hard stop. thank you for your presentations. [applause] ief colloquy with ther from south carolina. the presiding officer: without objection. mr. mccain: we're also facing another crisis as far as the is ther crisis as far as the >> the secretary of defense

has stated sequestration would have a devastating impact as we plan tr nation's security. for example, our shift in emphasis from europe to asia-pacific, which requires significant air and naval assets, amongst other things. and i'd ask my colleague, i'm not sure that the american people are fully aware of the effects of something that is supposed to take, as i understand it, beginning of the next fiscal year, which would be the beginning of october of 2012. is that a correct statement, i'd

ask my colleague? mr. graham: yes, it is. mr. mccain: so we're asking the defense department to plan on what our force structure will be, what our mission will be, what our capabilities will be beginning the 1st of october, and all i can see so far is a total gridlock on this issue. now, if somebody wants to say that it's our fault because we refused to -- quote -- "raise revenues" -- or the other sides insistence on that and a resistance to spending cuts ... but i'd ask my colleague, i don't think that people understand that we still live in a very dangerous world. you just talked about those who have already sacrificed. don't we owe it to them and their families to stop something that all of us agree would have catastrophic impact on our ability to defend this nation? and isn't it true, would you

agree that it's time we sat down and started having serious negotiations, because there's no greater responsibility that the congress and the people's representatives have than to defend the security of this nation? so, i know that the senator from south carolina, before i ask him to answer, traveled around his state, which i intend to do, to the various military installations and talked about what would happen with this sequestration, and we are not talking about -- we're talking about a very limited period of time. we're about to go out of session. we'll be in doing the month of july -- we'll be in during the month -- most of the month of july, and probably most of the month of september. end of story. a senator: mr. president, may i just ask my colleague to yield. mr. kyl: if i could ask one other question to his very important question to my colleaguerom south carolina. i have a recollection that during one of the hearings you specifically asked the secretary of defense what the consequences

would be, and i recall he had a very dramatic response, and i wonder if he might share had a with us as well. mr. mccain: mr. president you i ask unanimous consent that the senator from -- senator kyl be included in the colloquy. the presiding officer: without objection. mr. graham: well, one, i would hope that my colleagues would stay around for a minute, too, because this is an important topic to be talking about. let me put this in perspective of what we're trying to do and what we're trying to avoid. we're about $16 trillion in debt. there's probably no stronger defense supporters in the congress than jon kyl and john mccain. and he just spoke of war. john mccain has seen his fair share of war. i think he understands as well as anybody in this body -- probably better than most -- what happens in war. people get hurt and people get killed, and anybody -- he's been in the military, no fan of war. but the goal is sometimes to make sure that those who are asked to fight a particular war

can fight it quickly, overwhelmingly win, and come home. and what we're doing here is trying to get out of debt. so the three of us are pretty big defense hawks, but we've all agreed that the pentagon has to reduce their spending, too. i think all of us, particularly senator mccain, believes there are a lot of ways at the pentagon the. and you could chief $450 billion of savings over the next decade by reforming the way the pentagon does business and, quite frankly, doing more with less. so count us all in, on the three of us, for reducing defense spending to help get us out of debt. but here's what's got us all upset. the supercommittee that was formed by the budget control act had a mission of cutting $1.2 trillion over a decade to help get us out of debt. that's a pretty small number, given what we're going to to spend over the next ten years. but the committee, republicans

and democrats, could not find common ground as to how to cut $1.2 trillion over the next decade, and there was a penalty provision in the law. and it said that in any event the supercommittee failed, we would cut $1.2 trillion over the next decade as follows: $600 billion out of the defense department, $600 billion out of the rest of the government. if that penalty kicks in, then we will have cut $1 trillion out of the defense department over the next decade, blindly, across the board. every account gets affected. what did secretary panetta say in he said, sign me up for $450 billion. i think we can get there. we will lose some capability, but we'll be okay as a nation. we could fight iran and win if we had to. then i asked him, what if we did $1 trillion over the next decade, if we overdoubled what

you are trying to cut? he said, we would be shooting ourselves in the head as a nation. we would not have the ability to go in and take out the nuclear program in iran because the weapons that we need we could not maintain and afford. and when it comes to personnel costs, we're reducing the army by 80,000 people. under the $450 billion plan. if you do sequestration senator mccain, on top of that you're take another 100,000 people out of the army. under sequestration, the navy would be down to 250 ships. we'd have the smallest navy, the smallest air force in the history of the country and the army would go back to 1940 he feels will. do you believe the world has gotten that much safer are that we don't need a navy bigger than 1950, given the threats we're facing from iran, china, north

korea? do you think now it's good time for the country to basically disarm, given the threats we face from radical terrorism throughout the whole globe? so here's what we're going to do. and our congressional leaders need to be on notice. about a million people would lose their jobs if we put these cuts in place and we would destroy the defense industrial base that provides good jobs to the economy and keeps us free and safe by giving our people technology better than the enemy has. three national guardsmen were killed in june in afghanistan. we've improved the national guard, but when we first started this war, national guard units were leaving to go to the fight with inferior equipment. they didn't have armor. so if we do sequestration on top of what we're already trying to cut in the defense department,

we will destroy the finest military in the history of the world at a time we need it the most. this is a body known for doing some pretty dumb things. this would be the -- the prize. so what senator mccain and kyl and myself are trying to do is avoid sequestration before the first of the year so our defense people can plan, and if we do not set this aside before the election, that's political malpractice. so senator mccain, senator kyl, thank you for your leadership. mr. mccain: i'd like to add, and i note the presence of the senator from new hampshire, who has always played a very key leadership role, including working with the mayors of every city in america who have issued a resolution about their concern about this issue. i would also like to state to my friends and colleagues that i know that the chairman of the

armed services committee, who i've had the opportunity of working with for 25 years, the senator from michigan, also shares our concern. i hope that weekd at least -- we could at least get some of us together that have been involved with these issues of national security for so many years on both sides of the aisle that we could reach some kind of an agreement. we know that additional sacrifices have to be made when we're facing a $16 trillion deficit. but to take the overwhelming majority, well over 50% of these reductions out of what is about i believe 12% of our spending, is obviously not a appropriate. and one other point. if the president of the united states shares the concern that the secretary of defense shares -- catastrophic,

impossible to plan on, so draconian that it would cripple our ability to defend this nation. all of those are statements that the secretary of defense has made. i would argue that it would be appropriate, and i would sincerely ask that perhaps the president of the united states also be involved and members of his administration or charter members of the administration to sit down with us to see how we could resolve this. so far, the executive branch has not been involved in these efforts with the exception of the secretary of defense, who has told us in the most graphic terms the devastating consequences. and again i want to point out to my colleagues, you have to plan. especially in national defense. what weapons you're going to procure, what the number of people you're going to maintain in the military, what those missions are going to be. all of those right now, if not

held in abeyance in the pentagon as far as planning is concerned, cannot have a great deal of validity if we are staring at sequestration and these draconian reductions. yes, i know the senator from new hampshire -- our most eloquent member has arrived on the floor. not to mention other attributes that we are lacking in. mr. graham: i would like all three of you to comment on this proposition. you've just challenged the president -- who is the chief, by the way, -- to fix a problem that your secretary of defense has said would be the most devastating thing possible to our ability to defend ourselves. he said it would be catastrophic, it would be draconian, there's no way to plan for it, we'd be shooting ourselves in the head. now, mr. president, you're the commander in chief. when your department secretary e and every general under your command is telling you and the

congress you need to fix this before it gets out of hand, why aren't you asking us as republicans and democrats to answer the call of the secretary of defense? you're the commander in chief, my friend. it is your job to make sure that our military has what it needs to go fight wars that we send them to fight and protect our nation. but that's not enough. it is also our job as members of congress to take care of those who serve. so to our republican and democratic leader, why don't you convene a group of senators and to our leaders in the house, why don't you get a group of house members and ask us to come up with a plan to do at least one thing -- avoid the consequence of sequestration for one year in 2013 to take the mok monkey off their back. i am willing to meet -- i am willing to meet our democrats in the middle to offset the

nondefense spending but to the leaders, if you think the rest of us are going to sit on the sidelines and let this matter be taken up in lame duck when it becomes a nightmare for the country, you can forget it. so we're challenging our leaders and the president to get a group together to fix this. senator mccain, do you think that's a good idea or not? mr. mccain: i know it's the only way we're going to sox sofl this. i ask unanimous consent the senator from new hampshire be included and i know the senator from tennessee, snore corker -- -- shall senator corker is waiting. the senator from south carolina has stated the problem and a solution here. the problem is we face devastating impact on our national security. the solution is for our leaders and the president, if possible, convene a group of senators, whether it includes us or not is immaterial on both sides of the aisle on both sides

of the capitol to sit down and work out so we can avoid this sequester. i will take responsibility for a sequester if that's what's necessary. but i will also say without concrete, significant, and meaningful action to cause this sequester to be prevented, we are risking the lives of our young men and women serving in the military. i don't know of a greater responsibility that we have. i ask the senator from new hampshire if she --. the presiding officer: the senator from new hampshire is recognized. ms. ayotte: i join with my colleagues over the concern, deep concern that keeps me up at night about sequestration because we cannot do this to our national security. and both sides of the aisle have to come together. we need leadership from our commander in chief on this issue. because to put it in perspective, i asked the assistant commandant of the

marine corps what the impact of sequestration would be on the marines and you know what he told me? that the marine corps of the united states of america would be unable to respond to one major contingency. talk about putting our country at risk. and putting ourselves in a situation where, unfortunately, there are still so many risks around the world that our country needs to be protected from. to think that our marine corps wouldn't be able to respond to one major contingency. it's outrageous and it really cries for bipartisan leadership on this issue, and particularly leadership from our commander in chief. and to put it in perspective, it's not just -- it's not just an issue of our national security. you would think that would be enough to bring people to the table, but we are talking about jobs across this country. the national association of manufacturers has estimated it would be nearly a million jobs. george mason university, the same, and to my colleagues,

looking around here just at pulling some states in terms of the estimates of job losses, 24,000 for alabama. when we look at a state like missouri, 31,000. when we look at a state, for example, like florida, there are thousands of jobs -- 39,000 for florida. this is an issue that will hit every state in this nation, but most importantly, what i'm concerned about, it is going to hit our military in a way that we break faith with our troops. in fact, one general has said we would have to cut an additional 100,000 troops from our army on top of the reductions we're making right now, approximately 72,000 and 50% would have to come from the guard and reserve. you think about the important function not only protecting our country, we could not have fought in afghanistan and iraq without our guard and reserve.

i'm the proud wife of someone who served in the iraq war, and i can tell you this, that it's not only the function that our guard and reserve play in terms of protecting us overseas, but they also perform a very important homeland function and every governor in this country will be deeply concerned if we're going to diminish our guard and reserve. so this is an issue that cries out for leadership from both sides of the aisle. i look forward to working with my colleagues on this now. it cannot wait till a lame duck session. we cannot put our national security in the balance, and nearly a million jobs at issue, till a lame duck session. this is something we should resolve right now and i appreciate my colleagues have come to the floor to talk about this issue today. we must get this done on behalf of the american people and our of the american people and our

this is 35 minutes. >> good afternoon. it has now ben one year cents a was sworn in as secretary of defense. it truly has been an honor to lead the men and women of this department. to do so during a historic time with the united states military and country.

my have been fortunate to have an outstanding partner and civilian leadership. i will recognize the past highlights. four the co an outstanding partr with the chairmen, vice chairman, achieves, secretar ies and combatant commanders and civilian leadership. i will recognize the past highlights. four the commanders in the field the iraq war ended with a safe return of the united states troops. we began a drive down nine remaking a transition to the afghan security lead which is ongoing. with the fall of gaddafi, we have maintained a relentless focus on decimating al qaeda leadership.

a new strategy to reshape the force to meet the challenges of the 21st century. invest and rebalance to the middle east and asia pacific. and implement the strategy mandated savings $487 billion over 10 years. refocus on saving taxpayer money and improve business practices at the pentagon eliminating $60 billion in overhead over five years and are accelerating to get statements of budgetary resources by two years. we affirm our commit to

those that serve to protect pay and benefits for active duty and reserve troops and also deployment activities for spouses. implemented repeal "don't ask, don't tell" and opened up 14,000 positions to women and have enhanced measures to protect sexual assault. this has been a historic year. the past two weeks focused on the overall health of our lunteer force. this inane wounded warriors in san antonio, sharpening our focus on stresses levying to suicide and ptsd

ptsd, those who work with military families and try to boost veterans hiring. there is a strong commitment with military leaders to ensure that service members have everything they need. after visiting them they still have needs and will continue to need in the years to come. to be frank, the biggest risk the health of our force , well being of service members and families, the threat of the sequester. cutting another $500 billion

across the board from the national security budget event in the way that apolo's out to national defense. i have seen extraordinary examples of courage and sacrifice from the men and women in the war zones, wounded warriors here at home. they are willing to put their lives on the line to protect our country. they deserve better than the threat to the sequestration. nation's problems are held hostage to not find consensus or compromise. in the face of gridlock gridlock, devices like sequester a used to force

action. but in its absence, sequester could threaten the programs critical to national security. defense and domestic. sobriquet it involves drastic cuts. as much as 12% across the board with vital programs. congress cannot kick the can down the road. or avoid dealing with its problems. the department and families need to know with certainty we will meet our commitments to them.

our partners in the defense industry need to know we have the resources to implement the strategy we put forward and will not face layoff notices. our success to protect america of any defense strategy, any effort to support men and women in uniform, families, depends on a political system with the compromises to protect national security. next week we celebrate the birth of our nation. it is time for our leaders

and americans to recognize the blessings of freedom are not free. they come from a legacy of sacrifice, courage, and leadership. in his now our responsibility to fulfill so our children can enjoy a better life in the futures. >> good afternoon. i share the secretary's perspective with the men and women in uniform. i just returned from a trip visiting strategic command where my wife and i participated in a town hall meeting or family meeting at strap. we also traveled to texas to

chat with kids and educators and discussed leadership yesterday from those at fort hood. i was struck by their pride and commitment. dedicated, smart, irrepressi ble, doing anything to take care of this country. also the budget concerns them our families are interested but it is unfortunate it weighs heavily on their mind. they have faith in us and expect us to figure out. so we have to come together to prevent the unbalanced cut that could deal with the real and serious threats we face.

the chiefs and i have no problem holding the budget accountable or making tough decisions moving ahead. that is why our strategy has carefully balanced choices to make sure we have the tools to keep the country and viewed from coercion. the balanced approach is what we see and a way forward is what we expect. that is the only way to honor our commitment to our family. america's sons and daughters are also watching. president obama has promoted the tenet grass to chief of the national guard bureau.

he is currently head deputy commander of the northern command. . .

for the spring of the year. and collaboratively with good october, november time frame. and that miller is not back yet, so i don't know what the final decision was, but it is our expectation is that it's money that will occur. >> and with regards to reconciliation, to contie discussions with regards to reconciliation, there are no specific commitments that have been made with regards to changes at that point. one thing i will assure you is that i have to certify or will abide by the law that prisoners do not return back into the battle. >> anything can tittered at this point? >> i think the discussions are going on generally, but i haven't seen any specific

proposal. >> thank you am a secretary. understand the turkish military has moved towards the border with syria in response to shooting down of the turkish aircraft. what is your -- >> obviously we continue to be concerned about development in syria and as you know, secretary clinton is engaged in discussions with allies to determine what the next step should be. turkey is close discussion with them. with regards to how we best approach the situation in syria. they had maintained troops as i understand it along the border

>> i will add to that of a conversation with general is, who is my counterpart, the chief of defense. he has taken a very measured approach to the incident. so he and i are staying in contact. secondly, to the issue to the risk of escalation, any time a nation that says in this case, to a hostile act, it will of course increase the risk of escalation. but as the secretary said, the internal movement of our ground forces, i would but you have to esoterics. if they are not seeking to be provocative. >> secretary come you focused over the past week about the budget and sequestration.

what do you take away from their comments what was your message to them? >> i think it is fair to say about the ceo of the company's that i talk to all share the same concern we do with regards to sequester. there are very concerned about the impact it will have on their companies and on their employees. as you know, they say certain legal requirements with regards to notifying their employees if in fact sequester should have been. but more importantly, i think they are worried about the cloud that sequester has over the defense department and over the future of our whole modernization program. and so, one thing i can assure you is that we are very much a team. we are both expressing the same concerns to capitol hill and

both the companies, as well as the defense department are making very clear to capitol hill that this is a matter that ought not to be postponed. it had to be stoutly soon so that sequester it will not happen in nv, we will have some degree of assurance that we can proceed with the budget as we have outlined as opposed to facing another possibility of another drastic cut. >> sera, are you concerned about recent reports that russian bombers come in the cold war era planes carrying nuclear weapons had entered the air defense near a laska? are you seeing any rise in not? i understand the last year it did so was while president, was meeting president putin in

mexico. are you concerned about this? could you describe whether you believe the relationship with russia has been reset? >> i think we continue to be able to work with the russians and a number of important areas. the p5 plus one is one area we continue to work with them. we work with other issues and maintain military to military relations with the russians. with regard to the planes that sometimes peruse up in the north, this is not an unusual situation. we have oftentimes seen planes come into that area. i don't think we regard it as anything that is provocative at this point. >> and i would add we have a very close relationship with canada in terms of our security

to the north. and so from time to time we assess whether we see this as in any way a change of some sort of message. to this point we haven't concluded it would be a message of any particular kind. >> thank you. >> this morning the department made notification of all three. given the accidents have a lot of concerns, just tell me why weren't you able to wait another three or four weeks or month or so for this to die down? >> we've had very good discussions with their japanese allies on this issue and we have assured them with regards to the safe seat of the ospreys. the important thing we thought was to deploy these things they are and we will continue to brief them with regard to the operation of these planes. we actually think we have

reached a good compromise here. they had expressed concerns to indicate. i think we have been able to relieve their concerns with what we presented to time. but we will continue to work with them. the good thing is that our ability to deploy these forces will certainly help us with regards to our whole rebalance into the issue of acidic region. >> a question of iraq. level of violence in iraq in june have written quite sharply. neither of you i don't believe has been that to iraq since the withdrawal last year. what is happening to any of that? has barony process into energy plan on visiting iraq anytime this year? >> direct tuning discussions with the iraqis. with regard to the threat coming from hq i. we've seen increased violence as you pointed out.

we share the concern of the iraqis with regards to the increased violence. and i think we're going to continue to work with them to do what we can to improve their ability to be able to deal with those kinds of threats. this is something we obviously working great cooperation on prior to her departure. we have continued to work with security forces, but we think it's really important now that we try to bring that cooperation in closer together to make sure these kinds of threats are dealt with directly. >> in terms of our engagement, the centcom commander and high-level consultant dave talks in the first part of the calendar year. i think this late february, march. then mr. delaney, the actor of defense is here to meet with the secretary last month. what we are doing is charging away on the potential for exercises. the things we talked about at

the closing ceremony if you will. and i'm going back to iraq. i'm scheduled to visit it back in august. i've chosen not just because it's the most miserable month of the year over there. so i will go on august into a trip. >> secretary come you mention as one of your accomplishments over the past year implementing enhanced measures in an effort to stop sexual souls. get this week you heard from the aforesaid 31 cases of alleged sexual assault against young recruits when they are probably at their most vulnerable, but after the service. first of all, what is your personal reaction to that? and second, is it time that there be changes made in the way the military pursues unprosecuted sexual assault, assuming congress have

suggested? >> well, i was very concerned by the reports that came out of this situation involving the air force in these obligations of sexual assault. you know, this is a situation in which these young recruits are very vulnerable at point. and i think it is absolutely essential that the leadership make sure that those who are responsible for these recruits don't take advantage of the situation before that reason i ask the matter be fully investigated. it is investigated now with the air force. following through on allegations involved. i take sexual assault allegation seriously. we have no place in the military for sexual assault. we have reached out to bring women into the military.

i am proud of what we have been able to do an proud of what women have been able to do in the military. but we have to maintain strict discipline here to ensure that sexual assault does not happen. for that recently put in place a number of steps to try to make sure that we do with these allegations, not at that level, but a higher level so that it doesn't involve influence within a unit. we've taken steps to develop special vic damian nance to try to directly deal with this. we've asked for legislation to try to also help us in this effort. the command structure from the chairman on down has made very clear to the leadership in this department that this is intolerable and it has to be done away with, that we have absolutely no tolerance for any

form of sexual assault. this matter i can assure you is going to be fully investigated. >> wrister secretary come about due to the parents of these young women, the families who have turned over their children to the military and expect them to be protected or at least respected? >> you know, what i tell the parents is that as a parent and as secretary of defense, i am very proud of those men and women who volunteer for service in the military. and i want to make sure that we take every step possible to ensure that good discipline and bonds are abided by and we do not have any criminal action. they have my assurance, assurance that the military

leadership that we will do everything possible to make sure they have the opportunity they deserve to serve without that kind of threat. >> i was struck when you read your list of accomplishments about what she said about afghanistan. i wanted to ask you. it seems like nobody really talks about winning in afghanistan. officials talk about responsible withdrawal come and meet in the national goals and was trying from afghanistan. for you, secretary of defense, is that enough? what are your thoughts about what it does to troop morale or how the troops view having to go into the war zone now, still facing the task and for them, it is not about winning. it is about achieving the goal of withdrawal. >> let me start because i've recently been to afghanistan.

i wouldn't characterize it that way. i think what you see is a recognition as we learned the lessons of the last 10 years on this kind of conflict is that winning is defined in their terms. in other words, the afghans have to win this fight. you have heard many of us a famously, you can't kill your way out of this kind of conflict. so this is about as empowering and enabling asking security partners, providing the space necessary for governments in economics to catch up. that is the definition of winning. it is that kind of conflict. >> the mission in afghanistan is to establish and afghanistan that can govern and secure itself. that is what this mission is about. and the success of our effort there will be determined by an afghanistan that can truly secure and govern itself. and that is the path we are

wrong. that is the transition we are making. bernardi got over 50% of the population transition to bask in control and security. we are in the process of going 75% of the population and the third tranche that has been announced by president karzai. general allen, i think make very clear we are on the right path towards achieving the goal that this mission is all about. most importantly, let me just say this. i had a chance -- i was at work hospital this week and i saw it what it wanted warriors. i asked him. i said, where were you when did what happened? how do you feel about the situation there? because they are the ones that

probably can speak with more authority about how things are going at it than almost anybody else. and everyone i talked to said we are doing better. they feel like security is much better, even though i got wounded, i think her unit was doing a good job and i see things getting better. and i said to them, i think your sacrifices worthwhile because everything i see when i go there, everything the chairman sees when he goes there, every time we sit down with general allen and get the report, i think it is clear that we are in the right direction here. this is task. we have seen a spike in violence. we've seen an enemy that continues to be resilient. this is still a heavy fight, but we are on the right track and

not i think is what keeps me confident that we'll be able to achieve the mission in afghanistan is all about. >> when you sit down and talk to the seriously wounded now, what are they asking you? what do they want to know from you? what are you learning from them? >> well, i mean, first and foremost, when you walk in these rooms and see these wounded warriors, you cannot help but be inspired by this spirit that they have to fight on. they have incredible wounds as a result of the ieds.

and yet, they have a smile on their face and they will fight on. i had a chance to not only go to burke, but go across the street to the intrepid center where they are providing rehab to our wounded warriors. and they are together, i'll go into rehab together, this tremendous spirit. tremendous things are done. miracles produced every day with regards to these kids. and so, what a gift from them is a tremendous amount of inspiration with regards to the incredible spirit they have two fight on. what they say is that, you know, the other thing is that most of them want to go back. most of them want to go back.

but they were there. they thought they were doing well, you know, the mission was being performed. they felt good about their unit, very good about the quality of colleagues that they are fighting when and they feel good about the mission they were involved with. so i am getting good report that they feel good about what they were being able to achieve. i think that the one thing that they want to see is that we don't walk away from this, but that we continue the effort to make sure the mission is accomplished. that is the message i gave. >> could i ask whenever we visit these wounded warriors, what you learned? user and the real meaning of curry each. and if i'm struck a anything, it is the degree to which they trust us, the senior leadership of the armed forces to take care

of them. and that is a great blessing that we have that trust within the ranks of the trust we have to live up to. >> question on two weeks ago you told trust in his $100 million or endotoxin which were broken up the u.s. genocide. is it hanging on to the u.s. apology? who also took congress other issues. >> bear continued to be discussions in this area. we continue to have a line of communications for pakistanis to try to see if we can take steps to reopen the clocks. the good news is that there continued to be those discussions. there still are some tough issues to try to resolve.

but you know, i think the important thing right now is that both sides in good faith keep working to see if we can resolve this. >> so in kabul, you also said you running out of patience in terms of not being able to take action on the haqqani network. is that part of the discussion as well? >> it is. general allen met with general kai ani and they had discussions on the issues we talked about and i think he made clear that we have to -- both the united states and pakistan have to work together to deal with the threat from the haqqanis. and i think he thought, you know, he got reset to the d. for general kai ani that he understood the concern.

after all, they too have been the victim of terrorism. they lost 17 pakistanis on a patrol to the ttp. so every day, day two i visit dozens of terrorism. so we have a common enemy. with make sense if we could work together to confront that common enemy. >> mr. secretary, mr. chairman. the joint staff recently put together a lengthy report on lessons from the last decade of war. i wonder if you've had a chance to review it and if so, what she thought of it and also if there's any recommendations in there, anything from the need to create an isr strategy to be organizing the interagency and the national security arena. i wonder if any steps will be taken to implement those recommendations. >> the secretary hasn't seen it yet. it is just beginning.

>> you know, what we have discovered -- i asked when i first came to do a survey, what is out there. but studies have been done and what analysis -- but finding the recommendations? there were approximately 47 significant studies done. when you add up the finding, approximately 400. i said that's overwhelming for me. bayonne new jersey also. i guess the g7 who now since the disestablishment is not a proponent for joint lessons learned to take this and within the staff, not contracted out, not outsource, but within the statute take a look given the new strategy that the secretary approved of the president, my strategic guidance to the force and map those recommendations to those documents to weave a coherent way ahead and can decide which recommendations are

most beneficial and should be pursued and we are working on it. this is a very positive step actually. >> waited to many studies. that is what we do. so now we'll try to make it down a little bit. >> okay. happy for us. -- happy

>> this is the conversation we need to have been a country that nobody is willing to house. what role should the government play? >> "new york times" columnist gretchen morgenstern details the 2008 financial meltdown and government subsidize homeownership. >> if you want to subsidize housing in this country and talk about it and the populist agrees that it's something we should subsidize, then put it on the balance sheet and make a clear and make it evident and make everybody aware of how much it's costing. but when you deliver it through the third-party enterprises, fannie mae and freddie mac can only deliver subsidy to a public company with private shareholders and executives who can extract and i've subsidy for

themselves, that is not a very good way of subsidizing homeownership. i think we've seen the end of that movie in 2008. >> at one time in 1967, this is called the bloodiest 47 acres in

america. >> at this hearing, experts told congress that afghanistan's security forces have made progress but are not ready to operate without nato assistance. if all with drug nato forces are scheduled for 2014. the house armed services subcommittee hearing as an hour. [inaudible conversations] >> i will call to order the house armed services subcommittee on oversight investigations.

other local folks this morning and today are set to many since the second of a series of hearings related to the afghan security forces. at this hearing received testimony from outside experts about the resources strategy, which the u.s. and nato are devoted to training the ins staff and a timetable for transitioning security lead responsibility to the nsf. our panel today includes max boot, national security studies at the council for foreign relations. mr. bill, welcome to retired general jack keane, vice chief of staff for the army and michael o'hanlon at the foreign policy program at the brookings institution. general keane, dr. o'hanlon, thank you for joining us today. we look forward to your testimony and my views on these issues have been informed by a recent trip to afghanistan and during my visit i had several

opportunities to talk with folks in provinces and notebook leaders including chiefs of police could also be opportunity stuck to military commanders on the ground who provided their impressions of the level of support needed to create a self-sustaining ansf. it is my hope witnesses today can provide further context to these important issues. before the final take a moment to highlight extraordinary efforts of our all volunteer force serving in afghanistan. these brave men and women are conduct in daily combat operations against the taliban and come al qaeda and associated terrorist networks and earlier this month i saw their sacrifice firsthand and want to convey my appreciation for service here today. i thank them and their families for service and sacrifice they provide to our nation. as an administrator that i recognize members of subcommittees have joined us. mr. thornberry, vice chairman of the house armed services

committee. thank you for joining us. pursuant to committee was i recognize members. actual members have had an opportunity to question witnesses. the battle turned to mr. kratz, acting like a member for any statement he may have. >> thank you, mr. chairman. i just want to say thanks, gentlemen for coming in as we move forward with the transition to afghanistan, which i did do is make sure we have enough information so they can make the best decision for a country, men and women in uniform and for afghanistan for the effort mayfair and i yield back. >> thank you, mr. critz. we begin with the witnesses, mr. boot. >> thank you, mr. chairman. for convening this hearing is in casting such an important spotlight on these vital issues, which i appear to short trips or political culture. since the focus of the hearings

of ansf, let me say briefly that i think nsf capabilities are exaggerating any considerable support from american forces in terms of intelligence coming medevac comment air fire support, class packages, all sorts of other things about which they would not be as effective as they are and they still have tremendous challenges in securing the country or deny people with the force that's only going to buy 350,000. in the course of this year. the council on foreign relations issued this week a policy innovation memo in which i suggested seven concrete steps we need to take to secure the gains made by troops to whom you rightly paid tribute that the gains secured by troops, allies have captured some of the course of the last couple of years during the afghan surge. i fear that if we don't do enough follow-up, the gains will

be lost and will be placing too much of a burden on the afghan security forces to try to expand a tenuous gains made. every lesser time is limited, so let me just run down briefly the seven steps i think are. the first and most important is not to reduce funding for the ansf. this causes me the greatest concern, the fact that currently the administration reduces funding from $6 billion a year down to 4.11 unicare after 2014, which will necessitate a reduction in the ranks by about 120,000 soldiers and police. it is far from clear where these 120,000 could possibly find gainful medical employment in afghanistan's economy. many would no doubt wind up working for drug lords or insurgents. this is perhaps the most calamitous advocate possibly take to destabilize the situation at guinness and. i really do not see the necessity of doing so would not we would be saving has approximately $2 billion a year, which i really said that the

world is a lot money. but around here is that a significant portion of the federal budget. in any case you don't have to contribute the entire manner so that should give more to get our allies to pay. it is incumbent on us not to reduce and shortchange the ansf which could have calamitous concept. the second most important recommendation is not to reduce precipitously. by the end of september we will have 60,000 troops and unless there's a substantial improvement on the ground between now and the end of 2014 i would recommend we keep those levels at about 68,000 because the pictures have been able to do is vastly improve the security situation in the south. we not seen any such improvement in the east or haqqani sanctuaries only a few hours drive from kabul is same heard during a visit. this is a very dangerous situation to the behind, which could potentially destabilize

and lead to the overthrow unless we do more to establishes security, which is difficult enough to do with even 68,000 troops that are impossible if we go below that number. we need to make sure this is my third recommendation, make sure we don't precipitously cut force levels after 2014. in some quarters there is another thinking going on that leaving only a handful of special operators out there by themselves can secure all interest in afghanistan, which is far from the case, even if we want to maintain the joint special operations command or close to their current level of operations requires a vast infrastructure of forward operating bases, medevac air support, all sorts of platforms to enable the men and women of special operations to be as effective as they are. if we get levels below 30,000 after 2014 can i fear will not have the infrastructure to enable us to carry out the

minimal advisory special operations, but most of us agree need to be performed. in terms of other recommendations have been through quickly. we took oath slow on peace talks and not force the taliban to lead to a backlash. we need to groom a successor to president karzai who is due to office in 2014. 22 and u.s. subsidies for the pakistani military in effect subsidizing the other side and finally we need to launch drowned and her special operations strikes on haqqani and afghan taliban leadership targets within pakistan. they cannot have impunity to operate within afghanistan as they currently have if we expect to be at all successful in the long run in afghanistan. that concludes my testimony, mr. chairman. >> we appreciate your testimony. thank you for your viewpoints. we look forward to your

testimony. >> thank you, mr. chairman. ranking member and other members of the committee for inviting me to testify. it's a pleasure to be back in front of the house armed services committee. i also want to talk about an important subject, the afghan national security forces. i'm delighted to be appear with michael o'hanlon of max boot. i'd don't discussed for years i truly admire and thank them for their contribution to the national security. as you know from submission to the record, i've done for assessments in afghanistan the last 18 months for commanders at last was for general mattis and general allen in january. i think it's a dramatic time the forces down a platoon and company level and the afghan national security forces who are their counterparts. i want to say up front that we've had much success in this situation since we apply to search forces and particularly in the south, which was a priority of forces that we have

just begun to turn the momentum in the east, the frustration is we don't have the force generation because of the pullout of forces in the south and southwest a thing to be able to achieve the same kind of and save. also, the other thing is i believe the ansf as a capable force and is beginning to stand up to the task of taking over from the united states and nato forces. however, you know 2014 is a major transition year for us politically, economic and also a security perspective. i'm a fan of political and economic side, there is considerable less effort and a transition that has been on a security side from my perspective, even though it's not the major part of my assessment in afghanistan and always security, which cannot be immune to what is going on around the security situation. there are four key decisions facing us in the next year,

maybe during a hospital they made to dramatically influence stability and security of afghanistan, some of which maxus mentioned. all four will impact genetically on ansf success. the posters u.s. forces is 68,000 expansion. i totally agree we cannot be prematurely breached by force. if we do drive the race card to match in terms of what we try to achieve in the east but the forces they have an side-by-side operation so critical to the afghans. when a train side-by-side with us, what they get out of that in terms of their own performance in their own growth and development as exponential as opposed to just providing advice. they see what right the click of a single day from sergeants, soldiers and officers. key decision number two is the funding for the ansf. the force level at 352 weary about that 19 through 2015 at a

cost of $26 billion largely provided by u.s. dollars. discussions take place as a note right now with options on the table to reduce that to a force of 230,000 beginning 2016. think about that. this makes no sense. how can we expect the ansf to protect the people with one third less force, only a gear after we almost zero out the u.s. nato force of 100,000. the issue is about $2 billion a year. we spent a decade investing in it to training and equipping. a 2014 will have the results of that investment and ansf capable of protecting its people. so why after all these years of investing but we got out for us at risk linux in terms of the timetable, the ansf funding should remain through 2020 as part of our strategic partnership agreement and of course afghans are able to pay a

greater share, that should be expected. we can reduce that force in size prior to 2020 based on the conditions. but it be the conditions for nonarbitrary financial number. 230,000 ansf for his beginning in 2016 would have a disastrous impact on the relative force and i believe in that the south almost certain that guarantees the return of taliban domination. a third key decision is the residual u.s. nato force post 2014. they should be sized for the missions vital to continued success. should not be an arbitrary number. those missions or counterterrorism, training assistance, security, forces to protect the force itself, which are largely defensive. then you need the enablers. enablers are needed for all three of the forces.

for training assistance only also need enablers for the international community residual forces and the ansf paired what are some of the things the ansf needs? first of all, primarily army. when you look at the army on the battlefield today, largely a maneuver force. so it means major functional support for some time beyond 2014. what am i talking about? intelligence cammarata leary, logistics to include medical evacuation. it is almost exclusively human intelligence. they are good at it, but they have no technology. no uavs, no sense others, listening devices to monitor cell phone communication radios. it is mostly russian name and italian may see 20 sevenths. everyone of the aircraft has and broke on the tarmac for months.

at some point we should transition them out of those aircraft to u.s. helicopters and c-130 is this part of a long-term partnership with the afghans, some of which in time they'll pay for themselves. the other thing is they have no mineclearing equipment, none of us should be part of an anti-ied package provided. if we shut down our intel systems and they're left out there by themselves, the casualty rate will spike rather genetically. the last decision as the taliban sanctuaries. to know we have one of your shot one also had quite a? the way you should think about this is because sanctuaries is loosely knitted the literary basis with the following functions, president and both, command-and-control is, intelligence, training, logistics for family housing in eric's. at these bases, later set the

strategy in afghanistan, birdfeeders to return from the site to afghanistan, planned for future operations, provide intelligence to commanders, trained fighters and bombers and provide resources and logistics. furthermore, the pakistan army, particularly the isi provides intelligence on u.s. nato operations in the sanctuaries to those commanders. they provide training and logistics and as a result the taliban have finished to protect the water for over eight years which has diverted to political and moral role of the american people and nato partners. something must be done about the sanctuaries if we intend to succeed beyond 2014. we should start telling the folders now have become a major collection item for intelligence services, which it is not done then we should start connecting drum attacks against leaders and

the family we have had success against al qaeda leaders and fata. look at what is happening to the al qaeda at the systematic attack on leadership. they became largely a defensive organization in pakistan, no longer able to control operations or project power outside of it. i would be an absolute game changer and afghanistan if we started systematically change behavior of the taliban leadership, both acquired a handheldhaqqani leadership. and they conclude by saying this for decision in front of us to determine whether we'll be successful in afghanistan are not are on the cusp of participation. never before in our nation has so usurped for so long on behalf of so many and more is fundamentally a test of wills.

that is why leadership is always at a premium. this effort has enjoyed your support and thanks for your continued leadership in support as we begin to write the final chapters. ryan crocker, who you all know the are distinguished capable ambassador in iraq and pakistan has said, quote, how relieved they were and what we leave behind is far more important how we began it. thank you and i look forward to your questions. >> thank you, general keane. dr. o'hanlon peered >> i think you and ask a the discussion dutifully. first of all, i would like to underscore my concern as well about the projected intention to downsize the afghan security force quickly after 2014 or 2015. i agree, by the way up at the urging of you should be careful about our own forces. but i'm especially concerned what we what we say now about

the downsizing of the afghan forces. i want to get a quick anecdote based on my trip to afghanistan about the concept of downsizing rapidly began at how it's been misconstrued in the ensuing discussion. as i understood from discussions in the u.s. part of the training command, the united stated initiate a discussion about what long-term afghan forces might have to be in terms of size and capability of cost. it did not work through nato or with the afghans to try to get the notional concepts on the table. one of which was the same as option to go to 230,000 african forces for a suspiciously precise formulation was one of four scenarios based on a certain assumed threat, a relatively favorite one because 220,500 is a lot less than we have now. right out of 130,000 nato troops in 300,000 afghan forces in the

field. what's another 40,000 training. now we have 400,000 forces intended to go down to 230,000. this was one of four scenarios, which the united states did not intend to be a prediction of where we should go, but the idea is to give concreteness to the planning exercise and get diplomats and the state department come away figures in a very good job with a difficult proposal something to plan for, going to allies and say can you at least consider this to be a minimal requirement and therefore pony up some fraction of the cost even for this minimum requirement. unfortunately what was designed as an illustrative scenario analyst with help from allies has been the default plan. i don't quite know when or how that happened is a bad idea and we should assume the afghan forces need to stay at 350,000 for some number of years after 2015 until proven otherwise. an access point plus or minus the issue here is not to parrot

we are spending on her own operations on the field. if we had at 2000 more american troops post 2014 to compensate for an insufficiently sized afghan force, that would consume all the savings rate their because of the enormous expense in the field. i wanted to add my voice can also explain the genesis of what i think has become misconstrued. it is supposed to be an option or scenario and now has become the default plan. for more points and i'll be done. this is in the spirit of reminding the broader debate and discussion about the good news from afghanistan. we are all aware that that is. i don't in any way trivialize. bad news is accurately reported as you know, but the good news is to be kept in mind and the general dr. boot has done a good job of reminding the country of this discussion of what we're able to make progress up against. them and former points.

one has to point general allen is great in is great in others is the afghan forces are now leading 40% of all operation and these are typically easier ones. so we have to be clear and transparent about that. thank you the april 15 coordinated attacks in kabul and elsewhere were handled primarily by the afghan security forces and i believe that was also the case that tragic attacks last week at the hotel resort near kabul in which afghan forces took a primary role. they are getting pretty good by all accounts and i think that's worth bearing in mind as well. the afghan local police had to make the news and they do something wrong or when somebody else come to some militia claims to be afghan local police and goes out and does something wrong. i think however this for some balance is doing extremely well. there have been some investigations and the various

alleged misdoings that some individuals units and for those who are familiar, perhaps c-span viewers and local police are essentially community watch organizations under government supervision but nonetheless different than the army or police to defend their communities and are not allowed to go beyond as you well know. there have been some cases of abuse. there were nine alleged piece of flashier. subsequent investigation suggested one or two were serious violations of proper procedure are allowed by afghan local police. overwhelmingly forces are operating well and are holding their own and take in the number of casualties and even a fromage hold their got 80% against insurgency when they don't have health quickly from afghan army or nato army forces. i think they deserve credit. the bad news here is the reason they're good is because her

careful in how we built a month. members of the committee are aware of the fact. this is not out of control reincarnation of the afghan militia. we have american and other nato forces operate with these folks for several months at a time before we certify them as ready to go on with their her admission that it is only 12,000 right now. we had to bear in mind this is not a silver bullet that the sons of iraq to some extent were in anbar province. not that big of a contribution to afghan security, but still useful one. third point, people talk about sometimes in the space of the afghan security forces are dominated by the tajiks or other minority groups in its true we have to hire the dependence on tajik officers in certain parts of the afghan security forces, but the overall at the composition almost exactly mirrors the demographics of afghanistan and of course that is because the people he general caldwell and associates in the

afghan forces great effort to ensure this. finally my last point, we reduce the this behavior, corruption, nepotism and to some extent ethnic partiality in the behavior of afghan leaders, and the afghan leadership in nato leadership get rid of these people and replace them. as you know from your recent trip some of the things i was told my trip in may, 50 afghan army leaders in the east of afghanistan have replaced in the last year. and this is often the americans having eyes on the operations reporting up the chain of command and general allen for someone else make us he general carini or president karzai and there is an exchange of views on the afghans ultimately control their own security forces and provide them with information and take it seriously and finally the minister of interior, some people think he's aggressive and some people

accuse the tajik nationalist of some type. but what appears to be the cases leaders of what other ethnic persuasion in his replaced 70 in herat, including a number of his own fellow tajiks. i see hopefulness in the security force. the title of my testimony with the classes about 50/50 5% full and that is the point of finish on. thank you. >> embers of the panel, thank you so much. we will begin with a line of questioning. i want to go back in theater with general allen and ambassador crocker in their assessment of where we are and where we see the need going forward. one of the concerns i have been looking at strategically the plan going forward as you know now we are in a situation of a force of 68,000 at the end of 2012 and making the decision through 2013 as to where we progress by 2014.

into a knot of a transition to fight tranches. now the concern to me as as you look at the staunchest, easier transition points to a place up front points take place in the end, which to me is counterintuitive to drawing down our forces, having less capability they are, sort of less capability facing a more difficult transition time and then not having a full complement of air in place of nfs. so my concern is does that logically make sense and on the transition is to take place? i got their perspective there. they propose making changes in moving more difficult areas of transition into tranche three, with they are beginning the effort now. that being said, the interesting point is a somewhat different approach as far as the total number of isaf forces after 2014

and a draw down with ansf forces not long after the 350,000. my conversations with defense minister barak is after going to 250,000 after the appointed time at the 2016th will lead a power vacuum and if they are concerned about transitioning to 120,000 people and do some productive elements of society do not have them become part of the insurgency. there's a temperate areas where the fake to me counterintuitive myths about the plan going forward. all of you all touched on certain parts of that. i want to get your thoughts about what impact that has on our success on the current track and what the contingency should be if these scenarios, as they are playing now, knowing what has been proposed, what should the contingency be if those elements of the plans don't work out as proposed? all start with mr. boot.

>> i would just reiterate what general keane said, which is that all of our decisions need to be conditioned space. not taste on a timeline to do that in washington for purely washington reasons for that to correspond to conditions on the ground and we need to be as general keane suggested, very careful about the drive down to managing in a responsible way so that we don't leave the power back and i'm afraid that could well be the result of the current trajectory we are wrong. i'm afraid we need to be careful, go slow and make sure we are not shrinking the ansf. we are shaken our force presence prematurely if conditions have not improved a good deal. there has been improvement in the last year but it's been mostly focused in the south through the easter means dangerous and still in need of considerable pacification.

so as my colleague said, i would urge to go slow conditions-based approach. >> it is pretty interesting what is happening. in the beginning -- i'll give you five years to solve this for an object of the resources to do it. i think anyone would've taken out. 2009 to 14 to five years. but is the problem? the problem is right from the beginning we start tying our hands. first tying of the hand was petraeus and the crystal recommend that dirty, which is 25% less. what do that to the rest? they want to conduct the south and east to collapse the enemy and put as much pressure on it without 10,000 could not do it. we had to do it sequentially. what did that do? tricep casualties, factories more political will at home.

second problem we have. another hand count is petraeus wants to keep the surge forces that the president gave in the 30,000 much longer at a much higher level. they are all gone before this year is out. so that is where we are at the point of your question now. given those dynamics have already happened much pressure and the commanders to stay on a schedule that transitions combat forces in 2013 totally, not 2014 and then be out of there by 2014. ..

>> the resource should be at with its enablers. >> dock? >> i'll put it in these terms because i agree with what my colleagues said. when president obama was inaugurated, he was against the iraq war, but gave it time to execute draw down in 18 months and kept 50,000 troops, which i think was a good decision on his part rather than the original intention to go small. he gave the field commanders time as well to figure out what the draw down path would be. as we recall, they kept the forces through the iraqi elections of early 2010 and do most of the draw down a year and a half into the obama presidency. something similar will be necessary and advisable with whoever's in the white house come january. whoever does a a policy review, i hope they have the same leeway because the answer to your question in my mind is as we do this transition to afghan lead, we need substantial capability we still retain to back them up

if they get in trouble, which they likely will. if we stay at 68,000 through the fall, i hope will be the case, then we do a review by the newly elected president, whether it's governor romney or president obama, and then early in 2013, the president largely defers to field commanders and keeps probably most of the 68,000 through much of the fighting season of 2014, 23 that's what field commanders recommend. that's my instinct where i think we need to go to address the problem you mentioned. >> very good. i want to welcome ranking member mr. cooper, and i'll turn to him in he has opening statements, and if not, i'll turn to him for questions. >> thank you, mr. chairman. i apologize for being late getting here. i'm prompt for being slow and defer to mr. crist who was here before i was. >> mr. chris? >> you made the issue that some

of the commanders were -- if you look at the entire force it's really demographically matches the country. is the leadership geographic, and in other words, is the leadership tribal almost in the way it's set up that maybe we're looking at something further down the road that they are which areas with other commanders? >> thank you, congressman. >> i'll briefly answer and invite colleagues who know better than i do to correct me if i'm wrong. generally speaking, i believe that while many of the leaders come from the northern and eastern parts of afghanistan, they are doe ployed throughout the country, and in current operations, and the main additional problem -- there are ethnic issues as you know and other charges and recruiting pashtun and other provinces in kandahar, and even incentivizing

them to stay in the home district or province for a certain period of time. there are charges. i don't want to trivialize that. we have to rely on other recruits from other provinces in further south than we'd like. they are deployed throughout the country and receiverring well throughout the country as best i know. >> and you're saying we have maybe we're lacking in pashtun commanders then? >> in certain parts of the forest. i think, for example, the afghan police, the amcop forceses or the elite military, i think those are 50% plus tashik led. that's not true of every kind of unit in the afghan security forces, but that's one example. that causes you some concerns. >> yeah. >> on the other hand, the units are individually integrated. >> yeah. >> there is a balance, relatively good balance throughout the force.

40% is pashtun leadership of a pashtun population of 45%. it's not bad if you look at the afghan security forces, but the hazara are under represented especially in a couple wings of the military. >> okay. you made a statement that part of the seven points was that one of them that was that we should discontinue upbeat to the pakistan military. what's your prediction as to what that would yield? >> well, i can't say for certain what would happen if we subsidize the pakistani military, but we gave them tens of thousands -- >> if you make that statement, you have to figure there's impact. what's it look like? >> what i was going to say it we tried heavily subsidizing them over the last decade to basically wean them away from

the taliban hakanis and bribe them in an effort that failed, and i think as a starting point, we have to recognize the effort failed that the pakistanis remain as deeply committed to the afghan taliban and the hackny network as they were a decade ago. it's counterproductive to give subsidies we gave to the pakistani military which in essence is indirectly sub subsidizing forces killing our personnel in afghanistan. don't cut off all aid, but fund civil society in pakistan and alternative to the military dominated foreign and national security policy they pursue, but we have to recognize pakistan is not our friend here, and that giving further subsidies to the military is counterproductive and wouldn't lead to the consequences people feature such as angie -- a jihadist takeover. they are good at internal

control, and we'll be able to remain in power. resources they use in large part for preparing for war against india and subsidizing jihad groups that attack ourselves and allies, those resources will be decreased. >> okay. thank you. i have no further questions. >> thank you. mr. brooks? >> thank you, mr. chairman. in reviewing your written statement that have been provided to our staff, one thing in particular, i don't believe it likely this congress or future congress sustains up to 20,000gis in afghanistan over 25 years and another $3-$5 billion for the aftergan government and people. he concludes with given american politics and budget constraint it would be likely we're not able to do some of the things as

suggested. on the other hand, i'm looking at other testimony of mr. boot and general kean. one wants us to provide $6 billion a year for the afghan national security forces. we've also got a request of perhaps up $25-$35 billion annually for united states support personnel and special operation forces and got the comment it costs approximately $6 billion to fund the nasf, and discussions are ongoing to reduce it to $4 billion resulting in a reduction from $352 to 30,000 beginning in 2014. it makes no sense. that's quoting from some of the excerpts of the testimony provided. let me try to see if i can interject financial reality of the position the united states of america is in and then i ask you to think about where the money's going to come from that you are asking for.

this year, we're going to blow through the $16 trillion debt morning. we had three consecutive deficits in excess of a trillion dollars a year. this is our fourth one of a trillion dollars a year. you see what's going on in italy, greece, and spain, on the verge of insolvency and bankruptcy, but for other communities in europe, they already have been insolvency and brurps. i don't know of anyone in a similar situation to help the united states avoid bankruptcy if we continue on this path. if we do continue on this path, there's one outcome, and one outcome only, and that is an american insolvency and bankruptcy which in turn means we have no money for national defense. think about that. no military personnel at all, even with the security forces quest ration which is a -- sequester, the tip of the iceberg situation laying off 700,000 american uniformed personnel and/or civilian workers and/or private contractor who are supporting our military with the g-whiz

bang rep ri so desired by other nations elsewhere, but they don't have and which gives our military capabilities far above and beyond what our enemies typically can field. given this situation, given the afghan economy. i've been to afghanistan as have you. personally, i don't think their economy in the next decade will be able to support their own defense needs which means it has to be america if we're going to continue to put money into this as you all acknowledged in your testimony. where do you think the money ought to come from to pay for the sums you suggest are desirable or needed to stablize the afghan situation as we continue to draw down the troops? do you want to cut other parts of national defense? if so, where? do you want the welfare pams, entitlement programs? if so, which ones? give me guidance on the priorities to get the financial house in order and do what you want us to do. mr. boot, general, and doctor.

>> well, congressman, i agree with you about the dire state of our finances. i don't agree that defense is the primary cricketing factor to it. clearly, it's entitlement spending. defense is only taking about 4% of the gross domestic product. that's not the part for afghanistan. no matter what happens, we redice spending in afghanistan by $100 billion today to some lesser level. even at the levels that general kean and i and michael recommend, we're talking about a two-thirds reduction in the amount of money we're spending in afghanistan down to, let's say, $30 billion, $35 billion a year, and, yes, that is a lot of money, but the question in my mind is what is the alternative, and if we are # in effect trying to stabilize the situation in afghanistan; and not just in afghanistan, but pakistan because our presence in afghanistan also allows us to impact pakistan, which if that is to fall, that's a total

nightmare, a nuclear armed state, and we are able to prevent afghanistan from falling back under the control of the taliban and al-qaeda allies in effect to prevent -- >> i'm going to interject for a moment. i agree with you that inarm defense shouldn't take the hit. it imposing sequestering, but you mentioned entitlements. is that where we should cut because it's a lesser priority? where would you cut? >> i think entitlements are driving the out of control deficits. if we address the deficits, go where the money is which is entitlements, not defense. >> the other two, the gavel has hammered so yal get off the hook. thank you. >> thank you, mr. brooks, i 1k that the acquaintance -- i'll ask the witnesses provide comments in writing back to the committee for mr. brook's question, and we'll go to mr. comer. >> thank you, mr. chairman. i want to be brief. two issues. one the vulnerability of the troops cut off supply through

pakistan, particularly if we make a dray gnattic curtailment in aid to pakistan, and second, the allegiance of nasf troops, what risk do we face that we may be having a force that turns against us? help me with both of those questions. that would be great. >> i'm glad to jump in. obviously, we've had our main supply route closed for a number of months now, and we're able to sustain the force that we have. means to do that is the other supply route in the north, and also the airline of communication that we've established. i think it's overstated. our dependency on that main supply route. it's certainly desirable because it's a lot easy to use, less costly, although the pakistanis want us to pay through the nose that challenges we had between them. i don't -- i think we could actually take the issue off the table in my judgment in terms of our relationship with pakistan on this issue because we do have

alternatives, and most dramatically, our force is coming down rather significantly, and therefore, there's less requirement. we have issues inside the nasf clearly in terms of what we were referred to as green on blue atrocities, and there's no doubt that the taliban looked at how do we get at u.s. forces? major means of doing that has hs been by and large on the roads or on footpaths using explosive devices and we're painfully aware of that. the other strategy is infiltration into the security forces in order to attack u.s. forces, and that has taken place. the good news is, and in talking last night to general and also to minister wardock, who you know, is they believe they stoppedded about 75% of what has happened by increasing their intelligence, by vetting people

better, ect.. nay are very much aware of the challenge that we have, and it -- i think the way our forces look at it as debilitating as it is, it is something, a tool, that the enemy is using as the enemy is using an ied against us, they use that kind of infiltration against our forces. it's frustrating for our forces to deal with that, but at the same time, our soldiers are pretty tough, and their resilience is extraordinary, and that does not diminish their performance nor the quality of their performance nor the extraordinary morale they've had for all of these years. >> do the witnesses general agree with the assessment there that we should take pakistan supply route off the table in negotiation with the pakistanis and there's no that significant worry about green on blue? >> well, i certainly agree that logistically speaking, we're in

a much better place vis-a-vis pakistan and hats off to those who developed the network. it's an amazing alternative. it's still increases slightly uncomfortably our dpens on putin, but some don't require his explicit permission, and in event, it's a much better place. i think the green on blue situation is still very troublesome. i don't think the general trivializes it either, and it runs of risk of eroding our ability to cooperate well it afghan forces. general allen was concerned about it when he testified in march. i think it's risen to a strategic concern. i agree that there are serious efforts undertaken to try to at least cap it. that's not good enough, but that may be the best we can do in the short term. that would be my reflection there. if i can briefly comment on to whom the afghan forces are loyal, because you asked a great question on that, congressman, as well. a lot turns on the 2014 elections in afghanistan, which

are crucial as we all recognize. i talked to a top afghan general while i was visiting last month, and we asked what his number one concern was about security in afghanistan, and he said the 2014 elections. we got the wrong person legislated, and all bets are off. i don't think president car -- karzi is a great leader, but they need non-pashtun presidents. the first vice president, but the basic concept of having maybe a tashik as the first vice president and maybe a zara is a solid concept and needs to be dupedded. i think a pashtun wins in 2014. in terms of security, you need at least one non-pashtun as well. these are elements that will be important. of course, the president can't be more corrupt than karzi's

family. i think we need to find a way quietly or explicitly to veto. that's the point i was trying to get to in my testimony. i can't imagine this congress funding $5 billion a year for afghan aide if the next president of afghanistan is more problematic in this doe man than the karzai regime. we need to send that news soon. >> thank you for the preparation of your testimony this morning. thank you for the advice you've given us over the weeks and years on strategic issues. you've been invaluable. we appreciate that very much. in the last sentence of your testimony, you say most afghans have no desire to be ruled by the taliban. they need our continuing aid to consolidate the post 2001 efforts to create a more inclusive and more moderate state. how committed to a more inclusive and moderate state do you think the karzai regime is

in >> they are deeply problematic, there's deep issues of corruption there. it is possible to work with them as we've seen in the recent agreements with the night raids and handover the detention facility, and at the end of the day, i mean, i think there's no question that the karzais are trying to get the most they can out of the state, and a lot are doing well with accounts and so forth, but we're encouraging that by not having control over our spending and setting deadlines for departure which says get as much as you can. >> is the other half of the argument says we stay indefinitely and keep writing checks. is it encouraging that? let me ask you this question. i agree that obviously the part

of the country is holy undesirable and what we're trying to prevent. i'm concerned and want to know if the witnesses are concerned that the regime might find it quite acceptable to have an unwritten agreement where they would stay in power, but there's, in fact, parts of the country ruled by the taliban and do whatever they want. aren't we at risk this regime would double bank us, reserve their own control of the country, their own wealth, and just look the other way as the taliban rules certain parts of the country and perhaps, once again, is the host for the al-qaeda parasite. what's wrong with that hypothesis? any witnesses. >> sure. well, first of all all, this ree is going, and thank god for that p. e ryan crocker, you know how capable he is as ambassador,

best in the business in this part of the world. he's confident there's going to be a political transition, and that was not always the view. there was some speculation, as you know, that karzai would hang on by constitutional reform. it's not happening. he is going. i don't think we'll get a transformational leader, but i do believe we'll get a leader who clearly understands the legacy of the past and the problems it's caused the country and try to make improvements much more along the lines of what took place in korea over a number of years so i'm not of the mind that the regime is going to get worse, although there's potential for that, and i clearly believe we should be all in helping to influence that situation as michael has suggested and do a much better job of it here than what we did -- >> i if could rephrase the question. what i'm asking is how confident are we that the afghan regimes'

interests are truly aligned with ours, and to the extent they are not, what can we do to influence a regime and then the specificity of this is that it's absolutely not in our best interest, the taliban to control a square inch of afghanistan. i agree with it. they see it as being somewhat inheirs. how do we make sure our interests are aligned. >> to finish up, i was going to answer that question. i don't know political leaders in afghanistan that a i've dealt with who would be willing to seed any of that country to the taliban. >> uh-huh. >> for all of the obvious reasons in terms of that rule violation of human and civil rights and what that would mean inside of their country. it would be absolutely no toleration for political leaders doing something like that in my view. you know, one of the most remarkable things that took place was the lawyer jarga too

-- took place last summer with the participation of the united states. it came from every province in the country. >> my time is about to expire. i appreciate it, but i'll close, mr. chairman, by saying this. i sometimes think that through our majority and yours and through the republican administration and the democratic administration, we've been asking the wrong question which is how confident are we at transitioning over to afghan security? i think the question is how willing are they to accept it? >> yeah. >> and, you know, our troops are doing a fantastic job there under very difficult circumstances. i think these gentlemen have given us very staged, tactical advice on how to achieve it, but tactical measures fail there there's not uniform agreement. i wonder if exists here. thank you. >> thank you, appreciate that. gentlemen, thank you for spending time with us today.

we're on the front end of a vote series, and i want to make sure there's an opportunity if there's questions that the panel has to ask, that they be able to submit those in writing, and ask that you be able to answer those for the committee, and with that, i, again, thank you for appearing before us today, and with that, this hearing is adjourned. [inaudible conversations]

>> the purchasing power of gold as a weight, for example, of any national currency, was constant for a period of four centuries. >> it seems to me the report of the gold standard in sum is of growth and in the macrosense, and of personal accountability in the banking. >> this weekend, louis and james grant look at the origins, departures, and arguments for returning to the gold standard >> at the conclusion at the

2-day european union summit in brusselsment the president of the european counsel and commission spoke about solutions to resolve the european debt crisis. leaders from the 27-member states agreed on bailout funds for spain and creating a single supervisory banking union for the eurozone countries by the end of the year. this is 25 minutes. >> good afternoon, ladies and gentlemen, welcome to the press conference after the european counsel. without any delay, i give the floor to the president of the european council. >> thank you. good morning, good afternoon. i lost all time sensitivity. the european council was about combining short term action to stimulate growth and to stabilize the markets. together, with a long term

vision on the way forward to strengthen our economic and monetary union. the key short term challenge across europe is to revive growth, building on yesterday's discussion. we decided today on a compact for growth and jobs. it will mobilize 120 billion euro for immediate investment which will boost the financing of the economy and help create jobs. in the current situation, establishing a longer term perspective for the euro area is a pressing priority. indeed, as has been pointed out, if you want investors who invest in bonds, understandably, they would like to know where the eurozone stands in ten years time. yesterday, we discussed the report on the future of the economic and mop tear union.

i presented earlier this week at the request of the heads of state of government and i made this report in close corporation with the president of the european commission, the euro group, and the european central bank. as you know, this report outlines an architecture based on integrated frameworks for the financial sector, the fiscal matters, and the economic policies. the steps forward in these three areas have been accompanied by democratic legitimacy and accountability. these are the four building blocks. let me start with the financial sector here beyond general agreement on the longer term view we already achieved a hugely important first result. last night, we agreed that under circumstances and under certain conditions, they could recapitalize banks districtly. the biggest and most important

condition is setting up a single supervisory mechanism for banks. the eurozone leaders asked the council to work in a very speedy way so we can have results by the end of the year. this is a major breakthrough. i said it this night. it is a first step or so to break the vicious circle between banks and sovereignty. it's already a first result of our common report. we said last week the building block of banking integration is the most important one in the sense that we can achieve results in a short time frame and in the banking frame work that surveils the european organized surveillance, and we are delivering already a few hours after that we presented our report.

on the second and third building blocks of the report, fiscal matters and economic policies, we all share the same analysis. economic and monetary union can only function if each and every country's budgetary and economic policies are sustainable. this is a founding contract between countries sharing a common currency. we also took another important decision yesterday night during our eurozone discussion. we agreed to open the possibilities for countries which are complying with common rules, recommendations, and timetables to make use of the existing esf, esm instruments to reensure and stabilize the markets. assistance to spain will be provided without seniority staters with the authority provided by the esf. the european counsel agreed on a method to take forward the work

on those four building blocks. president of the council have been invited to develop a road map again in close cooperation with the president of the commission, the euro group, and member states will be closely involved. there are also be consultations with european parliament, and we will present the final report before the end of the year with already a first report in october. happy to announce another breakthrough, a historic one after 30 years of the discussion on the european patent. we reached an agreement on the last outstanding issue, the seat of the unified patent court, the danish prime minister and i appeared to the sense of compromise. let me explain the major achievement to the prime minister of denmark, and we discussed this morning on affairs and foreign policy, the

european council condemns the brutal violation in sere yew calling for strong action on two pints. first to end the bloodshed, and second, support the political solution for the crisis. on the iran's nuclear program, we urged iran to engage constructively and welcome the entry into this sunday of the e.u. oil embargo. we have good news. the european council endorsed the decision to open negotiations this very afternoon. to conclude, even if fighting the crisis has been european council's top concern for over two years now, and would remain so in the niewch future, we must not lose sight of the path ahead and keep setting orientations for the future. this happens to be the first summit of my second mandate i

shared with colleagues the work plan up until the end of 20 # -- 20 # 14. this program foresees times to focus on specific things like industrialization, competitive, trade, and also defense. it was a difficult european council summit of the euro zone, but it was a fruitful one. we agreed on the fiscal compact treaty. we are achieving the first results of our emu report, and we have these historical breakthrough on the european patent. so the start of my second mandate was a difficult one, but if you can, happen in politics, and happy for the upcoming hours, not more than that, a happy night. thank you. >> prime minister, you have the floor. >> thank you very much, and just

a few -- i would like to highlight a few points of the agenda that the minister didn't go into so deeply. first of all, i'm extremely pleased to have decided on a compact for growth and jobs. it has been -- there's no doubt we are not leaving the crisis behind us with this compact, but nevertheless, this decision provides us with hope, directions, and tangible results in order to move europe forward in creating new growth and new jobs, and i think that the -- on top of that, we have the eurostatement that came this morning, and that concludes a meeting that was difficult, yes, but also quite decisive in terms of where we go next. secondly, of course, i'd like to point out that after 30 years of negotiations, we now have an agreement of the european pa

patent. european businesses will now experience, when we have it finalized, this instead of applying for a patron in 27, member states can apply only one place, and that is, of course, something good for growth and business in europe. the agreement is as follows: the main central division of the court will be in paris. it will also been the first extension that comes from the member state hosting this central division. there's also highly specialized nature of the patron litigation, and that means that we've decided to create two sections. one in london, and another one in munic chrks with the main station in paris. i want to use this opportunity to say nobody can do anything alone, and i want to appreciate the work that we've been doing with the commission, with the polish presidency, and, of

course, also the president because this is a very good example of how working together and cooperation, we can manage to have this kind of an agreement. this marks the end of the danish presidency. our presidency has first and foremost been about creating growth and jobs in europe. everyone knows that this is one of the biggest problems we have, particularly youth unemployment. we have pushed reforms of the single markets. we have pushed the conversations to have the potential of creating thousands of new jobs in europe, and we have established a basis on the future negotiations of the e.u. budget. as we were asked to do in december by the european council. we worked hard in a time of crisis to show that e.u. is still capable of producing tangible results and taking decisions in a time of crisis. i look very much forward to working with a new presidency,

and i want to use this opportunity to thank you very much for the corporation we have had over the last six months. it has been excellent, and i think we have truly lived up to how you organize decisions from the lisbon treaty, how you can work together. thank you very much. >> thank you. president barasso, you have the floor. >> let me begin with a word of thanks, and an excellent team, they took enormous amount of work into the presidency which has been shown by the results they have achieved. i want to thank them for the extremely good cooperation personally and those who have been on the team. i knew that many people were skeptical about the prospects for this summit. i hope they were pleasantly surprised when they heard the news this morning because this european council and the summit delivered what our citizens, our intergnarl partner, and

investors have been asking for. a robust set of answers to have confidence in europe's financial stability. let's see how. we have agreed short term measures to support countries and the market pressure. following the presentation of the emu report, we have now clear commitment of a single banking superrise ri mechanism -- supervisory mechanism for the area. we have a clear commitment when this supervisory mechanism for the area is established, it will be possible to direct banks right here and the condition. we have an agreement to waive senior -- seniority of recapitalization under esm. once again, we have taken decisions that were unthinkable, unthinkable just months ago.

commission looked intensively on the solutions, and we work intensively on implementing them over the coming weeks and months. we have endorsement by european council of the country's specific recommendation. we have agreement on a compact merger for growth and jobs turning work into complete action and financing commitments, and it's set out to leverage funds. i was making the case for many of these ideas when it was too ungnat m -- unfathomable to do so. launching the first phase of project bonds with directing some general funds. we know as full agreement on this. we have also recognition among government that we cannot separate growth or the debate on this budget. the progress achieved and the danish presidency was ore yen at

a timed -- orientation for further work with a lot of negotiations still ahead of us, but we are making progress. we have -- this is the part i like to highlight quickly -- we have agreed a convincing vision for a strengthened monetary union following the report presented to the european council on the emu. in fact, just after this report was presented, we have clear agreement to simplify what i can call a banking union, that the commission has been calling for. in fact, the banking union will be made in a way that republics the single market and recognizes there's member states that you do not want to participate in some areas that are predominantly linked to membership of the euro now in the future, and a heavy one here agreed that the stable euro is

in danger of our european unions. the commission put together, proposals to make this a reality. we need to go further building a fiscal union and also taking steps towards a political union. this is consequence of the needs for deeper integration to match our growing dependence and the need for financial stability. i like, particularly to highlight an agreement on the european council as a whole to supporting the statement of the area summit. if i may, i reach conclusion on emu because they are extremely important. following the report presented by the president of the european council in close corroborations by the preponderate's commission and group of ecb, a specific and time bound movement for the achievement of the union and monetary union is now in considerate which will include

now and leverage which will include concrete proposals on reserving unity and integrity of the single market in financial services and which will take into accountant your statement and intention of commission to bring forward proposals and article 137 of the treaty. they will examine what can be done in the treaties and what requires treaty change. they will ensure member states will be close associated to the reflection and considered and also be consultations with the european parliament. this is extremely important to understand what we are both agreed because, in fact, it was possible to agree on the single financial super-- supervisory mechanism, and you will be, of course, the proposal of the commission.

we are proposing the ecb to take it, and at the same time, there will be a consideration for all the european union that currently has seven member states, with all respect of the integrity of the single market and in the conclusions of the european council, i quote we welcome the statement of the euro area summit of the 29th of june 2012. very good program. not yet end of the road, but very, very important steps were taken today and yesterday. thank you for your attention. >> thank you. do you have questions? yes, sir? >> yes, from the german press agency. two questions for the two presidents please. overnight, it was said today there would be a decision announced on the eurozone presidency. do you have any news about this, and secondly, what happened over

the last few hours have been described by a lot of media by a lot of commentators as some kind of defeat for merkel. what do you say to the assessment? thank you. >> just on the nominations, the appointments, we were not complete as eurozone summit by the end of our meeting at noon. the german chancellor had to leave because she had a debate so we couldn't take a decision because we have to be with 17 to take decisions on appointments. it is highly likely that we can take decisions in the beginning of the months of july. >> for the defeat and who is the winner and who is the loser.

no, we are not entering into that game because that is -- this is always based on perceptions. we have broad understanding about on what was achieved. it was a tough negotiation. it took hours. certainly, yesterday, and you can summarize this -- can't summarize this in winners and losers. we have, and i say this not for the sake of the argument, okay? we have a common task, a common mission to stabilize the eurozone, and in order to stabilize the eurozone, we passed, in some way, have to support countries under market pleasure. those countries have also to deliver, also to deliver, and so when they, in some way, are receiving some report, it is

always under conditionality, even under strick conditionality. when we speak about recapital izing of the banks then we say we can only do this really, district recapital ization, a new supervisory agency when we have a centralized european surveillance of the banks, and this is absolutely key, huh? so there's nothing for free, and there's conditionality that is absolutely key in when we speak about support. it's always responsibility and solidarity. those are the two branches of our approach, and that's the last two and a half years, and it is a balanced agreement, not only on italy and spain, but on all the rest. it is balanced because it is toughly negotiated, not just with two or the three, but with 17 and with 27.

>> thank you. next question, please. >> john o'donald. in the case of banks which received direct assistance, perhaps from the esm, can you clarify whether it is the banking question or the state's where the banks are based, that are liable for the assistance. if it's the banks, they don't ensure bailouts and ensure money is returned to taxpayers. how do you envision this works? >> look, i'm not going now into details. i slept less than three hours, and so i cannot now go in detail. what i can tell you is the commission comes with a proposal very soon based on article 137, paragraph 6, for a single supervisory mechanism. of course, we know that this is not the supervisory mechanism that's going to do the bulk of the work, but that was considered the condition when we

moved the greatest financial supervision in the area. this is a condition with what's going on with the idea of recapitalization. it's important to know and have full confidence in the old system, and this plan, of course, is in full conditionality. it is also very clear in the provisions, and so if, as an ambitious timetable. member states agreed to consider this proposal as a matter of urgency by the end of this year so it's not going for the, let's say, long term, affect immediate work, but, yes, we need before to agree in the area, a single supervisory mechanism because it needs necessary confidence for further measures regarding

direct stabilization. i think it's extremely important and ambitious conclusion. again, afterwards, we can brief you with my people and people from the coup cul and give you -- council and guff you a full -- give you a full definition of what this is. of course, some of this matters you will have clearer idea when the commission, which i expect will happen very soon, will present its proposal causing article 137, paragraph 6. >> thank you, last question, please. >> yes, immediate help, so the direct recapitalization of the banks, from when on will we have it? 9th of july to the 1st of july or the beginning of six years? >> my knowledge now is written in madrid to determine the

situation, but will be as quick as possible, but we have to wait first for the division. >> it's the point i want to end because, again, this was not guaranteed and in the agreement yesterday with the eurosummit that financial assistance to the banking sector of states will be provided by the esf until dsm is available, and that in turn be transferred to the esm without gaining seniority status. i think market up vesters, this was extremely important. we have not yet esm in place, but we have the esf. it is true the esf that you have this proposal to the financial sector in spain. we are now urging rapid conclusion attached to this financial support to spain for positions with the banks, and as

soon as it comes, we can, in fact, stabilize support from spain without the bonds gaining the seniority status. i think this was in practical terms a very important decision for, of course, districting of banks, and as i said before, wait for the supervisory mechanism at the european level. >> thank you for final answer. thank you for your attention. [inaudible conversations] ddd

today, a house hearing looked at the legal issues of payments through electronic devices and smart phones. the house financial services subcommittee on financial institutions and consumer credit

heard from the head of the treasury didn't's financial crimes enforcement network. an attorney for the federal reserve. this is 50 minutes. >> i will start with my opening statement. first, i want to welcome the witnesses. this morning's hearing marks the final installment in the series of the hearings that the subcommittee had on the future of money. in march, we held a hearing that served for members on the current landscape of mobile payments. earlier this week, the ranking member and i had a bipartisan dinner that afforded numbers to the staff with the opportunity to learn about the technology developmentings in mobile payments, and i, for one, can say it's an exciting future, and i wish i had the brain depth to be able to invent some of these things myself. this morning, we will learn about the current regulatory structure for the payment system and now new developments in mobile payments fit into the regulatory structure. the past decade saw tremendous growth and innovation in technology that influences the

payment system in this nation and ablood. we can't imagine what the technology may be six years from now. for that reason, it's important for the committee to understand the rules of the road for mobile payments. today's regulatory structure provides seeing protection for consumers. easy dispute resolution, and protect against money laundering in the financing of terrorism, or did we need to make changes? if so, what changes should be made? for that reason, we have two important voices to talk about the regulatory structure. the federal reserve has been the expert on the payment system for a long time and involved in atlanta feds con bined to the best early examination of the promise of mobile pitfalls with mobile payments. while consumer protection duties were transferred two years ago. the reserve is an important player. the witnesses at our first -- as witnesses in our first mobile payment hearing warned, some of the forms of payments available,

including those tied to phone bills and billing may not fall under current payment law as we understand it. meanwhile, the treasuries financial crimes enforcement network were prescribing regulations that help the law enforcement agencies fight money laundering and the financing of terrorism, and is in the best position to tell us if newer parts of payments fall outside of current requirements of financial institutions to report suspicious activities. we have to make certain we get the latter part right. the senior economist at the bank warned we must follow the future of money and establish the sender and receiver of money as the transactions move towards anonymity we also have, and i want unanimous concept to insert a statement into the record. i want to thank both of witnesses for their work that they've done in preparing for today's hearing, and for their years of steady government service, and in particular, the

committee would like to thank director frees for the five yeah service, the longest tenure of anyone in what we know is a very difficult job. you are transitioning to another job and could have declined the invitation to testify. we especially want to thank you for coming today. i would now like to recognize -- there she is! [laughter] i thought i heard her coming in. >> [inaudible] i apologize. we had a democratic caucus meeting on health care. >> on mobile payments, i think. >> i thank the chairwoman, and this is the third look at the issue of mobile payments, and i have to commend the chairwoman and committee for holing the series of hearings on new

technology, and we co-hosted a dinner to look at it, and expose the new technology to members of congress, and we saw this earlier in the week, and i'm pleased we are trying 20 get out ahead of the issues rather than fining ourselves reacting, but being proactive. i really want to put my opening statement in the record. believe me, it's very interesting, but i would like to hear the testimony today and have the opportunity to ask questions, particularly in the area of identity and security and maintaining the security of our consumers with these new products. thank you, i yield back. >> i'd like to recognize you for two minutes. >> thank you, madam chair. the growth of the mobile payment industry represents a tremendous opportunity for everyone from consumers and merchants to financial institutions and other

providers. mobile payments have already proven to be the most significant development in consumer payment methods since the move away from checks to debit cards. this should bring a great number of benefits, particularly in the form of competition and lower costs for consumers. yet, it is essential that policymakers and regulators structure a regulatory frame work that helps protect the private information of mobile users, but also encourages investment and up no -- innovation with then industry. now, it is very relevant to mention that the last significant policy initiative in this area which was price fixing in the debit card market was the exact opposite of what congress and regulators should be doing, and i hope we've learned from the very significant mistake. ..

we basically became pleasantly cap days by the cell phone and waited to make sure that the american people are adequately protected from abusive comment invasions of identification theft. many people may not know, the 92% -- 92% of all the american

people now use mobile phones. the pay phone has gone by the way. and what that calms all other types of services that are good with it. many times people have their bank accounts, bank statements on their mobile phones. they have medical information, pharmaceutical information, prescription drug information all in there for. and so it has become an integral part of our physical beans. and so, we really have to make sure that adequate protections are they are and half of the stones are what we call a smartphones, which are capable of processing mobile payments, credit card payments. so when you look at the entire scope of this significant amount

of impact that mobile phones have on our entire existence, particularly verifiable and pertinent information of our health care, all of their important information, it is very important that we make sure proper regulations are in place to protect the american people and i look forward to hearing panel. thank you, mr. chairman. >> thank you, mr. scott. at that, opening statements are completed and i would like to turn to the panel. our first presenter is mr. james h. rees, director of financial crime enforcement network at the department of treasury. welcome. i welcome your statement. >> thank you and good morning. chairman woman capito -- for some reason that microphone -- thank you.

>> i am jim freis, direct growth than some staffers to establish a meaningful regulatory framework for mobile payment to another american payment that is. my testimony today will focus on some of the most important regulatory analytical work being done to prevent criminal abuse of the financial system as technological advances create innovative ways to move money. at the outset i would like to make a distinction between mobile banking and mobile payments. mobile banking involves communication and direction from an account holder about their account at a depository institution. mobile payments essentially involves the directions of funds outside of a bank account to affect payments or other transfers. me emphasize that those types of activities are subject to relevant information for anti-laundering and terrorist finance purposes. either as part of the requirement on eggs or as part

of the requirement on money transmitters. recognizing systems evolve rapidly, and some tech and approach revising its regulation what year ago to cover mobile payments and other innovations. the robust developed to be technologically neutral and hopefully cover new developments for years to come. specifically, the rule focuses more on the underlying activity as opposed to the particular electronic communication vehicle. if a mobile phone allows person-to-person payments or pavements across borders in or out of the country, the provider must identify the customer, keep records of transactions, how procedures in place to report to think that money laundry or activity. in further instance, regulations make it clear the acceptance of funds from one person in the transmission of those funds to

another person or location by any means constitutes money transmission and any person doing business wholly or in part that engages in the transmission regardless of telecommunication services would likely be a money services business subject to the regulations and must register and comply with all requirements applicable to money transmitter. shortly after publication my shared the prepaid commitment to engage in dialogue with the industries they regulate, held a series of town hall representatives. it has released a guidance with respect to the prepaid access to regulation family and to anticipate guidance will be forthcoming related to issues raised by the industry attendees during the town halls as well as ongoing requests for clarification and guidance on the new radio three framework.

i would like not to mention some of sub seven sub reference manuals to help her understand the workings of payment mechanisms and to provide steps to utilize the understanding and specific criminal investigations. one recent such manual focuses on mobile payments. the printed manual and subsequent line for us of reach, we've seen an interesting trend in the mobile payments industry, were different telecommunication systems and mechanisms emerge and become interwoven in the same a mobile payments transaction. for example, a customer may choose to initiate it would treat physical location with the transaction being processed through the msc system. the payment of the fund go to recipients mobile account. upon completion of the transaction, the recipient typically receives a text

message from a notification that indicates the funds have been credited to their mobile account. the transactional overlap results in multiple informational choke points that may assist to follow the money trail and identify other accounts and trained actions associated with a given subject. fortunately fincen regulation was specifically designed to be flexible and accommodate new type elegy as they emerged but also to capture innovative payment methods being used by u.s. institutions such as the scenario just described. an area of new payment method the administration has made appropriate oversight of prepaid access products of clarity and fincen is encouraged by the progress made thus far. moving forward we are dedicated to continuing to build on the accomplishments for us to encourage consumer activity to flourish also help service providers focus on serving

customers, not criminals. thank you for inviting me to testify before you today. i'd be happy to answer any questions you have. >> thank you, director freis. we'll have ms. stephanie martin can associate general counsel of the federal reserve board of governors, welcome. >> chairman capito, ranking member maloney and members of the subcommittee, cheney met for inviting me to appear before you today to talk about the regulation of mobile payments. the evolution of technology that enables consumers to conduct financial transactions using mobile devices has the potential to affect financial lives an important new ways, including by expanding access to mainstream financial services to segments of the population that are currently on banker and are banked. within a payments system including a mobile payment system regulators had two key concerns.

one, whether consumers are protected ascent goes wrong, such as an unauthorized transaction paradigm to, whether the system provides appropriate security and confidentiality for transmission and storage of payment instructions and personal financial information of consumers. in many mobile payments can at least some parts of the transaction are settled through existing payment systems such as card networks subject to the statutes ruled to procedures that are already in place. the evolving aspects of mobile payments typically are related to new consumer interfaces and new payment or settlement arrangements which can involve service providers that have not traditionally been in the payment business. for example, a telephone company. making payments through nontraditional arrangements may change legal protections related to the purchase depending on the details of the arrangement and applicable statutes and rules.

there is a legal framework to address the payment tbd as banks and federal bank regulators have the tools to ensure the banks offer mobile payment services in compliance with the consumer protection provisions of any applicable laws or rules such as the electronic fund transfer act. the application of most federal consumer law to mobile payment transaction is subject to the rulemaking and interpretive authority of the consumer financial protection bureau. as part of the supervisory process, the banking agencies review a bank security protection for new payment interfaces as well as for compliance with rules on information security identity theft prevention and anti-money laundering. many questions that have arisen with respect to mobile payments whether related to involvement

in on banks. on banks can have a variety of roles in the transaction such as an agent of a bank, manager of prepaid value program, money transmitter or company that those customers for payment transactions. the applicability of existing consumer protection laws or security requirements to non-banks generally depends on the nonbank row and mobile payment and specific provisions that particular statue. in conclusion, it's difficult to make broad generalizations about the applicability of the listing statutes and rules to mobile payments. this is due to the service providers, bank and nonbank, the wide variety of payment arrangements and potential applicability of thinking and nonbank immodest to any given arrangement. given recent technological developments in mobile payment for their analysis of the adequacy of existing laws may be

appropriate in order to ensure consumers are adequately protect it. at the same time, given the fast-paced nature changes in this area and potential for significant improvement in consumer financial services or mobile payment for their fact fighting what a bad analysis and be helpful to ensure any legislative or regulatory proposal would not stifle the very innovation that would benefit consumers overall. thank you again for inviting me to appear today. i'm happy to answer any of the committee's questions. >> i want to thank you both and i will begin with my five minutes of questioning. and like to make a comment on something ms. martin said at the end of your statement because at the dinner we had last night we had five presenters at the whole range of forward thinking mobile payments, some that are currently in the system, some that are innovating into the

system. one of the concerns that they have and i think we did through your comments is we don't get ahead of the curve regulatory with regulation and stifle the innovation in cutoff what could be in use of payment ringing and people who are not in the bank or under banked. so i think the point of this hearing as to really see where are we and where do they need to be, not so much where do we as lawmakers need to come in and cleaned down. i think that's an issue, but something to keep an eye on. i would like to ask general questions. are there in existence informal or formal agreement between banks on mobile payment issues? is this the structure banks have formerly recognized through

specific agreements along the lines of mobile payment and consumer protections that are contained with? or does that fall within the general? >> i would say for a particular new arrangement that are using new technologies coming usually choose the partnership -- i benicia partnership between a bank, nonbank service provider, sometimes the telephone company would be involved. any particular mobile payment arrangement they would have contacts and agreements as to how that will work. many of these arrangements ultimately get funding into your mobile wallet, for example using existing payment rails. so a consumer with a virtual wallet who wants to perhaps put in the bought a credit card or debit card would be finding most

credit or debit card transactions through the normal -- those rules are already in place. is that responsive? >> i don't know if you have a comment on not. it certainly looks internationally, too. other specialized agreements for mobile payments are aware of or do they fall within the normal bank to bank relationship agreements that are already existing? >> i would concur with ms. martin that if you are trying to transfer between different financial institutions , then it is largely today reliance on existing bank centric networks, such as those involving what we commonly know as mastercard or visa card for which you need a bank to be an issuer of that consultation showed. otherwise, you're talking about

proprietary systems. i'm going to a specific money transmitter and i must be a member of that network. >> let me ask you this, too. in your statement you were talking about nonbank participants in mobile payments. one of the innovators we saw was talking about being able to have a card that you could slap between pain but your visa database example or not reward points. i mean, that would be something that billy would be covered because that would be a vendor. i mean, you would be using your u.s. frequent flyer miles or something of that nature. is that something you have all taken into consideration? do you understand what i'm asking? >> i understand you have a mobile arrangement where you can choose different ways of paying for whatever you're purchasing. today you have a credit card with flight miles on it too

risky. that is usually redeemable at a specific merchant selected newsnight u.s. air flight miles at u.s. air. so that is typically within a very proprietary system. if system. if i were to use my debit card, i would have to get the money from my bank account so that would move over a payment card network rails. so i think it will depend on what card you pull out of your virtual wallet as to what rails that transaction will follow. >> i think the important thing i'm not is because tumor protection jurisdiction and are they covering all sorts of different transactions that may be coming over the same virtual wallet. >> one of the issues is to look at the consumer protection laws such as the efta if there's a credit card involved. of course this ef bb will have the book writing authority under those laws. but it's not clear that those laws do apply.

>> that's a point you're making. >> in some cases the laws were bit but the bank type relationship in mind. the concept may or may not apply depending what the nonbank school is. >> thank you. ms. maloney. >> first of all, she think both of the pin on us and i agree with the cherry lady and stifle innovation as we move forward to make sure money laundering is prevent them other things aren't place. as you look at this evolving new technology, i must say in terms of privacy and consumer protection, some of the technology release identified the person by their voice, a

photograph, a very detailed i.d. could be hard for someone to steal their identity, which is regrettably a growing crime in america among any constituent. and i would like to get a sense from you because this is not necessarily a bank. it only camille. who do you think would be the primary regulator? someone has to be in charge. which agency should take the prime role over mobile payments, which are not necessarily bank products. to what extent should the banking regulators involving courtney endo d.c. as taking the form of the primary regulator, the sec, ftc, federal reserve, treasury? your comments first, mr. freis and that ms. martin. how do you see this being

regulated? we have to someone to call if there is a problem. >> thank you for your question. from my tears as fincen with a great deal of experience in working in a range of different financial service providers and a different range of agencies to ensure appropriate regulation. so for the anti-money laundering purposes, the principle is anyway think you can move money, anyway you can intermediate value can be abused by a criminal act here. so that is the reason why fincen looks at the ethics and trillion example i've given, whether a money transmission is made through a bank, whether it's made three traditional money service business for attorney providers such as in the mobile payment space, we have a common interest in making sure we've done this much is possible to mitigate the risk of criminal abuse. in so doing, we rely on the

federal bank and agencies or state regulators in the money transmission space. and we found that is an important working model, just as in other areas such as insurance working with the state or in the securities industry. each of them will have the primary responsibility with respect to others' safety and soundness, consumer protection. our ability to work with them is on our single mission of the anti-money laundering requirement central to avoiding the regulatory gaps and balances they must take a criminal's would abuse. so the model we have for my purpose is working. >> and ms. martin quiets >> i agree basically with what jim said. i think it's an interesting strategic question to think about what agency should take ownership of this area.

it is such a broad area and it covers so many different types of entities. it's really hard to point to one agency with the right experience and expertise that can cover the gamut. i think at least as a first step is certainly seems to me there should be coordination and consultation among all of the agencies are named as well as fincen and state regulators as an initial step to figure out who's got what. his covering my bases, where cabs there are that need to be addressed. i think you can achieve consistent results and not wait to to interagency discussion and coordination. >> that is true. but finally someone has to be in charge otherwise everyone's pointing fingers at each other. they're building on your question on this theme in your hat, they are testifying to us are telling us that this dinner we had explained the new technology is that there out

there now. tens of thousands of people are already using these products. and so i wanted to know what protections are actions have states put in place to protect consumers from unauthorized transactions and disputed charges to pre-paid phone deposit for wireless phone bills? and wondering what action states have taken, if any in this area? >> states to have money transmitter love, where if an entity meets the definition of the money transmitter, many states have registration requirement and bonding investment limitations. so to that extent i know states do have some life. when you talk about bringing phone can't into the equation, perhaps that is something we've might want the fcc to weigh in on. i am not sure what kinds of protections exist and telecommunications law for

consumers who are billed for particular line item senate bill, which might represent a payment. i think is worth further investigation. if you make my time is that. mr. canseco. >> thank you, then chairman. ms. martin. we often talk about the bank. it is noted that 10% is payment users don't have a bank account and roughly 30 million americans are either on banked or under banked. so how do you feel the growth of mobile payments will affect this group and what they'd be more or less likely to enter the banking system? >> it is hard to predict the second question that you asked. i think mobile payments present a good opportunity for the bank and on banked to obtain payment services perhaps better more

efficient and perhaps even cheaper than alternatives today which may be going to check cash or money transmitter and a pretty hefty fees. it is also convenient as somebody stated, over 90% of people do have a mobile phone. it is a very ready device for them to enter into the financial system. to the extent that banks can offer products that are available through that mechanism, that might be a way to get people into a bank or lake shannon ran mobile phone as a replacement for a check casher or buying a money order. >> one concern, and the smart to have as we adopt a regulatory framework that makes it more costly and more prohibitive for market participants to annotate within the space. what specific steps should regulators be taking to encourage innovation and

investment in the mobile payment space while also ensuring that data security and enforcement of anti-money laundering laws are working? >> the locks on the fine line between regulation and stifling innovation is always a tricky line. it is important for regulators to decide priorities and key concerns that you would like to see in this mobile payment relations regard to how they're structured. i mention a couple in my testimony. one basic consumer protection security you might add money laundering to that list. so we can look across all of these arrangements and ensure the key concerns are met, then maybe you don't want to drill down into more detailed requirements until you see where will come out and allow role

until best industry practices are established on that might be a time where you see a particular pattern emerging that you think you should address it more regulation might be the time to do that. >> the next question goes with ms. martin. do you believe that international standard should apply to mobile payments? and if so, what type of coordination is going on between regulators in the united states another kind trees? >> i'm happy to address that first. with respect to anti-money laundering counterterrorists at first, we have developed international principles in terms of expectations estimate the risks that are enough for us to mitigate them. we do that at a broad level in terms of different products including money transmission, not things that are specific to

the device of mobile payments as opposed to other mechanisms for entering the system. i believe that is the right approach, especially based on the concerns you just expressed about rapidly evolving technology. better is to define risk in expectation about how to mitigate them and not to prescribe one specific area by the time we had agreed, it would are to be obsolete in terms of tech logical advances. that is being done on an international basis and the financial action task force, the u.s. has been active in guiding those developments and pushing other countries to work on that area. i can tell you in my own work and the development of prepaid access regulations from a specifically mobile phones as described in my testimony at the react to the engaged of my counterparts, both regulatory side and one for the support side throughout the