particularly i want to acknowledge that's being done by the fed, and especially my old colleagues at 33 liberty street in new york is really quite impressive. progress really is being made and in getting to better understand this, and are specific initiatives of their risk management. one of the things that i made, that i thought was a pretty good argument for in this space was the financial infrastructure stuff, including settlement systems and all that. because right now when you move away from probably the five or six or eight or nine best managed clearing systems, that

are not dozens of them around the world. and i suspect that in many cases the discipline that's been applied to risk control and risk management are some of those clearinghouses and related organizations probably is not what it should be. i suggested, for example, that for all of those mechanisms there should be, among other things, minimal standards whereby using stress tests and related techniques, you should have a standard that would say that any one of those organizations anyplace in the world showed, among other things, have the capacity that at a given business day they could survive the simultaneous

default of their two or three largest artist events. so that's pretty draconian stuff. but i think it is symptomatic of the fact that we've got a lot of work to do to get our arms thoroughly around the shadow system. keeping in mind, above all else, that it is in my judgment a two-way street. >> i would agree with that. i think dodd-frank try to deal with issues associated with basically two things. under title i it gave regulators the ability to regulate outside the traditional banking sector, the ig type model problem, so-called title i designation. they are brought into supervision by the fed, and then under title eight results and methodology for fsoc to make

recommendations on system activities to that's money fund reforms. this is one area where the fsoc has identified this as a systemic problem and asked the sec to address it. so my view a lot of this is more activity than institution rated the license is if the execution is viewed as a naval to fail without disruption, the best answers to make them downsized until they can be, resolve and the bankruptcy process. i think the fittest and great work to get a lot on the plate already and just move more and more kind of accept their business and system and put them under federal provision under title i. if not that i think a lot of the issues for instance, the research grid quite a brouhaha recently and report identifying some issues that it is as potential for systemic problems with the asset management

industry. there was a big overreaction i think to that report, but i do think the issues that identified if they need to be addressed should be through activity regulation and most of by the fcc but again that requires the agency jurisdiction to move forward and get ahead of these types of problems. so the are mechanisms to deal with the shadow sector based on the lessons we learned and dodd-frank. i think they can work if used appropriately. the other thing i would say though about the shadow sector is the shadow sector works great in good times, and in bad times it kind of goes away. and that's why again we need that well-regulated banking system that has safety net programs that would keep it functioning and lending in the real economy and those and have little pullbacks accrue. and they do worry. if you're planning i think maybe one small example of where you're having a separate

mechanism now for making loans, consumer, and now we're getting into small business loans. in a venue that is quite lightly regulated. certainly can to do a bank or a community bank. so the competition is nice and the like there's been a problem with credit availability. i like the fact they're getting more credit out there at lower cost but how much of that is because they felt -- just break your arbitrage. they don't have the same rate as ththe restrictions but as much s i'm happy for borrowers who have a good expense with those platforms, we know they will disappear and the downturn. once investors are seeing losses they're not going to put money to make loans in the. hopeful you'll have a robust banking sector, particularly the community banking sector which does more in the small business space. will still be there. so i do think not just systemic stability but also regulatory arbitrage has to very much be in the focus of regulators when

they see these new types of mechanisms outside the traditional banking sector develop. this is one area where the consumer bureau i think, ability better disclosures could be helpful. we want to make sure that the shadow sector doesn't so cannibalize in the good times to everything works in the good times. but in the bad times we had a weakened banking sector. >> well, i am not sure what term shadow banking system means, and my concern is that if it means everything that's not regulated by a federal banking agency is the shadow banking system, i think it would be a mistake to try and bring all of these institutions into that system. i kind of like very much what she said, which is to try and identify those institutions that failure would cause a systemic problem, rather than simply say we need to regulate the shadow

banking system. i don't think that would be necessary at a don't think it would be productive to say you have to be subject to federal supervision even if your small or not systemically important. i also agree with sheila that they could be regulatory arbitrage which would be unfortunate but a don't think the solution is to impose the same regulatory regime on non-regulated institutions. there's a certain advantages to being in the safety net which gives banks and other regulated entities a competitive advantage. so it may even out. >> so let's shift gears to each of you have touched on this topic as well, but asset bubbles to over the last 50 years virtually every financial crisis has been associate with asset price bubbles, as we all know. how can we distinct between asset bubbles that oppose the

senate risk of supposed that those two not such as the dot com bubble in the year 2007? >> it's common to say nobody knows when there's an asset bubble and i don't buy that. i think it's very hard to know when it's going to pop, but i think anybody that didn't think it was a housing bubble prior to the crisis, you, my mother saw. she was commenting about it. for heaven's sake, let's have some common sense here. i think there are some things regulators can and should do to make sure that government actions don't further asset bubbles. one is i think more robust regulation that requires loans to be based on the ability to repay. is going to do business or a household they have income where they can pay back the olympic they're not just making the loan based on the idea that the asset is going to appreciate. we got into that during the crisis where people were routinely hitting loans. granted this is being done by

nonbanks, without having to document that could pay. of course, that's going to inflate prices. if you disassociate the price of the house, you have a very increased demand and unsustainable prices building. that's exactly what we had a. leverage is another way, to make sure the bubble so get out of hand and not just capital requirements for regulated banks but also get the kind of leverage that the people there lending to. i applaud the occ for his leadership on this leverage alone guidance. i think it's the type of thing regulators need to do, especially in this very prolonged period of accommodated to monitor policy and yesterday that monetary policy destined to be to asset bubbles or creates risks of asset bubbles but i think it's very hard. i don't think it's hard to call it. i think it's hard to know wins going to turn. by definition asset bubbles,come everything to keep it going. so knowing when it's going to turn is for difficult and telling people to stop the madness, you know, chuck

prince's favorite statement, you know, when the music is to blame you've got to keep dancing. that kind of groupthink dynamic is something regulators have to defend against. but i do think some of the things we are seeing now with tougher capital requirements will help constrain some of the silliness that i see and a lot of other see now in the emerging markets. >> i agree possible that a lot of people recognize asset bubbles but it think the practical matter is that when you're in the middle of an asset bubble, it's almost impossible to stop it. and let me illustrate that with a few examples. in 2006, regulars issued a modest guidance to try and tamp down commercial real estate lending. and they got pulled before congress and were lambasted in

public to the extent that one of the regulators disowned the guidance in the hearing. there were attempts to rein in fannie mae, freddie mac, arguing that they were undercapitalized in 2004, we saw a nobel prize-winning economist and very prominent professors write papers saying, it would be one chance and 500,000 if fannie mae whatever become over capitalize or insult them. you saw comptroller clark when he tried to rein in commercial real estate. he became the regulator from hell. that's what he was called and he was not allowed his confirmation hearing. he was not allowed to have second term as comptroller because he tried to tamp down

spending. it happens over and over again. when you're in the middle of a bubble, if you try and tamp down the credit, you're going to be accused of being the regulator from hell. you're going to be accused of hurting the economy. you're going to be accused of preventing disadvantaged people from obtaining a house, et cetera, et cetera. and right before the bubble the house passed legislation called the no down payment mortgage loan bill last night okay? now what would have happened in 2005 or 2006 if the agencies have said, were going to prevent come were going to tell our banks they can't buy mortgage-backed securities, because that's what philosopher, the banking. it wasn't originating loans but it was in buying the loans that banks lost the money. and if the regulars had come in

and said you can't buy mortgage-backed security, i think the reaction would've been very, very harsh on the agenci agencies. >> yeah, i would say if the argument is forget it because regulators will get too much political pressure, i just don't buy that. that's why we have good strong people in these records are jobs. that's why they have independence, that's why the term protection. that is the job and they need to do their job. instead of three and up and say let the crazies go on again because congress will like as if they don't. i just don't buy that. i agree the political pressure is terrible but there was a lot of pushback on the leverage alone guidance that other people defend it and it died down. you guys are still admitting it. i think you can do it. i think, again, and it's much tougher leverage ratios. sort of also committees work and the fed and the occ and the fdic moving forward a lot of support for the.

i hope to see the final licensing. pushback on that but i think the regulators are going to the courage to move ahead. that's the kind of thing you need to do because risks are building again in the system. >> let me just respond because percival i didn't say throw up your hands and do nothing. and i think, i mean, i agree with you that regulars need to do something, and i think appropriate capital standards, appropriate liquidity, appropriate supervision is part of the solution. but it's also not very unpopular. i'm talking about in 2008, in 2008 winches that everybody knew we had a problem, congress passed legislation which rigorous can't ignore directing federal housing finance agency to ensure fannie and freddie led the nation in providing home mortgages to very low, low and

modern ink people, great standards they would have to meet with guidelines and directed federal housing finance agency to encourage the use of innovative mortgage products. it's a statute. in the '80s regulatory forbearance for agricultural loans was put into law. so there are other examples. regulatory capital for commercial real estate loans was directed to be given 50% risk weighting. when the loans were securitized even though they thought 100% were appropriate. you can't simply say that the regulators can put up a brave face and stared down congress and nothing will happen. and if they are wrong and if there wasn't a bubble, then they would be responsible for causing

harm to the economy. so it's not quite as easy at that. >> no, it's not easy. i was head of the fdic for five years and it took a lot of flack. i think one thing the regulators need to do more of is the public. i'm sorry, i know people disagree with my engagement with the media, but get out there and explain what you're doing and why you're doing it. if you're quiet about it, the people who don't like it have a lot of political influence on deep pockets. to dedicate out in the public domain and explain what you're doing and why you're doing it. if you can't explain what you're doing and the public benefit of it then maybe you should rethink it. but i think there are tools that need to be used more aggressively. believe me, i quite sympathize and i wish congress would just stand down and get out of it because, you know, sometimes they are a positive influence but i'm sorry, most of the time they're not. they are a negative influence. so it's not the regulars are perfect and there's a legitimate role for congressional oversight but that should be structured oversight hearings, not letters

signed by 200 members of congress telling them to stand down on a rope whatever. i don't think -- the other people with the technical expertise, the ones who go through the comment letters and have the -- that's why they have these jobs, to make these kinds of decisions, and congress doesn't have the same expertise. i think it's incredible and i hear what you're saying but i think there are tools for pushback the need to be used. >> it's hard to go to the pub and say people who are buying houses and pretending to flip them that we're going to take away your credit if you don't think buying a home is a good idea. >> the flippers, i think it would've been a lot of political support. >> now there is but not back -- i mean, the public basically thanks, i mean, we all know people who speculated in houses in the middle of it, and thought they were doing the right thing. and it made sense if you believe

in the bubble. and i don't think you can go to the press and say we're going to take away this opportunity to have economic advancement. >> one more thing. there are other countries, canada and australia come to mind that did, they ratcheted up the down payment requirements. there were things that could've been done that work done. >> absolutely. those are two countries but there are probably half a dozen that i know of that essentially did exactly that. and it worked. >> it worked. they avoided it and we didn't. >> so in the interest of time, a final closing question and then we can take questions from the audience. so based on what we discussed this point in what is the one recommendation you give to each of the following participants, the government, financial services providers, and consumers. give a short, snappy response to that question if you can. >> you want me to go? >> sure. >> well, on the government,

balance the budget. simple. >> there you go. >> and one of the reasons why balancing the budget is so important is because that would give us more room to finance private investment. and if you want to get the economy back on track, one of the things that is going to have to happen is more private investment. so that's that one. financial service providers, i kind of -- i tend to put regulators in that same category because we are all in the same boat. i think that perhaps especially though for financial service providers, with all the things that are being done am revisiting models, cutting

expenses, building new regulatory framers, but lots of stuff going on. all of that is very good. but what i would like to see on top of all that good stuff is more attention within financial institutions of all kinds, more attention placed on effective governance, values and culture to ultimately those are the things that are going to provide the glue that really, really, really makes banks special. and, in fact, would make other forms of financial institutions also special. with regard to consumers, et cetera, one of the things i would love to see is for payday lenders to disappear off the face of the earth.

[laughter] and within the framework, to provide much more stimulus and emphasis within the regulatory community and the banking community for outreach programs that really do make progress in reaching out with banking services to low-income and other members of our society who could use some help and could use some education to begin, in a really effective way, to put that nightmare behind us. and then finally, which gets back to the bubbles question, greater transparency in terms of things that really matter. one of the things that's all

over the place, including any mortgage space, but it's not limited to that, is a lack of transparency. one of the things that is common it's much too widespread is what i like to call in bed leverage. and embedded leverages one of the things that grows out of derivatives and other highly structured complaints and complex financial products. we've got to do a better job within the industry of the regulatory community of trying to get much more effective disclosure, particularly as it surrounds the concept of embedded leverage. that was probably too long. >> no words. we stuck a time. shelia. >> so for government i think getting our fiscal house in order to looking at fiscal policy for growth, taking burden off of it.

monitor policy can only accomplish so much. we need more infrastructure spending. i think we can do that in a way that is fiscally responsible. funded attacks for. those are the discussions we need to be having. we need fiscal policy to get more robust growth in our economy. that they can't do it, and i wish congress with all the problems we have with unemployment, why does not agree to focus on jobs and going to the economy i don't know. but i think that's the been for everybody including the banking sector to get this economy going again in a way that we have been used in the past. for financial service providers, i think for the long-term, ma think in terms of long-term customer relationships. take of making money by providing real value, not hidden fees or, you know, selling instruments ar or constructing complicated derivatives that people don't really understand what they are buying. you know, get back to customer

service, whether it's a business or a household, a service that provides them could valley and longer-term. that is going to make your institution more sustainable and more profitable. for consumers, i think they need, a couple of things, consumers are voters. they need to get more engaged in finance reform to combat some issues and pushback regulators get when they try to institute unpopular reforms with the industry. i think we need more of a counterweight from the main street folks so they need to get more interested and involved and put counter political pressure. as consumers of financial products, its age-old advice by know what you're getting. i think the consumer view is helpful in terms of getting better disclosures and encouraging the industry to develop similar products that are easier to understand and posing some consequence to them if they don't, if they do provide things where the keys are hidden or potentially

abusive. consumers also need to be prepared to protect themselves. so know what you're getting and if you're unhappy go some place else. is a lot of stickiness with customer relationships, financial institutions, and we probably do make it too hard to change account relationships. i'm not just talking about banks, i'm talking brokerages as well. move. another thing the consumer view might think about is making it easier to move those transactions when you feel like you've not been well treated by your financial institutions. that is another kind of market is what i think would be helpful and improving the sector. >> well, i certainly agree with the comments that i've heard so far so i'm just going to add my thoughts, which should be viewed as an addition to the recommendations. i think the government should start to think about long-term policy and not short-term political gain.

it's too much, in my view, of trying to get the next deadline, tomorrow's paper. and they really need to figure out what's the best policy for the united states, country, and not for themselves. financial institutions, really screwed up. and i hope that they've learned their lesson in terms of what happened in the reaction. i think some financial institutions should seriously consider whether they want to be in the consumer business at all. banks, especially where for many years commercial lenders, they didn't specialize in consumer products. i'm not sure that they are the best institutions to be in the consumer business going forward, or if they are, they have to the kinds of ethics that would be discussed right here. and what was the third one? >> consumers. >> consumers, yes. consumers, my advice would be

just because you can get a loan doesn't mean you should take it. [laughter] >> there you go. so any questions from the audience? over here. [inaudible] [inaudible] >> first of all, i'm not representative of a banking industry. so i can't speak for the banking industry, and i'm sure there's things i have said today that the banking industry would oppose. but let me give you an example

of what i'm talking about. i recently read a paper from the boston fed which talks about adjustable-rate mortgages. the thought had been and conventional wisdom is that adjustable-rate mortgages were a big problem because when the rates went up, people were tricked into getting their loans at a low interest rate when they have the right shock two years later and they weren't able to repay the loan. well, empirical data which is coming out now says that is not actually what happened. that for many of the adjustable-rate loans, there was no rate shock because when interest rates went down, there was no increase in their monthly payment. and if you look back over history, the past 15 years of the performance of adjustable-rate mortgages, there is no correlation between -- or very little correlation between adjustable-rate mortgages and mortgages that defaulted.

.. >> so that's just, you know, one example. we are beginning to get evidence certainly, i think, prudential standards, having better liquidity, having better and more reasonable capital requirements, having stress tests, these are all things that make sense no matter what the

cause of the crisis. but we need to make sure that the actions we take are based on tacts and not on con -- on facts and not on conventional wisdom. >> okay. i'm sorry, i can't contain myself. [laughter] >> no. i think the industry, you know, not -- there has been some industry-sponsored research and other kind of, you know, reinventing history, spewing fuzziness about what causes crisis and whether that serves people's interests. if they don't want reform, let's create a lot of confusion about what the problems were, and we don't know what the solutions should be. there's these talks of 328s and 327s that defaulted at much higher rates than 30-year fixed rate subprime mortgages. it's silly to suggest otherwise, and if you want research that does not necessarily reflect the industry view, i would suggest you go be on the web site of the

center for responsible lending. most certainly, yes, there was a significant size of the troubled mortgage market, they were flippers. they were doing the low doc, no-doc, buying three or four houses, you betcha. that ugly stuff was out there. there were also a lot of people living in lower income neighborhoods who once had nice, safe, 30-year hour backs who got re-fyked, and, yes -- re-fid, and these were very high. >> i have to respond be because -- [laughter] i feel with my -- >> okay. did the industry have think -- any responsibility for the crisis, or was this just all, you know, the government forcing them to give poor people mortgages or, you know, sophisticated borrowers ripping these investors off. was it all the borrowers' fault? i am still hearing it. take some responsibility for

this. [applause] [laughter] >> we can't get it fixed until you start taking responsibility. >> just a reminder, we have time for do. do -- >> no, no, we're going to have one more rebuttal. >> first of all, i respect you, sheila -- [laughter] >> no, you are with heroine -- you are a heroine. what i'm a little troubled with is the reference to industry-sponsored research. because my research, federal reserve bank of boston. i don't think that's industry-sponsored research. it may be, and if it's, i retract all i say. but if you look at the empirical data identify looked at, i think you might want to say, ray, i -- >> just look at the default rates between adjustable -- >> no, i didn't talk about adjustable -- >> okay. why don't you two take this discussion offline in the speakers' lounge after after the fact. [laughter] gentleman in the back.

>> yes, eric. since we're at a symposium morning the 15 -- honoring the 15 0th anniversary of the occ i must ask this. ms. bair, in your book, one of your reforms included abolishing the occ. [laughter] at the time -- >> wow. >> -- regarding the agency's future with mr. curry taking over as controller. do you still espouse this proposal? and if not, how has the occ altered its behavior to cause you to change your mind? and are there any be particular rules, guidelines or other regulatory actions that you would point to as evidence of this improved and reformed behavior? >> there is. >> thank you. >> well, look, i think my experience with the occ was during the time which predated tom curry's ten your here. he was at -- tenure here. he was at the fdic, on the fdic

board. was one of great frustration. there were a lot of disagreements, and i felt as opposed to being a partner in trying to make sure these banks were stable, it was an impediment. i also think just having so many regulators can complicate supervisory response in rule writing, and so having a framework where you had the fed as holding company regulator and the fdic as regulator of insured banks seems to me to headache some sense, that -- make some sense. that it was done before tom got here, i think tom's showed tremendous leadership here. i think occ examiners are some of the best in the country, you know? they really have been topnotch. i don't think we should abolish the occ anytime soon, but let me tell you something else which i think would make occ a stronger agency, dealing with their funding base. they have to rely on examination of fees which is difficult,

especially as the industry has become more and more concentrated. the fed and the fdic have the advantage of having separate funding sources from institution-specific fees. and so finding, trying to figure out a new structure that is some combination of a shared fed-fdic funding for the occ, i think, would make it a stronger and more independent agency, and that is something i would hope would be in the short term doable. but i do want to compliment tom, i think he's done tremendous work here. and i had disagreements with the past leadership, and i to think the examiners are some of the best and most sophisticated among the regulatory community. that said, i found as i chronicled in my book that frequently, unfortunately, the occ, i felt, was an impediment in getting these problems fixed. >> last question in the back. >> jose. thank you for a great panel. my question is about the bank funding model. banks are supposed to be illiquid. they're illiquid by design because they borrow short and

lend and trade long. but you look at a lot of the regulatory proposals, thely quid fit coverage ratio which requires more assets, the net stable funding ratio whose status is unclear, but governor tarullo makes noises about getting u.s. banks to issue longer term debt, are regulatorsing suggesting that the borrow short/lend long model is no longer tenable or the banks can't really do that anymore or in the same way? >> well, i think -- >> that's what they're doing, they're in for a surprise. >> yeah. i think the issue is nondeposit funding and your debt financing and whether that's short or long term. and, yeah, there was way too much reliance on the repo and paper market, and that was an increasing portion of the liability structures in these larger institutions which is quite unstable. so i think in terms of the non-deposit component of the

funding base, forcing them to issue more long-term debt is good. and that will also have the indirect effect of making the uninsured deposits more stable because you'll have a thicker level of long-term, unsecured debt to serve in addition to the capital if the institution fails to protect the uninsured depositors which should make that funding more stable. so i absolutely strongly support governor tarullo. i think that is the right direction to go. but i think you need to distinguish between deposit and than-deposit funding. >> we're changing the nature of banking, how banks are regulated, how banks are funded. that is going to result in different impacts on the economy. so as a general matter i'm not saying it's not appropriate, but no free lunch. there's going to be higher costs for borrowing, higher costs for credit. maybe that's good, but it's going to be an impact. i don't think it's good, but it's going to be an impact.

so we can have that model, but it's not free. >> excellent. well, like to thank each of the paneltists, thank you so much. -- panelists. thank you so much. [applause] >> my first reaction was surprise because i had worked for mr. sterling. i'd coached the clippers in the year 2000. he invited me to his tower's wedding. i -- to his daughter's wedding. i had no idea exactly what was going on. but i also because of my association i know elle gin baylor, i know what he was complaining about. so i was confused not knowing exactly which set of facts mr. sterling stood behind. and then when his words came out, it was so obvious and shocking and just disgusting. all of those things wrapped up. the surprise of it, to find that

type of sentiment in someone who relies on black-americans for so much of his success and public profile, it was amazing. i just couldn't believe it, that someone could have that much bigotry inside and think that it was okay. >> july 4th on c-span a look at racism in sports just after 11 a.m. eastern. later, exploring the red planet with mars probe engineers and senior nasa officials beginning at 3:40. and later, at 8:30 p.m. eastern, discussions on gun rights and the perm recovery of michigan -- personal recovery of gabby giffords. >> we have more now from this forum on our banking system featuring gene ludwig in a discussion on whether banks are safer now than they were in 2007 just before the bank failures of the following year. >> a great pleasure to be here,

an honor. want to congratulate tom and others who set up this terrific conference and, obviously, happy birthday to the occ. i haven't written anything in my book that said it should be abolished, just to be clear. [laughter] and we have two jimmy stewarts right here with us. there are a few left. they're not all dead. these are people that are extremely distinguished, they really need no introduction, but just for those few of you who may be along the younger side and not know that john reid was chairman of citigroup, citicorp for, i guess, 16 years from 1984-2000 and that he transformed citigroup into a global consumer bank, and he then rescued the new york stock exchange for many years.

today he's chairman of the board of mit, the corporation of mit. in other words, john is running mit now as well. [laughter] to its great benefit. gene ludwig's an of mine, and he was a distinguished and transto have missional -- transformational comptroller of the currency between 1993 and 1998. he -- and during that period he put special emphasis on making sure the low and moderate income households would be able to get loans from the banking industry and vigorously enforced the community investment act. he also then turned to working with bankers trust as vice chairman, and subsequently he founded and is now ceo of the

financial group. so these are two fantastic folks to talk to us about your views of the financial crisis, the reforms that have been implemented so far and where we need to go. the title of this talk is "protecting the bank." i think we really want to change that to "protecting the financial system," because it's not just the banks that need to be protected, it's the entire financial system. and it's not just the united states' financial system, it's the global financial system of which the american financial industry is so much a part of. let me just say just for maybe three minutes here -- and i do want to leave us a fair amount of time at the end for q&a for everybody to participate -- just a few words about the economists' perspective on this, or at least one economist's perspective. so i'm a, you know, professor of economics. and the way i look at what we have here in the financial

system is that we have two public goods at stake. one is the financial highway system. think about your physical highway system. that's a public good. a lot of people can use it at the same time, it doesn't interfere with other people unless there's congestion, and you want to keep that open and free and working. you wouldn't want the gas stations who are kind of helping manage the system to gamble with their businesses and lead it to potentially break down which would completely cut off traditional commerce, shipping of goods and services. so the financial system is very much a public good. it's a financial highway system. the banks and other shadow banks are running that system, and what they're doing is gambling with it. that's what they're doing. they're gambling with a public good. there's a second public good that is the level of confidence in the economy. when lehman brothers failed in

2008, its building did not collapse. none of the seem working there died. none of the people working there died. there was nothing physical that happened to the economy. but the failure of lee match scared -- lehman scared the hell out of everybody, and we had collective panic. so people who are employers, small, big employers started seeing all this panic, all the discussion of the next great depression. the google searches for that spiked sky high in september after lehman went under. so the press had a field day. it was something they could write about. politicians had a field day. everybody got nervous, and the employers decided let's fire people, let's fire my employees before my customers stop showing up. and over the next 19 months, eight and a half million americans were kicked out onto the street from their jobs. that was a tragedy, and it

was -- and each employer was firing somebody else's customer. and so we had a coordinated panic. and that's the other public good, the state of confidence is a public good. and when the banking system fails, and it could be an insurance company, it could be ltcm, it could be a small thing that flips that degree of confidence, then we can have massive economic fallout. so we need to make the system, we need to recollect these public -- protect these public goods, and that's really a discussion we're going to be having today. i'm going to ask gene to start us off with some comments about the, how he views the protecting the football system, and -- the financial system, and then john will follow, and then we're going to have some pointed questions, specific questions, and we're going to try to leave about 20 minutes at the end for all you folks to interact. thanks. >> thanks, larry. i'll just grab a -- [inaudible]

[inaudible conversations] >> oh, hi. well, first, larry, it's an honor to be here. i particularly wanted to single out kahn hurley and boston university for putting this together. cam has done a great job in focusing in a serious way on the academic issues that surround our industry, and congratulations to them for putting this together. along with, i might say, jest key stiller of the occ -- jesse stiller of the occ. in this regard this is a particularly big event because it's the 150th anniversary of the occ. i myself aspire to 150. [laughter] personally. but at least the organization made it that far. we're also lucky as an organization not only to have an organization filled with extraordinary men and women of -- i may say our having once

been a part of the occ, i take tremendous pride in the association, but also having an enormously capable and highly intellectually-strong controller of the currency, tom curry. and importantly, like the women of the occ, somebody who's dedicated to public service and the well being of the financial system. it's also an honor, i might say, standing in for my good friend, paul volcker, who i'm happy to say i think has a very bad cold but nothing worse, he's a person of exceptional character, intellect and integrity as everybody knows, and i'm proud to call him a friend. and, of course, i'm honored to be on the platform with john reid who i have a great deal of respect for and once supervised his institution, spent some time with john -- [laughter] and realize his capability is extraordinary. now, the issue before us that is probably this panel specifically is sealing off the bank, as i

remember. and so to what degree can we or should we wall off, ring fence if you will banks? and there i think an important premise for this is when the occ was founded 150 years ago by just the brilliant ability and swe elect of abraham lincoln, he actually personally sent his secretary to lobby to congress to get the national currency act, national banking act through, and i'm sure it's true for tom, it was true for me, right over hi shoulder was the national banking act interlineated by abraham lincoln. he actually spent the time to work on the act himself. it was a brilliant stroke. and at that time the banking system was the financial system, in essence. and in 150 years the banking system is still enormously important, but a lot has changed. and it is not the whole financial system, and that to some degree is the heart of my remarks about sealing it off.

the question, i think, is will walling them off make them safer and/or the financial system safer? and behind this, it seems to me, is a broader question; what is the right relationship between formal charter banks and the rest of the financial system? is and -- and i think the answer is, as it is for much of finance, it's a matter of proportion, judgment and balance. right now we're at an important inflection point, it seems to me. many steps have been taken to strengthen bank ands banking, good steps. good additional capital liquidity is have made the system safer. we can take pride, i think as a nation, for having confronted new financial realities, learned from the past and made changes. i mean, the wonderful thing about america, you can, god knows, see it in these wonderful regulatory institutions and in the congress, we won front our -- confront our problems, we make changes, we move on. but as we implement the new rules -- dodd-frank, basel iii

and its progeny finish we're in danger, i think, of letting the pendulum swing to excess of losing balance to the detriment of the financial system and the broader economy. in some ways, this is the hardest period. so we've made the changes. implementation is always less fun and less topical and less newsworthy. but for those of us who toil in the intricacies of this, it seems to me that's the most important part, or a very important part. now, a great apartment of the risk lies in the -- part of the risk lies in the shadow banking system, a $9.2 trillion sector that grows every day. the shadow banking system since you say it doesn't seem like a big thing. you read about the banks on the front page of the paper, you typically and often don't read about the pieces of the shadow bank system, but it's enormous, and it's growing every day. that is the more we lock banks off from the real financial economy, the more financial activity is moving to the unregulated financial players. we can see it almost every day

in the newspapers. as talent is draining away from the banking system and moving to the unregulated sector. in of us -- any of us who read the financial banker, you can see it almost dale hi this transformation's going on. and in our highly dynamic, high-tech age, this swing of the pendulum can happen very quickly. internet peer-to-peer lending, hedge funds, it's only the tip of a very big iceberg that's getting big beer. now, as someone who believes in regulation and supervision, me, i myself am uncomfortable at the notion that regulating by charter type is distinct from activity makes sense. isn't the right answer like activity, like size of entity, like regulation? if an activity is risky, it's not made less risky by putting it into an entity that has a different charter, a different name on the door if you will and much less regulation ask

supervision. and goodness knows, i think you can say that for consumers importantly, that a consumer doesn't even know the name of the door, you know, going into an unregulated institution and getting abused, it seems to me, is something we all ought to worry about. banks are different to a degree. deposit insurance confers benefits, and taking deposits, insured or not, and making loans along with maturity transformation is a tough business requiring an enormous amount of skill. and, yes, we've found after 150 years of regulation and supervision and there is a -- that there is a great deal of value that comes with men and women such as those at the occ with the experience and responsibility to help insure honest dealing and avoidance of excess. i mean, one can't overstate, in my view, the importance to the well being of the financial system of the supervisory excellence that you see at the occ and other financial regulatory agencies. everything cannot be done by

rule. a lot of what really makes a difference in the safety of the system has to be done by feel and touch. and that supervisory experience that developed -- and it takes generations to develop at an organization like the occ -- makes a profound difference in the safety of the system. but banks are not, thises essence, the entire financial system as i mentioned earlier. it's not the way it was in 1863 when the occ was founded. they are ip extrick my -- inextricably intertwined, and history has taught us that they cannot be walled off, nor have they been the flashpoint, the actual causes of our greatest financial calamities. and i hues say this is my own biggest bug bear. the great depression, as scholars today understand, was caused by restrictive monetary and trade policies. bank failures did not cause the great depression. they were, in many ways, caused

by the great depression. every time there's a financial crisis in the united states because of our history in banking, we call it a banking crisis. so the great depression people viewed very much as a banking crisis. historically, now that academics like larry -- one of my most talented academic friends in this area -- find really the great depression is caused by governmental policies. now, it's also instructive to note that in what is now called the great recession or the financial crisis of 2008 -- i know great recession is kind of a nice euphemism, i think -- the failures that brought the country to the brink of disaster were not bank failures. just think of it. bear stearns, lehman brothers, aig, fannie and freddie mac, the triggers for the crisis, they're not banks. and when these nonbanks, less regulated financial players, got sick, so did the banking system. and that sense is parallel to

the 1930s. banks are a part of the transmission process, but in both cases were not, in my view, the cause. now, in part this is an issue of competitive die too manics. -- dynamics. why do banks get caught up in this. i think the danger of the shadow system is competitive dynamics. if you're going to stay in business and you have this enormous system that is unregulated, the pressures move you in that direction. and in addition, of course, it's an issue of connectivity. natural connectivity to the financial sector. now, this is not to say that banks are not important players in the economy, and they are, indeed, transmission belts for financial laws i just mentioned. they should be regulated and supervised by experts such as those at the occ and other bank regulators. but to think that we can solve serious financial and systemic problems by walling banks off is, i believe, a big mistake. the financial crisis of 2000

itself teaches us that walling banks off within bank holding companies is not the answer. that was viewed as, you know, one solution to the problem, but it's not. where bank holding company affiliates got into trouble, the entire banking organization gets into trouble including the bank. as i mentioned, walling them off from other financial players doesn't work either. so where does this leave us? to my mind, it suggests the following rules: one, banks ought to be regulated and supervised by knowledgeable specialists which we're blessed to have at organizations like the occ and, importantly, the o to -- occ. two, will not solve our financial problems by overregulating banks and squeezing activities out to the unregulated sector. in my view, quite the contrary. and, three, to the extent an activity is risky, it should be regulated throughout the financial system in an

even-handed way. again, i come back to what i think is the right rule: like activity, like size of activity and entity, like regulation. of course, this takes some doing. but anyway, those are my thoughts, and thank you very much for listening. [applause] >> i hesitate to get up because i met with larry for lunch a couple of weeks ago, and we agreed we would have no starting comments. and since i thought i was going to be talking with paul volcker and he and i have often spoken about the volcker rule and so forth, so i'm sitting here sort of reacting realtime. but let me say a few things. first of all, i agree very much with jerry corrigan, banks are special. i do think you have to look at

function, you have to look at size. i hadn't intended to talk very much about regulation. i've experienced it, and i must say it's a very important component be to the industry -- component to the industry. when i got in trouble in the '90s, had the interaction with the regulators that we did, i doubt seriously that we would have gotten out as well as we had, in other words, it really did help in the dealing with the problems we were dealing with. the thing i would say is this, and i'm going to introduce a couple new ideas here. one is when you think about banks, i think you have to understand something about bank customers. there's a small but very large -- [inaudible] to customers who enjoy access to the capital markets. they've been rated, they have access to capital markets, they become customers of banks, they

also become customers of institutions who specialize in intermediating the capital markets. that is what we were dealing with when we dealt with our most recent chi -- crisis. the great majority of customers for the banking industry do not have access to the capital markets, they are not part of the problems that we had here in '08. they get impacted by it, but remember, for the great majority of bank customers, they're looking for banks to finance them this their activities. they don't have the luxury of issuing debt or other instruments that can with sold in the capital markets. often they don't have much of an equity base and, certainly, it's not one that is traded. that industry is which has gone through its troubles, i like jerry's comments about going back to the '80s. that industry when they got into trouble did not constitute a

systemic risk to the economy. it couldvery devastating to a local -- could be very devastating to a local economy. i can remember when the texas banks got into trouble, and it was disastrous for the banks themselves. certainly did not help the local economy, did not imply the systemic risk that exists with the larger institutions that are dealing with these larger enterprises that do, in fact, have access to the capital markets. so when we talk about the industry, you should talk about an industry that serves people who have access to capital markets and differentiate it from those who do not. and then when you look at the industry, particularly the portion of it that deals with entities that have access to the capital markets, there's been an immense transformation that i did not have to live with totally during my career. i just saw the beginning of it. banks traditionally had provided credit to their customers, often, you know, seven,

eight-year loans were long-term finance. if you wanted anything beyond that, you went in the days of glass steigel to somebody who dealt with the capital markets who could issue bonds or equity on your behalf, what i call capital capital as opposed to working capital. the big transformation that took place in the industry was when securitization came along. all of a sudden the industry shifted its focus, and many of the customers were not the people who originated credits, but they were customers who wanted to buy an investment product. people who manage money -- and managing money in the united states and in the developed part of the world is a very large business because we have large pools of capital that need to be professionally managed, and these pools of capital tend to demand performance. and it's a very competitive arena, and if you remember during the '60s and '70s when the markets didn't really

do all that well, there was a tremendous amount of pressure put on investment managers who were managing pension funds and college endowments and things of this sort to get performance because the institutions they were dealing with required that performance for their own economic well being. the industry responded by becoming very aggressive. the idea of shareholder value is something that emerged from that, and it had a profound impact on the structure of the financial sector because all of a sudden people who used to simply provide credit and allocate capital as economists would describe it started looking at how they could create products that could be packaged and sold to an investment industry that was looking for higher-yielding products than those which were traditionally available to them. so the industry shifted very, very importantly to creating

products for investors. and that's where the idea of packaging mortgages came from, and that, of course, has been sliced and diced and made very sophisticated so that you can now create products that don't really exist, they're sort of synthetic products that you create and sell to would-be investors. as this transformation has taken place, it changed the structure of the industry that traditionally deals with customers' access to markets. and it allowed the industry to take products that normally would sit on the balance sheet of banks that didn't deal with customers that had access to markets. you could buy those assets, package them, sell them off to customers, and the industry has changed. and with that change the vulnerability of the system, the highway system, larry, that you're talking about became at risk because if a difficulty

developed within one of these institutions, they were so interconnected and so tied to other institutions that the notion of systemic risk -- a word that couldn't even have been pronounced when i first joined the banking business -- this notion of systemic risk became a reality. it's an issue of how can we have a healthy banking system that provides the is functions that this society needs and, larry, i like your highway analogy. and yet live in a world where systemic risk doesn't take on this character that you also referred to which is the fear factor that leads to an actual closedown where you can't use the highway system that's been built because everybody's scared the get in their car and get on it. so that's what i'm talking about now. the notion that banks are special is important because they do have a particular role

to play because of their depository function and because of their function in the clearing and settlement mechanisms, most importantly for money transfer purposes which are absolutely fundamental to the operation of this highway system. when mr. volcker came up with the notion -- and i don't know to what extent, you know, it's just become a label as opposed to an idea -- the idea that things that are banks that enjoy the protection of depository insurance and access to the liquidity at the fed, that they should not be using their institution for purposes of speculation with their own capital. they could work on behalf of their customers, but they should not be engaged in trading activities for their own account. i joined in supporting this argument and, frankly, in supporting a separation of those

who engage primarily in capital markets from those who do not. and the word is "primarily" because of managerial issues. and that is something that is not typically in the conversation, but the only skill that i bring to this discussion is the fact that for 30 years i, in fact, was a manager within a bank. i'm not a trained economist, particularly, i've never been a regulator although i've come to know regulators pretty well -- [laughter] my only contribution to the discussion is i have had the responsibility to, in fact, run a banking institution. i would tell you from a managerial point of view the type of management -- and, again, i go back to one of jerry's comments which i think is extremely important which has to do with culture, values, ethics and is forth and -- and so forth and so on associate with the the management of

institutions. the culture and the management of an institution that is a traditional bank as we imagine it in our minds as opposed to an institution that deals primarily in the capital markets or an institution that deals primarily in trying to create investment product, these require different managements, different cultures and different skills. and i would argue for a separation based on man year -- managerial differences. i think it would be better for the structure of the industry and for the problems we're dealing with if you could get the managerial separation between these various things and take that into account. because, ultimately, when you deal with crises, the structure of the management and the capability of the management is extremely important. and i do think we would benefit if there was some compartmentalization based upon

this managerial difference as well as the functional difference. why don't i sit down, and your questions will elaborate this. >> great. thank you, john. so let me ask a few quick questions to you, quick in the sense of maybe you could give us quick answers so we can get everybody a broader sense of your general views. finish -- and then we'll, again, in about 25 minutes we'll move to some q&a. so do you think the system is safer today than in 2007? let me start with you, gene. >> absolutely. i think the changes of the last few years have been profound. you've got vastly increased capital standards, increased liquidity requirements and a whole panoply of other requirements and some new good offices like the office of financial research at the treasury is a big step forward

in terms of looking at the is system. from a systemic perspective. having said that, i think that the implementation of these rules as we go forward is profoundly important because where the banking industry may be safer, the whole financial system may be weakened if what we have is a moving of activity into this shadow banking system without any regulation or capital standards or liquidity -- >> so do you think the overall financial system is safer, or are you kind of not so clear on that? overall? >> overall, probably better. but the shift is dangerous. and it's something that has to be watched pretty closely. >> okay. john? >> i don't think it's safer. no question the banking industry is better capitalized. and that, presumably, is going to continue. it's certainly alert, you know? people are not sleeping, and people are paying an awful lot

of attention. on the other hand, the interconnectedness of the major financial institutions, those that are deemed to be systemically important, if anything, is greater. the institutions are greater. i doubt seriously -- i think the fact that we have more capital and people are paying attention makes the likelihood of a problem smaller. but if a problem were to develop, i think they're so interconnected thousand that we'd be right -- now that we'd be right back to where we were with bigger institutions, and it would take a hell of a lot of money, you know? so my sense, you know, if we were flying on an airplane and you wanted to say is the risk of this plane crashing going up or going down, probably the risk is going down, the probability of the crash, but there are going to be a lot of dead people if the plane crashes. >> it's a bigger airplane. >> it's a bigger airplane. >> i see.

do you guys think that the role of a financial system is to gamble with its public good or just to intermediate between households who want to save and lend money and households who want to borrow money and also the households who want to invest money in the firm's, nonfinancial firms who want to borrow and also sell securities? why do we need the banking, the financial intermediaries to gamble with the financial highway at all? i've not figured that one out. are they, are they somehow adding some value? we wouldn't let gas stations systematically gamble with their businesses like they gamble on their own, but we wouldn't let them sell securities -- like, for example, we wouldn't allow them to sell forward contracts

on gasoline and all do the same, take the same position and all go broke at once and all leave their businesses with the keys in their hands to the pump. that would be ruled out immediately by congress. but yet we're letting the financial system, broadly speaking, continue to gamble. you're telling us we've got this big jet that could crash. jerry was telling us earlier today that things almost went south bigtime in the early '80s. we just saw what happened globally in 2008. isn't it time for the financial intermediaries to stop gambling entirely with the financial highway system? >> is well, larry, if you ask the question am i in favor of gambling at the financial, in the financial system, the answer is affirmatively, no, no gambling. [laughter] but the issue, i think, is a bit more complex. and i know you say that as a way to sort of elicit, you know, sort of interest here, provoke

comment. >> yeah. >> is the nature of the transformation process is risk taking. and in order to foment economic activity, whoever's lending money is taking risk. they're taking calculated risk. it's not surety. if you call that gambling, then the whole financial system has always gambled to a degree. thanks to the product. the question, i think, is to the extent that the risk taking is as controlled, thoughtful, regulated and supervised is can be consistent with the needs of the society. and that's where it gets, you know, complicated and i will even say nerdy. because, you know, you have to make decisions how much risk you're willing to take, not whether or not you take any risk. >> scale makes a big difference.

you know, the fact of the heart is individual gas stations go broke -- of the matter is individual gas stations go broke. and you may have to drive an extra five miles to get your gas. individual banks, you must take risk. you use gambling, obviously, a loaded term. you must take risk. but if there are individual sides so that you're not threatening the entire highway, that, in fact, has worked out pretty well. there are societies that use their banks for economic purposes and, basically, cause them to, you know, ignore risks and simply support certain industries and so forth and so on. and if the government's willing to bail them out at the end of that, it works pretty well. korea, the korean banking system which i know a little bit about was used in that fashion, but when they got in trouble, the government was there, and so goes to haves were not -- depositors were not at risk. what we're sort of saying is,

look, we don't want all the gas stations taking the same risks, and we don't want 'em all owned by a single entity that is taking risks that might result this all the gas stations getting closed. so it's a question of scale. the reason we talk about systemic risk is we say there is a set of institutions whose scale is such that we worry about them because they would have second order effects that we're not willing to live with. so it seems to me that it isn't the function, it isn't that, hey, a bank is doing something that we don't want them to do. banks will take risk almost all of the bank failures are credit failures, you know? shipping, so forth and so on, you lend, goes bad, you have big problems. if the scale is distributed so that you're not closing the highways down, it's unfortunate, but it works. your question is, hey, can we

risk the highways? and the answer is, no, we should not, and that's why we have this big discussion. >> but, you know, larry, i would go -- and, john, i would go a bit target in this regard. farther in this regard. systemic risk, yes, can be caused by a panoply of large institutions, but the great depression was a systemic event. and we didn't have institutions of the scale we do today. it seems to me that we are always going to have from time to time challenging global events. and it's the nature, i think, of finance and the pendulum swing. the reason institutions like the occ make such a difference is because while regulations can do some things to lower the probability and perhaps the extent of systemic events, the on-the-ground, day-to-day activities dealing with entities that are flying in realtime -- to use your analogy -- is e

enormously important. >> so let me press you guys a little bit on this. you said it's important for the financial intermediaries to take the risk. in 1795 frederick the great of prussia, and he also owned denmark at that point, he set up something called the covered bond system which is, basically, if you look at it, i think it's pretty much an equity-based mutual fund system. so here i am, i want to lend money to john so that he can buy a house. he's trying to sell me his mortgage. you're a mutual fund in between us. you sell shares to me and others who are willing to buy a pool of mortgages, be a closed-end mutual fund. it's 100% equity financed example here. so now you're a financial institution that can never go broke. you're part of the financial highway that's now perfectly secure. and the covered bond system has

worked really well in europe for centuries now. would you favor moving our mortgage system to a covered bond, 100% equity-based, you know, they use the word "bond," but it's really an equity-based mutual fund system, and there's parts of europe that have it, as a way of taking some of the risk out of the intermediaries? yes, there is risk, there is my need to risk my money with john, but there's no need for you, gene, to risk your institution, your gas station. >> larry, i'm not sure whether if you had a one-to-one capital versus lending ratio, which is what that suggests -- >> yep. >> -- you would, indeed, eliminate systemic risk. i don't know whether that's the case. but i do know that what we have admitted in the financial system for several hundred years is to some degree a leveraged model. in other words, banks, in fact, are levered. so is the rest of the financial

system. that is, the capital base is not one-to-one regard to the risk taking lending. and we have believed, you know, for a couple hundred years -- i don't mean just the united states, i mean globally -- that that kind of leverage added value to growth and economic development. the, i think that is, you're at the heart of a very big issue, and it seems to me it does go to -- i hate to keep heart harkg back on the shadow system. one of the good things that's come out of increasing capital is the leverage in the banking system's come down. you still have a leveraged system, but more contained -- by the way, prior to the crisis the banking system was much more leveraged than the leveraged system. today you still have the shadow system levered 50 to 70 to 1 as in the old days in many of these funds. so you've got to decide what the

balance is. and those are are the kinds of difficult questions that i know you put your mind to, and that's why academic focus on these things is so important. >> john, what do you think? >> i think the question's been answered. >> okay. so, well, i mean, this thing has worked pretty well in europe for a couple hundred years. i guess the question is whether we do have the option of switching to it. there have been many members of congress and even secretary geithner thought that this was a way to move. >> europe has a banking system as well, and it certainly has exposed maybe in less good shape than ours. >> yeah. >> so it isn't as if the society is operating on a different way. >> so let me push you on the question of passty. -- opacity. sheila bair was saying our system's far too opaque. would you agree with that? let me just, give the story of the tylenol scare back in 1982

that probably most of you will remember. there were four bottles of tylenol that were sold in an undisclosed manner in the sense that there was no safety seals back then. so somebody put in cyanide in these four bottles of the e he knoll --ty he knoll, and within a few days seven people died from eating this stuff. and around the world there were 30 million bottles. so just four bottle of tylenol that people knew were bad or poisonous, and this could have been others, nobody knew for sure because there was no safety seals on the containers. around the world, places like thailand, everybody decided that stuff's too dangerous to buy. that market just dropped like crazy. there was a run on tylenol, if you like. $100 million market went to zero. now, what did johnson & johnson

do? they just, they threw away all the old tylenol, they recalled it, and they repackaged it with safety-sealed containers. that's why we can't open anything these days. [laughter] now, that's an act of disclosure. we don't have much disclosure as far as i can tell and as far as she'll that can tell in the sheila can tell in the banking system. people are investing money in these -- i'm lending money to your bank, gene, you're in the middle, and you're lending it to john, but you might be ann lo mozilo -- angelo mozilo and be involve inside no-doc loans, and i won't know. and then i get a little bit of news there might be some bad mortgages you've made, and suddenly i panic, and i get scared and try to get my money out, and others do as well. i'm not just scared about losing -- i'm scared about what other people are scared about. i'm scared about them running on you too, and then the whole

thing collapses. do we need more disclosure? do we need vastly more disclosure? do we need an fda for the financial services sector so that we can see in those bottles? >> you're an expert at provocative questions. [laughter] the, i think this, unfortunately, the situation is more complicated in this regard. the one thing we want to avoid is financial panic, and while i'm a huge fan of transparency, transparency has got to be to clear, and it's very hard sometimes not to panic people with information that may be totally unclear to them. sadly, financial literacy in this country even among well educated people is remarkably low actually. and that's a huge, i think, responsibility we all have to sort of get ourselves better educated and everyone else. but having said that, the it is. and the question is what information one gives out and

how one gives it out without causing a financial panic. you know, a la jimmy stewart. so that's something that the bank regulatory agencies have pored over for generations, you know, how much information to give out. if you gave every single piece of information, you could really have misinformation. and also a very, a greater difficulty in disciplining the institutions. interestingly enough, if you want to get philosophical, there are societies in the world -- you think of china, you certainly think also to some degree of europe -- where the transparency is less than in the united states. and you wonder whether or not, you know, that lack of transparency you actually are likely to have less panics and less runs on institutions. now, i'm not add advocating for those systems by any means. but this question of

transparency, how much you recognize, how much is mark-to-market is very much difficult stuff and potentially highly volatile stuff. >> john? >> yeah, i agree. i mean, you have to have some reliance on the institution just for a division of labor if nothing's. if nothing else. if you trust the institution, they're making judgments about credit and risks that they're going to take. you have some track record, yes, you need some degree of transparency. no one knows how much. i'll tell you having run a bank where you have infinite transparency, in other words, the management of the bank could have as much information as they want about thinking that is going on, even there you don't get rid of the risks just because you understand. you may get rid of concentrations of risk and things of this sort, but -- and this is one of my objections to the risk-based capital formulation. i don't think we know where the risks are until after the fact.

and, therefore, i really am, you know, sort of agnostic. i sort of say all assets are risky. we don't know how risky, and so you've got to manage 'em as if there is a hidden risk. and it isn't a lack of transparency. it's a question of judgment, you know? if the price of oil drops from $100 a barrel to $50 a barrel, i assure you there'll will be risks in your portfolio you didn't know were there, because there are a lot of people that are sustained at the price levels that existed at the time. banking industries, by and large, can't take price adjustments. if you think of buildings worth $100 million and then next week it's worth 70, you undoubtedly have a bad loan on your hands. and so it seems to me that transparency is important in order to gain credibility with your depositors and your investors. you want to tell 'em whatever you might need make an informed

judgment as whether they want to deposit with you or not, and the reason the fdic exists is they came in and provided an umbrella that got rid of that kind of judgment. then you want -- and, by the way, one of the reasons the chinese and european systems worked is because the goth has a history -- the government has a history of protecting gross to haves. and people -- depositors. when you yet into a shadow banking situation where you have more sophisticated investors, they're going to demand what they want from the people who are managing their money. and they're going to insist upon it. so i think having transparency is important. i think it's vital, but ultimately, transparency isn't going to get rid of the risks because the people who have total transparency, which is the management, they make mistakes about risk. >> okay. >> well, let me, let me push you on the, you know, lehman

brothers kept all this information to itself, and a few days before it went under -- i think on september 12th -- it put out a report saying it had 11% capital which is higher than, i think, most of the banks have in these stress tests. and the sec must have approved this document, because they've been in the bank since bears had crashed. so because nobody could actually investigate the assets online or the public didn't have the information, the hedge funds might have had some information, but nobody could really tell. so they all ran. >> i say something about that? -- can i say something about that? look, i went through a crisis. jerry knows it better than i in the '90s where people were worried about citi. i spent tons of time talking to

the people who lend to us. i talked to the other banks who gave us lines of credits and so forth and so on. and the level of disclosure exceeded by far anything that was in the mix domain. and they were very interested in just seeing me and getting a sense, hey, is reed okay, is reed telling the truth, is this guy capable, or is he not capable? that level of disclosure undoubtedly existed with lehman, and the funders must have reached the conclusion that lehman wasn't going to make it. it had nothing to do with public disclosure, it had nothing to do with 11% capital requirements. you have counterparties who are funding you if you're in the security business as they were. almost all your funding's coming from counterparties. they are getting all of the

disclosure that they want. if a major counterparty calls and says, hey, i want to come over and talk to you about what's going on, you meet with them, you talk to them, so forth and so on. .. that occurs between the funders and the institution. regulators play an important role in the banking industry because if the bank of england says not to worry these guys are going to be okay, other lenders

will place a certain amount of credibility on what the bank says. >> i think that is profoundly important in terms of the way it works. and it's a problem if you make a nice everything in the market to market environment in a panic everybody is dead. the mark to market environment every institution is gone. >> not on the mutual funds. we have 25% of the financial assets in this country are held by every finance mutual funds. i'm not talking about the money market funds. i'm talking about the equity the other mutual funds there are 10,000 in total about 7500 art equity-based mutual funds bought a single one of those intermediaries went out of business because of this financial crisis. so we had a financial earthqua

earthquake. certain structures collapsed and the others that were made out of stone did not collapse and we rebuild out of straw as far as i could tell so we will have to differ on this but let me ask a different question which is on the money market. do you think there should be mark to market? >> mark to market lets leave them aside for the moment it seems to me is a very dangerous area that deserves a great deal of looking hard. i'm in favor actually of looking at real numbers and in real-time. but the way the mark to market often works in terms of how it translates into the financial system is a point of time marked to market to the question becomes on december 31 death

marked to market on that date and time of the decision you ought to take from how you measure all kinds of thing's in the institution is one of the reasons the supervision is so important because the regulators have the opportunity through the supervisory mechanism to look at an institution over time. and h it goes to the excellent point of who is management and what is the quality of the book and the problem with any of these disciplines it seems to me there is certainly good in them and we want them were transparent. we want a transparent society. but at the same time there is a danger added because if you make their own judgments based on simply that. >> i agree 100%. >> so the money market mutual funds should be allowed to be back to the buck without any change in the regulatory status or how would you deal with that?

what you require them to pay for the fdic insurance? >> genes that upfront we were not answering the money market question per se. any mutual fund you buy into there are risks. you may have 100% capital leverage etc. or maybe there is less rich but the point is it can go up or down. >> i think one of the dangers of assuming that any part of the financial system in and of itself is not going to be volatile on the crisis is that the system is so complex and you don't know where people panic will grow. to your excellent point even if you have one to one people can lose a lot of money and say i want all of my money out if it is on the basis.

>> there are two things and i know we will go to questions after this. there are two different things. panic is always going to have them in stock markets are going to fluctuate like crazy. in 2000 and 2002 but none of the financial institutions clas collapsed. so the intermediaries collapsing it seems to me to scare people like crazy. that could be averted by this alternative system. but let us ask the audience now for their questions. and please come up to the microphone and give a question or two. nobody has any questions? come right up to the microphone. >> i have a question for john.

the size and the complexity of citigroup was thrust into the spotlight and the federal reserve rejected the capital plan is to just kind of wondering your thoughts on the complexity of the organization if citigroup is a very complex organization is a part of the global sprawl and are they making it risky to be in the other countries and multiple businesses or is it more the consumer that you talked about? thanks. >> the size is one thing that multiple business lines is the other. and i of course spoke about the culture of management is required if you're dealing with capital markets as opposed to if you are not. citigroup today is immensely large and geographically dispersed, but it's been geographically dispersed since

1902. they have major capital markets as well as very traditional banking operations. and that makes for very difficult management structures. if anybody wants to get scared they should read a book called command and control. they are immensely difficult to manage the discipline. even if you know exactly what you want to do to make sure it happens in the organization is amazingly difficult kind of task.

that reflects this complexity. they seemingly in the minds of the fed were able to create whatever the fed was looking for. and when you're talking about an institution that is large in size, diverse and activities and has gone to be certain amount f managerial turmoil, you can well imagine that it was very difficult for them to respond to the request that they've got just due to the scale, complexity lines of business at the fact that they have three or four ceos over the west in years couldn't help. you described is transformational when you are the comptroller of the current sea. you have an interesting history

and i was wondering what the take away would be from your experiences as you basically introduced the innovation through the role. >> there are some interesting ones. thank you for the question. one that i think is fascinating is we encouraged the community reimbursement to low to moderate income people. there are those that try to claim that that kind of advancement is in fact the cause of the financial crisis. but in any case in and of itself isn't unsafe just not true. the boston fed in the san francisco fed did a long study of this in the book and found that in fact the lending to the low to moderate income people done properly is not only transforming in terms of their own life experiences but also in terms of coming into this perfectly safe, is it exactly as safe as lending to a person with

a great means, maybe not, but perfectly safe if done correctly. innovation and finance it seems to me is something we do not want to stop the cause the wonderful thing over the last couple of years developing the banking system through the national banking system of 1863 is opportunity and economic development as well. of enormous contribution of the microcredit lending has led to the global poverty elimination, so there is a balance in the innovation and safety and soundness and i think they've done a good job of making that

balance in allowing things to grow up and basically support the growing economy. >> we have time for one more question. if there are no other questioners the whole issue that we have been discussing about the financial system, how do you see the world economy occurring today, what would you do if he were in the world economy that we are in right now? >> so much of what makes finance have been it seems to me is what they used to call it humorous that i,that is an individual ana confidence or act of confidence, and we are living in an enormously dynamic era where more discoveries are being made

to delete and probably were made in the period from zero to 1700. but that offers tremendous opportunity in the elimination of poverty and opportunities for a better environment. but it also creates all kinds of opportunities for risk and so i would say that in terms of the world economy these days my own personal bottom line is keep your seatbelts fastened tight there is no question in the last 20 years. there's been an immense change in the poverty levels on a global scale. we have an interconnected system and i think the biggest challenge is government.

there's a little bad and good exists in the small pockets, b but. it's possible and certainly challenging and in the short-term i definitely have my seatbelt on. >> okay. thank you so much. >> john mancini and larry, thank you so much for your tremendous contribution. ' which >> so, i told a story about how i come who every aspect of whose identity is in one way or another a threat to israel. my gender is male, my religion is muslim t but my citizenship s muslim my nationality is

israeli. everything about me send us off, you know, all the warning signals for israel. and so the experience of the iranian american single man trying to get through the airport in the 21st century is a reminder to everyone that despite the way the globalization has brought us closer and has diminished the boundaries that separate us as nations, as ethnicities, as people and cultures, despite all of that old you've got to do is spend a few minutes trying to get through the airports to remember that those divisions of other things that separate us are still very much alive. >> best-selling author and a professor reza aslan will take your phone calls, e-mails and a tweets on islamic fundamentalism the war on terror int and the current instability in the middle east live for three hours sunday at noon eastern on

booktv's in-depth, part of a three-day holiday weekend of nonfiction books and authors during this friday on c-span2. booktv, television for serious readers. onto a third panel now from the conference on banking as the head of the group representing community banks says new regulations are hurting small banks and their customers. the senior financial regulator in the european union and the banking consultant or all of the panel. >> okay. we are going to get started while my cattle drivers are out in the hallways forcing people into the room. it's an honor to introduce my friend and andy's friend calamare who is the commissioner of banks in massachusetts. he's currently the executive vice president of the cooperative central bank. now that's up to be confused

with the federal reserve system. it's the massachusetts cooperative central bank. i serve on the board of the federal home loan bank of boston where he is our chairman. by the way the federal home loan mortgage austin is cosponsoring the reception after this event, so i hope as many of you as possible will hang around for that. and andy, it's all yours. >> thank you, professor. you have been called worse. i know. exactly. it is a pleasure to be here this afternoon. we had a great distinguished panel. this afternoon to talk about issues affecting banks in the future. their biographies are in the packet. we are not going to spend a lot of time although we both served in the state government and we decided we are going to go back for a couple of weeks to settle old scores can issue a few subpoenas and then come back. >> absolutely. >> so, as you see he is the

president and ceo of the former bank and knows what it's like to work in thing. pca is the manager of the financial analytics and is at the forefront of most banking and political questions and i won't say how many decades but i go back further than you that you are certainly at the front line. we also have the honorable share in bowles of the parliament who is the chair, i want to get this right for the chair of the influential economic and monetary affairs committee which is guiding the european parliament as it formulates consistent rules for the european union. so we are divided to have you all here. we are going to start with cam find and share it wasn't about the intermediation and we will end with the honorable, the right honorable sharon bowles

who will give a perspective of what she is doing. cam? >> thank you. i wish i had that cool british accent. that will be neat once she gets up to speak in words like rubbish and stuff like that. [laughter] i want to thank the comptroller. happy birthday even though you were born in the civil war pitted and inauspicious occasion but nevertheless, wonderful job you and your staff are doing and i want to thank boston university. and con thank you for having me here today. i painstakingly wrote out a 15 or 20 minute speech that i'm not going to give because i don't like to give reading speeches.

that's just not me. i feel too much like a regulator when i do that. and regulators and i have a checkered history even though i was born at a time i was the tax regulator and the director of the tax department in the state of missouri. if you come from a state that is two thirds of those works you don't want to be the text v-victor. [laughter] tax collector. [laughter] >> let me tell you that. there are some counties in southern missouri where they are still making their own money. they don't wreck it is county government much less state or federal government so you have to understand the culture of the state. but i live in washington now which makes those folks that need their own money with my old compared to some of the people in washington. i thought i had seen it all until he moved to washington and it is a different culture than the midwest let me tell you. i have a passion for community

banks. i chartered a bank. i then went out and out a bank in some of my friends would say who owns the bank and i would say i owned a bank. who are your shareholders? me. and i had one senior banker from a huge giant bank that unfortunately didn't make it through the crisis say to me how do you do your board meetings [laughter] and i said after supper my wife and i are eating apple pie and drinking coffee and talking about the bank. that's a board meeting. and it just he couldn't figure that out. there's not a great appreciation for privately owned banks in this country, but ladies and gentlemen, there are about probably 5,500 or more privately owned banks in this country and a huge portion of those are owned like mine by one single

family and they are sort of under the radar. you don't even see them but they are there. i am tasked with talking about the future of community banking. those of you that have prescribed to the big bang theory if there is another big bang sometimes you hear people say the only thing that will survive the next big bang or the roaches. well actually two things well, the roaches into the community banks. they will both survive. community policymakers, regulators, presidents have been trying to do away with community banks for 200 years, and they just keep surviving. they just won't go away. and if you really delve down into the history of the currency act, one of the objectives was to have a national banking

system. no state banking system. they thought they would eliminate the state banks. surprised they survived and that is what they will continue to do. community banks have a very bright future. they have a symbiotic relationship with their communities. they have flat management structure is, they are nimble, innovative, they develop innovative products. believe it or not most community banks are very technologically savvy. they also appear appeal to the generation y. because the relationship bankers. and they crave good relationships. they might be technically dependent, but they still like relationships and that's important.

even though the only control 19% of the assets of the nation, they make 60% of the small business loans in this country. and small business creates two thirds of the jobs created in this nation over the last 15 years have been by small businesses. so, you have that relationship going. community banks don't get bailouts. community banks sometimes have trouble raising dale. that's what we worry about. we worry about being able to raise bail much less getting a bailout. so we have two twin challenges to the future, asset concentration is one of the challenges and regulatory burden is the other twin challenge. and that could be a problem for the community banks going forward if we don't overcome those challenges, but we will.

how does asset concentration and regulatory burden manifest themselves? first, systemic risk. you've heard all of that. right now, just six banks out of 6,600 banks just six control over 50% of the nation's banking assets and the nation's deposits. just six names. market advantages. they talk about the imf, 70 billion-dollar a year advantage. the new york federal reserve bank 41 basis point funding advantage. they have capital advantages you all know all about the advantages. lack of diversity. the fdic did a study that shows up to 3,200 counties of this nation, 1,200 of the counties, roughly one in three counties is only served by a community bank.

that's the only source of commercial banking services to the citizens of those counties. you add up the population of the counties and it's just short of 20 million people. the only physical presence in that county is a community bank. so asset concentration is a driver of consolidation that diminishes access. americans in those 1,200 counties asset concentration taken to an extreme these stories the free market capitalist system. the free market capitalist system is based on competition and diversity. if you take asset concentration to the extreme there is no diversity. you have a banking system stomping around.

how does that encourage competition and diversity? short answer, it doesn't. i want to say something about the subsidy reserve bill. hr 2266. it's an interesting way to approach this problem of asset concentration. at least they have to acknowledge it on their balance sheet and ic bh supports that. we have to get our hands around his asset concentration problem that is just one problem. the flipside of the same clan as regulatory burden. to giv give a three bergen is a byproduct of asset concentration. and why do i say that? because if you look at every single major financial piece of legislation that has gone through congress since the late 1970s, dealing with some aspect of regulation that has

been triggered by a major bank. it has been triggered by something that happens in the congress and regulators want to correct that a majo at a major n it tumbles down on us. it's indiscriminate. think regulation is indiscriminate. it's blind to the size of the bank. so in my little bank in jefferson city missouri which was a 50 million-dollar bank, i have to fill ouhad about the sae called report the city has to fill out. i have to have on my shelf many of the same policies that the bank of america has. even though i don't engage in that stuff. it's indiscriminate and it is choking the community banks. regulatory burden stymies that relationship modeling and community banks are built on the

relationship banking model one-on-one. i sat out in my lobby in my desk even though i owned the bank and i was the president i could always go into an office if i wanted to but i sat out in the lobby and i saw every customer that came into the bank. i saw them all into the relationship business. and regulations squeeze the relationship out of banking. you are put into a process. it comes into a process. judgment and relationships are squeezed out and that is death to a community bank. it is the relationship that is the key to the competitive edge the community banks can have. and it stifles innovation. community bankers are very reticent to develop something new for fear that they are going to go on the wrong side of some regulation. when i got into thinking, and upon you will probably remember this, the quarterly report when

i got into thinking my very first record i ever had to fill out in 1984 was 14 pages long. and i could fill it out at my desk. it took me maybe half an hour and then i would file it. today the call report, this one that's coming up today at the matter-of-fact march 31, the call report is 72 pages long it's going longer here in the future. it will get up around 80 pages long four times a year. you still have thousands of community banks that are under $250 million of assets. roughly 80 per quarter to regulators that its time consuming and burdensome and there's got to be a better way. there's got to be a better way. so taken together, the twin

challenges -- >> we will briefly leave the discussion on community international banking for live coverage of today's pro forma session of the u.s. senate. expect to be very short. we will then rejoin the banking discussion in just a moment. now live to the senate floor on c-span2.