his tv performance, i've thought that in many respects it was a masterful performance. he was on top. he clearly could be very spontaneous. it was a little bit orchestrated , but well, this is russia. but when i was thinking about his effectiveness, his traditional electorate, but with this new generation, i thought that he was out right counterproductive. it said the look like they're wearing some kind of commons. people found this very offensive for them, going to this to miss station was a big deal this was

announcing that they were becoming citizens. today moscow another scandal. former vice prime minister who i consider one of the most respectable people in russian politics comes back. russian corruption. he was one of the favorite, engaged in this privatization. now he is a champion of democracy. but he is one of the people who is appealing to this younger generation. i assume that putin despises him because he accuses them. that is his principal campaign slogan. having said that, they just released on a government-related website, audiotapes of private home conversations in which she is using a lot of vulgar language and where he is

criticizing a lot of his colleagues in the position. now, clearly the idea was his reputation would be destroyed. but they feel that this is another offense to their dignity. they're taken for idiots. if they wanted to run the government and complain like that they will further anger a lot of people. so it is not all over yet for putin to demonstrate his potential to become different. but the clock is ticking. >> i am going to open this up because we have our friends from c-span. please identify yourself. arnold. >> arnold corgi. dmitri, you have posed the issue for the united states in what is by now a very familiar and

traditional way. it really is, should we support a stability which is fairly predictable, not entirely satisfactory, and opposed to which there are possible alternatives that are better, and some that are worse. once that he has been most of your time on really the ones that are worse. we have been there. we have done this before. the answer certainly is not to make a premature choice one way or the other, but to be as smart and a sharp, attentive and as analytical as we can be to see which way the movement is going internally depending partly on how putin and his government are responding to the challenge and how the challenges are organizing themselves and

preparing and creating. the second big question has to do with the opposition. and that is equally difficult. the liberal opposition in which we are most interested in has a very, very poor track record. it is very vulnerable, but it is also clear that the opposition that those people who are out in the square demonstrated and are active on the internet, they are not interested in the official opposition. the official opposition is no opposition at all. the parties that gained most in this election, whether by hook or crook, are not parties in our judgment of american interest that would serve our interests if they gained new strength. so the struggle really internal,

as i see it, is between those forces who are trying to advance the deal legitimization of the system which in their view has failed them and the country. and opposite force is in this case headed by putin himself who are trying to reassert the legitimacy of the system. i think the u.s. response so far has sort of threaded the needle and has been, i think, quite skillful. i think the administration was right to put the secretary of state out in front very quickly, and it was right not to follow the advice of some, of you, not including incidently the republican candidates, which was interesting, to have the president immediately come out with a strong position on the elections themselves. so my reply to you is not so

fast. i am not so persuaded yet that a defeat of putin will lead to a political change in russia that will necessarily be to our disadvantage, and i see extraordinary benefits both for russia and for mankind, indeed, if, in fact, contrary to past performance the opposition now with a new import of vitality, energy, and a different population, could succeed in putting together something that the country can get behind. i think the initial response of putin to it and the interviews was very bad. i don't think he advanced his cause, but on the other hand, the opposition has not shown us that they're capable of organizing a successful movement. >> well, what they should stop

doing. that is what was mentioned offensive to the dignity of those who disagree with the russian government and accept what they should know themselves , their reasons for opposition. if putin and medvedev talk about the russian pervasive corruption over time, there are talking all the time about the office and all power in russia and interest and dignity of the people. actually, dignity and the interest of foreign investors as well, which leads to outlaw of capital from russia. i think that what you need to see is for mr. putin to start talking either way that would indicate at least to more modern on the protesters that putin is getting the message that we may see a new reincarnation of putin. we have seen a reincarnation of

nixon and many other american political leaders. we do know that it is possible, not always successful, but possible. but the first immediate question is to make a conscious decision that something has changed in his country and that he has to change some of his ways. without that, i don't think putin will be held to be successful. the second thing, more specifically, i think that they have to accept that putin cannot win elections in the past. as they made very clear. in order for putin to win the election without a second round, he needs in the first-round to get an absolute majority of the vote, absolute majority. according to every opinion poll i have seen, this is simply not doable. let me emphasize, not a little

bit here and there, but a kind of massive approach which would make elections illegitimate in the minds of millions and millions of russians. putin would have to accept that he should be prepared to go to a second round of elections. the process that a second round of elections, opposition can unite against putin, even to support somebody like a communist leader just to get rid of putin, and they do understand that putin would have to accept an element of politically and unpredictability. and if i was in his shoes i would hate to accept this unpredictability, because if you listen, they are not running against the political program of

putin or the way putin runs the country. there are saying that he is a thief, kirk. they do not just want to change the government. they want to put putin and company in jail. they want an arab style revolution, and as you can imagine, what happened to khaddafi, you know, they take threats like that rather personally. but putin has to take steps that is the way it yesterday. there is an element of uncertainty that they have to accept. i am convinced that if putin plays his cards right he still can win in the second round. i do not know that i would say this a month from now, but today i believe he can win in the second round. he remains by far the most popular politician in the country. and not just talking about opposition polls, i'm talking about position polls which are

respected and totally independent. 77 percent of the russian tv audience watch putin for four and a half hours, and that is not from the tv channel, but, again, from an independent post. he remains a kind of charisma and legitimacy which would make in a strong candidate. he would have to accept an element of uncertainty. he has to stop demonizing his opponents, people who go to demonstrate. and he would have to stop -- start talking seriously about what he is going to do for the country. again, constantly reporting. a lot of announcements how he's

going to praise this group, that group, retired people, military, security, well, russian has its limits. i think it is important for putin to go to the post presenting his problem, then what'd he intends to do. and that would require something prepared for him by a group of people, and i don't see something like that happening so far. the clock is ticking. >> madame ambassador. >> thank you. in busy of bulgaria. thank you. as always, one of the most interesting and challenging debating cases in this town. i was going to ask you about further reflection on your description of the relative support of russia, but i think if you give that much of an answer explaining that this

could go much farther a modest today. i think that having today's discussion on two planes, one is the domestic scene, immediately the aftermath of the elections, and the behavior of the opposition and the emergence of an opposition group, and also the other plane, of course, is geopolitics and the implications of the expected aftermath of this election. i would really appreciate a comment from you. how would you describe what can be a rational argument in favor of more engagement with the west, whenever it may mean, and the united states of america. and they get a feeling, which, i think, is quite different, the feeling that has been there for generations, i think. correct me if i'm wrong, but ever since the time, kind of a defensive attitude.

in modern times this is the united states of america and the first place. how would you compare the policy of appeasement for european countries with russia and the reset of the current administration to act would there be some limits? would one of these p kind of a better attitude than the other? and another one, how would you describe, what is a patriotic platform, a patriotic attitude on nationalistic, depends on how you termed it, and russia? what would be, not just for the russians, again to more internal argument, but how would you describe the patriotic political platform? >> well, let me start with your last question first because it is a very important. i do know some people who

demonstrated at the square on december 10th. some of them i know very well. some are, in the spirit of full disclosure, close personal friends and relatives. people who never have demonstrated in the past. and i think -- since i spoke to someone on the phone, i would not want, you know, to describe with any certainty their convictions at this point. but i think that they have to conflicting impulses. one says enough is enough. these people of power or denying our dignity and our rights. now we want to be taken seriously. and because they don't have a well formed political platform there is a sensibility of their demands. but what they want from government is not another monologue, but a genuine

dialogue. at the same time, these people support the nationalists strategy. some of these people actually, sound like me without an accent, some of them went to best american universities, and very successful in their professions. but they do not want secretary of state providing them with a dispensable guidance on how they should conduct their elections. and ever since the secretary of state says this, they still do not quite like it. so two conflicting emotions. they are very angry with the government. yet they want to be able to make their own choices. >> a government which goes along the same lines. i'm sorry. >> well, they want -- they do not want to to be told from

anyone from the outside. they don't want the government to say that they're acting on anybody's orders to what they also do not want anybody from outside the country to become involved in the internal affairs. i think that we have to try to develop policy which would not look and would not be an appeasing policy, but would allow us to have real dialogue with these people, something that was talked about. and i will speak about three specific things. we could seriously consider, i think that we, since russia is joining the wto, we need to get rid of the commitment because it -- we keep it on the books. it would really discriminate against u.s. business and against u.s. investors in

russia. however, in the current environment in my view to get rid of the jackson amendment without replacing it with some other legislation which would establish a leak between u.s. policy and russian domestic purposes, i think it would be sending the wrong signal. actually, that would give a compression of russia that we do not care about russian corruption. accordingly, i think that we should proceed with the so-called bill which is named after russian law. a long story, but i would say that we, in my view, should have a carefully drafted piece of legislation which would give the administration appropriate procedures which would make short that it is sufficiently posed with sufficient safeguards and very important but the president obviously being it

will to make an appropriate national security exemption when necessary, but i do think that some version is important to. the second thing that i would do is, well, i don't think that we need to attack russian elections and if i was a member i would think seriously about engaging in exchanges with the new russians if we do believe that he is legitimate. it's certainly is our prerogative to what extent we want to have dialogue with these people. and last but not least the board of directors where richard burt instructed me to proceed with this event would also discuss our sense of the national interest in taking foreign

money. they both had decided that we will not and did not in the past take any foreign government money for foreign money connected with the government. i think that it is important for groups like ours and other american public policy that nonprofit organizations become quite careful about taking money from groups connected to the russian government and which engaged. we sometime ago the center for the national interest was questioned by the "washington post" whether we were taking a russian money. we never did. but then the "washington post" has proceeded with the whole section, which is a propaganda advertisement produced by the russian government. so i want to suggest, you know,

a certain degree of consistency, and a higher level of integrity and how we deal with those in russia who we, ourselves, accused of corruption. let's look in the mirror and let's be prepared to put our money where our mouth is. and if certain money is. let's. [inaudible] >> barbara. >> they i am curious about the latest addition to the presidential campaign, the owner of the new jersey nets, can you tell me something about them? does he have a shot? and also, there are rumors bruton has had plastic surgery? do you know if this is the case? >> i looked at mr. putin during his last performance, and he looked a little different. m not an expert on plastic surgery.

i cannot give you any informed answer. i also have to say that if i was putin i would have a lot of sleepless nights. change the appearance somewhat. a very successful businessman. he made the bulk of his fortune and the 1990's when his partner he just gave $5 million, his partner went into the government, became vice prime minister and was very active in privatizing russian government property on behalf of himself. that was the origin of his enormous wealth. over time, as you know, some russian businessmen proved to be unable to grow from their previous unsavory routes, and

some proved they're capable of much more. they have clearly demonstrated that she is a successful business leader and established himself as a formidable presence in russian politics. so far he has an uneasy relationship with russian government but was considered basically on a fairly short leash. i want to see whether he actually would be interested to run against putin. the chances that he would be elected to a zero because the russians are in the populist mood. they don't like oligarchs who made their money is in the 90's instead of contributing to russian causes. also, you know that there was a scandal. he was arrested in france for

importing a lot of organs. he was found in the sense because there were not professional prostitutes. but how to put it delicately, this is not a lifestyle most ordinary russians would executive identify with. but -- >> they might approve of it. >> them a dream about. [laughter] the bottom line is there is suspicion that the purpose is to kind of appeal to some liberal without being a credible threat. that, in my view, well, these things happen in electoral politics, but if putin relies on things like that then i think he is boeing to be deeply disillusioned. >> thank you. >> by the way, we take no for money either. earlier this year there was a

good deal of expectation, i think that putin and medvedev would delay announcing their presidential reelection until after the parliamentary elections. by doing it in reverse order they have provoked precisely the kind of problems that we have seen. why do you think that they chose to exercise this slap in the face of announcing their castling scheme so close before an election where people could to some extent actually register their disapproval? >> well, you're asking a very good question. first, clearly, there were becoming nervous about declining numbers. if united russia would go down in the elections it would provide justification as the

leader of united russia to announce his return to the presidency. but the second case, i think it clearly miscalculated, and to the best of my knowledge there was never any serious discussion inside the russian government or if putin had any kind. any kind of discussion of what they're doing and of the likely consequences. as with most such decisions it apparently was mr. putin who made his own calculations, a kind of conclusion that medvedev is not going to run for presidency of up for. medvedev went to putin and negotiated a deal where he would stay as prime minister and putin accepted this in the name of harmony, and that was clearly a very serious miscalculation and a reflection on the decision

making style of putin. >> a short question. falling out on what cliff asked, did you expect the putin government to try to stage manager who gets to run in the march 4th election in a way that either produces a tours that would be unacceptable to a majority of russians or one that would at least not be -- i mean, there will try to manipulated and what's direction? >> first of all, they're going to manage it. no question about it, if for no other reason in order for an individual can did it, and depended candid it's. they have to get 2 million signatures. january 20th, something like that. there's no way anyone can collect in russia, a country with a repressive apparatus,

2 million signatures which can be easily verified unless the government allows you to do it. and then if the government is fairly broad minded. so the decisions will be made by the government, but the question is how the government is going to handle it. they might decide to be very strict and prohibitive and allow only those which are already in parliament, and most of them have strong government connections to allow only these candidates. or they may agree, not a hero of the radicals, and he is a little too old-fashioned for the internet generation, but he is not corrupt and generally liberal. he may become a serious challenger. i am sure that there will be people who would say we should

not allow him because he gets more votes and would go into the second round. then who knows what is going to happen? if the government would listen to this voice i think that there would be a widespread public indignation, outrage, and it may break loose. if they allow him to run i would not say that anybody would accept this election as perfect, but at least their would be a tiny modicum of legitimacy. >> we are really running out of time here. i think there are three journalists in a row here. i'm going to let them all as they're questions commend then you can answer as you see fit. i will begin with you.

>> going back a little bit, what were the consequences if, indeed, russia went through with an anti-missile deal with iran? >> you mean to sell the iranian -- >> well, dmitri spoke about the

relationship with the united states and russia. what would it do to the world situation? >> if the russians sold their f 300 air defense missiles to iran? >> right. >> okay. i wanted to clarify. >> i am curious if the events in the election in russia might have a great impact on the elections in the united states? the debate and primaries, could be a top foreign policy issue for republicans to take on, obama declared -- >> let me start with this question. in terms of these missiles, f f300, some in russia are talking about supplying and more modern system, 400,000. in terms of the system being delivered to the iranians, of course, israel will have

something to say about that. the israelis may have thought that. it may become more difficult for their government gives -- to constrain. i will simply say that that action would clearly indicate iran may. a quick crisis and would also raise questions about what is calling to happen in the aftermath of this crisis because it is one thing to attack iran and try to destroy their nuclear missile program, which is not going to be easy, but let's imagine that from now on they are not alone and that they can count on an active russian assistance in rebuilding whenever was destroyed. i think that it would chase the securitization in the middle east profoundly and in a very dangerous direction.

the impact of russian air spring , well, it is quite clear that well you cannot establish , one reason the russians, in addition to the dignity, it is clear that because of the world economic crisis and because of russia's own mismanagement, corruption, and the effects, as a result of that, living standards in russia stopped improving, and i have to say, in some areas and for some categories, even began to go down which creates an explosive potential. it is unlikely to contribute dramatically to what is going to happen between now and the presidential auction, but if you're talking about what may happen next fall, that is what russian economists were warning about. if you're looking, what to consider in addition to the

presidential elections, you have to look at possible economic problems in russia in the fall and how a weekend illegitimized russian government would be able to handle that. finally, i think that you have asked a very good question. actually, a lot of people in russia do not quite entirely understand the dynamics. this man is much better than me the difference from the time of the soviet union american policy was often oversold and overbooked. and i think the same has happened to the reset policy which obama administration, in my view, allowed to look as more involved and more lasting than it really was. president obama talked about the policy as his success. the more he seems to count on

president medvedev as his strategic partner the more he talks about his face in the russian live reports, the more i think he was encouraging the republicans to say, wait a minute. what is going on in that country. so i do think that if they're is a crisis in russia it would become a foreign-policy challenge for the obama administration and an inevitable top pick up presidential debates. >> i'm sorry. i have not been able to call on everybody. i am sure that you will all agree with me that this has been a tour de force. we have not gotten, of course, all the questions answered, but i think demetrias helped us with how to answer those questions and what the context should be and what the crucial issues are going forward. join me in thanking them. [applause] [applause]

we are adjourned. [inaudible conversations] [inaudible conversations] [inaudible conversations] [inaudible conversations] [inaudible conversations] [inaudible conversations]

[inaudible conversations] >> road to the white house coverage as we go live to columbia, south carolina for a town hall meeting by republican presidential candidate newt gingrich. the former speaker is getting a bite to eat now and will begin the town hall after he's done in a few minutes. over on our companion network, c-span, president obama will speak shortly from the white house briefing room above the house and senate this morning passing a 2-month extension of the payroll tax cut and unemployment benefit. then, president obama will travel to hawaii for vacation. the white house announced that the president's departure plan

was announced shortly after the house and senate signed off on the deal to extend the tax cut. again, the president's comments live in a few minutes at 1245 eastern time over on c-span. ♪ [inaudible conversations] ♪ [inaudible conversations] ♪ ♪

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♪ >> newt gingrich, the republican presidential candidate is expected to shortly after lunch at the blue marlin restaurant in columbia, south carolina, a getting under way when the speaker arrives. coming up later tonight on c-span2, the british inquiry into phone hacking by tabloid news papers. the former editor with news of the world that was shut down in the wake of the phone hacking scandal. at 8:00 p.m. eastern time here on one. [inaudible conversations] [inaudible conversations]

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>> we are here standing by in plumb new, south carolina, wedding for presidential candidate newt gingrich to speak. here is how the associated press is writing about what happened. after weeks of bickering and doubt congress delivered a last-minute holiday tax cut extension to hundreds of workers along with further unemployment benefits for millions laid off in the nation's fierce recession and weak economic recovery. a victory for president obama and a humbling retreat for house republicans. the associated press. on c-span right now, waiting for president obama to speak at 1245 eastern time.

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♪ ♪ >> as we wait here for former house speaker newt gingrich to speak, the republican presidential candidate, more political news. the associated press writes that an elected preview of the general election argument to come vice-president joe biden and gop presidential candid mitt romney traded barbs today over whose economic policies are best for the country. mr. biden said romney's would

leave most people behind while the republicans said mr. biden would -- and president obama live in a fantasy land for thinking their policies are helping. that in the associated press. ♪ [inaudible conversations] ♪

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♪ ♪ ♪ >> we are expecting newt gingrich, the republican presidential candidate live here shortly. mr. gingrich challenged republican presidential candidate mitt romney to a lincoln-douglas style debate. the associated press riding yesterday that mr. romney spurred the rivals challenged but the notion suggested by the former house speaker that he is afraid to participate in such a face-off.

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[applause] [applause] >> how are you? [applause] [applause] hello. hello. hello. [applause] [applause] all right. okay. that's very funny. let me -- let me have your attention for just a moment, please. my name is bill duke's. i am from columbia.

i own the blue marlin. i hope that you enjoyed your lunch today. well, thank you. let me just move ahead because i know you did not come here to listen to me. okay. i want to introduce their release. -- mary louise. i will ask you this. if you have not contributed anything, canned goods, not perishables to more money, please, please into your pockets before you leave. we have a very difficult situation got three of every four children to go to bed at night in south carolina without a nursing meal. that is enough for you to think about. i don't want to give you any more statistics. moving non. i'm here to introduced billy wilkens. the first federal judge in the nation appointed by newly

elected president ronald reagan. most recently known for playing a very simple rule on boeing's decision to locate in south carolina. in addition to a prestigious military career he now holds the rank of retired brigadier-general. billy and his wife deborah and congressman john pierre are here as coach fares for nudes campaign in south carolina. at this time of like to introduce bill lee wilkins. [applause] [applause] >> join me in expressing our appreciation for bill's generous hospitality. [applause] [applause] i want to welcome everyone here and tell you that i am delighted that you are willing to become part of the passion and action of our time.

>> under his lead as speaker of the house, get this, the budget was balanced, the federal budget was balanced with the first time in over a generation. [applause] [applause] under his lead we experience welfare reform and taxes were cut significantly. newt has experience, knowledge, intellect, and the strong work ethic to get america growing in the right direction again. in naming him man of the year, time magazine said this, and i quote, leaders make things possible. exceptional leaders make them inevitable. he belongs to that category of exceptional. [applause] [applause] well, it gives me great pleasure to welcome the next president of the united states.

[applause] [applause] >> thank you all very much. first of all, thank you for coming out just two days before christmas. let me start by saying, merry christmas to all of you. i hope you have a wonderful christmas. judge, thank you for helping. i really appreciate it. thank you for hosting over here. you have a great lunch. of very, very wonderful chance to have some self carolina cooking, and i appreciated very much as a georgian. i am really glad to be here, and i want to talk about a couple of key things, and then i'm going to take questions. i want to five please be seated.

let me start to talk to what just happened in washington, and i don't know how we get this message across to both parties, but there is something profoundly wrong in this economy with the problems around the world press need to make it worse to have a president and the congress think that they have accomplished something by passing a 2-month extension of one item. [applause] [applause] and as my dear friend and former congressman was saying, we were talking. we were able to work with the democratic president to get things done. we got welfare reform done. we got the first tax cut in 16 years done, the largest capital gains tax done, four consecutive balanced budgets done. these were real achievements that have a real effect. unemployment went down.

how much better christmas we would have if our unemployment were at 4%. so let me talk for a minute about creating jobs, and we will talk specifically about south carolina. one of the great opportunities in all of america for job creation if we have the right policies. the boston consulting group, with a steady in august that said that by 2015 when you take total cost of energy, transportation, equipment, manpower, it will be less expensive to manufacture in south carolina than in the coastal region of china. now, they did not take into account the obama national labor relations effort. nonetheless, that effort for the moment has been pushed back. what does it mean to think that we would be competitive head to

head in south carolina with the area around shanghai? it means that we have a chance of the world market to create manufacturing jobs right here selling worldwide. what does that mean? it means we have to modernize. [applause] [applause] and it also means that part of the process we have to modernize is a little bit north of georgetown. now, people have known this for years. our red tape, and this requires of but not to reform of the army corps of engineers, which is why i worked with strong american now, the same modern management in government we apply in our manufacturing companies. the texas locker today to plan the modernization of the port of charleston than it is killing to take to modernize the panama canal.

now, that is just plain incompetence. that is the government bureaucracy which has ground down to a level that is unbelievable. i remind people that when you have an aircraft carrier out here, we've fought the entire second world war from december the seventh, 1941, to victory over japan in august of 1945. it is three years in eight months. in 44 months we defeat nazi germany, and imperial japan. recently took 23 years to add a fifth runway. now, that is all -- this is of humanly created incompetence. ..

governor reagan campaigned on it. his program for job creation was for things, one, cut taxes, two cut regulations, three, favor american energy, four, praise the people who create jobs. now what is the obama model? the exact opposite. raise taxes, increase regulations, be against the american energy and attack the people who create jobs. exactly backwards. what was the result of the

reagan approach? we created millions of new jobs in august of 1983. we have created 1,300,000 new jobs. the unemployment rate dropped from 10.8% to about 5.6% during the reagan years. i became speaker. what was the gingrich jobs program? well, i believe in imitating. we have a good lunch here and if i wanted to cut back on a particular dish i would come to him and say can i have a recipe? i wouldn't go out and try to invent my own recipe. i don't know if they would give it to me but still, the ideas right. [laughter] i promise i won't open up a restaurant across the street but here is the point. when you get it good recipe you cook with it. obama's recipe is so messed up, you think you get a hard egged by putting it in the freezer. [laughter] [applause] so what do we do?

we cut taxes including the largest capital gains tax in history. precut regulation. we strengthen american energy and we work with the people who create jobs. and we know what works and in the four years i was speaker not only did we balance the budget and pay off $405 billion in debt, we balance it for four straight years, to while i was speaker and two in the media following uris based on on the policies we establish. in addition to all that, their 11 million new jobs created. so we know what works and we had to classic studies. let me talk about how it ought to work here. its accommodation of exactly what i just described, taxes, zero capital gains tax, hundreds of billions of dollars will pour into the country. 12.5% corporate tax rate, that is the average tax rate. we would overnight tier companies be more competitive. we would liberate about $700 billion in money locked up

overseas and this is what i tell my liberal friends, at 12.5% general electric would actually pay taxes. [applause] 35% by 12.5% day -- and pay their tax. this is very important. 100% expensing for all new equipment. what does that mean? it means if you're a farmer or a factory or a restaurant your business and you buy new equipping you write it off in one year. why does that matter? we want american workers to be the most modern, most productive workers in the world with the best equipment. [applause] in the gingrich jobs and economic growth plan, we eliminate permanently the death tax. it is an immoral tax. [applause]

it's both costly, wrong and economically wrong. it's costly wrong because the fact is, if you work all your life you save all your life, you do the right things all your life, but what right does a politician come in and take half your money when you die? it's just wrong. but it's also economically wrong. if you have somebody who is smart and effective you don't want them to spend the last 15 years of their life trying to avoid taxation. you want them to spend the last 15 years of their life building new and better jobs and creating new and better companies. it's a better approach. [applause] for individuals under the gingrich plan, we also created create an optional 15% flat tax for anybody who wants to can either keep the current system with all of the deductions or this is -- write-down this is what i earn and this is my dependence. hong kong has a two-page plan. you can either have a complicated system or simple system. they have had of her generation and it works. now let's talk about how do you

build on the tax policy? deregulation, one. repeal obamacare immediately. [applause] two, repeal the dodd-frank bill immediately. [applause] three, repeal sarbanes-oxley immediately. [applause] everyone at the steps raises more jobs. everyone of the steps liberate small banks, moves it in the right direction and again i do think you need some health reform right after you appeal obamacare. i think we need to reform some financial services right after re-repeal dodd-frank at this big government centralized bureaucratic system is guaranteed to be corrupt and is guaranteed to be wrong and it is crippling the american economy.

now a couple more steps. we need to replace the environmental protection agency with a brand-new -- [applause] we need a brand-new solutions agency and when i say replace i mean i would not transfer anybody from the current agency. this is an institution which has grown so radical, so lacking in common sense and so dedicated to crippling american business and dictating the local communities that it needs to be replaced by a commonsense, practical organization that takes into account economics and that focuses on innovation and developing new and better approaches that doesn't focus on litigation and punishment and dictating to the whole country. one last big change. i'm for a 21st century food and drug administration which is in the laboratory understanding science and accelerates getting a 21st century say you get it as best as possible. the biggest market in the 21st century is going to be health

care as people get wealthier. they want to live better. i would like america to be the leading producer of health products of the world. those are high value-added jobs with high profit origins. we want them to be here in america, not in china, not in india, not in europe but here in america. [applause] now let me talk very briefly about energy. there is an estimated $29 billion plus in natural gas just offshore. you set a standard so it's far enough offshore doesn't affect tourism and you set a standard that it doesn't affect the fishing industry. that's thousands of high value-added jobs. in louisiana that industry averages $80,000 a year. it also produces royalties. and i like a bill that is introduced by two democratic senators webb and warner from

virginia. says in virginia they can develop offshore 50% of the oil goes to the federal government, 37.5 goes to the commonwealth of virginia, 12.5 goes to infrastructure and to land conservation. now if you take that model you would generate more than enough money to redevelop not just the support infrastructure but also the roads and railroad infrastructure necessary to maximize their productivity and the job creation capacity of south south south carolina. that is a plan that is a win-win. you create jobs in the energy industry. that improves the chance to export. that creates jobs in manufacturing. suddenly have dramatically expanded the job base of south carolina and he will put people back to work. i will tell you one of the major themes of 2012, we have today the finest, most effective foodstamp president in american history. no one has ever put as many people on food stamps as barack

obama. i would like to become the best paycheck president in american history. [applause] now i will say these two last things and then i'm going to take questions. first i want to tell you, i'm not going to ask any of you to be for me. because if you are for me you are going to vote and go home and say i sure -- frankly i can't fix it by myself. even as president. i need your help. so what i'm going to do is ask you to be with me, to agree to be with me for the next eight years. i want you to be with the first of all to stand side-by-side to remind the congress, the governor come the state legislature, the city council, the county commission, the school board. this is the direction america is going to go in because we are going to get america back on the right track and we need your help doing it and that takes it is in power to get elected officials to do the right thing.

[applause] second, i'm going to ask you to be with me because in a practical level if you have as many changes as we need to get back on the right track we are going to make mistakes. dwindle emit mistakes i want you to tell us. this isn't working. we have a better idea. the world has changed. it's important that we recognize no 537 people in washington can possibly understand enough to see all the different things that have to be fixed. so we are going to build using social networks. we are going to build the ability for people to really stay in touch to really understand it to be able to say look this is an improvement. we have to fix that. it will make us to radically more effective. there's a third reason. if we apply the 10th amendment and we shrink the government in washington, we have to grow citizens back home. because you have to fill the

vacuum we are creating. so i am going to ask you to be with me. lastly, it is a huge choice. to go with a solve wolinsky model of socialism or with the american exceptionalism, the decoration of independence, our rights coming from our creator and us being citizens, not subject to the government should serve us. we don't serve the government. [applause] this is possibly the biggest choice in over 100 years. which direction do we go in? eight years of barack obama will wreck this country on a scale that will make it almost unrecognizable. and therefore we need to win, not just the house, not just the senate and not just the presidency but we need to win the argument about the nature of america and the nature of solutions that will work. that is why if you help me, and

i believe if i win south carolina, i will be the nominee. [applause] if you will help me, as the nominee i will challenge president obama's 27, three are debates in the lincoln-douglass tradition of a timekeeper and no moderator. [applause] to be fair, i will concede in advance that he can use the teleprompter. [applause] after all, let's be honest, if you had to defend obamacare, wouldn't you want a teleprompter? [applause] now people think that is not going to accept that i believe he is going to accept for three reasons. first, he announced in february

of 2007 in springfield, illinois, quoting lincoln. second, it's a question of ego. this is a graduate of columbia university, a graduate of harvard law school, the editor of "the harvard law review," the finest orator in the democratic party. how does he look at a mirror and say he is afraid to debate some guy who taught at west georgia college? [applause] but finally, as many of you know, i study history. and unlike the president, i study american history. [laughter] in 1858 abraham lincoln had been out of office for 10 years. he served one term in the u.s. house before that in the state legislature. when he announced he was announcing against the most

powerful senator in the country, the probable next president he said they are 105 days left in this campaign. let's debate every day. douglas said, i don't think so. so lincoln adopted a policy, wherever douglas went, lincoln would show up the next day and after about three weeks douglas figured out the newspaper coverage was lincoln's rebuttal of douglas' speech. and so he wrote link in a letter and said alright i will agree to the debates. there were nine congressional districts. is that i'm not going back to the first two. you a party been there but i will debate you seven times. those seven debates, each one was covered by the newspapers across the whole country. lincoln then had it published in the book in 1859. it was a major factor in his emergence as a presidential candidate. so i want to take lincoln's idea. if you help me become the nominee, in tampa, in my acceptance speech, if the president has not yet accepted,

i will announce that as of that night, the white house will be my scheduler. [laughter] wherever the president goes, i will show up four hours later, and i will answer his speech. now the age of talk radio, social media, 24 hour cable television news, i don't think it will take very many weeks for them to decide that having gingrich answer each speech is a dead loser in the debate is a lot better gamble. so i think the odds are very good, we will end up with seven, three our debates. one of them can be on obamacare versus real health reform. one can be on job creation versus job-killing. one of them could be on american exceptionalism versus european values. we will have a contest later on to figure out what the seven topics are. and it will be a lot of fun. it will be a good experience. somebody wrote me the other day

and they said the president's challenges iran last time with the slogan yes we can and is going to run next time with the slogan, why we couldn't. [laughter] so again i am thrilled to have come out just before christmas. i think we have two microphones in the audience. so, if you will hold up your hand, and microphone person will come to you. here we go. you take decided you take that side. this gentleman right here. and then we will come to you. there we go. >> mr. speaker, when you become president sir, will you be in a position to actively campaign to get rid of pelosi and reed? >> oh sure. [laughter] i mean pelosi is pretty hard because she represents san francisco and she may actually be a more conservative person then her district.

>> hopefully they will secede by that time. another short things there, no it's, know the amendment is free speech and all but is there any way to hold the media accountable for the lies and the in the misrepresentation? beasher, we will watch them. [applause] my view is there certain channels i refuse to watch because we no they are not in touch with reality. several of which could be called the science fiction channel news. yes, maam. >> mr. speaker in the small business owner here in columbia south carolina independent voter and i recently applied for a loan and was denied. i have perfect credit so i don't know what the banks do with their money, but i know you had a recent contract with america, where you had supported term limits because i know the president has one and as i see it now i feel like all of our politicians are bought out by special interest. i don't care what party you're in and they don't listen to the

voters. i don't how you get special-interest money out of politics. i think that is really hard to do but i think it would be may be easier to support term limits and i wonder if you support that idea? >> if you are a small business owner, two things are your comment. one is we are working to develop it the equivalent of a 12.5% tax rate for subchapter s as well as corporations because the corporate tax cut doesn't help you. iran for small subchapter s's over the last year so understand the difference. the second is your challenge of getting money is exactly why we should repeal dodd-frank. dodd-frank is killing independent small businesses and killing independent banks and is actually maximizing the likelihood of the big banks becoming even bigger in a way that is totally destructive of this country and the number of small-business owners who can't get credit when they are totally come exactly why it each gets credit out is mind-boggling.

to big factor on why the economy is not recovering. i'm not a big fan of term limits because we now have have had 20 years experience with them and what they have done is, in a place like sacramento, term limits are so short that the elected officials never know what's going on and the result is that bureaucrats in and the lobbyists run the city. what i am in favor of is the decisive election reform that says anybody who wants to can give any amount of tax money they want to give as long as it's reported every night on the internet so you know where the money comes from. overnight cannot, challengers could raise the money to run against incumbent and you would certainly see incumbent in trouble everywhere all the time. the current campaign finance laws protects incumbents because it made it so hard to raise money for a challenger that it is a fundamental impediment to democracy. [applause] >> you talked about jobs. what would you do specifically to help the 50 to 64-year-olds

who are unemployed now and how would you help them save for retirement and protect social security so they will be able to retire someday? >> a couple of things. first of all, let me work backwards. social security for your generation is not in trouble. it was infuriating to have obama say in july, i may not be able to send you your check. there are two gillian four and a billion dollars in the social security trust fund. this was pure cynical politics and its most disgusting and this president does it routinely and he seems to have no care about the truth and no care about whether or not he is scaring people unnecessarily. the fact is the money was there. they could easily have passed the provisions or congress that said that those checks would be the first line of credit on the federal government and they could have paid them even during the debt ceiling fight. close the government twice. we never once threatened social security or air traffic control or the military or anybody who is engaged in public safety

because we were careful not to do damage. this president has no care about the number of people he frightens who don't understand the real world and the real situation. i think that part is different. second i think we need to find a way to increase the amount you can save and a tax-free and tax-sheltered way. people need to make up for a lost decade. people who have actually perfect plans for retirement under any reasonable standard are now being hurt. third, what bernanke is done at the federal reserve at keeping interest rates this low really hurts everybody who has saved. if you have savings, you look at what you're getting in your savings right now. this is an attack on every save for -- saver in america by the federal reserve system and one of the reasons i would like to fire bernanke as soon as i get into office. [applause] lastly i will give the same general answer i give young people who say to me how my going to pay out my student loans because i can't find a job? the best answer isn't to find some tech need to allow you to not pay your student loans. the best answer is why do we an

economic wolesi that creates so many jobs that everybody gets hired? at 4.2% unemployment virtually everybody is willing to work find a job so that includes people over 50 and includes people under 30. so i think we have to have is a goal for this country, let's get back to everybody having a job. america only works when americans are working. [applause] >> how are you doing today mr. gingrich? my question is, i am a little nervous. how are your policies going to help improve the lives in in a poor and minority communities which the recession recession really has it is hard. i just wanted to know that how your policies will be any different than republican, democrat, whatsoever. are you willing to put your

registration to a different background, not because you know him personally but the background is different and he wanted different mindset than the same old same old that went to this college went to that college or you network. serious change, thank you. >> it's a good question. donna brazil rand algor's campaign and she was at one time the assistant to the delegate from washington d.c.. she will tell you in the four years i was speaker, i was the most pro-district of columbia speaker in history. adopted policies that helps bring people back in the city and we adopted policies that help businesses come back into the city. we did everything we could to make sure that everybody was engaged and had a better future. i think it's very important and i say this to every conservative in the country, if you truly believe that we hold these truths to be self-evident that all men are created equal and that we are endowed by our creator with certain inalienable rights among which are life, liberty and the pursuit of happiness, then we who are conservative have an obligation

to go into the poorest neighborhoods in america and in a practical role up your sleeves level, find out how we help every single american have the right to pursue happiness. now that requires rethinking the schools. it requires rethinking the red tape on the tax policies. it requires making it easy for people to become entrepreneurs and start work. how many of you heard the idea that i got in trouble for recently. i case like a miser with some ideas that they left probably goes crazy, rensin circles. "time" magazine once had me as scrooge holding tiny thames broke in crutch. and it wasn't enough that i had stolen the crutch. i had broken it. and the title was, how mean will gingrich be? that was before i was sworn in as speaker. the following week "newsweek"

had me at a doctor seuss figure and the title the grinch who stole christmas. gave you some sense of how the elite media response to that. am going to give an example of an idea i've been describing to people. i believe the poorest communities we should really be creative in our schools. finding a way to help young people actually have a part-time job in the school. i think it will reduce the dropout rate. it will increase -- they will have money and they will actually have a job. it will increase their sense of pride in their school because they will be taking care of it. this got an article that said gingrich wants to trap poor pete -- children into being genders and then it was he wants 12-year-olds to do dangerous things. you can't believe the discourse in. so i'm in new hampshire on wednesday. the 16-year-old kid comes up to me. his father is an adviser of investmentsinvestments, 401(k)s and that sort of thing. this kid has his own doughnut company at 16. and i said well when did you

start? he said 11. he now has two restaurants that take his donuts and he sells, he does four, six, eight dozen donuts at a time. he is 16 years old. his father said he finally can drive and now he can deliver his own donuts. but here's my point. i want to go in with the idea that every person is has a chance to become nonpoor. i don't want to make life easier for the poor. i want to make the poor or middle-class. that means better education pro-grins, easier smaller business rules, printed ships and work programs. [applause] i will give you one of example. i want to modify unemployment compensation so in order to get unemployment compensation, you sign-up for a business based training program so we are not paying people to do nothing for 99 weeks. we are paying them to learn a new set of skills and a new job opportunity. [applause] does that help?

let him come back one time. >> i like that idea. i think the biggest thing is opportunity. i hear what you have to say but a lot of times people i know you know, they will go to college so sometimes that weight is on them or they have to raise their brothers and sisters. when you talk about pull yourself up by your own bootstraps, i know people who take care of their families because their mom and dad had a substance abuse problem. a lot of times you haven't been in those footsteps and you can't talk about it. do you know what i'm saying? when i was young my mother worked a lot. i had to run her bathwater. she worked hard hours and that made me a better man and my father, both of them, my father and my mother. they taught me a lot of values. it was a committee thing but a lot of times you don't have that. what we need is opportunity. are you willing to put that into your administration? a lot of times people in your position say one thing and do another. i want real change like anyone else. that is why i came out here

today, to hear what politicians want to do. >> let me tell you the difference. i know this is very good and i am really glad you have the courage to get up and persist. let me tell you the difference. i am not for outreach. i am for inclusion. and i will explain the difference. outreaches 15 white guys will the meeting and then call you. [laughter] inclusionist when you are in a meeting. and i can assure you precisely because we want to decentralize back home. we want to have people back home with a bigger responsibility. that is why i'm asking you to be with me. i want every community in america to have a better future and i will tell you some candidates if if the naacp invites me to come to their annual convention i'm going to come that i'm going to invite them to join us in getting america back on the right track so every american can work. [applause] this guy right here. >> mr. president-elect.

>> not yet, with your help but not yet. >> i'm retired military. i retired after 33 years and what i've watched over the last four years as the military being decimated. what will you do to ensure that we stay the strongest country in the strongest military in the world? >> well the question is how to be strong as an important question and let me start off by saying because i'm really concerned about this. the only person i know who is for a weaker military than barack obama is ron paul. we have to be honest about this. his positions are fundamentally wrong on national security. i do not agree with him that america is at fault for 9/11. i do not agree with him that we can ignore it and iranian nuclear weapon and i do not agree with him that it's okay if israel disappears. i think that is important to understand that america has a key role to play in the world. the world is a better place because since 1941, we have been

a stabilizing force that has enabled the world market to grow, has enabled freedom to grow and has enabled people to get to know each other better and if the united states pulls out and we go isolationist, the world is going to become more dangerous overnight. you are watching it in iraq right now. this president pulled out of iraq in such an abrupt manner that the place is starting to fall apart within days and it is supposed to be clear. it was barack obama overruling his own generals. i have great concerns about the campaign in the middle east. i think we need to rethink it from the ground up that i want to -- two major concerns of national security. china and the middle east. they are fundamentally different concerns. in the case of china, the number one challenge is us. if we rebuild our schools, we rebuild our science, we rebuild our manufacturing, we reinvest and recapitalize our military with new equipment, chinese aren't going to catch us in 75

years. that is what we have to do. [applause] the problem in the middle east is fundamentally different. we need to liberate our intelligence community on the mindlessly stupid laws of the past since 1975. we today have no ability to run a genuine intelligence operation. we actually rely on the pakistanis for intelligence. now i mean, this makes no sense at all. and so i'm for fundamental reform and i want to say one last thing. i'm a hawk but i'm a cheap hawk. i want to reform the pentagon as much as anyplace else and there is no excuse for wasting money just because it's in uniform and when you have the procurement process along you can buy new weapon in the cycle time of the technology, there something fundamentally wrong with what you are doing. these two young men right here need to have a chance. let me take another person here and then we will come to these two young men.

>> i'm an independent voter and i'm curious about your position regarding the confederate flag flying over the statehouse grounds. as an historian you must have some opinion on the matter. what is your stance? >> i have a strong opinion and i will tell it to the people of south carolina. [applause] that may be very clear. is a matter of personal deeply felt feelings, i am opposed to segregation and opposed to slavery. i think all those things were terrible and i thought it was fabulous to come into a fund-raiser for tim's got across the street in the largest slave auction site in the united states and it says an immense amount about america and how we appealed and how we have come together. i also believe you will even attend them and there's a lot of stuff local people need to argue

locally and they don't need other folks coming in and are getting it for them. that is how i would answer that question. these two young folks and then after the one there, come back here because otherwise she is going to attack me from the back. this young man here first. >> do you think you will win the war in afghanistan while you are president? >> it's a very good question. i personally do not believe we are going to win that war. i think that affect the sooner we can find a way to recognize that the problems are dramatically different and harder, the problems may well be with us our entire lifetime. trying to root out and defeat a religiously upheld terrorist operation that is very widespread requires i think a totally new strategy. this is why we need american energy policy. the saudi's are the largest funders of wahhabism across the planet. they have more schools teaching more people to hate us than any other group even though -- and i

guarantee you i will never bow to a saudi king or walk arm in arm with one. [applause] the iranians currently have a dictatorship dedicated to a religious system in which causing a nuclear war is seen as a positive event, because it would lead to the coming of the 12th imam. the pakistanis have been lying to us. i mean, when you learn that bin laden was in the military city about a mile away from the national war college, the one thing you know is the pakistani government was protecting him. there had to be some element to the pakistani government to protect him. what was the reaction of the pakistanis to our killing him? it wasn't to be angry about the people who were hiding him but the angry the people who helped us find them. that to me. that to me is a symptom of how bad the situation is so i think we have to rethink. this is not a military go shoot

people problem. this is a fundamental strategy of thinking through how we are going to change those cultures and that is going to be a long, hard process that involves diplomacy, information campaigns, education, lots of things but it is not going to be compress by the military and i think it's tragic the young men and women get lost in the campaign which in the end justice in iraq is going to turn out not to change the country. one last thing. by the way how old are you? you are 12. a very good question. one of my two leading debate coaches is 12. [laughter] maggie is my older, she is my granddaughter and she is 12 and she is one of my -- and my grandson robert is the other one. he is 10 and i will report to them that you're doing a good job here. i will tell all of you i wrote a paper in august of 2002 for the bush administration. it was called operation switch and i said in that paper we should go in and defeat saddam

hussein. it should take about 21 days and it actually took 23. we should immediately hired the iraqi regular army. and we should pull out of the cities immediately. we should be the reinforcers, but we should never be the enforcers because we don't know enough to police countries like that. unfortunately we did exactly the right thing for the first 23 days. ambassador bremer made a huge mistake and decided to try to reshape iraq. in december 2003 i went on "meet the press" and i talked to "newsweek" and i said we have gone off the cliff. we are now trying to do something we cannot do. i mean if we have put and a half million troops in the beginning and if we had been prepared to kill a lot of people, we might have done it. you look at germany and you look at japan, those were total war. we were prepared to engage in total war and when you're dealing with a society which repels you, you either crushing or you get defeated.

we were not prepared to crush it. we could not sustain crushing it. it would have sickened us to try to do that so we need a longer, more indirect strategy that modernizes the region and defeat our enemies but does so with the recognition of how hard it is. somebody's going to bring you a microphone i think. then you need to come to her. otherwise she is going to get real upset. i'm easily intimidated by these things. >> thank you are. at the best ways out of poverty as you know is to enlist in the military. are you aware that the department of defense regulations prohibit anyone with hiv from enlisting in any branch of the armed forces? with south carolina arts been the top 10 of new hiv cases, what will a gingrich administration do to preserve our military for the future? >> well i won't insist that the military except people who have a communicable disease that in combat might well lead to the

transmission to other people. [applause] i will on the other hand be happy to collaborate with a public health department to try to eliminate the transmission of hiv in south carolina would talk to be our goal. >> show everybody your sign. you have been waiting it. [laughter] go ahead. >> what is your opinion about bringing prayer back into the schools? congress opens up with a devotion and has a pastor prayer before they go into session. what is your position? >> i personally believe that prayer would be a useful thing to re-enter in school even if a was only a moment of silence. you start down the road of saying to people, there is a supreme being. we are subordinated to that supreme being. the people around us are part of that same fabric and therefore, you change the way people think of themselves. i think you go back to 1963 and

the school prayer decision and you say what were the problems in schools in 1963? what are the problems in schools in 2011? it's pretty hard to argue that the modern secular situation ethics, undisciplined, totally -- let me give you self-esteem as opposed to earning self-esteem model has been a success. but look, i'm very bold about this that. not only do i think it would be good to have a moment of silence every single day but i think would be good to reestablish the idea of discipline and to say if a teacher is a problem with you, your parents ought to have a problem with you because your job is to be there learning from the teacher. [applause] >> mr. speaker my name is james porter. i'm a young high school student and as i find myself looking forward to a career in the future, i find myself facing immense competition from illegal immigrants and the threat that they pose to our job market. what will be your steps as president to enforce the border? >> well i actually have, go to

newt.org and we have a number of steps laid out. the first one is to have absolute control of the border by january 1, 2014. [applause] we are drafting a bill that will post early next year which is very simple. it reestablishes world war ii speed and effectiveness, waives all of the various impact studies and all the other stuff that slows it down and says, the person in charge of securing the border will get it done by january 1, 2014. just go do it. there is no question my mind that if you're serious about you can get it done. in the world war ii generation would have thought it absurd that 25 years after reagan said we needed to do is we still haven't done it. the second to get favors making english the official language of government. [applause] the third thing i favor is having a requirement to the an american citizen you have to have a much deeper knowledge of

american history than we currently require an candidly i'd also say for american students it would be good before he graduated for you to have a deeper knowledge of american history than we currently require. [applause] before thing i would do is actually modernize the visa program so it's easier. if you want to come to visit the u.s., if you want to do business in the u.s., if you are legally coming here to visit your family or whatever, it would be easy to do. takes 174 days in brazil to apply for a visa. i mean the amount we cost ourselves in tourism dollars is astonishing as its just a pain in the neck to come to america now so we have to modernize that. the other thing which modernizes their deportation process. if you belong to ms-13 which is now salvadoran gang in our southern cities we should be a will to deport you in three days. if you're not american citizen you should not be protected under american civil law. [applause] i would then establish an american guestworker program so

that people could come here to work with a guestworker card but i would outsource the card to american express, visa or mastercard so it's very hard to have fraud and cheating. the federal government is hopeless and running a program like that. finally, and i would -- much deeper economic penalties for any employer who hired someone illegally once there was a card program and wants you could swipe it and he knew exactly what you were doing. [applause] i think most people who are here illegally should go home, period. but i do think when you talk to someone who has been here for 25 years, they been working, paying taxes and part of the community. they are not citizens were working and paying taxes than they are part of the community, they have a family and it might have children and grandchildren, they may belong to your church. i don't think we have to go in and root them out. it's just not going to happen so i think there ought to be a citizen certification program

builds on the world war ii draft board model where local citizens would review applicants. the applicant would have to be sponsored by an american family and they would have to have proof that they have been here, proof they been paying their bills, proof they been paying their taxes. those folks i think should get a residency permit. it doesn't lead to citizenship but it means they come out from under the illegality. if they want to apply for citizenship they would have to go back to their home country and applied and be in line like everybody else back there and not become until that point whenever that is finally there but i do think what i just outlined is imperfect but it's actually doable. and i would not do it in a single conference of bill. i think first of all you will never pass it. nobody is going to trust the government until they see real evidence we are going to control the border and i think once we control the border, people will be much more practical about the follow-on steps and the last step is the one of certification.

by the way people say well, one of my competitors said that will be a real magnet. you have to be your here 25 years, so that means instead of going to the guestworker program, said of applying legally today, you're going to try to sneak in so that 25 years from now, and mean it's not much of a magnet. but it is i think a practical solution to a hard problem. yes maam. >> mr. speaker, first of all you just pointed out to me why -- you have just pointed out to me why i so admired you in the debates. you are lead, follow or get out of the way with your solutions whereas mitt, and i'm not really sure, but the reason -- south carolina's very obviously very important and this was in the career in charleston about the romney bein connection.

are you familiar with that? >> i haven't seen the article. >> okay, anyway. i'm with you. i do not believe in negative campaigning but i will hand this off to your staffers. you can look at it but what it amounts to is he supported this big conglomerate and what it ended up doing was losing south carolinians a lot of jobs and the guy that was behind it came out smelling like a rose. >> look if you want to share that with their 6000 closest friends. that is certainly your prerogative. let me just tell you i'm not going to use that. the strongest thing i will say about governor romney is that he is a massachusetts moderate trying to come down and pretend to be conservative that i'm not going to say anything stronger than that. i want to's -- focus on positive things but actually that says it all. i don't want to spend a lot of

time being negative. let's go back to being positive. i have one opponent, barack obama. [applause] after him there is a guy way in the very back. >> mr. speaker, i am curious about the medical situation. all that is happening course with the settlements or the $100,000 stuff like that. what could be done? >> are you talking that litigation when it comes to health care? well we did a study at the center for health transformation with the gallup poll and with jackson health. we interviewed doctors and we found that the best estimate was that 800 alien dollars a year is defensive medicine. that is, medicine where they are

ordering something you don't need in order to avoid a lawsuit or to be ready if there is a lawsuit. $800 billion. that's about 25% of all costs in health care so obviously if you are serious about health costs, one of the key things has to be litigation reform and here i will say on behalf of governor perry who's a good friend of mine, the malpractice reforms in texas were quite effective. back here, yes or. >> mr. speaker, first of all thank you for standing up. we really appreciate it. next, i want to thank you for initiating welfare reform. it is was the first time people like herself, who actually i'm the chairman of yourself carolina social conservative coalition, the chance to push back against the liberal policies pushed by the nation called health and human services

and education of the united states. they are indoctrinating the next generation and to give us a chance to push back. as a result pregnancy rates across the nation among teenagers has gone down almost 50%. you don't hear that on the evening news, so thank you for that. but there is a culture war and i wonder, if you given any thought to the effect in education has shown in reducing teen pregnancy under welfare reform and will you continue to support that? thane. >> the answer is yes i'm aware of it. we help fund it and i would have fact -- though there's a guy in the very back. get his at times -- get his attention some way. somebody way back there. so i would support it. it's something i supported when i was speaker. the welfare reform is a good example of how i operate. because we actually brought in the governors, george allen and george engler and others and

their staffs actually helps write the bill. so it was a very practical bill because we have the people who implemented helping right at which frankly offended some of the federal staff who didn't like the idea that we brought in these outsiders. go ahead, yes maam. >> thank you for being here two days before christmas. [applause] we understand how hard you're having to work at this and we appreciate immensely that your foe is obama. one thing i would suggest to you, don't call him a target. that gets all of us in trouble. he is your adversary. i agree with you 100%. two things that i wanted to point out is you can have your researchers verify this. 60 gallup, 65% of all the nation are not concerned about big business. we are concerned about big government. i think you are right on with

all of your proposals. that is something that should be hammered home along with the fact that you are opposing obama. secondly, i heard and again i don't know if this is true, it was reported from overseas, a publication overseas which a lot of times we can trust more than our own media. it was reported that an obama strategist indicated that he is not at all concerned about the white working class. he is not going to approach any of us for our votes in the election in 2012. those are two points that i think if true, could be used to our advantage by you. thank you. we appreciate your effort. spiegel for take the last question, let me just say one thing about that last comment. i don't think about the white working class. i think about every american who

would like to have a job. [applause] and i reject the racism on both the right and the left. i want to campaign in black communities and i want to campaign in latino communities and i want to campaign in asian communities. i'm going to campaign among native americans and i'm going to campaign across this country and i want to ask this simple question. would you rather your children had food stamps or paychecks? would you rather they beat deep tendon or independent? anybody of any background who would like to have a paycheck and be independent i am going to reach out to and i want to challenge the president. this idea of dividing americans with class warfare and in videos rhetoric and using racism as an excuse for thought i think is absolutely totally unacceptable to the american people and of every background. [applause]

>> mr. speaker, john steinberger. without the 2% payroll tax holiday the social security account will still be in the red by 46 billion in 2011 alone and we have got tens of millions of baby boomers retiring. how can we sustain social security for the 12.4% payroll tax? >> i will say two things. first of all what they should've done is apply the principles of strong america now who believes modernizing the government saves $500 billion a year. obviously i would replace the money with those cost costs with the tax cuts of the tax cut would not increase the deficit. i would cut spending an amount equal to the tax cut. second, waiver program with over 100 college campuses where the young people who want the right to choose a personal social security savings account on the model of galveston texas and the country of chile. we have 30 years of experience and we know fewer like to have your money go into your own

personal account, the built-up compound interest your entire working lifetime you have to do three times as much money. by the way this is all voluntary. if you want to stay in the current system and not have the extra money you are allowed to. the social security actuary is said 95 to 97% of them would voluntarily pick the new program because the economic return is so massive. you do that, and the other thing we do is we take -- this number is amazing. we take the 185 different federal programs for the poor and we lock grant them into one grant to the states, eliminate all the federal bureaucrats. that saves enough money that you can afford to allow young people to have their personal accounts and you can take the savings and put them into social security and the whole system works out economically. i think the gentleman comes a very tall gentleman in the very back who was honestly fairly visible because he is slightly

taller than the 10. i think you have the last question. >> yeah chinned in 1980 you came to washington with ronald reagan to help save america. during that same time governor romney was a proclaimed independent and announce his presidency as late as 1994. you created a contract with america american 94 that prove sweeping victories from coast-to-coast. governor romney said it was a bad idea. the same ideas got a lot of political calculations wrong over the last six or seven years in telling us he is more electable. this strikes me as sort of ludicrous considering ronald reagan -- and governor romney lost by 27 points and you have created victories nationwide. my question to you is since governor romney has been lying to to you in iowa for the lesser aches will you tell the truth about him next week? >> that would be so painful. [laughter] what i've said to meg yesterday and the day before is, since he is determined to spend like a million, $40,000 in negative ads next week most of them enact red

and since he does not want to, she said i guess part of what got my goat was when he said that i was not a reliable conservative. and i thought to myself, let me get this straight. as you point out the massachusetts moderate who did not support reagan bush and did not support the contract with america wonders if i am a reliable conservative. how would he know? [laughter] i have a 90% american conservative union voting record for my lifetime and at 98.6% right to life voting record for my lifetime. i was honored by the national rifle association for lifetime legislative achievement in defense of the second amendment. i've helped balance the budget for four straight years. we were formed welfare and i voted against the two tax increases republican presidents tried to pass one of which led in houston that hit a certain

unhappiness with me. i think i'm about as staunch a conservative as you have seen since ronald reagan but i said to the governor because i think we should be fair that i would be willing to need him anywhere in iowa between now and the third and have a 90 minute debate with a timekeeper, no moderator. i will bring his negative ads and he can explain them. and so far is not seemed as excited by the opportunities that i thought he might. all i can tell you is that i wish all of you and candidly i wish all of my opponents and i wish the president and his family a very merry christmas and maybe for a few days we can slow down, enjoy life and then get back on the trail next monday. thank you all very very much. [applause] [inaudible conversations]

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>> it's three days of booktv. you're the primetime programs. on afterwards, the failed coup that led to the kill gorbachev's resignation. >> so i'm here arguing in favor of higher taxes on the wealthy. i'm one of the wealthiest 1%. >> would you be willing to donate to the department of treasury? >> individually? no. >> which is?

>> know, individual i'm very philanthropic with active x. all you have to do is put in your credit card number and you can donate to the government. >> that is not going to help anybody. >> you don't want to donate to the government? >> i want our class to be -- you've heard me. you're being silly. >> i am a video journalist. i would say that what we're doing is almost like citizen journalism, which is basically winning individual who doesn't have that much training in journalism has the tools of modern technology to capture a live event but doesn't have a background in journalism. >> michelle fields shares her experience is reporting on issues with a 24 hour sites. feedback than 10 -- >> the federal government took

over the mortgage companies during the 2008 financial crisis within as the price tag at $220 billion by 2014. earlier this month, the inspector general of the agency that regulates fannie and freddie testified before congress for an hour. >> good morning. i'd like to call this hearing to order. i would like to welcome the first inspector general of the fhfa, steve linick, before the committee today. as we wrap up the hearings for this year, i am pleased that the ranking member and i were able to agree to a plan for the hearings the committee held on housing finance reform this

year, and hope that we will be able to continue that bipartisan approach next year. the 12 housing finance related hearings we held this year have highlighted some general principles i believe we hold in common that will guide us going forward. small institutions that maintain sound underwriting standards during the boom should still have access to any secondary market that is created in the future. this is important for maintaining strong, responsible homeownership opportunities in rural and underserved areas. fully documented underwriting should be the standard practice in any system going forward. clear rules of the road are essential for providing stability to the market, but the

transition must be a gradual one given the current, fragile state of the market. the committee's exploration of these specific topics has helped inform members and build a record on which the committee can't evaluate legislative efforts. looking ahead to next year, there are some topics that still need to be explored, but i am hopeful that senator shelby and i can continue moving forward on housing finance reform in the same bipartisan way that we have conducted hearings and markups this year. in nearly every hearings this year, the current state of the economy and strategies for improving the housing market were topics of discussion. they need to reform our housing finance system and the need to improve the housing market will hand in hand. the federal housing finance agency, as conservatory of

fannie mae and freddie mac, could play a significant role in improving the housing market, but based on reports from the inspector general's office, there are deficiencies at the agency that are holding back those efforts. i am concerned that the reports produced by the inspector general's office show several negative trends in fhfa is oversight of operations at fannie mae and freddie mac. first, the regulator defers to the gses on major decisions without independently verifying the benefits to the conservatorship or the taxpayers. secondly, the fhfa adheres to allocate staffing resources in a manner that limits its ability to enforce directives and adequately oversee operations at

the gses. these two trends appear to restrict the fhfa's ability to help stabilize the housing market and protect taxpayer dollars while also continuing the problematic relationship at fannie mae and freddie mac had with their previous regulator. despite its independent status, which was granted on a bipartisan basis in 2008 as a single director with congressional appropriations, and expanded powers as conservator, fhfa could be doing more to prevent losses and enforce required changes at fannie mae and freddie mac. as the regulator of two of the largest entities in the housing market, it is essential that fhfa prioritize oversight as one of the strategies necessary to

stabilize our housing market. this would benefit the taxpayers both by strengthening the current state of the gses and also providing guidance and consistency to a large sector of the housing market to further create stability for homeowners and potential homebuyers. i look forward to hearing your recommendations for improvements and the possible reasons for the trends that you continue to see, inspector general linick. with that, i turn to senator shelby. >> thank you, mr. chairman. today as the chairman mentioned, between what is the testimony of the inspector general of the federal housing finance agency, mr. steve linick. this will be his first appearance before us. the office of the inspector general oversees the federal housing ins agencies regulation of fannie mae, freddie mac, and the federal home loan banks.

i've looked forward to hearing the testimony today from the inspector general about the status of fannie, freddie and the federal housing finance agency, as well as how he plans to carry out his duties. i'm interested to hear how his office can help fhfa, the federal housing finance administration, oversee the conservatorship of fannie and freddie. unfortunately, before mr. linick was confirmed the post of the federal housing finance inspector general was vacant for two years, a period when the need for oversight i believe was critical. during that time fannie and freddie were placed in conservatorship and taxpayers begin paying for their losses. so far, fannie and freddie have cost almost $183 billion, and counting. despite the financial problems, fannie and freddie's dominant

role in housing market persists as they currently back 71%, 71% of new mortgage-backed securities. the delay in filling the ig post means that mr. linick has a lot of important work, i believe, to catch up on. first and foremost i believe you must provide oversight of the federal housing finance agencies conservatorship of fannie and freddie to ensure that the taxpayers dollars is spent wisely. during its short existence, the office of the inspector general here has already identified several ways in which the federal housing finance agency can do a better job of protecting taxpayers. for example, in its semiannual report the inspector general noted that fhfa did not effectively oversee fannie and freddie's negotiations with treasury on the administration's home affordable modification program that we call hamp. according to this report does

contribute to gses entering into a poorly drafted agreement. as a result they have been significant disputes between the federal housing finance agency and the treasury about how the gses should run hamp. the report also notes that hamp has undermined the ability of the gses to perform their core functions. indeed, fhfa acting director ed demarco conclude in a letter, and i'll quote, he said, hamp grid operational risks with enterprises and 40 staff and resources from other critical priorities. this report recommends that the federal housing finance agency better engage with treasury and the gses to clarify certain aspects of the half agreements including establishing a dispute resolution mechanism. another issue that the ig mentioned in his semiannual report is that fhfa's lack of

analysis or compensation of fannie and freddie executives here. according to office of inspector general, and i quote again, fhfa have not considered factors that might have resulted in reduced executive compensation costs, in quote. to improve fhfa's framework for making executive pay decisions, the office of inspector general recommended that fhfa use performance date an independent verification of compensation levels. taxpayers i believe should never be put in the position of paying millions to executives of any company. yet as long as we've had the gses, this has been the case. the oig recommendations are intended to ensure that taxpayers spend only what is required, what is necessary. the oig's work also shines a light on the larger issue of the costs are rising from the

administration's failure to propose a detailed plan to end the conservatorship of fannie and freddie. it has been three years and 98 days since the conservatorship begin. the conservatorship never intended to last this long. nor was fhfa designed to handle the quote conservatorship to know whether we face today. we should not be surprised that the oig has some significant shortfalls in fhfa's examination program, including having too few examiners overall to ensure the efficiency and effectiveness of fhfa's oversight of gses. this is no small finding since examination is in the primary means by which the fhfa supervisors and regulates the gses. this section, serious problem there exist in large measure

because they have to proceed short term nature of the conservator, conservatorship makes it difficult by fhfa to hire enough qualified examiners. this is just one of many problems created by the gses prolonged conservatorship. and the longer we wait to reform our housing finance system, the larger these problems will grow and the solutions will come more expensive for the taxpayers. nevertheless, the majority decided not to tackle housing finance reform in the dodd-frank, as many people on this committee recommended. at some point, however, the majority is going to find that it can no longer kick the can down the road. we need to work together on this. thank you. >> thank you senator shelby. we have a core them so i would like to move to executive session to consider and vote on the following nominations.

mr. morris jones to be deputy secretary, u.s. department of housing and urban development. mr. karl galardi to be assistant secretary, u.s. department of housing and urban development. mr. thomas phonak to be vice chairman and a member of the board of directors, federal deposit insurance corporation. we have agreed to hold a recorded vote, and will have a voice vote on the other two nominations on block. senator shelby, do you have any remarks? [inaudible] >> first without objection, we will hold a voice vote. i moved to report en bloc the nominations of mr. morris a.

jones to be deputy secretary u.s. department of housing and urban development, and mr. thomas hoenig to be vice chairman and a member of the board of directors federal deposit insurance corporation. those in favor say aye ago. those opposed say no. the ayes have it. the nominations are hereby ordered and reported to the full senate. we will now have a roll call vote on the nomination of mr. karl gallant hud assistant secretary, u.s. department of housing and urban development. does anyone want to speak? >> mr. chairman? >> senator dement. >> thank you, mr. chairman.

the fha, like other federal agencies and the federal government as a whole is in serious trouble. underfunded, independent evaluation, 50% chance that they will need a bailout costing between 50 and $100 billion. we were very concerned about ms. gallant days lack of vision to change the course of the fha fa and, in fact, appeared to be of the opinion that more of the same, is a way to move the agency for. so i oppose her nomination. i think we need people now in the administration with a sense of urgency about the need to turn things around, reduce our debt, and to avoid future bailouts. that she does not appear to have that sense of urgency, so i urge my colleagues to oppose her nomination. >> mr. chairman, i have heard

the concerns and ask we thought there was legitimate concern just about the insurance premiums that fha is charging with the losses. i had a conversation this morning with ms. galante, and secretary donovan about the same issue. i plan to vote her out of the committee, but i will say that i'm distress, frustrated, embarrassed that we have not yet dealt with the issue of gses and just housing policy as a committee. and what i may do is hold her on the floor until i get some sense from the administration. again, i had a lengthy conversation with a secretary donovan today about the fact that nothing, i mean multiple choice proposal came out last february. i know numbers of us talked with administration in august about forming a bipartisan effort to deal with this. we became so frustrated we just offered our own piece of legislation as a marker, but i

do think the comment that senator shelby, and many of us on both sides of the aisle, expressed during financial regulation and then now, year and half later, having done nothing, our legitimate. and i think a partial indication to me would just be from this committee, as getting some sense of when we might try to market up the bill dealing with the gses. but again i plan to vote her out. she did say today she was very open to insurance premium increases. i think they think the losses are from old loans, and so the question is, u.s. insurance premiums increases on the loans right now that i probably money good. is that really the way to do with them? my sense is i do think they are very open to dealing with fha in a legitimate way. we haven't done as a congress is due with the whole issue of gses. and i'm concerned about that, and i think having a nominee like this is coming forth is a very good time to talk about

that. i don't know if the chairman wants to respond, but to me it is an important issue that we have left undone. and again, i'm going to vote her out today but may hold on the floor until i get some indication as when they're going to do with it. >> anyone else? we will now have a roll call vote on the nomination of mr. and told to be assistant secretary, u.s. department of housing and urban development, the clerk will call the roll. [roll call] [roll call] [roll call]

[roll call] [roll call] [roll call] [roll call] >> the nomination is hereby ordered, reported to the full senate. in addition to the three nominees that we have out of the committee today, we're also waiting more action on bloomberg

to be the fdic chair, and mr. tom, a comptroller of the currency. it is my hope with your support, senator shelby, that we will be able to confirm mr. honda, mr. gruenberg and mr. gregg as a package, as well as a hud specific nominees by the end of the year. >> i would work with you to that end, agree. >> are there any returning from executive session, are there any other members who wish to make a brief opening statement? >> thank you all. i want to remind my colleagues that the record will be open for the next seven days for opening statements and other materials you would like to submit.

now i would like to briefly introduce our witness here today. the honorable steve linick is inspector general of the federal housing finance agency. mr. linick has served in this capacity since october 2010, having previously served in various senior positions at the department of justice. we will welcome you here today, mr. linick, and thank you for your time. mr. linick, you may proceed with your testimony. >> thank you, chairman johnson, ranking member shelby, members of the committee, for inviting me to testify today. i'll provide an assessment of our emerging trends based on the work we've conducted to date, to describe our operation to an agency's first inspector general. my office began operations after i was sworn in in october of 2010. over the past 14 months without a professional staff and got the office up and running.

to date with published 10 audits and evaluations. recommends many investigation what is your second some and report to congress just two weeks ago. i wanted to about emerging trends we're seeing a number of our reports to which chairman johnson has alluded. let me begin with some other positives for which fhfa deserves credit. for example, fhfa has a limited golden parachute compensation awards terminate fannie mae and freddie mac executives. in addition to fhfa has accepted our recommendations to improve its effectiveness and efficiency and to reduce its vulnerability to fraud and waste and abuse. on the other hand, however, error report is also identified deficiencies reflecting to significant and related emerging trends. first, fhfa often relied on determinations of the enterprises without any penalty testing and validating them. thereby giving undue deference to enterprise decision-making.

second, fhfa's decision about how it allocates its resources may have affected its ability to oversee the gses. let me start with the first emerging trend, fhfa has not independent tested, validated enterprise and decision-making. in brief we would fhfa has displayed undue deference to the enterprises and a number of areas. the agency's actions appear to reflect the approach is an server, to delegate most business decisions to the enterprises. in four of our reports were identified instances where the agency relied upon review and corporate governance properties are in place at the enterprise. however, we believe there are some matters that are sufficiently important to work greater involvement and scrutiny by the agency. here are illustrations from two of those. first i will discuss fhfa's oig's report on the review and approval the freddie mac settlement with bank of america. at the end of 2010, fhfa

approved a $1.35 billion settlement of mortgage repurchase claims between freddie mac and bank of america. in approving the settlement fhfa relied on freddie mac's analysis of the settlement benefit. but there was reason to question the settlement based on significant flaw identified in for. >> loan review process. before the settlement came up, and fha senior examiner questioned whether freddie mac accounted for housing boom loans. freddie mac's internal auditors raised similar questions at the end of 2010, and in the middle of 2011. nonetheless, fhfa did not independent tested the assumption underlying freddie mac settlement. according to the senior fhfa examiner, he believed the flaw identified could be costing freddie mac a significant amount of money. in the wake of our report, fhfa has suspended approval of additional repurchase settlement agreed to improvements in its internal management process and

his initiate further study of the issue. second, i will discuss another example involving fhfa's review and approval of executive compensation. in another report we found that for 2009 and 2010, freddie mac -- fannie mae and freddie mac paid their top six executives over $35 million in salaries and benefits over those two years. fhfa reviewed and approved of those payments based on recommendations made by fannie mae and freddie mac. what fh at they did not test, and given the amounts involved, we conclude that fhfa should have done more. for instance, by include a wide range of salary from pay comparison purposes and review of performance metrics used to judge the executive compensation level, let me now turn to the second emerging trend. fhfa's resource allocation may have affected its ability to

oversee the gses and enforce its directive. again in brief identified situation which fhfa was not proactive in its oversight and enforcement, inadequate resource allocations may explain these feelings. here are two illustrations. first i will discuss a report involving fhfa's oversight of foreclosure process that uses. news reports about foreclosure abuses in the foreclosure process by law firms and their agents began to surface in a big way starting in the summer of 2010. but only after the news surfaced that fhfa began to schedule comprehensive examination coverage of foreclosure issues. before that time, fhfa had not considered risks associated with foreclosure processing to be significant. however, our report identified multiple indications of foreclosure of these issues prior to mid-2010 that could have led fhfa to pursue the height risks in the foreclosure process.

fhfa had not acted on issue before may 2010, because neither the agency nor its predecessor agency considered the matter to be a priority. the second illustration involved a report addressing fhfa examination capacity. as noted in this report, fhfa believe it is future exams monitoring the operation of fannie mae, freddie mac and the federal home loan banks moreover, about only a third of fhfa line examiners are credit. our report concludes his examination shores may have contributed to fha's lack of oversight in significant areas such as real estate owned property. i would now like to provide a brief overview of my office is operations. broadly, our plans for audits and if i wished include reviews of the following agency activity. management of the enterprise conservatorship, including servicing and real estate owned properties. oversight of the federal home loan banks, fhfa internal

operation. we also operate a separate office of investigation that was made significant conjugations to a range of investigations. for example, we recently participated in the investigation, prosecutions and convictions associate with two cases. the defendants perpetrated a to $.9 billion fraud. which has been described as among the largest in history. freddie mac reported losses in that case load of $1.8 billion. the office of investigations also operate fhfa-oig hotline which allows for confidential reporting of fraud waste, or abuse. that number can be reset 1-800 793-7724. in closing, we look for to continue to work with the committee to provide independe independent, relevant and objective assessment of fhfa's operations in programs. fhfa continues to face significant challenges based on

content for chile of the nation's housing market, continued key role still played i fannie mae, freddie mac and the federal home loan banks. i hope the work by my office needs those challenges. thank you, and i'm happy to answer your questions. >> thank you very much for your testimony. as we begin questions, i would ask the clerk to put five minutes on the clock for each member. mr. linick, according to your semiannual report, fhfa and its predecessor have failed to enforce recruitments that fannie mae implement an operational risk program. does this lack of policy or proposed credit risk to the conservatorship and taxpayer dollars, in your opinion? what is preventing the agency especially now as conservative,

when taking further actions to force compliance? >> senator, operational risks involves identifying losses caused by people, processes, external events such as foreclosure abuse. operational risk is critical to corporate governance. good operational risk programs would require the enterprise to self identify, report and correct risks as they emerge. what we found in a report on operational risk is that for five years, fhfa and its predecessor agency, ofheo, between two dozen six-2011, had repeatedly cited fanny for not implementing an effective program. in 2009 fhfa said it was a critical concern and issued numerous, numerous citations and

despite these findings, fannie mae has not taken, has not implemented an operational risk program and fha has not required if you. that's of concern to us. it's of concern to us because fhfa's own examination shortages cause concerns. and if fhfa is weak as a regulator or as a conservator, it's important that fannie's and freddie's operational risk programs be strong. because they go hand in hand. so that's what operational risk is a critical element to oversight and accountability. in terms of what is preventing the agency from doing, from enforcing this and requiring fannie mae to develop an operational risk program, i don't know why. it's rather shocking since they have been telling fanny for five years that they need an

operational risk program. they have brought authorities as conservator. they can fire people. and as regulator, they certainly can't issue a cease-and-desist orders and the like. they have promised that they will implement an effective operational risk program by 2012, and we are monitoring. >> can you give examples where staff and resources are not being adequate to prioritize oversight, and how this would impact fhfa's ability to limit taxpayer losses? >> we have issued a report on examination capacity at the agency. and this report reflected what the agency told us about staffing shortages resulting in limited transaction testing, scaled-back examination, delays in examination.

we heard from the agency in part. it involves the hamp program early on caused stressors on the examination program. the examination program is absolutely critical to accessing risk management at the enterprises, and we have noticed that as result of these shortages there has not been targeted examinations, real estate owned property until very recently. there hasn't been examinations of critical business lines such as multi-family housing. and there's been insufficient examinations the federal home loan bank. clearly, if they don't have the capacity to examine critical programs at the gses, there is a risk of loss to the taxpayers. and it's very important that the agency, which is doing, take

steps. >> doesn't fhfa have resources and staff to provide proper oversight and examinations of $5 trillion mortgage portfolio? and entities responsible for supporting the majority of the $11 trillion mortgage market? >> the staffing issue is a complicated issue, because there's no doubt doubt that the agency, in our view, could do a better job of prioritizing its and allocating resources. but we haven't done and across the board human capital assessment to determine whether overall the agency needs to step up to address the conservatorship. we've looked at staffing in one area, examination capacity, and we can do with the agency that they need more examiners. we're also concerned because they have six individuals.

we are looking at the issue now to determine whether or not that is sufficient. but staffing also relies in other considerations. eger is not necessarily better for an organization. so for example, it's possible that the agency can beef up its conservatorship operations if their examination operations are not strong, or vice versa. the agency can also ensure that operational risk programs such as fannie and freddie have their house in order in or to compensate for examination shortfall. so, clearly more can be done to improve, we've recommended the agency's study this issue to determine how it can mitigate these examination of false. and ultimately mr. demarco is going to define the optimal point of how to staff the agency in a way in which resources are allocated appropriately and

strategically. >> senator shelby. >> thank you, mr. chairman. transport in addition to managing a brand-new inspector general's office, you lead a very unique office here. the conservatorship of fannie mae and freddie mac have now lasted for over three is as i mentioned in my opening statement, at a cost of $183 billion, understand, and growing. in your position, you provide oversight of the federal housing finance agency, not only in its traditional role as a regulator, it also now as a conservator. during your tenure, and i know you haven't been there that long, what will be your priorities, number one, and what issues do you intend to focus on specifically? i know there will be some that pop up to you, but overall, substantive issues. and how will you implement your

agenda going forward as an independent inspector general at the federal housing finance agency? >> senator, as you mentioned, our role is unique, given we have conservatorship and a regulator all wrapped in one. in terms of our priorities, our number one priority is looking at conservatorship management and enterprise oversight. we are looking at every stage of the mortgage loan process, from underwriting all the way to deficiency judgments. we are looking at various stages of servicing, from the beginning of servicing to the end of the servicing. and we've already issued reports on default related legal issues, how attorneys and how, how attorneys relate to the servicing process and foreclosure processing abuses. we've issued an operational risk report. we are also looking at risk

management. we've already, the operational risk report addresses that and we're looking at other types of risk management. and enterprise board government and how the enterprise can have a $183 billion is being spent, just to name a few. we also look at the federal home loan banks come and there's a number of vicious associate with management of home loan banks, as was fhfa capacity internal operation. >> and also on the federal home loan banks risk to the taxpayer? >> absolutely. federal home loan bank, there are number of issues we're looking at. in fact, we have a couple of reports which are in progress now. one on the more troubled banks. we're also looking at advanced and collateral damage. and we're looking at capital management as well. we also have a robust investigation division, which we would like to hold people account and institutions

accountable for defrauding gses and defrauding individuals holding gses loans. so our investigation section combined with her audit, evaluation section, is how we plan to attack the issues facing the agency. >> in your testimony, you also mentioned that the federal housing finance agency use operational risk. you alluded to it earlier, as an important safety and soundness challenge to all of us. facing of course fannie and freddie. yet, during the past five years and he has consistently failed to manage operational risk. although the federal housing finance agency has the authority to discipline the gses of such failures, including removing personnel, fhfa so far has not chosen to exercise this authority. that doesn't mean you won't in the future, i understand that.

in your view should be federal housing finance agency take stronger actions to discipline the gses for their fair to manage operational risk? and why has fhfa not taken stronger remedial action? and does the perceived temporary nature of fhfa's role as a conservator create challenges to managing these significant and ongoing risks, $5 trillion i believe that chairman said. >> senator, let me start with the question of enforcement. the operational risk report is just one report we have done on the issue of enforcement, but enforcement and our view is critical to ensuring that losses are mitigated and that is proper oversight. enforcement not only in the operational, in ensuring the operational risk program isn't limited but also enforcement in servicing foreclosure processes

abuse. and we are in the middle of a servicing report now, but standards alone are not sufficient. there's an initiative, a current initiative, being proposed by fhfa, service or line initiative and we're monitoring that. that's a good step forward. but what we want to see is not just standard but compliance with the standards and enforcement by fhfa. >> what additional challenges have been created by the federal, not by but for the federal housing finance agency, by the uncertain nature of the ongoing conservatorship of the gses? in other words, you don't know where, with the future is going to be. >> senator, uncertainty is always a bad thing, and the uncertainty factor has created difficulties for the agency in

recruiting qualified personnel to the agency. it's affected their ability to plan how to staff resources, you know, whether they should staff them in the conservatorship operations or the regulatory operation. and i think it's had an effect on oversight as well. because one of the factors that mr. tomorrow as cited as the reason for employment allocated to conservatorship is the prospect of a wind down. >> fhfa was created to be an agency independent of executive branch influence. whoever the party was in power. there have been multiple reports of executive branch officials attempting to pressure the federal housing finance agency and the gses into implementing programs with political benefits to the administration. do you believe it's important for the federal housing finance

agency to continue to operate free from executive branch influence, as is mandated by the statute that created the federal housing finance agency? and how can your office most effectively insure your independence, that your independence is not compromised by the executive branch? and thirdly, do you believe increase transparency requirements are needed for fhfa and the gses, regarding their interactions with the executive branch? >> senator, let me answer the third question. transparency is always a good thing. our role is to promote transparency in government operations, and we have recommended that the agency be transparent in a number of different areas from executive compensation the operational risk. whatever it is.

one of the reports we issued is the treasury making home affordable report where we looked at the independence of the agency. and we do believe that it's essential for the agency to be independent and act independently. and we found in that particular report with respect to fh at face role negotiating the financial agency agreements for hamp, that it's independence wasn't undermine. the problem that particularcome in that particular review was the lack of engagement by fhfa and participate in those negotiations. >> what brought that about? >> well, fhfa decided to leave those negotiations up to the enterprises and treasury, and -- >> that's not always a good idea, isn't? >> it's not a good idea. these were five your commitments to administer efforts, to modify

millions of mortgages, and there were significant financial obligations and enterprises were in conservatorship at the time. we recommended that fhfa be more engaged. this was another example of a situation where the agency deferred too much to the enterprise. >> wouldn't that have been -- to allow the modification? >> i'm sorry? >> to allow the modifications? somebody has to pay for the. was fhfa going to have to absorb some of the? >> well, one of the issues we looked at is whether or not the treasury was going to be paying for the administrative effort of the enterprises. that was a point of contention. it was never i had out in the agreement. >> well, we wish you well in your job. >> thank you, senator. >> senator reed. >> thank you very much, mr. chairman, and thank you, mr. linick, for your efforts.

your very clear in your september 23 if that the fhfa has too few examiners, which goes to the very basic ability to conduct their operations. can you confirm that, in fact, is your conclusion? and second, what can they do to increase the examiners? otherwise they are underresourced and not effective. >> well, the fhfa told us that they have too few examiners, and we concur. with that assertion. we've recommended a number of things that they undertake to remedy that. number one, we asked them to study the issue, because as i mentioned earlier, shortfalls in examination capacity may be mitigated by strengthening operational risk or strengthening conservatorship. we asked to stay there that. the agency has taken a number of

actions to mitigate that and we've recommended that they train to increase the number of credit examiners, potentially higher detainees and contractors from other agencies. and, finally, to be transparent about these examinations shortfalls, may cause congress and the american public need to understand their ability to regulate fannie and freddie. >> on the moving aggressively to fulfill your recommendations and to correct his? and have the resources to do it? >> i believe they are moving aggressively in this area. i know that they have reorganized the agency and made examination a priority. but it's been very difficult from what i understand based on conversation with mr. demarco to extract examine. its armory difficult when you're not in a financial crisis, very difficult when you are.

i do think that examiners are reluctant to come to the agency because they don't know what their future lies. so this has been a very difficult area. i know the agency has been putting out notices and advertisement. so i'm confident that they are trying as best as they can. from what i've heard, however, they are having trouble meeting their goals. and we are continue to monitor and work on this, and we will certainly brief you. >> thank you. you'll have to because you have identified key, you know, fault line in the agency. let me just shift gears just slightly, but i think we've all been talking around this topic. the essence of the conservatorship is to maintain as best you can the value of the assets of the enterprises, that's my viewpoint. and there is a constant debate whether that is done simply by

sort of status maintaining the status quo or it's done by engaging in modification of some of the longer dues, changes, all of that is at the heart of what these discussions, the successor programs to have you taken your office perspective on how well they are doing managing or maintaining the value of enterprises? and have you evaluated whether alternate approaches like mortgage modifications, et cetera, would yield more value over time? >> senator, let me respond in two parts to your question. i think first this issue about monitoring the sale of assets and the modification issue sort of underscores the attention that we've seen between sort of

the housing mission and safety and soundness mission. and what we are doing is looking at how the directors are bouncing those missions as it, you know, as he promulgates policies and so forth. so transparency is absolutely critical. we're trying to take a look at, you know, the rationale, the analysis that is being done and trying to ensure that independent judgment is exercised and not undue deference on the enterprise. >> let's see, the second question, can you just repeat the second question? i'm sorry. i've lost my train of thought. >> you assume my training is your turn. >> i had two parts. >> but i think, rests on this whole topic of how well they are

doing maintaining the value as a conservator, and let me just, give you the opportunity elaborate just a bit, and very quickly. one is, part of all this is about what housing market is moving. if the house market starts depression, guess what? they will look like geniuses because they held onto these assets. if the market keeps deteriorating, and i think you could make the argument they should have disposed of assets, modify the mortgages, done all sorts of things, and they haven't done it. so there's uncertainty based on market moving. but the other competent effect is because of sheer size of fannie and freddie, what fannie and freddie does influences the market. so it is a very complicated and volatile situation, and again, from your perspective, are you trying to evaluate how well they are doing maximizing or maintaining, i guess maintaining

would be better, the value of fannie and freddie, even -- given that the markets future is uncertain and the fact that fannie and freddie influences the market? it's almost like particle physics, it's pretty complicated. >> got it. >> thank you, sir. >> senator, we're looking at this issue from a number of different angles. our repurchase claims report is sort of one way we've addressed this. looking at how well they're doing in the coming taxpayer money through repurchase process. there are a lot of different ways to slice this. the other way we've started looking at this is really state owned property. i mean, to me, you know, holding that property or selling it quickly, obviously is very important and tricky balance that needs to be made. if you hold that, obviously by carrying costs, the life issues and so forth, if you so to quote

it could affect the housing prices. so we have an ongoing audit in that area, but we are looking at this from, loss mitigation from a number of different angles in that i appreciate that. i think that's absolutely critical, because you are, we don't want to compromise the independence of fhfa, but we don't want an agency that is paralyzed because of the complexity of the issues they face in uncertainty. your office can help direct them come and i think you put your finger on the right terminology about minimize losses. and even to creative reo, renting it out, selling it quickly, modifications, et cetera. take all is off the table and just sit that i think is not the way to minimize losses going forward, lsu very lucky in the market comes back on its own. thank you. >> senator tester? >> thank you, mr. chairman. thank you for being here, mr.

linick. you address the $35 million fhfa approves compensation package in a march 30 report for the enterprise top six officers. you referenced the fact that fhfa failed to identify or acknowledge the benefits of federal assistance that they meet performance goals. you also found that fhfa lacked the processes necessary to monitor the gses compensation decisions and that the fhfa failed to provide necessary transparency. you talked about it in your opening remarks. you made a number of recommendations. i agree with him, disagree with others. can you explain to me why fhfa disagreed with the recommendation to take a look at disparity between executive compensation at fannie mae and freddie mac and other federal housing agencies, and a second recommendation that the fhfa test and independently verifies gses individual salary recommendations? can you give me any insight into their thought process on this?

>> senator, i think they actually have changed their tune on the comparability and their accident undertaking that analysis. >> so to test and verify, or the first one? >> i believe they've actually agree to all of the recommendations and they're actively engaged in looking at them. >> what are they doing looking? i mean, okay, take a lot of heat and say i agree with recommendations outcome we'll look at it. but what's the outcome of that? >> so, this is an area that concerned us, because we are in compensation where they are developing bonuses and so forth. the way it works is essentially there's a pace out and then there's a performance-based, and that performance piece is influenced by individual corporate goal. those corporate goals are developed and blessed, if you will, by the fhfa at the very beginning of the process.

and those corporate goals influence what grade those executives get. we stand in a report that there was a lot of dating being done of those goals. so for example, one of the goals required that enterprises to increase market share, required is a 37% of mortgage, issue 37% in xo we are going with this is what you're saying is nature it will be different? >> welcome what i'm saying is i'm concerned that we're going to be in the same exact spot next year as we were at issue in a even though they agree with recommendations? >> i believe they are going to do it. upon is whether they will do it in time. for the next cycle. so that's what concerns me, and i've offered senator demarco to the particular concern that they do need to get procedures in place so they can evaluate these goals to make sure these goals are in sync with the conservatorship. ..

>> we have actually asked for documents reflecting what those salaries are. we are looking at it but we don't have her reporting i have no findings or conclusions. >> okay, okay, well we look forward to that too because that will also have an indication of how serious they are to do with the problem that you pointed out that they disagreed with and then agreed with in my opinion. the previous questioner asked about reports he had read reports of the administration's pressure on fhfa.

i've not read that report and sometimes you wonder about what you read back here anyway but your perspective is more important than any report i might read any way except that it's your report and that is, have you seen any examples of the administration applying pressure to the fhfa? >> no, well we have only looked at one sliver of the variety of relationships but the one relationship we looked at is the relationship between treasury and negotiating the financial agency. we did not find that fhfa independence was compromised in that arena. >> alright, right. thank you very much. that is probably about it. i don't know that you can answer that question. how has, since fhfa has taken over, how has their portfolio looks from that time forward or have you had a chance to take a

look at that? >> i don't have any independent findings on that so i would rather defer to mr. demarco. >> thanks very much. thank you mr. chairman. speier work only strengthens my view that we need a permanent director at fhfa. unfortunately, the president's first nominee, joe smith, was blocked from confirmation despite a bipartisan vote of support in this committee. because of the importance of fhfa's mission i urge the president to send to the senate a new nominee as soon as possible. mr. linick i thank you for your testimony and for being here with us today. this committee takes oversight of fhfa very seriously and your role as inspector general serves

as an available resource and we appreciate it. fhfa continues to play a key role in the centralization of the market and a robust inspector general will only assist them in this process. this hearing is adjourned. [inaudible conversations] [inaudible conversations] [inaudible conversations]

[inaudible conversations]

>> christmas eve on c-span,

house speaker john boehner and other members of congress lighting the capitol christmas tree at 7:20 eastern. >> november, the financial firm mf global declared bankruptcy. in the days before mf global collapse the $1.2 billion of customer money disappeared. the firm had been headed by former senator and new jersey governor jon john jon corzine. last week the commodity futures trading commission, the securities exchange commission and the federal senate -- this

hearing is almost two hours. >> rager right-hand. do you solemnly swear or affirmed that the testimony you're about to give is -- will be the truth, the whole truth and nothing but the truth? thank you. please be seated. so our second panel, we have mr. dan berkovitz who is general counsel coming commodity futures trading commission, mr. robert cook director division of trading and market u.s. securities exchange commission, mr. terrence duffy executive chairman cme group, mr. richard ketchum president chairman and chief executive officer of financial industry regulatory authority, mr. james kamlin chief counsel for mr. james kitty on bankruptcy trustee for mf global inc. in mr. thomas baxter general counsel federal reserve bank of new york.

ministers berkovitz i would remind all of you that your full testimony will be made part of the record and we ask you to summarize your testimony and five minutes. mr. berkovitz you are recognized. >> good afternoon chairman nuegebauer, ranking member capuano and members of the sick and many. thank you for the opportunity to testify. >> mr. berkovitz we have make sure your button is on? >> congressman is that better? >> that is much better. >> good afternoon. the commission's highest priority at this time is returning money to mf global customers as quickly as possible. we are working around-the-clock to determine what happened to and locate all of the customer funds. the mf global bankruptcy trustee with the assistance of the cftc, has transferred nearly all of positions of customers trading on u.s. markets and soon will have transferred approximately $4.2 billion of customer property. commodity customers will have

quickly received approximately 72% of their account values. in bankruptcies commodity customers have priority in customer property. this includes segregated property, property that may have been illegally removed from segregation and is still within the debtor's estate and property that was illegally removed but is clogged back into the debtor's estate by the trustee. at the customer property is insufficient to satisfy in full all the claims of the customers, part 190 of the commission's regulations allows other property of the debtor's estate to be classified as customer property to make up any shortfall. the parent or affiliated entity however generally but not va debtor unless customer funds could be traced to that entity. stm's such as mf global are subject to the commission's

financial and reporting requirements. frontline oversight is carried out by a designated self-regulatory organizations such as the national futures association or the chicago mercantile exchange. dsr o. responsibility includes establishing and enforcing rules to ensure the financial integrity of the stm's and the protection of customer funds. dsr o.'s are required to examine each stm every nine to 50 months. at each scm must submit to the commission and its sro and annual financial report certified by an independent public accountant. annual reports are reviewed by staff of the commission division of the swap dealer and intermediary oversight as well as the sro's. fcm's are also required to file monthly unaudited financial reports. each report must include a statement of financial condition and the statement of segregated funds.

the dsr o.'s conduct a primary review of the monthly financial statements. the cftc staff conducts limited scope examinations of fcm's either as part of the assessment of the dsr o.'s examination function or on a four cause basis. these examinations include n. segregation reviews. the respect to the protection of customer funds, by statute and f. -- -- mica tim must treat all money for the trades are trade your trades are contractors of that customer as belonging to that customer. all customer money securities and properties must be separately accounted for and segregated from the ftm's for dietary funds. funds deposited at one customer for margin or secure traits may not be used for another. and ftm must notify the commission immediately of any

occurrence of under segregation and a significant margin calls for whenever its capital drops below minimum requirements. section for d of the commodity exchange act permits ftm's two submit aggregated funds and obligations of the united states obligations fully guaranteed as the principle a principle and interest by the united states and municipal securities. commission regulation 1.25 permits additional types of investments. on december 5, the commission voted unanimously to amend regulation 1.25 to vote in restrictions on these types of investments. under the revised rule, permitted investments are those identified by statute, by statute as well as specific deposit and money market mutual funds, commercial paper and corporate notes or bonds that are fully guaranteed by the united states under the temporary liquidity guarantee program. the new rule also includes areas of concentration limits on investments.

all fcm investments made with customer funds under regulation 1.25 mostly cap by the fcm and the customer accounts. further, and investing customer fund, the value of the customer segregated accounts must remain intact at all times. thank you. i would be happy to answer any questions. >> i thank the gentleman. mr. cook. >> chairman nuegebauer, ranking member capuano and members of the subcommittee my name is robert cook and i'm the director from the division of trading and markets at the securities and exchange commission. thank you for the opportunity to testify on behalf of the securities and exchange commission concerning the collapse of mf global. that bank gypsy gypsy of gypsy of the pressure vote segregated accounts of customers have resulted in serious hardship for many mf global customers. regulated to working with the jesse and her fellow regulators to help return customer assets as well as investigate potential

investigations of law that made country that you to customer losses. mf global's regulated u.s. subsidiary mf global inc. or msg i was duly registered with the cftc at the futures commission merchant and with the fcc as it broke her dealer. as of october 31, msg i had approximately 36,000 teachers customers and approximately 330 custodial accounts for nonaffiliated securities customers. msg i was also the member of several futures self-regulatory organizations are sro's insecurities sros. for securities activities the front-line supervisor revision of the broke her dealer is performed by the sros of which the broker-dealer is a member. in this case finra and various securities exchanges. there has been significant attention given to their trance -- transactions entered into by the term tramon european sovereign debt. in the summer of 2011 sro staff identify these transactions

based on an analysis of mf g.i. financial statements and question whether the firm is recognizing them are properly for purposes of this net capital computation. the firm believer transaction should be subject to lesser capital charges than the sro staff. the sro staff in consultation with is supported by sec staff take a higher capital charge and to report the net capital deficiency for the month of july. several months later after reporting a substantial loss within stock and with the stock and credit rating under pressure and sgi into the weekend of october 29 to 30th and engage in negotiations with various parties regarding potential strategic transactions such as the sale of the firm's customer business to another firm. i participated in communication with the firm management during this period together with other fcc staff and at times with the radiators. my regulation is the request for more permission about the firm's

computation's fort segregation accounts and features customers when it's a lot of the issues discussed with the firm on sunday october 30. when the firm subsequently afforded monday's significant deficiencies in those accounts and the negotiations for strategic transaction had ceased firm management attempted to explain to regulators how the deficiency had occurred and whether could be remedied. after consultation with the cftc we determine together that the safest and most prudent course of action to protect customer accounts and assets was to initiate a liquidation proceeding. referral was made that morning. since then, we have been working with the pic in the trustee to return securities and funds to the securities customers of mf gi. last friday the court approved the sale and transfer of approximately 330 accounts for nonaffiliated customers of the mf gi. the trustee estimates that the initial transfer will restore 100% of the net equity for more

than 80% of the securities customers. the fcc has a set of rules designed to protect customer property by prohibiting broker-dealers from using customer funds and securities to support the proprietary positions. the rule requires broker-dealers that whole securities or cash for customers maintain physical possession or control of the securities that customers have paid for in full. alternatively if a customer has a margin loan, the customer protection laws strictly amounts -- limits the amount of security deals for financing purposes. as to catch the broker-dealer must also maintain a reserve and a account for the benefit of customers in an amount that exceeds the net funds attributable to customer positions. these funds cannot be invested in any instrument that is not guaranteed by the full faith and credit of the u.s. government. together with the applicable sec cap requirements and protections, this regime is meant to ensure that if the broker-dealer fails customer

securities and funds will be readily available to return to the customers. the sec will continue to work towards it by further improvements to its customer protection regime. thank you again for inviting me here today and i look forward to answering your question. >> i thank the gentleman and now mr. duffy. >> mr. chairman mr. franken and members of me i'm executive chairman of the cme group. let me start by saying the actions of mr. core seen's firm mf global have put a lot of market users in a tragic position. our efforts with respect to the unprecedented loss of customer segregated funds caused by mf global have been to assist these customers and minimize the market disruptions. by testimony summarizes reports from our staff who were on site at mf global along with the cftc in the days immediately preceding its bankruptcy. my written test my expands on the introductory statement includes the middle of the week of october 24 mf global had announced poor earnings and was downgraded by rumors it would

sell its broker business. cme was global with responsibility for auditing future business. on thursday october 27, and of global chicago office to review mf global's daily segregation reports for the close of business on wednesday, october 26. wednesday segregation report which is not available until thursday, showed full compliance. our auditors asked for the material necessary to check the numbers on the report against third-party sources and begin the process of tying down the numbers for when this report. that substantial review process of report mf global segregation report for thursday october 27 which was delivered to see me on friday the 28th also stated that mf global remains in full compliance with segregation requirements. in fact a show that the hundred million dollars in excess of

sunday the cftc informed us that they were draft segregation report to the close of business for friday october in acquired segregation. cftc and cme staff and editors returned to the firm on sunday october 30 and were formed by mf global employees at the discrepancy was caused by quote auditors worked with the cftc devoted the rest not on sunday to find the so-called accounting error. no such error was ever found. instead at about 2:00 a.m. monday morning october 31 mf global informed both the cftc and cme at approximately the same time that the the customer segregated funds have been firm's broker-dealer accounts. after receiving this information to the cme attempted to identify

segregation to reduce or eliminate cme auditor also participated in a phonecall with senior mf global employees wear in one employee indicated that mr. corzine he been made for, and the customer group has provided this information and the names of individuals to the department of justice and the cftc who are investigating these matters 31st the day the trustee took over mf global, mf global revises segregation report from thursday october 27 indicating the alleged $200 million in x. x. says that grated funds should have been reported as a deficiency of $200 million. the shortfall in segregation on thursday october 27 was hidden by telling sign that regulators were being kept in the dark. it remains to be seen whether segregated funds be improperly transferred. throughout this time the firm and its employees were under the

direction and control of mf global of customer funds effectuated by mf global constitutes a serious violation of our rules and of cftc regulations. we all weather clearing firms and their customers. also at all times billion dollars in excess customer segregated funds on behalf of mf global of cme group's efforts have council transferring positions in providing the trustee with a 550 million-dollar guarantee for cme group to encourage them to quickly release customer funds that were securely held that cme clearing. no the other exchange or clearing the same azimi group is an. the federal mandated customer segregation program has been in place since 1936. in that time prior to mf global failure no customer has ever

lost a segregated fund because of the failure by clearing member of the cme. moving for the intent to work with congress regulators and industry leaders to strengthen safeguards systems at the firm level. i thank you very much for your time and attention and i look forward to your questions are. >> thank you mr. duffy and now we go to mr. richard. >> chairman nuegebauer, ranking member capuano and members of the subcommittee thank you for the opportunity to testify today. my name is richard kitchen chairman and ceo of the financial finra. in a firm is always value in reviewing the events leading to that failure and examining where rules and processes may be improved. i commend the subcommittee for having this hearing to respect oversight of compliance with securities laws, which is most

relevant to today's hearing, finra shares oversight responsibilities to the chicago board options exchange and the sec. for broker-dealers and members of multiple other things the firm's compliance with the commission's net capital and customer protection rules means the cboe. when finra is not the dea for once it's regulated with dea and focus report filings and annual audited financial statements as part of broad range of issues our financial surveillance team places a heightened focused on exposure in the spring of 2010. during april and may our their positions in european sovereign debt as part of our monitoring in the area.

in a review of mf global's audited financial statements filed with finra on may 31 of this year, our staff raise questions about a footnote disclosure portfolio. during discussions with the firm, finra learned that a significant portion of that portfolio was collateralized by approximately $7.6 billion in european sovereign debt. according to the u.s. gap afforded sales treatment and therefore not recognized as the balance sheet. notwithstanding firm remains subject to credit risk throughout the life of in mid-june, finra along with the cboe had discussions with the firm regarding the portfolio. our view was that while recording debris pose as sales were consistent with the gap the purposes of the capital rule given the positions carry. as such we asserted the capital

needed to be reserved against the rtm position. finra and cboe also discussions with the sec about these concerns. with our assertion that the firm should be holding capital against these positions. the firm bought this interpretation throughout the summer of appealing directly to the sec late refused additional capital made precatory filings on august 31 and september 1 and notified regulators of the identified capital deficiency and the change in net capital treatment of the rtm for the reporting heightened monitoring process whereby we are prior firms to provide weekly information including net connotations. during the week of october 24 as mf in its credit rating was cut finra increase the level of surveillance of the firm. at the end of that week finra was on the site at this firm with the sec as it was unlikely

to continue to delong business. our primary goal was to gain an understanding of securities and work closely with potential liquidation. as it has been widely reported discrepancy discovered in the segregated funds in the future site of the firm and of those discussions. while finra believes the finance security rules of retaining customer funds firm village or bright opportunity to prudence may be warranted. finra has to propose rules that we believe what assist in our work to firm's. and the proposals would expedite the liquidation affirms and most importantly the transfer of customer assets. firms would need to contract we require that declaring banks as custodians would provide transaction fee to the the commencement of liquidation. the rule would also require carrying a clearing firm to

maintain current records in a central location. the other proposed rule requires finra rebated firms to file additional operational schedules or reports weeding necessary to supplement the focus report. finishers your commitment collapse. we were a few our own rules and procedures but would regulators to provide a broader set may be assessed. i'll be happy to answer to questions you thank you mr. ketchum finale proceed to mr. james kamlin chief for mf global. >> mr. mr. ranking member and members of the committee thank you very biting the reserve and return assets to the former customers of mf global inc..

my name is a counsel to james gibbons mf global inc. under securities investor protection act. i would like to provide an update protect the former. this trustee appreciates the interest of this committee and the direct encouragement from members of to customers of mf global we share that sense office of the trustee has been working the securities investor protection corporation invaluable from

we arrived at this estimate by comparing the actual assets we believe are available or have collected from depositories with an estimate of the claims. the full amount of the shortfall cannot be known with certainty

until the claims process is complete. no matter the final amount of the shortfall, this is as the chairman has described it, completely unacceptable and as the trustee characterized it, in his testimony tuesday, an appalling situation. the ultimate shortfall will likely be significant and this will substantially impact the trustee's ability to make a 100% distribution to former customers in the immediate term. the collective efforts to collect funds from u.s. depositories continue, assets located in foreign depositories however are now under the control of foreign bankruptcy trustees and administrators. we have been and will continue to pursue these assets vigorously led recovery may be more uncertain and may take more time. mr. chairman, mr. ranking member

and members of the committee, thank you for the opportunity to testify here today. >> thank you mr. kobak and now we go to mr. thomas baxter general counsel of the federal reserve bank of new york. mr. baxter. >> good afternoon chairman nuegebauer, ranking member capuano and other members of the subcommittee. thank you for inviting me to appear here today. i am tom i am tom baxter, general counsel of the federal reserve ancop new york. i will speak about the new york fed's relationship with its primary dealers and more specifically, how a relationship with the former primary dealer mf global inc.. let me start with a short summary of the new york fed's relationship with the regulated institutions that we designated as primary dealers. our relationship with this group of 21 firms is a counterparty relationship, not a supervisory relationship. we are not a supervisor.

primary dealers serve as trading counterparties in the transactions that the new york fed undertakes to implement monetary policy. as such, primary dealers are required to participate in consistently as counterparties to the new york fed and purchases and sales of treasury and agency security. primary dealers are also expected to provide the new york fed's trading desk with market information and analysis that is helpful in the formulation and implementation of monetary policy and to participate in the new york fed's auctions of u.s. government securities on behalf of our treasury. in evaluating whether a particular firm may be designated as a primary dealer, the new york fed considers whether the firm has the experience and capability to meet the new york fed's unique requirements. which are different from the needs of other market participants.

as a result, the new york fed has repeatedly and publicly stated that the designation of a firm as a primary dealer should not bring regarded as a kind of good housekeeping seal of approval. and we have cautioned market participants that they should not take the primary dealers designation as a substitute for their own counterparty due diligence. now i will turn to the specific issues concerning mf global. first, concerns have been raised about the new york fed's application process for primary dealers. more specifically, the question has been asked as to how mf global became a primary dealer. the application process for primary dealers is governed by our primary dealer policy, which is published on our public web site. the rigorous application process is designed to assist us in a caning dealers who will

satisfied our highly specialized needs. mf global first expressed interest in becoming a primary dealer in december 2008. it was not until february, 2011, more than two years later and hardly in a rush to judgment, that we designated mf global as the primary dealer. in considering mf global's application to become a primary dealer, we followed our primary dealer policy to the letter. as my written testimony explains in detail, the substantial record evidence fully supported the new york fed's decision to designate mf global as a primary dealer. second, i would like to briefly address questions that have been asked about the prompt and progressive action that the new york fed took in late october october 2011 as mf global

financial condition deteriorated abruptly and quickly. first, we mitigated the exposure by excluding mf global from certain primary dealer operations. second, to protect us against potential exposure to mf global, we asked mf global to execute an agreement to pose martians to the new york fed and it did post margins. third, the new york fed informed mf global that mf global was suspended from conducting new business as a primary dealer. through these actions, we protected the taxpayer interest and we sustained no loss. on october 31, following the initiation of a proceeding by the securities investor protection corporation, the new york fed terminated mf global status as a primary dealer. we also returned excess margin we had received from mf global

to specific trustees in accordance with the trustee's direction. let me finish by thanking the subcommittee for holding this hearing. the new york fed joins the subcommittee and its members in sharing concern for those customers of mf global who have sustained losses as a result of the firm's collapse. we at the new york fed stands ready to assist the mf global trustee and the congress in their important roles in this matter. i am pleased to answer any questions you may have. >> thank you mr. baxter and thank you gentlemen for being here today. at this time come the chair will yield itself five minutes for questions. and i would like to begin by hearing from the cftc and the ftc about regulatory coordination in the wake of dodd-frank. one of the big selling points of that bill was that regulators would work together particularly through the fsoc and in doing so we would be able to avoid

problems at the one we have at mf global. so mr. cook, blatz march the ftc began looking into the so-called windowdressing of quarterly statements by mf global and it was known by that point that the winds company has significant exposure to the european debt crisis. at this point, what kind of communication was going on between the fc -- the sec and other agencies? there is a second part to my question. was secretary geithner or fsoc notified or involved in the mf global situation? >> mr. chairman, i think the timeframe you are referring to, there may have been some ongoing review by air division of corporation of finance of some of the filings that were being made in the ordinary course. i'm not directly familiar with what the questions they are raising. i think there were regular reviews of the filing. i'm not aware of any committee

patients with other regulators have that time. >> mr. berkovitz do you have any? >> i would add that typically, there is consultation and coordination between the two agencies on these types of matters and it is not something that would raise red flags for. they would necessarily be coming keeshan. >> was in the communication sent to secretary geithner or the fsoc? >> i couldn't answer that but i'm not aware of any. throughout this period that you are referring to in the review of the reports, we had the information that we obtain from our review of mf global as well as looking at the reports from the self-regulatory organization. we have not received any red flags as it would be a major issue at that time.

>> well now, the dodd-frank statute states one of the objectives of the fsoc is to facilitate information sharing and coordination among member agencies. there were obvious problems at mf global. was fsoc doing its job here? do you know mr. berkovitz? >> from the sec i would say that again during this time period, based on the information that we had in terms of the segregation accounts, that with respect to the issues that we looked at such as mf global, professional customer funds, daily reports that we were getting, the monthly report that we had and that we have been obtaining from the self-regulatory organizations, from cme to not raise any red flags regarding the treatment of customer funds.

so in the normal course of business as two to red flags wouldn't necessarily -- would have been notified of. >> if i could asks her, i was thinking of the earlier time period and i think you have started your question. when it became clear that there were serious concerns with mf global, there was a lot of discussion among various regulators. we were talking with the cftc, the federal reserve bank of new york, the treasury department during that week about and leading into the weekend about what was going on. fsoc has been talking about, and i don't want to speak for fsoc -- >> are you a board member of fsoc? >> our chairman is a board member of fsoc. >> you are a member of the board of fsoc?

>> obviously after the bankruptcy filing there was a call to fsoc on that day to discuss with the implication might be of the bankruptcy. >> mr. cech and you have any comment on that? you are also a member, your organization is a member of fsoc. >> no we are not. to the best of my knowledge no so predatory agency is a member of fsoc. >> okay so you have no account on that? >> there were obvious problems with mf global. do and if you have an opinion whether not fsoc was doing its job here? >> my view is that, my understanding is that fsoc was created primarily as a way to help on a true systemic risk and identify where there may be systemic risk and to deal with it. while the bankruptcy of mf global is obviously a significant event and has caused enormous hardship for many

individuals, it is not there to me that it fell within the framework of a systemic risk. that being said, you know i think one of the, from the discussions on that call after the bankruptcy, it was recognized that this was an opportunity to learn lessons about how the predatory structure works and whether there is any opportunity for further improvement. >> well, but me ask you something. the purpose of the fsoc is also to facilitate information sharing and coordination on the member agencies and other federal and state agencies regarding domestic, financial service policy development rulemaking, examinations, reporting requirements and enforcement actions. these are the duties of the fsoc so both of your organizations were duty bound to exchange information and was that not happening with regards to, from

what you were hearing from lf global at the time? >> we have exchange information. we are in communication with the sec and our staff is in communication with finra as well. through this period up until the last several days that have been described, the daily segregation report, the monthly report, the report said we were getting from our dsr zero had not indicated there were issues with the customer segregated funds. in the absence of information coming to us from the reports from mf global, from the dsr zero and from our own review, this wouldn't be something that necessarily we would pass on to the fsoc. as mr. cook stated. >> thank you very much gentleman. i now yield five minutes to

mr. capuano, the raking member. >> mr. chairman i'm good to try to stick to the issues at hand. if you want to talk to fsoc let's get them in. i think it's a fair question to ask what they are going to do from this point forward but they will may or may not get to this point but i don't think anyone here suggesting yet that it is. so in the meantime mr. kobak i would like to start with you. i totally 100% agree that your responsibilities for the customers but for the sake of discussion i also realized as a bankruptcy trustee were collecting information on all creditors. is that a fair assumption? >> our primary emphasis is both on the security and commodity side but we certainly -- >> for the sake of discussion all customers and i'm not suggesting they camp out for the sake of this discussion let's assume you get to 100% productive customers are paid was the largest creditor you to your knowledge at the moment?

>> i believe the largest creditors probably jpmorgan. they were creditor of the holding company. >> do you have any idea and again -- >> i know they are a very large revolving loan. i know they were declaring bank. >> 500 million, a billion? >> hundreds of millions. >> so it's a regulated bank of the other end and the reason i ask is when everything is said and done where the collateral might have come from during that time, but the final analysis somebody had to loan money to get to a 30 or 40 to one ratio and it appears from the cursory view of that money had to come from the outside and probably came, i was a probably but at least in this case a significant amount came from a regulated entity. said a fair statement? >> i really don't know. we have been there and we do haven't done an analysis. >> and are trying to jump ahead. i guess i am jumping ahead because that's what i have to do today. i personally think that is where is going to end up.

mr. kobak have you look at the rating agencies or the other regulated entities with the presumption being at some point you are going to have to go with it ready to try to get money from anyplace you anyplace to camp it is due to this cup need for people who might have it done their job. >> step one is related to look at the counts to see if we can identify what the transactions were. i think as mr. corzine was suggesting today, another part of that is probably looking at money that should have been coming in to see whether it all got there. that is what we have been concentrating on today. we certainly will do the other thinks. >> mr. baxter do you know that is look at that and if they're regulated entities that might've been on the other side of these agreements? >> you now, ranking member, can't talk about specific regulated institutions. but the answer to your question generically is if we were looking at certain institutions, banking institutions before the bankruptcy then we have continued to look at them after the bankruptcy.

>> i will tell you that eventually i myself am going to want to ask questions. not expecting you to know yet today but to make this message -- macmaster had to be two parties. mind party might've been mf global maybe or maybe not doing something wrong but there had been of the party and another regulated entity out there giving loans at incredibly risky situations. this unfortunately sounds all-too-familiar. which i know it's too early yet but i just want to make sure that the fed is aware that i for one of going to want to go down that road when the time is appropriate. mr. berkovitz, last week i think it was and i might be a week off, change regulation 125. but, that changes been pending since may of 2009. that is two years. it is officially put out there in october 2010. you have been dealing with this for two years. do you think that maybe you kind of waited a little too long? >> congressman, the commission,

as you noted, published and it ends notice of public rulemaking in may of 2009. we took the public comments that we received on whether we should -- >> how many public commons did you get? >> i think there were -- >> 12? about 12? so it's not hundreds of thousands of public comments? >> that's correct and we issued a notice of proposed rulemaking in october 2010 at that time. >> i understand that but you think that maybe should have asked a little quicker and the only reason i ask is because clearly this is the way that mf global went through. whether i'm right or not it is the incredible doors that were open by the sea of tc-99 to allow them to repo in double repo and hyperrepo everything there was an ball. now from what i see and again i'm still catching up here, looks like you finally close the

door and the truth is you close the door a week after the bankruptcy raises even more red flags that you knew that there was an open door and you knew you should have closed it earlier. so i guess the question is if you enclose it earlier would we be sitting here today? being i would like to clarify in terms of what regulation 1.25 would allow in the types of transactions it did not cover. regulation 1.25 -- >> you sam f. global has violated 125? >> no congressman, and saying that 1.25 covers and vestments of customer funds. >> i know what it covers. that is why we are trying to get back to customers. 125 is the regulation for all intensive purposes enforces the so-called segregation of customer funds but obviously they were segregated otherwise we would not be looking for them. as i understand it everything i've read so far has indicated that mf global went through 125, possibly legally, maybe not, not

sure yet, to get at those funds in a way that was allowed by the cftc. no whether they did it illegally is fine but at least some of that, that door was open and now that it is closed, the fact that you close to so quickly after the bankruptcy certainly indicates to me that was the problem and you have now closed the bonjour -- the barn door after the horse is gone which is fine. for me i would like to know what change? why all of a sudden do somebody on the board change their vote? >> congressman, as i was describing, this is a process. >> i understand the process mr. berkovitz. why was not pass before the bankruptcy? >> the commission was considering through the summer. >> all of a sudden i woke up on december 4 and said oh my god we have to pass this today? >> there were a number of standing issues. >> do you realize how much this smells? this is like a dead fish sitting on the table to me.

because the way you are implying it is that if this had never happened, somehow miraculously on december 4 they would have had to change in a way which of course is virtually impossible for me to believe sensitive been hanging out there for two years. >> there is nothing in the change orrin 1.25 prior to the change which would have permitted a person to take a customer out of segregation. >> no, no, no. in the stable 125 this but i also understand the door should open it. it allows them to be sovereign debt and allow one house repose. as a matter of fact as i understand mr. cookie never opened those doors at the cftc. is that a fair statement? in house repose? >> the reserve account on the security side needs to be invested in cash or treasury. >> didn't have the store opened from the f. -- sec side. >> if i could clarified, 1.25 a

lot before this is a minute. >> i know what went if i did but i also know how was used and that is why the door was closed. you clearly saw it as an open door and i think that's fine because it was and i'm glad you close it but i've got to tell you it seems as though he were sitting on your hands for year and a half when you knew you should have shut the doors. you knew there was a problem and you acted visited sicily -- i wouldn't mind hearing a follow-up but i have limited time here. i think i marty over my limited time so i think i'm done. even though i will be back. >> i thank the gentleman. mr. berkovitz, commissioner sommers told the senate ag committee on tuesday, we have a very good idea at this point what happened to the money. what happen? >> congressman, i think what commissioner sommers was referring to was we have a very good idea of additional transfers out of the segregation accounts. we have a lot of information

about initially where that money went within the company. but we are continuing to look at, what we are continuing to examine is what was the nature of those transactions, what was the underlying purpose of those transactions, to what extent would a legitimate transactions, to what extent were they not legitimate transactions and then from there, what happens to those funds? so there are several other steps that we are looking at very very closely to try and trace exactly where all that money went. >> was there one particular entity that got a lion's share of those transfers in the last days or the hour? >> i can't speak to that. we are trying to continue to find these funds and that is an ongoing process and i can't speak to part of our investigation but that is one of the questions we are trying to figure out. >> thank you. mr. duffy.

you heard mr. corzine testified today when asked about a 70 million-dollar transfer, 175 million-dollar transfer that was made and classified as alone to a u.k. subsidiary and that he denied actually knowing about those transactions. do you agree with that testimony? >> i can only tell the committee, which i told the senate, what i have been told. this committee asked for an explicit timeline of everything that cme group no and we document of that for the record and i think you submitted earlier. in there, thad references of our employees have braun calls where the other employees of mf global said mr. corzine was aware of the loans to the $175 million to the european subsidiary so that is what i know about it, sir. >> i assume you have all been doing some postmortem of what went on as you're trying to help

be a part of recovering those funds. >> we are not sir. where not allowed to do an investigation. >> so your hands are off at this particular point? >> our focus and as i said in my testimony, the cme group put up $550 million to help the trusty put monies back into the small farmers and ranchers and that is what we have done, sir. >> thank you. my friend from texas. i want to follow up on the testimony and the line of questioning about interagency coordination. and i know that the sec initiated some actions back in the summer i believe to require this entity to put up additional collateral. is that correct mr. kho?

>> yes sir i would just amplify that is initiated by the supervisors of finra and the cboe who initially identified issue and consulted with us. >> when the first get concerned about this issue with this entity? >> this particular issue was raised by finra and the cboe i think in june, july timeframe. and there were a number of conversations are not time grant. ski mr. berkovitz, when was the first indication to the cftc that there was a problem with mf global? ..

>> the exalt charge issue in august was one that was discussed to understand the facts and what are the issues and ultimately reach a final determination and where they needed to take the charge at that time, and i understand the fcc staff did inform the tftc staff about the issue that a charge was going to be taken. under the normal rules when someone takes a capital charge of this nature in a way that suggests it, they file a notice

to the regulators, which i believe they did which would be to us, to the tftc, and than they were forced to restate their report, their financial report, filed with us, all in the august and early september time frame. >> back to what you said, you didn't acknowledge the august date and said you became aware of the problem in the first week. >> i think i answered a different question than the one you asked, and i apologize for that. mr. cook is correct. we were told about the capital issue in early august, and we were informed of the issue and the resolution so we were aware of that in the early august time frame. >> okay. i thank the gentleman. >> thanks, mr. chairman chair. it'll be interesting as the weeks and months go by, and all of these facts really do unfold

because there is several sort of major things that i'm concerned about, and i'd like to first just sort of understand the process. you said, you know, we need to be able to get our hands on this quicker, but if i'm not mistaken , civic steps in, and they can freeze everything by filing a bankruptcy, and isn't that -- that's how we protect customers of broker dealers. >> well, the -- congressman, the ultimate protection for customers of the brocker dealers -- broker deals is specific in the trustee and should be. in many circumstances where a firm is in financial trouble, the regulators working with the firm are able to identify either transfer accounts of the sale of the firm avoiding having customer counts frozen and avoiding all impacts, but we try

to avoid that whenever we can. >> that's the last straw. >> absolutely. >> but in advance of that, you're saying you want to be able to have some authority to force a sale or to protect dpsh because you it sounds like you get weekly updates and you got nervous a week or two in advance of the trustees stepping 234 and closing the company. >> well, we, as you recall from the testimony and from mr. cooks earlier, we became concerned over the positions of the quarterly statement at the end of may, and demanded -- made the initial requests with the cbo with additional capital to meet the capital requirements we thought applied with the support of the fcc that finally occurred in august. we continued to monitor the firm as time went on, the position didn't change, and what changed over time was the gradual public recognition of the size of the

position in foreign sovereign debt that the firm had, and with that, the ratings impact of the liquidity support that put the firm into its spin in the last week. we were concerned about that. it was entirely working to the with the other self-regulatory organizations and with the fcc. no, i don't think it's a matter of additional authority. it -- it simply is the concerns when you have a firm that takes a -- >> in hindsight somebody should have put them into bankruptcy a week before this to maybe save that $900 million that is floating around. i'm just trying to understand that because i'm very concerned, this feels like deja vu all over to me again, okay? mr. duffy, and and i had conversations about cme and how this would be the first time money was lost from segregated accounts, and i was counting on you guys sort of in this, and i

appreciate that the cma put up $550 million which is, you know, towards the assistance to the customers, and how does this happen? you clear twice a day. you see who is got money and who doesn't. >> it is very disturbing, sir, and we have had many conversations, and i think one of the reasons you saw my testimony the way it was, it was a timeline to show we were getting falsified segregation reports, and as we tied the segregation report out from wednesday going into thursday and friday, the money was there as of wednesday for the most part, 80% to 90% tied out. something happened thursday or friday. we were doing everything possible to do it. we spent $11 million a year doing this, audit each and every firm every year, spot audits, surprise audits, we do things to ensure our system never fails, and in 75 years it did. in our opinion, somebody violated the law here. >> if there's an embezzlement or

fraud or whatever, you know, we have to deal with it. the fbi's in this, but i was hoping that the system that was in place, especially -- >> the system didn't fail, sir. >> all right. so as this unfolds, i want to see that. >> i'm trying to show that in the testimony. >> i'd like to turn my question to mr. baxter because here you have to primary dealer, mf global, you know, i don't remember if lehman brothers was a primary dealer. i think it was. in monitoring these guys who are doing deals with you, you start getting nervous. you cut them off in earlier october. nervous about things over the course of the summer flu august, maybe the books are getting crooked. we have two regulators over there, and finally the bankruptcy trustee comes in, boom, locks it down, able to return $4 billion, which is 72%

as of today. i'm curious, and this is where we were going. you know, did the banks come in, and if they did, they were doing their job, and sweep all the cash that then left the customers holding the bag? >> let me review some -- >> i said a lot there. i apologize. >> and i hope i don't copy that. let me review the activities of the new york fed in the week of october 24th, the week proceeding the bankruptcy, and it started with a downgrade on monday, the 24th, the next day, there was a large loss declared by mf global, and already in the market, there were rumors and not only rumors burks confirmed about the large position taken in sorch debt by m -- sovereign debt by mf global, and what those three things did,

congressman, they acted together to generate a loss of confidence that started a run on mf global, and the run that went on mf global really went on the funding side, and mf global funded itself in the repositioning market the same way that behr sterns ran itself, and the rungan on march 11th, and by march 14 #th, they had no liquidity, and the run began on september 9th to 2008, and again, began on the repositioning side of the book, and by september 12st, that friday, the lehman brothers dealer was out of liquidity so part of what you see happening here relates to the funding and relates to funding assets that are not liquid, so what you see happening is the run starts

abruptly, and it is vicious, and it's downward spiral on the firms, so consequencely when we saw what was happening early in the week on october 24th, on october 26th, i called my counterparts at the commission, and one of my colleagues called counterparts at the cftc and said given what we've seen in other recent experience, we think that we ought to be -- we ought to be picking up the pace with respect to the crisis management, with respect to mf global, so with respect to the earlier questions about communication among the government talentties, including the -- entities, including the fed, there was, i think, good communication that we had a crisis on our hands. now, turning for just a minute to the other piece of this question which relates to the secured parties and the

unsecured parties, i want to make three points, congressman, because we were one of those secured parties that protected themselves, and protected the american taxpayer. >> [inaudible] >> yes, and i want to make three points of what we did, and by making these points, i don't want to in any way come across as insensitive to those who lost money due to this bankruptcy. there's three important points as to why we avoided a loss. first, our margin account was on our books, and we controlled it. it was not on the books of mf 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 billion transfer that it in any way 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 was mf global's own property. if that representation turns out to be false, a federal criminal offense has been committed. >> and the gentleman next to you comes and collects that money. with that, i'd yield back. >> i thank the gentleman. i recognize the gentleman from florks. florida, mr. posey. >> thank you very much, mr. chairman. both you in your previous testimony stated that no matter the exact size of the short fall, speaking of segregated funds, its probably size is significant and will

substantially effect the distribution to former mf global customers. is that still your opinion today? >> [inaudible] >> good. thank you for just the yes or no answers. they are very rare around here, and we really do appreciate it. i know that you do not want to speculate while the investigation is still underway, but based on mr. duffy's testimony and other reports, it seems highly probably -- probable that customer funds were transferred and comingled with mf's funds, nobody's doubting that, probably to meet calls on european bond commissions is that -- >> [inaudible] >> assuming for the moment that is, in fact, what happened, it would mean the missing customer funds will never be found or overlooked in an account somewhere as hoped for by many customers when they first discovered that a substantial

sum of money was missing from their accounts because if the money was used to back the bond positions, we know that those bonds were sold in mid-november; correct? >> that's our suspicion as well. it doesn't mean we're not looking at it carefully. we stay up -- >> that's -- we take yes for an anxious -- around here. thank you. according to a detailed report in "wall street journal," the were sold at a loss at bargain price to buyers that included jp morgan bank. have you seen the reports in the "wall street journal"? >> i looked quickly at the "wall street journal," yes. >> all right, thank you. i don't know you're not responsible for dealing with the bankruptcy proceedings for mf global, but is it true that once the wall is breached between customer segregated funds and corporate funds, the money coif been moved by a whole range of

intercompany transactions, internal repositions, ect., to virtually any part of mf global or to the counterparties who were financing those bond positions. >> if the question is is it possible, i believe it's possible. whether it happened or not, we don't know. that's -- >> possible? possible is fine. that's just -- it strikes me that what we have here is a situation where the segregated funds belonging to mf global, including the honest, hard working families in my districts' money were misappropriated to support a way too big speculative bet by mr. corzine and the board of mf global and because the bet was closed at a loss that a transaction needs to be investigated further, we could be looking at an unjust and absurd situation in which money was taken from customers' pockets to find its way into pockets of managers and hedge funds. you need time to do your work and have no right to interview

with the bankruptcy proceedings. that's the responsibility fft judiciary branch, obviously, but if we can reverse the travesty, that's what we want to do, and that's in large part why we are here right now. it's just essential to protect the sanctity of segregated accounts to restore confidence to the commodity markets and the u.s. markets in the future. final question -- posed an interest k question, and i'll frame it a little bit differently. is it true that jp morgan was one the main depository notes for customers of segregated bank accounts? >> i believe it was a depository, but any funds -- i'm not sure it was a customer bank, and we got from virtually all

the domestic depositories, the funds they were holding. it's really the foreign funds that are the problem. >> okay. they were also the providers of the main line of credit to mf global, over a billion dollars? there there was a substantial line of credit. i think to the holding company, and i think it was on behalf of the syndicate of banks, but jp morgan, i believe, was the lead of that 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's true or not at this time. >> is it possible? >> it's possible. >> probable? >> i would say possible. >> all right. we'll settle on possible. jp morgan purchased the mf bonds in mid-november; is that correct? >> 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 $1.2 billion in customer funds; correct? >> i certainly was aware of it. i assume others were. >> okay. 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. >> mr. baxter, do you? yes or no would work. >> there are provisions in law for a bonafied purchaser, and i don't remember as vividly as i wish i did, but i think the board approved some of the transaction, and assume the bankruptcy court would not have approved transactions if they felt it was violative of the law. >> i -- i know no more with respect to the liquidation other

than that. i know nothing more directly. >> all right. >> mr. duffy? >> i have no knowledge other than what i read in the paper also, sir. >> mr. cook? >> i have nothing further, sir. >> i can't really comment on where the money -- where the transactions may have gone. we're trying to trace these and we're trying to get the money back. >> do you think it would be reasonable for customers to expect some call back starting with mr. baxter. >> again, there are protections in law for transferees who are bonafied purchasers and have no knowledge that what they are purchasing has been tainted or

otherwise, and i don't know the facts, congressman, as to what -- >> purchase had been made after everyone was aware you got $1.2 billion missing. i mean, i think even the most extray ordinary -- extraordinary naive person would say there's $1.2 billion missing here. i wonder why i'm getting a bargain on this. >> and perhaps he's more -- familiar to answer this than i am, but we worked in some bankruptcies together, and often times it's important to be able to liquefy assets if they are losing values so you shouldn't jump to the conclusion, congressman, that a sale is necessarily bad for the bankruptcy estate. it was not for some of the estates that i acted as liquid dater for, and i suspect jim

would agree with me on this. >> and, again, i'm trying to think of customers first just like the customer advocate is supposed to, and i can't help as far removed as it is, i can't help but be remined of madoff and how effective the claw back has been for the people exploited by madoff, and i'm trying to get an idea if there's possibility here. maybe there's not, but it's an interesting concept. >> i think they'll all plead ignorance on this. >> well, just be lightning answers here, please. >> okay. i don't know if i'd call them clawl backs. there are legal theories you can avoid, transfers, atact transactions, and that's what we'll look into. i don't know if the transaction you talk about is ours, but it's something we'll be looking into, but we have to find the basis, the cause of action, and if we

find it, i'll assure you we'll pursue is very diligently. >> okay. >> and neither have the facts or bankruptcy expertise to speculate, congressman. >> i don't have the expertise, but i'll say one thing. the customer segregated funds are the ones missing, and they do not have civic protection or other things of that nature. i believe they should be first in line in any circumstance whatsoever to get the money back. >> thank you, mr. duffy, i do too. >> i don't have the specific facts, and is it reasonable for a customer to look for claw back, and if i were a customer, i'd want every possible avenue to be pursued vigorously. i don't know whether there's -- i don't know the technical details of the law here to know whether there's hope that occurs here. >> we are absolutely committed to getting customer money back to the customers. >> thank you. thank you, mr. chairman. >> yield back? >> i yield back, and i thank you. i thank you for the extra time.

>> yeah. the gentleman, mr. miller is recognized. >> thank you. i want to make another question that i asked earlier of the first panel without satisfactory results, maybe because of my questioning or because of their answering. as i understand it, mf global bought more than $7 billion of european sovereign debt, which was 100% financed by the market want the sovereign debt itself was the collateral, which is pretty stunning, and it was asked how they got to 40-to-1 leverage, and 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 or the sovereign debt that was placed as collateral or because of mf global, and they issued a margin call, and then they began a mad scramble to come up with the money. they sold assets. they -- and then i think

mr. baxter said that what happened was a classic run like used to happen in the depository institutions, and if you know the movie, "it's a wonderful life," and the other lenders decided they needed more security too, and it went downhill from there, but in the mad scramble, the question is what happened to the money or to the assets that were in clients' segregated accounts? the reality is that segregated accounts get used all the time. it is supposed to be segregated, yes, but they can get at the accounts, and an article a week ago said out verbatim a paragraph in mf global's client contract consent to loaner pledge, you hereby grant us the right in law to borrow to pledge, repledge, and on and on, and mr. corzine said, yes, but

there were limits to that under tftc, but the guess the question, you know, was it legal -- was there a legal way for mf global at the 50 rules 245 -- that existed at the time to use asset in clients' accounts as security for any kind of short term loan for mf global, and whether it was legal or not, is there a reason to think that that might have happened? >> i can't speak to what mf global did or what they didn't do. that's the matter we're currently looking into. i can say is under our regulations the customer funds remain the property of the customer, and they can't be pledged to the -- on behalf of the company for security of a loan. >> could not legally have been done? >> correct. >> there's no reason to suspect that may have happened?

>> i can't speak of anything they may or may not have done factuall. >> okay, there was questions about whether or not they could borrow funds in clients' accounts through internal repo or whatever, but was there a legal way with the rule in effect at the time for them to borrow from their own clients? >> in effect at the time, the regulation 1.25 in effect at the time, they could have done internal repurchase agreement, but the customer segregated funds have to remain in tact and whole at all times. the value of the cues mother -- customer funds would have to be preserved. they could not reduce the value of the funds. >> they could borrow from them and offer collateral. >> i wouldn't say "borrow from. " >> it's a repo transaction and

the thing of equal value was a way to create an instrument of its own to be permissible collateral. >> only with permissible investments under the regulation. they could only use a repo transaction with per missable investments. >> can you speak to whether that happened? >> i can't speak to the matter. >> okay. again, a couple people mentioned, used the term of the banks that used to happen in depository institutions all the time, and then there's depositor insurance, has not happened in 70 years really, and before the financial crisis, we had a repo market, a shadow banking system equal in size to all bank deposits. a stunning amount of money sloshing around every night, and sterns borrowed $40 million a night in the repo market.

a run on them, lehman, object entire financial system and that week after the lehman collapse, and now it's happened again. any reason to think that maybe this completely unregulated shadow banking system, that actually no one in congress knows much of anything about, but seems to create a remarkable instability for our financial system that maybe we should be paying attention to it? some limitation on how many times a given asset can be made collateral and then collateral again and collateral again or some required haircut so there's a limitation on how much can be borrowed? is there some reason to think there should be some limitation or should this just go on the way it has over the last three or four years? mr. duffy, you want to answer a question? >> i won't answer on behalf of cme, but myself. i absolutely think you're

correct. there needs to be raining in of this type of activity. one of the things that mr. corzine said is he was bringing leverage ratios down from 37 to 30 and failed to say he took the debt from 1.6 billion to 1.3 billion. this is me speaking personally, that the leverage ratios need to be adjusted. >> okay. >> actually, i mean, i think all of you are equally qualified to speak to this, but how about you? >> i can't really speak to the issue on shadow banking, although i would note that under -- under dodd-frank, there's a number of additional measures to reduce the systemic risk, increase transparency in the marketplace for a variety of swap transactions, but i can't really speak to questions of shadow banking.

>> mr. baxter? new york fed is deeply involved in all of this stuff. >> thank you, congressman. one additional point i would note in terms of references to banks, banks also fund short term with respect to the deposits, and they fund longer term assets like loans, but banks, of course, have access to the liquidity facilities of the federal reserve. >> right. >> the shadow banking system which consistents of non-banks, primarily broker dealers, they do not have access to the window at the federal reserve, and as you may recall, one of the changes effected in dodd-frank is some of the provisions that we used, and i'm speaking here about section 13, subdivision 3 of the federal reserve act to lend to 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 for the purpose of taking assets off the balance sheet like we did with respect to behr sternes, and where the shadow banking system does not, and now that's a generalization, r there are some exceptions. second point, just by way of historical reference, you mentioned lehman. you may also remember that the week after lehman, there were several prominent investment banks, and i won't name names because i shouldn't -- >> there were not that many. >> that became bank holding companies, and, again, the reason for that relates to the structural feature of having access to the liquidity facilities at the central bank. >> mr. chairman, i know my -- one more question along my

earlier lines about the way that a transaction could have been structured to borrow money from client segregated accounts. could mf global have issued any kind of instrument on their own? a bond, commercial paper, whatever that would have been an asset that they could have used in an internal repo and borrowed the clients' funds? >> up won't speak to -- i won't speak to mf global, but hypothetically speaking, you could put a corporate, highly rated corporate bond, could be a subject of a repo, but -- >> you won't? your own corporate bond? >> you could not put your own bond in. >> okay. i thank the gentleman, and now

the gentleman from ohio is recognized. >> thank you, mr. chairman. mr. baxter, the mf global application to become a dealer with the federal reserve bank of new york was approved despite the firm's history of compliance failures and disclosures to regulatorrings. apparently these problems and poor recordkeeping continued at mf global until the firm's collapse. if the new york fed had a surveillance system for primary dealers in place, do you think weaknesses in the books would have been caught? >> the first point, congressman, is we were not acting as mf global supervisors. we were acting as the counterparty, and as that, we were concerned about the financial risk, and we were concerned about our reputational risk. that's why it took the application of mf global to be approved, and with respect to reputational risks specifically,

one of the concerns arose from the enforcement actions, and in december of 2009 against mf global, and under our policy, the institution facing a material enforcement action goes into a kind of personalty box period for a period of a year. we put that mf global application through that full one year penalty box, checked to ensure it had remediated 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, so more than a year from the day to the enforcement action, we decided to approve the designation of mf global as our counterparty. >> what was that date again? i'm sorry. >> it was february 20 # 11 -- 2011. >> okay.

was there a review past that? any surveillance past that? >> past that, we continued to receive weekly fr2004 reports from mf global, continued to receive the monthly focus reports from mf global. we continued to meet regularly with mf global staff, and most importantly, we were transacting business on behalf of the government with mf global and looking at their trading activity done through us. >> and those reports you received subsequent to that, were you seeing a weakness in mf global? >> what happened -- what happened after the date we approved it, so february of 2011, is these repo to maturity trades in european sovereign debt were put on the to the credit of finra who discovered those in the summer of 2011. they were reported to us by mf global in late july of 2011, and we were looking at the situation

at mf global throughout that period. now, we have two particular capital requirements for dealers. one is a minimum capital requirement of $150 million. that was always satisfied. the other is that our primary dealers have to satisfy the fcc net capital rules, and after the experience through the summer of 2011, mf global brought itself into compliance with the fcc net capital rules, so there was no problem under our policy which we apply even handedly across all 21 dealers. >> all right. i notice you use the word "counterparts," and i guess i question why is it necessary for the federal reserve board of new york to designate a select group of firm of primary dealers if the new york firm says they are only counter parts? >> we impose significant burdens on the 21 institutions that we designate as primary dealersment one, they have to participate in

our trades in the open market to implement monetary policy. two, they have to provide us with market intelligence related to the monetary policy function. three, they have to participate in every auction we conduct on behalf of the treasury for u.s. treasury securities, every auction, and fourth, they have to be ready to make markets for us for the $3 trillion in assets we have under management for foreign and central banks and monetary authorities, dollar reserves, so there's burdens that every one of the primary dealers has to agree to, and so not every primary dealer can experience those burdens, and there are situations, congressman, where primary dealers withdraw, and they can no longer satisfy a very specific requirements, but there our requirements, our requirements because of the types of counterparty activities we engage in, and they assure

that the primary dealer that is are designated meet the needs of the fed and the united states. >> last but not least, are you monitoring any of the information released by the dealers that are referenced their status and begin the market perceptions of dealers, wouldn't it be wise for the federal reserve bank of new york to compel all primary dealers references their status in oral and written communication to explicitly disclose that a dealer designation does not constitute an endorsement by the federal reserve? >> i hear that suggestion, congressman, and you know on our website, we published prominently that the primary dealer designation should to the be regarded as a substitute for counterparty due diligence, but i hear the suggestion that maybe we should do more and monitor what all the 21 are saying. now, that's a significant burden on us, but maybe it's a burden we have to undertake. i'll take that under advisement, sir. >> thank you. i yield back.

>> i thank the gentleman. we're going to do a lightning round. i don't know who our time keeper is here, but it's a two minute round, so i ask members to pick the question that they are willing to ask, and i ask the panel to be brief in the answers, and with that, i recognize the ranking member for two minutes. >> thank you, mr. chairman. i don't need a response to this, but this is 5crs -- a crs report dated 2008 from mf global, and on a footnote on page 2, talking about how segregated accounts can't be comingled, but they cite an exception permitting comingling "for convenience. " i don't expect you to answer that today, but i want to hear from you in the future as to exactly how big of a hoop hole that might be. not today. this is another time.

it raises questions, and i ask it really only because i have such high regards to the dr. rs if they put something in there, it raises my concern. i guess for the entire panel, i don't expect to be familiar with the an article, but i have not read a news article as frequently as this one. i read this four times now slowly because it's difficult, above where i'm capable of understanding, but it's a readers article entitled "mf globals and the rehigh pottization scandal" published on december 7th from the u.k.. i'm not going to suggest anything here it accurate, but i want you to look at it later on, and i'd love to have comments on this to think what you think he says. the reason i mention it goes to a long explanation that i have to admit i have a hard time following. it's above my pay grade, but i try, and on some real serious questions. here's a paragraph near the

end. after he talks about rehypothecation, and i'm still struggle what that is, but it's loans on loans, with collateral being rehypothecated to four according to estimates, the capital backing banks rehypothecation transactions could be as little as 25%. the churning of collateral means the rehypothecated transactions generated liquidity, much of which has no real asset backing. now, i have to be honest, that reads like something i read not too long ago about mortgages, and it concerns me deeply. he goes on to the next page, listing big companies in his estimation have faken advantage of weak collateral rules, and incredible leverage by pledging and repledging collateral, and lists jp morgan as having sold or repledged $410 billion of collateral received under

customer loans, derivative transactions, securities borrowed, and reverse purchase agreements. morgan stanley at $410, and interestingly enough, interactive brokers at $8 billion, the ones you tried to sell mf global to. again, i'm not trying to bush whack you, but i'd love you each to take a good look at this and let me know what you think of the article and why you think i shouldn't be concerned, and i specifically ask that those of you on the fsoc bring the article back and ask them because, again, they, in hi estimation was created clearly to ensure there's no systemic risk, and this article raises concern it's there and nobody's watching. i look forward to your response. >> i thank the gentleman. >> i wanted to go back to something i believe in late

september of 2010, i think y'all did a call around, and 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 30 call around? >> mr. chairman, i don't recall whether it was in september 30 call around or sometime shortly thereafter, but the response was they had no positions in european sovereign debt. >> and it turned out they did have exposure? >> to be most generous to them, it would be that they interpreted the fact that it was a repo to maturity and not required to be reported as an asset for accounting purposes that they dent review it as that, but it's what we expected. they are credit and market risk, and they should have explained that to us. >> did you ever have any, you know, once you discovered later on in, i think you discovered in march -- >> we does covered it at the end of may. >> end of may. did you bring that to their attention that you were

concerned they had not previously disclosed that? >> my staff did raise it with them. i don't know the details. i'd be glat to get -- glad to get back to you on it. we are concerned with it, and they should have been far more forthright than they were. >> sir, in one of the things we want to do is when we get through with all 6 this, we want to do something productive with it, ensure that we make the system betterings but taiment -- better, but at the same time not make the system more erroneous, so we want to be careful here, but it appears to me down the road the disclosure of these transactions that need to be a little bit clearer and some guidelines of reporting those because obviously what mr. corzine thought was a risk-free transaction turned out to be an extremely risky transaction. >> i absolutely agree with you, mr. chairman. it should be looked at from a

gap accounting standpoint, and that's one of the reasons we have the rule before the fcc that would give us the authority to require much more extended disclosure than impises in the -- exists in the fcc's present focus forms. >> i thank the gentleman. the gentleman from colorado. >> i appreciate herb's testimony -- everybody's testimony today. this is something we'll look at for awhile, to know when you force a sale, merger, or demand or capitals close the institution. you want to allow companies to operate if they can, and here we've got other people's money, and that's why, you know, we have this ability to come in and shut the doors and preserve what exists, so i just have a question from the fcc and look at this because when we went through this thing before, there was was a lot of short selling, rumor mongering going on, a lot of driving a company that sort of wounded into the ground, and

so i would, you know, as part of the investigation, i really would like to know if that was going on, you know, and who benefited by it? if it's possible to check something like that out because we've seen it in the past, and it really hurts the system, and i would just ask you to do that, and i have a million questions so i'm not going to ask anymore, and i'm just going to wish you all a happy holidays. >> i thank the gentleman, and the gentleman from florida, mr. posey, recognized for two minutes. >> thank you very much, mr. chairman. mr. duffy, i believe in a senate hearing, you were asked to basically butt out of any investigation. can you elaborate on that a little bit? >> 07b8 to what i know -- only to what i know, sir. the cftc asked us not to get involved and they were going to proceed with the investigation

and we were no longer a part of the investigation. you would have to ask them why. i don't know. >> do any of the others of you have any interest in pursuing an investigation of your own? i mean, other than just being observers about what you read in the newspaper or somebody tells you? anybody else other than mr. duffy attempt to pursue your own investigation? raise your hand if you had. oh, good, i'd like to hear from all of you -- mr. chairman, if i can have the time? >> yeah, we dpsh part of our duties as i said in my remarks is to do a thorough, independent investigation. we are doing that. we are trying to coordinate it with the other investigations. >> but you were not asked to butt out? >> no. >> okay. >> we were not asked to butt out, provided support to the trustee, and we understood the fcc and ftfc were both investigating it.

>> yes, sir, we're looking at in things related. >> you have not been asked to butt out? >> no, sir. >> we are investigating what happened to the funds. >> everybody's investigating, and mr. duffy was the only one to be asked to butt out. anybody have any idea why that could be? >> nobody has any idea why mr. duffy's organization is was only one asked not to do -- >> just to be clear, sir, all the information testified is information we have gathered in our own internlg interviews prior -- internal interviews prior to being asked to butt out. >> do you know why? >> i don't know. >> why? can -- >> i'm not familiar with what has been referred to, but even if i were, i couldn't talk about it. [laughter] >> with the chair's permission,

and i'm sure everyone left on this panel would be intensely interested in knowing that at the earliest possible moment you're able to tell us why you asked mr. duffy not to participate in an internal investigation. i hope you write that down and not forget it. at the earliest possible time that you feel ethically, morally, or legally able to tell us why you would tell him not to conduct an internal investigation, not to discover facts on your own that you possibly could, we look forward to having your explanation on that. >> i thank the gentleman for his questioning. now the questionman from texas. >> thank you, mr. foreman. i have a brief question because most questions have been asked. mr. duffy, mf global had a very spotty compliance record and paid about $87 million in fines to regulators in 2007. was there anything in mf global's past that would give cme concern about the

segregation of customer funds at the company? >> no. again, we do random audits, auditing the firms every year, spot audits, daily segregation reports, third party tieouts, and there's been disciplinary actions, throughout the years, but when they took over, we never took them off daily reporting, and most firms don't report daily, it comes a day or so later, but we continued to keep a close watch on all firms incoming mf global. >> thank you very much. i yield back. >> i thank the gentleman, and i apologize to mr. miller for skipping over him. you're recognized. >> that's fine, mr. chairman. i'll accept double the time. [laughter] the only proposal that i recall in dodd-frank that got at the repo market, which was a huge part of the financial crisis was a proposal from the fdic and

she'llly bear to limit how much would be paid or give fdic discretion in receivership to pay less than 100% of the transactions, obviously aimed at the repo market. it was aimed at mortgages on office buildings that made my think congress does not really understand the shadow banking system, and the repo market, and someone really needs who is important, and the industry does not want us to understand it because if we did, we might start to pay attention and figure out what a risk it posed to us. i have a couple question of proposals made to limit repo transactions. one is, and i mentioned it earlier, but limit the number of times a given collateral, and icing the term "rehypothecation," and he was

not sure what it meant, but same collateral -- same instrument, same asset used for collateral for multipal transactions. should that be used like a double mirrors where you just see forever or some limit on the number of times a given asset can be hypothecated? mr. duffy? >> as i said earlier, sir, i believe there should be a limit on how much any particular security can be leveraged out, and if there's 20 times over, you know, we're all looking to get the same security back at the same time, there's 20 of us looking for one thing. 19 of us will have a problem. i do believe there needs to be a limit to that type of behavior. >> anyone else? okay. >> sir, i'll just add that i think there's a lot of complicated issues there. there are -- repos are very valuable financing tool in the markets, and i think, frankly,

repos to maturity may have purpose. i'm not here to defend them, but they cut down certain risks and potentially create others. i think you raise an important question. i know the ranking members asked us to look at the article, and i have, and i look forward to discussing it further, but it's hard to say that there's a difference between leverage and allowed rehypothecation. let's go to leverage. it's stunning that mf global was able to have 100% financing of their purchase of sovereign debt more than $7 billion in sovereign debt for the repo market. should there be essentially a margin requirement, a requirement of a haircut to limit the vulnerability to the repo system, and i understand the immediate need for liquidity and imposing anything immediately would have a problem in the world economy begin where things are, but if we ever pull out of where we are, should there be a limit on -- should

there be a margin requirement, mr. cook? >> i believe that was, in fact, the effect of requiring them to take a capital charge through the discussions with the fcc, take the capital charge for the positions. i think the question, the broader question of leverage is a very important one. i think there's a number of policy issues to think through there, and there's different types of leverage, and so you can have two firms that have the same degree of leverage, but different risks, and i think, you know, the question of how we approach that is important to think about. i don't want to use up your time answering that question. >> anybody else? >> i gurnet line what -- underline what mr. cook said. i think you raise a very important issue of the view of leverage with respect to assumptions and most of the financial oversight from banking to securities firm with regard to meshbook leverage that's build in, but the exposure of that leverage varies dray

patically by asset quality and by the nature in the maturities, and i think you raise an important issue that all of us should go back and review, but i think mr. cook is right, there's also a great deal of exceptionally critical part of financing that is built into the repo markets. >> one last question at the chairman's indulgence. the argument for the haircut, the haircut and repo market is there needs to be market displn plin, and there was known that renders in the repo market made decisions only collar rail when -- collateral when they were in the water, and lehman was in the water, everybody knew they were in trouble, and the result of the favored position of transactions was when the fdic finally arrived, there was just this smoking crater in the ground instead of an institution that actually may have had

franchise value and assets. do you think there is any discipline market. what can be done to create discipline in the repo market? >> it -- i'll take a stab, sir. it's a complicated question. i think, you know, in some respects, lehman are examples where counterparties looked beyond collateral because the entities were not able to finance themselves using treasuries, and so there is a discipline in that sense, but that's also part of the challenge is if you become highly dependent on financing yourself including using very high quality collateral and there's some representational issue out there, then you have a significant liquidity problem. i think the way -- one way to come at your question, there's many, but the appropriate capital treatment of the transactions whether they are properly addressed through capital charges. >> i thank the gentleman. good questions.

i remind all members that if you have additional questions for this panel, you may submit those in writing. we'd ask the panel then to respond to that, and without objection, we'll hold the record open for 30 days for that question period. we thank this panel. i would remind the members of the committee that we believe that additional hearings on this issue are wanted, and we'll look at credit ratings agencies, the accounting practices discussed today, risk management, internal control, issues we think are important, and i think the ultimate product to deliver when this is -- when we get all information we asked and get reportings back to the various people looking at that is to, for this committee to publish a finding and let that finding then be a part of the record, and then we can then ascertain if additional things we can do and in working with the industry to make sure that we make whatever fine tuning adjustments

that need to be done to ensure we don't have another hearing like this in the future. we thank the panel. you've been parent. it's been a long day, and go ahead and take the rest of the day off, and with that, this hearing's adjourned. [inaudible conversations] [inaudible conversations] [inaudible conversations]