global. all right? second point, we received margin in the form of cash and the proceeds came in in a wire transfer of funds, and there was absolutely no evidence in looking at that $4.2 million wire transfer that it in anyway connected to any customer funds. third point, and perhaps the most important, we had an express representation in writing from mf global that the property transferred to us as margin was mf global's own property. if that representation turns out to be false, a federal criminal offense has been committed. >> and the gentleman sitting next you will come and collect that money. with that i will yield back. >> i think the -- recognize the gentleman from florida, mr. posey.

>> i thank you very much, mr. chairman. first for mr. kobak. both you and mr. giddens in your previous testimony idly stated that no matter the exact size of the shortfall, speaking of segregated funds, it's probable size, significant and will substantially affect the trustee's ability to make a 100% distribution to former mf global customers. is that still your opinion today? >> good. and thank you for the yes or no answers but they are very rare around here, we really do appreciate it. i know that you do not want to speculate why you're investing is still underway, but they saw mr. duffy's testimony and other reports it seems highly probable that customer funds were transferred out of segregated accounts and co-mingled with mf own funds to out of him understand that at this point.

probably to meet margin calls on your positions. i mean, is that -- [inaudible] >> okay. assumed for the moment that is, in fact, what happened. it would mean that the missing customer funds will never be found and some overlooked or, had been hoped for but many customers when they first discovered that a substantial sum of money was missing from their accounts because if the money was being used to back those bond positions we know that those bonds were sold in mid-november. correct lex. >> that is our suspicion as well. it doesn't were not looking at it carefully. if we stay up, let -- >> thank you. according to detailed report in "the wall street journal," those bonds were sold at a loss and at an additional discount for bargain prices the, to buyers that included j.p. morgan bank and george soros. have you seen the reports in

"the wall street journal"? >> i looked quickly at "the wall street journal," yes. >> all right, thank you. i know you're not responsible for dealing with the bankruptcy proceeding for mf global. but is it true that once the wall has been reached between customer segregated funds and corporate funds, the money could have been moved to buy a whole range of intercompany transactions come into the repo's, et cetera, virtually any part of mf global or to the counterparties who were financing those on positioned? >> if the question is a possible, i believe it is possible. whether it happened or not we don't know. >> possible is fine. it strikes me that we have here is a situation where the segregated funds belonging to mf global, including the honest, hard-working families in my district money, were misappropriated, we did expect it to bet by mr. corzine and the board at mf global.

since the bet was close in a transaction that i believe needs to be investigated further, we could be looking at an absurd and totally unjust situation in which monies have been taken from customers pockets only to find its way into the pockets of big bankers and hedge fund managers. kind of skinny time to do your work and have no right to interfere with the bankruptcy proceedings, that's the responsibly of the judiciary branch obviously, but if this committee can find a way to help reverse the travesty that's what we want to do and that's in large part why we're here right now. it's just essentially to protect the sanctity of segregated accounts if we're ever going to restore confidence in the commodity markets and the u.s. markets in the future. final question. mr. capuano poses a really, really interesting question.

let me just bring this a little bit differently. is it true that j.p. morgan was one of the main depository banks for customers, segregated bank accounts? >> i believe it was a depository, but any funds that they -- i met after sure it was a customer bank. and we've gotten from virtual all of the domestic depositories, the funds they were holding. is really the foreign funds that are the problem. >> okay. they were also the first of the main line of credit to mf global, over a billion dollar? >> there was a substantial line of credit. i think to the holding company, and i think is our behalf of a syndicate of banks, but j.p. morgan i believe was the lead of the syndicate. >> okay. and they would probably be unable to recover all of those loans if customers were made whole? >> i don't know whether that is true or not. it's possible. it's possible.

>> probable? >> i would say possible. >> all right. we will settle on possible. jpmorgan and george soros purchase the mf funds in mid-november, is that correct speakers that's what i read in the paper. >> that's what the article says. by then, everyone in the world was well aware of a missing 1.2 billion customer funds. correct? >> i certainly was aware of it. i assume others were. >> do you think they should be concerned about the possibility of buying stolen goods? >> i really don't know what the circumstances of those sales -- >> esther baxter, do you? yes or no woodward? >> there are provisions in law for bona fide purchaser. and those transactions come while i don't remember acid as perhaps i wished it, jafa, you

help but i think the bankruptcy may approve some of those transactions. and ice in the bankruptcy court would not have approved transactions if the bankruptcy court felt they were violated of law. >> mr. kitchen? >> i know no more a congressman than that. i do have some recollection. it was approval but i know nothing more directly. >> mr. duffy speakers i have no other knowledge other than what i read in the paper also. >> mr. kirk? >> i have nothing further, circuit. >> mr. berkovitz? >> i can't really comment on where the money, where the transactions wait passionate may have gone. where try to trace these. were trying to get the money back. >> do you think would be reasonable for customers to expect some clawback starting with mr. baxter?

>> again, there are protections in law for transferees who are bona fide purchasers, and have no knowledge that the property they are acquiring has in any way tainted in title or otherwise. and i don't know the facts, congressman, as to what -- >> the purchase had been made after everyone was aware, you got $1.2 billion missing. i mean, i think even the most extraordinarily naïve person would say there's $1.2 billion missing here somewhere, i wonder why i'm getting such a bargain on this. >> and perhaps mr. kobak is more -- >> all right. >> we have worked in a couple

bankruptcy together. oftentimes it's important to liquefy some assets, particularly if the market is declining and those assets are losing value. so you shouldn't jump to the conclusion, congressman, that a sale is necessarily bad for the bankruptcy estate. it wasn't for some of the estates that i acted as liquidator for, and i suspect that jim would agree with me. >> and again, i'm trying to think of customers first, just like the customer advocate is supposed to think of customers first. and i can't help that we are reminded of bernie madoff. and i can't help but remind of how effective the clawback has been for some of those poor people who were destroyed by bernie madoff. i'm just trying to get an idea, it is possible here. maybe there's not that issues an interesting concept. i think they will all plead ignorance on this. >> lightning answers here.

>> i don't know if i'd call them clawbacks. there are legal theories you can avoid transfers, you can attack transactions. that's what we're going to look into. i'm not sure if the transaction were talking about is specifically our transaction, but it is early sunday would be looking into, but we have to find the basis, the cause of action that if we find it i can assure you we will pursue it very diligently. >> okay. >> and you need to have the facts know that expertise to speculate, congress and. >> i don't have the expertise but i will say one thing that i think estimated segregated funds are the ones that are missing. they do not have specific protection, other things of that nature. i believe that they should be first in line in any circumstance whatsoever to get this money back. >> i don't have a specific fact. i think original question was would be reasonable for a customer to look for clawback, and i think if i were a customer i would want every possible

avenue to be pursued vigorously but i don't know whether, i don't know the technical details of the law should be able to know whether there is hope that would occur here. >> we are absolutely committed to getting customer money back to the customers. >> thank you. thank you, mr. chairman. >> yield black? >> i yield back and i think you. i think you for the extra time emac mr. miller is recognized. >> thank you. i want to make another try to the questions i asked earlier. from the first panel without satisfactory result, maybe because of my questioning, maybe because of their answering. as i understand it, mf global involved more than $7 billion of european sovereign debt, which was 100% financed, the sovereign debt itself was the collateral. which is pretty stunning. mr. capuano earlier asked how they got 40 to one leverage. maybe that was how.

but at some point the lenders figured out that was maybe not such a good idea, either because of the debt over the sovereign debt that was pledged as collateral or because of mf global, and issued a margin call. and then there began a mad scramble to come up with the money. they sold assets. and then i think mr. baxter said that what happened was a classic run, like what used to happen in the depository institutions, the movie "it's a wonderful life." other lenders decided that they maybe need a little more security, and it went downhill from there. but in the mad scramble, the question is what happened to the money over to the assets that were in clients segregated accounts. the reality is that segregated accounts is used all the time. it is supposed to be segregated, yes, but they can get to those accounts.

in an article a week ago, a paragraph in mf global client contract, you hereby grant us the right, applicable laws to borrow, pledge, we pledge, transfer, and on and on. mr. corzine said yes, but there were limits to that under cftc. but the question i guess for mr. berkovitz, was there a legal way for mf global, at the ctc rules that existed at the time, to use assets and clyde accounts as security for any sort of short-term loan for mf global? and what is legal or not, is there a reason to think that might've happened? >> i can't speak to what mf global did or what they didn't do. it's a matter that we are

currently looking into. i can say is under our regulation, customer funds remain property of the customer and they can't be pledged to go on half of the company as security for a loan or something like that. >> it could not legally -- >> direct. >> and you cannot speak to whether there's any evidence of? >> i can't speak to anything they may have made not have been faxing. >> several memset us questions about whether there was a way to structure the transaction so they could, in fact, borrow funds in clients accounts, whether through internal repo or whatever. was there in fact a legal way with the ctc rule that was in effect at the time for them to borrow from their own clients? >> in effect at the time, the regulation 125 have been in effect at the time could've done and internal repurchase, repurchase agreement. but customer segregated funds have to remain intact and whole

at all times. the value of the customer funds would have to be specific if they couldn't take, reduce the site of the santo take customer -- >> they can borrow them. >> i wouldn't say borrow from spent a repo transaction. >> a repo transaction with her putting something of equal value back into the customer account. ..

borrowing $40 billion a night in the repo market. there was a run and bear stearns and they run on lehman and the entire financial system in that week after the lehman collapse. now has happened again. is completely unregulated shadow bank. no one in congress knows much about it. it creates a remarkable instability, but we ought to pay attention to that. not to be some limitation on how many times a given asset made collateral and collateral again

and collateral again or their heirs should be some required hair cut when there's a limitation on how much can be borrowed. is there some reason there should be some limitation or does this just go along the way over the last two four years? you want to answer question, mr duffy? >> avalanche run behalf of myself. i think you are correct. there needs to be some reining in of this type of activity. one thing jon corzine kept saying was he was bringing leverage ratios down from 37 to 3 but failed to say that the debt was 1 billion to six billion. i do believe and this is me speaking personally that the leverage ratios need to be adjusted. >> okay. >> all of you are equally qualified to speak to this. mr. berkovitz, how about you?

>> i can't speak on federal banking although i would note that under dodd-frank there are number of additional measures to reduce systemic risk and increase transparency in the marketplace where a variety of slots transactions but can't speak to questions of chateau banking. >> mr. baxter? >> the new york fed is deeply involved in this stuff. >> thank you, congressman. one additional point i would note in terms of references to banks, banks' fund short-term with respect to deposits and fund longer-term assets like loans but banks have access to the liquidity facilities of the federal reserve. the shadow banking system which consists of non banks primarily,

broker-dealers, they do not have access to the discount window and the federal window and as you may recall, one of the changes affected in dodd-frank is some of the provisions we used speaking about section 13 subdivisions 3 of the federal reserve act to wrote -- broker-dealers that provision was changed to make it much more difficult for the fed ever to loan to a single company that was facing insolvency or a single company taking assets of the balance sheet like we did with respect to bear stearns. that is one point i would make right off the bat. there is a difference because the banking system has access to liquidity facilities in the central bank whereas the shadow banking system generally does not. that is a generalization. there are some exceptions. the second point by way of historical reference, you mentioned lehman.

you remember the week after lehman, there were several prominent investment banks and i won't name names because i shouldn't, that became -- that became a cold and companies and the reason for that relates to the structural feature of having access to liquidity facilities at the central bank. >> mr. chairman -- one more question about earlier lines about the way transaction could have been structured to borrow money from clients segregated accounts. could mf global have issued any kind of instrument on their own? a bond or favor or whatever that would have been and assets that they could have used in an internal repo and bar of the clocks on it? >> ira will speak hypothetically

speaking, you could put a highly rated corporate bonds to be the subject of a repo. >> your own corporate bond. [inaudible] >> could not put your own bond behind it. >> all right. the gentleman from ohio, mr. may see. >> mr. baxter, mf global application to be a primary dealer with the federal reserve bank of new york was approved despite the firm's history of combined failures, internal control process and incomplete disclosures to regulators. compliance problems and poor record keeping continued at mf global until the firm's collapse. if the new york fed had a surveillance system in place to you think witnesses and mf global would have been caught? >> the first point is we were

not acting as mf global supervisor. we were acting as mf global's counter party. as mf global's counterpart we were concerned about financial risks and we were concerned reputation risk. that is what it took the application of mf global more than two years to be approved. with respect to reputation risks specifically, one of the concerns arose from the enforcement actions that the cftc did in december of 2009 against mf global and under our policy, the institutions facing a material enforcement action goes into a kind of penalty box period for period of a year. we put that mf global application through that one year penalty box. we checked to make sure it had remediator the enforcement problems that resulted in the 2009 action and there were no new problems during that one

year penalty box period. as a result of that, in february of 2011, more than a year from the date of the enforcement action we decided to approve the designation of mf global as our counter party. >> what was that date again? >> it was february of 2011. >> was there any review past that? any surveillance passed that? >> we continued to receive weekly reports from mf global. we continued to receive the monthly focus reports from mf global. we continued to meet regularly with mf global staff. most importantly, we were transacting business on behalf of the government with mf global and looking at their trading activities going through us. those -- >> those reports you receive were you seeing weakness in mf global? >> what happened after the date

we approved it in february of 2011 is these repo to maturity trades and european sovereign debt were put on to the credit of fin rot, discovered those in 2011. they were reported to was by mf global in late july of 2011 and we were looking at the situation and mf global throughout that period. now we have two particular capital requirements for primary dealers. one is the minimum capital requirement of $150 million. that was always satisfied. the other is that our primary dealers need to satisfy the net capital rules. and after the experience through the summer of 2011, mf global brought itself into compliance with the sec net capital rules so there was no problem under our policy which we apply evenhandedly across all 21

dealers. >> i noticed you use the word counterpart. i would question why it is necessary for the federal reserve board of new york to designate affirms of primary dealers of the new york fed maintains its primary dealers are only counterparts? >> we impose specific burdens on 21 institutions we designate as primary dealers. they have to participate in our trade in the open market to implement monetary policy. they have to provide us with market intelligence related to our monetary policy function. they have to participate in every auction we conduct on behalf of the treasury for u.s. treasury securities. every option. and they have to be ready to make market for us for $3 trillion in assets we have under management for foreign central banks and monetary authority dollar reserves. burdens that every one of the primary dealers have to agree

to. and so not every primary dealer can experience those burdens and there are situations where primary dealers withdraw and can no longer satisfy very specific requirements. but they are our requirements. they are our requirements because of the types of counter party activities we engage in and they ensure that the primary dealers designated meet the needs of the fed and the united states. >> last but not least are you monitoring communication released by the primary dealers which represent status as primary dealers given the market perception about primary dealers? would it be wise for the federal reserve bank of new york to compel all primary dealers referencing their primary dealer status and oral ridden communication to explicitly disclose that a primary dealer designation does not constitute an endorsement by the federal reserve? >> i hear that suggestion a new

no on our web site we published prominently that the primary dealer designation should not be regarded as a substitute for counterparty due diligence but i hear your suggestion that we should do more and monitor what all of the 21 are saying. that is a significant burden on us but may be a burden we need to undertake so i will take that under advisement. >> i yield back. >> we're going to do a lot. we're going to do two minute rounds. ask members to pick the question that i will ask and ask the panel to be brief in their answers and with that i recognize the ranking member capuano. >> i don't need a response the this is the crs report on mf global. on a footnote on page 2 which is

ridiculous, talking about segregated accounts can't be coming will but also cite section 4 d f 3 and that has an exception permitting coming bling, quote, for convenience. don't expect you to answer that today but i would like to hear from you some time in the future as to how big a loophole that might be. it certainly raises questions and i ask it because i have such high regard for crs putting something in it raises my concern. for the entire panel, i don't expect that you will be familiar with this article but i haven't read a news article as often -- as frequently as a read this one. i read it three times. four times. very slowly because it is very difficult. it is a reuters article entitled mf global and the great wall street scandal. it was published on december 7th by christopher ely s. of the

u.k.. i won't suggest anything here is accurate but i would like to go back and look at this later on and i would love to have someone to comment on this to see what you think. he says the reason i mention it, goes to a long explanation which i have a hard time following. but i am trying. on some real serious questions. i will read you one paragraph in the end. talked-about publication -- i am still struggling exactly what that is. basically loans on loans. with collateral being populated to a factor of 4 according to imf estimates the actual capital banking banks reach a provocation transactions may be as little as 25%. the transaction created enormous amounts of liquidity much of which has no real asset backing. that sentence reads like something i read not long ago about mortgages.

it concerns me deeply. he goes on to the next page listing big companies that in his estimation have taken advantage of weaker collateral rules and rules, incredible leverage. by pledging and reap pledging collateral and lists j. p. morgan as having sold or read pledge $410 billion of collateral received with derivative transaction and securities borrow and reverse purchase agreements. morgan stanley $10 billion and interestingly enough interactive brokers are the ones you're trying to sell mf global to. i am not trying to bushwhack you but i would love you to look at this and let me know what you think about this article and why i shouldn't be concerned. and would specifically ask that those of you on the f stark bring this article back and ask them because they were created unequivocally to make sure there

is no systemic risk. this article raises concerns that it may be there and nobody is watching. i would love you to respond. >> thank the gentleman. mr ketchum? >> i wanted to go back to something. in late september of 2010, you get a call around asking firms if they had sovereign debt exposure in europe and can you tell me what the response from mf global was in that september 30th call around? >> i don't recall whether it was september 30th call around or shortly thereafter but the response was they had no position in european sovereign debt. >> it turned out they did have exposure. >> to be most generous to them it would be they interpreted the fact that it was rico to maturity and not required to be

reported that as an asset for accounting purposes that they didn't do the position for that. that would not have been what we expected. they had credit and market risk and should have responded and explained. >> did you ever have -- once you discovered later on you discovered in march -- >> at the end of may. >> did you bring it to their attention that you were concerned that they had not previously disclosed that? >> my staff did raise it with them. i don't know the details. but we are concerned with and they should have been more forthright than they were. >> one of the things we want to do when we get through with this is do something productive, make sure we make the system better but don't make the system more onerous. we want to be careful here. but it appears to me down the

road that disclosure of these kinds of transactions that would need to be a little bit clearer with guidelines, what jon corzine thought was a risk free transaction turned out to be an extremely risky transaction. >> absolutely agree with you. should be look frankly from a gap accounting standpoint. that is one reason we had the rules before the sec that would give us the authority to require more extended disclosure than exists in the present focus. >> i thank the gentleman. the gentleman from colorado. >> i appreciate everybody's testimony. this is something we will all be looking at for a while to know when you force a sale or demand for capital closed the institution. if you want to allow companies to operate. but here we have other people's

money. that is why you have this ability to come in and shut the doors and preserve what exists. i have a question for the sec and those of you who look at this because when we went through this type of thing before there was a lot of short selling going on and a lot of rumor mongering going on and a lot of driving a company that is sort of wounded in to the ground. as part of all of your investigation, i would like to know, who benefited by it. >> if it is possible to check that out. we have seen it in the past and it hurts the system and i would ask you to do that. i have a million questions of won't ask anymore and wish you happy holidays. >> thank the gentleman. the gentleman from florida recognized for two minutes. >> thank you very much, mr.

chairman. i believe in a senate hearing you were asked to butt out of any investigation. could you elaborate? >> we were told that the cftc asked us not to get involved in an investigation but proceed with the investigation. we were no longer part of the investigation so you would have to ask them why. >> did any of the others of you have any interest in pursuing an investigation of your own other than just being observers of what you read in the newspaper? did anyone else besides mr. duffy attempt to pursue your own investigation? raise your hand if you had. i would like to hear about it. i would like to hear from all of you. >> part of our statutory duties as i said in my remarks is to do

a thorough and independent investigation. we are doing that. we are trying to court made it. >> but you were not asked to butt out. >> no. >> mr. ketchum? >> we provided support for the trustee and understood that the sec and cftc were investigating this. wikipedia and see to do their work. >> we're looking at many things. >> you haven't been asked? >> mr. berkovitz? >> we are investigating. >> everybody is investigating and only duffy was asked about out. any idea why that could be? nobody has any idea why mr. duffy's organization was the only one -- >> all the information i testified was information we have gathered in our own internal reviews prior to us being sent to investigate further. >> do they tell you why? >> i guess you would have to ask

the cftc. >> why? >> i am not familiar with what has been referred to. but even if i were i couldn't talk about it. >> with the chair's permission and i am sure everyone left on this panel would be intensely interested in knowing that at the earliest possible moment you will tell us why you asked mr. duffy not to participate in an internal investigation. and i hope you will write that down and not forget it. at the earliest possible time you feel ethically, morally or legally able to tell us why you would tell him not to conduct an internal investigation, not discover the facts on your own that you possibly could, we look forward to your explanation.

>> the gentleman from texas. >> i have a very brief question. most of the questions have been asked. mr. duffy. mf global had a very spotty compliance record. paid about $87 million in fines to regulators in 2007. was there anything in mf global's past that would give cme concern about our segregation of customer funds? >> we do random audits. we are each and every one of our firms every year as we are required to do. we do daily segregation reports. we do third-party tie ups. they had some disciplinary action throughout the years. when they took over we never took them off of daily reporting. most firms report daily segments later. we have continued to keep a close watch on all the firms including mf global. >> thank you very much.

yield back. >> apologize to mr. miller for skipping over him. you are recognized. >> that is fine. i would accept double the time. the only proposal i can recall, dodd-frank, got the market which is the huge part of a financial crisis was proposal from the fdic and sheila bair to limit how much would be paid or to give fdr see discretion in receivership of less than the one hundred% of discretions aimed at the repo market. but all the debate in congress was about mortgages on office buildings which made me think congress does not understand the shadow banking system and the repo market and someone needs to do what is important and also very much the case that industry does not want us to understand it because if we did understand it we might start to pay

attention and figure out how much risk it posed to us. i have a couple questions. proposals to limit repo transactions. one that i mentioned earlier, limit the number of times given collateral, read hypothecated but admitted he was not sure what that meant but the same collateral they used, same instrument or asset used for collateral for multiple transactions. should that be used at infinitum like double mirrors we have seen forever or should there be some limits on the number of times a given asset can be hypothecated? >> as i said earlier i believe there needs to be a limit on how much any particular security can be leveraged out. if it is 20 times over and we're

looking at the same time, 20 of looking for the same thing. there needs to be some kind of limit to that behavior. >> anyone else? >> i think there ever a lot of complicated issues. there are -- repos are very valuable in the markets and frankly maturity may have their purpose. i am not here to defend them. you are raising an important question. the ranking member asked us to look as this article. i look forward to discussing it further but it was important to say the difference between leverage and allowing -- >> let's go to where average. mf global was able to have 100% financing of their purchase of sovereign debt for the repo

market. should there be essentially a margin requirement? some requirement of a hair cut to limit polar ability to the repo system? i understand the need for liquidity and imposing anything immediately would have a problem in the world economy given where things are but if we ever pull out of where we are, should there be a limit, essentially a margin requirement. >> that was the effect of requiring the capital charge with the capital charge for these positions. the broader question of leverage is an important one. there are policy issues we need to think through and different types of leverage so you can have two firms with the same degree of leverage the different risks. the question of how we approach that is important to think about further.

>> anyone else? >> i think you raise a very important issue from the standpoint of leverage particularly with respect to assumptions and most financial oversight from banking to securities firm with regard to matchbook but the exposure of that leverage very dramatically by asset quality and dramatically by the nature and maturity of the matchbook so you raise an important issue that all of this is in review but there is a great deal, exceptionally critical part of financing bills into the repo market. >> one last question. and the chairman's indulgence, sheila bair's argument, does their need to be a market where there was none? lenders in the repo market made the decision based entirely on the collateral.

when bear stearns was listening in the water lehman was listening in the water and everyone knew they were in deep trouble, as a result of repo transaction was when the fdic finally arrived there was a smoking crater and the ground instead of an institution that actually may have had some franchise value and assets. using fears discipline in the repo market and what can be done to create discipline in the repo market? >> a complicated question. in some respects there are examples where counterparty, those entities as i understand it were not able to finance themselves using treasurys so there is a disciplined in that sense but this is part of the challenge.

highly dependent on financing including high quality collateral and some reputation will issue out there that you have over significant liquidity. one way to come at your question is to think of the capital treatment of these transactions weather being properly addressed to the capital charge. >> i would remind all members that if you have additional questions for this panel you may submit those in writing. we ask the panel to respond to that and without objection we will hold the record open for 30 days for that question period. we thank this panel. i would remind members of the committee is that we believe additional hearings on this issue are warranted. we will look at credit rating agencies and accounting practices have been discussed, internal control and those issues are important but the ultimate product we want to deliver when we get all the

information that we requested from various people, for this committee to publish a finding and let that be part of the record and then ascertain if additional fame as we can do working with the industry to make sure we make whatever fine-tuning adjustments to make sure we are not having another hearing like this in the future but we thank the panel. you have been very patient. it has been a long they. take the rest of the day off. this committee is adjourned. [inaudible conversations]8bee i

>> can of frazier talks about the future of health care. you can watch at 10:00 eastern on c-span2 or any time at the c-span video library. just go to c-span.org. >> three days of american history tv on c-span2. saturday at 7:00 p.m. eastern this is the congressional cemetery on american artifacts and at 8:00, university of colorado and boulder professor thomas stalin era american prosperity in the 50s and 60s. at 7:30 meet the white house chef dating back to the carter administration and monday at 8:00 and 4:00 highlights of c-span coverage of the '70sanniversary of the japanese

attack on pearl harbor and at 7:30 the history of native american military service. experience american history tv all weekend every weekend on c-span3. >> a senate hearing on narcotics in the caribbean. u.s. officials said jamaica, haiti, the bahamas and the dominican republic are becoming havens for drug traffickers. witnesses discussed the state department's security initiative. a program designed to assist caribbean countries in stopping the illegal drug trade. this is an hour and 45 minutes. >> this hearing of the western hemisphere subcommittee on global narcotics affairs will come to order.

welcome to our hearing on the shared partner should responding to the growth of tracking in the caribbean. i want to thank panelists for coming today and hearing what they have to say. let me begin by providing historical context for today's hearing. in may of 2010 after a number of regional meetings and a substantial dialogue process the united states and caribbean representatives held the inaugural caribbean u.s. security cooperation dialogue in washington and approved a declaration of principles based on strategic priorities. one substantially reduced in the caribbean for public safety and security. on november 10th of this year the second annual caribbean u.s. security cooperation dialogue was held in the ball hamas. the keynote speech by secretary

of homeland security janet napolitano, both highlighted a number of new initiatives designed to reinforce the original strategic priorities, creation of a fingerprint collection system by the united states and caribbean partners that help combat terrorism and transnational criminals, better sharing of information between the caribbean and the united states, implementation of a regional maritime and air control strategy and finally developing a regional juvenile justice policy. while i applaud these initiatives i know the two years is not a long time to stand up such an ambitious initiative. i have to say i am neither satisfied with the progress being made on the ground or the news and information i am receiving from the region. for example, in the bahamas 104

people have been killed this year topping the record of 94 killings from last year but that pales in comparison to jamaica which has become the murder capital of the caribbean with 1400 people killed this year. in fact the 2011 you and report on homicide's worldwide reported that caribbean homicide rates have been increasing every year since 2006 and concludes that the region exhibits the highest levels of violence in the world. in september president obama certified four caribbean nations as major drug transit companies. the bahamas and dominican republic, haiti and jamaica. there is unquestionably a direct correlation between the growth in narco trafficking and loss of security we are seeing in the caribbean. in the dominican republic one of the candidates for president declared the country is close to becoming quote back in arco's

stake and said the government is incapable of stopping the drug traffickers. the situation has gotten so bad that the government declared a state of emergency so the police can combat venezuelan drug smugglers and the drug violence doesn't stop at the u.s. border. puerto rico has already seen 1,000 homicides this year which is a new record. is estimated at least half of these murders involved drug-trafficking organizations. this situation is deplorable and unsustainable. violence is up for one of the region. crime is increasing the point that some countries are almost under siege. drug trafficking is growing exponentially and drug use has hit those levels. the drug cartels are using money and violence to undermine the government's in the region by paying off corrupt officials and killing of the honest ones. corruption has returned with a

vengeance making it almost impossible to reform the security and justice sectors in many countries. cbs i have little chance of working if the government's we are partnering with our themselves involved in illicit activities. i am very troubled and concerned that when i talk to government officials in washington there doesn't seem to be a sense of urgency about the situation in the caribbean. we have sent national guard troops to the mexican border. we are starting to see the central american regional security initiative get more funding. colombia gets assistance but what about the caribbean? why haven't we heard about the inherent ability of the traffickers to be one step ahead of our counternarcotics initiative? total funding is expected drop next year in fiscal year 12 to

$73 million from this year's $77 million allotment. the officials are tarp with just don't seem to get that are counternarcotic efforts in other parts of latin america, cartels are moving into the caribbean and if we don't pay attention to the caribbean we will repeat history with our exclusive focus for example on colombia traffickers into mexico and central america. not just the surge of drugs spiraling out of control. gun smuggling is a growing menace with firearms and the most web -- most likely weapon used in the region. money-laundering operations are moving large quantities of cash throughout the region. human trafficking has reached appalling levels. what will it take for washington officials to realize how bad the security situation is in the caribbean? my other concern is there doesn't seem to be a comprehensive approach to tackling these problems in the caribbean.

we have to make a thorough assessment of all law enforcement development and development agencies. in the initiative both domestic and foreign to determine where there are redundancies and where we are not complying enough resources. we have state, usaid and the coast guard and other agencies working in the region and we hope it will be a more were related fashion. our commitment to share responsibility with our caribbean partners must be shared by our own government to create a whole government approach to the task. in order to work, cbs i must take a holistic approach on land-based law enforcement from local to national to international law integrating a maritime component and at the same time tying in the civil sector actors. funding for cbs eye is caught, we have to figure out how to make our efforts more effective

and coordinated. so i look forward to listening to where the leadership to drive this coordination is going to come from. can anyone tell me what the administration's counter narcotics priorities in the caribbean are? is it interdiction of supply? is it targeted eradication of production to originate in south america? caribbean is a big producer of marijuana. we focus on coast guard and other maritime forces in the region? better intelligence is a priority but does that entail more training of local police and vetting of those police and military forces or placing more u.s. assets in the region? we need to enhance border control as well to stop the gun running illegal money-laundering and human trafficking. cbs i should be and must be the vehicle to coordinate our in gauge would and create the synergy needed without caribbean

partners to combat this when surge of drugs and violence rocking the region. in the last congress are worked with senators john kerry and senator lugar to reach an our efforts to address this issue to create a comprehensive multi-year strategy for combat narcotics taking into account demand and supply issues and u.s. weapons control and the balloon affect them move from one part of the hemisphere to another. the plan to introduce legislation in this congress that i hope will focus the administration's efforts on developing a comprehensive strategy for the hemisphere that will bring together all the pieces of the puzzle and commits us to the promise of assistance and cooperation in the caribbean as articulated by president obama in april of 2009 at this summit of the americas. let me conclude my remarks by saying stopping the flow of drugs through the caribbean is one of america's top national

security interests and cbs i deserve to have the resources are country can muster. i often think about this in a very significant way in my own home state because we know that some of those container ships laden with cocaine when they leave the dominican republic where do they sale to? they often end up in newark and elizabeth which is the port of the east coast in my home state of new jersey. from the port the drugs go to street corners of schools in new jersey and new york. all of us here today were sitting in the witness chair, we owe it to our children and those who protect them to do everything in our power to stop the flow of drugs in our country. and so we look forward to hearing from our panelists and with that let me turn it to the distinguished ranking member of the committee. senator lugar. >> thank you for holding this hearing. i think our witnesses for this

service to the country and keys to see them back here. and return to the hole for one of the frequent visits and want to welcome mr. farah from panama. the gateway to america is a prosperous and severe region of great importance to florida and my fellow floridians. at the same time building a long-lasting partnership with our caribbean partners and getting them to buy into sustainable commitment to combat transnational criminal organizations is essential to our nation's security and prosperity. the evolution of our counternarcotics strategy into subregional approach has significantly improved our chances of success in tackling the ever-changing threats from transnational criminal organizations. according to the march 2011 state department international narcotics control strategy report cocaine flows from the caribbean and to the u.s. have dramatically dropped last decade from 40% to 1999 of total flow to 5% today.

the caribbean countries are suffering under dramatically high rates of violent crime while increasingly becoming a transit for cocaine flows into europe. we must ensure enough resiliency in terms of the caribbean initiative to withstand the pressure that will come from enhanced efforts with mexico and central america and increasing concern that have pressure increase in central american corridor to vulnerable expands into the caribbean zone and we are always looking to build on our success in colombia as well which increases traffic in the future in the caribbean zone. i look forward to your testimony. thank you for being part of this. thank you, mr. chairman for holding this hearing. >> let me introduce the first panel. ambassador william brownfield from venezuela and chile before becoming our best to colombia where he instrumented plan colombia to coordinate the

department worldwide efforts as secretary of international narcotics and law enforcement and look forward to hearing from ambassador brownfield on our efforts to coordinate our nation's drug policy in the caribbean in the hemisphere. mr rodney benson is chief of intelligence of the drug enforcement administration. he is representative to the u.s. intelligence community, oversees a global intelligence organization. teamwork in the d e a international operations, mexico and central america where he coordinated the enforcement activities conducted by d e a offices in mexico and central america and led special operations division in quart mating law enforcement strategies and operations to dismantle major drug-trafficking organizations operating on a regional, national and international level and we appreciate your appearance here today, your experience and we salute all the members of your agency with a singular focus

mission every day. ambassador liliana ayalde is administered for latin america in the caribbean and served as ambassador to paraguay and before that was posted in numerous countries in latin america with usaid in bolivia and colombia. we look forward to your testimony particularly how usaid plans to continue its cbs eye and other development programs in the region during a difficult budget environment we find ourselves in. with that let me ask ambassador brownfield to begin the testimony and mr. benson, we ask you to summarize your testimony in five minute. your full statements will be included in the record without objection. ambassador brownfield, welcome to the committee. >> i thank you very much, mr. chairman, i thank you for the

opportunity to appear before you today to discuss the u.s./caribbean shared security partnership. and i do indeed thank you for the opportunity to enter my written statement into the record. mr. chairman, i want to start by telling a story and it is the story of a crisis foretold. begins in the year 2000 when the international community began to apply pressure on the drug cartels in colombia and the drug nexus relocated to mexico. in 2007 we began to apply pressure in mexico and they are even today relocating through central america. this year we begin to apply pressure in central america that they will feel in 2012/2013. mr. chairman, i predict that the criminal organizations will not retire to run surfing cabanas on the beach when they are driven out of central america.

they will look to relocate again. and when they do they -- their old caribbean routes and networks from the 1980s will look very attractive. i agree with both of your analyses. we see this crisis coming. we even have a sense of when it will arrive. we have the opportunity and the obligation to prepare and position ourselves for it. i realize this is not the best time in our nation's history to come before congress with a huge budget request for a crisis that has not yet fully materialized but for the president's caribbean basin security initiative we have dramatically increased funding for the region, build a regional coordination mechanism, and identified trafficking, public security and social justice as priorities in the region. and while resources are limited,

we know what we need to do. first, we concentrate on building institutions and capabilities. equipment and operations give quick results but institutions are the logical target of drug trafficking organizations and we strengthen them with regional coordination, training and equipment, intelligence exchange and access to data bases. we must fortify both law-enforcement and rule of law institutions. second, we integrate our caribbean programs into a comprehensive regional approach. we estimate our fiscal year 2011 funding for cbs i am at $77 million and we get to that number by combining law enforcement, developmental, security and anti-terrorism accounts. they are separate appropriations and some programs are inherently

development or police or security but they are all mutually supportive. third, we work with and through partners. this is not a time of searching for an assistance budget which makes it all the more important that we work with other governments and organizations. canada and the united kingdom have serious programs in the caribbean and we coordinate well with them. the e.u. and other european governments, and the united nations are active. we need to leverage our impact by coordinating with them. caribbean governments must put their own resources into these programs. we can't do it for them. and we must work as well through existing regional mechanisms. the caribbean states have long standing coordination mechanisms in the regional security system and we get better value for our investment if we work through

them. mr. chairman, this is not the first time we have addressed security challenges and the caribbean. we have learned some lessons since the 1980s. we cannot rely on a single tool like interdiction to address the threat. coordination is essential. regional governments must participate in designing programs and invest their own resources in them. our efforts must be comprehensive and hole of government. we must be flexible enough to adapt to the changing tactics of the drug trafficking organizations themselves. there are some who are throwing their hands up. we heard the same thing in the 1980s. they were wrong then and i predict they will be wrong this time as well. i thank you, mr. chairman, and look forward your comments and your questions. >> thank you, mr. benson.

>> good morning, chairman, ranking member marco rubio, thank you for the opportunities speak on the eat a's assessment of drug trend in the caribbean region. on behalf of the men and women of drug enforcement administration, thank you for your support. the caribbean region continues to be a focus of u.s. counterdrug efforts. the school principal drug threat is cocaine trafficking. smuggling and abuse of apps, marijuana, are also of concern as is the diversion of prescription drugs in puerto rico and the u.s. virgin islands. as lead counter narcotics agency, dea is actively engaged in addressing all these drugs threats. i understand the committee is particularly concerned about the role of the dominican republic and rightly so as the dominican republic is the primary

caribbean transit point for south american cocaine. through operation broken bridge, initiated in august of 2007, dea successfully assisted the dominican government in its interdiction efforts against drug laden aircraft arriving in his annual from venezuela. as result, traffickers increasingly shifted towards maritime operations, transporting cocaine load of 500,000 kilograms in go fast boats. today dea is working with our dominican counterparts with operation see wall to target and disrupt go fast activity in the dominican republic and the secondary flow of cocaine from the dominican republic to puerto rico. the dominican republic is certainly not the only caribbean transit point traffickers use. they also sent cocaine loads through trinidad and tobago, by hamas, puerto rico and other caribbean islands.

as for the other drugs, jamaica is the primary marijuana producer and her when is transmitted from colombia to the u.s.. finally mgm a transported from europe for the caribbean and local consumption for the export to the united states. drug-trafficking organizations from mexico and south america are attracted to the caribbean due to its proximity to both of america and the southern coast of the united states and include puerto rico and the u.s. virgin islands. joined dea in dominican operation past july led to the arrest of a mexican national and member of the sinaloa cartel in the dominican republic. this trafficker coordinated cocaine shift by air from venezuela to the dominican republic. after the arrest of this individual and his dominican associates several execution-style murders took place in the dominican republic, further highlighting concern

over rising rates of violence. over the past decade violence has increased in the region. there have been notable recent spikes of violence. for example there have been over 1,050 reported homicides this year alone in pr many of which are believed to be related to the illicit drug trade on the island. despite the importance of the caribbean it is critical to remember the vast majority of drugs in the united states, transit mexico and central america. dea does not see indications of a large-scale trafficking shift back to the caribbean but where remain alert and engaged for such a possibility particularly as enforcement operations in mexico and central america become increasingly effective. our engagement in the caribbean is a regional one that takes into account drug flow through the entire hemisphere.

the u.s. government counternarcotics strategy is the drug flow attack strategy designed to disrupt the flow of drugs, money and chemicals between four zoned in the united states. this call for aggressive and were native enforcement operations in cooperation with counterparts. dea is committed to working with u.s. agency pardners, counterparts and others in order to reduce this drug-trafficking threat. thank you for the opportunity to be here today and i welcome your questions. >> thank you. >> mr. chairman, senator marco rubio, i'll appreciate this opportunity to share the national development, to advance business security in the caribbean. it is an honor to complement the testimony of my colleagues. during my tenure working for u.s. aid and recently as u.s.

ambassador to paraguay and observed with great concern the security situation in this region. the problem is exacerbated and the caribbean, framing levels of drugs climb and the associated violence. over the last ten years there has been an alarming escalation to homicides in the region and some countries the murder rates double or triple and jamaica has one of highest murder rates in the hemisphere. we are especially concerned, caribbean youth like their peers struggle with highest levels of unemployment and our disproportionate victims and perpetrators of crime. in jamaica 70% of homicides are committed by youths under the age of 30 and in the dominican republic 70% of drug-related arrests or 17,000 people are young offenders. our mission in the caribbean and latin america is to strengthen the capacity of the region's government, civil society and private sector to improve security, governance and economic growth. we recognize we will not be

successful in advancing these development goals if we did not help our neighbors get a handle on the security problem. through the president's caribbean based security initiative, we're working with caribbean partners and other donors are you focused crime-prevention programs. these are designed to get at the root causes of crime and generate long-term solutions to juvenile crime in the caribbean. we are doing so alongside our colleagues from other u.s. government agencies. evidence for successful anti-crime strategies implemented in cities like l a bleak chill new york and rio and improvements i have witnessed in cities like megayang tells us effective crime reduction happen when law enforcement actions are paired with community-based crime-prevention, workforce development and violence reduction programs. aaron vestments build stronger and safer communities, with access to greater art -- educational and job

opportunities. with our support, there are internships with local businesses. the poor inner-city communities in jamaica are working with police to improve security and at risk use in santa domingo tapping into informal education and job-training opportunities. we are already having success with these interventions. for instance, a sports based work force development program co-founded by nike and microsoft placed eastern caribbean use in internship and jobs. in 2011, 85% of students who completed the program obtained a job and went to school or started a business. we embrace this model because it creates employment for youth and leverages private sector research to supplement investments. we also collaborate with local governments to reform juvenile justice system does in the caribbean and craft policy to address youth crime in the long term. for example we are helping

caribbean legal authorities to introduce early intervention for at risk youth. alternative sentencing for young offenders and separation of juvenile from adults in correctional facilities. cbs i allows us to wrap up crime-prevention investments and allows target programs in the country towards preventing crime. i witnessed this in a recent visit to the dominican republic. programs to train teachers and links to all producers to lucrative markets to building struggler communities that offer youth viable alternative to crime. addition, cbsi have told members of the caribbean community and the dominican republic work together with support from other donors to draft and implement a regional security strategy, share best practices and coordinate implementation. this regional cooperation is crucial because no one island can take on this region's well

organized criminal -- nor can a single sub region make headway in the absence of complementary efforts underway in other parts of our hemisphere. that is why investment in the caribbean are massed by the work being done in the central america and mexico merritt initiative. just as no one country or region can solve its challenges on its own neither can a single donor. the united states government can help put the primary responsibility lies with the national government. cbsi's success is in the interest of the united states. the caribbean basin focus on borders--a major transit hub for illegal traffic of all sorts. given our geographical and cultural ties the crime that afflicts those countries eventually flows to us. finally cbsi held the turn illegal activity and stops resources creativity and dynamism and communities on both sides of the caribbean. whether they be in jamaica the country or jamaica, queens in

new york. i look forward to the committee's questions. >> let me start off. that is a lot of questions here. let me start with ambassador brownfield. do you believe that we have a comprehensive multi agency hemisphericwide counternarcotics policy to address the challenges and threats from the different regions in the hemisphere? if your answer is yes, i would like to know who is formulating this policy and who is in charge of carrying it out. if you put the microphone up. >> my loud and annoying voice often carries, mr. chairman, without the assistance of a microphone. i hear that with considerable regularity from my spouse. my answer to your question as usual will be two parts. i will say first, i believe we

have a comprehensive comprehensible multi agency approach and process for addressing this issue. that was not your question. your question was do we have a policy? i would say this is a work in progress. we have a structure we have put together. it is a structure whereby at least once the year we meet at ministerial level with each of the governments in the region, us and the other international players. more than once a year we meet at the next level down. the commission which they would call the permanent secretary level to set the agenda for the ministerial meeting and below that we need as often as necessary three or four times a year in technical working groups to address these issues among ourselves. in the united states government itself we have an interagency process whereby we prepare for

each level of those international meetings and operate on the basis of the three core principles you describe in your own opening statement that drive our participation addressing illicit trafficking, citizens security and addressing social justice. so we have an umbrella policy and an unusually successful process to try to put meat on the bones of that policy but i assert, claim and except in response to your probable follow-up question that we still owe you greater detail and greater specificity in terms of what this policy is. >> let me go back at it again. the question is, i appreciate your answer. i am asking, take your answer to

say we don't quite have a hemispheric policy because you say it is a work in progress which means we do not have any policy that is final. is that a fair statement? >> that is a fair summary. >> if we don't have a policy yet, the question is who is working to develop that policy? when will we are expect a policy to exist? and who is the individual who is going to be in charge of carrying out that policy? >> fair enough. first, within the executive branch we have an interagency process that is managed or at least coordinated out of the white house and the national security staff. their principal players in terms of working towards a single coherent comprehensive caribbean policy would be your beloved assistant secretary of state for i n l attempting to manage the

foreign assistance side of drugs and law-enforcement. the western hemisphere bureau of the department of state managing the overall policy side of the approach. the distinguished lady seated two seeks to my right obviously handles the developmental side. social, economic and other elements that we traditionally associate with developmental. not present with us today are the representatives of the armed forces and specifically the u.s. southern command who has a piece of this. are counterterrorism colleagues have a piece of this in terms of the nadir funding that goes into certain areas such as firearms which are important in the region. that is the process by which we are getting there. it is coordinated at the top by the national security staff. >> that sounds to me like a recipe of where we need to be

any time soon. let me ask you this. we talk about the caribbean as a transit flow. not as great as it once was but i am fearful of what is and could be again. what do you think a lot of this transit from venezuela? do you think the venezuelan government is doing anything to prevent drug trafficking? they seem to be using trinidad and tobago with impunity and also using the dominican republic for over flights and we know that we have seen recent reports of has a lot working with drug cartels in the region. as the starting point of which a lot of this comes through what can you tell me about that? >> mr. chairman, you are going to tease a headline out of me but i will try to use my words and select my words judiciously.

when i look at the air tracks that are provided to us by that part of the united states government, joint interagency task force of headquartered in key west, florida that attempts to track the movements of maritime and air of a listed products coming up from south america, the overwhelming majority of the air traps do come out of venezuela. it would not be a surprise to you to learn that we have at this stage very minimal cooperation between the united states government and its constituent parts and the government of venezuela. there are a few case specific areas where we have cooperated but that relationship has in practical terms not worked probably for four or five years. it is a challenge.

it is a problem. the approach we have attempted to take in a strategic sense is to build work arounds to strengthen the periphery are around venezuela in an effort to control, monitor and if possible reduce the flow of product. >> the venezuelan government doing anything to prevent drug trafficking your answer would be yes? no? not very much? some what? what would be the answer? >> my answer would be they're doing very little in terms of cooperating with us to reduce flow. they assert they are doing great things. i am not in a position to express a view on that. i have an inherent bit of skepticism on the point. >> if you had worldwide for the state department and our government this issue, surely you would have a view as to

their cooperation. your cooperation is not existing with us. are they doing anything to impede this? i would like to turn to mr. farah answer to a question. if all of -- very large number of these flights laden with drugs are coming of venezuela are have to believe they're not doing very much in this regard. >> i would agree with you 100%. >> could you give us some insight? >> clearly venezuela is devolving into a major shipment point for cocaine moving into central america and also moving into the caribbean. the ambassador noted the cooperation that we have with the venezuelan government is limited. our strategy is to look at those criminal organizations that were operating in venezuela and

central america as well as colombia and target them and dismantle them but the role of venezuela as the shipment point is growing insignificance by the week. >> other questions. >> thank you. all three of you, you know when your testimony the violence is one of the highest in the world. murder rates are high in jamaica and trinidad and tobago and i will talk about that in a moment the drug trafficking in the caribbean has decrease in the last ten years. you touched a little bit in your testimony, how do we coincide the rise in violence with the lower amount of drugs being shipped through the region? what is driving the increase in murder rates and farm crimes in conjunction with this decline in the flow coming into the area?

>> there has been a recession in the region and the economy has had an impact in the unemployment. that is why we are focusing on the youth because those are the ones that have been impacted by this economic situation. obviously tourism has been affected at all of that has a way of the increasing job opportunities. >> i will add to that, senator at least a little bit. my testimony which i completely and utterly believe is that we are correct, over the last 20 years and certainly over the last ten years the amount of illicit drugs that are trending through the caribbean have gone down. they have gone down dramatically and i would add they have gone down dramatically because of our efforts, not those of the united states government to control the flow. i genuinely belief that the

handwriting is on the wall. we can see the train coming down the tracks. they have left structure and infrastructure behind. some of that is driving homicide rates today. in other words the same people, the same organizations, same businesses and the same officials who were corrupted in the 1980s an 1990s are still there, still capable of doing this same things they were doing back then. among those with the homicide and general violent crime. that is why my own conclusion is we know we are going to have to deal with this crisis again. it is in our interest. it would be the height of folly and stupidity for us not to prepare for it now and in advance. >> i want to turn my attention to puerto rico. that the domestic security obligation we have. i heard about this earlier in the year and the situation