>> treasury secretary tim geithner the plot of the senate passage of the tax-cut extension

bill for the middle-class. the treasury secretary appeared before the senate banking committee on the oversight counsel's report and its questions about the u.s. economy and the financial system. this is two hours, 10 minutes. [inaudible conversations] [inaudible conversations] [inaudible conversations]

[inaudible conversations] [inaudible conversations] >> good morning. i call this hearing to order. today we welcome treasury secretary geithner to deliver the financial stability oversight council counsel annual report to congress as required by the wall street reform acts. i have been recently marked the two-year anniversary of wall street reform. i believe we have made important

progress to enhance our financial system's stability. critics are quick to point out that the unfinished rules by the improved regulatory structure is not going to work overnight. in two years we have a mechanism in place to unwind non-bank financial firms and the regulators have proposed rules to enhance capital and standards for a nation's largest and more's mars complex financial institutions, and we have improved consumer and investor protections among other efforts. the financial oversight council is a key part of these efforts to enhance financial stability and eliminate regulatory gaps. it manages the process to designate financial firms that

is systemically important, coordinates and inter-agency -- monitors the financial markets and provides a forum for all of the financial regulatory federal and state to identify areas that need to be addressed, to strengthen our nation's financial stability. i look forward to hearing from the secretary about fsoc's progress. the fsoc has had early challenges too. the office of financial research, fsoc's data arm is said to have a confirmed director despite the president president -- nominating the well-qualified candidate. without the certainty of a director in place we have struggled to attract a staff to put the systems in place and raise red flags on our nation's

financial institutions and economy are in trouble. i urge my colleagues to confirm berner in this role as quickly as possible. they fsoc has also had many -- the annual report we are reviewing today provides important insights into the workings of the council and it identifies many important issues of concern and provides recommendations for the regulators to address these concerns. from the banking committees perspective, this report provides a tangible way to measure fsoc's progress. the fsoc also recently designated a financial market utilities that are systemically important. this is a major step toward and

is another example of how wall street reform is helping to provide financial stability. the fsoc has finalized the criteria and is in the process of designating non-bank financial companies and is another critical step. the fsoc also has a finger on the pulse of the economy's most important issues. for example, as you can see from the public minutes and the annual report, the fsoc has been focusing on the situation in europe, an issue that this committee also has been monitoring. as i have previously stated, i asked secretary geithner to come prepared to speak about libor. as the president of the new york fed in 2008, he raised early

warning signs about the integrity of the libor submission process and called on the bank of england to specifically eliminate incentives to this report. shortly afterwards, -- shortly before the cftc began its investigation leading to an international effort resulting in actions by the cftc, doj and fsa. as additional investigations into this matter continue, hope we can have a conversation today about what happened during the crisis and how going forward we can have more reliable benchmark rates that reflect the cost of borrowing, protecting both

borrowers and investors. while this committee will continue to exercise oversight, we cannot lose sight of the fact that the libor issue at its core is about fraud. there are some who seek to put the entire blame on -- in stead but it would be a mistake to shift the focus away from the continued effort to hold the companies and individuals who committed fraud accountable. our economy continues to face many challenges and it is unlikely we will be able to stop a future crisis but i do believe because of the work of the fsoc and wall street reform, we are prepared. i will now turn to senator shelby for his opening statement. >> thank you mr. chairman.

as you said mr. chairman, secretary geithner comes before the banking committee today to report on the work of the financial stability oversight council. the council as we all recall, was established by doc frank and is required to report annually on the state of the u.s. economy, threats to financial stability and the council's activities. in this year's report, the council described a stagnating u.s. economy with a mere 1.9% growth rate in the first quarter and the federal deficit exceeding 7% of gdp. it also reports that u.s. households have seen only modest income growth and access to mortgage credit is constrained and investment is restrained by continued elevated uncertainty, their words. as a council reports the unemployment rate is still above

8% while labor force participation has fallen to its lowest rate in 30 years. nearly four years into this administration, not even the council headed by its own treasury secretary i believe can hide the president's failure to revive the economy and put americans back to work. also troubling is the council's view of dodd-frank. is report describes all of the new dodd-frank rules but fails to mention the enormous cost to the economy. nowhere does the report mentioned that these rules will require americans to spend more than $24 million -- 24 million hours and billions of power -- dollars every year to comply with them. excuse me. if the council wanted to understand why unemployment is high, then mortgage lending is

constrained. an examination of dodd-frank would have been a good place to start. more fundamentally, the council's report overlooks the serious structural flaws in our regulatory system which dodd-frank only made worse. for all of the presidents talk about the need to reform wall street, dodd-frank is merely strengthening the advantage that large financial institutions possess in our financial system. first dodd-frank imposes huge compliance costs on bank, conferring a competitive advantage over large financial institutions that can more easily bear that burden. as a result, the banking system has and will become even more concentrated in the largest firms thanks to dodd-frank. second, dodd-frank failed to address the freedom that our largest banks received from bank regulators. for far too long regulators have viewed themselves as advocates and not supervisors of large banks.

they have developed cozy relationships with their banks and actively sought bank supported regulatory changes such as lower capital requirements. those close relationships however cause regulators to raise red flags from sub-prime loans to insufficient capital to the securitization practices. regulators also adopted the mindset that none of their large banks should ever fail on their watch. consequentially, regulators have orchestrated a series of a lot to benefit our largest banks, including the 1995 rescue of long-term capital management and most recently here in t.a.r.p.. unfortunately dodd-frank reserved and codified the preferential treatment of the large financial institutions. dodd-frank solidified the close relationship between regulators and big banks by maintaining its

preexisting prudential regulators. and contrast the regulator for the smallest banks, the ots, was -- and it also protect the big tanks from bankruptcy by creating a new resolution mechanism to ensure that large institutions do not fail. and all the while dodd-frank did nothing to make financial regulators more accountable. instead, dodd-frank i believe in it many more difficult to remove regulators who have become captured by their banks. for example come the structure of the consumer financial protection bureau makes it effectively impossible to remove its director. i have said many times through the years that nothing focuses like the specter of the -- not one regulator however was held accountable in the wake of the financial crisis. to add insult to injury's, the same regulators to they missed the warning signs were then closely consulted on how to draft dodd-frank. in fact, staff from the very

same agencies have failed us to help write the bill. this is the type of thing that outrages the american people but it is sadly business as usual in washington. secretary geithner is no stranger to bank bailouts and has played a key role in financial regulations for the past 20 years. however a recent news report about his handling of the libor manipulations suggest that he too may have tempered his response for what could be characterized as a significant problem within the banking industry. accordingly today's hearing gives secretary geithner before the banking committee, an opportunity to explain. when he first learned of the allegations of libor manipulations and how he did everything he could to protect the american taxpayer remitted vigil harm. secretary geithner i believe we'll also have an opportunity to explain to this committee into the american people how the

presidents policies are improving the economy. it shouldn't take too long. thank you. >> thank you senator. in order to get to the questions of our witness as soon as possible, opening statements will be limited to the chair and ranking member. i want to remind my colleagues at the record will be open for the next seven days for opening statements and any other material you would like to submit. welcome back to the committee mr. secretary. you may begin your statement. >> thank you mr. chairman, ranking member shelby and members of the committee thanks for the chance to come before you talk about the council's annual report. the council report outlines we have made significant progress preparing and reforming our financial system since the crisis. we have forced banks to raise more than $400 billion in

capital to reduce leverage and to fund themselves more conservatively. the size of the shadow banking system has fallen by trillions of dollars. the government has closed most of the emergency programs put in place during the crisis and recovered most of the taxpayers investments made in the financial system. on current estimates as you know the t.a.r.p. bank investments will generate an overall profit of approximately $20 billion. credit is expanding and the cost of credit has fallen significantly for businesses and individuals since the crisis. these improvements have made the financial system safer, less vulnerable to future economic and financial stress, more likely to help rather than hurt future economic growth and better able to absorb the impact of potential future failures of large financial institutions. but of course we still face a number of very significant challenges. the ongoing european crisis

presents the biggest risks to our economy. the growing recession in europe has hurt economic growth around the world, not just in the united states and an ongoing financial stress caused by the stress and europe has cost a tightening in financial conditions exacerbating the slowdown in growth. in the united states economy is still expanding but the pace of economic growth has slowed significantly during the past two quarters and in addition to the pressures from europe the economic slowdown has been hurt by the earlier rise in oil prices, the ongoing reduction in government spending at all levels of government and slow rates of growth in household income. the slowdown in u.s. growth could be at exacerbated by concerns about tax increases and spending cuts and by uncertainty about the shape of reforms to put in place reforms to both tax policies and spending that are necessary to restore long-run fiscal sustainability and these potential threats underscore the

need for continuing progress in repairing the damage, the remaining damage from the financial crisis and enact in financial reform to make the system stronger for the long run. the regulated responsible have made important progress over the past two years designing and implementing the regulations necessary to implement financial reform. roughly 90% of the rules that have deadlines before july 2 have been proposed or final eyes and the key elements of the law will largely be in place by the end of this year. as part of this we have negotiated much tougher new capital requirements on the largest banking system including higher levels of capital on the largest banks. we have the ability to put the largest financial institutions under enhanced supervision, tougher credential standards whether they are banks are non-banks and we have the abilities of two subject key market infrastructure to tougher and more carefully designed safe guards against risk.

the cftc and ftc are putting in place a conference of framework of oversight in the derivatives market providing -- combating market abuse in bringing this market out of the shadows. the ftc has designed an innovative way to put large financial institutions through an equivalent of bankruptcy while protecting the taxpayers from the risk of any loss and protecting the broader economy and the consumer protection bureau has worked to simplify improve disclosure of mortgage and credit card loans so consumers can make that her choices about how to borrow responsibly. as these reforms are very complicated and it's a very complicated process, is challenging in part because their financial system is very complex and is challenging because we need to be careful to target damaging behavior without damaging access to capital and credit and its camp -- challenging because we want the

reforms to endure as the market evolves and innovates and is challenging because we need to make sure we are according to work of multiple agencies, not just in this country but across major financial centers. beyond the reforms enacted in dodd-frank the council is put forward a list of additional recommendations for other changes to help strengthen our financial system. further reforms are needed to reduce vulnerabilities and wholesale funding markets including to mitigate the risk of runs in money market funds which will reduce credit exposure in what's called the tri-party debo market which is a funding market. regulators need to established and enforced wrong protections for customer funds that are deposited for trading financial firms and regulators need to contain to improve risk management practices with stronger capital buffers, better disciplines and better internal risk management disciplines and controls for over complex trading and hedging strategies.

the council recommends further improvements in the quality and availability of financial data. the office of financial research will continue to lead this effort and i appreciate mr. chairman reminding people that we hope the senate like on lack, nomination of richard berner to that office and finally the council continues to push for progress towards comprehensive housing reform so we can bring private capital back into the housing market. these recommendations will help though blonde the considerable offers made by the council in the past two years in making the system safer and stronger, more resilient and less vulnerable to crisis with better protections for investors and consumers. we still have a lot of work ahead of us however and we need your support to make these rules strong and effective and to make sure the enforcement agencies have the resources they need to prevent fraud and manipulation and abuse. i want to convey my compliments and thanks to the members of the financial stability oversight

council and their staff and i want to emphasize again that we look forward to working with this committee and with the congress as a whole to build on this progress and address the remaining challenges we face in the financial system. thank you mr. chairman. >> secretary geithner, thank you for your statement. we will now begin asking questions of our witness. will the clerk please put five minutes on the clock for each member? with regard to libor issue, last week i asked chairman bernanke what he knew, when he knew it and what did he do about it? secretary geithner, you stated that you are aware of witnesses -- weaknesses and older abilities with libor and he made recommendations on this matter in 2008. where if any actions any members of the presidential working

group, after they were -- at that time. in light of the recent enforcement action is there more that should be done? >> mr. chairman, in early 2008, as the financial crisis intensified, as concerned about the strength of banks in europe in particular, as those banks found it harder to borrow dollars and they needed to borrow dollars, we saw the libor rates increase. libor as you know it is a reference to the london interbank operate which is a rate set in london by the british bankers association which is an average of estimates of what predominantly foreign banks might pay to borrow and current scenes at 15 different maturities. at that time, as the rate went up, there was a lot of concern in the market about the design of the rate and the potential it created from this reporting and

the incentives bank best on the report particularly foreign banks faced higher borrowing costs. at the new york fed we took a very careful look at those concerns in the market. many of those concerns made it to the press and "the wall street journal" wrote about it in 2008. with those concerns and we thought they were justified. we were very concerned about them and on that basis, we took the following steps. we briefed the president's working financial markets which is a group composed of the secretary of the chairman, the chairman of the sec and the cftc among others and my staff subsequently re-for treasury and the cftc and the ftc following an initial meeting. but in addition to that because again this was a rate set in london by the british bankers association, i raise this directly and personally with the governor of the bank of england and i wrote a detailed memorandum to the governor

outlining a series of reforms to reduce the vulnerabilities in the rate. the bank of england was very receptive to those recommendations and indicated they supported them and would act on them. now it turns out as the cftc has testified roughly the same time the cftc initiated a far-reaching comprehensive investigation as you have seen ultimately resulted in the initial set of announced earlier this month. that investigation was still ongoing and has come to involve the range of other regulatory authorities. now if you think about what's ahead, just want to take a minute to outline what we think is important and necessary going forward. in addition to this ongoing enforcement, of course it's very important to the integrity of our system because a simple important and necessary test for any financial test is do we have the capacity to hold people

accountable when they do these kinds of things of the investigations are still very an important but addition to those i want to highlight some of the additional work ahead of us. the council and the relevant agencies are taking a very careful look at the potential and vocations for the functioning of the financial system of these remaining challenges. we are carefully examining -- this is the members of the council -- carefully examining other survey-based measures of financial crisis or interest rates to assess whether there is any other potential out there for the kind of problems we have seen in libor. these entities are carefully examining potential reforms to libor and alternatives to libor, a broad global effort is underway led by the chairman of the financial stability board which is the group that includes all the world's major central banks and market regulators like

the ftc and the cftc and their global counterparts examining reforms to the system. now in addition to these additional challenges ahead, we need to take a very careful look as a council in how we deal with the circumstance in which a confidential investigation enforcement action reveals evidence of behavior of practices that could have implications for the financial system as a whole. this is a challenge because as you know we have to have careful safeguards to protect the confidentiality of those investigations and yet i think we have to find a way to make that information if it had systemic implications available, two key members of the council and we are taking a careful look at that. finally we have to take a careful look at other parts of the financial system, where the markets relied on private

organizations composed of private firms like the british bankers association that has some quasi-regulatory or self-regulatory role. as you have seen in this case we have to be careful to make sure that the system is not relying on associations of private firms that leave us vulnerable to the kinds of things we have seen. of course it's very important to the integrity of our system that the enforcement authorities have the resources they need to do their jobs. if you have -- if there is a small town in america and its population grows by 10 fold or 100-fold in a five-year period you need to increase the size of the police department. it is absolutely important to do that. now the members of the council i am very confident will be fully responsible -- responsive to the oversight conducted by this committee and other bodies in congress to examine this

particular set of challenges and how we are dealing with them moving forward and we will continue to keep the committee informed as we pursue the things i just outlined. >> there has been continued criticism about wall street held accountable by law enforcement officials. we now know that the investigations have been ongoing in this matter since 2008 and so far there has been one major -- i want you to commit to me and the american people while the administration make sure that those are involved are held accountable and prosecuted to the full extent of the law. >> absolutely. it's very important do that to that and i'm very confident in the relevant the horsemen's authorities will make sure they meet that objective.

>> there have been additional developments this week in europe that have been troubling. do you think recently announced changes out of the e.u. like the creation of the banking union, are going far enough to resolving the european financial crisis and are there additional steps that you would like to take? >> europe is working through, working to replace a mix of very challenging reforms, reforms to make their economy more competitive but also reforms that put better disciplines in place and how much countries can borrow and better oversight of their financial system but those reforms are going to take some time. and in the interim, the european authorities are going to need to do more to restore confidence in the financial system, to do more to make improved the prospects for economic growth and they

need to do more to make sure the that countries that are doing these reforms are able to borrow that sustainable interest rates so there is absolutely more they need to do to underscore their commitment and their stated commitment which is to do what is necessary to make sure that they monetary union is going to work and hold together. but it very challenging crisis for them, the solutions have to be designed in europe because they have to be willing to live within the constraints and make sure they work and pay the financial cost. they will have to be designed in europe if they are going to work. what we can do is what we are doing, is to make sure we are encouraging them to go as far as woey can to protect the rest of us from a longrk and damaging -- and their specific areas where we can help them financially in ways that are very much and in our just which is with the federal reserve is doing with theirs swap lands.li

if her prospects for growth here in the united states. wor a lot of challenges ahead. theyld are making progress but they have a lot moren more to. >> senator shelby.ey ey >> thank you mr. chairman. mr. secretary you reference libor and we all have.h. tell us why libor and the setting of libor we all have. tell us w rates of loans are involved and billions of dollars involved in that. >> as i said, libor is set in ten currencies, not just the dollar or the pound sterling. 15 different maturities. it has implications around the world in part because there are a variety of financial contracts, mortgages is one example in the united states, but around the world that

reference that rate. so it is important for that reason but it is also important of course because we have seen a devastating loss of trust in the basic of trust and confidence in the integrity of the financial system so when you see a system vulnerable to banks misreporting, that can have more damage to the basic confidence people have about how the system works than any of the direct finance implications of the rate itself, and that's why it is consequential. >> historically a lot of banking has been based on trust, has it not, integrity, so when people realize that some people were perhaps manipulating the libor rate or manipulating this and that or fraud here and there, it hurts the whole financial system. it hurts us all, does it not? >> i agree with that. as i said, i agree with that

completely. >> mr. secretary, going back to when you first learned about possible manipulation of libor, was that in 2008, early 2008 i believe you said? >> that's my judgment looking back at that time which is again it was these reports in the market and in the press and concerns started to come when the rates started to go up as the financial crisis intensified. >> who did you notify besides merve king who was chairman of the bank of england about your concerns and others concerns about the manipulation of the rate? >> as i said, i briefed what's called the president's working group on financial markets which means the body includes the secretary of the treasury, chairman of the fed, chairman of the sec, chairman of the cftc, other officials, too, and then my staff briefed the treasury and the sec and the cftc after

that and that was important because although it was clear that the reforms to this problem were going to have to come in london, it had kblixzs for us. >> but we had banks that fed into that rate, did we not? >> at that point 16 banks were part of the sample. three of those banks were american banks. >> okay. do you know, did you follow up after notifying the working group you talked about and did you noich the attorney general of the united states and the justice department? >> we are the new york fed and my colleagues and former colleagues are carefully looking through all of the records of what the -- whom the new york fed staff informed at that point. >> did you, sir, as president of the bank, did you personally inform or direct someone on your staff to let the justice

department know about the implications of probably manipulation of the rate? >> to the best of my knowledge what i did was inform the president's working group and those regulatory bodies and the reason i did that is those are the bodies which have a range of different authorities that relate to market manipulation and abuse and so that was a very important and necessary thing to do. >> did you think when you first learned of possible manipulation of the rate, did you think this was a big deal? a real thing? >> i absolutely thought this was a problem is why i took the initiative to do the things we did. again, the problem was you had a rate in london over seen by the british bankers association where banks were asked to provide an estimate of what they might pay to borrow and then there was an estimate that was averaged over time, and that itself created this

vulnerability to misreporting, so it was for that reason that we were concerned about the problem in this context which is why we took the actions we did to brief the broader regulatory community in the united states and to encourage the british to fix it, to reform it. >> going back to the justice department, do you have any knowledge yourself of when the justice department got involved in this? was it late? was it recently? was it after the british hearings and regulators were involved? what? >> it is something you have to ask them and the enforcement agencies. my recollection from what other people testified is the cftc's investigation which they started about the same time, april of 2008, ultimately came to include the sec and justice as well as a mix of regulators in london and elsewhere. >> does the federal reserve bank of new york have the authority

to oversee misconduct by banks that would be under your jurisdiction? >> the congress has given the federal reserve in this case the board of governors a range of different enforcement powers. those powers are given to the federal reserve as a whole and the reserve banks like the federal reserve bank of new york do play an active role in enforcement cases working with the board of governors when they implicate our direct authorities. >> thank you, mr. chairman. >> senator reed. >> mr. secretary, when you reported to the presidential working group including secretary paulson and chairman bernanke and chairman cox and i think chairman luken, did they direct you to do anything? did they indicate that they would do anything? essentially what was the reaction? >> no, but as you now know the

cftc did roughly at the same time i think in response to the similar concerns we had did begin this investigation ultimately involving other parties and again it took quite a bit of time. these typically do. these are complicated things. you had the cftc and ultimately a variety of other regulator enforcement authorities undertaking a very far reaching investigation resulting in very tough enforcement actions. >> one of the things i think this illustrates again is the rather ambiguous position of the president of the federal reserve bank of new york. this was brought to your attention. did you communicate with mervyn king on your own volition? were you directed to do so? >> no. did i that on my own. >> why would you do that if you were not responsible for or clearly responsible for the policy of the united states with

respect to libor or anything else? you were simply the chosen by -- >> i thought it was -- >> the banking community of new york to regulate that pang. >> i thought it was the responsible thing to do because it had broad implications not just for london but the united states and i thought that was the appropriate and necessary thing. >> again, i think one of the things we tried to attempt in dodd-frank was to clarify the position of the president of the federal reserve bank, the only person that has a statutory position, i believe, in the open market committee by making that position subject to confirmation and a point by the president and confirmation, and ironically it was rejected and in fact on a bipartisan basis by all of my colleagues here. that was one of my ideas that just didn't get any traction. i think you would have been better served had you had much clearer authority and been on a level with the secretary of treasury and with the chairman of the federal reserve and had

clear enforcement responsibilities. what's your view? >> well, i think i would say it this way. we had the financial system before the crisis where you had a huge amount of risk and activity that had important implications for the average american, american economy, that grew up outside the basic protections and safe guards and authorities we have put in place after the great depression to deal with these kind of problems and that was a terribly damaging problem for us, and neither the federal reserve bank of new york nor the chairman of the federal reserve board or even the chairman of the women of the sec and cftc had authority at that stage to deal with that huge growth of risk and activity and as you saw a lot of manipulation and abuse and fraud that came

out outside the safe guards of the banking system, so the crisis was so severe in part because of that problem but of course also because within the banking system the constraints on leveraging capital were just not sufficiently prudent or careful or conservative. >> you now feel given the dodd-frank legislation that you have a much better capacity to deal with issues like this? >> i do. i think the as i said in my opening statement, it is not just that we forced $400 billion more capital into the baning system and negotiated much tougher constraints on capital and leverage globally with much tougher requirements on the largest banks so the large banks have to hold much more capital against risk than do small banks. we have given the authorities the ability to make sure that where there is risk outside that in derivatives or in the financial market infrastructure or in large institutions like aig, that are not banks but

still present risk, that we can put similar constraints and leverage on them, too. i definitely believe that dodd-frank has put us in a much stronger position than we were before the crisis even recognizing of course that you have to get these rules right and there is a lot of work to do still to address the remaining challenges. >> let me raise the final point in a few moments. because of the ubiquitousness of the line or, this presents huge potential liabilities to the banking system back then and right now. on one side you might have a borrower benefitting from depressed rates and then have you a bond holder that is not receiving what should be the rates that they contract for. obviously was that a -- first, was that a consideration in your discussions with the presidential working group, that there could be huge potential liabilities for manipulation of this rate by particularly bond holders and then moving to

today, is that a potential going forward now where you have actively consideration of suits against multiple institutions by numerous bond holders? >> absolutely that was a concern then and that's a critical concern going forward. as i said in my opening statement or initial remarks to the chairman's question, one of the issues that the fed and the sec and the cftc are working on now and which the council will review is make sure they're carefully examining not just the remaining implications for the integrity of the system but reforms and alternatives to make sure we address the remaining problems, the critical focus of the remaining work ahead. again, that basic vulnerability and reality is what motivated the actions i initiated in 2008. >> thank you. >> senator. >> thank you, mr. chairman. thank you, secretary geithner for being here with us today. i want to switch to the housing issues. in your testimony you state that

as we move forward we must take care not to under mine the housing market which is showing signs of recovery but is still weak in many areas. i am hearing a lot of concern about how dodd-frank will reduce credit availability in the housing market through some of the proposed rules for a qualified mortgage that increases liability and a qualified residential mortgage that requires a 20% down payment. recently the director of the cfpv said that if the qualified mortgage is drawn too narrowly, that could upset the mortgage market. that could be a notable example of a rule itself restricting access to credit. i would like your opinion on this. do you believe that there needs to be a broad qm definition? >> well, i want to just start by saying that i completely agree that right now mortgage credit is tighter than it should be, and it is tighter than the basic requirements put in place by fannie and freddie and fha for example, and the main reason for

that is because banks and servicers given all the mistakes they made and the damage they made feel much more vulnerable now to what people call putback which is the institutions protecting the taxpayer by putting back to those originators loans that didn't meet those initial tests, you know, no doc loans or some of the other loans they describe in that context. >> that's why we're working on the qm and qr. >> yes, but i think that concern is the biggest remaining cause of the fact that credit is tighter in mortgage than it needs to be and independent of that rule writing process ahead i want to make it clear that the fhfa and demarco to his credit and the fha are looking at ways even ahead of defining those rules that they can help address some of those concerns that is residual uncertainty about reps and warranties and putback risk is leaving mortgage credit harder to get for an average individual with good credit score than should be the case. you're right the rules have to be designed very carefully and

what the chairman is doing but the other agencies responsible for the qualified residential mortgage rules are doing is they're trying to figure out how to balance appropriately the obvious need for more careful, prudent underwriting standards, more standardization, better disclosure, with the need to be careful not to over do it, not to go too far. >> wouldn't you agree that in that context we need to be sure we don't define the qms too their rowly so that we don't restrict access to credit more than is necessary. >> i wouldn't say i agree with the objective completely. i think you want to make sure both of these two rules are designed together and carefully to reduce thesk mortgage lending more than would be necessary to do. >> i want to move to another topic since the time is short in these five-minute sectors. i want to get to the end user issue. you may recall that ever since

the dodd-frank conference there's a debate about nonfinancial end users were intended to be exempted by the statute. that is clearly what the members of congress intended. chairman dodd and chairman lincoln acknowledged the language was determined to hedge those funds to mitigate commercial risk. the regulators read the statute otherwise and have issued regulations now that do in fact require margin from those nonfinancial end users. and they basically take the position that notwithstanding their understanding of congressional intent, it was the exact language they feel bound by. because of that i introduced legislation to correct that and make it clear there's an exemption for the end users and when he was before the banking committee recently, i asked this question that i'm going to ask you, would you it be appropriate for us to correct that language

and provide an exemption for nonfinancial end users so it's clear that is what congressional intent and what statutory language requires. >> my own view, i don't think you need to do that. i think the way the statute was designed you gave flexibility and discretion to the regulators to try to achieve the objective you laid out. i think the concern is if you open this up too much, you're going to let the exception undermine the critical safeguards over financial institutions that the law was absolutely intended to cover. i don't think this requires a legislative fix. i think the law gives the regulators discretion to get that balance right but that's obviously something that we need to continue to look at and i would be happy to consult with you more and talk to you more closely about it to get a better feel for how they're defining that balance. >> are you saying that you believe that the statutory language as is gives regulators authority to exempt nonfinancial

end users? >> i want to be careful how i say this. it's not my authority. it's the authority of the regulatory agencies. i believe it gives them the ability and the discretion and the authority to define an exemption that i think meets your objective. >> you're not saying there shouldn't be exemption for end users. you say we need to get it right? >> i believe the law as you wrote it does try to make sure you're not capturing people in risk you don't need to capture. if you create exemptions and loopholes in this context, you'll undermine the broader safeguards that are necessary. that has to be our concern. >> you are saying you're worried if congress does thisthy may get it wrong and be too broad in this exception? >> i didn't mean to imply that. the balance the congress struck in the law was right and i think the regulators were given the ability to get that balance right. >> would you agree that if the law is interpreted to mean

otherwise, in other words if regulators -- i understand the regulators to take the position that they do not have that discretion. would you agree that the regulators need to have the discretion to address this issue and provide an appropriately formed exemption. >> i think i want to talk to them more carefully about it and come back to you and follow up. i just want to say in general we're trying to be very careful to make sure that we don't legislate -- this is not your intention. we don't legislate things that would weaken the overall protections in the bill and we think the law gave the regulators the ability to strike an appropriate balance in this context. >> you're not saying there should be no exemption appropriately defined for end users. >> they should implement the law as you intended it. >> thank you. >> thank you, mr. chairman. secretary geithner, welcome. in the council's report one of the emerging threats you identify in the fiscal policy

outlook of the united states and uncertainty posed by the impending fiscal cliff over the past year the constant dysfunction has caused frustration on wall street and this week a report was released showing the treasury department was forced to spend $1.3 billion in associated borrowing costs with actions taken to avoid the default last year. that was self-inflicted wound which was completely irresponsible and i don't like the situation we found ourselves in. we do need a long-term plan to get our fiscal house in order. there's no doubt about that. i also don't like having to tell folks that because folks in washington couldn't get it together to solve our country's problem it cost us over a billion bucks. that happened because some were willing to see the federal government default on its debt

resulted as the downgrade by standard & poor's. there's a real cost associated with our lack of action on this important issue. our debt and cost associated with it increase by billions every day in washington does not act. just this week we had a made in washington fight encouraged by interest troops over competing tax plans that we now have a little chance of being signed into law. instead of working to address the debt, we're no closer to resolving our problems. we can spend the next few weeks pointing fingers and blaming each other, if we continue to play political games, nothing is ever going to get done. we have to get a lot more urgent about this issue. the bottom line is we do need a bipartisan balance deficit reduction plan that is broad in scope and large enough to address the magnitude of the problem. it's going to have to cut spending and it's going to have to include revenue. we know there's only one bipartisan plan that's achieved this broad scale and scope necessary to begin to tackle the challenges before us and that

plan was developed by the president's commission on fiscal responsibility and reform, a commission that the administration did not initially support. and when we tried to create that commission through legislation, seven senators supported that idea and turned around and opposed it. i don't support everything in the commission's plan but it's a starting point and a real plan. the commissioner's effort is getting renewed support by a number of ceos. i'm encouraged the -- i'm concerned that the president has given only lukewarm support to these efforts so far and that came after the gang of six introduced a plan last july and it was evident there was wide support for it. given the experiences of the past few years, do you regret that they didn't get behind the frame work presented by the commission? >> i agree that this problem is

not something we can avoid and defer. the solution to this is going to lie in the broad frame of what bowles-simpson laid out. it will be tied to significant changes to reduce the rate of growth of health care under parts of spending. as you know the president of the united states in april of 2011 and september of 2011 in the budget in 2012 released in february laid out a detailed set of side that would mean that basic tests in restoring her deficit to a sustainableso leve.

deficits to a sustainable level. i think it's very important to remind people that we face two critical challenges. an economy is not growing fast enough and we need to make sure we're doing everything we can to make growth faster so we're healing the remaining damage caused by the crisis. we also have to get congress to come together in a bipartisan basis and agree on a set of reforms to start to restore sustainability. they have to be designed carefully to make us more competitive over the long run. doing things for education, infrastructure, private investment that makes sense but absolutely we need to get the country to come together around a set of these reforms. we have to demonstrate we can make tough choices in this area. you express concern about actions the senate took on the tax side yesterday. i want to speak in favor of what happened. what the senate did was to extend tax rates for 98% of americans but also demonstrate

they're prepared to do the fiscally responsible and the fair thing by allowing those tax rates in the top 2% to expire and i think that was a good example of what you can do that's good for the economy for certainty but also demonstrating that this town can make some tough choices to start to restore sustainability. >> my concern was more with the fact that if it ever comes to fruition. i'm not sure that we'll be -- i just want to ask one more thing. my time has run out. i think the country is ready for a long-term well thought out plan to take care of our deficit and debt on the long-term. i think the country is far ahead of washington, d.c. on that. the question that i have and congress has its own faults. i talked about it in my opening. the question i have is what have you learned, what are you going to recommend to the president when the time is right to push forth a real plan to get our deficit under control? >> i have been a long and

consistent supporter of action on a balanced frame work of tax reforms to raise revenue tied to long-term reforms across government on the spending side that are designed not just to protect the safe net but make it sustainable over time and preserve the ability for us to invest in things that will allow growth. that is just driven by a basic recognition that if we're going to do more for growth to make the economy stronger, we have to deal with long-term fiscal needs. if we do that alone and don't address this broad range of major challenges that middle class in america still faces, the erosion of competitiveness will .. t to talk to you mostly

about the things that we have the ability to look at and i know that in title 2 as we wrote the bill, there were lots of words like liquidate throughout it. as fdic has come forthwith their proposal, what really is happening and i think you know this is in the large highly complex institutions they found they were so intertwined that the best way to deal with them was to let them to continue to operate and take the stockholders out and the creditors at the holding company level and not concerned about consolidation of banking on one hand it solves that problem but it doesn't said over and over and over we want to put the banks out of business. we heard leaders in the industry say that. the fdic mechanism really doesn't do that. it's a process where they in

essence operate entities for up to five years and then re-ipo them and everything stays the same. i know the stockholders obviously are crushed thankfully and leadership is gone and those are all good things if the institution fails but i'm just wondering, i think i accurately discussed how that's going to be and we spent a lot of time with them and i'm just wondering if you feel comfortable about that or would we be better off if there's systemic risk for the fdic to step in potentially during the immediate phase but then move it on to an orderly bankruptcy at that time because again that's what happens in a bankrupt, the entity continues to operate. you would really move away from any kind of potential -- i'm not saying this would happen. where creditors were dealt with because they knew the right people. >> senator, i understand your concerns. i don't share them in this case. let me explain. i think what the fdic is

designed to do exactly what you said the objective should be, which is to come in if necessary and dismember the institution, put it out of its misery, sell whatever is viable remaining -- >> that's not what they're doing. >> i believe that's exactly what they're doing. >> they're just doing it at the holding company level. >> i think that's a slight misimpression. i understand your concerns about this. what they're trying to do is make sure they have a practical way to do the practical equivalent of bankruptcy for a large complex financial institution and what congress did that is important is to deprive them and the fed and the other relevant agencies of the ability to protect them from their mistakes and to leave them to survive to fight another day. you deprived them of that ability, which you should have done. i know that ranking member shelby, long standing concern

about this and you said in your opening remarks, same basic concern. i don't think it is right for these reasons. what the bill does is force the largest, most complicated institutions to hold more capital against risk than would a normal commercial bank, a small regional bank, a community bank and it means that if they end up making mistakes that put them in jeopardy, the government can do nothing but step in and dismember them safely at no risk to the taxpayer. now, i understand your concern. i don't think it's justified by their strategy. >> what i would like to do because i don't want to spend the whole five minutes on this, i don't think the word dismember is appropriate. we don't necessarily have to talk to you. >> that's not really a technical term. >> dismember means -- i think what fdic has found is that these organizations are so intertwined, they're not like stove pipes that you can just

move off to the side. because of that, they're not dismembering them. they're going to allow them to operate up to five years and then re-ipo them so that's a different concept. i see some of the benefits of not creating concentration because another large institution may have to take those pieces. i understand the problem. i don't think that's exactly what congress intended and i just think that if it's going to be laid out the way it is, one of the things we might think about is a real bankruptcy taking place because in essence the institution continues to operate under bankruptcy. let me just move onto one other point. this took longer than i thought. the money market funds. i think you all believe that they create systemic risk as they are currently set up. the fsoc. is that true or false? there could be systemic risk? >> i believe that although they are in a stronger position and smaller in size because of the reforms that have been taken by the fcc, i still believe as does

fcc and the fed, they are vulnerable and could hurt the system as a whole. >> the fcc -- by the way, contrary to some of the folks on my side of the aisle, i don't understand why we're protecting them exactly the way that we are right now. i think the fcc hasn't come up with the right solution. i wonder if you happen to know what that right solution might be? it seems we haven't quite come to the right conclusion on the money markets and if the fcc doesn't take action, i think the fsoc can and i wonder what your thoughts might be in that regard? >> i think it's important that the fcc propose a range of options for how to go forward in this so that the market can assess those and comment on them and the fcc and others can

reflect on what that means for getting the balance right. the fcc has to go farther than they have gone. there are a range of options people are considering as you know. one option is to go to full floating -- >> that would take a tax code change to make that happen. >> a range of things. one option is to have a mix of investment restriction, liquidity requirements and capital requirements to protect against this risk and another option is to have a mix of those things and a holdback provision and it's a complicated question. the fcc can go further and we should get on with the business of letting them expose to the world and to the markets a set of options that the world can comment on and help refine. >> i agree it should be more market based than what it is. it should not create tax consequences and that may be a way of solving it. if i could just ask one more question. a lot of community banks are in here lobbying us about the

transaction account guarantee. i think it expires at year end. i if you look at a transaction account, it doesn't take much activity to be -- to have a transaction account. if you have excessive reserve with money markets paying almost nothing and you can move into a transaction account that's fully guaranteed, i think there's already been tremendous flight into transaction accounts for this reason because it's fully insured, i would just love to have your thoughts as we consider this at year end. should we continue to extend full guarantees on transaction accounts, full guarantees, or should we end government involvement in that way? >> very good question. the relevant parts are thinking through that question now. it is not -- our judgment has

been it's not necessary to extend it. that's the judgment of the relevant authority so far. this is an issue and concern to many people and we'll look at those concerns carefully. >> a section of your report addresses housing finance reforms as an issue to be concerned about and you note that differing state standards on foreclosure practices, the lack of standards, all of these are relevant to restoring market for private capital and financing. i wanted to focus on a different piece of that puzzle. and that is we have about 4 million families who are under water who do not have fannie and freddie loans and they are essentially locked into high interest loans with no chance of refinancing. i consider this a systemic risk

from my perspective because those families become high risk for foreclosures, foreclosures drive down the price of the market and the my amount of money they pay every month compared to what they would pay at lower interest means they don't have extra spending money, if you will, that would strengthen other parts of the economy. and so all of those things are interconnected. and so that's a piece that i have been immerced in and i would like to ask if you have concern about the families with no refinancing options and if we can kind of get an effort as much support as you can possibly give to help us address that piece of the puzzle. >> we share your view completely. the president is supportive of legislation in that context. your own leadership in this stuff we fully support. we like the way you designed it. i think it's good economic policy and good for the country

to become law for the reason you said. it's not just a fairness question but it would help reduce the remaining pressures the housing is putting on the economy as well. there's a good economic case for doing it. you can do it in a way that doesn't leave the taxpayer at risk. we would be supportive of progress in that area. >> i realize there are questions that have to be resolved about whether programs and modification of existing program but we have a number of these funds out there, congressionally approved that are underutilized and if one is a modification of another, it seems launching a few pilots would help pave the path for us to build momentum. >> the policy is very good. it's very well designed. we would like to work with you on it. the question is whether we can find legal authority and resources to test on the pilot basis. >> thank you. i wanted to turn to another issue that i thought carried

some systemic risk. there was an article in the financial times just about a week and a half ago about banks stepping up their oil trade role. the article basically says that several of the largest banks have got into close relationships with refineries in order to have contracts to provide the crude to the refinery to buy the refined products after they're refined and this is essentially because under the draft rules spot commodities are exempted from pr proprietary trading concepts. my question is three years from now are we going to have a situation where because one entity is affecting the supply of oil and trading over the

contracts affected by the price of oil essentially a conflict of interest that's an enron style issue? >> good question. you can think about this in two different ways. it's very important that we have in place safeguards that limit the risk -- banks take risks in this area that could threaten the security of the market generally. we limit the risk they hold. and provisions like the volcker rule are part of that important objective. but in addition to that, you need to make sure that the market regulators have the authority that they need to make sure that they can police and deter manipulation and one of the things that's very -- the most important consequence of the fact that the s.e.c. and

fdic definitions they adopted this month on swaps is that will unlock a range of additional authorities they have to police abuse and manipulation. both of those two things are important to address the risk they pointed out and we are going to be very focused on making sure we're not just limiting the risk they take too much risk in those areas but that the market is not vulnerable to manipulation and abuse. >> thank you very much, mr. secretary. thank you. >> senator? >> thank you, mr. chairman. thank you, mr. secretary. i also wanted to ask some things about this very concerning libor issue. as we sit here today, do we know whether citibank, bank of america, jpmorgan, which participate in the libor process like barclays, did or did not similarly manipulate libor? >> we don't know that, but i

think that's a question you need to refer to the enforcement agencies and i suspect you're going to find that because this is still a confidential investigation, they won't be in a position to answer that question until these remaining investigation is brought to its natural conclusion. >> we don't know that as we sit here today? >> i can only tell you what i know, and i don't know that. i don't know what they know. and the reason i don't is because as you would expect, they have very careful protections around their investigations to preserve confidentiality. >> when did you first know about this libor issue and manipulation? >> as i said, in roughly the spring of '08 -- >> spring of '08. so we're now over four years later and we haven't answered that question. >> i don't think that's quite right. what we did at an early stage in

this process is bring this to the attention of the highest levels of the relevant agencies with the authority to prevent manipulation abuse -- >> brought it to the highest levels but we haven't gotten to the bottom of it 4 1/2 years later. doesn't that unequivocally suggest somebody dropped the ball? >> i don't think you should look at it this way. the cftc at that same time started this investigation ultimately involved the s.e.c. and the justice department in it and it is true it took four years for them to find the evidence they disclosed in the settlement. i don't know that's surprising if you look at what's typical in financial cases like this. again, if you look at a cross history of these things, these things take a lot of time. you have to do them very carefully. >> do you expect it to take 4 1/2 years and we don't know whether citi, bank of america

and jpmorgan were involved in this? >> to their credit, they started very early like we did in trying to make sure that they were examining carefully there was not risk of this behavior but actually happening in that context and they deserve enormous credit for doing that. >> as prudential regulator of the new york fed of these three institutions, did you in the new york fed look into the issue directly? >> i believe that we did the necessary and appropriate things as i said in bringing this to the attention -- not just to the fed and fcc and fdic which is an important thing to do at that early time but also to the attention of the british. >> can i just follow-up on the question? you don't think this issue with regard to those three institutions potentially impacted their safety and soundness? new york fed was the primary regulator of that. >> i thought this was a very important issue not just for our financial system but for the global financial system which is

why we did what we did. again -- >> do you think it potentially went to the safety and soundness of the three institutions? >> i don't know. i don't think i needed to know that because concerns themselves were significantly troubling to justify a very substantial response. >> given what we all knnow agre is troubling information about libor, why was it allowed to be essentially the repayment metric for t.a.r.p.? >> what you're referring to, i believe is in a series of specific programs, the fed and treasury undertook in the financial crisis, we, like many investors, used libor as a reference rate. in many ways we were in position as investors around the world which was making use of the best

available at that time. were we disadvantaged by that? we don't know whether we were or not. we're looking very carefully at that question. obviously we'll be in a position to brief you on that once we looked at it carefully enough. >> when libor was used in those contracts, you and others had knowledge of the fundamental systemic concerns about its validity, right? why was it used in those contracts? surely were there other alternatives and surely the federal government was calling the shots. >> we needed to choose what rate to reference and we made a judgment at that time what was the best rate at that time and it is true that same broad time frame we knew this rate was vulnerable to the type of practice we faced but we don't know whether we were disadvantaged by that choice. it's not clear at this stage. this is really a question you should talk to the s.e.c. about.

we don't know at this point what impact that behavior had the rate up or down for investors to borrow. as one of your colleagues said earlier, it's possible that people who borrowed money were advantaged by this. it's possible people were disadvantaged. we don't really know to the extent that happened. >> it is certainly easy to imagine -- let me put it this way -- megabanks that borrowed money were advantaged by manipulation of libor that artificially pushed it down, correct? >> it's possible. >> if that happened, the taxpayer was disadvantaged? >> if you read carefully the s.e.c. settlement documents, you'll find that the attempted behavior went in both directions so what you don't now know is what impact that had on the rate itself or the direction of the impact. that's a very important issue and it's an issue which those agencies and the other agencies

that are part of the council are going to examine very carefully. it's going to be a matter of litigation as well. >> you knew when using libor that it was manipulated so there was that potential so why did we use it? >> that's not quite accurate what you said. we knew the way the rate was designed as i said fully in the public domain that the rate was designed where banks, mostly foreign banks, were presented estimates of what they might pay to borrow across these different currencies and therefore as you might expect, any rate that's an average of estimates, there is some risk in that context. it was just that risk that caused us to push for broader reforms. >> beyond that you knew of reports of manipulation? >> we knew of reports of misreporting in that context. again, what we did was in terms of choosing a reference rate which we do what investors

around the world did which is we had to make a choice among alternatives and that was the best alternative available at the time. you can't say now with confidence that that choice in any way disadvantaged the american taxpayer. it's quite unlikely. we'll take a careful look at that. >> again, let me just wrap up because i'm over time. it seems to me that treasury and the fed and the new york fed knew of basic problems with libor, knew of charges of manipulation that underreported and pushed down the rate and then the treasury adopts that very metric for t.a.r.p. repayment. now, it's very clear that raises the huge potential of advantaging those megabanks and disadvantaging the taxpayer. thank you, mr. chair. >> mr. secretary, thank you for your testimony. i was reading as someone that wrote a letter on this issue on

libor that documents were released by the fed bank show as early as august 2007 barclays told fed analysts about possible problem. earlier in 2008, you made recommendations to the bank of england but performed the security and exchange commission and under the federal reserve those are all -- let me just see my history. 2008. who was the president of the united states? >> you know the answer to that question, senator. president bush was president. >> who were the appointees made by? >> appointed by the president and confirmed by the senate. >> this was known to entities going back into the bush administration and when you became aware of it, you raised it to all of those appropriate

entities that had the where with all to conduct investigatory abilities to pursue, is that a fair statement? >> that's absolutely a fair statement. >> with that in mind so that we cast this in the appropriate context, it still is challenging and troubling because obviously the reasons that barclays enters into a consent agreement is because they did something wrong. when they did something wrong, there's a manipulation of some sort. depending on that moment that you borrowed as has been said, you might have actually benefited or you might have actually been caused harm and considering how many mortgages and other commercial instruments are indexed to libor, that's a real concern. my question is as we move forward here, how has the treasury or the fed considered issuing our own american libor or using banks data when calculating a number? is that feasible?

how do we prevent this from happening again because one of my frustrations is that we can in the congress pass and have the president sign laws that define what is acceptable and unacceptable practices but we can't seem to get the culture and financial institutions, many, not all, many financial institutions to accept that. so one, can we have an equivalent of an american libor or other index that would be more transparent and less subject to manipulation and how do we get culture here to turn around. >> you need tough rules, tough safeguards, enforced by people who have resources to enforce them. there's no alternative to that. you can't regulate for ethics. you can't regulate for culture. you have to assume they will take risks they don't understand. that's inherent in finance.

the job of washington and government is to make sure there are tough rules in place that can be enforced and that requires resources and not just authority. now, we are looking very carefully at not just what reforms make sense to how libor is determined but what alternatives might be better for the system going forward and we'll do that very carefully and involve all relevant people and we'll brief this committee and the congress as we go through that process. as you're pointing out, it is an interesting thing. an interest rate that affects the price at which americans might borrow in dollars was set in london by a group of foreign banks largely by a group of foreign banks who needed to be able to borrow dollars occasionally under a process overseen by the british bank association. it's a strange thing. and so it is right to think about what is a better

alternative to that now and that's one of the things we're focused on. >> i think the question is right to think about what is an appropriate alternative here. i appreciate your answer to my question of culture. let me just say if we have rules and regulations, laws and even if we give, which i support regulators, the resources to pursue this, we need vigorous sanctions at the end of the day so people get the message this is not simply the cost of doing business. >> i agree that's what enforcement means. >> i have an issue with colleagues that want to retract from those sanctions otherwise we're not going to change the culture and the american people are ultimately going to be subject to the risk of those who make decisions that ultimately create collective risk. that's a huge problem. finally, i would like to ask you, can you tell us at a time

that your testimony talks about european debt crisis remaining a looming challenge for the united states, with the possibility of defaults in certain countries, what have we done to know the full exposure of u.s. banks and other institutions to the debt of the european countries and if they were to materialize at this point in time, what are we doing to limit the effects on americans in that context? >> very good question. the federal reserve has for throughout the past three years just carefully looked at how best to measure the potential exposure of u.s. banks and other financial institutions to those parts of europe. as i said in my opening testimony, we forced banks to hold much, much more capital against risks. 400 billion more than before the crisis. banks have moved aggressively to

significantly reduce and limit their exposure to the risk they pointed out. that happened to money market funds too which is important in this context. now, it's important to recognize that europe is a very large part of the global economy and the largest, strongest economies in europe are still very big and very consequential. a prolonged serious financial crisis in europe that goes long beyond a long recession would have significant implications for our economy because export growth would be weaker, financial conditions would be tighter here, and that would add to the pressures we're facing on the u.s. economy. u.s. institutions hold more capital against the risk in that exposure and that's a good thing for us. >> senator toomey? >> thank you, mr. chairman. mr. secretary, thanks for being with us. just briefly i want to follow up on a discussion that we had

earlier about money market funds. i just want to strongly urge you to reconsider the position that the fcc needs to adopt a new round of regulations now for several reasons. first, i am not aware, we certainly have not seen the evidence that the new wave of regulations already imposed in 2010 is somehow inadequate. we have seen that this industry is now in a stronger footing and got through some very difficult times last summer without a single hitch suggesting in fact that they are in pretty good shape. second point i would make, this notion that i see repeated often that they are somehow susceptible to runs is quite ironic to me given that over the 40-year history of hundreds and hundreds of funds through all kinds of extraordinary historical moments, there haven't been runs. so to suggest that we need this new wave of regulation, some of

the proposals of which i'm concerned would destroy the product. the capital requirement i don't think achieves its stated objective. it's unaffordable with holding requirements i think badly damage the product. so i would like to just urge you to reconsider this. i think this is the wrong way to go. the questions i would like to get to if i could is on libor. first of all, there has been some suggestion that some of the british regulators may have known and in fact may have condoned or even encouraged some misreporting during the financial crisis for fear that otherwise a perception of risk at these banks might cause problems. i think i know the answer. just for the record, did you or any regulators that you're aware of ever actually condone or encourage misreporting of libor? >> absolutely not. >> that's what i thought. here's what i don't understand.

that is how you were aware of this in early 2008 and for the last four years you never used the bully pulpit that you had to, a, warn the american people. there's literally hundreds of municipalities receiving libor payments and we know and you knew that those libor payments may not be the correct payments. in fact, might very well be less than what they ought to be getting. these municipalities didn't know that and they should have. the second thing and then i'll let you answer. the second thing is why did you not use the enormous influence that you have had both at the fed and treasury to persuade the financial institutions to adapt the different mechanism that would not be subject to this kind of manipulation when there are other alternatives available? >> i did what i thought was the

most effective way to get to the heart of this. in general, you're right, there are some problems that you can address by talking about them. generally i'm of the view that it's better to act on these things and that's what we try to do. now, these concerns that you fer to as you know were in the public domain at that time. "the wall street journal" among others did a very good job reporting these concerns and the vulnerability we were worried about was there for people to see. now, in this period between that time, spring of '08 when we acted and when the cfdc annou e announced a settlement earlier this month, they were involved in a far reaching complicated difficult investigation which ultimately covered the damage you referred to and they involved the fcc and justice in

that context and fully appropriate and that process took time. in the interim, the british did do some things to try to reform the way the rate was structured. i don't think those reforms went far enough. our system has to work this way. you have to combine reforms to the underlying problem that we set in motion with enforcement action, with consequences and that's exactly what happened in this context. >> i am not at all suggesting we shouldn't have had enforcement. i think we should have. absolutely. my concern is that knowing that this rate did not have integrity, you nevertheless stood by while thousands of transactions were being executed and interest rates swaps, loans, all kinds of agreements, and it seems to me you could have used the enormous persuasive power that the secretary of the treasury has to encourage and persuade the financial institutions to fix this or start using an alternative

mechanism. >> that's exactly the objective of the actions i took at that early stage in the process. i do think it's important to recognize that the market began some time ago. the market was broadly aware of these concerns. investors, borrowers and lenders were aware of these concerns. it was driven by the recognition that their interest may be better served. i want to caution that it is important to take some time to carefully examine what was the impact of the behavior on those rates. again, i don't think we know with confidence now the direction of the impact or the magnitude of the impact. that's a very important issue and critical to restoring trust and confidence in the system and i think the relevant authorities are doing a careful job of looking through that. >> my time has expired. i'll close by saying i understand that we don't yet know exactly the direction or magnitude of the cost but we

know this was a process that lacked integrity. i would suggest that some transactions that were entered into and subsequently resulted in significant losses may never have been entered into in the first place had participants understood the lack of integrity in this rate setting process. >> that's one reason it was so important that we did what we did which is to not just reform the process but make sure the authorities responsible for abuse and manipulation had the ability to act on those concerns. >> senator bennett? >> thank you, mr. chairman. thank you, mr. secretary, for your testimony. just on the libor point when the chairman of the fed was here the other day, he talked about the possibility of moving toward a more market based alternative to libor and you mentioned to the senator that maybe we should think about that. what would those alternatives look like and i think the point

that he was making was rather than having rate reported by a small set of banks, you might find yourself in a place where you could have rates stress tested by the market to have confidence in what we were getting. >> you're right. one of the dominant questions before the council and people looking at this question is exactly what would be a better alternative and what transaction based rate would better serve the broader interest of the market? there are other parts of the financial markets where they relied on survey based estimates and they do that for very practical reasons. and that doesn't necessarily make it vulnerable to the type of incentives of misreport on this case but you have to ensure safeguards are designed carefully so it's not vulnerable to that. we'll look at those options and be happy to brief this

committee. >> i think we would like to hear about that. there are probably some situations where the market is lagging or transactions aren't actually happening and you can see why in that circumstance you may not have a market rate that would work but it would seem that there ought to be one that could replace libor. that would be very interesting to me. robert samuelson had a piece in "the washington post" this week called the $12 trillion misunderstanding. in this piece he accounts for how we got from a projected budget surplus of $5.6 trillion that was made in 2001 to where we are which is 6.1 trillion and $11.7 trillion swing he says. he goes through and says this is how we got here. the biggest cause of it was the recession itself which was about 27%. if you add up the recession and

the tax cuts from early 2000s, you're at 40%. if you add up the iraq and afghanistan war, you're at 10%. that's 50% of where we are. increase in defense spending, 5%, obama stimulus, 6% and so on and so forth until he gets to 100%. his conclusion is most theories often partisan of the $11.7 trillion shift turn out to be wrong, exaggerated or misleading. there were lots of causes. no single cause dominates. i think i would like to enter that article in the record, mr. chairman, with your permission. i think he very clearly lays at the comprehensive nature of how we created this problem and the reason why we're going to need as you have testified a comprehensive solution to get out of this problem. as we think about coming to the end of the year here, it seems to me maybe there are four alternatives to what we face. we would go over the cliff. when i say we're going over the cliff, it's not the united states congress.

we're driving the american people over the cliff if we don't do something. that's one option. we could let the sequester go into effect and tax cuts expire. we could do as we've done for a long time and continue to kick the can down the road and just say we didn't really mean it. when we put this tough sequester in place, we didn't really mean it so we'll turn around and lift it or extend the tax cuts. we could solve the problem in a comprehensive way during the lame duck session or we could put some process in place to try to get us to a solution in the new year. i wonder if you could talk a little bit about -- first of all, are those the only alternatives? maybe there's something i haven't thought about. second, how the financial markets would respond to those or maybe what would be the most reassuring thing we could do for the american people at the end of the day not to repeat the

travesty of last summer. >> if congress tried to defer everything, tax cuts and sequester and do nothing about the long-term fiscal position and nothing to help growth in the short-term, that would be very damaging to the interest of the country. i think to say that as a nation we have no capacity to come together on a set of reforms to address these problems and have to go as you use your phrase go off the cliff, seems deeply responsible. i think the solution to this problem has to lie in and there's been a lot of function laid by you and others and your colleagues in this direction over the last year in particular, the solution has to lie in replacing those expiring tax cuts for middle class americans and the sequester with a balanced mix of reforms that will raise a modest amount of

revenue and lock in some carefully designed savings to make our commitments to seniors more affordable over time and still preserve room to invest in things necessary for us to grow. that's the way this has to be resolved. if we were to do that as a country, that would be good for confidence and good for the economy and good for certainty and it would demonstrate again what the world has always believed about this country which is ultimately we come together and do the necessary thing. we don't wait until it's too late. >> i apologize because i know my light is red. i've been here for the whole hearing so i'll ask one follow-up question. i learned so much. it's been good. one follow-up question to that. i don't believe there's enough of this around this place but at home people do have a sense that we're all in this together. we have to come together to fix this together. and at least in colorado they really are sick of the partisanship in this place on this topic.

could you give us -- in that spirit -- a sense of what the scale we would be asking ourselves to commit to versus what they have to do in europe for example. and what we would be asking our generation to do to secure the future for the next generation as a relative matter what the people in these other countries are doing go to have -- >> excellent question. let me try to do it briefly. to get our deficits down to a level where the debt stops growing as a share of the economy, we need to do it on top of the trillion dollars of savings congress enacted last year. we have to agree on roughly $3 trillion at least of additional savings. that seems like a lot to people but it's only about 2% of the national output income this economy creates. it's roughly 2% of gdp. that's a very manageable challenge for a country like us. if you do it carefully with

sensible reforms on the tax side and carefully designed savings on the spending side, you can do it without causing any damage to the growth prospects of the u.s. economy and to the basic confidence and security retirees have or what people have for health care even the basic safety net for low-income americans. the challenges faced by every other major industrial economy in the world from japan to europe are vastly greater because growth potential is weaker, populations are much older, the size of their governments are dramatically larger, the generosity of their commitments are much higher. our challenges feel daunting to us and can't be deferred forever are completely within our capacity to act again without asking americans or business community or retirees to accept an unacceptable basic burden in that context. that's why it should be within our capacity to solve. we can't control what europe

does. it has big effects on us. they're not within our capacity to control. these things are completely within our capacity to control. they are completely within the ability of this body to come together and agree on some sensible reforms. >> thank you, mr. chairman. senator? >> mr. secretary, i sure appreciate senator bennett being here the whole time. i can assure you i've been watching on television and i've learned a lot too. i admire senator bennett for being here the whole time. i've got some prepared questions but let me just follow up on what he says. two things. these carefully structured savings, carefully structured savings, they have to include savings in the entitlement programs like medicare and

medicaid. that's correct, right? the witness is nodding his head. >> that's correct. the president has proposed hundreds of billions of dollars of savings in that area because as you know the long-term deficits are driven by mostly the ageing of america and rising health care costs. >> and for example the medicare program -- i think we all concede senator bennett has been outspoken on this -- a program that grows at three times the rate of inflation cannot be sustained and that's medicare at the present time. >> that's right. i think that even with the long-term savings in the affordable care act and even with what you might call promising slower growth in health care costs, long-term projections still show unsustainably rapid growth because more interns are retiring and the cost of health care is still rising. >> and i think also most of us

while appreciating the importance of the savings in the budget control act, i think we agree with secretary panetta and other members of the administration that the approach of the sequester by the end of this year is not helpful to the economy, is that your view also? >> again, the sequester was designed by the republican and democratic leadership not because it was good policy. it was designed to force this body to make some compromises on a set of long-term reforms. that was its purpose. >> now it's the law of the land and we didn't get the result out of the super committee that we wanted. you agree it's unsettling for the economy to be facing this approach particularly in the defense and other important discretionary programs between now and the end of the year. >> i would say it a little differently. i think what's damaging to the economy now is the combination

of inability of congress to find legislative majorities that would help growth short-term and long run as well as an inability to come together and agree on long-term fiscal reforms to replace the sequester. i think both of those concerns are weighing on the economy. i don't think they're as big as direct effects on europe or spending is falling across the government, but it is a risk and it's referred to in this council report and i think we all have a responsibility to try to demonstrate to the american people and the private sector that again this body is going to be able to come together and make some tough choices on a balanced package of reforms. what the sequester is designed to do is to force that and if congress in the face of concerns about the impact of spending cuts were to simply defer them,

that would not be good for confidence. it would leave the world and the markets concerned that it's another symptom of inability of democrats and republicans to compromise on things that are in the interest of the country. >> my clock is ticking too fast for us to go on with this. let me just say that there's -- i think the looming sequester is hurting economic confidence even as we speak. it's going to make the economy worse between today and the end of the year and i don't think i want that. i don't think you want that and i don't think the president wants that. let me ask one other question. da áwq.gq,exáq

aig to protect the economy from a failing aig on current estimates, the taxpayer in that rse, too w the fed and the treasury as aea. whole. and we still some common equity in aag which we've begun to sele down significantly over time as quickly as we can. expect as important as the results on how carefully we manage importa

taxpayers exposure, it's res on ht to recognize the fed and treasuryposure and it's important to recognize that they move to not just replace the management and board of the institution, but to bring down the risk and the risky parts of the entity that prove very dramatically. alongside what the state insurance companies have been doing to make sure the insurance businesses at aig are closely supervised and monitored, we've been very aggressive in bringing down the risk. i'll just give you an example, the derivative exposure which so famously has been at the center of the vulnerability has been reduced by 90%. so aig is in a much less risky position today, and a very different firm and they look into the government's exposure and this is a remarkable thing and is likely to show that they have a modest returns and substantial exposure.

that's a remarkable outcome at the time. >> so you disagree with the conclusion of the inspector general. >> i don't think the --? it is unlikely to get some of these funds back ever? >> again, we can't -- all we can know is what the remaining exposure is and what the market value is in exposure today, but it is not a matter of dispute. it's a matter of fact. people might take different views of what happens to the taxpayers' remaining exposure and the common equity of aig as the world evolves going forward and that's something we don't have certainty over. and of course, there are some states where that may not turn out as well, but on current estimates it looks favorable and most of the exposure has been recovered for the fed and the treasury. >> thank you, mr. chairman. i appreciate you, secretary ithner being here today, and ilonly ask one question because

i have to preside over the senate. the fsort recently exercised key authorities when it designated eight firms, and as i understand it, these companies which are often referred to as the plumbing of the financial system have not challenged those determinations. the timing of these mid-will j july determinations made it impossible for the fsot to include the discussion of the selection process in its most recent, updated report or annual report. can you talk about the determination process, why were those eight firms selected and will there be other firms selected for a desing nation and what does the designation mean for the firms going forward. >> two types of authority that were provided in the financial reforms congressman act and the ones that you refer specifically refer to the infrastructure and we designated eight firms and what that means is we have the authority and this is very

important, and didn't exist before to make sure they're run with conservative cushions against risk and they're protecting the system from systemic risk. we went through a very, very careful process within the council to identify the criteria to decide where we needed to extend that authority and we went through a very carefully-designed process to make sure we gave the firms the opportunity to context it. we r remaining authority that we have not yet executed, but we will, to designate large, non-bank financial institutions and we haven't made that judgment yet who as we saw in '08 could pose to the broader economy and the taxpayer. if all you do is limit leverage

and capital for the core of the banking system and there's risk over time as we saw in the last few decades and there was a huge parallel banking system so it's very important to protect the system to make sure that you need the authority to extend those prudential safeguards to firms that are in the business. that's what we're examining now. in each of these cases we have to move very carefully and we want to move in a way that we can s is thain them legally. >> thank you. thank you, mr. chairman. >> senator werner? >> thank you, chairman. first of all, let me start by following up on what the senator said and we concur with him that we want to avoid the sequester

at all costs and my state is contingent on defense costs and i would find it just stunning to me that if all we did was simply buy off $55 billion in one year defense sequester cost and say that's the extent of our responsibility. i mean, we need a minimum of 4 trillion as you and everyone from left to right have said and we all care about the country's security and national defense, but i wholeheartedly believe that the former chairman of the joint chiefs admiral mullen who said the greatest single threat to our country is not the threat of terrorism, but the threat of the deficit and those who say, well, all we have to deal with is the sequester or the subset of sequester, just the defense half of the house, to me, and

there are others who say that should be our only top priority is stunning to mow, and i do not think addresses the concern that we face, and i would hope that we could, perhaps, with your assistance or others, size as you mentioned and the challenge is over a five to ten-year frame that would move close to historic numbers and bring spending down and start to reform our entitlement programs. the relative ask of the american people is so much smaller than what is being asked of people all across the world. and stronger circumstances of india and china and the more we can frame that, i think, would be helpful. i also want to come back to libor, and there was some irony

and as somebody who is not fully followed as closely as you other ands and here was the circumstance that was reported in the press and the wall street journal and other papers at the ti time. we had regulators in britain. we had a host of regulators in the united states. we had treasury officials in the united states, and to my knowledge, the only guy that actually sounded the alarm and said we ought to be looking at this was the then new york fed president and yet you seem to be getting perhaps a disproportionate share of why not more when there were a host of other folks who would at least have equal or greater responsibility in acting on this matter. there is going to be a question here. you know, one with of the things

that we pointed out and we all kind of scratch our head. we pointed this out and we moved to a cftc and to start an enforcement action and we all kind of scratched our head and gosh, does it take four years to get an enforcement action through? >> one of the things that concerns me is the nature of these enforcement actions because of their confidentiality, what would happen if an enforcement entity feels they've got to do this in a confidential basis and yet the actions may end up be posing a systemic risk. how do we get that right so that under the guise of confidentiality a regulator is free to at least revel to the fsot, hey, this is not only potentially criminal or otherwise, but the action in itself is systemically risky and

we can't wait three or four years before we can bring it forward? >> i think that is a very good question, and i thank you for raising it. this is a solvable problem, but what it requires is that the enforcement agencies have in place safeguards so that when -- if they find it necessary to bring to the attention behavior that has implications to other agencies like, for example, the fed, they're able to do that without jeopardizing the investigation. there's lots of precedent for doing this, but we don't yet have in place the types of mous, and other types of agreements that would give them that satisfaction and we're on that and trying to fix that quickly. >> mr. chairman and ranking member, this would be something they think we ought to look into a bit more to make sure that i can just see some of the systemically risky action being caught up inside an investigation and created an fsoc to make sure we have the broad overview. and we ought to urge the

treasury and others to get these and we'll use in place. let me follow up with a second question. a lot of concern being raised by both sides of the aisle about the kind of voluntary actions institutions to contribute to libor and some of the incentives -- make sure folks were coming clean, and aren't there across the whole financial system a whole series of other voluntary actions where financial institutions are asked to contribute information that could also be subject to manipulation and we have whole swathes, i think about again with the chairman and ranking member as we took over the financial crisis and organizations like others that are more self-policing, and not that we want to create massive,

new amounts of rules and regulations and how do we make sure if it's libor this month that there's not one of these other voluntary industry-generated and self-regulatory bodies. how do you put a warning out to say, hey, guys, everyone needs to come out with clean, non-manipulated information. >> very good question and this is something the council is looking at right now. we've had two different sets of examples that created this. one is what you saw with libor, and as i said earlier, we're looking carefully at other survey-based measures like financial prices set by industry bodies and we'll do that very carefully, but there's a different example we have recently and the failure which points out, and this is true in a variety of areas that enforcement, the market regulators rely on the so-called self-regulatory bodies that carry the burden for examination

on it, and as you saw in that case, as the report refers to in a different context, that puts us in a position where you might have customer funds more vulnerable to fraud than might be the case. the council will take a closer look at those things, too. i don't know where that's going to take us yet, but we want to address both and not just the first question. >> mr. chairman, one of the things that many of these entities work, do self-police rather than trying to create some huge, governmental structure and we have to look at the penalty side if there is bad behavior within the voluntary organizations and to make sure that we don't have to create a whole new art face. i was hoping that being the last member i would have one more question and i see my colleague saying no, no, no, i'm three minutes over. >> i need to get settled.

ask a nice long one. >> can i get one more brief on him? >> with the chairman's permission, of course. >> permission granted. although falling into -- i can do five minutes and i've just violated it as well and one quick comment i would like to have is one interesting comment by one of the architects of the collapse of glass steagall, and let's put glass steagall back in the case and interesting transformation there and one of the things that as we were trying to sort through how you kind of get the right balance was the ability of these liquidation plans to help regulate size. you're seeing a lot of the banks trade below book value and maybe the market saying size may not be this big of asset in terms of

how the market views it. are you starting to see any of these tools change any behavior? >> mr. chairman? >> congress thought about this question long and hard in considering financial reform and it put in place tots credit, a set of pretty tough, now safeguards in the system and among them are higher capital requirements where if we're one of the largest institutions which means if you're among the largest in the world you have to have more capital against the risk you take than is true for a typical bank. >> that's one. two, it's not just living wills, but there's broad authority in the law to limit the ability of the government in the future to come in and save these first from their mistakes. we can't protect them from that. that's very consequential. there's authority in the law for regulators to brake up or limit

the size and scope of those decisions in advance of the crisis if they believe they're -- they pose too much risk to the system and my own sense is what's happening right now is the full effect and impact of those reforms as they get traction are starting to have people reassess what's the right mix of scale and scope and size that's appropriate for investors and this kind of thing. it's forcing this examination. what we're going to do is continue to look at any idea that helps satisfy this basic obligation that we have and it is more stable and resilient and what we saw in '08 and we have a much tougher framework in place than we had before the crisis and we want to make sure that we don't see that weak withened by all of the pressure we're facing to weaken those reforms.

senator schumer? >> thank you, mr. chairman. i appreciate you waiting here, mr. secretary. there's been a lot of discussion about libor in recent weeks about who knew what and when and whether various regulators should have done more on the libor. obviously, this is a serious issue and the potential impact is vast. although it goes in different directions and if people wanted low libor there are lower mortgage rates and credit card rates and things leak that and it's hardly as clear cut as some are making it, but i'm puzzled by repeated claims that you and other regulators stood by and did nothing and that somehow we are just learning about this four years later. you in the new york fed were proactive and not only by raising concerns, but also proposing structural solutions. moreover, barclays reached a large settlement with, guess who? the u.s. regulators and not the uk regulators a s ans and anybo and it was the fed and doj and

working on the investigation and those didn't just start up two weeks ago. they've been going for a long time, and the idea that we did nothing for four years and some are taking unfair shots at you. obviously, you have to answer every question and every criticism and overall, i would say this, since one or two comments were talked about even here, and i think you've been just a very, very fine, public servant from the days when we first met when we were dealing with the t.a.r.p. and the stimulus, both of which saved our country from what i think would have been the great depression, and you've been smart on the merits. down the middle, you stood up to the financial services industry when you thought they were wrong. volcker rule is an example, but you also didn't bash them needlessly, and so i give you kudos for that, and i think somebody should say it, so i did. i have a question for you on our

favorite subject where we disagree. some big country over there at the other side of the pacific oce ocean. undersecretary brainard said china's economy is too large for it to pick and choose what it follows which is what the chinese have done constantly. president hoover, the u.s. china strategic economic dialogue made significant commitments to create opportunities for americans to export and sell to china by increasing market access and leveling the playing field by eliminating several barriers to trade from foreign firms. these reforms if implemented would bolster u.s. investment in china and we've heard commit a s s like this with over and over and over again with little result. what progress has china made to live up to the commitments to increase foreign market access?

what, concretely, have they done since that speech by president hu, particularly in light of nixon by the offshore oil corporation which obviously provides chinese access, increased chinese access to the u.s. market? >> senator, i don't actually think you and i disagree on this although we disagree how best to promote the interest in this context and the problem that we agree with you and we give it a lot of attention in this context. i would be happy to have my staff and and that's a specific piece which is opening up the broader investment opportunity to u.s. firms and it goes much farther than that and not just about making sure the exchange rate over time as the markets determine. the trade surplus comes down and it has dramatically, but when you didn't provide much stronger protection for u.s. innovators and there's a whole range of other disadvantage and we need to address over time and it's

not tenable for china which now has a world class manufacturing sector to maintain this range of protections for its own basic firms. so -- >> has anything happened specifically since president hu gave his speech. trade has come down significantly, but not with the u.s. it's come down worldwide and with europe a lot, but not with us as i read the numbers. >> true, but u.s. exports, to take the other side of it, are going rapidly to china and that's a very good thing. one final question, if i might, mr. chairman. this about the fiscal cliff and the senate cut tax bill and as you noted in the opening statement and the slowdown in u.s. growth could be exacerbated by concerns about approaching tax increases and spending cuts and yesterday the senate took significant action to eliminate a major piece of that certainty so let me ask a few questions to

highlight that. what percentage of the fiscal cliff does the extension of middle class tax cuts take care of. >> the extension of the rate itself avoids $100 billion tax increase on 98% of americans. that's a very substantial piece of what you call the full compliment of fiscal measures. >> the numbers i have takes 130 billion out of 630 billion. that's a lot, right? it has a big effect because it goes to the tax rates that 98% of americans pay. >> how about the one-year amt patch? >> i have 92 out of 607. so that's 15%. you had those two things up, 36% and that's a lot. all together, how much protection from the anticipated gdp hit with the house's passage of the tax bill afford the country? my numbers are 41%. >> the 40% number slightly

understates it because what people count in the overall number in some extent is already expected and planned for. the thing that would be most damaging to confidence is the middle class americans did go up and if you let them expire it's a very substantial tax base on middle class americans and remember, it's not just you all recognize this in the senate and you don't need to just extend the rates in amt, but you need to make sure you extend the expanded tax credits that we put in place in '09 that go to americans. if you don't extend the tax credits then taxes go up to $25 million americans and we have to do that to the full mix of things and if the house were to enact that, that would take care of the most damaging piece. and the uncertainties. who should pay what, and what

with percentage of the government which we hear from our republican colleagues all of the time. the number one thing we could do is pass the tax cut which we all agree on. we may not agree on what to do with people above 250, but we all agree it should be below 250. so we can take a huge amount of uncertainty off the table. so my view, and i don't know if you agree with this, if we don't pass our tax cut they should stop talking about uncertainty. i think it's necessary to do and the need to go beyobd that and there are other things that would make growth stronger and infrastructure involving teacher or incentives to hire and we all want to see congress come together on some set of reforms to produce the long-term deficits. >> thank you, mr. chairman. i appreciate it. >> thank you again, secretary geithner for being here today. your work and the work of the council is greatly appreciated. thanks again to my colleagues

the importance of conservative leadership. you can see it live starting at 1:00 p.m. eastern on our companion networking c-span. on c-span 3 the center of american progress holds a forum on state education reform. what worked and what hasn't and what is needed to improve educationed at the future. live coverage at 9:30 a.m. eastern on c-span 3. the first weekend in august visit the kentucky city on booktv and american history tv. >> welcome to the he's call society. we have been collecting for a long time. we have amassed over that 128 years absolutely fee nominal collection. >> everybody heard of the lewis

and clark expedition. what many people don't realize it has deep roots here in louisville and in kentucky. many historians believe this is the only verified animal art fact from the expedition. it's from a sheep. family used it as a doorstop. a weekended in in louisville august and 5. they explore the heritage and literary culture on booktv and american history tv on c-span2 and 3. at the white house thursday, health and human service secretary along with eric holder outline details of the new partnership with private insure. to stop medicare fraud. it is expected to save billions of dollars through information

sharing. this is ten minutes. [inaudible conversations] bringing the federal government and the country's private health insurance organization together. the very first time to prevent health care fraud on a national scale. this is just a latest milestone in our coordinating campaign to stamp out fraud from the health care system. when barack obama took office he asked attorney general hold ebb and me to make it a cabinet-level priority. we gave that effort a boost in 2010, with the affordable care act. one of the strongest health care antifraud laws in american history. so the law provided us with new resources and new tools to help law enforcement catch up with criminals and establish tougher sentence for those who get

caught. we have also developed new tools to analyze claims in real time. we can spot that phoney claims before they do major damage. in the past, too often we in the government follow the pay and chase model. paying claims first and then only later trying to track down the ones we discover to be flaunt and the money already out the door. now we are taking away crooks head start. we are using technology similar to ones that credit card companies and many of you have used to identify suspicious activity as soon as it happens. since we have put the system in place, it stopped prevented or identified millions of dollars in payments that should have never been made. because the system is designed to get smarter over time, as it analyzes more data going to be more effective in the future. and that's why the partnership

we're launching today is so exciting. over the last three years, we have stepped up both prevention. stopping many bad claims early and saving millions of dollars for taxpayers. but we know that frauds taking place across the health care system. with many private insurance companies facing the same challenges that do, in fact lots of the fraudsters have used the fragmented health care system today. for example, a bad may bill medicare for eight hours of care one day and simultaneous bill insurance companies each for eight hours on the same day. seen separately, those seem like legitimate realistic claims. sharing information across payers we can bring this potentially fraudulent activity to life so it can be stopped.

private and public payers alike we have a stake to make sure cheaters underdon't mine the health care system. we have made great strides to protect our programs from fraudsters. as criminal schemes grow more and more sophisticated. we recognize our efforts must evolve as well. by sharing strategies and prosecuting a united front, we can go much farther toward stamping out health care fraud than any of us can do on our own. so again, i want to thank you all for your partnership on this historic day. we see this as just a beginning as a new front, an a opportunity for us to develop creative ways to share information and data about fraudulent schemes, as well as nationwide trends and patterns found at fraud interviews. the collaboration allows us to get the proper payments to --

making sure no money falls into the hand of crooks. that will ultimately mean more resources for better care which is something we all want. now i'd like to turn things over to my great partner and friend, attorney general eric holder who co-chairs this antifraud effort with me. >> good afternoon. it is a primpleg to join with the secretary, the president america's health insurance planes an leaders from across the administration and the health care industry. as we know a critical step forward? our nation's fight against health care fraud. especially want to thank you president obama for his commitment to despite and the leadership he has provided in establishing the fraud prevention partnership. now through the historic new partnership, government leaders and private sector experts will come together as never before to share information while protecting patient confidential

to leverage critical resources and seek out and implement the solutions we need. we'll work to develop and disseminate practices to educate health care professionals and on ways to identify and stop fraud and establish an open ongoing dialogue on emerging threats throughout the national marketplace. as secretary mentioned, the benefits of sharing claims and health care data across the public and private sectors are extremely clear and have been recognized since the supportability and accountability act in 1996. under this administration, federal leaders have worked tirelessly to enhance data sharing between federal partners and private counter parts. we have succeeded in strengthening the cooperation between public officials and private organization in this and other areas and through these collaborative earths we're taking up prevention and

enforcement efforts to a new level. but the reality is we more to do. the new partnership will allow those on the front lines of industry antifraud efforts to share their insights more easily with investigators, prosecutors and other state holders. it will help law enforcement officials to more effectively identified and prevent suspicious activity that safe guards precious taxpayer resources. and will enable federal officials to use a full range a of tools and authorities provided by the affordable care act and other essential statutes to combat illegal actions and bring those to justice. perhaps most critically the fraud prevention partnership to extend the ordinary and unprecedented record of achievement that the administration has established in combating health care fraud. shortly after taking off president obama signaled his strong effort to the work and i

pledge to name a cabinet-level priority. as part of the promise more than three years, the departments of justice and health and human services launched a initiative known as health care fraud prevention or heat to strengthen federal state and local partnerships. the summit in january of 2010, private sector partners including son-in-law of the leaders who are here in the room have been a great part of the efforts over of the past two years we have traveled to fraud hot spots across the country meeting with local leaders, raising awareness and learning about common fraud schemes and abringing additional stakeholders into the world. thanks for the medicare strike worses and hard work of those in team of federal agents and prosecutors nationwide, during fiscal year of 2011 alone, health care fraud action by the

justice department recovered nearly $4.1 billion in cases involving fraud on federal health care programs. this was a new record. and i'm proud over the last three years, for every dollar we have spent fighting against health care fraud, we have returned on average $7 to the u.s. treasury to medicare trust fund, and others. it's clear that our approach is working. and that our investment antifraud efforts are yielding extraordinary returns. but as today's announcement proves this is really only the beginning. the fraud prevention part ensureship undercores this determination to build on the successful exports by -- and by working with them to hold criminals accountable and to seek justice for health care fraud victims. and i'm confident that this new initiative will strengthen our

ability to -- schemes that devastate lives that can undermine the integrity of our health care system and drives up a cost for all consumers. this work has never been more important or more urgent. the national scope of the problem means we need all hands on deck to address it. sphrnt lifer our determination to track l problem of health care has never been stronger that's true for ever member of this administration and our industry partners in and beyond this room. secretary and our colleaguings and on behalf of president obama i'd like to thank them for their outstanding ongoing contributions. i look forward to where our joint efforts and can take us from here. now my privilege to turn things over to a key leader in this work. karen. >> thank you. [inaudible] i want to begin by thanking the

secretary for terrific leadership on this very important initiative and also to acknowledge the members of your team your teams that are here and played a very important role in the initiative. it's an honor here at the historic lunch and be able to give voice to the views of my distinguished health care plans around the table and those at work working on the issue. they'll been trailblazers in the effort to shut down fraud. it is an unprecedented national collaboration. it's a crucial step forward and we'll open new approaches as both you have said that have been not previously available. and secretary, you said fraudulent actors don't decide to participate in either public or private programs. they participate in both. and working together in our view, will avow us to do four things. share information, identify fraud early, weed it out more quickly, protect patients from being at risk for inappropriate sub standard or wrong care.

health plans developing cutting edge technique and shown impressive results around the country. we have set up interdisciplinary unites including former law enforcement personnel and other clin nation and data specialist that work together to use the sophisticated day da that mining to determine where to look and start. intervene early and prevent it. and secretary, you said that in our view the name of the game here to intervene early. this approach sent powerful in preventing fraud from occurring in the first place rather than trying to chase after it after it occurred. in our view we're doing it all us of us are working together to do this because the cost of fraud is far more substantial than the matter of claims that should not have been made. it can cause harm to patients who have been intentionally exposed to radiation ininvasive surgeries they don't need or suffer the lasting consequences

of receiving fraudulent diagnoses they never find out or follow them in the medical records. in our view it will be better than the sum of the parts. in an effort that's coordinated an organized across the public and private sector is a double threat toker. s because the partnership opens up a new front. it sends a meth age it's got a greater deal harder inspect is a national partnership that greats a bridges to a new era of collaboration cooperation. based on the pest be practice and tools of the public and private sector. we know that we're law enforcement has partnered locally with health plans that have been risk results. we're confident will produce results in more detection effective prosecution and send a strong message to perpetrators. our community represented around the table with such distinction today is honored to roll up the sleeves, get to work partner

with hhf and the justice democrat and show results. you both made it possible for the best and the brightest in both sectors to work together. we graduate on you on the development of this path breaking effort. >> friday on c-span 2 the alliance for health reform looking at health insurance exchanges and how the state and federal government can implement them. we'll have live coveraging starting the u89 30 a.m. eastern. later in the afternoon, at 4:25 eastern also on c-span2 former president bill clinton addressing the 2012 international aid conference. nancy pelosi will speak to the group too. this weekend on american history tv . >> let me begin to open up the discussion by asking this one. what exactly is the nature of the clash between? is it a clash of a policy?

is it a problem of personalities? >> from lectures in history, truman and mcarthur johns hopkins professor on the relationship that lead a president to relieve a general at the height of the korean war. saturday night at 8 eastern and sunday more from the contenders. a series that look at key political figures that ran and lost but changed history. i'll governor once said he had a bad case of hereditary politics. his graph was vice president. his grand and he ran twice. the contenders 7:30 eastern and pacific. american history tv this weekend on c-span 3. [inaudible conversations] military suicides are highest levels in the ten years of war in iraq and afghanistan. with an average of one south side happening every day this year. that issue was part of joint

hearing on the house armed service and veterans affairs committees with the defense secretary leon panetta. this is two and a half hours. [inaudible conversations] good morning i welcome everyone for this special joint hearing with the committee on veterans affairs. our focus is the collaboration between the department of defense and the department of aveterans affairs to assist service service-members transitions to civilian life. we have two americans leaders on the issue with us. secretary panetta and secretary slen sick i can to serve those who have served best in uniform. i also welcome chairman jeff mill enand ranking member bob.

of course, ranking member adam smith from our committee. i thank them all for their significant efforts to address a range of transition issues. it's no secret that i have posed plans to reduce the size of our military, especially when con ting sei operations are ongoing in afghanistan. i find it strange when we're at war the department of desks is announced it will rduce the size of the army and marine corp. such cuts put strain on the service-members and the families. more over, i have been vocal regarding the threats poses to the strength and into the integrity of our military. reduction in -- will be asked to leave the military on top of the 175,000 service-members that suffer every year. i continue to voice my staunch opposition to further cuts to

defense budget, which if they take effect will not increase the damage to the national security but put significant strains on the transsystem that is already working to too slowly. today's hearing demonstrating our joint land standing comment there be no gap in service and support providing to our service members and the families as they transition from the department of defense to the department of veterans affairs. the transition that serve members experience from active service in the civilian life must be improved. veterans of afghanistan and iraq know that the hardships don't end when they leave the war zone. we are painfully aware that at this moment 26,000 service-members are in the mist of disability evaluation process and are forced to wait over 400 days on average but they can return home to the communities. to further assist the transition, the congressman mandate over a decade ago the

dod and da create a health record to facility the transfer of service-members personal health information between the dd d. o. d. unfortunately after continuing delays we're told it is expected to be completed until 2017. and finally, we hear about the veteran unemployment numbers 23.3% of veterans between the ages ever 18 and 24 are unemployed. this highlights the difficulty of our younger veterans are having to find employment. the idea that our service-members can go from the frontlines to the unemployment lines is unacceptable. these men and women who whom i have called the next great generation and who who with their families sacrificed so much for the country deserve better than to have to face the uncertainty of leaving the military in the very hard economic times. we must never stop working on their behalf and there is much

work still to be done. during my meeting with secretary i came away impressed by his deployment improving the transition. he met multiple times with secretary gates in joint commitment to action was born. that commitment has continued with secretary panetta. i like to hear from both of you today on the progress you have made and also what you believe to be the critical next steps and i would like to compliment both of you for working so hard together to make these things happen. specifically, i want both of your views on the transition aassistance program tap which facilities the transition from active duty. with regard to objectives do you both agree on on objects. for example, the tap design prod prepare service-members for entry into the job market, or is the purpose to actually get a service-member a job? how do you measure weather tap is achieving the objectives?

service-members transitions deserve a government-wide approach that includes support from the department of defense, veterans atbairs, labor, education, small business administration among others. how is it provide the such an approach? the unimportant consequence of over a decade of war is service-members return with serious life-changing injuries. even as the numbers of service members being deployed to combat zones goes down, projections are that the numbers of service-members and veterans needing support will grow substantially for the foreseeable future. what are both departments doing help service-members transition as quickly as possible by providing them the treatment they need to return to their families live fulfilling, lives. given the significant evolution of medical science they survive horrific injuries that would

have been fatal even during the first gulf war. many of these wounded veterans will need long-term comp comprehensive services and support that can be provided by the military and virginia. va. what are the plans to maintain an light of the fact that the department of defense is facing another half trillion dollar reduction due to se sequestration. but the department of veterans affairs is exempt? i now recognize chairman jeff milling for the opening remarks to be followed by ranking member adam smith and ranking member bob for their opening remarks. >> thank you very much. mr. chairman and to the ranking members for helping to set up this really truly historic meeting today according to quick search, it appears that we have never had these two secretaries simultaneously appearing before

our two committees, and i suggest we don't wait song before we do it again. and if we're going ask the va and d. o. d. to work together. i think our committees should be doing exactly the same secretary pa then that. it's a pleasure to have you both with us here today. in your presence i think underscores the goal we all share. that our separating service-members have a seamless transition from the military live to the civilian life. our committees the veterans affairs committee and the subcommittee on oversight investigation has held at least 13 oversight hearings on transaction related issues. it including joint dpaibility of evaluation system the didn'ts more ensuring the highest quality of health care for the severely wounded ensuring our service-members leaving military requipped successfully during

today's work force. we have also nows canned on the tools your departments must use to deliver these 21st century service such as the electronic health records and other it solutions. the test testimony that we have received so far on matters that we talked about has been somewhat mixed. at we have a heard of number plans and processes and improvement from your testimony today, e see it ebbing coast much of those improvements but i think what we all want to see is clear bottom line results. several examples would include not withstanding the resource congress has provided over the last several years to improve afghanistan and iraq to mental health care access. many concerns remain. va psychologist testify that they are overrun with veterans in need. mental health service lynns are

push -- five yeergs ago they called for the establishment of effective federal recovery coordinator program for the seriously wounded and the families. but rather than a single point of contact, they called for va and dodd created two separate programs. the gao testified that, quote, proliferation of the programs has resulted not only in inefficiency but confusion for those being served. the intended purpose which is better management and may had the opposite effect. five years ago senator barack obama said, quoting with all of us are in agreement we need to make the dodd disability review process less complex and better coordinated with the va process, end quoted.

that process remains slow and continues to be complex. gao reported that case processing times have increased over times and measure of service-member satisfaction have shown shortcomings. finally, despite repeted asorings eater the need for them to cher medical and other information electronically. it seems the goal post continued to move over and over again on when the finally going to take place. gao says still don't fully agree on keep planning and operational elements that would ensure future success. so it's my hope that raising these important issues to both of you here today will serve as a benchmark going guard by which ul of use can hold you or your suck covers accountable. i know, that both of you and i believe both of you are committed to solving the problem.

if we are going isn't working thenlet work together to get things back on track. i look farred to your testimony i yield back my time. >> thank you, mr. smith. >> thank you. i thank both of our chairman for holding the hearing.

we need to get at coordinating that service. i think one of the things that struck me about the issue is how so many people in the country want to help. certainly it's true at your two departments, it's true in congress, but, you know, business leaders, community leaders so many people out there that have coming up with creative new ideas every day for how to help our service-members and the family as they transition out of the military. i think one of the great challenges how do you bring the resources together, come up with a best practice approach. what works best and how can you use that for helping the people who serve in the military make the most of out of through resources and best coordinate. i think that's a challenge out there. there are folks outside of the government who are anxious to help. we need to boric them in as well. i agree with both of the chairmans and the challenges. i look forward tour your testimony and questions and answers how we can step up to the critically important college

with the nation. i yield back. >> thank you. thank you, mr. chairman. thank you for holding the hearing. the picture of the two secretaries sitting there together says it all. and i will tell you, mr. chairman, when i was chairman of the veterans committee. i was trying to work our party to have a joint session. i could couldn't accomplish. thank you for getting it down. thank you, mr. secretaries. we're going use the word transition a lot here. i want to thank -- can i say leon here? when i first came to congress, the secretary was very helpful in me transitions from local government to congress, i'll never forget your kindness and mentoring. thank you, leon, for all of your work over so many years with so many people. you have a legacy, here, of course, that we never forget. the issues that we be, bev within talking, you know, as a

congress and with the exiktive branch for many years, decades in fact. we have to break down the bureaucracy health record system. it just -- people die because that system is not integrated closely enough. and it seems that this is not beyond our capacity as a people to ge those systems integrated. i want to say one word we want to thank the president for announcing this reverse boot camp. i think it's a good start. recognition of that but i think it's just the start. and i've been talk forking at least a decade about a boot camp, i don't think, mr. secretary you ought to build on the tap program. if you attended the programs, what shall i say? they're a waste of time for most

people. the only poem more bored than the service-members sitting there. they're thinking about getting out. they're not talked about. the only people more bore is the people giving the lecture. it's not exciting fop expand it to five days, doesn't seem to get heart. i think so you to seriously look at and i know there's a cost factor and the predecessors would not look at it seriously, a real boot camp when we send our young men and women to military they go through ten, or twelve weeks to get to the military. you need as much time to transition. and first and foremost, which the president's program, i don't think it has it and is adequate medical evaluation. you know we have thousand tens of thousands probably hundreds of thousands of young people living the military without adequate diagnoses or the mental or physical health. we know pdsd could be

undiagnosed. they unrecognized. people are in self-denial. they transition and that having enormous problems. suicide, homelessness, whatever. we can stop that with an adequate diagnose. if you did it in et et setting where it was a transitional setting on a campus or some base somewhere, with their families, with their company of soldier, they get the support they need that they lack when they do a sudden transition. their families with are with them. you can do the medical stuff. you do the job counseling, you do the educational counseling, but in a relaxed atmosphere where everybody is paying attention. be part of active duty the last eight ten, twelve weeks. i'm tell you five days is a start. it's not going to do it. as you know, you know better than all of us. the rate of south side, the

homelessness, the convictions for crimes of recent veterans are symptoms of incredible problem. it's an epidemic. we are not focusing. we don't know to know about it, it seems to me. if you look at the reverse boot camp and take it seriously and deal with the medical and psychology and economic and educational issues other a period of time, i think you can greatly reduce this blot on the record after the young men and women serve so professionally in iraq and afghanistan or whenever they happen to serve and come home and have domestic violence and suicide and homelessness and joblessness. we're not doing our country a service. and i think you all -- so you the leadership skills, you have the ability, you work well together, we can get this blot all of our country's record and really do something seriously.

so thank you all for being here. we thank you for your personal cooperation, your personal leadership, you really change the two biggest obamacares we have in the nation you can change them. and we look farred to working with you. thank you. >> thank you. given the interest in the hearing today and it is a joint and that fact it's a joint hearing and after consultation with mr. smith, -- i ask unanimous consent that each member shall not have more than two minutes to question the panel of witnesses. starting with me. hearing no objections so ordered. in addition, we will follow or committee rules and recognize members who arrive before the gavel in order of seniority. i want to give special reck initials to one of the committee staff john johnson better known

as j.j. who is responsible for artfully configuring this hearing room that normally hold 64 members. but today has been expanded to comfortably seat 22. 82 been you have any personal thanks. now, mr. secretary panetta, if you would please begin. >> thank you, mr. chairman. i would ask that my full statement be made part of the record and i'll amaze. >> both will be fully entered. >> thank you very much. chairmans, former colleagues of mine i appreciate the opportunity to be here. i want to pay my respects to the members of both committees. this is a unique event. it's an important event.

and first and foremost i want to thank all of the members of both the armed service and veteran committee for the support the provide the department of defense the men and women and uniform and the veterans. , we could simply not do the work that needs to be done in protecting this country and in serving those that are warriors and their families. we could not do it without the partnership that we have with all of you, and for that reason, let me just express my personal appreciation to all of your for your dedication and commitment to those areas. i want to thank you for the opportunity to appear this morning alongside the secretary. he is a great friend and public servant. great military leader and a great friend to me an to our nation's veterans. i appreciate the opportunity to appear alongside of him.

i'm pleased to have this chance to discuss the ways the department of defense and the department of veterans affairs are working together to try to meet the needs of our service-members, our veterans, and their families. this hearing comes at a very important time for our nation, and for collaboration between our two departments. dod and va are in the process of building an integrated military and veterans support system. something should from been done a long time ago. we are in process of trying to make that happen. and develop a support system that is fundamentally different and a lot more robust than it's been in the past. today after a decade of war, a new generation of service-members of veterans, coming home our nation has a made a lifetime deployment them for their service and sacrifice

for their willingness to put their lives in the line for the country. these men and women have shouldered a very heavy burden, they have been deemployed, as you know time and time and time again. they fought battles in iraq, they fought battles in afghanistan, they have been targeted by terrorists, and by ied. they have i did employed from kuwait to south south korea from the pacific to the middle east. many are dealing with serious wounds as well as complex and difficult problems both seen and unseen. they will -- they have fought and many have died to protect this country. we need to fight to protect them. we owe it to those returns service-members and to the veterans to provide them with a seamless support system so they can put their lives back

together. so they can pursue their goals, so they cannot only go back to their communities, but be able to give back to the communities. and to help strengthen our nation in many ways. none of this, none of this is easy it takes tremendous commitment on the part of all americans those in government, those in the military, it takes tremendous commitment on the part of those in the private sector or business leaders, and frankly, all citizens across our country. there is no doubt that dod and va are working more closely together than we have before. but frankly, we have much more to do to try to reach a level of cooperation to better meet the needs of those who have served our nation in uniform especially our wounded warriors.

since i became secretary a little over a year ago, secretary and i have met on a regular basis in order to personally guide efforts to share resources and expand cooperation between our departments. partnership between our departments extends to all levels lead by a jointed committee co-chaired by the under secretary of defense for personnel and readiness and the deputy secretary of veterans affairs. senior military leaders have been deeply committed to this effort. this is about the care of their troops, but it's also about i are criewtding -- recruiting and retaining the best military force mt. world. when it comes down to it, care are for those who have served and their families is not only a moral imperty. it is a national security

imperative as well. for those who have fought for their nation, we need to protect their care and their benefits, but we also need to protect their integrity and their honor. it's that for reason before i discuss the specifics dod and va collaboration, i want to announce an important step that my department is taking in order to help maintain the integrity of awards and honors earned by our service-members and their veterans. your aware of the supreme court decision that determined that free feature allows someone to lie about military awards and honors. free speech is one thing, but dishonoring those who have been honored on the battle field is something else. for that reason, today we are posting a new page on the

defense department's website that will list those service-members and veterans who will earned the nation's highest military awards for valor. initially the website will list the names who earned medal of honor since 9/11. in the near term, it will include the reaccept yets of the service crosses, and the silver star since 9/11. we'll look at expanding that information available on the website over time. this effort will help raise public awareness about our nation's heroes, and help detur those who might falsely claim military honors, which i know has been a source of great concern for many veterans and has beens of these committees and members of the congress. i want to thank you for your concerns and for your leadership on this issue and our hope is that this will help protect the

honor of those who serve the united states in battle. now let me discuss the five priority areas that dod and va trying to work on to enhance collaboration. the first is the transition program. the transition gps program. the department of the defense our goal is to provide a comprehensive transition assistance program that prepares those who are leaving the service for the next step. whether that is pursuing additional ease, whether it's trying to find a job in the private or public sector or starting their own business. on monday, the president announced the new transition gps program that will extend transition preparation through the entire span of each service member's military career. the program will ensure that every service-member develops

their own plan, meets new career readiness standards, and prepared to apply the valuable military experience however and where ever they choose. second area we focused on is trying to integrate the disability availability system. we have overhauled the legacy disability evaluation system and trying to make improvements with regard to developing a new system in the past, as you know service-members with medical conditions preventing them from doing their military jobs had to navigate separate disability systems at did od and v. a. we have replaced it with a single integrated system and that enables our dps to work in tandem. under the new system currently in use servic