but the idea is that the process was flawed from the outset. i can concur with mike's

assessment about the introduction of sopa. we were under the impression it would represent a more sane approach to some of the issues that protectip was trying to resolve and that was not the case. we are talking about a stakeholder community that is much broader than anyone in washington has ever considered before. i mentioned tocourt in my remarks. it is a platform that allows artists to distribute to itunes, amazon and all of streaming services. they're executive just told me they distribute more music in one month than all the major record levels due combined in a one hundred years. these are copyright holders. these folks have to understand they have rights as well and they may not be reflected perfectly and proposed legislation. it won't happen overnight. when you have a small nonprofit like future music coalition versus -- i don't want to use

the word versus the foreign tents and purposes, enormously well established, well lawyers up, big money trade industry, you can see how the deck is stacked. >> we provided three redline drafts to the committees of jurisdiction over the last two years and if they weren't totally ignored they were substantially ignored in the process. the house and senate judiciary committee's. >> i am grand gross. a couple of you have alluded to, can you talk about the importance of the protests yesterday and was that a tipping point that you see in this debate? >> i don't want to call it the great awakening of the internet because a lot of us here and

most of our friends and people with no on line have been involved in these issues for long time and what we saw was concentrated mass action that had immediate results. we couldn't keep up with twitter yesterday because so many senators were taking to the service to announce they were no longer supporting the bill. we are running around town trying to figure out what is up and down. you saw people gathered in new york and san francisco and seattle or whatever was going on and wherever else. it was heartening to see people coming out and it was a great day but it was not the first day and not the last day. we are here for the duration and we're here to make sure we find that better way forward and all of us here and the people who came out yesterday will echo those comments. >> what is really interesting

about what happened yesterday is like most things you are going to see 90% of the people, they will do nothing with it. a lot of people won't understand this new ones to subject. people who are pro and against, that too simplistic and people are not going to grasp them. we reached such a wide audience and an audience of all ages. a core group, i get this, this is important to me. they do great things in this world and we want to protect it and created advocates, and that is going to mean great things to the next one and the next one. >> as much as yesterday was

tactically against sopa and the of, yesterday was for the internet. >> there is an opportunity for the m p aa to learn something here. the mpaa and other studios tried to outlaw cable television, tried to outlaw the vcr, tried to outlaw the ipod, tried to outlaw let d r. the common theme, technologies that are the biggest revenue sources for hollywood. they're scared of the internet. they have an opportunity to embrace the internet's potential where the internet can become the largest revenue source. that is inevitable. they have to go through that

cycle. i am hoping of last couple weeks will accelerate the timetable for the studios for business models and regulatory plans. >> i would like to think that were true but judging from the original kerri in the gold mine which is the music industry waiting more than that business model to be appropriate to some behavior. i don't have a lot of high hopes that the motion picture industry will wake up to that understanding any time soon. >> let's get some other questions. >> katie bachman. you were talking about this is the last bush. it seems from markham erickson's comments that you think that amendment and that bill will zip through the floor on the senate. my question is what does that mean? do you continue your advertising

campaign you talked about? would you going to do? >> i don't think the bill will zip through on the senate. will try to to introduce ham sandwich that they think can pass. what use have seen yesterday is a don't think that tactic will work. if they try to move forward and have a protracted debate on the floor members will step up and have a protracted debate on the floor. i hope the doesn't get to that point. >> i think it is important to recognize that even -- let's just say in some bizarre world that the senate comes up with some bill that everyone at this table even agrees with. i am not sure that would work given the process of what has happened and what happened on line yesterday. that was the internet speaking

out. that was not a group of people represented directly by us. that was a large group of people who are concerned about the overall process that we don't control in any way and not even so much about what we'd do even if everyone at the table says this is a wonderful bill that magically comes, don't think that is likely. there is larger concern about the overall process of how this was done and i don't think the internet will go away quietly. >> i also think some proponents may try to tweak the existing bill, for a lot of members fold pipa at sopa approaches are toxic. they are radioactive. the situation where congress's approval rating is very low. there is a perception among the left and the right among tea

party years and occupiers that there are some well-connected interests tried to gain the system to the detriment of everybody else. people love the internet. they use it. they think they own it. when people get the sense that congress is about to harm the internet at the behest of a handful of well-connected interests they get very 83. what we have seen as extraordinary. 1500 people protesting in the streets of new york yesterday on a copyright issue. this is coming up in primaries, coming up in town halls in new hampshire and south carolina. this is extraordinary. i don't think it is going away. the notion that somehow you can make a few minor tweaks and it is business is usual and no one will notice is unrealistic. there are a lot of members at this point who want nothing to

do with the sopa pipa approach going forward. time to reset. >> an important comment. yesterday the first draft of the open act was released. i was up until midnight reading through that bill with a couple of representatives from two of the largest companies in our industry. we were up until midnight looking for this bill talking and one of the largest companies in our industry, they said one of our largest clients into a today. a foreign company and they said if sopa were to pass we have got to go and post of shores. the company's won't wait, they are just going to leave our shores and they're going to take

american jobs with them as our industry combines and offshore industry increases. it is going to happen. >> different way to answer that is not what we are going to do but what is congress going to do? after yesterday's the internet has spoken. what you going to do? >> with all of the statements from people in congress, how much of those statements came out and how they communicate with the public? they used the very tools people were using to speak out as well. it was twitter and facebook and youtube. that is how they got the message out and that was very much a statement as well as some members of congress are recognizing in beijing by the internet is an important part of being an elected official and representing constituents. we need more of that.

going back to the previous question, what happened yesterday was the beginning of something of that is important not just in this process but getting congress more engaged with the people there represent. >> and over on the end. >> jason. what percentage of your business is international? how much revenue have you lost by this bill? >> i represent a company, we see 60% of our business as international. what is interesting, 20% of the world and would goes through the united states but when it comes to the actual infrastructure of the internet we still lead the industry. we lead the world when it comes to our infrastructure. people from all over the world

gravitate towards the united states because our bandwidth access and reliability and power grids are still the best and the world but that is changing every day. the more we give people chances, reasons to go offshore with their infrastructure to bypass the united states there's a huge economy out there so i can only speak for myself in saying 60% of us is foreign business that has a responsibility of affecting u.s. jobs in my particular company. but as a whole we are seeing the internet infrastructure economy representing 4.2 billion is i think the number we represent in overall revenue. lot of that easily move offshore. >> the 60% number is consistent with what larger internet companies do with big internet

brands. they have gone over the 50% mark where revenue from offshore is exceeding domestic revenue. the internet represents 23% of net growth gdp worldwide. much of that is driven by u.s. internet companies promoting their services overseas. the bigger concern for many companies is not a revenue loss but the global retaliation of a president that starts to allow government to sensor and determine what speech will be allowed on the internet. these are not just countries like china or iran but liberal european democracies that would like to see an excuse to begin regulating speech on the internet because they don't have a first amendment and they will use this as an excuse to begin doing that and our companies as they try to promote their service worldwide are very much concerned about the international retaliation from

foreign countries. >> and i will have a venture peace here as well. those numbers definitely better off about the company's that are happening and being created now, going back to this point the company's, next wave of innovation won't happen -- we won't -- companies like ours will not want to subsidize litigation. we're looking to give you venture money to create jobs and growth wealth. we will be looking for more international investment. it is that simple fact of the matter. i firmly agreed with martin's point that we don't want to be on the list of countries that do this and don't want to add to it. we don't want to align ourselves with china and iran. it says what liberal western democracies line up and do the

same thing. and internet innovator, paul vixy said not that the internet won't survive this, is that we won't like it once it will become. that is the larger point about moving offshore and revenue growth and all those things. we don't know what it will be at the wheat won't the like it. >> another question. >> i have two questions. the first i want to hit on, i am still getting press releases from different members of the house and senate saying they're coming out against the bill. for i think about six co-sponsors of protect ip, allotted transforming and also a speaker yesterday saying that, wasn't going to move forward without compromise they didn't look like that was happening

anytime soon. you still think the builders are going to go for it? is it dead? the second thing i want to ask about is is the intention to just kill the bill and start from scratch? or are there areas of compromise where you are open to possibly supporting something if things were tweaked? >> the answer to the first question is senator kyl has promoted or proposed a deal with senator leahy to get this bill off life-support and there are members, would try to introduce a ham sandwich into the situation if they thought it could pass. we have to be careful to look at those statements that may occur. the bigger point is there are

solutions but we need to step back and reset and have a data driven process to look at what the scope of the problem is. we don't know how many websites we're talking about on the other side. we don't know what the scope of the piracy problem is. that is an issue. and we don't know how burdensome these proposals would be and the impact they have on the internet. much of this is driven by grass-roots advocacy from engineers who are not lobbyists who said here is the real data about how much traffic is going to these sites are the cybersecurity effect. instead of having to negotiate let's sit down and have that data driven process with a wide array of stakeholders. engineers and small business and small business and copyright owners of all stripes. and figure out a more intelligent solution. >> to have that process the public. >> can't emphasize that enough.

no matter what comes out if a bill comes out and everyone agreed with it, the people who were protesting yesterday won't accept that process. that was clear from the statements being made and what you saw being said. it is not what we would accept. it is an open-ended involved process. >> we're looking for something to support. we are fierce advocates against piracy and want to support something. it is really tough to get there. we have 24 hours to delve into the open act. we are always looking for something. >> we can definitely agree continue to double down on the data aspect.

our organization to figure out how musician that making a living in this market place and whether we can bring constructive information into the policymaking process and finishing the artist revenue streams, will have that impact on these conversations. the folks who introduced sopa and pipa are keen to bring in stakeholders' now and supporters of those bills are so key in to compromise, there were described over the last six months. is it possible we could get -- to the bad actors are, and legislation that is appropriately tailored and avoid collateral arms? sure. doing at 11th-hour is not going to be the way forward.

>> is a dead? despite the american people speaking loudly, majority leader as we speak still scheduled to bring this bill to the floor of the senate tuesday. number 2, what is extraordinary to me is the manufactured urgency. you have substantive and smart interests or bringing up substantive, why can't we step up to get it right? i really don't understand the rush. number 3, we're interested in the bowl of coming up with some solution that addresses these rogue pirate websites. it is a narrow, targeted and strategic way to do that.

we have a philosophical bifurcation. some believe this is to hubble the internet. the opening act approach, to cut off the money, and do business. so you cut off the money. will look at the offshore gambling bills and it has the added advantage of not adding to innovation. to the extent that you're going to do something or something needs to be done is a reasonable way to approach the issue. >> i want to echo michael's comments. the phone is scheduled tuesday. and we want to keep the pressure

on. more than that intellectual property laws, some might say a little boring but also very complicated and not the kind of thing you want rushed through. not the kind of thing you'd want to go through with a fine tooth comb and find every little minute detail so nothing is fought out in court for decades. we want to get it right the first time. help us help you. we want to sit down and talk to you. the open act as a great counterproposal. we would like to see both of these judged on their merits. we would love to talk about any and all avenues to combat piracy and we are sitting and waiting. the bill is very much alive. keep calling and keep the pressure on. >> intellectual property, complex and changing infrastructure of the internet. we have to have foresight. where will we be in 10 or 20 years? that takes a lot. >> on top of that in terms of

building on all of what was said, copyright law over the last 35 years has been adjusted. there have been new copyright laws or changes 16 times in 35 years. feels like every two years or so there's a complaint. none of those changes have necessarily addressed the problem which is why they keep coming back but none of the potential problems caused by earlier changes, never a process to look at the problems with existing law and essentially fix them. the ideas that we should sit down and think for the impact of these particular changes before they go into effect is important. >> one or two more questions before we get kicked out. when and then again and then we

will wrap up. >> a lot of this opposition is not necessarily from organized groups. you also emphasized the process as seen as the legitimate. is it possible that the whole process and the whole issue has become so tainted that if you decided you all did like the act and it was a good approach that even that could not get past because not everyone would understand that. here is another way the back room is trying to push through something and we won't listen to what it is or how distinguished. >> it is the process becomes more open, people on the internet will for support behind something that works. we talk about the back room

deals and i love your line about dropping the ham sandwich. we talk about these things, in the entrepreneurial community the reason we haven't gotten involved at this point is we don't care about the issues. it is that we look at it and say just like lead -- let me do my job and i don't understand that process and don't want to be part of it. is not open or honest. to more open and honest the better and more support you will find. today, tomorrow and the next day they will support something. transparency matters tremendously. >> the open act has been transparent from the beginning. the public to criticize and attempt to amend the bill and i think from what i just looked at it is a preliminary stages that it is a bill that if pipa and sopa the media industries would be thrilled to have and we don't see major public outcry about it

yet. it is because of the transparency and the approach that has been taken. >> the set up with that particular bill whether people agree with it was really an important step. even people who don't necessarily like that particular bill were very impressed and they like the fact is that it was presented not just in open fashion. the original text of the bill was months before it was introduced, actually introduced in the house and senate was put up and people could, and. was put on a platform that let people make language suggestions and comments and give their thoughts and the bills that actually were introduced from that are very different from what came out first. weather acceptable i could not

say. the process itself was a lot more open and people definitely recognize that. if more or all happened during that process. >> there were members of congress and representatives who established a track record and build some good well as experts looking out for the best of the constituency in a particular field. b shares of the internet caucus are supposed to be looking out for the internet and they are the two primary movers behind this legislation. we have seen a new generation of members of congress stepping up to be a new internet caucus. people like darrell issa and ron

wiseman and congressman change its and others. i'm leaving many others out. and senator more and -- moreand. as they become the new generation of an internet caucus they will build up some good will and credibility with the constituencies that when they say we're trying to move in a constructive way to balance the interests of the internet community with a copyright community, that will help. there's a distrust right now with members of congress and what their intentions are and that is beginning to change. >> if you want to give leadership the benefit of the doubt and i have no problem doing that because we have been consistent in our message of folks with interests in the creative communities can interact productively with lawmakers, lawmakers need to hear from this community. it is a question how the argument is weighted. if it is just mpaa, the

leadership is hearing from, that is a problem. we will take every opportunity. this underscores the need to hit pause. is increasingly clear that it is the tech community whose interests need to be represented and the entrepreneurial community whose interests need to be represented and now more than ever the copyright owners who have never had an opportunity to introduce their side of the story into these debates. all the more reason to hit pause and see if we can bring more stakeholders to the table. >> there was a time not so long ago when it was considered to be charming that members of congress didn't know much about technology. now we have gotten to the point where it is no longer funny. to the extent that you are going to be making rules and governing the internet you have to have some familiarity with how it works. most of you are watching this

house markup on sopa. in some ways it was frustrating because a lot of members clearly did not have anything close to that level of familiarity. >> also exciting because a lot of members, who were clearly tech people and were quite familiar with how technology works and howie internet works and what the innovation community needed. those numbers are in the ascendancy. in terms of how congress deals with these issues it will get better. because there are a lot of very young, very articulate members who are engaged in this issue and have that deep understanding of how it works and what smart policy is. from that i am very optimistic. >> let's end it there and take your questions offline before they never let us use this room again because we are way over. the panel, i will speak for

them, will stay. we just need to get out of the room. if you have additional questions we will check in the hall. thanks for coming. [inaudible conversations] [inaudible conversations] >> today presidential candidates newt gingrich and ron paul will speak at the southern republican leadership conference in charleston, south carolina. road to the white house coverage begins at 9:00 eastern on c-span2. >> a couple famous. he argued that american policy toward japan in 1940 and 41 was

provocative and perhaps in a juvenile way we are putting pins in a rattlesnake and eventually the rattlesnake will strike back. >> for half a century herbert hoover's freedom betrayed remained in storage and seen. saturday night on afterwards on booktv, george nash on the former president's evaluation of executive branch decisions starting with the second world war right through the cold war with the soviet union at 10:00 eastern. also this weekend jeff charlotte on religion in america from sweet heaven when i died saturday at 8:00 and sunday night at 8:15 j. wechsler on understanding of the constitution by looking at the odd clauss. booktv every weekend on c-span2. >> banking industry officials testified on capitol hill wednesday on a proposal to ban banks from proprietary trading.

the focus will, key piece of the law keeps federally insured institutions from speculative investing in hedge and private equity funds. this part of the house financial services subcommittee hearing is an hour and a half. >> at this time we have the second panel of witnesses and i will introduce them individually. congresswoman hayworth will make an introduction which i will save until we get to your constituents. our first witness is anthony carfang, partner at treasury strategy on behalf of the chamber of commerce. welcome. you need to turn the microphone on and pull it close to you. and speak up. >> we are pleased to present to

the committee on such an issue of importance to the stability of the system. my name is anthony carfang and i'm a partner of treasury strategies. we're leading consultancy in the area of treasury management. for 30 years. today as the 30th anniversary we are working with corporate treasurers and c f os helping them manage their daily cash flows and growing their businesses. we also consult international institutions to provide treasury and liquidity services to those corporations. we are speaking on behalf of the chamber of commerce, three million members and three million treasuries of those companies who have to deal with these regulations. what i would like to do is share with you the untold story of how these regulations will impact the daily management of america's businesses. there are five points i would like to make. five chapters to this story.

number one, american businesses of most capital efficient in the world and the volcker will change that. number 2, as every treasurer knows risk can be created or destroyed, only transformed. the full rule will remove this from the banking system but put it in the lap of every u.s. corporation. the rulemaking process you were discussing earlier is so non aligned in terms of the comment periods and in terms of implementation that that further adds to the uncertainty and increases the possibility that all except the largest banks will either scaled back or reduce the number of services they offer all together. the fourth point i would like to make is this is one of four major pieces of regulation

impacting corporate treasurers along with basil, proposed additional money market fund regulations and along with derivative regulations, auld four of these designed to impact national institutions but frankly landing right on the desk of every corporate treasurer in america. there are no do overs here. corporate treasurers will be realigning their balance sheets, reprogramming very e r p systems as they change banks and the way they manage risk and raise capital. those are long-term changes. it may take 18 months for even a midsize company to make these changes and once made that they are not going to be easily reversed. i would like to dwell on the first point of capital efficiency. moving with corporate treasurers

day in and day out helping them manage their cash and u.s. corporations keep cash balances of $2 trillion here in the u.s. which is 14% of u.s. gdp. in europe and the comparable ratio is 21%. fifty% higher. should banks exit some capital ratio and risk-management -- they need to increase their cash buffers and essentially see the cash efficiency decline. should that $2 billion rise to the european level of 21%, that would mean an extra $1 trillion. corporations would have to raise and idled sideline $1 trillion in capital efficiency increases to european levels which could well happen under the volcker rule. $1 trillion is more than the

entire t.a.r.p. bailout and more than a stimulus and the recent federal reserve quantitative easing. to take that money out of the system and sideline it would have huge economic impact that could only be done through downsizing or deferring an expansion plan, maintenance and capital investment. not a good outcome. we encourage you to think carefully about how all of this plays out. there are four major regulations designed to impact national institutions that will impact the way corporate treasurers manage their cash day in and day out. the evil rule and fund regulations and derivative regulations and capital requirements. all of these are and tested yet will hit the markets simultaneously. this has not been thought

through. this is not been thought through. we encourage you to take the time necessary to think this through. finally the ultimate question is when a u.s. corporate treasurer calls his or her bank in order to raise capital on managed risk will there be anybody to answer the phone? thank you very much. >> thank you. miss hayworth? >> i have the pleasure of introducing mr. scott evans who happens to be a constituent. i am privileged to be his representative of congress in the nineteenth congressional district in new york. he is executive vice president of asset management leader original chief executive officer of the company's investment advisory subsidiary. he has oversight of nearly $441 billion in combined assets under management. he previously served as chief

investment officer and he was head of kraft investments from tough university and northwestern university and kellogg school of management and financial analyst and member of the new york society of security analysts. i am privileged to welcome you and thank you for your testimony. i yield back. >> thank you, congresswoman hayworth for that kind introduction. my name is scott evans. i am executive vice presidents of asset management division. are appreciate the opportunity to speak with you about some of the effects of the volcker will on the insurance industry. specifically as relates to our ability to invest in certain financial vehicles. please allow me to tell you a little bit about dia c r e f, we have not-for-profit heritage serving 3.7 million americans in

the academic research and cultural fields. we are and insurance company managing $64 billion in assets providing $10 billion a year in retirement income to teachers, nurses, campus service personnel and others in the not for profit sector. in order to provide our participants, clients with a comprehensive set of financial solutions we and a thrift institution. many of our participants have a lifetime relationship with tiaa-cref and trust us to provide a long-term financial success. thrift further enables us to meet participant's lifetime financial needs by providing them with a banking partner as they live to and for retirement. our thrift currently compromises less than 0.one% of total assets but it qualifies as an insured depository institution under the

proposed rule and those subjects, our entire enterprise to the investment and sponsorship restrictions of the volcker rule. the proposed regulations provide an exemption for proprietary trading restrictions for insurance companies this exemption does not expressly extend to allowing insurers to hold ownership interest in covered funds to encompass private equity funds. this is a concern for tiaa-cref and others in the insurance industry since private equity investments for an interval part of are all long-term investment strategy these investments are widely used by insurers to diversify our portfolio and enable us to deliver the long-term commitments that we have to our participants. our insurance portfolio primarily compromises core investments with stable return characteristics. private equity investments allow us to diversify our portfolio while also seeking higher yields

over investment rises. this investment blend enables us to meet the long-term financial goals of our participants providing them a steady stream of income in retirement on a variety of asset classes. additionally many private equity investment provide long-term capital to important sectors of the economy including infrastructure projects, build roads leading to the airports, water treatment facilities, desalination plants and energy distribution facilities. we believe the intent of congress with respect to the volcker rule as stated in the dodd-frank act was to appropriately accommodate the business of insurance. we do not believe the proposed rule follows this intent as it subject our entire enterprise to limitations designed to regulate the investment activities of the thrift. tiaa-cref appreciate it congress is conducting responsible oversight of the regulations to implement the volcker rule and

it is our hope final regulations will not result in any significant disruption for insurers or individuals depending on us for their long-term financial security. thank you again for the opportunity to testify before you today and i look forward to taking your questions. >> thank you. professor johnson. >> thank you very much. i would like to make three points if i may. the first with regard to the costs of financial crisis including the cost of the last crisis and the cost of any future crisis. i have listened to the hearings this morning. i have heard very little discussion of what we lost and what we could stand to lose in the future. you can measure it in different ways. talk about eight million jobs lost or the loss of growth that will not get back. i stress the fiscal costs according to the congressional budget office. the change in medium term debt of the united states, federal

government that helped by the private sector is roughly 50% of gdp, $8.5 trillion. that is a huge cost. what is the mechanism through which we encountered the previous financial crisis and what are the risks we face going forward? this is my second point. a lot of these risks come from the behavior of very large banks. despite the best intentions and attempts by congress to deal with this problem of too big to fail banks i am afraid the structures are still with us. there is a distorted set of incentives that these banks have. they get the upside when things go well. they get the profit, compensation for executives. when things go badly the risks and costs get shoved onto the american taxpayer. that is the point of eight$.5 trillion in losses. the way that you blow up, that

lehman was destroyed the way bear stearns was destroyed and merrill lynch occurred. was precisely and exactly through proprietary trading, properly defined as defined by the statute as defined by wallace tuberville's remarks this morning. to buy and hold securities hoping to benefit from short-term price determined that led them into what were regarded as very highly rated investments, aaa securities where they suffered the most damaging losses. we shouldn't be fighting always the last war and he is right. the advantage of the volcker rule adds -- as written and as attempted now to be implemented is precisely on a forward looking basis preventing big banks from again putting their

hands into the pocket of the american taxpayer. my third point is i understand that the industry is concerned about this and i have read carefully the documents that were put out through various organizations and individuals and i am deeply skeptical of 4 reasons expressed in my written testimony of the estimate of the so-called liquidity cost reduction in liquidity. the methodology is used for example in the oliver wyman report is deeply flawed. i am happy to take that up with you further. however, let's say there are some small liquidity costs. let's say we should be evaluating and thinking about potential costs and you have done that carefully this morning. we must weigh those costs against the benefits. surely the question is not can you find this or that small

nickel and dime cost but what are you doing to the risks that this society will face? another massive devastating financial crisis because we have banks that are so big that when they threaten to fail it can bring down the entire economy. we can talk about alternative approaches. we can argue there should be more capital in the financial system. i argue this day in and day out with regulators here and around the world but you won't get it. basel iii will not give you enough capital. there's nothing else on the table that will make meaningful progress in this area. and i would close by reinforcing and reiterating the point made by barney frank in this morning's panel which was if uncertainty is an issue and we want to get past the process of

resolving and the basis of the rules going forward you shouldn't have more delay. you need to have rules now and the rules are available. the rules can be put into place and i would urge you not to encourage regulators to delay any further. thank you very much. >> thank you. mr. elliott. >> thank you for the opportunity to testify at the volcker rule. i should note while i am a fellow at the brookings institution my testimony is solely on my own behalf. i believe that the volcker rule is fundamentally flawed and will do considerably more harm than good for the economy. i base this on two decades on wall street as well as the years i spent at think tanks since then. despite being a former banker i should note my views on the volcker rule denied stem from opposition to the dodd-frank reforms would die on record as a strong supporter of the overall approach of the legislation.

my problem with the volcker rule is it tries to eliminate excessive investment risk and major financial institutions but without me during either of the two key attributes, the level of investment risk and capacity of the institution to bear the risk. instead will focus is on the intent of the investment. i believe the globally agreed basel will on bank capital takes a more intelligent approach by measuring both investment risk and the adequacy of capital to absorb those risks. one can validly argue about the techniques used to do this but makes a lot more sense to fix any flaws in that approach and to act as if we have no ability to measure risk for capital. focusing on intend create multiple fundamental problems. for starters the concept of proprietary investments is highly subjective. i surmise that the underlying

rationale is to try to separate out activities that are in terrible to banking from those that are not. focusing on investments alone the volcker rule implicitly assumes that lending is good. in addition, some investment activities are recognized as into goal to banking as we discussed this morning and others are not. this raises several concerns for me. most fundamentally finances evolve over the last few decades to the point where corporate bar were switched easily between borrowing loans and securities. this means securities activities are integral to modern corporate banking and lending has always been. further, it is extremely hard to draw the line between acceptable and unacceptable activity under the volcker rule. operational arbitrary and subjective decisions will force regulators to peer into the hearts of bankers which will be

extremely difficult. we are in danger of forcing regulators to micromanaged banks in one of their core activities, the ownership and trading of securities. in addition the rule misses investments that is taken up with acceptable intent but which still represent an excessive risk. for example, we want banks to hold safe and highly liquid securities to meet sudden demand for cash without having to make a fire sale of their loans or other assets. therefore the proposed rules provide an exemption for liquidity activities. but a large portion of the investment losses at commercial banks in the crisis were on their holdings as securities purchased for liquidity purposes. they botch aaa mortgage-backed securities as prof. johnson noted which were liquid at the time of purchase. the intent would have been considered acceptable but banks still lost the lot of money.

these critical flaws mean that the volcker rule will do a poor job identifying or eliminating excessive investment risk, will be costly when it correctly identifies risk and will be even more costly when it discourages risktaking that is incorrectly treated as if it were excessive. for rule will raise the cost of credit to our suffering economy. securities markets will be harmed by substantial reduction in the liquidity provided by banks. this will widen spreads and the make new issuances of securities more expensive. meanwhile banks themselves will have reduced role in profitable lines of business that were in trouble to modern banking. forcing them to recoup through other ways of charging more to their customers. as a result of all this businesses will pay more for funds to invest in new plants for r&d or hire additional workers. the decrease efficiency of

markets will spur investors to demand higher risk premiums, reducing the price of existing stocks, bonds and other assets including housing. u.s. banks will lose market share to global competitors. this will further reduce their profits leading to the path of war costs and destroying some high paid u.s. jobs. ideally i would like to see congress repealed the volcker rule. failing that, congress should send a clear signal that regulators are to implement the rule in a modest and relatively simple fashion that focuses on only stopping those activities that very clearly violate the rule. thank you again for the opportunity to testify. i look forward to your questions. >> thank you. our next speaker is alexander marx of global bond trading. >> thank you. ranking members maloney and waters and members of the

subcommittee, thank you for the opportunity to testify. my name is alexander marx. i'm head of global bond trading for fidelity investments. i responsible for the bond trading that support the investment products for which fidelity serves as investment adviser including fidelity's mutual-fund. fidelity is one of the world's leading providers of financial services with assets, including managed assets of $1.6 trillion? fidelity provides investment management, retirement planning, portfolio guidance, benefits outsourcing and other financial products and services to twenty million individuals and institutions including as well as 5,000 financial intermediary firms. we manage 400 mutual-fund across a wide range of disciplines including equity, investment-grade bonds, high income bonds, asset allocation and money-market bonds. the assets belong not to fidelity but the shareholders and customers who have entrusted

us with their savings. in this role fidelity has a fiduciary duty to serve the best in custody clients who are small investors such as retirees, parents saving for college and other individual investors as well as pension plan participants and institutional investors such as government leaders million overseas, nonprofits and other business. the capacity that i appear before you today to make you aware the implementation of the volcker rule as proposed will have significant negative impact on fidelity's customers. fidelity is not here to represent the interests of wall street but capital market participant who is interested in insuring u.s. capital markets remain the most liquid and efficient in the world. we have two concerns with regulations propose to implement the volcker rule. rule as proposed will have significant burdens on banks when they engage in principal trading. the result is they will need more cash available to accommodate shareholder

exemptions cause a loss of investment opportunities and higher transaction costs which will lead to reduced return investors across the industry. second, the proposed rule could slow growth in the economy by raising a cost of capital issuance for u.s. companies and municipalities which would come to particularly unfortunate time as the economy continues to strive for recovery. as an investment it is not a bank that would be directly regulated by the proposed rules. we recognize the volcker rule regulates banks and seeks to reduce the likelihood of proprietary trading conducted by those banks to put the u.s. economy at risk. the banks provide liquidity in capital markets through their ability to trade securities with our funds at any point in time. this customer facing principal trading with the dealer and principal on one side of the trade and fidelity funds as the principal on the other is significantly different from the specter was a proprietary trading that the volcker rules sought to limit yet this

distinction is not addressed in the proposed rules. we are concerned that this exemption will be so burdensome for the dealers that they either have to charge market participants more for trades or in some cases dealers will choose to exit marketmaking in certain businesses altogether resulting in less liquidity, increased volatility and higher transaction costs for investors. additionally banks regulated by the volcker rule serve as a critical role in the under market. the bank's purchase securities from corporate and municipal issuers and sell these securities to investors such as fidelity's funds. the rules will affect the manner in which banks conduct ratings services potentially resulting in higher cost of capital issuance for bar words. higher borrowing costs could potentially cause downstream effects on the health of u.s. business and their ability to hire workers and invest in new markets. the resulting higher capital costs and less efficient markets

may compromise the competitiveness of u.s. business globally. last week due to their definition of municipal securities will be higher debt costs for many municipal issuers preparing their ability to fund critical project. the impact of the volcker rule proposal would have significant impact on equity markets as well as fixed-income markets. for example the proposal would jeopardize the ability of dealers to engage in program risk trading with large institutional investors like fidelity funds. my written statement includes additional details on the effect on equity markets. in conclusion we look forward to working with congress and regulators to ensure any final rulemaking is tailored and will not create negative consequences for investors, capital formation and economic growth. i would like to thank the subcommittee and staff for their work on issues important to investors in the financial markets and for holding this hearing and i would be happy to

answer any questions. >> our next witness is wallace tuberville. on behalf of the americans for financial reform. >> on behalf of americans for financial reform a coalition of 250 organizations have come together to advocate for the financial sector. ..

>> cheap and plentiful capital they would have. those issues are still central to what we're talking about today. finish now, there's been discussion of the volcker rule as based on intent or based on looking into the hearts of people or using psychiatrists and what not. the, in reality in looking at the rules, the volcker rule is all about prohibiting a line of business which has a purpose, so you have to twine what the purpose -- define what the purpose is of the business that is a direct threat in terms of a run on the financial system. in other words, proprietary trading, large positions that where margin calls are required. regardless of what the crisis is or what the causes are, the vehicle that's most threatening to the financial system has historically in this country been a run on it. and that's what it does. proprietary trading is not made illegal.

trading can and under the rule will be met by other institutions in the system. the act surgically excises only those trading practices which caused the greatest risks and tries to leave, as permissible, client-oriented trading. however, what's happened other the years is client-oriented trading, the fever of proprietary trading has sort of infiltrated client-oriented trading, so it's hard to tease out what's client-oriented and what's not. that's why the rules are so long and complex. 90% of the 300 payments is about discussion, and -- pages is about discussion, and most of it is about trying to tease out what is client oriented and what is not. having prevailed with the insertion of numerous exceptions and permissions in the volcker rule, it's ironic that banks now complain that the rules are complex. that was somewhat inevitable. the industry, um, sets forth a

number of objections, but the center piece of -- is that liquidity in the traded markets dry up imposing large costs of society. and studies are sort of put forth to support that. but the study, these studies don't withstand scrutiny. for example, an explicit assumption of the oliver weinman study by the commission is a reduced bank acttivity will not be replaced. that assumption is transparently false. proprietary trading that's profitable and useful and makes sense will migrate out of banks and into other organizations, and the capital behind that will follow it. it's really remarkable that all of the industry comments assume that this will not be replaced. they pound the drums about the business moving off to dusseldorf, but they ignore the possibility when they do their numbers and come up with their costs that the business might actually just move across the

street. um, the claim that the lost liquidity, about the cost of lost liquidity is a complex one. in fact, a lot of the trading that's going to be prohibited isn't actually about liquidity, it's about, it's trading of other p types. there's a new study done by nyu's stern school that found that the overall financing costs in the entire real economy have actually increased over time despite greater i.t. efficiencies. in his words, the finance industry that sustained the expansion of railroad, steel and chemical industries industries e electricity and automobile revolutions was more efficient than the current financing industry. this reduction of liquidity asserted by the commenters is based on all these misleading assumptions using market data from stressed situations and the rest. but worse, the commenters ignore

the costs and risks of rising from subsidized too big to fail trading. and finally, in all of the cost benefits the value to the public of avoiding bailouts is not even considered. thank you for the opportunity to speak, and i am happy to answer questions. >> thank you. our next witness is douglas peebles, chief investment officer and head of fixed income alliance bernstein on behalf of securities industry and financial markets association management corp.. >> good afternoon, chairman garrett and members of the committee. my name is douglas peebles, i am the chief investment officer and head of fixed income at alliance bernstein with approximately $400 billion ins assets under management. alliance bernstein is a major mutual fund and institutional money manager, and our clients include among others state and

local pension funds, universities, 401(k) plans and similar types of retirement funds and private funds. today i will focus on provisions of particular concern to alliance bernstein and the asset management group. we believe significant changes must be made to the implementing regulations particularly with respect to the market-making exemption. market making is a core function of banking entities and provides liquidity needed by all market participants including pension funds and individual investors. the simplest market-making activity involves exchange-traded equity securities where in most cases market makers are generally able to resell securities quickly. other markets, however, are more complex and less liquid n. the fixed income market, for example, a single issuer may have many debt instruments outstanding with different terms, and can as a result there is fragmentation and

intermittent liquidity for any single debt issue. because in fixed income market buyers and sellers are much less likely to wish to trade at the same moments in time, market makers bridge the gap and provide the immediate liquidity necessary for these markets to function. in carrying out this function, market makers are required to evaluate all the risks in purchasing the securities at a price that reflects those risks. the dodd-frank act expressly seeks to protect these functions by providing an sense for the purchase, sale, acquisition or disposition of securities and other instruments education in n with underwriting or market-making abtivities. unfortunately, there are several problems with the proposed regulations. one significant issue is they were drafted from the perspective of regulated market-making activities for equities security traded on organized markets such as

exchanges. where intermediaries generally act as agents, the proposal clearly fails to accounted for different types of market-making environments, particularly those related to fixed income other over the counter markets. we believe the failure to take into account different otc market activities reflects a major oversight in the proposal and could have devastating effects on fixed income markets that exhibit intermittent liquidity. the potential impact would have negative consequences for mutual fund investors. products that feature less liquid investments could experience difficulties with subscription and redemption activity. if banking entities reduce their role to agents and there's no other counterparty available, then mutual funds might face challenges in redeeming shares at the stated net asset value. the results could be few products in the market or a limited universe of securities for them to invest in which would harm capital availability.

such a change could have consequences to the average retail consumer. for those who are living on a fixed income such as seniors, if these assets will ill liquid or have significant decrease in value, it could have an impact on our aging population's ability to take care of themselves. it is also important to note the negative impact it will will han those individuals who are doing the right thing by saving for their future retirement. the proposal creates a presumption that any covered financial position held for a period of 60 days or less is a prohibited proprietary transaction. essentially, prohibiting market makers from holding inventory. the proposal allows for rebuttal of the 60-day presumption if wanging entity can demonstrate the position was not adwyered for -- acquired for any list of several purposes. we believe this combination of a negative presumption with a list of restrictive conditions will

encourage market makers to dispose of every position as quickly as possible to avoid the possibility that the transaction will be considered a prohibited proprietary trade. it is imperative that the implementing regulations take into account the fact that market making often involves a need to take short-term positions that will result in profit and loss. this activity is the natural economic result of a market maker's willingness to commit capital to facilitate orderly trading. this proposal fails to recognize that there are not perfect hedges for all securities. it is impossible to predict what the behavior of even the most highly-correlated hedge will be. in general, the realization of some profit and loss is unavoidable even when a market maker commits capital to facilitate coordinating of securities with properly structured hedges. the impact of the regulations will have broad implications. the ability to raise capital in the u.s. by selling their debt securities is dependent on the

availability of secondary market liquidity which is largely provided by banking entities through the market making activities. we are convinced that the proposal will significantly reduce the liquidity of secondary market for debt securitieses and is likely to have a profound and unintended adverse effect on our capital markets. >> thank you, mr. peebles. our next witness is mark standish, president and ceo rbc capital markets on behalf of the institute for international bankers. >> thank you, chairman cap i toe and garrett, ranking members and members of the subcommittees. my name is mark standish, and i am president and co-ceo of rbc capital markets. now, as someone who is british by birth and american by choice, it is an honor to testify before you on behalf of the institute of international bankers. the iab's members consist principally of foreign banks that have substantial banking, securities and other financial

operations in the united states. our members contribute significantly to the depth and liquidity of u.s. financial markets and to the overall u.s. economy. iib members' u.s. operations have approximately $5 trillion in assets, generate a quarter of the commercial and industrial bank loans made in this country, employ tens of thousands of americans and directly contribute to the u.s. economy more than $50 billion in annual expenditures. our u.s. operations are subject to u.s. regulation and supervision. our activities outside the u.s. are summit to the regulation by authorities in the countries in which we operate. and our home country regulators supervise our global activities. like u.s. banks, we have concerns regarding how the proposal impacts our u.s. operations. however, today my remarks will focus on the cross-border implications of the proposed regulations. the iib support it is goal of

financial reform. we acknowledge the agency's hard would be and the challenges in dropping implementation. however, we submit the proposal as currently formed is inconsistent with congress' intent and not advance reform goals. congress was clear that foreign banks trading in funds' activities conducted outside of the u.s. are not summit to the rule -- subject to the rule, recognizing that these activities are regulated under foreign law by home country supervisors. the proposed regulations, however, fail to adhere to this long-standing u.s. policy. for example, the proposal would restrict a foreign bank's trading desk in london done, terror know or -- toronto or tokyo including the new york stock exchange. or our employees in houston would not be able to market a non-u.s. fund to compliants -- clients in south america. a canadian bank could not sell interest in canadian mutual

funds to the 1.2 million canadian snow b.i.d.es that regularly visit the u.s. foreign banks would be restricted from troongs acting in liquid securities necessary to fulfill our roles in supporting our domestic trading markets. and finally, the proposal would frustrate our ability at the parent bank level to actively and dynamically manage our balance sheets in currencies outside of our home countries. in short, the extraterritorial reach of the proposed regulations restricts activities that would pose no threat to, but rather directly and indirectly support u.s. jobs and the u.s. economy. the proposal exempts trading in u.s. government securities but fails to allow principle trade anything non-u.s. government securities. regulators in canada and japan have written to the agencies explaining that such an uneven playing field could undermine the liquidity of government debt markets outside of the u.s. as well as impede the ability of foreign banks to manage theirly

quid thety and funding needs. iib strongly urges the agencies to adopt an exemption for trading foreign government securities. lastly, i would be remiss not to comment on the extremely complex compliance requirements. they impose extensive, quantitative reporting requirements on banks that engage in permitted activities such as market making and risk-mitigating hedging. apart from the questionable usefulness of the approach, such requirements should not apply to the non-operations of foreign banks without regard as to whether the u.s. taxpayer is put at risk. in conclusion, we are very concerned that the burdens of the proposed regulation will far outweigh the alleged benefits. it will encroach on the autonomy of foreign banks and regulators, harm the competitiveness of u.s. markets, the global markets that u.s. counterparts transact in the. we urge the agencies to take their time in developing regulations to implement the

rule to make sure they get it right, and we would submit the basel iii requirements very well may achieve the objectives sought to be addressed by the volcker rule. thank you, and i look forward to your questions. >> thank you, mr. standish. um, our first, chairwoman biggert? five minutes. >> thank you, mr. chairman, and my questions are for mr. evans to start out with, and i'm glad you're here. i did not have the opportunity to ask the regulators about the insurance issue, but i am going to submit several questions that i had for them also, so i think that your testimony's been very helpful. you stated in your testimony that the dodd-frank act provides an exemption from the volcker rule for insurance companies, but there seems to be part exemption and the question about

private equity. if you could give some examples of the private equity investments that are attractive to insurers that invest for long term, and could you explain how that will -- do those investments differ from private equity firms like bain? is there a clarification in the volcker rule that these would, are acceptable or exemptions are not? >> thank you, congressman finish woman, for the question. the dodd-frank act says that the regulators should appropriately accommodate the business of insurance, and the accommodations could take the form of giving an exemption for proprietary trading or giving an exemption for covered firms, private equity funds, hedge funds, etc. the interpretation of the rulemaking seems to be that it exempts only proprietary trading which makes no sense when you think about it because

proprietary trading is a short-term activity. insurance companies invest for the long term to provide, in our case, lifetime income for 3.7 million people in the academic, medical and cultural fields. and so for us it's extraordinarily important that we maintain an ability to make these type of adjustments. now, we do all kinds of investing that would be considered covered fund investing. but to give you some examples of long-term investing that helps us allow our 3.7 million participants to have large and stable lifetime income, we're invest inside a power plant -- invested in a power plant in the northeast, a toll road in the southeast, electrician -- electricity transmission business in the southwest and a clean coal gasification plant in the midwest. these are long-lived

investments, 20, 30, 40 years in duration. they're designed to provide steady streams of income that can support average working people's lifetime income after their working years. >> okay. then, um, obviously we've been working on making sure that insurance companies which are regulated by states and so this bothers me that they're really bringing this in, into the voc or rule -- volcker rule on this. how do state insurance investment laws add a layer of protection by insurance companies affiliated with banks? >> state regulators are have regulated insurance companies for many, many years, and they have a number of restrictions. it's no accident that insurance companies are structured in a conservative manner and made it through the recent downturn in

relatively good shape because we are under strict regulations. in our case, the state of new york is the primary state regulator. we have restrictions on the type and amount of covered fund-type investing that we do. there are very strict regulations on that. those regulates work well, and we're working with the new federal insurance overseer to make sure that there's consistency and not duplication of regulations as we transfer to federal regulation. >> do you think that congress intended to allow insurance companies to be able to engage in proprietary trading and also to invest in the private equity and hedge funds? >> it's our belief that congress intended when it said that the rule makers should appropriately accommodate the business of insurance that they were speaking of both proprietary

trading and covered funds, particularly since insurance companies don't engage in proprietary trading. so in our minds they must have meant covered fund, and we think it's very important that the rules as they become finalized specifically exempt covered funds activity for the reasons that i mentioned. >> okay, thank you very much. >> thank you. >> do you think that the volcker rule has the potential to raise the cost of capital for both large nonfinancial companies and small to mid-sized american businesses? >> thank you for the question, madam congressman. absolutely. because of the volcker rule's eliminating or restricting the activities of market participants, the costs will go up. there are fewer bidders to bid down the price. but i think, you know, an even greater concern is the crowding

out of small businesses. you know, as we continue to have concentration in the larger banks, and the volcker rule exacerbates that, the largest companies will still have access to the largest and highest credit rating companies will still have access to capital, albeit at a higher cost. there's a real question as to whether there is enough capital to avoid the crowding out of smaller businesses at any cost. >> you know, we've been working to try and increase the jobs and take down the barriers for small businesses to be able to do that. the only jobs that the dodd-frank bill seems to have increased is compliance jobs. treasure and so is this one of the costs that would be increased? >> well, exactly. costs will go up in terms of, first of all -- >> and i hope you'll forgive me, ms. biggert -- >> the operating services -- >> thank you. i yield back. >> thank you, chairwoman biggert

ranking member maloney has asked me to make sure we work on members on her side that did not get a chance to ask questions mr. . i think you're next. >> thank you, mr. chair, and also thank you, congresswoman maloney. i appreciate all the help you've given us to understand these issues, but i just want to ask kind of a basic question first. um, do you all agree with the basic premise that trading operations of banks shouldn't be subsidized with access to the federal window and other l federal subsidies? do you agree with that basic idea? how about you, mr. carfang? >> well, i generally agree with that statement -- >> thanks a lot. i've only got a limited time. does anybody basically agree with that, or is there anybody who disagrees? professor johnson? >> if i understood the question correctly, you're asking if we

disagree with the existing structure of subsidies. >> no. what i'm asking is do we basically agree with the goal and intent of the volcker rule, do we agree with the premise that trading operations of banks should not be subsidized? >> oh, absolutely -- >> i know you agree, but i'm kind of curious -- >> it's a more complex question than it might appear on the surface. >> i hear you, mr. elliot, and i want to ask you ant that. >> right. >> so let me -- if you agree on the basic idea that, that banks should not be subsidized to buy deposit insurance, basically the taxpayer if they want to engage in investment which can -- >> i don't believe they should be subsidized in any of their activities based on things like deposit insurance. however, if you subsidize them at all, the must be is fungible.

-- the money is fungible. you end up subsidizing any of the things that they choose to do. that's why i view it as a more -- >> now, okay, thank you for asking that because, you know, and again, before i got to congress, i was a public defender. this stuff is complicated. but i am aware that between the establishment of glass-steagall and graham-leech-bliley, for a long time, you know, banks couldn't -- you know, the core functions of banks and insurance companies, investment banks were separated, and they couldn't do this kind of stuff, and the system seemed to be pretty stable. and now that they can do it, things seem kind of unstable. and what everybody except for mr. johnson and mr. tushville seem to be saying is we absolutely have to allow banks, trading operations to use, to use, you know, subsidized deposit insurance and discount

window access and the accounts associated. we have to do that because if we don't, we won't have access to capital, overseas investors will outcompete us, we'll lose jobs. that seems to be the -- i mean, tell me why this system was stable for so long when we couldn't do this and how it's so essential that we have to do it now. well, mr.-- >> i actually remember the old system. >> okay. me too. >> yeah. so i think you hit on the real issue which is not that this business is going to, poof, go away, but we're talking about moving the business from being capitalized by subsidized capital. i think it's absolutely correct, and i think that what one of the things that was part of the genius of the new deal was they figured out, yeah, you put in the safety net for the banks, but you also separate out this trading availability so that one

doesn't overlap the other. i think mr. elliot is absolutely right even though deposit insurance, for instance, doesn't directly subsidize the capital, it indirectly does because you can't, you can't let those institutions -- >> it seems to me the absence of something like volcker rule we have a heads, i win, tails you lose system. in which if i'm a bank, i can go out and buy mortgage-backed securities -- aaa-rated -- and if they make a bunch of money, i keep that. i don't give that to those deposits who i use that money for. but if i lose a bunch of money, then i'm coming to the taxpayer to save me, and it just seems so unfair. and we go through this debate, a lot of you guys who are so smart, you know so much, and i'm so impressed, but it seems like what you're doing is saying, well, you know, there's ten exceptions, no, twenty, no, thirty, no, fifty, you know

what? it's too complicated, let's just keep it how it was since 1999. and that just doesn't seem right. it seems like if we can't fix and have everything perfect, that we can't do anything which, of course, is a good deal because if i, if i said, look, i am going to use somebody else's money, invest it, maybe put it in many mortgage-backed securities, if i make a bunch of money, i keep that, if i lose it, somebody else pays, of course, why would anybody want to stop that if they're on the plus side of it? and i guess what everybody said except for mr. onsoften and mr. tuberville is right, we like it, we don't want to stop it. >> if i could just briefly say as i mentioned in my testimony, i have been a strong supporter of dodd-frank which contains many things that are far from perfect but move us in a safer direction. i want to be clear about that. >> okay. >> the thing is, the premise of your question and the explicit comments of professor johnson

are that the volcker rule would actually increase safety in some appreciable way. that i do not actually bereave. for believe. for instance, holding the mortgage-backed securities, most of them would have been perfectly okay under the volcker rule. you can lose money on these investments without being in danger from the volcker rule. >> but, well, here let me -- >> congressman, you're exactly right. the volcker rule proposes to remove the subsidies from some very powerful people in our society. not surprisingly, they would like to keep those subsidies, and they are telling you that today. and with regard to access to capital ask the cost of capital, this is not just unfair, congressman, this is incredibly inefficient. what has destroyed access to capital, what has destroyed jobs in this country over the past four years? it was the behavior of the biggest firms in the financial sector, the way they used those subsidies in a reckless and excessive manner, and they will do it again. >> if i could go to -- i'm out of time? >> yeah.

but it was getting interesting. [laughter] >> all right. sorry about that. >> thank you, mr. ellison. all right, a statement for the record. americanbackers' association, blackrock, the business round table, cms energy, ici, ici global, silicon valley bank, stanford professor daryl duffy's comment letter without objection. placed into the record. um, i'm going to yield myself five minutes and see if i can actually do a little continuing on of parts of this discussion. um, professor, i've actually heard a couple of members of the panel, at least one but maybe two, talk, touch on basel iii and basel 2.5 that's already out there. basel iii is also creating enough capital safety net. can you comment to that? >> yes, congressman. basel iii is very unlikely to provide enough capital to the financial system. remember, this is the least

common denominator conversation across leading countries, industrialized countries. it includes the europeans, and as i'm sure your -- >> [inaudible] >> well, they brought it on -- >> i think germany may have, the first stage downgrade may have happened today. germany. >> what about germany today? i'm sorry, i didn't want hear the point. um, the europeans don't want capital in their banks. deutsche bank, for example, is a very lightly capitalized bank. they have consistently resisted from all accounts within the basel committee attempts to raise capital standards even to the levels proposed, even to the levels that mr. trillion low was -- trujillo was recommending. capital requirements should be increased way beyond what you would get in that framework. >> okay. to that point, mr. standish, you actually touched on basel iii. help me understand where the professor is right or half right or wrong.

>> thank you, congressman. we have actually adopted in canada large parts of basel iii, and by the first of january, 2013, he will also have adopted basel iii in our trading books. the effect of that has probably been to increase the amount of capital supporting our trading activities by two to three times. i think what's probably appropriate is just touching so the members can understand basel iii a little bit better on the key characteristics of basel iii. banks will need to hold substantially more capital than required today and, again, i just mentioned it's heavily in trading books. bank capital will be comprised predominantly of common equity, and that's versus tier ii, tier iii capital. banks will need to hold substantially unencumbered assets to reduce dependency on short-term financing, and that also includes increased term funding of their businesses. banks will be required to

establish loan loss reserves that consider full economic cycles, and here we're talking about countercyclical capital. when things are great, everyone thinks it's going the continue, so you don't think you need to hold much capital against those exposures. that will be reversed. banks will be subject to global leverage ratios, and that includes the impact of off balance sheet vehicles that were the cause of a lot of problems with the shadow banking system. so i feel basel iii does a tremendous job and, actually, a better job of volcker than addressing the shortfalls in the financial system. obviously, basel iii is then applied globally differently by jurisdiction depending on the risks in individual jurisdictions. >> okay. and, professor, and maybe you can go real quick because there's a couple other areas i want to touch on. shoot. >> just to counter on the point whether it's enough capital, deutsche bank which is as far as i'm abare almost basel iii compliance has total assets of

around 1.9 trillion euros compliant with basel iii of about 60 billion euros. it faces potential losses and exposure to other banks within the european context. this is a very thinly-capitalized, major bank around which the germans and the europeans are negotiating. they also own -- [inaudible] corporation in the united states that's more than 50 to 1 leveraged according to statistics, and that's okay, also, apparently, under the way we operate -- >> all right, only because i'm down to a minute left, but actually, i'd love to have a side conversation with you on this. i actually have some real interest in the ecb issues. mr. evans, your book of business is somewhat unique with what you to and the population you serve. how would we exempt you? how would, um, you know, the hedging practices, particularly the number of folks -- and be i must admit i think, actually, i even have some resources with you also. the annuities and the other

products, tell me what volcker rule does to you and mechanically how you see yourself either needing to be exempt or the costs we just pushed on to your members. >> thank you, congressman. i think it's actually a pretty straightforward. if rule makers adjust their interpretation of your intent to include, your intent to appropriately terminate the business of insurance to include an exemption for covered funds activity, i think that does the trick. because that will enable us to make these investments in, um, what are loosely defined as private equity securities, but we, we recognize very long-term investments in infrastructure and other assets. l so i think it's actually pretty straightforward in terms of what needs to be done to correct this. >> you win the award for the simplest answer of the day.

my time has expired. >> thanks, mr. chair. and to the panel, excellent testimony. i think all of you make legitimate points. i draw some different conclusions than some of you do. mr. carfang, you really had a cogent -- you laid it out nicely. to begin with, and then you sort of countered by the professor. and sitting here as kind of the political guy, the decision maker, we want to have robust, efficient markets, yet we don't want to stick the taxpayer with a ton of responsibility if those efficient markets somehow fail. and so the more efficient they are going up, the more efficient they are going down. and in america we've tried to sort of limit that a little bit, and that started with the new deal, with the glass-steagall separating investment banking from commercial banking. and, you know, over time that

eroded. unitary banking went, you know, the investment banking piece went. we still have the fdic which, i think, is the third piece of glass-steagall that's left. so when this all came to us, we started out, and mr. miller and i had a one-page amendment that was more or less not the volcker rule, but sort of the precursor to the volcker rule. it said, i first said if you're a systemically significant organization -- it could have been an insurance company, it could have been a bank, whatever -- and you're trading places the economy at risk, then you can be ordered to divest it. so there was a danger piece to it. mr. miller said, well, we ought to have that for banks generally, so we added banks, but there was a danger piece to it. we did some carveouts, you know, for the insurance industry for their hedging and their covering and all of that stuff. went to the senate, they said, no, we don't like it.

but we'll do a few exceptions. then went to the conference committee and said you can't do this accept, and they go through all of the market making insurance kinds of issues, foreign banks, holding companies, and now we've placed the regulators with the responsibility to take what i think, you know, 619 is a pretty prescriptive section. we ask them to make rules from this to try to deal with who can trade and who can't and when can they and when they condition. can't. so, you know, from my point of view i think we did a pretty good job. i appreciate some of the comments mr. peebles and you, mr. standish, and do we have two englishmen on the panel today? >> i'm also an american, congressman. >> i know, but -- >> yes, does originate elsewhere. >> okay, element. [laughter] i mean, americans, but english by birth? okay. well, it's nice to have you guys

on the panel. [laughter] >> we came over on separate boats. [laughter] >> okay. but, so let's go back, you know? we are where we are. we had a tremendous fall. and it may be a trillion dollars in costs in inefficiency to the capital market, but by my calculation just the drop in the stock market between the summer of '08 and the end of '08 was 6,000 points. that's $1.3 billion per point or $7.8 trillion. that's $26,000 for every man, woman and child in america. and so we've got to deal with that. i have to deal with that. what i don't think we can delay this any further. we're not going to go back to glass-steagall. that is the bright line test. so, mr. carfang, give me -- do you disagree with what i've said, or, i mean, don't we have to have some restriction --

>> i absolutely agree that unbridled risk taking, you know, should not be supported by taxpayers, by deposit insurance. the issue is the gray area and the lack of clarity around the regulations and the lack of a precise definition of proprietary trading. you know, much of what could be falling into this gray area is, has become standard risk-taking practices that every company uses, you know, even individuals use. and without that lack of clarity, the fear on the part of corporate treasurers is banks will err on the side of, you know, conservativism and withdrawal from businesses making medium-sized and small businesses totally without access to capital razeeing and race -- raising and risk management tools. we absolutely agree -- >> so my question to you is i'm not sure it's the rulemaking as it is from your position getting rid of section 619.

>> we already have a robust system of capital requirements that basel ii is making even stronger with the, with the additional capital requirements for systemically-important institutions. in addition to that, you know, regulators have substantial latitude in terms of the risk weighting of assets on bank balance sheets, and i think that is where you manage the problem, not simply coming up with hundreds of pages of prescriptions on how, you know, three million u.s. treasurers should do their job every day. that's not doable. >> thank you. >> thank you. i yield five minutes to myself. um, mr. elliot, you write in a book, you write that we will survive the implementation of the voc or rule, but that it is un-- volcker rule, but that it is an unnecessary, self-inflicted wound. is it possible for the regulators to adopt a volcker rule that does not have the negative consequences you

describe, or has congress given the regulators a mandate that simply cannot be fulfilled in many way that the benefits will outweigh the costs? in frankly, i think it's the latter. i think there is such a lack of clarity as to what proprietary trading is, an inherent lack of clarity. there isn't some platonic answer that if we just searched for it, we'd find it. it's inherently subjective and an arbitrary choice. it creates all these other issues. i would rather have seen, as i mentioned, an approach similar to the basel approach if. if you end up feeling that isn't nearly conservative enough, then quadruple the levels or something. but at least it would say we're going to measure risk and measure capital to take the risk, and we'll make sure there's enough. >> okay. it's interesting because the one thing i seem to have learned today from both panels is there is still a lot of uncertainty in the implementation. mr. marx, you testified that the

volcker rule will reducely bidty --ly liquidity, who are your customers, what does can reduced liquidity mean for them? will it mean that your customers may have to work longer to retire or won't be able to save as much as, you know, for their children's education, for example, just things like that? >> sure. as i mentioned in my statement, the customers that we have are retail investors, parents saving for college for their children, 401(k) pension plan participants, institutional investors as well. when i talk about the fact that it's going to cost more, um, i talk mostly in the markets arena where the transaction costs are going to be precipitously higher dependent upon the asset class that you're referring to. so the ability for investors to get in and out of funds, um, with regards to redemptions, um,

the ability for, um, for issuers, um, where they're trying to come into the market, it's going to give us a moment of pause as far as investments on behalf of our shareholders and, therefore, ask for more from issuance. all around it's going to cost more, it's going to cost the issuers whether they're corporations or municipalities in order to give us the protection we need for our investors, and that's just the buffer. that's not that they're getting something incremental in a new issue, it's just to give them the buffer to get out from a liquidity perspective. >> do you have some modifications that you think would work that would make the volcker rule, you know, would make it work as far as liquidity and bringing some of those issues to the table? >> i think at a high level the most important thing, um, there were two or three important things. one is really, truly identifying the difference between principle

risk taking and proprietary, speculative risk taking. i think if you can take the time to figure out how to separate the two, you're going to be in a lot better space, and it will allow dealers, um, to feel more comfortable that they're not going to get in trouble with the regulators. i think that's the biggest, that's the biggest thing. the second issue for me is when you think about this legislation and other legislation that's, um, trying to be enacted right now, it's too granular. you're trying to solve for all of the answers at once. and i think if you take it up, you know, we use the term take it up to 50,000 feet as opposed to trying to get it all done at 10,000 feet, and you give it time to sort of focus through, you're going to realize what the unintended consequences are as opposed to all of a sudden them being right there for you. >> again, i think your response relates back to a lot of things i've heard today about just trying to figure out the differences, and we need to take that time.

um, professor johnson, if market making becomes purview of nonbanks because it's difficult to distinguish from proprietary trading, won't the risk to the financial markets be even greater given that nonbank firms like measuring f global would not be summit to the same strict oversight that bank holding companies are? >> no, congressman, not at all. under dodd-frank, the regulators have the ability to designate any financial institution systemically important and, therefore, to regulate them. i'm well aware of the arguments by professor duffy in the paper he submitted and that you put onto the record, but it doesn't make any sense. if there is anybody who's a significant player becoming a significant market maker who you think is generating potential damage to the financial system, they can absolutely be covered under the systemically important provisions of the dodd-frank act. >> thank you. um, my time has expired. i now recognize representative carney for five minutes. >> thank you, mr. chair, and be

thank you to the panel for coming. i must apologize, i wasn't here for your opening statements, is so i'm going to ask probably some of you to repeat some of what you said. but in the first panel i know some of you were here. governor trujillo said kind of an outstanding comment, if there's a better idea out there, we're open to it. does anybody have a better idea? i've heard some specifics, but does anybody have a better idea of how to approach that? that's one question. and part of the that question is i've heard some of you say you don't think it's possible to make the distinction clearly enough. i think, mr. elliot, between market making and proprietary trading, and so i guess i'd be interested in what everybody thought about about that. so start off with those two quick questions, and i only have five minutes. >> well -- >> please. >> sir, it's our sense among the better ideas are many of the regulations that are already in place, as i mentioned earlier, on capital requirements and on risk weightings.

there are four major pieces of regulation that are impacting corporate treasurers, none of which have been tested. the capital requirements of basel ii, the volcker rule, money fund regulations and derivatives regulations. we think a better idea is to not do all four of them at the same time. >> okay. he mentioned basel ii. how about basel iii? you know, are you saying that the volcker rule and basel iii are unnecessary, they're this some ways basel iii accomplishes what the volcker rule's attempting to accomplish? >> yes, congressman, i do. i think the issue currently with basel iii is the current implementation plan is 2018 globally. i would contend that that should be accelerated and sped up. and it will, i believe, meet certainly all the checks and balances on the financial system. >> i don't know the details, but doesn't basel ii and iii essentially deal with capital requirements? >> it does, but it takes it to another level.

it focuses not just on increasing trading book capital. one of the negatives, i will admit, is that it penalizes or applies more capital to support, um, market-making trading activities in a lower rate of securities. so where i do have an issue with someone else stepping up and supporting markets is in smaller, lower-rated companies. i think that will end up being a bit of the black hole in the market that should concern the members. >> so unless there's somebody else who has a better idea, please, quickly. >> in my written testimony, congressman, i suggested that putting the firms in charge of compliance which -- >> i read that. >> that strikes me as not a good idea, and that's a relatively easy thing for mr. trujillo and his colleagues to address. >> right. so i'd like to go to this fixed income market question. so what, what dynamic do you, are you saying will create the effects that you just mentioned in response to to the priest --

previous question? what does the volcker rule do to the -- i've talked to some of the folks from there fidelity and vanguard, and i've heard some of those arguments, and i'd like you to state them for the record. >> if you take a look at the high-income market versus the investment-grade corporate market, it's probablily three times the size just from a new issue perspective on an annual basis over the last couple of years. so if you think that there's any sort of fear that liquidity will dry up, which it will based upon people's inability to take risk or for fear of dealers to take risk because they don't want to, you know, they don't want to be at odds with the regulators and the rules that are being implemented, you're going to see a market that is three times the size of the high-income market approach spreads that are and liquidity that are in the high income market. and that's a significant, that's a significant change as far as the liquidity that's going to be provided. >> so people have their hands up. would you like to add to that?

>> yes. >> others? >> i completely agree with what mr. marx just said. just to give you a very simple example, right? so fidelity or alliance bernstein manages a mutual fund. but let's say we own all corporate bonds in that mutual fund. today there's a trading notion that takes place in those bonds, and tonight we receive redemption orders from our clients. right? and those redemption orders we process at today's closing price. we wake up tomorrow, we see collectively that we have redemptions, we have to go into the marketplace to sell the securities to fund those redemptions. and the price that we expected to be there as of close last night is very far away. so, you know, the 65-year-old woman from iowa who wanted to raise a thousand dollars now has $750 in terms of her redemption. that's a big problem. >> so i've got ten seconds left, how do you fix it?

i had another part of it, but i only have ten seconds. is there a fix? >> to me, the fix truly is identifying the difference between principle risk taking and proprietary risk taking. we need prudent risk takers in the market and not speculative risk taking. >> i'd love to hear from you if my colleague from ohio would allow it. >> congressman, it strike me we should have more confidence in the market. the assumption here is that the liquidity will only be provided by the existing big banks that are highly subsidized, and if you withdraw those subsidies, somehow the liquidity provision will go away. why? if there is genuine opportunities there, if there's really profit to be made in these markets, making the markets, the business will shift. that's the problem with the oliver weinman study. they take you through this, they take very extreme assumptions, but the logic should be that the market will adapt, that that's the basic principle how these deep financial markets like this work. >> thank you.

>> okay. i want to recognize ranking member maloney for fife minutes. -- five minutes. >> well, first, mr. tuberville, you had your hand up that you wanted to comment. >> are yeah, sorry. and there's another way to look at this which is that when someone goes out and places a block and they're going to have a liquidation or they need to buy some securities, they go to a bank, and they put the block with the bank. and what's happening there is that the that institution is renting the bank's balance sheet, right? because they're saying we're going to move these securities at a price over to your balance sheet. so the question is this, and professor johnson is just right, do you want the balance sheet that is rented to be a subsidized balance sheet supported by too big to fail, or do you want it to be an unsubsidized balance sheet with an institution that is not subject to the safety net and subject to too big to fail guarantees? >> thank you.

mr. peebles, i know that many people have questions on it, and we can follow up with written questions on it. are you familiar with the global legal entity identifier? >> no, i'm not. >> is anybody on the panel? you are? do you think that this identifier will provide financial regulators and the public sector to have a better review of the benefits and can better control what's happening? do you think that this is important to, um, manage, finance and prevent failures and risks, the identifier? >> aside from the issues we're talking about today, perhaps actually being able to monitor the markets and understanding what's going on and having data is absolutely the most important thing. the first threshold issue is the legal entity identifier which is to sort out what the legal entities are that are involved in all these transactions. i believe the fact is that lehman brothers had 2,500 or

more separate entities inside it when it went under and caused a massive systemic problem. so the legal entity identifier is the linchpin, the first part of getting a handle on what's actually going on in the financing markets. >> who do you believe should bear the cost of implementing the legal identifier? >> i believe that the costs for implementing -- if i were in charge of everything, the industry would bear the cost. >> and going on to the implementation of the volcker rule, do you believe that we will see an increase in trading firms? people are saying people will be moving overseas. there's a likelihood they might move across the street in a trading firm. could you comment on whether or not you think this will have the impact of increasing trading firms or not? >> i think that's right. i think it will increase trading firms, and trading will change

in the different firms. even professor duffy and his paper talks about that. i mean, nobody, nobody really believes this business -- if it's a sound business, if it's profitable, if it makes sense, if trading business makes sense, the people will find a place to do it, and the capital will find its way to those institutions -- >> but won't that increase liquidity? >> um, it'll -- i think it'll net, not effect liquidity because i think what'll happen is it'll find it own as far as. i think what'll happen, though, is if you don't have capital devoted to trading that is too big to subsidize, some kind of trading that probably doesn't add anything, i'm sure it doesn't add anything to liquidity but probably a drag on the economy, some of the layers of intermediatuation and some of the trading that has nothing to do with liquidity and nothing to do with the things being talked abdomen -- about on this panel

will dry up. >> and will too big to fail banks' revenues increase or decrease, in your opinion? >> i think too big to fail banks' revenues will decrease except for the years in which they blow themselves to smithereens and create massive financial problems for the, for the economy. but i think, also, their capital will shrink, and their businesses will change. >> and in your opinion what will be the impact on the financial industry, and more importantly, how will market hedge funds, public and banks react to increased trading volumes? what will this increased trading volume have on the whole system? >> well, the overall volume may or may not go up. liquidity will survive, and the liquidity purpose will be fulfilled. it's entirely possible, and i meant to suggest that in my oral statement, was that, is that, um, some of -- it's entirely possible that the system itself

now, the financing system and the trading system is efficient from the banks' perspective but is not efficient from corporate america's perspective. so that the actual cost of financing and raising capital is higher now than it was 50 years ago. there's some research that suggests that. so it's entirely possible that in the post-volcker world if, indeed, moving proprietary trading out of banks causes some of this not productive trading except for the financial institutions to go away that it'll actually be beneficial. >> okay. i want to thank -- >> okay, that okay. >> did you want additional time? >> yeah. i just would like mr. johnson to comment, if he could briefly, on there were many causes out there for the financial crisis, but would you say that one of them was the inability of regulators and interested parties to see financial transactions and track what's happening and see what's

happening? one of our goals is that we created a office of financial research that would be capable of providing risk assessment and stress tests based on realtime data, and would that have an impact that could prevent loss and prevent crisises? some ceos that testified before us said that this central system could be effective in preventing crisis in the future. what is your opinion? >> congresswoman, i was the chief economist of the international monetary fund in 2007 through august 2008, i was involved in discussing the details of the financial crisis as it developed including the highest levels of government both in this country and around the world. and the lack of data was a very big problem. but my concern is that even now, even after the creation of the office of financial research with derivatives markets in particular remaining so completely opaque in many regards, and with cross-border