economy functions, that is, with banks having the opportunity, banks and other financial institutions having the opportunities to criticize what the government is suggesting, but, also, to our political system because the public then will not get the kind of feedback about what the government is doing that they can only get from the regulatory, from the regulated industries. so that's, those are the two policy issues that come out of this very, very heavy settlement that the government exacted from jpmorgan chase. thank you. >> thank you, peter. i mentioned earlier that we had intended a fourth statement but we were not able to complete that in time given the weather conditions. we'll send it to you by email but he wants review part of it before that. >> it's a simple statement. we had technical difficultyings with a missing e copy. it is a comment on a letter by

four resolution authorities in four different leading countries to isda, international wall dealer association. changing master agreements to facilitate bank resolution. when they realize if any one of them, fdic, the bank of england, bofa in germany or swiss authorities were to try to resolve one of the their major banks, under the isda master agreement, all of the foreign counter parties to swap agreements which number as you know in the trillions, would be able to immediately close out their contracts, net it and run. they are not constrained in the way others are by a stay. secondly, they are concerned that if the u.s. were to put a major bank in resolution and shift it to a bridge bank which

is what title ii permits, this bank should be very healthy but a change in control under the isda master agreement would give opportunity for the counterparty declare a default and try to act. it would also be true if they exercised a default across clause. all of these things could make it virtually impossible to resolve a large international institutions because they have huge numbers of cross-border derivatives of these kinds. what the, these resolution authorities ask is to please think about changing its laws to, its master agreements to make all of this possible. it's ironic that isda has been more successful harmonizing international law than any international regulatory body. they have actually gotten their

contracts written into law in 45 or so countries. there is an irony however in this because a number of the large banks as you may have heard are bragging that too big to fail is over because there is now a very good resolution plan in place and so nobody is too big to be resolved in an orderly way. who runs isda? the self-same banks that are in fact the major players in derivatives markets. there are others but they certainly control what's going on. so it was our view that the letter could have been tougher still. it could have pointed out if they really did believe in having a sound resolution structure then they should be quite willing to alter the agreements to facilitate resolution. >> thank you, richard. now open it up to the audience. if you have any questions, let me recognize you. there's a floating mic around. if you state your name and affiliation that would be a good way to begin. back there.

>> henry edgar, researcher at nara. i noticed a recent report on television by a financial reporter that the serious issue of systemic risk is now moved to subprime loans from mortgages, to automotive loans. do you have any comments on this? how great of a figure would this be and how serious would it be to be considered systemic risk? >> i, let me try to answer that. i mean it is very hard to know without knowing what data this report was based on but the notion that auto loans would be a source of systemic risk is quite doubtful in my mind and the size of the individual loans for an auto are so small, and

the, the default that is, the number of default that is would have to occur on those loans in order to create this kind of problem would be astronomical. it would have to be a huge percentage of all the auto loans outstanding and finally most auto loans, if i'm correct, are securitized. and that system is incidentally worked extremely well. much better than, if i may editorialize a little bit, much better than the government's system of securitizing mortgages. the auto loans are, in fact, generally of good quality by the time they get through the process, and so they don't generally fail. there are other factors. auto loans are much smaller than mortgages and so forth and payments each month are much smaller but the point is that system has worked very well without the government's

involvement at all. we've had, never had the kind of crash in auto loans that we've had elsewhere. now, there is one other problem and that is that there is a creeping sense that the government is gradually trying to move into more and more areas under the rubric of this idea of systemic risk. and that is what you heard marshall talking about just a moment ago. if you can identify any area of the economy where you think there might be systemic risk, the financial stability oversight council has the power to designate the participants in that area as systematically important and once they do that, those who have been so designated are subject to regulation by the fed very strictly, stringent regulation is what the dodd-frank act requires for those institution that is are so named. and so gradually the fed will be

able to extend its regulatory authority over most of the financial economy. i don't know whether that is what is happening here but it seems to me that every, every financial area ought to be concerned about the power of the fsoc to make those declarations and they are, without any oversight on that question. it would be very hard for the courts to make a judgment that they are unable to make, to decide whether something is of systemic importance. so, this is an area where all of us i think should be quite cautious. >> thank you, peter. other questions? yes. alex? >> thank you, mr. chairman, alex pollack of aei and i have question for my colleague and

friend, peter wallison. peter, you said if a regulated financial entity, say a bank, were to engage in litigation, maybe especially successful litigation with its regulators they would possibly be subject to that retaliation. i would edit and say with certainty that they would certainly be subject to retaliation? do you disagree with mid did? >> no, alex. alex and i usually agree on everything but i had, you understand, i had to deal with five or six other members of the committee but that is an edit i would certainly accept. another, another one of my colleagues. >> ed pinto, aei. colleague and friend of peter and alex. i would only add the successful cases that i'm aware of financial institutions suing the government were all defunct ones that then sued under the fslic

and others after they were basically shut down and shareholders brought suit. they were successful but they were no longer operating so it didn't make any difference. they had nothing to fear but ultimately they were successful but that is the only way they were able to take it on. >> gerald chandler. would you go back to basics and compare what you've been talking about, having, reserves required, required reserves and so on, to having the government take over? suppose you had a system where the government guaranteed we'll buy everything at 75% of its last transaction value or some other number? how would you decide between having those two systems? >> well, with, with what

industry are you talking about? >> banks. okay, i'll clarify my question. banks have securities or something they own. you talked about first and second level types securities and if the bank has a run on the bank and has to sell those and it can't, the purpose of all this is to make sure that it has adequate cash and other things that the first level. the alternate system would be to simply say that the government is a guaranteed buyer and buys everything at some level, 75% or 95%. >> there is an intermediate step that we do have in place which is the lender of last resort and so before you would go to what is really a bailout pure and simple and then you have to ask whether there is the appetite in congress or in the public to fund such a thing, you do have the possibility that a bank candies count assets at the central bank and these days for almost nothing without having to sell them at distressed prices

in the marketplace. so i think we do have a safeguard that would keep us from having to go that far. >> but my question was compare the two systems and how to decide between them? >> well the one system would be incredibly expensive for the public and the other one should be much less so. the banks are subject to much more moral hazard with system where they had 75% guaranties on all the assets. >> i agree with you that there is a visible expense to the public but there is visible expense having larger reserves and charging higher rates on loans or whatever. if you could identify all the costs on both sides presumably you would take a side that has the lower cost. >> that is not a full accounting of the cost. you have to ask yourself whether the public is paying appropriate costs for liquidity and if it is

being subsidized to that extent by the government i would question whether that's true. it is nice to have free liquidity but i'm not sure it's a healthy thing for the economy over the long haul. it is something that is scars and should have a scarcity value. >> if i could interject. how much capital banks ought to hold is the amount of capital they would in a world where you didn't have these guaranties. since you do have the guaranties you have to make an estimate what the right amount of capital is and that's why we have capital regulation. with liquidity our criticism is liquidity is important but it is also related to the amount of capital you have. if you have a amount of capital you don't need as much liquidity. if you have much liquidity you don't need as much capital. as dick pointed out you have two aspects to it. the one characteristicses of the security and two, the characteristics of the america contest. the regulation focus only on the first, the characteristics of the security and what our state says that at the time commercial

paper which in good times when the market's operating well is a liquid asset and in bad times when you have a run on the banks, you have the financial crisis we just experienced commercial paper is not very liquid. >> the question you raise is a very pertinent now. there's, some movement to try to resolve the government guaranty of mortgage loans by having private insurance take the first fixed percentage of the loss and then after that the government would take the remaining part of the loss. i, at this point i don't have a feel for the relative advantages of that procedure over the existing government guaranty but peter probably does, right? you want to talk about that?

>> i don't know how i got into this. this is the so-called corker-warner plan. i don't know how relevant this is to what the question was -- okay. but, but, in any event under the corker-warner plan there would be a 10% amount taken by the private sector before any losses to the government any losses to the taxpayers or to the government entity that is guaranteeing the mortgage-backed security. so that shrug of 10% in there is protect taxpayers -- "shrek." the problem is, of course unless the mortgage quality is good, unless the mortgages are subject to strong underwriting standards, the losses could be enormous greater than 10%, quite easily. s in the government exists on good underwriting standards and there is no indication the

government is insisting on those right now, we will have a situation in which the government will have to subsidize in some way the loss that is are going to be occurring because the quality of the mortgages are so poor. how the government will do that, nobody knows at the moment but that's the danger of having the government in the position it is put in in the corker-warner situation where the government is guaranteeing all-out standing mortgage-backed securities. they then can create all kinds of terrible mortgages, low-quality mortgages, assume that the private sector will take the first losses but the private sector is going to ask for quite a lot of compensation in order to do that and when they do that, the mortgages will become extremely expensive to the people who the government wants to have these low quality mortgages. and when that happens, the government will then have to find some way to subsidize those

low-quality mortgages. so the people who otherwise don't have down payments or good credit scores will not be able to buy homes. that's the problem and i don't think, myself, that congress is really focusing on that yet. >> actually, i'm glad you brought that up. it leads me to a question, mr. wallison. first of all, thank you for your contribution sometime ago of the large volume having to do with dodd-frank and your copious thoughts on that. , on that subject. i wanted to ask you what has been the result subsequently and how it may have affected any legislation or amendments or thinking as far as banking regulations is concerned? >> none. i don't know.

i would say this. that from my perspective, and thank you much for the compliment too. i think you're talking about the book that i put out, "bad history, worst policy, how we got the dodd-frank act." the, i think that the work that i have done and the work that my colleagues have done ed pinto and alex pollack have convinced i think, at least the republicans, and not all in the, either the house or the senate but a substantial number, that there is a real danger here in having the government involved deeply in the mortgage system. and as long as we have that occurring, i'm afraid that we're going to go back to the same problem that we had before and that is, that low-quality mortgages will pervade our financial system. we will have a, some kind of a bubble and when that bubble

collapses, we will have another financial crisis. so the effect that i think my work and pinto's and pollack's has been is successful as far as it goes but unless more people in the united states understand what the danger is, get more information from the media than they have gotten about what happened in the financial crisis, it is going to be extremely difficult to prevent the government from responding to what we called the government mortgage complex. the muscle here in congress are the realtors, the homebuilders, and the banks and they like programs where the government is guaranteeing mortgage-backed securities and they are pressing congress to institute a new system like that instead of going to a system in which is largely privately operated. so we're having some effect.

not as much as i would hope but we're still young. >> tom jennings. former general council of a former bank holding company. another question for mr. wallison if i may on statement 348. i agree with most of what was said there including the amendment by mr. pollack. but with respect to the transparency side of it in the days following the settlement and the publicity about the settlement, jpmorgan's market cap went up and stayed up for several days after that. without this transparency there, why did this happen? do you have any explanation of that? >> resolution of uncertainty.

that would be my answer, the resolution of the uncertainty. the market reilly thought, i think, that it could have been a heck of a lot worse and jpmorgan had now settled almost everything that was likely to happen in the future some that probably made people feel somewhat more confident about the bank and that the fact that the bank could pay a 13 billion-dollars fine and series of fines and still be profitable was similarly impressive. >> there is with a similar bent in the late '80s when city corps set aside several billions of dollars against potential losses in its portfolio of country loans. that gave it the largest loss ever registered by a u.s. corporation that quarter but its share price went up and the reason was it sort of put a line under the loss it is was willing to take and remobilize part of

that portfolio. there was a lot in resolving uncertainty which i think drives people to settle than string out the litigation. >> [inaudible] >> this is a question for another friend, dick hearing. -- herring. on the swap changes you discussed, interesting question. are we to understand that, that the proposal is that the collateral delivered at some point against the adverse mark-to-market of a swap counterparty would become a preference item as in bankruptcy and would be taken away from the holder of that collateral? is that how to understand this proposal? >> no. i probably explained it badly you about the idea is to avoid a race to seize assets of a bank

in resolution while supposedly transformed into a bridge bank that is perfectly solvent and the fine print in the isda contracts actually gives the count party of a swap the right and close out net and grab whatever assets they can to make the difference. >> dick, if they're doing the job right under the isda agreements it is an ongoing collateralization at all times. >> and the -- it would continue to, to do the collateralization. it is just that, there is an opportunity to cut an run. we saw it with long-term capital most prominently that was the driving pressure but the problem is in order to take, to execute a resolution you need a bit of time and you don't have that time if all the counterparties are simply taking the money and running. >> to add something to it, what

we're worried about regulators are concerned about is fire-sale losses and if you have to do this immediately or could do this immediately, then you take the fire-sale losses. you take one day or two-day period where you have the longer period to sell securities, then you reduce the possibilities and probabilities of fire-sale losses. >> at a more basic level, there is an asymmetry in the contracts as between a u.s. counterparty and a foreign counterparty and the more basic issue that asymmetry should be reversed and how it is reversed is a second question. but it should be the same, should be symmetry. >> question is to -- what we're saving is in the united states the fdic does have the ability to impose a stay. it is one of the sections in that voluminous document.

but it can't be applied to foreigners. this is quintessentially foreign international market and so, if you can't, and there could be literally thousands of counterparties to a swap book and so if you can't just assume that you can impose a stay, and actually have to go around and talk to each of those counterparties that takes an enormous time too and may not be successful. . .

>> doesn't the need of the governmo try to find somebody to take over, a healthy candidate to take over a weak financial institution go away because of the liquidation authority which allows them to put a tax on all the healthy institutions ex post facto to pay for liquidation and, as you say, keep them in liquidation and run them as a going operation so they can maximize the value? the government doesn't need help from a jpmorgan in the future, because jpmorgan will be paying 30% of whatever it is out of the tax. >> actually, i think that is the hope. i think looking back on the crisis one of the worst kinds of decisions that was made was to let very large institutions get larger still. there was -- and it was really subsidized by the government. i sort of differ with some of the things peter said about the nature of those deals. but, um, there is a real difference between liquidation

and a bridge bank. even though dodd-frank calls it the order toly liquidation -- orderly liquidation authority, they have no intention of leaving these banks. they want to leave behind a good bank, and that good bank would be able to either be sold as a whole which might be unlikely if it's a very large bank, or carved into pieces that the market would buy. but the idea is to give them time so that they don't have to sell at a fire sale price. and i don't think that's really taxing everybody for liquidity. there is -- you may be referring to the provision -- >> [inaudible] in terms of the losses -- [inaudible] they can do an ex post facto tax against the healthy banks for civilians. >> well, no, that would be looking ahead. if the bad bank is taken apart, the bad assets and losses are left behind.

but looking ahead, if the good bank turns out to be not all that good or it needs to draw on the treasury fund that the fdic has and can't be paid back, you're right. at that point it would fall to the other banks to make up the difference. the idea is to have several layers of support between the loss and the taxpayer. but it's supposed to be a remote possibility. >> let me remind you that this is feasible now because under the legislation you could form a bridge bank. the dodd-frank act keels with a -- deals with a bank holding company, and it brings a bank holding company resolution into the same process as the bank resolution. also what we're charging is if there are losses, it should be borne by the industry and not by the taxpayer. and what you're doing is basically saying that deposit

insurance is paid through the premium for losses that go for the uninsured depositors should be paid for, any losses by the industry, on an ex post basis. >> well, i want to thank you all for coming, braving the weather. wish you all a happy holiday, and we'll see you in february. thank you. [applause] [inaudible conversations]

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