges, ise will cease to operate has a maverick competitor? >> i don't think this subcommittee should be concerned about a lack of competition in the options industry. since ise's launch becoming the fifth options exchange, an

additional four exchanges started trading options. and there's even another one announced to begin trading in the first quarter of 2012. many option exchanges joined under one corporate umbrella. there are a number of examples of that today. and it has not diminished the amount of competition in our industry. it has not diminished the product innovation in our industry. and i don't believe that this merger will affect the level of competition, both in the u.s. and globally. >> the chicago board of options exchange, the new york stock exchange and nasdaq all currently operate multiple options platforms, as you note. in your experience, do these equity options exchanges that are controlled by the same parent vigorously compete with their corporate siblings, or is competition primarily among unrelated firms? getting back to my first question, if we combined some of

the relationships, if you will, is the competition going to be diminished and less innovative? >> i think we would actually lose something if we combined these exchanges that are under one corporate umbrella into one marketplace. the reason that there are so many in existence -- >> no one's advocating that. what we want to know is whether we're better off being separate competitors or competitors under the same umbrella? >> they actually compete with themselves. the reason they're doing that is because each one has a different market model. the way the s.e.c. approves exchanges today, they are allowed to use one market model, one set of fees per exchange. and as a result, an exchange can actually compete with itself and compete vigorously to try to attract different segments of the marketplace to do business on their exchange. so i don't believe that they are just working in a complementary manner, they're actually

competing to try to attract as many different clients to their business as possible. >> thank you. my time's expired. i now recognize the gentleman from north carolina, mr. watt. >> mr. chairman, i think i'm going to wait and go last. >> then we'll turn to the ranking member in the full committee, mr. conyers. >> thank you. thank you for your testimony, gentlemen. would you agree to a follow-up inquiry that we may have, that the committee maybe have with the department of justice about this proposed merger? >> certainly we're already actively discussing this with the department of justice. and are open to further conversation. >> okay. thank you. now, what about you, mr. katz? >> we are in active dialogue

with the department of justice, and they are reviewing all of the material that we have presented to them, and we would be pleased to have a follow-up review with this committee, if that becomes necessary. >> well, it will become necessary, because we don't know what you're in deep discussion about. i mean, they don't come back and tell us what they're talking to you about. the only way we can find out is to get a report from them when they're finished, and then to talk with you about it after it. how do you feel about the securities and exchange coming before this committee to give us their impressions of what the effects of such a merger might be on the markets in the united states and in the world? >> we would be very

comfortable -- >> you're okay with it? >> yes. with having the s.e.c. come before this committee. >> you're okay with it, mr. liebowitz? >> with all due respect, i don't think you need my permission to call the s.e.c. in. you need to talk to as many people as you need to to feel comfortable with this. >> i'm trying to be polite today and on my best manners. this is a pretty serious inquiry. what about the united states treasury? i ought to ask you about whether we need to talk with them or not. >> sure. i think we're going to set a record for the number of regulatory agencies that we need to talk to as part of this merger. i've heard it's 47. so each of them is going to have, including the fed, the fdc -- >> well, would you give me the list of the 44 that i haven't found out about yet? >> yes. many of them are european. >> well, they're important, too,

aren't they? i notice d a number of things about your testimonies outside of your closing sentence, mr. katz. you've told me a lot about your company, and about the circumstances that the market works in. i'm intrigued at your response to the ranking subcommittee chairman, the ranking member, that you can compete better intei internally than externally. >> congressman, i don't think i ever used the word "better." but i do believe that the -- >> well, i'll use the word "better." i think you can compete better if you're separated than if

you're together. >> the amount of competition that has taken place in the options industry, in various different ways, whether by exchanges that are independent, by exchanges that are public, or private, or under one corporate umbrella, has created one of the most competitive industries in the united states. and it has resulted in a growth of volume. it has resulted in a better opportunity for the customers that are using our product. and that competition continues to grow unabated as a result of the mergers -- >> well, that's a view -- you're entitled to that view. i don't think bigger is always better, though. a and -- would you think with me

about this consideration? if you were to merge, what would happen to all the others in the business? wouldn't there be a requirement that there would -- wouldn't somebody else have to merge as well, because you'd be so much larger than anybody else in this country? and i was impressed and sympathetic to your explanation, mr. liebowitz, of the relative smallness of your organization on a global scale. >> so i think the challenge, and it seems counterintuitive, that you can't be right in the middle. you either have to be among the biggest or you have to be among the smallest. the smallest are efficient because they're typically late entrants into the market. they don't have all of the regular assy or huge regulatory

history. a perfect example is the baath exchange which filed to go public recently. they have less than 200 employees in the whole company. they compete very effectively against both of our organizations in u.s. options and u.s. stocks. and then at the top end, you have the companies that have merged to achieve scale, and also to provide a breadth of platform. they're not just focusing on one or two businesses. the tough spot is to be in the middle. because that means you are neither one. >> well, you're in a tough place, really. i can almost sympathize for you. what do you think all the small people are going to do? you don't anticipate that there will be other mergers as a result of yours, if you were fortunate enough to gain a merger? >> well, i can't speculate on what our competition would do. i think everyone -- >> well, sure you do. you do that every day. >> i think everyone in our space is constantly looking at the

landscape, and trying to decide what their vision for their company is. and what the best combinations, or whether standing alone is the best for them. and pursuing that path. there are some people that may look at this and say, gee, we should look for a partner. there are some people who say, we don't agree with that strategy. nasdaq's response, their attempt to take us over was saying, we don't agree with the broad platform. where you have to do derivatives and technologies and equities. completely different philosophy to the business. and it allows each of us to determine what we think our vision is, and what our platform should be, and we act accordingly. >> i thank the gentleman. the chair recognizes the chairwoman from florida, ms. adams. >> thank you, mr. chairman. mr. liebowitz, why is it that nyse euronext, which is the world's largest exchange, by

trading volume and market capitalization of listed companies, has a fairly small market capitalization? and why does the hong kong exchange, which is smaller than nyse, have a market capitalization that is more than two and a half times nyse? >> sure. it has to do with such things as being in areas that are growing much faster. because the economy is growing faster, the markets are growing faster. being in instruments that are a lot more volume is taking place, such as derivatives. in the case of hong kong being in a regime where the regulations protect them. if you remember, the u.s. regulatory structure allows relatively open competition with low barriers to entry. that means that intense competition drives prices down and drives our market cap down as well. so hong kong is in the best of all worlds. they're in a highly protected regime. they have a very rapidly growing product in a very rapidly growing region. and they have some products that are protected in a vertical

silo. so you add all those together and that's why. >> nyse has insisted that this deal is a merger of equals rather than a german company acquiring an american company. but deutsche boerse will own 60% of the shares. doesn't this mean that deutsche boerse shareholders will essentially control the nyse after the deal closes? >> sure. that's a really good question. this one has gotten a lot of press. it's important to note that deutsche boerse itself is 35% u.s. owned. and only 18% german owned. and so when you put the combined entities together, actually the combined company is 55% to 60% u.s. owned by the common shareholders. the distinction of merger vehicles is really a technical legal distinction and has to do with the fact the way the companies are being brought together with a balance management team, relatively balanced equity base. >> mr. katz, while there will still be an equity exchange operation in operating in the

u.s. after the merger, they're controlled by four company parents. does it move from five to four operating companies and if so, what will the competitive -- what will be the competitive effect? >> congresswoman, one of the beauties of the u.s. options industry is that you can create an exchange and take your exchange to the s.e.c. for approval and then become a member of the options clearing corporation, so that your trades can be cleared. already today, there is an announced tenth exchange, the miami international stock exchange, that is scheduled to launch in the first quarter of 2012. this industry has been growing at double-digit rates for the last 15 years. and as a result, it's bringing in new competitors, and new companies that want to provide a value-added service in the

options industry. so i've never thought of this industry getting smaller. it continues to get larger. it gets larger as a result of the number of exchange. it's also getting larger because the number of retail and institutional investors that are embracing this product, the options product, has continued to grow. and it's a result of the education, it's a result of the product development and the innovation at all of these exchange and that's something that i expect to continue. >> so the decrease over the past 15 years in the number of u.s. poips and the number of companies listed on the exchange has coincided with an increase in exchange. to what extent are the two phenomena related? >> i didn't understand your question. >> the decrease in the past 15 years in the number of u.s.