principal advantage is you get to schedule legislation. and of course there are a number of things that can be done with a simple majority of 51. and i would ask my friend the majority leader why it's his view that republicans have somehow prevented the senate from passing a budget which could have been done with a mere 51 votes any time during the last three years. mr. reid: madam president, that's an easy question to answer. we already have a budget. we passed in august of last year a budget that took effect for the last fiscal year and this fiscal year. it set numbers through -- 302-b numbers in effect. we already had a budget. so the hue and cry of my republican fleendz we need a budget is just a lot of talk. we already have a budget. mcconnell: i say --. mr. mcconnell: , i know the parliamentarian disagrees with

his few but let's assume we do have a budget and by judge ask the majority leader why we haven't passed a single appropriation bill. mr. reid: that also is an easy question to answer. the republicans in the house, this is a bicameral legislature, why have reneged on the law passed last august that set numbers. their appropriation bills have artificially lowered the numbers and in effect violated the law that's in effect here in this congress. as a result of that, senator inouye has marked up his subcommittee bills and we can't -- and i would also say, madam president, the house was not serious about what they do. energy and water which used to be one of the most important subcommittees, most popular, i should say in addition to being important, subcommittees in this body, i was fortunate to serve on that subcommittee for more than a quarter of a century

under a great -- under great leaders, domenici, bennett johnson, domenici and i switched back and forth. but the house sent us over here an appropriation bill that has more than 30 riders directed toward e.p.a. type functions alone. i mean they're not serious about doing sage. they're serious about satisfying their tea party and the ridiculous messages they're trying to send. so -- and i would also say one of the problems problems we have we have to fight to get to anything, any legislation. we have to fight to get that done. as you know, we've wasted -- i said weeks earlier. months. trying to get legislation on the floor. so appropriation bills, i wanted to get these done, i'm an appropriator but it's been with the actions of the house

unrealistic. mr. mcconnell: what we just heard, madam president, it's not the senate's house, it's the house's fault that the senate won't schedule appropriation bills that have been marked up in the senate appropriation committee. my concern here is that nobody's taking responsibility for the senate itself. we're not responsible for what the house is doing. typically these differences in what we call 302-b's, that is what each subcommittee is going to spend, are worked out in conference. we can't have a conference on any of the bills because we haven't passed any of the bills across the senate floor. so the majority leader doesn't want to do the budget. he doesn't want to schedule votes on appropriations bills. then i would ask my friend why don't we do the d.o.d. authorization bill? mr. reid: the answer is pretty simple there too. we have spent the last many weeks working through procedural matters on bills that the

republicans have held up. i've spoken to senator levin last night about that. he's the chairman of that committee. i've spoken to john mccain several times on this matter. i know how important they feel this legislation is. and i think it's important also. and we can only do what we have to do. one of the things i think i have an obligation for our country to get to is cybersecurity. i was asked to visit with general petraeus. i did that a day or two ago. and i think that you don't have to have a briefing by general petraeus to understand how important it is to do something about cybersecurity. there are people out there making threats on this country every day, and we've been fortunate being able to stop a number of them. so we're going to have to get to

cybersecurity before we get to the defense authorization bill because the on the relative merits, cybersecurity is more important, one i believe is more important than the other. mr. mcconnell: madam president, it's pretty obvious here the reason the senate is so inactive is because the majority leader doesn't want to take up any serious bills that are important to the future of the country. he mentioned cybersecurity. why isn't it on the floor? defense authorization, why isn't it on the floor? appropriations bills, why don't we call them up? these are not partisan bills. they're widely supported. they are the basic work of government, including the budget. and i understand his view is that the parliamentarian is wrong, that we really did pass a budget. but the budget could be done with a simple majority. the appropriations bills are not partisan in nature. if there are differences in the 302-b's, they would be worked out in conference, which is the

way we did it for years. we have followed the regular order occasionally, and when we have, senators have been involved. they were relevant in the process. i'll give you five examples. the export-import bank reauthorization, trade adjustment assistance, patent reform, f.a.a. reauthorization, the highway bill, and the farm bill were all examples of when senators were made relevant by the fact that we took up bills that actually came out of committees that were worked on by members of both parties, that were brought up on the floor, amendments were offered and in the end bills passed. the core problem here is my good friend, the majority leader, as a practical matter is running the whole senate because everything is centralized in his office which diminishes the opportunity for senators of both parties to represent their constituents. we all were sent here by different americans who expected

us to have a voice, to have an opportunity to effect legislation. i would say to my good friend, the majority leader, we don't have a rules problem. we have an attitude problem. when is the senate going to get back to normal? i can recall my friends on the other side saying repeatedly the difference between the house and senate is you get to vote. it's not a top-down organization like the house is. it's really kind of a level playing field in which the majority leader has a little more advantage than any of the rest of us and the right of first recognition. but really once a bill is called up, it's a jump ball. and what my friend, the majority leader, is saying is it's inconvenient, it's hard to work with all these senators who have different point of view and want to do different things. well, heck, that's the way legislation is passed. it's not supposed to be easy. and senators are supposed to have an opportunity to

participate. and i would argue in the examples that i just cited where senators did participate both in the committee and on the floor, the senate functioned like it used to. and all this talk about rules change is just an effort to try to find somebody else to blame for the fact that the senate has been ruled essentially dysfunctional by 62 efforts by my good friend, the majority leader, to fill up the tree, in effect, deny senators, both democrats and republicans, the opportunity to offer any amendments that he doesn't select. that's the reason we're having this problem. so it doesn't require a rules change. it requires an attitude change. and i sense on both sides of the aisle -- this is not just a republican complaint, i would say to my friend the majority leader. i've talked to a lot of democrats about this too. they'd like to be relevant again. and the way senators are relevant is for their committee work to be respected and to be

important and to become a part of a bill coming out of committee. or if they didn't, an opportunity to offer an amendment, to effect it on the floor. and, sure, we have no rules of germaneness. we generally are able to work that out. when he we were in the majority, we got nongermane amendments from the democratic side, and i used to tell my members the price of being in a majority is you have to cast votes you don't want to cast because that's the way you get a bill across the floor and get it to completion. so i would say to my good friend, the majority leader, quit blaming everybody else. it's not the house. it's not the senate. it's not the motion to proceed. why don't we operate like we used to under leaders of both parties, and understood that amendments we don't like are just part of the process, because everybody here doesn't agree on everything. that would be my thought about how to move the senate forward.

but, at the beginning of this discussion the majority leader made it clear that what he said at the beginning of the congress is no longer operative. it is now his view that the senate ought to operate like the house. ought to operate like the house. a simple majority. i think that's a mistake. i think that would be a mistake if i were the majority leader and he were the minority leader, which could be the case by the end of the year. and now i'll probably have to argue to many of my members why we shouldn't do what the majority leader was just recommending about six months before. let's assume we have a new president and i'm the majority leader next time and we're operating at 51. i wonder how comforting that is to my friends on the other side. how does it make you feel about the security of obamacare, for example? that i think's worth thinking about. the senate has functioned for

quite a number of decades without a simple majority threshold for everything we do. it has a good effect because it brings people together. you have to get -- to do anything in the senate, you have to have some bipartisanship. my colleagues do. we really want the senate to become the house. is that really in the best interest of our country? do we want a simple majority of 51 to ramrod the minority on every issue? i think it's worth thinking about over the next few months as the american people decide who is going to be in the majority in the senate and who is going to be the president of the united states. mr. reid: madam president, the republican leader has asked a few questions, so i'll proceed to answer them.

i can remember reading with great interest george orwell's 1984 book where it came out that up was down and down was up. the republican leader is living in a fantasy world if he believes what he said, and i assume he does. that's why two scholars a couple of months ago wrote a book. they have been watching washington for three or four decades. they said they have over the years been like a lot of people who are writers. the democrats did this, republicans did this. but their conclusion was what's happened in recent years is the republicans have stopped this body from working. they said that. by all of their shenanigans on

these motions to proceed, creating 60 votes when it never existed before. robert karo who is writing the definitive work on lyndon johnson, one of my predecessors, said i had a very difficult job based on how the senate has changed, with what the republicans are doing. now, madam president, we have tried mightily. we've gotten a few things done. whenever there is a decision made that they want help, a bill get passed, we get it done. but that's rare. for example, the highway bill. that bill took so long to get done. we had one major piece of legislation that we waited four weeks before they could get out of their system that instead of doing highways, we should be doing birth control, determining what birth control women should be entitled to. all of these extraneous issues. important legislation held up

for one of the republicans over here decided they are a better secretary of state than hillary clinton. holding up major pieces of legislation. so i can take the criticism that the republican leader has issued. i assume that is constructive criticism, and i accept that. but i would just suggest to my friend that if a democratic senator, as the presiding officer knows, has a problem about anything going on here, they talk to me. and i don't think there is any reason for them to talk to the republican leader. but if they do, that's more power to them. madam president, there have been volumes of pieces of legislation that have been brought to a standstill here. whoever -- why did we have now a rule that every basic piece of legislation has 60 votes? i had a meeting with senator feinstein, senator tester,

senator lautenberg. and in the course of the conversation, senator feinstein looked back and said, you know, i had really a controversial amendment dealing with what should happen to assault weapons. she said, you know, that passed with a simple majority vote. no one suggested filibustering that thing to death. that's only new. that's new. legislation being used as an excuse to stop things. now, i want the record to be very clear, and i've made it all very clear in all of my public statements about the need to get rid of the motion to proceed. madam president, i'm not for getting rid of the filibuster rule. in 1984 i suggested i think the house and senate should be the same. i do believe when the filibuster came into being was to help get

legislation passed. i repeat: it's now to stop legislation from passing, and that's not appropriate. so i'm convinced the best thing to do with the filibuster is have filibusters. i've been involved in a couple of them. i'm sure i i irritated people on both of them. but i did that. one of them lasted a long time. the other one didn't last too long. the first one lasted 11 or 12 hours. that's what filibusters are supposed to be. not throwing monkey wrenches into decision we're trying to make and then walk off the floor. the rules have to change, i acknowledge that and don't apologize it for one second. as far as how i attempt to run the senate, i do the best i can under very difficult circumstances, as indicated by the two writers, mann and orenstein. mr. mcconnell: most people think a filibuster is to stop a bill from passing. cloture is to end debate. what we've had here on at least

62 occasions while the majority leader was running the senate, for example, the time when senators were not allowed to talk, not allowed to offer amendments, not allowed to participate in the process. cloture is frequently used in order to advance a measure. but as you can imagine, when senators have no opportunity to have any input, it tends to create the opposite reaction. but what is all of this really about? it's about making an excuse for a completely unproductive senate, much of which could have been done with a simple 51 votes -- passing a budget -- and not even bringing up bills that we all want to act on. all the appropriations bills, the defense authorization bill. and on the rare occasions when the majority leader has turned to a measure that senators have been involved in developing,

we've come to the floor, we've had amendments, we've had votes, and the bills have passed.s that's the way the senate used to operate. this isn't a rules problem. this is a making excuse argument. of the senate i sense on a bipartisan pwaeusdz would like to be -- basis would like to be more productive which would involve the use of senators' talents, speaking ability, voting and debating on the floor of the senate. since when did that go out of fashion? we have a big difference of opinion here about the way this place is being run. and it's not a rules problem. it's an attitude problem. it's a looking for somebody else

to blame game. my friend, the majority leader, i think what we need to do is get busy with serious business confronting the american people. where is the defense authorization bill? where are the appropriations bills? don't blame it on the house. don't blame it on us senate republicans. we want to go to these bills. all of our members have been involved in developing this legislation in the armed services committee, in the appropriations subcommittee, senate republicans are involved in that legislation. we'd like to see it brought up on the floor, debated and considered. what is more important than funding the government? what is more important than the defense authorization bill? why is it on the floor? that's my question of the majority leader. we can have the rules debate later. and apparently we will. but why aren't we doing anything now? that is my question for my friend the majority leader. mr. reid:

this can best are answered in not my responding directly but quoting. this is from an op-ed that appeared around the country by thomas e mann and norman j. ornstein. let's just say it is the headline. the republicans are the problem. representative -- i'm quoting. representative allen west, a florida republican was recently captured on video saying there are 78 to 81 democrats in congress who are members of the communist party. of course it's not unusual for a regular agaid member to say something outrageous. what has made west so striking is that there was a complete lack of condemnation from republican congressional leaders or party figures including presidential candidates, republican presidential candidates. it's not that the g.o.p. leadership agrees with west, it's that such stream remarks and views are taken for granted. i go on.

we've been studying washington application in congress -- politics in congress more than 40 years and never have we seen them this dysfunctional. in our past writings we've criticized both parties when we believes it was warranted. today, however, we have no choice but to acknowledge that the core of the problem lies with the republican party. madam president, understand ornstein works for the american enterprise institute, a conservative think tank. they go on to say the g.o.p. has become an insurgent outlier in american politics. it is ideologically extreme, scornful of compromise, unmoved by facts, evidence and science and dismissive of the legitimacy of its political opposition. madam president, i am a legislator, been doing it for 30 years here and for quite a few years in nevada prior to getting here and i've enjoyed

being a legislator. this last few years because of what we hear from ornstein and mann has made it very, very unpleasant and for my -- for the republican leader with a straight face to come here and say why aren't we doing the defense authorization bill, why aren't we doing appropriation bills, everyone knows why we're not doing them. they haven't let us get to even virtually anything. and to be dismissive of me because i say the republican leader in the house has been dismissive of the law we have guiding this country, i think says it all. we, madam president -- i recognize we're a bicameral legislature. we have our own things to do. but we have to take this as a whole, and look at the record. major pieces of legislation, we can't get to. for example, we can't get to something dealing with outsourcing of jobs. we're here flubling a motion to proceed to that. a motion to proceed to it.

not the substance of the legislation. a motion to proceed to it. so, madam president, the record speaks for itself. the record speaks for itself. we've been studying washington politics and congress more than 40 years and we have never seen them this dysfunctional. today we have no choice but to acknowledge that the core of the problem lies with the republican party. the grand old party, the republican party, has become an insurgent outlier in american politics, it'sed yoa lodgey cli extreme, unproved by facts, evidence and science and dismissive of the legitimacy of its political opposition. mr. mcconnell: the reason i'm having a hard time restraining my laughter, i know norm or steern and thomas mann. they're ultraliberals. their problem with the senate is the deputies don't have 60 votes anymore. their problem is the republicans

control the house. their views about dysfunctionallity of the senate carry no weight certainly with me. i know this have an ideological agenda, always have and usually admit it although it's cloaked in this particular instance. but the best way to wrap it up this is nobody else is keeping the majority leader from calling up the appropriation bills, from calling up the defense authorization bill, from calling up a budget. that's his responsibility. he has a unique role in this institution. he has the opportunity to set the agenda. and just because all 100 senators don't immediately fall into line and it may be a little bit difficult to go forward is no excuse for not doing the important and basic work that the american people sent us here to do. it's time to bring up serious legislation that affects the future of the country, that the american people expect us to act on. and not expect a hundred

senators to all agree on every piece of legislation from the outset. passing bills is inevitably difficult. but not impossible. and that's been demonstrated on at least five occasions when the majority leader allowed the committees to function, allowed the senate floor to function, allowed members to have amendments, and we got a result. mr. reid: madam president, in one committee, the energy and water committee led by senator bingaman, that committee alone has had hundreds of piece of legislation held up, can't get out of the committee. what -- you know, i'm sorry that it's an usual thing to have ornstein and mann referred to as liberals but whatever they are, working for the conservative

american enterprise institute, one of them at least, it's very clear that they view this body as being in deep trouble because the republicans being dysfunctional themselves. and i think it's very clear that we have a situation here, i understand there's a presidential election going on. i clearly understand that. and i know there are efforts to protect their nominee and we do what we can to protect the president of the united states but that should not prevent us from legislating. and for my friend, who has been on the appropriations committee as long as i have, to talk about not -- why aren't we doing the appropriation bills, it's obvious. 12 or 13 appropriation bills, we have simply not been able to get to the appropriation bills because --. mr. mcconnell: have you tried calling any of them up? mr. reid: mr. president, i don't think it calls for my being interrupted here. i've listened patiently to his name calling and i don't intend

to do that but i will say this, i've tried to call up lots of things, by consent or by filing motions and virtually everything habs stopped. for him to boast about passing five pieces of legislation in an entire congress isn't anything any of us should be happy about. shouldn't be happy about that at all. we should be passing scores of pieces of legislation, like we did in the last congress. but no, a decision was made at the beginning of this congress to do -- i may not be a direct quote but certainly substantively accurate that my friend the republican leader has said his number one goal is to stop obama from being reelected and that's what the legislation we've tried to get forward has had -- is barrel we've tried to get around continue wally. we're going to go ahead, we'll have cloture tomorrow on another -- one of our scores of

times we've tried to break cloture this congress, and move on to something else. we've had 13 cloture votes on motions to proceed in the second session of the congress lien. 13. others just went away becau you ran out of time to do those kinds of things. so now as indicated by the republican leader we've passed five things, that's about one-third of the petitions i've had to file motions to invoke cloture on motion to proceed. not on legislation. mr. mcconnell: the reason it's difficult, we didn't get an agreement with the majority leader to have amendments once we do get on the bill. so the reaction on this side is if the majority leader is not going to let us have amendments, if the only result of invoking cloture on the motion to proceed is he fills up the tree and doesn't offer us any amendments, why would we want to do that? all of this is much more easily

avoided than you think. the majority leader is basically trying to convince the american people that it's somebody else's fault that the senate is not doing the basic work of government. and, you know, regardless of the blame game, the results are apparent. no budget, no appropriation bills, no defense authorization. we're not doing the basic work of government here. and that really ought to stop. and it's within the purview of the majority leader to determine what bill we try to turn to. and just because it may be occasionally difficult to get on a bill particularly when the majority leader won't say you can have amendments is no good excuse for not trying. we spend days sitting around here when we could be processing amendments and working on bills. all we need is an indication from the majority leader that these bills are going to be open for amendments.

we've tried that a few times. it's worked quite well. it's amazing how the senate can function when members are allowed to participate, offer amendments, get votes and move forward. i recommend we try that more often. mr. reid: madam president, we are where we are. i think it's very clear from outside sources -- take, for example, i repeat what caro said writing the definitive work on lyndon johnson about the difficult job i've had is because of how the senate has changed because of what has taken place in the last couple years. we have had bills that we have been able to work things out with republicans and that's pleasant. i'm glad we've been able to do.

but most of the time we can't do that. we have one republican senator in tense negotiations with pakistan on a lot of very sensitive issues that wants to do something that's outside the scope of rational thinking which holds legislation up. so we've had -- we've tried very hard all different ways to move legislation in this body but for the first time in the history of the country the number-one issue in the senate of the united states has been a procedural thing, how do we get on a bill, a motion to proceed to something. that has taken over the senate and it needs to go away. we shouldn't have to do that anymore. mr. mcconnell: the final thing i would say is just last week the chairman of the appropriations committee, senator inouye, said his committee's been working hard to have the bills ready to go. to date, the panel has cleared nine of 12 annual bills. senator inouye has is quoted as saying on july 10, just last week, after putting us all to

work like this i expect some of these bills to pass. i would recommend that my good friend the majority leader heed the advice of the chairman of the appropriations committee of his party. let's pass some appropriation bills. mr. reid: madam president, i don't have a better friend in this body than the chairman of the appropriations committee. i've been one of his big fans, he's been one of my big fans. he of course is a national hero, medal of honor winner and great chairman of the appropriations committee. we work hand in glove. everything that i have said about the appropriation process will be underscored and has been by senator inouye. he supports what we are unable to do. he realizes that. he realizes his counterpart in the house has fumbled with the numbers and makes it extremely difficult to get things done. we understand that. but the main thing, madam president, the main thing, we can't get legislation on the floor because the number-one thing that we talk talk about here in the senate this entire congress is how to

get on a bill and that's why the motion to proceed must go away. mr. mcconnell: madam president, a good example of the problem is the bill we're on right now, the stabenow bill bypassed the committee entirely, introduced a week ago, a week ago, placed on the calendar. this is not the way legislation is normally done. it's crafted in somebody's office, rule 14. brought up by the majority leader. i expect it has something to do with the campaign. we spent a week on it when we could be doing the d.o.d. bill. that's my point. what are we doing here? is the senate a messaging machine or are we doing the basic work of government? we're certainly not doing the basic work of government, but it could change. there are a vast majority of senators of both parties who would like to become relevant, who would like to participate in the legislative process, who would like to do the basic work

of government. mr. reid: madam president, one of the most important issues facing america today is jobs being shipped overseas, whether it's olympic uniforms being made in china when they could be made by hickey freeman in new york, made here in america. outsourcing is an important piece of america that we now have to deal with. and of course we have the additional problem that governor romney has made a fortune shipping jobs overseas. the american people care about this issue. we can sit here and point fingers at, boy, that's terrible, we're now going to have to deal with outsourcing. we should deal with outsourcing. we should have done it before. but we've had a little problem getting the legislation on the floor. i don't want to apologize to anyone for having a debate on outsourcing.

senator stabenow has done a wonderful job on that, and we couldn't have a better senator to deal with outsourcing than her. because what we did in the stimulus bill, the american recovery act, is direct jobs back to michigan, detroit, other places, with what we did with batteries, billions of dollars there. instead of importing batteries, now we're making most of them here in america. what we did with governor romney, we should have let the general motors and chrysler go bankrupt. we didn't do that and as a result created almost 200,000 jobs just in the auto industry alone. outsourcing is important and it's a debate we're going to have. let me remind the republican leader that it wasn't democrats that threatened to shut down the government last year and took most all the time we had. first it was the debt ceiling and after we got through the debt ceiling, they weren't going to allow us to do anything, getting funding to take us

through the end of the fiscal year. it was the republican party last year that threatened to default the debts that we have as a country. now they're holding up tax cuts for 98% of the american people. 98%, in an effort to satisfy this mysterious man who i never met, but he must be a dandy, who has gotten every republican with rare, rare exception to sign a pledge that they're not going to deal with the 98% because they've got to protect the 2%. we're here dealing with outsourcing because that's what outsourcing because that's what

and a simplified entitlement system, specifically medicare and medicaid, that spends less. if we don't do that we will never resolve this issue. like a lot of issues, both republicans and democrats are right. there's a ripeness to both of their positions. what we need to be doing is working together to address this as an american problem.

if we can't have people continuing to revel in pluralism, or just indulging in the joy of simultaneous asphyxiation when we have a problem of this magnitude we need to address. to build on bob's point, i thought it was a good one about how the rest of the world views this come as the ceo of honeywell i've traveled about 100 different countries during my tenure 10 year. you could see a lot of people changing, a lot of countries change and you see everybody working harder to compete every day. the competitiveness of the world is improving every day. we are not keeping step, and this is one of the biggest things we can do to improve the competitiveness of the country and get us back on the path i think we rightfully belong, and that is that we have to solve the debt first. there's a lot of people in the world, and some countries even to think that we no longer have the political will to act. as a once great country we have gone down a path of decline because we can no longer due to the tough things in life, make the big decisions we need to.

i don't believe that. i know this group doesn't believe that. i can also represent the most u.s. ceos don't believe that, but we have to exercise that political will to actually act to make those tough decisions. thanks. >> i'm alice rivlin, i'm at the brookings institution and i may have served on more debt commissions than any -- [laughter] anybody in washington. we are calling this effort fix the debt, but i think what we really mean is fixed the economy and restore a vital high-growth u.s. economy that is capable of leading the world. fixing the debt and growing the economy are not antithetical. they are necessary to each other. we can grow the economy without

fixing the debt, because at the moment we are in unsustainable situation. and we can't fix the debt without growing the economy. so, what i was proud to serve with erskine and alan simpson and david cote on simpson-bowles but i also serve with my friend, pete domenici, on a different task force that we called domenici-rivlin, and what i learned from this double experience is, as somebody said earlier, it's the arithmetic that drives the problem. if you have a bipartisan reasonable sensible group looking at what do we do, they come to the same conclusion. we have to reduce the rate of growth of the entitlement programs, especially the health care one, and we have to reform our tax system so that raises more revenue in a better way.

those are the keys. so it isn't very complicated. it is doable, and this group is set out to convince the american public and our legislators that we are on a track that can lead to any good, but we have the potential to get off it, to grow the economy and to fix this problem. thank you. >> hi. i'm steven rattner. i think i guess i am the wall street represented here, having spent, i hope that's okay still, having spent -- [laughter] having spent most of last 30 years on wall street let me say couple things from the point of view. there's then i think to, i got a more references to arithmetic everybody on wall street into arithmetic. something to calculus and business analyst of the wall street is a diverse place. with people from every end of the spectrum in many in the

middle. i cannot think, i've been trying to think and i've not been successful, of a single person i know or to work with on wall street who does not see this as a major threat, a life-threatening problem for our economy. there are different views about what to do about it. about urgent is that everybody on wall street can do math and everybody understands how big a problem it is a the second able to say about the financial markets is that you can like or not like them. certainly the trend is in the latter direction at the moment but you can't deny their importance. they are the critical lubricant of any well functioning economy, and we fortunately have historically had the best functioning capital markets in the world and we want to keep it that way, particularly in terms of how they view our debt. you for a couple of mentions made of places where the markets have gone awry. one place where the markets almost went awry which a number of people in this room will remember well was in 1993 when bill clinton arrived and was hoping to do some expansionary stuff, and the bond markets had not so fast, we need to deal

with deficits, interest rates start to go up. bill clinton was known to use four letter words to use bond traders in the market and so forth, but ultimately a deficit reduction package was put in place and ushered in a pretty sustained period of low inflation and growth and, indeed, any lower budget deficits as the '90s wore on. europe was mentioned and we certainly have seen the consequences in europe, but when you get off track, some people say, many people say to me it's so low in the u.s. right now, markets clear don't care about this so why should we care about it? a couple things about that. in the land of lines, we have all these problems but most of the world has worse problems and we are the flight to safety, incredible. but secondly markets are not quite as fast acting and as responsive as you might expect them to be. markets are not perfect, and so it's a little by the powerful

boiling frog you can go along if you like your just fine and the next thing you know you are bold. greece had interest rates but think were very close -- until 45 years ago markets thought, didn't understand and now you see what's happened to greece. so i don't think we should take any comfort or any reassurance from the fact that we have historically very low long-term treasury rates. that could change in an instant and i think one of the great fears that many people who have been involved in this project that is that could well happen. the last thing i want to comment about is the fiscal cliff. among the many things the market hates is uncertainty, almost what hates most is uncertain. we saw some of that during the debt ceiling debacle last summer, which produced the second sharpest drop in consumer confidence in history of recording consumer confidence, secondly to hurricane katrina, and a bigger drop than occurred after the invasion of kuwait,

the collapse of lehman brothers, 9/11, none of them draw as much. so i think let's be very mindful, not just about the long-term picture but about how we operate in the short term. i would like to leave us on a positive note and say that i think an example of president clinton in the early '90s, and an example of what happens when paul volcker came into the fed in the early '80s and cleaned up and even far bigger mess that we have after that, there is hope and it is a way to fix this problem. but as ensure everybody up your greece, every day that we let it fester it syndicates more difficult and harder to fix. thanks. >> i'm polston become executive chairman of -- first and foremost on on entrepreneur. the company i started with my partner back in 1985 has grown to be 70 offices in 22

countries. it never occurred to me all the years of building a global company, we did all the right things. we are proof positive, american ingenuity can compete with market leaders in the world but it never occurred to us that would come a time in my group with a single greatest long-term threat to my ability to compete with the global marketplace was fiscal solvency of the united states. that's quite a shocking thing to wake up to and i think there's a sense that life would just go on, that would be okay. as business people, whether it's about cash, train people, creating jobs, issues related to long-term health care cost, issues related tax policy, all these things are derivatives of the root the root cause and it all goes back to the debt. and that crisis is real and it is unsustainable and we're headed towards as others consent, to $7 trillion mess. that level of uncertainty -- to solve the problem requires political will as was said by many people here. we live in a highly polarized,

highly hostile political environment and i think that we need to stop trivializing the debate. i think we need to talk about substantive. i think we have to think about getting beyond and transcending the partisanship and realizing this is an issue of citizenship to so i'm not here as executive chairman of the country, i'm here as a citizen of this country. this is about broad support across all segments of society to get citizens to help create the political will that needs done. and to take control of our economic destiny. william jennings bryant said destiny is not a matter of chance, it's a matter of choice. it's not something happens to you, it's something that is achieved. i think this is achievable. if there's anything i've learned from erskine bowles, is that there's a framework in place but there are people who can appear at done a lot of work in building a framework that allows russia while many people to get

together and solve this problem but it's not easy. we don't get a free pass. business as part of the prague. everybody is part of this. we have all put in the elections, people in government have -- nobody gets a free pass. but you can stand back and watch. that would be reckless. we don't own this country better. we our citizens better. we owe our children ought better than that. sso to sit back and be passive, we can't do that. i think that now more than ever there's urgency that is unprecedented and i think i'm proud to be part of his campaign. i agree with the statement that i drove all over the world and i tell you, people were stunned last year when we fooled around with the deficit and to see. i mean, the dead sea. that shocked the world. if they thought america is the greatest free country in the world, cannot get the political will -- i think we have an opportunity. of the people by the people for the people. take back control of our destiny. i think we can do this and there's no greater state of the consent of the world than to get

the debt deal, and that's what can get this done. thank you. >> good afternoon. i'm alan simpson. [laughter] >> income without william jennings bryan quoted, we've had adam smith. we had alexander hamilton. so i will quote my hero al simpson. i talk to al a few minutes ago. he just text me and he said how is it? i said it so hot you wouldn't believe it. he said god, it's so cold out here. to lord walking down the street with their hands in their own pockets. [laughter] now you know i really talked to him. al would be here but he's had some surgery done on his legs and he gave me some notes to speak from, as he always does. i just want to make a few short points, attentively the chance to listen to. i am really proud to be a part

of this bipartisan effort to put our fiscal house in order. but more importantly i'm really delighted to have a chance to work for judge and ed. i worked with him both many times in the past. they are my kind of leaders. they know how to work. they know how to work hard. they know how to get something done. that's what we've got to do in the days and weeks ahead. and i think i would be amiss if i also didn't say i'm really proud to be up there on stage with people who have been in the vanguard of this effort, real pioneers, people whose shoulders i certainly stand on, people who supported this effort and actually saw we would end up where you are today long before i did, people like pete peterson, sam nunn and alice rivlin. and i wish pete domenici was here because those kind of people have recognized this problem for a long, long time.

i do believe, and you have all heard me say before, that our nation does face the most predictable economic crisis in history. it is just math. fortunately, for all of us it's also the most avoidable economic crisis in history. the fiscal path we are on is simply not sustainable. and these deficits of over a trillion dollars a year, they are a cancer, anticancer is going to destroy this country from within if we don't get politicians here in town in both parties to wake up and decide now is the time to fact -- time to act. we have to have a comprehensive long-term fiscal plan that reduces the deficit by at least

$4 trillion. 4 trillion is not a number we made up. 4 trillion is not the maximum amount we need to reduce the deficit. it's not even the ideal amount. it's the minimum amount you need to reduce the deficit to stabilize the debt and get it on a downward path as a percent of gdp. our commission, the commission of alice and david, out and i served on, our commission came forward, and judd, actually this will commission idea came out of an idea that judd and kent conrad had. if they hadn't held the administration's the to the file i don't think we would've ever had this commission, so thank you, judd. thanks to kent conrad for the but this commission is national commission on fiscal responsibility reform, did come forward with a plan that is exactly what i think this nation needs to do. but alan and i have always said that this plan is no more than a

starting point. you are lots of good ideas out there. i have read the plan that alice and pete domenici put together, and it has some better ideas and we put forward. it is terrific. you know, i've looked at the work that was done by the gang of six, and there are good ideas there that we can all use but if you look the work is done by the supercommittee. if you look at the work goes down by the president and the speaker. if you look at some of the work done by the biden commission, you can see some really good ideas. and we've got enough really good ideas out there. what we need now is to act. we need real action. answer but he said he came before me, we do face a fiscal cliff. if we do nothing, and we barreled through this fiscal cliff at the end of the year,

you, we're going to have about $7 trillion hit this country right in the gut, and that is crazy because the effect of that will be somewhere between one and 2.5% of gdp and that is enough to put our country back into a recession. that we cannot have. that's why al and i have spent, you know, i would save 90% of our time during the last year traveling around this country. we spent some time here in washington meeting with members of the house and senate from both parties come and got some great ideas. we have visited with the think tanks and got some really good ideas there. think tanks on the right and on the left. we have designed and hopefully it will be kicked off today this effort to put together a social media campaign, where we hope

that we can get as many as 10 million people to sign a petition to encourage congress to act, and act responsibly now. and lastly, we've been putting our plan in legislative language. it's gone from the 65 page report that senator nunn held up to over 600 pages. and while i think that's crazy, it's probably one of the many reasons i would've been a terrible senator. it does, we do hope it will help as a framework for the real decision-makers in the house and senate to come together. we had hoped from this effort we have made and effort we have made putting together his ceo fiscal leadership council, which has over 100 members of a force of 500, now as part of it. we had hoped that commonsense

would overrule politics and people in this town would be hard at work at this now. but it looks like politics is going to override common sense and nothing is probably going to happen until after the election. what the hope of this group is, is that we can provide to decision-makers a kind of vehicle, the kind of support and the kind of support from the country at large where they can come together during the lame-duck, put together a framework of a policy that will move this country forward. i think if they do, not only will the people in this country rejoice, i have literally met in the last year with hundreds and hundreds and hundreds of thousands of people, people from the right, the left, the far right, far left, the center,

democrats, republicans, conservative liberals, and if we got another with each one of them, at the end of the time that al and i sit with them, we always got a standing ovation, because the people did it. they want real solutions to real problems. they understand the problems are real and solutions are painful, that there's no easy way out. but i believe those same people will rejoice, and i think steve is right, that the markets will rejoice if we come together on a common bipartisan balance plan. and i think if we do that, the future of this country is very, very bright. maya, thank you for letting me be a part of this. >> we're going to take a couple quick questions from the audience, and then we're going to have a time after which were people sent off with all the i get experts as well. i'm going to turn over to

governor rendell and judd gregg to manage questions. >> time's up. [laughter] >> this idea of the deadline, can you give us some idea what you expect to happen then and the lame-duck? there's a twist but you guys don't sound like we will hit the cliff along. >> we're not trying to tell the congress -- [inaudible] were i in the second which i'm not i would suggest they set up a procedure with very ascertainable standards, which would cause them to be out or four things to occur if they do not act. before july 4, on these big issues, the entitlement reform and the tax reform. [inaudible] i also want to thank her for launching this campaign. a question concerning two

elements -- elephants that are in the room that i see. i wonder if i could, there's no present existing stock of outstanding entitlements that we approach, or when you talk about debt, that does include the huge overhang but alan referred to. i want to mention this in bold letters. we need to underscore anything about the entitlement as post-tax revenue. the second has to do with the combination of the wingnut that people were talking, about this airplane fuselage and the campaign contributions. if you had a billion dollars worth of campaign contributions twisting representatives and the wingnut's twisting them, i don't see the logic, the political logic for putting this together, something rational as you're suggesting, and if i missing something on the arithmetic, let me know. if i missing something on the wing nuts.

i guess my question is, are we doing anything to mitigate the major contributions to the wing nuts and voting are the wing nuts, on both sides? thank you. >> this is not an absolute direct answer to your very good question, but some of us as part of this coalition, concord coalition, bogged excuse here in the front row,. [inaudible] he and i co-chair that now the bob kerrey is not running for the senate, a nebraska. csis which historical has focused those securities and on foreign policy, but we believe that this is a security issue. those two groups, and others, including pete domenici, very prominently, and i was comical and have a a set of hearings. will have for hearings, one on fiscal policy, one on entitlement policy, one on taxes

and growth, and one on security. now, well, that we don't know but we'll get the best witnesses we can find and we'll try to get the consciousness raised about the country and were going to try to get a little of america as assertive as those on the wings. 's that i think we should also we are not trying to engage in the presidential election at all. what we want is when this election cycle is over, will want to be available as a resource for whoever the next president is to be able to govern well. and congress to govern well, we're going to give them a lot of different ideas so they can accomplish that, and hopefully the american people, who have an inherent commonsense quite often -- understand that need and will be supportive of the effort. >> all the way in the back. [inaudible] >> it's just a problem of which

peace to make a better, with you going to do it spinning or whatever. my question is, since this is a very social media campaign how to get people from that point saying it's a problem to accepting the hard values of the solution? >> i don't think it's that big a jump it if you listen to what pete peterson said in -- 80% agreement to do both, raise revenue and reduced spending and reduce entitlements, or slow the growth of an topless pics i think is -- as the stages that went to galvanize those people to speak up. if you're an elected officeholders, you hear from, i don't want to use the word wing nuts, but year from some people on the extremes at a higher percentage of their numbers than you did people in the middle. what our job has got to be is to get those people in the middle to speak up, whether it is through social media, through traditional letters, e-mails into their congressmen senator.

we basically need them to get the legislature in washington a permission slip to its okay, we'll stand by you. we know this is important that we know it has to be done. go do it and we will be there. and i think that is doable. erskine bowles has experienced intelligence. pete peterson tells you that. i think this is doable. it's not going to be easy, but i think if you can get the americans to understand how important it is, and people are growing in understanding literally every time there's another bump in the road, i think we can do this. so that's our task. >> this morning during chairman for 90s testimony from the senate finance committee, senator schumer basically asked him why aren't you attacking to fix our economy, because we can't. it was one of the most unbelievable statements i've ever heard in testimony of that type. it to show that the senate

cannot do anything. how do you address that in this process, that type effective? >> ipaqs we think the senate is whether constructive action will be energized at a fairly high level. you have functioning in the senate right now at least, the gang of six, it's probably 30 to 40 people. erskine bowles and i went up and talk to a group of senators that were probably 40 people do. chuck schumer was there. people from both sides of the aisle with it. they were very engage, very interested in the understand very significant action has to occur. so i do think it is quite fertile ground for getting something substantive done. we're going to try to be of help to them. we're going to try to be a resource for them. [inaudible] >> it is only one, and has never

been as high as 24%. so what percentage of gdp would you balance the budget as taxation, spending? >> well, i can play the way we go through it, it's not exactly 100% of the way that everybody up here would do it, but you have roughly the right numbers. in 2020, i think the forecast is for spinning to be around 24, 25%, and revenue to be around 19%. if we wanted to get the deficit down to at least 1% gdp that meant we had to get spending at around 21%. and we had to get revenue up to around 20%. that's what we are able to do in our plan. i believe you can get spending down to 21%, even with the changes in the and the graphics and even with health care growing, you know, a rate of less a gdp plus one.

if we can slow down to that kind of level. somebody asked earlier how do you do that. you make really tough choices. there's this, this nobel prize winning scientist, and his nobel prize project was running out of money, and he turned to steam and said hey, we are running out of money. now we've got to start thinking. that's what america is. we're running out of money. we've got to start thinking. we've got to make choices, tough choices. you know, we've got to make the hard political choices. i just ran university of north carolina for the last five years. one of the things i really wanted to focus on was making sure that we did our part to improve k-12, and we produce most of the teacher so i want configure a how could we produce quality teacher, not just more teachers but better teachers, more math and science teachers. and so i turned to our team and said surely there is some

federal program that we can look at to improve the quality of teacher education. there are. there are 82. to any two or three good ones? you bet. don't need 82. we do $1.5 billion in annual federal scientific research at the university. is all of the high value added research? it's not. note is after 3000 other colleges and universities that do scientific research. i want to invest in education. i want to invest in research but i want to invest in infrastructure that we've also got outlook at how we're spending our money today and make sure we spend more wisely. that's what we can bring spending within and that's why i believe as the economy improves and we go to the measures of simplify and the code, and getting rid of some the spending and the tax code, that we can also create additional revenue. >> last question. [inaudible]

>> first off, i think most republicans and most democrats, and almost all independence, recognized assistance of the problem and recognized that you can't resolve this problem in a partisan way because the american people do not accept action on programs they consider critical to themselves and to the nation such as entitlement programs like medicare and medicaid, or the tax policy. unless they think it is there. definition of fairness requires bipartisanship. i think republicans look at it this way, or i hope they do it anyway, and that's this, if we get a solution like simpson-bowles, which recognizes that the majority of the effort on debt reduction has to come on the spending side and simpson-bowles it was about 70%, then the revenue side can be accomplished through tax reform, major taxa from along the lines of what president reagan did with our speaker, chairman rostenkowski, which give you a

different tax law which is much more oriented towards investment and economic growth. and so i think there's a referral ground for republicans to step into this debate and be extra in a constructive, and at the most republicans want to do that. again i return to this meeting in the senate to both sides of the aisle were there in larger numbers, very interested, very engaged in how to get this done. and these are really solid folks who really want to be constructive and are just looking for different ways to speak what judd pointed out to me, there were probably members there from both sides of the aisle, and members of the senate would use almost any reason to get out of a boring meeting, and they had three votes during our session, and they ran out to vote but boy, they're all back in there. nobody pulled out. people are really interested. they know we face this fiscal cliff and they know they've got to deal with it.

>> and we don't, another effective social be a challenge, every aspect of tax reform has some strong special interests and lobbyists backing it. and that's why it's absolutely necessary to galvanize strong uniform public opinion from virtually every area in this country. and with that, i think some of us will stick around if anybody wants to talk to us individually, and thank you all for coming. [applause] >> [inaudible conversations]

>> [inaudible conversations] >> [inaudible conversation

>> [inaudible conversations] >> [inaudible conversations]

>> [inaudible conversations] >> [inaudible conversations]

>> [inaudible conversations] >> my own view is that the big event. how it affects economy and how it affects public confidence. a major deal, and it's really gone separate thread. the major deals here -- imac

fight over whether we extend the tax cuts are not will actually become a moot by doing a major deal. [inaudible] >> then it becomes a tax cut instead of a tax increase. i've talked a lot with some of my friends on the hill, appreciate the subtlety of that point, not settle. appreciate that point. the big issue is a major package which will include tax reform and inevitably and, therefore, whether that is done, whether this whole issue on tax cuts,

tax increase -- [inaudible] >> you mentioned reagan's tax reform as a model. do you think that's in the cards this time? [inaudible] [inaudible conversations]

>> [inaudible conversations] you can't let people stand in the doors and shout and make any progress. [inaudible conversations]

>> [inaudible conversations] to fix the debt we are saying

you've got to have a proposal that -- [inaudible] >> that's what we are trying to preserve. >> [inaudible conversations]

>> [inaudible conversations] >> [inaudible conversations]

>> [inaudible conversations] >> what i said earlier what we are trying to do is to be a will to govern well. the next president is going to have a tough question, national fiscal crisis. you're not going to get through the next four years without a massive tax on our dollar and a dramatic increase in financing our debt unless we take some action. and that's going to be, if you're the next president, or your the incoming president, if you want to predict a crisis,

thus predictable. it's going to be huge. so we're going to try to help them, give them a pathway to getting -- [inaudible] >> thank you. good to see you again. >> [inaudible conversations] >> homeland security secretary janet napolitano testifies before a house judiciary committee oversight hearing. it's live on c-span3 at 10 a.m. eastern. than that to be an eastern also live on c-span3, airing on how the dodd-frank financial regulation law is affecting consumers access to credit. testimony from the deputy director of the consumer financial protection bureau.

and later a and the day on c-span3, president obama is at a retirement community in west palm beach, florida. backslide that 6:20 p.m. eastern. -- that's live at 6:20 p.m. eastern. >> you're watching c-span2 with politics and public affairs we? feature live coverage of the u.s. senate. every weekend the latest nonfiction authors and books on booktv. you can see past programs and get our schedules at our website, and you can join in the conversation on social media sites. >> there has been hostility on poverty. since the war on poverty, lyndon johnson was the best president of the that poverty issues and spend money on and talked about the social service program. lyndon johnson. let's follow that -- i hate to say this but richard nixon is actually the father of minority

business development. and inside his minority business a stylish a small business administers and, minority agency, and use the term economic justice but richard nixon. economic justice. >> the former president of college for women, juliane malveaux, regulate rights and comments on politics, education and african-american economic history. and live sunday august 5 at an eastern come your questions, calls, e-mails and tweets for the author of surviving and thriving, 365 facts in black economic history. juliane malveaux, in depth, august on c-span2 booktv. >> it was about those men and women almost mortally injured in war who, because of the huge advantages that have been made in medical trauma treatment over the last 10 years, now they're

being safe and incredible number of them are being saved. almost everybody falls on the battlefield is being saved. and i wanted to write about what life was like for these people ever start off with the question, having seen some people who were pretty pretty gruesomely maned, we may be better off if they were dead? don't they wish that they were dead? >> in "beyond the battlefield," his 10 part pulitzer-winning series for the "huffington post," and in the subsequent e-book, david wood spoke with surgeon, medic, therapists and nurses on the daily struggles for those severely wounded in military operations. learn more sunday at 8 p.m. on c-span's q&a. >> a congressional report says london-based bank hsbc allowed drug traffickers, terrorists and rogue states to launder billions of dollars to the u.s. financial

system. current and former executives with hsbc testified before the senate's permanent subcommittee on investigations earlier this week. >> we will now call our second panel of witnesses for this morning's hearing. david bagley, the head of group compliance of hsbc holdings in london, paul thurston, chief executive for retail banking and wealth management at hsbc holdings in hong kong, michael gallagher, the former executive vice president and head of pc in north america for hsbc bank u.s. in new york. and, finally, christopher locke, the former head of global banknotes at hsbc bank u.s. in new york. we appreciate all of you being here this morning. we look forward to your

testimony. as you heard, we have rule six which requires that all witnesses who testify before the subcommittee are required to be sworn, so we would ask each of you to please stand, raise your right hand. [witnesses were sworn in] >> the timing system that we'll be using today will give you a warning one minute before a red light comes on, and then there will be a shift from green to yellow. we will give you an opportunity to conclude joe remarks. your written testimony will be printed in the record in its entirety. please try to limit your oral testimony to no more than five minutes each. before you go i want to thank hsbc for the cooperation, as i said in my opening statement.

hsbc was totally cooperative with this investigation. we appreciate that, and so, mr. bagley, i guess we'll have you go first following than mr. thurston been mr. gallagher and then mr. locke. and they will turn to questions. so mr. bagley, please proceed. >> good morning chairman levin, ranking member coburn, and members of the subcommittee. my name is david bagley. thank you for the opportunity to be here today. i have submitted written testimony but in interest of time i have confine my remarks to a few points. since 2002, i have been the head of group compliance at hsbc holdings plc, which is the global parent of hsbc. having been a compliance officer for 13 years in a bank that operates an approximate 80 jurisdictions worldwide, i have dedicated my career not only within hsbc, but through my broader industry work as well.

beating significant challenges that confront global banking institutions in the world we live in. i have followed the work of the subcommittee and seeing how your work has advanced important dialogues and help the international banking committee including hsbc identify and address potential vulnerabilities. my chief focus as that of compliance at hsbc has been promoting the values that we as a bank have set for ourselves and the guys that you and our regulators both in united states and around the world rightly expect from a global bank like hsbc. and while there have been successes on many compliance issues, i recognize that there have been some significant areas of failure. i have said before and i will say again, despite the best efforts and intentions of many dedicated professionals, hsbc has fallen short of our own expectations and the expectations of our regulators. this is something that a bank is seeking to conduct business in

united states and globally must acknowledge, learn from, and most important, take steps to avoid in the future. the group has always had a core element of its compliance policy of focus on both the lesson and spirit of law of regulation. not just what is permissible, but what is prudent and responsible. in hindsight come as reflect on the dialogue from 2002-2007, and specifically the wider lessons learned at both the -- i think we all sometimes allowed to focus on both lawful and compliant to obscure what should be best practices for a global bank. transparency is a principle that hsbc entered the bank should always make a top priority, even when it is not legally required. i think that with the revised structure approach this is where we are today. indeed, we have learned a number of valuable lessons, and that make us well along the way of converting those lessons into solutions. as i expect my colleague stuart levey to describe in some detail, hsbc is in the process

of shedding the historical compliance model that the bank has outgrown. this departure from the old model is very significant to our formal complaint search was a product of historical growth by acquisition, and as a major factor in some of issues that expect will be discussing today. under the former model, my mandate was limited to advising, recommending and reporting. my job was not which with all of our global affiliates followed the groups compliance standards, and they do not have the authority, resources, support our infrastructure to do so. rather, final authority in decision-making rests with local line management in each of the banks affiliates. now a major overall is underway. a new compliance model is a product of deep reflection and distilled to address today's challenges as was the inevitable challenges of tomorrow. significantly the group compliance function now for the

first time has authority over the compliance departments that everyone under the banks of this but this is a stark break from the past. both the mandate and the resources to ensure that affiliates are compliant. in other words, for the first time group compliance is an adviser and a control function. an additional, in addition, personnel of the affiliates are not accountable to group compliance for their conduct. second, under the new model, group compliance oversees the banks are 3005 and compliance officers worldwide and takes the lead to decisions about resource allocation, compensation, objective strategy and accountability. lastly, i would like, what do have the time to script all of the recent enhancements i would like to emphasize the creation of our assurance function. in short, the authority of the head of group compliance, and, therefore, the function as whole is greatly increased. as i thought about the structural transformation of the banks compliance function, i recommend to the group that now

is the appropriate time for me and for the bank, someone to serve as head of compliance. i've agreed to work with the bank senior management to work toward an early transition of this important role. thank you for your time to i welcome this opportunity to answer any questions. >> thank you very much, mr. bagley. mr. thurston. >> thank you and good morning, chairman levin, ranking member coburn, and members of the subcommittee. my name is paul thurston but on the chief executive of retail banking and wealth management for the hsbc group. i have submitted a written testimony, but in interest of time today, i will confine my comments to a few points as well. i have worked in the banking industry for 37 years, and i've served in various roles at hsbc around the world. i was the chief executive of hsbc for 14 challenging and stressful months, beginning in

february 2007. when i arrived in mexico, i set out to find out the most important business issues and risks they were in the business. i met with business head, risk management, audit and also with the regulators. and it became clear that a number of group systems have been put in place by that time, but that this was not hsbc as i knew it. there were significant weaknesses in the control infrastructure, and these weaknesses existed in kyc and aml management, and in other areas of the bank as well, including credit risk management, card fraud prevention, technology and management information. as i investigated these issues and try to assess why the problems persisted, i came to learn that they were exacerbated by a business model and performance management system that we have inherited form the form -- that was heavily focused

on business growth rather than control. i should add that they we were operating in an external environment in mexico that was incredibly challenging. bank employees faced very real risks of being targeted for bribery, extortion and kidnapping, and, indeed, there were many kidnappings during my tenure at high levels of security were required for staff working in mexico. in addition, unlike the united states, mexico was a data port environment making it difficult to verify the identity of customers. some of the things i found frankly took my breath away. but every time i found a weakness, i tried to ensure that we took action. not just india with the immediate issues, but also in setting up programs to improve the infrastructure, obsesses and business model for the future. i frequently requested audit and group compliance reviews to be

scheduled so that i would have an independent review of progress, and i kept the board, the regional audit committee, and group management informed of everything that i saw and did. and also ensure that we cooperated fully with the regulators as indeed the group has done with this investigation your effective anti-money-laundering depends upon properly knowing your customers, and this was a major area of concern to me. with substandard files and kyc documentation, house across a network of 1300 branches. i committed to invest in technology and people to centralize the review of all files for all new and existing, and to keep central records that could be used for ongoing alert management. i recognize that this would take time to develop and install, but it would give us a more robust platform, provide more reliable reports and improve the quality

and speed of remediation once implemented. i believed that we made real progress at hsbc mexico in my short tenure. we change the business model, the performance management systems, and we enhanced our compliance systems. but clearly, after only short period of time, there was still much work to be done upon my departure in april 2008, and the skill of the remediation work, alongside an escalating drug war in mexico, continue to raise challenges and new issues. after i left, further steps continue to be taken. decisions were made to stop u.s. cash and in mexico. we close branches and mayors were there's a high risk of money-laundering. we're now in the process of closing all the hsbc mexico accounts from the caymans. we will continue to scrutinize our business in mexico to

determine how we can further mitigate compliance risk. we know that criminals operate globally, and as an international bank we will be a target. we have to be sure that we have the best and strongest defense in place in every business and every market in which we operate, regardless of the local challenges and we're committed to doing this. we know we should have done this better, sooner. there are many learnings in our experience in mexico for us and others, and i will be pleased to answer any questions that you have. ..

>> at the bank and, therefore, have not been a member of the bank for the past eight months. during my time at hsbc, pcm developed and marketed payments and cash management services to corporate middle market clients as well as financial institutions including hsbc-affiliated banks. while pcm generally did not manage the various operational units within pcm products, we worked very closely with our operations' colleagues to manage and maintain the expected standards of quality and control. i understand the subcommittee is interested in money laundering efforts. during my tenure, my team and i took compliance matters very seriously. we were active participants in the efforts of the compliance department to insure safety and soundness. pcm assisted the compliance department operations as well as relationship managers in this regard. in instances when pcm became

aware of negative information regarding the client, pcm worked closely with the compliance department operations and the relationship managers to insure they received the information that they needed. pcm also made resources available to relationship managers in the compliance department to assist in any way that we could. at various times pcm made staff available to different departments to assist in various projects and problem resolution. in summary, i'd like to thank the chairman of the subcommittee for allowing me to speak at the hearing on these critical matters. any money laundering, terrorism financing and global access to the u.s. financial systems are issues of critical importance to the banking industry, to national security and to me. hsbc and the banking industry as a whole have learned many important lessons over the past decade or so. i believe that hsbc's experience

can add real value to understanding more prodly the risks and opportunities for enhanced safety in this industry. during my time at h is sbc, there were steps taken to tighten anti--money laundering controls, and i understand significant progress has been made in this regard since my departure. but with hindsight it is clear we did not always fully understand the risks of our businesses or the challenge of the global cross-border nature of the business. it's clear that we could have done much more and done it more quickly. i appreciate the opportunity to provide this information to the subcommittee, and i am prepare today answer any additional questions the subcommittee may have at this hearing. thank you. >> thank you very much, mr. gallagher. mr. lok. >> good morning. chairman levin, ranking member coburn and members of the subcommittee, i appreciate the opportunity to be here today. my name is christopher lok, and from 2001 until 2010 i served as

the global head of the span of business at hsbc. in my statement today, i will cover three topics. first, i will provide my background. second, i will provide an overview of the business at hsbc. and third, i will address some of the specific problems and issues that i believe the subcommittee is interested in. for me it is painful and embarrassing to talk about the areas where in hindsight we fell short. at the same time, it is valuable to do so in order to find constructive solutions so that others don't make the same mistakes going forward. i was born and raised in hong kong. in 1981 i started working in -- [inaudible] of business, and that is what i did for 29 years. during the entire time from 1981

through 2010, i worked for hsbc or a predecessor institution. for most of my career, i was based in asia. but i was privileged to have lived and worked in new york for a brief period in the 1990s and again from 2001 until 2010. even though i'm not a u.s. citizen, i had a wonderful experience living and working in this country, and i have a great admiration and affection for the united states. i would like to provide a brief overview of the bank's business. in essence, the business is about the buying and selling of fiscal currency at the wholesale revel. level. our clients were banks and other financial institutions around the world. we employed about 275 people including traders, back office staff and people who focused on operations and logistics.

we dealt with approximately 800 customers in over 100 countries, and we transacted in about 75 different currencies. these customers have natural demand for supply of currency bank notes driven by various economic activities. to them, hsbc was a safe and reliable counterparty, and i believe that we provided them with a valuable service. i understand that is what the committee is focused on some of the compliance challenges we faced in the business. let me start by emphasizing that compliance was a critical part of the hsbc banknotes business. over a period of years u there were some occasions when i communicated with my colleagues in compliance in a manner that was unnecessarily aggressive and hard. harsh. these communications were

unprofessional, and i deeply regret them. in reality, the business line and compliance shared the same objective: to avoid the bank being used by inappropriate people for improper transactions. despite my awfully critical e-mails, i believe banknotes business and compliance people actually had a good working partnership. while i didn't always communicate this, i had great respect for my colleagues in compliance, and i valued their work. with respect to banknotes transactions with customers in mexico, up until december 2008 i was under the impression that hsbc's mexican affiliate, hbmx, was operating under hsbc group standards. in december 2008 hbmx announced it would no longer be accepting u.s. currency in mexico.

i was surprised by this announcement, and i tried to find out what was the reason behind i. -- behind it. it was not until early 2009 that i learned as a result of my own inquiries that hsbc had gotten into problems because the anti-money laundering controls were seriously compromised. i was surprised and concerned about this news. i was not previously aware of the problems at hbmx. if we had known of these problems, i'm certain that we in the banknotes business would have done things differently. as time went by, some questions were raised about the banknotes business in mexico. in retrospect, we did not adequately concern -- appreciate the concerns being raised. i'm sorry to say that i did not understand what later became apparent. with the benefit of hindsight, it is now clear that we did not perceive the extent of the anti-money laundering

deficiencies and the risks present in mexico. thank you very much. >> thank you very much, mr. lok. let's have a ten minute first round, if that's all right. does that give you enough time? >> yeah. >> because we'll have more than one round here. first, mr. thurston, hbmx was a bank that had a longstanding, severe money laundering problem, and we describe this at length in our report. the bank was purchased in 2002. you didn't arrive until 2007. take a look, if you would, at the exhibit book, mr. thurston, in front of you there, exhibit 1b. and what we've done here is we've put together a chart summarizing some of the exhibits, just a few highlights from those exhibits which are really a litany of money

laundering deficiencies at hbmx from 2002 to 2009. so, first, the first reference is 2002 in this exhibit. um, here's what the audit found. quote: there is no recognizable compliance or money laundering function at the bank that you bought. that's 2002. then from, in 2005, three years later now, senior persons within the compliance function be fabricated records of certain mandatory anti-money laundering meetings. this is, this quote's taken from exhibit 12, but we put together

these quotes on this exhibit 1b. now, the fabrications were ordered by the head of the anti-money laundering compliance program who was asked to leave the bank. this e-mail was sent by mr. bagley to stephen green who was then head of the hsbc group ceo. next, 2007. this is a quote from a july 7, 2007, e-mail from a senior compliance person at hsbc group, john root. it's taken from exhibit 19. it's a e-mail to the head of hbmx compliance after finding out that the anti-money laundering committee allowed three different high-risk accounts with suspected illegal drug proceeds to stay open. and he writes: what is this?

the school of low expectations banking? and in 2008 this is a statement from hbmx's' own anti-money laundering division who was leaving, and he said the following: that there were allegations of 60% to 70% of laundered proceeds in mexico going through hbmx. me -- he also stated that hbmx executives didn't care about anti-money laundering controls. that comes from exhibit 30. this is 2008. and then another quote from mr. bagley in 2008: what i find most frustrating is the way in which new issues constantly

emerge, however much time is spent with hbmx. 2009, quote, a statement from an e-mail from mr. bagley to the ceo of hsbc latin america, mr. alonso, quote: the inherent anti-money laundering risk in mexico is still very high, closed quote. so this has been going on for seven years, money laundering problems, anti-money laundering problems at the hbmx bank, the mexican affiliate. so, mr. thurston, when you arrived in 2008, you began immediately making some changes. the problems that you faced had been longstanding. they weren't corrected before you got there, and some of them, plenty of them, weren't corrected until you got there, and then some remained, and they

were corrected, some of them, after you left. why did you discover that these had festered for so many years? what was there about that bank, that culture that you discovered that allowed these things to go on and on and on? i mean, these aren't things which were discovered later. these were known at the time, e-mails show that they were known at the time. a number of you have talked about hindsight. these are contemporaneous e-mails. this isn't something discovered in hindsight or learned in hindsight. this is something that people knew was going on at that bank. why was it allowed to continue? what did you find when you got there? >> thank you, mr. chairman. my assessment was that starting from before the acquisition this bank had been a fast-growth bank. in fact, that was the reason why it got into trouble, and that was the reason that we were able

to acquire it. it grew fast, but it had no controls. the business model was completely decentralized. all the files, all the decisions were taken in a distributed branch network. it was very difficult from the center to get controls, and there was a very strong incentive scheme that backed continued volume growth rather than quality of controls. a number of steps were taken to install group processes and group systems, but if you're confronted with that as i've said in my opening remarks, you need to address the business model that's underneath it and put something systemic in. so one of the steps that i took was the to create this centralized platform where instead of relying on 1300 branches to do the kyc, we would have all of those papers imaged to a central site where we could

check and see that we had all the documents, that we had all the papers. and if we didn't, then we wouldn't open the accounts. but that kind of investment takes time, and there was a significant remediation task to be done to put right the files from the past. so there were multiple problems that existed in the bank as i saw it when i was there. >> these were a bank -- these were problems which were known for years. this was not something which was, you know, looking back. this is something which year after year after year starting in 2002 was known by this bank. and yet these problems festered for these years. here's another e-mail. exhibit 36. this was a hsbc group deputy head of compliance, a 2008

e-mail. now, been sent to mexico to try to get a handle on money laundering problems there. one of the problems discussed was a backlog of 3600 and thes that were -- accounts that were supposed to be closed but weren't. including 675 which had been identified as potentially involving money laundering that had been ordered closed by hbmx's anti-money laundering committee known as ccc or triple c. here's what the e-mail noted. this is 36. that of the 675 accounts, 16 had been ordered closed in 2005. 130 in 2006. 172 in 2007. 309 in 2008. so it took three or four years to close a suspicious k. --

account. now, should -- is there any way that that should have been allowed to happen? forget the business case. is there any way that should have been allowed to happen at the time? >> no, senator. >> now, another problem involving hbmx was the committee at the bank which was mandated under mexican law and is composed of both business and compliance personnel charged with resolving anti-money laundering issues such as what accounts should be closed. in july of 2008 after the ccc committee decided to allow several suspect accounts to remain open, a senior compliance official at hsbc group, john root -- so, now, this is the group now -- sends a blistering

letter to hbmx compliance head, mr. garcia. exhibit 9. 1-9d. i'm going to read from this exhibit. a number of items jump out from your most recent weekly report, but everything pales in comparison with the money laundering items on page 4, he writes. it looks like the business is still retaining unacceptable risks, and the aml committee is going along after some initial hemming and hawing. i am quite concerned that the committee is not functioning properly, alarmed even. i am close to picking up the phone to your ceo. what on earth is an assumption responsibility letter, and how would it protect the bank if the client is a money laundering? please note, he writes, you can dress up the u.s. dollar, $10 million to be paid to the u.s. authorities as an economic penalty if you wish, but a fine

is a fine and a hefty one at that. what is this, the school of low expectations banking? we didn't can go to jail, we just signed a settlement with the feds for $10 million? so, he said, one problem was strike one, another was strike two, let's not look at strike three. he writes, i hope you like baseball. the same person who is giving -- this is his writing -- the sacrosanct assumption responsibility letter is being asked by the ceo to explain why he retained casa de cambio relationship after $11 million u.s. was seized by the authority in pueblo with, in an account with wachovia in miami. what? the business was okay with this? and then he says, the anti-money laundering committee just can't keep rubber stamping unacceptable risks merely

because someone on the business side writes a nice letter. it needs to take a firmer stand. it needs some cajones. we have seen this movie before, and it ends badly. why is it that the bank, the bank that's the group bank that seized these kind of -- that sees these kind of problems just doesn't flat out hold some folks accountable and fire some folks? i mean, they can write this kind of a letter, and they did, and we dug this out of the e-mails. why if the folks running this are so bad, why isn't action taken against them by the parent bank? >> mr. chairman, in the time that i was in mexico we held, we were very firm on discipline. we took strict disciplinary action against many members of staff even at senior management levels including dismissals. so we were certainly taking it

seriously within mexico. >> my time's up. thank you. dr. coburn. >> i want to go to mr. bagley for a moment, if i might. i think your testimony was that it would -- you were in charge of compliance, but you had no essential line authority to enforce that compliance, is that correct? >> that's right. the core responsibility of group compliance was to set policy, to report, to escalate issues when they were reported to us. but we did not manage and control the individual compliance departments in each one of the affiliates or subsidiaries. >> those individual compliance departments in the those subsidiaries reported to the head of whatever that subsidiary was, correct? >> there were two reporting lines. one to the group compliance team for reporting and other reasons,

and then another line to the local ceo or business head. >> and i think it was also your testimony that that has now been changed? and that there is a line function for compliance from corporate hsbc all the way down to every bank, is that correct? >> it has fundamentally changed in that the hardest line of reporting is now through the function, so i am accountable, responsible and have authority over the whole function globally, 3,50 people across the group. and that means i control resource, allocation, budget, remuneration, the performance of the function and can insure that the adequate resources, the right amount of money is spent on this effort. it's a radical shift, a senate change.

change -- a significant change. >> there's the answer to the question you asked. in other words, there's no -- you can have a compliance officer all you want. if they have no line of authority to cause people to change actions and the same people that are guiding have a line authority that says here's your profit based on, how well our affiliate or our subsidiary does, one of those is going to have more power than the other. thank you. mr. gallagher, you said in your testimony both in hine sight it's clear -- hindsight it's clear we could have done much more and done it more quickly. you know, looking at the whole thing of this, that to me is almost an unbelievable statement when you have things going on in mexico, things going on elsewhere, it's almost like you weren't aware that these -- is it a fact that you weren't aware of these things happening?

>> it is a fact that there are certain things that we were not aware were happening, that's true, within certain entities. that's true. >> what were the efforts made to try to become aware of what was happening? my natural inclination is to say you weren't, didn't fully understand the risk, or you ignored reality based on the testimony and data that we've collected from inside your own operations. would you just expand on that a little bit so i can gain a clearer understanding? >> yeah, i appreciate the question, and i share your concern on this matter. one of the lessons we've certainly learned is the sharing of information not only through, throughout the organization, across various operations and silos, if it were, but across geographies is something that requires significant improvement. i'm led to believe that that has improved significantly since i left and even during my time there, there was improvement in

the process. but heretofore it was not easy to move information across organizations and to filter down to the appropriate levels to get action. compliance and monitoring was our first level of finding issues and looking after them, and whenever we found issues in my experience, i believe we inquired, we reacted, and we pursued. so i think we did a lot at the time, but as has been said by others this morning, we've learned a lot as we've gone along. >> okay, thank you. mr. thurston, in early 2007 right when you started one of hbmx's clients was a reported drug lord who got caught selling precursor chemicals for methamphetamine protection to la familia and the seen low what cartels. when you learned that he was a

client of hbmx, what was your reaction, what'd you do? >> well, i was horrified by the case, and this really exposed a whole series of weaknesses within the bank. so we -- i personally conducted an investigation. i brought in the audit team, i brought in the security and fraud team, i brought in the compliance team, and can we made a number of changes. this is where i found the, for example, the business heads were overriding the people in the compliance department on decisions on accounts. so i put up an escalation process is that compliance -- so that compliance had a route to the chief operating officer and then to me if they weren't comfortable with the decisions that were being made through that legal committee. i looked at the fact that we had here a business account that was being managed in the personal consumer part of the bank which would make it very hard for

people then to spot the underlying activity and compare it with normal activity. so we made a number of changes about that, and that's where we started to -- we dismissed a number of people who had falsified visit records, not been to visit the premises when they said they had. that's when i realized that practice existed. we looked to see if there was any sign whatsoever of any collusion. we investigated all the staff's accounts, and as result of that we found some incidents of staff lending to each other, so we created policy on that. so there were a whole series of actions that stemmed out of finding that incident. >> there was, in fact, significant attention from the compliance officer at that time. correct? prior to your knowledge of it? he had -- this had been raised as an issue. >> that's correct, dr. coburn. >> all right, thank you. during your tenure at hbmx, i

understand that law enforcement in mexico raised concerns about a high-risk money laundering at hbsa -- hbmx. why was it that the mexican legal authorities think today that your record was worse than any other bank in mexico? is it fact, or is there some assumptions there that the committee should know about? >> there were, they found that whenever they wanted information from the banks, hsbc was one of the slowest to respond. so when they were conducting investigations, hsbc took longer to produce documents and had more challenges producing documents than most of the other banks. when we investigated that, again, we looked to see is this collusion, is this people deliberately trying to hold information from the authorities. and we found no sign of that

whatsoever. but what we did find was a process where these things would go out because all the file were held out in all the branches round the country, and the quality was so poor, it would take a long time to colate effective information and get it back, and there were things that were missing which is why the centralized program we had was so important. but we were also swamped with information requests. we had on average a thousand a week coming from the regulators, not distinguishing between different types. so we then set up a direct line with the financial intelligence unit within mexico so that where they were conducting urgent investigations, they could come through straight to the bank so that we could respond more quickly. >> okay, thank you.

i'll yield back for right now. >> from -- mr. thurston, you were at the bank there for a year you've testified, and while there you made some impresumes -- improvements, but the problems continued. and i want to get to some of the issues by discussing with you the cayman accounts. now, when you bought the mexican bank, when hsbc bought the mexican bank, it found that hbmx kept open a so-called branch office in the cayman islands. now, i say "so-called branch office" because my understanding is there was no actual building, no office, no employees. it was just a shell operation that offered u.s. dollar

accounts. the branch, so-called, in the caymans was run by hbmx itself using it own employees in mexico. any hbmx branch could open a u.s. dollar account for a compliant, concern for -- for a client, and at one point they held $2.1 billion in assets. now, we have pent a lot of time on this -- spent a lot of time on this subcommittee raising questions about caymans and other tax havens for tax avoidance purposes, but this is a little bit, this is a little bit different. and this committee, the subcommittee's put a lot of, has a lot of interest in these issues involving the caymans because they are shell corporations. um, and they possess and pose

significant money-laundering problems, and they do it from as soon as they're organized because nobody knows who's behind those corporations. and here's a few of the highlights relative to the caymans. exhibit nine is a 2002 audit of hbmx, and that audit notes that 41% of the accounts in the cayman islands had no client information. exhibit 31 is a 2008 e-mail by mr. root saying that 15% of the customers there didn't even have a file. fixing the cayman accounts will be a huge struggle, he says. how do you locate clients when there's no file? exhibit 32 is a july 2008 e-mail noting that hbmx has discovered, quote: significant u.s. dollar remittances being made by a

number of hbmx cayman customers to a u.s. company alleged to be involved in the supply of aircraft to drug cartels. that's exhibit 32. later e mail -- november 2008 -- describes the cayman accounts as having been frozen due to, quote: massive misuse of them by organized crime. so, mr. thurston, first of all, did you know the cayman branch was fictitious, just a hell? just a shell? >> it's what's called a cap b license, i believe. >> but did you know that it was just a shell company? there was no employees there, no office, were you aware of that? >> i know now, sir. >> and did you know about the problems at the cayman accounts i've just read? >> mr. chairman, no, i didn't during the time i was there, and on reading your report i was

really angry to find that there have been audit reports on these in the previous year, but that it had been closed off with no action. so when i got there and went through what are the top risks in the big outstanding items, these were nowhere to be seen. >> all right. so you were unaware of the cayman accounts at the time that you were head of that office. >> correct, sir. >> now, mr. bagley, you indicated that the subcommittee during an interview that although you were aware of the account since 2002, the cayman accounts, you focused on them only after july 2008 incident involving funds going to buy planes for drug cartels. now, i don't know given the history here how you could possibly not know of the severity of the problems involving the caymans until that time, but in any event after

that incident the new head of hbmx decided to -- this is, i think, 2008 now, mr. pena -- decided to suspend opening new cayman island accounts. so hbmx executed a review of the accounts, eventually closed 9,000 of them. but as of the beginning of 2012, there were still about 20,000 accounts with $670 million in assets. so two-thirds of the money laundering risk continues. so, mr. bagley, this subcommittee really has found out that these kind of shell corporations in the caymans and other places create all kinds of tax avoidance problems, but this is a different kind of an issue here. this is a money laundering

issue, and we've got now two-thirds of the accounts, of those accounts which were in the caymans, but that many assets apparently still sitting there. what are you going to do about it? >> um, thank you. the point is that when we became aware of those cayman accounts, the ones that remain have all been fully remediated. so when we became aware and focused on the cayman accounts themselves, what we did as a group, what hbmx did was work through each and every one of those accounts, revise and refresh the kyc to satisfy ourselves that there was an explanation for the monies and that we were satisfy with the the source of the funds. and, therefore, what is left has been subject to revised and enhanced due diligence and a refreshment of all of the information that we're holding. >> does that mean 20,000 accounts now that you're going

to keep there? >> well, actually, the group has recently arrived at a decision which i support which is to, actually, close all of those cayman accounts. >> oh. well, that's the short answer. a very welcome answer. particularly, i think, this subcommittee can really look at its work as contributing to this kind of pressure on you to do the right thing. >> sorry to interrupt. i should just be very clear that we are in the process of closing those accounts. they are not yet closed, but they will all be closed. >> that's good news. now, hbmx did not inform hbus about the cayman/u.s. dollar accounts for many years. is that correct, mr. gallagher? >> yes, sir, that's correct. >> so these transactions were

run through the u.s. dollar correspondent account that hbmx had at hbus. would hbus have wanted to know about these high risk accounts in a secrecy jurisdiction? would you have wanted to know that? >> absolutely. >> do you know why you weren't informed? >> no, sir, i cannot answer that question. >> maybe mr. bagley or mr. thurston, why wouldn't the ubsu -- i'm sorry, hbus, why wouldn't hbus have been informed of those accounts? >> it's a very appropriate question. i think there are two or three reasons. one is that at that stage

neither hbus, as your report reflects, was conducting affiliate due diligence. second, we at that time did not do affiliate due diligence across the rest of the group, and as a consequence the questions that you would normally expect to be asked by one affiliate of another, one correspondent bank of another were not asked. they are now. >> under your new rules now, you're going to be notifying each of the affiliates of this kind of action? >> what we are doing and have introduced and are in the process of rolling out is affiliate due diligence across the whole group, so every affiliate will do due diligence on its own affiliates. that will be to the same standard as we apply to an entirely independent third party. in addition, we have put in place a process that insured

that if there's a material aml deficiency or issue or risk in one affiliate, that will be reported on a mandatory basis across the group and will automatically go to the head of compliance for each region. so what that will mean when that work is complete is that each affiliate will treat it affiliate at arm's length, will ask all of the appropriate questions, will know everything that it needs to know about the risk profile that one affiliate presents to another. >> and when will this be put in place? when will this be accomplished? >> we are rolling out -- it will take a while, obviously, to complete those due diligence profiles. we will use the ones we've already completed for the u.s. in response to the cease and desist orders. we will do it as fast as we can. we have already put in place the mandatory reporting of aml deficiencies, and we have that up and running as a process. >> and when will that be completed, do you know? >> i don't know exactly when it

will be completed, but we will do the highest risk as quickly as we can. >> all right. will you let the subcommittee know when it will be completed? >> i'd be happy to. >> thank you very much. dr. do burn. >> mr. gallagher, if you'd turn to clint number 40, the bank in iran. prior to 9/11 hsbc had a relationship with this bank in iran which because of its ohm country would -- because of its home country would get more scrutiny in the u.s. hsbc in europe helped coach the bank to send payments through the u.s. without getting slowed down. why was hsbc interested in doing business with this bank? >> i can't speak specifically for all of the reasons the business desire was coming out of europe and the middle east, not coming out of the u.s. there was a memo that described some opportunities that they saw for growth in business

generally, but hbus was not driving that business decision. >> what was it exactly that made you say in this e-mail, i wish to be on the record as not comfortable with this piece of business? >> yes, thank you. that's a very important question. i was very concerned about the lack of transparency in the proposal that had been put forward that described how the payments would flow. so in this particular case there seemed to be inability for the bank, that is to say meli, to describe in advance who its primary beneficiaries would be. that caused me to say we should not want to engage in business with a compliant who cannot provide that level of transparency the to our system. >> so there was really no know your customer here. >> i can't speak to that because i know the customer would have been done on the european side.

but when i became aware that there was seemingly a lack of transparency in one of my roles, i thought that was inappropriate and very strongly suggested we should not proceed -- >> and so what was the response to that? >> well, ultimately, the transaction never was approved. >> and do you know why? >> discussion went on for some time back and fort across the regions and the world. i don't recall the specific reason, but i was delighted to know that my recommendation was part of the solution. >> did you raise other concerns other than in this e-mail that we've documented under exhibit 40? >> about bank measuring eli specifically? >> yes. >> i don't recall. >> okay. if you turn to exhibit 57, iranian u-turn payments, in november 2004 this e-mail suggests that some inside hsbc thought that all iranian payments through the u.s. should be fully disclosed. nonetheless, many payments still went through without full transparency, sometimes because information was removed by hbeu.

this e-mail says hbeu would be advised to not alter the payment details in this way. was it well understood within hsbc that information was being removed from payments before they arrived in the u.s.? >> i don't know how well understood it was, and i don't recall specifically some of the exchanges. but if i had to speculate consistent with my earlier position which was unchanged regarding the importance of transparency and these messages, i'm quite comfortable that the proper people were alerted and it was in the proper hands for resolution. but specific detail on this i don't recall. >> but the decision went really against your advice? >> yes. >> because, because, in fact, they were altered, correct? >> it would seem so, yes. >> okay. do you have any idea how hsbc

intended to make sure all these payments complied with u.s. law? >> there was a view at the time that the team in london and/or subsequently elsewhere was going to insure that the payments were going to be u-turn client before they got to the u.s.. >> do you think they were? >> i don't honestly know specifically that they weren't. some of this information is slightly new to me and being involved in this investigation and catching up. so i don't know the specific answer to that question. >> who would know the answer to that question? >> i would suggest either operational staff doing the work on the other side and/or possibly somebody in compliance. >> yeah. should they have relied on people in iran to do that? >> no. certainly, in retrospect we should not have relied on

anybody but ourselves to insure the soundness of the payments coming into our system. >> mr. lok, we've left you alone for a little while. let's see if we can interest you in some -- in your testimony you said compliance was a critical part of the hsbc banknotes business. >> correct, sir. >> can you explain to me exactly what you mean by this and tell me what it looked like? >> we have a system where we have a system in place whereby, um, customers are risk rated, um, and they are rated according to different cat -- categories. and then for the high-risk customers, we need to make sure that there's a process in place whereby, um, the information about the client is laid out in the open so that people can come in, including the relationship managers, the business people,

compliebs -- compliance so that we can evaluate the risk. and finally, compliance has to be the final sign-off so we can do business with these people. in other words, we consider compliance a very important partner in our business. >> did you recognize certain vulnerabilities in your compliance strategy if the in -- in the banknote business? >> at that moment, no, honestly, no. we believe we -- >> you would agree that there were, though, if hindsight? >> in hindsight, yes. looking at all these documents, yes. the answer's definitely, yes. >> um, just for our educational purposes and given your broad experiences, are there certain challenges that are different in the banknote business related to specific currencies over other currencies? >> i'm sorry, can you repeat the question? >> are there specific challenges in the banknote business in

terms of compliance related to one currency over another? not necessarily in terms of geographic location, but, for example, is it easier to run a scam or play the game with the u.s. dollar, the british pound, the euro, the japanese yen, the rem by? in other words, does the same compliance vulnerabilities that you see now in hindsight apply to different currencies and different geographic locations? >> at that moment, no, it didn't strike me that there is a difference in terms of compliance risk. because the policy is exactly how we run it, analyzing the risk. no, we were not -- no. no, the answer is no. >> all right. i'll yield back.

[background sounds] >> let me ask some questions about the corporation which was a u.s. money service business that transmitted funds from u.s. clients to mexico and latin america. the dea undertook a sting operation in 2007 in which its agents told segay's operators that they wanted to send drug proceeds to mexico. and more than two dozen of those operators obliged n. january of 2008, segay entered into a deferred prosecution agreement with the u.s. department of justice admitting the facts for failing to have adequate money

laundering programs. hbus determined that in 2007 alone that it had processed 159 u.s. dollar wire transfers for segay involving about a half a billion dollars, and we they wee all sent through the hbmx correspondent account with hbus. then if you would look at exhibit 18a, mr. gallagher, this was a memo that was prepared by hbus after a 2008 "wall street journal" argue on the wachovia case. it talks about the segay case and it use of the hbmx account, but it also notes that segay was not added to the hbus filter.

so that it could be subjected to enhanced anti-money laundering to identify suspicious activity. now, you were the head of pcm at that time, mr. gallagher, and that handles wire monitoring. do you know why hbus did not subject segay to enhanced monitoring after the 2008 deferred prosecution agreement? >> no, mr. chairman. no, mr. chairman, i don't know. looking at the memo, i note that i'm not addressed on the memo. i can't honestly recall if i saw the memo. but the decision as to whether or not to add any name to enhance monitoring or to a filter, etc., is a decision that would be taken in compliance, not in pcm. >> uh-huh. but you don't know why. you were at -- you're saying it's not your department, but you just don't know why it wasn't added? should it have been added? >> seemingly, absolutely, it should have been added.

i do not know why it was not. >> okay. um, in 2007 -- this is exhibit 30 -- a man named mr. barrasso who was head of the hbmx anti-money laundering program was leaving the bank. he had an exit meeting with you, mr. bagley, i believe. and according to the a meeting summary, mr. barrasso told you there were allegations that, quote, 60-70% of money laundering in mexico went through hbmxx he did not think senior management had any commitment to robust anti-money laundering controls. that memo, i believe exhibit 30, was written to you, mr. thurston, if i've got that --

>> that's correct, chairman. >> -- correct. what, what was your reaction when you got that memo? >> mr. chairman, i was incredibly distressed. [laughter] i don't think anybody wants to hear those sorts of things coming through, so we made sure that we investigated. we made sure that we took the points that were there. we'd recently had discussion with the regulators in mexico. and we made sure that we took account of those points within the remediation program that we were looking at in mexico to make sure there was nothing new that we had missed. it also caused us to question whether our head of compliance was sufficiently good for the role as well. >> all right. let me now turn to the iranian issue which dr. coburn asked some questions about as well. now, iran had been subject to

sanctions in the u.s. for a long time as a rogue nation, had long been on the u.s. sdn list as we heard about this morning as a prohibited country. laws consistently prohibited u.s. persons from doing business directly with iran. but until 2008 u.s. banks were allowed to process transactions that might involve iran but which were sent to the united states by foreign banks located outside of iran. now, those transactions were called u-turns because they went from iran to a non-iranian bank, a foreign bank, to then a u.s. bank and then back to a different non-iranian, foreign bank and then to the final party. so there was a u-turn that was made through the u.s. bank. the issue with hbus is that the

hsbc affiliated -- affiliates in europe and the middle east wanted to send u-turn transactions through their accounts in the u.s. without triggering that filter or an individualized review to make sure that they were permissive u-turns. they wanted to remove any reference to iran and to go through the hbus systems without any manual or more detailed review. so this was a battle over transparency. united states wanted full transparency so that it knew it was dealing with an iranian u-turn and could make sure it complied with u.s. law. the affiliates didn't want to trigger these reviews or to take the time for those reviews. so hbus and the affiliates fought over this issue for three years, from 2001 to 2004. but while they're arguing, the

overseas hsbc affiliates were sending undisclosed iranian u-turns through their hbus accounts anyway. and to do that, the hsbc affiliate in europe, hbeu, stripped out the references to iran. senior employees at hbeu protested in 2003 and 2004, and i believe one of these proest thes was read -- protests was read by dr. coburn, that they didn't want to be altering wire transfer documents for iran. they even set two deadlines in 2004 when they said that they would stop doing it, but both deadlines were ignored. hsbc issued group-wide policy statements on iran in 2005 and 2006, but neither resolved the u-turn issue. the issue was resolved only in 2007 when hsbc made a global

decision to exit iran. now, i believe that exhibit 41 was referred to by dr. coburn. and if so, i will not read it again. um, but since i'm not -- [inaudible conversations] oh, you did 40. okay. so 40 was read by dr. coburn which made reference to the statement about i wish to be on record as not comfortable with this piece of business. exhibit 41 was with the amount of smoke coming off this gun, remind me again why we think we should be supporting this business. so that's another hbus employee describing the iranian business. but at hbeu, the europe branch,

they were stripping payment information, so the u.s. was unaware of these iranian payments. senior officials at hsbc, the headquarters in london from 2001 to 2007, knew that affiliates in england and the middle east, hbeu and hbme, were sending undisclosed payments through their hbeu accounts but did not stop them or inform hbus of the ec tent of the activity. -- extent of the activity. so they knew that their affiliate were hiding key information from each other. now, at hbus senior compliance officials were on notice as early as 2001 that the stripping was occurring but took no decisive action to stop it. they stopped