it gets two or 3 million people a night. that is not the electorate. it's a big country and the conservative media only reaches a tiny chunk of it. former and current jpmorgan chase -- that led to the $6 billion in trading losses. this is a two hour and 20 minute portion of the hearing by the senate permanent subcommittee on its investigation.

[inaudible conversations] >> let me first begin by extending a special welcome to the new ranking member of the subcommittee, longtime friend senator mccain. it's not the first time we have worked side-by-side and been a longtime member and formerly ranking member and was the ranking member on the senate armed services committee and has brought a great energy and a bipartisan spirit to our work together and we want to just welcome him as her new ranking

member here. we welcome senator johnson i think is a new member here also of her subcommittee like senator mccain has been a member of the subcommittee. senator johnson has joined us and we welcome him. in april 2012 americans were confronted with the story of wall street excess in the derivative disaster now known as jpmorgan chase wailed trades. the largest u.s. banks are derivatives which are complex financial instruments that derive their value from other assets. derivatives behind at jpmorgan trades were part of the so-called synthetic credit portfolio, sometimes called the scp. that essentially made outsized bets on whether particular financial instruments or entities were creditworthy or would default during specified time periods. the bets were made by traders in

the london office of the u.s. banking giant jpmorgan chase. their there are trades, meaning their pets drew -- grew so large that they were a bit 27 trillion-dollar credit derivatives market single-handedly affecting global prices and finally attracted the media storm in finding out who was behind it. that is when the media en masse chief investment office cio which until then had been known for making conservative and investments with many deposits. at first jpmorgan cto jamie dimon claimed claim the april media reports about the subtwenty trades were a tempest in a teapot by the month later the bank admitted the truth, that their credit derivatives have gone south and not only losses but eventually exceeded $6 billion but also the risk management promise in would have been considered one of america's safest tanks.

jpmorgan chase is the largest financial holding company in the united states and it's also the largest derivatives in the world and the largest single participant in world credit derivatives markets. it is consistently portrayed itself as a risk management expert with a fortress balance sheet that ensures taxpayers have nothing to fear from its extensive dealing in risky derivatives. with that reassuring portrayal of bank was shattered when whale trade losses shocked and the investing public not only with the magnitude of the losses but he cuts the financial risk had been largely unknown to bank regulators. the subcommittee meets today after nine months of digging into the facts behind the whale trade. the subcommittee collected nearly 90,000 documents have done over 50 interviews and briefings and has issued a 300 page bipartisan report.

while the bank and its regulators have cooperated with our investigation for key former jpmorgan employees directly involved in the derivatives trading declined to cooperate because they reside overseas and they have remained beyond the subcommittee subpoena authority. our findings opened a window into the hidden world of high-stakes derivatives trading by big banks. it exposes the derivatives trading culture of jpmorgan that piled on risk is losses disregarded risk amendments and manipulated risk models that dodged oversight and misinformed the public. our investigation brought home one overarching fact. the u.s. financial system may have significant vulnerabilities attributable to major bank involvement with high risk derivatives trading. the four largest u.s. banks

control 90% of u.s. derivatives markets and their profitability is parked in their derivatives holdings, nowhere more so than at jpmorgan. the whale trades just demonstrate how credit derivatives with complex components can -- a runaway train. the whale trades also demonstrate how derivatives valuation practices are easily manipulated to hide losses, how risk controls are easily manipulated to circumvent limits enabling traders to load up on risks in their quest for profit. firing a few traders and their bosses won't be enough to stop wall street's insatiable appetite for risky derivatives bets or stop the excesses. more controls are needed. among the most troubling aspects of the whale trades case history

in the jpmorgan traders were required to alt the value of their derivatives holdings every business day used internal profit-loss reports to hide more than half a billion dollars of losses in just three months. eventually those misreported values forced jpmorgan to restate its earnings for the first quarter of 2012. but to this day jpmorgan maintains that the mismarked values did not on their face violate bank policy or generally accepted accounting principles. but if derivative books can be cooked as blatantly as they were in this case without breaking the rules, then the rules need to be revamped. given how much major u.s. bank profits remain bound up the value of their derivatives, derivatives valuation can't be trusted and are a serious threat to our economic stability.

the whale trades also demonstrate how easily a wall street bank can manipulate and avoid risk control. the financial industry assures us that it can prudently manage high-risk at to these because they are measured monitored and limited. but as the subcommittee report demonstrates in detail, jpmorgan executives ignored a series of alarms that went off and the bank's chief investment office breached one risk limit after another. rather than ratchet back the risk, jpmorgan personnel challenged and reengineered the risk controls to silence the alliance. it is difficult to imagine how the american people can trust major wall street banks to prudently manage derivatives risk when bank personnel can readily gain or at north the risk controls that are meant to prevent financial disaster and taxpayer bailouts.

the whale trades provide another example of the major wall street banks misstatements of concealment. in fact in january of 2012, the bank told the occ, the office of the control of the currency and accurately that the portfolio was decreasing in size when it wasn't. most troubling of all, the media spotlight hits in hit senior bank executives mischaracterized to invest to the public the nature of the whale trades to the extent of risk management and regulatory oversight gambling apparently with portfolios that that's what recover before anyone took a closer look. well we took a closer look and it isn't pretty. a massive derivatives portfolio riddled with risk, a runaway train of derivatives, a runaway train of derivatives trading

blowing through risk limits, hidden losses, bank executives downplaying the bad bets, regulators who failed to act. together these facts were a reminder of what occurred in the recent financial crisis and we just can't rely on a major bank to resist risky bets and honestly report derivative losses or disclose bad news without a strong regulator looking over its shoulder. backed bylaws it requires transparency risk limits capital buffers against losses and consequences for misconduct. that is the big picture and here are a few of the detailed findings from investigation. first jpmorgan's chief investment office rapidly managed a huge portfolio credit derivatives in part using federally insured deposited funds in a series of risky short-term trades disclosing the portfolio only under intense

media exposure. during 2011 as shown on chart one and i think we can get chart one up over here the chief investment office and synthetic credit portfolio grew from the net notional size of $4 billion to $51 billion tripled in the first quarter of 2012 to $157 billion. that exponential growth and holdings of risk occurred with virtually no regulatory oversight. second once the whale trades were expose jpmorgan claimed to regulators and investors and the public that the trades were designed to hedge credit risk. internal bank documents failed to identify the documents being hedged and how they lowered risk or where the supposed credit derivative hedges were treated differently from other hedges by the chief investment office. if these traits were his jpmorgan hedges had gone

astray it remains a mystery how the bank determined the nature size or effectiveness of the so-called hedges and if it all reduced risk. the chief investment office generally concealed massive losses in the first several months of 2012 by overstating the value of its synthetic credit derivatives. they got away with overstating those values within the bank even in the face of disputes with counterparties and the face of two internal bank reviews. as late as january 2012, the cio valued his credit derivatives by using the mid-point and the daily range offered in the marketplace. that's the typical way to value derivatives. but beginning in late january the traders stopped using the point prices and started using prices at the extreme edges of the daily price range to hide

escalating losses. in recorded phone conversations one trader described these remarks is idiotic. at one point traders used a spreadsheet to track just how large by recording the valuation differences between using that point and more favorable prices. in just five days in march according to the traders own spreadsheet, the hidden losses exceeded $400. the difference eventually exceeded $600 million. counterparties to the derivative trade began disputing the cio's ovalles involving hundreds of millions of dollars in march and april. despite the obvious value manipulation on may 10, the same day jpmorgan announced the whale trades had lost $2 billion the bank's comptroller concluded a special review and signed off

on the cio's derivative pricing practices as quote consistent with industry practices closed quote peer jpmorgan's leadership has continued to argue that the values assigned by its traders to the synthetic credit portfolio were defensible under accounting rules. yet in july 2012 the bank reluctantly restated its first quarter earnings. it did so only after an internal investigation listen to phone conversations routinely recorded at the banks which traders mocked its own valuation processes. now there are mismarked values were wrong simply because the

traders intended to understate losses. they were wrong because they changed their pricing practices after losses began piling up. stop using the midpoint practices -- that excuse me stopped using the mid-point prices they had used up until january and they began using aggressive prices that consistently made the banks reports look better. intel jpmorgan and others stop their personnel from playing those kinds of games derivative values will remain imprecise malleable and untrustworthy set of figures that call into question the derivative profits and losses reported by her largest financial institutions. fourth, when the cio of the synthetic credit portfolio preached five key risk limits, rather than reduce the risky

trading activities, jpmorgan neither increase the limits, change the risk models and calculated risk or turned a blind eye to the breaches. as early as january 2012, the rapid growth of the synthetic credit portfolio reached one common measure at risk called value at risk. it caused a breach not just in the cio but for the entire bank. bad for dave breach was reported to top bank officials including ceo jamie dimon who personally approved the temporary limit increase and the breach was ended. cio employees then hurriedly push through approval of a new model that overnight drop the cio's risk by 50%. regulators were told about that remarkable deduction and the cio reported risk that raised no

traction to the new model at the time. the credit derivatives portfolio preached other risk limits as well. in one case, it exceeded established limits on one measure known as credit spreads 01 by 1000% per months running. when regulators asked about the breach jpmorgan risk managers responded that it was a sensible limit and allow the breach to continue but still another risk that the call comprehensive risk measure protected the synthetic risk -- excuse me the synthetic credit portfolio could lose $6.3 billion in a year and a senior cio risk management dismissed the result is garbage. it wasn't garbage. the projection was 100% accurate and the derivatives traders thought they knew better. downplaying the risk ignoring one risk boarding after another and pushing to reengineer risk

controls and artificially lower risk results flatly contradict jpmorgan's claim to prudent risk management. fifth at the same time the portfolio was losing money in breaching risk limits jpmorgan dodged the oversight of the occ. it omitted cio data from its reports to the occ and failed to disclose size risk and losses in the credit portfolio. it delayed or tinkered with the occ request for information by giving the regulators inaccurate or unresponsive information. in fact, the whale trades first became public that bank office blanket reassurance that the occ initially considered the matter closed was only when the losses exploded when the occ took another look. it can't be excused by the bank

's behavior. the occ also fell down on the job. it failed to investigate multiple sustained risk limit breaches and it tolerated incomplete and missing reports from jpmorgan. it failed to question the banks new value at risk or var model that dramatically lowered the cio's risk rating and accepted jpmorgan's protest that the media of the portfolio are overblown. it was not until may of 2012 after the comptroller of the currency took the reins at the occ that the occ officials instituted their first intensive inquiry into the synthetic credit portfolio. it began with the lessons of the 2008 financial crisis so painfully fresh it is deeply worrisome that a major bank should seek to cloak its risky trading activities from regulators that it was able to succeed so easily for so long. and finally, when the whale

trades trades when public jpmorgan misinformed regulators and the public about the synthetic credit portfolio. jpmorgan's first public response to the reports about the whale trades using prepared talking points proved by senior executives told reporters on april 10 that the whale trades were risk reducing hedges that were known to regulators and a more detailed description came at a in a conference call held on april 13 with investment analysts. during that call chief financial officer douglas braunstein made a series of inaccurate statements about the whale trade shown in chart two. he said that the trades have been put on by bank risk managers and were fully transparent to regulators. he said the trades were made on a very long-term basis.

he said the trades were essentially a hedge. he said the bank believe that the trades were consistent with the volcker rule proprietary trading by banks. those public statements on april april 13 were not true. as late as may 10 bank ceo jamie dimon repeatedly described the synthetic credit trades as hedges made to offset risk despite information showing the portfolio was not a hedge. the bank also neglected to tell investors the bad news, that the derivatives portfolio had broken through multiple risk limits and losses had piled up and ahead of the portfolio input management of the portfolio into crisis mode. it was recently reported at eight banks hit a five-year low in the percentage of deposits used to make loans. their collective average loan to deposit ratio has fallen to 84%

in 2012 down to 87% a year early or 2101% in 2007. jpmorgan has the lowest loan to deposit ratio of the big things lending just 61% of its deposits out in loans. apparently it was too many betting on derivatives to issue the loans needed to speed economic recovery. based on the investigation of jpmorgan and the whale trades the report makes the following recommendations. first when it comes to high risk derivatives, federal regulators need to know what major banks are up to. it should require those minks identify internal investment portfolios and derivatives over specified size, required periodic reporting on derivative performance, conduct regular reviews to detect undisclosed derivatives trading.

makes one next one banks claim they are trading derivatives to hedge risks we need to require them to identify the assets being hedged, how the jirgas trade reduces the risk associated with those assets and how the bank tested the effectiveness of its hedging strategy and reducing risk. next, we need to strengthen how derivatives are valued to stop inflated values. regulators should encourage banks to use independent pricing services to stop the games, require disclosure of evaluations of counterparties, required disclosure and justification when as occurred at jpmorgan and their values deviate from midpoint prices. next one risk on arms go off, banks and their regulators need to investigate the breaches, take action to reduce risky activities. next federal regulators should require disclosure of any newly implemented risk model or metric which would implement material

lower reported risk and investigate the changes for evidence of model manipulation. next, three years ago congress enacted the merkley-levin provisions of the dodd-frank bill also known as the volcker rule to and high-risk proprietary betting using federally insured deposits. financial regulators ought to finalize the long delayed implementing regulations. next, the major banks to trade derivatives, regulators need to ensure that banks can withstand any losses by having adequate capital charges for derivatives trading. it's way past time to finalize the rules implementing stronger capital bank standards. the derivatives trading that produced these whale trades damage the single blank but the whale trades expose problems they reach far beyond one london trading desk or wall st. office tower. office tower. the american people have parties suffered one devastatidevastati

ng economic assault rooted largely in wall street access and they cannot afford another. one wall street plays with fire american families get heard. the task of federal regulators and this congress is to take away the matches. the whale trades demonstrate that this task is far from complete. senator mccain. >> thank you mr. chairman and let me begin by saying what an honor it is to serve on the subcommittee which has a long history of bipartisanship and a celebrated legacy of covering waste, fraud and abuse and outright corruption before it moved forward i want to express my gratitude to you and the members of your staff for your unyielding and dedicated efforts to this investigation. i would also like to recognize the work of my predecessor on the subcommittee. senator coburn for his contributions prior to my arrival. this investigation into the

so-called whale trades at jpmorgan has revealed startling failures in an institution that touts itself as an expert in risk management and prides itself on its fortress balance sheet. investigation is also shedding light on the complex and volatile world of synthetic credit derivatives. in a matter of months jpmorgan was able to vastly increase its exposure to risk while dodging oversight by federal regulators. the trades ultimately cost the bank millions of dollars in it shareholders value. these losses come to light not because of admirable risk management strategies at jpmorgan but because of effective oversight by the diligent regulators. instead these losses came to light as they were so damaging that they should the market and so damning that they caught the attention of the press.

following the revelation that these huge trades were coming from jpmorgan's london office the banks losses continued to grow. by the end of the year the total losses stood at a staggering $6.2 billion. this case represents another shameful demonstration of the bank engaged in mildly risky behavior. the london whale matters to the federal government because the traders at jpmorgan were making risky bets using excess deposits portions of which were federally insured. these excess deposits should have been used to provide loans for main street businesses. instead jpmorgan use the money to bet on catastrophic risk. through an intensive bipartisan investigation the subcommittee has uncovered a wealth of new information, internal e-mails and memos and interviews that these trades were not conducted by a group of rogue traders, but their superiors were well aware

of their activities. traders at jpmorgan's chief investment officer for cio adopted a risky strategy with money they were supposed to use to hedge and counter the risk. however the head of the cio could only provide a quote guesstimate as to what exactly the portfolio was supposed to hedge. the jpmorgan ceo jamie dimon admitted that the portfolio had morphed into something that created new and potentially larger risks. in the words of jpmorgan's primary federal regulator, it would require quote make-believe voodoo magic to make the portfolio actually look like a hedge. top officials at at jpmorgan allowed these successive losses to occur by permitting the cio to continually preach all of that banks risk limits when the risk limits threatened to impede their risky behavior. they decided to manipulate the

models. disturbingly banks to primary regulator the occ failed to take action even after red flags warned that jpmorgan was breaching its risk limits. these regulators fell asleep at the switch and fail to use the tools of their disposal to effectively curb jpmorgan's appetite for risk. however jpmorgan actively impeded the occ's oversight. the cio refused to release key investment data to the occ and even claimed that the regulator was trying to quote destroy the bank's business. after these losses were uncovered at the press, jpmorgan shows to conceal his heirs and in doing so top officials at the bank misinformed investigators, regulators and the public. in april an april 2012 earnings call then chief financial officer douglas braunstein

falsely told investors and the public that the bank had been quote fully transparent to regulators. the deception did not end there. during the same earnings call mr. dimon tried to downplay the significance of the losses by infamously characterizing them as a quote complete tempest in a teapot. the truth of the matter is the $6 billion, some of which is federally insured, is an inexcusable amount of money to be gambled away on risky bets. this investigation potentially revealed systemic problems in our nation's financial system. the size of the potential losses and the accompanying deception echoed a misguided and dishonest action that the banks took during the financial crisis four years ago. let me be clear, jpmorgan

completely disregarded risk limits and stonewall federal regulators. it is unsettling that a group of traders made reckless decisions with federally insured money and all of this was done with the full awareness of top officials at jpmorgan. this bank appears to have entertained and indeed embraced the idea that was quote too big to fail. in fact with regard as to how the managed derivatives that are the subject of today's hearing it seems to have developed a business model based on that notion that they are too big to fail. it's our duty to the american public to remind the financial industry that high-stakes gambling with federally insured deposits will not be tolerated. in 2012 the london whale trades resulted in a 6 billion-dollar loss. what if it was 60 billion or 100 billion? as does jpmorgan operate under

the assumption that the taxpayer will bail them out again? what place the disregard for moral hazard having a proper operation of a truly free market? we look forward to hearing from our witnesses today as we examine what went wrong at jpmorgan. >> thank you very much senator mccain. senator johnson. >> i don't have anything prepared but the interesting thing about this whole process and what senator mccain just pointed out is that jpmorgan appears to have developed its business model around the fact that they are too big to fail. i've always said that the fact that we have institutions that are simply too big to fail shows how regulation the party failed us. we had regulation in place and probably should have prevented that years ago so again i'm looking forward to hearing the

testimony just to really highlight the fact that the regulators in general are very incapable of preventing all these things and i really look forward to recommendations in terms of how we can get regulation up to speed so we can deal with this in the future. >> thank you very much senator johnson. now we will call on our first panel of witnesses but before we do that let me make a comment about the procedures here today. we are anticipating a long hearing and so we are first going to call the first panel, witnesses with the most first-hand knowledge of the whale trades that are the central concern of the hearing and then after taking their testimony and asking questions of them there will be a very short rake and we are going to return them and broaden the panel by adding two senior executives for the bank when one who is responsible for public disclosures and the other who led the management postmortem

review. with that panel, that extended panel concludes there'll be a very short rake and you'll hear from the final panel with representatives from the office of the comptroller of the currency or occ. so now i will call our first panel of witnesses and ms. ina drew the chief investment officer at jpmorgan. ashley bacon the acting risk officer at jpmorgan and finally peter weiland with the chief investment offices or the cio. we appreciate you being with us is morning appreciated testimony. her son to rule six of the subcommittee all witnesses who testified are required to be sworn so i would ask each of you to please stand, raise your right hand. do you swear that the testimony you're about to give is the truth, the whole truth and

nothing but the truth so help you god? napley using a timing system today. about one minute before the red light comes on, you will see the light changed from green to yellow and it will give an opportunity to conclude your remarks. in your written testimony we have printed in the record in its entirety and we would appreciate you limiting your oral testimony to no more than five minutes. ms. chu if you have a prepared statement we will have you go first followed a mr. bacon and finish up with mr. weiland and then we will turn to questions. ms. drew please proceed. if you could keep your microphones on, if you would. >> good morning chairman levin, ranking member mccain and members of the subcommittee. my name is ina drew. thank you for the opportunity to provide my perspective on the

losses incurred in the synthetic credit portfolio chief investment office. as you know i have submitted a written statement discussing many details which i find important. i would like to take a moment though to talk about my career. i spent over 30 years at jpmorgan and its predecessor institutions in the field of asset and liability management. i joined shortly after receiving a b.a. from the johns hopkins university and a masters at columbia university. over the course of my career i had the privilege of working for a truly great ceos such as walter shipley, william howard zinn and most recently jamie dimon. during this time i helped build what i believe to be a world-class asset and liability management organization. i am very proud of the many successes we had him protect the

banks balance sheets, offsetting risk in investing prudently. i had a -- i had wonderful mentors who helped me grow and develop my leadership skills and to them i am very grateful. this was my life's work. through seven mergers and many financial crises i tried to do my best and what was right for the firm and a thoughtful, diligent manner. i loved the work in and the institution and gave it my all while raising a family, balancing my home life, charitable and educational board work and many other demands. on friday night may 11, 2012 a walk into the office of mr. dimon with whom i had a close and respectful relationship. i told him of my decision to resign was jpmorgan.

it was a devastating and very difficult decision for me. it marked the end of three decades of hard work at an institution i loved. we talked about the decision and how important i believed it was to let the company move forward with new leadership. i accepted responsibility for the offense that happened on my watch and one of the portfolios in my division. i overwhelming sadness and concern was extended to the 400 people who worked for me, many for more than 20 years. it also went to my colleagues throughout the firm who are now leading the company going forward. there were many people from the front office, risk, finance and quantitative research who worked on and analyzed static credit portfolios. in particular i relied on the experts to vet and supervise

trading and elevate important concerns to me. ultimately my oversight of the synthetic credit books were undermined. i too critical facts that i have come to learn only recently based on the customer's public statements. first, the company's new var model was flawed and significantly understated the real risks to the public were reported to me and second, some members of the london team failed to value positioned properly. they minimized reported and projected losses and hid from from the important information regarding the true risks. throughout these events i did but i try to do at all times during my career, face difficult issues with dignity and integrity.

i had many months to think long and hard about what happened. i don't have all the answers but what i can tell you is that i always tried to do my best. i tried at all times to approach these issues presented to me thoroughly, thought fully and transparently. clearly mistakes were made. the fact that these mistakes happen on my watch has been the most disappointing and painful part of my professional career. i thank you for the opportunity to appear today and i will be happy to answer any questions you may have. >> thank you very much ms. sub for now we will call on mr. bacon. >> good morning chairman levin, ranking member mccain and members of of the subcommittee. my name is ashley bacon on that at the chief risk officer of jpmorgan. i've been at jpmorgan for 20 years and has spent six years in

the firm's risk management function. i appreciate the opportunity to come before you today as part of inquiry into the cio portfolio until he would have served after being asked to independeindepende independently assess the ci zero trades. let me express the entire firm's commitment to the importance of and that -- a factor for his management turning to the cio report. the request of senior management i was brought in from outside as the chief investment office in late april of 2012 along with other individuals from the investment bank to lead a team of professionals conduct in an assessment of the synthetic credit portfolio. the purpose of that review was to understand the persistent losses being experienced and to help chart a path forward. the team worked long hours and reviewed and reported back to the senior management at least

on a daily basis. after initial reports with responsibility for the day-to-day management of the synthetic portfolio the responsibility that we held until the new cio management team took over. the firm also requested my colleague michael kavanagh lead a task force to investigate these trades. later that day i believe mr. cavanagh will speak in detail about those efforts. and the remedial steps identified by the task force. i will simply discuss a few key steps to improve our risk management and risk management within cio. first, the firm appointed a new chief risk officer of the cio in may of 2012. additionally the firm took steps to ensure independence and the purpose of staffing levels. the new cio chief risk officers actual reporting practices now

confirmed his functional reporting line. he reports to me. his compensation and career advancement controlled by risk with input from the business and others as appropriate. second, the firm has overhauled the coo risk committee. the committee's meets on a weekly basis from within and outside of cio. it has been reconstituted cio treasuring corporate risk committee to reflect its broader responsibilities and increase participation. cio implemented numerous new restructured risk limits covering a broad set of risk parameters. what remained of the synthetic credit portfolio was transferred to the firm's investment bank where was subject to appropriate oversight and detailed analysis. lastly jpmorgan has conducted

a conference of self-assessment of the risk organization and as a result we are implementing a series of improvements within our lines of business. in addition to working to improve model development review approval and monitoring the worms reaffirming where appropriate revising risk limits and lines of business. we have introduced additional granularity portfolio and will continue to do so as appropriate. strengthen our processes for limiting session to provide for more rapid escalation and a more effective review. we have established the firmwide risk committee and improve the operations of the risk operating committee and the risk governance committee and enhance their reporting to the theirs risk policy committee. the risk organization constantly looks for ways to improve. the steps i described reflect a fundamental leaf and how the firms risk profile should be overseen with effective

challenge in the right level of information available to address risk issues effectively. thank you for the opportunity to appear before you today and i welcome any questions you have. >> thank you very much. now mr. weiland. >> good morning chairman levin, ranking member cane. my name is peter weiland. i'm here today to help explain some of the facts surrounding the events in question to the best of my knowledge and recollection. >> thank you very much. let me start with you ms. true. if you take a look at exhibit number 81 which is in front of you, we will have 12 minute rounds and we will have probably more than a round or two with

this first panel. we will switch after 12 minutes. senator mccain and then senator johnson and the others who may show up. do you have exhibit 81? the presentation that you gave to your portraits are just policy committee on march 20, 2012 about the cio. on page 20 provide a chart listing nine investment portfolios at the cio and you indicated whether they had longer or shorter investment horizons. now where is the sep on that chart? >> the sep is on the right side on the bottom where it is noted that the portfolio was being reduced capital-intensive credit. >> all right, so it's at the

shorter and of the investment horizon. is that correct? >> it's in the process of being reduced. spam that asking you what it would be reduced at that time. i'm asking if it was at the shorter end of the investment horizon. is that correct? >> that's correct. secellon 2012 the credit portfolio was being actively traded every weekend sometimes every business day? cio traders are buying and selling credit derivatives on behalf of the portfolio. is that correct? 's c.'s. >> and if the portfolio grew from 51 to $157 billion is it correct that by the time of your presentation by the board of directors on march 20, 2012 most of the positions would have been purchased during the first

quarter? >> that is correct. >> so these were not investments that were made on a very long-term basis. is that correct? >> he senator -- >> your horizon is the shorter investment horizon and they were bought regular infrequently. is that correct mix. >> that is correct however the core position in the book which were high yields of positions was a long-term position that had been held for many years and the intention was for these to be held longer. >> but when this portfolio grew in the first quarter from 51 to 157 billion i think most of those positions have been purchased during that quarter. is that correct? >> they had. >> is that correct? >> that is correct. >> so these trades were made but

when there were losses for and since a $6.000000000 in losses at the place over 2012 and that affected jpmorgan's balance sheet and its earnings. is that correct? those losses the trades made in london. >> yes, certainly. >> of the london traders have to get approval of the cio risk managers like you to put on positions? let me ask mr. weiland. let me ask mr. weiland that question. at the london traders get the approval of the cio risk managers like you to put on these positions? >> not for individual trades. the traders in london worked within a set of delegated limits. >> so they didn't get approval from you for the positions they were putting on?

>> not individual trades. as long as they were working within the limit. >> is that which you call positions? >> that is what i call positions? the individual trades, they didn't get your approval is that correct? >> not one by one, no. >> on january 30, 2012 the cio match with the occ at their standard quarterly meeting to discuss the cio's upcoming plans the cio chief financial officer john wilmont represented the meeting with the occ. ms. drew take a look if you would at exhibit number 58. exhibit 58 is the occ summary of that january 30 meeting and with

interviews both as occ examiner attended the meeting and wrote the summary and mr. wilmont who attended confirmed to the subcommittee that the notes were accurate. about two-thirds down that page, exhibit 58, the occ reports that it was told by jpmorgan quote the mtm book, that's for mark to market book, consists primarily of the synthetic credit portfolio and is decreasing in size in 2012 and it's expected the rw a book decreased from 70 billion to $40 billion. so do you see that by the way, that note, two thirds down the page, exhibit 58 where is this mtm book is decreasing in size

in 2012? you see that? okay mr. is in fact the scp was increasing in size in the first quarter of 2012, is that correct? you can see on the chart over here. [inaudible] >> so again this meeting took place january 31 and the occ was told that the book was decreasing in size when in fact it was increasing in size. also in the first quarter of 2012, the cio stopped assuming standard data to the occ that might have alerted the agency to the portfolio's growth. for 14 months, from january to april, the cio did not send for the occ executive manager report

with this financial data. in february and march it did not send the occ its valuation control group reports with verified profit and loss data for the synthetic credit portfolio. is that true, ms. drew? those reports were not sent during that month. is that true? >> i do not know senator. i have no part of reports into any regulators and certainly if i would have known they weren't being sent i would have considered that the wrong thing to do. >> all right, so you don't know whether they were and if he -- if they weren't sent you do not know why? who was in charge of getting those reports to the ccc and we are suddenly missing february march. who is in charge of having those reports to the occ? >> it's my understanding that both risk -- >> give us the names of people if you would. who would have been would have been in charge? >> i don't have a specific verse and that but within the risk and financial organizations and end

all and all contact was made with the occ. >> mr. weiland do you know the answer to that question? >> i don't. >> do do you know why this report suddenly weren't sent? >> i don't know why they weren't sent, no. >> who was in charge of sending them? >> i don't know the people who are responsible for sending reports to the regulators, the individual people. my understanding is normally as part of the financing function. >> okay. maybe we can find out later from our next witnesses as to why suddenly reports weren't being sent to the occ during those critical months. mr. weiland take a look at exhibit 47, would you?

this is an e-mail dated march 2, 2012 and was sent to you by one of the quantitative analyst at the bank. he was talking about cio crm results. crm stands for conference at risk measurement. the occ now requires all national banks to use this risk measure to calculate, to money could be lost in a year in a worst-case scenario. it wasn't a requirement in 2012 but it was about to become a requirement in anticipation of that when this e-mail was written. jpmorgan had our day began requiring its offices to start calculating their comprehensive risk measure so that was part because the occ was going to it now does require banks to use their crm to calculate their capital requirements, in other words how much money has to come from shareholders to retain

standards. mr. weiland on march 2, you receive this e-mail, can exhibit 47 notifying you at the bottom of the first page that quote crm numbers have increased significantly in the cio and you responded quote these results as i understand them suggest that there are scenarios where the cio tranche fund another name for the synthetic credit portfolio, could lose $6 billion in one year. he then forwarded the e-mail to javier martin in london. he was ahead of credit-rating and you called the results garbage. you wrote, we have some carp m. numbers and they look like garbage as far as i can tell, two or three times a week so before. you and your colleaguecolleague s in the cio complained about the crm analysis to the head of quantitative research for the whole bank, the man whose full

name is mr. -- known as mr. becknell. if you look at exhibit 49 which includes an e-mail dated march 7 at the bottom of the page to all three of you and others explaining that the cio portfolio had gotten $33 billion figure in january and february which is why the risk of losing so much money also shot up. here is what he wrote which is at the bottom of that page on exhibit 49. based on our models we believe the 3 billion-dollar increase in our rwa which was referenced to the crm is entirely explained a 33 billion-dollar notional increase in short protection long risk in your portfolio between january and february. pete weiland du jour office confirmed his 33 billion notional increase in long index? mr. weiland the ccsp portfolio

increased in size by about $33 million in january and february the scp wasn't increasing as the cio told the occ on january 30. it was increasing. is that correct? ms. drew has rd indicated that you agree that it was increasing >> yes they were purchasing long positions. >> the portfolio was also also increasing, is that correct? yes. >> mr. mr. weiland the banks quantitative experts said the conference of risk measurement or crm numbers shot up to $6 billion in large part because its portfolio shot up in size. i understand that you had questions about that explanation at the time. do you now believe that the analyst had it right especially since the portfolio actually did lose $6.2 billion in the year?

you have now acknowledged that they got it right? >> yes, i acknowledge it now with all the information we have today that was correct. >> and you think it was a coincidence that the crm predicted a 6 million-dollar loss in a year and a worst-case scenario that is what happened? >> it's hard to believe that is a complete coincidence. i don't know the details of the scenarios that generated the numbers at the time but it certainly agrees with the way things unfolded. >> senator mccain. >> mr. chairman if it's okay with senator johnson has to go so i will yield to him. >> thanks mr. chairman and senator mccain. mr. bacon it seems your broadband to a kind of assess what happened here and i might ask you a question. did the management of jpmorgan,a

pervasive attitude that jpmorgan was too big to fail and they couldn't drive up their risk portfolio? .. i believe the work is ongoing, but i'm not the individual working on that process for jpmorgan. >> year fair amount of contact

with bank regulators yourselves? >> fair amount. >> t. believe regulators are to the task of understanding transactions in understanding the limits? >> the answer is generally yes. when something like this occurs and we don't understand ourselves, i think it makes it incredibly difficult for them to understand the details in the context. >> mr. chairman, my time is short but are they to sum up by saying the fact we even have the mysterious evidence we have not ended too big to fail and were so concerned about the activities of banks up as a systemic risk danger. the will of congress should be to get the american taxpayer off the hook for the banks. the only people that should worry or care at all whether jpmorgan last five or $6 billion on their desk would be jpmorgan management and jpmorgan

shareholders are not members of congress. certainly hoping these hearings and investigation get to the bottom of it so we can and too big to fail. thank you for your indulgence. >> thank you, senator johnson. senator mccain. >> thank you, mr. chairman. he said you didn't know who is responsible for the reports that were supposed to be made to the sec? >> that's correct. >> do you know the office i was responsible for sending these reports? >> as i said, my understanding is the financial function part of the cfo function is responsible, the primary responsibility for interaction with regulators. the >> which you don't know who that individual might have been? jpmorgan is so big you don't know who would have a very serious responsibility to make

required reports to the ucc, is that correct? >> that's correct. >> which you don't know the individual who should have been responsible. >> i don't know. >> your farmer abbas jamie diamond criticized the performance same quote, made a terrible egregious mistake, no excuse. when you are sloppy,, we knew there was bad judgment. do you share your farmer abbas' assessment of the scp? >> now that i understand all that transpired during that time, including deception and risk control issues, yes, i do agree. >> evening and in the subcommittee interview you could

only provide a gusto that when asked exactly what the portfolio was designed to hatch. do you stand by that statement as well? >> certainly that wasn't the best word i could have chosen. alexander $2.5 trillion balance sheet, macro headshake, which are fluid at the balance sheet changes do change and that's why in response to love and the positions to go up and down. they have to. it's time at process. poor choice of words, but i would not know the exact amount per se of each individual hedge versus the balance sheet. any hedges were limited to the balance sheet and its components. >> mr. weiland, you indicated an interview that he was not your job to enforce the risk laments

even though you were the senior risk officer at the scp. whose job was that to them for us to risk laments? >> i saw the way that was written in the report. it's not my recollection that i said those words. assert it was my job to enforce the risk laments in cooperation and partnership with the other senior management of business. i didn't make unilateral decisions about how to respond to risk laments excesses, that certainly is part of my job. >> mr. bacon come as early as march 1st, you and your bias for notify the chief of the series monday at have lost confidence in his team, that the cio needed help at the book and they were clearly in crisis mode. yet mr. hogan said he was surprised about the lawsuits.

disney's e-mail indicate otherwise and suggest they should have acted sooner? >> i recall the e-mail you are referring to. what i took him to be referring to at the time and and i still stand by this is bad lost faith in their ability to manage the rw a number, technical is amount the additional trades to the book and so on to something they were handling volatile advanced modeling expertise to be inserted into their group and i arranged for that to happen. >> ms. drew, in 2012, chief financial officer mr. wilmont assured the occ as she pleaded on reducing the portfolios and 70 billion to 40 billion, yet it tripled in size instead.

tell us what happened there. how does that transpired? you assured the occ you plan on reducing the portfolio and in actuality it tripled its size. how does that happen? or was the occ misled? >> senator, a field i mean explained, i was in the meeting when mr. wilmont met with the occ. however, the planned as signed off by a senior management including myself was to reduce the rwa. we have asked and received permission to have a slightly higher capital number for the first quarter before that embarking on a rapid reduction to the second quarter forward. things went terribly wrong as we

all know in very large purchases that were made at the end of march or not try to my attention on time. >> was it your responsibility to disclose to true nature of the scp to the occ ntg or? >> is a responsibility to be fully transparent, but it was not my responsibility to discuss information directly with the occ, no, sir. >> wrister weiland, you are warned in early 2012 as a matter of record that risk projected massive losses. after the bank last $6 million, you stand by your statement to risk managers were garbage and not sensible. >> you are referring to different risk measures.

the results of the test and, which i called garbage, which is not an appropriate word and not typical of my response to these things, which i take very seriously, that was part of a process we were working on to develop a model for the new crm regulatory capital requirements and that was the very first reaction to lay down their batistuta three times what we've seen previously and after some changes we made, my first reaction was that i felt like rate. clearly as we discussed earlier, it turned out to be perfect. with respect to the csl one, the second reference he made, in

fact with a limitless first breached, it's true the methodology we were using was not appropriate. the decision was made to make a change. the change is not made, so there was a mistake they are not making the change immediately. and there is a missed opportunity there to also have interpreted that as a sign of something we didn't see at the time. >> in a later e-mail you said we n credit credit inew set of the current csl one will be replaced with something more sensible and granular. mr. bacon, there are firmwide this climate at jpmorgan. is that true? >> yes.

>> with his breeches ignored? >> now, the breaches were not at lord. specifically the one i expect you are referring to add a firmwide level was not ignored. it caused action escalation. it was a situation where we relied upon the explanation that turned out to be wrong about the new model, and the flotation agreed by the risk management in place at the time by multiple review, all of which failed, but was erroneously placed on may. >> let me tell you it's hard to explain to my constituents when their tax dollars are ensuring their edits.

they're going to ask, how could we possibly do when to $6 billion loss and basically there is not only ignoring the facts, they sure did receive the behavior and it seemed that the treaters seem to have more responsibility and authority than the higher up executives. i have to go do a town hall meeting in arizona. you tell me what i'm supposed to tell my constituents whose tax dollars, some of these deposits were insured when this gambling win nine, when either way they're having extreme difficulty in getting their home loan mortgages consummated in

the change. tell me, mr. bacon, what should i say? >> first of all, we should be clear this whole name is regrettable and unacceptable and we believe the proof is on us now to demonstrate how this can't happen in other places, whether the financial crisis and how we make the entire firm if it replace for you and our regulators. this failed because of multiple things that did not catch it. the two obvious ones, trading oversight on the ground in london failed completely and second lines of defense, risk primarily and finance center that also failed with the escalation in the pushback to

risk committee failed. it would actually have been easy to catch this in many ways and very regrettably it happened. i believe we've taken correct elections on these accounts. >> do you believe jpmorgan is too big to fail? >> i don't think it is too big to fail. there's further work that needs to be done to demonstrate a document that is in process. i'm not involved in that, that is something that needs to be demonstrate to the satisfaction. >> i think the witnesses. thank you, mr. chairman. >> mr. weiland, you said in response to this tour responsibility. in five key risk limit. those risk limit may be

complicated. they sound alarms and it looks like investment portfolio is putting money at risk by looks like projected losses could exceed $8 limit set up ahead of time. now if you take a lack at exhibit in your book that's out there, this chart is also in front of you. the synthetic portfolio risk breaches. the limit was breached starting in january and then was changed. the new model was put into place a weird conversation about that. we'll have a lot more later on. the breach which occurred even before our preachers the so-called cs 01 breach and that lasted even longer.

the csl one stands for what? >> credit spread 01, the value of one move from critics. >> credit spread a basis point is cso one. >> take a look at exhibit if you would., mr. weiland. this exhibit lists the breaches from september 28, 2011 through april 30, 2012. it's page after page after page after page after page of breaches. by the way, most of them not our breaches because they changed the model.

if you look just at the breaches involving the scp in the last quarter of 2011 and first quarter 2012, you see a huge jump. six breaches in the synthetic credit portfolio to over 170 breaches. so from the last quarter of 2011 and two the first quarter 2012, the number of breaches jumped from six to 170. and then in april 20 there were 160 breaches. the almost as many in the one at the depot as the three previous months combined in those three months at 160.

170 breaches compared to the six breaches in the previous quarter would you agree when you have that huge jump in this climate breaches that that is a worrisome pattern? would you agree to? >> a large jump is a worrisome pattern, but i would say that by april the action of halting trading how dirty occurred. breeches and risk metrics can change even without making trades are changing positions in the market's mood and the team was at that point, as was writ been mentioned somewhere else in crisis mode, trying to figure out the best way forward to escape from the position we were in at that time. >> and you stop the trading -- wiki in april with that?

>> my recollection is after march 28. it said the report somewhere. >> late march he stopped treating. when more than one risk limit is breached at a time, does that send a stronger of the portfolio is overly risky? >> at may. if it's different types of measures come it certainly does. sometimes individual position can trigger several limit because the later portfolios are organized. it depends on the situation. >> was at a low risk investment portfolio? >> no, it wasn't. >> now, you have multiple breaches going on in huge numbers in the first quarter

took until the end of march to act with those breaches were flowing in. have you seen this many breaches before, by the way and a portfolio? >> no. what i would say is there's a couple different circumstances. as a bird he said, we missed an opportunity they are to understand some changes early. given the plan was to change the limits, it continue to breach because they're working on the changes. so it was understood their active discussions on how to deal with it. so continuing to the breaches as long as everybody understands those are happening, i actually thought it was a good thing, which would help you focus on the portfolio. >> understand the breaches to be a good thing, the breaches are

not a good thing? >> agreed. >> so now, let's take a look at the limit. the value of derivative and the portfolio drops by the specified amount, technical terms in the credit spreads by one basis point, the reference, synthetic credit portfolio first breaches limit january 6 and kept on breaching for more than three months. then on april 19 after the media storm had come in the occ century e-mail to look at exhibit 65. it asks you about the risk limit, which has been in accession by 1074% for 71 days. in the e-mail says in accession

by 1074% in the credit portfolio has breached by more than 1000%. is that correct? >> correct. >> it was over 10 the limit and an exhibit 39, which we discussed earlier, the list of the breaches indicate on april april 19 limit was $5 billion, but the projected scp lasses at the credit spreads widened one basis point could be $59 billion. is that correct? >> yes. >> you responded to the inquiry by saying we're all working on a new set of limit in the current cs 01 will be something more sensible and granular.

so you are ignoring the thousand% breach limit for 71 days because the limit was sensible? so with the risk limit without needed or not similar, why would it take that long to update at the back policy requires the risk limits be a dated every year? why wasn't the one that updated? as a matter fact, they had been updated since 2009, have a quick >> been the same since 2009. >> the policy was and is updated every year. they been in breach for 71 day 7000%. and sec rule updated every year, looking like that. how do you explain that? >> we were in the midst of a limit reevaluation at that time.

>> for three years? >> no, it was begun in the summer 2011. at the time, there were a lot of changes in the regulatory environment on the market. we were very focused on regulatory capital models to speed and working properly and adjusting the business cto with those things. those things to priority. another mistake of ours, but it was all in good faith and what we knew at the time to be the case that the change and not limit just did not take first priority at the time. >> for three years, you were supposed to have been every looking up at risk and didn't revise it. now, this tide has see how. 70 days, 1000%. that is 10 times the limit was

outdated anyway. despite the regulation here at two-year period were you aware of the four-month long breach? >> yes. >> why didn't you fix it? >> my understand was that as the process of being reviewed and i was told by risk that it is not a use: it is going to be replaced but the more useful than it being worked on in the risk group inside and outside. >> if you look at exhibit 64 reach true, here's what she she said and then officer irvin goldman wrote to you in a e-mail she said we have a global credit, csb the one limit,

another name for the cs 01 limit. it went on as follows. it was set up, unfortunately been preaching this to see you. this is how you responded. he said i have no memory of this limit. i think you just told us you are worth the breaches that limit. you told him you didn't have memory of the limit. >> that's correct. i didn't know there was a global limit as well as acs pb limit on mr. goldman was referring to a global limit and i probably simply misunderstood and that's why i followed it with the needs to be re-tasked with all the other elements, which was a review that i was assured was ongoing and had been started and

was making some progress. >> teaching of these were to be reviewed every year? >> yes. >> reorient the fact it hadn't been reviewed every year? >> i don't recall. >> were you aware there are thousand% over the limit? >> no, i was not. >> senator mccain. >> very quickly we will take a break and add to our panel. there's a second risk limit on this chart. it's known as the value of risk is being glossed over the course of the day driven market conditions.

the model is used to evaluate how much value in investment portfolio is putting at risk. if the value at risk exceeds the portfolio goes on to the risk managers. here, the portfolio preached both the cio and been quite limits for several days starting january 16 and reach them again for four days starting january 24. ceo jamie diamond personally approved a temporary increase as a matter of fact until the cio brushed her approval of a new motto we referred to, which is effectively around the risk limit. when i was activated january 27, it resulted on an overnight job. 50% in the cio results without

the scp having to get rid of a single risky investment. under the old model, the cio was $132 million. that's how much is at risk in a one-day period. when the new model took effect come even in the portfolio have the same risky credit derivatives, its value risk was cut in half. now it's $66 billion. in the new amount was way under the part of limit. the new parliament. ms. drew, how do she know the new model is going to be more accurate? >> senator, the vara model was a change in a review that had been ongoing for not one, not two, the seven-month baby by the independent risk modeling group

in my understanding was that it gone through quite a few iterations until it arrived in its final form as a correct measure, one that i've relied on very heavily to manage the position. >> digi back as the new model against the old data? >> that would've been done in risk. >> you know what it was done quick >> i do not. >> it may also say when they approved it that the cio had to automate the data entry quakes is not true? >> if they did, that would've been an order gone gone to risk. >> so you are not aware they said you had to automate the data entry when they approved this? >> at the time i was not. i am aware of it now.

>> okay, now the task force report of the pain said the back testing -- you said there was no back testing done. is that correct quick >> i don't know. >> you don't know. take a look at exhibit 98 if you would. and it's page 104.

[inaudible conversations] this is what the review group said. in this case the model review group required -- this is that the review said about what happened when this was put in place, that the model review group required only limited back testing in the new model, so there was no back testing was limited back testing and insufficiently analyzed results that were submitted. so now you have a situation we've got a new var dropped others to stolen group reach. it is approved, but when it was approved, it was approved with

the requirement that there be only limited that testing to see whether it was workable. and insufficiently analyzed results that were submitted. so it produced lower or var ordered correct by doing it. didn't supply the funds despite multiple requests to deal with the operational errors. mr. bacon, what do you think of a var model that drops the cio by 50% overnight. what do you think about that? >> i think it's something which would require explanation. >> late back testing click >> yes.

>> what it did provide, the insufficient data -- the limited back testing was needed in the last bit is quakes >> is absolutely not the way to do it. >> is not even analyzed. that's what the report said. >> i'm sure those rate. >> d'amato was new trading data instead of constructing a database that automatically would feed the trading data into a var model. mr. hagan, the model designer was stuck with having to manually enter the data every night using spreadsheets, which had calculation and formula errors. in fact, the new key model for the $350 billion portfolio,

including the synthetic credit portfolio is run manually using error-prone spreadsheets with operational flaws. teaching of mr. hagan was doing nightly manual data entry and sometimes staying up in the wee hours of the night to get it done? were you aware of that? >> i was nowhere the details of the work he was doing. i did know they were spreadsheets involved in mr. hagan often stated that it may. >> mr. bacon, the occ told us the spreadsheets, lack of a database, calculation and formula errors were shocking and absolutely unacceptable. do you agree? >> ideal. >> why did the bank model review say -- i'm sorry, why did they approved the var knowing the

problems and allowed to operate in a shoddy action. why did the bank allow that? >> it's very disappointing. i have no idea. the risk modeling group is an independent group sat by while chained and educated phd's who run the models and certainly very disappointed in this review properly and delivered to me in poor form. >> did a hagan work for your group quick >> he didn't want in. >> it bothers me not just the multiple risk limit were breached, but they weren't even really been missed. nobody was told to stop treating because of a risk limit reached. no one invested because of the breaches. i mean, some uninvestigated trading activity that triggered all these is the point someone

would investigate the breaches? another thing that bothers me is the bank's reaction has been to criticize the old risk limits as an adequate and added the shipping lanes. they used to be five big risk limits. now it's gone to 230 risk limits for the synthetic credit portfolio. it misses the point. it wasn't the synthetic credit portfolio had too few risk limits. it is that risk management personnel didn't enforce the ones they had. i don't see how piling another 225 risk limits solves anything. do you want to comment on my? >> yes. i very much agree with you that the first failure is not to escalate and remediate when the risk limits are already telling you some pain. i do agree with that. one of the changes to some

alteration to policies and procedures whereby automatically it goes other way to the firmwide race committee containing mr. diamond, our cfo, everybody. so that is now automated. on the question of whether it's necessary to have more limits, although this particular egregious mistake was caught a number of limits if you have followed up her other mistakes he could make that may not have been caught, which is why we want to be safer than that. >> you are going to take a very, very -- excuse me, we are going to take a five-minute break and then widen our panel to give us an opportunity to use the restrooms if anybody needs to do that. we'll be back in five minutes.

>> will be back in 192 or pml call witnesses to the hearing michael cavanaugh head of the jpmorgan task force reviewing cio losses in the co-chief executive officer of the corporate and investment bank jpmorgan chase and douglas bronstein, the current vice chairman and former chief financial officer from 2010 to 2012 the jpmorgan chase. i appreciate you being with us this morning. we look forward to your testimony pursuant to those of the sub to many, all witnesses who testified before us are

required to be sworn, so i ask each of you raise your right hand. do you swear the testimony about to get to decide what is the truth, the whole truth and nothing but the truth so help you god? did you hear now about the timing system? if you have opening statements -- now you do. do you want to put your mike on, please? >> may i click >> yes. >> chairman levin, ranking member became members of the subcommittee, my name is michael cavanaugh ananda co-ceo the corporate investment bank jpmorgan. iceni recently led a task force that conducted a review of circumstances surrounding the 2012 losses in jpmorgan chief investment office. he appreciate the opportunity to discuss the task force work to describe what we found puzzles

the steps taken in response. some of what we found was frankly very disappointing and does not reflect our institution at its best. that said, we've addressed issues head-on and are determined to become a better come to me because of this experience. we have fully cooperated during the course of inquiry and is noted in a state that we respect the role played in high rating effect to risk management and oversight or nations financial institutions. we also appreciate the courtesy is extended to us by your staff. as you know, earlier this year a task force issued a report which was the culmination of an extensive review. the work included interviews of many current and former jpmorgan employees in the examination of millions of intensive thousands of audio files. the work was overseen by an

independent review committee board of directors. frivolous than cooperating with inquiries by governmental authorities here and in the making them. because their findings are public efforts in iraq testimony, i'm not going to discuss them in detail now. instead, like to briefly summarize their key conclusions and describes steps we've taken to address problems we have. in short, the losses were the result of a number of acts and omissions, some involving personnel and some involving government. those responsible include to varying degrees the traders are designed and implemented the trades, the managers who fail to properly vet the strategy unit sherpas sound. the risk managers who fail to serve as a robust jacobite

trading activity in the senior management of the firm who fail to ensure cio was subject to favor aggressive oversight is other parts of the firm. in light of what we found, and from his remedial action both within cio and throughout the firm to prevent incidents similar to this from occurring in the future. these are described detail in the report, but i'd like to highlight for the subcommittee the more significant steps we've taken. first, the firm has terminated employment or accepted resignations of the responsible personnel and pursued clawback compensation. second, jpmorgan has appointed a new leadership team, which is refocused on its basic mandate. third, the firms increased resources for the key risk in finance control functions but in cio.

forthcoming cio has implemented new or restructured limits covering a broad granular set of risk parameters. and fisk on the firm has adopted a radio governance measures to improve its oversight and control of cio. the firms are mcgill efforts though have not been limited to cio. the firm has among other things conduct a comprehensive self-assessment of its entire risk organization and as the result is implementing a series of improvements across the entire firm. where there's room to improve we can and will do so. with respect to the trading itself, we've learned many hard lessons. in particular, any future portfolio hedging will be subject to appropriate modern requirements of documentation link in the hedge to the risk designed to upset. so in conclusion i want to assure you the experience has

caused substantial and healthy introspection at the senior management level of our current and recognition for continued improvement. thank you and i look forward to taking your questions. >> mr. bronson. >> thank you, chairman levin, members of the committee. my name is doug baustein and i serve as vice chairman of jpmorgan chase. from 2010 to 2012 i served as executive vice president and chief financial officer of jpmorgan. thank you for the opportunity to participate in today's hearing. mr. cavanaugh has made a statement on behalf of the firm. i look forward to answering questions today. >> thank you very much. during our investigation we came across a number examples of the

pink giving the occ examiners to hurt time. in 2010 according to the occ e-mail of 2012 been concluded and expand and told you, ms. drew, the cio idiots do a better job documenting risk and investment decisions, you sternly told the occ ever been over intrusive and there was little need because jamie diamond was aware of the investment activities. the record of your reaction to send exhibit 71 at-bats in may may 2012 e-mail when mr. waterhouse committee examiner in charge recounted the 2010 and then it. in the first paragraph, this is

what he wrote. fyi come we didn't examination at the end of 2010 and have a follow-up plan soon. we had some concerns about overwrote governance and transparency of the tvs. he received a lot of pushback from the bank regarding our comments. in fact, she caught occ examiner fred, should london and certainly discussed her inclusion with him for five minutes. basically she said that investment decisions are made with the full understanding of executive management including jamie diamond and everyone knows it's going on there's little need for more limits, controls the reports. so according to this e-mail, you said cios investment decisions are made with the full understanding of the executive management. is that true?

>> yes, it's true. >> according to occ in charge in january or february of 20 toby stopped sending daily prop and lost data to the occ, just plain stopped sending those documents. no notice, no explanation, no profit or loss that it are one of the nation's large midst because of the investment bank. according to mr. waterhouse, the occ had to escalate the issue to you, mr. baustein, chief financial officer to reverse the decision, which he did. during a meeting between you, mr. damon and mr. waterhouse, it became clear to this mr. diamond responsible for the data cut off. is that correct?

>> yes, sir. >> to the bank stopped sending the profit last year to the investment bank for a period of time? was it a week or how long was it? >> senator, he was approximately two weeks. >> teacher restore that data to the occ? >> yes, sir, i'd need. >> did mr. diamond say why? >> prior to stopping the data, and number a regulator said breaches in the information they shared with them. there had been mistaken losses of information, so we wanted to ensure prior to restarting the data we had adequate controls in place to ensure the data cut to regulators and only regulators. >> did you notify them that was your reason? >> i did speak to them during the course of that period of time. >> you told them that was the reason the information was not

coming to them? to january, february time, when you are not delivering data any order to be stored, apparently there is heat of the conversation allegedly. in any event he ordered that data restored. did you tell the occ waiver something that data? at the question. >> senator comes a time. his earlier, but i do recall that period of time having conversation to explain why we turned the data off. >> who did you talk to? >> i can't recall it was mr. waterhouse or mr. krum wish. >> which you gave for cutting the data off is the same explanation you gave to them? is that what you're saying? >> i expressed that concern them and told them i would turn the data back on. >> was mr. diamond unhappy?

>> at recall specifics of his reaction commissary. >> you don't recall there is an deep unhappiness they want was restored despite his order? >> i don't recall the interactions. >> how about the generalities? >> recollect specifics of the meeting. >> sometimes the big gave wrong information. it showed in the january 30 quarterly meeting, cio said it is reducing the size the credit portfolio and in fact it wasn't. for some more examples of wrong information in these come after the media exposed the trades and started asking to beg for some hard numbers.

the synthetic credit portfolio as a mark to market portfolio, which means again the value was measured and recorded internally everyday. on april 16, began after the media storm hit, the bank met with the occ impregnated his first prison keeshan on the synthetic credit portfolio. ms. drew, you were present for the briefing and at the briefing the bank told the occ the first quarter law says were $580 million that's an exhibit 60. the losses at the end of the quarter on march 31st have been reported inside the bank as $710 million. dare we take a look at exhibit one g.

this is a list that was provided i believe in may about the internal profit and loss reports. it feels like they are, you will see march $133,718,000,000 according to the bank's internal reports. what was reported to the occ was $580 million. not only that, but on the friday before the monday, april 16 public report, but i think you are involved in, mr. baustein, the bank met with the i've been losses by then had more than doubled to $1.2 billion.

said before the april 16 conference call, two things have happened here. one is that the report the occ of the first quarter losses of hundred 80 million were wrong according to the bank's own records of 708 team million dollars. and then before april 16, the friday before april 16, occ losses at more than doubled to $1.2 billion. so first, ms. drew, why did you tell the occ the first-quarter losses for $580 million when the losses for $710 million? >> senator, the number of reported with the number i believe is accurate and add it

as it always does post a quarter adversaries on top of mark to market losses. aggregated to choose the correct number given to the occ. >> i think this is separate from the reserves. the last reported on this chart for 718 billion. >> the number reported with the number given to me calculated by central risk and finance. >> whatever number was given to you. so you don't out whether the number was accurate or not. you just use the number given to you. >> now, that number quick with a statement given to me the day i met with regulators and was reviewed by chief financial officer. i knew that number to be the correct number. >> when you met with the occ in april 16, that is the number you

gave them, is that correct? >> i gave them whenever number was for. >> i want you to look at that exhibit. >> yes, look at the exhibit. >> first quarter was march march 31st. you see the $718 million. and then take a look at april 13. you see that number? on april 13? $1.2 billion. do you see that? >> yes. >> the number you gave to occ on april 16 was 580 million. your own report shows $1.2 billion. so the friday before you met, your internal report showed $1.2 billion loss according to your records, are you told the

occ the losses were 580 million. why not give them the loss as to the friday before you met with them? >> to occ to the best of my knowledge had profit and loss daily reports. the number i gave -- >> say that again. >> the best of my knowledge, the occ is given daily market reports of the cios activities. >> you are saying during january, february, march, april the occ has your daily profit and loss? >> that's my understanding. >> for the synthetic credit portfolio? >> for the total market to market activities of which the portfolio is included. >> was identified? >> pardon?

>> was identified separately? was the sep identified separately on those reports? >> that i do not know. >> i think you are inaccurate, but we will find out. to matter mccain. >> thank you, mr. chairman. >> -- best of my knowledge, thank you. >> mr. cavanaugh, let me be clear for the record i regulation tie regular reporters are required to go to the occ. is that correct? >> i believe so, sir. >> and yet, mr. diamond then made the decision for two weeks at a very critical time not to send reports to the occ. is that correct?

>> that is correct, circumvent based on a concern about the confidentiality of those reports. >> you know, when normal citizens, normal enterprises if i regulation you require to do something and you don't want to do it, you seek avenues to avoid it. do we live in a world that government regulations of business headlines decide well, because we are concerned about something were not going to comply with regulations. is that how jpmorgan works? >> no, sir, does not. >> did it work their way in your case? >> the report in question and not allow that was a report required to be provided to the regulators. we also were concerned about the loss of confidential information about wanted to ensure we had seizures in place to avoid that going forward.

>> i guess we can find out whether those reports are required or not. i believe they are, but was there any other time for an executive decision was made? throughout sunday's reports to reports to the occ? >> not that i'm aware of, sir. >> it seems to me it's remarkable that a few required to make reports regulators to regulators on a routine basis and this is a time -- the timing is very interesting of this. just decide not to give a reporter. i'm not sure there's many organizations and companies and corporations in america that could get away with such a team. frankly it's kind of a testimony

to the lack of action on the part of the regulators if they expect to those reports. i would like to go back to the e-mail from scott waterhouse to make brosnan. at the end of 2010 a follow-up and we had concerns about overall governance and transparency unit dvds. we received a lot of pushback from the bank regarding our comments. in fact, i know call, should one day and then discuss conclusions for 45 minutes. basically she said investment decisions are made with the full understanding the executive management including jamie diamond. would that include you? those decisions you are fully --

a full understanding of the investments made? >> senator, i am not familiar with what specifically i know was referring to. >> when they help you out. she was referring to concerns about overall governance and transparency effect dvds. >> i would say, senator, we endeavor to be fully transparent with regulators and others certainly have supported by transparency as the specific investment decisions i was aware of this and that it credit products. >> he said on april 3rd team call from his comfortable with the positions in the sep. as mr. cavanagh pointed out, that statement was wrong of course. when did you learn your statement was false digitech

efforts to correct the record? >> senator, and he stunned the benefit of hindsight, debate tonight were both misinformed and correct when i said we were very comfortable. based on the information available to me at the time from the whole range of services, cio, risk and it cannot work done, i believe that to be true. as soon as i discovered that there were behavior patterns is consistent subsequent to the portfolio's performance, myself and mr. diamond, john hogan began a much deeper inquiry. >> sites are traitors mismarked the book, who should be held accountable or has anyone been held accountable this site from traders for breaching jpmorgan's internal risk limit and adjusted

risk files? >> is a question for me, senator? >> yeah, i'm sorry, besides the traders who marked the book, who should be accountable for breaching jpmorgan's own internal risk limit and adjusting the risk models? >> senator, in aggregate i concur with the task force's resort but there were a number of mistakes made in cio, and the risk organization, finance organization i read in the senior management and i deeply regret those mistakes. >> when hauled accountable, what penalty is imposed when you're held accountable at jpmorgan? >> the firm has taken a number of actions. they terminate the employment of a number of employees. >> sized traders? >> yes, sir.

>> this club that compensation to reduce compensation for selected individuals. >> so we've reduced compensation , for example, your compensation was reduced? >> yes, senator. >> from what to what? >> approximately 50% with the board's actions for mr. diamond. >> that translated into dollars? >> i moved from 9.5 elion 25,002,012. >> mr. cavanaugh, once it was valued, with the final amount the cio lost as a result of the wheel trays? >> $5.8 billion through june 30 last year and modest losses that followed.

the >> besides the said committee's investigation, whether jpmorgan financial exposures including penalties paid by the firm stemming from the wheel trays, mr. cavanagh? >> i don't have a number. we're the middle of ongoing regulatory wake in examination authorities said there will be litigation, but we don't have any estimates for exposure on my site. >> well, i guess i don't have many other questions, but it's hard for me to accept that serious responsibility was assumed by the top management at jpmorgan, especially in light of

e-mails that say these decisions were, at least according to ms. drew, were fully discussed and decided to the top management at jpmorgan. no more questions.

>> you now, i actually found the hidden history by accident because there is a downspout says alexander it d.c. in the middle on the trade and a friend of mine pointed this out when i first moved to your essay did not alexander is part of the original district of columbia. i thought that was intriguing and since then i've been kicking in and i had to be a good project to look at the 50 year time. and what's now arlington part of the district of columbia. i found three places other to take you of whether there was a sense to live. what is jones point park, where you will find the original boundary marker for the tip of the district of columbia.

the other is the dueling ground, where fitness tool took based between secretary of state henry clay and virginia senator john randolph. the other place those interested in taking you is the slave pen at the franklin slave dealers. the union army invaded alexandria. one of the first places they can't pursue the slave pen because it was an infamous five and featured in the newspapers of the time. when the union soldiers came here, they came to the basement and found slaves shackled to the wall here where we're standing.

>> now, former national security agency senior executive, thomas strake, talks about the national intelligence community whistleblowing. he was charged under the espionage act after he hired waste fraud and other caught committee from the nsa. the national press club, this is an hour. >> afternoon welcome to the national press club. my name is suborder for bloomberg news and the 106% of the national press club. with organization committed her professions feature with events such as this will foster a free press worldwide. for more information about the national press club, visit her website at www.press.order. to donate to programs, please visit www.press.work/institute. on behalf of members, i'd like

to welcome her speaker and those of you attending today's event. our head table includes guess of her speaker as well as journalists who are caught numbers. if you hear a pause in her audience, we note members of the general public are attending, so it's not necessarily evidence of a lack of journalistic object dvd. that also like to welcome her c-span public radio audiences. collections are featured on our podcast from the press club available on itunes. follow the action on twitter using the hash tag and pc lunch. we will have q&a and alaska's many questions as time permits. it's time to introduce our head table guests. i ask each of you to you to see in casino briefly is is your name is announced. from your right, tim shaw rack for publications including the nation. racial oswald, staff writer at global security and a vice chair of the press club press freedom

committee. ram writer, editor and senior vice president of the american journalism review and columnist for "usa today." marilyn thompson, washington bureau chief. lewis clark, president of the government accountability office. skipping over the podium, alison fitzgerald a freelance journalist in the committee chair at committee chair and organizer today's event. thank you, alison. john donnelly, senior writer at congressional quarterly and chairman of the press club's freedom committee. josh rogan, a senior staff writer at foreign policy magazine. al isley, founding editor and editor at large at the hill newspaper in a press club member since 1965. charles lewis, executive editor of the investigative reporting workshop and professor at american university.

[applause] two years ago, our destiny was accused by the u.s. justice department of espionage. air force veteran and longtime senior executive at the national security agency was accused of giving classified documents to a news reporter. thomas strake facer behaviors and present. a year later on the eve of his trial, the government dropped all charges against mr. drake. he since been honored as a whistleblower to help expose and bring to let its massive effort to spy on american citizens. mr. drake's ordeal began on september 11, 2001 of which have been to be date is a full-time employee of the nsa. like all other u.s. intelligence agencies cover the nsa miss key pieces of information that might have tipped off the government the terrorist attacks were

imminent. shortly after 9/11, mr. drake came to believe it could have predicted the attacks it had made use of a surveillance system known as spam thread that could sift through massive amounts of data and detect patterns and key information. instead of the msa leaders turn to sa contractor to build a new data collection system called trailblazer that cost more than $1 billion, 10 times the cost of spam thread. at the same time, mr. drake when the agency was turning its capabilities on american citizens to which he believed was a violation of the u.s. constitution. he decided to speak out. mr. drake reported concerns about money wasted in domestic surveillance to congress and to the defense department inspector general. he became a material witness into 9/11 investigations. even after inspector charles found the project was a massive waste and the program is killed, little changed.

mr. drake decided to go public. he got information about the problems of trailblazer at "baltimore sun" reporter who registers of articles exposing the ways. yet when "the new york times" in 2005 reported the news the u.s. government is tapping into citizens telephone calls without warrants, mr. drake became a target in one of the most aggressive investigations in history. agents raided his home in 2007, two computers and files and threaten he could spend the rest of his life in prison. in 2010, the justice department indicted mr. drake for willful retention of classified documents. this all in the fourth time in history citizen was charged with espionage for mishandling documents. a conviction could have had a chilling effect on whistleblowers and journalists who often receive and keep defense documents.

.. please help me give a warm welcome to thomas drake. [applause] [applause] >> i would like to thank the national press club for inviting me here. i'm looking forward to the q & a. i have a few remarks to set the

tone and tenor, and to reflect, quite in sobering manner what happened to me and what is in stake of the country. praying open the first amendment. i first want to announce; however, i can neither confirm nor deny a solar ellipse is at least partially blocking the view of sunshine week. do either might reveal state secret reporters to journalists including those on the room unauthorized to receive them. i would not want you to all to end up with allegedly classified information regarding the weather in washington, d.c. the white house blog on wednesday said, quote, we celebrate sunshine week in appropriate time to discuss the porps of open government and freedom of information.

it will strengthen our democracy and promote e fresh sei and effectiveness in government. really? human rights director at the government accountability project remarkinged on twitter yesterday that after, quote three years of shouting to the wilderness unquote realizing the obama administration's draconian is finally reaching a boiling point. glen green wall published a powerful article entitled obama's secrecy causing sunshine week implosion. i would like to remind everybody that kennedy said that the word secrecy is repungent in a free and open society. i like to think we are reached a critical event horizon. and whether national security as a new state religion will

further suck the dwindling light of the first amendment to the black hole of classification and secrecy hidden from public view. it seems that secrecy actually strengthening the national security state in order to hide from accountability and oversight at the expense of informed public interest. where it matters the most. what is the price of keeping the public in the dark and having a government increasingly operating the dark through the secret law or interpretations of secret existing law? after all, this very event is part of sunshine week, and ilgd i wouldn't like to highlight one event that brings the message of sunshine week home regarding what is so at stake and our increasingly two faced government. the house oversight and government reform committee held

hearings on addressing transparency in the federal bureaucracy moving toward an open government. the larger theme of the testimony before the committee centered on the inherit tension between the president's pledge for a new era of unprecedented openness and record of eninvoking threats to national security to keep the public in the dark time and time again. the written testimony, here i give a shoutout to the project and government oversight and the blog states, quote, seems to be two obama administrations. two american governments, really. one looks like a democracy, in which an open government accountable to the people is an ideal antipriority. and the other is a national security state where claims of national security often trump democratic principles such as a people's right to know. civil liberties, freedom of speech, and whistle blower protections. of course this is not an

approach exclusive to the president. but the unchecked secrecy of obama's national security state is at cross purposes with many of the administrations' openness, objectives and raises doubt about president's commitment and declaration about transparency, unquote. so given where we are today, at the national press club, it seems to me it's more than appropriate for us discuss the long shadow of government secrecy of securing the view of the institutional republican or what is left of it it. threats to the first amendment by the government is bulls eye centered on a free and unfettered pressed designed to repress political expression in america. create fear, through unilateral authority and privilege over what is fit or unfit for the first amendment.

if speech becomes an instrument of crime when revealing government crime and wrong doing, we are under arbitrary authoritarian rule and not the rule of law. in our post 9/11 world, the government is increasingly in the first unamendment business engaged in a direct assault on free speech and the foundation of our democracy. because of our very individual freedoms have now become fair game for the regime. all in the name and under the mantle and cloak called national security. in fact, i can make an argument that ingovernment increasingly offers -- and finds the first amendment a constraint on the activities. yet taking off the israeli --

vail of government secrecy has more off than not turned truth tellers and whistle whoers -- blacklisted and broken be i the government on the stake of national security. egregious violations of the fourth amendment, many still occurring in secret far beyond the aware pes and knowledge of most americans are eroding and chipping away the first amendment. for example, the patriot act, along with a number of other enabling acts including the recently reauthorized amendment act plus many more including massive abuse of cfaa are now blunt end instrument of a homeland security surveillance apparatus that legalizes government deception, citizens monitoring and wrong doing. those revealing it are off prosecuted and increasingly

indicted for speaking truth to power. i know. i knew too much truth enposed government illegality, fraud, and abused and turned to a criminal for doing so. i was charged on the espionage act faced many years in prison and became an enemy of the state. it was five years of living under the boot of the surveillance state and yet, and yet, i was saved by the first amendment. and the court of public opinion. and the free press including the strength and growing resiliency of the alternative media. the very corner storn of our liberty and freedom. the one on which all of the rest rely. the active voice and conscious of the institution of the united states of america. freedom means everything to me.

and especially when i face a perspective of having all of my freedoms taken away from me and placed all kinds of restrictions in movement and monitored activity for several years. so for the sake of our common future, and the country we want to keep, we must ask of ourselves some very hard questions. is the first amendment becoming a casualty? an indefinite undeclared war -- get in the way of national security interests defined in secret? in our wired and wireless world, what happens to anonymous speech and the press on the internet when the government has a purr per persistent do we want the government listening in on and tracking the lives of so many others? have our constitutional freedom

become the latest victim of 9/11? is the intolerance shown by the secret federal government for the mag nigh sent of our precious first amendment freedom, a foreboding of things to come? will national security replace the individual rights? will fear take priority over freedom? will government censorship and propaganda try yomp over personal choice. the instrument for stamping out decent. extinguish exposure. is the tree of liberty becoming an endangered species? if we start liberty for the increasingly sake of security, what will we have left to defend? what happens when the acid of secrecy and suppression erode the bedrock of the first amendment. what happens the sources of what is happening in government increasingly choose not to speak to the press? what happens when we

increasingly self-center others and the news is not fit to print because it invites undue government attention. how else will the press report the real news when the sources dry up and the government becomes a primary per vaier of the own news. it it's a freedom of choice that at stake as citizen and not the government's to take away in secret under the guides of keeping us safe from ourselves. we must now rescue the constitution from our very own government before it becomes a hallow shell of the former sell. of. the rights we have, the rights not privileges, the rights we have under the first amendment are the living blueprint and beacon for personal freedoms and power of choice. george or well said, quote, if liberty means anything at all. it means a right to tell people they do not want to hear, unquote. when there is no transparency, openness, or public

accountability for the deeds of government, including secret surveillance, torture, kill list, amf, abandonment of due process, redaction and delay, prosecution overreach only -- unchecked power by the government. what happens to our country? what happens to our country when laws are secretly reinterstated behind closes who prefer to operate in the shadow without public debate but promote and support laws that violate the protection for the sake of national security? so are we willing to fore sake our liberty for the sake of security when in fact it is our very liberties which define the heart and core of our national security? what is more pernicious in term of freedom of the press when the various sourceses are threat

wednesday life in prison for simply telling the truth about the government? is he the first amendment -- you see the first amendment, the first amendment of all the amendments is an invaluable protection for public freedom against government overreach and intrusion in our lives. our fortunates on our futures. do we want to let the first amendment join the list of endangered species where the remaining defendants end up in a zoo where behind a cage where people common gawk? as kevin remarkable investigative reporter said yesterday in his article, quote, what is worse? a powerful person telling citizen they have no right to know because they believe that all hell will break loose if they allow any transparent sei or a powerful person who proports to favor tran parent sei and openness telling citizens they don't have a right to know because he or she is not

that powerful person who has contempt in government. unquote. in an open and transparent society, the citizen i are supposed to know the truth of its own government. so if the first amendment is a sunshine of the liberty, how else are we to remain free if the government casts the shadows over you and me? [applause] >> after your experience, would you advise someone else your position to blow the whistle on government wrong doing? >> yes, but make sure you

understand what you're getting yourself in to. do not speak to the fbi, and make sure you have a lawyer. right from the start. if my case is any example, they'll do everything they can to take anything you say and anything they find and use it to justify charges that, in my case were actually framed. i told the truth to the fbi agents, they didn't believe me. in fact four of the ten felonies counts were for making false statement. one was for obstructing justice? you know why? the chief prosecutor said that unless i cooperate with the investigation, they're going pursue prosecution. so -- the answer is yes. we actually need more. having spoke ton daniel, he actually thought in the early '70s with the publicity that

more people would step forward and other than close colleagues or associates? guess what? hardly anybody else stepped forward. regarding the travesty of vietnam. under what circumstances do you think the classified information should be leaked? >> that's a loaded question. [laughter] classified is what is happening now the government wants to classify as much as possible. what allows them to do is create a larger -- which they can charge you having retained, disclosed, or leaked classified information. to answer it directly, if it involves more crimes or wrong doing, violation of statute,

then, yes, there's little in government that actually truly ever needs to be classified. and always need to be placed under constant review. the problem is, oversight mechanism and the executive order and laws and statute the government classification system are just objectly broken. and so when everything is increasingly classified, nothing is classified. and if everything is increasingly classified, what remains a secret? >> you mentioned that former colleague said to you they believe talking to reporters is a crime. do you believe that that attitude is pervasive among government employees. maybe you could addressed in and outside of the intelligence community. >> it is true that of the intelligence community, which i was a part for many years as a government employee and contractor and even in the

military that you are -- you do sign secrecy agreements, and these vary based on the agency. the secrecy agreement that i signed was to protect the agreement what they call protected information. by definition was classified, truly classified, or under classification review. it was actually carefully articulated in term of executive statute and rules. in this particular case, when you're referencing -- i want to be very careful here in the wording. because you're referencing former colleagues. there was this misunderstanding that if you happen to speak to a reporter that by definition anything you might say to them could be characterized as classified. because you -- unless it was authorized then you were in an unauthorized status, and therefore you were liable under

administrative rules. like i said, there are distinctions between agencies. although increasingly the centralized to the dni. you may have heard recent they are james clapper, the director of national intelligence is now directing adding a question, questions, to the polygraph mechanism in which individuals either they're going obtaining a clarence or retaining an existing clearance asked about unauthorized contact with the press. and so, yes, i had individuals that i used to work with who assumed that it was criminal under the u.s. law to have any contact whatsoever with a reporter. i was asked the person by scott -- pellly on 60 minutes a few years ago. it was not a crime to speak with a reporter. there are certain administrative

rules governorring what it looks like. i was under an administrative rule that said if i were to have unauthorized contact with a reporter that was liable to certain administrative sanctions. at that time the worst that could occur, they no longer trusted me and remove my security clearance which would be a condition of employment president of after 2005 i knew there was a strong likelihood i would get caught up in the leak investigation regarding the rise in the article which reveally publicly the so called war on the wiretapping program. i knew they were criminalizing contact with the press. not only was it going back to the watergate era. it was the full force the department of justice was going go after anybody especially if you were allegedly retaining or disclosing information related to security they didn't take too

kindly too. >> the questioner said you don't acknowledge there are sometimes legitimate government secrets. suspect it more about balance. don't we need to keep some secret? >> i think i partially address it earlier; however, how the legitimate government secrets? i lived in the secrecy regime for many years. when it came to true movements, nuclear secrets and those kinds of things i certain sources and meths then there are legitimate reasons to keep the secret for the time. so it's not like i'm standing up here saying there are no secrets at all. but this is where it gets conflating. it you say anything, then you automatically come under the boot of the secret rules governing the classification system. that's not true at all. the secrecy system, i'm going to be very, very clear here is not

to be used to cover government illegality, wrong doing, hiding administrative inefficient effectivenesses, or where the state government threatening public safety and health. fraud waste, and abuse. in my experience, the secrecy system has become so corrupted that it's now being used routinely to do precisely that. under the color and cover of law, and when the color and cover of law is no longer sufficient, they will just make up the rules. it's one reason the defense expert in my own criminal case were so outraged by the government prosecution. the very individual who used to head up the information security oversight office, the office responsible for the

classification system and the integrity of the system was in the u.s. government. but obviously what i had allegedly retained or had allegedly retained for the purpose of disclosure to others not receiving under the espionage act of all things, was in fact revealing the kinds of activities that were actually not permitted by the secrecy system. you have a real problem. you reveal anything you are libel. if it's about the things we don't want you to know because in fact it is in violation of law and statute, then guess what? we're going come after you stronger. it's unprecedented. the administration has used the ease the espionage act as a means and mechanism to prosecute seven americans for nonspy

activities non-spy. when you're painted with the espionage act, it's the worst thing. you are immediately put to same category historically as the thames of the world. the real spies to say it that way. that's how that world war i statute was dined. as troubled as it is in term of the constitution, it was designed to go after spies, not truth tellers, not whistle blowers or people having contact with the press. it was not designed for that. that's what it turned in to. if we can't count on the government to design a classification of information system that is -- for whistle blowers and journalists, who should devise the system how can it be rolled back now? >> personally throw the whole thing out and start over.

it's really become a goldberg. it's use a hammer, used to cover, it's got various layers. it's gone far beyond the intended purpose. there's any number of people i can cite right here, i won't in the interest of time who flat out said the classification system is broken. period. it's a system we continue to use. i got caught up in that. you have to remember what happened in my case is happened in too many other cases, the government end up using other means to gain access to either what you know or what you have or what you hold or allegedly exposed or disclosed, and then decide what level of classification it violated. then they charge you. it needs to be redone. i spent too many -- one of the interesting dynamic in term of burke -- bureaucracy if there

was any doubt about the classification we would be stamp it at the highest level. that was pretty routine. part of the reason interesting enough, there's few people in government. there's a small number you who have formal authority to say what is classified or isn't. it's one of the things people don't fully appreciate. the number of people that actually have what is called a classification authority is very small. zipped for doing public releases or form alizing a report to send out within the government or for other types of releases, that is when it comes under the review. there were the rules but a lot of systems allowed you to say, hey, i'm not sure about what it is, i'll stamp it at the highest level. >> they have program to conduct surveillance on people within

the borders. do you see it as a defeat after you and other whistle blowers have gone through? >> a defeat? interesting enough. it means they won. [laughter] to say it that way. this is an area that subject of secret -- something that i live with every day because that's to my horror, i discovered that's precisely what the government is doing shotly after 9/11. that program is only grown. it's gone through various interrations. to say it's defeat would defeat the purpose for which those of us who stood up it would do a disservice to who we are as americans. see, myself and others in my

case facing many decades in prison for having done so, we knew that none of this was necessary. we knew there was no need to ever go to the dark side. we knew that the american exceptionalism was not getting away with and breaking the law because we're americans, the exceptionalism is that the fundamental basis for national security were our liberties and freedoms. i'm just telling you -- i said it in other audiences, there was never any need despite what happened on 9/11 to ever gone to the dark side. there was never any need at that time to violate in a vast and e egregious act. and turn to a purpose of secret surveillance? why. they would tell me the following, you don't understand. we live in extraordinary times. we live in exgent, this is the

-- it requires extraordinary me. >> the irony in my case was classified information. it was given to official government investigation.

the to 9/11 congressional investigations and a general audit investigation. when the senior attorney, the office of the general counsel said, tom come in the white house will prove the program is all legal. i knew that we had crossed the rubicon. it wasn't clear then, but i remember the bringing works of frank church from the 1970s. i was a very young teenager. when he actually talked about what would happen in the future, a technology that existed, could we pull it back? i am telling you. when you have secret power and

secret access to that amount of data on individuals, it goes to people's heads. you get to know an awful lot. for me, this is really personal. i became an expert during the years of the cold war in east germany, listening in on a fascist surveillance case they became efficient. getting to know everything there was to know about their own citizens. because all of the citizens are potential threats. so they did not trust any of them. all activity was suspicious. they became efficient in terms of the recordkeeping and files. the motto was to know everything. i can only imagine those who used to be in that state, drooling at the prospect of what

they could do with the technology that now exists in the hands of other government agencies. i only can imagine. my life was turned upside down. any and all subscriber information all exposed government, they were looking for what was necessary. they finally found something. the espionage. >> questioner asks, what about motivate the obama administration for going to what is called the dark side? >> you know, power tends to corrupt. it doesn't mean that well.

but absolute power clearly corrupts, absolute even though history would say it is a temporary condition and freedom ultimately prevails, we have had some very dark chapters in human history, particularly in the 20th century. when you are being given secret information, there is a success goodness that comes with that knowledge because it is secret. what can i do it that? how can i use it? and i am holding this. then i get to say who i can share it with or not. i get to say who authorizes it or had access to it. but i am holding this in secret.

the national security act of 1947, subsequent administrations had been not just reluctant to give up powers by a previous administration, but they have extended it. they want more. you can never get enough. this whole thing, all of the speed of the filibuster, especially one standing there in the senate, harking back to mr. smith goes to washington. you will get beyond what is at stake and there are serious questions that need to be asked. what does it mean to have the executive branch with what had been a largely compliant and complicit congress.

there is a thing called reduction the findings and recommendations get to be reviewed. much as say it was expunged as though the history never existed. it is unfortunate. what does it mean when you have that much power. if you do not check it, if there are not hyper oversights the environment of a post 9/11 threat landscape, there is always going to be more threats. you always manufacture more enemies in the goes far beyond the original purpose for which it was created. far beyond that.

there is a means by which you change law. you go through congress. do you know what they told me? this is in october, the first week. i realize that pandora's box has been opened up. if we ask congress to what they really want to do, they are going to say no. they are going to say no. congress would've signed off on just about anything. so why would the nsa tell me that we can't change the law. instead, we are going to violate it. and we will just make it legal later, which is precisely what happens. eventually this came out. and it is a violation of our system of justice.

using ex post facto law to make the legal what was illegal. cooperating at a very deep level, providing unity. an expanding that in 2008 with an amendment. which just becomes a rubber stamp. read section 702. in the barn door. >> we have several questions on wiki leaks. what are your thoughts on this? what do you think of the information he released. what do you think of the methods that used to relieve some? >> i will say it again here. i have said it before. he was a whistleblower and it took courage to do what he did. there are all kinds of other mischaracterizations. including a characterization. government has to avoid the

message. people have discussed differences of opinion, classified or unclassified was. the fact remains that he was a whistleblower. he he was witness to evidence of war crimes, and that is a fact. he was a witness to the dark side of the foreign policy. he was witness even though he brought it to the attention. it was a capital offense. you have to remember, what is my connection here? during the course of my criminal proceedings, william welch actually said in the final motions hearing before the judge

and with the public, he said that what i did, it endangered the lives of american soldiers. what i did. so separate from the myths directions, we have to focus on what was actually released. all of it was released. i will say it that way. it was in a very low-level system. but the aggregator that provides a very disturbing picture of who we are in terms of our american exceptionalism. i say that unapologetically. did you think about the extraordinary of blood, of american taxpayer money? the extraordinary loss of lives.

for what? he had to bear an incredibly high price. because of a choice that he made in his own conscience about what was right and he wasn't going to remain silent. from inside the courtroom, they had more draconian restrictions on what was going on at guantánamo. it is very clear. it is clear why he did what he did. he actually had made the attempt to connect with the u.s. press and media.

so even the prosecution was asked by the judge, what if he had gone through more times. meaning it didn't matter whether he had disclosed it, what does that say in terms of the first amendment? what message are you sending. what are you left with? one small example what was that? a sham and a fraud? apparently it was.

you will get the inside story on what he discovered as an eyewitness. this is what is happening in this country. the military justice has the right to question that it is lawful. guess what? you're going to have to follow them the only thing was to go to wiki leaks. and i find it ironic. incredibly ironic that the disclosures that he made were so

extraordinary for the time period of those disclosures, that other mainstream media had it on their front pages over many weeks and months. what does that tell you? i guess it must've been fit for news. there is a lot more i can say about that. and i stand on this. >> we have several variations about this. can you tell us that the government is stable right now? >> i hear you laughing. see, here is the dark side. because there is a lot that i have not shared fully and publicly. okay? although i have shared this with the