go forward the overriding principle so we work with states to ensure those to both of those things. that means understanding how we would address the of rate issue but not add quality to the system. >> but to look closely there is numerous cost savings with regard that shift costs to the federal government instead of lowering cost tata the mission of the medicare and medicaid coordination office to improve care for individuals thereby lowering health care costs that is a better way to save money they and shifting responsibility. i will ask about some of the contracts. year recently awarded to 15

states to design coordination of care models. one requirement was integrating care across the ku behavioral health long term support services. can you discuss the importance the barriers to integrating care and how prevalent full integration is today?

and mexico to wyoming. it is a big chunk at the louisiana purchase. pretty much. there we go. i didn't study civics for no purpose when i was becoming american. he has had a distinguished career within the federal reserve bank largely. he joined the federal reserve bank back in 1973. he's been president for 20 years since 1991. he has the legendary seminar every year which we either have intended or wish we had intended but were never reminded and his

kansas city federal reserve bank says he has been especially outspoken about the regulation of the financial industry during the recent crisis. so, to share his thoughts on why we haven't sold the too big to fail problem yet and how we can, and honored to introduce president thomas hoenig. [applause] >> thank you very much for the introduction. it's a pleasure to be here. i have to note we put the wrong embargo on the remarks today. i'm sure you've read it already, and i, because of that i'm going to try to present my comments and formally and leave time for questions because i'm sure there will be questions of one kind or

another. i will put this year so i can keep track. as already noted, we are approaching the one-year anniversary of the dodd-frank bill, and given all the work that is yet to be done and the uncertainty that surrounded, i think would be a little premature to celebrate, but i do think that it's an opportune time to take stock on where it is and what it might imply for the future. and i want to congratulate the organizers of this conference. i think it's important that we take this opportunity, and i particularly want to note some of the colleagues at the nyu school because they have done some great analytical work on this and also some pretty practical ideas have come out of that but it serves us all very well. as we talk about dodd-frank, the

discussions in important ways revolves around the disruptions, the difficulties we've had over this crisis and the distortions that have come from the systemically important financial institutions for sifi. part of the title, the title given was do sifi have a future my remarks are should they have a future. and that's really i think what it's about. and as we talk about the sifi, i always try to ask myself some fundamental questions and that is how in the world could we have investment banks that is relatively minor importance in the global basis merit bailout and how can another investment bank with its failure caused such devastation in the area of the collapse of the financial and economic system around the

world and how can a large insurance company that has failed be bailed out and left in private hands to go forward. how can the country the size of greece hold hostage most of the world's in a financial sense. and i don't think there are any good answers to those questions. it's been my experience that they were hard to answer. and that's because i think they are inconsistent that is having them and having these kind of defense makes them very inconsistent with the concept of the capitalism they've been in a powerful and increasingly destabilizing to our economy in the recent crisis and special support and they have if he will the availability of different rules and that's why we have to go beyond dodd-frank to address this question as we now have.

we have to end the artificial complexities to come with these large systemically important institutions that is to restore a more stable financial system, not a system of would be without crisis because we always will but one that is more stable as we enter and exit the crisis. i want to start by pointing out that i take this because the united states has been one of the most successful economies in history as an economy as the creation it has been able to provide us and that is because it has been mostly over its history bound by the rules of capitalism which does in fact reward success, but also it compels the participants in the market to play by open rules, to have a market that is a tree in the sense of transactions, and

compelled to fail when in fact they make poor decisions. that keeps it efficient and a vibrant and renewed and that is in that way how we in a more objective way allocate credit in this country to the most valued endeavors that have made this country great and build the wealth. now i think it's very important that when all history has done this we have changed. in fact, as recently as 1980 in this country we still at 14,000 financial the institutions competing across the nation locally available for the local needs, large institutions for the largest firms on the international basis and the largest five of those institutions controlled or

managed about 29% of the deposits or financial assets which was the equivalent of about 40% of gdp. but since then, and today we have a far more concentrated and far less competitive banking system as we have seen. fewer banks are operating in the country, and the largest five control more than 60% or more than 50% of the deposits and assets in the industry and the equivalent of almost 60% of gdp so the impact is larger and the largest 20 institutions control greater than 80% of the financial assets in the industry, and over 80% of gdp. so it's a very different environment we have today as we've seen. and the irony of all this that i think is important to keep in mind is that this very significant change has come from our efforts to make sure we were

able to deal with the financial crisis without having the consequences of the financial crisis. the federal reserve for example is a product of the 1907 crisis and which we were set up in part to make sure there was liquidity into the market when it was needed and then leave the insurance come after the fdic to make sure the small depositor was taking care of and therefore we had a more stable financial environment. of the last 30 years we have expanded the safety net bit by bit to an ever larger group of institutions and covering an ever larger group financial liabilities. and then in the late nineties even as some of the sensitivity of was in place we've eliminated the glass-stegall lacked what separated out the high risks activities from those activities that have been protected by the

safety net and thus created the incentives for the ever increasing risk that we saw. and finally with those failures in that period starting with continental, we confirmed for the world that some institutions were too big to fail. they were not subject to the same capitalistic standards that everyone else was. and in that instance the sifi was born. it's no wonder then we had a great recession. it's no wonder given the incentives that were put in place and the ability to grab for risk and return on equity the lending practices became weaker and we began to trade very significant amounts at the desk and we increased leverage buy almost twice what it was before we have the elimination of glass-stegall. the can dillinger was there and the housing market struck the

match and we have this great financial crisis. and that the bailout of the crisis has cost the american taxpayer billions of dollars and that is just the down payment. the 10% unemployment certainly was contributed to by the financial instability and their actions. now the sifi's argue and i've heard them argue very often we are pushing hard on capital standards, that it's great to make them competitively less viable. it will keep loans from growing my answer to that is pretty much nonsense. i don't believe that. one of the things we know them and i will outline some of those issues in the remainder of my speech after the crisis congress began to once again address how we take care of and deal with these crises and abuses that took place but we pulled out the

same tools we're going to enhance supervision and improved capital standards at least for a while and have a resolution process that of course is failure safe or at least make sure they are not too big to fail. but it fails in the most important remedy the brought stability to the great depression in my opinion, and that is remedies like the glass-stegall act. two principals of round that that i think when we start talking about the issues of the sifi. the first principle is an institution that has access to the safety net should be confined to the core business for which the safety net was established. and second, the shuttle banking system should be reformed in its use of those activities but also add to instability. those are primarily money market funds and certain repose. those are the two principles i think are important as we try and think about greater stability going forward.

now, institutions that have the privilege, the good vantage of the safety net should be ten confirmed a deposit taking short term and lending to and should still be allowed to underwrite securities. they can do advisory services, and asset management for what purposes like trust activities and those that are related. but activities that would be prohibited include dealing and market making, brokerage, proprietary trading, because you give them these activities plus the safety net york inviting inexpensive risc incentive which will return in time as this crisis fades. and certainly i would not allow them to even trade for customers' accounts because it will be gained as soon as it is allowed in terms of inventory preparation come all the reasons

he would see given very quickly. these are the activities that are inconsistent with the purpose of the safety net and we shouldn't forget that. or we will repeat the mistakes of the past. now critics are the understand. critics argue we need scale and scope. we need complexity if we are going to be globally competitive and take advantage of bringing the cost down to make more loans and expand. it's important to have one-stop shopping and that is absolutely part of the need, a very large expanse of system if we are going to conduct monetary policy i think the as arguments are not convincing and i think they also mislead especially when they say it will keep us from being competitive. it would be on think inconsistent with our 200 years of experience where we have had a low concentrated financial system and one of the strongest

economies in the world. so, just the logic of that people say things have changed. well, even with glass-stegall as we've had the activities of and the various institutions could engage in we had a very successful with commercial banking doing their thing, serving the customer because the business depends upon it and investment banks and dealers separate from that serving their customers and we were the leader in the world we issued as much new equity, new opportunity as the merchants bank and activities had in europe so history suggests that there's a better way without the intrusion of the terrible crisis that we have recently and may have again if we don't correct things. so when we go to the greater specialization as we learn we serve the client better, and it is, ladies and gentlemen, about the client and the public as

well as about the return on equity to the institution. i don't get any objection on the equity is it safe and reliable and it doesn't put people out of work as we take risk. the second reason i think we've to keep that in mind is that economies of scale that they argue are achieved at size is far less than half the size of the sifi. it's clearly over they've been shown this there are economies of scale but no where near -- you don't need to be anywhere near $2 trillion to gain them. and clearly one-stop banking for most activities will remain in place under this proposal. the trading activities, a high risk activity will be out, but the customer will be well served and those activities can be purchased elsewhere in a very efficient environment. finally it seems improbable to me the argument they will pick up their marbles and go to

another country. because i have to ask that country outside the united states do they really have the gdp size, the ability to pick up the tab on to big to fail they might think they are gaining by bringing of the institution over. all countries should be focused on bringing stability to the economic system and many are and i think the united states has an opportunity to leave it that way rather than undermine the progress in that area. absolutely essential. one thing product and yet to recognize is concern about the shadow banking system that to push these activities, risk oriented activities into the shadow banking system and that is an area we have to pay attention. but there's a couple of things we can do. one is a big source of the instability is money markets that was created to get around, and it's a major part of the instability.

and so, what we need to do is if you are going to be offering those, you can't have this 1 dollar, you can't -- you have to float with a value of the assets. that will discourage the use as the deposits and discourage the runs that will otherwise come. it won't end it but it does discourage it. the second is the repo market i think what we had this short-term liabilities issued secured by long-term assets. that is what happened in the mortgage crisis and its various liquid when you have a crisis. and we have to do is go to the 2005 bankruptcy rules where if you did have a problem you could grab the collateral and liquidate right away and make them subject to the same rules as everyone else has to deal with in a failure and that would discourage the use of the repo to fund long-term assets.

so those are a couple things we can do to address that. now, it's my argument that by pushing out the high risk activities that will help get them priced correctly and take the risk in to that part of the market where it belongs and leaves them the commercial banks to do what they are supposed to do under the protected banking system, make loans, make sure that the soundness of the payment system stays in place, and wheat in the long run will have a much healthier economic system both in the united states and globally. now, finally, there is as a member of the open market committee of course i am well aware there are issues and the fact of the matter is primary dealers are the counterparties for most transactions and so forth. they're now about 20 of the primary dealers and most of them

are affiliated right now. but the fact the matter is if you don't have to be affiliated and a commercial bank to be a primary dealer or counterpart before we have the breakup of the end of glass-stegall and the introduction of gramm-leach-bliley we had many banks the or not the others. it's just a matter of changing who the counterparty is. it's not something that can be accomplished, but i would go further and suggest other opportunities to really broaden the base for monetary policy. one is the use of the term auction facility which allowed you to really issue on an ongoing basis through an auction, substantial amounts of reserves, that is you can conduct basically an option type of open market transaction with a broad base of banks across the united states, regional banks

and you build your reserve base and use the primary dealers to fine tune if you will meet daily basis to see to make sure you get close to your federal funds target rate and so there are opportunities to actually expand if you will the democracy elements of conducting monetary policy. so there are a system of sustained way as any long-lasting way that is not going to go away to be directed appropriately to allow the banking system to make sure you do not intertwine and i think we will all be better off and certainly our businesses in these countries will be better served. so i'm going to end with that and right on time. and i mean open for questions or challenges. if i'm wrong i always want to know that and if i'm wrong i

always want to tell you you're wrong. [laughter] [applause] >> if you describe a scenario over the course of 20 years as the massive concentration in the financial, you didn't explain why that might be the case. do you have any thoughts assuming you're not alleging any behavior how it those banks got to be the size that they are and does that say anything at the natural state of the market structure and? >> there's a couple of arguments for that. the first is prior to that period you have limits on your

state bank and move those limits which certainly is a reasonable thing to do i suppose. and the second thing will be that there are these economies of scale but as i said in the remarks they are captured usually act least the research shows but the third reason and this is the reason that gives me great concern is that if you are perceived and then it is confirmed by actions that you are too big to fail, then you have a capital cost of finished of their institutions. and you can see if you are say regional bank of only 15 billion in size. everyone knows that if you fail you will be taken over and they will wipe out the stockholders. many of the uninsured depositors may be losers in the transaction

so where you go is where you think that is not going to happen if you are a company that is large enough to have that kind of deposit you go to the too big to fail institution and what that has done and there is research out there like anything else i guess you can argue about it is a clear suggestion that that means the costs of capital is lower if you want an advantage to have the lower-cost capital in your expansion efforts than anyone else, and i think that fact that you could raise the deposits more easily, the cost of capital was less and you see that if you look at the leverage ratio of the large institutions as the change from 1990 through the crisis it went from roughly 17 or 16-1, real equity i'm talking about that 15 to 16 to 30 to one. so obviously the market wasn't paying attention to that because they knew that and actions that

the government did and others took confirmed that. so that is a huge of vantage and it does see concentration. i think that's hard to dispute. so that's why i think it has been as rare as it has been. >> such a convincing argument. it's hard to dispute. >> [inaudible] and bringing in those two sources of instability. it strikes me that there's a kind of cycle [inaudible]

people are very complacent. they might know that at a certain point and inhibit their production but after awhile it doesn't really matter and it is the evolution of complacency and that's worrisome and i wonder how you deal with this potential in your frame of fangs for effectively called banking operations, finding a way around system. >> there is no perfect solution obviously but when the first thing i will tell you is having the money market instruments where you have this dollar projection and it's treated like a short-term deposit is a small

and if you've been reading the paper lately you know how much everyone is worrying about the money market again as a invested in higher risk to get their yields up and so forth, and the person holding the instrument thinks the of the deposit and they can cash and when they get doubtful they are going to run so you have to eliminate that. will something else to emerge? perhaps. but i think if you split this out from the commercial banking industry so what has a different issue, smaller and focused on lending and the non-bank activities and to limit the ability to gain at you will at least mitigate the the likelihood of that, the likelihood that it has to be marked on a daily basis people are going to pay more attention from a lot more attention and you won't have the build up of the access to the extent that we've had this part of for you to think about the shuttle banking part of the system to be

aware of what might happen to included. from having the market given the protection is a error because it caused people to have a false sense of security, and in fact they were bailed out because of the nature of the crisis and that has to stop. if the of any kind capitalistic system with a more effective market discipline to it. and i would hope that would work, but would be the first time ever. i can't imagine it working because i know what that friday afternoon is like when the liquidity crisis is upon you in the markets open and i suspect i

wouldn't want to be the sector of the treasury board would be inclined to bail them out so it has to be well before the crisis that you put in the stops if you will and that's my point. >> two quick questions. i don't know if you are familiar with the research i think when you talk about the uplift of the too big to fail if the research as much robust and the advantages to them and it's been quantified in a number of ways by as well as the kind of nonsense as to call what about the raised capital standard when they are an assertion that there's no research for all the research on the other side i would encourage you to be stronger on your assertions because the research. i don't know if you hear this this morning when we started or not there was a discussion when michael was on the panel with the others about that which is

politically, i'm sorry, policy optimal and politically possible and i actually lived through the politically impossible and possible as a senior staffer on the hill and many of the things you are talking about or attempted to get on the floor as amendments and it's difficult to get them up and with very few votes and the best epigram of what happened is senator durbin saying they own this place and he wasn't referring to the senators, to washington dc. whether that is true or not and one agrees or disagrees and i certainly agree the question is how we get from where we are to where you think we should be in the current political environment, how do you make that happen, how and how you see it happening if at all? >> i think it's possible or i wouldn't be putting my point of view out so strongly. she has done some great work as

her colleagues have and as nyu has gone, the capitol issue is almost propaganda in terms of what the impact would be because the stronger and safer the lower the return on the equity needs to be for the capitol for the capitol seekers and so forth, and so what you are trying to do as a manager's take advantage of the environment's you've been given to get her on equity up. so she has done great work. it does reviewed this idea and is we won't have growth in this country and i tell people we've had a lot of institutions with strong capital and you always do better when you're working from a position in terms of your decisions and allocations and resource that is important and i hope her work continues. the point is yes it is difficult and it should be difficult

because you have different parties. one of my concerns that i bring up when i do read the concentration. the institutions are far more powerful today than they were 20 or 30 years ago. i didn't put in these remarks but it's the fact that when the federal reserve was formed number of jpmorgan the institutions at that time control the assets about 2% of gdp. i'm not so worried about that. but now it's over 60%. now they are more than ever and i've seen the size of their political contributions and they are dramatic. so you're going to listen to them and they get a lot hearing on that, but there is a way because i've seen it where i find that when you hear would

have to say and they are willing if you're point is cogent you can't demonstrate or assert and one of the reasons we put out a white paper on how to do this was it's nice in theory but how do you do it? which are to say here's what works. talk to them one at a time and if you think about it is in the best interest of the economic system of the united states and the growing of the businesses and the creation of the real wealth across the country come and you make that point the research, then it becomes a more powerful argument itself, and i think there's a lot of businesses that are tied up in their daily activities, but when they hear this and begin to think about it can become an important part of the support, so over time it can make a difference.

glass-stegall, who would have thought at the time? >> from penn state university. i have a question. if you look at the shadow banking system, it seems there's of least three legs to that school, if not more. you talk about money market funds and the repo market place, but you didn't talk about the securitization and i was kind of curious if you left that out intentionally or have thoughts about that. up and down the arena to try to understand more about the dynamics that are happening. it seems like there's a kind of natural story and i'm ecstatic vision of an economist said you have to accept my shortcomings but on banks create these institutions create loans, the

preserves but then they can take them off their balance sheet and they get put into a special purpose vehicle which is not sifi size and there is a market-based capital requirement which is much lower than with the federal reserve has control with which the institutions of the safety net and essentially those are put onto the either the short term commercial paper market or balance sheets etc.. one of the things we found is part of the dynamic, the site of the capitol market at least in housing market the advance of technology which regards the rate at which the loans can be created and then passed on an accelerated through process of the build in the asset bubble. so almost a monetary policy on the freezing but it seems like to the extent you have reserves

creating assets and the speed with which they can create assets it seems like that is an important thing to consider reforming also. i held all of it but didn't read all of it and i wonder if dodd-frank addresses all of that and if that is in our economy and the ability to set to regulate and maintain the stability of the economy. >> you make a good point. it is an area that needs and deserves more attention. dodd-frank has some provisions in terms of holding on a certain percentage you move off the balance sheet so that as an area we should pay more attention to as we move forward because you're right, instead becomes a vehicle there's a whole host of

other things are around that problem, bad ratings systems and phony off balance sheets, and that's why the capitol requirements - carless because everyone had a wink and a nod we will provide the bailout as an institution so those have to be headrest but in a systematic way we do need to address that and that is a very good point. >> he made the case buy too big to fail with such a problem, but in talking about how you discourage or stop it, at least in your remarks you put emphasis on bringing back glass-stegall pin. if you're worried about size, that's the most direct way and you could even argue with glass-stegall you could get

mergers that very large institutions, $2 trillion could lose their money on the loans rather than investment banking. why not sites caps three or 4% of gdp, half a dozen u.s. institutions would be affected are be above the cap and would have to come back over some period. you could also have much bigger capital surcharges for sifi than was agreed over the weekend. there would be another way to go. i'm just curious as to why you chose in the glass-stegall route has opposed to the others were discouraging the two big to fail. >> we did think about size, and part of what we thought about is size isn't really the factor its one of the factors on but it's not the primary factor it's the nature of the risk whether your

bear stearns which probably wouldn't have been caught on the size limit is the nature of the rest your bringing on that brings this pause giving sifi if we can do to giving them what i will call marginal capital requirements above the would be fine but i don't have any faith in it all because it would be coopted within three years in the recovery for a simple we are already -- the resistance to 7% equity or tier one equity, and then a kind of add-on to that is atrocious, and once the economy turns around and these institutions are thought to be sound again we will start rolling those capital requirements as we have in every instance in the past.

but separating out the nature of the rest is a more stable economy over time, and enforce the rules more clearly. one of the difficulties in terms of supervision is there are so horribly complex the directors don't understand it and the managers don't understand it and the supervisor certainly can't deal with all the issues sciu to simplify the system and simplify the system then you can have capital standards that are enforceable at least more so than now and i feel your long run outcome will be better. size limit is another option but i don't think it will be taken very seriously. >> i was thinking out what you said on a sort of classic example on the time of consistency. push comes to shove to enforce the rule the problem i had in

the description is the same thing happening for these institutions if any of them are systemic even though they are not banks they could be systemic and some other way. the treasury secretary, and if not don't the of the same? >> that is a risk. if you have them separated out and others the confusion and the safety net that there has been then i think the capitol standards for the market will demand more and the market will pay more attention to it because you subject them to the bankruptcy loans and then it becomes a greater risk to those creditors that are outside, and they don't -- right now the assumption is because you are tied to the safety net it will because the impact on the primary financial institution

will be your main concern and you can't take a chance so you bailout over the year and the same thing with money market, that's why i want to eliminate their early to do it. so that is what is behind it. now i understand, i am not saying the crises go away. i'm not saying the risk goes away but it gets better allocated and better priced and we can handle the crisis that inevitably will come without having a ten per cent unemployment rate. i'm not just thinking about the 800 billion we will get a good part of that but we are going to lose a fair amount, and it bothers me stick to the leaders were able to go and when the institution wouldn't wipe out the common stockholder and speculate and make a ton of money off the taxpayer and i think we can do better than that.

there's no slice on the bank but the nature of the business might force them to downsize. there's a trend in the 70's, 80's and 90's that banks were having a hard time getting a good price on a loan to corporates like exxon and wal-mart and target. so if we are causing the banking system to sort of reduced, you need that in the real economy, too, and if it doesn't happen are we back to that problem of the 70's and 80's the banks make money lending and that's why they wanted the expanded powers. >> i'm not convinced of the argument because you have this

desire to get the banking business so that they could -- the thought they could build their return on equity that i. there is the large industrial companies you could get the loan out so i don't see that that is necessarily what follows, and if you have a strong capital, you have the right size and can do consortiums to fund about any loan because that's how we pretty much did it for decades, and i mean i did not see the evidence that suggested to me they were being disadvantaged. remember part of the issue is and i made the statement before publicly, if you are too big to fail and if you have access to almost an unlimited safety net

you are a gse and should have delivered return on equity. it still brings capital in. you still have that and can make loans and from a position of strength economic sound loans. will the corporation go somewhere else? if you allow money markets and other kinds of activities that are high risk and the perception is they will be bailed out and you have to transfer the problem. >> if you have banks that are 15 to 20 odd percent of credit card lending and mortgage banking, those are the banking activities that's okay as long as everybody is doing their job and stakeholders and regulators and the investors but combining it with speculative purposes that's where it gets out of control. >> it's not only combining it, it's when the could you give us back to the safety net so i can

gamble, and feel large bank or anything can make $100 million off of the trade, guess what, they lose $100 million even though they say they can't because they are perfectly hedged but there's no such thing. >> jian-li dimond wanted to be 20% of credit card lending and that's a good wholesome american business. >> i don't know about hosam. [laughter] i do know there's certain activities commercial banks can do well in the process and should do well and i think the market is theirs to define at that point. i don't want them using the safety net to build their research the then trade on in the speculative basis to make their earnings. >> now that you have the felker rule. >> we should be getting towards it.

>> my question is when you talk to policy makers in washington about the size about the market concentration you point to the top four of the organizations. it's not like it is in the u.k. or switzerland it's not that concentrated. they are not double the size of the economy. i'm curious to know why the current level is dangerous. estimate it is not my standard. we have had -- the u.s. economy has been the most innovative, has had credit available abroad space if you look at our history a distribution of the financial institutions that were similar to the distribution of the industrial companies, and you can meet the needs and local level or national level and now we are concentrating it increasingly to aware that small

business has to have some way to deal with this large institution because that is soon becoming their only choice that is the mechanism. it's not as innovative at least historically so we have a strength here we are saying it's not because europe was not therefore we should give up our strength i don't think so. i really don't and if you get institutions is a fact of life i talked to firms who have been pretty much told by some of the largest powerful institutions words like why should we make this loan to you? to convince me when you have it locally owned there's a mutual gain because the community doesn't do well unless the institution does well, so i think that's been our strength. we have to play to our strength rather than see it go away because it's not as b

[inaudible] neil barofsky is a professor new york university school of law. first special inspector general which i think is pretty unusual. i think any other person has an acronym for the public could think of. he's a university of lund alike graduate from law school in 1995. i can't believe that. is that right? and the criminal convictions which is about 98% of the

criminal conviction for those that have been fall when all of the crisis and as far as we know anyone i don't know of the rise is bernie madoff in good company. i left my question -- >> i did ask you what your brief was at t.a.r.p.. were you responsible for overseeing where the dollars flow or the policy or both? >> we have a very broad mandate. so when the congress enacted the emergency economic stabilization act, which gave treasury the authority to spend $700 billion of taxpayer money or are 700 billion in taxpayers' money to bail out the financial institutions, it is a part of the legislative compromise a number of different oversight

bodies were created. one of them the one placed on the executive branch was the office of the special inspector general for the troubled asset relief program, sigtarp to that unfortunate acronym i went by for about two and a half years, and the mandate congress gave was abroad. it created two different missions. the first was all enforcement. we became the country's newest created law enforcement agency. and we had full law enforcement powers, guns, badgers come search warrants, jackets, we arrested people, like a mini fbi for t.a.r.p. and t.a.r.p. related crime we were given jurisdiction which is primarily the reason i think i was so ready for the job as someone had a background as being a federal prosecutor. the second part of the mandate was brought and was just a generalized oversight transparency reporting function, so specifically we were given the authority to audit all things that happened under

t.a.r.p. and reaction taken by treasury, but also the responsibility is to be tell everything that was going on at t.a.r.p., everything going on at sigtarp, all the different programs, the alphabet soup of acronyms and the different sub programs as well as the requirements to go back and look of the decisions we made and make recommendations say they were good, say they were bad and what we should do going forward, so it is almost a congressional race sanctioned monday morning quarterback role the was part of the agency, so that is how we operate on those fronts. we were a brand deutsch agency that didn't exist before i was one in on december 15th, 2008, and we build an agency around the functions to carry out their role. >> when you look back on the crisis and what is managed using the resources, are there anything that stands out as having been particularly good about the supply whether or not let's say lessons to be learned?

>> it's sort of like anything. in washington there is this incredible political rush to put labels on whether something was successful or unsuccessful. you'll hear the officials tell you that was the single most successful program in the history of america and to busheir opponents in congress talk about how it was the worst thing that under heaven and of course the truth, the accuracy lies in between, and i think to pierce the political malaise that is around t.a.r.p. and there is a tremendous amount of political malaise, you have to look a what was the progress appears to, what was the intent of congress and what was the original intent of treasury and the many programs? ..

when the program shifted from what it was originally supposed to be as sold to congress and to the american people to go and buy troubled assets into a world of capital infusion, recapitalizing banks, it came with the promise that it was going to restore and increased lending. now this may have been an unrealistic goal given the state of the economy, but nonetheless that was the stated policy. as we all know, that just didn't happen. lending contracted and continues to contract well after the largest banks. >> why was it extended without

conditions? my impression is there were some banks that had no conditions imposed. >> low, i think, again, it depends on what the policy goal is. the stated policy goal was not just prevent financial armageddon. it was to get the banks to take t.a.r.p. funds and use it to restore increase lending. the lack of strength, having strings attached release sealed the deal along with the capacity that surround it the assignment of funds. so it would necessarily have to be a requirement. the t.a.r.p. finds. by the quake, x percent of small businesses and 8 percent of families. very -- not necessarily a helpful policy mechanism, but could have been done through

incentives. so for example, the t.a.r.p. shares that treasury bond was a 5% dividend payment. there could have been 8-cent -- incentives built around those payments. by increasing lending over a baseline it would turn the bank a better dividend. that's just one example. the second problem was the lack of transparency. again, this policy goal was set, but when i came to office, literally a week after i got there and made the recommendation that there be some mechanisms of the bank could report how they're using funds so we could measure and see whether this policy goal was being carried out with a lack of policy mechanism so that we could adjust it. it was utterly rejected. i was told that i was out of my mind, going to destroy the country, destroy the banking system. neither the first or last time i was told that.

but there was this lack of accountability. there was a sense of we will measure it later. [inaudible] >> i think so. if your going to have a policy goal and state your credibility on that policy goal which is what treasury did, the treasury came out and said, listen, the reason we are shifting gears and we won't be buying troubled assets, which was very important for the legislative compromise that got this bill passed, not to say that what they did wasn't fully authorized. it was. they had to have a justification, and it was to increase or restore lending. the policy mechanism, one, you have to have the mechanisms were, too, you need to be a little more careful about what your policy justification is for the change of behavior. >> t.a.r.p. was an incredibly important background fact. dot-franc was passing through

the legislative machine. how do you think it influence things? >> well, i think ultimately not as much as it should have. and i hear the statements that we have heard a number of times dodd-frank had its heart in the right place, and i think he did. count me among those that overall it made things in some ways less dangerous. ultimately this was sold, again, let me go back to the justification as to be the end of their era of bank bailouts. never again will we have to bail out a financial institution. because of the deep unpopularity with t.a.r.p. and in some ways a very justified and popularity, the core goal, it really hasn't had the legislative courage to accomplish that. in many ways it took in deferred the really hard and difficult decisions and pushed that out to the regulators.

even if they have their hearts in the right place, something that was said earlier today, the regulatory but also the political will to do what would be necessary to truly rain in the implicit guarantee for the largest financial restitutions. i think that is extremely unlikely. >> that is depressing. [inaudible conversations] >> we were talking earlier. there was a lot of resistance to the transparency of the treasury. what you just said about having a policy goal and try and measure it. that's the kind of transparency that they try to avoid if they can. why do you think in the treasury case transparency was such a big issue? >> well, and generally there is a reflexive antipathy towards

transparency among the regulators. you know, you solve it not just the treasury, but at the federal

we saw, which was very surprising, was the way that it was written. was sold to the congress and members of congress as buying troubled financial assets, mortgages and mortgage-backed securities, but it was written in a way that was so remarkably broad that the money could be

used to invest in any regulated company -- >> says that make do -- very broad. does that make you comfortable with the kind of bait and switch that the treasury was accused of going from toxic assets and bailing out institutions? >> well, i think that it wasn't really a bait and switch. i think that would be unfair if for no other reason than congress voted. i think a lot of members of congress didn't realize what they were voting for, but members of congress did.

this was something that from the congressional leaders new and anticipated, even members of the caucus did not that there was going to be a shift in focus. so essentially, while i have some sympathy for those members of congress, more from a perspective not necessarily that i voted for the huge bailout of the auto industry, but more from the perspective of where i think there really is a potential acquisition of a bait and switch was the process involving the foreclosure crisis accounting because those members of the caucus, particularly the democratic caucus and the cbc, their vote for tart was really conditioned on the idea of the purchase of toxic assets because the promise that was made that once treasury atoned $700 billion worth of mortgages and mortgage-backed security as the investor, as having the principal interest in those loans and mortgages, the promise

was that treasury would then modify those mortgages. the concern from members of congress, and their constituents who were really feeling the ravages of the foreclosure crisis in may 2008, and that think that is where you have the biggest sense of the trail because once that switched from buying mortgages that could be modified by the government to equity investments, investments in on companies, there was the feeling that poll, that policy goal, and going back to your first question, did t.a.r.p. work, that is one of the most significant fundamental main street failures of t.a.r.p. >> why don't we open it up? questions? do i see -- i'll ask one more before we -- to give people a chance to think of something provocative. you have been listening to a

presentation here today. how comfortable are you given your experience with t.a.r.p. and thinking about dodd-frank that we are on the right road. i'm not sure it shadow banking has been a proper frame. we have an idea of what we expect to happen that is robust. >> i think that when you look at the mechanisms of dodd-frank and see some of the people speaking here today, you are certainly start that they are remarkably thoughtful, intelligent. you know, in some ways deeply patriotic people. some of them have left a far higher paying jobs in the private sector in order to work on this project. it gives you a sense, a good feeling. but ultimately it is one of the failings of dodd-frank and one of the concerns i have. even the overall too big to

fail, ultimately whatever work they do is going to depend on the political process. and i think dodd-frank, it politicizes the approach of weather dealing with capital and dealing with the local rule, all of these things that in certain ways, this morning, more rule based approach, being left not just to the discretion of these regulators, but as their a prism of the political pressures and ultimately the decision maker for all of these decisions, the person who is invested with the most power over what happens is the secretary of the treasury. that is a political person. that political decision is going to be through the prism of whatever is going on in the political process with the administration with the next election. i just don't think we have seen that type of political commitment and the type of

significant change. he posed a question earlier about should we be worried about the concentration of our financial system because it is in as bad as europe, he was quoting secretary gunnar. i certainly agree with our speaker, that is an awful analogy, a terrible call. why should that be the standard for the united states of america. that is the person who is ultimately going to be responsible for making the really tough decision. >> coming your way. >> back to the original.

back to the original decision to bridge the mechanism. and could it have been the original idea. it was going to be complicated to figure out. and it was my impression at the time that the very reason, people understand how to do it. but with the first approach have been feasible? with the blessings of hindsight would it have been better to do that? the fallout from not doing it was, you know, enormous. >> look. certain aspects, it's my job to second-guess and use that hindsight. i have never been critical of the decision to use capital

investments. it was authorized under the statute. buying toxic assets at that point in time at that depth of the crisis could not have worked. there wasn't time. it would have had unintended consequences for the financial institution. that was not -- at that point that was not a viable alternative, and i think the capitol injections in the capital purchase program was instrumental in avoiding a collapse. i do think, where i think there was a material was that promise t.a.r.p. would be used not just of rescued of wall street banks. absolutely a benefit for main street. i don't mean to minimize that, but the second part of the legislative process with got the votes to pass was meaningfully addressing the foreclosure crisis through mortgage modification. that promise was shelled in october. understandably show. a ultimately it was abandoned until the administration in

february of 09 announced and executed a policy that has been, in my view, an abject failure. could they have done a better mortgage modification program? i think they could have from the beginning. throughout the process, and take it today. i think if you want to up -- don't take my word for it, take the secretary's work for it. talking about the home affordable modification program that was announced in february and nine with the intent to help up to 4 million american families stay in their homes through sustainable permanent modifications with t.a.r.p. funds. the secretary recently testified that -- really acre the criticisms i have had for more than a year. it is an incentive base system, and the incentives were not powerful enough. being run by the mortgage servicers.

unfortunately middleton nothing has been done to address those problems even though not just me, but the congressional oversight panel and many others identified this problem early on. [inaudible question] >> if you key individuals. the foreign exchange are likely going to be exempted from the clearing requirements. it was a decision that was left in the power of the treasury secretary. that seemed fine. i was actually hopeful that there would be a report or study on the basis of which this exemption was provided, but i think nothing was done. i wanted to come back to your last point. even today it is possible potentially for significant

mortgage modification. do you think something like this might happen? the household the leveraging cycle has really started. >> i think what we did is, i think that, you know, we took the worst path possible. you know, one suggestion is we should have done nothing and let us find the bottom on housing as quickly as possible. i hope it wouldn't drag along they're too often recover. or we could really commit the resources and try and make a program that would have an impact. i mean what the president proposed and promised, sustainable modification program, not act kick the can down the road program where you are just sort of the stretching it out, and that is where we are. we are in the definition of kick the can down the road. a program that took 800,000 people, give them false up and put them in a program they never had any chance of succeeding in and flushed them out for 600,000

to have some benefit through modification, but that is the proverbial drop in the ocean. we essentially sanctioned this process and not recognizing the losses for these mortgages that are either in default are heading toward default, encouraging some sort of industry practices that the stand. at one moment, and i think it was reported in the post. there was one moment of real honesty and clarity at some meeting. i think it was the secretary, various blockers on the internet. the idea was, the idea why this program was successful is extending the foreclosure crisis. the land that was floated. they trashed the idea. but that may be the only thing that this program has really done to any extent effectively, stretch this process out. >> three questions.

>> dennis. i first want to say thank you because i don't think anybody will ever know the enormous pressure you were put under. very few individuals and government were put under the pressure you were under. i was on the hill at the time. very few individuals in our history would not have cracked under that pressure. it's incredible time and time again, and each time you finally get to the next step. double the pressure. quite an amazing feat. the way to understand the accomplishment is to be reminded. i remember the day when the three page bill was sent up from treasury which was, of course, the first drafting of the bill which had complete blanket immunity from anybody for anything that they did in connection with the program that became t.a.r.p. and legally prohibited oversight and accountability. what happened in the legislative process and many parts of that process are dead. one of the good things that happened is in exchange for

allowing tart with you and some other oversight mechanisms. one of the key things people understood is you had to have real independence. some three pages to significantly more than three pages. no accountability, complete immunity. i don't know. it wasn't in there. so i think that the context, the whole program has to be understood in that context. and just very briefly for the historical record to be accurate, there are many members of the congress did not believe the purpose to the purchase of toxic assets would ever work, work fast enough. we forced it on the administration to allow capital injections. in the hearings on this bill the administration said no, never. the world will end. everything else. congress forced the provision in there and forced the executive to have the authority and ability to make capital

injections. i only and a slight modification to your comment on why people felt they switched. it wasn't just for closure. there was an expectation that there would be some criteria and consequence and connection with the money going into the banks. the only time they got religion on putting terms on the money was when they could-the auto companies. they didn't apply any of those strange and, really stringent, put your hands in the middle and capitalism requirements on the banks, not one. i think that was the other part. money for nothing and money under strict terms for everybody else. i agree completely with the foreclosure issue in the back and never had a hard to do it. >> thank you for coming. when you look at that the economy is born from two things. one is, they really were afraid that banks weren't going to participate. looking back on it that seems almost laughable.

frankly, at the time i thought it was laughable, but that does not make their sincerity any less. they really did believe that putting on stronger conditions would drive it out. notwithstanding the remarkable response that they got. they were prepared. they were prepared to actually direct them to do so. they didn't have to. the reaction was from all but one, capital in the middle of a crisis. of course were going to take it. part of it was almost a navy about banks and about what they had done. i think -- for me i came out of this probably from the exact opposite viewpoint. my entire interaction with banks were either i was the victim of the perpetrator, particularly perpetrator. it was really one of the reasons why was brought in. i view my role initially and particularly as being an antifraud guy. i cannot tell you how many times

we would be having a discussion about this programmer that program and get the response, no, you don't understand these are banks. they would never risk their reputation by giving something like this. and this was a constant argument. i think it was around six or seven months and when i finally said at a meeting, please, don't ever say that to me again because it's not going to work. you're talking about shaming the shameless, especially what just happened in the lead to the crisis, but i think that represents a couple of things. it's one of the reason there was this trust. i think sometimes when you see some of the anchor that comes out, it's almost like the treasury department and perhaps even the white house, a sense of pictorial -- the trail that the banks didn't put their policy goals in front of what you would want. >> yes.

i had a question about your enforcement activities. presumably you dealt with banks and institutions. how they were using it. a lot of discussion about the show banking community. a lot of the story of this particular crisis traces back to underwriting standards which in many ways were outsourced to nonbanking entities. potentially i assume there was fraud at those levels. stories that kind of bubble up around that. their efforts, did you ever get an opportunity to go beyond those institutions and the relationships they had and how far down that went in the whole web? did you feel that was -- in some sense we just didn't have the fed doing what they should have done. the oversight in that arena, did you have that mandate? did you follow the thread? did you learn anything

interesting? >> unfortunately, this is the material for me, under a toxic asset purchase program, that would have given as criminal authority to investigate all the way down. we would be buying these mortgage-backed securities and therefore as a potential victim for underlying fraud related to securities, but we didn't do that. as i said, one of the reasons why i was hired was not because of my auditing skills. it was because i spent eight years during mortgage fraud and securities fraud investigation and prosecution. so that would have been an opportunity. it pretty would have been an upsurge in the for the department of justice to have a specialized law enforcement entity or group that looks at financial crisis related crimes. for us the way t.a.r.p. was structured it fell outside of our jurisdiction. unless there was an attempt to capitalize on the t.a.r.p.

program now, the need was outside of our criminal jurisdiction. so other than that we really didn't have an option. even for the nine largest financial institutions, although a lot of our investigations are based on misrepresentations made to treasury in order to try to get t.a.r.p. funds, for the first nine banks it didn't matter if they were cooking the books on the balance sheets. treasury was giving them the money anyhow. if they had even larger holes in their balance sheet because of fraud that would have been only more reason for them to get money because that would have been a pure bailout. so we got rid now in many ways of financial crisis. >> to more questions. perry patient. >> just getting back. tart didn't really deliver for main street. you know, basically that summer

treasury secretary paulson, t.a.r.p. became that position. shortly thereafter city and bankamerica needed extenuating support with fdic, deferred, investment. more tart. fdic reinvesting of assets for a year or so. so just reflect on the terrain changing. so a week, month, it's hard to keep to it. and that is how the original intention to help of main street, come about because the big banks needed so much help. >> well, i think -- of first of all, i think the whole idea of using t.a.r.p. for foreclosure relief, that is not an idea that originated from the treasury department but was something

that congress insisted and wrote a section into the statute that dealt with how to modify mortgages. the fact that the terrain changed while it certainly may be an explanation, it's not a justification. this was part of alleges that a bargain. it's not as if they didn't have enough had run as far as the $700 billion cap. although citi and pfa involved $400 million, from an t.a.r.p. perspective they did it in a quite clever way. this nine or $10 billion of funds that actually would have been accounted against the 700 billion. there certainly was room for it. and, look, i know that during the time of transition the bush administration was working on foreclosure ideas. they knew very well that this was part of the product.

ultimately after the election they were asked essentially to stand down by the obama administration same, look, we don't want to inherit your program. and then they did watch out a program and committed and nice chunk. and this was also part of the alleges that a bargain. the second half of funds. i think it was a move led by barney frank. if you're going to release the other half you're going to need to make a commitment to foreclosure relief. that is where the $50 billion came from. unfortunately only a small fraction, but from a perspective of the original goal, unfortunately only a very small portion will be spent because it is poorly designed and executed. >> we have one last question. >> yes. what do you think if we had done , how do you think that

would have turned out? do you think that would have worked better than trying the program? >> the cramdown was fortunately while outside, even more outside than the financial crisis of our jurisdiction. to be honest with you, it was not something that we really study their work done because it really was outside the scope. i think the concept of principal reduction, not as afraid as many art, including the treasury department. i think not withstanding the potential moral hazard implication that a good principal reduction program could effectively help achieve that goal of affective sustainable mortgage modification. i think that given the moral hazard that t.a.r.p. is exacerbated. a little moral hazard would not be the end of the world. >> so we are where we are. if you had your druthers to you think we could do it just by enforcing dodd-frank well?

if so, what are the two or three things we have to get right? >> i think that the two areas -- where we are with dodd-frank as we are not breaking up the largest banks. i think it's probably a lost cause. you just your everyday as much as the weekend before, it seems like now in the process there is a full frontal assault. so the two areas where i think there is real potential. one, capital. not a perfect solution, but it will, you know, hopefully it is done effectively and there is a significant enough capital surcharge that it will at least hopefully provide more of the necessary cushion and even more importantly, i don't have a problem if it is penalized and somehow on drives them and incentivizes them to become smaller. but the most important area to

have any hope whatsoever to deal with too big to fail and address the implicit guarantee. that is the one mechanism that dodd-frank has put a tremendous amount of power and authority. fdic, federal reserve and treasury really have all white landscape a different things that they can do to make sure that these are resolvable. and that is ultimately the only way at the end of the data you can deal with the implicit guarantee, by convincing the market that the government really needs it, not just from the sense of well throughout the large financial position, but much more importantly, to demonstrate that to fail through one of these processes. and really strong effective use, simplify and if necessary shrink, break up, whenever you want to call it, contingent capital through the living will

process. there are lots of food ideas that can be adopted. but -- and here is the big bite. it requires a sense of political will that i think is just not there. you don't need to look any further. sheila bear has been a strong advocate and has said we will fail our role as advocate is if we don't use a living will provision to us simplify and make these institutions less complex. i have never heard anyone else in washington or any other member strongly echoed those concerns. as we all know, she is gone in a couple of [applause] [applause] >> thank you very much, charles, for having me here, and all of you for coming. i am going to get some formal

remarks to open this up, and then the panel has promised me to dispute everything i say which should provide a lot of entertainment for all of you. if you go back over two years ago the united states in global economy faced the worst economic crisis since the work craze depression. it was rooted in many years of unconstrained access and prolonged complacency. the crisis made painfully clear what we should have always known, that finance cannot be left to regulate itself, consumer markets permitted to profit on the basis of tricks and traps rather than competing on the basis of price and quality will ultimately put us all at risk. financial markets function best when there are clear rules, accountability, and transparency, and that markets break down sometimes catastrophically. for many years the strength of the financial system had been a regulatory structure that sought

a careful balance between incentives for innovation and competition on the one hand and protections from excessive risk-taking on the other. over time those constraints were undermined. the careful makes the protections we created eventually eroded with the development of new products and markets for which the projections have not been designed. a regulatory system that found itself outgrown and outmaneuvered by the very institutions and markets it was designed to regulate. in particular the growth of the shadow banking system permitted financial institutions to engage in the charity transformation with too little transparency, capitol, or oversight. years leading up to the crisis saw the growth of large, short funded, and substantially interconnected firms. a huge amount of risk moved outside the more regulated parts of the banking system to where it was easier to increase leverage. legal loopholes and regulatory gaps allowed large parts of the financial industry to operate

without sufficient oversight. entity's performing the same market functions escaped meaningful regulation on the basis of their corporate form. moreover banks could move activities outside the balance sheet. derivatives were traded in the shadows with insufficient capital to back the trade. repo markets became riskier as collateral shifted from treasurys. the lack of transparency in securitization hit the growing wage and incentives facing different players in the system and failed to require sufficient responsibility from those who made loans are package them into complex instruments to be sold to investors. synthetic products nearly multiplied wrists. the financial sector as a whole under the guise of renovation piled ill considered a risk upon el considered risk. as michele banking system

through our system failed to have sufficient capital or meaningful oversight. rapid growth in key market often hit myth alive -- misaligned incentive. financial innovation outpaced the capacity of managers, regulators, and markets to understand the risk and addressed. throughout our system we had increasingly inadequate capital buffers as well as market participants and regulators who fail to account for the new risks appropriately. short-term rewards and new financial products in rapidly growing markets overwhelmed or blinded private sector gatekeepers and swamp those parts of the system that were supposed to mitigate risk. consumer investor protections for weekend, and households took on wrists they did not fully understand and could afford. home and asset prices helped to feed the financial system and hide declining underwriting standards and other underlying problems in the origination and

securitization, in particular of mortgage loans. when home prices began to flatten and declined these fault lines were revealed. the asset employers and led to cascades throughout the financial system and then to contagion from weaker from stronger ones. those in the shadow banking system fell failures. in the fall of 2008 the credit market rose. the over reliance on short-term funding and excessive risk-taking that had been the source of significant profit on wall street and in financial capitals globally with spanned a panic that nearly collapsed the global system. in my view comprehensive reform was essential. one year ago president obama signed into law the dodd-frank act which provides for supervision of major firms based on what they do rather than their corporate form. shadow banking is brought into the regulatory daylight. the larger financial firms are

required to build up their capital, constrain size, and place restrictions on the risky is financial activities. the act comprehensively regulates derivative markets with new rules for exchange trading, a central clearing, transparency, capitol, and margin requirements providing for data collection and transparency so that no corner of the market can rest go unnoticed. an essential mechanism for the government to orderly liquidate failing financial firms without putting taxpayers at risk and creates a new consumer protection bureau with important consumer and investor protections. in sum, the act provides a strong foundation on which the u.s. must not carefully build a more stable and balanced regulatory system. let's look at each of these in turn. before dodd-frank, an entity or a bank, tougher regulation, more stringent requirements, and more robust set.

if an entity were an investment bank then it had tell only abide by a different set of rules. for example, when u.s. investment banks needed to find a consolidated holding company regulator in order to meet european union standards for doing business in europe sec set up of voluntary consolidated supervise into the program with little oversight. not established as a provincial regulator, did not have clear regulatory oversight, and had little experience. moreover the leverage requirements that served as a backstop for capital requirements on banks were not applied to invest in banks. in effect this system allows large financial institutions to choose a regulator that offer the least restrictive supervision. the fed did not have authority to set and enforce capital requirements on major institutions that operated outside a bank holding companies. that meant they had no supervision over investment

banks, a diversified financial institutions like aig or non-bank financial companies competing with banks in the mortgage consumer credit in business lending market. the office of thrift supervision duke its role as supervising thrift, not the holding companies such as aig. regulators permitted banks to engage in riskier mortgage lending stepping in with guidance on this sub prime market only when it was too late. today the dodd-frank act provided authority for clear, strong, and consolidated supervision by the federal reserve of any financial firm, regardless of legal form whose failure could pose a threat to financial stability. we will have a single point of accountability for tougher and more consistent supervision of the largest and most interconnected and financial firms. all bank holding companies will be supervised by the state, and the largest will be subject to heightened standards. all savings and loan holding

companies will be supervised by the fed. on big franchise to touche is designated by the financial stability oversight council will be fed supervised. the voluntary investment bank holding company regime has ended. dodd-frank also provides for more stringent standards. tardes to putting in place stronger requirements for capital and liquidity. the enhanced rules on affiliate transactions, lending limits, and counterparty credit exposures. required to use maximum supervision which will take into account not only the risk within the institution, but the risk that this institution poses to that financial system as a whole. major firms will be subject to a limit that prohibits a company from engaging in mergers or acquisitions that would result in the firm's liability, including wholesale funding and off-balance sheet exposures exceeding 10% of the finance

system as a whole. these are likely to reduce risk in the financial system and to reduce too big to fail distortions. before dodd-frank no regulator or supervisor had legal authority or the responsibility to look across the full sweep of the financial system and to take action where there is a threat. today while the regulatory infrastructure is undoubtedly far from ideal with too many divided responsibilities the financial stability oversight council is accountable to identify these threats to financial stability and to address them. access to affirmation across the financial services marketplace. the new office of financial research is in power to collect data from any financial firm and to develop and enforce standardization for such collection. before dodd-frank the derivatives market grew up in the shadows with little oversight. credit derivatives concentrated

risk. synthetic securitization with imbedded derivatives magnified failures in the real securitization market. major financial firms used derivatives to increase credit exposure to each other rather than decrease it. we should never again face a situation where the potential failure of a virtually unregulated capitol deficient major player in their religious markets such as aig can impose devastating risks on the entire financial system. this market didn't have enough information about the allocation of risk exposure or the extent of mutual interconnections. wind up crisis began regulators, financial firms, and investors had an insufficient understanding of the degree to which trouble for one firm spell trouble for another. this lack of information magnifier as the crisis intensified causing a damaging wave of leveraging and credit

market breakdown. the lack of transparency and sufficient supervision and adequate capital left our financial system vulnerable to concentrations and risk. today regulators are putting in place the tool to comprehensively regulate the derivatives market for the first time. the act provides for regulation and transparency for transactions and provides for a strong capital and business conduct regulation. it provides for regulatory and enforcement tools to go after manipulation, fraud, or other abuses. the act requires standardized derivatives to be clear which would substantially reduce the buildup of bilateral counterparty risk. central clearing parties themselves are subject to strong supervision. such derivatives would be traded on exchanges, alternative swap execution facilities which would improve pre and post

transparency. help to improve competition as well as to improve safety and soundness in the system. as market participants and the regulators will have full access to current prices in the event of system disruption. even otc derivatives would be reported to ed depository making the market far more transparent. the act provides for regulation of all otc dealers in major swap participants including business conduct rules, capital rules, and supervision. the act provides robust capital for derivatives, transactions that are not centrally cleared providing a strong incentive to use central clearing and a bigger buffer should problems arise. at the same time as the act reforms derivatives market it provides a new framework of regulation for financial markets utilities incredible payment, clearing, and settlement activities, including not only those in the derivatives market

but the wholesale funding repo markets that are curbing -- critical. in a to the financial crisis major financial firms became increasingly funded, not by traditional bank deposits or even longer term funding in the commercial market, but by overnight funding. these markets became increasingly concentrated in two major clearing banks. as the market became more concentrated it also became riskier because counterparties came to accept not only treasury securities but also highly rated asset backed securities. he's coming in turn, became riskier as credit rating agencies became increasingly willing to label as safe assets that were lower quality. when the financial crisis hit the repo market froze causing a massive contraction in available credit. the dodd-frank act fundamentally performs the wholesale funding market by providing strong

authority for the federal reserve to regulate financial utility in critical payment clearing and settlement activities. new rules for capital, cairo, and margin requirements and establish uniform standards for the market. these are coupled with basic changes to liquidity under basel iii rules. the concentration limits and reforms the insurance system. these reforms will have the effect of taxing short-term liabilities, and forcing firms to internalize more of the cost of the funding system. at the same time as ec changes to the regulation of money marketing mutual funds meaning that such funds have somewhat stronger liquidity positions. the act also transforms regulation of the last major element of the shut up banking system, securitization. it requires deep transparency into the structure of securitization, and getting information about assets and

originators. securitization sponsors retain risk. incentives are better aligned among participants in the market. capital rules will better account for actual risk. parallel changes will not bring the most common forms of securitization on to the balance sheet. credit rating agencies will be subject to comprehensive oversight, including policing and conflicts of interest. ratings themselves will be more transparent including key information on rating methodology, compliance, underlying qualitative and quantitative data, due diligence, and other protections. now, in the consumer market consumer protection was fragmented over seven federal regulators, most of which focus to chose they're energies in other areas rather than protecting and consumers. we lost coverage and consolidated authority. nonbanks could avoid federal

supervision, and banks could choose the least constructive approach. federal regulators preempted state consumer protection laws without adequately replacing these important safeguards. fragmentation of greuel riding, supervision, and enforcement led to finger-pointing. today the consumer bureau has market wide coverage and will focus on more effective regulation and supervision. it can focus on improving financial literacy and can help to set a level playing field for competition. the government did not have the authority to a unlined large and substantially interconnected financial firms that failed such as bear stearns, lehman brothers, and -- without disrupting the broader financial system. today major financial firms will now be subject to heightened standards including higher capitol liquidity requirements.

major firms will be required to internalize costs which would give them incentives to shrink and reduce the complexity, leverage, and interconnection. it will be a bigger capital buffer to absorb losses. this will help to reduce risk in and among these financial institutions. in the event such an institution fails these actions will minimize the risk that any one firm failure will pose a danger to the stability of the financial system. the crisis shows the u.s. government did not have the tools is essential to respond effectively when the failure threatened financial instability which is why the dodd-frank act permits the government in limited circumstances to resolve the largest and most connected firms consistent. this is the final step in addressing the problem of moral hazard, to make sure that the u.s. has the capacity to break apart or unwind major financial firms in an orderly fashion that

limits collateral damage to the system. under the orderly liquidation authority the fdic is provided the tools to wind down in major financial firm on the brink of failure. shareholders and other providers of regulatory capitol will be forced to absorb losses. management will be terminated. critical assets and liabilities will be transferred to read liquidity can be obtained by treasury borrowing that is automatically repaid or if necessary from other major firms , not taxpayers. in that manner the resolution authority allows the government to wind down a firm without exposing the system to seven disorderly failure that is the financial sector as a whole at risk. we need to have some humility about the ability to predict every systemic failure of a major financial firm. the creation of a domestic resolution authority is not enough. while the u.s. is implementing

the dodd-frank act, it is critical that global reforms proceed as well. in particular the u.s. should continue to press for progress on resolution authority for derivatives. resolution of a major financial firm will require international cooperation which is why it is so critical that other nations implement their own resolution authorities can participate in supervisory. it is also critical the major financial capitol implements a derivatives framework that requires adequate capital and moves clearing and exchange trading and provides for full transparency. on capitol, minimum capitol ratios are set at a level that will represent a significant increase in terms kapor requirements. these new requirements include the creation of a capitol conservation offer above the minimum which is preached will restrict the firm's ability to pay dividends or buy back stock. now at work on how to implement a capital surcharge for the

largest and most interconnected financial firms and reached significant progress over the weekend. the basel iii committee is examining how to use contingency in which debt transforms into equity. to further reinforce and internalize the cost of their own failure. the process is raising the quality of capital. the requirements will focus on common equity, excluding other liabilities that did not act as a sufficient offered to absorb losses. there will be strict limits in the capitol calculation on the aggregate contribution of investments in other financial institutions, mortgage servicing rights and deferred tax assets. moreover, increasing the capitol required for trading positions and counterparty credit exposures in derivatives and secured lending transactions. for the first time it will be introducing a new internationally applied leveraged that includes firms

off-balance sheet commitments and exposures. furthermore it will be instituting liquidity requirements for the first time to ensure financial firms are better prepared. in my view this is enormous progress. the united states had an urgent obligation to fix the failures that threatened our financial system and that helped trigger the worst global economic crisis since the great depression. the crisis caused a recession that has hurt and cost american families and american business is quite dearly. in my view the dodd-frank act puts in place most of the key reforms necessary to establish a foundation for financial stability and economic growth in the months and years ahead. thank you very much. ..

so he has a wealth of knowledge in both the policy arena and the academic arena. why don't we start off with martin. >> thank you. this microphone is on. i'm going to make some comments on dodd-frank. these are not on michael who i think has done a terrific job at the treasury and working on some

of these very difficult issues. so i have a few concerns about the dodd-frank, but i do think we should all be grateful for the job that michael did. when dodd-frank passed i was pleased an important step forward had been made making the u.s. financial sector saver in particular while placing the fed in charge of monitoring wasn't necessarily my first choice, i thought it was a better thing to have the said monitoring all major financial institutions that it was an improvement over the previous system we had in which aig, bear stearns and others were regulated by institutions that really didn't have the ability to control or recognize the failure of these companies. so i think that is a step forward. i've ended up supporting the consumer protection agency.

in my view they should always be resistant to the creation of a new agency, as it is truly necessary and there were and still are concerns that thus efp a man not fully understand the we the financial markets work. some regulations designed to protect consumers may end up limiting the access of low income consumers to borrowing more credit cards. in the end, however, i was persuaded because some financial institutions followed the dubious business practices to exploit the forgetfulness or lack of knowledge of the borrowing public that it is important to have such an agency. i strongly hope that it works to help consumers and avoid some of the pitfalls that would be involved in making credit more difficult to obtain. the most important concern of dodd-frank is a pre-have lamented or undermined the ability of the fed and the treasury to act quickly and

strongly to prop up the financial system and prevent collapse in the event of a new crisis in the future. both conservatives and liberals alike were outraged at financial institutions received support from the fed or from tax payers or a combination. on the left, the bailouts were seen as a redistribution from poor to rich, conservative the bailout created a moral hazard problem that were encouraged the next generation of the financial ceos to take more risks knowing if they feel they won't be bailed out. with both left and right united against bill walz, dodd-frank limited the power to act on the exigent circumstances to prevent a financial meltdown. i think this was the wrong lesson from the crisis. the direct cost to taxpayers of the bailout was very small. fannie and freddie were a different story. while the cost to shareholders and senior executives in the institutions that got into trouble were enormous they lost

a lot of money and in many cases lost their jobs whether they were built or not. the problem of moral hazard exists in our economy and in fact this problem and the health care area is drawing us into bankruptcy. so moral hazard can be and is a serious problem and certainly something that financial regulations should pay attention to but i don't see how future financial ceos are going to be taking excess risks because they look back at bear stearns, aig or think the same thing would be fine for their institutions. the moral hazard problem should be viewed through the realistic lines and not as a bumper sticker. let me note also the cost of financial breakdown of not stepping in our enormous and would have made the recession we are in now even worse. in other words, despite many mistakes along the way, the fed

and the treasury did the right things in supporting financial markets and financial institutions in order to present the total breakdown of the financial sector. one of the things the movie to big to fail correct was a serious danger of economic collapse faced in the fall of 2008. we are now in a situation where a our financial institutions or even more concentrated than they were before the crisis on the treasury. multiple failures among these large institutions would be even harder to deal with them before and limited the power of the fed and the treasury to deal with them. second question with dodd-frank is whether it is in fact creating an unwieldy structure that would inhibit the workings of financial markets and efficiencies of financial markets. recall our financial system was in fact highly regulated before the crisis. citibank had regulators that were supposed to be pouring over the books making sure everything

was all right. insurance companies large and small were and are highly regulated the problem in the financial crisis was that no one thought for the consequences of a 30% decline in home prices and one of this was possible almost no one the problem was not that they were insufficient regulation, it was that they were ineffective regulation. i want to give the benefit of the doubt. the nature of the regulatory system is emerging with some international cooperation and will fix the obvious problems of the system will make sure the result is a more effective system and not just a series of process changes that are a gold mine for accountants without much increases in safety. it would be nice to see steps taken to improve the pay and training of leading regulators on the one hand evidence of those who've regulate effectively on the crisis have been relieved to do their jobs.

talk about director resolution mechanism. while dodd-frank limited the power to act the fed and treasury debt on the exigent circumstances set up in its place a process that's designed not to avoid the failure of large institutions but resolve those institutions in the event that they get into trouble. this resolution authority has been given to the fdic. i've read the white paper on a resolution on what it would have done in the case of lehman brothers and i didn't really understand it. much of what is written about the resolution process seems designed to reassure politicians and the public that it's not a bailout. so it's designed to say no more bailouts. so okay, that means that the fdic process is not a bailout, it should be viewed as a kind of bitter bankruptcy procedure. how much better? i think any objective observer

who looked at what happened to the global financial markets after the lehman bankruptcy would say that it was a disaster. financial markets went in a freefall, the fed was forced to step in and provide guarantees and the dow fell below 6,000 some weeks after the event. it is natural in a crisis for everyone to try to move their wealth and six places and avoid whatever it may be ahead and collectively this response triggers runs on financial institutions and potential, potentially financial collapse. what better bankruptcy would have to avoid these consequences, and we need to understand how the fdic would accomplish this as part of its modified bankruptcy process. another way to look at what the fdic process is is that it is actually a bailout, a bailout in disguise lehman had 50 to 70 billion of bad assets we are told we are told the treasury refused to guarantees of a viable parts of lehman brothers

couldn't be sold to the caribbean for our cleaves or anyone else. the fdic says it would have created a reach institution and kept the viable parts of lehman brothers afloat and available to sell. this sounds to me like they would have done with the treasury refused to do, bailout lehman brothers. now, since i just argued the bailouts may be better than meltdowns i guess for me this version of the fdic resolution process is a kind of disguise the bailout is preferable than one which causes the whole system to go down. but, i think there's some questions about whether the public and the congress our understanding if that's what it is and it also seems to me surprising to put the fdic in this role. they are the caretaker of insured deposits, not the curator of the financial markets, and i do not see how

the fdic would have had the resources or authority to respond effectively to a future situation where multiple very large and may be small institutions were feeling on the global markets were in turmoil. media is a failure of my understanding that as a representative citizen i would like to feel more confident i would like to feel about this resolution process. my suggestion is we commissioned one or maybe more independent research studies that would try to rerun the crisis period with of the new limits on the fed power and the fdic a resolution mechanism in place and ask whether or not the researchers doing the study believe that the outcome that would have happened, the counterfactual would have been better or worse than the one we actually had. stress tests and the banks have turned out to be a good idea, and i think it would be worth doing a stress test for policy if we could do it effectively.

since the focus on areas of concern about dodd-frank, let me confirm further praise. there was an essential steps be taken to make the system safer and to avoid the excessive risk-taking that brought down the economy. as the new regulatory structure emerges, there are many elements that undoubtedly will make the banks or other institutions sievert, higher capital requirements, reporting, more unified regulatory structure for large institutions, the creation of yes fsoc and monitor development. these are all positive steps. we are not unfortunately right now protected from the crisis because sovereign debt is affordable and the treasury but for a while of least a think the private sector and financial institutions will not be the source of a new crisis. we just need to make sure that if or when this happens in the future we can in fact cystine the financial system. thank you.

[applause] >> let's move on to thomas and then we will give you a chance to comment and open up after that. he's a professor of the school of business and new york and the former dean of the school board and importantly a policy initiative by 43 n.y.u. professors on restoring stability to the financial system. so it comes at the subject of great depth of knowledge. i want to thank our hosts for the assessment of the dodd-frank act and particular also i want to thank michael barr for his hard work and service of the country and one of the principles forces designing the dodd-frank act. it's an unquestionably difficult

job to fashion regulation that's both effective and politically and lamentable. and then listen to the critics like myself and my colleagues to read politics free rahm of academia contrast with has been achieved that is infeasible, unlikely. nevertheless, that's what we are put on earth to do and do what we must. i commend michael barr for his very thorough and sing analysis of the crisis and very rich description of all of its moving parts. in particular the description of the role of the shadow banking sector and engaging in a regulatory arbitrage and accumulating the risk that led to the defense of 2007 to 2009. like many commentators, but he felt the dismantling of the architecture of the 1930's were precipitating a financial

crisis. now we can only hope the regulatory architecture developed in the framework of dodd-frank will give us six decades or more of financial stability and economic growth. the reforms of the 1930's. and we can hope that this is the end of too big to fail. certainly the intent is there and the ingredients are on the table, but i think that there's a lot of wishful thinking involved in achieving this legislation that's likely to repeat the success of the earlier reforms. in the 1930's the u.s. needed the choice to move away from universal banking towards a tightly regulated system. the reforms are successful because they address the market failure of the financial system at the time and they address the problems of moral hazards the were likely to arise as a consequence of their solutions. it was a belts and suspenders of regulation.

in contrast, the dodd-frank act reforms seem to me more like a group of regulators placed to reach out and hold the pants should they start to fall. maybe that will work. but for my perspective it seems like a missed opportunity to streamline the regulatory architecture and the safeguards in the system or automatic, less vulnerable to the regulatory arbitrage and was vulnerable to the interference. as i acknowledge some of this is easily said but hard to achieve. but some of it may be achievable even in this implementation in this phase. so to understand where the conservatives like, you have to understand why the regulatory architecture of the 1930's met its demise. a popular version of the story has it that we had a birth of the free-market fundamentalism and decided to do away with the restrictions embodied in the glass-stegall lacked. there was a high degree of

free-market fundamentalism not in dispute one only has to require, one only has to recall the testimony the head of the ft -- cftc about the dangers derivatives that were dismissed by the treasury secretary larry summers and fed chairman alan greenspan. but by the time the gramm-leach-bliley act was passed in 1999, the regulatory architecture of the 1930's was long since dead ha, killed not by is the police about the markets of disciplines, but by innovation. innovation occurred for many reasons. the end of the brentonwood system of exchange rates created the need for the currency hedging instruments and swap arrangements, high inflation rates in the 1970's inspired the development of certificates of deposits now accounts there was ongoing constant regulatory

arbitrage and the shuttle banking system is the heart of miami's about the dodd-frank act. of the rooms that occurred at the onset of the financial crisis occurred in the shadow banking sector, the runs on a wholesale funding markets, money market funds a around the dodd-frank act and implementation and michael speaks of this morning is acknowledged this. but they're seems to me a fundamental misconception about the nature of shadow banking and the fundamental role of regulation and i will get back to that in a minute. but first let's think about what we want for the dodd-frank act. this is not a statement about some ideal regulatory framework. it's kind of too late for that and that was politically feasible anyway. what we want from unimplemented version of what we have? it's to be a system that

encourages innovation and competition, provides a transparent financial system and ensure safety and soundness, preserves the center of global finance and deals as much as possible with the problems of moral hazard and timing consistency. we talk a lot about these issues in the recent book and i don't want to have rehearsed them all here although we think they're missed opportunities we give the dodd-frank act a lot of praise for improving transparency, praise for doing sensible things about consumer protection worrying about the right ingredients for safety and soundness but there are big areas of concern that remain. you know in good architecture it is said forms should follow function and i think the same thing is true in regulatory architecture. particularly for the financial system. when the dodd-frank act misses the boat on that score there's a

lot about the danger in the shadow banking system and gives the federal reserve the responsibility for identifying systemically important financial institutions, sending the cattle requirements for them nevertheless it leaves a lot of discretion to the fsoc to decide what to do of what a shot of institutions. needless to say, it was disconcerting in light of that to hear the treasury secretary a week or so ago who heads the fsoc threading that it might be dangerous to set capital requirements for banks to high because they might join activity into the shadow banking sector. this is disconcerting because capital requirements are the backbone of safety and soundness rita there are plenty of rational analysis that suggest capital requirements should be greater than those being contemplated by basel 3g and those that were announced this

weekend. and moreover, the right analysis is not that we should lower the capitol requirements for banks and bank holding companies, but we should apply them to all institutions regardless of their form. capital requirements should be applied at the level of markets and products and not restricted to the particular institutional forms. if the dodd-frank act is going to be viable for dealing with universal banks that operate in the cross border environment is going to have to address this problem. host countries are going to want to have capital associated with the markets, the institutions are operating in. the more closely proximate regulatory capital is for the markets the transactions that create risk by intermediation and maturity transformation, the more effective it will be at ensuring the health of the system. the other problem that this recent episode highlights is the

inconsistency of the framework. as long as there's discretion on the part of the regulators about capital requirements and there are incentives to do what is optimal in the short run rather than worry about the long-term health of the financial system. even though you are on a dhaka yet it is often not a mole in the short run to stop in for an ice-cream cone and get back on track, promise to get back on track next week. and that's why there's been so many proposals for institutionalizing strengthening the capitol when times are good to better withstand shocks when they are not. the other question is whether the dodd-frank act really does end to big to fail. if it does, then that addresses a lot of concern about moral hazard because that is indeed the major source, not the only source of moral hazard and the system. one interpretation is the liquidation spelled out in the act can be successful at

resolving the old institutions and this eliminates a major distortion in the financial system and it's true. the recent testing by the fdic to assess how well the system would have worked for lehman brothers is encouraging in this respect. on, too, had questions. there were aspects of it that i didn't understand, and i came away feeling that maybe a little more overoptimistic. but once again, the big fall is that it relies too much discretion and discretion bleeds to regulatory capture in the timing and consistent policies. one need know of look further the fdic to see this as a problem. the fdic is one of the most successful regulatory institutions to come out of the 1930's but it was viable for the institutions and their

supporters that did not want to over from the insurance fund leading underfunding in the s&l crisis. in fact, worrying the dodd-frank act is a little more wrongheaded than that because it proposes that in the event of a costly resolution of a failing institution, surviving the institutions can be asked to cover the cost rather than have taxpayers pay them. but this seems completely backwards to be. you don't in design insurance this week. for one it is timing consistent since the surviving institutions are likely to be stretched themselves in the event of a crisis, and it may encourage them to take additional risk. so this is a little bit like what's going on in europe, but there's a big difference. okay? in europe when they decided to engage in